Apparently feeling that Michael Moore’s new movie wasn’t getting enough publicity, the Bureau of Industry and Security (”BIS”) served its own subpoena on Moore, giving Moore yet another opportunity to talk about persecution on the late night talk show circuit. Additionally, the BIS subpoena sent a sly message to Treasury’s Office of Foreign Assets Control (”OFAC”), which is also investigating Moore, that the enforcement folks at BIS are just as rough and tough as those at OFAC.

I can’t find a copy of the subpoena, but it’s pretty easy to guess what’s going on here. BIS can penalize exports to Cuba under EAR section 746.2, which requires a license from BIS for all exports to Cuba not subject to certain narrow exceptions set forth in the rule. (OFAC on the other hand penalizes financial transactions with Cubans or the Cuban government.)

So BIS is clearly looking for something exported by Moore to Cuba. One possibility is the horse boat he road in on. We’ve seen that before when BIS nailed a sport fishing boat that chased a fish into Cuban waters. Outside of that it’s hard to see what Moore would have exported. Maybe he spit out some gum he brought with him from the United States. This would be problematic because section 746.2 doesn’t contain the LVS exception for limited value shipments that might otherwise cover the export of a stick of chewed-up chewing gum to Cuba.

Back to the boat theory, however, there may be an applicable exemption, because section 746.2(a)(1)(i) permits temporary exports to Cuba “by the news media,” which puts us back to pretty much where things are over in the OFAC proceeding. There the question is whether Moore is a “journalist” and therefore entitled to the general license for journalists to travel to Cuba. In BIS-land, the issue will be whether Moore is a member of the “news media” or not.

Unless, of course, they can nail Moore for that piece of gum he spit out on El Malecón.

Assistant Secretary of Commerce Christopher Padilla testified on Friday at a hearing on export controls held by a subcommittee of the House Foreign Affairs Committee. Most of the testimony was devoted to the current hobby-horses of Padilla’s Bureau of Industry and Security, including, of course, the agency’s emphasis on end users rather than on destination country. Two things, however, stuck out.

First, Padilla’s choice of an illustrative example of a dual-use good was interesting:

A good example is this triggered spark gap. Triggered spark gaps, which resemble empty spools of thread, are in fact high-speed electrical switches capable of sending synchronized, high-voltage electronic pulses. They have two principal uses: to break up kidney stones and to detonate nuclear weapons.

That’s not a very good explanation of the uses of a triggered spark gap (which, by the way, are covered by ECCN 3A228.b). Triggered spark gaps are used in flashlamps, pulsed CO₂ lasers, “crowbar” protection circuits, and a number of other common industrial applications. To say that nuclear detonation and lithotripsy are the two principal uses of triggered spark gaps is, frankly, misleading. And it is of more than a little concern when an agency like BIS which is required to be conversant in technical matters doesn’t fully understand what it is regulating.

But not everything about Padilla’s testimony deserved a boo and a hiss. The second thing I noted in his testimony deserves a cheer:

We are also planning a draft proposal that would introduce a standard format for all U.S. Government screening lists. Our goal is to have a more complete continuum of information – from the Unverified List through the Entity List to the Denied Persons List – available for exporters to use in screening potential customers.

Of course, like all other instances of proposed inter-agency cooperation, I’m filing this proposal under “I’ll believe it when I see it.” OFAC has zealously guarded its prerogative to have entries on the SDN list which are nothing more than a common name and, perhaps, a country of residence.

And while we’re talking about needed proposals for U.S. government screening lists, why doesn’t someone propose the next logical step? You know, one list in one place. How hard would that be?

We’d like to think that our post critical of the SEC’s list of public companies doing business in Syria, Sudan, Cuba, North Korea, and Iran had something to do with the SEC’s decision to remove the list from its website. But, in all honesty, we’ll have to admit that a storm of protest from more important people on the Hill was more likely the cause.

The SEC press release announcing the removal of the list made clear that the list hadn’t been killed but, instead, was undergoing surgery:

We are temporarily suspending the availability of the web tool while it undergoes reconstruction. We will work to improve the web tool so that it meets the various concerns that have been expressed.

It’s not clear how the list can be fixed unless it is transformed from a list that compiles companies that mention sanctioned countries in their filings to one in which the SEC staff exercises discretion to cull the bad companies doing bad things in the sanctioned countries from the good companies that have more innocuous connections to the sanctioned countries. Traditionally, the SEC has been disinclined to engage in such a function, preferring that company disclosures speak for themselves.

Some other interesting facts can be found in the press release. First, the list was enormously popular, receiving 150,000 hits over approximately three weeks. We get about 8,000 hits in three weeks — about 400 per day — so our board is going to meet in our world headquarters this weekend to consider putting the SEC list back up on this site. That’s a joke, of course. Please don’t send any threatening emails.

Also, the press release indicated that the countries clicked on were, in descending order, Iran, Cuba, Sudan, North Korea and Syria. Frankly, I’m surprised that people were more concerned about who was doing business in Cuba than in North Korea or Sudan, but maybe a bunch of people were clicking through Cuba looking for an Internet source for Cuban cigars.

Houston-based oil-drilling and oilfield services company Weatherford announced yesterday in its 8-K filing with the SEC that the company has

been notified that the Bureau of Industry & Security and the U.S. Department of Justice are investigating allegations of improper sales of products and services by us in sanctioned countries. We are cooperating fully with this investigation. In cooperation with the government, we have retained legal counsel, reporting to our audit committee, to investigate this matter. The investigation is in its preliminary stages.

It’s probably not to hard to guess what sanctioned country is involved. A map of Weatherford offices published in the September 2005 edition of W magazine, a Weatherford publication, tells the story:

Looks like three locations in Iran to me.

Of course, a foreign subsidiary of a U.S. company can do business in Iran provided that the foreign subsidiary has business in other countries (in other words, is not a device to evade the sanctions) and provided its operations in Iran are not controlled by the parent. Complying with the second condition — i.e. isolating the Iranian operation from control by the U.S. parent — is what normally creates a problem. Even something as innocent as U.S. approval of a travel and expense voucher in Iran from the foreign subsidiary can raise questions — particularly in an environment where U.S. officials are making louder and more frequent noises about swatting companies doing business in Iran.

An editorial in Friday’s Wall Street Journal was critical of the United Nations Development Program (”UNDP”) for several supposedly illegal exports. The criticism seems to be largely based on the questionable claim that the UNDP was required to obtain export licenses from the Bureau of Industry and Security for certain items exported by UNDP from foreign countries to North Korea, including a spectrometer, some GPS equipment and some computer equipment. Sadly, the author of the editorial, Melanie Kirkpatrick, doesn’t appear to have consulted with anyone who actually knows anything about export law.

Ms. Kirkpatrick premises her analysis on a export license application by UNDP for GPS mapping software which was denied on September 16, 1999. She notes that the software was EAR99. Astute readers will recall that up until September 17, 1999, U.S. sanctions prohibited the export of EAR99 items to North Korea. Thereafter, EAR99 items were freely exportable to North Korea (although on January 26, 2007, new license requirements and prohibitions on exporting certain luxury items such as cognac and iPods to North Korea were put in place). Hence, the need then for a license application that would not be required now.

Even so, Ms. Kirkpatrick seems to think that such a license would still be required:

Yet seven years later, the UNDP procured and transferred sensitive technology to the same, unsafeguarded project — this time without bothering to apply for a license. And while there’s no evidence the UNDP went ahead and purchased the software for which it had been denied a license, that possibility must be considered, since GPS equipment is useless in such a project without mapping software.

If it’s EAR99 and was shipped before anuary 26, 2007, no license would have been required, meaning that UNDP could have freely exported the software to North Korea.

Nor is it clear that a license was required for the other items at issue. The commercial GPS system would be classified as ECCN 7A994 and would require a license for export to North Korea. Similarly, the computer equipment may well be ECCN 4A994, which would require a license for North Korea. We can’t tell from Ms. Kirkpatrick’s description what the ECCN would be for the spectrometer, but let’s also assume, for the sake of argument, that it wasn’t EAR99

Even so, the EAR wouldn’t require licenses for the export even of these items to North Korea unless exported from the United States, or unless exported by a U.S. person (which UNDP is not), or unless the item has U.S. content. And it’s not clear that any of these conditions were met. According to Ms. Kilpatrick:

Mr. Melkert says in the annex that the UNDP is investigating “whether the vendors [in the Netherlands and Singapore] were required to obtain export permits for these items”–which sure sounds like an effort to shift responsibility.

It may sound to the Wall Street Journal like an “effort to shift responsibility” but to anyone familiar with export law it sounds like a claim that the exports may not have been subject to U.S. law.

There may well be a number of good policy reasons that these items shouldn’t be in North Korea, but saying that the export of these items violated U.S. laws isn’t one of those reasons.

Roy Lee Oakley, an unskilled maintenance worker, was indicted on July 17 and charged with violating section 224 of the Atomic Energy Act (42 U.S.C. § 2274). The charges were based on Oakley’s alleged attempts to export gas diffusion barriers from a dismantled uranium enrichment plant to the French. But before you go check your supply of radiation pills and duct tape, I can assure you that this is a story more out of Austin Powers than Tom Clancy.

According to the Knoxville News-Sentinel, Oakley was an unskilled worker employed by Bechtel Jacobs which had a contract to dismantle the gaseous diffusion plant that was once used to enrich uranium at the East Tennessee Technology Park outside Knoxville. One of the tasks assigned to Oakley, according to Oakley’s attorney, was to break the gas diffusion barriers and associated equipment into pieces. The gas diffusion barriers are membranes used to separate isotopes of uranium.

Oakley’s attorney claims that although Oakley thought of these broken barriers as “trash,” they might still be of interest to the French. (It is not clear whether this is because Oakley didn’t really think the barriers were trash or because he thought that the French had an unusual interest in buying trash). So Oakley did what any patriotic American would do, he called the French Embassy in Washington, D.C., and offered to sell the pieces to them. The response of the French diplomats to Oakley’s call, again in the words of Oakley’s own attorney, was that “they laughed at him.” And then apparently they called the FBI. The FBI had an agent impersonate a French diplomat to conclude the transaction (or at least enough of it to indict Oakley). Am I the only one wondering whether the FBI agent put on a cheesy French accent as part of the sting?

If the facts are as presented above, Oakley’s prospects for acquittal do not look good and indeed he deserves to be punished. However, the huffing and puffing about the vast harm that might have occurred — from various government officials and the perpetual alarmists at Arms Control Wonk — needs to be tempered somewhat.

There is a reason that the gas diffusion enrichment plant had been in mothballs for some time and was being dismantled is that it was obsolete and had been replaced by cheaper and more efficient methods of uranium enrichment. According to a typically reliable assessment from GlobalSecurity.org:

Gaseous diffusion is unlikely to be the preferred technology of a proliferator due to difficulties associated with making and maintaining a suitable barrier, large energy consumption, the requirement for procuring large quantities of specialized stage equipment, large in-process inventory requirements, and long equilibrium times.

Nor is it clear even that providing the membrane itself would enable a potential proliferator to determine how it had been manufactured. So, Oakley probably broke the law, but probably doesn’t deserve to be seen as the latest Julius Rosenberg or AQ Khan.

The Bureau of Industry and Security (”BIS”) has released new regulations explaining the treatment that BIS will give to voluntary disclosures of BIS’s antiboycott regulations. Those regulations, for example, prohibit exporters from certifying to Arab League countries that exported products do not contain Israeli content.

The new regulations set forth the procedures for filing a voluntary disclosure. These procedures more or less parallel the procedures adopted at other agencies, including permitting the filing of a bifurcated voluntary disclosure, i.e., an initial disclosure after the violation was discovered and a more detailed disclosure after the violation has been investigated by the company making the disclosure. The initial voluntary disclosure must be filed before BIS has learned of that information from another source and commenced an investigation. The new regulations make clear that disclosures made to the agency during telephone calls seeking guidance on the rules are not considered disclosure of the information from another source.

But, BIS being BIS, the new rules enshrine significant disincentives to companies to make voluntary disclosures. Most significantly, section 764.8(b)(4) says this:

Although a voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by BIS, it is a factor that is considered together with all other factors in a case. The weight given to voluntary self-disclosure is solely within the discretion of BIS, and the mitigating effect of voluntary self-disclosure may be outweighed by aggravating factors.

What BIS is saying here is that it may in certain circumstances give no weight whatsoever in mitigation because of the voluntary disclosure. This is a significant disincentive to voluntary disclosures because a company must weigh the possibility of there being no benefit to the voluntary disclosure against the possibility that BIS would never discover the violation if it hadn’t been disclosed. The only way to preserve the incentive to make a voluntary disclosure is to say that aggravating factors might be used to reduce the weight given to the voluntary disclosure but not to totally eliminate it.

But (and I’m sure some readers won’t be surprised by this) it gets worse:

Voluntary self-disclosure does not prevent transactions from being referred to the Department of Justice for criminal prosecution. In such a case, BIS would notify the Department of Justice of the voluntary self-disclosure, but the decision as to how to consider that factor is within the discretion of the Department of Justice.

Of course, a VSD shouldn’t be a “get out of jail free” card and there may be rare circumstances where such a disclosure should be referred to DOJ. But BIS by stating only that cases may be referred without the further qualification that the VSD at least makes it somewhat less likely that the case will be referred, erects another disincentive to voluntary disclosure. In my experience, the driving force behind most voluntary disclosures is the company’s desire to reduce the risk of prosecution.

An article in today’s edition of the Financial Times reports on a press conference given yesterday by John Rood, Assistant Secretary of the State Department’s Bureau of International Security and Nonproliferation, where Rood discussed the recently signed Defense Trade Cooperation Treaty between the U.S. and the U.K. (Don’t go looking for a transcript at the State Department’s website; usually only Sean McCormack’s daily press briefing is posted and other special press briefings, such as Rood’s on the treaty, are not.)

Rood had a few interesting things to say. First, he said that the administration hopes to get the treaty through the Senate before the end of this year. This seems optimistic at this point with the August recess nearly upon us. Additionally, it is unclear how functional the Senate will be after the slumber party planned for the next few nights.

Second, Rood said that the State Department and the Department of Defense hoped to have “implementation procedures” in place “within six months” to determine what companies and individuals would be part of the “approved community” that could receive and disclose ITAR-controlled technical data without formal approval by the Directorate of Defense Trade Controls (DDTC).

Finally, Rood more or less dashed the hopes of other countries — such as Canada and Australia — that might arguably wish to have similar treatment as the U.K. Rood said the treaty was entered into because of the “close relationship” between the U.S. and U.K. Then he said:

If other countries approach us we’d have to ask ‘Do they have the same close relationship?’ I don’t know if we’ll do anything like that or not.

I’m sure that remark was well received in Ottawa and Canberra.

Amnesty International, according to a letter it sent last Friday to the President of the Council of Ministers of the E.U., has evidence that India intends to transfer two military helicopters to the Myanmar military. The Dhruv Advanced Light Helicopters in question contain component parts from E.U. defense suppliers. As a result Amnesty International is asking E.U. member states to withdraw existing licenses and deny future license for any exports to India that could be used for the Dhruv helicopter. Amnesty is also asking the E.U. to impose upon future exports a strict and enforceable condition that items could not be re-exported to countries subject to arms embargoes.

The Dhruv helicopter also incorporates U.S. parts. The active vibration control system is made by Lord Corporation in North Carolina. U.S. companies supplying components to India that could be used for the Dhruv should expect increased scrutiny if the delivery to Myanmar takes place.

Although incorporating a number of advanced features, the Dhruv has been plagued by some controversy. In February of this year a Dhruv crashed, killing one pilot and injuring the other, during practice maneuvers for an air show. A 2004 crash had been blamed on defective tail rotor design, which was claimed to have been fixed. The February crash calls that into question. However, the Myanmar regime can’t afford to be picky and will no doubt accept delivery of the Dhruv whether or not the tail rotor has been fixed.

Iowa-based fish processor Stoller Fisheries was recently assessed $931.25 by the Office of Foreign Assets Control (OFAC) for shipping 20 grams of carp pituitary glands (valued at $4,900) to Iran without an OFAC license. Carp pituitary glands are believed to be beneficial to the spawning and fertility of farmed fish. The violation was not voluntarily disclosed.

The penalty notice issued by OFAC indicated that the company made both a written presentation and a verbal presentation to OFAC, which prompted OFAC to reduce it’s proposed penalty of $3,725 to the $931.25 actually assessed. The $3,725 represents a substantial reduction from the $11,000 penalty that could have been imposed, assuming, as seems the case, that only one export was involved.

So what prompted this significant reduction for a company that, after all, didn’t voluntarily disclose the violation?

To begin with, Stoller’s case presented all the other factors that would normally be used for mitigation. As the penalty notice stated:

Company alleged that it was not aware of regulations prohibiting sales to Iran and that its primary business is in the processing of fresh water fish for human consumption and particularly kosher fish products. Moreover, Company alleged that the sale of carp pituitary glands is a by-product of the primary business.

In support of its request for a waiver, Company has submitted its current compliance policy instructing employees to check and verify exportations to countries prior to packaging any shipment to such country and to contact the U.S. Customs and Border Patrol if any questions arise. . . .

Company took affirmative steps to prevent further unlicensed shipments to Iran and that some relief is warranted in consideration of the fact that this constitutes Company’s first offense on record at OFAC, Company instituted a new compliance policy, and evidence that such activity may have been licensable.

First offense? Check. Inexperienced exporter? Check. Unintentional violation? Check? Licensable? Check. Implemented steps to prevent similar exports? Check. Adopted new compliance program? Check.

One part of the compliance program adopted by Stoller, however, is something that I don’t recommend. As noted above, Stoller’s program advises employees to contact Customs if they have questions about a shipment. If Customs thinks it is being used as compliance counsel, it may well decline to provide assistance beyond saying: “Ship it and we’ll seize it and prosecute if there’s a problem.”

In addition to the mitigation factors mentioned above, there is one intangible reason, which I’ll call the good guy factor, that I think may also explain why Stoller was treated well here. I can’t help but think that Company officials made quite a personal impression during their verbal presentation to OFAC. This suspicion is based on the Company’s website which is, frankly, simple, charming and appealing. Even though I have no particular use for the plate-frozen blocks of mechanically-deboned minced fish sold by the Company, the website made even me consider, if only for a moment, whether I might find some use for plate-frozen fish blocks. Okay, let’s be honest, I even wondered whether I could find some use for the carp pituitary glands.

I think what sold me on the Company, among other things, was this memorable phrase from the website:

Don’t ask if the carp is good enough for you to eat. Ask instead if you’re good enough to eat carp.

Words to live by indeed.