The Bureau of Industry and Security (”BIS”) recently announced settlement agreements with Massachusetts-based Select Engineering, Inc., and with David Rainville, its Vice-President of Administration. Select Engineering agreed to settle charges that it exported medical electrode sensor elements and stainless steel snap connectors used in medical devices to Iran without a license. The items were alleged to have been exported to Iran by means of a transshipment through the UAE. As part of its settlement with BIS, Select agreed to pay a civil penalty of $52,800.

David Rainville was accused by BIS of violating 15 C.F.R. § 764.2(g) by making false representations to the BIS agent during the course of BIS’s investigation of the unlicensed exports. Specifically, it was alleged that Rainville told the investigator that he had spoken with an international trade specialist at the Department of Commerce after the unlicensed export when, in fact, he spoke with the specialist before the export. The specialist was alleged to have told Rainville before the export that an OFAC license would be required. Rainville agreed to a civil penalty of $35,200. (Ouch!)

The perplexing thing about this case is trying to understand why Select went ahead and shipped the items without getting license. Licenses are routinely granted here and are easy to obtain from OFAC. The settlement documents indicate that, in 2001, Select had applied for and obtained an OFAC license to ship the same kind of medical equipment to Iran. And, apparently, an employee of the Department of Commerce had specifically advised the company of the license requirement prior to the export at issue. I suppose that the company didn’t want to wait for license, but they paid a heavy price for their haste and risked criminal prosecution as well.

Last week we reported that charges had been filed against a U.S. Army Captain for exporting EoTech holographic rifle sights to Japan without the required export license from the Department of State’s Directorate of Defense Trade Controls. Of particular interest was that the government charged Captain Iishiba for violating the overseas smuggling provisions contained in 18 U.S.C. § 555, rather than under 22 U.S.C. § 2778(c), the criminal provisions of the Arms Export Control Act. We speculated that this might be because the government believed that 18 U.S.C. § 555 had a relaxed scienter requirement such that the government would only have to prove that the export was knowing but not that it was a knowing violation of law.

On Monday, a plea agreement between Iishiba and the government was entered with the court. Iishiba pleaded guilty to violation of the federal conspiracy statute, 18 U.S.C. § 371 for conspiring to violate the overseas smuggling statute. The plea agreement, however, did not simply indicate that the exports were intentional, but also stated that Iishiba knew that the exports were in violation of law. Specifically, the plea agreement noted that Iishiba was aware that the exports were illegal because he “misidentified the contents of the packages on the export declaration forms.”

Given that the plea agreement seemingly acknowledges that 18 U.S.C. § 555 requires that the export be in knowing violation of law, the question remains as to why Iishiba wasn’t charged under the Arms Export Control Act as opposed to the anti-smuggling provision. The penalties under the two statutes appear to be the same, so that’s not the reason. Any ideas? Let us know your thoughts in the comments section.

Last week the Office of Foreign Assets Control (”OFAC”) issued a document with the catchy title “Guidance on the Release of Limited Amounts of Blocked Funds for Payment of Legal Fees and Costs Incurred in Challenging the Blocking of U.S. Persons in Administrative or Civil Proceedings.” Although it did not purport to change current policy, it did so in significant and unstated ways.

Indeed, the guidance document is less than forthright about what it intended to accomplish. The guidance states:

This policy is aimed at enhancing the ability of a Blocked Party that lacks alternative access to funds to acquire legal representation in connection with its designation or the blocking of its property and interests in property.

In fact, the document is designed to prevent and/or burden legal representation in ways that OFAC has not previously sought to do. First, the guidance states that OFAC will only unblock funds to pay legal fees of U.S. Citizens that have been placed on the Specially Designated Nationals (”SDN”) list. Second, the guidance imposes limits on the amounts that will be unblocked with severe limits both on hourly rates and total fees reimbursed.

[T]he payment of legal fees from blocked funds may be licensed at a rate not to exceed $125 per hour, up to a cap set for each stage of the administrative proceedings or litigation. OFAC anticipates tracking the [Equal Access to Justice Act] hourly rate if it changes in the future. The policy incorporates fee caps per proceeding, as does the CJA, and limits the amount of licensable fees to $7,000 per attorney, for up to two attorneys, for administrative proceedings; $7,000 per attorney, for up to two attorneys, for district court litigation; and $5,000 per attorney, for up to two attorneys, for appellate court litigation. In extraordinary cases, such as cases involving lengthy or complex proceedings (e.g., may include cases lasting more than a year or with multiple parties whose designation or blocking resulted from a substantially similar administrative record or set of facts), the maximum fees allowed could be doubled for each stage of the litigation.

It’s probably a safe bet to assume that all the lawyers ran out of the room when they heard these figures. Suffice it to say that few persons challenging their inclusion on the SDN list will be able to find competent representation at these rates.

Prior to the guidelines, OFAC granted licenses to pay attorneys’ fees from blocked funds and assets without these limitations. Unlimited licenses were granted both to Global Relief Foundation and to Benevolence International Foundation.

Admittedly, this was not a uniform policy, and in the case involving the Islamic American Relief Agency, OFAC would only grant a license to pay attorneys’ fees from “fresh funds,” i.e., funds that came from outside the United States and had not been previously blocked. This, of course, is equivalent to licensing blocked funds since these fresh funds would also have become blocked once they entered the United States. And the guidance document leaves open the possibility that it may still permit broader reimbursement for attorneys in future cases from “fresh funds.”

What follows is admittedly rank speculation, but one has to wonder whether OFAC’s crackdown on attorneys in designation cases is the result of the bitter taste left in its mouth in the Al-Haramain case, where OFAC inadvertently disclosed to the attorneys a Top Secret document that revealed the attorneys’ phone calls were being illegally wiretapped by the U.S. government.

In addition to the general stupidity of killing animals that you don’t even eat, there may be another reason to cancel any upcoming safaris in Zimbabwe that you may have planned. President Bush today signed new sanctions against 1 individual and seventeen companies with connections to the discredited Mugabe regime in Zimbabwe, including a company called Famba Safaris.

According to a press release from the Office of Foreign Assets Control, Famba Safaris is a “registered Zimbabwean safari operator, whose Director and major shareholder is SDN Webster Shamu, Mugabe’s Minister of State for Policy Implementation.” Webster Shamu was put on the Specially Designated Nationals List on November 23, 2005.

The reason for adding Famba Safaris now to the SDN goes back to a brouhaha that erupted when Shamu was first placed on the SDN list. You see, HHK Safaris, one of the largest operators of safaris in Zimbabwe, has a somewhat ambiguous relationship with Famba Safaris, claiming that it “incorporates” Famba Safaris. After the initial designation of Shamu, the influential newsletter The Hunting Report raised questions as to whether this would make it impossible for Americans to do business with HHK due to its affiliation with Shamu. A spokesperson for HHK subsequently told Hunting Report that Shamu had no further affiliation with Famba and that Americans could feel free to come on down to Zimbabwe and kill a few hippos.

Well, not anymore, at least until HHK explains away its affiliation with Famba Safaris.

At a recent event in Washington, D.C., a U.S. legislator and an E.U. legislator announced a joint effort to adopt legislation to address the participation of U.S. and European technology companies in activities of repressive foreign regimes designed to limit access of their citizens to the Internet. The effort targets countries such as China that limit Internet access and which require the providers of Internet services to cooperate in prosecutions of citizens that engage in prohibited Internet conduct.

European Parliament Member Jules Maaten announced that he had drafted the European Online Global Freedom Act for consideration by the European Parliament. The draft legislation would, among other things, prohibit European companies from locating servers or other computer hardware used to provide Internet services in countries that restrict Internet freedom. The law also directed relevant regulatory bodies to promulgate regulations that would prohibit export of items that would be used by foreign countries to restrict Internet freedom and access. It would also prohibit filtering search engine requests at the request of foreign officials of such countries.

On the U.S. side, U.S. Representative Chris Smith (R - N.J.) has introduced the Global Online Freedom Act which roughly parallels the draft European legislation, but is somewhat less restrictive on the activities of U.S. companies. Smith’s legislation, which has been passed out of committee and is on the House’s Union Calendar, requires disclosure of any search engine filtering done at the behest of foreign officials in a country restricting Internet freedom but doesn’t prohibit the company from performing such filtering. It also directs the Department of Commerce to conduct a feasibility study addressing possible export controls on items used to restrict Internet freedom.

Whether or not these proposals will get any traction in their respective legislative bodies, it is safe to say that there is heightened awareness of these issues by legislators and that some export restrictions may ultimately be adopted to counter the worst instances of cooperation by U.S. and European Internet companies with repressive and authoritarian regimes. Of course, whether that will lead to more or less Internet freedom in such countries is an open question — repressive regimes are probably more likely to respond to such sanctions by further limiting access to the Internet rather than by simply eliminating all Internet restrictions.

ABOVE: Tomoaki Iishiba

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Captain Tomoaki Iishiba, stationed at Fort Lewis in Washington State, has been charged in connection with his shipment of sixty EoTech 553 night-vision-compatible holographic rifle sights to Japan without obtaining the required export license. Prior to these charges, Captain Iishiba was best known as one of the technical consultants on a computer war game known as Metal Gear Solid.

The export classification of these sights is unclear. The one-count criminal information filed by the U.S. Attorney makes no attempt to provide an export classification for the items. If these sights are principally used on firearms listed on Category I of the USML then they would be classified as Category I(h) and require a license from the Department of State’s Directorate of Defense Trade Controls. The sights could also be covered by ECCN 0A987 which covers “optical sighting devices for firearms,” but this classification does not require a license in the case of shipments to Japan. So, we can probably safely assume that the government believes that the items are properly classified as USML Category I(h).

Notwithstanding the likely USML classification of the sights, the criminal information does not charge Iishiba under 22 U.S.C. § 2778(c), the criminal provision of the Arms Export Control Act. Rather the charge is conspiracy to violate 18 U.S.C. § 555, the overseas anti-smuggling provision added by the USA Patriot Improvement and Reauthorization Act of 2005.* That section provides as follows:

Whoever fraudulently or knowingly exports or sends from the United States, or attempts to export or send from the United States, any merchandise, article, or object contrary to any law or regulation of the United States, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise, article or object, prior to exportation, knowing the same to be intended for exportation contrary to any law or regulation of the United States, shall be fined under this title, imprisoned not more than 10 years, or both.

Significantly, the criminal information doesn’t allege that Iishiba knew that it was illegal to export the sights. Rather it only alleges that he “knowingly exported” the rifle sights. Now the reason to charge under 18 U.S.C. § 555 rather than Arms Export Control Act, 22 U.S.C. § 2778(h), seems clear: the prosecution is trying to avoid the scienter requirement of the later statute.

Section 127.1 of the International Traffic in Arms Regulations is violated by an unlicensed export of a defense article whether or not the violator was aware that the export required a license. And it would appear that the prosecution is reading the anti-smuggling provision to require only a knowing export that violates a regulation without a scienter requirement. Whether a court will support this reading of the new provision remains to be seen.

*The provision was enacted as 18 U.S.C. § 554, even though there was already a § 554, and it was later recodified as § 555. The information, however, continues to cite the provision as 18 U.S.C. § 554.

ABOVE: Cuban oil well

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Last week we reported on criminal charges filed against a Colorado software company for violating the Cuba embargo. We had hoped to see the criminal information when it became public because the charges seemed, well, a little bit fishy. Now it appears, according to this article in Boulder’s Daily Camera, that the criminal information won’t be made public until a “change of plea” hearing takes place in October. The company had previously pleaded not guilty to the charges.

That article also gives a fair amount of detail about the facts leading to the indictment including claims by the defense attorneys that the company had no direct dealings with the Cuban government:

Foreman, an attorney with Denver-based Haddon Morgan Mueller Jordan Mackey & Foreman, said Thursday that the allegations stem from Platte River’s work in 2000 with Repsol, a Spanish oil and gas company.

He said the Boulder company sold its software program, which analyzes seismic and other ground data to assist in determining potential places to drill for oil, to Repsol in 2000.

A couple of months later, a Repsol employee came to Boulder for further training on using the software, Foreman said. At that time, a Platte River representative recognized that the seismic data looked as if it related to the Caribbean and Cuba, he said.

“I have no idea whether or not Repsol ultimately did anything with Cuba utilizing that software,” Foreman said.

This is all pretty attenuated as a basis for a criminal indictment. Platte River sold software to a Spanish company that then fed data into the program relating to areas around Cuba. Is Microsoft going to go to jail for selling Excel to a Canadian company that then uses the program to analyze its sales figures, including sales to Cuba? It strikes me that you don’t have criminal activity unless it can be demonstrated that Platte River knew that the software was going to be used to aid drilling in Cuba and was in fact later used to aid drilling in Cuba. Short of that, “no cigar,” as they say.

That being said, the mystery about this case only deepens. The change of plea hearing suggests that the defendants are now going to plead guilty and that some sort of plea agreement has been reached. But why would anyone plead guilty on the facts as they appear so far?

New-Jersey-based Advanced Orientation Systems entered into a settlement agreement with the Bureau of Industry and Security (”BIS”) pursuant to which it agreed to pay a $31,500 to settle charges that it shipped 11 “tiltometers” to Mayrow General Trading Company in August 2006. BIS agreed to waive $16,500 of this penalty if AOS committed no further export violations for one year. Exports to Mayrow General Trading Company without a BIS license are prohibited under BIS’s General Order No. 3.

AOS appears to be a relatively small company and not an experienced exporter, so it’s not surprising that it was unaware of the prohibitions of General Order No. 3, and there is no allegation in the charging documents that AOS was engaged in an intentional violation of BIS rules. Indeed, General Order No. 3 was promulgated by BIS in June 2006, only two months prior to the exports in question. This probably accounts for the relatively small fine agreed to by BIS.

One humorous aspect of the charging papers is that BIS continually insists on referring to the exported equipment as “tiltometers,” even though there is no such thing as a “tiltometer.” Maybe they were thinking about Tilt ‘O Wheels or something.

The correct term is an “inclination sensor,” which is the term used by AOS on its own website. A quick Google search of “tiltometer” would have revealed that this term refers only to a digital camera project by some English computer geeks who hung some plumb weights and protractors from a camera and to an Internet test, part of the Texas Information Literacy Tutorial about the best way to research certain questions. I guess the folks at BIS still don’t have access to the Internet.

It’s a slow day today in export news, so we’re bringing you a grab bag of various items, each interesting but none worthy of an entire post:

• Vanderbilt University has announced that it has hired a new assistant director of export compliance to handle the “new wave of federal export control regulations that is crashing down on Vanderbilt.” Were we asleep and missed a new wave of export control regulations or did Vanderbilt just wake up and discover the export regulations that crashed down on Vanderbilt years ago?
• An article on the Deutsche Welle website indicates that German firms are circumventing sanctions on Iran by doing business in Iran with suitcases of cash to avoid detection. This leads to the day’s most amusing quote from a German businessman living in Tehran:
  

  “If a plane crashes on its way to Tehran from Germany, then the loss of the luggage would be more expensive than the loss of the plane,” he said.

• A spokesman for the State Department testified yesterday in a Senate hearing that in response to the sham electoral victory of Robert Mugabe in Zimbabwe, the United States is considering additional sanctions against individuals and government entities in Zimbabwe. Raise your hands if you think these will lead Mugabe to break down in tears, resign his office, and flee the country.

The U.S. Attorney for the District of Columbia issued a press release today on charges filed against Platte River Associates in Boulder, Colorado, for violating the U.S. embargo on trade with Cuba. A copy of the criminal information detailing the charges is not yet available, and the press release raises as many questions as it answers.

According to the press release:

[Platte River] provided specialized technical computer software and computer training, which was then used to create a model for the potential exploration and development of oil and gas within the territorial waters of Cuba, without first having obtained a license from the Secretary of the Treasury.

No further information is provided relating to the substance of the charges, but the description provided here doesn’t really state all the elements of a violation. It seems unlikely, based on the language in the press release, that the training was provided to Cuban nationals or the Cuban government. Likely it was provided to nationals of other countries such as China, which is indeed involved in efforts to exploit Cuba’s offshore oil reserves. Even then, providing that software so that potential exploration can be modeled doesn’t violate the embargo until the software is used for actual exploration and then only if Platte had knowledge that the software would be used for those purposes.

The criminal information, when available, will likely provide enough information to evaluate the charges more fully, but, at the moment, not everything adds up. Once the criminal information is available, we will update this post.