Archive for the ‘BIS’ Category

BIS Settles with Ansell and Comasec for Attempted Transshipment of Industrial-Strength Gloves to Iran through UAE

Thursday, March 13th, 2014 by Brooke Driver

By: Brooke Driver

Well, folks, here’s yet another case of the consequences of defying U.S. embargoes. BIS has announced that it has reached a settlement agreement with Ansell Protective Products Inc. of New Jersey and Comasec of Gennevilliers, France. Specifically, Ansell was charged with two counts of engaging in prohibited conduct by exporting items to Iran without the required license and two counts of evasion, while Comasec was charged with two counts of causing, aiding or abetting and two counts of evasion. Between June 27, 2008 and September 19, 2008, Ansell entered into business with French company Comasec SAS and agreed to export 35,000 pairs of Nitrotough N115 and Blue Nitrile industrial-strength gloves with a total value of $43,500 to Comasec’s client Zhabeh Safety Co. of Tehran, Iran. To avoid the U.S. embargo, Ansell and Comasec chose to first ship the items to the UAE, where they would then be transferred to their final destination in Iran. The scheme was thwarted in March of 2009, when the violation was discovered and the items seized by CBP.

The two companies were certainly smart to settle, rather than go to court over these charges, as the investigation had uncovered a significant amount of evidence of both companies’ conscious efforts to continue with the transaction despite the U.S. sanction. The evidence ranged from invoices that explicitly stated the end user’s location in Iran to emails between Ansell and Comasec expressing their knowledge of the U.S. embargo against Iran and detailing their plan for avoiding the restrictive U.S. law. Considering the amount and gravity of the evidence, in fact, BIS’ settlement of a $190,000 fine for each company is surprisingly lenient.

Of course, the relatively low value of the items involved certainly played a role in determining the appropriate payment, but Ansell’s and Comasec’s blatant disregard for U.S. regulations seems to merit a more severe consequence. All the same, the case certainly proves the point yet again that it is never worth the cost to engage in business with an embargoed country and that BIS is cracking down on those that do.

Export Coordinator Gets Prison Time for EAR Violations

Thursday, March 13th, 2014 by Brooke Driver

By: Brooke Driver

“Play nice” may have been a lesson you learned in preschool, but the rule still applies—as shown recently in the case of Amplified Research Corporation. The Pennsylvania company’s former export coordinator Timothy Gormley was sentenced to 42 months in prison and 10 years debarment this January for his illegal shipments of U.S.-controlled amplifiers to Hong Kong, the People’s Republic of China, Taiwan, Singapore, Thailand, Korea and Malaysia. Apparently, the total value of the amplifiers, which are controlled due to their potential military applications as radar jammers and weapons guidance systems, was nearly $3,000,000. Twenty-five of the fifty illegal exports were to the People’s Republic of China.

Gormley certainly paid the price for his crimes, but what about his company? Amplified Research itself seems to have gotten off nearly scot free, which is rather surprising considering the high number of violations and the value of the products involved in the case. Eric L. Hirschhorn, Undersecretary of Commerce for Industry and Security, took note of Amplified Research’s cooperation with BIS throughout its investigation, including the company’s submission of a voluntary self-disclosure describing Gormley’s action. As a result, BIS has decided to waive the $500,000 fine, assuming Amplified Research does not violate the regulations in the next two years, and only requires that the company perform an outside audit. Lesson learned? Cooperation will go a long way in lessening the consequences of a violation.

US Implements Third Set of Export Control Reform List Shifts

Thursday, January 30th, 2014 by Brooke Driver

By: John Black

In the January 2, 2014 Federal Register the departments of Commerce and State published notices shifting export control jurisdiction over certain military items and technologies in the US Munitions List (USML) in the International Traffic in Arms Regulations (ITAR) to the Commerce Control List (CCL) in the Export Administration Regulations (EAR).  This is the third group of items that has undergone the shift from the USML to the CCL as part of the US Export Control Reform initiative.  The changes published on January 2, 2014 do not enter into force until July 1, 2014.


ITAR/USML Changes

The Directorate of Defense Trade Controls revised the USML so that this list shift applies primarily to four categories in the USML.  Those categories and the highlights of the changes are:

Category IV,  Launch Vehicles, Missiles Rockets, Torpedoes, Bombs and Mines

DDTC clarified the scope of Category IV by enumerating the items controlled in paragraphs (a) and (b).  DDTC also shifted demolition blocks, blasting caps and military explosive excavating devices to the CCL in the EAR (for example, ECCN 0A604.b for military explosive excavating devices).  DDTC also moved ablative materials from paragraph (f) to Category XIII(d).

The new IV(h) controls specified systems, subsystems, components, parts, accessories, attachments and associated equipment.  IV(h) controls certain items using the “specially designed” approach and other items using an enumerated approach.  IV(h)(28) enumerates controls on pneumatic, hydraulic, mechanical, electro-optical or electromechanical flight control systems (including fly-by-wire systems) and attitude control equipment for rockets and missiles—interestingly, IV(h)(28) does not specify attitude control equipment for teenagers as such items are not known to exist.  If attitude control equipment for teenagers were developed, I would expect the US Government would apply a 0y521 control to it.

Category V: Explosives, Energetic Materials, Propellants, Incendiaries

A significant change here is that DDTC enumerated specific controlled items and replaced the former catch-all approach in Category V.  As a result certain spherical aluminum powder and hydrazine and its derivatives shift to the CCL.

Category IX: Military Training Equipment

DDTC’s objective in Category IX is to establish a bright line between the items the USML controls and the items the CCL controls.  The newly enumerated paragraph (a) identifies training equipment, including, for example, towed targets and models or mockups used for maintenance or ordinance disposal training.  The new paragraph (b) identifies simulators including system simulators that replicate the operation of an individual crew station, a mission systems or a weapon of a controlled end-item, and simulation software.

Category X: Personal Protective Equipment

DDTC’s objective in Category X is to establish a bright line between the items the USML controls and the items the CCL controls.  Protective shelters shifted from the USML to the EAR in ECCN 1A613.  Anti-gravity suits, pressure suits and atmosphere diving suits also shifted to the EAR.  Equipment for producing Category X items shifted to EAR ECCN 1B613.  Finally, DDTC clearly narrowed the scope of Category X controls on parts and components to focus on things such as ceramic or composite body armor plates, laser protective lenses and other items.

Category XVI:  Nuclear Weapons Materials

DDTC clarified that neither the ITAR nor Category XVI apply to most of the items described in Category XVI prior to this notice because those items and technologies are under the jurisdiction of the Nuclear Regulatory Commission or the Department of Energy.  This category will continue to control tools that model or simulate the environments generated by nuclear detonations.

In addition to the changes described for the individual categories above, DDTC, as it has done with past list shift rules, added a new paragraph (x) to each category, which will be used to identify CCL controlled items on DDTC license applications.


EAR/CCL Changes

The 31-page Commerce Department notice created many detailed, new ECCNs and revised existing ECCNs.  In addition, Commerce revised License Exception TMP in EAR 740.9(a)(11) and License Exception BAG in EAR 740.14(h) to authorize exports, reexports and transfers of personal protective equipment classified under 1A613.c or d. in a fashion similar to the existing ITAR exemption for exports of personal protective equipment.

These new and revised ECCNs require careful review, especially if you are involved in the areas shifted off the USML.  The following summary is not a substitute for analyzing the new EAR controls, but it may be a useful road map.

Commerce created new 600 series ECCNs to receive the items shifted off the USML.  New ECCNs 0A604, 0B604, 0D604, 0E604 9A604, 9B604, 9D604, 9E604 control items shifted off USML Categories IV and V, with the new ECCNs in Category 0 controlling the shifted explosives/propellant-type stuff and related items and the new ECCNs in Category 9 controlling the items related to missiles and launch vehicles. Commerce created ECCNs 0A614, 0B614, 0D614 and 0E614 to receive military training equipment and related items.  ECCN0A614.a controls equipment specially designed for military training that is not controlled by Category IX.  0A614.x controls specially designed parts and components in the standard 600 series fashion. Interestingly, there is no y. paragraph in 0A614.

Commerce revised existing ECCN 1A005 for body armor and added several new 1Axxx ECCNs to control devices to initiate charges, devices containing energetic materials, charges, and other armored and protective equipment.  Corresponding changes were made to ECCNs in sub-categories B, C, D, and E in Category 1.

Finally, Commerce made revisions and conforming changes to many existing ECCNs.

 

Action Items

Even though the rules do not enter into force until July 1, 2014, export compliance personnel should find time soon to take a look at the changes to the USML and CCL.  After an initial review, you may find that you will need to work with technical experts to make specific decisions as to how the changes impact the export control classifications of your products and technologies.  This is an important, and, in some cases, difficult task.  The bad news is that, based on my initial analysis, this export control list shift does not seem to offer the benefit of moving as many items into EAR No License Required (NLR) eligibility as was the case for past changes for aircraft, gas turbine engines, land vehicles, surface vessels and submersible vessels.

As with past reform changes, after you determine how this impacts  your classifications, you need to decide your strategy for using existing ITAR approvals, transitioning to EAR approvals, and determining what type of EAR approvals you will need.  In addition, if your EAR expertise is not at the level of your ITAR expertise, you need to increase your EAR knowledge.

July 1 will be here before you know it.

North Carolina Man Jailed and Debarred for Violating ITAR Brokering Rules

Thursday, January 30th, 2014 by Brooke Driver

By: Brooke Driver

For Donald Bernardo of Matthews, North Carolina, the hits keep on coming. In November of 2011, Bernardo was tried and convicted in a Florida court for his violation of Section 38 of the Arms Export Control Act. Without first registering with the State Department, Bernardo engaged in brokering activities involving Venezuela. Specifically, in return for a fee and commission, he negotiated and arranged contracts, purchases, sales and transfers of regulated C-130 Hercules military transport aircraft. He was sentenced to 12 months of imprisonment and two years of probation at the time of his conviction in November 2011. Upon his release, BIS gave Bernardo a welcome back gift—five years on the denied persons list. For his sake, we hope his commission was worth it.

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.

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.”

BIS Changes EAR 180 Day Time Limit for Voluntary Disclosures

Tuesday, September 3rd, 2013 by Brooke Driver

By: Brooke Driver

Effective September 9, 2013, BIS is amending the EAR, CFR Parts 764 and 766 to require that the final narrative account included in voluntary self-disclosures of violations of the EAR be received by the Office of Export Enforcement within 180 days of the day OEE received the first VSD notification. The final rule also allows the usage of delivery services other than registered or certified mail in providing notice of the issuance of a charging letter from the EAR and removes the phrase “if delivery is refused” from a provision related to determining the date that notice of a charging letter’s issuance is served based on an attempted delivery to the respondent’s last known address. BIS hopes that the changes will help to resolve administrative enforcement proceedings more quickly.