Jun

15

DOJ Issues Misleading Press Release in Connection with Export Guilty Plea


Posted by at 11:47 pm on June 15, 2016
Category: BISCriminal PenaltiesIran SanctionsOFAC

All in a Day's Work by Damian Gadal via Flickr https://flic.kr/p/5xQkWj [Fair Use]
ABOVE: Erdal Kuyumcu

This blog reported earlier on the case against Erdal Kuyumcu in connection with exports of an EAR99 Cobalt Nickel powder (CoNiCrAIY) to Iran. In that initial post, I questioned the government’s evidence that Mr. Kuyumcu knew that his sales of this powder to a customer in Turkey were destined to Iran, noting that the criminal complaint based its allegations on the “training and experience” of an investigating agent who felt that unrelated emails discussing Iran covered these shipments. (I also mocked the agent’s claim that a “[b]ased on my training and experience … [a] colon followed by a close parenthesis … represents a smiley face.”)

Yesterday the Department of Justice issued a press release stating that Mr. Kuyumcu had pleaded guilty to the charges against him. Of course, the DoJ, as usual, could not restrain itself from misleading hyperbole in the process of patting itself on its own back:

Kuyumcu, a United States citizen, conspired to export from the United States to Iran a metallic powder composed of cobalt and nickel without having obtained the required license from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). The metallic powder can be used to coat gas turbine components, such as turbine blades, and can also be used in aerospace, missile production, and nuclear applications. Such specialized metals are closely regulated by the U.S. Department of Commerce to combat nuclear proliferation and protect national security, and exporting them without an OFAC license is illegal.

Why, you ask, if CoNiCrAIY powder is “closely regulated” by the U.S. Department of Commerce was its export a violation of OFAC rules? Good question. CoNiCrAIY powder is EAR99 and its export is not regulated, either “closely” or otherwise, by the Department of Commerce. Perhaps the DoJ has gotten confused, innocently or otherwise, by ECCN 2E003.f which controls certain “technology” for application of certain specified inorganic compounds, including CoNiCrAIY and similar compounds, on non-electronic substrates. But even this is not tantamount to close regulation of the powder because other inorganic compounds covered within these controls of deposition technology include tungsten and oxides like, er, carbon dioxide. By this logic, if Kuyumcu exported a carbonated soft drink to Iran, the DoJ could claim that he exported a product to Iran “closely regulated” by the Department of Commerce.

Once again, we see that the government can misinterpret export laws and regulations with immunity while everyone else does so at their peril.

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Jun

14

Busman’s Holiday


Posted by at 9:29 pm on June 14, 2016
Category: General

Before the FallI don’t know what’s going on but it seems I can’t escape my job even during seemingly harmless activities.   I watched the excellent AMC/BBC miniseries The Night Manager and it turns out to be about an illegal arms deal, and one of the major characters is from, get this, the Directorate of Defense Trade Controls.   DDTC on TV?  Really?  Who knew?

So now I’m reading Before the Fall, a mystery/thriller by Noah Hawley, best known, perhaps, for his role as the screenwriter for the television miniseries Fargo.  The novel, which has been well-reviewed and which is hard to put down, has, as a plot point . . .

CAUTION:  VERY MINOR SPOILERS AFTER THIS

. . . has, as a plot point, an investigation of sanctions violations by the Office of Foreign Assets Control.  But, sadly, popular novels are poorly edited these days, and there is an unfortunate whopper of an error.   The whopper is not the hilarious and continual references to “the OFAC” as in “Agent Hex and his superiors at the OFAC.”  (I suspect that Hawley is thinking that you say O-F-A-C and not OFAC.  Sigh).

No the whopper is that, in 2015, OFAC still thinks that Libya is sanctioned.   An indictment at issue involves a character engaging in financial transactions with Libya, even though those sanctions were lifted in 2011 with the only remnants remaining being the blocking of certain people who were once part of the Muammar Gaddafi regime.  Still, although I haven’t finished the book, it’s an enjoyable read.  Perhaps I’ll learn as I read further on that it’s actually an alternative history novel like Philip K. Dick’s The Man in the High Castle.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)



Jun

8

Cost of Sinning Adjusted for Inflation


Posted by at 7:27 pm on June 8, 2016
Category: Civil PenaltiesDDTC

Money by Nick Ares [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/55FLSR [cropped and processed]Of course, when it comes to adjusting benefits, the government could care less about the effects of inflation. However, when it comes to putting money in its pocket (as opposed to taking it out of the government till and putting it in yours), well, inflation is, all of a sudden, a huge issue. Just in case you were thinking of committing any export violations, the Directorate of Defense Trade Controls (“DDTC”) wants you to know that your penalty will be adjusted upward, as of August 1, 2016, to reflect inflation since 1985, the year in which the $500,000 per violation penalty was set. This adjustment will apply to all penalties assessed after that date even if the export occurred prior to that date.

So how much is an export violation going to cost now? Well, DDTC consulted the Office of Management and Budget (“OMB”) which told it, based on price increases, that the multiplier for penalties set in 1985 is 2.1182. This means the new penalty is a whopping $1,094,010 per violation. Evidently, Christmas occurs in August for DDTC this year. Although I’m not clear exactly how OMB computed that multiplier, I can verify that the difference in the Consumer Price Index between 1985 and 2016 is a multiple of around 2.23, so apparently the OMB was in a good mood and cut violators a little slack here.

Of course, for all of you who were checking your cash reserves and contemplating leaving the export business entirely, DDTC was quick to point out, in a statement on its website, that the increase “does not impede the discretion of [DDTC] to assess [penalties] lower than the maximum amount should circumstances warrant.” That’s cold comfort when lower means something lower than a million dollars.

Photo Credit: Money by Nick Ares [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/55FLSR [cropped and processed]. Copyright 2008 by Nick Ares

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)



Jun

7

Russia Sanctions Aren’t Rocket Science


Posted by at 7:08 pm on June 7, 2016
Category: OFACRussia Sanctions

OA 4 Launch by NASA via http://www.nasa.gov/sites/default/files/styles/full_width_feature/public/thumbnails/image/oa-4-launch-1c_0.jpg?itok=LZznlmsx [Public Domain - Work of U.S. Government]The U.S. still buys certain rocket engines from Russia for rockets that, among other things, launch U.S. satellites. This has gotten various Hill types, including Senator John McCain, all worked up and provides an opportunity for them to demonstrate their lack of knowledge about the current sanctions against Russia.

Indeed, Senator McCain a few days ago launched a letter to OFAC demanding that they justify this “selective enforcement of sanctions.” The problem, as the Senator thinks he sees it, is that Sergei Chemezov, who is on the SDN List, is on the Board of Directors of Roscosmos, which makes the engines. Novikombank, which is on the Sectoral Sanctions Identifications List, as is its owner Rostec, finances Roscosmos. So, according to Senator McCain, it’s game over, case closed, for Roscosmos:

[W]e are funneling U.S. taxpayer dollars to a Russian space agency that is financed by a sanctioned Russian bank, which is owned by a sanctioned Russian defense company, and which is controlled by a sanctioned Russian CEO, who also happens to be a close personal friend of Vladimir Putin.

Why this is “selective enforcement” of the Crimea sanctions is far from clear. To begin with, Senator McCain lumps the SDN List and the SSI List together as equivalent sanctions, which they aren’t. A company owned by one on the SSI List is not automatically blocked or even put on the SSI List.  Next, he doesn’t understand OFAC’s guidance which blocks companies that are owned 50 percent or more by blocked companies; it does not automatically block companies controlled by blocked entities. So Roscosmos isn’t automatically blocked because it’s financed by an unblocked bank on the SSI List that is owned by another entity (Rostec) on the SSI List just because Rostec is controlled by an SDN.

Now, leaving aside whether this is “selective enforcement,” which it’s not, there may be an argument, perhaps, that OFAC ought to sanction Roscosmos because of its connections with these companies. This is something OFAC has the discretion to do but which it is not required to do and which would not make it guilty of “selective enforcement” if it does not. Still, that question is not simply answered by looking around and pointing to all of Roscosmos’s unsavory connections. If Roscosmos produces something that the United States needs, then to target Roscosmos in that situation would be, as they (sorta) say, targeting your own foot.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)



Jun

3

Nork Money Laundering Designation Targets Chinese Banks


Posted by at 10:24 am on June 3, 2016
Category: FinCENNorth Korea SanctionsOFAC

Kim

On May 25, the U.S. Treasury Department issued a finding designating North Korea as a  jurisdiction of “primary money laundering concern.”  On the same date, Treasury, through FinCEN, issued a notice of proposed rulemaking (“NPRM”) setting forth the measures that it proposes be implemented as a result of the finding.  Although the finding was immediately effective, the proposed rules will not become effective until some time after the 60-day comment period expires.

The designation comes shortly after evidence that North Korea hacked the SWIFT system to steal money from foreign banks and after an increase in activity by North Korea relating to nuclear and missile proliferation. The finding, however, is based instead on the  requirements set forth in section 311 of the Patriot Act as predicates for such a finding — namely that entities in North Korea were engaged in proliferation of WMD, that North Korea has no controls on money laundering, that North Korea does not have a mutual legal assistance treaty with the United States, and that there is a high level of corruption in the North Korean government.

Once such a  finding is made, section 311 permits Treasury to impose one of five special measures, and in this instance Treasury, as detailed in the NPRM, selected the so-called Special Measure Five to impose. Under that special measure, Treasury “may prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account” by foreign banks that involve the designated jurisdiction. The proposed rules implementing Special Measure Five would prohibit U.S. financial institutions from opening or maintaining a correspondent account for a foreign bank if the foreign bank was engaged in transactions on behalf of North Korea. They also impose certain due diligence obligations on U.S. banks to ferret out North Korean activities by foreign correspondent accounts.

These rules, when adopted, will go beyond current restrictions imposed by the Office of Foreign Assets Control (“OFAC”). Under current OFAC rules, banking transactions with blocked entities in North Korea as well as those that would involve the unlicensed import of North Korean goods into the United States are prohibited. But under the new FinCEN rules, foreign banks could be cut off from the U.S. financial system for engaging in transactions with any entity in North Korea, whether blocked or not.

Chinese banks are clearly the target here. China is North Korea’s biggest customer, and many of those transactions are believed to be denominated in the U.S. Dollars that North Korea needs to buy goods from around the world. These transactions will clearly become much riskier for Chinese banks when the rules go into effect. Although it is certain that Chinese banks have in the past concealed from U.S. banks the extent to which their correspondent accounts are used in connection with purchases from, or sales to, North Korea, it seems unlikely they will continue to run the risk that these activities will be uncovered now that the stakes (namely continued participation in the U.S. financial system) are higher and now that U.S. banks will be more closely scrutinizing the correspondent accounts of Chinese banks.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)


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