According to Sherman, the proverbial [insert expletive here] hit the fan when Roth went to AGT and indicated that, in addition to the Chinese grad student already working on the project, he wanted an Iranian graduate student to the work on the project. [Are there no competent U.S. grad students at the University of Tennessee?] AGT, although happy to export controlled technical data about military technology to a national of China, a country subject to a U.S. arms embargo, had a sudden crise de conscience and decided to draw the line at a national of Iran.

AGT’s refusal prompted Roth to do something that I’ll bet he now sincerely regrets. He marched off to Robin Witherspoon’s office, who was UT’s Export Control Officer, and, according to Sherman, asked her to get a license for the Iranian grad student to work on the project. During the course of this discussion he revealed that a Chinese grad student was already working on the project. From there things went rapidly downhill, to say the least. Witherspoon, according to the government’s pre-trial brief, told him that one couldn’t get a licenses for either Iran or China, and that the participation of the Chinese grad student was illegal.

Witherspoon also informed AGT that the participation of the Chinese grad student was illegal. According to Sherman, AGT went into damage-control mode and feigned ignorance that any foreign nationals were working on the project. They were shocked, shocked, as they say, to find out that export violations were going on. Sherman testified that, in fact, he and others at AGT not only knew about the Chinese student’s participation but also shared controlled technical data with him. When Sherman indicated to company officials that he wanted to tell the truth to government investigators, he was told that the company would not provide him with legal representation. So, he told federal investigators during the early part of the investigation that AGT had no inkling that Roth was using foreign nationals.

By putting Sherman on the stand, the prosecution is endorsing his testimony that others at AGT knew what was going on and knew that it was illegal. Why Sherman is the only one to get indicted, while his equally culpable superiors appear to have escaped prosecution, is far from clear, and may erode the jury’s confidence in the government’s case.

Sherman’s testimony does no favors for Professor Roth either. If indeed Roth asked Witherspoon to apply for a license for the Iranian student, it’s hard to credit the defense’s assertion that Roth disagreed with Witherspoon’s assertion that the participation of the Chinese student was illegal.

NOTE: Export Law Blog will be going on a brief hiatus for the Labor Day holiday starting tomorrow, but we’ll be back on Tuesday, September 2, with more on the Roth trial and other export law matters of interest. Also, August 21 was our second anniversary, and I’d like to take this opportunity to thank the many readers, friends and commenters, without whom a first anniversary, much less a second one, wouldn’t have been possible.

Opening statements were made yesterday in the criminal prosecution of Professor J. Reece Roth, a retired University of Tennessee professor accused, inter alia, of violating the Arms Export Control Act. Specifically Roth is accused of violating the law by permitting a Chinese graduate student to work on a project involving the application of plasma technology to military unmanned aerial vehicles, commonly known as drones.

According to a report by the Knoxville News Sentinel on its website, the prosecution argued yesterday in its opening statement that an unidentified University of Tennessee official told Roth that it was illegal to have the Chinese graduate student working on the project. Roth’s attorneys do not deny this encounter:

Dundon [Roth's defense counsel] conceded a UT official, who has not yet been identified in court, told Roth he was violating the law.

“Dr. Roth said, ‘That’s crazy,’ ” Dundon said. “He has not stopped expressing his displeasure and his conviction this research was never subject to (the arms export law).”

Although the identity of this official wasn’t identified in the opening statements, the official was clearly identified in the prosecution’s pre-trial brief filed last week. The official who told Roth that the Chinese graduate student couldn’t work on the project was Robin Witherspoon, the University of Tennessee’s Export Control Officer.

If true, and the defense seems to concede that it is, this puts Roth’s scienter defense into a very strange position. It’s not as if the University’s football coach told Roth that the Chinese student’s participation violated the export laws. In such a case, Roth’s vigorous disagreement with that statement might have some weight. But it was the University’s Export Control Officer, who Roth had to presume knew more about the export laws than he did.

The prosecution clearly feels that the issue of scienter is central to the case. Almost all of its discussion in the pretrial brief of the applicable standards of law discusses the scienter requirement and an apparent conflict among courts as to the meaning of that requirement in export cases. The weak version of scienter only requires that the defendants knows that his or her conduct is unlawful without also requiring any specific knowledge of the laws that are violated or why they are violated. The stronger version requires that the defendant have specific knowledge that the item is on the United States Munitions List or that a license is required.

None of these cases, however, appears to address the scienter issue raised here, namely, whether scienter exists where the defendant has been advised of the export violation but believes, in good faith, that such advice is incorrect.

Initially the Entity List included persons and companies that were likely to divert exports into programs related to weapons of mass destruction. The new rule now permits BIS to designate foreign entities on the list when it determines that the entity has been engaged in activities that are detrimental to the foreign policy or national security interests of the United States.

Five types of activities are detailed in the new rule as examples of such detrimental conduct:

• Supporting persons engaged in acts of terror;
• Supporting the military or terrorism capabilities of governments that have been designated by the State Department as repeatedly providing support for international terrorism;
• Dealing with conventional weapons in a manner detrimental to the foreign policy or national security interests of the United States
• Preventing accomplishment of an end-use check by BIS or the Directorate of Defense Trade Controls (”DDTC”); or
• Engaging in conduct that poses a risk of violating the Export Administration Regulations (”EAR”) when such conduct raises sufficient concern that prior review of exports or reexports involving the party enhances BIS’s ability to prevent such violations

These rules provide fairly broad grounds for designation, and it is hard to predict how aggressively BIS will pursue designations based on these five new categories. Two comments on the new rules, however, are in order.

First, some of the comments on the proposed rule that formed the basis of the final rule released today noted that there appeared to be an overlap between the Unverified List and the fourth category contained in the new rule, i.e., preventing an end-use check. BIS noted that the difference between the two lists is that parties can be placed on the Unverified List where BIS is unable to conduct an end-use check, whether that is because of the party’s active refusal to cooperate with the agency or permit the end-use check or because of some other reason unrelated to the party’s activity. On the other hand, an active refusal or interference with an end-use check can provide a basis now for designation on the Entity List.

Second, the most interesting comment, and the least helpful response from BIS, was buried near the end of BIS’s notice adopting the final rule:

One commenter stated that the rule should make clear that only listed entities—not, for example, unlisted affiliates, subsidiaries or sister entities are covered.

BIS intends to publish guidance on dealing with entities related to those on the Entity List in the near future.

This has been a persistent problem with the Entity List and other BIS lists, and BIS shouldn’t have blithely declined to provide guidance when promulgating this rule. The issue is whether the fact that an end-user is a parent, subsidiary or affiliate of a listed entity should be treated as a red flag, triggering an obligation to engage in more due diligence to assure that the item won’t be diverted to the listed entity or whether that fact should that trigger a license requirement. At least for the moment, BIS isn’t providing any guidance on this issue.

The safest course of action is to treat an export to a parent or a wholly-owned subsidiary of a company on the Entity List as equivalent to an export to the listed entity and to obtain a license. Exports to affiliates of a company or individual on the Entity List should trigger due diligence and further investigation to assure that the exported item won’t be diverted to the listed entity.

Today, on the eve of the trial of retired Professor John Roth of the University of Tennessee for permitting a Chinese graduate student to access controlled technical data relating to military unmanned aerial vehicle (”UAV”) development contract, the company that subcontracted Roth to work on the UAV project pleaded guilty to ten violations of the Arms Export Control Act. As part of its guilty plea, the company, Atmospheric Glow Technologies, admitted that it knew that Professor Roth had a Chinese graduate student assisting him on the UAV project and was providing information on the project to the student without the approval of the State Department’s Directorate of Defense Trade Controls (”DDTC”). Roth’s trial starts Monday. Roth has pleaded not guilty.

We have discussed this case in two prior posts which can be found here and here. Roth’s likely defense will be that he didn’t know that he violated any laws by providing the information to the graduate student. Although AGT’s plea doesn’t directly affect that claim, that plea may result in AGT officials providing testimony on the issue of Professor Roth’s knowledge of whether U.S. export laws restrained him from disclosing the UAV data to a Chinese national.

Enter the lawyers. Last Friday, legal counsel for NBA sent an urgent letter to all NBA teams, telling them to cool their heels. According to the letter:

We have been advised that a federal statue prohibits a person or organization in the United States from engaging in business dealings with Iranian nationals.

And, of course, the NBA rapidly filed an application for a license from OFAC for the talks to continue, an application which is likely to be granted, if for no other reason that it will be hard for a 7′2″ guy to do anything sneaky once in the U.S.

But the NBA letter and last-minute application may not be the buzzer beater that it seems. According to the Yahoo Sports news report that broke the story of the NBA’s license application:

After going unselected in the 2004 NBA draft, Ehadadi became a free agent eligible to sign with any team.

Look, if Ehadadi was signed up for the 2004 draft, the horses have already left the barn, so to speak. For the draft to work, Ehadadi had to file a draft declaration and that draft declaration had to be communicated to each of the NBA teams participating in the draft. That certainly looks like a prohibited transaction with an Iranian national to me, although it’s possible that the NBA had an OFAC license permitting Ehadadi’s participation and the news report didn’t mention it.

UPDATE: A further thought on Ehadadi being in the 2004 Draft. Maybe the NBA can try to rely on the information exception. Since Ehadadi was never signed, it remained simply the provision of information about his availability. Thoughts on this argument, anyone?

As a result of the 2007 conviction, Electro-Glass was debarred from exporting by the Directorate of Defense Trade Controls (”DDTC”). Electro-Glass has now prevailed upon Representative John Murtha to write a letter to DDTC seeking to have the agency set aside the debarment. According to the article, Murtha wrote the letter as a favor to a constituent — the company is located in Murtha’s congressional district.

More interesting than this congressional intervention is the defense proffered by Electro-Glass for its unlicensed exports:

“We want to stay legal, we want to stay aboveboard. It was an accident what happened in the first place,” [James K.] Schmidt [Electro-Glass's President] said in a telephone interview.

Schmidt said he called the FBI and “they told me that India was a democracy and they should not be denied.” The company later consulted U.S. customs officials and got the impression that it should not stop the shipments, he said.

But officials from both the FBI and U.S. Customs and Border Protection have denied that they gave approval.

Although I don’t doubt that the FBI may have said something like that to Schmidt, you have to wonder why Schmidt was using the Bureau as the company’s export compliance department. Moreover, given that it wouldn’t be clear to either the FBI or Customs that “solder glass preforms” were components of military night vision, it’s hard to see that the okay from either agency, even if given, would be much of a defense.

Admittedly it is self-serving for me to say so, but this case just illustrates why inexperienced companies ought to call an export lawyer before exporting any item that could conceivably have a military use. But don’t be too hard on me for this little bit of self-promotion: it’s the middle of August, everybody is on vacation, and probably only three people will read this post.

News of the baseball tour to the island, not surprisingly, generated an alarmed reaction from some of the predictable corners of support for the Cuba embargo on the Hill. Congressman Lincoln Diaz-Balart called the OFAC action granting the license to the kids “very troubling.”

”Sporting events may be interpreted as diplomatic gestures even when they are not meant to be,” Diaz-Balart said. “And a sporting event is not an appropriate way to respond to the ongoing torture of political prisoners Yuselin Ferrera, Nelson Aguiar and many others.”

Vermont’s Senator Patrick Leahy took Diaz-Balart’s pitch and knocked it out of the park:

”He should pick on someone his own size,” [Leahy] said.

The latest report on the series has the Peregrines 1-1 in the series, losing 16-5 to the Santos and beating the Mangos 19-8.

First, the treaty eliminated the export license requirement for certain exports between the “United States Community” and the “United Kingdom Community.” This language and structure led to some question as to whether the benefits would be accorded to all exporters. In fact, the rules make clear that the “United States Community” includes all exporters registered with DDTC and not otherwise disqualified from exporting due to commission of a disqualifying felony, debarment, etc.

Second, the treaty contemplated that certain items on the United States Munitions List of particular sensitivity would be excluded from the benefits of the treaty. The draft rules provide a side-by-side list comparing the USML and the items that are approved for export under the treaty.

Of particular significance here is the provision of the rules which states that, notwithstanding the list of acceptable items, no exports will be allowed without licenses under the treaty of

Defense articles specific to reduced observable, or counter low observables in any part of the spectrum, including radio frequency (RF), infrared (IR), Electro-Optical, visual, ultraviolet (UV), acoustic, and magnetic shall not be exported.

The problematic language here is “in any part of the spectrum” which led DTAG Vice-Chair Sam Sevier to note that “almost all” military items would fall somewhere within that broad spectrum and that this exception could render the treaty meaningless and unusable. It does, indeed, seem broad since ordinary camouflage could be seen as a reduced observable in the visual spectrum.

Additionally the proposed rules exclude “sensor fusion capabilities beyond that required for display or identification correlation.” Participants at the DTAG meeting pointed out the unnecessary breadth of this provision by noting that it would cover export of Google Maps which put sensors and processing together beyond what is required for display or identification correlation.

Further comments on these issues are being solicited and should be sent to Terry Otis, DTAG Recorder, before the close of business on June 20 at terry.otis@itt.com

The most interesting part of this settlement relates to the charge that Lockheed-Martin failed to provide prior notice to the DDTC of its proposal to the UAE regarding the Hellfire missiles. Section 126.8(a)(2) of the International Traffic in Arms Regulations (”ITAR”) provides that prior notice must be given to DDTC of any proposal to sell more than $14 million dollars of “significant military equipment” to a country other than one that is a NATO member, Australia, New Zealand or Japan, provided that a license for permanent export of the article has been previously granted or a Foreign Military Sale of the item has been previously approved. If no such license has been granted, or FMS sale approved, the proposal requires prior approval by DDTC.

The issue is usually what constitutes a “proposal.” Is a casual conversation at the Farnborough Air Show covered? Does the proposal have to be a binding contractual offer? Section 126.8(b) of the ITAR attempts to define a proposal, but raises more questions than it answers

The terms proposal or presentation … mean the communication of information in sufficient detail that the person communicating that information knows or should know that it would permit an intended purchaser to decide either to acquire the particular equipment in question … For example, a presentation which describes the equipment’s performance characteristics, price, and probable availability for delivery would require prior notification or approval, as appropriate, where the conditions specified in paragraph (a) of this section are met. By contrast, the following would not require prior notification or approval: Advertising or other reporting in a publication of general circulation; preliminary discussions to ascertain market potential; or merely calling attention to the fact that a company manufactures a particular item of significant military equipment.

By contrast, the proposal given by Lockheed seems short of one “which describes the equipment’s performance characteristics, price, and probable availability for delivery.” According to the Charging Letter:

[Lockheed-Martin] sent its first proposal to the UAE on June 11, 2003, specifically providing a planning estimate and quoting a price for 360 Hellfire Heat missiles and 100 Hellfire Blast Missiles.

The takeaway from this is, I think, that any written proposal that provides a price for the item to be exported should be considered a proposal subject to section 126.8 and that this proposal will require prior approval or notification if the other requirements of that section are met.

The basis for this objection, as stated in that fax, is that Syriatel is owned by more than 7,500 shareholder and not only by Rami Makhluf whose ownership of Syriatel served as the basis for the designation. The company is going to need a stronger argument than that because OFAC seemed to be quite aware, judging by its press release announcing the designation, that Makhluf was not the only owner of Syriatel but simply the majority owner.

Syriatel’s efforts to contest the designation may face a larger barrier. A recent guidance document from OFAC suggests that OFAC is going to limit the fees paid to lawyers representing SDNs to $125 per hour, with a cap of $7,000 per lawyer for up to two lawyers. We’ll be interested to see who agrees to represent Syriatel under these conditions.