Of course, you didn’t expect that this blog would let a story about an arms company run by a 22-year-old kid and a 25-year-old “professional masseur” escape without comment, did you? The story, which the New York Times broke on Thursday, revealed how AEY, Inc., the company run by 22-year-old Efraim Diveroli and his massage therapist friend, was paid hundreds of millions of dollars by the United States Government to supply sub-standard ammunition to Afghan forces. Some of the ammo supplied by AEY is alleged to have been up to 40-years-old, i.e., manufactured before the AEY executives were even born.

There is at least one export law angle to the story. It arises from the discovery that some of the ammunition delivered by AEY had been procured from China. The Times story noted:

Tens of millions of the rifle and machine-gun cartridges were manufactured in China, making their procurement a possible violation of American law.

I’d say that’s more than a “possible” violation. When AEY arranged the export of ammunition from China to Afghanistan it would have been acting as a broker under Part 129 of the International Traffic in Arms Regulations (the “ITAR”). Section 129.5 of the ITAR notes that “no brokering proposals involving any country referred to in § 126.1,” e.g. China, “may be carried out by any person without first obtaining the written approval of” the Department of State’s Directorate of Defense Trade Controls. And we know that AEY would not have had such written approval because section 126.1 says that it is the policy of DDTC to deny licenses involving China.

I was saddened to learn today that one of the lions of the export bar, Don Weadon, passed away on Easter Sunday after a series of strokes that he suffered early that morning. Don was a kind and generous person, a great wit, a compelling raconteur, and a man with many friends. Laura Rozen, a friend of Don’s who blogs at War and Piece, wrote a moving and affectionate remembrance of Don which should be read by everyone who knew him.

Right after I started up Export Law Blog, I got a phone call from Don. There was very little in the export world that missed his keen eye and abundant curiosity. We met for lunch and corresponded by email after that. He provided loads of encouragement for this blog, and he often responded by email to particular posts, usually with a witty remark.

I last heard from Don on March 13 when he responded to a post I had done on Bigelow Aerospace which was planning to file a commodity jurisdiction request seeking the transfer of export licensing authority over its POOFs (privately-owned orbital facilities) from State to Commerce. The point of the post was the funny acronym POOF and the quixotic aspirations of Bigelow that DDTC would relinquish licensing of space technology. Don wrote:

Love it, Clif. As they used to say, a title on the door means a Bigelow on the floor. Literally.

Best regards,

Don

And, of course, Don wasn’t referring to a Bigelow wall-to-wall carpet on the floor.

Only 63 when he died, Don’s life was cut short sooner than anyone could have anticipated. However, the old chestnut from Plutarch rings true here: “The measure of a man’s life is the well spending of it, and not the length.” And by that measure, Don’s life was richly spent. He will be missed by many.

While everyone in the export community is enjoying a little schadenfreude over the Department of Defense’s inadvertent export of nuclear missile fuses to Taiwan, we shouldn’t lose sight that there are still plenty of civilian exporters that might want to tighten up their own compliance programs, assuming that they even have them. Case in point a California-based microwave electronics company profiled in this article in its local newspaper the El Dorado Hills Telegraph. The company, Genesis Microwave, has every reason to have a good export compliance program not only because it produces dual-use goods subject to the Export Administration Regulations, but also because one of its employees recently pleaded guilty to providing dual-use microwave technology to foreign companies without a license.

Here is what the company’s CEO Santiago Cutia, Jr., had to say about the application of U.S. export laws to his products:

“It’s really hard,” Cutia said. “When I see a request for quotation from a country on the National Security List, I know we would need to acquire an export license. For example, take a company from Iran. First, you need an end-user statement, who’s going to be using the product. Then, you have to submit it to the federal Bureau of Industry and Security.”

This must be done not just company by company that a U.S. firm might want to deal with, but rather contract by contract. The same government-approved Irani company that a U.S. firm sold to six months ago can call, and the entire licensing work must be repeated for each new contract, Cutia said.

I’m sure it will come as something of a surprise to BIS that it is approving exports of dual-use technology to companies in Iran. Note to export control compliance officers: make sure your CEO does more than sign the first page of the compliance program and actually reads it before talking to reporters about export regulations.

The article has one other gem, presumably also conveyed by the CEO to the reporter:

Federal tech-export regulations run to 61 pages, double-column.

In our dreams.

The Bureau of Industry and Security (”BIS”) issued a Temporary Denial Order on March 17, 2008, against Balli Group PLC and other related U.K. companies, the Armenian air carrier Blue Airways (a/k/a Blue Sky), and Iranian air carrier Mahan Air (which BIS erroneously calls “Mahan Airways”). The TDO arises out of the apparent lease (or sub-lease) of Boeing 747s to Mahan. These aircraft, which had once been in the United Airlines fleet, had been leased by Balli Group subsidiaries initially to Blue Airways and then sometime in 2006 had been leased by the Balli subsidiaries (or subleased by Blue Airways) to Mahan.

The TDO states that Balli had told BIS that the aircraft were not going to be leased or subleased to Mahan, although “open sources” showed that the aircraft, “identifiable by serial number and tail number were under the control of Mahan Air. The TDO also noted that Balli had refused to comply with an order to return the aircraft to the United States pursuant to section 758.8(b) of the Export Administration Regulations. (I can imagine the bemusement of the British companies when a U.S. agency demanded that they should return aircraft owned by them without compensation to the United States. I don’t think they said “no,” rather they probably said “not bloody likely.”)

Although the TDO doesn’t describe the “open sources” that it refers to, it appears that the arrival of the Blue Sky 747s in Tehran was first noted by Iranian “plane spotting” website www.iraviation.com, and then picked up on a large U.S. aviation-enthusiast forum www.airliners.net. The website www.airfleets.net also picked up the transfer of the aircraft. All this goes to show what should be fairly obvious: it’s really hard to hide a 747.

The Second Circuit issued an opinion on March 19 interpreting the sentencing guidelines applicable to violations of the Arms Export Control Act. That case, United States v. Sero, involved an appeal by a defendant that had entered a guilty plea to charges that he unlawfully exported gun parts and ammunition to the Philippines without a license. The District Court sentenced the defendant to 40 months followed by a three-year period of supervised release.

The defendant argued that the District Court erred when it interpreted the applicable sentencing guidelines and held that the lower sentence available under Sentencing Guidelines § 2M5.2 did not apply. A lower sentence is available under that guideline where “the offense involved only non-fully automatic small arms (rifles, handguns, or shotguns), and the number of weapons did not exceed ten.” Since the defendant’s exports included 2 boxes of .40 caliber Black Talon DP cartridges, the court held that the defendant was not eligible for the lower sentencing guideline. Interpreting that language literally, the Second Circuit held that the lower guideline is applicable only for exports that are restricted to small arms and do not include ammunition for those small arms.

The defendant also argued that a downward departure from the guidelines was warranted because he was selling the parts and ammunition to the alleged good guys. Section 2M5.2 permits a downward departure where the offending conduct posed no “security or foreign policy interest of the United States.”

The Second Circuit rejected this argument noting, first, that this downward departure is committed to the unreviewable discretion of the lower court unless the lower court mistakenly believed it had no authority to permit a downward departure. In this case, the Second Circuit noted, the lower court considered the security impact:

It explained that “it is not a good defense to say that the defendant sold to the right side or that he was not selling directly to the insurgents. There is no indication that he was.” Moreover, it found that a “citizen cannot pick and choose the firearm vendees that he will wish to deal with to the detriment of the policies of the State department” and that Sero had made no good faith attempt to receive an export license, suggesting that Sero knew that his gunrunning activity was potentially harmful.

The Court’s reasoning here is somewhat suspect. The language quoted by the Second Circuit suggests that the lower court was holding that all violations of the export laws necessarily pose a risk to security interests because the State Department says so. That comes perilously close to a holding by the lower court that it has no authority to make a downward departure by evaluating whether the conduct posed any risk to the security or foreign policy of the United States.

ABOVE: Allied Telesis iMAP

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Allied Telesis Labs, the Raleigh-based subsidiary of Japanese conglomerate Allied Telesis Holdings K.K., yesterday pleaded guilty to charges that it conspired to violate the U.S. sanctions against Iran. The interesting wrinkle in this case is that the charges are based simply on unsuccessful negotiations that Allied Telesis Lab employees had with Iran’s Information Technology Company to rebuild telecommunications facilities in Tehran and other cities in Iran.

Allied Telesis Labs designs high-capacity “multiservice access platforms,” known as iMAPs, and similar products. Such iMAPs, which can route a large volume of telecommunications traffic, were a central component of the redesign and had been designed in Raleigh. In anticipation of concluding the contract, $2 million worth of iMAPs for the Iranian project had already been manufactured for Allied Telesis at facilities in Singapore.

Court documents, however, indicated that:

The contract negotiations [with Iran’s Information Technology Company] eventually collapsed, the telecommunications system was not installed and the iMAPs were sold elsewhere at a loss.

The only public comment from Allied Telesis on the guilty plea was that the employees involved in the contract negotiations had been fired.

Since the charges here were conspiracy to violate the Iran sanctions, the prosecution would not have needed to prove any exports or attempted exports to Iran. It would only need to prove sufficient overt acts in furtherance of the conspiracy. Certainly the negotiations with the Iranian company, the design of the iMAPs, and, most significantly, the actual manufacture of those iMAPs in anticipation of the award, would be sufficient overt acts in furtherance of the conspiracy.

ABOVE: Dubai Court House

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According to a recent report in Gulf News, the English-language daily newspaper based in Dubai, a man who was attempting to export zirconium from the UAE was referred to the Dubai court for prosecution.

Judge Esam Eisa Al Humaidan, Attorney General, … told Gulf News the suspect was referred to court last week and a hearing will be held today. He said this is believed to be one of the very few cases of its kind, if not the first ever.

We’ll put our money on “first ever.”

Humaidan, no doubt aware that his country’s first tiny baby-step into the world of export control is being careful watched by certain people at the Department of Commerce, made clear that he’s doing everything he can not to screw it up:

“We have conducted thorough investigation in the case, to guarantee the complete and accurate implementation of the law,” he said. All procedures were done according the highest levels of accuracy, including ordering the arrest of the suspect, searching him, interrogating him and the other witnesses and the examination of the seized metal, he added

We’re not so sure what the “highest levels of accuracy” in interrogation means in the UAE, but we will take the Attorney General at his word and simply hope that the application of water wasn’t involved.

The background to all of this is, of course, an earlier threat by the Department of Commerce to put the UAE on a special list of countries of “diversionary concern,” which would have made exports of dual-use items to the UAE more difficult. The Department later retracted that threat after noting that the UAE had passed a new export law.

Swiss energy company EGL issued a press release today announcing that it had inked a contract to buy natural gas from Iran over the next 25 years. Most of the natural gas purchased by EGL under the contract is destined to Italy via the Trans-Adriatic Pipeline, which EGL is building with Norway’s StatoilHydro ASA.

The United States was not amused:

Lisbeth Keefe, spokeswoman for the U.S. Embassy in Bern, said Washington had told the Swiss that “major new oil and gas deals with Iran send precisely the wrong message at a time when Iran continues to defy U.N. Security Council resolutions requiring it to suspend enrichment-related and reprocessing activities.” She said Washington was studying whether the deal actually violates the Iran Sanctions Act.

Actually it shouldn’t take much studying. Section 14(9) of the Iran Sanctions Act specifically excludes from the Act “entry into, performance, or financing of a contract to sell or purchase goods.” My guess is that Keefe knew that because she also said:

“But we believe the deal in any case violates the spirit of the sanctions,” Keefe said.

This is the first time I’ve heard anyone argue — presumably with a straight face — that the “spirit” of a U.S. law should have extraterritorial application.

Robert Bigelow is a Las Vegas hotel billionaire who owns Bigelow Aerospace and wants to put a Budget Suites of America motel somewhere in space near you. Such facilities are apparently called privately-owned orbital facilities or POOFs. Seriously.

Of course, the folks at Bigelow think that their dreams of space tourism may be negatively impacted by the anti-POOF forces over at the Directorate of Defense Trade Controls (”DDTC”). Those grinches take the view that most space-qualified stuff is on the USML and needs an export license, which, of course, is a major annoyance for someone who wants to build hotels (and other commercial facilities) in the sky.¹ So, according to an editorial by Bigelow’s general counsel in the print edition of Space News, Bigelow is going to file a commodity jurisdiction (”CJ”) request to transfer the company’s “space habitat” (or POOF) technology from the United States Munitions List to the Commerce Control List (”CCL”).

Anyone who has filed a CJ request is probably giggling more over the idea that Bigelow’s CJ request will be addressed by DDTC anytime soon than they are over the acronym POOF. Similarly, the idea that DDTC will move space technology, even for space hotels, over to the CCL will provoke similar snorts. And, of course, once DDTC says no to Bigelow’s request, that will be the end of the story since such decisions are shielded from judicial review under section 2778(h) of the Arms Export Control Act.

But you can’t blame Bigelow for dreaming, can you?

[Thanks to Res Communis and Hobbyspace for info on the Space News editorial]

¹Under section 120.17(a)(6) a space launch of a payload is not itself an export of the payload. However, Bigelow appears to be hoping to launch its components from outside the United States, and thus would be required to export them prior to launch.

Virginia-based Wavelab pleaded guilty today to charges that it exported 2,400 microwave power amplifiers to China without the required licenses from the Bureau of Industry and Security (”BIS”). The company also agreed to forfeit the $85,000 it was paid for the amplifiers. Sentencing is scheduled for June 6, and the Court could impose additional fines.

The company’s website, which defaults to Chinese but is also available in English, lists 6 microwave amplifiers as its product line. Based on the spec sheets for these six products, it appears that they aren’t covered by ECCN 3A001.b.3 or 3A001.b.4, the two available classifications for microwave amplifiers. But the website also suggests that the company will custom produce microwave amplifiers for its customers, so it seems likely that such custom amplifiers were involved.

The company admitted in its plea agreement that it knew that the amplifier’s required licenses. Indeed, the ECCNs in question are relatively easy to apply and are based on the amplifier’s average output power, its frequencies of operation, its size and dimensions and its fractional bandwidth. (Fractional bandwidth is is the bandwidth of a device divided by its center frequency.) Although there are certainly ECCNs that pose difficulties in determining their applicability, these two are not among them.

An AP reporter that called the company for comment was told that everyone was “too busy” to talk and then hung up on.