The Bureau of Industry and Security (”BIS”) just released the decision of an Administrative Law Judge recommending a 15-year denial of export privileges to Megatech Engineering, a Mumbai-based distributor of MTS Systems products, and three of its employees. At issue were unlicensed exports of two MTS Systems products to the Indira Gandhi Centre for Atomic Research {”IGCAR”), a company on BIS’s Entity List. Based on the ALJ’s recommendation, Megatech and the named employees have been added to the Denied Persons List.

Megatech and the individual respondents argued before the ALJ that they were duped by IGCAR which set up front companies and then diverted the exported products from those companies. The ALJ rejected this argument on two grounds.

First, the ALJ noted that the orders that were allegedly destined to the front companies were negotiated by Megatech with an individual that Megatech knew to be an employee of IGCAR. This wasn’t a red flag as much as it was a smoking gun.

Second, the ALJ noted that Megatech departed from its routine procedures with respect to the sales that were diverted to the IGCAR. Normally, MTS Sytems employees would travel to India for installation and final acceptance of products sold by Megatech to its customers in India. For the sales at issue, however, the Indian customer traveled to the United States for pre-shipment inspection, and MTS Systems trained a Megatech engineer to install the equipment and handle final acceptance in its stead. This change guaranteed that MTS Systems would not travel to India to discover that the front companies were not the final end user of the products.

Of course, the change in procedures should have been a red flag not only to Megatech but also to MTS Systems. So, not surprisingly, MTS Systems agreed in March 2006 to a $36,000 civil penalty. The charging documents against MTS Systems noted that an employee working on the exports at issue sent an email stating that “all kinds of flags are being raised here.” Those “flags” weren’t specified, but chief among them had to be the change in routine installation and acceptance procedures.

The Bureau of Industry and Security (”BIS”) recently designated five Chinese companies under BIS’s Validated End User Program. Because of that designation, certain dual-use items can be exported to those companies in China without an export license.

The first reviews from China are now in. And they aren’t good:

The government yesterday criticized the United States over a new system that’s likely to reduce China’s imports of hi-tech products. Wang Xinpei, spokesman for the Ministry of Commerce, expressed “strong dissatisfaction” over the US move, as the “US side did not have enough consultation with China to reach a consensus on implementing the new VEU system”. The United States should not visit any companies registered in China for VEU screening without permission from the Ministry of Commerce, Wang said.

We have previously criticized the VEU program because it was unlikely that China would permit on-site inspections as part of that process. The statement by the Chinese spokesman confirms that, although it is not entirely clear that BIS actually visited the Chinese sites of the companies granted VEU status. It does seem likely, however, that the companies at least agreed to future on-site visits — one of the factors set forth as a consideration for granting VEU status under section 748.15 of the Export Administration Regulations

More significantly, one has to wonder if there is a veiled threat behind the puzzling statement that the VEU program “will reduce China’s imports of high-tech products.” If the VEU program operates as anticipated by BIS, it would increase such imports. Perhaps this statement is a harbinger that China may take internal measure to block the program. After all, from the Chinese perspective at least, the VEU program would give advantages to the VEU companies but not to their Chinese competitors. That might serve as a motive for China to block imports to the VEU companies unless they withdrew from the program.

Of course, this is just speculation based on a somewhat puzzling statement in a Chinese state-owned news outlet. But it will be interesting to see if China does adopt countermeasures.

The State Department is apparently upset that a Pratt & Whitney engine exported from Canada by Pratt & Whitney Canada, a Canadian subsidiary of United Technologies, wound up in the Chinese military’s Z-10 attack helicopter, pictured above.

State Department spokesman Karl Duckworth said information was being gathered before deciding whether to take any action. “We are reviewing the matter and have no further comments at this time,” he said.

According to P&W Canada, it received an export license in 2001 to ship 10 PT-6 engines to the Chinese. The PT-6, developed 40 years ago in Canada, is used in 25,000 civilian helicopters around the world.

So, the State Department may be upset, but where’s the beef? First, the State Department’s jurisdiction under the section 120.17 of the International Traffic in Arms Regulations extends only to exports of defense articles, including technology, from the United States. Unless the PT-6 engine shipped from P&W Canada contains U.S. technology, the State Department doesn’t have a hook to hang it’s annoyed hat on.

Second, the technology has to relate to a United States Munitions List (”USML”) item. Category VIII(b) of the USML only applies to engines for military helicopters. P&W Canada says that it shipped these engines for use on civil helicopters and that the Chinese, because of delays in developing engines for its military helicopters, subsequently decided to adapt the exported engines on the military helicopter.

Nobody, other than the Chinese, is particularly happy that the P&W engine wound up on the Z-10. But until the U.S. and other countries decide to restrict the sale of civilian aircraft engines to China, there’s nothing to be gained by threatening investigations against companies that legally exported the engines.

President Bush addressed this afternoon at the State Department a gathering of family members of Cuban political prisoners. Not surprisingly, he vowed to keep the Cuban embargo in place:

As long as the regime maintains its monopoly over the political and economic life of the Cuban people, the United States will keep the embargo in place. (Applause.)

After saying that, however, Bush did hint at two ways that the embargo might be loosened slightly:

The United States government is prepared to license non-governmental organizations and faith-based groups to provide computers and Internet access to Cuban people — if Cuba’s rulers will end their restrictions on Internet access for all the people.

Or the United States is prepared to invite Cuban young people whose families suffer oppression into the Partnership for Latin American Youth scholarship programs, to help them have equal access to greater educational opportunities — if the Cuban rulers will allow them to freely participate.

Of course, I wouldn’t hold my breath waiting for these proposals to go into effect if I were you.

I now have a copy of the criminal complaint filed against Qing Li and it answers a number of questions left open by yesterday’s post on that case. The copy I have isn’t suitable for posting, but I should have one by tomorrow that I can post, and I will then update this post with a link to the criminal complaint.

The first open issue was whether the accelerometer was an item on the United States Munitions List (USML). The criminal complaint identifies the part as Endevco Part No. 7270A-200K. That item is not listed on Endevco’s website under its product listing. However, if you enter that part number into the ECCN lookup on the site it returns “ECCN:XII(b), which is clearly a reference to Category XII(d) of the USML which covers “military accelerometers.” It may well be that the product is only sold to the military and that is the reason it is not listed on the website with the other accelerometers available for sale to the general public. The part is, however, listed on a page of the Endevco website showing items that are “guaranteed in-stock”

The second open issue was what did Ms. Li know about the export status of the part. If the allegations of the criminal complaint are true, it seems that she would have known that the item was export controlled. Apparently, Ms. Li first approached Endevco, who then reported her to the authorities, who then promptly set up a sting operation. In her first email to the undercover agent, Ms. Li indicates that she had been referred to the undercover agent’s company by Endevco. Thereafter the undercover agent replied with an email that said this:

I do not think that the US Government will give us a license to export these items to China. If you want to, you can apply for a license but I do not want my companies [sic] name on that application. If you still want to proceed without the license, there are ways of doing it.

If true, that could serve as a basis for a finding of criminal intent

Additionally, the criminal complaint reveals an interesting twist on the case. After receiving several emails from the undercover agent, including the one just quoted, Ms. Li appeared to walk away from the transaction and sent an email saying this:

I don’t need the products. I am just actually doing a favor for a friend in China to find the products. I have forwarded all the information to the friend and it’s up to them for the decision now. I have nothing to do with it. I have told the friend that I won’t be involved anymore due to the risk attached. I think they will contact you directly for any further questions. Sorry for any confusion to you.

But she may not have really walked away from the transaction. After her “good-bye” email, the undercover agent was contacted by an individual using the email chinaman326@hotmail.com seeking to purchase the accelerometers. The federal investigative agents obtained the IP Address history of that account from Microsoft and it allegedly revealed something very interesting. All of the emails were sent from an IP address in Beijing. But prior to those messages the hotmail account was logged into from an IP address associated with Ms. Li’s husband’s Internet account. Then an intercept on Ms. Li’s phone line revealed a telephone call to a number in Beijing, and thereafter a response was sent from the Beijing IP Address. The criminal complaint speculates that Ms. Li would log into the account and if she saw an email from the undercover agent, she would call her associate in China and discuss the message with him. The associate would then send an email to the undercover agent.

The issue at trial will no doubt revolve around the significance of this IP Address and telephone intercept evidence. And the ultimate significance of that evidence seems far from clear.

Qing Li, a Chinese permanent resident in the United States, was recently indicted for attempting to export piezoresistive accelerometers to China without a license from the State Department’s Directorate of Defense Trade Controls (”DDTC”). Ms. Li had sent an email to undercover investigators asking to buy the accelerometers. Although the woman never received the accelerometers, she was arrested as she was boarding a flight to China at JFK Airport.

Julie Myers, Assistant Secretary at the Department of Homeland Security (”DHS”) and head of Immigration and Customs Enforcement (”ICE”) had these comments on the indictment:

These devices are simply not for export to China or anywhere else without explicit permission from the U.S. government. … Accelerometers are a designated defense article frequently used in missiles, ’smart bombs’ and other major weapons systems and in the wrong hands, could prove catastrophic.

This case may not, however, be as cut and dried and Ms. Myer wants us to believe.

Piezoresistive accelerometers have a number of non-military uses, including automobile crash testing, flutter testing, and biomedical motion studies. Nor are all accelerometers designated defense articles. Category XII(d) of the United States Munitions List (”USML”) covers only “military accelerometers.” The Missile Technology Control Regime Annex of the USML only covers accelerometers with specified performance characteristics. Item 9, Category II covers only “continuous output” accelerometers “specified to function at acceleration levels greater than 100 g” or

Accelerometers with a threshold of 0.05 g or less, or a linearity error within 0.25 percent of full scale output, or both, which are designed for use in inertial navigation systems or in guidance systems of all types

The accelerometers in question were Endevco accelerometers. The Endevco website has a listing of available piezoresistive accelerometers and detailed specifications. Not one of the data sheets on the available accelerometers, at least that I could find, indicated that the particular accelerometer required a State Department license for export or that it was a military accelerometer. This accelerometer comes the closest, since the website states that it can be used in crash test dummies and in flight navigation systems. Nor did any of these products, as described in the data sheets, appear to me to meet the other specific technical specifications (e.g., designed to function at over 100g) listed above.

This indictment illustrates the dangers faced by exporters. Even if an exporter checks the USML and compares it to the technical specifications of the product to be exported, that may not reveal that the item is, in fact, export controlled. At a very minimum, companies that sell export-controlled items should clearly mark such items as export-controlled in their sales literature and data sheets. Absent that, there is a non-frivolous argument that the company itself has some liability for illegal exports of items that were not clearly disclosed as such.

I am trying to get the indictment, which may reveal other information that indicates the Ms. Li knew that the particular accelerometers she was seeking were, in fact, subject to export controls and listed on the USML. Once I obtain a copy, we’ll post it here and look at what evidence, if any, supports any claim that she had knowledge of the controlled status of the items she was trying to export.

During President Bush’s trip to Arkansas on Monday, he was asked about the situation in Burma:

So, along the lines in Burma, we have sanctioned individuals within Burma and are considering additional sanctions.

Bush was referring to the recent addition of more Burmese officials to the Specially Designated Nationals list. But he didn’t reveal what additional sanctions might be under consideration. No clue was given as to whether the Administration is simply contemplating a second round of additions to the SDN list or is instead considering more comprehensive sanctions, such as broadening the ban on exports to Burma or restricting dealings in Burmese-origin goods. Leaders of the U.S. House of Representatives yesterday proposed restrictions on the import of “blood rubies” from Burma.

But then President Bush appeared to veer off script:

But sanctions don’t mean anything if we’re the only sanctioner

Does this signal a change in Administration attitude on the Cuba sanctions or was it just a slip of the tongue? My guess is the later, so don’t start ordering any Cohibas on the Internet just yet folks.

A friend of mine, a former policeman who now sits on the U.S. Court of Appeals for the Ninth Circuit, used to say that the easiest thing about being a cop was that most criminals are really, really stupid. Case in point: Doli Syarief Pulungan.

Mr. Pulungan, an Indonesian national, was indicted last week for attempting to export Leupold Mark 4 CQ/T rifle scopes to Indonesia without a license. Now comes the stupid:

Pulungan is accused of approaching Norwalk-Wilton Police Chief Steve Kaczik on Sept. 26, saying he wanted to buy 100 rifle scopes for $1,000 each, about $300 above list price, and then ship them overseas.

Another news report indicates that Pulungan requested Kaczik “not to tell the company the scopes were going to Indonesia.”

Going to a police chief to buy these scopes and then asking him not to tell the company what they were for is about as bad as reporting your stolen marijuana to the local constabulary. Or writing a robbery demand note on the back of your latest pay stub.

Kaczik, not surprisingly, notified the FBI and the rest, as they say, is history.

Sometimes the Cuba embargo can be good for U.S. business — at least for the business of U.S. law firms. In the latest turn of events in the Purolite saga, which involves trading by a Purolite foreign subsidiary with Cuba, a federal district court recently ruled that a U.S. attorney involved in the prosecution may have to testify in a malpractice suit against a law firm that allegedly advised the defendants that the illegal trades were proper. Brodie v. United States Department of Justice, 2007 WL 2972577 (E.D.Pa. 2007)

The saga of the prosecution of Stefan and Dan Brodie, executives of the Purolite Company, began in 2000 when the brothers were prosecuted for sales made by a Purolite subsidiary in the U.K. to Cuba. The Brodies were convicted by a jury. The trial court then set aside the verdict against Stefan, arguing that there was insufficient evidence that he was aware of the sales to Cuba. The trial court also found that Dan deserved a new trial because of inflammatory remarks made by the prosecution at the trial. Dan subsequently pleaded guilty and Stefan’s conviction was reinstated by the Third Circuit.

In 2004 the Brodies filed a lawsuit against Morgan, Lewis and Bockius for malpractice relating to advice the law firm allegedly gave the brothers concerning the sales by Purolite UK to Cuba. A partner at the law firm was alleged to have advised that the sales by Purolite UK to Cuba weren’t illegal as long as there was no U.S. participation in those sales. Additionally, according to the Brodies, the partner advised that stopping the Purolite UK sales to Cuba would violate British law and that, accordingly, the Foreign Sovereign Compulsion Doctrine would shield the brothers from prosecution.

Of course, if Morgan Lewis actually advised that a foreign subsidiary could trade with Cuba as long as there was no U.S. involvement, this would have been truly cringe-worthy advice. The Trading with the Enemy Act explicitly covers activities of foreign subsidiaries controlled by U.S. parents and makes trading with Cuba illegal even if no U.S. citizens are involved. The advice, if given, on the Foreign Sovereign Compulsion Doctrine would seem equally problematic if applied simply to foreign blocking statutes. Some U.S. courts have narrowly construed the doctrine to require that the foreign sovereign order specific acts by the defendant. Others have applied a balancing test which discounts the interest of the foreign sovereign in merely blocking U.S. laws.

But the District Court opinion at hand involves an interesting side issue in the lawsuit against the Morgan Lewis firm. During the original prosecution, Kristin Hayes, the wife of the managing partner of Morgan Lewis joined the prosecution team. Thereafter, it was alleged that the managing partner of Morgan Lewis provided confidential information about the Brodie brothers to his wife. When the trial court learned of these disclosure, Hayes was removed from the prosecution team, and two weeks before trial, Morgan Lewis withdrew from representing the Brodies.

The case at hand arises from the efforts of the Brodies to obtain a deposition of, and the trial testimony of, Kristin Hayes in the Brodies’ suit against Morgan Lewis. When the DOJ refused to make her available, the Brodies sued the DOJ in U.S. District Court. The district court ruled that the deposition was unnecessary because of the extensive testimony of Hayes during the disqualification hearing and because the DOJ had made a substantial number of relevant non-privileged documents available on the matter. As to the trial testimony, the court found that there may be reasons that would justify Hayes’s testimony at trial and scheduled further proceedings to resolve that issue.

So far it would appear that the Brodies have probably paid much more in legal fees over the Cuba sales than any profits that they might have made from those sales.

Oh good grief.

Daisy Manufacturing just agreed to pay $20,400 to settle charges that it exported “rifle scopes” without a license. The Bureau of Industry and Security charged that the “rifle scopes” were classified under ECCN 0A987.

Most guys, particularly guys my age, are quite familiar with Daisy Manufacturing. Hell, anyone who has ever seen A Christmas Story is probably familiar with Daisy. The company makes BB guns and air rifles — like the Official Red Ryder Carbine-Action Two-Hundred-Shot Range Model Air Rifle featured in the film.

And export folks of any age are probably familiar with ECCN 0A987 which controls:

Optical sighting devices for firearms (including shotguns controlled by 0A984); and parts, n.e.s.

That’s right — optical sighting devices for firearms. Now the Export Administration Regulations don’t bother to define firearms, but it would seem reasonable to look at the definition of firearm in the Federal Gun Control Act of 1968. A firearm is defined in that act, at 18 U.S.C. §§921(a)(3) and (4), to cover only weapons which “expel a projectile by the action of an explosive” or, if expelling the projectile by other means, have a rifle bore of greater than one-half inch in diameter. The Daisy air rifles do not meet either criterion.

And the scopes manufactured by Daisy, like this one, all appear to be made for Daisy’s air rifles and, therefore, not properly classified under ECCN 0A987 as claimed by BIS. The BIS charging and settlement documents don’t provide sufficient detail as to the types or model numbers of scopes being exported. Once again, those documents refer to a schedule of violations which is missing from the documents posted on the BIS website. So there remains the possibility, albeit unlikely, that Daisy was exporting scopes for other rifles that could properly be defined as firearms.

All that notwithstanding, does anyone else feel that a scope on a BB gun is, well, cheating? What next? Laser designators?