A company needs three levels of training

1)      Expert training: The core export compliance experts need to be experts on the rules

2)      Awareness training:  A wide range of company personnel need to trained to know what issues export rules create and how to handle them or whom to ask for help

3)      Executive training:  Top level management needs to understand the risks of violation and how export rules impact the company’s business activities so management can decide how much money and resources to spend on compliance.

This article will focus on expert training.  I will write articles later to discuss the other training.

A starting point for any company export compliance program is for the company to figure out what the rules are and how they apply they apply to the company’s products, technologies and activities.  This usually means that the company, depending on its size and export issues, appoints one or two, or maybe a few people to be the export compliance experts.  While someone new to export compliance theoretically could learn the rules by reading the rules, it is usually much better for the newbie to be taught what the rules say and how they work before digging into the voluminous, arcane, and complicated regulations.  There are various export control regulations—the Export Administration Regulations (EAR), the International Traffic in Arms Regulations (ITAR), the Foreign Trade Regulations (FTR), plus the various Office of Foreign Assets Control (OFAC) regulations—and the company needs to know if and how each of these regulations impacts the company.

And, unfortunately, a quick glance is not enough and common sense won’t help—who would think the ITAR regulates exports of items involved in sending TV signals for the Sunday football game to your house?  You need to learn what the rules actually say.  Beware of company folk lore—“we’ve always done it this way,” or “if we sell to the military its ITAR, but if we sell to somebody else it is not ITAR,” or “the ITAR does not let you put technical data in the ‘public domain.’”  You need to focus on learning the rules themselves.

Beware of oral information that contradicts the rules—whether from a government or other source.  Sure, maybe today the government interprets the word “green” to include “yellow” because yellow is a precursor to green.  But if the rules do not say that, and you act as if green does not include yellow, you have put yourself in a defendable position, to say the least.  Most of us do not talk to every government official in Washington so that we know the interpretation of the day — and we don’t know if 99% or only 0.01% of the government interprets green to include yellow.  Learn how to read the rules — then do what they say!

Once you start on the long path to becoming an expert on the rules, you have to figure out what procedures you will implement to help your company follow the rules.  Technically, in most cases, implementing procedures is optional because it is not a violation to fail to have compliance procedures.  It certainly is prudent, however, to implement compliance procedures if you want to do a good job on compliance.

Going to a live seminar is the best form of training.  There is nothing better than being able to interrupt a knowledgeable speaker and ask a question when it pops into your head.  A key part of live training may be the 5 minutes you spend at a break talking to the instructor about a specific issue.  Electronic or online training is better than nothing if your company is not willing to pay for live training, or if live training is otherwise not an option.

In any event, you need to make sure the people giving the training are experts on the rules.  They need to be able to give practical advice on the many different approaches you can take in implementing company procedures to follow the rules.  Verify the expertise of the trainers.  A person’s title or pay grade is not a key factor, nor is whether the person works in or outside of the government.  The best thing to do is talk to industry experts who actually have received training from the person giving the training you are considering.

Your goal should be to become an expert on the rules, or perhaps an expert on the rules that specifically impact your company.  This is a difficult task but you can do it.  (If I can do it, anybody can, trust me.)  To be an expert, you need regular and repeated training.  The first training you get to introduce you to the topic may be overwhelming, so just try to pick the most important issues—for example, take away the fact that you need to do export jurisdiction determinations and classifications for all of your hardware, technical data and software, but don’t worry if you didn’t memorize the second exception to the first prohibition in the antiboycott regulations.

Go to each training after the first with two objectives.  First, to hear people validate that what you think is true is true.  These export rules are often illogical and hard to believe so you might start doubting your understanding.  You will get value from just listening to somebody say that a convoluted rule means what you think it means.  You second objective is to learn more.  Eventually you need to understand the second exception to the first prohibition in the antiboycott regulations.  I know people who are experts and continue to attend the same seminar 5 – 10 times because they always get something new out of it.

If you are an export compliance professional, you need to embrace this reality:  The more you learn about the export compliance rules, the more difficult it becomes to comply with the rules.  Think about it:  A novice thinks export controls just mean taking care of exports of products.  As that person learns more he realizes that export compliance applies to hundreds of emails leaving his facility daily, and then that his employees with work visas present export compliance issues.  More and more training will not make your life easier, but will likely just add more things to your list of things do to as you learn about a rule you did not know about, or as you notice a different aspect of a rule.

As you can see, training is not a onetime event.  You should be training at least once a year, and I recommend twice a year in most cases.  I already discussed how the complexity of the rules calls for repeated training.  These rules also change.  The government procedures often change (hmm, the ITAR Agreement Guidelines come to mind!).  You need to stay up to date with changes and continue to grow and build your expertise.

Having well trained export compliance experts is good for your company.  Being a well-trained export compliance expert is good for you.  As your expertise grows, so does your confidence in your knowledge, and that puts you in a better position to tell your engineer “yes, it is true that we have to treat the employee with a work visa as an export issue.”  You will encounter people who want to comply with what the rules ought to say or what they would like for them to say.  You argue against those people by showing them what the rules say.  Your expertise will enable you to point to the rules as the basis for the positions you take so you can say “maybe it does not make sense, but this is what it says.”

And, of course, being well trained on export compliance is a valuable addition to your resume!

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John Black has been in the field of export controls since 1984, is a consultant with BSG Consulting and a regular speaker for The Export Compliance Training Institute (ECTI).  ECTI offers live seminars for US Companies and companies located overseas.  The current schedule of their seminars can be found at http://learnexportcompliance.com/schedule

I am old.  I can’t even count the number of times I have heard well intentioned high level government officials tell us that they plan to make significant reforms in the US export control system.  Some government officials have told me that they are going to make the system so transparent and user friendly that they will put consultants like me out of business.

It’s been 26 years for me in this business and numerous government pledges to make things better.  As far as I can tell, I am still here and there is still a huge demand for assistance in dealing with the infinite number of problems that US export controls create for companies who try to comply with the rules.  Yes, this reform could be different.

So, I apologize (for a change) in advance for being the cynic as a good number of my peers spout enthusiastically about Defense Secretary Gates’ call for comprehensive reform to the US export control system.  Reform certainly makes sense.  Comprehensive reform could both promote national security and make compliance a bit easier for companies.

Comprehensive reform is highly unlikely.  Adjustments to certain aspects of US export controls might be the better-than-nothing result we should hope for.  And, changes to the current system that will create a lot of extra work for us without actually improving anything is what we should fear.   (Well, this last scenario will probably be a gold mine for my seminar and consulting businesses.)

On behalf of the Obama Administration, Secretary Gates called on Congress to make sweeping reforms.  There are four pillars of the reform:

1)      Create a single export control list.

2)      Create a single export licensing government agency.

3)      Designate a single agency to coordinate the currently dispersed export enforcement resources.

4)      Create a single, unified IT infrastructure for the US export control system

Items 1 and 2 seem to be the focus of most of joyful exporter discussions.  Item 3 seems to be closely related to item 2, except I guess the licensing agency and the enforcement agency could be separate agencies.  Item 4 is the least talked about and would be a relatively natural consequence of item 2.

I once again apologize in advance. Something I do now that I am old.  Here is my editorial view of the 4 pillars.

Single Control List

The number of export control lists we have is not as big a problem as a) the US imposing severe military product type controls on non-military products such as satellites; and b) the difficulty determining where an item is controlled.

We could get a single list and keep those two problems.  We could have bombs, satellites, and machine tools on the same list.  But if the new single list says that satellites are subject to the same ITAR-type requirements as bombs, we have we gained nothing.  If in the current structure, satellites were moved from the ITAR to the EAR but that move included creating EAR MLAs, TAAs, exclusion from the de minimis rule, etc. for satellites and the US continued to deny all licenses involving countries such as China, the list switch doesn’t benefit satellite companies.

READ THIS:  And, worse yet, unfortunately, a single list could increase the risk that items currently controlled by the friendly EAR rules could be made subject to ITAR type export controls.  Right now, the EAR structure is not set up to impose ITAR type controls on, let’s say, a super duper machine tool.  But if both military and commercial items exist in the same list, that implies that some items will be covered by ITAR type controls and some will be covered by EAR type controls.  So, if that machine tool is covered by regulations that include ITAR type controls, the government could much more easily  apply ITAR type controls to machine tools because the ITAR type controls would be part of the regulations that apply to that single list.

On to problem b):  A significant problem companies face is determining whether an item is controlled by the ITAR’s USML or the EAR’s CCL.  (The fact that companies might not like their commercial items being subject to ITAR-type controls is discussed above.)  For example, let’s say a single list merges renames ITAR Category XI as ECCN 6A881 and Category XII as 6A882 and puts those ECCNs into EAR Category 6.  If the new ECCNs use the words from the former ITAR categories, then the difficulty in figuring out whether something is controlled by 6A881, 6A882 or 6A003 is the same as the current problem of figuring out if something is Category XI, Category XII, or 6A003.

The difficulty in determining jurisdiction/classification is due to the words used in categories XI and XII—these words are sometimes ambiguous and open to interpretation, and perhaps that is a naturally unavoidable problem that a single control list will make neither better nor worse.  But a bigger problem might be the fact that DDTC is willing to say an item is controlled by categories XI or XII even if there are no words in the ITAR that says that item is controlled by either of those categories.  (The ITAR says DDTC can put USML controls on things not mentioned in the USML, and DDTC says the USML is “illustrative” of the things subject to ITAR jurisdiction.)  So, some exporters live in a world where DDTC imposes ITAR controls on a thing not described by the ITAR—that is a world where “white” might mean “black” so some companies live in fear that their product, that they treat under the EAR could be the next “QRS-11 case,” a case where DDTC imposed ITAR controls on a commercial aircraft part, just because it wanted to.  So, some companies err on the conservative side and treat items as being ITAR controlled because maybe DDTC would want to control them.  Since the new regulations that apply to the single list will be able to apply ITAR-type controls to some items and EAR-type controls to other items, the implications of making the wrong classification decision in the single list could be as serious as the current risk associated with making the wrong ITAR vs. EAR jurisdiction determination.

But, at least, if you classify an item as being 6A003 when, in fact, the government thinks it is 6A882, you won’t make the current mistake of getting an EAR license for an ITAR item.  But the new single list rules could still impose an extremely harsh penalty if you export a 6A882 item under the 6A003 rules—say you export a 6A003 item under an EAR-type license exception to China when in fact it is subject to ITAR-type military rules..  The penalties might be described in a different way, but why would we assume that mistake will be subject to lesser penalties?

Single Agency

If there is going to be a single control list, there probably will first have to be a single agency.  Some agency will have to take the lead in combining the control lists and the regulations that go around them.  If that single agency is transparent, customer-service oriented, efficient, and friendly, life will be good.  If that single agency is the opposite, life will be bad.  I won’t make any stereotypical statements about the current State and Commerce department export licensing agency strengths and minuses.

If I am a company who exports only items classified as 9A991 and EAR99, the last thing I want is a single agency and a single set of regulations because I am thinking that things can only get worse than they are now.  If I am a company who makes satellites, maybe I think a single agency can only make things better.  But, ultimately, it is the rules and policies that are the issue, not the number of agencies who administer them.  Sure, at the margin a single agency may improve consistency of interpretation (perhaps) and there might be benefits to the one-stop-shop export licensing agency.  But, it is ultimately the regulations, rules, policies and procedures that are the biggest issue, not the number of agencies involved.

And I didn’t even talk about the fierce turf wars that will be involved in deciding what government department gets to have the single export control agency.  The turf wars make take so long that by the time they are resolved, President Palin won’t favor the single agency idea anyway.

Conclusion

Don’t get me wrong. I support export control reform.  And I know that reforms, if possible, could enhance our national security and make compliance a bit easier for exporters.

Obama’s reform plan is based on good ideas.  I see the biggest challenge as being reforming the rules and policies that underlie the multi-control list and multi-agency structure we have.  So many organization, agencies, and people have a vested interested in the current rules and policies—maybe of those entities and people created the system we have now, and they did it for what they see to be good reasons.  And those entities, even at the lowest level of government, have an enormous capability to prevent real reform, even if the White House supports reform.  (Remember when President Clinton’s Administration announced the Defense Trade Security Initiative and decided to create the special bulk ITAR authorizations (“Global Project,” etc.)  for certain trade with our allies?  DDTC ended up setting up those bulk authorizations in a way that no company wanted to use them.  To prevent the White House from reforming the ITAR, DDTC had to implement the idea, but DDTC maintained the status quo by implementing that reform idea in a way that effectively blocked reform.  We did get the allies maintenance exemption out of that, which was a decent improvement, but not a sweeping reform.)

Export control reform is a great idea.  It is long overdue.  But pardon me for wondering if real reform is possible.  Who among you remember these labels for past reforms:  “China Green Zone,” “The Core List” (and “The Bikini List”), the Defense Capabilities Initiative, and the ever popular “Higher Fences around Fewer Products,” and, of course, the above mentioned “DTSI.”

When I use the word reform, I mean significant and meaningful changes to the current system, not just superficial changes made that result in marginal improvements.  Marginal changes to the system are not reform.  They are adjustments.  Adjustments can be good, and they are certainly possible.

At the end of the day, the White House is going to have to invest a great deal of time, effort and political capital into achieving its objectives, and even more if those objectives end up being beneficial for national security and exporters.  US companies will have to invest a great deal of their resources into this too if they want to get beneficial reform.  I think ultimately, most companies believe they have better places to spend their government relations budgets and ultimately the White House and Congress will decide they have better places to spend their time.  Many of those with vested interests in the current system do not have a better place to invest their time and resources and they are willing to fight a slow war of attrition against reforming what they have created.

I do not think significant reform will happen.

I hear that most people in Washington disagree with me.   Somebody just told me that Washington insiders are convinced real reform will happen.

I rest my case.

Lukas admitted that from 1999 to 2005, he and other Nexus employees agreed to, and paid, bribes to Vietnamese government officials in order to obtain contracts. These bribes were covered up as “commissions” in Nexus’s accounting records. Court records indicate that Nexus paid over $150,000 to Vietnamese officials over the 6 year period.

Lucas has been indicted for one count of conspiracy to bribe Vietnamese public officials, in violations of the Foreign Corrupt Practices Act (FCPA) along with Nexus and co-conspirators Nam Nguyen, Kim Nguyen and An Nguyen. Cases are still pending against the other defendants and Nexus. Lukas is scheduled for sentencing on April 6, 2010 and faces a maximum sentence of 10 years in prison and $350,000 fine.

More information:

• DOJ news release

Monsieur and his accomplice, Dara Fotouhi, an Iranian citizen living in France, were indicted on August 27, 2009 for conspiracy, money laundering, smuggling and for violations of the AECA, and IEEPA. The two have been working with the Iranian government to procure military items for the Iranian government for years. Monsieur was arrested immediately after his plane landed in New York after the indictment and Fotouhi remains at large. Both face up to 65 years in prison if charged with the maximum for each sentence.

The indictment alleges that in February 2009, Monsieur contacted an undercover agent seeking to purchase engines for the F-5 fighter jet and/or the C-130 military transport aircraft for export to Iran. These engines are on the US Munitions List and require a license for export; the engines are also controlled under the Iran embargo and require an OFAC license for export. Monsieur met with the undercover agent in Paris and London along with Fotouhi to discuss the illegal transaction and the logistics of getting the engines and parts from the US to the UAE and then into Iran.

Over the course of several months Monsieur sent the undercover agent purchase orders for the engines and parts and wired $110,000 from Dubai to the agent’s bank account in Alabama and assured the undercover agent that he would deposit another $300,000 as down payment for 2 F-5 fighter jet engines.

We will continue to follow this story for updates.

More information:

• DOJ News Release

Air Shunt agreed to a $100,000 fine but won’t be paying any of that to the State Department, $70,000 has been spent on past compliance measures and the additional $30,000 must be spent on future compliance which is described in detail in the consent agreement. The company also agreed to on-site inspections by DDTC with “minimal advance notice.”

More information:

• DDTC’s Consent Agreement (PDF)

The criminal complaint has yet to appear online but the press release states that the Hansons purchased the circuits from Canadian company, MicroPilot who told the two that the autopilots could be shipped to the US, but that exports from the US would need to be licensed. The Hanson’s told MicroPilot that the autopilots were destined for model flying clubs in China. MicroPilot was understandably suspicious and further inquired about the autopilots. Harold Hanson allegedly replied, “typical of Asian men, these modelers want the very best product on the market,” and signed a letter promising that he would not export the autopilots without a license from the US government.

Mrs. Hanson hand delivered the autopilots to China without a license, alleging that she “thought that they were destined for humanitarian purposes and for the flight clubs.” The Hansons later filed a claim with UPS asserting that they never received the $90,000 shipment from MicroPilot and it must be lost.

(Note to Potential Export Violators: You might not want to file claims with shippers or carriers related to item you illegally export. If you don’t mark up the price of the items to your customer, don’t try to increase your margins by filing false claims with the shippers or carriers.)

The autopilots are used for unmanned aerial vehicles (UAV) and micro aerial vehicles (MAV); they are classified under ECCN 9A012.b for national security, missile technology, and anti-terrorism reasons.

If convicted, Mrs. Hanson faces a maximum sentence of 20 years in prison and a $1 million fine.

More information:

• DOJ News Release (PDF)

Between late 2003 into March 2005, Willbros’ employees agreed to make corrupt payments in excess of $6.3 million to Nigerian government officials to obtain and retain a $387 million contract for work on major construction on a gas pipeline project known as the Eastern Gas Gathering System. Other employees based in South America also agreed to pay $300,000 in corrupt payments to Ecuadorian government officials of the state owned PetroEcuador and its subsidiary, Petrochemical, to obtain the Santo Domingo project. The project involved rehabilitation of several kilometers of a gas pipeline in Ecuador.

Willbros’ and its international subsidiary are charged with six criminal counts:

• One count of conspiring to make bribe payments to Nigerian and Ecuadorian officials;
• Two counts of violating the Foreign Corrupt Practices Act in connection with the authorization of corrupt payments;
• Three counts of violating the FCPA by falsifying books and records relating to corrupt payments and a tax fraud scheme.

The Department of Justice has agreed to defer prosecution of all counts of criminal charges of the companies for three years; if the companies abide by all terms of their agreement the Department will dismiss the criminal information when the term of the agreement ends. This decision was made based on the Willbros’ exemplary cooperation, implementation of enhanced compliance policies and procedures, and their engagement of an independent corporate monitor.

More information:

• Willbros Group Agrees to Pay $32.3 Million To Resolve DoJ and SEC FCPA Enforcement Actions (Steptoe & Johnson LLP)

The Israel citizen was employed by the Government of Israel as the Consul for Science Affairs at eh Israeli Consulate General in Manhattan. He would direct Kadish on what documents he needed and met Kadish at his home to photograph them.

Of the numerous documents photographed over the years the most alarming were documents classified as restricted containing nuclear weaponry, major weapon systems of an F-15 fighter jet, and major strategies of the US patriot missile air defense system, noted as being “Secret”.

On March 20, 2008 Kadish received a phone call from the unnamed co conspirator instructing him deny any contact with him to federal law enforcement officials. The next day Kadish followed the conspirator’s orders and denied any contact with the individual and even the phone conversation from the previous evening.

Kadish is charged with 4 counts of conspiracy, that which include disclosing documents of US national defense to the Government of Israel, acting as an agent of the Government of Israel, hindering a communication to a law enforcement officer, and making a materially false statement to a law enforcement officer.

More information:

• DOJ News Release

Cyrostar was a middleman between Ebara International Corp., Inc. and “TN” a French company with a US subsidiary. Cryostar was to purchase the pumps from Ebara and then resell them to “TN” who would then forward the pumps to Iran. Cryostar falsely indicated that the final purchaser was the French company “TN” who would install the pumps in France, when all parties were in agreement that the pumps would go to Iran. The three companies created false purchase orders, and purchased as many component parts from non-US suppliers as possible to avoid any and all questions from US suppliers and to conceal their conduct. No export licenses were ever obtained for any of the items.

In 2004 penalties were imposed on Ebara and its former CEO Everett Hylton. At that time Ebara pled guilty to criminal violations and agreed to an administrative settlement, with combined fines of over $6.4 million dollars while Hylton agreed to personally pay $109,000. Ebara and Hylton’s schemed together to violate the embargo on Iran after some people in Ebara initially stopped an Ebara sale to Iran. Ebara falsified some documents and removed “made by Ebara” markings from certain items to evade US restrictions on Iran.

More information:

• DOJ Announces $500,000 Fine for Illegal Exports to Iran (WorldTrade Interactive)
• For the 2004 penalties: BIS News Release

In the court documents, prosecutors claim that Sherman and Roth both agreed amongst themselves to assign the Chinese student, Xin Dai, to the military development project. They never advised the Air Force or sought any special export licenses or consul.

At this time Sherman faces up to 5 years imprisonment and a $250,000 fine, the charges for the professor and student have yet to be released.

Patrick Rowan, Assistant Attorney General for National Security made a point, “Knowingly disclosing restricted US military data to foreign nationals represents a very real threat to our national security, particularly when we know that foreign governments are actively seeking this information for their military development.”

More information:

• DOJ News Release