For several years now the Bureau of Industry and Security (“BIS”) has had the statutory authority to impose a civil penalty of $250,000 per export violation but has yet impose anything near that fine. So when BIS finally whacks someone with a $2.5 million fine for 10 violations, you might assume that the person paying such a fine did something really terrible like exporting dual-use items to Iran that Iran could use in uranium enrichment facilities. But you would be wrong.

Sirchie Acquisition Company, LLC, agreed to pay a $2.5 million fine for 10 violations arising from acts not committed by SAC but by an acquired company several years before SAC acquired it. And the exports involved included fingerprint equipment that did not require a license to the destinations involved (France and the U.K.).  The exports also included, get this, some magnifying glasses. These exports are detailed in the deferred prosecution agreement with federal prosecutors but the BIS charging documents don’t provide any detail on the exports in question — proof, I suppose, that even BIS was embarrassed about whacking someone with a $250,000 fine for exporting magnifying glasses and fingerprint pads.

These exports were allegedly problematic because the CEO of the company that Sirchie acquired set prices for these exports, which was allegedly a violation of a denial order that BIS had entered against the CEO individually. As I pointed out in my last post on this case, SAC’s actions didn’t violate any of the provisions of the denial order that expressly applied to third parties. And BIS doesn’t claim that they did but claims instead that they constituted “aiding and abetting” the CEO’s violation of his own denial order. The problem here is that the denial order in question doesn’t say that all aiding and abetting activities by third parties are prohibited but instead prohibits particular and specific types of aiding and abetting, none of which occurred in this case.

Other aggravating factors that might justify such a massive fine aren’t mentioned by BIS. There is no claim in the charging papers that SAC, or its predecessor, knew that these activities violated the CEO’s denial order or that SAC, or its predecessor, tried to conceal the exports or that SAC, or its predecessor lied to federal investigators.

Call me old-fashioned, but it seems to me that the highest fines ought to be reserved for the most serious violations and not for exports of magnifying glasses by an acquired company.

North Carolina based law enforcement supply company Sirchie has signed, and a federal court has entered, a deferred prosecution agreement under which Sirchie agreed to pay $12.6 million in penalties with $2 million of those penalties going to the Department of Commerce’s Bureau of Industry and Security (BIS”). The penalties arise from conduct that occurred in 2006 and 2007, prior to the current owners’ purchase of all the assets of Sirchie.

At issue were alleged violations of a BIS denial order entered in 2005 against John Carrington, the former president, CEO and majority shareholder of Sirchie. The denial order was premised on unlicensed exports by Sirchie of fingerprinting equipment. The deferred prosecution agreement against Sirchie alleges that Carrington violated the denial order against him when he set prices for goods being exported by Sirchie.

The problem here is that Sirchie wasn’t subject to a denial order, only Carrington was. And the deferred prosecution order doesn’t adequately explain how Carrington’s violations of that Denial Order led to criminal liability by Sirchie. The provisions in Carrington’s denial order that cover third parties such as Sirchie are limited to four situations. The denial order prohibits third parties from (1) exporting on Carrington’s behalf, (2) helping Carrington obtain possession of items for export, (3) acquiring items that Carrington has exported, or (4) servicing items in Carrington’s possession that will be exported. Sirchie was not alleged to have done any of these things. In short, it looks like Sirchie was steam-rolled here by BIS and some overzealous prosecutors.

For any exporters who may be thinking of ignoring prior export violations hoping that no one will find out, this SEC filing and its tale of a whistleblower might give them an occasion for pause. Law Enforcement Associates just disclosed in an 8-K filed with the SEC that a former executive that the company had dismissed had charged the company with export violations.

The charges by the former executive, Mr. Paul Feldman, are contained in a letter that Feldman filed with the Department of Labor in connection with his dismissal. According to that letter, Law Enforcement Associates appears to have sold items to a company called Safesource for export to the Dominican Republican. Thereafter, Feldman learned that John Carrington, a former owner of Law Enforcement Associates, was a 50 percent owner of Safesource. That was problematic, according to Feldman’s letter, because Carrington was subject to a BIS denial order.

Feldman, another company director and company counsel then contacted the BIS agent that had investigated Mr. Carrington to inform the agent of the exports and its discovery that Carrington was involved in the exports. A week later federal agents raided Safesource.

Three other directors at Law Enforcement Associates, who Feldman alleges were friends of Carrington, became upset about the disclosures to federal authorities. They fired the company’s general counsel who had met with the BIS agent and replaced him with the personal attorney of one of the three Board members. The three directors also sought to have Feldman tell them what he had said to the BIS agent. When Feldman refused, claiming that the three other directors were leaking information about the matter to Carrington, the newly-appointed general counsel, according to Feldman’s letter, called the BIS agent “demanding” that he reveal what Feldman had told the government. Not surprisingly, the BIS agent is said to have told the new general counsel to “tread lightly.” (Practice note to budding export lawyers: this was not a good move by the new general counsel.) Feldman was later fired by a vote of the three directors.

Notwithstanding the ill-advised board-room theatrics — it’s generally a bad idea to try to shut down a company official trying to report export violations — it’s not clear that an export violation by the Company even occurred here. Of course, as regular readers are aware, I do not believe that BIS has the authority to impose general denial orders under the International Emergency Economic Powers Act, BIS’s current governing statute. Even if BIS did have that authority, the portion of the Denial Order that deals with actions by third parties, such as Law Enforcement Associates, would prohibit Law Enforcement Associates from assisting the Denied Person from acquiring any item to be exported from the United States. Here, the items exported were acquired by Safesource, which was not a Denied Person, and not by Carrington, who was.

Law Enforcement Associates disputes the claims made in the Feldman letter and states its belief that the allegations are simply an “attempt by a disgruntled former executive to seek retribution from the Company.”

Stay tuned. I don’t think this show is over yet.

Minnesota-based FSI International, a manufacturer of semiconductor wafer cleaning products, voluntarily disclosed to the Bureau of Industry and Security (“BIS”) that it had exported fluoropolymer-coated pumps and valves classified under ECCN 2B350 without first obtaining an export license from BIS. Last month, FSI entered into a settlement agreement pursuant to which it agreed to pay $400,000 in fines. The exports in question consisted of 66 shipments valued at around $265,000. (I didn’t actually add up the amounts in the schedule of exports but did a rough estimate.)

Those are the facts, but I think that my speculation about what happened here offers a valuable compliance lesson, one that suggests that BIS’s “Interpretation 2″ is both a boon and a bane to exporters. The equipment produced by FSI is designed to clean semiconductor materials at various stages in the manufacture of those materials into integrated circuits. Because the FSI equipment doesn’t make the semiconductor wafers or etch or imprint the patterns into them, FSI’s equipment does not appear to be controlled by ECCN 3B001, the most likely classification for such equipment. The exports in question — fluoropolymer-coated valves and pumps — were likely parts and components of FSI’s cleaning equipment which FSI was exporting to its customers to maintain or to repair the equipment.

By now you should see where I’m going with this. Interpretation 2, which is set forth in EAR § 770.2(b), is what you might call BIS’s “no-see-through” rule. It states that parts integrated into equipment do not require licenses for export as long as the parts are “normal and usual” components of the equipment and have not been incorporated into the equipment for the purpose of evading the rules. But, and it’s an important “but,” if the parts are exported when not incorporated into the equipment, whether as spares, replacements, or otherwise, they may require a license depending on the ECCN of the part and its destination.

The lesson here is that although Interpretation 2 makes the classification of an item easier and permits its export even when it has export-controlled parts (the boon), Interpretation 2 also means that spare parts may still have to be classified before they are exported for maintenance or repair purposes (the bane). It seems likely that FSI had determined that its cleaning equipment was EAR99 and never thought about separately classifying its parts. Even if equipment has an ECCN other than EAR99, the reasons for control for the equipment’s ECCN may be different from those for the ECCNs for the parts, meaning that export licenses are required for both but possibly for different countries.