Archive for 2013

Chinese National Sentenced to Nearly 5 Years in Prison for Attempting to Illegally Export Aerospace-Grade Carbon Fiber

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

On December 10, 2013, Chinese citizen Ming Suan Zhang was sentenced to 57 months in prison for violating the International Emergency Economic Powers Act by attempting to export high-grade carbon fiber from the United States to China, which is controlled due to its applications in the defense and aerospace industries. Thankfully, Zhang’s attempt to negotiate a long-term contract for large amounts of the product to aid a Chinese company involved in the development of a military aircraft was intercepted by an undercover agent working with the Department of Commerce.

Federal authorities were first alerted to Zhang’s illegal activities when two Taiwanese buyers—at Zhang’s guidance—attempted to purchase several tons of specialized carbon fiber, including Toray type M60-JB-3000-50B (“M60”) on the Internet. Zhang intended to export the fiber to a Chinese customer. In their search for an entity selling the fiber, the two buyers contacted the UC, who informed them that a license was required to export the M60 outside the U.S. After the UC refused to do business with them without the necessary license, Zhang contacted him directly, claiming that one of his clients, an employee of a Chinese military company, required the fiber for a test flight of a “jet fighter plane.” Zhang emphasized that this “client” required the product as soon as possible, implying that the need for urgency outweighed licensure:

“Hello! Please find time to send me an email or call me to explain the situation, because the customer over here is rushing me. . . . On the 5th, [he] is handling the site of a new fighter aircraft test flight. He will return between the 10th and the 20th of next month. That’s why he requested that be done this month. . . . Thank you for your cooperation!”

Zhang was captured when he traveled to the United States to meet with the UC in order to obtain a sample of the specialized fiber. United States Attorney Lynch said of the case,

“The defendant brazenly disregarded U.S. law in an attempt to procure a highly sought after commodity and provide it to a foreign power. Foreign governments are willing to go to great lengths to acquire potentially dangerous materials such as specialized carbon fiber composites, which are of high value in the development of advanced weapons programs. We and our law enforcement partners will continue to use all of the tools in our arsenal to protect our technology and maintain the national security of the United States and its allies.”

State Department Posts Updated Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret and Embargo-Related Criminal Cases Report

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

The DDTC has posted an updated Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret and Embargo-Related Criminal Cases Report on its website. The new report chronicles a selection of some of the major export enforcement, economic espionage, theft of trade secrets, and embargo-related criminal prosecutions undertaken by the Justice Department from January 2008 to present day. Specifically, the cases in the updated summary reflect investigations by the Homeland Security Investigations (formerly Immigration and Customs Enforcement), the Federal Bureau of Investigation, the Department of Commerce’s Bureau of Industry and Security, the Pentagon’s Defense Criminal Investigative Service and other law enforcement agencies.

You can access the summary here: http://pmddtc.state.gov/compliance/documents/OngoingExportCaseFactSheet112013.pdf.

Weatherford Subsidiaries Pay $252.7 Million for Export Violations and Bribing Government Officials in Violation of the FCPA

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

In November, Weatherford International Ltd. broke a BIS penalty record, suffering a fine of $100 million for its subsidiaries’ 174 violations of the regulations. The company was also charged with violating the Foreign Corrupt Practices Act’s anti-bribery provisions and federal export controls regulations. On November 26, Weatherford and three of its subsidiaries pled guilty to these charges, and agreed to pay a massive penalty of nearly $252.7 million, to retain an independent corporate compliance monitor for at least 18 months, and to implement an improved compliance program in order to prevent and detect future FCPA violations. The huge fines demanded by the U.S. Government in this case are a reflection of the company’s repeated (and varied) efforts to intentionally evade U.S. law. According to the Department of Justice, Weatherford International’s subsidiaries:

  • purposely failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations
  • operated a joint venture in Africa with two local entities controlled by foreign officials and their relatives for the purpose of bribing those officials
  • bribed a foreign official in Africa to approve renewal of a contract in 2006
  • paid $15 million of improper “volume discounts” to a distributor in hopes of establishing a slush fund to bribe a national oil company’s executives

Apparently, these illegal activities earned the company nearly $54.5 million in profits.

Co-director of the SEC’s Enforcement Division Andrew Ceresney described some of the methods Weatherford used to conceal its illegal activities:

“They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”

Given the extensive measures to which Weatherford went in order to avoid U.S. regulations and the widespread corruption of the organization, it is difficult to believe Chief Executive Bernard J. Duroc-Danner’s statement that:

“With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

If Weatherford’s compliance program is truly “best-in-class” material, the exporting world as we know it is doomed.

Making Up License and Agreement Numbers Will Get You in Trouble: Former Honeywell Compliance Officer Debarred for Falsifying Government Authorizations

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

On November 25, 2013, the State Department announced that LeAnne Lesmeister of Honeywell has been debarred for three years from participating in any activities that are subject to the International Traffic in Arms Regulations as a result of her multiple violations of the Arms Export Controls Act. Given the nature of the charges against her, it is quite surprising that DDTC has not yet decided to enforce either civil or criminal penalties. Apparently, Lesmeister, who had worked as Honeywell’s Clearwater, Florida branch senior export compliance officer for 27 years, committed 21 ITAR violations during the period between 2008 and 2012, when she circumvented Honeywell’s compliance program by fabricating Department of State authorizations. Based on these counterfeit licenses, Honeywell exported defense articles—including technical data—and provided defense services to various foreign persons without Department approval, in violation of the AECA and ITAR.

DDTC issued the charging letter against Lesmeister in July, but received no answer from the accused. As Lesmeister did not contest the charges against her (or bother to respond at all), the Department considered the violations verified and debarred the former Honeywell employee. The charging letter contains a variety of startling evidence of Lesmeister’s crimes and disregard for U.S. law, such as the following:

Lesmeister used fake DSP-5 license numbers or reused numbers from previously approved licenses to Honeywell for unrelated products or, in other cases, numbers from previously approved licenses to unrelated applicants where a Honeywell entity sometimes appeared as a party, but often not at all.

With intent to falsify an approved technical assistance agreement, Lesmeister reportedly assured a Honeywell employee that “we are expecting to see approval within about a week at max, all staffed agencies have responded so it is just a matter of getting the licensing office to finalize.”

Regarding a fake DSP-5 license and forged technical assistance agreement, Lesmeister commented to two Honeywell employees, “[t]hey ended up sending it to me – it ain’t pretty but it is official.”

Several of the alleged violations related to Honeywell’s Miniature Inertial Measurement Unit, which provides stability and pointing for various types of spacecraft. Recipients of the illicit products included a number of foreign space programs, such as Europe’s Galileo satellite navigation system, Europe’s Exomars Mars exploration mission, Argentina’s Arsat program and Eutelsat’s W6A telecommunications satellite. In addition, end users of the illegal transactions were located throughout Europe and South America and in the countries of Canada and Israel. Honeywell voluntarily disclosed these violations upon discovery, and cooperated fully with the Department, implementing remedial measures to address the conditions that allowed one employee, in a position of authority, to execute numerous and intentional export compliance violations. Honeywell’s first move, of course, was to fire Lesmeister in June of 2012, just four days after she was charged. As a result, it seems, of the company’s efforts and transparency, the Department has not yet issued any charges against Honeywell, which is somewhat surprising, considering certain descriptions of Lesmeister’s fabrications in the charging letter that detail some very obvious red flags; Lesmeister’s fabricated  DSP-5 licenses were described as “low-quality scan[s],” included “page numbers [that] were not sequential” and contained obvious discrepancies (“the country of ultimate destination was inconsistent with the end-users listed”).

Honeywell spokesman Scott Sayres claims, however, that the company will not make the same mistake again:

“Honeywell is committed to acting with integrity in all our business dealings. That’s why we immediately and voluntarily reported to the U.S. Department of State the discrepancies we discovered in export authorization documentation that led to this decision. We also took strong corrective action, including initiating a comprehensive review of our processes to ensure this type of misconduct doesn’t happen again. Appropriate disciplinary action was taken and the employee is no longer with the company. This was an isolated departure from Honeywell’s values and should not taint the hard work and honesty of our nearly 140,000 people world-wide.”

In this case, we can learn from the bad habits of others. A more balanced internal check system and routine audits would have proved helpful here. Perhaps, if Lesmeister had not enjoyed unchallenged authority, she would not have been able to fake her job for four years (and maybe 27 years).

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

Tuesday, December 31st, 2013 by Brooke Driver

Source: AES Broadcast #2013098; census@subscriptions.census.gov

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: 120
* Narrative: Carrier Unknown
* Reason: The Carrier ID (SCAC/IATA) reported is not known in AES.
* Resolution:  For vessel, rail or truck shipments the carrier must be identified with an active SCAC code issued by the National Motor Freight Traffic (NMFTA). For air shipments, the carrier must be identified with an active IATA code issued by the International Air Transport Association.

If the Carrier ID (SCAC/IATA) as known at the time of filing is not valid in AES and a valid Carrier ID (SCAC/IATA) cannot be obtained from the carrier, as a last resort, report the Carrier ID as UNKN for vessel, rail or truck shipments. For an unknown air carrier, report one of the acceptable “unknown” codes as follows:

– F or 99F for Unknown Foreign Air Carrier
– U or 99U for Unknown U.S. Air Carrier
– C or 99C for Unknown Canadian Air Carrier
– or 99O for flyaway aircraft reported under Chapter 88

Verify the Mode of Transportation Code and the Carrier ID (SCAC/IATA), correct the shipment and resubmit.

* Fatal Error Response Code: 167
* Narrative: Transportation Reference Number Contains Leading or Embedded Spaces
* Reason:  The Transportation Reference Number contains leading or embedded spaces.
* Resolution: The Transportation Reference Number cannot contain leading or embedded spaces. Left justify the Transportation Reference Number and remove all spaces within the number.  Verify the Transportation Reference 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.

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
Email: askaes@census.gov
Online: www.census.gov/trade
Blog: blogs.census.gov/globalreach

BIS Publishes Advisory Letter Concerning Screening Requirements for Posting Time-Limited EAR99 Software on Public Website

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

At the end of October, BIS posted a response to an email advisory opinion request sent last March that answered the question “Are free trial periods subject to the EAR?” Specifically, the unidentified inquirer wanted to find out if he/she could skip screening for prohibited parties and embargoed destinations during a 30-day trial period of EAR99 classified software that would be publicly available for download from their website. The individual would then perform the necessary screening after the trial period, when the customer is required to purchase an unlock code to continue using the software.

BIS responded that, technically, the product is subject to the EAR during the 30-day trial period, because the software is only available for free download during a limited time period, and is therefore not publicly available under Section 734.7 of the EAR. Commerce was quick to add, however, that just because the software, in this situation, is subject to the EAR, this does not mean that it is in violation of the regulations. As long as the download is completely free and anonymous and the software distributer has no reason to believe that a prohibited person or entity in an embargoed country will download the product, it is not in violation of the EAR.

Beware RWA: BIS Licenses Lack Flexibility of ITAR Agreements

Tuesday, December 31st, 2013 by Brooke Driver

By: John Black

BIS is currently not allowing applications to exceed 70 end users (e.g., former ITAR agreement licensees and sublicensees) and items on its license applications. The SNAP-R application will not allow you to exceed that limit and if you try to go above 70 by naming additional parties or items in your letter of explanation, BIS will RWA your request with this notice:

“Regrettably, for the end users not identified on the actual license [applicant name omitted] will have to submit a second, completely separate license with the parties not identified in the initial license application. We apologize for the inconvenience; however, this is the guidance we are giving all applicants who encounter this same problem with multiple end users that will not ‘fit’ on the application.”

So, it looks like you will have to replace certain large TAAs and MLAs with multiple BIS licenses and keep track of multiple licenses and what you do under each with and for the different parties on each license. For example, instead of using an MLA for all 90 parties, you use license 1 to export data that is going to party A and license 2 to export data that is going to party B. With multiple licensees and sublicensees, keeping track will be a challenge.

We can all hope BIS changes this, so its approvals are at least as flexible as ITAR agreements.

$100 Million EAR Violations: You Don’t Have to Be a Weatherford to Know Which Way the Wind Blows

Wednesday, December 4th, 2013 by Brooke Driver

By: John Black

It’s a record. $100 million dollars. Last week when Assistant Secretary Mills and his team told exporters at the Export Compliance Training Institute’s Advanced Seminar that BIS fines would be increasing, little did we know a $100 million penalty was close at hand for Weatherford International Limited, a Swiss oil services company. And $100 million is not an increase; it is a huge jump. With this penalty, EAR and OFAC trade control violations clearly moved into the league of ITAR penalties and OFAC penalties against financial institutions.

Here is where the $100 million penalty comes from:

  • $50 million settlement for violation of the EAR and the Iranian Transactions and Sanctions Regulations (ITSR)
  • $48 million monetary penalty imposed by the Justice Department pursuant to a deferred prosecution agreement.
  • $2 million criminal fines imposed by the Justice Department.

So what the heck did Weatherford do to put itself on the top of the list for export control violations?

According to BIS, its 174 charges against subsidiaries of Weatherford included these violations:

Weatherford International Ltd.

1)    Between 2004 and 2007, Weatherford knowingly moved $12 million worth of oil and gas drilling equipment from the United States to Iran via Weatherford’s Dubai subsidiary.

2)    Between 2005 and 2007, Weatherford knowingly transferred $20 million worth of oil and gas equipment from the United States to Cuba via Canada.

3)    Between 2002 and 2007, Weatherford violated the EAR by exporting pulse neutron decay tools to Venezuela and Mexico without a license.

Weatherford Oil Tool Middle East Ltd.

Between 2002 and 2008, Weatherford worked with its parent company to evade the EAR in connection with the export of oil and gas equipment from the US to Iran and Syria while concealing the fact that those countries were the actual destination.

Weatherford Production Optimisation (UK) Ltd.

Between 2003 and 2006, the company evaded the EAR by exporting oil well production optimization items and concealing the fact that the final destination of the items was Iran.

Precision Energy Services ULC

Between 2005 and 2006, this Canadian subsidiary transferred oil and gas equipment despite the knowledge that it would (illegally) go to Cuba.

Precision Energy Services Columbia Ltd.

Between 2006 and 2007, the company evaded the EAR in exports and reexports of oil and gas equipment, while concealing that the ultimate destination was Cuba.

According to the FBI, Weatherford committed violations between 1998 and 2007, which is a slightly different time frame than BIS reported. According to the FBI, Weatherford generated $110 million in revenue from its illegal transactions involving Cuba, Iran, Syria and Sudan. People in the U.S.-based management structure were involved in the decisions involving transactions with these countries.

While Weatherford was already digging deep to pay the export control penalties, the company also agreed to pay an additional $152 million for violations of the Foreign Corrupt Practices Act for bribing government officials and misusing the United Nations Oil for Food Program (I guess that the Oil for Food Program is not a Food for Oil Money Program, because it does not include using money to buy a nice steak dinner for Iraqi Ministry of Oil officials, so you can make more money.)

Lessons: 

Penalties for violations of EAR and OFAC export controls have reached the $100 million threshold—previously hit only in the biggest ITAR cases and in the OFAC violations by foreign banks.

The second lesson is that when a company is lax about compliance and engages in repeated violations with embargoed countries, the U.S. Government will not hesitate to impose huge penalties.

Does this mean that the next time you fail to file your Electronic Export Information in AES you will end up paying millions of dollars? No. That is not the lesson here. According to U.S. Government officials, this was not a case of a few mistakes here and there. Instead, officials described this as a situation where compliance was not important and there was no management interest in developing effective compliance procedures.

But, you don’t need to be a Weatherford to know which way the export control penalties wind is blowing. The U.S. Government clearly is willing to impose multi-million dollar penalties for non-ITAR export control violations. This is both new and significantly different from the past. Again, this does not mean every EAR violation will result in multi-million dollar fines, but it certainly changes the way we will estimate the possible penalties when considering what the government might do in response to our violations in the future.

On the plus side, for export compliance personnel, few things grab management’s attention better than $100 million penalties. Smart management immediately recognizes that penalties of this magnitude usually come with a corresponding amount in legal fees and remedial measures costs. If this case doesn’t convince your top management that compliance is critically important now, I doubt anything will.

But, don’t worry, your occasional failure to file EEI or your mistaken EAR99 classifications won’t earn you a Weatherford-like penalty, and you won’t end up with the “Subterranean Homesick Blues.”

DDTC Updates DS-2032 Statement of Registration Form: Older Versions No Longer Accepted

Wednesday, December 4th, 2013 by Brooke Driver

By: Brooke Driver

As of October 25, the State Department has introduced version 4.0 of the DS-2032 form. Be advised that older versions of the form are no longer valid. You may submit the new form electronically, through EFS, or through the mail until December 31, 2013. As of New Year’s Day, however, the form will only be accepted electronically. The changes to the form include the ability for U.S. persons to consolidate manufacturer, exporter and broker registrations, updates to ITAR USML Categories, disclosure of intermediate through ultimate parents, a certification regarding debarred or subsequently reinstated parties and a certification on violations involving any U.S. criminal studies, as well as clarification on foreign ownership.

Ameron International pays $434,700 for Illegal Transactions with Iran and Cuba

Wednesday, December 4th, 2013 by Brooke Driver

By: Brooke Driver

Ameron International Corporation of Pasadena, California recently settled with OFAC for violations of both the Iranian Transactions and Sanctions Regulations and the Cuban Assets Control Regulations that occurred between March 14, 2005 and October 5, 2006. Ameron was accused of:

  • Approving its Singapore and Dutch subsidiaries’ requests to purchase tools and equipment necessary for them to fulfill orders for a South Pars project located in Iran,
  • Passing along to its subsidiaries Iranian business opportunities in order to sidestep preventative U.S. Government regulations, and
  • Providing testing results to its Singapore subsidiary, despite the fact that Ameron professionals had reason to believe that they would be sent to the Iranian company Arvand Petrochemical.

U.S. companies should learn from this case that they may not approve or facilitate another party’s dealings with Iran or Iranian entities. The first two violations above involved the acts of approving subsidiaries requests and passing on business leads. In the third case, Ameron exported tech data to Singapore with knowledge or suspicion that the data was intended to be forwarded on to the Iranian entity.

Ameron also violated the CACR when its Columbian branch sold concrete pipe to a conglomerate that included a Cuban partner.

The company was hit with a relatively significant penalty in this case, because its Iran-related violations involved intentional actions to violate the rules or to try to get around the rules in an illegal fashion. In other words, if you do things wrong on purpose, you pay more.

The base penalty for Ameron’s collected offenses is $690,000. OFAC stated that it arrived at the settlement amount of $434,700 based on the following factors:

  • The case was ruled non-egregious
  • Ameron did not voluntarily disclose
  • Ameron’s management and supervisory staff acted with reckless disregard of U.S. sanctions requirements
  • Ameron had reason to suspect the involvement of the Iranian and Cuban entities in the transactions with its foreign subsidiaries
  • Two of the apparent violations (the approvals of the two capital expenditure requests) caused significant harm to U.S. sanctions program objectives on Iran
  • Many violations involved transactions that were never completed
  • Ameron had not committed any violations in the five years prior to the date of these illegal transactions
  • Ameron has taken remedial steps to improve its compliance program
  • Ameron cooperated with OFAC throughout the investigation