Earlier this month, the United States Court of Appeals for the D.C. Circuit announced that it was dismissing the appeal of machine gun manufacturer and distributor U.S. Ordnance in its lawsuit against the Directorate of Defense Trade Controls (”DDTC”). The Court of Appeals dismissed the appeal because DDTC had resumed processing U.S. Ordnance’s pending export licenses. This certainly raised a few eyebrows since the trial court had sided with DDTC and upheld the agency’s decision to deny U.S. Ordnance’s pending license applications. So why did DDTC cave after winning in the lower court?

The reason, in my view at least, is that the decision of the District Court was a mess. Basically the Court defended DDTC’s actions because the father of the owner of U.S. Ordnace had been indicted, but not convicted, of crimes arising out of allegedly illegal firearms imports. That’s right — the father.

According to the trial court:

In May 2004, however, the Department learned that plaintiff allegedly was associated with an individual named Curtis Lynn Debord (“Debord Sr.”), who had been indicted in 1997 for violations of § 2778 of the AECA, and therefore was considered as being ineligible to engage in the export of arms under the AECA’s implementing regulations – International Traffic in Arms Regulations (“ITAR”). See United States v. Debord, No. 97-CR-239 (N.D. Cal.) (charging Debord Senior with smuggling arms into the United States, dealing in firearms without a license, entry by false statements, conspiracy, making false statements and witness tampering).

In a footnote, the Court noted that Debord Sr. was the father of “Curtis Lee Debord, who is the President, Treasurer, Secretary and sole director and owner of” U.S. Ordnance.

When the trial judge says that U.S. Ordnance was ineligible for DDTC licenses because the father of the owner of the company had been indicted for firearms import violations, you have to wonder whether anybody bothered to share a copy of the ITAR with the lower court. And if they did, whether it read it. Not only doesn’t the ITAR impose any family eligibility requirement but also the charges against Debord père don’t appear to be violations of the Arms Export Control Act or any of the other statutes singled out by ITAR section 120.27 as disqualifying. (Parts of section 2778 of the AECA do deal with certain imports of firearms but it’s not clear from the court’s description that these relatively narrow provisions were involved.)

But it gets worse. The trial court held that it had no jurisdiction over U.S. Ordnance’s case because the DDTC’s actions were matters of foreign policy committed to the agency’s discretion. That argument might make sense if U.S. Ordnance was challenging the decision of DDTC to adopt a rule that made license applicants ineligible for the sins of their fathers; it makes no sense where the argument was that the DDTC wasn’t following its own rules.

To be fair, the DDTC claimed that the father was, at least for a period, a senior official of U.S. Ordnance. If that was true and the indictment against Debord Sr. had charged crimes listed in section 120.27, then U.S. Ordnance would have been ineligible under section 120.1(c) and would have been required under section 126.13(a)(1) with any license applications. But this appears to have been contested by U.S. Ordnance and certainly wasn’t relied on by the trial court judge who felt it sufficient that the CEO of U.S. Ordnance was related to someone who had been indicted.

The Office of Foreign Assets Control (”OFAC”) announced expanded sanctions today against Sudan and added three individuals and thirty-one Sudanese companies to the SDN list. Doing business with these companies was already prohibited by the Sudanese Sanctions Regulations. The effect of the designations means that any funds of the newly-designated companies or individuals must be blocked when they come under the control of U.S. companies and individuals.

It’s always hard to anticipate the effect of such blocking. Certainly U.S. financial institutions have systems in place that will catch these funds should the newly-designated companies attempt to utilize those institutions. But other U.S. companies without such controls may well continue to provide services to the Sudanese SDNs.

Take IX Web Hosting, for example. IX hosts a number of websites on its servers in Hopkinsville, Kentucky. One of the websites hosted by IX Web Hosting just happens to be the website of Advanced Petroleum Company in Khartoum, one of the newly-designated SDNs. Of couse, such hosting already violated Section 538.205 of the Sudanese Sanctions Regulations (unless IX Web Hosting can somehow claim that it had no idea it was providing web-hosting to a company in Sudan). Under the new sanctions, if IX Web Hosting receives any hosting fees from Advanced Petroleum it will now have to block them.

We’ve noted on a number of occasions that the Internet poses unique challenges for sanctions compliance, challenges which a number of companies haven’t even begun to address. So how long before the Advanced Petroleum website disappears?

The Bureau of Industry and Security (”BIS”) published today in the Federal Register an order denying export privileges to Super Net Computers, a Dubai-based computer retailer. You don’t have to be a rocket scientist, or a computer scientist, to guess why — Super Net was transshipping U.S.-origin computer parts to Iran. Surprise, surprise, surprise.

Dubai is just a short hop across the Straits of Hormuz to Iran and, not surprisingly, is the transhipment point of choice for goods being shipped into Iran in violation of the U.S. sanctions on Iran. Any exporter should exercise increased diligence when shipping goods to Dubai, and to the UAE, to insure that the goods don’t wind up in Tehran, which could lead to some pointed questions from BIS.

While searching the Internet to get information on Super Net Computers, we found a valuable asset to assist exporters in exercising that extra measure of care. There is a site called the “Iranian Business Directory Dubai” which bills itself as the “ultimate guide to Iranian businesses in Dubai.” And right there in that directory we found Super Net Computers, more or less advertising that any thing shipped to it would cross the Straits of Hormuz before you could say Ahmadinejad.

More than seven thousand other Dubai businesses — 7,222 to be precise — are listed on that directory, which makes the directory an extremely valuable resource. The “ultimate guide” indeed. Although not in the way we imagine it was intended.

Last week, Dr. Thomas Enders, the CEO of the European Aeronautic Defense and Space Company (”EADS”) spoke at the CEO Leadership Series at the U.S. Chamber of Commerce. An article in World Politics Review describes an ITAR war story told by Dr. Enders during his speech:

Offering his own “war story” concerning ITAR, Enders cited a case involving EADS and the U.S. Navy. EADS had exported U.S.-made parts for incorporation into a radar system for Malaysia, he said. When that deal . . . became sidetracked, the [parts] became available and the Navy decided that it needed them. So, in June of 2005, EADS asked the State Department for permission to re-transfer the American-made parts back to the United States.

The State Department, which is responsible for enforcing ITAR rules, took 11 months — until May, 2006 — to grant that permission, and only “when this matter was elevated to the highest management level of the Directorate [of] Defense Trade Controls in the State Department,” Enders said. Was the State Department “worried about the reliability of the Navy as end-user?” he asked rhetorically.

While noting that he was “not trying to ridicule ITAR,” Enders said that “There’s something wrong” with the current situation. “The point is [that] these regulations are so burdensome for industry on both sides of the Atlantic.” They are “strangling” U.S.-EU defense trade, he said.

Although my first thought was that these re-exports of the parts to the Navy would be covered under the exemptions in ITAR § 126.4 for shipments by or for U.S. government agencies, a closer look at them shows that not to be the case. The exemption in § 126.4(a) only applies to temporary imports and temporary exports. In this case, a permanent export was involved. Similarly, the exemption in § 126.4(c) only applies to exports for end-use by the U.S. government in a foreign country, which was also not the case.

Certainly it is an odd result that there would have been an exemption if EADS were shipping those parts back to the Navy for use outside the U.S. but no exemption if they were being shipped back for use by the Navy in the United States itself. This only makes sense if you make the otherwise reasonable assumption that the definition of re-export in § 120.19 wasn’t intended to cover a transfer of defense articles to the U.S. government in the United States. However reasonable that assumption might otherwise be, the language of § 120.19 doesn’t explicitly permit such a reading, and EADS was, therefore, required to apply for a license to cover the re-export of the parts to the Navy.

What do missiles and toilets have in common? Both are on the United States Munitions List.

Zodiac Group apparently learned this the hard way. Zodiac, best known for its inflatable water craft, also makes toilets for boats and airplanes. According to this article in Defense News, Zodiac told the European Institute’s Transatlantic Roundtable on Defense and Security yesterday that it found out that a toilet might be on the USML when it tried to export toilets for use on military aircraft.

Now before we all get out our pitchforks and storm DDTC, let’s look at the situation a little more closely. The item apparently in question is the rather descriptively named Evac 90 Kandre. That product can be found here on the company’s website, which describes the toilet as follows:

Evac 90 Kandre, with shock and vibration proof design, has been developed for navy/military use. It is equipped with proven fully pneumatic Evac 900 mechanism with flush memory and vacuum sensor technology. For spare parts Evac grants a lifetime support. Evac 90, Kandre, has passed the MIL-SPEC 901D (Navy) Grade B, Class 1, Type A shock test.

Not even a close question here. That stainless steel “shock-proof” baby needs a license, and Zodiac shouldn’t have been surprised that it did.

UPDATE: A reader sends in an image of another toilet that is on the USML:

The “Jules Verne,” the automated transfer vehicle (”ATV”) being designed by NASA and the European Space Administration (”ESA”) to ferry supplies to the International Space Station is, by definition, a defense article covered by Category XV of the United States Munitions List (”USML”). As such, technical assistance agreements must be in place for each transfer of technical data on the ATV from U.S. contractors to their European counterparts.

NASA has long complained about these requirements in relation to the International Space Station. In December 2006, NASA requested relief from ITAR requirements for transfers of technical data relating to the International Space Station but this request has not yet been acted on by State. The final report by the International Space Station Independent Safety Task Force, released in February of this year, concluded that these requirements jeopardize the safety of the International Space Station.

At the Washington Space Business Roundtable last week, William Gerstenmaier, NASA’s associate administrator for space operations, revealed what NASA believed to be a “feasible workaround” if the State Department fails to act on NASA’s request. According to Gerstenmaier:

We are actually training civil servants as a workaround. It’s not truly training unique civil servants, but we are utilizing civil servants more than we would have … if we had some of these restrictions removed.

According to Gerstenmaier, civil servants could, under existing rules, interact more freely with their non-U.S. counterparts.

It’s difficult to understand Gerstenmaier’s position here. There is no exemption for civil servants to export technical data. Perhaps what he means is that the private contractors, aware of the restrictions, will refuse to share information with the Europeans whereas a government employee will either be unaware of the restrictions or will believe that the “I was just following orders” defense will shield him or her from liability for export violations. I’m not so sure I would call that a feasible workaround.

A while back we reported on a fine that OFAC imposed on the Alliance of Baptists, a church group which obtained a license for its member churches to travel in Cuba. Some of the member churches had apparently engaged in tourist activities such as visiting museums and other tourist attractions. Licenses for missionary activity in Cuba require that the missionaries devote their entire time in Cuba to a religious program and forbid groups from engaging in any tourist activities while in Cuba.

According to this article from Associated Baptist Press, OFAC withdrew the penalty on May 17, finding that none of the trips in question involved any improper tourist activities. This finding was allegedly premised on a submission that the group made to OFAC which can be found here. That submission, however, seems to be a fairly direct confession that the groups did, in fact, devote time to tourism, making OFAC’s actions here a bit hard to understand without assuming that the decision was based more on politics than policy.

The problem for the Alliance of Baptists started when it submitted to OFAC in June 2005 an itinerary for a March 2005 trip to Cuba. After analyzing that itinerary, OFAC suspended the Alliance’s travel license and stated the following in the Notice of License Suspension:

The itinerary included approximately four hours of religious activities each day, on average. The rest of the time was filled with walking and driving tours, sightseeing and beach time in Varadero, and visits to farms, museums and craft markets.

The Alliance response to OFAC’s subsequent decision to fine the Alliance $34,000 included a number of affidavits from people who were on the trips to Cuba using the Alliance license. In each instance, the affidavits admitted tourist activity occurred but tried to put a religious gloss on those activities.

An affidavit from a member of the Baptist Church of the Covenant in Birmingham, Alabama, admitted that its group took a driving tour of Havana, claiming to be to sick to engage in the religious activities that had been scheduled for the group. The affidavit of the pastor of the First Baptist Church of Washington, D.C., admitted that the group toured Old Havana but claimed that this was part of its “partnership” with a Cuban church. A member of another church admitted in his affidavit that his group, among other things, engaged in a nature hike in a national park, took a tour of the city of Santa Clara, attended the ceremonial closing of a harbor, and spent a morning touring Old Havana. These were all claimed to be religious activities because they were done together with members of Cuban churches.

Regular readers know that I think that OFAC has better things to do than to pore over the itineraries of Baptists in Cuba to make sure that they don’t have any fun while there. But, 31 C.F.R. 555.516 explicitly requires that licensed religious travelers be engaged “in a full-time program of religious activities” while in Cuba. Normal tourist activities can’t be turned into religious activities simply by enlisting a Cuban church member as a tour guide. Without some clarification from OFAC, it certainly looks like its about-face on its proposed penalty had little to do with the merits of the case.

On its website today, OFAC designated the Estancia Infantil Niño Feliz (aka “Happy Baby Day Care Center”) in Culiacan, Mexico, as a narcotics playpen kingpin. Undercover agents reported hearing a discussion between two four-year-olds planning to ship 200 kilos of cocaine into the United States.

Actually, the Day Care Center is alleged to be, according to a DEA press release, a front company for Ismael Zambada Garcia, a fugitive from justice designated as a narcotics kingpin (”SDNTK”) in 2002. Needless to say, a day care center seems ill-suited to the demands of a narcotics front company. How exactly would Happy Baby Day Care center explain making ginormous deposits at the local branch of Banamex? But let’s take the DEA and OFAC at their word on this.

The important take-away here is that no assumptions can be made about whether a company is likely to be on the SDN list. If a kindergarten can be an SDNTK, so can a ballet troupe and a provincial petting zoo. Even if you had googled Happy Baby Day Care or, more precisely, Estancia Infantil Niño Feliz, you would have discovered that, in at least one sense, the pre-school is the real deal. The site for the Mexican state of Sinaloa actually lists Happy Baby Day Care as one of the preschools in Culiacan. So, check the list, no matter how innocuous or legitimate the customer seems.

(Note: the picture illustrating this post is not a picture of the Estancia Infantil Niño Feliz in Culiacan)

A press release from the Bureau of Industry and Security (”BIS”) this afternoon announced that Cooper Tools Industrial Ltda., a wholly-owned Brazilian subsidiary of Houston-based Cooper Industries, agreed to pay $27,000 to settle anti-boycott violations that had been voluntarily disclosed to BIS. Between June and July of 2004 the Brazilian subsidiary responded to requests for prohibited information about its business relationships with Israel to buyers located in Kuwait and the UAE.

Once again we have an example of a company winding up in the soup because of non-compliance by one of its foreign subsidiaries. It is easy to forget the broad scope of the anti-boycott regulations in Part 760 of the EAR. Section 760.2(d) prohibits “U.S. Persons” from providing information about its relationship with a boycotted country. A “U.S. Person” is defined in Section 760.1(b)(1)(v) as including foreign subsidiaries that are “controlled in fact” by a U.S. company. Section 760.1(c)(2) makes clear that, not surprisingly, a wholly-owned subsidiary will be presumed to be “controlled in fact.”

Violations by foreign subsidiaries can easily occur without anyone really understanding that a violation has occurred. Cooper’s Brazilian subsidiary no doubt understood itself as subject to Brazilian law and not to U.S. law. So it behooves companies, in my view, to spend the extra bucks to send their foreign employees to export compliance training. And, of course, plenty of lawyers are more than happy to fly down to Rio to do the training there.

The Directorate of Defense Trade Controls (”DDTC”) announced today that it was amending section 126.1 of the ITAR to reflect a partial lifting of the arms embargo against Somalia. These amendments are being adopted to implement revisions made to the Somalia arms embargo by U.N. Security Council Resolution 1744 adopted on February 21, 2007. Thee three month delay in announcing the amendments, which have not yet even been published in the Federal Register, indicates that revising the arms embargo on Somalia was not exactly put on the front burner at DDTC.

In January this year, an offensive by Ethiopian troops overthrew the fundamentalist Islamic militia that had ruled the country and allowed the emergence of the Transitional Federal Government of Somalia (”TFG”). The TFG is the result of mediation by the Intergovernmental Authority on Development. Formed in late 2004, the TFG governed from neighboring Kenya and then moved to Baidoa, a city in Western Sudan. On January 8, 2007, the TFG established itself in Mogadishu, the capital of Somalia. Shorthly thereafter, the African Union announced that it was opening a mission in Somalia aimed at promoting stability in Somalia as the TFG attempts to establish itself, consolidate power, and transition to a democracy through elections in 2009.

The UN resolution lifted the arms embargo in two respects. First, it permits export to Somalia of “weapons and military equipment, technical training and assistance intended solely for the support of or use by” the AU Mission. Second, it permits exports of the such military supplies, assistance and training “intended solely for the purpose of helping develop security sector institutions, consistent with the political process” leading to the establishment of the TFG and elections in 2009. The meaning of “security sector institutions” is unclear, but all such exports need to be notified to the Security Council Committee on Somalia and may proceed only in the absence of a negative decision by the Council within five days of such notification.

Continued violence and unrest in Somalia suggest that the January victory of the Islamic militias may not have been complete and call into question whether the TFG will be able to bring stability to the nation with a view towards elections in 2009. The U.S. seems to harbor some skepticism about the situation in Somalia, and this could well explain the delay by DDTC in implementing Resolution 1744.