This article in the International Herald Tribune explores the prevalence of American brand name products in Iran and Sudan notwithstanding sanctions that prohibit most exports to the two countries. As we’ve noted before, much of these products are re-exported from other countries, with large quantities of American products being exported from Dubai to Iran.

Two products that are ubiquitous in both countries make it through another route:

Leaving the airport at Khartoum, one of the first things you see is the ultimate symbol of American capitalism: the classic form of a Coca-Cola bottle printed on multicolored banners, next to a huge billboard for its rival, Pepsi.

…

Coca-Cola and PepsiCo have both secured export licenses from the Office of Foreign Assets Control of the U.S. Treasury, using legislation that allows blacklisted states to buy U.S agricultural commodities, medicines and medical equipment.

Coca-Cola said the syrup on which the company’s beverages are based qualified as an agricultural product. Pepsi said that its brands were produced in Sudan under “an OFAC license,” but declined to comment on the Iranian arrangement.

Although Coke syrup doesn’t immediately seem to be an “agricultural product,” the list of eligible products is quite broad and includes a broad number of prepared food products, including coffee and tea extracts. Although soft-drink extracts aren’t explicitly mentioned, they probably fall under USHTS classification 2106.90 — “food preparations not elsewhere specified” — which is included on the list of agricultural products covered under the Trade Sanctions Reform Act which permits agricultural exports to sanctioned countries.

Interestingly Coca-Cola relies on an OFAC license for agricultural products rather than the exemption under OFAC regulations for Iran and Sudan which would permit activities in Iran and Sudan by foreign subsidiaries of Coca-Cola as long as no U.S. persons aren’t involved in the foreign subsidiaries activities in the sanctioned country. That is, I think, a smart move given the difficulty of proving that foreign subsidiaries of U.S. companies act without any involvement by U.S. persons.

Pepsi’s refusal to comment on how it dispenses Coke its soft drinks in Iran, suggests that it may be relying on the foreign subsidiary exception. As long as cola syrup is seen by OFAC as an agricultural product, it’s hard to see why Pepsi relies on the foreign subsidiary exception rather than simply getting an OFAC license to export the syrup to Iran for bottling.

Even if activities in Sudan and Iran might be legal under OFAC licenses, these activities might be magnets for public criticism, particularly in Sudan. Coke seems to have cleverly sidestepped even this issue:

A Coca-Cola spokesman, Dana Bolden, said the primary motive for operating in Sudan and Iran was “to ensure quality control and protect our trademarks with the independent bottler.”
… Bolden also said the company was reinvesting all the proceeds from its sales in Sudan into programs that benefit the country. “We have committed more than $5 million over the next three years for programs aimed at building communities in Sudan.”

This, of course, doesn’t respond to the issue that Coke products in Iran might provide just the caffeine boost that its nuclear scientists need to build the bomb. Word is, however, that the average Iranian nuclear scientist prefers Austria’s Red Bull energy drink to Coca-Cola.

Nelson S. Galgoul, the Brazilian distributor for software company Engineering Dynamics, who sold the company’s software to customers in Iran was sentenced to 13 months in jail, a fine of $100,000 and a forfeiture of $109,291 for violation of the International Emergency Economic Powers Act and the Iranian Transaction Regulations. We’ve previously posted on this case here, here and here.

Two things are of particular interest about this sentence. First, how did Mr. Galgoul, a Brazilian distributor, wind up in U.S. jail for violation of the U.S. embargo against Iran. An Immigration and Customs Enforcement (”ICE”) press release suggested that Mr. Galgoul was an American living in Rio, so that serves as a pretty solid basis for criminal jurisdiction. Certainly its a much better basis than the oft-asserted basis that the exported product was a U.S.-origin item.

But even if the U.S. courts had jurisdiction over Mr. Galgoul, they have to get their hands on him. The extradition treaty between Brazil doesn’t provide for extradition in the case of violation of U.S. export laws. Furthermore under the dual criminality principal embodies in Article III, even if it did, extradition wouldn’t be possible unless exports to Iran were a violation of Brazilian law, which they are not. Mr. Galgoul was arrested by Immigration and Customs Enforcement, which could only occur on U.S. soil, so obviously he came to the U.S. voluntarily, although the possibility can’t be dismissed that ICE and the FBI said that they just wanted to “talk” to him. I can imagine that he sure wishes he stayed home now.

Second, the DOJ apparently aware that 13 months might seem harsh for selling software to Iran, larded its press release with a whopper:

According to court documents, Galgoul is the director of SUPORTE, a Brazilian consulting engineering firm which acted as an agent for Engineering Dynamics, Inc. (EDI), a Kenner, Louisiana engineering company that designed, produced, marketed, and supported Structural Analytical Computer Software (SACS), an engineering software program intended to assist in the design of offshore oil and gas structures. Due to the product’s sophistication and its potential use, SACS is a controlled product under various United States laws and regulations.

The cite to “various” laws should be the first indication that something is amiss. Computer assisted design (”CAD”) software for offshore oil and gas rigs isn’t controlled under any laws due to its “sophistication and its potential use,” much less “various” laws. The Commerce Control List covers CAD software for the design of semiconductors under ECCN 3D003. Software for the design of nuclear power plants is probably covered under ECCN 0D001. But the CAD software here seems to be EAR99 and only controlled for destinations such as Iran because it is a U.S.-origin product.

Professor John Roth, an electrical engineering professor at the University of Tennessee, has been indicted for violations of the Arms Export Control Act. The indictment alleges, among other things, that Roth disclosed to a Chinese graduate student controlled technical information on a drone aircraft being developed for the Air Force. Additional charges relate to Professor Roth traveling to China with controlled technical data. There is no charge that this data was disclosed to anyone in China, and the charge apparently arises from the fact that the data was on the laptop computer which he took with him to China.

Violations of the Arms Export Control Act must be premised on willful conduct and specific intent, i.e., a “voluntary, intentional violation of a known legal duty.” United States v. Adames, 878 F.2d 1374 (11th Cir. 1989). The indictment alleges that Professor Roth’s exports were willful, but it is, shall we say, sketchy on alleging, much less demonstrating, that Professor Roth knew that his actions were unlawful.

The charges relating to his taking his laptop computer to the PRC seem particularly vulnerable in this regard. There is no suggestion that Professor Roth disclosed this information while in China and thus it is perfectly reasonable to suppose that he had no idea that he needed a license from the Directorate of Defense Trade Controls (”DDTC”) to take his computer with him on his trip to China. (He was in China to teach a course at a Chinese university).

The deemed export charges — i.e. disclosure of the technical data in the United States to a PRC national — also seem to lack the requisite criminal intent. The concept of a “deemed” export is not something naturally intuited by everyone. Many people don’t realize that it might be criminal to disclose non-classified data in the United States to a foreign national. The indictment attempts to allege, unsuccessfully I think, specific intent by Professor Roth by claiming (a) that Roth sent an email in which discussed U.S. nationals as potential students who might assist the project and (b) that there were references to export controls in a contract reviewed by Roth and relating to the drone project. None of this makes a convincing case that Roth knew that having a Chinese student work on the drone project was a federal crime.

There is, I think, a big missing piece to the puzzle here. Nothing in the indictment provides any motive or reason that Professor Roth would intentionally commit a federal crime. There is no reason to think that he had any financial motivation here. Nor is this a case where a motive might be inferred because of any ethnic loyalty of the defendant to the country of his birth. Nor was there any apparent attempt by Professor Roth to conceal that the Chinese student was working on the project. In short, nothing adds up here. In my view, it seems that Professor Roth is more likely to be Mr. Chips than Professor Moriarty.

[Thanks go to Josh Gerstein of the New York Sun for sending me a copy of the indictment.]

The Bureau of Industry and Security recently released a Final Decision and Order fining Kabba & Amir Investments, Inc. dba International Freight Forwarders (”IFF”), a Canadian freight forwarding company, $6,000 for aiding and abetting the export of an x-ray film processor to Cuba in June 2000. Notwithstanding the potential penalties that could have been imposed on it, IFF represented itself in a hearing on the charges and made arguments that, well, illustrated the famous maxim about someone who represents themselves having a fool for a client and an idiot for a lawyer.

The underlying facts appeared not to have been in dispute. Kontron Instruments S.A., a French company, ordered four AFP Minimed 90 x-ray film processors from a U.S. company and had them shipped to IFF in Canada. Kontron directed IFF to remove all shipping and packing labels and documents, relabel the packages and ship the products to Cuba.

IFF took the matter to hearing in front of an ALJ and premised its defense on two arguments. First, that it didn’t know that the goods originated from the United States. Second, IFF argued that under Canadian law the exporter, not the shipper, was required to obtain any export license. Luckily, IFF can’t sue itself for malpractice.

The ALJ dismissed the preposterous argument that IFF didn’t know that the goods came from the U.S. by noting that IFF had admitted in its response to the initial BIS charging letter that it had been “advised to pickup a shipment from United States for furtherance to Cuba.” IFF probably also realized where the shipment came from when it removed the original shipping and packing labels and documents, but I suppose that’s just piling on.

Nor did IFF’s argument that Kontron, not IFF, needed to get the export license fare much better. Section 734.12 of the Export Administration Regulations (”EAR”) specifically states that compliance with foreign law does not relieve anyone from compliance with the EAR.

This case was pending as of October 16, 2007, IFF was subject to the increased $250,000 penalty. Given that IFF took the matter to hearing with, charitably speaking, two not very compelling defenses, IFF should be ecstatic that BIS imposed only a $6,000 fine.

Canadians are continuing to complain about U.S. export controls on defense articles according to this article in the Montreal Gazette

ABB Bomem Inc. was waiting for beryllium parts it had ordered from a U.S. supplier, when the company was hit with a six-month delay. The U.S. supplier hadn’t complied with a series of complicated American rules governing the export and import of defense-related articles. …

“That was a big, big problem,” recalled Marc-André Soucy director of remote sensing at the Quebec City firm, which designs and manufactures optical instruments. “The very ironic aspect is that we were importing parts from the United States.”

I’m not sure I see the “irony,” but perhaps this doesn’t really translate from the Québécois.

The most significant part of the article, however, is that it reveals that the U.S.-Canada dialogue on ITAR issue continues, but still seems to be getting hung up at the same sticking point: dual nationals and arms embargoes:

behind the scenes, talks have been going on between Public Works Minister Michael Fortier - whose department oversees Canada’s Controlled Goods Program - and the United States since last year. The most recent meeting was held this month in Ottawa, Fortier’s press aide Jacques Gagnon said.

The government’s first priority is to settle concerns over dual nationality restrictions, but progress has been slow.

Under ITARs, Canadian citizens born in Vietnam, China and other restricted countries cannot access material deemed sensitive under the U.S. rules. Controversy erupted at Bell Helicopter Textron Canada Ltd. in 2006 when certain foreign-born workers were banned from working on ITAR-restricted projects - a move that violates Canadian human rights laws.

I think that it’s more likely that the North-Going and South-Going Zaxes will resolve their dispute before this one get’s resolved. For those of you unfamiliar with the Zaxes, here’s an animated version of Dr. Seuss’s tale of two creatures who couldn’t compromise:

Some enterprising pornographer — from Sweden judging by my server logs — hacked the site sometime yesterday in an unsuccessful attempt to strew porno links everywhere. As a result the site was down last night and this morning.

We’ve updated WordPress to plug any security holes in WordPress that might have been exploited. The email notification function may be a little quirky since it doesn’t look like the one that I’m using is completely compatible with the new version of WordPress. We’ll try to get any issues on that worked out over the next several days

This recently unsealed criminal complaint against a Florida man shows that the FBI agents and the federal prosecutors haven’t a clue as to the correct reading of the definition of a “broker” in Part 129 of the International Traffic in Arms Regulations (the “ITAR”). In fact, it appears that the prosecutors and investigators have charged the defendant as an unlicensed broker merely because he had begun to negotiate for the export of a shipment of ammunition before getting the export license. If that’s a criminal offense, there are certainly lots of people who better get their affairs in order and contact a criminal defense attorney.

The defendant, Lance Brooks, had been awaiting sentencing after pleading guilty to the unauthorized export of defense services arising out of a trip he made to the UAE to train customers in the use of a grenade launcher. While Brooks was awaiting sentencing, the FBI obtained a warrant to search a DHL package to Brooks from the Firearms Coastal Security Branch in Jamaica. Inside the package was an End Use Certificate (DSP-83) from Jamaica’s Ministry of National Security pertaining to 270,000 rounds of jacketed soft point ammunition, most of it .38 caliber.

The FBI Joint Terrorism Task Force contacted the Jamaican government to obtain further details about the transaction. According to the Jamaican government, Brooks had bid in response to a government proposal to purchase the ammunition, had won that bid, had faxed an invoice for the ammunition to the government, provided banking information for payment for the ammunition, and requested and received an End User Certificate (DSP-83) from the Jamaican government for the ammunition. The FBI inquired with the Directorate of Defense Trade Controls (”DDTC”) to determine if Brooks had a license to export the ammunition. When it learned that Brooks had not yet applied for the license, it charged him with engaging in unlicensed brokering activities without first having registered as a broker with DDTC.

Significantly there is no evidence alleged in the complaint that Brooks had attempted to export the ammunition without a license or that he had no intention of applying for the license. Indeed, his request that the Jamaican Government execute and send to him the End User Certificate (DSP-83) — a document that had to be obtained before a license could be granted — suggested that Brooks had every intention of obtaining a license prior to export. Lacking any evidence of an attempted export or a conspiracy to export, it would appear that the FBI and prosecutors cooked up the brokering charge.

The definition of “broker” in section 129.2 of the ITAR doesn’t cover Brooks’s activities with respect to the contemplated sale of ammunition to the Jamaican government. The key part of that definition is that a broker is someone who acts “as an agent for others” in arranging for the sale of defense articles “in return for a fee.” The allegations of the criminal complaint do not provide any evidence that Brooks was acting for anyone other than himself in arranging this contract or that he was going to receive any fee from that other person. Instead, it appears that Brooks was engaged in a transaction on his own behalf and expected a sales profit on the deal rather than a third-party fee or commission.

If what Brooks did — namely, negotiating a contract for a defense article prior to receiving an export license — is brokering, than almost every exporter will be subject to criminal penalties if they haven’t registered as a broker. Worse, those exporters may need to obtain brokering licenses from DDTC before even talking to potential customers with respect to transactions that fall within the brokerage licensing requirements of section 129.6.

Exporters that had such a poor understanding of the ITAR as these federal enforcement officials would likely be fined or worse when their misunderstandings led to rule violations; no such negative consequences, however, await these enforcement officials who appear not to have even a rudimentary understanding of Part 129 or the definition of a “broker” under that Part. One can only hope that Brooks’s public defender reads Part 129 with slightly more care and gets these charges dismissed.

An article in today’s CNN Money contains some interesting tidbits about Weatherford’s operations in sanctioned countries, which we first reported here, and which have been the subject of a governmental investigation.

First, the article notes that Weatherford’s divestment of its operations in Sudan allowed it to donate its many assets in Sudan to Thirst No More, an organization seeking to drill water wells in Sudan.

Among the most valuable items it received was Weatherford’s Nissan truck, which hauled oil-drilling equipment in Sudan, and which will now pull water rigs and pipes in parched Darfur. And most of the furniture and office equipment from Weatherford’s Khartoum villa will be shipped to the Thirst No More base in North Darfur’s capital El Fasher.

All though such a donation is not a traditional basis for mitigation of penalties owing as a result of doing business in sanctioned countries, I certainly hope that it might be so considered here, assuming that there is any basis for penalizing Weatherford’s operations in Sudan through a foreign subsidiary.

Second, the article points to a SEC Form 8-K, filed last September, where Weatherford said it was discontinuing its business through its foreign subsidiaries in “Cuba, Iran, Sudan and Syria.” The reference to Cuba more or less jumps off the page of Weatherford’s 8-K and certainly explains the most serious problem Weatherford may have with respect to the governmental investigation of its operations in sanctioned countries.

The reporter who wrote the CNN article missed the significance of this revelation, apparently under the mistaken impression that there’s a loophole that permits U.S. companies to operate in embargoed countries through their foreign subsidiaries:

The company used a loophole in U.S. sanctions laws - used also until recently by Halliburton … in Iran - which allows U.S. companies to operate in embargoed countries, so long as no U.S. citizens are involved, and it operates under a foreign subsidiary.

This exception applies only to operations in countries sanctioned under the International Economic Emergency Powers Act, like Iran and Sudan, for example, but not to operations in countries sanctioned under the Trading With The Enemy Act, like Cuba and North Korea. Operations by foreign subsidiaries of U.S. companies in those two countries is a violation of the Trading with the Enemy Act and can give rise to civil and criminal penalties. Once Weatherford admitted it was doing business in Cuba, it had, as they say, a situation on its hands.

A magistrate hearing pretrial motions in the criminal export case against Doli Syarief Pulungan wondered in a recently issued Report and Recommendation¹ whether there might be a secret version of the USML which lists actual items rather than categories of items. Of course it’s impossible for me to say whether or not there is a “secret” list of that sort with any certainty, since if I knew about it, it wouldn’t be so secret. I don’t think such a list exists, however, but I do think its useful to see what caused the magistrate to wonder about such a list.

As we reported in an earlier post, Pulungan is charged with conspiring to export 100 Leupold Mark 4 CQ/T Rifle Scopes to Indonesia without a license. One of Pulungan’s pretrial motions was for a bill of particulars describing “the specifications to which the subject riflescopes were manufactured that make them defense articles on the Munitions List.” According to the magistrate’s report:

The government’s initial response is that its expert will testify at trial that Leupold Mark 4 CQ/T Riflescopes are on the Munitions List. Pulungan rejoins with an obvious observation: the list itself does not specify any brand or model of riflescope, nor does it list the specifications that would make the scopes defense articles; so what relevant testimony could this ostensible expert possibly provide? Pulungan wants a breakout of the implied syllogism: a riflescope that possesses characteristics x, y and z is deemed to be manufactured to military specifications; a Leupold Mark 4 CQ/T Riflescope possesses characteristics x, y and z; therefore, a Leupold Mark 4 CQ/T Riflescope is manufactured to military specifications. What, asks Pulungan, are x, y and z?

Of course the answer to that question is hardly a deep, dark secret. Leupold’s web site reveals that the scope was designed for the M16. Rather than saying this, however, the prosecution tried to be cute, and that’s where the trouble begins. The magistrate continues:

The government responds that it doesn’t work this way. There is no x, y or z factor that lands a riflescope on the Munitions List in Category I(f). The only logical way to interpret the government’s response is that there is another list, prepared by the DDTC, which determines whether any particular item is a defense article included on the Munitions List as part of ITAR.

The magistrate goes on to note that the government in its pleading says that an item “is designated as a ‘defense article’ on the United States Munitions List” or “defined by the ITAR as a ‘defense article’ covered by Category I(f)”:

If I am interpreting Count 1’s passive-voice declaration and the government’s explanation correctly, then some person or committee within the DDTC has declared that the Leupold Mark 4 CQ/T Riflescope is a “defense article” because it fits within Category I(f) of the Munitions list. But this doesn’t answer Pulungan’s actual complaint: how did it get there? Where, precisely, might a potential exporter actually find this ITAR designation of the Leupold Mark 4 CQ/T Riflescope? What is the foundational basis for the testimony of the government’s trial witness from the DDTC? Does the DDTC have some other real list by make and model? Is there a memo specific to the Leupold scope’s I(f) designation? If so, where is it and why hasn’t it been provided to Pulungan as pretrial discovery?

Following this logic to its end, the Magistrate ordered the prosecution to provide the who, how and why of the designation:

[T]he government promptly must explain in detail who designated the Leupold Mark 4 CQ/T Riflescope a “defense article,” how they did it (the procedural mechanisms) and why they did it (the actual and specific reasons for the designation).

To which we can anticipate the government will respond: nobody designated the Mark 4, there was no procedure that designated it, and no specific reasons were given. The scope is a USML item because it was manufactured to be used on the M16.

You can easily see how the government’s loose language got it into this silly predicament. Items aren’t on the USML; just categories are on the USML and items are either in a USML category or not. The Mark 4 scope isn’t designated on the USML. “Riflescopes manufactured to military specifications” are designated category I(f) on the USML and the Mark 4 either is or isn’t a “riflescope manufactured to military specifications.”

And the issue before the court is not the designation of milspec rifle scopes as category I(f), a designation which is not reviewable under section 38(h) of the Arms Export Control Act, 22 U.S.C. § 2778(h), but simply whether the Mark 4 is or is not a “riflescope manufactured to military specifications.”

It is only a semantic distinction to note that the category not the scope itself is on the USML, but failing to observe that distinction clearly resulted in the magistrate issuing an order that he might not have otherwise issued.

¹ Westlaw subscription required.

Mr. Sasan Azodi, mentioned in yesterday’s post, called me just a few minutes ago to give me his side of the dispute between him and Dräger Safety as to who was at fault for the export of the VisioWave security monitoring software to Iran. As you may recall, I questioned why he would be buying the expensive software for Dräger in the first place.

According to Mr. Azodi, the project managers at Dräger for the Irasco security system claimed that they had been blind-sided by the new requirement that the security system would be tested at Dräger’s facilities in Germany. They alleged that they would get in trouble with the company if they now had to buy a second copy of the software for testing in Germany after already having told Irasco it would have to procure the software on its own for the final system. The factory acceptance testing would now require two copies of the software and, according to Azodi, the managers said that they hadn’t factored that into their planning for the project.

I’m guessing that Mr. Azodi’s commission on successful completion of the Irasco project must have been significant if he was willing to dig so deeply into his own pocket to make sure that the project was a success. Yet even if people at Dräger swore a hundred times on their geliebten Mütter’s honor that they would never, ever export the software from Germany to Iran, surely one might have been a bit credulous in the circumstances involved that they could resist the temptation to ship the software to Tehran and be done with it. Even so, Mr. Azodi says he has that promise in writing and that should at least count for something.