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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

¹ Westlaw subscription required.

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

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

Dräger had been contracted by Italian-based Irasco to build and deliver a security system for an Iranian pipeline. The security system used GE Security’s VisioWave monitoring software. Initially Dräger, apparently concerned the the U.S embargo on exports to Iran, told Irasco that it would have to obtain and install the software on its own and install the software itself in Iran. Irasco made some unsuccessful efforts to obtain the software and then, allegedly, demanded a full test of the system at Dräger’s facility in Lübeck, Germany.

Dräger then tasked Sasan Azodi, its intermediary with Irasco, to obtain the software and ship it to Lübeck. Oddly enough, what happens in Lübeck, doesn’t stay in Lübeck and, for reasons that Dräger can’t fully explain, the software miraculously wound up in Irasco’s hands in Iran. Sometime thereafter, Dräger filed a voluntary disclosure with U.S. government authorities revealing the problem.

Now let the finger-pointing begin. Azodi has this to say:

Azodi acknowledges that he arranged for the delivery of the software, via the US, to Luebeck, but claims he only sent it for test purposes. Upon learning that the software had been delivered to Iran, Azodi said, “that’s when I realized I had probably been conned.”

Dräger, for its part, apparently is trying to blame everything on Azodi and has refused to pay Azodi for the software, which costs approximately $125,000. Azodi has filed lawsuits, in both the United States and Europe, seeking the money that he claims is owed for the software and seeking recovery of the damages caused to his business by the allegation that he violated the Iranian embargo.

Of course, one has to wonder why Azodi didn’t see red flags all over the field when Dräger asked Azodi to purchase and export the expensive GE software to Germany. Why couldn’t Dräger do that itself? Why would it ask its Iranian intermediary to ship the software from the U.S. to Germany?

It should be interesting to see how this plays out. Pass the popcorn, as they say.

Current OFAC regulations forbid the import into the United States of Burmese-origin goods. OFAC, however, refers to U.S. Customs rules for determining whether a good is of Burmese-origin, as can be seen from this OFAC guidance letter on Burmese teak sawn into planks in third countries. Most Burmese rubies are exported in uncut form to Thailand where they are processed and cut for sale to jewelers. In December 2004, Customs ruled that rough rubies mined in Burma that were processed and cut into gemstone rubies in another country underwent a “substantial transformation” and were no longer considered to be of Burmese origin. Notwithstanding this ruling, the 11,000 member association Jewelers of America urges its members not to traffic in blood rubies.

It is not clear that the designation of the Myanmar Gem Enterprise will have any substantial effect. Because the Burmese rubies must be processed in Thailand or elsewhere in order to be imported into the United States, no U.S. persons have any dealings with Myanmar Gem Enterprise but, rather, deal exclusively with companies in Thailand that process and cut the rough stones.

OFAC also designated the Myanmar Pearl Enterprise, hence the opportunity to swipe a line from an A.E. Housman poem as the title of this post.

As we reported in a prior post, two officers of Engineering Dynamics are currently subject to criminal charges in connection with the same sales of the software to Iran. A copy of the criminal information filed against them can be found here, and it provides considerably more information on what happened than the BIS Settlement Agreement and related materials.

Upon my initial review of the criminal information, I expressed some skepticism in my earlier post that the two individual defendants — and, by extension, the company — should be held liable for the actions of their “distributor” in Brazil. Upon re-reading the criminal information, it seems to me that there is ample evidence here to support a conspiracy charge, at least if the facts alleged in the information are true.

To begin with, the company’s Brazilian distributor was really more a commissioned agent than a distributor, and that is significant. If a U.S. company sells its products to a distributor, who then resells those products without the U.S. company’s knowledge to a proscribed destination, it may be difficult to prove that the U.S. company was aware of the resale. However, in this case the Brazilian agent was paid a commission and then directly remitted the funds back to Engineering Dynamics. Additionally, the criminal information alleges a number of instances of communications between the U.S. company and the Brazilian agent about the customers in Iran.

This is also the second reported case subject to the new $250,000 penalty provision. Interestingly, BIS charged only one violation of the rules — a conspiracy count — even though multiple counts could have been charged for the various shipments to Iran through Brazil. Various BIS officials have said that under the new penalty scheme they will be less likely to pile on counts, and this provides some confirmation of that.

• Purchase orders and invoices support the license application must be with a foreign party not with its U.S. subsidiary. DDTC bases this requirement on the notion that the U.S. subsidiary is a “U.S. person” although why that should prevent the U.S. subsidiary from issuing purchase orders on behalf of its parent is not clear, particularly where the exporter may prefer to have an agreement with a U.S. party rather than a foreign one.
• The purchase order or similar document must “have an issue date within one year from the date of application submission.” Since documents that are more than one-year-old are still legally binding, this seems, at best, an arbitrary requirement. DDTC gives no reason for this requirement.
• If the invoice lists the price in a foreign currency, the exchange rate and U.S. dollar conversion for each line item must be annotated on the document. Again, since the license application must provide those figures in dollar amounts, there is no reason why this must be hand-annotated on the documentation. Even so, this shouldn’t pose a huge compliance burden on applicants.
• The purchase order, invoice, or similar documentation must indicate the ultimate end user of the item.

So Professor Sadeghi hired a lawyer to free the santurs. The lawyer told the WSJ blog that he “scoured” the Iranian Transactions Regulations for an exception for “dulcimers” — to no avail, of course. I suspect that the lawyer is speaking figuratively here because anyone familiar with the regulations would have known immediately that there were no applicable exceptions that would cover Professor Sadeghi’s santurs.

So, the lawyer did his best to make something up:

In his package, he acknowledged that the dulcimers didn’t have the appropriate licensing from the Office of Foreign Assets Control (OFAC) but argued that the instruments met the requirements for the regulatory exceptions made for informational materials and gifts.

Er, no. The gift exception provided in section 560.506 of the Iranian Transaction Regulations is limited to gifts valued at less than $100 dollars, and Persian santurs seem to exceed this dollar limit by a considerable amount. And I’m not quite sure how one gives a gift to oneself. Nor is the informational exception applicable. A musical instrument does not fit within the category of items described as informational materials in section 560.315. Frankly, he could just as well have argued that the santur is a carpet covered by section 560.534.

Even the lawyer himself appeared to be a little embarrassed by these arguments and offered an alternative justification:

Furthermore, [he] argued, even if they didn’t meet those exceptions, this was an ideal case for OFAC to exercise its discretion.

Okay, now were talking. And, miraculously enough, he received a letter from OFAC, stating:

Mr. Manoochehr Sadeghi is hereby authorized to engage in all transactions necessary to receive delivery from Iran of four miniature hammered dulcimers (santurs) seized by U.S. Customs and Border Protection on or about August 30, 2007.

More interesting, it appears that the lawyer, rather than filing a voluntary disclosure, filed something akin to a retroactive license request. If he did file a voluntary disclosure, the WSJ blog doesn’t relate whether OFAC imposed a fine or mitigated the fine completely.

In the end, it appears that two factors were at play in OFAC’s decision. In the past, the Bureau of Industry and Security (”BIS”) has used its discretion to permit exports of musical instruments to Cuba, and so a direct appeal to OFAC’s discretion in this case, without relying on inapplicable regulatory exceptions, was probably the best approach. Additionally, it seems possible that OFAC may have been influenced by Professor Sadeghi’s fame: he performed at the Kennedy Center and received a National Heritage Award from the National Endowment for the Arts.

Although the charging documents don’t make this clear, it seems likely that Aviktor exported the thermal imaging camera in checked or carry-on baggage of an airline passenger. Normally an SED is not required for baggage but there is, of course, a significant exception. Section 758.1(b)(2) requires that an SED be filed for any export that requires a license, regardless of value or destination.

Obviously, the SED charge was just another case of piling on by BIS but this is a good opportunity to remind exporters that if you hand carry an licensed item to its destination, don’t forget to file the SED with Customs before departing.