Under the Wikileaks Radar: Blue Lantern End-Use Checks in Europe

March 31st, 2014 by Brooke Driver

By: Scott Gearity

When the Export Compliance Training Institute returns to London next month for its seminars on US Export Controls on Non-US Transactions, it seems likely that Julian Assange will still be holed up at Ecuador’s embassy to the UK, the WikiLeaks founder’s home since June 2012. ECTI can neither confirm nor deny that Mr. Assange will make an appearance at the Hilton London Kensington Hotel as a special guest speaker.

Whatever you may think of Mr. Assange’s work, or the allegations that have caused him to seek asylum, it is simply a reality that the leak of a quarter million U.S. Department of State cables beginning in 2010 put an enormous amount of information of interest into the public domain. Some of the contents of the leaked cables are well known – spying by U.S. diplomats to the United Nations, untactful criticism of foreign leaders, the ugly wheeling and dealing involved in attempting to get countries to resettle Guantanamo Bay detainees. But many of the cables relating to more obscure topics have escaped broad public notice.

It is fair to say that among these lesser-known communiqués are those detailing end-use checks conducted by U.S. embassy personnel as part of the Directorate of Defense Trade Controls’ Blue Lantern program. That is not to say that these checks are not a frequent subject to the leaked cables, fully 1,865 of which reference the program. Blue Lantern focuses on Direct Commercial Sales, and is one of two broad U.S. Government end-use monitoring programs. The other is the Department of Defense’s Golden Sentry program, which examines compliance with Foreign Military Sales agreements. (By the way, who names these things? Stan Lee?)

In fiscal year 2012, there were 820 Blue Lantern checks in 103 countries (a large increase from a few years earlier, when the number of checks consistently hovered around 500). The checks are not equally distributed around the world; 195 of the 820 checks initiated in FY2012 were in Europe. While 36 percent of license applications are for exports to Europe, only 24 percent of Blue Lantern cases occur there, reflecting a higher level of trust by the U.S. Government in the many European countries, which are either NATO members or otherwise allies with the U.S. In other words, Europe is the site of a disproportionately low number of end-use checks. But even this relatively small number means the U.S. conducts a Blue Lantern check in Europe almost every working day.

Here are a few of the more interesting selections from cables:

  • The investigations do not necessarily involve an on-site visit. For a check into Aviation Trading Co., Embassy London contacted the U.K. firm and inquired with multiple U.K. Government agencies to establish the firm’s bona fides, but no published cable indicates that an actual visit ever took place.
  • Unfavorable checks in Europe are uncommon but not unheard of. There are several cables to and from Embassy Madrid discussing unfavorable checks involving night vision goggles at Elint, S.A., including a description of an “egregious alteration of a U.S. Non-Transfer and Use Certificate (DSP-83).”
  • The Germans are skeptical of “ITAR-free” products, but want to be kept in the loop. At a 2009 meeting in Bonn, a Ministry of Defense official “expressed strong sentiments against European companies that market allegedly ‘ITAR-free’ defense articles, such as satellites, asserting that such efforts contribute to the deterioration of transatlantic ties and falsely deny the interdependency of European and American defense companies.” Only a year later, the Ministry of Foreign Affairs expressed concern to Embassy Berlin at the array of U.S. Government departments (Commerce, Defense and State) conducting end-use monitoring without notifying the German government.
  • Broker registrations get the Blue Lantern treatment, too. There are numerous cables recounting inquiries made by U.S. diplomats into foreign firms attempting to register with DDTC as brokers. In these cases, embassy personnel often describe their attempts to reach out to contacts in foreign trade and law enforcement to establish if there is any derogatory information about the prospective registrant. In one example from Embassy Copenhagen, ironically marked as “not for internet distribution,” the embassy political officer actually visited the home office of a Danish consultant.

All in all, it seems that as long as a European firm is abiding by the terms and any provisos of a State Department export license, it has little to fear from an end-use check.

Should I STA or Should I Go (Use a Different License Exception)

March 31st, 2014 by Brooke Driver

By: Scott Gearity

When the Export Control Reform Initiative truly began to come into fruition last year, License Exception STA received a lot of attention. This, despite the fact that it is not a new exception, having been introduced more than two years earlier in 2011 to create what Under Secretary of Commerce Eric Hirschhorn called a “license free zone.” And in that two year period exporters had been getting accustomed to using License Exception STA to ship microwave solid state amplifiers (ECCN 3A001.b.4), thermal imaging cameras (ECCN 6A003.b) and other similarly sensitive products in situations which previously would have required an export license.

Now, actually using License Exception STA to export 600 series items is a whole other story, replete with frustrations involving additional limitations and conditions on top of this exception’s preexisting burdensome requirements. Less well-understood is that there are alternatives to License Exception STA short of an export license, even for exports of 600 series items. To begin with, some 600 series items are eligible for export No License Required, in particular shipments to Canada and those items in .y paragraphs (e.g. 9A610.y) everywhere except to China, Cuba, Iran, North Korea, Sudan and Syria. Some ground vehicles and ground vehicle parts and components (i.e. those classified in ECCN 0A606.b) are also NLR-eligible to a number of destinations (many European countries, Australia and Japan among them.)

Still, exporters will not be able to ship most 600 series hardware, software and technology NLR anywhere other than to Canada. But this does not mean that the only remaining options are License Exception STA or, failing that, a license. There are other EAR license exceptions which can authorize an export of a 600 series item. These are:

  • License Exception LVS (§740.3): This can be a useful authorization for low value shipments. Many existing 600 series hardware ECCNs are eligible for this exception at the $1,500 level. So if the destination for the export is in Country Group B (which is much larger than the list of STA-eligible destinations for 600 series items in Country Group A:5) and the net value of the order does not exceed $1,500, License Exception LVS may be a good option. (For the ITAR fans out there – the closest equivalent exemption to LVS in DDTC’s regulations is §123.16(b)(2).)
  • License Exception TMP (§740.9): If the export is intended to be temporary, consider whether this exception may be an option. Its provisions are generally available for 600 series items. (TMP stands in for several ITAR exemptions including §123.16(b)(5) and (9), §123.17(c) and (f)-(i) and §125.4(b)(9).)
  • License Exception RPL (§740.10): Have a customer who wants to send 600 series hardware back to the U.S. for repair or replacement? The return itself is not subject to the EAR (because the EAR does not regulate imports), but to send the repaired item or a one-for-one replacement for it back abroad, an appropriate authorization is required. That authorization could be License Exception RPL. Like License Exception LVS, the list of RPL-eligible destinations is much longer than that for License Exception STA. (The ITAR exemption at §123.4(a)(1) permits shipments in situations similar to those allowed by License Exception RPL .)
  • License Exception GOV (§740.11): Are you the U.S. Government? Would you like to export to the U.S. Government? Have you been told (in writing) by a U.S. government agency to make an export? Is your export consigned to and for the official use of an agency of a handful of “cooperating” governments? If the answer to any of these questions is “yes,” then License Exception GOV may be an option. (There are a slew of roughly equivalent ITAR exemptions to GOV including §125.(4)(b)(1) and (3), §125.(4)(c), §125.(5) and §126.4.)
  • License Exception TSU (§740.13): This exception is only for software and technology, but within that scope is one of the broadest in the EAR. It permits the export of operation technology and software related to lawfully exported hardware. And the “sales technology” provision may allow exports of technology classified in XE6XX ECCNs in response to RFPs or RFQs which previously might have had the exporter stopping to seek a DSP-5 marketing license or TAA (and maybe losing the contract thanks to the delay). License Exception TSU also includes an authorization of particular utility to universities. (Compare License Exception TSU to the ITAR exemptions at §125.4(b)(4), (5) and (10).)

Clearly, there are more options for exporting 600 series items than just STA and licenses. When considering using one of these license exceptions, always remember to carefully review not just the text of the exception itself, but also EAR §740.2 which contains general restrictions on the use of exemption.

Intevac, Inc. Settles for $115,000 with BIS Over Deemed Export Violations

March 31st, 2014 by Brooke Driver

By: Chad Wolfe

Intevac, Inc. settled in February for several violations of the EAR stemming from the illegal export of controlled technical data. Over the course of 5 years (from May 2005-July 2010), Intevac provided controlled technical data, classified ECCN 3E001, to foreign nationals within the United States and to its subsidiary in China. Specifically, Intevac provided access to the company mainframe to foreign nationals of Russia and China. In both instances, the transaction required authorization from BIS. (See the charging letter for details.)

At the heart of this violation and subsequent fine are the common pitfalls of engaging with foreign nationals with controlled technical data and deemed export rules. The fact that Intevac did voluntarily Self-Disclose the violation and still received a fine and potential debarment gives you an idea of how seriously DOC is taking violations post-reform.

Deemed Exports can be difficult to wrap your head around, but remember to separate the person and his or her nationality. That is not Larry the engineer; he is the foreign national that works in your engineering department. Having foreign nationals working in the U.S. as full time regular employees is becoming more and more common, and will put you and your company at an increased risk.

Some tips on how not to end up like Intevac:

  1. Know what nationalities are working at your facility and understand what requirements are needed to share information. Unfortunately, there isn’t a “one size fits all” approach to this; 3E001 is NLR to Canada, but requires a license to every other country.
  2. Don’t fall into the “we’re out of time” excuse and make a bad decision. Not providing the technical data may cause a deadline to slip, but I imagine things are moving awfully slow at Intevac these days. Making sure everything is in place might add time to the process, but being found guilty of violating the EAR will absolutely add time to the process. Rest assured that someone within your organization knew the particulars about this project long before you were in the loop, so don’t let them pressure you now or blame you for the slippage, because you are doing the right thing.

Some reasons things went so badly for Intevac:

  1. They knew their technical data was controlled. They had the good sense to create a secure location for their technical data. Unfortunately, they provided the credentials needed to gain access to foreign nationals. At some point in May of 2005, someone within Intevac must have realized this was a licensable activity, and they applied for authorization to cover the initial deemed export to Russia, but apparently BIS was taking too long, so at the end of June, they went ahead and exported more data via the same means as before.
  2. Lastly, and more damaging, they acted with knowledge, and-for all those keeping track at home-this is the kind of thing that will get you hammered by DOC. Honest mistakes are one thing; acting with knowledge will get you a fine and potential debarment almost every time. As if that weren’t enough, in May of 2010 (not sure what happens at this place in May, but that doesn’t seem to be their month), Intevac exported the same type of technical data to its subsidiary in China-you guessed it-without a license. Once again, the foreign national was provided login information from the U.S. arm to gain access to the data.

Deemed Exports happen every day and are nearly impossible to stop. You must train your teams and your management so that they understand that this is a violation and that any perception of time savings is just not real. The EAR and ITAR clearly explain that providing technical data to a foreign national constitutes an export. Know your data and know your recipient and avoid ending up in articles like this one.

A Modest Post-ECR Proposal

March 31st, 2014 by Brooke Driver

By: Scott Gearity

A longer and more technical U.S. Munitions List. Dozens of new Export Control Classification Numbers. A 1,588 word Export Administration Regulations definition of “specially designed” (the International Traffic in Arms Regulations manage a definition of the same term in a comparatively brief 987 words). A license exception (STA) with enough limitations and conditions to leave even the most grizzled ITAR veteran fondly recalling her DSP-5-related repetitive stress injury.

All are consequences of the recent revisions to the ITAR and EAR. The Obama Administration’s approach to Export Control Reform is largely succeeding in its aims to refashion the US export control system in a more sensible, more reasonable and less ambiguous direction. But, by this stage, it should be clear to even the not-so-keen observer that riding along with these very real and not to be understated improvements is an unwelcome passenger – increased complexity. Administration advocates for the reform initiative might argue that more complexity is the unavoidable tradeoff for enhanced transparency and flexibility. Many in industry would likely agree that the ECR changes are very welcome overall, and they would be loath to insist upon anything that could upset this steadily accelerating applecart.

No one seriously doubts the necessity of export control regulations. Still, regulatory complexity is unwelcome, regardless of what is being regulated. It increases the cost of compliance. And, as with anything else, when the “cost” of compliance increases, people can be expected to “buy” less of it. There is another, more insidious downside to overly complex regulations. They tend to breed contempt among the regulated. When well-intentioned, intelligent and diligent exporters feel little choice but to rely upon expensive attorneys or consultants to understand and interpret the rules for them, should we be surprised if the exporters develop a sense of cynicism about the regulations? That is a problem, because some strategic trade controls are very important (a category which certainly includes most defense articles described in amended USML categories and many 600 series items). All else equal, simpler rules are better.

If we assume that ECR as presently conceived will continue apace, the question is this – what else can be done to offset the added complexity introduced by the reform process? This is my modest proposal:

BIS should remove from the CCL every commodity, software and technology controlled exclusively for purported “anti-terrorism” reasons. Just get rid of them all.

You have likely encountered the controls to which I refer, which date, in their current format if not all the details, to the major restructuring of the EAR in 1996. These are the ECCNs which capture such advanced technologies as Clinton Administration-vintage PCs (4A994), 737 lavatory faucets (9A991), drugstore-bought disposable waterproof cameras (8A992) and that new Xbox One you just bought your kid (5A992). There are also cell phone antennas (5A991), the stainless steel pipes under your kitchen sink (2B999) and that GPS-enabled wristwatch you wear while jogging after work to offset the eight hours you just spent chained to your desk while painstakingly classifying low-end, mass-produced consumer goods (7A994).

These restrictions might (emphasis on might) have had some real meaning back when the list of countries subject to AT controls (effectively Cuba, Iran, North Korea, Sudan and Syria) was different from the list of countries subject to general export bans (also Cuba, Iran, North Korea, Sudan and Syria), but in today’s environment, they have very limited impact. Anti-terrorism, as an EAR reason for control, fails any regulatory cost-benefit analysis. And nothing is more frustrating (not to mention pointless) than regulations which serve little or no purpose. Does anyone really believe that AT controls do anything to reduce the actual risk of terrorism?

The benefits of giving the CCL the Biggest Loser treatment are clear: (1) fewer ECCNs means quicker, more accurate classifications by exporters; (2) as with ECR, concentrating controls on the more important technologies will improve respect for and compliance with the parts of the EAR which actually matter; and (3) this change will support a more level playing field with U.S. allies, who do not generally include these sorts of commonplace items on their control lists. If BIS is looking for a next act after completing the transition of items from the USML to the CCL, axing AT controls is a good place to start.

Export Control Reform Surprises for Reexporters

March 27th, 2014 by Brooke Driver

By: Scott Gearity

For the unfortunate souls beyond the borders of the United States tasked with complying with the U.S. Government’s bewildering web of regulations on non-U.S. transactions, President Obama’s Export Control Reform (ECR) initiative sure must have seemed like a godsend when it was announced in 2010. Clearer control lists! More reasonable licensing polices!

And, to be fair, there is a lot to like about the reality of ECR. But in the midst of all the excitement (OK, let’s be realistic, mild interest), it would be easy for a reexporter to overlook a number of surprises:

  • Oh, wait, our suppliers still need to get licenses?…Yes, this may very well be true. To get a product to you, you may find that your U.S. vendors will simply switch from applying for licenses from the Department of State’s Directorate of Defense Trade Controls (DDTC) to applying for licenses from the Department of Commerce’s Bureau of Industry and Security (BIS). Just because something is no longer controlled under the International Traffic in Arms Regulations (ITAR) does not necessarily mean that it may be exported from the U.S. license-free.
  • Oh, wait we still need licenses?…You might. Many items remain controlled as defense articles on the U.S. Munitions List, subject to the usual burdensome ITAR retransfer requirements. And most of the things moving to BIS jurisdiction under the reform process will continue to be strictly controlled, necessitating licenses for most reexports under the Export Administration Regulations (EAR), which are nearly as extraterritorial in their application as our old friend the ITAR.
  • Ah, yes, about the EAR…You need to learn about it now. In all likelihood, your organization was handling EAR-controlled hardware, software or technology in the past, but in many places focused on ITAR controls and the EAR took a back seat. With ECR, the EAR now controls more items, including many previously subject to the ITAR.
  • China? Nope…ECR changes basically nothing about U.S. export control policy toward China. This was entirely deliberate. The status quo reigns.
  • License Exception STA is a pain in the neck…You may have heard of a “license free zone” for many of the formerly ITAR items now subject to BIS jurisdiction. To the extent that this exists, it is authorized by License Exception STA. But this exception comes with so many caveats and compliance requirements that your U.S. suppliers may just throw up their hands and apply for a license instead. On top of that, in the Asia Pacific region, only three countries are eligible destinations – Australia, New Zealand and South Korea. Anywhere else and STA does you no good at all.
  • It’s time to dust off your knowledge of Latin…Under the ITAR, nearly any defense article remains ITAR-controlled indefinitely, even once incorporated into a higher-level assembly inside or outside the U.S. (sometimes called the “see-through rule”). With the EAR, there is no general see-through rule, but there is a complex set of rules known as de minimis which determine whether a non-U.S.-origin item with U.S. content is subject to U.S. reexport rules. As always, purchasing export controlled goods from the U.S. is a caveat emptor situation if there ever was one.
  • What’s an import certificate?…It is time to find out because you may be hearing from U.S. suppliers who request one with your purchase order. The EAR sometimes requires U.S. exporters to obtain an import certificate from the consignee prior to submission of an export license application. This document would be issued by the non-U.S. government.

Relaxation is not the same thing as simplification.

In many ways, ECR is making the U.S. regulations clearer and more sensible. But the tradeoff for those benefits is sometimes greater complexity. In other words, it is essential now more than ever to receive comprehensive training on the current state of U.S. export controls compliance if you plan to do business with the United States.

A Very Busy Year for Canadian Economic Sanctions and Export Controls With More to Follow in 2014

March 27th, 2014 by Brooke Driver

By: John Boscariol

Canadian export controls specialist John Boscariol of McCarthy Tétrault–to speak at ECTI’s US Export Controls for Non-US Companies seminar series in Montreal this May–analyzes the current state of Canadian economic sanctions and trade controls. 

As we start the New Year, it is an opportune time for Canadian companies engaged in international or cross-border activities to review the key changes to Canada’s economic sanctions, anti-terrorism and trade and technology controls during 2013 to ensure compliance programs, including due diligence and screening processes, are fully up-to-date and risks of contravention and enforcement action are minimized. This is particularly important in light of the substantial financial and reputational costs of violating these laws.

For Canada, 2013 was another very active year as trade and technology control measures were liberalized in some areas while significantly tightened in others. The most important developments of this past year and some thoughts on what to expect for 2014 are discussed below.

Further Liberalization of Encryption Controls

In its continuing effort to level the playing field for Canadian companies subject to export and technology transfer controls over information security goods and technology, on January 14, 2013 the Canadian government issued a General Export Permit - GEP No. 46 (Cryptography for Use by Certain Consignees) – which allows for the transfer of finished products containing controlled cryptography to affiliates without having to apply for an individual export permit.

Under this GEP, transfers may be made to a consignee in another country that is (i) controlled by a resident of Canada or (ii) is controlled by an entity that has its head office in one of 29 designated countries and controls the resident of Canada who is making the transfer. The exporter must notify Foreign Affairs, Trade and Development Canada’s Export Controls Division (ECD) prior to the first transfer in each calendar year and then report on transfers made during the previous calendar year by January 31. Transferors must respond to ECD information requests within 15 days. In the case of physical exports, “GEP-46″ must be specified on the export report filed with the Canada Border Services Agency.

Update of Export Control List

On February 13, 2013, the Canadian government announced a number changes to Canada’s Export Control List (ECL), which sets out the goods, services and technology subject to export and technology transfer controls that include permit and reporting requirements. Many additions and removals of controls, as well as clarifications to existing controls, were made in order to reflect Canada’s obligations and commitments under international control regimes – in this case, the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, the Nuclear Suppliers Group, the Missile Technology Control Regime and the Australia Group. The amendments brought Canada up to date with its commitments under these international arrangements as of April 2011.

The changes impact goods, software and technology that are dual-use commercial items in ECL Group 1 (including encryption), military items in Group 2, missile control-related items in Group 6, as well as chemical and biological items in Group 7.

The new Guide to Canada’s Export Controls (April 2011) reflecting these changes came into effect on March 15, 2013.

Comprehensive Economic Sanctions Imposed Against Iran

Effective May 29, 2013, Canada expanded its existing economic sanctions measures against Iran under the Special Economic Measures (Iran) Regulations (Iran Regulations). Up until that time, Canada’s sanctions against Iran had been restricted to nuclear and military activities, financial services, as well as activities in certain sectors of the Iranian economy, including oil and gas, mining, telecommunications and shipping.

Key Measures

These are the most significant changes to Canada’s economic sanctions against Iran since a financial services ban was imposed on November 22, 2011. The amendments include three key measures that apply to persons in Canada and Canadian outside Canada:

(i) a prohibition against exporting, selling, supplying or shipping goods, wherever situated, to Iran, to a person in Iran, or to a person for the purposes of a business carried on in or operated from Iran;

(ii) a prohibition against importing, purchasing, acquiring, shipping or transhipping any goods that are exported, supplied or shipped from Iran, whether the goods originated in Iran or elsewhere; and

(iii) a prohibition against making an investment in an entity in Iran.

Goods that are sourced or supplied under a contract entered into before May 29, 2013 are exempted, provided that they were not already banned pursuant to the pre-existing measures and certain other conditions are satisfied. There are some other limited exceptions, including for informational materials, personal and settlers’ effects, and non-commercial packages sent by mail. Exemptions have also been added for equipment, services and software that facilitate secure and widespread communications via information technologies (provided that an export permit has been issued in respect of any export-controlled goods) and for goods used to purify water for civilian and public health purposes.

Prohibited Dealings Involving Designated Persons

There are now over 600 entities and individuals that have been designated under Canada’s Special Economic Measures (Iran) Regulations.

Companies and individuals are prohibited from engaging in a wide range of dealings with designated persons under Canada’s numerous economic sanctions programs, including its measures against Iran. Canadians are also subject to reporting requirements in respect of property owned or controlled by designated persons and related proposed or actual transactions. Financial institutions, including federally regulated banks and provincial trust and loan companies and securities dealers, are required to monitor and determine on a continuing basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person under these measures.

Potential for Relaxation?

On November 23, 2013 an agreement between Iran and the P5+1 (the United States, United Kingdom, Germany, France, Russia, and China, facilitated by the European Union) was announced that provides for the halting of Iran’s nuclear program in return for the relaxation of certain sanctions measures. However, the Canadian government has been clear that it is skeptical of Iran’s commitments and that comprehensive sanctions will remain in force while it reviews the deal and Iran’s progress in implementation and granting access to its nuclear facilities.

Major Changes Coming to the Defence Production Act and Controlled Goods Program

On November 19, 2013, Public Works and Government Services Canada launched consultations on proposed amendments to the Defence Production Act (DPA) which will have a significant impact on Canadian companies in the defence, aerospace, security and satellite sectors.

Companies that are subject to the DPA and its Controlled Goods Regulations must comply with significant registration, screening and security obligations in their dealings with controlled goods and technology within Canada. The proposed amendments to the Schedule to the DPA will significantly change the scope of products and technology subject to the Controlled Goods Program (CGP), including by removing just over half of the current entries.

The Canadian CGP was designed to work hand-in-hand with the U.S. International Traffic in Arms Regulations (ITAR) regime so that, generally speaking, the kinds of goods and technology controlled for ITAR purposes would also be subject to domestic security controls in Canada under the CGP. These latest amendments have been proposed in response to complaints that CGP requirements are overly burdensome and there have been problems specifically with the intersection of the Canadian and U.S. regimes. This has included instances in which items that were no longer controlled under the U.S. ITAR regime are still being controlled under the Canadian CGP regime, a challenge that would become more difficult as the United States reforms its export controls and moves items from United States Munitions List control under the U.S. State Department to dual-use control under the U.S. Commerce Department.

It is important to note that none of the proposed changes will impact Canadian controls on the export or transfer of controlled goods or technology from Canada.

Prospects for 2014

In addition to the DPA defense trade control changes discussed above, amendments to export controls are also anticipated as Canada continues to update its Export Control List in accordance with its international obligations, including under the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. Canadian companies engaged in cross-border transactions should be closely monitoring developments under Wassenaar and other international control regimes to anticipate coming changes to Canadian law in this area – this includes new controls over goods and technology associated with internet and network surveillance.

Further, all indications are that Canada will continue to implement an aggressive economic sanctions and anti-terrorism regime, not simply based on multilateral initiatives through the United Nations Security Council, but also through unilateral measures where Canada is of the view that UN measures are insufficient or non-existent. This continues to be the case for Canada’s measures controlling dealings with a number of countries, including Iran, Syria, Belarus, Burma (Myanmar), Zimbabwe and North Korea.

Canadian companies and financial institutions should be carefully reviewing their compliance policies and screening lists in light of these latest developments. Because of the substantial financial and reputational impact that contraventions in this area can have, it is important that any company doing business internationally, whether in the goods, services or technology sector, ensure appropriate compliance and due diligence measures are in place. These include: maintaining compliance manuals; appointing responsible compliance officers; screening customers, end-users and suppliers; providing training programs; conducting internal audits; establishing disclosure procedures; and reviewing contracts and other legal documentation on a regular basis.

At the present time, Canada imposes trade controls of varying degrees on activities involving the following countries (and in many cases, listed entities and individuals associated with them): Belarus, Burma (Myanmar), Côte d’Ivoire, the Democratic Republic of the Congo, Cuba, Egypt, Eritrea, Guinea, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Pakistan, Somalia, Sudan, Syria, Tunisia and Zimbabwe. Any involvement of these countries or any “designated person” in proposed transactions or other activities should raise a red flag for further investigation to ensure compliance with export and technology transfer controls and economic sanctions.

John W. Boscariol is a partner at McCarthy Tétrault LLP and leader of the firm’s International Trade & Investment Law Group. He specializes in compliance and enforcement matters related to anti-corruption laws and policies, economic sanctions and export controls and other laws governing the cross-border trade in goods, services and technology and foreign investment.

Treasury Department Releases Foreign Sanctions Evaders List

March 13th, 2014 by Brooke Driver

By: Brooke Driver

On February 6, the Treasury Department released its new Foreign Sanctions Evaders List, which you should incorporate into your screening process for selecting potential international clients and associates. The list identifies foreign individuals and entities that have either violated, attempted to violate, conspired to violate or caused a violation of U.S. economic and financial sanctions on Syria or Iran or facilitated deceptive transactions for or on behalf of persons subject to such sanctions. Individuals and entities included on the list are prohibited from working with U.S. commercial or financial systems. Likewise, U.S. persons or companies are forbidden to directly or indirectly enter into business relations with any of the listed parties unless OFAC grants permission or the transaction is exempt under the International Emergency Economic Powers Act.

To view the list, click here: http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fse_list.aspx.

BIS Seeks Input on Proposed Amendment to EAR: Replacing the term “Routed Export Transaction” with “Foreign Principal Party Controlled Export Transaction”

March 13th, 2014 by Brooke Driver

By: Brooke Driver

BIS recently released a proposed change to the EAR that would remove the term “routed export transaction” and replace it with “foreign principal party controlled export transaction” in order to better define export transactions in which the foreign buyer assumes responsibility for export licensing. In so doing, Commerce hopes to eliminate the confusion caused by the two different interpretations of “routed export transaction” as it appears in the EAR and the Foreign Trade Regulations. Comments on the proposed rule are due no later than April 7. The EAR define “routed export transaction” as a transaction in which the foreign party in interest agrees to terms of sale that include taking delivery of items inside the U.S. through an American agent and assuming responsibility for transporting those items from the U.S. to a foreign destination. In such cases, the U.S. provider may allow the foreign buyer to assume the task of determining the need for approval and acquiring licenses if necessary. BIS claims that some, however, have incorrectly interpreted the term within the context of the FTR to state that it is required that the USPPI allow the FPPI to assume licensing responsibility in all routed export transactions. The proposed term “foreign principal party controlled export transaction” would then describe a transaction in which the FPPI is responsible for the export of items subject to the EAR and also for fulfilling licensing requirements.

Under this new rule, the USPPI would be required to provide the FPPI and its agent, if prompted, with the ECCN of the product(s) involved in the transaction or sufficient technical information to determine the correct ECCN and any additional information that it knows may affect the determination of license requirements or export authorization. The FPPI would then need to authorize the USPPI to obtain from the U.S. agent the date of export, port of export, country of ultimate destination, destination port, method of transportation, specific carrier identification and export authorization.

To submit your comments, email Robert.Monjay@bis.doc.gov.

BIS Settles with Ansell and Comasec for Attempted Transshipment of Industrial-Strength Gloves to Iran through UAE

March 13th, 2014 by Brooke Driver

By: Brooke Driver

Well, folks, here’s yet another case of the consequences of defying U.S. embargoes. BIS has announced that it has reached a settlement agreement with Ansell Protective Products Inc. of New Jersey and Comasec of Gennevilliers, France. Specifically, Ansell was charged with two counts of engaging in prohibited conduct by exporting items to Iran without the required license and two counts of evasion, while Comasec was charged with two counts of causing, aiding or abetting and two counts of evasion. Between June 27, 2008 and September 19, 2008, Ansell entered into business with French company Comasec SAS and agreed to export 35,000 pairs of Nitrotough N115 and Blue Nitrile industrial-strength gloves with a total value of $43,500 to Comasec’s client Zhabeh Safety Co. of Tehran, Iran. To avoid the U.S. embargo, Ansell and Comasec chose to first ship the items to the UAE, where they would then be transferred to their final destination in Iran. The scheme was thwarted in March of 2009, when the violation was discovered and the items seized by CBP.

The two companies were certainly smart to settle, rather than go to court over these charges, as the investigation had uncovered a significant amount of evidence of both companies’ conscious efforts to continue with the transaction despite the U.S. sanction. The evidence ranged from invoices that explicitly stated the end user’s location in Iran to emails between Ansell and Comasec expressing their knowledge of the U.S. embargo against Iran and detailing their plan for avoiding the restrictive U.S. law. Considering the amount and gravity of the evidence, in fact, BIS’ settlement of a $190,000 fine for each company is surprisingly lenient.

Of course, the relatively low value of the items involved certainly played a role in determining the appropriate payment, but Ansell’s and Comasec’s blatant disregard for U.S. regulations seems to merit a more severe consequence. All the same, the case certainly proves the point yet again that it is never worth the cost to engage in business with an embargoed country and that BIS is cracking down on those that do.

Clearstream Banking Pays $151.9 Million for Transferring Funds to Iran through the U.S.

March 13th, 2014 by Brooke Driver

By: Brooke Driver

On January 23, OFAC announced that Luxembourg-based Clearstream Banking, S.A. has agreed to pay $151.9 Million for alleged violations of the Iranian Transactions and Sanctions Regulations. OFAC points out that the case is an example of the particular risks faced by intermediaries, custodians and other firms in the international security markets. Apparently Clearstream held an omnibus account at a New York bank, through which the Central Bank of Iran maintained a beneficial ownership interest in 26 corporate and sovereign bonds, with a nominal value of $2.8 billion. In connection to this account, Clearstream exported controlled security-related services to the Iranian bank. One of the main factors, surely, in OFAC’s decision to assign such a large fine was the fact that OFAC officials had previously confronted the Luxembourg bank concerning its relationship with the CBI, and, while the institution assured OFAC that it would cease business relations with the bank, it continued to work with the CBI, simply disguising its activities by utilizing a European bank as a custodian for the CBI’s securities entitlements.

Clearly, these violations were committed intentionally, a theory further supported by the fact that Treasury discovered evidence that at least one Clearstream supervisor and one senior executive of the institution possessed knowledge of the illegality of the institution’s actions. OFAC claims that it arrived at the large penalty due to the reckless and egregious nature of the case and the fact that Clearstream did not disclose its violations. However, OFAC greatly reduced the potential fine of $5.6 billion, as the institution has made substantial efforts to improve its compliance program. It’s hard to believe that anyone could be relieved by a nearly $152,000,000 debt, but in this case, I’m sure Clearstream’s officials are feeling just that.