Cloud Computing with Export-Controlled Data

Security and privacy are the most frequently expressed concerns about cloud computing (defined for this article to include software as a service, platform as a service and storage as a service), but for companies that engage in research, design, development, manufacturing and servicing of items that are subject to U.S. export controls, cloud computing poses another risk that must be properly managed to avoid the substantial penalties that flow from unlicensed exports of technical data.

The Export Control Regulations

Exports of technical data from the U.S. are controlled by three principal sets of regulations: the Export Administration Regulations ("EAR") administered by the Department of Commerce, the International Traffic in Arms Regulation ("ITAR") administered by the Department of State and economic and trade sanctions rules administered by the Treasury's Office of Foreign Assets Controls ("OFAC"). Only the Commerce Department has issued guidance concerning how it will regulate exports through cloud computing of technical data governed by the EAR. Neither State nor OFAC have done so with respect to their regulations, but describing conduct that would constitute violations of those rules is not difficult.

Putting Export Controlled Technical Data in the "Cloud" Risks Export

Setting the "cloud" image and all of its marketing hype aside, the transmission of data to a cloud platform for manipulation or storage is not conceptually different for export control purposes than carrying a hard copy of that data abroad or sending it through the mail. Transmission of data to the cloud for processing or backup involves copying that data to a server or group of servers, located somewhere. If that location is outside the U.S., then sending the data to the cloud server for processing or storage is an export. If the data or software sent to the cloud server is export controlled, then doing so is an export of controlled technical data as surely as if it had been copied on paper and carried abroad.

Furthermore, it is not necessary that export controlled technical data actually leave the U.S. to be deemed exported. Under the EAR, the disclosure of technical data to an individual in the U.S. who is not entitled to permanent residence here is deemed to be an export of that technical data to the individual's home country. If the export of the technical data to the individual's home country would require a license under the EAR, then disclosing the data to the individual in the U.S. also requires a license. Similarly, under the ITAR, controlled technical data may not be disclosed to a "foreign person," regardless of where that person is located, without a license. A foreign person under the ITAR includes any individual who is not a lawful permanent resident of the U.S. and any business entity organized under foreign law.

The Cloud Service Subscriber, Not the Service Provider, Is at Risk for Export Law Violations

The Commerce Department has ruled that the exporting of controlled technology or software to and from the cloud is subject to the EAR, but that the cloud service provider in the U.S. is generally not considered an exporter of the data that its subscribers place on its servers. The U.S. subscriber to the cloud computing service that places its data on the service provider's cloud hardware is considered the exporter if the data is transferred outside the U.S. Accordingly, if controlled technical data is exposed to a foreign national IT administrator of the cloud service provider, it is the subscriber to the service, not the cloud service provider that is engaged in a deemed export to the foreign national. Under the ITAR, the mere disclosure of export controlled information to a foreign person, whether or not it leaves the U.S., is considered an export. Although the State Department has not issued formal guidance on the subject, cloud subscribers should assume that such foreign disclosures will be treated as exports, at least by the subscriber and perhaps in addition by the service provider.

ITAR and EAR "Compliant" or "Certified" Cloud Service Providers

Cloud subscribers should understand that there is no ITAR or EAR "certification" that is recognized by federal export control officials. A service that claims to be "compliant" or "certified" needs to be investigated as carefully as a provider that avoids such claims to determine specifically what assurances the service offers. Claims of export control compliance in cloud service provider marketing materials should never displace the need for careful due diligence and adherence to best practices in contracting for cloud services if controlled technical data is going to be processed or stored in a cloud environment.

Best Practices for Cloud Service Contracts Involving Export Controlled Data

First, it is important to understand that employing best practices is not a safe harbor or defense in the face of an export violation. Careful attention to best practices may help to mitigate potential penalties.

Second, encryption of controlled data transferred to the cloud does not address the export violation risk. Exporting encrypted technical data is still an export of technical data. Neither ITAR nor EAR makes exceptions for export of controlled technical data or software in encrypted format. There are strong privacy and security reasons for encryption, but it is not a substitute for other measures.

Third, employing the following best practices helps reduce the risk of inadvertent exports of controlled data:

1. Develop a solid understanding of the technologies and information that your company creates or receives from vendors and customers that are subject to control under the EAR, ITAR or economic sanctions regulations.
2. Before consigning any data to a cloud service, understand the export licensing requirements, if any, for each category of data.
3. Segregate export-controlled data from non-controlled data to permit the export compliance officers of the company to focus on those parts of the problem that pose the greatest risks.
4. If export-controlled data is going to be eligible for transfer to the cloud, modify the company's export control plan to address the procedures by which such transfers can be authorized so that effective control of the data can be maintained.
5. Train employees with access to export-controlled technical data in the circumstances under which such data may be sent to the cloud and the procedures to be followed.
6. Control by contract the storage and disclosure of export-controlled data being transmitted to and stored by the cloud service provider:
   1. Specify the physical routings and locations where the data may be transmitted and stored;
   2. Specify the limits on the physical and logical access to the virtual servers;
   3. Specify requirements for the destruction of copies of controlled data withdrawn from the cloud;
   4. Specify the limits on nationalities of individuals that may have access to your data and where they are located;
   5. Specify the limits on the ability of the cloud service provider to subcontract to third parties;
   6. Specifically address the liability of the cloud provider for defense costs, fines and damages that the subscriber may incur if the provider permits an unauthorized export.

None of these steps can eliminate the risk of an adverse enforcement action, but employing these measures both significantly reduces the risk of violation and demonstrates a strong intent to comply with export controls that will mitigate an adverse outcome. For more information, please contact Jonathan Cain or an attorney from Mintz Levin's Privacy & Security Practice.

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