A memorandum opinion of the Ninth Circuit, filed on March 30, 2012, reaches a somewhat paradoxical conclusion. It held that a party that had been indicted for violations of the Arms Export Control Act had no right, even though the indictment was dismissed, for compensation resulting from the destruction of the seized merchandise by U.S. Customs. The merchandise in question consisted of weapons parts imported from Vietnam in violation of the U.S. arms embargo against Vietnam. The opinion pointed out that the goods were still contraband because the claimant did not have a license from ATF required for permanent imports or a license from the Department of State required for temporary imports.

Of course, the back story — why were the indictments dismissed for the illegal arms import? — is the most interesting part of this story and can be found in the district court opinion dismissing the arms charges. The charges in question were dismissed because the court found that the defendant (and claimant) had been denied his Sixth Amendment right to a speedy trial. That happened because — get this — U.S. Customs destroyed the central evidence in the case, the seized weapons parts, because it was costing too much to store them. Repeated calls by Customs to the AUSA prosecuting the case weren’t returned and so Customs simply torched the goods. The prosecution was somewhat loathe to reveal this blunder to the defense and so it kept dawdling on complying with the defendant’s discovery request. Interestingly, the district court held that the destruction of the evidence, although that constituted “gross negligence” by the government, did not violate the defendant’s rights under the Due Process Clause because the evidence was not exculpatory.

My favorite part of the district court decision is this little nugget explaining how the evidence wound up being destroyed:

SA Bench followed SA King’s suggestion and made several telephone calls to AUSA Schaeffer at the San Francisco United States Attorney’s Office, leaving voicemail messages, asking for return calls, and stating that unless he (Schaefer) authorized continued retention of the evidence, [Customs] would destroy it. At SA Bench’s request, his Group Supervisor Jerry Barnett also called one or two times and left the same voicemail messages for AUSA Schaefer. … AUSA Schaefer testified that he never received the voicemail messages, that he always returned his telephone calls and that he had no information that the weapons parts were in jeopardy of being destroyed. Numerous present and former government employees, however, testified that Schaefer had an extremely poor reputation for returning phone calls. SA Bench did not receive any return call from AUSA Schaefer and Bench advised Ms. Mower in July of 1999 that the evidence could be destroyed, which occurred on September 28, 1999. …

AUSA Schaefer had a reputation among law enforcement agents, defense attorneys and members of the United States Attorney’s Office in San Francisco, for extreme dereliction regarding returning telephone calls. SA Stoltz testified that when he wanted to contact Schaefer, it would typically require 50-60 calls and voicemail messages

[Record citations omitted.]

The amazing thing here is that someone would actually leave 50-60 messages in such a situation. I think that’s often referred to as the triumph of hope over experience.

In yesterday’s post, I discussed the ramifications of the debarment of six freight forwarders — Bax Global, Inc.; Ceva Logistics LLC; EGL, Inc.; Kuhne and Nagel International AG; Panalpina, Inc. (including its Swiss affiliate Panalpina Welttransport Holding AG); and Schenker AG — from government contracting. The State Department’s Directorate of Defense Trade Controls (“DDTC”) has today issued a guidance indicating that these parties are indeed ineligible to participate in any transaction involving the export of defense articles.

First, for the good news. Existing authorizations that include any of the six freight forwarders will be unaffected. Exporters can ship under licenses now in their hands even if the license refers to one of the six freight forwarders at issue.

Now for the bad news. Licenses received by DDTC after February 18, 2012, that name one of these freight forwarders and which do not contain a transaction exception request will be returned without action, unless a transaction exception request is filed with DDTC within three days of the issuance of the guidance. Those days apparently include this weekend, so unless you get a transaction exception request to DDTC by this Monday, February 27, your license application will be returned. (Have a nice weekend!)

It is not clear what will happen to pending applications received before February 18, 2012. The guidance says that they will be “reviewed by DDTC in the normal course,” whatever that means. Probably that means that the license will be granted with provisos or amendments excluding the six freight forwarders.

And although the guidance does not say this directly, you can be certain, indeed you can bet the farm, that no transaction exception requests are going to be granted. The guidance says that the transaction request should explain

why the generally ineligible entity should be part of the transaction (i.e., why the applicant is unable to utilize a different freight forwarder), and how the inclusion of the ineligible entity is in the interests of U.S. foreign policy or national security.

In other words, don’t waste your time because I do not see how you can ever demonstrate that no other freight forwarder is available.

It bears repeating that, as I said yesterday, the Arms Export Control Act does not require DDTC to do this. DDTC has the discretion not to do this. Where there is no reason to believe that the antitrust plea is evidence that these freight forwarders are now more likely to violate the ITAR in connection with their shipments, there is absolutely no reason to exclude these freight forwarders from all ITAR-related exports. Indeed, DDTC is removing from the pool of freight forwarders companies with substantial ITAR experience. This will force exporters to use smaller, less experienced companies who are more likely to violate the ITAR precisely because of their inexperience. DDTC foot, meet bullet. Bullet, meet DDTC foot.

A rumor has been circulating that some prominent freight forwarders have been debarred by the Directorate of Defense Controls (“DDTC”) and can no longer handle defense articles listed on the United States Munitions List.

This rumor starts with the appearance of six freight forwarders on the Excluded Party List System. On February 16, the ELPS added entries for Bax Global, Inc.; Ceva Logistics LLC; EGL, Inc.; Kuhne and Nagel International AG; Panalpina, Inc.; and Schenker AG. With the EPLS,the important thing is the code because it tells you both the reason that the party is on the list and the precise treatment that is to result from the listing. In the case of these six freight forwarders, the codes are A and A1.

Code A is used when the reason for debarment is conviction of, or civil judgment for, violation of antitrust laws and the treatment resulting under that code is that the listed party is prohibited from receiving government contracts and from directly or indirectly receiving benefits under Federal nonprocurement programs. Code A1 is just the proposed version of A. The six listed freight forwarders pleaded guilty to antitrust charges which is what led to this debarment from government contracting and grants.

Had this been a debarment of the parties from handling defense articles in export contracts, the code would have been UU. But it wasn’t and yet I’ve heard reliable confirmation of the rumor that the DDTC is saying that none of the six freight forwarders can be involved in defense exports.

On what basis does DDTC turn a guilty plea on an antitrust charge into a complete debarment from export? Apparently on the grounds that by appearing on the EPLS, a company is an ineligible party under section 120.1(c) of the ITAR and that therefore dealing with them is a violation of section 127.1(c). Section 120.1(c) says:

U.S. persons who have been convicted of violating the criminal statutes enumerated in §120.27, who have been debarred pursuant to part 127 or 128 of this subchapter, who are the subject of an indictment involving the criminal statutes enumerated in §120.27, who are ineligible to contract with, or to receive a license or other form of authorization to import defense articles or defense services from any agency of the U.S. Government, who are ineligible to receive export licenses (or other forms of authorization to export) from any agency of the U.S. Government, who are subject to Department of State suspension/Revocation under §126.7(a)(1) through (a)(7) of this subchapter, or who are ineligible under §127.7(c) of this subchapter are generally ineligible.

The six freight forwarders pleaded to antitrust charges which are not the criminal statutes enumerated in § 120.27. Nor have they been debarred pursuant to 127 or 128 which requires a finding of a violation of the Arms Export Control Act. DDTC is basing its position, apparently, on this language quoted above relating to U.S. persons:

who are ineligible to contract with . . . any agency of the U.S. Government.

DDTC reads this to make automatically ineligible under 120.1(c) any persons “who are ineligible to contract with . . . any agency of the U.S. Government.”

Section 2778(g) of the Arms Export Control Act does have language in 2778(g)(3) which says that DDTC “may” refuse to grant licenses to persons ineligible to contract with any agency of the U.S. government. However, 2778(g)(4) only requires the denial of licenses to parties who have violated the enumerated statutes or who are ineligible to receive export licenses from any federal agency, neither of which is the case here.

The absurdity of DDTC’s position of automatically denying export licenses to any party “ineligible to contract with . . . any agency” cannot be involved in defense exports is underlined by the fact that this position would mean that companies that are not registered in the Central Contractor Registration or who do not have a DUNS number, and who are therefore ineligible to contract with any government agency, must also be automatically excluded from defense exports. Worse yet, it would be a criminal offense to use in any such export transaction a company that does not have DUNS number or that has not registered with the federal government’s CCR.

Naturally, if DDTC takes a hard line here, the most significant problem is that this will create an undue burden on defense exporters given the prominence of these six companies. Ironically, it will also mean that the antitrust conviction will decrease competition in the defense export industry, certainly not something that the antitrust laws being enforced here intend to occur. And it will likely drive up prices for freight forwarding services, also not a consequence consistent with antitrust enforcement. Since the AECA does not require this result here, DDTC should exercise its discretion to permit these companies to continue their involvement in providing freight forwarding services to licensed defense exporters and to make clear that only parties convicted of violating the statutes enumerated in the AECA or who have been held by other agencies to be ineligible to receive export licenses are automatically prohibited from involvement in defense exports.