Mr. Sasan Azodi, mentioned in yesterday’s post, called me just a few minutes ago to give me his side of the dispute between him and Dräger Safety as to who was at fault for the export of the VisioWave security monitoring software to Iran. As you may recall, I questioned why he would be buying the expensive software for Dräger in the first place.

According to Mr. Azodi, the project managers at Dräger for the Irasco security system claimed that they had been blind-sided by the new requirement that the security system would be tested at Dräger’s facilities in Germany. They alleged that they would get in trouble with the company if they now had to buy a second copy of the software for testing in Germany after already having told Irasco it would have to procure the software on its own for the final system. The factory acceptance testing would now require two copies of the software and, according to Azodi, the managers said that they hadn’t factored that into their planning for the project.

I’m guessing that Mr. Azodi’s commission on successful completion of the Irasco project must have been significant if he was willing to dig so deeply into his own pocket to make sure that the project was a success. Yet even if people at Dräger swore a hundred times on their geliebten Mütter’s honor that they would never, ever export the software from Germany to Iran, surely one might have been a bit credulous in the circumstances involved that they could resist the temptation to ship the software to Tehran and be done with it. Even so, Mr. Azodi says he has that promise in writing and that should at least count for something.

When companies wind up with products in Iran, they usually claim that they were hoodwinked by their overseas sales reps or agents. In a case involving the German security firm Dräger Safety, the situation appears reversed. According to this article in Deutsche Welle, Dräger’s agent is claiming that he was hoodwinked by the company.

Dräger had been contracted by Italian-based Irasco to build and deliver a security system for an Iranian pipeline. The security system used GE Security’s VisioWave monitoring software. Initially Dräger, apparently concerned the the U.S embargo on exports to Iran, told Irasco that it would have to obtain and install the software on its own and install the software itself in Iran. Irasco made some unsuccessful efforts to obtain the software and then, allegedly, demanded a full test of the system at Dräger’s facility in Lübeck, Germany.

Dräger then tasked Sasan Azodi, its intermediary with Irasco, to obtain the software and ship it to Lübeck. Oddly enough, what happens in Lübeck, doesn’t stay in Lübeck and, for reasons that Dräger can’t fully explain, the software miraculously wound up in Irasco’s hands in Iran. Sometime thereafter, Dräger filed a voluntary disclosure with U.S. government authorities revealing the problem.

Now let the finger-pointing begin. Azodi has this to say:

Azodi acknowledges that he arranged for the delivery of the software, via the US, to Luebeck, but claims he only sent it for test purposes. Upon learning that the software had been delivered to Iran, Azodi said, “that’s when I realized I had probably been conned.”

Dräger, for its part, apparently is trying to blame everything on Azodi and has refused to pay Azodi for the software, which costs approximately $125,000. Azodi has filed lawsuits, in both the United States and Europe, seeking the money that he claims is owed for the software and seeking recovery of the damages caused to his business by the allegation that he violated the Iranian embargo.

Of course, one has to wonder why Azodi didn’t see red flags all over the field when Dräger asked Azodi to purchase and export the expensive GE software to Germany. Why couldn’t Dräger do that itself? Why would it ask its Iranian intermediary to ship the software from the U.S. to Germany?

It should be interesting to see how this plays out. Pass the popcorn, as they say.

Today the Office of Foreign Assets Control (”OFAC”) added three Burmese entities to the Specially Designated Nationals and Blocked Persons List, i.e., the SDN List. Among the three entities was the Myanmar Gem Enterprise, the state-owned monopoly that is in charge of gem sales in Burma. As you may know, Burmese rubies are especially prized and the sale of these rubies is thought to constitute a significant part of the revenues to the military junta that controls Burma.

Current OFAC regulations forbid the import into the United States of Burmese-origin goods. OFAC, however, refers to U.S. Customs rules for determining whether a good is of Burmese-origin, as can be seen from this OFAC guidance letter on Burmese teak sawn into planks in third countries. Most Burmese rubies are exported in uncut form to Thailand where they are processed and cut for sale to jewelers. In December 2004, Customs ruled that rough rubies mined in Burma that were processed and cut into gemstone rubies in another country underwent a “substantial transformation” and were no longer considered to be of Burmese origin. Notwithstanding this ruling, the 11,000 member association Jewelers of America urges its members not to traffic in blood rubies.

It is not clear that the designation of the Myanmar Gem Enterprise will have any substantial effect. Because the Burmese rubies must be processed in Thailand or elsewhere in order to be imported into the United States, no U.S. persons have any dealings with Myanmar Gem Enterprise but, rather, deal exclusively with companies in Thailand that process and cut the rough stones.

OFAC also designated the Myanmar Pearl Enterprise, hence the opportunity to swipe a line from an A.E. Housman poem as the title of this post.

The Bureau of Industry and Security (”BIS”) released yesterday a Settlement Agreement with Engineering Dynamics, Inc., a Louisiana-based company that writes and distributes computer-assisted design software used for the design of oil and gas drilling platforms and rigs. Under the Settlement Agreement, Engineering Dynamics admitted to a one-count charge that it had conspired with an individual in Brazil who would sell the company’s software to customers in Iran. Engineering Dynamics agreed to pay $132,791.39.

As we reported in a prior post, two officers of Engineering Dynamics are currently subject to criminal charges in connection with the same sales of the software to Iran. A copy of the criminal information filed against them can be found here, and it provides considerably more information on what happened than the BIS Settlement Agreement and related materials.

Upon my initial review of the criminal information, I expressed some skepticism in my earlier post that the two individual defendants — and, by extension, the company — should be held liable for the actions of their “distributor” in Brazil. Upon re-reading the criminal information, it seems to me that there is ample evidence here to support a conspiracy charge, at least if the facts alleged in the information are true.

To begin with, the company’s Brazilian distributor was really more a commissioned agent than a distributor, and that is significant. If a U.S. company sells its products to a distributor, who then resells those products without the U.S. company’s knowledge to a proscribed destination, it may be difficult to prove that the U.S. company was aware of the resale. However, in this case the Brazilian agent was paid a commission and then directly remitted the funds back to Engineering Dynamics. Additionally, the criminal information alleges a number of instances of communications between the U.S. company and the Brazilian agent about the customers in Iran.

This is also the second reported case subject to the new $250,000 penalty provision. Interestingly, BIS charged only one violation of the rules — a conspiracy count — even though multiple counts could have been charged for the various shipments to Iran through Brazil. Various BIS officials have said that under the new penalty scheme they will be less likely to pile on counts, and this provides some confirmation of that.

Yesterday the Directorate of Defense Trade Controls (”DDTC”) announced new documentation requirements for export licenses. Failure to meet this requirement can result in an export license being returned without action although DDTC says that for an “interim” period of unspecified length it will decide on a case-by-case basis whether to return applications not in compliance with these documentary requirements.

• Purchase orders and invoices support the license application must be with a foreign party not with its U.S. subsidiary. DDTC bases this requirement on the notion that the U.S. subsidiary is a “U.S. person” although why that should prevent the U.S. subsidiary from issuing purchase orders on behalf of its parent is not clear, particularly where the exporter may prefer to have an agreement with a U.S. party rather than a foreign one.
• The purchase order or similar document must “have an issue date within one year from the date of application submission.” Since documents that are more than one-year-old are still legally binding, this seems, at best, an arbitrary requirement. DDTC gives no reason for this requirement.
• If the invoice lists the price in a foreign currency, the exchange rate and U.S. dollar conversion for each line item must be annotated on the document. Again, since the license application must provide those figures in dollar amounts, there is no reason why this must be hand-annotated on the documentation. Even so, this shouldn’t pose a huge compliance burden on applicants.
• The purchase order, invoice, or similar documentation must indicate the ultimate end user of the item.

The Wall Street Journal’s Law Blog had an interesting post last Friday regarding Iranian santurs (a dulcimer-like instrument) that a UCLA professor of ethnomusicology had been importing from Tehran. These instruments had been sailing through customs until last August when somebody in customs woke up and seized the instruments. A curt notice from DHL informed the professor of the seizure and the possibility that the santurs might be destroyed.

So Professor Sadeghi hired a lawyer to free the santurs. The lawyer told the WSJ blog that he “scoured” the Iranian Transactions Regulations for an exception for “dulcimers” — to no avail, of course. I suspect that the lawyer is speaking figuratively here because anyone familiar with the regulations would have known immediately that there were no applicable exceptions that would cover Professor Sadeghi’s santurs.

So, the lawyer did his best to make something up:

In his package, he acknowledged that the dulcimers didn’t have the appropriate licensing from the Office of Foreign Assets Control (OFAC) but argued that the instruments met the requirements for the regulatory exceptions made for informational materials and gifts.

Er, no. The gift exception provided in section 560.506 of the Iranian Transaction Regulations is limited to gifts valued at less than $100 dollars, and Persian santurs seem to exceed this dollar limit by a considerable amount. And I’m not quite sure how one gives a gift to oneself. Nor is the informational exception applicable. A musical instrument does not fit within the category of items described as informational materials in section 560.315. Frankly, he could just as well have argued that the santur is a carpet covered by section 560.534.

Even the lawyer himself appeared to be a little embarrassed by these arguments and offered an alternative justification:

Furthermore, [he] argued, even if they didn’t meet those exceptions, this was an ideal case for OFAC to exercise its discretion.

Okay, now were talking. And, miraculously enough, he received a letter from OFAC, stating:

Mr. Manoochehr Sadeghi is hereby authorized to engage in all transactions necessary to receive delivery from Iran of four miniature hammered dulcimers (santurs) seized by U.S. Customs and Border Protection on or about August 30, 2007.

More interesting, it appears that the lawyer, rather than filing a voluntary disclosure, filed something akin to a retroactive license request. If he did file a voluntary disclosure, the WSJ blog doesn’t relate whether OFAC imposed a fine or mitigated the fine completely.

In the end, it appears that two factors were at play in OFAC’s decision. In the past, the Bureau of Industry and Security (”BIS”) has used its discretion to permit exports of musical instruments to Cuba, and so a direct appeal to OFAC’s discretion in this case, without relying on inapplicable regulatory exceptions, was probably the best approach. Additionally, it seems possible that OFAC may have been influenced by Professor Sadeghi’s fame: he performed at the Kennedy Center and received a National Heritage Award from the National Endowment for the Arts.

A recent settlement agreement between the Bureau of Industry and Security (”BIS”) with Miami-based Aviktor Trading Corporation involved both a charge of an unlicensed export of a thermal imaging camera and a charge of failure to file a Shipper’s Export Declaration. The latter charge is fairly rare. After all, how exactly do you manage to export something without filing an SED?

Although the charging documents don’t make this clear, it seems likely that Aviktor exported the thermal imaging camera in checked or carry-on baggage of an airline passenger. Normally an SED is not required for baggage but there is, of course, a significant exception. Section 758.1(b)(2) requires that an SED be filed for any export that requires a license, regardless of value or destination.

Obviously, the SED charge was just another case of piling on by BIS but this is a good opportunity to remind exporters that if you hand carry an licensed item to its destination, don’t forget to file the SED with Customs before departing.

Defense News published yesterday an interview with Frank Ruggiero, Deputy Assistant Secretary (DAS) for Defense Trade and Regional Security in the Bureau of Political-Military Affairs. Mr. Ruggiero oversees all defense exports from the United States, including Direct Commercial Sales and Foreign Military Sales. And he had several interesting things to say.

First, he reported that pursuant to National Security Presidential Directive No. 56, the Directorate of Defense Trade Controls has significantly streamlined processing times:

In summer 2007, we had nearly 700 licenses that were over 60 days. As of April 16, that’s down to 67. An average license takes about 18 days to process, a 50 percent reduction from last summer. We’ve also dropped backlog by 50 percent.

Second, Ruggiero suggested that licensing policy might be used to retaliate against foreign defense firms that produce defense articles free of U.S.-origin goods in order to trade with China and other countries that are subject to arms embargoes or strict licensing policies:

Q. Your office can veto the export of foreign-made items that use controlled U.S. parts or technologies, which has led some firms, such as France’s Thales and Italy’s Alenia, to develop satellites free of American components for sale to China. Is that a concern?

A. We are monitoring the circumstances and analyzing what International Traffic in Arms Regulations (ITAR) items we may have authorized to such companies to make sure those items are in fact not being incorporated into ITAR-free products. We would certainly factor into any future licensing determination the activity of a foreign company in terms of licensing ITAR-free items to countries that may raise potential national security risks to the United States.

That’s one way to expand the scope of U.S. export laws, I suppose.

ABOVE: Iran’s 9th Olefin Petrochemical
Complex

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Earlier this month, French corporation Cryostar SA entered a guilty plea to various export violations arising from its role in a scheme to export cryogenic pumps for installation in the 9th Olefin Petroleum Complex in Iran.

In 2001 a French company, identified only as “TN,” approached Ebara International Corp., Inc., a manufacturer and distributor of cryogenic pumps, i.e., pumps designed to work with liquids at very low temperatures, and sought to purchase various cryogenic pumps worth almost $750,000. The two companies enlisted Cryostar to act as an intermediary in the plan. The pumps were sold to Cryostar in France, which then resold the pumps to “TN,” which, in turn, exported the pumps to Iran. Cryostar created false invoices indicating that it was the end user of the pump.

Cryostar has no offices in the United States, and it does not appear that any company employees entered the United States in connection with this transaction. Rather the jurisdictional bases for the prosecution are (1) the questionable theory that the items involved were U.S.-origin items and (2) the much sounder theory that Cryostar participated in misrepresentations to U.S. authorities.

Of course, the real question is what motivated Cryostar to get involved in this deal in the first place. Why weren’t the items exported directly to “TN,” which could have held itself out as the end user of the items in France? Well the answer to that question becomes clearer once a reasonable surmise is made as to the identity of “TN.”

The DOJ press release on the guilty plea identifies “TN” as “a a French company with a U.S. subsidiary.” An article on the Chemicals Technology website, notes that French company “Technip and its Iranian partner Nargan were awarded the engineering, procurement and construction contract for the” petrochemical facility. And Technip has a U.S. subsidiary.

Now, this is not proof that Technip is the same company as “TN,” but it is certainly a reasonable surmise. Additionally, since Technip’s participation in the Iranian project was well-known, this explains why it would have sought an intermediary to make the false claim that the pumps were being installed in France. Such a claim from Technip would have been less believable.

Under the written plea agreement, Cryostar has agreed to a fine of $500,000 and two years corporate probation. I imagine that the execs at Cryostar are now ruing the day that agreed to a corporate favor for another French company. They may have been hoping for a few dinners at Pierre Gagnaire paid for by Technip, but wound up getting more than they bargained for.

ABOVE: Vibro-Meter Pressure
Indicators

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A story by Dan Browning in the Minneapolis Star-Tribune alerted me to an investigation of Global Engineering Associates (”GEA”), a company located in a Minneapolis suburb. According to a recently unsealed search warrant (which Dan Browning was kind enough to send to me), GEA is being investigated for alleged shipments of pressure indicators and radio mounts to Singapore.

A search warrant needs to show probable cause for all elements of the crime and, of course, the scienter element of the violation — i.e. evidence that the defendant knew that the exports were in violation of the law — is, as usual, the hardest part to establish. The affidavit supporting the search warrant places its main emphasis on a visit made to GEA by agents of Immigration and Customs Enforcement under “Project Shield America,” a national outreach program initiated by ICE to inform exporters of export licensing requirements. According to the affidavit:

Special Agent Cramsey and Leff [the CEO of GEA] discussed the Project Shield America program in detail and exchanged business cards. Leff was given copies of the Project Shield America brochures for his review. Leff stated that he would be happy to review the literature to ensure his company was in compliance with all US export laws and regulations.

I don’t think I’m being too much of a cynic to suggest that this is a thin reed upon which to base scienter, and it’s not the first time that ICE has tried to use Project Shield America as a basis for claiming that export violations were willful. There is no question that the project teaches exporters that licenses are required for military and dual-use items. The problem is it provides little guidance to exporters in how to determine whether items are military or dual-use items.

In this case, the items in question aren’t obviously military items. Vibro-Meter, the manufacturer of the pressure indicators in question, produces pressure indicators for both civil and military aircraft. Nor does a “radio mount” have anything about it that inherently suggests that it is a military item. Indeed, ICE needed to request a specific determination from the Directorate of Defense Trade Controls to get the information necessary to conclude that these were military items on the USML. So, a friendly visit from ICE agents and a short brochure aren’t going to establish that GEA knew that these items were military items and therefore subject to export licensing requirements.

There are two other facts alleged in the affidavit that might support probable cause on the scienter element. First, there is a claim that the invoice inside the shipping packages differed from descriptions of the items in the shipping documents. However, it appears from the affidavit that the enclosed invoice simply had more detail than the descriptions in the shipping document, not necessarily an indication of criminal intent by the exporter. Second, the affidavit indicates that GEA never inquired about the two shipments containing the allegedly export-controlled items, both of which were seized by customs. That is, admittedly, somewhat more suspect, but there could be a number of innocent explanations.

The important consideration here is an issue that increasingly needs to be addressed. Export prosecutions have begun to veer from prosecution for exports of items that reasonable people would clearly realize were export-controlled — guns, tanks, night vision and the like — to less obvious items such as involved in this case. Some procedure needs to be implemented to assist exporters in determining export classification, and the current commodity jurisdiction procedure, which can take a year or more, is broken and not the answer.