Yesterday OFAC issued a new set of designations of individuals under the sanctions regime for the Democratic Republic of the Congo. In that designation, OFAC amended the designation of Viktor Anatolijevitch Bout to include the DRC Sanctions as the reason for designation in addition to the Liberia sanctions under which Bout had already been designated.

Mr. Bout has a more interesting story than most SDNs. Starting in 1992, Bout built a network of aircraft that he used to carry everything from guns to gladiolas. It was the former product, and not the latter, which got Mr. Bout into hot water. There appeared to be substantial evidence that bout was running weapons to the Northern Alliance in Afghanistan, the Taliban, Angola and the UNITA rebels that sought to overthrow Angola, Charles Taylor of Liberia and Col. Muammar el-Qaddafi.

After the U.S. incursion into Iraq, Mr. Bout also began to provide services to the U.S. military and its contractors. Shortly after the fall of Baghdad, the United States coordinated a massive airlift of goods and supplies into Iraq. According to a just-published article in Foreign Policy by Douglas Farah and Stephen Braun, Bout played a role in that airlift:

But to their embarrassment, U.S. officials later learned that many of the Russian planes were operated by companies and crews working for Viktor Bout. His planes were flying Federal Express shipments for the U.S. Air Force, tents for the U.S. Army, and oil field equipment and personnel for KBR, a Halliburton subsidiary. In the months that followed, Bout’s flagship firm flew hundreds of sorties in and out of Baghdad, earning millions of dollars from U.S. taxpayers.

Bout’s involvement in the Iraq airlift caused the U.S. to delay impositions of sanctions on Bout. OFAC continued to squabble with the Pentagon which claimed that it had no obligation to scrutinize second-tier subcontractors such as Bout, who was ferrying items for KBR. Finally in April 2005, sanctions were imposed on Bout for his dealings with the Charles Taylor regime of Liberia. UN Sanctions followed in November 2005. Even so, there appears to be evidence that Bout-operated planes have continued to ferry goods into Baghdad’s airport, at least according to Farah and Braun.

The purpose of designating Bout under a second sanctions regime at this point seems unclear. Perhaps OFAC hopes that this might double the penalty for dealing with Bout, although the legal basis for such a supposition is doubtful. More likely it may be to preserve a second basis for sanctions against Bout if the Liberia sanctions should be ended for some reason.

In all events, Mr. Bout is alive and well in Moscow. He has always claimed that he has no idea, absolutely no idea whatsoever, what was in those packages he delivered throughout the world to rebels and dictators. He continues to reside in a luxury apartment complex and to carry on his business undeterred. As Messrs. Farah and Braun state:

Conceding their difficult straits, U.S. officials admit that there is no clear evidence that Bout’s air fleet has been diminished or his activities slackened as a result of the sanctions. “You never can say with 100 percent certainty that he is gone,” says Zarate—who is now President George W. Bush’s chief counterterror deputy at the NSC. “He is very, very good at doing his business.” The Europeans find it equally hard. “He doesn’t go away. He just keeps changing his aircraft and registrations, hoping that he will outlast the interest in following him,” says a European military intelligence source. “So far, he is right.”

In an effort to deal with its ever increasing backlog of license applications and agreements, DDTC announced on Friday that it was locking up all its licensing officers in their offices and throwing away the keys until the backlog was cleared. Well, not exactly.

Instead, DDTC said that the Response Team would handle all incoming calls. They also made clear that licensing officers won’t be picking up their phones anymore:

We ask that you refrain from contacting licensing officers directly, as voice mail messages will simply direct you to the Response Team.

While efforts to rein in the out-of-control and growing backlog problem are commendable, the prospect of being remitted to the euphemistically monikered “Response Team” is not exactly inviting. I suppose that “Response Team” isn’t completely inaccurate in the sense that “Responses” are provided; the problem is that these “Responses” are often wrong. I’m sure we all have anecdotes of erroneous information coming from the Response Team, but my current favorite involves a member of the team telling an overseas agent that he didn’t have to register as a broker because he was not a consignee of the goods involved!

Perhaps the ultimate goal here is that by denying access to the licensing teams, more license applications will be deficient from the outset and can simply be returned without further action by the staff.

At the Strategic Security Blog, run by the Federation of American Scientists, Matt Schroeder reports today on a briefing given last week at a Washington think tank by Mark Esper of the Aerospace Industries Association. Esper announced “Phase II” of the AIA’s campaign to reform U.S. export laws.

Some of you may remember Phase I which included the proposal to remove the license requirement for export of certain items on the USML to Australia and the United Kingdom. That proposal met its ignominious end in 2004 in the House International Relations Committee in 2004 at the hands of Chairman Henry Hyde who seemed convinced that the U.K and Australia would divert unlicensed exports from the U.S. to various unspecified but problematic nations and groups.

According to Schroeder, Esper revealed little about the content of Phase II other than to say that the proposals were “measurable, attainable, and meaningful,” that they were “capable of reasonably quick implementation by the administration,” and that (at least some of) the proposals “do not involve Congressional action.” Oddly the AIA’s White Paper on Export Reform has disappeared from the AIA’s website or, rather, the link to that White Paper is now broken. Once bitten, twice shy, I suppose.

So, we’ll have to wait and see both what AIA intends to propose and whether the 110th Congress will be more open to reform than its predecessors.

Yesterday a new indictment for conspiracy to export controlled technical data was issued against a family that had been previously indicted for failing to register as agents of the Chinese government. At the center of the case is naturalized U.S. citizen Chi Mak who worked for a defense contractor in California. Mak allegedly took files from his employer about, among other things, naval ship design. He then encrypted them, hid them as music files on a CD, and passed the CD to his brother Tai for delivery to the Chinese government. The CD never made it to China, but was found in Tai’s luggage at LAX as he prepared to depart for China.

Mak’s problem, however, is not only the indictment. He has also hired a lawyer who doesn’t appear to have a clue about export law, at least judging from this statement:

[The] attorney for Chi Mak . . . said he hadn’t seen the indictment. He said his client worked with sensitive information as part of his job, but never misused it or stole intelligence.

“My client is involved in an area of technology that is not classified — is not even prohibited from distribution,” [Mak's attorney] said. “It’s a strong sign that they are desperately trying to find whatever counts can stick. They’ve overcharged this case consistently.”

As any export lawyer or export compliance officer knows, technical data on USML items need not relate to classified or restricted technology in order to require a license for export. It only needs to be company-proprietary technical information about a USML-listed defense article.

Since not much is in the news today export-wise, other than OFAC’s addition of “El Mono” Sabogal to the SDN list¹, I thought I would bring up something I’ve been wondering about since seeing a Nextel television ad for the Motorola i580. This is something that would only bother an export lawyer, so I thought I would mention here. When I’ve mentioned it to friends they’ve told me that I need to take a vacation.

Anyway, here’s my query regarding the Nextel i580. The commercial, and advertising materials, make a big deal that the phone is made to “810F military specs.” That means, presumably, it has been “ruggedized,” which is military-speak for saying you can drop it from a plane, or throw it on the ground, or run over it with a tank and you can still call your wife, er, lieutenant on it. Assuming that this is true, doesn’t that put the phone on the USML and specifically in Category XI(a)(5)? After all, it is a communication system “specifically designed, modified or configured for military application.” Do I need an export license from DDTC if I take it with me on my next trip to Europe?

Leave your thoughts on this in the comments.

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¹And that really isn’t news because you shouldn’t be doing business with anyone with the alias “El Mono” (The Monkey) in any event.

According to a report from television station WTVJ in Miami, Florida, a small group of craftsmen in Cuba are trying to restore “The Pilar,” the fishing boat which was owned by Hemingway and which was captained by Gregorio Fuentes, the presumed model for the protagonist in The Old Man and the Sea.

Lacking funds, the craftsman are relying on their on sweat and sandpaper to restore the boat, ravaged by years of hurricanes and lack of upkeep. A group of American conservationist have tried to help but . . . well, you can probably guess the rest of the story:

A group of conservationists from the United States tried to help the preservation efforts, but [OFAC] prevented them from traveling to Cuba, arguing that proceeds from Cuba’s Hemingway Museum benefit Fidel Castro’s regime.

Who knew you could make so much money in the museum business?

L-3 entered into a Consent Order last week for export violations of its subsidiary Titan. L-3 acquired Titan in June 2005 several years after the violations had occurred. The violations at issue were the failure by Titan to report commissions paid by Titan in connection with three sales of ITAR-listed items to Sri Lanka, France and Japan in 2000, 2002 and 2003 respectively.

The Draft Charging Letter starts with a recitation of Titan’s violation of the Foreign Corrupt Practices Act. As is well known by now, Titan was convicted in March 2005 for the payment of more than $2 million to the re-election campaign of the President of Benin in order to induce Benin to award Titan a contract to build and to operate a wireless telephone network. Hmmm. A wireless telephone network? Is that a defense article? Umm, no. So why is DDTC putting that in the Draft Charging Letter? The answer appears to be for no apparent reason other than to suggest that if Titan is capable of violating the FCPA, it is capable of violating the Arms Export Control Act as well. It’s a good thing that DDTC doesn’t normally have to argue things in court because this kind of argument wouldn’t make it very far in front of a real judge.

The real violations charged by the Draft Charging Letter have nothing to do with the FCPA or the Benin bribes. Instead the violations arise solely from three commissions that weren’t reported by Titan as required by Part 130 of the ITAR. The unreported commissions related to three separate export license applications to Sri Lanka, France and Japan mentioned above.

As anyone has struggled with interpreting the requirement of ITAR’s Part 130 to report commissions knows, the issue is always whether a payment to an agent is is instead exempted from reporting under section 130.5(b)(4) because it is a “payment made . . . for . . . technical, operational or advisory services, which payments are not disproportionate in amount with the value of the goods or services actually furnished.” All commissions are arguably paid for technical, operational or advisory services, so the question is always whether or not they are disproportionate. Needless to say, “disproportionate” is an extremely vague standard. In one of the charged violations, the commission falls pretty far on the other side of disproportionate — $1.2 million on a $2.5 million dollar sale (48%). However, in the other two cases — $109,000 on a $870,000 sale (12.5%), and $958,000 on a $7.4 million sale (12.9%) — it is a bit harder to conclude that the payment is disproportionate.

In the Consent Order, L-3 agreed to pay a fine of $1.5 million. That fine consisted of a $1 million dollar cash payment and a $500,000 credit against the costs of the compliance program that L-3 agreed to conduct pursuant to the Consent Order. The good news for L-3, relatively speaking at least, is that DDTC agreed in the consent order to suspend the application of ITAR section 120.1(b) which made L-3 ineligible for export licenses due to its FCPA conviction. DDTC also declined to impose debarment as a penalty for Titan’s failure to report the commissions at issue.

The U.S. Attorney’s Office for the District of Columbia announced this week the indictment of three California men for the attempted export of textile machinery to Iran in violation of the Iranian Transaction Regulations. Two of the men — Babak Maleki and Shahram Setudeh Nejad — were arrested; the third man — Mojtada Maleki-Gomi — is currently at large in Iran.

According to the indictment, the three men had placed an advertisement on a web site to sell “knit de knit” textile equipment. KDK equipment is used to dye multicolor yarns for fabrics and carpets. An undercover ICE agent and a “cooperating source” contacted Nejad and asked if the equipment could be shipped to Iran. Nejad then put the undercover agent and the source in contact with Mr. Maleki-Gomi who explained that the equipment could be transhipped through Dubai to Iran in order to avoid the U.S. sanctions on transactions with Iran. A container of 30 knit de knit machines was shipped and then intercepted by the U.S. government in Dubai.

Exporters should note with caution that this was a sting operation where the government agents proposed the illegal export. It is easy to see why the three defendants here might have been targeted. All three men had what appeared to be Iranian surnames and were selling textile equipment. Iran is, not surprisingly, a substantial importer of textile equipment for its carpet and fabric industry and the agents surmised that the men might, therefore, be willing to ship the equipment to Iran.

We have also seen a tendency for ICE agents, as they did in this case, to target web-based sellers for sting operations. This is probably because it allows them to do investigative work from the comfort of their offices.

On Monday, October 16, Russia’s ambassador to the U.N. Vitaly Churkin demanded that the U.S. lift sanctions that the U.S. had imposed on two Russian firms. The sanctions at issue were imposed on August 4, 2006, by the State Department’s Bureau of International Security and Nonproliferation (”ISN”).

The ISN slapped sanctions on Rosboronexport and Sukhoi for transferring sensitive technology to Iran in violation of the Iran Nonproliferation Act of 2000. Rosboronexport is the firm that handles most arms exports from Russia and Sukhoi manufactures military and civilian aircraft. Rosoboronexport is chaired by Sergei Chemezov, an ex-KGB officer and friend of Vladimir Putin’s.

In imposing the sanctions, the ISN did not provide any details as to the particular transfers that were the basis for the imposition of sanctions. The ISN sanctions prohibit exports to either company of items on the ITAR or the CCL. The ISN sanctions list can be found here. (And you thought you knew the names and locations of all the export sanctions lists, didn’t you? Well, unless you knew about the ISN list, you didn’t.)

Monday’s statement by Churkin issued a not-so-veiled threat to hold new U.N. Iran Sanctions hostage if the U.S. does not lift the sanctions on Rosboronexport and Sukhoi:

If Russia is asked to vote on a Security Council resolution imposing sanctions on Iran for refusing to suspend uranium enrichment at the same time that Russian companies are subject to U.S. sanctions, it would be voting on a measure “which at least by implication supports sanctions which have already been imposed on us,” [Churkin] said.

In my view, the U.S. will be more than willing to use these sanctions as a bargaining chip to gain Russian support in the Security Council for expanded multilateral sanctions against Iran.

In a notice published in today’s Federal Register, BIS has withdrawn the safe harbor and red flag rules that BIS proposed in October 2004.

Under those proposed rules, BIS would have increased the number of red flags from 12 to 23. “Red flag” is a term used by BIS to signify an indication that an export transaction has a high probability of diversion from an authorized end-use, such as an order placed for supercomputers by a bakery in Addis Ababa. The rules also proposed a “safe harbor” that set up a procedure whereby BIS could clear a transaction with “red flags” and the exporter would not be liable if, indeed, the bakery in Addis Abbaba transshipped the supercomputers to North Korea. Finally, the rule expanded the knowledge standard for liability for export violations.

The most interesting part of the withdrawal is BIS’s not-so-tacit admission that it would have taken BIS so long to resolve “red flag” questions that exporters would be better off simply applying for a license for the transaction:

A number of commenters criticized the safe harbor proposal, stating that it was too complex and lengthy. Several predicted that few, if any, firms would be inclined to use it. Some suggested that submitting a license application for the transaction would be simpler and probably faster than waiting to see if BIS approved of the manner in which the party resolved the ‘‘red flags.’’

Also surprising is that, judging from Scott Gearity’s detailed account of BIS’s Update 2006 Conference, which took place on October 16 and 17, no one from BIS breathed a word that the rules would be withdrawn the very next day on October 18. Nor has BIS updated its website to reflect the withdrawal. Of course, no one ever likes admitting a mistake.