An indictment was returned on October 28, charging three men with conspiring to export carbon-fiber material to the China Academy of Space Technology (”CAST”). Certain types of carbon-fiber materials are covered by ECCNs 1A002, 1C010, 1C210, and 1C990. The DOJ press release announcing the indictment provides no further detail on the carbon-fiber material involved or the applicable ECCN.

Two of the indicted men are or were employed by a Singaporean import/export company known as FirmSpace, Pte Ltd. A reporter for Singapore-based news website TODAYonline visited FirmSpace and discovered some interesting things:

For over a year, the company, Firmspace …, appears to have not had any business. But it has not laid off any employees and was even able to pay its staff promptly, said its receptionist, who only wanted to be known as Ms Vera.

“I found it quite strange but I never thought of asking the bosses, as long as I still got my salary,” she told Today. …

None of the three employees working in Firmspace knew what was sustaining the business, Ms Vera said. But she stated that Firmspace had been “involved in a few projects” — she didn’t know the nature of these projects, though — since it stopped its import and export business, but none of them were successful.

Ms. Vera and her two co-workers had the perfect job where they got to show up at work, do absolutely nothing at all, and still get paid. Who were they to step off this gravy train?

Of course, it doesn’t take an especially clever sleuth to guess what was going on:

TODAY’s checks revealed that Chinese nationals Mr Hou Xinlu and Mr Gao Xiang are listed as Firmspace’s directors. It is believed they are based in China.

Ya think?

Not surprisingly, Firmspace appears to be simply a front company set up by CAST or some other agency of the Chinese government to obfuscate Chinese efforts to obtain export-controlled items from the United States. This time it didn’t work out so well, since the Chinese front company tried to order the carbon-fiber material from a U.S. front company set up by the U.S. government to catch people trying to engage in illegal exports. Still, you have to wonder how many people get paid by the Chinese to sit at desk in a front companies used by the Chinese in their attempts to obtain sensitive materials from the United States and other countries.

The Office of Antiboycott Compliance of the Bureau of Industry and Security (”BIS”) released a settlement agreement that it recently entered into with American Rice, Inc., pursuant to which American Rice agreed to pay $30,000 to settle charges that American Rice failed to report 15 instances of requests that the company engage in a prohibited boycott of a foreign country. In particular, BIS alleged that on 15 separate occasions, American Rice failed to report that in connection with exports of rice to the United Arab Emirates it had been requested in a letter of credit issued by a UAE bank to supply a “certificate issued by owner/master or agent stating that the ship is allowed by the Arab authorities to call at Arabian ports.”

The failure to report this request does appear to violate the anti-boycott rules, but only as a result of an excessively narrow and technical reading of the rules. Of course, the interpretation of the lengthy and detailed anti-boycott rules requires the patience of Talmudic scholar or a medieval casuist and is a task that has been known to reduce grown men and women to tears. But let’s make a stab at it.

The charges here were for failure to report, so it is important to remember that a failure to report can be a violation of the rules even in instances where the exporter could legally supply the information. Under Supplement 1 to the antiboycott rules:

the owner, charterer, or master of a vessel may certify that the vessel is “eligible” or “otherwise eligible” to enter into the ports of a boycotting country in conformity with its laws and regulations.

However, under section 760.5(a)(5)(viii) of the antiboycott rules, an exporter need not report:

A request to supply a certificate by the owner, master, charterer, or any employee thereof, that a vessel, aircraft, truck or any other mode of transportation is eligible, otherwise eligible, permitted, or allowed to enter, or not restricted from entering, a particular port, country, or group of countries pursuant to the laws, rules, or regulations of that port, country, or group of countries.

So why doesn’t this exclusion from the reporting requirement apply? It would appear that it doesn’t apply because the request could have been satisfied by a certificate from an “agent” and not just by a certificate from “the owner, master, charterer, or any employee” of the vessel. That certainly seems to be a narrow and technical distinction on which to premise a $30,000 fine, but that is what appears to have happened here.

And there are additional nitpicks which would prevent the exemption from applying. The request refers to Arab authorities and Arabian ports although BIS has apparently said that “Arab” doesn’t refer to a “group of countries” within the meaning of the exception. Additionally, the language requesting the certificate didn’t track the exemption inasmuch as it did not add the qualification that the vessel wasn’t restricted “pursuant to the laws, rules, or regulations of” the countries involved.

In short, exporters can only safely rely on the reporting exceptions in section 760.5(a)(5) if the language tracks the wording of the exception virtually word for word.

[Thanks to Doug Jacobson for confirming that, in his view, the addition of the word "agent" to the boycott information request led to the exporter's downfall here.]

ABOVE: USML Category II(a)

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I always tell clients that even an obsolete military item can be on the United States Munitions List (”USML”) and require an export license. Still, not all obsolete military items are on the USML. Maces, catapults, jousting poles, caltrops, scythed chariots, spears, arrows, and siege hooks immediately come to mind. Swords too. Unless, it seems, you are a special agent for U.S. Customs and Border Protection.

According to this op-ed column in The Capital Times by Howard Waddell of Albion Swords Ltd. in New Glarus. Wisconsin, U.S. Customs recently seized an export by him of replica swords modeled after the ones used by Arnold Schwarzenegger in Conan the Barbarian:

I received a telephone call on Friday morning indicating that a shipment we had made to our European distributor was being held by U.S. Customs because of a possible ITAR violation — shipping “weapons of war” without prior authorization from the State Department.

…

When I pointed out that the shipment in question consisted primarily of reproductions of swords from the 1982 film “Conan the Barbarian” starring Arnold Schwarzenegger and were not, in fact, “weapons of war” per se, the dutiful customs officer pointed out that the U.S. Marine Corps still uses swords, therefore swords are still considered to be “weapons of war.”

Oh. Good. Grief. Don’t go searching your copy of the International Traffic in Arms Regulations (”ITAR”) for “weapons of war,” because you won’t find that phrase anywhere. Nor, frankly, will you find a category on the USML which encompasses sword replicas. The closest I could find was “close assault weapons systems” in Category I(c), but, although that term isn’t defined in the USML, it is a clear reference to a now-discontinued type of highly accurate short-range rifle for urban warfare, not to swords, which haven’t been used on the battlefield for, oh, four or five centuries.

Some interesting news today on the sanctions front, so it’s time for another Export Law Blog grab bag:

• The Iranians aren’t very happy about the sanctions imposed yesterday by the Treasury Department on the Export Development Bank of Iran (”EDBI”), so they issued a press release decrying the sanctions. According to the Iranians, the sanctions were imposed “as a propaganda move in order to cover up the consequences of the recent American economic crisis.” That, I guess, would explain why yesterday’s entire news cycle was dominated by the sanctions on EDBI and absolutely no coverage was given at all to to the the decline of the Dow Jones or other economic news. The Iranians also threatened to file complaints with unnamed “relevant authorities.” Let’s see how well that works out for them.
• At the same time the U.S. is tightening sanctions on Iran, the U.S. continues to lay the groundwork for a U.S. “interests section” in Tehran. This would be the first time the U.S. has had a diplomatic presence in Tehran since the 1979-81 hostage crisis. According to this report by McClatchey Newspapers, the Bush administration intends to announce these plans in mid-November. No word yet on whether Iran is on board with this idea, although Iranian President Mahmoud Ahmadinejad said last month that he’d consider the idea.
• Cuba has announced that its recently-discovered oil reserves have 20 billion barrels of oil instead of the 5-10 billion previously estimated. To put this number in context, the U.S. has estimated reserves of 29 billion barrels. This has caused some skeptics to scoff that the new estimate is “off the charts” and might simply be a ploy to rekindle investor interest despite falling oil prices. Even so, there are reports of proposals on the Hill to exempt U.S. oil companies from the embargo so that they could get a piece of the action. Embargo hardliners are countering with proposals to prevent executives of foreign companies that drill in Cuba from visiting Disneyland.

The Office of Foreign Assets Control (”OFAC”) today announced that it was adding the Export Development Bank of Iran (”EDBI”) to its list of Specially Designated Nationals and Blocked Persons. The effect of the designation is to freeze all assets of the bank in the United States now or in the future. According to the press release issued in connection with the designation, the Iranian bank is assisting the Government of Iran in connection with its nuclear proliferation activities.

More interesting than yet another Iranian bank designation was OFAC’s simultaneous designation of EDBI’s Venezuelan subsidiary Banco Internacional de Desarrollo. The name of the Venezuelan subsidiary is perilously similar to the Banco Interamericano de Desarrollo, otherwise known as the Inter-American Development Bank, an international banking organization just blocks away from the Treasury Department in Washington, D.C. To make the situation worse, a Google search on “Banco Internacional de Desarrollo” returns the Banco Interamericano de Desarrollo as its first result.

The possibility of confusion, as well as the desire to avoid about 4 million calls to the OFAC hotline, led OFAC to take a step so far unprecedented on the SDN list: it specifically noted that the designation did not cover the Banco Interamericano de Desarrollo. Here’s the entire designation:

BANCO INTERNACIONAL DE DESARROLLO, C.A., Urb. El Rosal, Avenida Francisco de Miranda, Edificio Dozsa, Piso 8, Caracas C.P. 1060, Venezuela; RIF # J294640109 (Venezuela); SWIFT/BIC IDUNVECA; Banco Internacional de Desarrollo, C.A. is a separate and distinct entity from Banco Interamericano de Desarrollo, known in English as the Inter-American Development Bank (IADB), and from Banco Desarrollo Economico y Social De [sic] Venezuela (BANDES), an entity owned by the Government of Venezuela [NPWMD]

And, as you can see, OFAC also gave a “Get Out of Jail Free” card to the somewhat less similarly named Banco Desarrollo Economico y Social de Venezuela. These preemptive exclusions are, to my knowledge, unprecedented on the SDN list.

OFAC has been subject to substantial criticism that it is easier for an SDN to remove itself from the list than for an innocent party with the same or similar name to an SDN to obtain from OFAC an official clarification that the innocent party isn’t on the list. This unusual new designation substantially erodes OFAC’s claim that cases of mistaken identity aren’t its problem.

Country-based sanctions start to get leaky in the age of the Internet. How does a software download service know whether or not it’s providing a service to an individual in a sanctioned country?

A blogger at PBS’s Mediashift Blog notes that Google has blocked downloads of its new browser Chrome, as well as other Google programs, to residents of Syria and Iran. Well, sorta:

Iranian blogger, Hamid Tehrani, who edits the Iran section for Global Voices, [reports] that Chrome is blocked, along with other Google downloads, in Iran. But it’s relatively easy for Iranian users to get around this obstacle. [Another Iranian blogger reported] in an email (from his Gmail account) that he is still able to access Google services by using a proxy.

“Currently, we are using all of the search engines and portals without any restriction, using the latest versions of Google Earth, Chrome, GTalk and any other downloadable product,” he said. In addition to helping users get around government filtering and censorship, proxies and anonymizers can also fool Google’s servers into thinking that the downloads were going elsewhere rather than to users in Iran.

What’s going on here is that normally each user is assigned an IP address that identifies the user as he or she surfs the Internet. IP addresses are assigned, in part, based on geographical location, and there are blocks of IP addresses that would identify an Internet surfer as Iranian or Syrian (or French, etc.) Google has, apparently, blocked downloads from users with IP addresses allocated to sanctioned countries. An open proxy server, however, can be used by most browsers to connect to the Internet, thereby making the user appear to be coming from the country in which that proxy server is located rather than from the country in which the user is actually located.

The article reports that other web-based service providers have taken alternate approaches to dealing with U.S. sanctions.

Although Yahoo removed Iran from the drop-down list, Iranians were still using Yahoo services, according to Kourosh Ziabari, an Iranian journalist and blogger who wrote about the issue for the citizen journalism site OhMyNews.

“[Iranians are using] Yahoo services, downloading new versions of Messenger, using the different web site parts but not finding the name of their country in the sign-up list,” Ziabari wrote. “In fact, if an Iranian user wanted to sign up for a new account in Yahoo mail, he should have selected the name of the other countries, and then he would proceed.”

Although removing Iran, Cuba, Syria and other sanctioned countries from drop-down lists is certainly a good idea to demonstrate compliance with U.S. economic sanctions, it can hardly be considered sufficient. Websites that provide web services, such as downloads, should also capture IP addresses in order to determine whether a web-based customer is coming from sanctioned country. Arguably, websites that sell non-virtual products (you know, computers, GPS equipment, bricks, etc.) should also capture those addresses. A web-based order from Iran for a shipment to the UAE is a bit of a red flag, n’est-ce pas?

But given the ease of using proxy servers, should websites do more to implement U.S. sanctions? Should Google (and other browser providers) put “kill switches” in downloadable software that would make a direct connection to the Internet, “call home,” and then shut the program down if the home servers indicated the verification connection was coming from a sanctioned country? Or should the program require activation using a code sent to an email address other than a web-based email address? Any other ideas? Or is this just a losing battle that should be abandoned?

The Texas subsidiary of German logistics and transportation provider Rohde & Liesenfeld agreed to pay $108,000 to settle charges by the Burea of Industry and Security (”BIS”) that Rohde & Liesenfeld had committed 36 violations of BIS’s antiboycott regulations. Those regulations are a response to the Arab League boycott of Israel and forbid U.S. persons from providing information concerning its or another person’s business relationships with or in a boycotted country.

According to the charging documents, Rohde & Liesenfeld supplied to Al Furat Petroleum, on 36 occasions, invoices from Tropwind Trading Ltd. containing the phrase

We certify that the goods enumerated in this Invoice are not of Israeli origin and do not contain any Israeli materials.

The problem here is that the invoice was supplying a negative certificate of origin, even though section 760.3(c) of the Export Administration Regulations (the “EAR”) makes clear that a U.S. person, in connection with an export to a boycotting country, may only supply a positive certificate of origin stating where the product originates. A negative certificate of origin certifying where the product does not come from is prohibited.

The problem here is that there is another requirement for a violation of the anti-boycott regulations which does not appear to have been met. Section 760.1(e) of the EAR requires that the information be furnished “with intent to comply with, further, or support an unsanctioned foreign boycott.” Here, although it seems clear that Tropwind made the negative certification with such intent, Tropwind is not a U.S. person and isn’t subject to the regulations.

The case for intent against Rohde & Liesenfeld is a bit shakier. A logistics provider does not necessarily inspect all the shipping documents, and if Rohde & Liesenfeld was unaware of this negative certification in the invoice, it’s delivery of the invoice with the shipping documents wouldn’t constitute intent. There is nothing to suggest whether the clause at issues was conspicuous and on the face of the document or buried among the 6 point terms and conditions printed on the back of the invoice If BIS is seeking to impose liability on freight forwarders, logistics providers, and the like, it should provide some notice to the export community in the settlement documents of the basis for its finding that the freight forwarder or logistics provider had an intent to comply with the boycott.

When Jesus Argandona, arriving in San Antonio from Mexico City, stepped off his plane, he probably thought his next destination would be his hotel. Instead it was jail. A criminal complaint had been filed against him under the Anti-Smuggling statute, 18 U.S.C. § 555*, in connection with his export of blank CDs from Laredo, Texas to Mexico City. If you think there’s something confusing about the U.S. charging a Mexican for smuggling goods into his own country, then you only know the half of it.

The criminal complaint filed against Argandona is hardly a model of narrative clarity, but the basic outlines of what happened seem to be this. Argandona purchased five containers of blank CDs for $600,000 from a Panamanian company which the Panamanian company had purchased from China. The containers, which were in the Laredo Free Trade Zone at the time of the sale, were being shipped “in bond,” i.e., they had entered the United States without assessment of duties because they were in transit to another country, in this case presumably Panama. Argandona allegedly instructed a warehouse employee outside the FTZ to use the services of a custom broker that Argandona believed could bribe a CPB official to cancel the in-bond documents.

The warehouse employee was then to take the containers to his warehouse outside the FTZ and subsequently to export them to Mexico. Instead, Customs officials later discovered that the document used to release the containers from the FTZ had been forged by the Customs broker, so they seized the containers at the warehouse to which they had been moved. The warehouse employee admitted to the Customs agents that he had assisted in other shipments for Argandona of blank CDs to Mexico, and that he was paid $40,000 per trailer, most of which was used to pay bribes to Mexican law enforcement officials.

The criminal complaint against Argandona alleges that this conduct violated 18 U.S.C. § 555. 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.

An essential element of this statute is that the export is contrary to a law or regulation of the United States. Neither the criminal complaint nor the U.S. attorney’s press release on this case specify what law this export violated, instead citing only 18 U.S.C. § 555. And it’s not clear what laws the export violated. There may have been U.S. laws violated before the export as a result of the fraudulent in-bond release documents but the export itself did not violate any U.S. laws. If the government’s claim is that any law violation that occurs in the course of the export transforms the export into a violation of 18 U.S.C. § 555, then that law would also be violated if the truck carrying the export to the border ran a stop sign or exceeded the speed limit.

Another conundrum posed by this case is why Argandona sought to cancel the in-bond documents even though he was planning to export the blank CDs to Mexiso and not to illegally divert them for sale or use in the United States. My speculation, and it’s only that, is that Argandona wanted to avoid the extra scrutiny involved in an in-bond export. Music piracy is a substantial problem in Mexico and there have been a number of seizures of blank CD media by Mexican authorities under Mexican law when they suspect that the blank CDs are destined for illegal piracy operations. It’s probably reasonable to suspect that these five containers of blank CDs were more likely destined to be used by large-scale piracy operations and not, say, for retail distribution.

However, even though it might have been illegal under Mexican law to import these CDs, the export must violate U.S. law for charges to be appropriate under 18 U.S.C. § 555.

[Hat tip to Guy Feral who first noticed this case.]

*The criminal complaint mistakenly cites 18 U.S.C. § 554 and not 18 U.S.C. § 55f. The anti-smuggling provision was original enacted, the USA Patriot Improvement and Reauthorization Act of 2005, as 18 U.S.C. § 554, even though there was already a § 554. It was later officially recodified as § 555.

An interesting and informative article in the online edition of Die Welt takes the U.S. export control scheme to task for restrictions imposed on the export of avian bird flu vaccine.

When Indonesia’s health minister stopped sending bird flu viruses to a research laboratory in the U.S. for fear Washington could use them to make biological weapons, Defense Secretary Robert Gates laughed and called it “the nuttiest thing” he’d ever heard.
Bird flu has killed more than 240 people across the world since 2003, nearly half of them in Indonesia.

Bird flu has killed more than 240 people across the world since 2003, nearly half of them in Indonesia.
Yet deep inside an 87-page supplement to United States export regulations is a single sentence that bars U.S. exports of vaccines for avian bird flu and dozens of other viruses to five countries designated “state sponsors of terrorism.“

The reason: Fear that they will be used for biological warfare.

The article doesn’t identify that single sentence, but, of course, that’s what this blog is for: to supply such technical details. ECCN 1C352.a.2 controls avian influenza viruses that have an intravenous pathogenicity index in six-week old chickens greater than 1.2 or which cause at least 75% mortality in 4- to 8-week old chickens infected intravenously. Although a note to ECCN 1C352 excludes vaccines, it refers to ECCN 1C991, which covers vaccines against the pathogens identified in ECCN 1C352, and hence at least some vaccines against avian influenza. ECCN 1C991, like other ECCNs in the xx99x series, is subject to anti-terrorism (AT) controls and thus items covered by that ECCN require export licenses to Cuba, Iran, North Korea, Syria and Sudan.

The article interviewed several experts who cast doubt on the notion that bird flu vaccine can be turned into a terrorist weapon:

The danger of biological warfare use depends on the specific virus or bacteria. But most experts agree that bird flu vaccines cannot be genetically altered to create weapons because they contain an inactivated virus that cannot be resuscitated.

Worse, the export controls appear to be counterproductive and run the risk that a virus that might have been controlled early in poultry populations instead mutates into a deadly human form which spreads to the United States:

[Export controls] could make it harder to contain an outbreak of bird flu among chickens in, say, North Korea, which is in the region hardest hit by the virus. Sudan and Iran already have recorded cases of the virus in poultry and Syria is surrounded by affected countries. Cuba, like all nations, is vulnerable because the disease is delivered by migratory birds.

Kumanan Wilson, whose research at the University of Toronto focuses on policymaking in areas of health protection, said it would be ironic if the bird flu virus morphed into a more dangerous form in one of those countries.

“That would pose a much graver threat to the public than the theoretical risk that the vaccine could be used for biological warfare,” he said.

U.S. Commerce Assistant Secretary Christopher Wall was interviewed for the story. He declined to elaborate on the precise threat posed by these vaccines, other than to say that the U.S. had “valid security concerns” with respect to the vaccines.

The Bureau of Industry and Security (”BIS”") issued an order today denying the appeal of U.K.-based Galaxy Aviation Trade Company Ltd of a Temporary Denial Order (”TDO”) without mentioning or responding to the grounds asserted by Galaxy for its appeal, although I suppose it’s possible that the Galaxy appeal was a procedurally inappropriate notice of appeal which asserted no specific grounds in support of the appeal.

Even so, the case in support of the TDO against, as set forth in the Administrative Law Judge’s Recommended Decision and Order upon which BIS relies, is several pebbles short of being rock solid. According to that decision, BIS presented evidence of contract of sale for the aircraft between Ankair and one Sam David Mahjoobi. Corporate records for Galaxy listed Mahjoobi as an officer of Galaxy. Additionally, one of Galaxy’s three shareholders has an address in the same building as Iran Air’s headquarters in Tehran. Another of the three shareholders had an office address in Tehran. Finally, the CEO of Act Air, which once owned the airplane, told a third party, who subsequently spoke to BIS, that the airplane in question was to be sold to Galaxy. The only direct evidence of Galaxy’s involvement is hearsay evidence from someone not necessarily even in a position to know that the sale was to Galaxy. The remaining evidence is suggestive but far from conclusive.

Two interesting things, however, emerge from the ALJ’s decision. First, BIS was using an Iranian “plane spotting” website to track the 747 in question and to confirm its delivery in Iran. (”Plane spotting” sites are sites where individuals can upload photographs of airplanes they have taken at various airports, usually with the tail identification number of the aircraft visible in the photograph). Second, BIS believes that there are two more 747s on their way to Iran Air.

Whaddya wanna bet that the Iranian plane spotting website, er, disappears?