Representative Brad Sherman (D-CA) recently introduced, with one other Democrat and two Republicans, a bill to “improve the performance of the defense trade controls functions of the Department of State.” The proposed legislation is a clear response to mounting exporter frustration over increasing delays by the Directorate of Defense Trade Controls (”DDTC”) in processing licenses and other export-related requests.

The centerpiece of the proposed legislation is the imposition of mandatory average processing times. For transactions not subject to Congressional notification requirements, for example, licenses to NATO members, Australia, Japan, New Zealand, and Israel must be processed, on average, within 20 days; 30 days for exports to major non-NATO allies; and 60 days to everyone else. Commodity jurisdiction requests would be required to be acted upon by DDCTwithin 60 days on average.

DDTC’s average processing times for Technical Assistance Agreements (”TAAs”) would need to be 120 days. It’s not clear why the proposed legislation would permit a significant delay in processing TAAs when license requests are put on such a short string. Further, the time limit doesn’t cover approving amendments to TAAs, even though the most significant delays currently being experienced are with respect to such amendments.

The proposed legislation would also significantly change the current provisions of the International Traffic in Arms Regulations (”ITAR”) relating to exports of spare parts. Under the proposed changes, a DDTC license would not be required for exports of spare and replacement parts to NATO members, Australia, New Zealand and Japan in specified circumstances, including that the parts and components are one-for-one replacements for parts and components for an item previously exported pursuant to a DDTC license. 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. If this proposal is adopted, spare parts can be exported even if their value exceeds $500 and more than 24 shipments are made per year.

The Securities and Exchange Commission released (on Black Friday of all days) a document requesting public comment on whether the SEC should develop mechanisms to facilitate greater access by investors and the public to corporate disclosures concerning that corporation’s activities in or with countries designated as State Sponsors of Terrorism. This request for comments is related to the ill-fated and short-lived web listing that the SEC’s Office of Global Security put up last July, and which we discussed here and here. That list purported to help identify companies that had been doing business in sanctioned countries such as Iran, Cuba, Sudan, North Korea and Syria.

The SEC document maintains an agnostic tenor on whether it will reinstitute the Office of Global Security’s list. Instead it asks for comment as to whether the public needs an enhanced tool for this purpose other than the existing mechanisms to search corporate filings with the SEC. The release further notes that the tool might not be useful without constant updating, a task that it states might unduly strain the SEC’s staff and resources. Finally, the SEC document suggests that the disclosure issue might best be handled by having corporate filers include searchable tags with their filings disclosing activities in sanctioned states.

One part of the SEC’s discussion of the Office of Global Security’s list is intriguing. The SEC states that the list was not simply a product of keyword searches but that these searches were further refined by staff analysis of the significance of the activity revealed by the search:

[The list] was not based on a simple keyword search of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The web tool was the result of a staff review of company disclosure including any reference to a State Sponsor of Terrorism. This disclosure review allowed the web tool to exclude disclosure unrelated to a company’s activities in or with any of these countries (e.g., generic references to a country; references to a State Sponsor of Terrorism in the context of an executive officer’s or director’s experience and educational background; or generic descriptions of risk associated with the possibility of war). It also permitted the web tool to exclude companies whose disclosures stated that they did not conduct business in or with State Sponsors of Terrorism.

But these filters were apparently narrowly applied. As we noted in our initial post on the SEC list, Cadbury Schweppes appeared on the list because it disclosed that it had divested its operations in Syria. Obviously, this meant that the the last filter was applied to exclude only companies that never conducted business in a sanctioned state and not those that at some prior time had done business with a sanctioned state.

Ahmed Idris Nasreddin

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On August 29, 2002, OFAC designated various entities owned by Ahmed Idris Nasreddin, thereby blocking all assets of those entities and forbidding U.S. citizens and companies from dealing with those entities. The basis for the designation was a finding that Nasreddin was a “supporter of terrorism.” The press release supporting the designation stated:

Based on information available to Italy and the United States, … Ahmed Idris Nasreddin (”Nasreddin”), through commercial holdings, operate[s] an extensive financial network providing support for terrorist related activities.

OFAC didn’t disclose what information linked Nasreddin to terrorism, but other sources suggest that Nasreddin finances a mosque in Milan, Italy, which is the major station of Al-Qaeda in Europe and that, among other things, the Al-Qaeda operatives involved in the 1998 embassy bombings stayed at the Mosque

One of the blocked Nasreddin entities was Akida Bank Private Limited, about which the OFAC press release said:

Nasreddin, who serves as Akida Bank’s president, also serves on the board of directors of Akida Bank along with Youssef Nada. According to corporate documents, the Nasreddin Foundation, an entity proposed for designation, owns an overwhelming majority of shares of Akida Bank, affording Ahmed Idris Nasreddin and the Nasreddin Foundation ownership and control of Akida Bank.

That was then; this is now:

The following deletions have been made to OFAC’s SDN list:

AKIDA BANK PRIVATE LIMITED (a.k.a. AKIDA INVESTMENT CO. LTD.; a.k.a. AKIDA INVESTMENT COMPANY LIMITED), c/o Arthur D. Hanna & Company, 10 Deveaux Street, Nassau, Bahamas, The; P.O. Box N-4877, Nassau, Bahamas, The [SDGT]

A number of other Nasreddin entities designated in 2002 were also deleted from the SDN list.

The accompanying Federal Register notice is completely opaque as to the reasons for deletion, stating only:

The Department of the Treasury’s Office of Foreign Assets Control has determined that these individuals and entities no longer meet the criteria for designation under the Order and are appropriate
for removal from the list of Specially Designated Nationals and Blocked Persons.

There isn’t an OFAC procedure for former supporters of terrorism to absolve themselves simply by claiming that they’ve renounced terrorism or seen the light. I suppose that a change in ownership of the designated entities might be grounds for removal from the SDN list, but there is no suggestion here that Nasreddin divested his control of these entities.

Instead the deletion must be a concession that the original designation was mistaken. And needless to say, OFAC isn’t particularly interested in revealing why it was mistaken in the first place, although you would think that such an explanation would be in order here, particularly where there had been allegations that Nasreddin was financing the major Al-Qaeda station in Europe.

The Office of Foreign Assets Control (”OFAC”) today released a document entitled “Notice for TSRA License Holders and Applicants.” In that document, OFAC notes that Bank Sepah, Bank Saderat, Bank Mellat and their branches and certain subsidiaries were designated pursuant to Executive Order 13382 and Executive Order 13224 and that all property of those banks was therefore blocked and U.S. persons were forbidden to deal with those banks. The Notice then stated:

Even if you are holding a valid OFAC license authorizing the exportation or reexportation of agricultural commodities, medicine or medical devices to Iran …, as of October 25, 2007, you are no longer permitted to engage in any transactions, directly or indirectly, with any of the above-listed banks.

The need for the notice was probably prompted by an ambiguity that may have been created by section 516 of the Iranian Transactions Regulations which deals with payment for transactions involving Iran. Section 516(a)(3) permits U.S. banks to process transfers of funds to or from Iran where:

The transfer arises from an underlying transaction that has been authorized by a specific or general license issued pursuant to this part ….

The Notice now makes clear that this doesn’t apply to transactions with the three designated banks.

A battle is being waged over the planned, but allegedly illegal, export of a former U.S. Navy hospital ship M/V Sanctuary. Decommissioned in 1989, the battle certainly isn’t over whether a license should have been obtained from the Directorate of Defense Trade Controls (”DDTC”).

No, it’s all being waged around the Toxic Substances Control Act (TSCA), yet another federal statute that may have an impact on exports. Section 12 of TSCA, 15 U.S.C. § 2611, requires prior notice to the EPA of exports of certain substances and section 6(e), 15 U.S.C. § 2605(e), through its prohibition on introduction of polychlorinated biphenyls (”PCBs”) into commerce, forbids the export of PCBs. And, according to opponents of the export, Sanctuary likely contains PCBs.

In 2003, a federal district court, relying on section 6(e) of TSCA entered a temporary restraining order forbidding the export of WWII-era decommissioned ships to the United Kingdom. The EPA had issued in May 2003 “enforcement discretion” letter saying that it would not enforce section 6(e) to prevent the export of naval vessels if certain conditions were met. The district court provisionally accepted the plaintiff’s argument that the EPA was required to engage in a formal rulemaking proceeding to adopt this exemption. Since then, no WWII-era naval ships have been exported.

The Sanctuary was sold in 1989 to a non-profit organization which turned it into a drug rehabilitation center and moored it in Baltimore. Subsequently the organization defaulted on moorage payments and the ship was auctioned off August 21, 2007 on the Baltimore Court House steps to Potomac Navigation Inc. The Basel Action Network, a group devoted to opposing toxic waste exports, is claiming that Potomac Navigation intends to export the ship to a breaking yard in India or Bangladesh where it will be demolished for scrap. The EPA has reportedly contacted the new owners to request permission to board the ship to sample for PCBs.

The Bureau of Industry and Security (”BIS”) recently set aside a default judgment denying export privileges to S.P. Equipamentos de Protecao ao Trabalho Ltda (”SPE”), a Brazilian firm charged with violating U.S. export laws by re-exporting night vision equipment to Brazil’s State Secretariat of Civil Defense. The reasons given by Undersecretary Mancuso for setting aside the judgment suggest, at best, a simple mistake by BIS’s Office of Chief Counsel (”OCC”) and, at worst, a violation of BIS’s rules by the OCC. Somewhere in between is the possibility of some legal but unfair shenanigans by BIS’s lawyers.

According to Undersecretary Mancuso’s decision, a charging letter was sent to SPE on September 13, 2004, and received by SPE eleven days later. On February 7, 2005, counsel for SPE filed an appearance with BIS. On November 11, 2006, BIS filed a motion for default based on the failure of SPE to file an answer to the charging letter within 30 days as required by the Export Administration Regulations (”EAR”). On January 31, 2007, the BIS Administrative Law Judge entered a default judgment which was approved by BIS on February 26, 2007.

On September 7, 2007, Counsel for SPE filed motion to set aside the default judgment for good cause, arguing that it did not receive a copy from BIS’s counsel of the motion for default. The certificate of service for the default judgment, which is addressed only to BIS’s counsel, supports this claim of failure of service. Undersecretary Mancuso’s decision further states that there is evidence that for about a year prior to BIS’s filing of the motion for default, counsel for SPE and counsel for BIS “engaged in settlement negotiations” regarding these charges. BIS filed a response which did not oppose SPE’s claim that good cause existed to set aside the default.

The question here, of course, is why on earth did counsel for BIS fail to file the motion for default on SPE’s counsel with whom it had been negotiating the matter for a considerable period of time? Section 766.5 of the EAR governs service of papers other than the charging letter. It explicitly states that service must be made on “each party in the proceeding.” If a party is represented by counsel, service on such counsel constitutes service on the party.

Section 766.7 of the EAR governs default motions and states:

Failure of the respondent to file an answer within the time provided constitutes a waiver of the respondent’s right to appear and contest the allegations in the charging letter. In such event, the administrative law judge, on BIS’s motion and without further notice to the respondent, shall find the facts to be as alleged in the charging letter.

That rule says that the default judgment can be entered “without further notice,” but it doesn’t say, in my view, that the motion for default isn’t subject to the service rules provided in Section 766.5. Even supposing that it does, isn’t it a violation of Simple Decency and Fairness 101 not to mail a copy of such a motion to opposing counsel?

Perhaps it was a simple oversight by BIS’s lawyer, but it’s hard to imagine how that happened. In all events, however, BIS did what appears to be the right thing by setting aside a default judgment that was obtained through a motion that wasn’t served on the respondent’s counsel.

The Office of Foreign Assets Control (”OFAC”) yesterday released its monthly report on penalties imposed by the agency last month. And, for the first time since the invention of the Internet, no one got fined for buying Cohibas over the web. Instead, OFAC reports penalties relating to Sudan, Iran and Specially Designated Global Terrorists (”SDGTs”).

Notice the interesting disparity between the violations that were voluntarily disclosed and those that weren’t. Wachovia voluntarily disclosed one rejected rather than blocked payment to an SDGT and got the maximum penalty for one violation, which in 2004 was $11,000. SKE and Rita made multiple shipments over a period of years and paid less than $11,000 per violation even though the violations were not voluntarily disclosed. OFAC has a good record of reducing penalties for voluntary disclosures, so it is not quite clear here why this didn’t happen for Wachovia.

If any company considering its first export transaction actually read and tried to understand the recordkeeping requirements of Part 762 of the Export Administration Regulations (”EAR”), it is unlikely that anything would ever be exported from the United States. And although enforcement actions by the Bureau of Industry and Security (”BIS”) which promulgated and enforces these regulations are rare, they are not non-existent as Hardinge, Inc., the New York-based manufacturer of milling, grinding, turning and workholding machinery learned the hard way. Well, not that hard. The company signed at the beginning of the month a Settlement Agreement pursuant to which it agreed to pay BIS $3,000 for failure to keep records relating to its export of “metalworking and/or machine tools” to Israel. There was no allegation by BIS that the exported equipment was subject to any licensing requirements.

The recordkeeping requirements of Part 762 are, to say the least, extensive. Section 762.2 states:

The records required to be retained under this part 762 include the following:
(1) Export control documents, as defined in part 772 of the EAR;
(2) Memoranda;
(3) Notes;
(4) Correspondence;
(5) Contracts;
(6) Invitations to bid;
(7) Books of account;
(8) Financial records;

Just let that sink in for a moment. Let’s say one of your company’s salespersons receives a call from an overseas customer and he jots down on a piece of paper “Company X wants us to quote prices to export three cases of peanut butter to the U.K.” If you ship the peanut butter, but don’t retain the original of that note, you’ve broken the rule.

The rule does permit copies to be retained under section 762.5 but only if you comply with an onerous set of restrictions relating to the copies, including making a copy of the “obverse and reverse”* sides of paper documents. You also have to keep a record of “where, when, by whom, and on what equipment” the document was copied. You don’t have to be a management consultant to figure out that this is simply not going to happen.

Section 762.4 describes a number of documents exempted from the broad recordkeeping requirements of section 762.2. But these exemptions don’t include the note I described or other “notes” or “memoranda” regarding the transaction.

Of course, the charging documents and the Settlement Agreement don’t tell the whole story. It’s doubtful that it was just a salesman’s note that was involved. Still, the BIS requirements are extremely broad and quite easy for even a legitimately concerned and compliant exporter to trip over.

*”Obverse” and “reverse” are terms that are normally applied to coins and paper currency. The corresponding words for book pages, prints and drawings are “recto” and “verso.” And the words used by ordinary people who haven’t spent three years in law school or too much time in government agencies are, of course, simply “front” and “back.”

U.S. District Court Judge Inge P. Johnson, after a seven day bench trial, recently dismissed six felony charges against Alexander Latifi, a defense contractor from Huntsville, Alabama. The judge ruled that the prosecution failed to carry its burden of proof. Based on news accounts of the decision, it is likely that the judge’s decision was swayed by the revelation that the prosecution’s chief witness, a former employee of Latifi named Elizabeth Lemay, pleaded guilty to embezzling money from Latifi and admitted on the stand that before she left Latifi’s company she sabotaged company computers and destroyed the purchase order system.

Latifi’s company Axion had been awarded a contract by Sikorsky to produce a bifilar weight assembly which is used in a rotor in the steering system of the UH-60 Blackhawk helicopter. According to a report in the Huntsville News, Lemay testified that Lafiti needed to find a supplier for tungsten used in the weight assembly.

Eventually, Latifi contacted a man in California named Ming Hwong, the representative of a Chinese tungsten supplier, ECO-Tungsten, Lemay testified. Latifi and Ming Hwong traded numerous correspondence by e-mail and telephone, she said.

Then, an ECO-Tungsten representative named Ding Dong, entered the picture via e-mail and by telephone, Lemay testified. Eventually, Latifi ordered her to send technical drawings of the bifilar weight assembly to Ding Dong at ECO-Tungsten in China.

The defense claimed that Latifi never directed Lemay to send the drawings at issue and sought to impeach her testimony:

Latifi’s lawyer, Henry Froshin of Birmingham, engaged Lemay in a heated cross-examination about why she was lying about his client.

“Were you trying to cover up your own forgery and theft?” he asked.

“No,” she said.

According to Froshin and court records, Lemay pleaded guilty in 2005 to forging 15 Axion company checks totaling $12,730. Latifi fired Lemay on February 2004. A Madison County judge suspended a three-year prison sentence and placed her on probation for four years.

While she was stealing Axion’s money, Lemay was feeding information to federal agents, Froshin said.

She admitted that she did not tell federal agents about the theft. She also said she neglected to tell the grand jury.

And with those admissions I think we can safely say that Lemay and the prosecution’s case crashed and burned.

Defense counsel also told the Huntsville News that they opted for a bench trial rather than a jury trial because Latifi was born in Iran and, given the current state of relations between the United States and Iran, might not be favorably viewed by a jury.

Last week, on October 31, the Office of Foreign Assets Control issued a final rule amending the Sudanese Sanctions to permit exports to the semi-autonomous region of Southern Sudan. These rules implemented Executive Order 13412 issued by the White House on October 13, 2006 which exempted Southern Sudan from the sanctions imposed on Sudan by Executive Order 13067.

Apparently because OFAC’s regulations weren’t revised for almost a year after Executive Order 13412 lifted the export ban for Southern Sudan, OFAC’s staff was insisting that licenses were still required for transactions in Southern Sudan and either weren’t granting them or were granting them after long delays. According to this wire report yesterday from Reuters:

Until now U.S. organisations have still had to go through long procedures with OFAC to get around the 1997 order. “To get an exemption from the comprehensive sanctions imposed in November 1997 was virtually impossible,” added Sudan specialist Eric Reeves, who has been trying to set up schools in the south despite “extremely onerous” regulations. “In some fundamental sense only now have sanctions really been lifted on the south,” Reeves added. …

“It should have been clear from day one that the south would be exempted from the sanctions,” said Sudan expert John Prendergast, currently with the Enough Project. He said the period of confusion arose from what he called U.S. government ineptness.

An interesting anomaly persists in the new regulations. The amended regulations of added a new subsection (g) to the list of exempt transactions in 31 C.F.R. § 538.12 (formerly § 538.11). Subsection (g)(1) exempts transactions in the “Specified Areas of Sudan” which are defined to include large parts of Southern Sudan. However, section (g)(2) says that the exemption in (g)(1) doesn’t apply to food, medicine and medical devices. Apparently, as I read this, you could ship a ton of bricks to Southern Sudan without a license to Sudan, but to send food and life-saving medicines you still need to undergo the delay and expense of a license. That doesn’t seem to make a whole lot of sense, but I haven’t gone back to see if there is some legislative justification for this in either the Trade Sanctions Reform Act, which governs exports of agricultural products, medicine and medical devices, or in the initial legislation which led to Executive Order 13067.