Archive for February, 2010

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Balli Exec Tells Alma Mater His Defense to Iran Export Charges

Thursday, February 25th, 2010
Vahid Alaghband
ABOVE: Valid
Alaghband

Valid Alaghband, Chairman of the Balli Group, which just agreed to a $17 million fine to settle charges that it exported U.S.-origin commercial passenger aircraft to Iran, took to the pages of the daily student newspaper of his alma mater Cornell University to present his side of the story. Frankly, his story isn’t very convincing, and I doubt that regular readers of this blog or others familiar with U.S. export laws will be swayed by Alaghband’s story. Some may, in fact, chuckle that Alaghband would publicly mount the defense that he does.

The confusion arises from the use of the term “export” which, to a layman, signifies a sale and purchase (or physical trade) of goods across international borders. That is not how the U.S. regulations necessarily define exports and our settlement with the U.S. authorities does not remotely suggest that Balli Aviation sold its aircraft to Iran. Balli Aviation legally and beneficially owned its fleet of aircraft at all material times.

Epic fail, as the kids on the blogs say nowadays. Anybody with even a smidgen of familiarity with U.S. export laws is aware that you can export stuff to Iran which hasn’t been sold to Iran. To begin with, the aircraft in question were flown in an out of Iran carrying commercial passengers. Balli was charged with re-exporting the aircraft to Iran and the Export Administration Regulations, in section 734.2(b), provide a pretty unambiguous definition of re-export:

“Reexport” means an actual shipment or transmission of items subject to the EAR from one foreign country to another foreign country

Hmm. I don’t see anything in that restricting an export to a cross-border purchase and sale, do you? I didn’t think so.

What happened here was that Balli leased the aircraft to an Armenian airline, Blue Sky, that then operated the aircraft in and out of Iran under a code-sharing arrangement with Mahan Airways. Or as Mr. Alaghband admits:

Balli Aviation … [leased] three of the aircraft to an Armenian operator which serviced the civilian passenger traffic under arrangements with a local operator.

The “local operator, which Alaghband can’t bring himself to name, was the Iranian carrier Mahan.

Alaghband also claims that Norton Rose, a prominent U.K. law firm, told him that this scheme would comply with U.S. export laws. If Norton Rose did indeed provide such profoundly awful advice, and I have no evidence of this other than Alaghband’s claim that they did, this would underline what I might have thought obvious: a firm of British solicitors with not even a single office in the United States might not be the best choice for obtaining advice on complying with U.S. export laws.

Posted in BIS, Iran Sanctions | 2 Comments »

ITT Debarment Lifted Two Months Early

Wednesday, February 24th, 2010

Red TapeOn Monday the Directorate of Defense Trade Controls (“DDTC) published a notice in the Federal Register that the three-year statutory debarment of ITT Night Vision, scheduled to end on March 26, 2010, was ended effective February 4, 2010. DDTC noted, in justifying the early termination, noted that

ITT Corporation has taken appropriate steps to address the causes of the violations and to mitigate any law enforcement concerns.

While the denial order was in effect, ITT Night Vision products could be exported by ITT and by resellers but only pursuant to a specific transaction exception from DDTC. Such transaction exceptions were granted only with respect to exports for end-use by the U.S. government or for end use by certain allies. As a result of DDTC’s actions, license applications to export ITT night vision products will no longer need to contain information supporting a transaction exception.

Posted in DDTC, Night Vision | No Comments »

More Deemed Export Red Tape Courtesy of BCIS

Tuesday, February 23rd, 2010

Red TapeDHS’s Bureau of Citizenship and Immigration Services (“BCIS”) wants to make your life more difficult if you hire H-1B workers and need a deemed export license to do so. Under a proposed revision in the form used to apply for H-1B visas for skilled technical workers, employers will now need to obtain the deemed export license from the Bureau of Industry and Security (“BIS”) before applying for the H-1B visa. Previously, the license needed to be obtained before the foreign worker could be given information on the controlled technology, but the employer could file for the visa and the deemed export license simultaneously. Now, the export license must be obtained before the visa can even be submitted to BCIS. Here is a copy of the proposed form. Check out page 6.

Oddly, this requirement is only for employees needing BIS deemed export licenses. Those requiring a deemed export license from the Directorate of Defense Trade Controls (“DDTC”) for foreign workers involved with technologies controlled by the United States Munitions List (“USML”) can apply for the visa and the license at the same time.

BCIS, with typical transparency, announced the revision and asked for comments in this public notice in the Federal Register. The public notice doesn’t reveal the nature of the proposed changes or how to find them other than suggesting that employers go try to find the proposed forms at regulations.gov. Good luck with that. We can only thank a loyal reader for tracking down the proposed, but undisclosed, changes in the visa application form.

Comments on this proposed change are due by April 9, 2010. Comments can be submitted by fax to 202–272–8352, or via e-mail to rfs.regs@dhs.gov.

Posted in Deemed Exports | 3 Comments »

Don’t Believe Everything You Read in Newsweek

Wednesday, February 17th, 2010

Bashar al AssadAndrew Tabler, who works for a Washington-based think tank on the Middle East wrote a column in today’s web-edition of Newsweek on the appointment by the Obama administration of a new Ambassador to Syria — the first since 2005 — and what that might mean for U.S. sanctions on Syria. According to Tabler the sanctions have economically crippled Syria, and Syria is now “fanatical about ending U.S. sanctions (which, Damascus has only just admitted for the first time, are truly damaging).”

In trying to explain how U.S. sanctions have economically damaged Syria, Tabler gets into the weeds of export law and the Export Administration Regulations (the “EAR”) and, frankly, doesn’t come out smelling like roses:

[T]he regime had to ground most of its civilian air fleet—as well as President Assad’s personal jets—because the sanctions forbid the sale of spare parts without an export license. (Sanctions classified anything with more than 10 percent American content as an American product, and since U.S. companies dominate the aerospace industry, even third-party retailers from other parts of the world couldn’t sell the parts to Syria.)

This is clearly a reference to the de minimis rule in section 734.4 of the EAR which, for sanctioned countries, only exempts exports to sanctioned countries with less than 10% controlled U.S. content, not exports with less than 10% of all U.S. content. According to the Guidelines for De Minimis Rules set forth in Supplement 2 to Part 734, controlled content consists of content in the item that has an Export Control Classification Number (ECCN) requiring a license to the sanctioned country in question. There are plenty of items that might be parts of exported items that aren’t controlled content to Syria, so Mr. Tabler’s misstatement of the applicable regulations is a significant error in this regard and suggests that more items are subject to the Syria sanctions than is in fact the case.

Posted in Syria | 7 Comments »

BIS Assesses Maximum Possible Fine Against Exporter

Wednesday, February 17th, 2010

FingerprintFor several years now the Bureau of Industry and Security (“BIS”) has had the statutory authority to impose a civil penalty of $250,000 per export violation but has yet impose anything near that fine. So when BIS finally whacks someone with a $2.5 million fine for 10 violations, you might assume that the person paying such a fine did something really terrible like exporting dual-use items to Iran that Iran could use in uranium enrichment facilities. But you would be wrong.

Sirchie Acquisition Company, LLC, agreed to pay a $2.5 million fine for 10 violations arising from acts not committed by SAC but by an acquired company several years before SAC acquired it. And the exports involved included fingerprint equipment that did not require a license to the destinations involved (France and the U.K.).  The exports also included, get this, some magnifying glasses. These exports are detailed in the deferred prosecution agreement with federal prosecutors but the BIS charging documents don’t provide any detail on the exports in question — proof, I suppose, that even BIS was embarrassed about whacking someone with a $250,000 fine for exporting magnifying glasses and fingerprint pads.

These exports were allegedly problematic because the CEO of the company that Sirchie acquired set prices for these exports, which was allegedly a violation of a denial order that BIS had entered against the CEO individually. As I pointed out in my last post on this case, SAC’s actions didn’t violate any of the provisions of the denial order that expressly applied to third parties. And BIS doesn’t claim that they did but claims instead that they constituted “aiding and abetting” the CEO’s violation of his own denial order. The problem here is that the denial order in question doesn’t say that all aiding and abetting activities by third parties are prohibited but instead prohibits particular and specific types of aiding and abetting, none of which occurred in this case.

Other aggravating factors that might justify such a massive fine aren’t mentioned by BIS. There is no claim in the charging papers that SAC, or its predecessor, knew that these activities violated the CEO’s denial order or that SAC, or its predecessor, tried to conceal the exports or that SAC, or its predecessor lied to federal investigators.

Call me old-fashioned, but it seems to me that the highest fines ought to be reserved for the most serious violations and not for exports of magnifying glasses by an acquired company.

Posted in BIS | 3 Comments »

Company Agrees to $12.5 Million Fine For Predecessor’s Exports

Thursday, February 11th, 2010

FingerprintNorth Carolina based law enforcement supply company Sirchie has signed, and a federal court has entered, a deferred prosecution agreement under which Sirchie agreed to pay $12.6 million in penalties with $2 million of those penalties going to the Department of Commerce’s Bureau of Industry and Security (BIS”). The penalties arise from conduct that occurred in 2006 and 2007, prior to the current owners’ purchase of all the assets of Sirchie.

At issue were alleged violations of a BIS denial order entered in 2005 against John Carrington, the former president, CEO and majority shareholder of Sirchie. The denial order was premised on unlicensed exports by Sirchie of fingerprinting equipment. The deferred prosecution agreement against Sirchie alleges that Carrington violated the denial order against him when he set prices for goods being exported by Sirchie.

The problem here is that Sirchie wasn’t subject to a denial order, only Carrington was. And the deferred prosecution order doesn’t adequately explain how Carrington’s violations of that Denial Order led to criminal liability by Sirchie. The provisions in Carrington’s denial order that cover third parties such as Sirchie are limited to four situations. The denial order prohibits third parties from (1) exporting on Carrington’s behalf, (2) helping Carrington obtain possession of items for export, (3) acquiring items that Carrington has exported, or (4) servicing items in Carrington’s possession that will be exported. Sirchie was not alleged to have done any of these things. In short, it looks like Sirchie was steam-rolled here by BIS and some overzealous prosecutors.

Posted in BIS | 2 Comments »

If Only They Gave Darwin Awards for Export Violations

Tuesday, February 9th, 2010

Interturbine HeadquartersThe Directorate of Defense Trade Controls (“DDTC”) has posted the settlement documents for the case involving Interturbine Aviation Logistics GmbH and its Texas subsidiary which was reported by this blog last week. And — now, don’t faint from shock — an overeager business development executive and one of his employees appear to have been the source of Interturbine’s problems.

According to the Proposed Charging Letter, the $1 million penalty was premised on one shipment of 400 kilograms (880 pounds) of Dow Corning Ablative 93-104 Ablative Material and Sealant. The substance can be used to provide heat-protective coatings on missile tips and is controlled under Category IV(f) of the United States Munitions List.

In 2004 Dow Corning notified its customers that DC 93-104 was a USML item and could no longer be shipped outside the United States. On of Dow Corning’s former customers, Bayern-Chemie, began to look for a new supplier and contacted Interturbine’s German office. A business development employee of Interturbine thereafter met with GmbH. The employee then prepared a report stating that DC 93-104 couldn’t be sold outside the United States and that this presented an “excellent opportunity” to acquire a “profitable new customer.”

The Interturbine employee instructed an intern to prepare a purchase order. When the intern noted that the material was export-controlled the business development employee falsely told the intern that the export had been cleared. The intern then ordered DC 93-104 from Dow Corning for shipment to Interturbine’s Texas office.

Once the shipment from Texas to Germany had been made, the Vice-President of Business Development in Interturbine’s German office altered records to show that the 400 kilograms of DC 93-104 were still in Texas. He also created a delivery note indicating, falsely, that the material had been shipped to Bayern-Chemie from Interturbine’s facility in Germany.

Things went downhill rapidly after that. Bayern-Chemie questioned the absence of a U.S. export license, quarantined the shipment and refused to pay Interturbine for the shipment. Interturbine conducted an internal investigation and requested Bayern-Chemie to return the shipment to Texas. U.S. Customs seized the shipment on its way back to Texas. And the rest is now history.

Even though the Interturbine employees were selling missile products, it’s safe to say they weren’t rocket scientists. Trying to make an illegal export to Bayern-Chemie without having everyone at Bayern-Chemie in on the scheme is a little bit like writing a bank robbery demand note on the back of your own business card.

Posted in DDTC | 4 Comments »

Do Not Open That Email Attachment

Monday, February 8th, 2010

Big News!Everyone that has sensitive data (including, of course, ITAR-controlled data) on their computers networks should read this sobering article in Wired, which reveals, for the first time that I am aware of, the methodology, extent and scope of Chinese cyber-attacks on U.S. computer networks. After you read this article, there will be no question in your mind that these attacks are orchestrated and carried out by the Chinese government, even though the Chinese government is currently issuing risible denials of its involvement. Also, you will never open an email attachment again from anyone. The problem is, of course, that someone on your network will.

Called Advanced Persistent Threats (APT), the attacks are distinctive in the kinds of data the attackers target, and they are rarely detected by antivirus and intrusion programs. What’s more, the intrusions grab a foothold into a company’s network, sometimes for years, even after a company has discovered them and taken corrective measures. …

The Heartland and RBS attackers, and other criminal hackers of their ilk, tend to use SQL injections attacks to breach front-end servers. The APT attackers, however, employ undetectable zero-day exploits and social engineering techniques against company employees to breach networks.

… They attempt to take every Microsoft Word, PowerPoint and Adobe PDF document from every machine they compromise, as well as all e-mail, says Mandia. …

Last year, for example, an unidentified defense contractor discovered 100 compromised systems on its network, and found that the intruders had been inside since at least 2007.

APT attackers also appear to be well-funded and well-organized. In some cases, Mandiant has found multiple groups inside a network, each pursuing their own data in a seemingly uncoordinated fashion. …

Many entities don’t discover a breach until someone from law enforcement tells them. By then, it’s too late.

“By the time the government is telling you, you’ve already lost the stuff you didn’t want to lose usually,” Mandia says, noting that it’s generally not possible to ascertain everything that an attacker took.

While APT attacks are sophisticated, they use simple techniques to gain initial entry and, once inside, adhere to a pattern.

For starters, the attackers conduct reconnaissance to identify workers to target in spear-phishing attacks — such as key executives, researchers and administrative assistants who have access to sensitive information — and then send malicious e-mails or instant messages that appear to come from a trusted colleague or friend.

The e-mails have an attachment or link to a ZIP file containing zero-day malware that exploits Microsoft Office or Adobe Reader vulnerabilities. Google employees received an e-mail with malware that exploited a vulnerability in Internet Explorer 6 that Microsoft had not yet publicly disclosed.

Once the attackers have a foothold on one system, they focus on obtaining elevated access privileges to burrow further into the network. They do this by grabbing employee password hashes from network domain controllers — and either brute-force decrypt them or use a pass-the-hash tool that tricks the system into giving them access with the encrypted hash.

Not only should you be extremely cautious about email attachments and forwarded links, even from trusted friends, but also you might think about taking down your entry on LinkedIn or other business networking sites. Unless, of course, it’s already too late.

Posted in China, Technical Data Export | 4 Comments »

Breaking News from the Registration Front

Friday, February 5th, 2010

Big News!The biggest news today was the announcement by the Bureau of Industry and Security (“BIS”) of a U.K. company’s agreement to pay a $15 million fine, the largest fine ever collected by BIS. I’ll write about that when the charging and settlement documents are released.

In the meantime, however, I want to share with you a bumper crop of company press releases over the past few days announcing registration under Part 122 of the International Traffic in Arms Regulations. And, as always, these press releases are a never-ending source of amusement.

New-Hampshire-based Ion Beam Milling’s announcement perpetuates the myth that ITAR registration represents some kind of certification by the Directorate of Defense Trade Controls (“DDTC”):

Upon verification of a company’s ITAR compliance, an ITAR Registration Code is assigned and certifies the company’s clearance to work in conjunction with the US military and its counterparts.

Ion Beam also wins the award for the most original spin ever on ITAR registration:

ITAR Registration enhances Ion Beam Milling’s existing Intellectual Property and Document control policies.

A free subscription to this blog will be awarded to any reader who figures out just what the heck this means.

California-based Lenthor Engineering scores a first by issuing a press release announcing that it has renewed its registration. I can just imagine someone in the company saying that they’ve paid $2,250 and will be darned if they’re going to let that money go to waste.  Don’t be surprised if Lenthor announces next week that the company added another copy of the Pocket ITAR to the company’s library.

Munich-based computer hardware manufacturer Kontron AG’s announcement notes that the company

has registered and is in compliance with International Traffic in Arms Regulations (ITAR) administered by the United States Department of State Directorate of Defense Trade Controls who [sic] controls the export and import of defense articles and services.

Obviously Kontron didn’t have to take the legendary DDTC certification test or it would have known that DDTC only controls temporary imports of defense articles.

Posted in DDTC | 5 Comments »

OFAC Mugabe Sanctions Hit Home, Our Home Not His

Thursday, February 4th, 2010

Kokopelli Golf ClubA golf course in Marion, Illinois, is set to close as a result of economic sanctions imposed by the Department of Treasury’s Office of Foreign Assets Control against Zimbabwe’s Robert Mugabe and his cronies. How do the Mugabe sanctions have an impact almost 9,000 miles away?

According to this story in an Illinois newspaper, Kokopelli Golf Course was purchased, almost 15 months ago, from a Florida partnership by local investors. One of the partners in the Florida partnership, it appears, was John Bredenkamp, alleged by OFAC to be a Mugabe crony — a charge that Bredenkamp denies. So OFAC blocked the title to the golf course and the sale hasn’t closed, despite the intervention of Senator Durbin, the senior senator from Illinois, and despite arguments that the closing of the golf course as a result of OFAC’s blocking title to the club would have a significant impact on the local economy. Indeed, the closing of this town’s golf club would appear to be the only visible impact of the Mugabe sanctions since, the last time I checked, Mugabe was still sitting fat, happy, rich and in power in Zimbabwe.

The news story does not reveal the size of Bredenkamp’s interest in the partnership that owned the golf club. If his interest was greater than 50 percent, then under current OFAC guidance, as this blog reported here, the partnership and all of its assets, including the golf club, would be a blocked asset. This case shows the problem with such a rule is that it potentially punishes innocent parties. Assuming, as is likely the case, that the other partners entered into the partnership with Bredenkamp prior to Bredenkamp becoming designated by OFAC as subject to the Mugabe sanctions, there is no conceivable reason to punish the other partners. Instead, OFAC should block Bredenkamp’s interest in the partnership and any revenue due to him under the partnership agreement. The policy behind this position is even more obvious when blocking the interest of innocent partners has an impact on the economy of a small U.S. town.

If the Kokopelli Golf Club closes, Marion residents can, ironically, always go to Zimbabwe to tee off. According to Golf Digest:

Despite hyperinflation, cholera and hugely unpopular President Robert Mugabe, golf survives in Zimbabwe. At Bulawayo Golf Club (founded in 1895), members have been paying with gasoline because local bank notes are now worthless.

Fore!

Posted in Economic Sanctions, Zimbabwe Sanctions | 3 Comments »

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