The Office of Defense Trade Controls Licensing Reorganizes

April 27th, 2015 by Brooke Driver

By: Brooke Driver

As of April 20, the Office of Defense Trade Controls Licensing has been restructured to reflect the 36% drop in licensing volume and disparity in the volume of cases among the previous divisions resulting from changes made by Export Control Reform. The DTCL has streamlined its divisions to reflect the post-ECR environment and now includes four operational divisions: Space, Missile and Sensor Systems, Electronic and Training Systems, Sea, Land and Air Systems and Light Weapons and Personal Protective Equipment Systems.

Export compliance professionals will not need to adjust application procedures due to the changes; D-Trade will automatically route cases to the corresponding division based on the USML commodities listed in the application.

Click here for more information.

NYPD Police Officer and His Customs Officer Brother Jailed for Illegally Exporting Guns to the Philippines

April 27th, 2015 by Brooke Driver

By: Brooke Driver

Sometimes, brotherly love isn’t a good thing—particularly where power and means meets bad intentions and family connections. In a shocking case, an NYPD cop named Rex Maralit (46) and his brother, forty-nine-year-old Wilfredo Maralit, a California Customs and Border Protection officer, have been jailed for illegally exporting military-grade weapons for over four years (over a third of Rex’s career as an NYPD officer).

The Maralit brothers took advantage of their resources as law enforcement officers to purchase the weapons—assault rifles, AR-15s and semiautomatic weapons—and shipped the products for distribution to yet another criminal brother, Ariel Maralit, who lives in the Philippines and emailed Rex and Wilfredo customer orders.

Both Rex and Wilfredo pled guilty to violating the Arms Export Control Act and received three years in prison a piece. The presiding judge, Allyne R. Ross, said of her sentence, “the rule of law applies with equal force to law enforcement officials and non-law enforcement officials.”

Potential Poster Child for Violating US Export Controls on Russia?: Flider Electronics’ Put on the U.S. Denial List for Shipments to Russia

April 27th, 2015 by Brooke Driver

By: Brooke Driver

BIS recently issued a temporary denial order suspending Californian-based Flider Electronics, LLC’s export privileges for 180 days, due to two of its officers’ illegal activities, who are accused of smuggling and money laundering.

BIS claims that the company exported items subject to the EAR to Russia without a license by transshipment through third countries, listing in AES filings Estonian and Finnish end-users who, in reality, acted as freight forwarders. In addition, BIS discovered no licensing history from the company of controlled U.S.-origin electronics to Russia.

BIS chose to issue the temporary denial order due to its belief that a violation of the EAR was “imminent in both time and degree of likelihood.”  This temporary denial leaves the door open for BIS to impose further penalties.

Russia likely is joining China and Iran at the top of the list of countries that will get you in the most trouble for violating US export or reexport controls.  The US Government is certainly looking for a more well-known company to be the “Don’t Let This Happen to You” poster child for violations of US trade controls on Russia.

Schlumberger Oilfield Holdings to Pay Over $232.7 Million for Violating U.S. Iran and Sudan Sanctions

April 27th, 2015 by Brooke Driver

By: Brooke Driver

Schlumberger Oilfield Holdings, Inc., a subsidiary of Schlumberger Ltd., recently pleaded guilty to multiple violations of the International Emergency Economic Powers Act. According to Assistant Attorney General Carlin,

“Over a period of years, Schlumberger Oilfield Holdings, Inc. conducted business with Iran and Sudan from the United States and took steps to disguise those business dealings, thereby willfully violating the U.S. economic sanctions against those regimes…The International Emergency Economic Powers Act is an essential tool that the United States uses to address foreign threats to national security through the regulation of commerce. Knowingly circumventing sanctions undermines their efficacy and has the potential to harm both U.S. national security and foreign policy objective.”

U.S. Attorney Machen added,

“This is a landmark case that puts global corporations on notice that they must respect our trade laws when on American soil…Even if you don’t directly ship goods from the United States to sanctioned countries, you violate our laws when you facilitate trade with those countries from a U.S.-based office building.”

Along with a three year corporate probation, the company must pay a fine of $232,708,356, consisting of a $77,569,452 criminal forfeiture and a $155,138,904 criminal fine—the largest criminal fine ever assigned in connection with an IEEPA prosecution.

State Department Announces New Requirements for Export of Unmanned Aerial Systems

April 27th, 2015 by Brooke Driver

By: Brooke Driver

The DDTC recently announced a changed policy for licensure to export unmanned aerial systems. According to the new policy, in order to receive a permanent export license for these items from the State Department, applicants must include an additional piece of paperwork to ensure proper use from foreign end users prior to export.

Now, in addition to the required DSP-83, Non-Transfer and Use Certificate, applicants must now include an addendum to paragraph 5 of the DSP-83 to confirm proper use. The addendum is to be signed by both the applicant and the foreign end user.

Keep in mind that this new requirement only applies to permanent exports; temporary exports of UASs will not require the additional addendum.

Click here for the new addendum and for more information.

Commerce/Census: “Tips on How to Resolve AES Fatal Errors”: Fatal Error Response Codes 168 and 538

April 27th, 2015 by Brooke Driver

Source: www.census.gov/trade

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: 168

- Narrative: Transportation Reference Number Ineligible

- Reason: The Transportation Reference Number reported is ineligible.

- Resolution: The Transportation Reference Number cannot be reported as “UNKNOWN” or have any value not found on the standard keyboard. Verify the Transportation Reference Number, correct the shipment and resubmit.

Fatal Error Response Code: 538

- Narrative: Shipping Weight Must Be Greater Than Zero For MOT

- Reason: The Mode of Transportation Code reported was one that identifies a Vessel, Rail, Truck, or Air shipment and the Shipping Weight was not reported.

- Resolution:   When the Mode of Transportation is Vessel, Rail, Truck or Air, the Shipping Weight must be reported. Verify the Mode of Transportation and Shipping Weight, 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.

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 five calendar days after departure.

For further information or questions, contact the U.S. Census Bureau’s Data Collection Branch.

Telephone: (800) 549-0595, select option 1 for AES

Email: askaes@census.gov

Online: www.census.gov/trade

Blog: blogs.census.gov/globalreach

 

BIS Amends Six ECCNs to Comply with MTCR Annex

April 27th, 2015 by Brooke Driver

By: John Black

In the April 7, 2015 Federal Register, the Bureau of Industry and Security revised 6 ECCNs, so that the Commerce Control List will conform the pertinent sections of the current Missile Technology Control Regime Annex.  The revised ECCNs are 1C111, 3A101, 9A106, 9A110, 9A604 and 9A610.

ECCN 1C111

  • BIS corrected an error in paragraph a.1 in the List of Items Controlled section to correct an omission error in the referenced ISO standard.
  • BIS clarified 1C111 by adding Chemical Abstract Service (CAS) Numbers to accurately identify each of the chemicals listed in the Technical Note to paragraph b.5 and paragraphs d.7, d.14 and d.18 in the List of Items Controlled.

ECCN 3A101

  • BIS revised paragraph a.2.a to remove paragraph a.2.a.1 and revised paragraph a.2.b to remove paragraph a.2.b.1 in the List of Items Controlled section, because the quantization requirement was removed in the MTCR Annex.  BIS also predesignated the paragraphs in 3A101 to be consistent with the already-mentioned substantive changes.

ECCN 9A106

  • BIS revised 9A106.d and the Note to 9A106.d, so that it controls gel propellant in addition to the already controlled liquid and slurry propellants and to clarify the controls.
  • BIS revised 9A106.d to clarify only servo valves, pumps and gas turbines that are specified under paragraphs a., b., or c are classified under 9A106.d.
  • BIS revised the Note to 9A106.d to clarify the control applies at the “maximum operating mode” of the already-existing 8,000 rpm parameter.
  • BIS also revised the Note to 9A106.d by adding to a new paragraph c. to specify that gas turbines, for liquid propellant turbopumps, with shaft speeds of 8,000 rpm or more at the maximum operating mode are also controlled under 9A106.d.

ECCN 9A110

  • This final rule revises and clarifies the previously “slightly convoluted” heading 9A110.  This change, along with the additions of 9A604.f and 9A610.t (see below), is intended to make it easier to understand where the CCL controls composite materials for commercial UAVs (under 9A110) and composite materials for military UAVs (under 9A604.f and 9A610.t).

ECCN 9A604 

  • BIS added a new paragraph 9A604.f to control composite structures, laminates and manufactures thereof ‘‘specially designed’’ for the items controlled under USML Category IV that are specified in paragraphs f.1–f.7. Such commodities previously were classified under ECCN 9A604.x. The purpose of this change is to allow a clearer identification of these commodities and for the designation of MT license requirements.
  • The ‘‘MT’’ control in the Reason for Control paragraph in the License Requirements section does not apply to 9A604.f.

ECCN 9A610

  • BIS added a new paragraph 9A610.t to control composite structures, laminates and manufacturers thereof ‘‘specially designed’’ for unmanned aerial vehicles controlled under USML Category VIII(a) with a range equal to or greater than 300 km. 9A610x  previously controlled these items.  The new 9A610.t is intended to allow a clearer identification of these commodities and also for consistency with the MTCR Annex.
  • BIS also makes two conforming changes in the 9A610 Reason for Control paragraph. First, this final rule revises the ‘‘NS’’ control to add the new 9A610.t to the list of 9A610 commodities that are not subject to the ‘‘NS’’ control. Second, this final rule revises the ‘‘MT’’ control to add 9A610.t to the MT control.
  • BIS removed the 9A610 Related Controls paragraph (2), because it is no longer needed, due to the revisions made to 9A110, 9A604 and 9A610.

To see a copy of the Federal Register notice, go to http://www.gpo.gov/fdsys/pkg/FR-2015-04-07/pdf/2015-07872.pdf

Denied Party Screening Failures: PayPal Pays $7.7 Million

April 27th, 2015 by Brooke Driver

By: Brooke Driver

It turns out that one of the world’s most-trusted money services provider, Paypal, Inc., out of San Jose, California, may have committed nearly 500 violations of U.S. Sanctions programs, including the Weapons of Mass Destruction Proliferators Sanctions Regulations, the Iranian Transactions and Sanctions Regulations, the Cuban Assets Control Regulations, the Global Terrorism Sanctions Regulations and the Sudanese Sanctions Regulations.

Due to inadequate screening procedures, between the years of 2009 and 2013, PayPal processed 98 transactions totaling $19,344.89 in violation of the CACR, 125 transactions totaling $8,257.66 in violation of the ITSR, 94 transactions totaling $5,925.27 in violation of the GTSR and 33 transactions totaling $3,314.43 in violation of the SSR. It also participated in transactions involving an account in which Specially Designated Terrorists Interpal or Kahane Chai had an interest.

The company also processed 136 transactions totaling $7,091.77 to or from an account registered to Kursad Zafer Cire, an individual designated in the 2005 executive order “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters.” Apparently, while an automated interdiction filter flagged Cire’s account five times, on each occasion, a PayPal Risk Operations Agent dismissed the alert.

Although the cumulative base penalty for these charges was $17,018,443, OFAC chose to significantly reduce the fine, due to PayPal’s cooperation throughout and the fact that the company took immediate measures to restructure and strengthen its compliance program.

When Export Practices Cross the Line: Hidden Foreign Corrupt Practice Act (FCPA) Violations Can Hurt You

April 20th, 2015 by Brooke Driver

By: Stephen Wagner

Your company exports and ships its products all over the world through a small, local third-party logistics provider. The export manager at the shipping company, who is a close personal friend, has been handling your company’s products for years and has been doing a perfect job. The products arrive at your foreign customer locations on time, without problems, and you just pay the invoices for the shipping costs without question. In fact, international shipping is the one part of your company’s operations at which you have never needed to take a second look.

Until today… Today two special agents from Homeland Security Investigations (HSI) arrived at your office to ask about your company’s export activities. They were vague about the nature of the investigation, but asked a lot of questions about your shipping practices. As they were leaving, they handed you a subpoena for five years’ of export records. You started gathering your documents together and now, reviewing your export shipping invoices for the first time in years, you see line items and charges for a “Customs Clearance Fee” in certain countries and an “Import Commission” in other countries. When you called your friend at the shipping company to ask about these charges, he said that the receiving shipping companies in these countries must pay these fees “so your products can sail through customs.”

What are you really seeing when you look at these charges?

Depending on the exact nature of these payments, you may end up seeing federal criminal charges.

The Foreign Corrupt Practices Act, as amended (15 U.S.C. §§ 78dd-1, et seq.) (“FCPA”), was enacted in 1977 and makes it illegal for U.S. companies (including their foreign affiliates) to make payments to foreign government officials. The “anti-bribery provisions” of the FCPA prohibit “any offer, payment, promise to pay, or authorization of the payment of money … directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage[.]” 15 U.S.C. § 78dd-1(a). Additionally, the “accounting provisions” of the FCPA require companies whose securities are listed in the United States to “make and keep books and records that accurately and fairly reflect the transactions of the corporation” and “devise and maintain an adequate system of internal accounting controls[.]” 15 U.S.C. § 78m(b)(2).

Yet, the world of international business is not so black and white. There are myriad court cases, attorney general opinions and legal theories that seek to define a “foreign official.” While someone working for a foreign government (like a uniformed foreign customs officer) is clearly such an “official,” what about employees of a nationalized, or government-owned company? What about employees of private companies that conduct government functions (such as processing customs paperwork) under a contract with the government? What about agents, consultants or lobbyists who “grease” the foreign government processes on your behalf?

Furthermore, recognizing that sometimes payments must be made to foreign government officials just to move paperwork along or obtain routine approvals, the anti-bribery provisions of the FCPA contain an exception for “facilitating payments.” This narrow exception applies to payments made for non-discretionary actions, like processing customs paperwork or import permit applications; actions which would take place even without the payments, but would probably take much longer to occur.

Therefore, looking at your company’s “Customs Clearance Fee” or “Import Commission,” several critical questions arise: who is being paid, and for what?

Even if you think you have found the logical answers to these questions, you will need to consult with your company’s general counsel or a qualified outside attorney, because you may not be able to interpret these answers correctly. Indeed, sometimes, the law does not apply logically to the way businesses operate, and sometimes, the language used in the statutes and regulations can be ambiguous or subject to multiple interpretations. For example, if you think the “fee” or “commission” would qualify as a facilitating payment, the U.S. government’s FCPA Guidance warns, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere. In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.”

And you cannot stop your investigation with just these “fees” and “commissions,” because no federal government investigation will stop there either. Many exporters may pay intermediaries to obtain business in foreign countries. Whether these payments to “middlemen” are labeled as “sales commissions” or “distribution fees” or “licensing payments,” they may all still be bribes as that term is interpreted by enforcement agencies under the FCPA.

As an example of how broadly the FCPA can be interpreted, in May 2014 a federal appeals court ruled in the case of United States v. Esquenazi (752 F.3d 912 (11th Cir. 2014)), that the FCPA’s definition of “foreign official,” which includes “any officer or employee of a foreign government or any department, agency, or instrumentality thereof,” also includes officials working for “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Esquenazi, 752 F.3d at 925. Therefore, if your company is doing business with a foreign state-owned or state-controlled business, certain payments to officials of that foreign company could be illegal under the FCPA, because such businesses can be interpreted as being “instrumentalities” of the foreign government.

It is also important to note that FCPA enforcement is expected to be on the rise in 2015. Violations of the FCPA can result in criminal and/or civil charges from the U.S. Department of Justice (DOJ) and (if your company is a “reporting company” under the Securities Exchange Act of 1934) civil or administrative cases from the U.S. Securities and Exchange Commission (SEC). While enforcement actions by these two agencies had been relatively stable over the last three years, there has been a recent uptick in the number of potential FCPA violations reported to the U.S. government. This is due in large part to stronger anti-corruption laws and enforcement measures around the globe, which is increasing corporate awareness of anti-bribery issues. As companies are reporting more to the enforcement agencies, actions under the FCPA should increase as well.

And the stakes in FCPA compliance measures and enforcement actions can be enormous. For 2014, the average value of monetary resolutions in government FCPA enforcement actions against corporations was over $150 Million. And those are just the fines and penalties. On the compliance side the costs can be staggering for businesses as well. In one well publicized case, Walmart self-reported possible FCPA violations to the DOJ and SEC after a New York Times investigation. According to filings with the SEC, Walmart is now spending between $10 Million and $35 Million per quarter for its “global [anti-bribery and anti-corruption] compliance program and organizational enhancements.” In its fiscal 2014 Global Compliance Program Report, Walmart reported it had spent an overall total of $439 million in legal fees and other costs associated with the on-going investigations of alleged FCPA violations, and to revamp its global compliance protocol.

While smaller companies may not have the breadth of operations (and the financial resources) of Walmart, having an effective and robust FCPA compliance program is just as critical. A combination of a strong, written program together with its robust use and periodic audits can help prevent exactly the type of situation that has befallen the company in the scenario above. Moreover, an effective FCPA program can be a critical factor in mitigating possible penalties in any FCPA enforcement action that may arise.

So what does this mean for your company? In the short-term, you should conduct an immediate self-assessment to check foreign transactions for both export violations and FCPA violations. It is common for a company lacking in FCPA internal controls to also be lacking in effective export controls and vice versa. (You also need to have legal counsel carefully review all of the responsive subpoena documents for possible export and/or FCPA violations.) In the long-term, your company must become more vigilant with respect to FCPA issues. Your company’s overall compliance program must address anti-corruption and anti-bribery programs, just as company contracts with foreign entities or with respect to export-related operations should contain standard provisions requiring FCPA compliance.

DDTC Migrates All External Systems to a New Platform

March 30th, 2015 by Brooke Driver

Source: http://pmddtc.state.gov/

DDTC is modernizing its technology infrastructure, and migrating all external systems to a new platform. The migration will occur on Friday, April 17, 2015.

New versions of the DTrade DSP forms will be available from the DDTC web site on April 3, 2015. DS-2032 and DS-4076 form versions will remain unchanged. If you have any questions, please contact the DDTC Helpdesk at 202-663-2838 or dtradehelpdesk@state.gov

Following the migration, Users will be required to submit a DSP-85 for any amendment applications to License for Export/Import of Defense Articles that were previously submitted using a DSP-119. The Ellie system will be decommissioned as of Friday, April 17, 2015.

Industry users will see no functional changes to the remaining online applications. However, effective April 18, 2015, users will access DTrade, Electronic Forms Submission, and MARY using the following new URLs:

- DTrade Application: https://dtrade.pmddtc.state.gov
- Electronic Forms Submission for DS-2032 and DS-4076: https://efs.pmddtc.state.gov
- MARY status application: https://mary.pmddtc.state.gov/mary