Earlier this month, the the House of Commons’ Quadripartite Committee released a report entitled Strategic Export Controls: 2007 Review. In the report, the Committee recommends that the U.K. adopt a broker registration system that is interesting both in itself and in comparison to the current treatment of brokers in the United States under the provisions of Part 129:

We accept that the EU Council Common Position on the control of arms brokering, adopted on 23 June 2003, does not call for the registration of arms brokers. Article 4 suggests that Member States “may” establish a register of arms brokers, and that “registration or authorisation to act as a broker would […] not replace the requirement to obtain the necessary licence or written authorisation for each transaction”. We conclude that the EU Common Position on the control of arms brokering sets the best practice and we recommend that the Government follow best practice to establish a register of arms brokers. We conclude that a register will help to ensure that brokers meet defined standards, requirements and checks as well as deterring those—for example, with a relevant criminal conviction—for applying for registration. We also recommend that any brokering or trafficking in arms by a person in the UK or a British citizen abroad who is not registered be made a criminal offence.

The report doesn’t address, or even seem aware of, the difficulty of defining what activities in connection with the sale of a defense article constitute brokering. But leaving aside that question, it approaches the registration issue in ways that are significantly different from Part 129.

First, under Part 129, the registration process is purely informational. There is no endorsement by the DDTC when it issues a registration number that it has made a determination that the registrant is indeed qualified to act as a broker. The Committee’s proposal, however, clearly contemplates the enforcement of certain standards, including background checks, that more closely resemble a professional licensing system.

Second, the U.K. proposal relating to brokers requires registration only. There is no suggestion that broker participation in particular transactions may require specific licenses as is the case under Part 129 of the ITAR.

Third, one of the most significant controversies relating to Part 129 has been its jurisdictional scope. Part 129 requires registration by brokers “otherwise subject to” U.S. jurisdiction. The question here has been whether “otherwise subject to U.S. jurisdiction” covers brokers who are outside the United States, have no contacts with the United States and are not U.S. citizens but who are engaged in brokering with respect to U.S. origin defense articles. The U.K proposal applies only to British citizens engaging in brokering in the United Kingdom and throughout the world and to citizens of other countries engaging in brokering in the United Kingdom. It does not apply to parties that are not British citizens and are brokering outside the United Kingdom.

Three of the 167 counts charged against Armor Holdings which led to the recent $1,102,200 settlement agreement related to charges that Armor exported items in excess of licensed value in violation of EAR Section 764.2(a). For example, Armor exported plastic handcuffs valued at $1,980 under a license that authorized export of plastic handcuffs valued at $1,000. The Settlement Agreement doesn’t make clear why exporting merchandise in excess of authorized value under the license is a violation of the EAR, but it is, and it’s instructive to see why it is a violation.

The specific violation charged with respect to the export of excess-value plastic handcuffs was Section 764.2(a) which says:

No person may engage in any conduct prohibited by or contrary to, or refrain from engaging in any conduct required by, the EAA, the EAR, or any order, license or authorization issued thereunder.

But where exactly in the EAR is there a prohibition on shipping items in excess of the value authorized in the license? That would be Section 750.7(c)(1)(ii) which lists the “non-material changes” in an export that do not require the issuance of a replacement license, including:

Increase in price or quantity if permitted under the shipping tolerances in §750.11 of this part.

Under Section 750.11, shipping tolerances depend upon the unit value specified in the relevant ECCN. If the unit reads “$ value,” there is no shipping tolerance. If the unit reads “Number” or “in Number,” then the value of all shipments under one license may exceed the authorized dollar value by up to 25 percent. If the unit refers to weight, area or some other similar measure, then that measure may be exceed by up to 10 percent and authorized value by up to 25 percent.

Plastic handcuffs are categorized under ECCN 0A982, which specifies the unit as “$ value.” That means that, under the zero tolerance policy, you can get whacked for shipping plastic handcuffs valued at $1000.01 under a license authorizing exports of $1,000. Is that a compliance nightmare or what?

Consider for example nylon hand restraints also categorized under ECCN 0A982 and subject to the zero tolerance policy. These restraints are valued as low as fifty cents, so a license authorizing $1,000 would authorize the export of 2,000 such restraints. How do you know you haven’t exported 2,001? How many times did your shipping department count the contents of the package being exported? Let’s even suppose that you are shipping ten 200-count packages that you purchased from a third party. How do you know that there are 200 in each package? How many export compliance officers reading this have just broken into a cold sweat?

Ace Systems, a Georgia-based reseller of refurbished voice cards and other PC-based telephony products, agreed to a fine of $36,000 to settle these charges as set forth in the Bureau of Industry and Security’s Charging Letter:

On or about July 3, 2006, Ace attempted a violation of the Regulations by attempting to export dialogic [sic] voice cards to Mayrow General Trading (“Mayrow”) in Dubai, United Arab Emirates,
without the Department of Commerce license required by General Order No. 3 of Supplement No. 1 to Part 736 of the Regulations. Dialogic voice cards are items subject to the Regulations and are designated as EAR99 items. Ace tendered ten dialogic [sic] voice cards items to its freight forwarder with instructions to export such items to Mayrow. The export did not reach Mayrow because the U.S. Government ordered its return pursuant to the Regulations. In so doing, Ace committed one violation of Section 764.2(c) of the Regulations.

It seems reasonable to suppose that Ace Systems was more than a little surprised when this charging letter showed up in its mailbox. The Dialogic voice cards were, after all, EAR99, and weren’t headed for a country subject to sanctions. Like many other exporters, Ace Systems had probably never heard of General Order No. 3.

There is, of course, no question here that Ace Systems attempted to violate the law and that, technically, more than a $36,000 fine could have been imposed. But is only Ace Systems at fault here? What has BIS done to inform companies like Ace, which appears to be a relatively small Internet-based merchant with little export experience, about General Order No. 3? Wasn’t this attempted export more an occasion for an educational outreach visit from BIS than a fine? Granted there may be facts not stated in the Charging Letter that justify a significant whack in this case, but at least on the face of it, Ace was more in need of education than correction.

BIS also issued a press release on the Ace Systems settlement. That press release, arguably, vastly overstates the situation:

“We have reason to believe that Mayrow General Trading and its affiliates have been acquiring U.S.-made components for use in improvised explosive devices (IED) in Iraq and Afghanistan,” said Mario Mancuso, under secretary of commerce for industry and security. “We will do everything in our power to protect our forces in the field by prosecuting those who illegally export sensitive U.S. technology.”

Clearly Mancuso is trying to imply that the Dialogic voice cards could have been used in IEDs in Iran and Afghanistan, even though I could find no evidence that these computer boards have ever been used, or could be reasonably used, for IEDs. Nor is his claim that these EAR99 voice cards were “sensitive U.S. technology” very convincing.

Frankly, it’s not clear that anyone at BIS had a clear idea what the exported product was. The Charging Letter, Settlement Agreement, Order and press release all make multiple references to “dialogic voice cards” as if “dialogic” is a generic description of the product. In fact, Dialogic is the name of the Intel subsidiary that makes the cards and is the brand name of these cards.

To be clear, BIS had every right to fine Ace Systems here. My point is that a more sensible outcome, at least based on the facts set forth in the documents posted by BIS, was a warning. If after being made aware of General Order No. 3, Ace violated it again, then, as they say, “book ‘em, Danno.”

Because it is another slow day in the export law world, I thought I’d use the opportunity of today’s post to note that on Tuesday Export Law Blog was one year old. Since our initial post, there have been 207 additional posts and 582 separate comments on those posts.

Traffic statistics are harder to measure, but one of my server statistics programs shows that we are up to about 4,000 unique visitors each month and about 600 visits per day. Around 250 people have signed up for our email notification service. And the Akismet comment spam filter has caught almost 4,000 (!) spam comments from enterprising souls who believe that the readers of this blog are really looking for links to kinky pornography sites of every conceivable permutation, pictures of Britney Spears in various states of undress, prescription drugs, and payday loans.

In all events, I want to take this opportunity to thank all the readers and commenters who have dropped by this year, as well as those who have sent kind emails and tips.

. . . especially when the newspaper is Granma, the official daily “newspaper” of the Cuban government.

Export law news being somewhat slow in these final weeks of August, I thought it might be amusing to see what Granma had to say about the OFAC fine imposed on Travelocity for booking 1,458 trips to Cuba. And Granma, as usual, did not disappoint:

La administración Bush ha recrudecido la aplicación del cerco a la mayor de las Antillas, con especial ensañamiento contra su industria turística, el bloqueo se extiende incluso a los medicamentos y tecnologías de la salud, lo que constituye un ensañamiento criminal contra el pueblo de la Isla.

Which in my rough translation reads:

The Bush administration has strengthened the application of the embargo against Cuba with particular force against the Cuban tourist industry. The blockade also extends to medicine and health-care technology, constituting criminal brutality against the people of Cuba.

I guess if you’re going to lie, there’s no reason to waste the effort on a little fib. Just go ahead and tell a whopper. As many faithful readers know, after the passage of the Trade Sanctions and Reform Act of 2000, the embargo was lifted on medicine and medical devices.

If you thought BIS could only come after you for exports of dual-use items, you would be wrong — a lesson learned the hard way by P.R.A. World Wide Trading Co., Inc., a freight forwarder which was fined $250,000 pursuant to a Settlement Agreement released last week. According to the Settlement Agreement, P.R.A. understated the value of exports on 41 separate Shipper’s Export Declarations (SEDs) filed in 2001 and 2002. The BIS agreed to suspend $90,000 of the penalty contingent upon PRA not committing any further violations for one year.

The Settlement Agreement alleged that PRA’s conduct violated two provisions of the Export Administration Regulations (”EAR”). First, since PRA conspired with its shippers to understate the value of the shipments, PRA violated section 764.2(d) which prohibits conspiracies to violate the EAR. Second, the false statements on the SEDs violated section 764.2(g)(1)(ii) which prohibits making any false statement on an “export control document.”

For a company that didn’t voluntarily disclose the violations, that’s a fairly good deal, since BIS could have fined PRA up to $462,000, i.e. $11,000 for 42 violations (41 false statements and 1 conspiracy). Perhaps the fine reduction reflected the fact that the President and owner of PRA, Igor Cherkassky, pleaded guilty in December 2006 to a conspiracy to file false SEDs and was sentenced to two months of imprisonment, three years of supervised release, a $5,000 criminal fine, and a $100 special assessment.

False statements on SEDs not only violate the EAR and the criminal provisions of 50 U.S.C. § 1705(b), but also violate other federal laws. Willful misstatements on an SED are punishable under 13 U.S.C. § 305, which provides for civil penalties and for a criminal penalty of five years imprisonment. And, of course, such false statements are also punishable under 18 U.S.C. § 1001(a)(3), which also can result in up to five years in jail.

So it might be said that PRA got off fairly lightly. One question I have is what happened to the exporters themselves? BIS charged a conspiracy between PRA and its exporters to understate the value of the shipments. Clearly the exporters were doing this to try to reduce their liability for import duties imposed by the destination country. They would, therefore, seem just as culpable, maybe even more culpable, than the freight forwarder in this case.

During a briefing held today Assistant Secretary of State for African Affairs Jindayi Frazer announced that the United States is preparing to designate Eritrea as a “state sponsor of terrorism.” Such a designation would be made under the provisions of 50 U.S.C. App. 2405(j), which requires a finding that a country “has repeatedly provided support for acts of international terrorism.”

The U.S. intends to base its argument for designation of Eritrea as a state sponsor of terrorism on a July 18 report of the United Nations that found that “huge quantities of arms” have been provided Al-Qaeda linked groups in Somalia “by and through Eritrea.” These arms “include an unknown number of surface-to-air missiles, suicide belts, and explosives with timers and detonators.”

If designated, Eritrea would join the list of state sponsors of terrorism that currently is comprised by Cuba, Iran, North Korea, Sudan and Syria. Designation would automatically result in an arms embargo against Eritrea pursuant to section 40 of the Arms Export Control Act, 22 U.S.C. § 2780. It could also serve as a justification of a ban on imports from, and exports to, Eritrea.

Imposition of an arms embargo and/or comprehensive sanctions, including bans on imports and exports, would probably have minimal effect on U.S. exporters — or on Eritrea, for that matter. The Section 655 report for 2006 shows no licenses granted for shipments of arms to Eritrea. Other trade between Eritrea and the United States is small, which is not surprising given that Eritrea’s economy is overwhelmingly based on subsistence agriculture. Exports from the United States to Eritrea in 2006 were valued at $8,848,000. Imports from Eritrea to the United States in 2006 were even less and were valued at $858,000.

One area in which sanctions might be effective would be in cash remittances. The State Department estimates that currently 32% of the GDP of Eritrea is provided by overseas workers remitting cash back to their families and relatives in Eritrea. And a large number of Eritreans live in the United States. So, if Eritrea is designated and sanctions are imposed, my guess is that we will see prohibitions on cash remittances to Eritrea.

An excellent news story in the Miami Herald by Douglas Hanks on the Travelocity fine, which we first blogged about here, raises some interesting questions. (Full disclosure: Hanks interviewed me for the article).

First, Hanks (being a real reporter and not a lowly blogger) called Travelocity to ask about the fine and the response that he got was a whopper, if you know what I mean:

‘’In no way did the company intend to sell trips to Cuba,'’ the spokeswoman, Ashley Johnson, wrote in an e-mail Tuesday. “The trips to Cuba . . . were unintentionally booked online because of a technical issue several years ago and it’s just now being settled.'’

I’m not buying it. You can’t “unintentionally” include Cuban flights on a website and then “unintentionally” take money from a traveller and then “unintentionally” pay it to an airline for a flight to Cuba. Maybe you can unintentionally leave the “District of Columbia” off of your drop-down list of destinations; you don’t unintentionally add Cuba to that list.

The Miami Herald story also got a current travel provider to confess that they are still facilitating travel bookings to Cuba:

Kayak.com, a popular travel website operated out of Norwalk, Conn., does advertise Cuba vacations. Though Expedia, Travelocity and other large travel sites set their own prices, Kayak merely receives ‘’referral fees'’ from travel providers who get business through the site, spokeswoman Kellie Pelletier said. Because of that, she said, it is free to post the Cuba offerings

Huh? Has anyone at kayak.com actually read the Cuban Assets Control Regulations? That rationale makes no sense — there is no “referral fee” exception in those regulations.

Whether or not kayak.com is violating the Cuban embargo is a close question. The kayak.com site will generate a list of Havana hotels. If you provide dates of your intended stay, the site will take you to another site which will provide rates for those dates, will book the hotel for those dates and, presumably, will pay a referral fee back to kayak.com for the booking.

This might well be seen as more than simply providing information about Cuban hotels and would arguably seem to make kayak.com a “travel service provider” under section 515.572. “Travel service providers” are required to obtain an OFAC license. Under section 515.572, “travel service providers” are defined as parties that “provide services in connection with travel to Cuba,” including “arranging hotel accommodations.” The kayak.com website provides a list of hotels, permits a click-through reservation for specific dates for those hotels, and receives a “referral fee” in exchange. That looks like providing a service in connection with Cuba travel to me.

USA*Engage recently released a report on foreign countermeasures that have been applied to the extraterritorial application of unilateral U.S. sanctions. Most of the incidents covered in the report have been discussed here — such as the eviction of a Cuban oil delegation from an American-owned hotel in Mexico City and the eviction another Cuban delegation from a American-owned hotel in Oslo. But I missed one interesting story from April of this year. Of course, I blame Google.

The incident in question was the cancellation by BAWAG, an Austrian bank, of all accounts held by Cuban nationals at the bank in advance of the expected takeover of the bank by American-owned Cerberus Capital. Lawyers for Cerberus had evidently advised that it could not close the transaction as long as Cuban nationals had accounts at the bank. In response to the cancellations, Austria instituted proceedings under E.U. Council Regulation 2271/96 which prohibits compliance with U.S. sanctions on Cuba. BAWAG faced a 73,000 euro fine under the Austrian proceeding.

Two things are interesting about this. First, this is the first instance I am aware of where a proceeding has actually been brought by an E.U. member state under Regulation 2271/96. Second, BAWAG applied for a license from OFAC to reinstate the accounts. And the license was granted.
So companies that find themselves caught between the rock of U.S. sanctions and the hard place of foreign countermeasures should consider seeking a license based on the foreign countermeasure.

While reading some of the news accounts of the BAWAG matter, I also discovered the interesting story of Maria Cajigal-Ramirez, whose accounts at BAWAG were initially cancelled. Ms. Cajigal-Ramirez was a naturalized Austrian citizen who had been born in Cuba. Problem is that Cuba doesn’t allow renunciation of Cuban citizenship. Section 515.201 of the Cuban Assets Control Regulations prohibit transactions with Cuban “nationals.” Are banks, and other businesses, in the U.S. violating the CACR by dealing with first-generation Cuban immigrants since they are still Cuban nationals? And, in answering this question, don’t forget the application of section 515.303 of the CACR that says that dual nationals are considered nationals of both countries for purposes of the regulations.

The new OFAC penalty disclosure for August came out on Saturday with some embarrassing news about Travelocity’s Roaming Gnome. Seems that for for six years, between 1998 and 2004, the Travelocity site booked 1,458 reservations for travel to Cuba. The gnome, or rather his employer Travelocity, agreed to a fine of $182,750.

The report of the Travelocity fine follows the general OFAC “the less you know the better” policy and reveals no more about the violation than described above. But some educated guesses can be made. First, the violation was not voluntarily disclosed because the OFAC report almost always notes that fact if there has been a voluntary disclosure. Second, given the time frame, this violation probably involved Travelocity booking trips to Cuba through the sites of its foreign subsidiaries.

You may remember this letter which OFAC sent in 2002 to an unidentified company that operated travel websites in the United States and in foreign countries. That company (probably Travelocity, Orbitz or Expedia) had sent a letter to OFAC requesting OFAC to declare that those operations were permissible or, alternatively, to issue a license to cover them. In OFAC’s responding letter, OFAC asserted that the Cuban Assets Control Regulations apply to overseas subsidiaries and that the Berman Amendment’s exception for information didn’t apply to actually booking reservations but only to providing information about available flights. Accordingly OFAC held that the company’s overseas operations violated the CACR and declined to issue a license to permit such operations.

It’s now pretty safe to assume that the 2002 OFAC letter did not involve Travelocity. Travelocity appears not to have disclosed the violations leading to the fine, and the company involved in the 2002 letter had at least fessed up to its overseas operations. (My money is on Expedia, and not Orbitz, given the length of the whited-out references to the company in the letter.)

One part of the letter has an intriguing passage:

Your letter indicates that there are many U.S.-owned or controlled companies located in third countries that engage in providing travel services. OFAC has not granted a license authorizing any such companies to provide services associated with the tourism and business travel of third country nationals to Cuba. If you have specific information concerning apparent violations of the CACR by such companies, you may submit the information, preferably in writing, to the attention of OFAC’s Chief of Enforcement.

Does anybody else wonder if Expedia (or maybe Orbitz) snitched on Travelocity?

In other OFAC penalty news, the August disclosure indicates that your tax dollars are still being spent on fining individuals who bought Cuban cigars over the Internet, with one individual being fined $999.45 and another $510.00. Given what’s involved in the penalty process, it’s safe to assume that these fines won’t recoup the time spent by OFAC enforcement staff on chasing down the stogie-puffing miscreants, sending penalty notices and negotiating a settlement. Shouldn’t OFAC be chasing terrorists or something?