When “Minor” Export Violations Can Become Federal Crimes

August 28th, 2014 by Brooke Driver

By: Stephen Wagner

Your foreign customer has been complaining to you about the high duties on your products when they are imported into his country. He asks if you could manifest an item as a “Return of Goods under Warranty.” That way, his company will avoid having to pay customs duties when the merchandise is imported.

You know that the merchandise will be properly valued and described (other than the “warranty return” label) when your freight forwarder inputs the Electronic Export Information into the Automated Export System (AES). This will really help the customer, so this isn’t a big deal, right?

There is an old proverb that states, “What you don’t know can’t hurt you.” However, when it comes to export regulation and enforcement matters, the “First Law of Blissful Ignorance” is probably more accurate:

What you don’t know will always hurt you.

Improperly declaring export information in AES is a violation of the Foreign Trade Regulations (FTRs), which are codified at title 15 of the Code of Federal Regulations (C.F.R.) part 30. Specifically, 15 C.F.R. § 30.3(a) requires that electronic export information (EEI) be “complete, correct, and based on personal knowledge of the facts stated or on information furnished by the parties to the export transaction.” This requirement of accuracy applies (in this case) to the merchandise information that is submitted pursuant to 15 C.F.R. § 30.6(a)(13), which calls for a description of the commodity.

Therefore, even if you disregard the guidance contained in the FTRs regarding the “reporting of repairs and replacements” (15 C.F.R. §30.29) and accurately report the price and the commodity classification number, misrepresenting that merchandise as a warranty return, when it is not, is still a violation of the FTRs.

Subpart H of the FTRs (15 C.F.R. §§ 30.71-74) outlines the penalty provisions for export violations; these penalty provisions are enforced by U.S. Customs and Border Protection (CBP). Penalties for this type of infraction can be as high as $10,000 per violation, but CBP mitigation guidelines could reduce the penalties to as low as $500, if this is your company’s first offense. Moreover, according to CBP:

For first violations of the FTR, CBP may take alternative action to the assessment of penalties, including, but not limited to, educating and informing the parties involved in the export transaction of the applicable U.S. export laws and regulations, or issuing a warning letter to the party.

(U.S. Customs and Border Protection, “Guidelines for the Imposition and Mitigation of Civil Penalties for Failure to Comply with the Foreign Trade Regulations in 15 CFR Part 30,” CBP Dec. 08-50 (Feb. 2009)).

But that may not be the end of your potential enforcement liabilities.

In 2005, the U.S. Supreme Court considered the case of Carl and David Pasquantino and Arthur Hilts who were arrested and convicted of smuggling large quantities of liquor from the United States into Canada to evade Canada’s high alcohol import taxes. In this case, the men were convicted of criminal wire fraud, in violation of 18 U.S.C. § 1343.

The federal criminal wire fraud statute prohibits the use of the “instrumentalities of interstate or international telecommunications in furtherance of any scheme or artifice to defraud.” The Court in Pasquantino held that a scheme to deprive a foreign government of lawful duties and taxes comes within the scope of a “scheme or artifice to defraud” in the U.S. federal wire fraud statute. (Pasquantino v. United States, 544 U.S. 349, 354-55 (2005)).

The bottom line is that whenever a U.S. exporter knowingly falsifies any export information or export documents with the result that a foreign country is deprived of its lawful import duties, that action may constitute a Pasquantino violation.

Therefore, if you electronically transmit your EEI to AES with the erroneous “warranty return” information, under Pasquantino, you could be guilty of criminal wire fraud, because you are using your U.S. computer to deprive your customer’s foreign government of its duties. Also, if you mail copies of the export documents with that same false information, that may be a violation of the federal criminal mail fraud statute (18 U.S.C. § 1341).

While the penalties for the AES violations may be as negligible as informed compliance from CBP, a warning letter, or a mitigated penalty of $500, a criminal conviction of federal wire fraud and/or mail fraud can carry prison sentences up to 20 years per violation and a fine of up to $250,000 for each violation. Such serious potential consequences of even “minor” export violations is why your company – and every U.S. exporter – should religiously adhere to all export laws and regulations, and make export compliance a top corporate priority.

The Export Compliance Manual: One Size Does Not Fit All

August 28th, 2014 by Brooke Driver

By: Stephen Wagner

You are so confused.

BIS Agents were in your office conducting an “industry outreach.”  They spoke with your export managers and scanned through your export records and training program materials.  However, when they reviewed your export compliance manual, they said that it was inadequate and that your company could face higher penalties because of it, if violations are found.

When your company created the manual three years ago, they precisely followed and used the outline and sample forms for export compliance manuals that were given by BIS on its own website.  Since you followed their forms to the letter, how can you be non-compliant?

Simply put: when it comes to export compliance manuals, one size does not fit all.

The Bureau of Industry and Security (BIS) (the Department of Commerce’s export control office) has developed and published “Compliance Guidelines: How to Develop an Effective Export Management and Compliance Program and Manual.”  Within the contents of this 145-page document, BIS delineates the “Key Elements” necessary for export compliance programs in general and, more specifically, the manuals that are supposed to capture the policies and procedures that underlie those programs.

Yet, as informative and helpful as these Compliance Guidelines can be, they are just that – guidelines.  BIS stresses the importance of customizing the contents of your compliance manual (and program) to reflect your company’s operational realities and meet your company’s specific needs.

For example, if your company sends its technicians (and their equipment) out to overseas clients and customers to perform training, maintenance, repairs and warranty replacements, your compliance manual should specifically address the controls you have put in place to safeguard – and license, when necessary – the equipment, software, technical drawings and knowledge that goes out with them.  While the BIS-provided manual outline addresses “Nuclear explosive activities” and end-use checks for “Certain Rocket Systems and Unmanned Air Vehicles,” those sections are probably irrelevant for most companies and can be omitted from the export compliance manual.

Your company needs to reevaluate your compliance manual to see if the manual does such things as:

  • capture the company’s current operations and work-flows,
  • provide standard operating procedures (SOPs) for compliance activities and safeguards during each step of the export process,
  • allocate specific compliance tasks to specific responsible personnel, and
  • involve all levels of the company from the senior executives responsible for operations all the way down to the people working the loading dock.

In addition, your compliance manual should contain features that are not even included in the BIS Guidelines.  For example, your manual could contain, if applicable, SOPs to identify and prevent foreign corrupt practices, such as improper payments to foreign government officials.  Also, every manual should have procedures on how to respond to enforcement activities such as investigations, subpoenas and an announced or unannounced “industry outreach,” which is just an enforcement action in disguise.

You can also think outside the box when it comes to an export compliance manual.  The “manual” does not have to be a three-ring binder on a bookshelf.  An effective manual can also be well-documented checks and balances that are integrated into your automated processes.  For example, when entering the “ship to” name on a packing list, a pop-up window can ask whether the employee has checked the consignee’s name against screening lists promulgated by the various export control agencies.  Many enterprise accounting, logistics, and inventory control solutions can incorporate such control features into company operations.

Most critically, your export compliance manual needs to be a living, breathing document.  A manual created three years ago that has sat on a shelf almost invariably is outdated.  The company must have procedures in place for reviewing and updating the compliance manual no less than annually.  Employees need to be trained on how to use the manual (and report needed corrections to SOPs).  Finally, the manual needs to be in harmony with – and accurately reflect – the overall export compliance program for the company.

The importance of having an up-to-date, dynamic export compliance manual cannot be underestimated.  As special agents from the BIS Office of Export Enforcement will tell you, having a current manual (as part of the overall compliance program) is accorded “great weight” by BIS as a mitigating factor in possible export penalties and sanctions.  In contrast, an out-of-date manual speaks of an export compliance program that probably is not being adequately implemented by a company.

OFAC Revises Burmese Sanctions to Reflect Executive Orders

August 28th, 2014 by Brooke Driver

By: Brooke Driver

As of June 27, 2014, the Office of Foreign Assets Control has altered and reissued the Burmese Sanctions Regulations to reflect the following executive orders:

  • EO 13448, which blocks (with some exceptions) all property and interests in property of specified persons as well as those determined to meet the indicated criteria
  • EO 13464, which blocks all property and interests in property of specified persons as well as those determined to meet the indicated criteria
  • EO 13619, which blocks all property and interests in property of persons determined to meet the specified criteria

EO 13651, which revokes EO 13310 implementing the broad ban on the importation of products of Burma, reinstated the prohibition on imports of any jadeite or rubies mined or extracted from Burma and any articles of jewelry containing such gems and waived the blocking and financial sanctions on certain categories of persons described in the Tom Lantos Block Burmese Junta’s Anti-Democratic Efforts Act of 2008

Red Bull’s Cuban Documentary Violates the CACR

August 28th, 2014 by Brooke Driver

By: Brooke Driver

Red Bull might give you wings, but that doesn’t mean you should fly (without a license). The energy drink company Red Bull North America, Inc. has agreed to settle with OFAC for $89,775 over its alleged seven violations of the Cuban Assets Control Regulations. Specifically, the company violated 31 C.F.R. part 515 of the CACR when it authorized seven Red Bull representatives to travel to Cuba in order to film a documentary between the dates of June 8 and June 18, 2009.

While the maximum penalty in this instance is $455,000, the base penalty is $105,000, and OFAC chose even to significantly reduce that fine despite the facts that:

  • Red Bull did not disclose its violations
  • Red Bull had prior knowledge of U.S. sanctions on Cuba and took steps to conceal the transactions
  • Red Bull is a U.S. subsidiary of a sophisticated multinational company with extensive experience in international trade (in other words, “you should have known better!”)

And considering the facts that:

  • The case was deemed non-egregious
  • Red Bull had not committed a violation in the five years prior to the incident
  • Red Bull immediately took remedial action in implementing an OFAC compliance program

Red Bull’s mishap acts as a forceful reminder that “export” applies to many more situations than a clear cut shipment of an item and that companywide training is essential for your protection. Marketing, in this case, and many other seemingly unrelated departments often perform or are involved in some form of exporting. Be sure to arm them with at least a high level awareness of the compliance risks they face.

BNPP Pays Nearly $9 Billion for Repeated Sanctions Violations

August 28th, 2014 by Brooke Driver

By: Brooke Driver

The French bank BNP Paribas SA has agreed to pay $8.97 billion for its (get ready for this number) 3,897 apparent violations of the Sudanese Sanctions Regulations, Iranian Transactions and Sanctions Regulations, Cuban Assets Control Regulations and Burmese Sanction Regulations, a record breaking penalty for American sanctions violations. The enormity and global nature of the case prompted collaboration between OFAC, the U.S. Department of Justice, the New York County District Attorney’s Office, the Federal Reserve Board of Governors and the Department of Financial Services of the State of New York in the process of investigating BNPP’s violations and arriving at an appropriate consequence.

For a number of years prior to and including 2012, BNPP processed—and concealed—thousands of transactions to or through U.S. financial institutions involving parties subject to the aforementioned sanctions programs. In executing these illegal transactions, BNPP concealed, removed, omitted or obscured references to the sanctioned parties in related paperwork.

Specifically, between the dates of September 6, 2005 and July 24, 2009, BNPP processed 2,663 wire transfers totaling approximately $8,370,372,624 involving Sudanese entities, 318 wire transfers with a total value of $1,182,075,543 involving Iranian entities between July 15, 2005 and November 27, 2012, seven wire transfers for Burmese parties (totaling $1,478,371) between November 3, 2005 and sometime in May 2009 and 909 Cuba-related wire transfers between July 18, 2005 and September 10, 2012 with a total value of $689,237,183. The severity of the fine and year-long ban from conducting certain U.S. dollar transactions is a clear message to other financial institutions that might not take U.S. sanctions seriously.

OFAC claims that the settlement amount reflects the following factors:

  • BNPP had knowledge that its conduct might have violated U.S. law
  • At least one member of BNPP senior management and multiple supervisors  were aware of the company’s illegal conduct
  • The violations are numerous and span many years
  • The illegal transactions were large monetary transfers
  • BNPP had not received a violation notice in the five years leading up to the settlement
  • BNPP cooperated with OFAC’s investigation
  • BNPP has taken remedial action to prevent further U.S. sanctions violations

Commerzbank OFAC’s Next Target for Large Sanctions Violation Penalty

August 28th, 2014 by Brooke Driver

By: Brooke Driver

Currently, the French bank BNP Paribas is receiving a lot of attention, due to its record breaking fine of nearly $9 billion for breaking U.S. sanctions laws. However, it seems that the German-based Commerzbank will serve as the U.S.’s next example of what can happen to a financial intuition that foolishly ignores U.S. law.

The bank, which has entered into settlement negotiations with the combined forces of OFAC, the Department of Justice, the Treasury Department, the Federal Reserve and the Manhattan District Attorney, is expected to pay between $600 million and $800 million to resolve its violations of sanctions regulations, including Iranian transactions, amongst others.

Among the actions in question are Commerzbank’s business transactions with the Islamic Republic of Iran Shipping Lines, which was designated for economic sanctions in 2008 for allegedly supporting Iran’s proliferation of weapons of mass destruction. Apparently, Commerzbank continued to work with the company, despite the fact that it had prior knowledge of the sanction. ECTI will keep you updated as the case unfolds.

Commerce/Census: “Tips on How to Resolve AES Fatal Errors”

August 28th, 2014 by Brooke Driver

Source: AES Broadcast #2014060

When a shipment is filed to the AES, a system response message is generated and indicates whether the shipment has been accepted or rejected. If the shipment is accepted, the AES filer receives an Internal Transaction Number (ITN) as confirmation. However, if the shipment is rejected, a Fatal Error notification is received.

To help you resolve AES Fatal Errors, here are some tips on how to correct the most frequent errors that were generated in AES for this month.


Fatal Error Response Code: 561

Narrative: DDTC License Number Unknown

Reason: The License Code/ License Exemption Code reported requires a Department of State/ Directorate of Defense Trade Controls (DDTC) license number, but the DDTC license number reported is unknown in AES.

Resolution: The DDTC license number reported must be valid in AES.

Verify the DDTC license number, correct and resubmit.


Fatal Error Response Code: 590

Narrative: Shipment Value Exceeds Available Value for License

Reason: The License Code/ License Exemption Code reported was DDTC S05 for a DSP-05 license, but the Value reported exceeds the value remaining on the license.

Resolution: The DSP-05 license has not been decremented because the Value reported exceeds the value amount remaining for that license.

Verify the Value, correct and resubmit.

For further assistance, contact the licensing agency. The Department of State/ Directorate of Defense Trade Controls / DDTC Help Desk can be reached on 202-663-2838.

Epsilon Pays Over $4 Million for ITSR Violations

August 28th, 2014 by Brooke Driver

By: Brooke Driver

Epsilon Electronics Inc. of Montebello, California (A.K.A. Power Acoustik Electronics, Sound Stream, Kole Audio and Precision Audio) recently agreed to settle for $4,073,000 over its violations of the Iranian Transactions and Sanctions Regulations. Between the dates of August 26, 2008 and May 22, 2012, Epsilon issued 39 invoices for car and audio equipment (valued at $3,407,491 to a company that reexports nearly all of its products to Iran and has offices in Tehran, Iran and Dubai.

Epsilon was aware of the company’s relationship with Iran and was also issued a cautionary letter from OFAC in January of 2012 explaining the role of the ITSR in protecting U.S. interests. OFAC chose to demand the high fine based on Epsilon’s awareness that its actions were in violation of U.S. law and its apparent conscious efforts to obscure those actions.

Determining Classification After U.S. Export Control Reform: The reexporter’s guide to determining US export license requirements in a reformed world

August 27th, 2014 by Brooke Driver

By: Scott Gearity

– originally published in the World ECR…the journal of export controls and sanctions

This article is the second in a series of articles examining how U.S. export control reform impacts non-US firms. In the last installment, we introduced readers to this subject with a step-by-step guide to the application of U.S. export controls outside the U.S. In this and future articles, we will introduce case studies in export control reform and identify answers to common questions.

As U.S. exporters acclimate to the major changes to their country’s export control system, which began to come into effect last year, many non-U.S. firms affected by export control reform are just starting to appreciate what the new rules mean to them.

To illustrate some of the issues facing non-U.S. companies as a result of the U.S. reforms, consider a scenario involving a fictional Belgian aerospace and defense firm, which we will call “EuroAero.” EuroAero is the prime contractor for a fourth-generation fighter aircraft assembled in Belgium. Since the inception of the program, EuroAero has purchased the aircraft canopy actuator from its longtime U.S. supplier California Actuation. The actuator is made to EuroAero’s specifications in order to fit properly and integrate with the other components of the canopy assembly. California Actuation has always obtained U.S. Department of State licenses to authorize the export of the actuators to Belgium and onward to the various governments operating the aircraft.

EuroAero’s legal director calls you into his office. You immediately notice a newspaper clipping about U.S. export control reform on her desk. She says, “I just read this article about the new U.S. export control regulations and I have a few questions: Will these U.S.-origin actuators still be controlled by the Department of State under the International Traffic in Arms Regulations? If not, will they be controlled at all by the U.S.?”

How do you answer her?

Answers

The ITAR now takes a very different approach to controls on aircraft parts and components then it did prior to October 15, 2013, when U.S. reforms began to come into effect. In the past, the U.S. Munition List took a very general, vague approach to controls on these items. A handful of things were identified by name, but virtually any aircraft part could be subject to strict Department of State controls in USML Category VIII(h) if it were “specifically designed or modified” for a military aircraft. (And the U.S. Government never defined what was meant by “specifically designed or modified,” resulting in widely varying interpretations by exporters and reexporters).

Under export control reform, that is no longer the case. Now, there are only two ways in which an aircraft part may be controlled on the USML: either it is (a) “specially designed” for a handful of the most advanced U.S.-origin aircraft types, such as the B-2, F/A-18E/F/G or F-35 or (b) actually identified by characteristics or functions in a specific entry within Category VIII(h). A few examples of these items, which are now enumerated on the USML, are automatic rotor blade folding systems, weapons pylons and air-to-air refueling systems. In some instances, specially designed parts and components of these identified items are also ITAR-controlled.

Now let’s apply these concepts to EuroAero – a Belgian firm procuring a canopy actuator for their modern fighter aircraft. This is an aircraft component, so we review USML Category VIII(h). Since the actuator is made to EuroAero’s specifications for their aircraft, it is highly unlikely that it could be considered “specially designed” for one of the U.S. aircraft types listed in paragraph (h)(1). Next, we turn our attention to the items described in paragraphs (h)(2)-(26). None of these controls mention either canopies or actuators more generally. The probable conclusion – this actuator is no longer controlled under the ITAR. (It is worth noting that it is still possible to have an ITAR-controlled actuator if, for example, that actuator is “specially designed” for an automatic rotor blade folding system.)

The ITAR may no longer control this actuator, but that does not mean that no U.S. export controls apply to it.

To identify the relevant controls, the next step is to review the Commerce Control List within the Export Administration Regulations, in particular the new 600 series Export Control Classification Number 9A610, which was created largely to control military aircraft and related items no longer described on the USML. Some paragraphs of ECCN 9A610 do identify specific aircraft components (e.g. aircrew life support equipment in 9A610.g and certain radar altimeters in 9A610.v), but catch-all paragraph ECCN 9A610.x is now one of the most common classifications for military aircraft parts.

ECCN 9A610.x controls virtually any part, component, accessory or attachment “specially designed” for a military aircraft controlled in USML Category VIII(a) or ECCN 9A610.a, which is not otherwise controlled on the USML or by ECCN 9A610.y. If the canopy actuator is “specially designed” for EuroAero’s fighter jet, ECCN 9A610.x is now the most likely classification. Of course, in practice you would want to confirm this with the actuator manufacturer.

Scott Gearity will be discussing classification for European companies as well as many other important topics at ECTI’s “US Export Controls on Non-US Transactions” seminar in Amsterdam in October 2014.

Reexporting No License Required: The reexporter’s guide to determining US export license requirements in a reformed world

August 27th, 2014 by Brooke Driver

By: Scott Gearity

– originally published in the World ECR…the journal of export controls and sanctions

This article is the third in a series of articles examining how U.S. export control reform impacts non-US firms. In this and future articles, we will introduce case studies in export control reform and identify answers to common questions.

The Case: Reexporting No License Required

There are many unpleasant aspects to applying the International Traffic in Arms Regulations (ITAR), but determining license requirements is not one of them. If an item is a defense article described by the U.S. Munitions List (USML), exporting it from the U.S. requires a Department of State license perhaps 99 percent of the time (with the remaining one percent permitted by exemption). Outside the U.S., where most ITAR exemptions are unavailable, the proportion of retransfers requiring specific authorization is probably even higher. The basic rule is simple – if the item is ITAR-controlled, expect to need a license. Simple, yes, but also quite burdensome.

Now, enter the Export Control Reform Initiative (ECR). How do the recent U.S. regulatory adjustments affect the license requirements applicable to reexports of items now subject to the Export Administration Regulations (EAR)?

To better understand the answer to this question, imagine a fictional Belgian aerospace and defense firm known as EuroAero. EuroAero has been working diligently with its suppliers to reclassify various U.S.-origin components in its inventory to reflect ECR changes. Among the recently reclassified items are the following:

Part No. Description ECCN
34507 fuel tank 9A610.x
43900 check valve 9A610.y.4
84366 armored truck 0A606.b.1

 

The business team is pursuing opportunities to sell these products in Canada, Poland and Qatar. The team needs to set customer expectations for lead times, and U.S. reexport license requirements are an important factor. Your assignment is to advise them as to which of these items may be shipped No License Required (NLR) to each of the three prospective destinations.

The response:

In contrast to ITAR-controlled defense articles, reexporters may ship many EAR-controlled items NLR. This is true even for items classified in some of the new 600 series Export Control Classification Numbers (ECCNs). The determination mainly depends on the item’s ECCN and the country of destination. NLR is not merely a statement that no specific, advance approval of the Bureau of Industry and Security (BIS) is necessary; it is a reexport authorization in and of itself on par with a BIS license or regulatory license exception.

First, consider the fuel tank classified in ECCN 9A610.x, a common classification for parts specially designed for a military aircraft, but which are not controlled on the USML. The “License Requirements” section of the ECCN tells us that items classified 9A610.x are controlled for four reasons – National Security (NS1), Regional Stability (RS1), Anti-terrorism (AT1) and United Nations (UN) Embargo. By cross-referencing the reasons for control against the EAR’s Commerce Country Chart, we learn that none of these reasons for control apply to Canada, but NS and RS are each applicable to Poland and Qatar. This fuel tank is eligible for NLR reexport to Canada, but not to Poland or Qatar. Parts described by ECCN 9A610.x are highly controlled. In fact, Canada is the only NLR-eligible destination.

The next part in EuroAero’s classification matrix is a check valve with an ECCN of 9A610.y.4. Despite sharing the same base ECCN as the fuel tank classified 9A610.x, the only applicable reason for control for the .y paragraph of ECCN 9A610 is AT1. Referring again to the Country Chart, we note that AT1 controls are inapplicable to all three of the countries of interest. Therefore, the check valve is NLR-eligible for shipment to Canada, Poland and Qatar.

Finally, there is the matter of the armored truck classified in ECCN 0A606.b.1. NS, RS, AT and UN reasons for control all apply to this truck. But, importantly, the NS and RS controls are each of the Column 2 variety, which do not apply to a much larger group of countries than the corresponding Column 1 controls. So the armored truck is eligible for NLR reexport to both Canada and Poland, but not to Qatar.

Three different items – all controlled by new 600 series ECCNs – and in each case subject to a different set of determinations for reexporting without a license.

It is important to remember that NLR eligibility does not necessarily mean that EuroAero can actually make the reexport NLR. Other factors, such as a problematic end-use or an ineligible end-user might intervene. Also beware other EAR restrictions which are not handled by the Country Chart, such as the blanket prohibition on the reexport of 600 series items (including those classified in a .y paragraph) to China.