The Validated End User program of the Bureau of Industry and Security (”BIS”) has experienced a fox-in-the-henhouse moment and may come crashing to a screeching halt. Apparently two of the five companies first awarded Validated End User status have ties to the Chinese military, prompting an inquiry by one U.S. lawmaker as to how this might have occurred.

Back in October, BIS announced its first participants in the Validated End User program in China. Chinese companies with a “record of using [dual-use] items responsibly” are eligible for the status of a Validated End User after review by BIS. Under the program, certain dual use items may be exported and re-exported to the Validated End User without a license from BIS.

Unfortunately, according to this AP wire report, two of the five Validated End Users — Shanghai Hua Hong NEC Electronics Co. Ltd. and BHA Aerocomposite Parts Co. Ltd. — have links to the Chinese military. Hua Hong NEC is owned by China Electronics Corp., which provides electronics to China’s People’s Liberation Army. And BHA Aerocomposite is partly owned by China Aviation Industry Corporation I, a state-owned company that makes Chinese military aircraft. Its other owners are two U.S companies: Boeing and Hexcel.

As a result of these revelations, first reported by the Wisconsin Project on Nuclear Arms Control, U.S. Representative Edward Markey sent a letter of inquiry to the Department of Commerce questioning whether BIS’s Validated End User program “has unwisely reduced controls on the sale of dual-use American products with significant links to the the People’s Liberation Army.” The letter requests information relating to the process by which the two companies were designated under the Validated End User program.

Although the designation of Hua Hong NEC clearly seems problematic, I am less convinced that BHA Composites wasn’t properly designated as a Validated End User. After all, BHA is a joint venture that includes two U.S. companies, which should significantly reduce the risk of diversion of dual use products to the Chinese military. The Chinese partner, AVIC I, owns only one-third of the joint venture. The Wisconsin Project argued that Boeing and Hexcel “have a history of violating U.S. export controls that should have barred BHA from consideration.” Admittedly, both companies have entered into settlement agreements relating to export violations, but none of the violations involved illegal exports to the Chinese military or otherwise suggest that the two companies would engage in illegal exports to the Chinese military.

The Bureau of Industry and Security (”BIS”) released, on January 23, a settlement agreement under which freight forwarder Elite International Transportation, Inc. agreed to pay $156,000 in penalties for export violations. According to the Settlement Agreement, Elite made a false statement on a Shipper’s Export Declaration (”SED”) that it prepared when it stated that no license was required for the export of triethanolamine to Mexico. Triethanolamine, which is covered by ECCN 1C350.c.9 is a common ingredient in shampoos, shaving creams and other cosmetics but is also a precursor to nitrogen mustards, which can be used as chemical warfare agents and which cause blistering similar to the sulfur-based mustard gases used in WWI and WWII.

This blog has often criticized certain enforcement actions against freight forwarders that appear to impose upon the freight forwarder an undue burden of due diligence verifying statements made to it by the exporter. This, however, isn’t really such a case. The SED would have described the product as triethanolamine. Even if the exporter indicated to Elite that no license was required, it was a simple matter for Elite to check this statement. After all, triethanolamine is listed in the alphabetical index to the Commerce Control List. Making the classification here wasn’t rocket science.

Freight forwarders are also not doing any favor to their customers by not double checking the classification of exported items. No doubt the exporter here has already received a nastygram from BIS and is negotiating a settlement agreement under which it will pay an ouch-worthy fine to BIS. If the freight forwarder had double checked the classification of triethanolamine and told the exporter of the mistake (rather than ratting it out), both Elite and the exporter wouldn’t be the subject of a post on this blog.

Clif adds: Be sure to read the comment below from Jim Dickeson. Jim, who is the import and export compliance manager for a freight forwarder, makes a persuasive case that in this instance the freight forwarder was sandbagged by the exporter. Still, I think there’s plenty of fault to go around in this case because the name of the chemical was listed on the index to the CCL. This wasn’t an instance where you had to know the temperature resistance of a composite material or the size and inclination of a borehole in a turbine. It was one where one only had to look under T in the index and there is was: “triethanolamine.”

A copy of the indictment of two Louisiana men for selling CAD software to companies in Iran which we reported last week is now posted here. And it certainly raises some interesting issues.

First, the AP wire story gave the impression that the two defendants were directly exporting the software to Iran. In fact, as the indictment shows, the software and maintenance services in question were sold not by the two defendants but by a distributor in Brazil. Specifically, the indictment alleges a conspiracy between the two Louisiana defendants and the Brazilian distributor to sell the software to companies in Iran.

Second, because the indictment is based on sales by a foreign distributor, it raises the issue of the reach of U.S. sanctions against Iran. If a U.S. company sells an item to an independent foreign distributor who later sells the item to a sanction country, the U.S. company is not liable for that sale unless there is some evidence that the sale was made to the foreign distributor for the purpose of re-exporting that item to the sanctioned country. The indictment in this issue seems to fall short of that standard.

The indictment makes clear that Engineering Dynamics, Inc. (”EDI”), the company that employed the defendants, had sold the CAD software at issue to Iran prior to the 1995 sanctions which prohibited exports to Iran. After the sanctions, all sales to Iran were made by a distributor in Brazil rather than by EDI. Most of the allegations of the indictment relate to communications from the Brazilian distributor to EDI relating to its Iranian sales, many of which were for the purpose of calculating and paying commissions due to EDI. There were only a handful of communications from the EDI employees to the Brazilian distributor from the two EDI employees, many of which were innocuous at best, including an email from one of the defendants telling the distributor to “have a nice trip” to Iran. Nothing in the emails indicated that the distributor’s sales efforts in Iran were being directed by EDI or were being made with the prior knowledge of the EDI employees.

The worst facts alleged in the indictment are hardly conclusive. There is an allegation that EDI reimbursed the costs of one trip by the distributor to Iran. Additionally, there is an allegation that one of the defendants provided activation codes for software that the defendant knew had previously been sold by the distributor to an Iranian company. Finally, there is an email where one of the defendant employees tells the distributor that he responded to an Iranian inquiry with a pro forma invoice but should have forwarded the sales inquiry to the distributor instead.

There is, of course, a compliance lesson here. Even though the Iranian sanctions don’t require that a U.S. exporter obtain an undertaking from a foreign distributor that the exporter’s products won’t be sold to a sanctioned country, it is still a good idea to require such an undertaking. After all, once the distributor makes such a sale, it may be difficult for the U.S. exporter to prove that the distributor was solely responsible for the sale and that it was not made with the knowledge, participation or assistance of the U.S. exporter.

According to an Associated Press wire story, two Louisiana men were indicted on charges that they illegally attempted to export structural design software to Iran without a license from the Office of Foreign Assets Control (”OFAC”). The two men own Engineering Dynamics, Inc., a Kenner, Louisiana, company that sells worldwide a software package knows as SACS (”Structural Analysis Computer System”). The software, although apparently aimed at the oil and gas industry, can also be used by designers and engineers for a wide variety of structures outside of oil and gas drilling platforms.

Although I don’t have a copy of the indictment yet, the AP story attributes an interesting assertion to the document:

The software is a controlled product under various U.S. laws and regulations because of its sophistication and its potential use, the documents said.

Say what? Anybody want to venture a guess at the ECCN of this software? It’s simply CAD software. If it could be used to design semiconductors it would be covered under ECCN 3D003, but otherwise generic CAD software isn’t controlled. It’s not clear why this assertion is even in the charging documents, since the defendants are only charged with exporting to Iran without an OFAC license. And in that case it doesn’t matter whether they were attempting to export sophisticated software or a pile of bricks. The crime was committed because the software was going to Iran, not because it was “sophisticated” or had a particular “potential use.”

It would appear that the U.S. Attorneys Office involved either doesn’t understand what items are subject to export controls or the office is simply trying to lard the indictment with irrelevant and prejudicial material. It’s not clear which is worse. Of course, since I haven’t seen the indictment and am relying only on a reporter’s account of the indictment, it’s impossible to be sure that the indictment alleged that the software was controlled. Once I get a copy of the indictment, I’ll update this post.

The Directorate of Defense Trade Controls (”DDTC”) has revamped its web site and says it hopes “the new format enhances your experience at this Web site.” It also hopes that all visitors to the new site only use Microsoft’s Internet Explorer because the new site is broken if viewed in Firefox. Firefox, currently used by almost 40% of people browsing the Internet, is Internet Explorer’s chief competitor and is available as a free download.

Here’s what you see at the new DDTC site if you’re using IE6:

And here’s what a Firefox user will see:

Notice that in Firefox the blue menu on the left covers up the beginning of each line of text on the right, making the page unreadable, hardly the “enhanced experience” that DDTC was hoping for. It is somewhat disheartening when an agency that is in charge of guarding critical technology stumbles when it comes to something as simple as cross-browser compatibility.

Québec’s Commission des droits de la personne et des droits de la jeunesse (”Human Rights Commission”) issued a press release yesterday describing (somewhat) the settlement agreement entered into between Bell Helicopter and a Canadian with dual Haitian citizenship. The Canadian had been dismissed from an internship with Bell once Bell learned of the Canadian’s dual citizenship. The company based this dismissal on the U.S. arms embargo on Haiti, which would prevent Bell from transferring technical data on U.S. origin defense articles to the Canadian citizen based on his dual citizenship as a Haitian.

The press release noted that the terms of the settlement agreement were confidential. However, since the Canadian citizen’s complaint sought money damages, it can be safely assumed that Bell paid monetary damages to settle the complaint.

Not surprisingly, the Commission’s press release went beyond reporting Bell’s voluntary settlement agreement with the Canadian citizen and expressed the obligatory outrage at the application in Canada of U.S. rules relating to U.S. defense articles:

The Commission reiterates its opposition to the application of the ITAR rules in Québec because of their discriminatory impact. It has conducted a legal analysis of the rules and concluded that they include requirements that are inconsistent with The Québec Charter of Human Rights and Freedoms. More specifically, they infringe the right to equality without discrimination based on ethnic or national origin. “We can no longer accept that companies established in Québec submit to foreign rules that infringe on the values and rights of citizens as recognized by the National Assembly,” says Gaétan Cousineau, the president of the Commission.

And, of course, it would be understandable for the U.S. to say that in such a case it would no longer accept that companies established in Québec be permitted to participate in projects relating to U.S. defense contracts.

Even so, there is a good argument that there is a fundamental unfairness in a U.S. rule that would permit a U.S. citizen who is also a dual citizen of Haiti to receive technical data on defense articles but not to permit a Canadian citizen who also has such dual citizenship to receive the same technical data. The U.S. has already conceded that it won’t apply this dual citizenship rule to Canadian government employees. This decision of the Québec HRC may prompt a faster resolution of the dispute between Canada and U.S. on the application of the dual-citizen rule to private enterprises in Canada, notwithstanding the overheated rhetoric of the Canadian commission.

Mahmoud Ahmadinejad

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The General Accounting Office (GAO) today released a report on the effectiveness of the unilateral sanctions imposed by the United States on Iran. The report cast doubt on the effectiveness of these sanctions and criticized the agencies charged with enforcing the sanctions for failing to make any efforts to assess or to determine the effectiveness of these sanctions.

The broad details of the report are neither surprising or particularly controversial. The report notes that because Iran’s oil-based economy makes it a key player in the global economy, U.S. bans on exports to, and imports from, Iran have been followed by substantial increases in exports from, and imports to, Iran. A timeline graph in the report makes this point eloquently:

The report also notes that transhipment of goods from the U.S. to Iran through third countries also compromises the effectiveness of the sanctions:

According to officials at key U.S. export enforcement agencies, the trade ban may be circumvented by the transshipment of U.S. exports through third countries. Officials identified several locations that serve as common transshipment points for goods destined for Iran. These locations include Germany, Malaysia, Singapore, the United Kingdom, and, according to Commerce officials, the United Arab Emirates (UAE) in particular.

Two trends underscore the possibility that U.S. goods are being shipped to Iran through the UAE. First is the considerable growth in U.S. trade flows through the UAE. The United States has become the number one supplier of imports to the UAE and Iran is the UAE’s largest trade partner.

The inclusion of the U.K. and Germany in the list of common transshipment points is a bit surprising, but indicates that exporters can’t ignore the possibility of transshipment based on the country to which the item is being exported.

Finally, the report notes that the Departments of State, Commerce and Treasury, all of which enforce the Iran sanctions, do not engage in any systematic review of the effectiveness of these programs. The Treasury Department, in its response to the GAO findings, took issue with this:

The Treasury Department continues to assess the effectiveness of its authorities that have been used against Iranian entities or Iranian interests. These assessments, which are not publicly available, are designed to determine the specific impact of Treasury actions and their success in meeting policy goals.

Of course if these assessments are, like double secret probation, kept secret, the wisdom of the sanctions is effectively removed from criticism by the U.S. businesses that are negatively impacted by the sanctions.

Canadian Foreign Minister
Maxime Bernier

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An article in today’s Toronto-based Globe and Mail uses the occasion of the recent visit of Canadian Foreign Minister Maxime Bernier to Washington to see his U.S. counterpart, Secretary of State Condoleezza Rice, as an opportunity to comment on disagreements between the two countries on defense trade and export controls. As reported previously on this blog, a major bone of contention between the U.S. and Canada is over Canada’s legal prohibition against nationality-based discrimination and the U.S. refusal to permit transfer of defense technology to Canadians who are dual-nationals of countries subject to U.S. arms embargo, such as China and Syria.

According to the article:

[Canadian] officials have said recently that a solution is not imminent, although they insist they want a deal. And Public Works Minister Michael Fortier, who met U.S. procurement officials in Washington last week and is now the designated point man in negotiations with Washington, won’t discuss the status of the file. Nor did he meet anyone at the State Department, which administers the contentious U.S. export controls.

The article posits two reasons that an agreement over this issue with Canada languishes while the United States has entered into agreements with the United Kingdom and Australia which would ease transfer of technical data to individuals and entities in those countries. First, the article quotes a Virginia-based “trade consultant” who said that

Canada doesn’t have a deal yet because it’s resisting concessions made by the British and the Australians. She pointed out that both those countries agreed to aggressively prosecute violators of the technology-sharing deals, most notably by applying domestic Official Secrets laws.

The second reason cited by the article is this:

Unlike the Aussies and the Brits, Canada buys relatively little of what U.S. military suppliers produce.

I’m not entirely convinced that these are reasons that the U.S. and Canada can’t see eye to eye over the dual national issue. The U.S.-U.K. Defense Trade Cooperation Treaty leaves open the criteria for determining what companies will be within the approved “community” of companies eligible for transfers with export licenses. It would not be surprising if those criteria require agreements by such companies not to transfer defense technologies to dual-nationals of countries subject to an arms embargo. If that’s the case, Canada can’t expect different treatment of dual nationals even if it increases its defense spending in the U.S. or agrees to cover re-exports of non-classified technical data under Canadian laws relating to official secrets or classified data.

The Treasury Department’s Office of Foreign Assets Control (”OFAC”) released today its monthly summary of enforcement actions. It would appear that the OFAC Task Force devoted to crushing sales of Cuban stogies on the Internets was either on vacation or disbanded because this is the first month where some hapless Internaut wasn’t fined a couple of hundred dollars for snagging a few boxes of Cuban Cohibas on-line. Or perhaps the Task Force was assigned to Iranian caviar given the circumstances surrounding the penalty paid by Diversified Business Communications.

Diversified organizes trade shows and conferences, including the annual European Seafood Exposition in Brussels. Sometime after 2000 (the Penalty Notice doesn’t specify a precise date), Diversified sold booth space to Shilat Trading Company, the Iranian company charged with sales and distribution of Iranian caviar.

In it’s defense, Diversified argued to OFAC that on March 17, 2000, the Secretary of State announced that sanctions against Iran would be eased to allow U.S. persons to purchase and import carpets and food products, such as dried fruits, nuts, and caviar from Iran, citing 31 C.F.R. §§ 560.534 and 560.535, which authorize the trade in, among other things, “foodstuffs intended for human consumption.” Diversified also argued that “Shilat is the exclusive producer of Iran’s caviar, which appears to be a primary focus of this exemption.”

OFAC’s response was, in short, that you can’t eat a trade show booth:

Company does not allege to [sic] have purchased foodstuffs from Shilat. Moreover, Company has not denied its provision of services, in the form of booth space booking arrangements, at an annual European seafood exposition, to Shilat, an entity located in Iran.

Because Diversified took steps to keep Shilat from participating in future European Seafood Expositions, OFAC whacked the possible penalty in half, down to $5,500. That’s enough, by the way, to buy about two pounds of Iranian Beluga Caviar at retail.

Screen clip from Al-Zawraa

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On January 9, the Department of Treasury designated Syrian television station Al-Zawraa under Executive Order 13438. That executive order targets parties that threaten Iraqi stabilization, including insurgent and militia groups and their support. Among the reasons cited for sanctioning Al-Zawraa were its broadcast of insurgent videos showing attacks on U.S. troops in Iraq.

According to a State Department authored article disseminated by the Voice of America:

Administration officials concede Wednesday’s order will likely have little practical impact. But Treasury Undersecretary for Terrorism Stuart Levey said the move brings to light “the lethal actions” of the sanction targets, and he urged the international community to join the United States in isolating them from the global economy.

One reason that this order “will likely have little practical impact” is that Al-Zawraa has been off the air since July 2007 and no longer appears to exist.

This is also the first time, at least that I am aware of, that Treasury has based a designation, at least in part, on the content of a broadcast or a publication. There is no reason to doubt Treasury’s claim that the station, while it was in existence, broadcast videos of insurgent attacks on U.S. troops. But so did major U.S. networks, including CNN.

The Treasury release also stated as a ground for the designation of Al-Zawraa that the station agreed “to broadcast open-coded messages through patriotic songs to [a] Sunni terrorist group.” Of course, coded messages are quite a different story from broadcast of insurgent videos and should have been sufficient, in and of itself, to designate that station. At least assuming that there is any point in blocking the assets of defunct entities.