The Bureau of Industry and Security (”BIS”) released Settlement Agreements that the agency entered into with AR-AM Medical Services LLC and DMA Med-Chem Corporation, two related medical device distributors located in Great Neck, NY. According to the charging papers, the companies supplied commercial invoices to the New York branch of the Bank of Egypt containing the following language:

The goods are neither of Israeli materials nor [sic] they contain any Israeli materials nor are they exported from Israel.

We declare that no raw material of Israeli origin has been used for production or preparation of the goods mentioned in this invoice.

AR-AM was alleged to have included this language in three invoices and agreed to a fine of $7,200. DMA was alleged to have included this language in one invoice and agreed to a proportionate fine of $2,400. Both companies agreed to a “non-standard” two-year denial order forbidding them from engaging in exports to Bahrain, Iraq, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates and the Republic of Yemen. Both fines were suspended for two-years contingent upon compliance with the non-standard denial order and no further export violations by the companies.

Since the language was contained in the invoices generated by both companies, this is not a case where the company simply missed the boycott language in terms and conditions or other documents supplied by the purchaser. As a result, neither company was in very good position to claim that it was an oversight or a failure to read all documents thoroughly. This probably explains the two-year denial order.

However, the “non-standard” denial order is hard to defend even in this circumstance. Section 764.3(a)(2) of the EAR permits a “non-standard” denial order which is described as “narrower in scope” than a “standard” denial order. The order at issue is non-standard because it is restricted to specific Arab countries. Since only four instances of anti-boycott compliance were alleged, and three of those for Syria and the fourth was for an unspecified country, these aren’t the countries that were involved in the transactions in dispute. Nor or these all the countries in the Arab League.

Instead, the list seems to be derived from the list of countries reported in the 2007 BIS report to have been involved in anti-boycott requests, excluding Egypt and Jordan which were involved in only a handful of such requests. That being said, it seems more than a little ironic that a boycott would be punished not be a general denial order but by an order that in effect was itself a boycott of specific countries.

Back in November, Pennsylvania-based Colorcon, a manufacturer of specialty chemicals for the food and pharmaceutical industries, agreed to pay $39,000 to the Bureau of Industry and Security, based on alleged violations of BIS’s anti-boycott regulations. According to the charging documents and settlement agreement, Colorcon’s U.K. subsidiary provided assurances in connections with sales to Syrian companies that no Israeli components were used and that Colorcon would otherwise comply with Syria’s boycott of Israel. Additional charges settled by Colorcon included Colorcon’s failure to report the boycott requests at issues.

A recent article in the Jerusalem Post provides some interesting detail on the settlement agreement and the circumstances that led to it. The reporter interviewed Pam Lehrer, general counsel for the Berwind Group, a private investment firm that owns Colorcon. She said that the violations were the result of an “oversight”:

This matter occurred at Colorcon’s UK subsidiary. The requests were typically in the fine print of the terms and conditions, and the UK subsidiary’s employees were not aware of the requirement to look carefully for these matters and report them. We became aware of the issue through an internal audit review. We felt it was important to review our compliance with the antiboycott laws and performed an audit of our subsidiaries. As a result, we found the issue and voluntarily reported it to the US Commerce Department.

That statement differs from what Colorcon admitted in the settlement documents. In those documents, the company conceded that the anti-boycott certifications “with intent to comply with, further or support an unsanctioned foreign boycott.” This specific intent requirement is contained in section 760.1(e) of the Export Administration Regulations. If the information was buried in the fine print and the U.K. employees were not aware of the requirement to find such provisions, it’s hard to say that the U.K. employees signed these contracts with the intent to participate in the boycott against Israel.

Of course, agreeing to pay $39,000 to BIS may make more sense than paying much more to lawyers to litigate with BIS over whether the U.K. subsidiary had the requisite intent to comply with the Syrian boycott of Israel.

The Bureau of Industry and Security (”BIS”) has released new regulations explaining the treatment that BIS will give to voluntary disclosures of BIS’s antiboycott regulations. Those regulations, for example, prohibit exporters from certifying to Arab League countries that exported products do not contain Israeli content.

The new regulations set forth the procedures for filing a voluntary disclosure. These procedures more or less parallel the procedures adopted at other agencies, including permitting the filing of a bifurcated voluntary disclosure, i.e., an initial disclosure after the violation was discovered and a more detailed disclosure after the violation has been investigated by the company making the disclosure. The initial voluntary disclosure must be filed before BIS has learned of that information from another source and commenced an investigation. The new regulations make clear that disclosures made to the agency during telephone calls seeking guidance on the rules are not considered disclosure of the information from another source.

But, BIS being BIS, the new rules enshrine significant disincentives to companies to make voluntary disclosures. Most significantly, section 764.8(b)(4) says this:

Although a voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by BIS, it is a factor that is considered together with all other factors in a case. The weight given to voluntary self-disclosure is solely within the discretion of BIS, and the mitigating effect of voluntary self-disclosure may be outweighed by aggravating factors.

What BIS is saying here is that it may in certain circumstances give no weight whatsoever in mitigation because of the voluntary disclosure. This is a significant disincentive to voluntary disclosures because a company must weigh the possibility of there being no benefit to the voluntary disclosure against the possibility that BIS would never discover the violation if it hadn’t been disclosed. The only way to preserve the incentive to make a voluntary disclosure is to say that aggravating factors might be used to reduce the weight given to the voluntary disclosure but not to totally eliminate it.

But (and I’m sure some readers won’t be surprised by this) it gets worse:

Voluntary self-disclosure does not prevent transactions from being referred to the Department of Justice for criminal prosecution. In such a case, BIS would notify the Department of Justice of the voluntary self-disclosure, but the decision as to how to consider that factor is within the discretion of the Department of Justice.

Of course, a VSD shouldn’t be a “get out of jail free” card and there may be rare circumstances where such a disclosure should be referred to DOJ. But BIS by stating only that cases may be referred without the further qualification that the VSD at least makes it somewhat less likely that the case will be referred, erects another disincentive to voluntary disclosure. In my experience, the driving force behind most voluntary disclosures is the company’s desire to reduce the risk of prosecution.

A press release from the Bureau of Industry and Security (”BIS”) this afternoon announced that Cooper Tools Industrial Ltda., a wholly-owned Brazilian subsidiary of Houston-based Cooper Industries, agreed to pay $27,000 to settle anti-boycott violations that had been voluntarily disclosed to BIS. Between June and July of 2004 the Brazilian subsidiary responded to requests for prohibited information about its business relationships with Israel to buyers located in Kuwait and the UAE.

Once again we have an example of a company winding up in the soup because of non-compliance by one of its foreign subsidiaries. It is easy to forget the broad scope of the anti-boycott regulations in Part 760 of the EAR. Section 760.2(d) prohibits “U.S. Persons” from providing information about its relationship with a boycotted country. A “U.S. Person” is defined in Section 760.1(b)(1)(v) as including foreign subsidiaries that are “controlled in fact” by a U.S. company. Section 760.1(c)(2) makes clear that, not surprisingly, a wholly-owned subsidiary will be presumed to be “controlled in fact.”

Violations by foreign subsidiaries can easily occur without anyone really understanding that a violation has occurred. Cooper’s Brazilian subsidiary no doubt understood itself as subject to Brazilian law and not to U.S. law. So it behooves companies, in my view, to spend the extra bucks to send their foreign employees to export compliance training. And, of course, plenty of lawyers are more than happy to fly down to Rio to do the training there.

An article in the March 19 edition of the Jerusalem Post reports that Iraqi firms appear to be stepping up their participation in the Arab League Boycott of Israel. The article bases its report on figures contained in the 2006 Annual Report of the Bureau of Industry and Security:

In its recently released annual report for 2006, the US Commerce Department’s Bureau of Industry and Security noted that there had been 31 cases in which the Iraqi government had engaged in restrictive trade practices last year.

In 2005, according to the previous year’s report, there were a total of just eight such cases involving Iraq.

. . .

It was unclear why Iraq began enforcing the Arab boycott of Israel more energetically last year. However, the Iraqi government sent an official representative to take part in the annual meeting of international liaison officers of the Arab League boycott Office in Damascus last May.

The aim of the meeting was to discuss ways of intensifying the trade embargo against the Jewish state.

When the Jerusalem Post contacted the U.S. Embassy in Tel Aviv about this increase, the Embassy only said that it was “disappointed” in this and anticipated that it would raise the issue again with Iraqi officials.

Although it seems likely that Iraqi boycott activity has increased, the BIS reports don’t fully support the figures cited by the Jerusalem Post. First, the BIS tables on Iraqi boycott activity are inconsistent. One table (Appendix E-3) cites 31 reports of boycott activity by Iraq between October 2005 and September 2006 while another (Appendix E-4) shows 26 reports during the same period. The tables do not explain the reason for this inconsistency.

Second, the figures given by BIS are reports of boycott requests, and there may be multiple reports of the same boycott request, e.g., by both the exporter and the freight forwarder. In the 2005 Annual Report, footnote 1 to both Appendix E-3 and Appendix E-4 stated:

All figures are enhanced to the extent that an exporter and one or more other organizations reports on the same transaction.

The 2006 Annual Report contains the footnote number but the footnote text has, inexplicably, gone missing. (Does anyone edit documents at BIS before they are released?) Presumably, however, the footnote was intended to reference the same text as in 2005.

BIS issued the first anti-boycott penalty of the year last week to the National Bank of Egypt (warning: linked Bank web site has migraine-inducing animated gifs). As a result, BIS wrangled a settlement agreement and payment of $22,500 from the Bank. True to BIS form, the charging letter, the settlement agreement and the order provide minimal detail about the alleged violation, but still enough that something smells fishy, and it’s not a Nile Perch.

The charging letter notes that NBE has a branch in New York and then alleges that the bank “engaged in transactions involving the sale and/or transfer of goods or services (including information) from the United States to Syria.” Specifically, the charging letter references four commercial invoices either to or from Al Issar Trading Company which contained language certifying that no Israeli goods were “used for the production or preparation of the goods mentioned in this invoice.”

I think it is safe to say that the NBE in branch in New York was neither selling goods nor buying goods from Al Issar Trading Company. More likely, indeed almost certainly, what was involved here was that the Bank was issuing or confirming a letter of credit relating to that transaction. In a typical instance, a commercial invoice would be one of the documents to be presented for payment of the credit and would be used to determine the amount payed. The issuing or confirming bank would not read all the terms and conditions of the invoice, including any warranties relating to the country of origin of the goods or their component parts.

This is not unlike BIS’s penalizing a freight forwarder for a prohibited boycott term buried in the shipping documents, which we have complained about before. EAR § 760.1(e)(3) makes clear that intent is required for each anti-boycott violation and not merely the intent to perform the act that constituted the violation but also the “intent to comply with, further, or support an unsanctioned foreign boycott.” Since the Bank likely did not read the entire commercial invoice, it almost certainly didn’t have the requisite intent. Nor does there seem to be any sound policy basis to force banks to read every word of all customer export documents to ferret out anti-boycott violations.

The BIS website recently listed an anti-boycott settlement agreement involving freight forwarder and customs broker International Specialist, Inc., located in Boston, Massachusetts. The charging letter provided this significant bit of information about the alleged violation:

In connection with the transaction described above, on or about August 29, 2003, you provided to a customer in Oman, AEA Technology commercial invoice #102075, Order #CO133795, which contained the following information:

“NO ISRAELI COMPONENTS USED.”

Note that this is not an allegation that the freight forwarded actively provided the proscribed information about Israeli components; rather the freight forwarder merely provided the information passively by delivering shipping documents that contained a statement from its customer that provided the proscribed information.

The freight forwarder was charged with a violation of EAR § 760.2(d) which prohibits any U.S. person from providing information about that person’s or a third party’s business relationships with a boycotted country. Significantly, however, EAR § 760.1(e)(3) makes clear that intent is required for each anti-boycott violation and not merely the intent to perform the act that constituted the violation but also the “intent to comply with, further, or support an unsanctioned foreign boycott.”

This high-standard of intent is inconsistent with what looks like an effort by BIS to impose absolute liability on freight forwarders for forwarding commercial documents with proscribed information. Perhaps International Freight actually read every word of the customer’s invoice to the recipient in Oman and therefore had the requisite intent. But BIS doesn’t allege that and, frankly, it seems unlikely that International Freight bothered to scour all the terms of AEA’s invoice before forwarding it along with the shipped goods.

An article in today’s Jerusalem Post reports that the Arab Boycott of Israel, often thought to be on the wane, is alive and well and perhaps on the rise:

According to material compiled by the US Commerce Department’s Bureau of Industry and Security, a copy of which was obtained by the Post, Arab states made a total of 201 boycott-related requests in all of 2005, or fewer than 17 per month.

By contrast, US firms have reported receiving 120 boycott-related requests in just the first six months of this year, for an average of 20 per month, marking an increase of nearly 20 percent over the rate recorded last year.

The Jerusalem Post refers to this as a “sharp increase” although given the small number of data points here the difference between these figures may not be a statistically significant indicator of an increase. Additionally, these numbers still reflect a reduction from the 295 and 297 reports in 2003 and 2002 respectively. Even so, the numbers are high enough that exporters should realize that the Arab boycott is not a thing of the past.

The Post article is also interesting for its indication of which Arab countries appear to have generated the most anti-boycott reports by American companies:

Based on the material compiled by the Commerce Department, it appears that at least seven Arab countries, including ostensible US allies such as Bahrain, the United Arab Emirates (UAE), Kuwait and Iraq, are enforcing the terms of the Arab boycott more energetically this year than in 2005.

At the top of the list is the UAE, which made 40 boycott-related requests during the period of January to June, followed by Syria, with 20.

The prominence of the UAE on the list is not surprising since it has, at least for the past few years, led the list. That, however, may be short-lived. The United States and the UAE are negotiating a Free Trade Agreement, and the U.S. has made the UAE’s participation in the boycott an issue in the negotiations.