On December 3, Philip Cheng from Cupertino, California, was sentenced to a two-year prison term for his involvement in a scheme to export night vision equipment to China. Cheng, an export broker, had been involved in a transaction in which Night Vision Technology, a U.S. company, agreed to sell Panther thermal imaging cameras to two Chinese companies — North China Research Institute of Electro-Optics and the China National Electronics Import & Export Corporation. As a result, Cheng was indicted in 2004 for illegal exports, illegal defense brokering activities and money laundering. After a hung jury, Cheng pleaded guilty to the brokering charges under 22 U.S.C. § 2778(b)(1)(A)(ii)(III) and 22 C.F.R. § 129.6.

The DOJ press release on the guilty plea concentrates on the Department’s proof that the night vision exports to China were illegal. But, of course, that doesn’t demonstrate why Cheng’s activities were violations of the requirements of Part 129 of the International Traffic in Arms Regulations (”ITAR”) to obtain licenses or provide prior notification for certain brokering activities. The evidence seems clear that Cheng was involved in brokering under Part 129. But not all brokering activities require a license. Nor does brokering of illegal exports violate the brokering rules, even though such activity would support a conviction for conspiracy.

Section 129.7 of the ITAR sets forth those situations in which a broker must obtain a license. First, of course, the brokering must involve significant military equipment (”SME”), and it seems clear that the night vision in question was SME under the ITAR. Additionally, in order to require a license, a brokering transaction must meet one of four criteria: (1) the value of the transaction must exceed $1 million; (2) the same significant military equipment had not been license for export to the armed services of the country involved; (3) the agreement would require the manufacture of SME abroad; or (4) the items involved were being sold to non-governmental entities. Alternatively, prior notification might be required under section 129.8 for transactions involving SME valued at less than $1 million.

It seems likely that at least the notification requirement was breached. Arguably, the license requirement was also breached on the grounds that the Panther thermal imaging camera had never been licensed to the Chinese military. Even so, the DOJ press release on the conviction seems not to have understood that more than an illegal export is required to support a conviction for illegal brokering.

Representative Brad Sherman (D-CA) recently introduced, with one other Democrat and two Republicans, a bill to “improve the performance of the defense trade controls functions of the Department of State.” The proposed legislation is a clear response to mounting exporter frustration over increasing delays by the Directorate of Defense Trade Controls (”DDTC”) in processing licenses and other export-related requests.

The centerpiece of the proposed legislation is the imposition of mandatory average processing times. For transactions not subject to Congressional notification requirements, for example, licenses to NATO members, Australia, Japan, New Zealand, and Israel must be processed, on average, within 20 days; 30 days for exports to major non-NATO allies; and 60 days to everyone else. Commodity jurisdiction requests would be required to be acted upon by DDCTwithin 60 days on average.

DDTC’s average processing times for Technical Assistance Agreements (”TAAs”) would need to be 120 days. It’s not clear why the proposed legislation would permit a significant delay in processing TAAs when license requests are put on such a short string. Further, the time limit doesn’t cover approving amendments to TAAs, even though the most significant delays currently being experienced are with respect to such amendments.

The proposed legislation would also significantly change the current provisions of the International Traffic in Arms Regulations (”ITAR”) relating to exports of spare parts. Under the proposed changes, a DDTC license would not be required for exports of spare and replacement parts to NATO members, Australia, New Zealand and Japan in specified circumstances, including that the parts and components are one-for-one replacements for parts and components for an item previously exported pursuant to a DDTC license. Under section 123.16(b)(2) of the ITAR, components or spare parts can be exported without a license in support of a defense article previously authorized for export as long as the value is under $500, the parts are going to the end user and not a distributor, and no more than 24 shipments are made per year to the end user. If this proposal is adopted, spare parts can be exported even if their value exceeds $500 and more than 24 shipments are made per year.

Almost a year after the last plenary of the Wassenaar Arrangement approved and adopted changes to the Wassenaar List of Dual-Use Goods and Technologies, the Bureau of Industry and Security (”BIS”) yesterday released a final rule implementing those changes on the Commerce Control List (”CCL”). A number of changes have been made, including the addition of some items that were not previously on that list. The list of changes is too long (and in some case too tedious) to fully detail in a blog post, but I did want to discuss briefly the addition of microwave power modules to the CCL which appears to be yet another item which could pose overlapping export control jurisdiction between BIS and the Department of State’s Directorate of Defense Trade Controls (”DDTC”)

Microwave power modules are a recent technology that combines solid-state and vacuum electronics to provide highly efficient and powerful amplifiers with very low signal-to-noise ratio and extremely compact size. MPMs are also known for their rapid turn-on times. These properties have made them attractive for use in military applications such as radar, communications, and unmanned aerial vehicles (”UAVs”). In particular, MPMs have been used in the Predator and Global Hawk UAVs for both satellite and line-of-sight communications to and from the remote pilot. Commercial uses for MPMs include civilian satellite communications, wireless communications, and high power RF sources for laboratory use

The new ECCN for MPMs is 3A001.b.9. The controls on the new ECCN are NS2 and AT controls. The NS2 controls mean that licenses will be required for all countries other than those classified on those in Country Group A:1 on the Country List. License requests to any country other than one in Country Group D:1 will be subject to a general policy of approval unless there is evidence of a possibility of diversion to a country in Country Group D:1. License requests for a country in Country Group D:1 are subject to a case-by-case examination and will be approved if BIS determines that the item will not be used for military purposes. AT controls mean that license requests for exports or re-exports to Cuba, North Korea, Iran, Sudan and Syria are subject to a general policy of denial.

ECCN 3A001.b.9 sets forth certain performance requirements for an MPM to be covered. These include the unit’s turn-on time, the size of the unit as a function of its output power, and a measure relating to the unit’s instantaneous bandwidth.

A large number of MPMs are explicitly identified by their manufacturers as designed for military use, in which case they are covered under Category XI (Military Electronics) of the United States Munitions List (”USML”) or possibly Category XV (Spacecraft Systems and Associated Equipment). Interestingly, the related controls section of ECCN 3A001 only references, and excludes, MPMs covered under Category XV. This leads, of course, to an interesting question of overlapping or conflicting jurisdiction.

Consider, for example, an MPM designed for a military terrestrial communication system which therefore is covered by USML Category XI(a)(4)(iii). If that MPM meets or exceeds the performance characteristics of ECCN 3A001.b.9, then it would also be covered by that ECCN because only items covered by USML Category XV are excluded from the ECCN. Do you file a commodity jurisdiction request for that MPM? Or should you simply file for export licenses from both BIS and DDTC? Given the length of time it takes for a commodity jurisdiction request to be decided, the answer, of course, is to file for licenses from both agencies. To avoid this result, BIS should add to the “related controls” section of ECCN 3A001 an exclusion for MPMs covered by USML Category XI.

I now have a copy of the criminal complaint filed against Qing Li and it answers a number of questions left open by yesterday’s post on that case. The copy I have isn’t suitable for posting, but I should have one by tomorrow that I can post, and I will then update this post with a link to the criminal complaint.

The first open issue was whether the accelerometer was an item on the United States Munitions List (USML). The criminal complaint identifies the part as Endevco Part No. 7270A-200K. That item is not listed on Endevco’s website under its product listing. However, if you enter that part number into the ECCN lookup on the site it returns “ECCN:XII(b), which is clearly a reference to Category XII(d) of the USML which covers “military accelerometers.” It may well be that the product is only sold to the military and that is the reason it is not listed on the website with the other accelerometers available for sale to the general public. The part is, however, listed on a page of the Endevco website showing items that are “guaranteed in-stock”

The second open issue was what did Ms. Li know about the export status of the part. If the allegations of the criminal complaint are true, it seems that she would have known that the item was export controlled. Apparently, Ms. Li first approached Endevco, who then reported her to the authorities, who then promptly set up a sting operation. In her first email to the undercover agent, Ms. Li indicates that she had been referred to the undercover agent’s company by Endevco. Thereafter the undercover agent replied with an email that said this:

I do not think that the US Government will give us a license to export these items to China. If you want to, you can apply for a license but I do not want my companies [sic] name on that application. If you still want to proceed without the license, there are ways of doing it.

If true, that could serve as a basis for a finding of criminal intent

Additionally, the criminal complaint reveals an interesting twist on the case. After receiving several emails from the undercover agent, including the one just quoted, Ms. Li appeared to walk away from the transaction and sent an email saying this:

I don’t need the products. I am just actually doing a favor for a friend in China to find the products. I have forwarded all the information to the friend and it’s up to them for the decision now. I have nothing to do with it. I have told the friend that I won’t be involved anymore due to the risk attached. I think they will contact you directly for any further questions. Sorry for any confusion to you.

But she may not have really walked away from the transaction. After her “good-bye” email, the undercover agent was contacted by an individual using the email chinaman326@hotmail.com seeking to purchase the accelerometers. The federal investigative agents obtained the IP Address history of that account from Microsoft and it allegedly revealed something very interesting. All of the emails were sent from an IP address in Beijing. But prior to those messages the hotmail account was logged into from an IP address associated with Ms. Li’s husband’s Internet account. Then an intercept on Ms. Li’s phone line revealed a telephone call to a number in Beijing, and thereafter a response was sent from the Beijing IP Address. The criminal complaint speculates that Ms. Li would log into the account and if she saw an email from the undercover agent, she would call her associate in China and discuss the message with him. The associate would then send an email to the undercover agent.

The issue at trial will no doubt revolve around the significance of this IP Address and telephone intercept evidence. And the ultimate significance of that evidence seems far from clear.

Qing Li, a Chinese permanent resident in the United States, was recently indicted for attempting to export piezoresistive accelerometers to China without a license from the State Department’s Directorate of Defense Trade Controls (”DDTC”). Ms. Li had sent an email to undercover investigators asking to buy the accelerometers. Although the woman never received the accelerometers, she was arrested as she was boarding a flight to China at JFK Airport.

Julie Myers, Assistant Secretary at the Department of Homeland Security (”DHS”) and head of Immigration and Customs Enforcement (”ICE”) had these comments on the indictment:

These devices are simply not for export to China or anywhere else without explicit permission from the U.S. government. … Accelerometers are a designated defense article frequently used in missiles, ’smart bombs’ and other major weapons systems and in the wrong hands, could prove catastrophic.

This case may not, however, be as cut and dried and Ms. Myer wants us to believe.

Piezoresistive accelerometers have a number of non-military uses, including automobile crash testing, flutter testing, and biomedical motion studies. Nor are all accelerometers designated defense articles. Category XII(d) of the United States Munitions List (”USML”) covers only “military accelerometers.” The Missile Technology Control Regime Annex of the USML only covers accelerometers with specified performance characteristics. Item 9, Category II covers only “continuous output” accelerometers “specified to function at acceleration levels greater than 100 g” or

Accelerometers with a threshold of 0.05 g or less, or a linearity error within 0.25 percent of full scale output, or both, which are designed for use in inertial navigation systems or in guidance systems of all types

The accelerometers in question were Endevco accelerometers. The Endevco website has a listing of available piezoresistive accelerometers and detailed specifications. Not one of the data sheets on the available accelerometers, at least that I could find, indicated that the particular accelerometer required a State Department license for export or that it was a military accelerometer. This accelerometer comes the closest, since the website states that it can be used in crash test dummies and in flight navigation systems. Nor did any of these products, as described in the data sheets, appear to me to meet the other specific technical specifications (e.g., designed to function at over 100g) listed above.

This indictment illustrates the dangers faced by exporters. Even if an exporter checks the USML and compares it to the technical specifications of the product to be exported, that may not reveal that the item is, in fact, export controlled. At a very minimum, companies that sell export-controlled items should clearly mark such items as export-controlled in their sales literature and data sheets. Absent that, there is a non-frivolous argument that the company itself has some liability for illegal exports of items that were not clearly disclosed as such.

I am trying to get the indictment, which may reveal other information that indicates the Ms. Li knew that the particular accelerometers she was seeking were, in fact, subject to export controls and listed on the USML. Once I obtain a copy, we’ll post it here and look at what evidence, if any, supports any claim that she had knowledge of the controlled status of the items she was trying to export.

The fact sheet released by the State Department’s Bureau of Political-Military Affairs on the defense trade treaty recently signed by President Bush and Australia’s Prime Minister Howard provides few details on what the treaty says. Fortunately, a detailed FAQ on the treaty was posted on the Australian Prime Minister’s website. Here are some of the more interesting portions of the FAQ.

First, unlicensed exports under the treaty will still require governmental notification:

Under the Treaty, US exporters will only need to advise the State Department that they have engaged in an eligible defence export activity; they will not need to apply for a licence.

Second, although government-to-government sales under the Foreign Military Sales programs are not addressed by the treaty transfers of technical data relating to the approved FMS equipment will not be required:

The arrangements for approving the export of US defence equipment to Australia on a government-to-government basis under the Foreign Military Sales (FMS) program will not be included under the Treaty. But once the equipment has been received in Australia, retransfers of the FMS-origin technology within the approved community of Australian companies will be permitted without the need for further approvals, significantly enhancing our ability to support this equipment in country and creating improved opportunities for Australian companies.

Third, the treaty permits unlicensed exports to companies in the “approved community.” The FAQ provides more detail on the requirements to be in that community. An Australian company would be excluded if

- There is a serious failure to comply with Australian export control laws and regulations and/or the commitments undertaken in joining the approved community;

- A company fails to meet its security obligations under the Defence Industry Security Program;

- There is a failure to provide written notification of material changes in the facts provided with the company’s application for qualification;

- There is a significant risk that there will be unauthorised diversion of articles or data provided under the treaty;

- There are false statements, misrepresentations or omissions of fact in the application or export related documentation, or significant failures to provide or maintain records of US defence articles and data in the company’s possession.

Fourth, the treaty will include verification procedures:

The Treaty will stipulate the setting up of a compliance and audit regime, the details of which have yet to be mutually determined.

Finally, as with the analogous U.S.-U.K. treaty, the treaty with Australia will exclude “highly sensitive exports” although there is not yet any agreement as to what articles will be deemed to be “highly sensitive.”

An alert reader pointed out this interesting article in Aviation Week which raises the issue, which we last talked about in relation to the Chi Mak prosecution, of deemed exports at scientific conferences. The conference in question was an American Institute of Aeronautics and Astronautics conference in July on propulsion technologies, including scramjet and related technologies.

The Cincinnati meeting differed from a traditional U.S. industry gathering, because nearly a dozen engineers from Iran also submitted papers on Iranian solid and liquid rocket technologies. The Iranian engineers are based at the Sharif University of Technology and the KNT Technical University, both in Tehran. They apparently did not deliver the papers in person. However, as participants, the Iranians have access to all of the highly detailed U.S. aircraft and rocket propulsion presentations made at the conference.

Of course, the non-attendance of the Iranians isn’t surprising, since the probably didn’t apply for visas and even if they had those visas would likely have been denied. And the sanctions against Iran would not forbid access to presentations from the conference under the informational exception.

But, of course, if the information at the conference went beyond public domain information or fundamental research under section 120.11 of the ITAR, then companies and individuals at the conference may have committed export violations, not only because of any access to that information by Iranians nationals but also because of access to that information by any other foreign nationals. And it would appear that all the papers presented at the conference can be purchased from the AIAA website.

So, was any such information available? Consider this:

[O]ne [of] the more interesting historical papers presented at the forum was a detailed description of how the U.S. Air Force and Lockheed combined top-secret ramjet propulsion technologies with segmented solid rocket boosters for the Mach 3 D-21B reconnaissance drones that were launched by modified SR-71s and B-52Hs in the late 1960s. … This was the first time details on the segmented rocket booster portion of the D-21B program have been presented publicly, says Robert Geisler of Geisler Industries, who led the analysis with retired Pratt & Whitney and ATK Tactical Propulsion engineers.

Yikes. If I were the one who presented that paper, I might be a little nervous right now.

Earlier this month, the the House of Commons’ Quadripartite Committee released a report entitled Strategic Export Controls: 2007 Review. In the report, the Committee recommends that the U.K. adopt a broker registration system that is interesting both in itself and in comparison to the current treatment of brokers in the United States under the provisions of Part 129:

We accept that the EU Council Common Position on the control of arms brokering, adopted on 23 June 2003, does not call for the registration of arms brokers. Article 4 suggests that Member States “may” establish a register of arms brokers, and that “registration or authorisation to act as a broker would […] not replace the requirement to obtain the necessary licence or written authorisation for each transaction”. We conclude that the EU Common Position on the control of arms brokering sets the best practice and we recommend that the Government follow best practice to establish a register of arms brokers. We conclude that a register will help to ensure that brokers meet defined standards, requirements and checks as well as deterring those—for example, with a relevant criminal conviction—for applying for registration. We also recommend that any brokering or trafficking in arms by a person in the UK or a British citizen abroad who is not registered be made a criminal offence.

The report doesn’t address, or even seem aware of, the difficulty of defining what activities in connection with the sale of a defense article constitute brokering. But leaving aside that question, it approaches the registration issue in ways that are significantly different from Part 129.

First, under Part 129, the registration process is purely informational. There is no endorsement by the DDTC when it issues a registration number that it has made a determination that the registrant is indeed qualified to act as a broker. The Committee’s proposal, however, clearly contemplates the enforcement of certain standards, including background checks, that more closely resemble a professional licensing system.

Second, the U.K. proposal relating to brokers requires registration only. There is no suggestion that broker participation in particular transactions may require specific licenses as is the case under Part 129 of the ITAR.

Third, one of the most significant controversies relating to Part 129 has been its jurisdictional scope. Part 129 requires registration by brokers “otherwise subject to” U.S. jurisdiction. The question here has been whether “otherwise subject to U.S. jurisdiction” covers brokers who are outside the United States, have no contacts with the United States and are not U.S. citizens but who are engaged in brokering with respect to U.S. origin defense articles. The U.K proposal applies only to British citizens engaging in brokering in the United Kingdom and throughout the world and to citizens of other countries engaging in brokering in the United Kingdom. It does not apply to parties that are not British citizens and are brokering outside the United Kingdom.

Stephen D. Mull, formerly the U.S. Ambassador to Lithuania and now the Acting Assistant Secretary for Political Military Affairs at the State Department, testified last week at the House Foreign Affairs Subcommittee’s hearing on export control. Most of the testimony was a not very convincing effort to defend the long processing times for Technical Assistance Agreements at the State Department’s Directorate of Defense Trade Controls (”DDTC”). Mull repeatedly referred to the “complexities” of TAAs to justify these processing times.

Another part of his testimony, however, suggested a possible change in procedures relating to employment by defense contractors of foreign nationals from NATO, E.U and the “plus three” countries (i.e. Japan, Australia and New Zealand):

We are set to initiate a policy change that will permit employees of foreign companies who are nationals from NATO or EU countries, Japan, Australia and New Zealand to be considered authorized under an approved license or TAA. This will alleviate the need for companies to seek non-disclosure agreements for such nationals and recognizes the low risk to of transferring technologies to nationals of these countries under an approved license or TAA.

A welcome change to be sure, but if there is such a low risk of transferring non-classified defense technologies to such nationals, why not eliminate the requirement for a DSP-5 license application for them as well?

An article (subscription only) in today’s edition of Inside U.S. Trade reports on the hearing held last Friday by the House Foreign Affairs Subcommittee on export controls. We have previously described the prepared testimony of Christopher Padilla, who heads Export Administration at the Bureau of Industry and Security (”BIS”), which he gave during that hearing. During the Subcommittee’s questioning of Padilla, the subject of processing times for license applications at the Department of State’s Directorate of Defense Trade Controls (”DDTC”) came up:

Padilla also criticized the staffing level of DDTC, which processes several times the licenses processed by … [BIS] with roughly half the staff. “In my personal opinion, I don’t think the State Department has sufficient resources to do the job,” Padilla said at the hearing.

Foreign Affairs Subcommittee Chairman Brad Sherman has been considering a user fee for export license applications processed by DDTC in order to try to speed up processing times. According to the Inside U.S. Trade linked above, aides to Sherman are circulating a draft of the proposal and are trying to keep the fees low enough to attract sufficient support and yet still be sufficient to ameliorate the processing delays.

Not everyone, however, is happy with the user fee proposal. The Vice-Chairman of the Subcommittee David Scott, who represents Marietta, Georgia, where Lockheed has operations, had this to say:

Any move toward a user fee to process a license could severely restrict the ability of industries to do business in a free market way

That’s what they might call hogwash in Georgia since the requirement to get an export license has pretty much tossed the ability “to do business in a free market way” out the window. Obviously, Scott just wants the taxpayer to bear the costs of processing the licenses and not the companies benefiting from them.

However, there is a compromise position that might have a better chance of acceptance by everyone involved. DDTC could impose, in the same way that the Citizenship and Immigration Services does, a premium processing fee, so that companies that need export licenses on a faster track would have that option but would have to pay for the privilege.