Last week, the United States Court of Appeals for the D.C. Circuit issued its slip opinion in Del Monte Fresh Produce Company v. United States. The appeals court reversed a lower court ruling that had dismissed a case filed by Del Monte against the Department of Treasury’s Office of Foreign Assets Control (”OFAC”) alleging that OFAC was taking too long to process a license application Del Monte had filed to export agricultural commodities to Iran.

The Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”), 22 U.S.C. §§ 7201-7211, authorizes exports of agricultural products, medicine and medical devices to sanctioned countries such as Iran. Section 906 of TSRA provided that the licenses for exports to Iran were to be no more restrictive than license exceptions for agricultural products administered by the Deparment of Commerce. Pursuant to that section, OFAC published an interim rule that followed Commerce’s “nine-day” rule and which provided, in effect that licenses to Iran would be granted if no objections had been received from the State Department within nine days of the referral of the application to State and if the application was otherwise in conformity with OFAC’s rules. In March 2007, OFAC issued a policy statement that it would no longer comply with the 9-day rule.

Del Monte’s application to export agricultural products to Iran was filed with OFAC on August 8, 2007, and referred by OFAC to State on August 17. On September 13, State replied that it had no objection. After the OFAC Help Desk advised Del Monte on November 27 that the application was still pending, Del Monte filed suit the following day, November 28, in federal district court. On November 29, Del Monte filed a motion for preliminary injunction, the court scheduled a status conference and OFAC granted Del Monte’s license, which it appears had been signed on November 23, i.e., before Del Monte had filed suit. Because OFAC had issued the license, the District Court dismissed the complaint and the motion for preliminary injunction as moot.

In the opinion released by the Court of Appeals, the court ruled that the district court had jurisdiction over the otherwise moot claim under the exception for claims “capable of repetition but evading review.” As a result, the decision is instructive more on arcane issues of federal jurisdiction than it is on anything else.

But since the case was remanded for further proceedings before the district court, the district court will now be forced to confront several issues of immense interest to exporters. First, how long does OFAC have to act on a TSRA application under the terms of section 906 of TSRA? Must the agency act within 9 days of referral to State if State raises no objections and the license is otherwise grantable? Or could the agency, by its action in March 2007, defer action on applications for a much longer period? If the District Court reinstates the nine day rule, can OFAC effectively avoid it by waiting for long periods before referring the license application to State?

. . . to the tune of $6,600. In the civil penalties information released today by the Treasury Department’s Office of Foreign Assets Control (”OFAC”), the agency reported that Willbros, a Texas-based oil and gas drilling services company, paid $6,600 to settle charges that the company

through a former Senior Vice President, willfully violated the Sudanese Sanctions Regulations (the “Regulations”) when it entered into a contract to bid on an oil development project in Sudan, despite its knowledge that such activities violated the Regulations, by facilitating the export of goods, technology or services to Sudan and evading the prohibitions set forth in the Regulations.

A Willbros SEC filing provides a little more detail on the alleged violation:

Acts carried out by Mr. [James] Tillery and others acting under his direction with respect to a bid for work in Sudan may constitute facilitation efforts prohibited by U.S. law, a violation of U.S. trade sanctions and the unauthorized export of technical information.

In December 2008, Tillery was indicted for violations of the Foreign Corrupt Practices Act in connection with bribes paid to officials of Ecuador and Nigeria to retain business with the state-owned oil companies in those countries. Tillery remains at large. Willbros itself paid $22 million dollars to settle criminal charges in connection with these bribes.

The OFAC description of the violation is that Tillery “entered into a contract to bid” on the Sudanese oil project. There is no claim that Willbros actually bid on, or even worked on, the Sudanese oil project, which makes it somewhat unclear as to how the regulations were violated. If I agree with a friend to take a trip to Cuba, I haven’t violated the Cuba sanctions until I actually take the trip.

But, of course, there’s always the issue of facilitation, and OFAC claims that this contract somehow facilitated a violation whether or not a bid was ever made. If I don’t go to Cuba but my friend later does, then the facilitation argument, in its broadest since, is that I facilitated that violation by proposing the trip. (Hemingway might also, if he were still around, be guilty of facilitation by writing books that indirectly encourage his fans to visit his home and drinking haunts in Havana.)

And although this may all seem a stretch, it is consistent with OFAC’s broad concept of facilitation in which the butterfly that flaps its wings in Western Africa arguably facilitates the hurricane that a month later slams into the Atlantic coast of Florida.

A report on Reuters today raised some interesting issues with respect to the MTN-Bharti deal. The merger, which would create the world’s third largest wireless telephone company, is creating some heartburn for U.S. bankers who’d like to get a piece of this action. The reason for the heartburn: South African wireless operator MTN derives 13 percent of its revenue from Iran, Syria and Sudan.

As usual, OFAC isn’t saying anything about the propriety of U.S. banks financing or advising this deal, which is, of course, consistent with OFAC’s standard policy of regulation through ambiguity, a policy that utilizes fear of substantial penalties to keep U.S. firms from engaging in activities that are arguably permissible under the rules

A U.S. Treasury official declined to comment on the MTN-Bharti advisory work by U.S. banks, but said there was some room within OFAC rules for U.S. companies to deal cautiously with situations involving deals with foreign firms that have subsidiaries in the sanctioned areas — as long as they are not facilitating transactions with the sanctioned countries.

“U.S. persons are not necessarily prohibited from dealing with third-country firms that do business in sanctioned countries, although they should approach such dealings carefully,” said the official, who was not authorised to speak publicly about OFAC’s enforcement of sanctions.

Ah yes, the facilitation bogey-man rears his ugly head. That should scare not just bankers but lawyers, CPAs, PR firms and anyone else even tangentially involved with the deal, including the limo drivers that take the bankers and lawyers to work and the chefs that cater their working lunches.

A DC lawyer tries to pooh-pooh the concerns:

[A lawyer] who often deals with OFAC compliance, said the sanctions are not intended to kill off opportunities for U.S. banks to do work on foreign mergers that involve some business in foreign countries.

“If you had a rule that no U.S. investment bank could advise a merger between non-U.S. companies that is one scintilla related to a sanctioned target country, there would be no cross-border advisory business done at all by U.S. banks. It would all move to London,” he said.

I think that’s what might be called hyperbole. Some business might go to London, but all? I don’t think so. And even if it did, I’m not so sure that would sway OFAC.

[The lawyer] says he believes there could be a strong risk of running foul of OFAC restrictions if revenue from sanctioned countries is 25 percent or more — a level that some lawyers use as a rule of thumb to determine a safe level of business in sanctioned countries for the foreign firms.

Twenty-five percent is a nice number as far as numbers go. Certainly it’s much easier to remember than, say, thirty-two percent. But even if that number is used by some as a “rule of thumb,” it is, politely put, a completely made-up number.

This would be a great area for OFAC to clarify, but I’m not holdng my breath.

Even though Iran’s mobile phone infrastructure was crucial to the ability of Iranians to send to the outside world video, still images and first-hand reports of the events in Iran, Senators Chuck Schumer and Lindsey Graham think it’s a good idea to impose sanctions on two European companies that provided equipment used by Iran’s mobile phone infrastructure. The rush to pitchforks and torches was occasioned by a Wall Street Journal report earlier this week that revealed that Nokia Siemens Networks, a joint-venture of the German and Finnish telecom equipment giants, provided equipment that the Iranian government was using to monitor mobile telephone and Internet communications. A spokesman for the joint venture indicated that the technology provided to Iran was intended for lawful intercepts, a capability provided by the joint-venture and other companies to telcom providers around the world, including the United States. Lawful interception capacity is built into telcom networks to enable interception of communications relating to child pornography, drug trafficking, terrorism and other criminal activities.

Schumer and Graham are proposing to introduce legislation tomorrow that would require U.S. government contractors that export “sensitive technologies” such as the intercept technology to Iran to terminate relationships with Iran before applying for new contracts or renewing existing contracts. The proposed legislation allows the President to waive the restrictions as long as the reasons for the waiver are reported to Congress. If, as Nokia Siemens Networks claims, the intercept capability is inherent in all networking equipment, the Graham-Schumer proposal could have the counterproductive effect of slowing the growth of Iran’s mobile telephone system. At this point, that would seem to benefit the currently embattled Iranian regime to the detriment of ordinary Iranians as well as dissidents in Iran seeking to communicate with the outside world.

Ironically, Schumer and Graham appear not to realize that they might do more for Iranian dissidents and the ordinary Iranian in the street by limiting sanctions rather than increasing them. As we noted in an earlier post, current sanctions, as interpreted by OFAC, arguably prohibit the provision of social networking and similar services, such as Twitter and Facebook, to Iranians, even though these services have been essential to allowing the flow of information from Iran to the rest of the world. More good could be done by legislation expanding and clarifying the information and telecommunications exception to make provision of Twitter, messaging-services, Facebook, YouTube and the like to private citizens in Iran clearly and unambiguously legal.

Michigan-based Delphi Corporation, maker of auto parts and systems, agreed to a $50,000 suspended fine in connection of three exports of triethanolamine to the PRC and to South Africa. The fine will be suspended for a year provided that Delphi commits no further violations and will be waived thereafter. The fine was the result of a voluntary disclosure by Delphi. The charging documents provide no information as to the quantity or value of the exported triethanolamine, so it’s difficult to put the fine in context.

Triethanolamine is a chemical with diverse uses. It is used as an emulsification agent in shampoos, soaps, shaving cream and various cosmetics. It’s also used in metal cleaning and rust removal, and in lubricating and metalworking fluids. (Think of that the next time you wash you hair or use shaving cream!) The automobile industry uses triethanolamine in machining and grinding fluids. It’s also a mustard gas precursor. Because of the ubiquity of triethanolamine, it’s not surprising that it has been the subject of a number of enforcement actions. We’ve reported on enforcement actions relating to triethanolamine exports previously here and here.

It’s not clear why Delphi was exporting triethanolamine, other than to be used by one of its subsidiaries or OEM manufacturers abroad. Delphi does have several locations in China, although it’s not hard to find sellers of triethanolamine in China, such as this one.

Once again, BIS’s charging documents demonstrate that the agency lacks some familiarity with the item that it is regulating, as was the case, recently, with 6-2-4-2 titanium. Although the charging letter correctly spells the name of the exported item, both the Order and the Settlement Agreement state that Delphi exported “triethanolmine,” which, frankly, should have just looked wrong to anyone who knows anything about chemistry and knows why triethanolamine might be regulated as a dual-use item. Again, I’m not simply complaining about a random typo in the charging documents. Certainly, one can find typos here particularly given our, er, leisurely production schedule. But it’s not too much to ask that the charging documents correctly spell the name of the exported item.

More U.S. computer chips have been sighted in Iran, this time some AMD Opteron Dual Core microprocessors that the Aerospace Research Institute of Iran (”ARI”) touts it has incorporated into what passes for a supercomputer in Iran. The ARI is affiliated with the Iranian government and conducts research on missile technology.

A spokesman for AMD states that he’s “shocked, shocked” to discover that there are AMD chips in Iran. Actually he said that the company complies with all export laws and he has no idea how the company’s chips wound up in Iran, a statement that is likely true in the sense that AMD does not know which of its distributors broke its distribution agreement and sold AMD product to Iran. But generally speaking, AMD, like everyone else, knows how the chips wound up in Iran. The unmentioned two-ton elephant sitting in the corner of the parlor is — are you ready? — named Dubai.

Back in December 2007, this blog reported that Amirkabir University of Technology in Tehran had announced that it had used 218 AMD microprocessors to build what it called a “supercomputer” with a theoretical peak performance of 860 gigaflops. (Real supercomputers measure peak performance in hundreds of teraflops, so this was frankly a rather anemic supercomputer.) AMD issued pretty much the same press release at the time, indicating that it complied with U.S. export laws and had no idea how its chips wound up in Iran.

A little bit of investigation by this blog and we found a picture of Amirkabir assembling the computer complete with pictures of boxes for the AMD chips bearing the logo of Thacker, a company based in — surprise, surprise! — Dubai. Thacker also did its best imitation of Captain Renault and purported to be shocked that its products had wound up just across the Strait of Hormuz in Iran.

This time AMD has indicated that it is going to inform the Bureau of Industry and Security (”BIS”) that it has learned that ARI’s website claimed that it had used AMD chips to build a computer. That is, of course, the right thing for the company to do, but I wonder what such a disclosure is called. It’s not what BIS would normally call a “Voluntary Self Disclosure.” Perhaps we should call it a “Voluntary Somebody Else Disclosure”?

[Hat tip to Patrick Thibodeau at Computer World for breaking this story.]

According to this report in the Wall Street Journal, the State Department asked Twitter to delay again a previously scheduled downtime on the service because of unfolding events in Iran. Twitter itself had delayed the first scheduled downtime. Twitter, however, ignored State’s request to delay the downtime again, cryptically noting in its blog that “the State Department does not have access to our decision making process.”

But where is the Department of Treasury’s Office of Foreign Assets Control (”OFAC”) in all of this? The current sanctions seem to prohibit California-based Twitter from providing its services to people in Tehran or anywhere else in Iran. The Twitter service sets up for each user a micro-blogging page that contains each of his or her “tweets.” This goes far beyond the narrow interpretation OFAC has of both the telecommunications exception and the information exception in its Iranian Transactions Regulations. Certainly if it is OFAC’s position that providing ISP services in Iran must be licensed, providing micro-blogging hosting services would require a license as well.

Don’t get me wrong: I am not advocating that OFAC rush in and shut down Twitter in Iran. But this instance shows the absurdity of applying comprehensive, rather than targeted sanctions, against Iran as well as the absurdity of OFAC’s narrow interpretations of the telecommunications and information exceptions. OFAC should define telecommunications services to cover all or most Internet-based services (including instant messaging, blog hosting, VOIP telephony). Similarly, the information exception should be broadened to include provision of any services by which information can be transmitted to or from Iran. Otherwise, OFAC’s regulations will have the unintended effect of supporting the Ahmadinejad regime’s goal of suppressing dissent in Iran.

One wonders whether OFAC and the State Department had any discussions about Twitter in Iran. And to be completely fair to OFAC, I’ve spoken informally with some people at the agency that are fully aware of, and concerned that, broad application of OFAC’s sanctions against private citizens in Iran might not be the best idea if it results in squelching the expression of dissenting views within the country.

Related ExportLawBlog Posts:

• U.S. Export Laws Block Access to Website on Crisis in Darfur
• On the Internet You Can Be From Anywhere You Want
• Web Host Uses OFAC Sanctions To Boot Dissident Bloggers
• Microsoft Shuts Off IM Service in Sudan and Other Sanctioned Countries
• It Wasn’t Me, I Swear

Yesterday, the United States Court of Appeals for the Seventh Circuit reversed* a federal district court conviction of Doli Syarief Pulungan for attempted unlicensed exports of rifles copes to Indonesia in violation of the Arms Export Control Act. I previously reported on Mr. Pulungan’s case here and here.

The decision can only be characterized as a complete smack-down of the theory, advanced in most recent prosecutions by the DOJ and the Directorate of Defense Trade Controls (”DDTC”), the State Department’s export licensing agency, that decisions that a particular defense item falls within a particularl USML category are unreviewable under section 2778(h) of the Arms Export Control Act. The Seventh Circuit’s decision also provides an interesting elucidation of how the “willfulness” requirement for an AECA prosecution and conviction should be construed.

In the Pulungan case, in order to prove that the Leupold Mark 4 CQ/T rifle scope was listed on the United States Munitions List (”USML”), the prosecution introduced the testimony of Anthony Dearth, a Division Chief at DDTC. According to the appeals court, Mr. Dearth:

testified that the Directorate of Defense Trade Controls has concluded that the Leupold Mark 4 CQ/T is “manufactured to military specifications”—but he would not say what those specifications are or why the Directorate believes that the Mark 4 CQ/T is “manufactured to” them. The decision itself was not produced.

The prosecution then claimed that this determination was not reviewable under section 2778(h) and asked for, and received from the district court, a jury instruction, stating that the rifle scope was, as a matter of law, a USML item and taking that question out of the jury’s hands.

The court disagreed, adopting the interpretation of section 2778(h) that this blog has advanced — namely that the decision of DDTC to put a category of items on the USML is non-reviewable but that the decision as to whether a particular item falls within a USML category is not shielded from judicial review:

Section 2778(h) provides: “The designation by the President (or by an official to whom the President’s functions . . . have been duly delegated), in regulations issued under this section, of items as defense articles or defense services for purposes of this section shall not be subject to judicial review.” (Emphasis added.) So if 22 C.F.R. §121.1 Category 1(f) read “any Leupold Mark 4 CQ/T riflescope”, that designation would be incontestable (even though made by the Directorate rather than the President), and the question for the jury would be whether the item that Pulungan tried to export was indeed a Leupold Mark 4 CQ/T riflescope.

And now for the smack-down and language which can only be characterized as unusually harsh for an appellate opinion:

A designation by an unnamed official, using unspecified criteria, that is put in a desk drawer, taken out only for use at a criminal trial, and immune from any evaluation by the judiciary, is the sort of tactic usually associated with totalitarian régimes. Government must operate through public laws and regulations.

On the willfulness issue, the Seventh Circuit made clear that because DDTC had not made a public determination that the rifle scope was a USML item, it would be difficult to prove that the defendant here knew that it was a USML item and required a license. The court dismissed all of the evidence that the prosecution had proffered as proof of willfulness and criminal intent.

First, the prosecution introduced evidence that Pulungan had printouts of web pages from sellers of the Leupold rifle scope that stated that the rifle scope could not be exported outside the United States. The Court noted that the web pages didn’t say why the items couldn’t be exported. Territorial restrictions imposed on distributors could be one reason. That the pages said that the items couldn’t be exported even with a license further suggests that these restrictions may have been unrelated to U.S. export laws. And the court noted that other web sites advertised these rifle scopes without any mention of export restrictions.

The prosecution also pointed to Pulungan’s efforts to conceal the actual destination of the rifles by claiming that they were going to Saudi Arabia rather than Indonesia and to an email from Pulungan indicating a belief that exports of defense articles to Indonesia violated a U.S. arms embargo. The concealment of the destination and the emails were based on his mistaken belief that Indonesia was subject to a U.S. arms embargo at the time of the proposed exports. The court held that an intent to break a non-existent arms embargo is not sufficient proof of an intent to break the specific licensing requirements of the AECA.

As always, it is always difficult to parse the exact amount of intent and knowledge that is required to prove a criminal export violation. One the one hand, it seems clear that defendants need not know the name of the law or the section numbers of the provisions violated. On the other hand, it’s not enough for the defendant to have a mistaken belief that his conduct violates the law in a manner different from the charges brought by the government. Where to draw the line between those two extremes is a challenge and the Seventh Circuit’s decision doesn’t provide much guidance in this regard.

The court’s ruling, however, on the scope of section 2778(h) is clear and well-reasoned and is likely to have influence on other courts considering the matter. DOJ and DDTC would be well advised to stop trying to hide classification decisions behind a non-existent and improper shield of non-reviewability.

*Free FindLaw subscription required. I’ll update the link when the slip opinion appears on the Seventh Circuit website.

According to an article (subscription required) in today’s Inside U.S. Trade, an official of the Bureau of Industry and Security (”BIS”) told an agency advisory committee that the significant increases in penalties enacted by Congress in 2006 for export violations has not deterred exporters from filing voluntary self disclosures of export violations. Thomas Madigan, the director of BIS’s Office of Export Enforcement (”OEE”) told the Rules and Procedures Technical Advisory Committee (”RPTAC”) that exporters filed VSDs at roughly the same rate as last year. He based this assertion on the 167 VSDs filed this year, which is close to the 175 that would be expected at this time in the fiscal year based on the 200 VSDs that were filed during the last fiscal year. (BIS’s fiscal year ends on September 30).

Madigan also gave a partial breakdown for the disposition of the VSDs filed in 2009. Of the 167 filed, four were closed with no action and 14 with warning letters. The bad news, then, is that companies filing a VSD, can pretty much expect a fine. The good news is that none of the 167 VSDs was referred to the Department of Justice for prosecution.

ABOVE: Rep. Ellen O. Tauscher

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In connection with the Senate confirmation hearing for Ellen Tauscher on Tuesday morning, Senator Lugar, the Chairman of the Foreign Relations Committee, released a pre-hearing questionnaire completed by the proposed nominee. Representative Tauscher has been nominated by President Obama to become Under Secretary of State for Arms Control and International Security. In that position, she will be responsible, among other things, for the Directorate of Defense Trade Controls (”DDTC”) which licenses arms exports from the United States.

Interestingly very few of Senator Lugar’s questions in the prehearing questionnaire were directed at export control. Most revolved around the proposed nuclear cooperation agreement between the United States and the proliferation concerns surrounding North Korea’s nuclear program.

However, the questions on export control revealed that the nominee appears to favor transferring jurisdiction over certain satellites and their components back to the Department of Commerce:

I support export control reform in general and would consider supporting the transfer of commercial communications satellites to the Department of Commerce provided that the transfer is consistent with our foreign policy and national security objectives. I would note that unless Congress determines otherwise, defense services related to integration and launch that might be required for exports of U.S. commercial communications satellites would continue to be licensed by the Department of State, as launch vehicles are controlled by the International Traffic in Arms Regulations.

She acknowledged that this would require Congressional authorization as jurisdiction over satellites was transferred from Commerce to State by legislation enacted by Congress in 1998 by section 1513 of the 1999 Defense Authorization Act.

Although Representative Tauscher is widely thought to be sensitive to the concerns of defense exporters, she dismissed a question relating whether U.S. export controls “unduly hampered” U.S. industry:

In the past, U.S. industry had some valid concerns regarding their competitiveness in a global market. In 2006, the average space-related export authorization took 76 days from submission to the Department of State to issuance of the authorization approval. In 2008, such approvals were averaging 23 days.

It’s not at all clear why she limited her answer to space-related export authorizations, because the question was broader than that industry. And while the export community is glad to see processing times for license applications diminish, licensing delays are not the only concerns that the export community has, particularly given the perception that many items that are licensed are widely available on the world market and shouldn’t be subjected to any delays for licensing, no matter how short.