The Bureau of Industry and Security (”BIS”) released today the text of its proposed rule which would implement a new license exception for intra-company transfers and which the agency dubs, not surprisingly, license exception ICT. The new license exception will permit, among other things, transfers of technology between U.S. and foreign subsidiaries. It will also allow transfers of technology by a company to its foreign national employees working in the United States or for the company’s foreign subsidiaries. However attractive the exception is in concept, it is much less so as implemented by the rule, which runs to 23 pages of complex eligibility requirements and even contains what most would consider not one but two poison pills. Not to mention a raft of unanswered questions.

In order to be eligible to use the ICT license exception, a company must first submit a detailed application to BIS which requires, among other thing, a compliance program that meets certain requirements set forth in the proposed regulation, including corporate commitment to export compliance, a physical security plan, an information security plan, personnel screening procedures, a training and awareness program, a self-evaluation program, and non-disclosure agreements by foreign employees. In addition to providing the plan itself, the application must submit documentary evidence by the company of its compliance with each of the mandatory requirements just described. Only upon approval of this submission may a company begin to use the license exception.

So what are the poison pills? First, if the self-evaluation program required for ICT eligibility reveals any export violations they must be “voluntarily” disclosed, which could lead to criminal penalties including jail time and civil penalties of up to $250,000. Second, the exporter relying on the exception must agree to a BIS audit every two years. I suspect that for many companies, the mandatory “voluntary” disclosure and the mandatory biennial audit may constitute a strong deterrent to utilizing the new license exception.

As for the unanswered questions, the rule is less than clear about how it operates in the context of a merger or takeover of a company using the exception. Without further clarification it would seem that a company that uses the exception would need to have the merger or takeover “approved” by BIS prior to closing. Otherwise all technology transfers subject to the exception would have to cease at closing, something which is likely to be quite impractical.

Another significant limitation of the proposed rule permits use of the license exception in only 37 of the 194 countries of the world. Countries eligible include the countries of Europe, including Eastern Europe and Scandinavia, as well as Turkey, Japan, Australia, and New Zealand. The only eligible countries in the Western Hemisphere are Canada and Argentina. Mexico, Brazil and Costa Rica, among others, were deemed unworthy by BIS, as were Russia and the former Soviet States, the entirety of Africa, the Middle East and Asia. Luxembourg is eligible but, strangely, Liechtenstein is not. H.S.H. Prince Han-Adam II is said to be not amused at all.

The Bureau of Industry and Security (”BIS”) released today a revision of the de minimis rules which BIS touted as a major simplification of the rules. I think most people when reviewing the new rules will find them as complicated as ever.

The de minimis rules are an effort by BIS to define when the U.S.-origin content of a commodity is sufficiently small that the commodity will not be deemed to be subject to the export control restrictions set forth in the Export Administration Regulations. When U.S. content doesn’t satisfy the requirements of the de minimis rule, then the incorporation of that content, even if that content is not itself subject to U.S. export controls, into a commodity may subject that commodity to U.S. export controls.

Leaving aside whether the new rules are ultimately a simplification or not, there is one significant area in which the new rule may permit a de minimis finding where the old rules would not — namely, hardware commodities that bundle U.S. origin software. Under the prior rule, the de minimis calculation had to be made separately for hardware, software and technology. Under the new rule, the value of “bundled” U.S.-origin software will be compared with the value of the hardware. If it constitutes less than 25% of the commodities value (or 10% in the case of exports to Cuba, Iran, North Korea, Sudan or Syria), then the de minimis rule applies and the commodity is not subject to U.S. export controls.

The new rules define bundled in a broad way that would go beyond pre-installed software but which would also include un-installed software distributed on a separate disk with the hardware. Think printer drivers, for example. To qualify as bundled software, the software must be exported or re-exported with the hardware and must be configured for the hardware. Additionally, if the software is listed on the Commerce Control List it must only be controlled for anti-terrorism reasons. Software that is controlled for export for other reasons can slip out of the country under the de minimis rule no matter what percentage its value bears to the value of the hardware with which its bundled.

Actually, the penalty that freight forwarder Demetrios International Shipping recently agreed to pay was only $6,000, but it was for export of two Raptor 100K stun guns to Algeria without a license from the Bureau of Industry and Security (”BIS”). My apologies for the bad pun.

Stun guns, all of them, even those built by hobbyists from disposable cameras, are classified under ECCN 0A985 and require BIS licenses for exports to all destinations mostly because of concerns that they can be used as implements of torture. The Raptor 100k stun guns involved here, which retail at around $12 each, are relatively benign. Here’s an undeniably inane video (with some language that may not be safe for work) posted on YouTube by some dimwitted teenagers using a 100k stun gun on themselves to no apparent ill effect. These low end stun guns are probably not the first choice of Algerian police officers or Middle Eastern terrorists as implements of torture.

And, of course, it goes without saying that stun guns are readily available outside the United States. They are also easy to build from commonly-available electronic components using schematics readily available on the Internet. (WARNING: these schematics are controlled by ECCN 0E982. If you live outside the United States or are not a U.S. citizen or permanent resident, clicking the preceding link to those schematics will violate U.S. law and subject you to civil and criminal penalties, including imprisonment.)

Of course, none of these considerations are defenses to the violation by Demetrios. But it does suggest that there are good policy reasons for a review of ECCN 0A985 to restrict its application to stun guns that people might find, shall we say, more shocking.

An article in today’s Miami Herald provides more details about the settlement agreement that we previously reported and under which freight forwarder Cargoland Air and Ocean Cargo, Inc. agreed to pay a fine of $36,000 to the Bureau of Industry and Security (”BIS”). The fine was paid in connection with an unlicensed shipment of police helmets to Venezuela. These new details, however, may raise more questions than they answer.

According to the article, Susan Olmo, the owner of Cargoland, had no idea a license was necessary:

Doral freight forwarder Susana Olmo shipped 210 riot helmets to Venezuela two years ago as a favor to a customer who had won a contract to outfit some of the country’s police.

It was only after the goods were on their way that Olmo learned that U.S. law required her to have a license to export the helmets. Olmo stopped the shipment and had the helmets returned to the United States, but that wasn’t enough to prevent her company from being fined $36,000 by the Commerce Department

Several things can be gleaned from this. First, it seems likely from this account that Olmo never bother to even consult the Commodity Control List before exporting the helmets. Accordingly, although our previous post on this complained that the ECCN involved might not give reasonable notice to a freight forwarder of what was covered, Olmo can’t claim that defense. Indeed, it is likely that BIS’s decision to whack her company even though she made every effort to get the helmets back was based on the absence of any evidence of an attempt to comply with BIS’s export rules.

I’m not quite sure what to make of Olmo’s claim that the export was “a favor to a customer.” Does Olmo export stuff with charge for customers she likes? And even if she did, I can’t find a personal favor defense in the Export Administration Regulations.

A settlement agreement with BIS doesn’t require that the exporter show remorse for the illegal shipment, and Olmo isn’t about to show any:

Olmo … is riled that she was fined $36,000. She said she lost about $20,000 shipping the helmets back to Miami. And she’s been stuck with about $15,500 worth of helmets she doesn’t know what to do with.

Uh, maybe she could send the helmets back to her customer. And what does she mean that she’s stuck with the helmets? Did she buy them? Was she the exporter of record or, in the current jargon, “U.S. principal party in interest”? Maybe what happened here is that her customer, knowing that a license to ship riot helmets to Venezuela would be difficult to obtain, duped her into buying and exporting the helmets, hence her claim that it was a favor.

‘They want to make an example of a small company,” Olmo said. “I don’t think it was fair. I didn’t make any money.”

She’s vowed she’ll never export anything again.

Her company is a freight forwarder and a non-vessel owning common carrier (”NVOCC”) that ships container loads to foreign countries. Is she saying that she’s shutting down her company? Or again, maybe this is consistent with my speculation that perhaps she was duped by her customer to be the exporter of record here. Even so, someone ought to tell Olmo that even where she is just the freight forwarder she is still involved in an export and required to comply with U.S. export laws.

Another freight forwarder pays for the sins of its customers. Cargoland Air and Ocean Cargo, Inc., a Miami-based freight forwarder, recently agreed to pay to the Bureau of Industry and Security a penalty of $36,000 in connection with its attempted export of 210 riot helmets to Venezuela without a license. According to the Settlement Agreement, the riot helmets were classified as ECCN 0A979.

As is usually the case, the charging and settlement documents released by BIS provide only minimal details of the circumstances leading to the violation and nothing to explain its theory of liability by the freight forwarder. For all that can be gleaned from these documents, the exporter might have described the exported items as bicycle helmets, meaning that the freight forwarder’s liability is premised on its failure to open and inspect the contents of the shipment.

The documents released by BIS refer to the exported items as “riot helmets,” suggesting that perhaps this was the exporter’s description of the items. If that was the case, BIS was apparently expecting to the forwarder to discern from this description that the product was properly classified as ECCN 0A0979, even though that ECCN heading is “police helmets and shields; and parts, n.e.s.” and the ECCN states that the “list of items controlled is contained in the ECCN heading.” Now certainly the exporter and manufacturer of the helmets and related equipment should understand that riot helmets are police helmets, but it is not entirely clear that the freight forwarder should make this connection.

As BIS continues to expand the liability of freight forwarders, one has to wonder whether the only way for a freight forwarder to avoid liability for unlawful exports is to file a classification request for each item before it is shipped. Granted there may be circumstances in this case that demonstrated that the freight forwarder should have been aware of the proper classification of the helmets, but, if that was the case, BIS would do everyone a favor by disclosing the facts that caused the agency to reach such a conclusion.

The Bureau of Industry and Security (”BIS”) recently announced settlement agreements with Massachusetts-based Select Engineering, Inc., and with David Rainville, its Vice-President of Administration. Select Engineering agreed to settle charges that it exported medical electrode sensor elements and stainless steel snap connectors used in medical devices to Iran without a license. The items were alleged to have been exported to Iran by means of a transshipment through the UAE. As part of its settlement with BIS, Select agreed to pay a civil penalty of $52,800.

David Rainville was accused by BIS of violating 15 C.F.R. § 764.2(g) by making false representations to the BIS agent during the course of BIS’s investigation of the unlicensed exports. Specifically, it was alleged that Rainville told the investigator that he had spoken with an international trade specialist at the Department of Commerce after the unlicensed export when, in fact, he spoke with the specialist before the export. The specialist was alleged to have told Rainville before the export that an OFAC license would be required. Rainville agreed to a civil penalty of $35,200. (Ouch!)

The perplexing thing about this case is trying to understand why Select went ahead and shipped the items without getting license. Licenses are routinely granted here and are easy to obtain from OFAC. The settlement documents indicate that, in 2001, Select had applied for and obtained an OFAC license to ship the same kind of medical equipment to Iran. And, apparently, an employee of the Department of Commerce had specifically advised the company of the license requirement prior to the export at issue. I suppose that the company didn’t want to wait for license, but they paid a heavy price for their haste and risked criminal prosecution as well.

The Bureau of Industry and Security (”BIS”) issued a non-standard 180-day denial order against various entities, including Iran Air and Ankair, in connection with what BIS believes to be the imminent sale of a Boeing 747 from Ankair to Iran Air. The non-standard denial order provides, in part, that no person may take any action to assist Iran Air in the acquisition of the aircraft in question or to service that aircraft. The denial order also prohibits Ankair from engaging in any transaction related to the aircraft.

Here’s a picture of the jet in question, which was once used by Martinair Cargo, parked at Schiphol in May 2008 prior to its delivery to ACT Airlines, a Turkish cargo airline based in Istanbul. How the 747 then wound up in the hands of Ankair, a charter passenger airline, is unclear.

But the involvement of Ankair in this transaction necessitates a completely off-topic digression into the history of Ankair and the story of its misconceived logo. Ankair was once World Focus Airways. An MD-83 which World Focus leased to and operated for AtlasJet crashed in November 2007 on its approach to an airport in Isparta, Turkey, killing all 57 people on board.

Because of the negative publicity generated by the crash, the company sought to re-brand itself as Ankair, short for Anka Air. Anka derives from the Turkish word for phoenix - anka kuşu. As if the image of resurrection from the ashes wasn’t sufficiently unfortunate in light of the crash that led to the re-branding, the airline’s logo (pictured below) has been the object of mirth given the striking similarity between the phoenix that precedes Ankair and the letter “W.”

If this little bit of history piques your interest in Ankair, rest assured that the non-standard denial order wouldn’t prohibit you from flying on one of Ankair’s charter flights.

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.

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.

While everyone in the export community is enjoying a little schadenfreude over the Department of Defense’s inadvertent export of nuclear missile fuses to Taiwan, we shouldn’t lose sight that there are still plenty of civilian exporters that might want to tighten up their own compliance programs, assuming that they even have them. Case in point a California-based microwave electronics company profiled in this article in its local newspaper the El Dorado Hills Telegraph. The company, Genesis Microwave, has every reason to have a good export compliance program not only because it produces dual-use goods subject to the Export Administration Regulations, but also because one of its employees recently pleaded guilty to providing dual-use microwave technology to foreign companies without a license.

Here is what the company’s CEO Santiago Cutia, Jr., had to say about the application of U.S. export laws to his products:

“It’s really hard,” Cutia said. “When I see a request for quotation from a country on the National Security List, I know we would need to acquire an export license. For example, take a company from Iran. First, you need an end-user statement, who’s going to be using the product. Then, you have to submit it to the federal Bureau of Industry and Security.”

This must be done not just company by company that a U.S. firm might want to deal with, but rather contract by contract. The same government-approved Irani company that a U.S. firm sold to six months ago can call, and the entire licensing work must be repeated for each new contract, Cutia said.

I’m sure it will come as something of a surprise to BIS that it is approving exports of dual-use technology to companies in Iran. Note to export control compliance officers: make sure your CEO does more than sign the first page of the compliance program and actually reads it before talking to reporters about export regulations.

The article has one other gem, presumably also conveyed by the CEO to the reporter:

Federal tech-export regulations run to 61 pages, double-column.

In our dreams.