You may not have heard of the SEC’s relatively new Office of Global Security Risk. But Ford Motor has heard of the OGSR. And I suspect export professionals will hear more of this SEC office in the future.

The OGSR is tasked with reviewing SEC filings to determine whether particular publicly-traded companies are subject to global security risks that should be disclosed to corporate shareholders. One area of focus by the OGSR appears to be the dealings of publicly-traded subsidiaries, both directly and through overseas affiliates, with sanctioned countries.

This is made clear by recent correspondence between the OGSR and Ford Motor. The correspondence occurred this summer but only appeared last week on EDGAR, the SEC filing database, according to this BNA article (paid subscription required). Upon review of Ford’s SEC filings the OGSR sent a letter on July 26 to Ford inquiring about its dealings with Syria, Iraq and Sudan. The interchange relating to the dealings of the company’s Land Rover subsidiary in Sudan is particularly interesting.

The July 26 letter from the SEC noted that Ford’s 2005 Annual Report (Form 10-K) revealed that Land Rover has a relationship with a U.K. distributor that sells vehicles to Sudan. The letter asked Ford whether these sales were made to the government of Sudan (or state-owned entities) and, if so, to detail these sales.

One has to assume that the SEC letter is a response to existing OFAC sanctions on Sudan, but it appears that the SEC office is not completely familiar with those sanctions and believes that only dealings with the government and state-owned entities are proscribed. In fact, OFAC’s Sudanese Sanctions Regulations are much broader than that. Section 538.205 of the regulations prohibits exports of any goods by U.S. person to Sudan, not just to the government of Sudan. Section 538.206 goes further and prohibits any U.S. person from facilitating such an export.

Ford responded to the SEC by a letter dated August 16 and frankly admitted that sales were being made to the Government of Sudan:

Ford and its majority-owned subsidiaries do not directly or indirectly conduct business in Sudan or Iran, except that our Land Rover subsidiary has a contractual relationship with a distributor in the United Kingdom that sells Land Rover models into various markets, including Sudan. As discussed below, we requested additional information from this distributor in response to your further inquiry, and we have been assured by this distributor that its sales into Sudan are negligible. We do not believe that this lawful, de minimis sale of Land Rover vehicles by an independent distributor has had or will have a significant negative impact on our reputation or share value.

[W]ith regard to Sudan, the distributor sells the vehicles that it purchases from Land Rover to a retail outlet in Sudan, which does supply vehicles to various government departments in Sudan. We have been advised by the distributor that the bulk of the small sales volume of this retail outlet has been directed toward the Ministry of Interior. We have been advised further that the other government sales have been largely used for agricultural development purposes.

Clearly no one who knew anything about the Sudanese Sanctions Regulations crafted this response for Ford to the SEC. There is no de minimis exception for sales to Sudan. Moreover, the response seems to think that the sanctions regulations only cover exports by U.S. persons from the United States to Sudan. But Section 538.205 forbids exports to Sudan by U.S. persons from any location to Sudan. And Section 538.206 forbids any U.S. person from facilitating these exports from any location to Sudan. So for Ford to say that a U.K subsidiary sells Land Rovers to a distributor which then sells them to Sudan does not dismiss the possibility that these sales may violate the Sudanese Sanctions Regulations.

Instead the real question is whether Ford Motor “facilitated” these sales in violation of Section 538.206. The Sudanese Sanctions Regulations provide guidance on the meaning of facilitation in Section 538.407. That section notes that reporting the sale in financial statements is not facilitation but that financing or warranting the sales would be. Forwarding orders would also be facilitation. More broadly the interpretative rule states that the foreign subsidiary engaging in the sales to Sudan must act completely independently of the U.S. parent. Nothing in Ford’s representations to the SEC’s OGSR even remotely addresses these issues and does not permit any conclusion by the SEC that Ford is not violating the Sudanese Sanctions Regulations. Nonetheless the OGSR issued a letter on August 23 stating that it had no further comment on the Ford Motor filings.

This issue may not go away soon for Ford even if the SEC has stopped pursuing it. News reports indicate that an increasing number of Land Rovers equipped with machine guns are appearing in Northern Darfur.

A headline to an article in today’s Washington Post breathlessly announced: “U.S. Bans Sale of iPods to North Korea.” The copy editor at the WaPo, however, jumped the gun since the ban is not yet in place. The article was also inaccurate in several other respects which we, at ExportLawBlog, feel compelled to correct.

First, the background. The current sanctions regime against North Korea forbids imports from North Korea but permits exports to Korea of all items not otherwise subject to export control. On October 14, shortly after North Korea’s nuclear test explosion, the U. N. Security Counsel passed UNSCR 1718 which stated that U.N. Member States (such as the U.S.) are required to take all actions necessary

to prevent the direct or indirect supply, sale or transfer to the DPRK, through their territories or by their nationals, or using their flag vessels or aircraft, and whether or not originating in their territories, of . . . luxury goods.

The resolution did not define luxury goods, so the U.S. has been busy developing a provisional list which you can find here in the United States’ “30-Day Report for the UN Security Council on Efforts Toward Implementing UNSCR 1718.” This report was released on November 13 by the Bureau of International Security and Non-Proliferation (”ISN”) at the State Department. That list is still identified as provisional, and I can find no record that ISN or OFAC have taken any official action to give the list force of law, although such action may be imminent. So, if you’re planning on sending an iPod to North Korea, you had better hop to it.

The WaPo article also made it sound like the list targeted brand name goods:

The Bush administration wants North Korea’s attention, so like a scolding parent it’s trying to make it tougher for that country’s eccentric leader to buy iPods, plasma televisions and Segway electric scooters. . . . [T]he list of proposed luxury sanctions, obtained by The Associated Press, aims to make Kim’s swanky life harder: No more cognac, Rolex watches, cigarettes, artwork, expensive cars, Harley Davidson motorcycles or even personal watercraft, such as Jet Skis.

In fact the luxury goods list is not brand-specific and is quite general. It doesn’t target Harley Davidson motorcycles but all motorcycles. The iPod is not singled out since the list bans all “personal digital music players,” thus effectively crushing the last hope of Microsoft to find someone to buy its new Zune music player. Cognac is forbidden but only because the list forbids all exports of “wine, beer, ales, and liquor” to North Korea.

Leaving aside the WaPo’s inaccurate coverage of the issue, what will be the impact of these sanctions, if and when implemented? First, it seems that the purpose of the list is little more than an effort to annoy North Korea’s conspicuous-consumer-in-chief and will have little impact on any actual trade. Under Secretary of State Nicholas Burns admitted as much in his testimony to the House International Relations Committee on November 16:

Further, we have defined a list of luxury goods banned for transfer to North Korea. The U.S. currently sends very few, if any, of these goods to the DPRK, but these new regulations will ensure that we are in full compliance with Resolution 1718

Nor is it likely that the sanctions will in fact lead to much annoyance in Pyongyang, because Kim Jong Il will likely be able to get all the proscribed luxury goods that he needs on the black market or even from U.N. member countries that don’t implement UNSCR 1718. And even if Kim Jong Il couldn’t get these goods, it seems unlikely that the dictator will abandon his nuclear aspirations over an iPod or a glass of Chateau Margaux.

Last Friday, BIS released a final rule implementing certain understandings of the annual plenary of the Australia Group in June. The new rules apply controls to pipes, vessels, valves and related equipment made of niobium or niobium alloys. It also changed the classifications for shiga-like ribosome inactivating proteins and for the fungi coccidioides immitis and coccidioides posadisii from ECCN 1C360 to ECCN 1C351, which appears to have stricter controls. This change will also make coccidioides immitis and coccidioides posadisii the first fungi to be controlled under 1C351.

Some interesting background information on the two fungi is provided by Tom Volk, a biology professor at the University of Wisconsin at LaCrosse. According to Professor Volk infection with either of the related fungi often results in a mild disease that confers then confers lifetime immunity to the disease. In other cases it may result in much more serious, and possibly fatal, illness. It is endemic to semi-arid areas, most notably the San Joaquin Valley in California. Infection occurs by inhalation of the spores.

Professor Volk has this to say about the weaponization of the fungi:

Since this is the most virulent of the fungal pathogens, it should never be grown out in culture except under very controlled conditions, such as using gloved transfer hood and in screw cap vials. The fungus produces its small arthrospores in abundance in culture. If these escape, they can cause lab infections. These arthrospores can pass through a 2 mm filter found in normal biological safety cabinets/ hoods! It is a very dangerous organism. There have been persistent rumors that it is being developed for use in biological warfare, but it could probably not be grown in a large enough quantity to be used for use in bioterrorism because of the danger it would pose for the people growing it.

Professor Volk’s page on the two fungi has more interesting information, including some unpleasant pictures of the effect of the pathogens, all of which will convince you that even if they don’t have much use as CBW agents it is still probably a good idea to regulate their export.

BIS released a public notice today revising the country chart to reflect that Montenegro seceded from Serbia and Montenegro. Not surprisingly, the column entries for Montenegro and the column entries for Serbia on the country chart will be identical.

Updating the Country Chart probably shouldn’t be one of the highest priorities over at BIS, but then again Montenegro has been independent of Serbia since June 3, 2006. The State Department got the news and only 10 days later, on June 13, 2006, recognized Montenegro as an independent state.

Of course, we shouldn’t complain since this is, frankly, a relatively rapid response by BIS. Western Sahara is still listed on the Country Chart even though it has been part of Morocco since 1979. And Hong Kong is still hanging on with its own row on the country chart even though it became part of the PRC on July 1, 1997.

MARK YOUR CALENDARS. I’ll be participating in an Audio Briefing with Mike Turner, Director of BIS’s Office of Export Enforcement, on Wednesday, November 29, at 2:00 pm E.S.T. The briefing was put together by Export Practitioner and Washington Tariff & Trade Letter. A brochure for the briefing, with sign-up and phone-in information, can be downloaded here.

In a clever marketing ploy timed to coincide with the release of the latest James Bond film, BIS has issued new rules relating to the export of surreptitious listening devices (”SLDs”). The Notice announcing the final rule, however, is hardly a model of clarity so that you might really require the services of a super-spy like 007 to figure out what BIS is trying to do. Or you could read this post.

Under the current rules, SLDs are classified under ECCN 5A980. Licenses are required for exports to all destinations of items classified under ECCN 5A980.

This classification was adopted some time ago by BIS pursuant to the provisions of the Omnibus Crime Control and Safe Streets Act of 1968. The Omnibus Crime Act prohibits the export of any device “primarily useful” for the “surreptitious interception of wire, oral, or electronic communications.” (18 U.S.C. § 2512). Congress enacted this provision after the private detective Hal Lipset demonstrated to the Senate Subcommittee on Civil Rights his prototype of a “martini olive” transmitter, which created a national press sensation. Even though it is unclear whether a martini olive transmitter was ever used to intercept any actual communication, it became the paradigmatic SLD and is specifically cited as an example by BIS in EAR § 742.13(2) which further defines the SLDs covered by ECCN 5A980.

The new rule doesn’t affect any of this. Rather, it adds three refinements to the current rule.

First, two new related ECCNs are added: 5D980 and 5E980. The first, 5D980, controls software “primarily useful” for the surreptitious interception of wire, oral and electronic communications or “primarily useful” for the development, production or use of SLDs. You might call me a cynic, but I rather doubt that, given the “primarily useful” test, there is any software that is actually covered by this new ECCN. I mean is there really someone out there offering a CAD program which is really only meant to produce drawings of martini olive transmitters and other SLDs? The other new ECCN, 5E980, is technology “primarily useful” for development, production or use of SLDs. Again I’m not so sure that there is any technology that fits in this newly minted ECCN.

Second, the rule creates a brand new control reason or SL which means — you guessed it! — surreptitious listening. The reasons for the new control category is unclear since SLDs require licenses to all destinations. All this does is add a new column to the Country Chart where every country will be checked. Perhaps this is a subtle indication that BIS sees the future possibility that controls on exports of SLDs to certain countries may be lifted.

Third and finally, the new rules amend EAR § 742.13 to restate the licensing policy for SLDs. Under the old rule, license were generally approved for telecommunications providers and government agencies. Under the new rule, the policy of general approval will apply except where the telecom provider or government agency seeks to export the SLD to a country controlled for AT reasons, e.g., North Korea and Iran. Although I can understand why BIS might want to clarify that telecom providers can’t export SLDs to Iran or other AT-controlled countries, I’m not so sure what is going on here with respect to government agencies. I mean, if an undercover CIA agent wants to export a martini olive transmitter to Korea to bug Kim Jong Il’s palace, who is the BIS to say no?

If anybody has an alternate take on what BIS is doing here, please share them in the comments section.

Last month I wrote about the Motorola i580, which Motorola advertises as being built to 810F military specifications. That led me to post this smart-alecky query: if the i580 is built to milspec can I take it with me on international trips?

Reader Matthew Lancaster did the right thing to answer the question — he went directly to the source. And then he posted in a comment to the original post what he found out:

My policy has always been that when you don’t know the answer, go to the source - the manufacturer. In response to my inquiry, Motorola returned the following:

*****

Dear Matthew,

Thank you for your inquiry regarding obtaining the Export Control Classification Number, Schedule B Code and other related export controls information for the Motorola iDEN i580. We appreciate your interest in our products.

To summarize your conversation with our representative T-, the Motorola i580 is considered a regular transceiver radio/cell phone when traveling outside the US. There are no military spec’s on or in the phone. It does not have be treated any differently than any other cell phones.

We hope that conversation and this response have answered your question regarding obtaining the Export Control Classification Number, Schedule B Code and other related export controls information for the Motorola iDEN i580. Thank you for choosing Motorola.

*****

Not exactly the information I was hoping to receive (an ECCN and Schedule B Code), but close.

Well, that does resolve the question if in fact the phone isn’t built to milspec. But it seems to me that Motorola has leapt out of the DDTC frying pan and into the FTC fire given that Motorola clearly advertises the military specifications of the phone. Here’s a press release that touts that the phone is built to milspec. And then on the web page about the phone, Motorola waxes eloquent about the 810F military specs:

810F Military Specs Built to meet 810F military specifications to withstand the toughest days in the roughest places.

. . .

Meets Tough US Military Specifications.

And the television commercial for the phone mentions the milspec business. I mean they are practically bundling the phone with a tour of duty in Basra. And I’m sure that’s where the Motorola advertising department will want to send the CSR who gave the reply to Matthew, at least if they ever find out about it.

(By the way, the real answer to the question about the phone isn’t to plead false advertising. The best answer, in my view, is that there is a theoretical distinction between building something to milspec and something that is “specifically designed, modified or configured for military application.” The latter would be something that you actually sold to the military. Accordingly, as long as Motorola doesn’t sell the i580 to the DoD, you can safely take it with you out of the country.)

On Wednesday the GAO issued a report on U.S. funding initiatives designed to promote democracy in Cuba. The highly critical report concluded that these programs need better oversight and management. It pointed out the lack of competitive bidding for these programs. The report also documented examples of waste, including program funds that were used to buy Godiva Chocolates, cashmere sweaters, crab meat, Nintendo Game Boys, and Sony Playstations.

One of the purposes of these democracy initiatives was to supply to dissidents and others on the island goods and services that had been cut off by the U.S. embargo. Although the report stated that most of the means whereby the goods were delivered to Cubans were classified, one part of the report revealed the practice of paying “mules” $4 to $20 per pound to transport the donated goods to Cuba.

An immediate reaction to the report was a call for easing the embargo on Cuba, starting with recent restrictions on travel to Cuba. Jeff Flake, a Republican member of the House who is one of the members who requested the GAO report, said:

The U.S. has spent millions of dollars in democracy assistance to Cuba with little or nothing to show for it. When people see what we’re doing now and how taxpayers’ funds are being misused, I think they will demand a change in policy, particularly if they understand we can accomplish the same objectives simply by allowing family members to travel more frequently and take with them goods.

When a Republican member of Congress (albeit a somewhat independent-minded one) calls for loosening the Cuba embargo, it is not irresponsible to suggest that the 110th Congress, which will be controlled by Democrats, may revisit the 40-year-old embargo.

What happens when a rebel group on the OFAC SDN list lays down its arms, renounces terrorism and joins a government friendly to the United States? If you said they would be removed from the list, you would be wrong. If you said it would result in the U.S. requiring U.S. companies to obtain licenses to deal with the government, you might be right.

In 2003 the Communist Party of Nepal, generally referred to simply as the Maoists, was added to the SDN list. Last week the Maoist rebels reached a peace accord with the government of Nepal pursuant to which they would lock up their weapons and then join an interim coalition government. The United States, skeptical that the Maoists will keep their promise to end violence, has refused to remove the Maoists from the SDN list.

If the Maoists remain on the list, the effect of their joining the government may mean that certain transactions with the government of Nepal may, in effect, be transactions benefiting the SDN-listed Maoists and might, accordingly, require a license. As a result, NGOs in Nepal may now need to obtain OFAC licenses to continue operations in Nepal after implementation of the peace accords. Exports from the U.S. to the government of Nepal or to companies owned by it may be subject to the same restrictions.

A “highly-placed” source told the Kathmandu Post that the U.S. Embassy had requested that OFAC grant licenses to permit NGOs to continue to operate in Nepal when the Maoists join the coalition government on December 1. That source indicated that the grant of the licenses was almost certain.

A similar situation was posed when Hamas, also on the SDN list, became the majority party of the Palestinian Legislative Council of the Palestinian Authority after the January 2006 elections. As a result, members of Hamas hold high-level positions of authority in the government, including the post of Prime Minister. Accordingly, OFAC determined that transactions with the Palestinian Authority would require OFAC licenses and issued a series of six general licenses to permit certain transactions with the Palestinian Authority. These general licenses include a general license permitting U.S. citizens to act as employees of the U.N. in the West Bank and Gaza and another general license permitting in-kind donations of medicine, medical services and medical devices.

Whether or not the Maoist participation in the Nepal government will be analogous to the Hamas situation with the Palestinian Authority is difficult to determine at this time since the final details of the accord between the Maoists and Nepal are unknown. Accordingly, any exporter dealing with the government of Nepal or its state-owned enterprises should exercise caution until the situation becomes clear — both as to the level of the Maoist’s participation in the coalition government and as to OFAC’s response to such participation.

I admit that this is an inflammatory headline. But the recent settlement agreement entered in the EP MedSystems matter does little to refute the common wisdom that companies should never file a voluntary disclosure with BIS unless they are almost certain that BIS will otherwise discover the problematic export.

At issue are six shipments of seven items of heart monitor equipment valued at $510,590. The equipment was shipped by EPMed to Iran between March 2001 and April 2004 without a license. Shipments of these devices after July 26, 2001 would have been permissible under the Trade Sanctions Reform Act of 2000 provided that an OFAC license had been obtained. Five of the six shipments in question occurred after that date. The company agreed to settle the charges for payment of a fine of $244,000.

The company filed two voluntary disclosures relating to the shipments. The first was a preliminary disclosure that was filed on October 13, 2003, approximately two weeks after one of the shipments at issue had taken place. The second was a final disclosure which the company filed on November 20, 2003. Normally it would have been significant mitigating factor that most of the shipments described in the voluntary disclosure would have been granted a license if an application had been filed. BIS, however, paid no attention to that factor and, instead, focused on alleged misrepresentations in the voluntary disclosures themselves.

Four false statements in the preliminary and final voluntary disclosures were alleged by BIS. The first was the claim in the October 13 preliminary disclosure that the Company filed the disclosure “immediately” after learning of the shipments to Iran. The charging letter alleged that this was false because the company first learned of the shipments based on one email dated May 22, 2003, between unnamed EPMed officials A five-month delay is, perhaps, not immediate, but it hardly seems a sufficient justification for a significant fine for misrepresentation. Moreover, it may well have been the case that the Company had not yet discovered the May email or other earlier documents when it filed the preliminary disclosure in October.

Second, the charging letter took issue with the claim in the initial October 13 voluntary disclosure that the company did not know before October 2003 about the exports to Iran. This claim is also based on that single email in May 2003 between unidentified company officials and which the company may not have discovered at the time of the preliminary disclosure.

The third false statement pointed to in the charging letter allegedly occurred in the final version of the voluntary disclosure filed on November 20. According to the BIS charging letter:

In its disclosure EPMed stated that it “has no record of ever having sold any of its products to any customer in Iran.” This statement, representation or certification is false or misleading because, at the time it was made, EPMed had in its possession a number of documents indicating that the company had sold its products to Iran. These documents include an email between EPMed officials dated on or about May 22, 2003, which listed five hospitals that were operating EPMed equipment.

This is a confusing allegation since the preliminary voluntary disclosure made by the Company on October 13 appears to have indicated and admitted that the Company had such records. Indeed, how could the Company have made either the preliminary voluntary disclosure or the final one without such records? Here it looks like BIS’s charge either takes the sentence in question out of context or deliberately misreads it.

Fourth and finally, the BIS charging letter attacks a statement in the final voluntary disclosure that its European Sales Manager was “totally unfamiliar with the U.S. Government restrictions on exports to Iran.” This statement was false, according to BIS, because the European Sales Manager “had been informed of the U.S. embargo of Iran and knew that certain equipment required a license for export to Iran.” Again, BIS seems intent on stretching the likely meaning of the voluntary disclosure to find a misrepresentation in it. What was likely meant by the disclosure was not that the sales manager didn’t know that the U.S. forbade shipments to Iran. Rather, it seems likely that the company was truthfully representing that the sales manager didn’t know that U.S. law was violated by a company shipment to a German distributor who then shipped the goods from Germany to Iran.

So what lessons should be taken away from this? First, it remains clear that companies file voluntary disclosures with Commerce at their peril. Second, and more significantly, if a company feels that a voluntary disclosure is prudent (because, for example, discovery of the violation by BIS is likely), then the company should not file a preliminary voluntary disclosure under any circumstances. The danger of such a preliminary disclosure is that subsequent discoveries can later be used by BIS to claim that the initial disclosure constituted a misrepresentation. Third, and this should almost go without saying, if a company does file a voluntary disclosure, it should be careful that everything in it is accurate.

Last week Israeli Customs at the port of Ashdoda seized a 40 foot container of the antibiotic Levaquin which had been exported from the United States. According to the Israeli customs press release, the drug had never received an export license from the United States or an import license from the Israeli Ministry of Health.

The rules on exports of drugs, biologics and medical devices from the United States (which are summarized here) are sufficiently complex that it is understandable that Israeli Customs might not understand them completely. However, since Levaquin is an approved drug in the United States, it can be exported with FDA approval (at least as long as it is being exported for an approved use).

Probably Israeli Customs was referring to an FDA export certificate. The FDA export certificate program is described here. Basically an export certificate is a document that is not mandatory for export but which may be requested by the importing country as a guarantee that the pharmaceutical meets the quality standards of the exporting country.

(For the conspiracy-minded, Levaquin is in the same class of antibiotics as Cipro and is an approved treatment for inhalational anthrax. It is also approved for other types of bacterial infections as well.)