BIS Revises Penalty Structure

August 9th, 2016 by Danielle McClellan

By: Danielle McClellan

Effective July 22, 2016, The Bureau of Industry and Security (BIS) has updated its Guidance on Charging and Penalty Determinations in Settlement of Administration Enforcement Cases (Supplement No. 1 to Part 766 of the EAR).

Both BIS and the Treasury Department’s Office of Foreign Assets Control (OFAC) use the International Emergency Economic Powers Act (IEEPA) to administer sanctions programs. The goal of this BIS change is to make the civil penalty determinations more predictable and transparent as well as be aligned with OFAC’s penalties.

Under IEEPA, criminal penalties can reach 20 years imprisonment and $1 million per violation, and administrative monetary penalties can reach $250,000 or twice the value of the transaction, whichever is greater. These final rules will not apply to civil administrative enforcement cases for violations under Part 760 of the EAR— Restrictive Trade Practices and Boycotts. Supplement No. 2 to Part 766 continues to apply to enforcement cases involving part 760 violations. This guidance also will not apply to pending matters where, as of July 22, 2016, there are ongoing settlement negotiations and a charging letter has not been filed.

Comments related to this final rule are available in the Federal Register Notice.

Federal Register Notice: https://www.gpo.gov/fdsys/pkg/FR-2016-06-22/pdf/2016-14770.pdf

Justice Department Publishes Major Export Enforcement Cases

August 9th, 2016 by Danielle McClellan

(Source: Justice)

The link below provides a brief description of some of the major export enforcement, economic espionage, theft of trade secrets, and embargo-related criminal prosecutions by the Justice Department since January 2008. These cases resulted from investigations by the Homeland Security Investigations (HSI) [formerly Immigration and Customs Enforcement, (ICE)], the Federal Bureau of Investigation (FBI), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), and other law enforcement agencies. This list of cases is not exhaustive and only represents select cases.

The Department of Justice, National Security Division, has posted its “SUMMARY OF MAJOR U.S. EXPORT ENFORCEMENT, ECONOMIC ESPIONAGE, TRADE SECRET AND EMBARGO-RELATED CRIMINAL CASES (January 2009 to the present: updated August 12, 2015)” at the DOJ website.

Publication of New Cuba-Related Frequently Asked Questions

August 9th, 2016 by Danielle McClellan

(Source: OFAC)

On July 8, 2016, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) updated its Frequently Asked Questions regarding Cuba to issue two new FAQs (#43 and #50) regarding the use of the U.S. dollar in certain transactions.

For more information on this specific action, please visit this page.

DDTC Reinterprets Defense Services Related to Firearms: Not all Gun Activities are Created Equal…or Covered by the ITAR

August 9th, 2016 by Danielle McClellan

By: Danielle McClellan

Previously, several activities related to firearms constituted manufacturing for ITAR purposes. This meant that many activities related to firearms required registration with DDTC. After a review of the policy, DDTC has found that many traditional gunsmithing activities do not constitute manufacturing for ITAR purposes and will no longer require DDTC registration.

The guidance below is limited to domestic (U.S.) activities involving firearms (as defined in Category I(j)(1) of the United States Munitions List (USML) (22 CFR § 121.1)) and related ammunition that are .50 caliber (12.7 mm) or smaller – i.e., firearms in Category I, paragraphs (a) and (b), related items in paragraphs (e)-(h), and ammunition in Category III(a) for those firearms.  Activities involving items elsewhere on the USML, including Category I, paragraphs (c) and (d), are not included in the scope of this guidance.

  1. Registration not Required – Not Manufacturing:  In response to questions from persons engaged in the business of gunsmithing, DDTC has found in specific cases that ITAR registration is not required because the following activities do not meet the ordinary, contemporary, common meaning of “manufacturing” that DDTC employs in implementing the ITAR and, therefore, do not constitute “manufacturing” for ITAR purposes:
  1. Occasional assembly of firearm parts and kits that do not require cutting, drilling, or machining;
  2. Firearm repairs involving one-for-one drop-in replacement parts that do not require any cutting, drilling, or machining for installation;
  3. Repairs involving replacement parts that do not improve the accuracy, caliber, or other aspects of firearm operation;
  4. Hydrographic paint or Cerakote application or bluing treatments for a firearm;
  5. Attachment of accessories to a completed firearm without drilling, cutting, or machining-such as attaching a scope, sling, or light to existing mounts or hooks, or attaching a flash suppressor, sound suppressor, muzzle brake, or similar item to a prethreaded muzzle;
  6. Cosmetic additions and alterations (including engraving) that do not improve the accuracy, caliber, or other aspects of firearm operation beyond its original capabilities;
  7. Machining new dovetails or drilling and tapping new holes for the installation of sights which do not improve the accuracy or operation of the firearm beyond its original capabilities; and
  8. Manual loading or reloading of ammunition of .50 caliber or smaller.

Activities limited to the domestic sale or resale of firearms, the occasional assembly of firearms without drilling, cutting, or machining, and/or specific gunsmithing activities that do not improve the accuracy, caliber, or operations of the firearm beyond its original capabilities (as described above) are not manufacturing within the context of the ITAR.  If you are not manufacturing, exporting, temporarily importing or brokering defense articles or services, you are not required to register with DDTC.

  1. Registration Required – Manufacturing:  In response to questions from persons engaged in the business of gunsmithing, DDTC has found in specific cases that ITAR registration is required because the following activities meet the ordinary, contemporary, common meaning of “manufacturing” and, therefore, constitute “manufacturing” for ITAR purposes:
  1. Use of any special tooling or equipment upgrading in order to improve the capability of assembled or repaired firearms;
  2. Modifications to a firearm that change round capacity;
  3. The production of firearm parts (including, but not limited to, barrels, stocks, cylinders, breech mechanisms, triggers, silencers, or suppressors);
  4. The systemized production of ammunition, including the automated loading or reloading of ammunition;
  5. The machining or cutting of firearms, e.g., threading of muzzles or muzzle brake installation requiring machining, that results in an enhanced capability;
  6. Rechambering firearms through machining, cutting, or drilling;
  7. Chambering, cutting, or threading barrel blanks; and
  8. Blueprinting firearms by machining the barrel.

3) Registration Required – Other than Manufacturing:

  1. Assisting foreign persons in the design, development, and repair of firearms may constitute the export of a defense service (see 22 CFR § 120.9) and require ITAR registration with and authorization from DDTC; and
  2. Exporting a firearm or any other item on the USML requires ITAR registration with and authorization from DDTC.

It should be noted that there are two US laws that are related to the manufacturing of firearms and just because one regulation controls an activity it does not mean the other will or will not. The Gun Control Act (GCA) and the Arms Export Control Act (AECA) both control the manufacturing of firearms. The GCA requires manufacturers to obtain licenses as manufacturers (Federal Firearms Licenses from the Department of Justice’s Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)). The GCA is intended to cover a broader scope of activity than the AECA. The term firearm is defined differently thus, not every firearm controlled by the ATF regulations is also controlled by the ITAR.

If, after careful review of this guidance, you are unsure as to whether you are required to register with DDTC, you may submit an advisory opinion request (see 22 CFR § 126.9) detailing exactly what you do or intend to do with regard to firearms and ammunition.  This request should be sent in hard copy (services like UPS or FedEx recommended for faster delivery) as indicated on our website: http://pmddtc.state.gov/about/contact_information.html.

If you have any general follow-on questions, please feel free to contact the Response Team at (202) 663-1282 or DDTCResponseTeam@state.gov.

State/DDTC Relaunches “Company Visit Program”

August 9th, 2016 by Danielle McClellan

(Source: State/DDTC) [Excerpts.]

What is the Company Visit Program?

The Company Visit Program (CVP) entails visits by Directorate of Defense Trade Controls (DDTC) officials to U.S. entities registered with DDTC as manufacturers, exporters, or brokers of defense articles and defense services, as well as others involved in ITAR-regulated activities, to include foreign companies and foreign governments. The CVP is administered by the Office of Defense Trade Controls Compliance (DTCC); however, representatives from DDTC’s Licensing and Policy offices, or other entities in the Department or elsewhere in the U.S. government, may also participate in the visits.

What is the purpose of the Company Visit Program?

The CVP has several purposes. First, the CVP ensures DTCC understands how compliance programs are implemented in accordance with the International Traffic in Arms Regulations (ITAR). Second, the program enables DDTC to gather information to support the Directorate’s development of regulatory policy and practice. Finally, DTCC uses site visits to glean, assess, and disseminate industry best practices, provide feedback to individual companies on their compliance programs, and share information on compliance programs industry-wide. Note that the CVP includes two (2) types of visits:

  1. CVP-Outreach (“CVP-O”) is an extension of DDTC’s outreach activities, e.g., speaking at conferences. These visits are intended to be a learning exercise for both parties, and provide an opportunity to discuss challenges (such as adapting to changes associated with Export Control Reform) and offer suggestions or best practices. CVP-O site visits are unrelated to specific compliance matters. The purpose of the visit is to understand how companies implement ITAR compliance requirements, not to evaluate compliance failures or violations.
  2. CVP-Compliance (“CVP-C”) visits are designed for DTCC oversight activities, for example as part of consent agreement monitoring. These visits may include a more in-depth look at a company’s compliance program.

Is a CVP visit considered an audit or inspection? What is DDTC looking for during a CVP visit?

Both CVP-O and CVP-C type visits are neither an audit nor an inspection. Visits do not produce a grade or pass/fail assessment for internal or external use, and generally do not include review of transactional records. DDTC will request information from the company to gain a better understanding of their compliance program. CVP-C visits may require a more in-depth look at a company’s compliance program because the visits are focused on overseeing compliance matters already known to DTCC.

How is the visit not an audit if DDTC provides recommendations for improvements to our program?

DDTC may provide recommendations for improvements to a company’s compliance program during both CVP-O and CVP-C type visits. If we make recommendations, it is an effort to offer assistance, help prevent violations and share best practices. The CVP is intended to serve as a learning tool for both parties.

What happens if the DDTC team discovers or learns of a violation during the visit?

DTCC will recommend that the company review the issue and submit a disclosure, if appropriate.

How many companies does DDTC plan to visit each year?

DDTC plans visits for each quarter based on other engagements requiring travel and available resources. Generally, DDTC aims to conduct between two and four CVP visits per quarter. In 2015, DTCC conducted eight company visits under CVP auspices; three of those visits were pursuant to consent agreement monitoring.

How are companies selected for a CVP visit?

DTCC selects companies based on its CVP goals. DTCC considers a variety of factors when selecting companies to visit, including proximity to other activities DDTC is participating in, registration status, volume of licensed activity, experience conducting ITAR activities, nature of business, type and sensitivity of technology, geographic location, monitoring of an existing consent agreement, and value to ongoing work within the Directorate.

How is the DDTC team staffed for each CVP visit?

A CVP team typically consists of two or more staff from DTCC, depending on the size of the individual company/site being visited and number of companies/facilities visited per trip. On some CVP visits, staff members from the Offices of Defense Trade Controls Licensing and Policy, or other relevant agencies, may participate. One DTCC team member serves as team lead and primary point of contact with the company. This primary contact is responsible for coordinating the site visit with the company.

How is a CVP visit conducted and what should a company expect?

  • Once a company is selected for a potential CVP visit, DTCC contacts the company. The company can elect not to participate in the visit. If the company would like to participate, DTCC will propose visit dates and begin planning with the company.
  • Once visit dates are finalized, DTCC sends the company a formal visit notification letter outlining the visit. DTCC may request pre-visit materials from the company for review and preparation purposes. Before the visit, DTCC will work with the company to finalize the agenda.
  • At the visit’s opening, DTCC meets with senior management to explain the visit’s purpose and the agenda. The company should provide an overview of its operations and export activity during opening discussions. Visits generally last one to two days, depending on the purpose, and occur on the company’s premises in offices and conference rooms, and through tours of business operations within the facility (e.g., business development, contracts, procurement, design, manufacture, security, IT, personnel, and shipping).
  • At the visit’s conclusion, the DDTC team briefs company senior management and export control staff to share information the team gathered. DDTC invites the company to provide feedback, ask questions, or raise concerns for follow-up.
  • The DDTC team returns to the Department and generates an internal report. The team also follows up on company feedback. DTCC will send a formal close-out letter to the company. Close-out letters summarize the visit, indicate best practices, recommend areas for improvement or suggest best practices, and address feedback, questions, or concerns raised by the company. DTCC also requests feedback on the visit’s quality and usefulness and suggestions for improving the program.

State also published a slideshow overview of the program, which can be found here.

Living out Your Fantasy to Work with Russian Spies Can Cost You

August 9th, 2016 by Danielle McClellan

By: Danielle McClellan

Gregory Allen Justice, 49 of Culver City, worked the night shift at Boeing Satellite Systems in El Segundo as an engineer. He felt unappreciated after over a decade with the company and had a sick wife who had mounting medical bills. To get away from the perils of his life he found a special love for “The Americans,” the FX series about KGB spies in the US and a mysterious woman in Long Beach.

Justice had access to sensitive technical data about military and commercial satellites; he tried to sell them to a Russian spy, who just happened to be an undercover FBI agent. It is unclear how Justice met the agent but over the course of 5 meetings he provided the agent with USB drives that contained satellite information in exchange for payments of cash, in stacks of $500 or $1,000 bills. Justice told the agent that he needed the money to pay for his sick wife’s huge medical bills; however, it was found that he provided an unnamed woman in Long Beach with over $21,000 in cash as well as TVs, a $900 IPhone and a purse among other things.

Justice told the agent on numerous occasions that he loved the “The Americans,” and the agent told him, “You’re very, very important to the Russians.” There was also a secret recording of Justice released where he expressed his frustration with his inability to grow within his current position at Boeing, “I’m going to stop trying…Why put out the effort if there’s not going to be any reward? I’m tired and I’m done…What I can’t do is keep putting myself out, without being rewarded for it.” It seems that this was a perfect storm of events for Justice, live out a life similar to his favorite TV show and make money while getting back at the company he felt so unappreciated by.

Justice’s father, William Justice, told journalist, “He’s a good kid…I’ve never known him to do anything that was inappropriate.” When asked about his son’s wife, William Justice explained that she had a variety of health problems, including diabetes and chronic accident-related back pain.

Gregory Allen Justice has been arrested and is being held without bail. He faces 15 years in prison if convicted of a charge of economic espionage, in addition to 20 years on charges of violating the Arms Export Control Act (AECA).

Criminal Complaint: http://www.courthousenews.com/2016/07/11/US%20v%20Justice.pdf

More Information: http://www.latimes.com/local/lanow/la-me-ln-espionage-charges-20160709-snap-story.html

Schedule B & HTS Codes Updated…Don’t’ Get a Fatal Error!

August 9th, 2016 by Danielle McClellan

Effective immediately, the Schedule B & Harmonized Tariff Schedule (HTS) tables have been updated in the AES (Automated Export System). AES will only accept outdated codes for a 30 day grace period beyond the expiration date. Using an outdated code after the 30-day grace period will result in a fatal error.

The ACE AESDirect program has also been updated and will accept shipments with outdated codes during the grace period as well.

The Schedule B and HTS tables are available for download here:

The current list of HTS codes that are not valid for AES is available here:

Please note: Presidential Proclamation 9466 signed June 30 created new HTS numbers, effective July 1.  These changes are not included in this update.  A second broadcast will notify AES filers when the new HTS code tables are ready.

For more information or questions, contact the U.S. Census Bureau’s Micro Analysis Branch.

Telephone: (800) 549-0595, select option 2

 

BIS Renews Temporary Denial Order for Mahan Airways, Skyco and Many Others

August 9th, 2016 by Danielle McClellan

On July 7, 2016 BIS extended the Temporary Denial Order (TDO) on the basis of preventing an imminent violation of the EAR for 180 days for the following entities:

  • Mahan Airways
  • Pjman Mahmood Kosarayanifard
  • Mahmoud Amini, Kerman Aviation
  • Sirjanco Trading LLC
  • Ali Eslamian
  • Mahan Air Gernal Trading LLC
  • Skyco (UK) Ltd.
  • Equipco (UK) Ltd.
  • Mehdi Bahrami
  • Al Naser Airlines
  • Ali Abdullah Alhay
  • Bahar Safwa General Tradeing
  • Sky Blue Bird Group
  • Issam Shammout

Order: https://efoia.bis.doc.gov/index.php/component/docman/doc_download/1069-e2467?Itemid=

It’s Not A Good Time for Iran Violations: Company Fined Over $16 Million for Medical Supplies Exported to Iran, Sudan and Syria

August 9th, 2016 by Danielle McClellan

By: Danielle McClellan

Alcon Laboratories, Inc., (Fort Worth), Alcon Pharmaceuticals Ltd. (Fribourg, Switzerland) and Alcon Management, SA (Geneve, Switerland) (collectively, “Alcon”) have agreed to settle a potential civil liability with the US Department of Treasury’s Office of Foreign Assets Controls (OFAC) and with the Department of Commerce’s Bureau of Industry and Security (BIS).

Between 2008 and 2011 Alcon exported end-use surgical and pharmaceutical products from their United States location to their sister companies in Switzerland and then along to distributors in Iran, Sudan and Syria. The charges are broken down as follows:

OFAC Charging Details

On 452 occasions Alcon violated the Sudanese Sanctions Regulations (SSR) when they sold and exported medical supplies to distributors in Sudan. On 61 occasions they violated the Iranian Transactions and Sanctions Regulations (ITSR) when they sold and exported their products to Iranian distributors. Alcon will pay $7,617,150 related to the OFAC violations. The statutory maximum monetary penalty amount was $138,982,584 and the base penalty amount for the Apparent Violations was $16,927,000.

OFAC considered the following to be aggravating factors in this case:

  1. Alcon demonstrated reckless disregard for U.S. sanctions requirements by having virtually no compliance program, despite significant business involving the exportation of goods from the United States to Iran and Sudan, and by failing to take adequate steps to investigate a third-party freight forwarder’s cessation of shipments to Iran on behalf of Alcon;
  2. Alcon and its then-senior management knew of the conduct giving rise to the Apparent Violations; and
  3. Alcon is a sophisticated multinational corporation with extensive experience in international trade.

OFAC considered the following to be mitigating factors in this case:

  1. The harm to U.S. sanctions program objectives was limited because the exports involved medical end-use products that were licensable under the Trade Sanctions Reform and Export Enhancement Act of 2000, and in fact had been previously and subsequently licensed by OFAC for Alcon;
  2. Alcon has no prior OFAC sanctions history, including receipt of a Penalty Notice or Finding of Violation in the five years preceding the date of the earliest transaction giving rise to the Apparent Violations, making it eligible for “first violation” mitigation of up to 25 percent;
  3. Alcon took remedial action by ceasing the unlicensed exports to sanctioned countries, initiating an internal investigation of the Apparent Violations, and instituting a robust compliance program that now includes:
    1. Updated or newly-created corporate export and trade sanctions compliance documents,
    2. Enhanced trade compliance training, and (c) enhanced compliance procedures for requesting OFAC licenses; and (4) Alcon substantially cooperated with OFAC’s investigation, including by providing detailed and well-organized information and entering into several statute of limitations tolling agreements with OFAC.

BIS Charging Details

Alcon has received 100 charges of Acting with Knowledge of a Violation, 45 charges of Unlicensed Reexports to Syria, and 43 Charges of Unlicensed Exports to Iran. In the cases of unlicensed exports, Alcon Pharmaceuticals (Switzerland) sent orders and invoices to Alcon labs (United States) with instructions to ship the orders to warehouses and distribution centers that it used in various countries, most specifically Switzerland. The facilities would receive the products and then Alcon Pharmaceuticals transferred and/or forwarded the items to Iran and Syria without required government licenses.

Alcon collectively has been accessed a civil penalty from BIS in the amount of $8,100,000, all of which is due, and will accrue interest if not paid on time. Alcon must also pay the penalty amount due to OFAC in a timely manner and comply with all of the terms related to the OFAC Settlement Agreement.

OFAC Information: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20160705_alcon.pdf

BIS Information: https://efoia.bis.doc.gov/index.php/component/docman/doc_download/1068-e2466?Itemid=

Company Pays $100,000 for One Transfer of ITAR Technical Data to PRC Citizen Employee

August 9th, 2016 by Danielle McClellan

By: Danielle McClellan

Microwave Engineering Corporation (Microwave) of Andover, MA has pled guilty to one charge of an unauthorized export of a defense article to a foreign person and will pay $100,000 to settle the matter. The company designs and manufactures high-power, broadband passive components, antennas, and waveguides for radio frequency microwave and communication systems. The majority of Microwave’s business comes from orders for custom-designed parts and providing research and development services. Microwave’s products are used in both military and commercial applications and are often integrated into other systems.

The company has submitted over 120 authorizations with DDTC since 2007 and maintained a Technology Control Plan (TCP) which was approved by the Defense Security Service. Between September 2009 and September 2011 Microwave employed a foreign person (citizen of the People’s Republic of China) as a Research Scientist. The employee did obtain an H-1B visa in conjunction with the employment. Microwave’s Export Control Officer explained to the employee’s supervisor that the employee “could only work on general research concepts and could not work on anything related to specific product design or production.” By May 2010 the employee was moved to a segregated work space.

While the employee was employed with Microwave the then president, Dr. Rudolf Cheung, and another engineer repeatedly provided the employee with ITAR-controlled technical data (USML Category XI(b))  without obtaining authorization. Between December 2009 and June 2010 the employee received technical data related to five research and manufacturing projects. Of the five projects, only one actually resulted in a purchase order and finally a developed component in November 2011. Authorization was never obtained from DDTC for this project and the transfer of ITAR-controlled technical data to the employee related to the project was a violation. The Export Control Officer for Microwave became aware of the transfer of technical data for the project in May 2010 and worked to limit the unauthorized transfers.

On January 20, 2012, Microwave disclosed to DDTC the illegal transfer of technical data which also happened to be the day that Dr. Cheung pled guilty to an unrelated criminal violation of the AECA. The Department of State released the following as mitigating factors in the charging letter:

  • Respondent’s submission of a voluntary disclosure under ITAR § 127.12
  • Acknowledging both the charged violation and other potential violations;
  • The exceptional cooperation of the company during the Department’s review of the disclosed conduct; and
  • The reduced likelihood of future violations due to demonstrated improvements in Respondent’s internal compliance program.

The Department also considered countervailing factors.  Most notably:

  • Deficiencies in Respondent’s export compliance program prior to the charged violation;
  • The involvement of a foreign person from the People’s Republic of China, a proscribed destination under ITAR § 126.1 and by statute (Suspension of Certain Programs and Activities, Pub. L. No. 101-246, title IX, § 902,104 Stat. 83 (1990) (amended 1992));
  • The amount of time between discovery of the issues and notification of the Department; and
  • The potential harm to national security.

Charging Letter: http://pmddtc.state.gov/compliance/consent_agreements/pdf/MEC-PCL.pdf

Consent Agreement: http://pmddtc.state.gov/compliance/consent_agreements/pdf/MEC_CA.pdf