A spokesman for the Treasury Department’s Office of Foreign Assets Control (”OFAC”) told Export Law Blog this morning that discussions between OFAC and the North Pole over Santa Claus’s Christmas Eve itinerary had broken down and were not expected to be resumed before Santa’s scheduled departure on December 24 at 10 pm EST.

The dispute arose from a dilemma that the U.S. sanctions against Cuba posed for Santa’s planned delivery of toys to children in Cuba. If Santa delivers toys for U.S. children first, there will be toys destined for Cuba in the sleigh in violation of 31 C.F.R. § 515.207(b). That rule prohibits Santa’s sleigh from entering the United States with “goods in which Cuba or a Cuban national has an interest.” On the other hand, if Santa delivers the toys to Cuban children first, then 31 C.F.R. § 515.207(a) prohibits the sleigh from entering the United States and “unloading freight for a period of 180 days from the date the vessel departed from a port or place in Cuba.”

A press release from the North Pole announced that the OFAC rules left Santa no choice but to bypass the children of the United States this Christmas. A spokesman from OFAC warned that if Santa attempted to overfly the United States, his sleigh would be forced to land and his cargo seized. He continued:

We know that the outcome is harsh, but we cannot allow Fidel Castro’s regime to continue to be propped up by Santa’s annual delivery of valuable Christmas toys to Cuban children.

Congressional leaders had left for the holiday recess and could not be contacted for comment.

Looking at the title of today’s notice from the State Department’s Directorate of Defense Trade Controls (”DDTC”), which reads “Policy of Denial Regarding ITAR Regulated Activities of EP Investments, LLC (a/k/a Blackwater),” one might think it’s “Bye, Bye, Blackwater.” But the actual content of the notice isn’t quite so bad since it provides significant exceptions to this policy of denial, exceptions which seem designed to allow Blackwater’s contracts with the United States Government to proceed unimpeded as long as Blackwater files some additional paperwork for its new license applications.

In fact, the policy of denial doesn’t apply to applications that are in “direct support to the U.S. Government” and where certain conditions are met. Those conditions are the following:

Applications that are not in direct support of the U.S. government are subject to a policy of denial unless the license request “is based on overriding U.S. national security, foreign policy or law enforcement grounds or present other compelling reasons.” In cases found to meet that criteria, the ECC must submit the same certification letters, including the 30- and 60-day followups, as described above.

Finally, Blackwater isn’t allowed to use any ITAR exemptions from licensing, such as the spare parts exemption in section 123.16(b)(2). Instead, license applications must be filed for each exemption and those applications will be considered on a case-by-case basis.

Outside of requiring a bundle of additional paperwork for each Blackwater license, the biggest effect of the new policy is probably that Blackwater won’t be able to follow through on its proposed pirate-chasing gig.

According to an exclusive story in today’s Washington Times, the Validated End User Program implemented by the Department of Commerce’s Bureau of Industry and Security (”BIS”) may be terminated before the end of the Bush administration on January 20. Under that program, five companies in China were permitted to obtain from U.S exporters certain dual use items without export licenses that otherwise would have been required. As reported earlier on this blog, the program had come under criticism because two of the five validated end users had links to the Chinese military. The program had also come under fire because the Chinese government was not allowing U.S. investigators to have access to the facilities of the approved companies to verify that the exported items were not being diverted to the Chinese military.

An unidentified spokesman for the Commerce Department, who spoke to the Washington Times on condition of anonymity, said that the program could only be saved if the Chinese agreed to on-site inspections:

“This program will either be fixed or ended before Jan. 20,” the official said, adding that a decision will be made “in days, not weeks.”

China could avoid a suspension of the program by agreeing to U.S. demands for on-site inspections. The official said, however, that it does not appear likely that Beijing will make concessions before the Bush administration leaves office.

You have to wonder why BIS ever thought it would be able to engage in official inspections in foreign countries. Not surprisingly, most foreign countries are just a little touchy about the sovereignty issues raised by allowing foreign law enforcement officials to inspect facilities located on the foreign countries’ soil. Indeed, the Chinese had a history of interfering with efforts by the U.S., even before the Validated End User program was adopted, to determine whether items shipped under export licenses were used in the manner described in the export licenses.

UPDATE: BIS has issued a press release disputing the Washington Times article. The release states, among other things, that BIS has been able to conduct site-checks in China and is simply trying to formalize procedures for future site checks. It does concede that suspension of the program is a possibility if those procedures are not formalized.

[h/t to commenter jd]

Three naturalized U.S. citizens, Dan Tran Dang, Liem Duc Huynh, and George Ngoc Bui were recently indicted and charged with conspiracy to export 55 third generation military night vision goggles to Vietnam without a license. According to the indictment, the men purchased ITT AN/PVS-7 night vision goggles from Win-Tron Electronics, an electronics wholesaler principally specializing in marine electronics. The head straps and helmet mounts were removed and shipped to defendant Bui in Vietnam. The remaining parts of the night vision were then carried by Huynh and Dang in their luggage on trips to Vietnam.

The three men were caught in large measure because of Win-Tron Electronics and what appears to have been its careful attention to export compliance issues. According to a story in the Tulsa World, Win-Tron tipped off the authorities when it became suspicious of the purchases by the three men. The defendants claimed to have a business called Protective Security, and yet the address for Protective Security turned out to be a private residence. This apparently led Win-Tron to suspect that Protective Security had no use for a large volume of night vision goggles and suggested that the goggles might be instead destined for export, likely to the defendants’ country of origin.

Knowing your customer means knowing where your customer lives; and if a business has a residential address, this certainly should be considered a red flag.

Edward Hasbrouck, the author of the informative travel manual The Practical Nomad and of an entertaining and informative travel blog of the same name, left a comment to one of our earlier posts on the Syria sanctions:

Earlier this year, [my bank] froze my account (refused to honor checks, and refused to accept deposits, both paper and electronic) after I tried to check my balance on their Web site from a Syrian IP address. …

Only after I had left Syria (which [my bank] “verified’ by calling me at a Turkish land-line telephone number, which of course could have been forwarded to anywhere) was I able to get the account unfrozen. …

I had notified [my bank] in advance of my intent to travel to Syria. I had read their customer disclosures, which make no mention of any sanctions by [the bank] except those *required* by OFAC regulations, which this clearly wasn’t. I had gone to considerable lengths to avoid having any financial dealings with the government of Syria or government-owned entities (or any other “specially designated nationals” in Syria). And I had been able to withdraw funds from an ATM in Syria (of a private, non-Syrian — I was later told they route transactions via a private line to Lebanon, although my … Bank statement correctly showed the address of the ATM in Syria) without incident.

The prior post in question dealt with Google blocking downloads to Syrian IP addresses and wondered how widespread that practice is. Apparently, some banks are at least trapping IP addresses for queries to their websites, but apparently these banks don’t know what to do once they capture an IP address from a sanctioned country such as Syria.

The current Syria sanctions prohibit export of U.S. products to Syria. Food, medicine and informational products are exempted from the export ban. It’s not clear whether the bank’s response to a web-based balance inquiry was an export of a product to Syria and, even if it were, it arguably fell under the informational exception. Even if the informational exemption were not applicable, the bank’s obligation was simply not to return an answer to the Syrian IP address, not to block the account.

The remaining relevant segment of the Syria sanctions blocks the assets of approximately 20 individuals that have been determined to be involved in (a) the proliferation of weapons of mass destruction; (b) destabilizing activities in Iraq and Lebanon; (c) associating with al Qaeda, the Taliban or Osama bin Laden; or (d) benefiting from public corruption. These sanctions would permit blocking a bank account. However, Hasbrouck’s bank certainly couldn’t conclude from the IP address alone of his web-based balance inquiry that he was one of those 20 individuals (he, of course, is not) or that he was acting on behalf of such individuals. Moreover, because the bank itself “unfroze” the account, it was never officially blocked in any event, because only OFAC can unblock such an account once the bank has blocked it.

It seems what likely happened here is that the bank’s compliance program, rather than focusing on the precise scope of U.S. sanctions against Syria, simply blocked all transactions with Syria whether required or not. There certainly are administrative advantages to such a broad brush approach to compliance; however, a bank using such an approach might wind up violating its own account agreement with the customer. In such a case, let’s say that the blocked accounts leave the customer stranded in Syria, or thrown in jail when he can’t pay his hotel bill, the liability to the customer could be significant.

It’s easy to forget that there are things other than dual-use items, defense articles, and nuclear materials that are export-controlled. The recent conviction of Florida resident Max Moghaddam for the unlicensed export of paddlefish roe should serve as a reminder that plants and animals listed on Appendix II to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (”CITES”) also require export licenses from the U.S. Fish and Wildlife Service. Paddlefish, a species found in the Mississippi River and related to sturgeon, produces a roe that is often sold as American caviar at around $17 per ounce, about one-tenth the cost of Iranian beluga.

One count of the three-count indictment in the Moghaddam case charges the defendant with unlicensed export of the paddlefish roe to Belgium in violation of the Lacey Act, 16 U.S.C. §§ 3371 et seq.. Section 3372(a)(1) of the Act prohibits the transport of any fish or wildlife in violation of an U.S. treaty. Article IV of CITES requires member states to prohibit the unlicensed export of items listed on Appendix II of the treaty. And paddlefish are listed on Appendix II of CITES.

A second count charged Moghaddam with falsely labeling the paddlefish roe on export documents in violation of section 3372(d). According to the indictment, Moghaddam labeled the paddlefish row as bowfiin roe, amia calva (the scientific name for bowfin) and mia calva (a misspelling of amia calva). The false labeling, in addition to constituting a separate count, also provides evidence that the defendant was perfectly aware that his export required a license.

A review of the docket in the case provides no clear view of Moghaddam’s defenses against the charges. Most seem to have been procedural and directed at a third count of the indictment which charged Moghaddam with conspiracy to violate the export provisions of the Lacey Act. A motion to dismiss filed by the defense alleged that the indictment failed to provide sufficient details regarding the co-conspirators and the defendant’s alleged overt acts with these co-conspirators. I couldn’t determine what defenses Moghaddam offered with respect to the attempted export and false labelling charges. Perhaps he argued that the exports really were bowfin roe. Whatever he argued, the jury didn’t buy it.

Last week, the Bureau of Industry and Security (”BIS”) used section 744.11 of the Export Administration Regulations for a second time to designate sixteen more entities to the Entity List for activities by these entities that could be contrary to the national security or foreign policy interests of the United States. The first round of designations under the section occurred on September 22, 2008. The effect of the designations in this instance is to require a license for all exports to the designated entities and to adopt a policy of denial for all such license requests.

Nine of the newly-designated entities are located in Iran. Since exports to these entities in Iran are already prohibited these new designations are of limited utility except, I suppose, inasmuch as the designation would prohibit exports made to these entities when they are located outside Iran. Additionally, the designation order states that no license exceptions are available for exports to the newly-designated entities, which means that gifts and humanitarian donations to these entities that might otherwise be eligible for license exceptions are now not eligible for export under these exceptions.

The remaining designations are entities in Singapore and the United Kingdom, including Brian Douglas Woodford, a U.K citizen and his Singapore-based company, Monarch Aviation. Woodford’s wife Laura Wang-Woodford was arraigned in February in connection with aircraft parts allegedly exported by Monarch Aviation and the Woodfords to Iran. Brian Woodford is still at large although he does have a LinkedIn Profile up which indicates that he’s interested in “getting back in touch.” I suspect that the DOJ is also interested in getting in touch with him. In the meantime, he’s not getting any Christmas presents sent to him from the United States.

The final designation is as brief as it is vague and reads — in its entirety — as follows: “MCES, London, United Kingdom.” A Google search reveals three companies named MCES in London here, here, and here. So which one is it? Come on, guys, at least give us a hint.

ABOVE:A380 Cockpit

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The Bureau of Industry and Security (”BIS”) has asked for comment on a proposal to eliminate the de minimis rule, in certain instances, with respect to products classified under Category 7A of the Commerce Control List and controlled for missile technology (”MT”) reasons. The de minimis rule permits re-exports of foreign manufactured goods containing U.S. origin components when those components constitute only de minimis content, as defined by the rule, of the final product.

The concern which has prompted the proposed limitation is that the avionics and navigational items controlled by Category 7A for MT reasons might be diverted by foreign governments and be used for missile proliferation. The proposed rule excepts U.S.-origin components incorporated into “standard equipment in FAA (or national equivalent) certified civilian transport aircraft.” The reason for this exception is that in that case there is less likelihood of diversion because, in large part, it seems unlikely that foreign companies or governments would buy civilian aircraft simply to strip out the navigation and avionics in order to incorporate such items into a national missile program. In the case of aircraft components, however, the likelihood of diversion into missile programs is thought to be higher.

The proposed exception is not clearly explained by BIS, but I think it would work like this. If a U.S.-origin Category 7A item controlled for MT reasons is exported to be incorporated in an aircraft component, that component can’t then be re-exported to a third country even if it is to incorporated as standard equipment in an FAA-certified aircraft. However, if the U.S.-origin component is incorporated into the aircraft component and that component is incorporated as standard equipment in an FAA-certified civilian aircraft in the same country, then the de minimis rule would apply to exports of the aircraft.

Comments are requested on what impact this would have on, among other things, the decision by foreign manufacturers to use U.S. components and estimates of U.S. jobs that might be affected by the rule. The deadline for comments, which can be filed by email at publiccomments@bis.doc.gov, is January 20, 2009.

Last week we reported on the settlement agreement that Cabela’s, the outdoor supply store, entered into the the Bureau of Industry and Security (”BIS”) to settle allegations that the company had exported 76 rifle scopes without the required BIS licenses. This was the company’s second settlement of illegal export charges, the first covering allegations covering unlicensed exports of 685 rifle scopes between 1999 and 2000. The company agreed to a fine of $680,000 to settle the most recent charges.

The settlement documents are now available on the BIS website and provide details not available in the press release that served as the basis for our initial report on the settlement. Not surprisingly given Cabela’s repeat offender status, the settlement also includes a requirement that Cabela’s conduct a compliance audit substantially in accord with BIS’s Export Management System audit module.

The audit requirement imposed in the settlement agreement is purely an internal audit. Even so, the audit module requires extensive review of company compliance procedures, including compliance with many outmoded requirements. This is because the audit module was created in 2000 and hasn’t been revised since then. Extensive coverage in the audit module is devoted to inquiring whether the company’s export procedures provide instructions on filling out and retaining copies of the Shipper’s Export Declaration (”SED”), even though filing an SED is now a violation of applicable regulations. The module also seems to hark back to the pre-Internet dark ages by requiring the company to keep hard copies of the Export Administration Regulations and the Denied Party List.

It seems to me that if BIS wants to tout the EMS audit module as the touchstone of export compliance, it might want to update it a little more often than every decade.

ABOVE: Marina Hemingway, Cuba

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In 2003 Michele Geslin and Peter Goldsmith, residents of the Conch Republic, otherwise known as Key West, organized the Conch Republic Regatta, a sailboat race between Key West and the Marina Hemingway outside Havana, Cuba. The organizers traveled on two boats owned by participants. The day after their return they were dragged from their bedrooms in their pajamas and indicted on charges that they violated the Trading with the Enemy Act and, more specifically, 31 C.F.R. 515.572(a)(1), which prohibits, among other things, the provision of unlicensed travel services to Cuba.

Judge James Lawrence King was not amused and dismissed the indictment, noting that the provisions of section 515.572(a)(1) were not violated by independent coordinated travel to Cuba where the defendants didn’t provide the travel or provide lodging in Cuba. In the case of the regatta, the sailors traveled to Cuba on their own boats, not on boats provided or arranged by the defendants. The court further noted that none of the regatta fees collected by the defendants were spent in Cuba and that the indictment did not allege any expenditures in Cuba or other financial benefit to Cuba.

Four years later, in December 2007, the Bureau of Industry and Security (”BIS”) decided not to let bygones be bygones and issued a charging letter accusing Geslin and Goldsmith of aiding and abetting the unlicensed temporary export of two vessels in the regatta to Cuba. Geslin and Goldsmith, thinking no doubt that the dismissal of the indictment settled the matter, sent letters to BIS contesting the charges but participated no further in the proceeding.

In particular, the two failed two respond to requests for admissions filed by BIS, so the Administrative Law Judge (”ALJ”) assigned to BIS’s case deemed that all the requested admissions had been admitted and entered summary judgment against Geslin and Goldsmith. On November 4, BIS entered an order, just published in its website, imposing and $11,000 fine against the two as well as a conditional denial of export privileges that would not go into effect if Geslin and Goldsmith paid the fines in a timely fashion.

It does not appear that any of the boat owners was fined or prosecuted for the export of the boats to Cuba. Rather only the regatta organizers were fined by BIS for “aiding and abetting” the export. The charging letter and the ALJ decision make much of the fact that the duo rode the boats to Cuba but there is no evidence that they raised a spinnaker, took control of the rudder, or otherwise did anything but sit on their keisters during the brief voyage between Key West and Havana. The regatta fees that they collected were all spent in Key West and so also don’t serve as much of a basis for an “aiding and abetting” charge. At most, they publicized and coordinated the regatta, activities that Judge King said didn’t constitute provision of travel services. Perhaps that is alone enough to be seen as aiding and abetting, but you have to wonder whether BIS doesn’t have more compelling things to do than to carry on a grudge match against two regatta organizers, particularly where the boat owners were apparently allowed to sail off into the sunset.