Electronics Retailer Pays $275,000 for Illegal Exports of Optical Sighting Devices

February 4th, 2015 by Brooke Driver

By: John Black

Well-known electronics retailer, B&H Electronics Corp. of New York, most likely lost money on 50 exports of 0A987 optical sighting devices after it agreed to pay $275,000 for 50 illegal export between 2009 and 2012.  In fact, if B&H paid the standard hefty legal fees normally involved in reaching settlement agreements and paid to implement corrective, remedial actions to prevent future illegal exports, its losses could easily exceed double the $275k settlement payment.

Ever the auditor, I couldn’t stop myself from making a quick check-up on the B&H website to see what happens if I pretended to be outside the United States and order some optical sites.  When I indicated I was in Australia, the B&H website would not accept my order and cited US export controls as the reason.  I tried again using the UK, Pitcairn Island, and Canada and B&H refused each one, even for Canada.  I then ordered an Audio Technica turntable pretending to be in the same countries and the system did not refuse my order.

I pulled my audit’s cap tighter onto my head and I entered a fake order from Canada using the name of a person on an export prohibited parties list.  Unfortunately, in order to see if it would accept my order, I would have had to enter a credit card number, and, well I stopped my spot check at that point.  Not only did I not want my credit card charged, I did not want to participate in an export involving a prohibited party.

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

February 4th, 2015 by Brooke Driver

Source: AES Broadcast December 23, 2014

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: 128

- Narrative: Port of Export Unknown

- Reason: The Port of Export Code reported is not valid in AES.

- Resolution: The Port of Export Code must be valid in AES. Valid Port of Export Codes reportable in AES are contained in Appendix D – Export Port Codes. Verify the Port of Export Code, correct the shipment and resubmit.

Fatal Error Response Code: 628

- Narrative: 1st Unit of Measure Code / Schedule B/HTS Mismatch

- Reason: The Unit of Measure (1) reported does not match the Unit of Measure (1) required for the Schedule B/ HTS Number reported.

- Resolution: The Unit of Measure (1) must match exactly the Unit of Measure (1) prescribed by the Schedule B/HTS Number reported. Verify the Unit of Measure (1) required for the reported Schedule B/HTS Number, correct the shipment and resubmit.

For a complete list of Fatal Error Response Codes, their reasons, and resolutions, see Appendix A – Commodity Filing Response Messages.

BIS Corrects Amendments that Shifted USML Cat. XI to CCL

February 4th, 2015 by Brooke Driver

By: Brooke Driver

Effective December 29, 2014, BIS corrected certain provisions of the EAR that were amended in 13 past final rules taking place between November 5, 2007 and October 14, 2014. The changes enact corrections meant to improve clarity and consistency in the regulations. The rule also addresses typographical errors included in the 13 final rules.

BIS Expands Microprocessor Military End-Use and End-User Control

February 4th, 2015 by Brooke Driver

By: Brooke Driver

On December 17, 2014, in an effort to accommodate technological advances, BIS revised the Export Administration Regulations (EAR) to amend  the microprocessor military end-use and end-user control in 744.14 of the EAR. The rule altered the scope of microprocessors subject to restriction.  The rule now prohibits exports, reexports or transfers (in-country) of:

  • Microprocessors (“microprocessor microcircuits,” “microcomputer microcircuits,” and microcontroller microcircuits having a processing speed of 5 GFLOPS or more and an arithmetic logic unit with an access width of 32 bit or more, including those incorporating “information security” functionality), or
  • Associated “software” and “technology” for the “production” or “development” of such microprocessors s.

The rule only applies to items destined to a “military end-use” or “military end-use” (see 744.17(d) for definitions) in Country Group D:1.

BIS said it amended the regulations to incorporate recent advances to microprocessor chips and to include related technology and software involved in the development and production of these products.

BIS Embargoes Crimea: No Vodka for You!

February 4th, 2015 by Brooke Driver

By: John Black

In the January 29, 2015 Federal Register the Bureau of Industry and Security (BIS) amended the Export Administration Regulations to impose a comprehensive embargo on exports and reexports to, and transfers inside, “the Crimea region of Ukraine (CRU”).  The EAR now requires a license for all items destined to or moving inside CRU, except for medicine and food classified as EAR99.

In an unprecedented assault on a famous stereotypical hobby of Russians in Crimea and around the world, the EAR requires a license for exports and reexports to, and transfers inside, CRU of alcoholic beverages.  The EAR definition of food that does not require a license explicitly excludes alcoholic beverages from the definition of food, thus extending the US embargo to apply to any kind of booze, in addition to machine tools, military aircraft parts, and teflon-lined valves.

The EAR defines CRU to include “the land territory in that region as well as any maritime area over which sovereignty, sovereign rights, or jurisdiction is claimed based on purported sovereignty over that land territory.”

In addition to the new license requirement, the EAR prohibits the use of license exceptions except when the new 746.6 specifically authorizes license exceptions.  EAR 746.6(c) authorizes these license exceptions:

  • TMP for items for use by news media (including booze)
  • GOV for the US Government (but not to the other national governments typically GOV-eligible) , the International Atomic Energy Agency, or the European Atomic Energy Community (including booze)
  • GFT for gift parcels and humanitarian donations (not including booze)
  • TSU for operation technology and software (not including booze, but including instructions on how to open and consume booze previously lawfully exported or reexported to, or transferred within, CRU)
  • BAG for exports by people leaving the United States (including booze, but BAG requires the items be for use by the traveler, so don’t get any ideas)
  • AVS for civil aircraft and vessels (not including booze)

While generally speaking the EAR has imposed a comprehensive embargo on CRU, there are important differences between the long-standing EAR embargoes on Cuba, Iran, North Korea, Sudan and Syria and the new embargo on CRU.  For example, for CRU, there is a 25% US controlled content de minimis rule for foreign items with US content, compared to the 10% level for the long standing embargoed countries.
This new regulation partially implements the December 19, 2014 executive order in which President Obama targeted the Russian-occupied region of Ukraine, Crimea. In the first section of this order, Obama effectively shut down any trade or business relationship between the United States and Crimea, stating that imports, exports, new investments—any kind of business transaction—between the U.S. and Crimea is strictly prohibited. Likewise, the president froze all U.S. assets of entities operating in the Crimea region or associated with individuals or entities in that region. As an extra measure of precaution, Obama also prohibits these entities from entering the United States.

Canada Expands Sanctions against Russia to Target Russian Oil Industry

February 4th, 2015 by Brooke Driver

By: Brooke Driver

In solidarity with U.S. and EU energy sector restrictions placed on Russia, Canada announced this December its decision to impose restrictions on the export of certain goods and services related to Artic shale oil exploration or production. The December order reflects the August 6, 2014 Harper government announcement that it would impose export restrictions on technologies used in Russian oil exploration activities. Specifically, the sanction prohibits entities located in Canada or Canadian entities located outside the country from exporting or supplying any listed goods that to a Russian entity that would be used in offshore oil exploration or production at a depth greater than 500 meters, in oil exploration or production in the Arctic or in shale oil exploration or production. Canada has also added 20 Russian and Ukrainian individuals to its lists of designated persons.

Personal Liability for Export Violations: Civil Penalties for Individuals may be Trekking toward You

February 4th, 2015 by Brooke Driver

By: Stephen Wagner

You run a small tech company that customizes other manufacturers’ desktop and laptop computers for your customers.  You can install special chipsets, encryption hardware and software, upgrade the fans and power units to make them “ruggedized” for field use—whatever your clients need.  You are the sole owner of the company and, except for occasional part-time help, the only employee.

One of your customers is an American research scientist with whom you have been working for years.  He is on a special project at a university in a former Soviet republic and his team liked what you had done for his computer so much, you upgraded multiple machines for them and sent them out.  Today, Special Agents from the Office of Export Enforcement visited your office and told you that you may have violated export control laws, because these computers required some sort of license.  From your own research after they left, you have learned that your company could be liable for hundreds of thousands of dollars in civil penalties.  The Special Agents told you that they didn’t see any potentially criminal liability issues.

If your company got hit with those sorts of penalties, you would have to close it down.  You’re wondering if there are any other risks that you need to consider.

Generally speaking, the owners (equity holders), directors and officers of corporations and limited liability companies do not face personal liability for their corporate actions.  Under the Business Judgment Rule, there is a presumption against individual liability if decisions are made on an informed basis, in good faith and with the best interests of the corporation at heart.

However, personal liability can attach for company actions under multiple circumstances; for example, if company officials intentionally act in a criminal or fraudulent manner, breach their fiduciary duties to the company or if the company is found to be an “alter ego” of the individual.  The “alter ego” doctrine is especially important for small or closely held companies.  As an attorney, I recommend to my smaller, corporate clients that they strictly observe corporate formalities (have regular director and shareholder meetings, execute formal resolutions, have company bank accounts that are separate from their personal accounts, not commingle personal and company assets, etc.) as a means to avoid a court “piercing the corporate veil” and extending corporate liability to a company’s owner(s), director(s) and officers.

Until recently, I would have said taking such actions to ensure that a company is not considered to be the alter ego of its owners/operators would protect an exporter from individual civil liability in the event that a company has export violations.  And then came Trek.

In United States v. Trek Leather, Inc., and Harish Shadadpuri, 781 F.Supp.2d 1306, (CT.Int’l Trade, 2011), a company had improperly imported merchandise into the United States.  The U.S. government (U.S. Customs and Border Protection) brought legal action against both the company and its president, individually.  The applicable customs law in Trek provides “no person by fraud, gross negligence, or negligence” may “enter, introduce or attempt to introduce any merchandise into the United States by means of” misrepresentations or omissions.  19 U.S.C. § 1592(a)(1)(A) (emphasis added).  The court in the Trek case applied the laws of agency – which state that an agent who actually commits a civil wrong is generally liable for the act along with the principal, even though the agent was acting for the principal – to find that not only is the company (i.e., the principal) liable for the import violation, but the president (its agent) is personally liable as well.  Further ruling that the company’s president, Harish Shadadpuri, was indeed a “person” within the meaning of the statute, and is therefore covered by the statute, the Court of International Trade found both the company and its president liable on a theory of gross negligence.

On appeal to the Federal Circuit, the court held that corporate officers may be held personally liable for civil penalties even without the government piercing the corporate veil or when the officers themselves do not act in a manner that violates the Customs statute.  United States v. Trek Leather, Inc., 767 F.3d at 1288, 96-99 (Fed. Cir. 2014) (en banc).The Trek court found that to impose personal liability, the corporate officer or his or her agent must only take some action that “introduce[s]” goods into the United States.

So what does the Trek decision mean for exporters?  It may mean that individuals who take actions which violate export control laws can face civil liability in the form of monetary penalties for their actions.

Just like the customs law at issue in Trek, the Export Administration Regulations (EAR) provides:

No person may engage in any conduct prohibited by or contrary to, or refrain from engaging in any conduct required by, the EAA, the EAR, or any order, license or authorization issued thereunder.

15 C.F.R. §764.2(a) (emphasis added).  Similarly, under the ITAR regulations,

Any person who is granted a license or other approval or who acts pursuant to an exemption under this subchapter is responsible for the acts of employees, agents, and all authorized persons to whom possession of the defense article or technical data has been entrusted regarding the operation, use, possession, transportation, and handling of such defense article or technical data abroad.

22 C.F.R. §127.1(c).  In the same manner that the court in Trek found that company’s president to be a “person” covered by the statute and, therefore, personally liable for civil penalties arising from import violations, BIS, DDTC or a court could impose civil penalties on individual persons for their company’s export violations as well.

While individuals have often been charged, convicted, fined, and imprisoned for criminal violations of export control laws, I can think of no instance in which an individual has been assessed civil penalties for export violations committed by his or her company.  Trek may now open the door for such civil penalties.  With federal budgets tightening and the ruling of Trek relieving the government of any obligation to pierce the corporate veil, enforcement agencies may use the ruling to increase their assessments of civil penalties against companies and their principals.  On December 18, 2014, for example, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) filed a lawsuit seeking $1 Million in civil penalties against the former compliance officer of MoneyGram for violations of the Bank Secrecy Act.  This is the first attempt by this enforcement agency to hold an individual personally responsible for the anti-money-laundering failures of his employer.

It is likely that smaller exporters, and especially closely-held companies, may have a higher risk, because day-to-day operations – including export matters – are usually vested in just a few people.  The fewer the people involved in an export transaction at a company, the easier it may be for government investigators and enforcement officials to affix individual liability.  However, export program managers, compliance personnel, and even the “front line” employees responsible for export operations at larger exporters may also be at risk.

The ruling in Trek highlights the importance of an exporter– large or small – having a strong compliance program, using robust compliance procedures and safeguards which are implemented and maintained on an on-going basis and relying on agents such as freight forwarders and attorneys with proven compliance experience.  Each of these measures will help ensure that companies and their individual officers, directors and employees are remaining compliant with respect to export matters.

Trek may also highlight the need for individuals involved in a company’s export operations to seek certain protections from their employers.  Such individuals may well demand proper insurance and indemnification from the company for their export activities.  They may also need to review company governance documents (such as bylaws and board resolutions) to ensure that the company is adequately protecting them from possible risks.

Don’t miss Stephen Wagner’s Personal Liability & Penalties for Export Violations Webinar on March 5, 2015.

BIS Revises Six 600 Series ECCNs

February 4th, 2015 by Brooke Driver

By: Brooke Driver

A final rule came into effect December 30 that revises six Export Control Classification Numbers to accommodate a new ECCN, created July 1, 2014. This final rule revised the pertinent six ECCNs by clarifying that certain basic parts, components, accessories and attachments are not controlled by those ECCNs, but caught by the new ECCN. Likewise, the rule also removes controls on certain monolithic microwave integrated circuit power amplifiers and discrete microwave transistors and related technology, because these controls are outdated since the release of two other July 1 rules that provide controls on those items. Finally, the rule states how “specially designed” applies to printed circuit boards, populated circuit card assemblies and multichip modules to eliminate confusion.

BIS Slightly Tightens Controls on Hong Kong

February 4th, 2015 by Brooke Driver

By: John Black

In the December 23, 2014 Federal Register the Commerce Department revised the Export Administration Regulations to add export and reexport licensing requirements for certain items controlled for national security (NS) reasons.  Specially, items controlled for NS2 reasons are no longer eligible for export or reexport as No License Required (NLR) to Hong Kong.  The rule does not otherwise change Hong Kong’s eligibility for license exceptions, or change other aspects of the EAR controls on Hong Kong.  Items that are not eligible for NLR for Hong Kong still may qualify for export or reexport to Hong Kong under a license exception.

BIS Revises Controversial Controls on MMICs and Discrete Microwave Transistors

February 4th, 2015 by Brooke Driver

By: John Black

In the December 23, 2014, Federal Register the Bureau of Industry and Security (BIS) amended the EAR controls in 3A001 and 3A611 to address the controversial controls on microwave monolithic integrated circuits (MMIC) and discrete microwave transistors, and other items.  This rule change addresses a classic export control dilemma:  How should the US Government control items that have both sensitive military applications and non-sensitive commercial applications.  How should the US control radar used in both military and civil applications?  Where should the government draw the lines of control?

In the July 2014 USML and CCL military electronics changes, which entered into force on December 30, 2014, certain mimics and discrete microwave transistors (we will focus our conversation on these items to illustrate the issues) became subject to must stricter export controls because of US Government concerns about the sensitive military radar and other military applications for these items.  This change did not upset a lot of US companies because not many companies make these things, however, several US companies who manufacture these devices were quite unhappy with the change.  For starters, the items that they had long been selling under less stringent export controls were going to be subject to strict export controls under 3A611 which controls “military electronics.”  And nobody likes to have to get export licenses, especially for things that did not previously require licenses.

But there is much more to this story—More even than I will talk about here.  The MMICs and discrete microwave transistors are used in a wide range of non-sensitive applications such as cellular telephone communications, commercial satellite communications (e.g., direct individual access to internet via satellite, passenger aircraft access to satellite internet connections),  telecommunications test equipment and civilian maritime, air traffic and weather radar.  Unfortunately for manufacturers and exporters, the same devices also have very sensitive military applications in radar and other items.  You might say a classic dual-use item in the Wassenaar sense of the word.  (OK, you probably wouldn’t say that, but I am sure some people would.)

By putting the MMICs and discrete microwave transistors into 3A611, the Commerce Department made the export and reexport of the items to China require a license that would be subject to a presumption of denial.  This would prevent US manufacturers from selling these items for use in non-sensitive commercial communications equipment manufactured in China.  To make matters worse, some of the devices in question are available from non-US sources, for example, Singapore and Japan, who do not have the same extensive and restrictive export controls on these devices.  And adding icing on the matters worse cake, the European Union member countries are far behind schedule in implementing even the current Wassenaar agreed controls on electronics which are much less stringent than the new US 3A611 controls, so it is unlikely that the EU would implement controls following the US approach on these devices anytime soon, if ever.

Add up all those things that make matters worse, and we end of the sum of all worse matters, which equals China telecomm manufacturers buying the devices from non-US suppliers, increasing the prospect that US manufacturers end up sending their manufacturing know-how to other countries to have the formerly US items made abroad where the foreign made duplicates of the US devices would be subject to less stringent US controls, including no US controls on the foreign devices that are duplicates of US devices once they would be incorporated into foreign telecomm equipment.

Enter the Great US MIMIC Depression of 2015.

OK, well, the depression was narrowly avoided as the US Government  decided to modify its July 1 military electronics changes that would have entered into force December 30, by publishing in the December 23 Federal Register a change to the July 1 change.  Without getting into the important and complex details of the change to the change, what we more or less ended up with is a middle ground approach to control for these devices.  The devices largely will be classified as 3A001 and have the standard, flexible 3A001 licensing requirements when destined for civil telecommunications use.  For all other uses, the items will be subject to an export/reexport license requirement when destined for any country other than Canada.

And that is just the quick summary of the complicated and interesting situation.  This situation is a classic example of balancing national security concerns and economic concerns, a balancing act made more complex by the fact that national security concerns and economic concerns sometimes agree with each other and sometimes do not.  On the one hand, there are the national security concerns because of the highly sensitive military applications of the devices and the concerns that China and other countries could use these devices to strengthen their military capability and, thus, harm US national security.

On the other hand is the interest in keeping the US manufacturers of these advanced technology devices strong and thriving by not imposing controls that could cause them to lose market share vis-à-vis their non-US competitors while the availability of non-US sources means US controls would not prevent China and others from getting the devices anyway.  The classic analysis comes down to the fact that it is sometimes better to have US companies selling sensitive devices under a flexible level of US controls than having strict, unilateral US controls that foster the development of foreign sources of the sensitive items.  Foreign sources will sell free from any level of US controls and take money out of the hands of US suppliers.  Nobody in the US wins when that happens.

It supports US national security to have US companies excel in making devices such as these and having US companies profit from doing so will allow them to continue to develop new and better technologies to develop new and better devices for US military applications and commercial applications too.  That strengthens US national security.  And all of this is good for the US economy.

So, in a way, it all comes full circle:  Sometimes we can serve both national security interests and economic interests by having US companies who make sensitive and valuable technologies thrive while targeting our controls at those specific exports that could obviously and directly give the adversaries of the United States a military advantage.  Sometimes flexible controls are a win-win for national security and economic interests.

Kum-ba-ya my friend.    Kum-ba-ya.

Don’t miss Felice Laird’s Export Controls on Electronic Components, Telecom & Infosec: 2015 Update Webinar which will cover this topic.