In today’s Federal Register, the Bureau of Industry and Security (”BIS”) published a decision by an Administrative Law Judge finding William Kovacs in default in responding to a charging letter, fining him $66,000, and suspending his export privileges for five years. The decision resulted from a motion for default filed by BIS on January 11, 2007.

The facts relating to Mr. Kovacs are not particularly savory. Mr. Kovacs had applied for a BIS license to export an industrial furnace to the Beijing Research Institute of Materials and Technology. BIS denied the license on the ground that BRIMT was likely to use the furnace for the design, development, production or use of missiles. Undeterred Mr. Kovacs and BRIMT agreed that the furnace would be shipped to a “new” customer in China who would, in fact, be BRIMT under a different name. This was, as they say, just asking for it.

The ALJ opinion doesn’t, however, tell the full story as to why Mr. Kovacs might have been in default when BIS filed the Motion for Default on January 11, 2007. That may well have been because Mr. Kovacs was in jail serving a sentence imposed on October 5, 2006, for a criminal conviction arising from the export of the furnace to BRIMT. Granted Mr. Kovacs wasn’t in jail when the charging letter was sent by BIS on June 28, 2005, but that meant that BIS had plenty of time to bring the motion for default while Kovacs still had some opportunity to respond in person. There is also nothing in the decision to indicate that BIS provided a copy of the motion to Mr. Kovacs at his prison address even though BIS certainly did know where to find him.

Kovacs doesn’t seem a particularly sympathetic defendant, but that is still not a reason for BIS not to play fair with him.

The prior post “BIS Continues to Stack Deck Against Voluntary Disclosures” has been updated and revised to reflect the fact that there were two transactions, not one, involved in that case.

Yesterday the Bureau of Industry and Security (”BIS”) published in the Federal Register an Advance Notice of Proposed Rulemaking. In the Notice, BIS proposed to fill in Country Group C of Supplement 1 to Part 740. Under the BIS proposal, the countries in Group C would be called “Destinations of Diversion Concern.”

BIS says in the Notice that licensing policy would “likely change” for exports going to countries listed in the new Group C. I think BIS is just being a little coy with the “likely” business — you can pretty much bet that licensing policy will certainly change. Why else bother with the list?

The Notice lists the factors that will be considered before a country is admitted to the new club:

• Transit and transshipment volume;

• Inadequate export/reexport controls;

• Demonstrated inability to control diversion activities in this destination;

• Government not directly involved in diversion activities; and

• Government unwilling or unable to cooperate with the U.S. in interdiction efforts.

So, who do we think is going to be on the list? BIS won’t say in this “Advance Notice.” But we think that BIS has at least one country in mind and that this “Advance” Notice is a shot across the bow aimed at the UAE. It’s only been several months since Assistant Secretary Padilla of BIS and Undersecretary Abdulla Bin Ahmed Al-Saleh of the UAE engaged in a war of words over diversion of shipments from the UAE to Iran and other places of concern.

Any other ideas? Leave them in the comments where I suspect that they just might be seen by BIS.

Magnetic Shield Corporation, the company that made the magnetic shield vault in which the Watergate tapes are stored, filed a voluntary disclosure with the Bureau of Industry and Security (”BIS”), something it probably now regrets. According to a Charging Letter just posted on the BIS site, Magnetic Shield exported magnetic shielding in 2001 to the Indira Gandhi Centre for Atomic Research, which is on BIS’s Entity List, without the required license. The company also forgot to fill out item 27 on the Shipper’s Export Declaration for the 2001 export. Exporters are required to put the license number, license exception or NLR (”No License Required”) in Item 27. Finally, it appears that the company attempted to export magnetic shielding to the Indira Gandhi Centre in a separate transaction in 2004.

According to the Settlement Agreement entered into with respect to these transactions, Magnetic Shielding voluntarily disclosed “certain” of these transactions. The Settlement Agreement doesn’t disclose which of the transactions were voluntarily disclosed, but it’s reasonable to suppose that the completed transaction in 2001 was the subject of the voluntary disclosure after the attempted export in 2004 led to a BIS inquiry.

Magnetic Shield agreed to pay $19,000 in settlement of the BIS charges. Considering that Magnetic had a maximum liability of $33,000 for one export violation in 2001, one technical SED violation relating to the 2001 export, and one attempted export in 2004, BIS didn’t really do Magnetic Shield much of a favor here for the voluntary disclosure. The issue here is why BIS charged the SED violation other than to increase the ultimate penalty. There is no allegation that the failure to fill out Item 27 was anything other than a simple clerical error. The only reason to charge the failure to fill out Item 27 in the SED appears to have been to justify collecting a higher fine for the voluntary disclosure.

(Note: post and comments updated to reflect that two transactions rather than one were involved.)

The criminal complaint filed against the two Florida men who obtained Cuba travel licenses for fake churches is amusing reading, at least if you enjoy reading about gangs that couldn’t shoot straight. Some 4,500 people traveled on the fake churches’ licenses and it’s easy to see how the authorities caught wind of the scheme:

During interviews by Customs and Border Protection (”CBP”), travelers returning to the U.S. after traveling on these licenses admitted . . . that they were not traveling for religious purposes.

That is ICE-Special-Agent-Speak for what probably really happened:

CBP Agent: Welcome to the U.S., sir.

Tourist (dressed in tropical shirt and Oakley sunglasses): It’s great to be back.

CBP Agent: I see you were in Cuba doing missionary work.

Tourist: Me? No, dude, I was there drinking mojitos and smokin’ Cohibas. I was too wasted to do any missionary work.

The complaint also states that the defendants made up the names of churches and pastors and opened up mailboxes for the fictional churches at various UPS stores. Made-up church names included the First Church of Christ, the Assumption Church of Christ, Woodland Church of Christ, Outreach Hispanic Ministries. and the Church of Life of Ocoee.

According to the complaint, the defendants then filed OFAC license applications for these churches using the maildrops as addresses and providing fictional congregation sizes for the churches. One of the other things that tipped off authorities to the scheme — aside from the distinctly nonreligious demeanor of the tourists — was that the numbers of people traveling on these licenses exceeded the number of congregants for the churches.

The two defendants were stopped in Miami on a return trip from Cuba and they produced the Assumption Church of Christ license. When questioned separately, one of the defendants allegedly admitted immediately that the Assumption Church of Christ didn’t exist. “You have me dead to rights,” he is alleged to have said.

That would be, fairly, an understatement.

According to this AP wire story, two men in Florida were charged with violating the Cuban Sanctions Regulations by applying for Cuba travel licenses using “fake” religious organizations. Prosecutors charged that the two men then sold these licenses to travel agencies which, in turn, sold these licenses to over 4,500 people who used them to travel to Cuba.

Adam Szubin, OFAC Director, provided a novel explanation of the harms caused by travel on fake licenses. Abandoning the traditional OFAC line that money spent by tourists on mojitos goes straight into Castro’s pockets, Szubin said this:

Those who fraudulently obtain or traffic in such licenses not only commit a crime, but also undermine the good works of legitimate religious groups traveling to Cuba.

Frankly it is hard to see how these tourists are harming the work of other religious groups. That could happen, I suppose, if a bunch of rowdy and over-served American tourists traveling on these licenses were pretending to be missionaries. That, of course, seems highly doubtful at best. Indeed, the fact that these tourists were likely not even making a pretense of being religious will pose more than a few difficulties for them when OFAC inevitably comes knocking at their doors.

BIS just posted additional information on voluntary self disclosures on its website, including a slightly edited version of Wendy Wysong’s article (paid subscription required) from the December issue of The Export Practitioner entitled “BIS Data Show Benefits of Voluntary Disclosures.” The website also just posted descriptions of voluntary self-disclosures and their outcomes for 2004, 2005, and 2006.

This is more fallout from the brouhaha that this blog started when it criticized the outcome in the EP MedSystems case and suggested that because of that case, a company should think long and hard before filing a voluntary self-disclosure with BIS. The posted article argues that VSDs often result in a 50 percent reduction of the maximum allowable penalty. As I’ve said before, this approach by BIS is somewhat disingenuous given BIS’s well-known ploy of trying to turn single exports into multiple violations. In all events, I am reviewing these new materials and will post my analysis of them later.

In the meantime, I did notice one interesting thing in the VSD article that I had not focused on previously:

Of course, disclosure of violations to BIS and BIS’s action on VSDs are not the only steps needed to fully address noncompliance issues. Disclosing parties must also continue internal improvement of their compliance efforts, programs, and processes. Corrective actions to address the underlying causes of noncompliance and to ensure that violations do not recur are a critical part of companies’ overall export compliance programs. In order to avoid a denial order
in cases involving knowledge, BIS looks particularly closely at the possibility of recurrence. Factors considered include the continued employment of culpable employees, the actual implementation of the export compliance program set forth on paper, and senior management commitment to future compliance.

Yikes. This is, to my knowledge, the first time that an export agency has publicly suggested that a company filing a voluntary disclosure needs to fire the employees involved. Even the Thompson Memorandum, which discusses considerations in charging a criminal offense, says that the prosecutor should consider what the company has done to “discipline or terminate [the] wrongdoers.” Here BIS is suggesting that employees involved in a civil violation should simply and automatically be terminated, without even any consideration of other disciplinary measures that might be more appropriate to the circumstances.

The sucking sound you are now hearing is the sound of hundreds of export compliance officers looking for new jobs.

Last week the House Foreign Affairs Committee unanimously approved legislation that would expand the Iran and Libya Sanctions Act of 1996. Under the proposed legislation (H.R. 957), sanctions provided under the Iran Sanctions Act could also be imposed on U.S. companies based on business activities of their foreign subsidiaries in Iran.

The Iran Sanctions Act requires the President to impose sanctions on companies that make an investment of $40 million or more that “directly and significantly contributed to the enhancement of Iran’s ability to develop petroleum resources of Iran.” The sanctions that can be imposed on such a company include denial of export privileges, debarment from government contracting and prohibitions of loans to the sanctioned company from U.S. financial institutions.

The proposed legislation increases the scope of the Iran Sanctions Act by modifying the definition of person to include “foreign subsidiaries.” It also modifies the definition of petroleum resources to include “petroleum by-products [and] liquified natural gas” for purposes of the Act.

As is usually the case with unilateral sanctions proposals, very little thought was apparently given as to whether this bill would accomplish anything other than to make it easier for non-U.S. companies to invest in Iran. This lack of analysis extends even to the language of the provision which erroneously cites each of the provisions it is attempting to amend. The definition of “person” is in section 14(14) of the Act, not section 14(13) which H.R. 957 references. Similarly, the definition of “petroleum resources” is in section 14(15) of the Act, not in section 14(14) which H.R. 957 references.

Moreover, H.R. 957 inserts language in the wrong place in the Iran Sanctions Act. It states that “, petroleum by-products, liquified natural gas” should be inserted “after ‘petroleum’ the second place it appears” in the amended section. That would make the provision read as follows:

PETROLEUM RESOURCES.—The term ‘‘petroleum, petroleum by-products, liquified natural gas resources’’ includes petroleum and natural gas resources.

Oops. Clearly the bill’s drafter meant the third place petroleum appears rather than the second place.

That’s a lot of mistakes for a bill that is exactly one page and eighteen lines long.

This bill needs to go back to the drafting table, both for technical and substantive reasons.

UPDATE: As pointed out in the comments, the Iran Freedom Support Act, changed the numbering of the definitions section, so that the sections referenced in the proposed bill are in fact referenced by the correct section numbers. The bill’s placement of the phrase “petroleum by-products, liquified natural gas,” however, remains incorrect.

One of the things that SCP Global Technologies got in trouble for according to the Settlement Agreement released today by BIS was shipping spare parts without a license that were not eligible for License Exception RPL. According to the charging letter, one set of spares was not eligible for License Exception RPL because “the items were maintained in a bonded warehouse in China rather than being exported as one-for-one replacements.” The other set of spare parts were not eligible because “the items were maintained in consignment at the customer’s site in Israel rather than being exported as one-for-one replacements.”

As is often the case, the BIS charging letter is far from a model of clarity. The parts might have been held in a bonded warehouse or on consignment as “one-for-one replacements.” What BIS means to say, even if unable to articulate it clearly, seems to be that the parts were not for “immediate repair” as required by section 740.10(a)(2) of license exception RPL. Additionally, holding the parts in a warehouse or at the customer’s site probably also ran afoul of section 740.10(a)(3)(ii) which provides: “No parts may be exported to be held abroad as spare parts or equipment for future use.”

I’ve always thought that License Exception RPL makes little sense from a policy perspective. If BIS finds no objection to exporting a dual use item to a particular end user, why should it inject itself again into the process each time the unit needs to be repaired. That certainly makes the U.S. item less competitive, particularly since it is often not practical to ship every conceivable spare part under the original license. If the item is subject to the CCL, a repair may take a month or more while a license for the spare part is being obtained.

DDTC’s rules on spare parts seem eminently more sensible. Under section 123.16(b)(2) of the ITAR, components or spare parts can be exported without a license in support of a defense article previously authorized for export as long as the value is under $500, the parts are going to the end user and not a distributor, and no more than 24 shipments are made per year to the end user. This doesn’t require an immediate use for the exported part but allows the exporter to ship parts that may be needed to repair or maintain the defense article — a much more commercially reasonable result.

BIS will send you, if you ask, an email notifying you of updates to the BIS website. Today I received one of the odder of such notices:

In the matter of the denial order of Ihsan Elashi, et. al., the inmate numbers for the following related parties have been corrected: Bayan Elashi, Basman Elashi, and Hazim Elashi.

The Elashi brothers were put on the Denied Parties List after conviction for shipping computer equipment and other goods to Syria and Libya and, it seems, BIS gave them all the same inmate numbers:

The current list gives the three their own, and presumably correct, inmate numbers. BIS probably had little choice other than to spend our tax dollars fixing this error, but, frankly, it could have also saved the money. If you have a proposed exporter with an address at a federal correctional institution, it’s probably a good idea not to go forward with the transaction.