Mr. Sasan Azodi, mentioned in yesterday’s post, called me just a few minutes ago to give me his side of the dispute between him and Dräger Safety as to who was at fault for the export of the VisioWave security monitoring software to Iran. As you may recall, I questioned why he would be buying the expensive software for Dräger in the first place.

According to Mr. Azodi, the project managers at Dräger for the Irasco security system claimed that they had been blind-sided by the new requirement that the security system would be tested at Dräger’s facilities in Germany. They alleged that they would get in trouble with the company if they now had to buy a second copy of the software for testing in Germany after already having told Irasco it would have to procure the software on its own for the final system. The factory acceptance testing would now require two copies of the software and, according to Azodi, the managers said that they hadn’t factored that into their planning for the project.

I’m guessing that Mr. Azodi’s commission on successful completion of the Irasco project must have been significant if he was willing to dig so deeply into his own pocket to make sure that the project was a success. Yet even if people at Dräger swore a hundred times on their geliebten Mütter’s honor that they would never, ever export the software from Germany to Iran, surely one might have been a bit credulous in the circumstances involved that they could resist the temptation to ship the software to Tehran and be done with it. Even so, Mr. Azodi says he has that promise in writing and that should at least count for something.

When companies wind up with products in Iran, they usually claim that they were hoodwinked by their overseas sales reps or agents. In a case involving the German security firm Dräger Safety, the situation appears reversed. According to this article in Deutsche Welle, Dräger’s agent is claiming that he was hoodwinked by the company.

Dräger had been contracted by Italian-based Irasco to build and deliver a security system for an Iranian pipeline. The security system used GE Security’s VisioWave monitoring software. Initially Dräger, apparently concerned the the U.S embargo on exports to Iran, told Irasco that it would have to obtain and install the software on its own and install the software itself in Iran. Irasco made some unsuccessful efforts to obtain the software and then, allegedly, demanded a full test of the system at Dräger’s facility in Lübeck, Germany.

Dräger then tasked Sasan Azodi, its intermediary with Irasco, to obtain the software and ship it to Lübeck. Oddly enough, what happens in Lübeck, doesn’t stay in Lübeck and, for reasons that Dräger can’t fully explain, the software miraculously wound up in Irasco’s hands in Iran. Sometime thereafter, Dräger filed a voluntary disclosure with U.S. government authorities revealing the problem.

Now let the finger-pointing begin. Azodi has this to say:

Azodi acknowledges that he arranged for the delivery of the software, via the US, to Luebeck, but claims he only sent it for test purposes. Upon learning that the software had been delivered to Iran, Azodi said, “that’s when I realized I had probably been conned.”

Dräger, for its part, apparently is trying to blame everything on Azodi and has refused to pay Azodi for the software, which costs approximately $125,000. Azodi has filed lawsuits, in both the United States and Europe, seeking the money that he claims is owed for the software and seeking recovery of the damages caused to his business by the allegation that he violated the Iranian embargo.

Of course, one has to wonder why Azodi didn’t see red flags all over the field when Dräger asked Azodi to purchase and export the expensive GE software to Germany. Why couldn’t Dräger do that itself? Why would it ask its Iranian intermediary to ship the software from the U.S. to Germany?

It should be interesting to see how this plays out. Pass the popcorn, as they say.

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.

The Wall Street Journal’s Law Blog had an interesting post last Friday regarding Iranian santurs (a dulcimer-like instrument) that a UCLA professor of ethnomusicology had been importing from Tehran. These instruments had been sailing through customs until last August when somebody in customs woke up and seized the instruments. A curt notice from DHL informed the professor of the seizure and the possibility that the santurs might be destroyed.

So Professor Sadeghi hired a lawyer to free the santurs. The lawyer told the WSJ blog that he “scoured” the Iranian Transactions Regulations for an exception for “dulcimers” — to no avail, of course. I suspect that the lawyer is speaking figuratively here because anyone familiar with the regulations would have known immediately that there were no applicable exceptions that would cover Professor Sadeghi’s santurs.

So, the lawyer did his best to make something up:

In his package, he acknowledged that the dulcimers didn’t have the appropriate licensing from the Office of Foreign Assets Control (OFAC) but argued that the instruments met the requirements for the regulatory exceptions made for informational materials and gifts.

Er, no. The gift exception provided in section 560.506 of the Iranian Transaction Regulations is limited to gifts valued at less than $100 dollars, and Persian santurs seem to exceed this dollar limit by a considerable amount. And I’m not quite sure how one gives a gift to oneself. Nor is the informational exception applicable. A musical instrument does not fit within the category of items described as informational materials in section 560.315. Frankly, he could just as well have argued that the santur is a carpet covered by section 560.534.

Even the lawyer himself appeared to be a little embarrassed by these arguments and offered an alternative justification:

Furthermore, [he] argued, even if they didn’t meet those exceptions, this was an ideal case for OFAC to exercise its discretion.

Okay, now were talking. And, miraculously enough, he received a letter from OFAC, stating:

Mr. Manoochehr Sadeghi is hereby authorized to engage in all transactions necessary to receive delivery from Iran of four miniature hammered dulcimers (santurs) seized by U.S. Customs and Border Protection on or about August 30, 2007.

More interesting, it appears that the lawyer, rather than filing a voluntary disclosure, filed something akin to a retroactive license request. If he did file a voluntary disclosure, the WSJ blog doesn’t relate whether OFAC imposed a fine or mitigated the fine completely.

In the end, it appears that two factors were at play in OFAC’s decision. In the past, the Bureau of Industry and Security (”BIS”) has used its discretion to permit exports of musical instruments to Cuba, and so a direct appeal to OFAC’s discretion in this case, without relying on inapplicable regulatory exceptions, was probably the best approach. Additionally, it seems possible that OFAC may have been influenced by Professor Sadeghi’s fame: he performed at the Kennedy Center and received a National Heritage Award from the National Endowment for the Arts.

ABOVE: Iran’s 9th Olefin Petrochemical
Complex

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Earlier this month, French corporation Cryostar SA entered a guilty plea to various export violations arising from its role in a scheme to export cryogenic pumps for installation in the 9th Olefin Petroleum Complex in Iran.

In 2001 a French company, identified only as “TN,” approached Ebara International Corp., Inc., a manufacturer and distributor of cryogenic pumps, i.e., pumps designed to work with liquids at very low temperatures, and sought to purchase various cryogenic pumps worth almost $750,000. The two companies enlisted Cryostar to act as an intermediary in the plan. The pumps were sold to Cryostar in France, which then resold the pumps to “TN,” which, in turn, exported the pumps to Iran. Cryostar created false invoices indicating that it was the end user of the pump.

Cryostar has no offices in the United States, and it does not appear that any company employees entered the United States in connection with this transaction. Rather the jurisdictional bases for the prosecution are (1) the questionable theory that the items involved were U.S.-origin items and (2) the much sounder theory that Cryostar participated in misrepresentations to U.S. authorities.

Of course, the real question is what motivated Cryostar to get involved in this deal in the first place. Why weren’t the items exported directly to “TN,” which could have held itself out as the end user of the items in France? Well the answer to that question becomes clearer once a reasonable surmise is made as to the identity of “TN.”

The DOJ press release on the guilty plea identifies “TN” as “a a French company with a U.S. subsidiary.” An article on the Chemicals Technology website, notes that French company “Technip and its Iranian partner Nargan were awarded the engineering, procurement and construction contract for the” petrochemical facility. And Technip has a U.S. subsidiary.

Now, this is not proof that Technip is the same company as “TN,” but it is certainly a reasonable surmise. Additionally, since Technip’s participation in the Iranian project was well-known, this explains why it would have sought an intermediary to make the false claim that the pumps were being installed in France. Such a claim from Technip would have been less believable.

Under the written plea agreement, Cryostar has agreed to a fine of $500,000 and two years corporate probation. I imagine that the execs at Cryostar are now ruing the day that agreed to a corporate favor for another French company. They may have been hoping for a few dinners at Pierre Gagnaire paid for by Technip, but wound up getting more than they bargained for.

Yesterday the Senate Finance Committee held a hearing on the Iran Counter-Proliferation Act of 2007, which was introduced on March 22 by Senator Gordon Smith and has 70 sponsors equally divided between Democrats and Republicans.

Among the proposed sanctions is a provision that would make U.S. parent companies liable for activities of their foreign subsidiaries that would violate the sanctions against Iran if such activities had been undertaken by the parent company. This reverses current law which allows foreign subsidiaries to trade with Iran as long as no U.S. persons are directly involved in the trading activities and as long as the subsidiary has legitimate additional business activities other than trading with Iran. (The article linked above from Congressional Quarterly by Matt Karode misreads the bill and claims that it would penalize U.S. subsidiaries of foreign parent companies for the parent company’s trading with Iran).

The legislation would ban all exports to Iran other than “food and medicine grown, produced or manufactured in the United States.” The impact of this proposed provision on the Trade Sanctions Reform Act of 2000, which permits exports of medical devices in addition to food and medicine, and the Berman Amendment, which permits exports of informational materials, is unclear since the legislation doesn’t explicitly repeal the prior legislation. Nor is it clear that Congress understands that this provision would also prohibit exports under section 560.528 of the Iranian Transaction Regulations of goods, services and technology to insure the safety of civil aviation.

Imports are also banned by the proposed legislation. Currently imports of foodstuffs and carpets from Iran are permitted.

Other provisions of the proposed legislation include:

• A prohibition of U.S. actions that would lead to accession of Iran to the World Trade Organization;
• A requirement that the President freeze the assets of Iranian diplomats, government officials and their family “at such time as the United States has access to [their] names”; and
• A reduction of U.S. contributions to the World Bank based on amounts loaned by the Bank to Iran.

This post is only peripherally related to export law, but it does involve Iran, blocked assets, terrorism, Persian antiquities and a fascinating conundrum of statutory construction. So bear with me, you won’t be sorry.

The conundrum is posed by the decision of a federal district court on March 31 in Rubin v. The Islamic Republic of Iran, 2008 WL 857522* (D. Mass. 2008). The plaintiffs obtained a default judgment against Iran after being injured in a Hamas terrorist attack and are trying to levy on Persian antiquities alleged to be the property of Iran but in the custody of Harvard University and Boston’s Museum of Fine Arts. The district court held that the plaintiffs could levy against those assets under section 201 of the Terrorism Risk Insurance Act.

The antiquities at issue were initially blocked in 1979 by Executive Order 12170. After the release of the U.S. hostage, Executive Order 12281 unblocked “all uncontested and non-contingent liabilities and property interests of the Government of Iran.” The Terrorist Risk Insurance Act of 2002 provides that “blocked assets” are subject to execution in satisfaction of a judgment against the blocked party. And that’s where the fun begins.

Harvard and the MFA argued, quite reasonably, that the plaintiffs could only execute against the antiquities if it was uncontested that Iran owned them, in which case they were unblocked by Executive Order 12281 and therefore not subject to execution under the Terrorist Risk Insurance Act. The court rejected this argument, also quite reasonably, by saying that the plaintiff’s motion to execute on the antiquities made the ownership contested, meaning that the items were blocked and subject to the provisions of the Terrorist Risk Insurance Act.

In other words, Catch 22 is that the antiquities are only subject to levy if Iran’s ownership is uncontested, but Iran’s ownership isn’t uncontested because the antiquities are subject to levy. All liability for headaches caused by trying to solve this paradox is hereby expressly disclaimed.

*Westlaw subscription required.

ABOVE: Strait of Hormuz

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Some excellent reporting by Eric Lipton in an article in today’s New York Times suggests that the UAE is mostly giving lip service to export control.

Yousef al-Otaiba, an adviser to the crown prince of the United Arab Emirates, said his country was more closely monitoring goods that it re-exported while blocking items that might help Iran build weapons systems. But trade experts and Iranian traders in Dubai said there was little evidence that the new export control law was being broadly enforced.

“It has virtually had no effect, to be honest,” said Nasser Hashempour, deputy president of the Iranian Business Council in Dubai. “If someone wants to move something — get it to Iran — it is easy to be done.”

Both Commerce and State have a more optimistic assessment, but, sadly, any proof of this was classified:

At the Commerce and State Departments, officials said they were encouraged by actions the Emirates had taken in some recent cases — the details of which are classified — that relied on their new authority under the export law. But they said an export licensing system must still be introduced and other enforcement steps taken.

Even so, Lipton quotes interviews with business in the UAE claiming that it’s business as usual with Iran:

S. M. Mir Ebrhimi, chief executive of Reza Nezam Trading, which operates mostly out of Iran, said he continued sending products with American-made components as usual. Mohammad Kazem, supervisor at Al Musafer Tourism and Cargo, said he had not even known his business was on the warning list. He said that the company followed the law, disputing any suggestion by American authorities that he had shipped prohibited items to Iran. He also said that he had seen no more inspections or spot checks by Emirati authorities.

(Full disclosure: Eric Lipton interviewed me in connection with the article, which includes a quote from me)

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.

The Bureau of Industry and Security (”BIS”) issued a Temporary Denial Order on March 17, 2008, against Balli Group PLC and other related U.K. companies, the Armenian air carrier Blue Airways (a/k/a Blue Sky), and Iranian air carrier Mahan Air (which BIS erroneously calls “Mahan Airways”). The TDO arises out of the apparent lease (or sub-lease) of Boeing 747s to Mahan. These aircraft, which had once been in the United Airlines fleet, had been leased by Balli Group subsidiaries initially to Blue Airways and then sometime in 2006 had been leased by the Balli subsidiaries (or subleased by Blue Airways) to Mahan.

The TDO states that Balli had told BIS that the aircraft were not going to be leased or subleased to Mahan, although “open sources” showed that the aircraft, “identifiable by serial number and tail number were under the control of Mahan Air. The TDO also noted that Balli had refused to comply with an order to return the aircraft to the United States pursuant to section 758.8(b) of the Export Administration Regulations. (I can imagine the bemusement of the British companies when a U.S. agency demanded that they should return aircraft owned by them without compensation to the United States. I don’t think they said “no,” rather they probably said “not bloody likely.”)

Although the TDO doesn’t describe the “open sources” that it refers to, it appears that the arrival of the Blue Sky 747s in Tehran was first noted by Iranian “plane spotting” website www.iraviation.com, and then picked up on a large U.S. aviation-enthusiast forum www.airliners.net. The website www.airfleets.net also picked up the transfer of the aircraft. All this goes to show what should be fairly obvious: it’s really hard to hide a 747.