Yesterday, the United States Court of Appeals for the Seventh Circuit reversed* a federal district court conviction of Doli Syarief Pulungan for attempted unlicensed exports of rifles copes to Indonesia in violation of the Arms Export Control Act. I previously reported on Mr. Pulungan’s case here and here.

The decision can only be characterized as a complete smack-down of the theory, advanced in most recent prosecutions by the DOJ and the Directorate of Defense Trade Controls (”DDTC”), the State Department’s export licensing agency, that decisions that a particular defense item falls within a particularl USML category are unreviewable under section 2778(h) of the Arms Export Control Act. The Seventh Circuit’s decision also provides an interesting elucidation of how the “willfulness” requirement for an AECA prosecution and conviction should be construed.

In the Pulungan case, in order to prove that the Leupold Mark 4 CQ/T rifle scope was listed on the United States Munitions List (”USML”), the prosecution introduced the testimony of Anthony Dearth, a Division Chief at DDTC. According to the appeals court, Mr. Dearth:

testified that the Directorate of Defense Trade Controls has concluded that the Leupold Mark 4 CQ/T is “manufactured to military specifications”—but he would not say what those specifications are or why the Directorate believes that the Mark 4 CQ/T is “manufactured to” them. The decision itself was not produced.

The prosecution then claimed that this determination was not reviewable under section 2778(h) and asked for, and received from the district court, a jury instruction, stating that the rifle scope was, as a matter of law, a USML item and taking that question out of the jury’s hands.

The court disagreed, adopting the interpretation of section 2778(h) that this blog has advanced — namely that the decision of DDTC to put a category of items on the USML is non-reviewable but that the decision as to whether a particular item falls within a USML category is not shielded from judicial review:

Section 2778(h) provides: “The designation by the President (or by an official to whom the President’s functions . . . have been duly delegated), in regulations issued under this section, of items as defense articles or defense services for purposes of this section shall not be subject to judicial review.” (Emphasis added.) So if 22 C.F.R. §121.1 Category 1(f) read “any Leupold Mark 4 CQ/T riflescope”, that designation would be incontestable (even though made by the Directorate rather than the President), and the question for the jury would be whether the item that Pulungan tried to export was indeed a Leupold Mark 4 CQ/T riflescope.

And now for the smack-down and language which can only be characterized as unusually harsh for an appellate opinion:

A designation by an unnamed official, using unspecified criteria, that is put in a desk drawer, taken out only for use at a criminal trial, and immune from any evaluation by the judiciary, is the sort of tactic usually associated with totalitarian régimes. Government must operate through public laws and regulations.

On the willfulness issue, the Seventh Circuit made clear that because DDTC had not made a public determination that the rifle scope was a USML item, it would be difficult to prove that the defendant here knew that it was a USML item and required a license. The court dismissed all of the evidence that the prosecution had proffered as proof of willfulness and criminal intent.

First, the prosecution introduced evidence that Pulungan had printouts of web pages from sellers of the Leupold rifle scope that stated that the rifle scope could not be exported outside the United States. The Court noted that the web pages didn’t say why the items couldn’t be exported. Territorial restrictions imposed on distributors could be one reason. That the pages said that the items couldn’t be exported even with a license further suggests that these restrictions may have been unrelated to U.S. export laws. And the court noted that other web sites advertised these rifle scopes without any mention of export restrictions.

The prosecution also pointed to Pulungan’s efforts to conceal the actual destination of the rifles by claiming that they were going to Saudi Arabia rather than Indonesia and to an email from Pulungan indicating a belief that exports of defense articles to Indonesia violated a U.S. arms embargo. The concealment of the destination and the emails were based on his mistaken belief that Indonesia was subject to a U.S. arms embargo at the time of the proposed exports. The court held that an intent to break a non-existent arms embargo is not sufficient proof of an intent to break the specific licensing requirements of the AECA.

As always, it is always difficult to parse the exact amount of intent and knowledge that is required to prove a criminal export violation. One the one hand, it seems clear that defendants need not know the name of the law or the section numbers of the provisions violated. On the other hand, it’s not enough for the defendant to have a mistaken belief that his conduct violates the law in a manner different from the charges brought by the government. Where to draw the line between those two extremes is a challenge and the Seventh Circuit’s decision doesn’t provide much guidance in this regard.

The court’s ruling, however, on the scope of section 2778(h) is clear and well-reasoned and is likely to have influence on other courts considering the matter. DOJ and DDTC would be well advised to stop trying to hide classification decisions behind a non-existent and improper shield of non-reviewability.

*Free FindLaw subscription required. I’ll update the link when the slip opinion appears on the Seventh Circuit website.

ABOVE: Rep. Ellen O. Tauscher

---

In connection with the Senate confirmation hearing for Ellen Tauscher on Tuesday morning, Senator Lugar, the Chairman of the Foreign Relations Committee, released a pre-hearing questionnaire completed by the proposed nominee. Representative Tauscher has been nominated by President Obama to become Under Secretary of State for Arms Control and International Security. In that position, she will be responsible, among other things, for the Directorate of Defense Trade Controls (”DDTC”) which licenses arms exports from the United States.

Interestingly very few of Senator Lugar’s questions in the prehearing questionnaire were directed at export control. Most revolved around the proposed nuclear cooperation agreement between the United States and the proliferation concerns surrounding North Korea’s nuclear program.

However, the questions on export control revealed that the nominee appears to favor transferring jurisdiction over certain satellites and their components back to the Department of Commerce:

I support export control reform in general and would consider supporting the transfer of commercial communications satellites to the Department of Commerce provided that the transfer is consistent with our foreign policy and national security objectives. I would note that unless Congress determines otherwise, defense services related to integration and launch that might be required for exports of U.S. commercial communications satellites would continue to be licensed by the Department of State, as launch vehicles are controlled by the International Traffic in Arms Regulations.

She acknowledged that this would require Congressional authorization as jurisdiction over satellites was transferred from Commerce to State by legislation enacted by Congress in 1998 by section 1513 of the 1999 Defense Authorization Act.

Although Representative Tauscher is widely thought to be sensitive to the concerns of defense exporters, she dismissed a question relating whether U.S. export controls “unduly hampered” U.S. industry:

In the past, U.S. industry had some valid concerns regarding their competitiveness in a global market. In 2006, the average space-related export authorization took 76 days from submission to the Department of State to issuance of the authorization approval. In 2008, such approvals were averaging 23 days.

It’s not at all clear why she limited her answer to space-related export authorizations, because the question was broader than that industry. And while the export community is glad to see processing times for license applications diminish, licensing delays are not the only concerns that the export community has, particularly given the perception that many items that are licensed are widely available on the world market and shouldn’t be subjected to any delays for licensing, no matter how short.

ABOVE: Tbilsi, Georgia

---

Worldnet Daily, a highly partisan and potentially unreliable source, reports that the Obama administration

placed a hold on all U.S. military exports to Georgia due to a “policy review,” with no indication as to when it will be completed or what defensive military items will be allowed to be exported ….

U.S. sources [said] that such a review has been so “close-hold” that even the Defense Department, which also reviews license applications for national security reasons, was unaware of the action. DOD has been recommending approval of munitions license applications for Georgia

The whiff or partisanship, however, is ripe. The article claims that the Obama administration was “bowing to Russian pressure” and cited an un-named U.S. official saying this:

“The Obama administration is caving to the Russians,” one official said. “It means that we’re letting the Russians control U.S. foreign policy interests.”

Leaving aside that Worldnet Daily, which is still claiming that Obama isn’t a U.S. citizen, may have a partisan axe to grind with the Obama administration, the notion that the U.S is caving to Russia on the Georgia issue isn’t terribly consistent with recent statements from Secretary of State Clinton, who has continued to emphasize in public that the U.S. and Russia don’t see eye-to-eye on Georgia. In her joint statement with Russian Foreign Policy Minister Sergey Lavrov on May 7, Secretary Clinton emphasized that Georgia was an issue on which U.S. and Russian “views may diverge” and on which the countries have a disagreement. More recently, Secretary Clinton said in an interview with Russian television outlet RTR that Georgia remained an “area of disagreement” between the two countries.

So my vote is for rumor. But I’d be interested to hear from any readers who have licenses for exports to Georgia held up.

A helpful reader emailed me earlier today that some guy was so impressed with this blog that he decided to start his own site* (pdf image file of site - safe) by stealing each and every one of my posts — text, images, links and all. If you click on the link to the site, it doesn’t look exactly like it did earlier today. I utilized the geeky magic of the htaccess file to change the images on his site from the images taken from my site to a new image that I felt was a more appropriate illustration to the stolen posts. (You may need to refresh your browser when you return here to clear the alternative image from your browser’s cache.) Of course, I can’t wait to see if this post shows up on the site in question.

While poking around in the links of the site in question to see if I could figure out the identity of Export Law Blog’s new BFF, I discovered a document posted at California’s Centers for International Trade Development that reinforces my long-held belief that these state centers provide atrocious advice on export matters. My favorite bit of “advice” from these “Export FAQs” was this:

1. Do I need any special permits or approvals to start an export business in the U.S.?

The U.S. Government does not require a company to have a license or permit to engage in the import/export business. Contact your appropriate state or local city hall regarding requirements and procedures for obtaining business permits.

I think that deserves the Export “Epic Fail” award of 2009. Exporters of defense articles certainly need to register under Part 122 of the ITAR to export those items. But perhaps the author of the document said what he did because he was totally unfamiliar with the Directorate of Defense Trade Controls (”DDTC”). Although he discusses the Bureau of Industry and Security and the Office of Foreign Assets Control, there is not one reference in these “Export FAQs” to the DDTC. Oops.

UPDATE: The blogger has taken down his site and replaced them with pornography links. I’ve removed all links to the site and will link to a pdf of the file I captured yesterday.

UPDATE: More on this here.

*I’ve changed the link to the offending site to a tinyurl link in order to make sure that the site doesn’t get search engine credit for my having linked to it. Also it appears that our “friend” has two addresses for his site. One is hosted on blogbugs, a Ukrainian porn-centered blog hosting service, and can be found here (link removed). This explains why some readers haven’t been able to get on the site. So he/she has another site which uses the same porno sites nameservers but has a URL that might sneak past porn filters. That’s the URL linked in the post above. You know that the person behind the sites in questions is up to know good when he’s operating namelessly from Ukrainian porn site.

According to an article that appeared yesterday in the Daily Mail, a London daily, test launch procedures for Lockheed Martin’s Terminal High Altitude Area Defense (THAAD ) ground-to-air missile defense system were found on a hard drive purchased on eBay. The disk also contained security policies, blueprints of facilities and social security numbers for individual employees

The disk was purchased by British researchers as part of a research project which scrutinized 300 hard drives purchased from public sources such as computer auctions and eBay. The researchers found that Lockheed Martin may not have been alone in disposing of insufficiently sanitized hard drives. Thirty-four percent of the 300 hard drives examined had identifiable personal or company data. Among the discoveries was a hard-drive with security logs from the German Embassy in Paris.

The article cited a spokesman from Lockheed Martin who stated:

Lockheed Martin is not aware of any compromise of data related to the Terminal High Altitude Area Defense programe. Until Lockheed Martin can evaluate the hard drive in question, it is not possible to comment further on its potential contents or source.

A good point and, it should be remembered, it’s possible that the hard drive was not one disposed of by Lockheed Martin but rather was a hard-drive from an employee’s home computer, although that would raise a different set of issues.

But the point here is not really whether THAAD program details were or were not on hard disk drives, or even what steps the researchers took to recover data, but rather to ask this question: “What does your compliance program say about disposal of hard-drives that may have ITAR-controlled or ECCN-controlled data? And what steps does your company take when disposing of hard-drives? Most companies probably contract those responsibilities to third-party contractors who promise to wipe or destroy the drives, a promise that, as this case may illustrate, may not always be kept.

The National Industrial Security Procedures Operating Manual, DoD 5220.22-M (”NISPOM”), which contains DoD procedures for protection of classified data, requires that disks with such data be “sanitized” prior to disposal, but the NISPOM doesn’t provide a description of satisfactory sanitization techniques. Vendors who sell disk-wiping programs, such as this one, describe the NISPOM procedure as requiring multiple overwrites of all sectors of the drive with random data, but this appears to be a reference to a 1997 version of a separate DoD document entitled “Cleaning and Sanitization Matrix.” The January 2007 edition of that matrix stated: “Overwriting is no longer acceptable for sanitization of magnetic media; only degaussing or physical destruction.” (The matrix appears to have disappeared from the Internet; if anyone has a current link, please let me know.)

There are no standard procedures mandated by DDTC or BIS for pre-disposal sanitization of hard disks containing non-classified, but ITAR-controlled or ECCN-controlled, technical data. However, a good resource for developing these procedures is a document released by the Department of Commerce’s National Institute of Standards and Technology entitled “Guidelines for Media Sanitization.” The document indicates that encryption is not a sufficient sanitization technique and recommends various other methods, including multiple overwrites, degaussing and physical destruction.

This gives companies a variety of options. Companies that would rather be safe than sorry can destroy magnetic media, and companies that would rather be green can degauss such media. And, at a very minimum, there is no excuse for not downloading a disk-wiping program and overwriting magnetic media prior to disposal or sale if the company is not going to destroy or degauss it. My personal favorite method for destroying hard drives is blowing them up with thermite, but that might not be feasible in most corporate settings.

An article (paid subscription required) in this week’s Washington Tariff & Trade Letter reports that at the Defense Trade Advisory Group (”DTAG”) meeting held on April 7, Frank Ruggiero, the Deputy Assistant Secretary of the Directorate of Defense Trade Controls (”DDTC”) announced that the agency had asked the National Security Council to review the treatment of foreign nationals under U.S. export laws. The DDTC request was sent at the end of March, but there is no current timetable for its consideration by the NSC inasmuch as the Obama administration is still putting together and organizing the new NSC.

At issue is the difference between the way the Bureau of Industry and Security (”BIS”) and DDTC treat foreign nationals with respect to approving transfer of controlled technical data to them. For example, DDTC may use the country of birth of a foreign national to deny licenses or agreements involving transfer of technical data to that individual. BIS, on the other hand, considers the individual’s current citizenship in evaluating his or her ability to receive controlled technical data regarding dual use items.

DDTC’s policy of considering country of birth has created some concern within the export community because it has been applied inconsistently and without any clear statement of applicable guidelines. In some formulations, it appears that the DDTC would automatically apply the policy to bar access to technical data by persons born in, but not citizens of, countries subject to arms embargos under section 126.1 of the International Traffic in Arms Regulations. At other times, DDTC has suggested that a case-by-case consideration would be applicable to foreign nationals born in proscribed countries, an approach that makes more sense when you consider situations such as a child of French diplomats born in China.

The policy has also drawn criticism from abroad. Human rights commissions in Canada and Australia have pointed out that the DDTC’s policy is, in effect, an illegal discrimination based on national origin. This has put U.S. contractors doing business in those countries in a difficult position since it is impossible for them to comply both with DDTC requirements and local laws.

Although a review of these issues for the purposes of achieving uniformity is laudable, DDTC’s motive in requesting that review is somewhat hard to determine. On the one hand, perhaps DDTC is looking for administrative cover to back away from its stricter rule and provide some relief from U.S. defense contractors with overseas operations. On the other hand, DDTC might simply be seeking to have its own narrower view imposed on BIS and other export agencies.

This must be the season for press releases from companies reporting that they have “achieved” ITAR “certification.” I reported on one of those just a few days ago and along comes another one, this time from California-based SigmaQuest. And I would have let this newest one slide by without comment if there wasn’t something particularly unusual about it.

The ITAR certification specifically demonstrates that SigmaQuest has met requirements pertaining to organization structure, documentation, corporate policy, training and procedures to permit it to handle, use and transfer information controlled by ITAR and the U.S. Munitions List. Moreover, this demonstrates that SigmaQuest has the knowledge and understanding to fully comply with the Arms Export Control Act (AECA) and International Traffic in Arms Regulations as well as having corporate procedures and controls in place to ensure compliance.

Regular readers will by now know that not a single word of that paragraph is even remotely true (and that includes “and” and “the”). But something else might sound, oh, strangely familiar about this paragraph. You might even say it’s “dejà vu all over again,” particularly if you remember a press release from another company I blogged about back in 2007

Meeting ITAR Certification certifies that CIMTEK has met requirements pertaining to organization structure, documentation, corporate policy, training and procedures to permit it to handle, use and transfer information controlled by ITAR and the U.S. Munitions list.

Companies receiving this certification demonstrate that they have knowledge and understanding to fully comply with the Arms Export Control Act (AECA) and International Traffic in Arms Regulations as well as having corporate procedures and controls in place to ensure compliance.

Now those similarities can’t be entirely coincidental, can they? I mean the paragraphs are almost word-for-word identical. It just goes to show that one of the dangers of copying some other company’s press release is that what you copy just might not be accurate.

Maybe SigmaQuest even copied it from my earlier blog entry quoting the press release. In that case, I am going to perform the public service of providing, absolutely free of charge and for unrestricted use, language that can be used in all future press releases by companies that have just received their ITAR Part 122 registration numbers:

Company A has just been notified by the Directorate of Defense Trade Controls (”DDTC”) that it is now registered with that agency as required by Part 122 of the International Traffic in Arms Regulations (”ITAR”) for all companies in the United States that manufacture or export defense articles or services. Registration also means that Company A can now legally export defense articles listed on the United States Munitions List. Although Company A prides itself on its rigorous compliance program and knowledge of the ITAR, registration is available to any company that fills out a form and pays a fee and should not be taken as an independent certification of the Company by the DDTC or any other government agency.

I’m not holding my breath that we will see this new version of the registration press release any time soon.

The Directorate of Defense Trade Controls issued a Federal Register notice, printed today, that lifted the 1997 statutory debarment of AdComm, Inc. AdComm became debarred after it purchased the assets of a debarred party, Electrodyne, which had been debarred based on its conviction for violations of the Arms Export Control Act. Debarred parties cannot be involved in any transactions involving the export of defense articles or defense services.

As some may remember, Electrodyne had several contracts with NASA and the U.S. Air Force to build components to be used in communications, radar and weapons systems. Electrodyne then contracted with companies in Russia and Ukraine to build the components, thus disclosing, without a license and in contravention of the Arms Export Control Act, technical data controlled by the International Traffic in Arms Regulations (”ITAR”).

In 1996, Electrodyne pleaded guilty to these charges, but that was hardly the end of the matter. The docket sheet shows two appeals by Electrodyne of the sentences imposed by the District Court and it was not until the third sentencing, in 2001, that the matter became final. In the first appeal, the Third Circuit vacated the sentence by the district court and remanded for further proceedings. And although the second appeal only concerned the sentence imposed by the district court in its second go-round on sentencing, the Third Circuit reversed the judgment of the district court. This reversal, it might be argued, effectively eliminated the basis for the statutory debarment of Electrodyne, although it might also be argued that this was sloppy language and that the court didn’t intend to reverse the conviction but just to vacate the second sentence.

In all events, a statutory debarment remains in place, even after a reversal of the conviction, unless the debarred party petitions DDTC to lift the debarment on that basis, something AdComm, by that time standing in Electrodyne’s shoes, didn’t appear to have done. More interestingly, the debarment order contained the standard language that the period of debarment was normally three years after conviction and that after that period the debarred party could petition DDTC to lift the debarment. It’s curious, then, that this debarment was in place for almost twelve years. Certainly Adcomm, as merely a third-party successor to Electrodyne that hadn’t been involved in the wrongdoing at issue, would have had a good basis to go into DDTC after three years, i.e. in 2000, to lift the debarment.

ABOVE:French Rafale M Fighter Jet

---

An article that appeared today on the website of the German-based Defence Professionals group reported on an address given last week by French Defense Minister Hervé Morin. Mr. Morin optimistically predicted that France would surpass Britain this year as Europe’s largest weapons exporter and added that French weapons exports in 2010 could reach $9 billion.

This part of Morin’s address, as reported, particularly caught my attention:

In his statement, Morin also pointed out that defence acquisitions are a political issue that have to be supported by a country’s politicians. “A country’s purchasing decisions depend on the quality of the product and the product’s price, but it is also a political act. There has to be both: industrial and political. If one is missing, our position is weakened,” he said.

In this context, the French government has undertaken a reform of export procedures with the result being that export license applications now can be processed in less than 40 days, compared previously with 80 days and created a high-level arms sale task force with the aim to help the defence industry to better trade their products.

(Emphasis added.)

While skeptics and Francophobes might suspect that this reduction in license processing times might simply reflect a decision to process licenses less carefully, I think that would be unfair. But whatever your position on how the reduction was accomplished, everyone can certainly agree that more streamlined procedures in processing U.S. export licenses for defense articles could be a significant benefit for the U.S. defense industry.

Luxembourg-based Qioptiq S.A.R.L. agreed in mid-December to a $25 million fine in connection with its unlicensed exports of military-grade night vision items and technology without required licenses from the Directorate of Defense Trade Controls. Most of the unlicensed exports were undertaken by a company acquired by Qioptiq and occurred prior to the acquisition. Of the $25 million, $10 million was suspended — $5 million in consideration of expenses already incurred by Qioptiq in its investigation of the illegal exports and $5 million to be used to defray the costs of the compliance initiatives mandated by the consent agreement.

A review of the charging letter that DDTC proposed as a basis for the consent agreement reveals two things of particular interest. First, successor liability at DDTC is alive, well, and thriving. Second, emails sent by Qioptiq’s predecessor in interest provide an object lesson about what companies shouldn’t say about export compliance. Clearly DDTC’s desire to impose a significant penalty seems motivated by these emails.

The DDTC has long said that it considers an acquiring company to be strictly liable for export violations committed by the acquired company. Many people, myself included, have questioned the wisdom of such a policy inasmuch as it could deter companies with a demonstrated record in export compliance from acquiring, and cleaning up, bad export citizens. The DDTC’s charging letter, however, casts most of these issues aside, asserting that these might be mitigating factors, but not enough to “mitigate away” the violations:

Given the significant national security interests involved as well as the systemic and longstanding nature of the violations, the Department has decided to charge the Respondent with one hundred sixty-three (163) violations at this time. Had the Department not taken into consideration as significant mitigating factors the Respondent’s Voluntary Disclosures, the fact that the violations were committed prior to the Qioptiq Group acquisition of the violating business units and the remedial measures implemented, the Department could have charged the Respondent with additional violations, and could have pursued more severe penalties.

DDTC’s hard line approach here seems to have been motivated by its discovery of emails sent by the acquired company that one might charitably call extreme indifference to export compliance. DDTC singled out the following instances of the acquired company’s cavalier attitudes towards compliance

Of course, these are merely allegations by DDTC. But, if true, they would certainly raise serious questions about a company’s commitment to export compliance.