Export Control Reform For and By Dummies

Posted by at 10:34 pm on October 4, 2016
Category: DDTCUSML

Blue Hour Capitol Building

Having ignored the export control reforms initiated by the executive branch over the last seven or so years, the geniuses on the Hill have now decided to wade into the field with, as you might imagine, not entirely salubrious results. At the end of September, a bill was introduced in the House (with a companion bill in the Senate) to move most of Category I on the United States Munitions List (“USML”) over to the Commerce Control List (“CCL”). Specifically, it would move every firearm other than combat shotguns and firearms with special military application to the CCL.

There appear to be two motivations for this. First, this is an effort to exempt all gun manufacturers from the registration requirement (and associated fees) set forth in Part 122 of the United States Munitions List. Second, this is an apparent response to recent guidance by DDTC that tried to draw a distinction between manufacturing, which requires registration, and gunsmithing, which does not. Some critics claimed that some activities defined as manufacturing should be treated as gunsmithing instead.

The proposed legislation simply moves the items to the CCL but allows BIS the discretion to determine where on the CCL these items would go. BIS would be free to designate, and likely would designate, these moved items as 600 series items, which would result in a license requirement for all destinations. BIS would also be free to determine which, if any, license exceptions would be available. This means that it is unlikely, or at least possible, that the proposed legislation would not necessarily make it any easier to export arms; rather, it would only reliably eliminate the registration and fee requirement. Calling this the Export Control Reform Act, as the legislation styles itself, seems inapposite; a better name would be the Gun Manufacturer Financial Relief Act.

Photo Credit: Blue Hour Capital Building by Clif Burns, via www.clifburns.net. Copyright 2016 Clif Burns

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I’ll See You in C.U.B.A.

Posted by at 9:41 pm on September 29, 2016
Category: Cuba SanctionsOFAC

Image via https://pixabay.com/p-1202440/?no_redirect [Public Domain]Several people have been wondering if I would write something about the allegation that Trump may have violated the Cuban embargo back in 1998. This blog expresses no opinion on political campaigns or figures, so I hesitate to wade into this other than as an opportunity to talk about how the Cuban sanctions are structured. So, for purposes of this post, I will take as hypothetically true for discussion the allegation, which has not been admitted by the Trump campaign, that in 1998 Trump asked consultants to go to Cuba on his company’s behalf to explore business opportunities there and that he later reimbursed their travel.

To begin with, it has to be observed that there is a five year statute of limitations on criminal and civil penalties related to the Cuba embargo. As a result, the possibility of a criminal prosecution or civil penalties if there was a violation, has long past.

The relevant prohibition of the Cuba sanctions is the oddly phrased prohibition in section 515.201 of the Cuban Assets Control Regulations. That section prohibits any person “subject to the jurisdiction of the United States” from engaging in specified transactions that “involve property in which [Cuba], or any national thereof, has at any time on or since the effective date of this section had any interest of any nature whatsoever, direct or indirect.” Those specified transactions are transfers through banking institutions, foreign exchange transactions, dealings in property and transfers of property outside the United States.

So the first question is whether asking consultants to go to Cuba to explore business opportunities there for your company violates that. Certainly when in Cuba, those consultants will have dealings in property in which Cubans have an interest — they’ll do that the minute they check into a hotel or drink a mojito. But does the U.S. person who simply asks them to go to Cuba by that request transfer anything through banks, engage in a foreign exchange transaction, deal in property or transfer property outside the United States? It would not seem so, which makes it hard to see a violation of this rule as written by sending consultants to Cuba.

The second question is whether the language in section 515.201 prohibits somebody from reimbursing the travel expenses of someone who has traveled to Cuba. It seems to me that there is a good argument that it does not. Unlike the mere travel request, this reimbursement transaction does involve dealing in property as well as a banking transaction.  But it’s hard to see that it involves any property in which a Cuban has or had an interest. No Cuban has any interest in the money paid to the traveler after he has left Cuba and has already made payments to hotels and restaurants in Cuba.  And that money seems to be the only property involved in the transaction. Clearly, the consultants engaged in one of the specified transactions involving Cuban property when they paid the hotel bill in Cuba, but it’s not so clear that, once the hotel was paid, any Cuban has or had any interest in the money used later to reimburse the traveler.

That being said, let me say that OFAC, which enforces these rules, takes the position that the reimbursement somehow or other does “involve” the Cuban hotel, which is, by my view, something like saying the butterfly that spreads its wings in Africa is involved in the hurricane that slams into the Outer Banks. In the end, of course, OFAC’s opinion, even if I think it stretches the meaning of “involve,” will control.

But, you say, since the consultants are violating the Cuban embargo, would Trump, if he sent them to Cuba and reimbursed them, have violated the embargo by conspiring with them or by aiding and abetting them in the violation of the sanctions? That is not clear either. The penalties established for violations of the Cuban embargo are set forth in section 501.701  That section prohibits and penalizes violations of the rules but does not include a penalty for aiding and abetting a violation, conspiring with someone to violate or causing a violation. This is in contradistinction to the parallel provision in the Iran sanctions, for example, which punishes anyone who “violates, attempts to violate, conspires to violate, or causes a violation” of the rules.

Again, I have to be clear that OFAC is not troubled by the niceties of the language of the Cuban embargo rules themselves, but would unambigously take the position that both sending the consultants to Cuba and the reimbursement of their travel expenses after they return, if that in fact occurred, would violate the Cuban sanctions.  So, kids, don’t try this at home.

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If It Were Real, It Wouldn’t Be “Deemed”

Posted by at 10:19 pm on September 27, 2016
Category: General

Printed Guns via http://defdist.tumblr.com/post/85127166199/i-have-often-been-asked-who-the-first-person-to-be [Fair Use] The Fifth Circuit last week released an opinion upholding the District Court’s decision not to grant Defense Distributed’s motion for a preliminary injunction.  Defense Distributed had sought a preliminary injunction against enforcement by the Directorate of Defense Trade Controls (“DDTC”) of its order prohibiting the company from posting on the Internet plans for printing guns with 3-D printers.

The majority opinion  did not really reach the merits of the case or whether DDTC had the right to prohibit U.S. citizens from uploading gun plans to the Internet. Rather it turned on a procedural issue: whether Defense Distributed or DDTC would be hurt more by an injunction. The majority opinion weighed that balance in favor of DDTC, arguing that a preliminary injunction would result in untold millions of foreigners printing crappy plastic guns whereas not granting the injunction would just mean that Defense Distributed had to sit on its hands until trial.

The dissenting opinion of Judge Jones, however, dove straight into the merits, arguing that DDTC’s theory of the case was fatally flawed because uploading things to the Internet is not an “export” within the meaning of the Arms Export Control Act. To summarize Judge Jones, “export” means sending stuff across a border for money. As a result, Defense Distributed could not be held to have engaged in an export as a result of “the domestic publication on the Internet, without charge and therefore without any ‘trade,’ of lawful, nonclassified, nonrestricted information.”

Judge Jones does not stop at the notion of mere access as an export, but zeroes in on the “across borders” criterion to take dead aim against “deemed exports.”

Although the majority opinion adopts the State Department’s litigating position that “export” refers only to publication on the Internet, where the information will inevitably be accessible to foreign actors, the warning letter to Defense Distributed cited the exact, far broader regulatory definition: “export” means “disclosing (including oral or visual disclosure) or transferring technical data to a foreign person, whether in the United States of abroad.” There is embedded ambiguity, and disturbing breadth, in the State Department’s discretion to prevent the dissemination (without an “export” license) of lawful, non-classified technical data to foreign persons within the U.S. The regulation on its face, as applied to Defense Distributed, goes far beyond the proper statutory definition of “export.”

Or, more succinctly, if it was a real export they wouldn’t have to call it a “deemed” export.

Judge Jones’s opinion is certainly grounded in common sense, something often lacking in export control. In the early days of my practice, I tried to explain to a former military officer who was CEO of a client that disclosing information to a foreign employee in the United States was an export. He paused for a moment and then, with the veins in his neck bulging and his cheeks flushed, he said “That is the dumbest [bad word] thing I’ve ever heard come out of the mouth of a lawyer” and promptly invited me to leave his office immediately.  I still think his assessment of “deemed exports” was dead on.

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Bad News For Anyone Named Paul Davis

Posted by at 9:46 am on September 23, 2016
Category: OFACSDN List

Paul Davis via http://pacnetair.com/crew.html [Fair Use]
ABOVE: Paul Davis

Yesterday, the Office of Foreign Assets Control (“OFAC”) designated PacNet Services, a Canadian payments processing company, and many of its officers and employees as SDNs under the Transnational Criminal Organization (TCO) program. According to OFAC’s press release, PacNet “knowingly process[ed] payments on behalf of a wide range of mail fraud schemes that target victims in the United States and throughout the world.” Prior to this designation, only ten individuals and entities (comprising seven organizations) had been designated under the TCO program.

The head of PacNet, who was designated as part of yesterday’s OFAC action, is an individual and pilot named Paul Davis. According to OFAC, in one of its more colorful allegations, Davis used his piloting skills and aircraft “to move illicit bulk cash within Europe.”

Long term readers surely see now what’s coming next. Over the next several weeks, it is likely that anyone anywhere in the world named Paul Davis will confront a financial nightmare as banks, credit card companies and anyone else with screening software will deny them loans, seize their credit card payments, cancel their leases, and otherwise muck up any financial transactions in which they are involved. And, of course, since these Paul Davises are not the “real” Paul Davis, they have no rights at OFAC other than to try to unblock funds each and every time that happens.

It really is time for OFAC to have the common decency to figure out a solution for these unintended collateral consequences that occur when people with common names are designated. They do it for companies, like Tidewater, Inc, but simply cannot be bothered with mere individuals. And parents, before giving your kids a common name, think twice. Naming your kid Uriah Aloysius is beginning to look pretty attractive.

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Copyright © 2016 Clif Burns. All Rights Reserved.
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Don’t Forget Croatia

Posted by at 7:43 am on September 22, 2016
Category: BISEncryption

Sea view. Rovinj, Croatia by Andrey[CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/5oVXCk [cropped and processed]

Yesterday, the Bureau of Industry and Security (“BIS”) announced various amendments to the encryption rules. I realize that the encryption rules are a sprawling mess, scattered through various sections of the EAR and written in an incomprehensible jargon that sounds like they were translated into English from a Vulcan paraphrase of the original Sanskrit. I also realize that your eyes understandably glazed over when you saw the word “encryption.” So I’ll try to make this as painless and entertaining as possible.

Let’s start with the really big news. Croatia has been added to the list of Supplement 3 Countries! Woohoo! For those of you aren’t really excited about this, that is probably because you forgot that if you are not a Supp. 3 country, there is a 30 day waiting period after a review request has been filed before encryption items described in 740.17(b)(2) and (b)(3) such as source code and high-performance network equipment can be exported to that country. And if those items were going to government end users in  country not on the Supp. 3 list, a license was required. So, today was declared a national holiday in Croatia and papier-mâché effigies of key BIS officials were draped with garlands and paraded through town squares across the country.

While we’re on the subject of government end users, the amendments create a new kind of government end user — “less sensitive government end users.” These are government agencies that are the toughest of their kind and at which you can hurl the most frightening insults — say, “you cabal of pointy-headed bureaucrats!” — without hurting their feelings. No, I’m just kidding with you. “Less sensitive government end users” are government agencies that are less likely to use encryption for evil purposes, like museums, water treatment plants and census bureaus.

The reason for identifying “less sensitive government end users” is that high performance network infrastructure equipment used to require a license to go to any government on the Naughty List (i.e., not on the Supp. 3 Nice list). Now these items can be exported 30-days after a review request is filed provided that it’s a less sensitive government end user.

The best news I’ve saved for last.  No more encryption registration numbers!  For the 50 or so companies out there who still don’t have an ERN, you’re off the hook.  Annual self-classification reports will still have to be filed; and the new format for the report, which is detailed in an amended Supplement 8 to Part 742, incorporates some of the information that used to be required by the ERN application.

For a summary of the remaining changes, including a long-needed update of the performance parameters for high performance network infrastructure equipment subject to higher encryption controls, you can read this excellent summary, which is mostly clear and more or less written in English, helpfully provided by the nice people at BIS.

Photo Credit: Sea view. Rovinj, Croatia by Andrey [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/5oVXCk [cropped and processed]. Copyright 2008 Andrey


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Copyright © 2016 Clif Burns. All Rights Reserved.
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