Another ECR Surprise: Application Support Documents

July 16th, 2014 by Brooke Driver

By: Scott Gearity

If you are a regular reader of ECTI’s communications, you already know that Export Control Reform has had many consequences. Some were anticipated, others less so. As empowered officials, compliance managers, in-house counsel and other practitioners continue to work with and apply the amended regulations to their organizations’ exports, more and more intricacies are becoming apparent.

One effect which has not garnered much attention so far is a significant change – for the worse – in the export license application support documents required for many items formerly on the U.S. Munitions List, but now controlled under an Export Administration Regulations 600 series Export Control Classification Number. Admittedly, license application support documents are among the less glamorous aspects of export compliance (it is certainly nothing as glitzy as EAR reporting requirements).

But before I explain what’s changed, here’s a refresher on what is required by Directorate of Defense Trade Controls when submitting an application to permanently export hardware (i.e. a DSP-5). It will be a quick refresher, since typically the exporter needs to provide just one document – what the ITAR calls “purchase documentation” (usually a purchase order). Because the foreign customer will typically issue a PO anyway, this is usually a minimal burden.

An exception to the one document rule is when the DSP-5 application includes significant military equipment. When SME is involved, the applicant is additionally required to submit a DSP-83 Nontransfer and Use Certificate. A DSP-83 can be more of a hassle, because it must be completed by the foreign consignee, foreign end-user and, in some cases, foreign government, and it requires those parties to explicitly agree to ITAR retransfer restrictions, which they may be hesitant to do.

Now consider what this means for a manufacturer and exporter of aircraft parts. Let’s take the example of a conformal fuel tank specially designed for the F-15. Prior to last October, such a tank would have been controlled under the ITAR in USML Category
VIII(h), but since the paragraph was not SME, no DSP-83 would need to have been submitted with the DSP-5 application.

Today, that same conformal fuel tank is likely controlled under the EAR, specifically in ECCN 9A610.x. Here’s the question: when the exporter applies for a Bureau of Industry and Security license to export their product, do they need to provide a support document with that application? The answer: maybe. Either an import certificate or a Statement by Ultimate Consignee and Purchaser (Form BIS-711) may be required, depending largely on the destination and value of the export. But that value threshold can be surprisingly low.

For example, let’s say you apply for a license to export $75,000 worth of conformal fuel tanks to a Japanese defense contractor, who will install them on F-15s operated by the Japan Air Self-Defense Force. Because items controlled by ECCN 9A610.x are subject to national security controls, Japan is a country listed in §748.9(b)(2) and the value of the transaction exceeds $50,000, an import certificate is required.

Take another example. This time the destination on the license application is a company in Israel and the value of the tanks is only $7,500, but a support document is still required. In this case, a Statement by Ultimate Consignee and Purchaser is required, rather than an import certificate. Unless otherwise exempt (for example, if the value is $5,000 or less), a Statement by Ultimate Consignee and Purchaser is almost always required when an import certificate is not. Two different transactions, neither of which would necessitate submission of a DSP-83 if they were still subject to the ITAR, now do require application support documents, following the implementation of Export Control Reform.

Many exporters who never had to submit a DSP-83 will now be required to understand and apply the rather complicated EAR license application support document regulations and quite possibly obtain (and, in some cases, submit) those support documents. Exporters are not the only ones affected by this disparity between ITAR and EAR. The EAR rules may also be new to some foreign purchasers of U.S.-origin military hardware, who may not know where to go within their own government to get an import certificate or how to complete a Form BIS-711.

The good news is that BIS seems to realize this situation is less than ideal. Last month, the agency published a proposal to raise the value threshold for obtaining a Statement by Ultimate Consignee and Purchaser to $50,000 and to essentially eliminate the import certificate requirement altogether.

Satellites and Spacecraft Shift from USML to CCL: The Circle is Now Complete

July 16th, 2014 by Brooke Driver

By: John Black

“I’ve been waiting for you, Obi-Wan. We meet again, at last. The circle is now complete.” –Darth Vader, Star Wars

Darth Vader’s reign ended; so too has the ITAR controls on many commercial communication satellites.

Some of us remember when commercial satellite export controls moved from the ITAR to the EAR in 1996. Soon after that came the Loral and Hughes case, which resulted in millions in penalties for transferring technology to the Chinese to help them figure out why a Chinese Long March rocket carrying a US satellite crashed. (The primary violations in that case were related to the transfer of rocket technology, not the transfer of satellite technology.) Then, in 1998, Congress passed the FY 1999 National Defense Authorization Act that transferred export control jurisdiction of commercial satellites from the flexible, exporter-friendly EAR to the rigid, exporter-unfriendly ITAR.

Now, the US Government has decided to change satellite spacecraft controls so that the USML controls only the most sensitive satellites/spacecraft and related items, while shifting the less sensitive items to the CCL. Importantly, the revised USML Category XV uses performance capabilities and functions as the basis for defining which items warrant ITAR export controls-Category XV does not focus on whether the item is designed for military or commercial applications. So, in some cases, the new Category XV will not control certain satellites designed for the military, and it will control satellites designed for commercial applications. It is not important who you designed it for or who is going to use it. The important decisive factors are capabilities and functions.

(Please do not use the words “military” or “commercial” for describing what is and is not in Category XV. That type of loose and inaccurate description of the post-Export Control Reform (ECR) USML is rapidly becoming one of my biggest pet peeves.)

In the May 13, 2014 Federal Register, the departments of Commerce and State published notices shifting a wide range of satellites/spacecraft and related items off the US Munitions List (USML) and on to the Commerce Control List. And, as we have seen in past ECR list shifts, when things shift off the USML, the Commerce Department creates new ECCNs in the Commerce Control List to impose CCL-controls on the shifted items. Past reform list shifted items have gone into 600 series military ECCNs. Most list-shifting satellites, spacecraft and related items go into four new 9X515 space ECCNs. Commerce has also adjusted other ECCNs for various reasons.

The majority of the new changes do not enter into force until November 10, 2014, although I will mention below some instances when certain aspects of the changes have a different effective.

The Waning Influence of Darth Vader: How Does the New Category XV Work?

To understand what happened, we need to look at the new Category XV to identify what has shifted and then at the EAR to see how it controls the shifted items.

“I’m Luke Skywalker. I’m here to rescue you.” Woops! I mean, “I’m John Reg-Whisperer. I am here to rescue (some of) you.”

The new Category XV uses many more detailed descriptions than its predecessor and generally controls fewer items. Most of the items that shift off of Category XV go to 9×515 ECCNs in the CCL. Importantly, some of the USML changes enter into force prior to the regular November 10, 2014 effective date. Integrated circuits formerly controlled by XV(d) and (e) shift to 9A515.d and 9A515.e effective June 27, 2014. The same June 27 effective date applies to 9D515 software and 9E515 technology related to those 9A515.d and .e integrated circuits.

Paragraph XV(a) controls “spacecraft, including satellites and vehicles,” regardless of whether they were designed or developed for research, military or commercial applications. Paragraphs (a)(1) – (a)(13) identify the functions and performance that Category XV uses to control spacecraft.

Paragraph XV(b) now is limited to ground controls systems and simulators specially designed for telemetry, tracking, and control of XV(a) items.

Paragraph XV(c) controls certain GPS-receiving equipment, which will move to Category XII when Category XII is revised.

Paragraph XV(d) no longer controls anything. It formerly controlled radiation-hardened integrated circuits. This change is effective on June 27, 2014. The earlier effective date means that these components will shift to 9A515.d before most of the other Category XV changes.

Paragraphs XV(e)(1) – (21) control specified parts, components, accessories, attachments, equipment or systems. Items not controlled here (or anywhere else in the USML) shift to the 9×515 ECCNs. An interesting aspect of XV(e) is that, in a few places, it says that EAR-controlled spacecraft with certain Category XV content remains EAR controlled-explicitly cancelling out the unwritten, arbitrary so-called ITAR see-through rule. More specifically, XV(e)(17) controls payloads that perform any of the functions in XV(a). Note 2 for XV(e)(17) explains that a spacecraft classified as ECCNs 9A004 of 9A515 keeps that classification even when incorporating a “hosted” payload performing a function in XV(a). (Note 1 to (e)(17) defines “hosted” and other types of payloads.) The, Note 2 to paragraph (e) says paragraph (e) items are subject to EAR controls when they are integrated into an EAR item.

An important aspect of the new XV(e) is that integrated circuits that otherwise would have been controlled by (e) are now 9A515.e, effective June 27, 2104.

Paragraph XV(f) controls technical data and defense services. Paragraph (f) has some non-standard controls on tech data that are worth noting. It clarifies that the scope of defense services may apply, for example, to activities related to EAR controlled spacecraft:

“Defense services include the furnishing of assistance (including training) in the integration of a satellite or spacecraft to a launch vehicle, including both planning and onsite support, regardless of the jurisdiction, ownership, or origin of the satellite or spacecraft, or whether technical data is used. It also includes the furnishing of assistance (including training) in the launch failure analysis of a satellite or spacecraft, regardless of the jurisdiction, ownership, or origin of the satellite of spacecraft, or whether technical data is used.”

Paragraph (f) also has a Note 1 that says that XV(f) does not control technical data related to XV(c) or XV(e) items when such items are integrated into an EAR-controlled satellite. Such data is 9E515. Note 2 says that certain activities and technical data are not subject to the ITAR or EAR: “Activities and technology/technical data directly related to or required for the spaceflight… passenger or participant experience, regardless of whether the passenger or participant experience is for space tourism, scientific or commercial research, commercial manufacturing/production activities, educational, media, or commercial transportation purposes…” This Note 2 appears to exclude from control information related to getting into the spacecraft, lifting weights in the spacecraft gym, using the bathroom and even cooking a steak while onboard, among other things.

Note 3 to paragraph (f) says that EAR99 is the classification for “housekeeping data,” which is “data transmitted to or from a satellite or spacecraft, whether real or simulated, when limited to information about the health, operational status, or function of, or measurements or raw sensor output from, the spacecraft, spacecraft payload(s), or their associated subsystems or components.”

Other ITAR Changes

To make clear that USML Category IV controls may apply when a non-ITAR satellite spacecraft is to be used with a Category IV launch vehicle, Category IV(i) now states:

“Defense services include the furnishing of assistance (including training) in the integration of a satellite or spacecraft to a launch vehicle, including both planning and onsite support, regardless of the jurisdiction, ownership, or origin of the satellite or spacecraft, or whether technical data is used. It also includes the furnishing of assistance (including training) in the launch failure analysis of a launch vehicle, regardless of the jurisdiction, ownership, or origin of the launch vehicle, or whether technical data is used.”

Finally, DDTC revised the ITAR 120.10 definition of technical data to clarify that telemetry data as defined in XV(f) is not technical data.

EAR Controls: “Help me EAR-Bi-Wan Kenobi. You’re my only hope.”

To some extent, many exporters got what they wanted; while DDTC did not shift all commercial satellites off the USML, less-sensitive satellites, spacecraft and related items are not controlled by the EAR and the EAR has 4 new space ECCNs (9A515, 9B515, 9D515 and 9E515) that join other existing ECCNs, such as 9A004, that control space-related items. At the end of the day, most items shifted continue to be fairly highly controlled.

Prior to this list shift, various ECCNs, such as 9A004 controlled items, were used in space. 9A004 is revised so that its paragraph .a controls the International Space Station (ISS) and its paragraph x. controls parts, components, accessories and attachments specially designed for the ISS.

The new 9×515 ECCNs, however, are the highlight of the EAR revisions. The 9×515 ECCNs generally are eligible for No License Required to Canada, have some License Exception STA availability for Country Group A:5 and require a license for everywhere else. The EAR does offer some flexibility to exporters and reexporters, as certain license exceptions, such as RPL, TMP, GOV, LVS, and AVS, are available in certain cases subject to limitation and restrictions similar to those that apply to 600 series items.

The EAR includes the various ITAR clarifications discussed above, such as the explicit limitations on the see-through rule for EAR items containing ITAR content, no controls on housekeeping data, passenger space flight information being classified as EAR99 and telemetry data not being controlled. The EAR also reflects the June 27, 2014 effective date for the shift of integrated circuits from Category XV(d) and (e) to 9A515.d and .e, respectively, so exporters may take advantage of these changes sooner than the other changes.

The new 9A515 is structured similarly to 600 series ECCNs and contains enumerated controls in paragraphs .a – .e and .y, and a catch all control in paragraph .x, catching specially designed items. 9A515.x, however, unlike most 600 series ECCNs, says that 9A515.x does not apply to specially designed items that are

–Microelectronic circuits: This means 9A515.x does not want to control integrated circuits that are not controlled by 9A515.d or .e. Look elsewhere in the CCL for those items.
–Described in certain named ECCNs and paragraphs: This means that if an item is described in one of the specified ECCNs and paragraphs, that ECCN controls the item, not 9A515.x.

9A515.y, which requires a license only for China, Cuba, Iran, North Korea, Sudan and Syria, only applies to items for which there is an interagency approved commodity classification (CCATS) that assigns 9A515.y as the classification.

[Confusion Warning: Because the 9A515.d and .e changes enter into force before the other 9A515 changes, the Federal Register notice actually changes 9A515 twice. The first change is to create 9A515.d and .e effective in June and the second change is to create the rest of 9A515 effective in November.]

Good News for Universities: Universities are eligible to take advantage of a new authorization in License Exception AVS 740.15(e) that authorizes the export of spacecraft and components for fundamental research purposes. AVS authorizes an accredited institution of higher learning to export items to another accredited institute of higher learning, a government research center or to a government funded research center in any country outside of Country Group D:5 and involving only non-D:5 nationals. This must occur in a fundamental research environment where all resulting technical data and information will be shared broadly and will be restricted for proprietary reasons.

Other Changes: In many respects, the new 9×515 space ECCNs are subject to many of the ITAR-lite or ITAR-like policies in the EAR that already apply to the 600 series military ECCNs. For example, the special rules applicable to 600 series ECCNs apply to 9×515 in these cases:

• 734.4 De minimis rule Limitations for Country Group D:5
• 740.2 Prohibitions on the use of license exceptions
• 744.21 Prohibition on export/reexport to China
• 758.1 and 758.2 AES filing requirements
• 758.6 Identify ECCN on the same documents requiring a Destination Control Statement

Action Items for the New ITAR and EAR Rules

Stormtrooper: Let me see your identification.
Obi-Wan Kenobi: [waves his hand] You don’t need to see his identification.
Stormtrooper: We don’t need to see his identification.
Obi-Wan Kenobi: These aren’t the droids you’re looking for.
Stormtrooper: These aren’t the droids we’re looking for.
Export Compliance Expert: These rules are complex.
EAR-Bi-Wan: [waves his hand]. These rules are easy to understand.
Export Compliance Expert: These rules are easy to understand.
EAR Bi-Wan: These changes and classifications will be easy to implement.
Export Compliance Expert: These changes and classifications will be easy to implement.

Feel better?

Unfortunately, while the force was helpful in the movie, I would not be looking for a miraculous force to come to your rescue, unless you consider the force to include the fact that you may continue to use ITAR licenses and approvals for these shifted items as you could for items in earlier ECR list shifts. Some spacecraft, satellites and related items have been freed from the ITAR dark side, but you still have to figure out exactly which of your items and technologies shifted off the USML to the CCL and how you will have to control the shifted items.

Instead of slaying storm troopers with your light saber, you need to get the Federal Register notices and read through them and study them. Those notices are at:

It might help to play the theme music from Star Wars as you grind through the new regs–it certainly will cause your co-workers to wonder about you (again). Or more appropriately, as you grind through the regs, you might want to hear that famous quote from Chewbacca:

“May the Force be with you.”

OEE Agents in the Lobby

July 16th, 2014 by Brooke Driver

By: Stephen Wagner

You work for a U.S.-based technology consulting agency and you are the office manager. Two agents from the Department of Commerce’s Office of Export Enforcement just showed up at your offices and demanded to see “all of your documents” relating to several things. They were asking about some surplus network architecture (firewall) products that you shipped to your Latin American subsidiary, some products that you ordered on behalf of a client located in Dubai (United Arab Emirates) and also a trip to Russia that one of your teams took to meet with a client for whom you do software development.

You want to cooperate, but you’re not sure what they are really looking for–and what your legal risks could be. They are waiting in a conference room. What should you do?

You are right to be concerned. As the Bureau of Industry and Security (BIS) (the Department of Commerce’s unit dedicated to protecting U.S. security through export controls) notes on its website:

OEE Special Agents are sworn Federal law enforcement officers with authority to make arrests, execute search and arrest warrants, serve subpoenas, and detain and seize goods about to be illegally exported.

Moreover, the Export Administration Regulations state that your export records must be “available for inspection and copying” at any time by OEE Special Agents, other BIS representatives, U.S. Customs and Border Protection officers and many other federal regulatory and enforcement agencies (15 C.F.R. § 762.7(a)). It is also important to note, however, that, while your voluntary cooperation with such oral or written requests is “encouraged” under the regs, it is not required (Id.). You are only required to produce such requested documents under a subpoena, which can be issued to your company by OEE.

That said, the way your company approaches such requests and deals with the agents waiting in your office is very important. Best practices suggest that, first of all, only people with strong first-hand (or supervisory) knowledge of your export activities should speak with such officials. If you have an Export Manager or Export Compliance Officer, that would be the ideal person to conduct the discussions, along with your company’s general counsel, outside counsel or another executive (always have two or more company reps present at all meetings with enforcement officials). Your representatives should also be very careful not to make any statements against the company’s interests, as the agents will be documenting everything said at the meeting.

And you’re right to say that you want to cooperate. When your executives meet with the agents, the predominant message should be: your company wants to cooperate; however, you need more information in order to respond to their requests. In that first meeting you can try to (i) identify the true target of the investigation (your company or someone else?), (ii) detect the scope of the investigation (just these three incidents, or are they the tip of the iceberg?) and (iii) deduce how serious the agents think the problem(s) might be. However, you should never turn over any documents (or information) to the agents without first copying everything you offer, carefully reviewing the documents to look for evidence of export violations and assessing your company’s overall export compliance activities and posture. OEE Agents are aware of your legal rights and responsibilities and what constitutes “best practices” in the face of an investigation. So, while they most likely will not be upset when you politely decline to give them any documents there on the spot, don’t be surprised if they have a subpoena ready and waiting to serve on your company.

How Do We Measure Up?: U.S. Versus Russia and CIS Classification

July 16th, 2014 by Brooke Driver

By: Jay Nash

Your company exports dual-use items (goods or technologies) from Russia and other Commonwealth of Independent State (CIS) countries (including Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Ukraine, and Uzbekistan). Your items already have been classified according to the U.S. Commerce Control List (CCL) (or the 2012 EU “List of Dual-Use Items”), and you want to know, in general, whether those ECCNs/classifications would be the same in those CIS countries, and if they could be used to determine when you would need a license to export those items.

A U.S. ECCN or a classification in accordance with the EU “List of Dual-Use Items” for a given item may provide an indication that the item is subject to control in CIS countries in some cases, but in many cases it cannot. Several CIS countries, including Russia, Belarus, and Kyrgyzstan, employ a unique classification numbering system for export controlled items, while others pattern their national control lists after (or have adopted wholesale) the European Union’s (EU) “List of Dual-Use Items.” Even the CIS countries that pattern their control lists after the EU may have discrepancies with the U.S. CCL, the EU “List of Dual-Use Items” and amongst each other.

In the case of CIS countries that pattern their control lists after the EU “List of Dual-Use Items”-such as Kazakhstan, Azerbaijan, and Armenia-it is possible that a U.S. ECCN or EU classification for a given item will be close to the item classification number for the same item in those countries. Even then, however, one would need to account for any discrepancies that may still exist between entries in the U.S. CCL and the 2012 EU “List of Dual-Use Items” (the technical parameters of entries on the U.S. CCL may be more detailed or altogether different than corresponding entries on the 2012 EU “List of Dual-Use Items”) and between the control lists of those countries and the 2012 EU “List of Dual-Use Items.” The control lists of Ukraine, Kazakhstan, Azerbaijan, and Armenia each have unique characteristics that may lead to discrepancies between them and the U.S. CCL and 2012 version of the EU “List of Dual-Use Items.” For example, Ukraine separates its listings of dual-use items into five distinct control lists (conventional dual-use, chemical-related, biological-related, missile dual-use and nuclear-related), does not assign five-digit alpha numeric classification codes to all of the items on all of its lists and updates its lists at different times so that some of the five lists are less current than the current EU “List of Dual-Use Items”, while others (such as the Missile Dual-Use List) have been updated more recently than the EU list. Kazakhstan’s control list was last updated in 2008, whereby the entries on that list do not completely correspond with those of the EU 2012 “List of Dual-Use Items” or the current U.S. CCL. Azerbaijan’s control list employs a five-digit alpha numeric classification coding system that is similar to that of the EU “List of Dual-Use Items”; however, it does not appear to have been updated since it was issued in 2006. Finally, Armenia’s control list was last updated in 2011, and it includes some categories of unilaterally-controlled items.

The following is one example that demonstrates some of the similarities and differences between the classification of an item according to the U.S. CCL and the EU “List of Dual-Use Items” and the control lists of Ukraine, Kazakhstan, Azerbaijan, and Armenia:

Even though the control lists of Russia, Belarus, and Kyrgyzstan cover many of the same goods and technologies as the U.S. CCL and the EU “List of Dual-Use Items,” the item classification numbering systems utilized in those lists are quite different, making it more difficult to correlate U.S./EU item classifications with classifications in those three CIS countries. To date, Russia, Belarus, and Kyrgyzstan have used item classification codes largely derived from the six (1. biological, 2. chemical, 3. nuclear, 4. nuclear dual-use, 5. missile-related and 6. conventional dual-use) Eurasian Economic Community (EurAsEC) “Model Lists” of goods and technologies subject to export control. Each of those lists employs a simple numerical categorization and classification system (e.g. 1.1.1., 2.3.2, etc.). Together those six lists cover many of the same items as the U.S. CCL and the EU “List of Dual-Use Goods,” because they are drawn from the control lists published by the four major multilateral export control regimes (Nuclear Suppliers Group, Australia Group, Missile Technology Control Regime and the Wassenaar Arrangement), which the U.S. and EU lists are based on as well. Russia’s and Belarus’ lists are the most similar and comprehensive among the CIS countries following the EurAsEC “Model Lists” (as a result of their Customs Union relationship); Kyrgyzstan’s current control list (last updated in 2010) does not include all of the items that are on Russia’s and Belarus’ lists. Uzbekistan has a very simple list that only includes a handful of categories of controlled items, identified by their Foreign Economic Activity Commodity Nomenclature (FEACN – the customs commodity classification coding system employed by the Customs Union and several other CIS countries), and it bears no real semblance to the U.S./EU, or even Russia, etc. control lists.

The following example demonstrates the differences between the classification of an item according to the U.S./EU control lists and those of Russia/Belarus/Kyrgyzstan/Uzbekistan:

Summary Points and Looking Ahead

The above example comparing the classifications of a machine tool/lathe across the U.S., EU, and CIS country export control systems is just one of hundreds, and each one might produce a different combination of results. In this case (U.S. ECCN 2B001.a), we find:

• Kazakhstan, Armenia, and Azerbaijan having the same item classification number and technical specifications as the 2012 EU “List of Dual-Use Items,” but, as a result, a lower technical threshold than the comparable U.S. CCL entry;
• Russia, Ukraine, and Belarus having the same technical specifications for their respective machine tool/lathe control lists entries (with a technical threshold that is lower than that of the comparable U.S. CCL entry, but higher than that of the EU “List of Dual-Use Items”), but different item classification numbers-with Russia and Belarus using the EurAsEC-based numbering system and Ukraine using a U.S./EU-based numbering-and
• Kyrgyzstan and Uzbekistan currently not listing the item.

The technical specifications of comparable entries may be closer or the same across the control lists of the countries discussed herein (but for Uzbekistan) in the case of other items, particularly those on the Nuclear Suppliers Group lists given. Moreover, they may become more similar going forward as more countries work to align the items on their national control lists entries more precisely with those of the multilateral export control regime lists. However, the differences in item classification numbers between the U.S./EU and CIS countries (and even among CIS countries) may increase going forward, as some CIS countries (such as Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia) look to streamline their export control systems with the expansion of the Customs Union and formation of the Eurasian Economic Union, while others (such as Ukraine and Azerbaijan) continue to lean more towards the West, both in terms of economics and export controls. Whatever the case, it may be very beneficial for companies dealing in potentially controlled items in or with CIS countries to classify their items in accordance with the control lists of each country they are operating and monitor developments in CIS country control lists going forward.

Argentinian Travel Website to Pay $2,809,800 for Violations of the Cuban Assets Control Regulations

July 16th, 2014 by Brooke Driver

By: Brooke Driver

A Delaware company with its headquarters in Buenos Aires, Argentina,, recently agreed to pay OFAC $2,809,800 to settle for the charges against it. Apparently, between March 2, 2009 and March 31, 2012, Decolar allowed its foreign subsidiaries to aid 17,836 individuals with flight and hotel reservations for travel to and from Cuba. Of course, Decolar neglected to attain the proper licensure to do so. But, while the cost is high, Decolar must be relieved that OFAC did not enforce the full penalty charge of $4,460,000. In determining the settlement cost, OFAC claims to have considered the follow facts:

• Decolar disclosed the violations and cooperated with OFAC’s investigation
• Decolar has taken measures to develop a working OFAC compliance program
• Upon discovering the violations, Decolar immediately stopped offering Cuba-related travel services
• Decolar demonstrated reckless disregard for U.S. sanctions by failing to ascertain that its activities were not in violation of U.S. law (OFAC states here that Decolar naively took the word of an unidentified third party who assured Decolar management that it was in the clear. OFAC adds that Decolar should have been aware of the CACR restrictions on its activities).
• Decolar’s senior management was aware of its subsidiaries’ Cuba-related travel services

The two main take aways here, folks, are that:

1. When relying on a third party legal/export compliance advisor, do your homework. Before you stake your business’ reputation on his word, be sure that he knows what he’s talking about.
2. Recognize that you will be punished for violating laws you should know about, not just the ones you do know. OFAC made it very clear in this case that Decolar management reasonably should have known that it was in violation of U.S. law—and now the company is facing a fine with an uncomfortable amount of digits.
In other words, an untrained company is an unprotected company. Put in the hours, not the dough.

Washington State Resident Targeted by OFAC for Exporting Unlicensed Medical Goods to Iran

July 16th, 2014 by Brooke Driver

By: Brooke Driver

OFAC recently announced that Concord, CA company Sea Tel, Inc. has agreed to pay a settlement of $85,113 for its apparent violations of the Iranian Transactions and Sanctions Regulations. According to OFAC, between the dates of November 20, 2007 and February 26, 2009, Sea Tel invoiced a South Korean distributor for 16 orders of marine antenna systems totaling $378,281 in value. The California-based company then exported these products to South Korea with knowledge or reason to believe that they were intended for use on vessels owned by the National Iranian Tanker Company. Although OFAC emphasized that the illegal shipments caused significant harm to the American sanctions program and that Sea Tel’s actions revealed a pattern of reckless disregard for said sanctions, luckily for Sea Tel, OFAC chose to significantly lower its fine from the base penalty of $189,141, due to the facts that:

  • This was Sea Tel’s first offense
  • Sea Tel disclosed the violations to OFAC and cooperated throughout the investigation
  • Sea Tel had an OFAC compliance program in place when the violations occurred (although, obviously not a very good one)

When “Minor” Export Violations can Become Federal Crimes

July 16th, 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.

UAE Freight Forwarder Pays $125,000 Penalty for Exports and Reexports of Monitoring Devices to Syria

July 16th, 2014 by Brooke Driver

By: Brooke Driver

In May, BIS announced that Aramex Emirates, LLC, based in Dubai, has settled for $125,000 to resolve the charges against it. BIS claims that in December of 2010 and February of 2011, Aramex facilitated the export or reexport of unlicensed network devices and software to Syria via the U.A.E. Under Secretary of Commerce, Eric L. Hirschhorn explained the importance of controlling the related items in announcing the settlement:

“Today’s settlement shows the importance of compliance with U.S. law by foreign freight forwarders handling items subject to U.S. export controls…The items in question could be used by the Syrian government to monitor internet activity and block pro-democracy websites as part of its brutal crackdown against the Syrian people.”

The case against Aramex strengthened significantly when it was discovered that the company’s cargo system team, including employees directly involved in carrying out the illegal transactions had been specifically informed of U.S. sanctions against Syria and advised to avoid U.S. shipments to Syria in the 2009 company-wide circular “Exporting U.S.-made Products to Countries Under the U.S.A. Trade Ban.”

Although BIS pursued action against Aramex, due to its seemingly purposeful violations of U.S. customs law, BIS reduced the demanded penalty to reflect the complete cooperation it received during its investigation.

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

July 16th, 2014 by Brooke Driver

Source: AES Broadcast #2014044, May 19, 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 this month.

Fatal Error Response Code: 515

Narrative: ECCN Must Be Formatted NANNN
Reason: The Export Control Classification Number is not reported in the correct format.
Resolution: The Export Control Classification Number must be formatted as NANNN where N is a numeric character and A is an alpha character, except when EAR99 is reported.
Verify the Export Control Classification Number, correct the shipment and resubmit.

Fatal Error Response Code: 643

Narrative: Quantity 2 Must Be Greater Than Zero
Reason: The Schedule B/HTS number reported requires a Quantity 2 to be reported and the Quantity (2) is missing or reported as zero.
Resolution: When the Schedule B/HTS number reported requires a Quantity 2, Quantity 2 must be greater than zero.
Verify the Quantity 2, correct and resubmit. Quantity (2) must be greater than zero.

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

It is important that AES filers correct Fatal Errors as soon as they are received in order to comply with the Foreign Trade Regulations. These errors must be corrected prior to export for shipments filed predeparture and as soon as possible for shipments filed postdeparture, but not later than ten calendar days after departure.

For further information or questions, contact the U.S. Census Bureau’s AES Branch.
Telephone: (800) 549-0595, select option 1 for AES

Commerce Amends Missile Technology Control Sections of EAR

July 16th, 2014 by Brooke Driver

By: Brooke Driver

On May 21, BIS announced a final rule that went into effect May 27, 2014. This rule adjusts aspects of the EAR, 15 CFR Parts 772 and 774 based on changes to the Missile Technology Control Regime (MTCR) Annex signed off by MTCR member countries at the October 2013 Plenary meeting in Rome and at the 2013 Technical Experts Meeting in Bonn, Germany. The rule revises eight ECCNs: 1B102, 1B117, 1D001, 1D018, 1D101, 6A107, 9A101, and 9B106. BIS also added new ECCN 9A102 to control turboprop engine systems (plus parts and related items) specially designed for items controlled in 9A012 for MT reasons and having a maximum power great than 10kW. BIS also revised the definitions of “payload” and “repeatability.” For more information, click here.