Mayfield Heights, Ohio-based advanced materials manufacturer Materion’s global export compliance program never takes a day off, simply because the regulatory risks are too great and the commitment to due diligence compliance is even greater.
Materion Corp.’s global export compliance program is a well-oiled machine that operates 24 hours a day, seven days a week. It never takes a day off, simply because the regulatory risks are too great and the commitment to due diligence compliance is even greater.
The Mayfield Heights, Ohio-based company produces precious and non-precious specialty metals, inorganic chemicals and powders, specialty coatings, specialty engineered beryllium alloys, beryllium and beryllium composites, and engineered clad and plated metal systems.
Materion’s legacy product line, beryllium, is a lightweight metal that is about one-third the density of, but harder than steel, that can be processed into a pure metal, alloy or ceramic form. The metal is often combined with other elements to make alloys that are used in many high-tech commercial applications, such as electrical connectors in commercial aircraft, automobiles, semiconductors and medical devices. It’s even used to make NASA’s largest space telescopes.
However, quite a lot of the materials that Materion manufactures are considered “dual-use” in the eyes of export regulators within the U.S. Commerce, State and Defense departments, meaning that the metal can be used as a component in sophisticated military hardware and weapon systems, as well as for benign commercial applications. It’s been the U.S. government’s goal for years to keep sophisticated materials like those made by Materion, which can only be produced in the most technically competent nations, out of the hands of countries of concern and terrorist groups who may use it to develop weapons that could then be used against the United States.
Scared Straight. When technology embodied in materials like those made by Materion is exported from the United States, it is subject to Commerce or State Department licensing requirements, depending on whether the product comes under the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR).
Failure to comply with these regulations can be detrimental to a company like Materion. Federal regulators can impose significant fines, suspend export privileges and even seek prison time for those individuals involved in the wrongdoing.
Materion’s senior management realized the importance of export compliance decades ago, and has put in place a robust program that keeps it in tune with the latest policies and regulations.
The person in charge of export compliance at Materion has been Steve Freeman, president of international business development. He joined the company in 1990 and prior to that worked 17 years at Foseco Minsep, a British company that made additives and refractories for metals.
In 1992, Materion, then known as Brush Wellman, had a business that was about 90 percent domestic and 10 percent exports. The other large manufacturer of beryllium prior to the 1990s was the Soviet Union, but with the collapse of the Soviet Union and changes in the global market, Materion’s U.S. exports gradually increased to about 60 percent of its total beryllium business.
Freeman worked in a spectrum of management roles at Materion, including global sales and marketing, technology and corporate, before moving into the international business development role in 2000. Export compliance was already a longtime part of the international business side of the company’s operations, but it was not as comprehensive as it needed to be to cover the rapidly expanding range of products that Materion had taken on as a result of both internal growth and a series of acquisitions in such fields as semiconductor packaging, vapor deposition targets, specialty chemicals, spectral filters and high purity precious metals.
“We didn’t really have a strong focus on it,” Freeman recalled. “Fortunately, we had not faced anything egregious, but it wasn’t high on our radar screen.
“We became aware of our need to strengthen the compliance program when we started receiving product orders from customers that required us to have a higher degree of export compliance expertise. We struggled at first, like many companies, in trying to implement a best practice approach,” he said.
And like many companies, Materion first reached out to various law firms for advice on export controls. But what it got in return were copies of excerpts from the EAR and ITAR, with no substantive guidance on how to establish policies and procedures that were implementable.
Then in 2000, the company had a “near miss” with one of its exports.
“We didn’t apply to obtain the appropriate license until the shipment almost got away,” Freeman said.
With that scare, Freeman told Materion’s CEO that the company in no uncertain terms needed to strengthen its export control processes and was tasked with developing the new compliance program.
“The big law firms simply couldn’t deliver what we needed. However, we had a subsidiary in Rhode Island at the time that was working with an export compliance consultant, Paul DiVecchio,” Freeman said. “I met with him there and was impressed by his experience and savoir faire. With his guidance, we developed a master process flow chart for export compliance—a decision tree that starts with the first contact with the customer and receiving a request for quotation, and continues throughout the entire export process to the shipping documents and follow-up.”
Constructing an export compliance procedures manual for Materion was no easy task. With the complexities of the company’s global operations, it took Freeman and DiVecchio about a year to conduct compliance assessments and awareness training, and implement comprehensive policies and procedures.
“It immediately received the backing of our CEO, the board and the rest of the company,” Freeman said.
“The idea is not to create a bureaucracy here,” DiVecchio said of the project. “The procedures must be comprehensive, but implementable. They can’t just be a set of reference materials.”
Coordinated Compliance. Freeman has been in charge of an export compliance core team made up of the three export compliance officers (ECOs)—Robyn Sautter in Elmore, Ohio; Jaya Kumar Pillai in Milwaukee; and Brendan Connell in Boston—that oversee Materion’s three corporate business groups.
Under these ECOs are another 13 export compliance coordinators, who work in the individual operations within the three corporate groups covering the entire spectrum of the company, from research and development to procurement and engineering, and sales and marketing.
The ECOs were selected because of their overall skills and senior roles in the company, which require effective communications, an initiative oriented ability to use logic, and most importantly, inherent common sense. The coordinator roles are filled by individuals mostly from global sales administration because they understand and handle the entire export process on a day-to-day basis, ranging from quotation to shipping product.
“They are masters of the corporate computer system, SAP, and can see what’s happening with any transactions within their group. They have their finger on the pulse, and can step in to halt a transaction pending confirmation that the entire export compliance process has been followed and confirmed,” Freeman said.
“In addition, there are product-specific classification issues involved with export compliance,” he said. “It’s incredibly complicated, highly technical, and you need really knowledgeable people covering it, especially for commodity classification, for which we have developed business unit specific process flows conducted by the technical staff responsible for each commodity classification.”
The export compliance coordinators also train other Materion staff “to be able to recognize when something about a transaction appears suspicious and there is a need to call in a pro,” or if something appears out of character with the export, Freeman added.
For example, if a Materion salesperson in Eastern Europe gets a request to quote for night vision components, that individual already knows that the export is subject to the EAR and possibly ITAR, and has to be vetted. The salesperson will also request from the customer end-use statements specifying exactly where and to whom the export is going and what it’s being used for.
Every party to a transaction—not just the overseas customer, but also the banks, shipping companies, or “anyone who touches it”—is screened by Materion against all the known U.S. and global “entities” and “restricted parties” lists for any possible prohibitions using an online program known as Visual Compliance.
“We do this for each customer before we will even accept a request for quote, and that can be done in mere seconds,” Freeman said.
All of the parties to the transaction are then screened automatically by the Visual Compliance system on a daily basis, against lists that are continuously being updated by the system. If any party shows up on any of the lists, the export coordinator and all of the ECOs, plus Freeman, are sent an email by Visual Compliance alerting them to the “hit.” This screen continues until the transaction closes.
“An order can take us anywhere from one day to nine months to manufacture and ship, depending on what needs to be done,” Freeman said. “There could be a change in the regulations or with a customer’s status, and that’s why we check them against the myriad entity lists every day, no exceptions.”
With so many combinations of names of individuals and entities on the various entities lists, especially with the transliterations of foreign language names, it’s not uncommon for some of the previously screened names to be flagged, because Visual Compliance adds all new parties screened to the master batch of names, and they are all screened daily.
Freeman and the three ECOs will review these system captures to ensure they’re compliant. “Every day we get about five to 10 captures. Most are false-positives—rarely do we get an actual catch, but it does happen,” Freeman said.
That’s one reason why Materion believes export compliance software is only a tool, and not the sole methodology to manage its program.
“Export compliance software folks think this can all be done electronically,” Freeman said. “That’s delusional. It may be possible with simple commodities or easily classified products, but you can’t do it with sophisticated high-tech exports like ours that can be used for, or diverted into, military applications.
“We have not found any acceptable automated way, for example, to handle our export classification process. It requires skilled human intervention in the form of engineers and technology staff who can compare the attributes and properties of the materials we sell against the incredibly refined specifications in the Commerce Control List and other regulations,” he said.
In fact, Materion’s ECOs have the authority to hold up any export if there is any suspicion, and not even the company’s CEO can override that decision.
“If you’re a company with integrity, you don’t challenge that,” Freeman said. “Besides, the penalties and harmful publicity for wrongdoing can be horrendous.”
Solution Providers. The CEO and board of directors of Materion are regularly kept up to date on export control matters and initiatives within the organization through General Counsel and Chief Compliance Officer Gregory Chemnitz and his staff, who often participate in the ECO conference calls.
Yet, the purpose of an export compliance program is not to have ECOs that act as an internal police force to stop shipments, but to facilitate them in accordance with the export control regulations.
“Compliance officers aren’t naysayers, they’re solution providers,” DiVecchio said.
In addition, DiVecchio explained that it’s important for the ECO to earn the respect of others within the organization. “That’s where a lot of companies fail, and that puts the export compliance officer out on a limb and on their own,” he said.
“One reason I joined this company and stayed with it so long is that it has an impeccable record for ethics and morals,” added Freeman. “We sell products that keep aircraft in the air, vehicles safely on the road and ships navigating the seas, and export compliance is part of that success which has earned us the trust and respect of the customers and end users.”
Thanks to this mindset, Materion hasn’t experienced a single penalty for a violation since starting its export compliance program in the early 2000s.
However, if an export violation should ever occur, a company like Materion—one with a strong, proven compliance program—can often mitigate and sometimes eliminate the penalty altogether, DiVecchio said.
To stay current on export control regulations and policies, Freeman and the three ECOs hold hour-long weekly calls, often with DiVecchio’s participation and teaching. They use video conferencing to collaboratively review documentation and make decisions collectively. In addition to DiVecchio’s consulting services, Freeman said he and the ECOs rely on information resources such as the Daily Bugle newsletter and Visual Compliance to stay up to date, as well as attending the educational conferences offered both commercially and by the Commerce and State departments.
The ECOs are also responsible for training Materion’s new sales hires on export compliance. Ongoing training for the company’s staff is provided several times a year through physical meetings, such as “lunch and learn” on-site updates by the ECOs to sales, marketing and technology staff, and by using recorded online sessions.
“Affiliates overseas also have a need for us to come and train their people,” Freeman said. “We’ll provide training on U.S. export control regulations, while a local expert will train them on their own national export controls. Interestingly, most other countries’ export controls tend to mirror those of the United States.”
When Materion’s sales, marketing and technology staff travel overseas, their technical data is rigorously guarded against theft. First, they leave their laptops in the office and use “travel laptops” that the company’s IT group scrub of any sensitive information. If sensitive or export protected information must be taken overseas for an authorized application, they use hardened USB thumb drives, which are password protected and self-destructive in the event of repetitive use of wrong passwords, essentially melting down the memory chip if illicit attempts are made to access the information.
One of the most significant threats to the stability of export compliance programs occurs when one company acquires another. Materion is no exception, and has acquired a number of other firms over the years, but as an essential part of the acquisition and integration process, the company conducts due diligence compliance assessments.
“Some of the acquired companies think they don’t have issues, but we have found out through our own experience with acquisitions that they actually did,” Freeman said. “As part of the acquisition agreements, the acquired company’s prior owners must assume liability and present these violations to the government agencies as voluntary self-disclosures before we’ll complete the acquisition.”
“Export compliance is an ongoing process; regulations change and business processes change. You cannot become complacent,” DiVecchio said. “The commitment to an effective compliance program at Materion starts at the top of its corporate structure and resonates throughout the rest of the company via dedicated efforts of its compliance staff.”
Government Partnership. Freeman admits that it’s not easy working with the multiple federal agencies concerned with U.S. export control oversight. The primary agencies for export licensing are the Commerce Department’s Bureau of Industry and Security (BIS) and State Department’s Directorate of Defense Trade Controls (DDTC), as well as the Treasury Department’s Office of Foreign Assets Controls (OFAC).
Materion has generally supported the U.S. export control reform initiative launched by the Obama administration in 2010. As part of this initiative, numerous items no longer considered militarily sensitive were removed from the U.S. Munitions List and placed on the less rigorous Commerce Control List. By the end of 2016, most of the list transfers had been completed by Commerce and State, resulting in a 57 percent reduction in ITAR-related license applications and an increase of more than 37,000 license applications for BIS, as these former U.S. Munitions List items now came under the EAR. However, BIS had been able to keep its licensing process times to 17 days.
The government is still a ways off from meeting its ultimate export control reform goal of creating a single export control list, a single licensing agency and single information technology system to manage the entire process.
In the first six months of the Trump administration, Materion has noticed some loss of momentum within BIS.
“On a personal level, they want to be helpful and they make every effort to assist, but they appear to be overworked and understaffed at the moment,” Freeman said.
The Senate in early August confirmed BIS appointments of Mira Radielovic Ricardel to undersecretary of export administration and Richard Ashooh to assistant secretary of commerce. It’s hoped that these long-awaited political appointments will reinvigorate the agency.
Meanwhile, Materion views its work with Commerce and State as a partnership. Freeman said when the company seeks a commodity classification from BIS, for example, it prepares the application with all the technical information presented in a format that makes the BIS officer’s task of reviewing it straightforward. “We have a good track record in working with the agencies,” he said.
Due to the highly technical nature and myriad applications of its high-tech products, Materion undoubtedly receives “probes” from individuals and entities seeking to illicitly obtain its products. But Materion’s export compliance staff are trained to look for “red flags” by asking the right questions of these technology prospectors.
“If a typewriter and printing company in the Seychelles with a non-commercial gmail.com email address is looking to purchase sophisticated night vision components, for example, then you really ought to know to suspect that something’s wrong,” Freeman said.
Another red flag for the ECO might be the physical location of an inquiring distributor, like those domiciled in known countries with a history of diversion, such as the United Arab Emirates or Hong Kong.
Materion will turn over suspicious export requests to export enforcement agencies to pursue.
“We want to be on the right side of the law, and anything we can do to catch bad guys, we consider that part of our duty,” Freeman said.