A spokesman for the Treasury Department’s Office of Foreign Assets Control (”OFAC”) told Export Law Blog this morning that discussions between OFAC and the North Pole over Santa Claus’s Christmas Eve itinerary had broken down and were not expected to be resumed before Santa’s scheduled departure on December 24 at 10 pm EST.

The dispute arose from a dilemma that the U.S. sanctions against Cuba posed for Santa’s planned delivery of toys to children in Cuba. If Santa delivers toys for U.S. children first, there will be toys destined for Cuba in the sleigh in violation of 31 C.F.R. § 515.207(b). That rule prohibits Santa’s sleigh from entering the United States with “goods in which Cuba or a Cuban national has an interest.” On the other hand, if Santa delivers the toys to Cuban children first, then 31 C.F.R. § 515.207(a) prohibits the sleigh from entering the United States and “unloading freight for a period of 180 days from the date the vessel departed from a port or place in Cuba.”

A press release from the North Pole announced that the OFAC rules left Santa no choice but to bypass the children of the United States this Christmas. A spokesman from OFAC warned that if Santa attempted to overfly the United States, his sleigh would be forced to land and his cargo seized. He continued:

We know that the outcome is harsh, but we cannot allow Fidel Castro’s regime to continue to be propped up by Santa’s annual delivery of valuable Christmas toys to Cuban children.

Congressional leaders had left for the holiday recess and could not be contacted for comment.

Norman Augustine
Chair, Deemed Export
Advisory Committee

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The Deemed Export Advisory Committee released today its report to BIS on BIS’s deemed export rules. The deemed export rules, among other things, require licenses prior to release of technology on a dual-use item to a national of a country if an a license would be required for the export of the particular dual-use item to the country in question.

The report is lengthy and I haven’t had time to review it fully, but an idea of the report’s contents can be gleaned from its epigraph:

If you guard your toothbrushes and diamonds with equal zeal, you’ll probably lose fewer toothbrushes and more diamonds.

— McGeorge Bundy

The diamonds apparently represent dual-use items and the toothbrushes represent the technical data regarding those items. So, not surprisingly, the report recommends loosening the deemed export rules in certain respects. Principally, the report recommends the creation of a “Trusted Entity” category. Trusted Entities would be companies and universities that meet certain criteria and that would therefore not be required to obtain individual export licenses to transfer dual use technologies to foreign nationals. Such foreign nationals would be required, however, to sign non-disclosure agreements.

But in another respect, the report recommends tightening deemed export rules when it wades into the tricky territory of permanent residents, dual nationals and individuals who have resided in multiple countries. Under current rules, the BIS looks at an individual’s current citizenship and/or legal permanent residence. The report recommends expanding the inquiry:

[We recommend] expanding the determination of the national affiliation of potential licensees to include consideration of country of birth, prior countries of residence, and current citizenship, as well as the character of a person’s prior and present activities, to provide a more comprehensive assessment of probable loyalties.

The report’s explication of this recommendation contains this example:

It would seem that inadequate distinction is made between an individual who, say, was born and raised in Iran but only recently became a citizen of the UK and an individual who was born in Iran but moved to the UK and became a citizen of the latter nation shortly after birth. Additionally, it would seem to be important to consider where that individual resided during his or her entire lifetime - not just where he or she was born or where his or her current citizenship has been granted. It is noteworthy that the current BIS interpretation is that the Deemed Export rule does not apply to persons lawfully admitted for permanent residence (i.e., green card holders), wherever their prior residences may have been.

(emphasis in original)

This analysis is sensible, but it also carefully finesses a significant problem. It is not clear whether the report is recommending that a foreign national admitted to lawful permanent residence in the U.S. should continue to be treated as a U.S. citizen for purposes of deemed exports or whether the rules should be revised to treat a U.S. permanent resident like any other foreign national and potentially subject to disqualification from deemed exports based on country of birth or country of former residence.

The State Department’s Directorate of Defense Trade Controls (”DDTC”) released today a final rule making it easier to transfer technical data under a technical assistance agreement (”TAA”) to third-country nationals, i.e., nationals of countries other than the country specifically authorized under a TAA. Under current procedures, if a U.S. company enters into a TAA permitting the transfer of technical data on a defense article to a company in France, that technical data can’t be transferred to anyone other than a French national unless the approved TAA provides for such transfer and the non-French national signs a nondisclosure agreement.

Under the new rules, technical data can be transferred to a third-country national without specific authorization and a nondisclosure agreement if four conditions are met. First, the third-country national must be a national “exclusively” of a NATO country, a European Union country, Australia, Japan, New Zealand, or Switzerland. Second, the third-country national’s employer must have either signed the TAA or a nondisclosure agreement. Third, the transfer must take place within the United States or the countries listed in the first condition. Finally, the transmittal letter for the TAA must explicitly state that permission is requested to make transfers to third-country nationals under these new provisions.

In its discussion of the new rules, DDTC restates its controversial position that a person may be a third-country national not only because of dual citizenship but also because of country of birth:

In addition to citizenship, DDTC considers country of birth a factor in determining nationality.

How the DDTC applies these factors is not clear from this statement. In theory, a French citizen born of French parents temporarily in Iran might be deemed Iranian. Or an individual born in Iran of Iranian parents that became a French citizen might still be considered an Iranian even if that individual has not retained dual citizenship.

Admittedly application of the rule in the first example is more controversial than in the second example. Still even the second example involves a double standard that rankles our allies. If an Iranian is made a permanent resident in the United States, he or she is treated the same as a U.S. citizen for deemed export purposes, whereas an Iranian naturalized by France is still treated as an Iranian.

Alexander Lukashenko

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Sometimes even somebody as distasteful Belarus’s dictator Alexander Lukashenko may have a point. Reacting to news that the U.S. may be considering further sanctions against Belarus, Belarus’s ambassador to the United States, Mikhail Khvostov, held a press conference to denounce the U.S. sanctions as illegal. The further sanctions against Belarus will likely target other state-owned companies in the same fashion that sanctions were imposed earlier this year on Belarus’s state-controlled oil-processing and chemicals company, Belneftekhim.

Khvostov pointed to the Memorandum on Security Assurances signed by the United States and Belarus in 1994. The U.S. entered into this Memorandum in exchange for Belarus agreeing to accede to the Nuclear Non-Proliferation Treaty. The relevant provision is this:

The United States of America, the Russian Federation, and the United Kingdom of Great Britain and Northern Ireland, reaffirm their commitment to [Belarus], in accordance with the principles of the CSCE Final Act, to refrain from economic coercion designed to subordinate to their own interest the exercise by the Republic of Belarus of the rights inherent in its sovereignty and thus to secure advantages of any kind.

According to Khvostov, the imposition of economic sanctions on Belarus notwithstanding this provision “shows that at any time the Bush administration can roll back the U.S. security assurances given to a legally binding instrument.” Not surprisingly, David Kramer, a State Department spokesman, countered that “We consider our actions to be wholly consistent with our political commitments and our obligations.”

It’s hard, however, to square the sanctions with the Memorandum unless one accepts one of two possible, but untenable, arguments. First, it might be argued that the sanctions are aimed at Lukashenko, members of his regime, and one state-owned company and not at Belarus itself. But the Memorandum prevents economic coercion broadly without making an exception for economic coercion targeting regime members and state-owned companies rather than the entire country. Second, it might be argued that the anti-democratic activities of Lukashenko which serve as the basis of the sanctions are not rights “inherent in sovereignty,” but this argument seems strained as well since sovereignty means, in the broadest sense, the right for a country to do what it wants, including things that are not necessarily democratic.

We reported earlier this week that Iran had announced that it had built a quasi-supercomputer using 213 AMD chips despite U.S. sanctions which would forbid the export of those chips to Iran. Where do you think the chips came from?

Wait, wait, don’t tell me. Let’s first look at a detail of a picture from the Iranian High Performance Computing Research Center (”IHPCRC”) website, showing the computer being built. (This picture has been mysteriously “disappeared” from the IHPCRC site, but was copied first by Softpedia before it vanished).

Let’s zoom in now on one of those boxes behind him.

Well, well, well. That box comes from Thacker FZE, whose website has also mysteriously disappeared, but still appears in the Google cache. Thacker is a distributor of AMD chips. In the UAE. Oh, and look, that would be UAE written right under Thacker’s name.

Who would have thought that the AMD chips came from the UAE?

According to an article in Computerworld:

A spokesman for Thacker … said they have no customers in Iran and noted that products can be imported into that country by many different means, including individual Iranians buying “one or two pieces” of technology in locations such as the UAE and then bringing them across the border.

I’ve been wondering where Baghdad Bob went. Apparently he’s now a spokesman for Thacker in the U.A.E.

The Directorate of Defense Trade Controls (”DDTC”) issued today a final rule amending section 127.12 of the International Traffic in Arms Regulations (”ITAR”) which governs voluntary disclosures of violations of the ITAR by exporters of defense articles and defense services. Four significant revisions were made.

The new rules require additional specification of details and identifying information in a voluntary disclosure. Second, the new rules state that the voluntary disclosure must link new compliance initiatives in the exporter’s compliance program to the specific violations uncovered. Third, the DDTC may require, in the case of a “systematic pattern of violations,” a signature of “senior officer” on the voluntary disclosure

By far the most significant change effected by the new rule is a time limit between the initial and final disclosures. Under the new rule, the exporter who makes a preliminary disclosure must now file its final disclosure with DDTC within 60 days of the preliminary disclosure. Prior to this change, there was no time limit for the final disclosure, although DDTC staff encouraged the final disclosure to be made reasonably promptly. The new rule provides that the exporter may request an extension of the 60-day period if additional time is needed, although DDTC is under no obligation to grant the extension. Failure to file the final disclosure within the requisite time period may be used as DDTC as a reason to disregard the voluntary disclosure as a mitigating factor in assessing the penalty.

Of course, more than a few eyebrows have been raised in the export community that the notoriously slow agency should be imposing stricter “hurry up an wait” deadlines on exporters. Voluntary disclosures can take more than a year before the agency responds. Amendments to technical assistance agreements can also take a year or more, and commodity jurisdiction requests can fall into a black hole and remain unadjudicated for years. Worse certain agency employees have suggested that if Congress imposes time limits on DDTC for the processing of export licenses and other agency actions, the agency will simply respond by bouncing export license applications for minor technicalities. In view of this, one would hope that DDTC won’t be stingy in granting exporter requests for additional time to complete their internal investigations of voluntary disclosures that have been preliminarily disclosed.

In an earlier post, we noted that License Exceptions TMP and BAG’s “tools of the trade” exception might allow temporary export of laptops and the software on it, but that this exception did not cover technical data. Today the Bureau of Industry and Security (”BIS”) amended its rules to permit the export of technology — which would include technical data on dual-use items — under the TMP and BAG license exceptions.

There are several significant limitations on the use of these license exceptions for technical data. First, the license exception is only available to U.S. persons (i.e. citizens and permanent residents) or non-U.S. persons otherwise authorized to receive the technical data or technology. Second, technology exported pursuant to these exceptions may not be thereafter disclosed to anyone who is also not a U.S. person or specifically authorized to receive the data. Third, if the technical data exported under these exceptions is in a form that could facilitate a subsequent disclosure it must be returned to the United States or destroyed within 12 months from the export pursuant to the exception. Finally, adequate security precautions must be taken to prevent unauthorized disclosure of the technical data once it has been exported pursuant to the exception.

According to a piece published yesterday in Information Week, the Amirkabir University of Technology in Tehran announced that it had used 218 AMD microprocessors to build a supercomputer with a theoretical peak performance of 860 gigaflops. The fastest supercomputer in the world currently is ranked for 478 teraflops, more than 500 times faster than Amirkabir’s computer.

Of course, the point here isn’t the paltry performance of the Iranian kinda-supercomputer, but rather that such a computer could be built with U.S. components despite the U.S. sanctions on Iran. Obviously U.S. sanctions, despite their purported reach against re-exports, can’t always stanch the flow of mass-produced products to sanctioned countries.

AMD’s response was, not surprisingly, both predictable and believable:

AMD fully complies with all United States export control laws, and all authorized distributors of AMD products have contractually committed to AMD that they will do the same with respect to their sales and shipments of AMD products. Any shipment of AMD products to Iran by any authorized distributor of AMD would be a breach of the specific provisions of their contracts with AMD.

Lesson to be learned here: make sure all your contracts have a clause dealing with illegal exports. That way when you read in the newspaper that your product was found in Iran, you can say the same thing AMD did.

On December 3, Philip Cheng from Cupertino, California, was sentenced to a two-year prison term for his involvement in a scheme to export night vision equipment to China. Cheng, an export broker, had been involved in a transaction in which Night Vision Technology, a U.S. company, agreed to sell Panther thermal imaging cameras to two Chinese companies — North China Research Institute of Electro-Optics and the China National Electronics Import & Export Corporation. As a result, Cheng was indicted in 2004 for illegal exports, illegal defense brokering activities and money laundering. After a hung jury, Cheng pleaded guilty to the brokering charges under 22 U.S.C. § 2778(b)(1)(A)(ii)(III) and 22 C.F.R. § 129.6.

The DOJ press release on the guilty plea concentrates on the Department’s proof that the night vision exports to China were illegal. But, of course, that doesn’t demonstrate why Cheng’s activities were violations of the requirements of Part 129 of the International Traffic in Arms Regulations (”ITAR”) to obtain licenses or provide prior notification for certain brokering activities. The evidence seems clear that Cheng was involved in brokering under Part 129. But not all brokering activities require a license. Nor does brokering of illegal exports violate the brokering rules, even though such activity would support a conviction for conspiracy.

Section 129.7 of the ITAR sets forth those situations in which a broker must obtain a license. First, of course, the brokering must involve significant military equipment (”SME”), and it seems clear that the night vision in question was SME under the ITAR. Additionally, in order to require a license, a brokering transaction must meet one of four criteria: (1) the value of the transaction must exceed $1 million; (2) the same significant military equipment had not been license for export to the armed services of the country involved; (3) the agreement would require the manufacture of SME abroad; or (4) the items involved were being sold to non-governmental entities. Alternatively, prior notification might be required under section 129.8 for transactions involving SME valued at less than $1 million.

It seems likely that at least the notification requirement was breached. Arguably, the license requirement was also breached on the grounds that the Panther thermal imaging camera had never been licensed to the Chinese military. Even so, the DOJ press release on the conviction seems not to have understood that more than an illegal export is required to support a conviction for illegal brokering.

There has been some discussion here at Export Law Blog about the proper role of freight forwarding companies in export enforcement. If a customer of a freight forwarder proffers a package addressed to Iran without an OFAC license, should the freight forwarder decline the package and tell the customer that shipments to Iran must be licensed? Or should the freight forwarder accept the package and call the authorities? The recent settlement agreement entered into between Kuwaiti-owned Proclad International Pipelines and the Bureau of Industry and Security shows, I think, a freight forwarder that struck exactly the right balance.

At issue were attempted exports by Proclad of nickel alloy pipes classified as EAR99 to Iran without a license. The company attempted to export the pipes to Iran by transshipping them through the UAE. In the recitation of the various counts with which Proclad was charged is this interesting language:

Proclad altered markings for use on the crates of nickel alloy pipes that it was attempting to export to Iran. The altered markings were provided to the U.s. manufacturers in lieu of markings previously provided indicating that pipes were being exported to Iran. Proclad altered the markings to conceal the true ultimate destination of the items after it had been informed by a freight forwarder of the applicable licensing requirements during a previous attempt to export the pipes to Iran.

What apparently happened was that once the freight forwarder said the pipes couldn’t be shipped to Iran, Proclad simply slapped on new labels saying that the pipes were going to the UAE. I suspect the freight forwarder then called the authorities.

The freight forwarder did the right thing by initially telling the exporter that exports to Iran required licenses. Clearly any exporter that hands documents to the freight forwarder showing Iran as the ultimate destination is clueless about U.S. law. Proclad Pipelines is located in Scotland, so it’s a reasonable assumption that they may not have been familiar with U.S. export restrictions.

But what initially might be seen as an innocent mistake quickly became an illegal undertaking when Proclad decided that the appropriate response wasn’t to decline to export items to Iran but to pretend to export the Iranian-bound goods elsewhere. And a freight forwarder who saw that a package previously bound for Iran now had on shipping labels for the UAE would have to be well-aware that the exporter was attempting some shenanigans. And that, in my view, fully-justified the freight forwarder ratting out Proclad.