Jul

8

BIS Slaps Defunct Company with Suspended Export Denial Order


Posted by at 5:00 pm on July 8, 2014
Category: BIS

Broken Building Parts by Nitram242 https://www.flickr.com/photos/25165196@N08/8164174513 [CC BY 2.0 https://creativecommons.org/licenses/by/2.0/]Back in April, the Bureau of Industry and Security announced a $45,000 fine imposed on C.A. Litzler Co., Inc., based on an unlicensed export of a 24 Inch Hot Melt Prepreg Machine, which sounds vaguely naughty but is indeed covered by ECCN 1B001.e. The machine (I’m not repeating that name again) was in fact exported in 2005 by Western Advanced Engineering Company (“WAECO”), a company that ceased operations when Litzler acquired its assets in 2011. Under BIS’s “substantial continuity” rule announced in the Sigma-Aldrich decisions, Litzler became liable for WAECO’s export violations. (And that, my friends, is why export due diligence is necessary before any acquisition).

Well, all taxpayers will be delighted to learn that nothing escapes BIS, which has worried itself sick about what to do about WAECO even though WAECO is an empty shell that had ceased all operations once it sold all of its assets to Litzler. So, because WAECO still had a corporate existence on paper, BIS recently announced a settlement agreement imposing a three-year export denial order on WAECO, which denial order was immediately suspended as long as the defunct company committed no further export violations during the next three years.

You never know what kind of trouble a defunct company can get itself into. Why wasn’t it only just a few months ago that TWA got caught trying to sell souvenir junior pilot wing badges to a toy shop in Khartoum?

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Jul

7

Who Elected Ben Lawsky to Conduct U.S. Foreign Policy?


Posted by at 5:18 pm on July 7, 2014
Category: Iran SanctionsOFAC

Official Portrait of Ben Lawsky http://www.dfs.ny.gov/about/staff_bios/blawsky.htm [Fair Use]
ABOVE: Ben Lawsky


Of the $8.9 billion fine being paid by BNP Paribas for violations of U.S. sanctions on Cuba, Iran and Sudan, $2.24 billion is going to the State of New York and, specifically, to Ben Lawsky’s Department of Financial Services. All of this will gild Lawsky’s credentials, overstuff the NYDFS’s coffers, and pay for NYDFS’s holiday parties and expensive lunches for eons to come, while not a single cent of this astonishing sum of money being handed over to the New York agency will go to anyone whom the sanctions seek to protect like, say, Sudanese refugees.

The NYDFS consent order justifies this mega-fine, in part, on BNP’s processing of $160 billion in dollar-denominated transactions for Iranian customers. This is the overwhelming bulk of the $190 billion total of dollar-denominated transactions at issue here for all three sanctioned countries. This amount for Iran covers, according to the consent order, the ten-year period between 2002 and 2012. Astute readers will remember, from the NYDFS/Standard Chartered fiasco, that we’ve been here before with NYDFS. Prior to November 2008 — i.e., for most of the period cited by NYDFS — it was perfectly legal for BNP’s NY branch to process off-shore dollar-denominated Iranian transactions under the so-called U-Turn transactions rule.

So, when Lawsky and his crew complain in the consent decree that the failure of BNP to include references to Iran in the legal U-turn transactions “rendered its New York Branch and other New York-based financial institutions helpless to detect payments that should have been rejected or blocked under U.S. law,” they are spouting utter nonsense given that these payments were legal before November 2008 and not required to be rejected or blocked. But Lawsky’s goal is to enrich NYDFS here, not to observe legal niceties like what OFAC’s rules actually said before November 2008.

There are two major problems here. First, NYDFS’s case is completely dependent upon the scope and extent of federal sanctions, because without a federal sanctions violations, none of the record keeping issues are material. And, obviously, the New York state regulators either have no clue, or do not care, as to the actual scope of those sanctions. Second, and more importantly, to the extent that everything is based ultimately on federal sanctions, the enforcement of those sanctions is ultimately a matter of U.S. foreign policy, something that should be in the hands of OFAC, the DOJ and the rest of the federal government and not in the hands of either the State of New York or, worse, the hands of a single New York regulator.

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Jul

2

OFAC Gores Red Bull for Skateboarding in Havana


Posted by and at 6:45 pm on July 2, 2014
Category: Cuba SanctionsEconomic SanctionsOFACSanctions

Ryan Scheckler Skateboards in Havana via http://www.redbull.com/cs/Satellite/en_INT/Gallery/Ryan-Sheckler-shreds-Cuba-and-Panama-021242761792131#/image-12 [Fair Use]

Last Friday, OFAC announced that Red Bull North America, Inc. (“RBNA” or, when we’re feeling informal, “Red Bull”) agreed to pay $89,775 to settle allegations that “seven representatives” of RBNA traveled to Cuba in order to “film a documentary” in 2009 without OFAC authorization but with the approval of RBNA’s “management.”  RBNA is the U.S. subsidiary of Red Bull GmbH, the Austrian elder statesman of excessively caffeinated energy drinks.  Although OFAC provided no details about the film itself, it is likely a 2009 documentary, described by Red Bull here, which the company made about Ryan Sheckler skateboarding in Havana.  Apparently there is no place left in the world that is safe from skateboarders other than, perhaps, some interior stretches of Antarctica.

Of course, there is a general license for journalistic activities in Cuba, which would seem to cover making documentaries, as opposed to, say, filming Transfomers LVIII: The Final (And We Really, Really Mean It This Time) Apocalypse.  But OFAC’s general license is restricted to “persons regularly employed as journalists by a news reporting organization.”  As we’ve noted before OFAC has not applied this limitation in a consistent fashion, suggesting that Michael Moore wasn’t a journalist but Charlize Theron was. Although Red Bull seems quite active in the documentary business, OFAC apparently viewed them as simply a commercial marketing endeavor in a country where Red Bull is undoubtedly sold.  In fact, judging from the Red Bull Cliff Diving World Series event held in Havana this May, a good amount of Red Bull is being consumed in Cuba.

In considering the penalty amount, OFAC said it determined and took into account that “RBNA did not voluntarily self-disclose” and that “RBNA had prior knowledge of U.S. sanctions on Cuba and took steps to conceal the transactions.”  Of course, we don’t quite understand how you conceal a documentary, particularly where Red Bull posted extensive information about it on the Internet, which is where OFAC likely discovered this transaction. On the other side of the equation, OFAC cited  RBNA’s institution of an OFAC compliance program, no other sanctions violation from 2004 to 2009 and the “non-egregious” nature of the violation.

We have over the past few years called attention to the confusion and lack of information in OFAC’s enforcement action announcements.  Last April, we highlighted what we thought was one of the more egregious “non-egregious” settlements that OFAC has announced.   The latest settlement with RBNA, furthers the confusion by imposing a fine on the low scale even after OFAC finds, albeit wrongly, that Red Bull concealed the documentary.

While OFAC makes up for its small-ish RBNA fine in its hefty enforcements against banks (à la the almost $1 billion settlement OFAC reached with BNP Paribas this week), most U.S. companies’ dealings with Cuba are going to be more on par with isolated occurrences like the one involving RBNA.  In the end, the RBNA settlement is good news for RBNA, its Red Bull parent and any other U.S. company in a similar situation.  If a U.S. company ever finds itself in the future before OFAC in an isolated situation like RBNA, the first thing to do is to pull out RBNA’s settlement announcement and try negotiating from there.

 

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Jun

26

How Not To Smuggle Guns To Nigeria


Posted by at 8:38 pm on June 26, 2014
Category: Arms ExportCriminal Penalties

Mugshot of Sheriff Olaleran Mohammed [Fair Use]
ABOVE: Sheriff Mohammed


A federal jury in Minnesota, on June 16, convicted a naturalized U.S. citizen on charges that he illegally exported guns to Nigeria without a license. At issue were eight handguns that Sheriff Olaleran Mohammed stuffed into brown paper bag and placed between the seats of a 1998 Mercury that was being shipped via a cargo ship container to Nigeria. Spanish police discovered the guns when the ship called in Valencia, Spain, on its way to Lagos.

The trial brief filed by Mr. Mohammed’s lawyers before the jury trial gives a pretty clear idea why he was ultimately convicted. First, the brief tries to rely on the exemption in section 123.17(c) of the ITAR for temporary exports of not more than three nonautomatic weapons for personal use. Since there were eight guns in the paper bag in the Mercury, I guess the idea here was that the defendant could invoke the exemption three times to cover his eight guns, or something like that.

The other argument forwarded by the defendant’s trial brief on the export charge is that Mr. Mohammed had no idea whatsoever that it was illegal to export firearms for personal use to Nigeria without a license. Which is, of course, why he stuffed them in a paper bag and hid them in a 1998 Mercury he was sending to Nigeria.

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Jun

24

It’s Good To Be The King


Posted by at 11:15 pm on June 24, 2014
Category: DDTCITARUSML

Intersil Low Dose Irradiator via http://www.intersil.com/en/applications/rad-hard/eldrs.html [Fair Use]Last week the Directorate of Defense Trade Controls (“DDTC”) announced that it had fined Intersil Corporation, a California-based manufacturer and developer of semiconductors and integrated circuits, $10,000,000 of which $6,000,000 goes to Uncle Sam and the remaining $4,000,000 goes to Intersil’s compliance program and remedial measures. Along with the fines, DDTC has required Intersil to jump through a number of now-typical compliance and re-education hoops, including appointing an ombudsman, hiring a special compliance officer, rewriting its compliance programs, engaging in audits, making frequent reports to DDTC and writing “I will not violate the ITAR” three million times on a blackboard after school. Well, of course, only the last item was not actually required.

According to the Proposed Charging Letter, Intersil incurred the ire of DDTC by classifying certain of its products as ECCN 3A001.a.1, 3A001.a.2, and EAR99 even though the items were radiation hardened and space qualified and, therefore, covered instead by USML Category XV(e). Why Intersil made this mistake is not revealed in the documents but since Intersil was applying for BIS licenses for the goods when required, it is hard to imagine that it was anything other than a good faith mistake (which is, probably, the reason why this information is omitted.) As a result, there were 3,152 unauthorized exports of Intersil’s products, although, due to the statute of limitations, only 339 exports were actually charged, with DDTC swearing left and right that although it couldn’t help mentioning the 3,152 exports it was paying absolutely no attention whatsoever to those in formulating the $10 million penalty.

But here is the most interesting part of the charging documents:

Several of the unauthorized exports were subsequently re-exported or retransferred without authorization due in part to the misclassification of the ICs.On August 20, 2010, a DDTC official misinformed Intersil that for any ICs that “HAVE already been exported under EAR jurisdiction, these [ICs] ARE NOT retroactively subject to the retransfer provisions of 22 CFR 123.9.: Intersil was further misadvised that Intersil did not need to inform its foreign customers to submit ITAR re-export authorization for these items and that this “decision to not retroactively aply USML controls for these already exported [ICs] will continue to be applicable even if a future formal CJ determination asserts USML controls apply.”

Interestingly, notwithstanding this bad advice, Intersil is charged with causing various unauthorized re-exports from, and retransfers in, foreign countries due to its misclassification of the integrated circuits. Whether or not any of these were the result, at least in part, of DDTC’s admittedly bad advice that the retransfer provisions would not apply to items exported under the EAR is not clear, but let’s give DDTC the benefit of the doubt and assume that these were all unrelated.

Even so, there is still an interesting moral to this story. Exporters who make mistakes have to pay large fines and engage in burdensome remediation activities. DDTC officials who make mistakes have to do, er, well, nothing at all because, well, you know, mistakes happen. As they say, it’s good to be the king.

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