Mar

4

Law Firm Sues DDTC over Application of Brokering Rules to Legal Advice


Posted by at 9:58 pm on March 4, 2015
Category: DDTCPart 129

State Department by Josh [CC-BY-SA-2.0 (https://creativecommons.org/licenses/by-nd/2.0/)], via Flickr https://www.flickr.com/photos/ncindc/2838284991 [cropped]On March 3, 2015, a small DC law firm filed a complaint against the Directorate of Defense Trade Controls (“DDTC”) seeking, inter alia, injunctive relief prohibiting DDTC from applying its brokering rules to the provision of specified types of legal advice. This blog previously has discussed the potential application of part 129 brokering rules to the activities of lawyers on behalf of their clients. As we stated, the broad language of part 129 always arguably covered legal work on behalf of clients, but no lawyers ever registered as brokers and DDTC never complained. When DDTC amended the brokering rules, it arguably then explicitly decided to start covering legal services. The interim rule does exempt legal advice, specifically noting, in the Federal Register notice at least, that legal advice about export compliance was within the exemption. The situation was then muddied when DDTC published FAQs on the brokering rules which said that common legal services, namely, “structuring a transaction” involving defense articles or negotiating contract terms involving defense articles was outside the scope of the exemption.

The plaintiff in the recently filed lawsuit optimistically (and some might say foolhardily) requested from DDTC an advisory opinion stating that certain legal services, such as advising on the structure of transactions involving defense articles and drafting contracts for the sale of defense articles, were outside the scope of Part 129. Not surprisingly, the request for an advisory opinion languished at DDTC for months, despite the plaintiff’s repeated communications with DDTC asking them to act on the advisory opinion request. Finally, according to the complaint, and eleven months after the request was made, a DDTC official called plaintiff and said the rules did not cover the activities specified in the request, and plaintiff, based on those representations, agreed to withdraw the request.

Seven months later, on February 24, 2015, in a plot twist worthy of Franz Kafka, the same DDTC official sent a letter to plaintiff and, incredibly, retracted the previously provided advice:

Please be advised that your letter of August 29, 2013 and our conversation which took place on July 3, 2014, lacked sufficient detail for the Department to make an official determination as to whether the activities discussed constituted brokering activities.

The official asked the plaintiff to submit another advisory opinion request. The understandably frustrated plaintiff filed a lawsuit instead.

There are, of course, a number of problems with applying Part 129 to legal services beyond the provision of legal advice on export compliance. To begin with, lawyers will need prior permission from the State Department under section 129.4 before becoming involved in transactions involving specified defense articles such as night vision equipment. Worse, section 122.5 would require lawyers to make all records relating to these transactions available to DDTC and law enforcement in violation of attorney-client privilege.

The good news, of course, is that DDTC’s bizarre volte-face on the applicability of Part 129 to legal services is unlikely to be favorably viewed by the court and means, I think, that the initial advantage in this lawsuit is with the plaintiff.

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Mar

3

Might As Well Be Hung for a Sheep as a Lamb


Posted by at 9:58 pm on March 3, 2015
Category: Criminal PenaltiesDDTCTechnical Data Export

Mozaffar Khazaee [Credit: Essex County Mug Shot Catalog]
ABOVE: Mozaffar Khazaee


On February 25, Mozaffar Khazaee, a former employee of various defense contractors, pleaded guilty to illegal export of ITAR-controlled technical data to Iran. The case started with an audacious shipment from Connecticut to a freight forwarder in Long Beach, California, by Khazaee of 44 boxes labelled as household goods that, in fact, contained numerous manuals and other technical documents relating to the F35 Joint Strike Fighter and military jet engines. The boxes were intended for ultimate shipment to Iran. Further investigation revealed that these documents had been taken by Khazaee from defense contractors for which he worked and that taking these documents violated the contractors’ rules requiring return of all documents at the end of employment. Khazaee was initially arrested for charges, set forth in the criminal complaint, of illegally transporting stolen property across state lines.

Khazaee’s ultimate plea was for violation of the Arms Export Control Act. The superseding information that served as the basis for the plea, however, alleged the export of only one document (out of the 44 boxes of documents) which was asserted to contain controlled technical data designated under Category XIX(g) of the United States Munitions List.

Two things stand out about this case. First, the superseding information charged, and Khazaee pleaded guilty to, export of the document and not attempted export of the document. The problem is the document was seized in Long Beach and never left the country. Section 120.17 of the ITAR defines export as “taking a defense article out of the United States.” No matter what your feelings may be about Long Beach, California, it is definitively still in the United States last time I checked. There is some evidence that the boxes may have been loaded onto the Panamanian-flagged NYK Libra. But given the definition of United States in section 120.13, it is hard to argue that the document left the United States until the NYK Libra did.

The second thing of interest were statements made by Khazaee, and cited in the superseding information, to potential employers in Iran that his job advancement in the United States had been hindered by his Iranian nationality even though he was an American citizen.

Even though working industry being very exciting, with best pay salary and high-tech events, my original nationality being Iranian (which I am very proud of), has caused me tremendous issue and hindrances towards my progress and goals. I can’t make any publication in current job (everything is very proprietary and restricted, mostly military projects), I was rejected to participate in the new advance engine program (this is beyond F135 engine, it’s called AETD), purely based on my original nationality. This is the primary … reason for my consideration to move to Iran.

Obviously one wrong does not justify another. However, discrimination against a U.S. citizen based on his national origin,if this is what occurred here, is a violation of federal law. And given the unhealthy obsession of the DoD and DDTC on national origin, at least with respect to dual and third-country nationals, it seems at least possible that this may have occurred. It may well be that the best way to encourage loyalty among American citizens is to treat them all equally without respect to where they were born.

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Feb

25

Two Agencies Are Never Better Than One


Posted by at 10:06 pm on February 25, 2015
Category: BISOFACSudan

Church of the Granite Columns CC-BY-2.0 [http://creativecommons.org/licenses/by/2.0], via Wikimedia Commons http://commons.wikimedia.org/wiki/File:Church_of_the_Granite_Columns_2007-10-03_02.jpg#mediaviewer/File:Church_of_the_Granite_Columns_2007-10-03_02.jpg [Cropped]

One of the most indefensible parts of the U.S. export control regime, and one that is not even addressed by the export control reform initiative, is the overlapping jurisdiction of two separate agencies — the Bureau of Industry and Security (“BIS”) and the Office of Foreign Assets Control (“OFAC”) — over sanctioned countries. No one has ever articulated a rationale for this other than the need to gouge federal taxpayers by hiring multiple people in multiple agencies to do exactly the same thing and to keep private lawyers employed to explain to baffled exporters which agency needs to bless a particular export. And nowhere has the insanity of this overlapping jurisdiction been made more clear than in the recent amendments by both agencies (and an accompanying tsunami of ink in the Federal Register) to permit the export of communications hardware and fee-based personal communications hardware and software to Sudan.

To understand what is going on, you must first understand that both BIS and OFAC assert jurisdiction over Sudan (unlike say Cuba and Iran where they have called a truce and agreed that one agency would be responsible for export licensing). Section 538.205 of the Sudanese Sanctions Regulations requires licenses for all exports by anyone from the United States to Sudan, all exports by United States persons from anywhere to Sudan, and all re-exports to Sudan from foreign countries by foreign persons of goods originally exported from the United States. This broad prohibition also necessarily covers by its terms exports or re-exports by U.S. persons of items “subject to the EAR” and which are on the CCL with an AT reason for control.  Such exports of course, will therefore also require a BIS license in addition to the OFAC license.  The language of 538.205 also covers exports of EAR99 items and items not “subject to the EAR” which would not require a BIS license and, thus, require only an OFAC license. Re-exports by foreign persons of foreign manufactured items on the CCL with more than de minimis U.S. content to Sudan are covered by the EAR and not 538.205 and, thus, would be licensed by BIS alone. Items that are EAR99 or foreign manufactured with less than 10 percent U.S. content, are outside the United States and are re-exported to Sudan by foreign persons are not within the scope of sections 538.205 or 538.507 of the SSR or the EAR and would, therefore, not require a license by either agency. Got that? I thought so.

The new OFAC amendments to the Sudan Sanctions Regulations (“SSR”) and the BIS amendments to License Exception CCD are designed to expand to Sudan the previous authorizations for exports to Iran (by OFAC) and Cuba (by BIS) of certain services, software and hardware for personal communications. How these two sets of rules now apply to exports to Sudan and the overlapping jurisdiction of OFAC and BIS is, not surprisingly, is a needlessly complex matter.

Let’s start by looking at certain hardware exports that can require authorization by both agencies, namely exports by U.S persons of items that are subject to the EAR and are not EAR99 that U.S. persons wish to export. Take, for example, a television receiver with encryption functionality classified as 5A992. Because the item is 5A992 it may require a license to be exported by a U.S. person to Sudan. However, such an item is listed in License Exception CCD at section 740.19(b)(14) and therefore does not require a BIS License. Under section 538.533(a)(3)(i) of the SSR, only hardware items on Appendix B to Part 538 are exempt from OFAC’s license requirement. Television receivers, however, are not on Appendix B. Digital cameras classified as 5A992 are included in CCD but not in Appendix B. Why OFAC and BIS would have differing views on whether these items are personal communications devices and why OFAC would still require a license for an item covered by CCD is, of course, anyone’s guess.

The analysis becomes a bit more confusing for software. Consider publicly-available free (or at cost) software with encryption functionality which, because it meets the mass market criteria, is classified as 5D992. Under EAR section 734.3(b)(3) that software is not subject to the EAR and could be freely exported by a U.S. person to Sudan without a BIS license even prior to the latest amendments. If, on the other hand, it is not free (or at cost), then it is subject to the EAR and, because it is 5D992, would require a BIS license to Sudan unless it is listed on CCD. (The basic change by adding Sudan to CCD was, in fact, to capture mass market software that was not free or at cost.)

Now let’s look at this software from the OFAC perspective since you have to look at both OFAC and BIS rules for goods that are not EAR99. Prior to the amendment, section 538.533(a)(2) of the SSR permitted the export if the software was not subject to the EAR which, under EAR 734.3(b)(3), this would not be, and was for personal communication over the Internet. If the software was not free, then the old section 538.533 would not apply, and an OFAC license would have been required in addition to the BIS license. Under the amended version of 538.533, section (a)(2) would permit software, whether or not mass market and/or free, to be exported by U.S. persons or from the United States to Sudan if it was necessary for personal communications over the Internet. Software not related to personal communications over the Internet and that is either not subject to the EAR because it is free or at cost and publicly available or because it is outside the United States, would still not need an OFAC license if it is on Appendix B, which includes things like anti-virus, anti-tracking and VPN software.

As you can see, because of the overlapping (and unnecessarily duplicative) jurisdiction of both agencies over Sudan exports, both OFAC and BIS regulations must be consulted for most exports to Sudan, making the process difficult and confusing. If you have a headache after reading the analysis above, then start clamoring for real export control reform which would involve merging the export control functions of BIS and OFAC into one agency.

Oh, and one more even bigger headache before we wrap up this post: OFAC itself apparently cannot figure out how it shares jurisdiction with BIS. In the FAQ on the new amendments, OFAC now says this:

427. May a non-U.S. person export, reexport, or provide to Sudan hardware and software that is subject to the EAR pursuant to § 538.533?

The Department of Commerce, Bureau of Industry and Security (BIS), has jurisdiction over non-U.S. persons’ exportation and reexportation to Sudan of items subject to the EAR. Please consult BIS, www.bis.doc.gov, for guidance on such transactions.

Now go back and re-read section 538.205 of the SSR, which clearly forbids exports to Syria by non-U.S. persons of hardware and software located in the United States. Now try to find a rule in the SSR that says that if such exports from the United States by non-U.S. persons are licensed by BIS no OFAC license is required. Nope, not there. When even the agencies themselves cannot figure out which agency is in charge, there is no conceivable remaining excuse to have both agencies regulating these exports.

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Feb

18

The Sledgehammer Exception


Posted by at 10:18 pm on February 18, 2015
Category: Arms ExportDDTCITARUSML

Sanaá, Yemen by Rod Waddington [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/rod_waddington/16293960729[cropped]

When the Marines evacuated the U.S. Embassy in Sanaá, Yemen, there were reports that they left some of their weapons behind, in large measure because they were leaving on a commercial flight. At first the military said that crew-served weapons and machine guns were destroyed before departure, but that M-9 pistols and M-4 carbines were handed over to Yemenis before the boarded the plane.

Realizing that this was perhaps a giant SNAFU, the military later revised its story to take care of the pistols and the carbines

“Upon arrival at the airfield, all personal weapons were rendered inoperable in accordance with advance planning,” the statement said. “Specifically, each bolt was removed from its weapons body and rendered inoperable by smashing with sledgehammers. The weapons’ bodies, minus the bolts, were then separately smashed with sledgehammers.”

There you have it: nothing to see here because the military used the smashed-to-bits exception which authorizes a U.S. person to retransfer a defense article to a foreign end user as long as someone takes a sledgehammer to it first. You may be wondering if there is such an exception, and the answer is maybe yes and maybe no.

A few initial observations are in order. First, the Arms Export Control Act applies to the military and active duty troops just as it does to everyone else. Second, the ITAR prohibits unlicensed transfer of defense articles from one foreign end use to another foreign end use without a license. So, unless there is a sledgehammer exception, we have a problem here.

The only possible source for the sledgehammer exception is section 126.4, which states:

The approval of the Directorate of Defense Trade Controls must be obtained before defense articles previously exported pursuant to this exemption are permanently transferred (e.g., property disposal of surplus defense articles overseas) unless the transfer is pursuant to a grant, sale, lease, loan or cooperative project under the Arms Export Control Act or a sale, lease or loan under the Foreign Assistance Act of 1961, as amended, or the defense articles have been rendered useless for military purposes beyond the possibility of restoration.

At first glance, this appears to support the sledgehammer exception. The military says it rendered the bolts “inoperable.” The rest of the weapons, however, were just smashed. So, I think we don’t have to worry about the bolts, but did smashing the rest of the weapons with a sledgehammer render every other part and component of those weapons “useless for military purposes beyond the possibility of restoration”?  Those parts and components are defense articles in Category I(h) and each and every one of them needed to be sledgehammered beyond the possibility of restoration. That’s a lot of sledgehammering, and it seems to me unlikely that actually happened before the Marines hopped onto their flights out of Yemen.

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Feb

17

UMass Bans Iranian Students


Posted by at 7:34 pm on February 17, 2015
Category: Deemed ExportsIran Sanctions

UMass Amherst Student Union by Trace Meek [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/tracemeek/8972271164 [cropped]

[UPDATES BELOW]

Why solve a problem with a scalpel when there is a sledgehammer nearby? That is the question that UMass Amherst administrators must have asked themselves when they decided to ban all Iranian students from their graduate-level science and engineering programs. The problem, of course, that had the administrators in a tizzy was the fear that the university might engage in deemed exports of export-controlled technology to those Iranian students.

It seems, however, that the UMass administrators perhaps need themselves a little education in export law. For starters, the Export Administration Regulations (“EAR”) make clear in section 734.9 that information “released by instruction in catalog courses and associated teaching laboratories of academic institutions” is not subject to the EAR and that, therefore, teaching this information to Iranians (or any other foreign student) is not a violation of the EAR.

Perhaps the administrators are afraid that school labs might have export-controlled equipment and that Iranians, if they have access to these machines, might be considered to have received export-controlled technology. That may be a legitimate concern, but it is not one that is restricted to Iranians. To solve this problem, UMass would have to boot all foreign students.

Nor is there any merit in the argument, apparently made by a “policy analyst” at a small DC firm cited in the linked article, that this result is mandated by section 501 of the Iran Threat Reduction and Syria Human Rights Act. That section prohibits the State Department from issuing visas to an Iranian to attend a U.S. university “to prepare … for a career in the energy sector of Iran or in nuclear science or nuclear engineering or a related field in Iran.” To begin with, this section imposes on obligation only on the State Department and not on any university in regard to its relation with a student once such a visa was granted. Nor does the prohibition extend to all fields in science and engineering, unless, somehow, a graduate degree in biology prepares one to work in the energy or nuclear field.

Beyond that, the University runs the risk of violating the anti-discrimination provisions of the Immigration and Nationality Act. Those provisions prohibit discrimination in employment against a legally-admitted foreign national based on his or her national origin. Since graduate students normally receive employment from their universities, a total ban on Iranian graduate students could very likely be seen as a violation of those prohibitions.

UPDATE: An email from the DC firm discussed in this post indicates that their policy analyst did not state in the interview cited in the linked article that section 501 of the Iran Threat Reduction and Syria Human Rights act mandated the position taken by UMass Amherst.  The email goes on to state that the law firm also believes, as I do, that the UMass Amherst policy is overbroad.

SECOND UPDATE:  Do you think maybe the folks at UMass Amherst read this post?  Probably not, but for whatever reason they’ve already reversed their policy banning Iranian graduate students in science and engineering.

 

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