Defense News published yesterday an interview with Frank Ruggiero, Deputy Assistant Secretary (DAS) for Defense Trade and Regional Security in the Bureau of Political-Military Affairs. Mr. Ruggiero oversees all defense exports from the United States, including Direct Commercial Sales and Foreign Military Sales. And he had several interesting things to say.

First, he reported that pursuant to National Security Presidential Directive No. 56, the Directorate of Defense Trade Controls has significantly streamlined processing times:

In summer 2007, we had nearly 700 licenses that were over 60 days. As of April 16, that’s down to 67. An average license takes about 18 days to process, a 50 percent reduction from last summer. We’ve also dropped backlog by 50 percent.

Second, Ruggiero suggested that licensing policy might be used to retaliate against foreign defense firms that produce defense articles free of U.S.-origin goods in order to trade with China and other countries that are subject to arms embargoes or strict licensing policies:

Q. Your office can veto the export of foreign-made items that use controlled U.S. parts or technologies, which has led some firms, such as France’s Thales and Italy’s Alenia, to develop satellites free of American components for sale to China. Is that a concern?

A. We are monitoring the circumstances and analyzing what International Traffic in Arms Regulations (ITAR) items we may have authorized to such companies to make sure those items are in fact not being incorporated into ITAR-free products. We would certainly factor into any future licensing determination the activity of a foreign company in terms of licensing ITAR-free items to countries that may raise potential national security risks to the United States.

That’s one way to expand the scope of U.S. export laws, I suppose.

ABOVE: Iran’s 9th Olefin Petrochemical
Complex

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Earlier this month, French corporation Cryostar SA entered a guilty plea to various export violations arising from its role in a scheme to export cryogenic pumps for installation in the 9th Olefin Petroleum Complex in Iran.

In 2001 a French company, identified only as “TN,” approached Ebara International Corp., Inc., a manufacturer and distributor of cryogenic pumps, i.e., pumps designed to work with liquids at very low temperatures, and sought to purchase various cryogenic pumps worth almost $750,000. The two companies enlisted Cryostar to act as an intermediary in the plan. The pumps were sold to Cryostar in France, which then resold the pumps to “TN,” which, in turn, exported the pumps to Iran. Cryostar created false invoices indicating that it was the end user of the pump.

Cryostar has no offices in the United States, and it does not appear that any company employees entered the United States in connection with this transaction. Rather the jurisdictional bases for the prosecution are (1) the questionable theory that the items involved were U.S.-origin items and (2) the much sounder theory that Cryostar participated in misrepresentations to U.S. authorities.

Of course, the real question is what motivated Cryostar to get involved in this deal in the first place. Why weren’t the items exported directly to “TN,” which could have held itself out as the end user of the items in France? Well the answer to that question becomes clearer once a reasonable surmise is made as to the identity of “TN.”

The DOJ press release on the guilty plea identifies “TN” as “a a French company with a U.S. subsidiary.” An article on the Chemicals Technology website, notes that French company “Technip and its Iranian partner Nargan were awarded the engineering, procurement and construction contract for the” petrochemical facility. And Technip has a U.S. subsidiary.

Now, this is not proof that Technip is the same company as “TN,” but it is certainly a reasonable surmise. Additionally, since Technip’s participation in the Iranian project was well-known, this explains why it would have sought an intermediary to make the false claim that the pumps were being installed in France. Such a claim from Technip would have been less believable.

Under the written plea agreement, Cryostar has agreed to a fine of $500,000 and two years corporate probation. I imagine that the execs at Cryostar are now ruing the day that agreed to a corporate favor for another French company. They may have been hoping for a few dinners at Pierre Gagnaire paid for by Technip, but wound up getting more than they bargained for.

ABOVE: Vibro-Meter Pressure
Indicators

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A story by Dan Browning in the Minneapolis Star-Tribune alerted me to an investigation of Global Engineering Associates (”GEA”), a company located in a Minneapolis suburb. According to a recently unsealed search warrant (which Dan Browning was kind enough to send to me), GEA is being investigated for alleged shipments of pressure indicators and radio mounts to Singapore.

A search warrant needs to show probable cause for all elements of the crime and, of course, the scienter element of the violation — i.e. evidence that the defendant knew that the exports were in violation of the law — is, as usual, the hardest part to establish. The affidavit supporting the search warrant places its main emphasis on a visit made to GEA by agents of Immigration and Customs Enforcement under “Project Shield America,” a national outreach program initiated by ICE to inform exporters of export licensing requirements. According to the affidavit:

Special Agent Cramsey and Leff [the CEO of GEA] discussed the Project Shield America program in detail and exchanged business cards. Leff was given copies of the Project Shield America brochures for his review. Leff stated that he would be happy to review the literature to ensure his company was in compliance with all US export laws and regulations.

I don’t think I’m being too much of a cynic to suggest that this is a thin reed upon which to base scienter, and it’s not the first time that ICE has tried to use Project Shield America as a basis for claiming that export violations were willful. There is no question that the project teaches exporters that licenses are required for military and dual-use items. The problem is it provides little guidance to exporters in how to determine whether items are military or dual-use items.

In this case, the items in question aren’t obviously military items. Vibro-Meter, the manufacturer of the pressure indicators in question, produces pressure indicators for both civil and military aircraft. Nor does a “radio mount” have anything about it that inherently suggests that it is a military item. Indeed, ICE needed to request a specific determination from the Directorate of Defense Trade Controls to get the information necessary to conclude that these were military items on the USML. So, a friendly visit from ICE agents and a short brochure aren’t going to establish that GEA knew that these items were military items and therefore subject to export licensing requirements.

There are two other facts alleged in the affidavit that might support probable cause on the scienter element. First, there is a claim that the invoice inside the shipping packages differed from descriptions of the items in the shipping documents. However, it appears from the affidavit that the enclosed invoice simply had more detail than the descriptions in the shipping document, not necessarily an indication of criminal intent by the exporter. Second, the affidavit indicates that GEA never inquired about the two shipments containing the allegedly export-controlled items, both of which were seized by customs. That is, admittedly, somewhat more suspect, but there could be a number of innocent explanations.

The important consideration here is an issue that increasingly needs to be addressed. Export prosecutions have begun to veer from prosecution for exports of items that reasonable people would clearly realize were export-controlled — guns, tanks, night vision and the like — to less obvious items such as involved in this case. Some procedure needs to be implemented to assist exporters in determining export classification, and the current commodity jurisdiction procedure, which can take a year or more, is broken and not the answer.

Daniel Max Sherman, a former employee of Knoxville-based Atmospheric Glow Technologies, entered a guilty plea today in federal court to a conspiracy with a former University of Tennessee professor to provide controlled technical data to a Chinese student research assistant in violation of the Arms Export Control Act. AGT had given a subcontract relating to its research on a military drone aircraft to UT’s Plasma Sciences Laboratory, and the professor and the Chinese research assistant were working on the project.

Sherman’s plea hearing went a little off track when Sherman declined to admit to one of the essential elements of the crime which led to a little prompting — and a misstatement of the law — by the prosecutors:

Sherman indicated to [Judge] Varlan that although he was admitting guilt he maintains he was unaware of the provisions of the Arms Export Control Act that would have restricted the work to U.S. citizens only barring a special permitting process. However, [prosecuting attorney]Theodore noted that the law states a person violating the action either must know or should have known about the act’s requirements and Sherman’s claim of ignorance would not pass muster.

Sherman then conceded that point and formally entered his guilty plea.

The AECA’s requirement of willfulness as an element of a criminal charge is a requirement that the defendant knew that the export was illegal. It is not whether the defendant knew or should have known that the export was illegal. Increasingly, it seems, U.S. attorneys are finding the scienter requirement to be too pesky to bother with and are looking for novel ways to disregard it.

[Thanks to Mike Deal for alerting me to this story.]

The Chi Mak case has engendered its fair share of confusion, and the latest victim is a trade law attorney who submitted a brief article to an export law newsletter that was published today. According to that article, the verdict in Chi Mak stands for the proposition that public domain data about defense articles can’t be exported to China. That’s simply wrong and betrays a fundamental misapprehension both of the International Traffic in Arms Regulations (”ITAR”) and what went on in the Chi Mak case. (Fair disclosure: I advised the Chi Mak defense team on the public domain issue in that case).

The article states:

The case sets the precedent that “technical data”, despite entering the “public domain”, requires an export license from the Directorate of Defense Trade Controls (DDTC) if China is the country of export. The jury’s finding reinforces this interpretation of the ITAR, and the subsequently heavy sentence by Judge Carmey reflects the seriousness the United States deems Chinese acquisition of military knowledge.

What the author apparently didn’t understand was that an instruction was given, and agreed to by the prosecutors, that if the data was in the public domain as defined by section 120.11(a) of the ITAR, it wasn’t subject to ITAR. So the jury’s conviction represents a determination that the items weren’t in the public domain as so defined.

For example, the conference exception in section 120.11(a)(6) doesn’t cover every conference. That exception was at issue in the Chi Mak case because the documents were alleged to have been presented at an American Society of Naval Engineers (”ASNE”) conference According to that exception, a document is public domain if it is generally accessible to the public:

Through unlimited distribution at a conference, meeting, seminar, trade show or exhibition, generally accessible to the public, in the United States.

The jury may well have determined that the ASNE conference wasn’t “generally accessible to the public.”

The article goes even further astray when it tries to find a basis in the ITAR for a conclusion that public domain technical data can’t be exported to China.

§125.4 contains the licensing exemptions provision of ITAR. §125.4(a) states:

“The following exemptions [§125(b)(1)-(13)] apply to exports of technical data for which approval is not needed from the Directorate of Defense Trade Controls. These exemptions, except for paragraph (b)(13) of this section, do not apply to exports to proscribed destinations under § 126.1 of this subchapter…”

So if §125.4 is the exclusive exemption section of the ITAR, and China is excluded from any exemption as a country listed in §126.1, then it follows all technical data exported to China requires a license regardless of its presence in the public domain.

The critical problem with this analysis is that the definition which excludes public domain information from the definition of technical data isn’t an exemption mentioned in § 125.4. It isn’t even an exemption at all or it would be covered by section 126.1 itself, as the prosecutors initially argued, which notes that the “exemptions” in the ITAR aren’t applicable to China and the other proscribed countries.

Rather public domain material is excluded from the definition of technical data covered by the regulations. Exemptions are exceptions to licensing requirements for technical data otherwise subject to ITAR such as, for example, technical data being returned to the original source of import or technical data exported in furtherance of an approved technical assistance agreement. But if information is public domain under § 120.11, it isn’t technical data at all under § 120.10, and it can be exported without license and without reference to any exemptions.

A case that makes clear the difference between a definitional exclusion and an exemption is the way that the USML handles the QRS-11 quartz rate sensor navigational chip. There is now a note to Category VIII(e) that excludes such sensors when, among other things, they are integrated into a civil aircraft. The reason for this was to permit Boeing aircraft (all of which were equipped with the QRS-11 chip) to be exported to China. If the note is seen as an “exemption” for sensors in civil aircraft rather than as a definitional exclusion from the USML, then § 126.1 would proscribe exports of those planes to China, which was not the result contemplated by DDTC when it added that note to the USML

In short, exemptions and definitional exclusions are two very different things in the ITAR and you confuse them at your peril as did the author of the article in question. Frankly he should have been suspicious of his own conclusion because by his reasoning if someone tells a Chinese national that the B-2 stealth bomber has a “bat-wing” shape to reduce its radar cross-section, that person would be committing a criminal act, even though everyone who hasn’t spent the last two decades in a cave in Siberia is aware of the shape of a B-2 bomber and its purpose.

Yesterday the Senate Finance Committee held a hearing on the Iran Counter-Proliferation Act of 2007, which was introduced on March 22 by Senator Gordon Smith and has 70 sponsors equally divided between Democrats and Republicans.

Among the proposed sanctions is a provision that would make U.S. parent companies liable for activities of their foreign subsidiaries that would violate the sanctions against Iran if such activities had been undertaken by the parent company. This reverses current law which allows foreign subsidiaries to trade with Iran as long as no U.S. persons are directly involved in the trading activities and as long as the subsidiary has legitimate additional business activities other than trading with Iran. (The article linked above from Congressional Quarterly by Matt Karode misreads the bill and claims that it would penalize U.S. subsidiaries of foreign parent companies for the parent company’s trading with Iran).

The legislation would ban all exports to Iran other than “food and medicine grown, produced or manufactured in the United States.” The impact of this proposed provision on the Trade Sanctions Reform Act of 2000, which permits exports of medical devices in addition to food and medicine, and the Berman Amendment, which permits exports of informational materials, is unclear since the legislation doesn’t explicitly repeal the prior legislation. Nor is it clear that Congress understands that this provision would also prohibit exports under section 560.528 of the Iranian Transaction Regulations of goods, services and technology to insure the safety of civil aviation.

Imports are also banned by the proposed legislation. Currently imports of foodstuffs and carpets from Iran are permitted.

Other provisions of the proposed legislation include:

• A prohibition of U.S. actions that would lead to accession of Iran to the World Trade Organization;
• A requirement that the President freeze the assets of Iranian diplomats, government officials and their family “at such time as the United States has access to [their] names”; and
• A reduction of U.S. contributions to the World Bank based on amounts loaned by the Bank to Iran.

For all the time that we export lawyers spend trying to inculcate into our clients the concept of export red flags, it’s heartening to see that pay off. And it certainly did payoff in the case of two Chinese citizens stopped at LAX carrying suitcases stuffed to overflowing with night vision cameras. The not-so-swift attempted exporters had used a company called Printing Plus Graphics as their front. I suppose that was better than using Panda Express as a front, but not much.

The manufacturer of the cameras, FLIR Systems, knew that a storefront print shop had little use for infrared cameras and quite properly saw the order as a red flag. They contacted the government about the attempted purchases and the rest, as they say, is history.

The saga of the government’s ill-fated prosecution of Alex Latifi and his company Axion Corporation continues. The federal district court judge delivered yet another forceful gavel whack to the hands of the prosecutors and awarded the acquitted defendants legal fees, filing costs and expert witness fees and costs incurred in defending the prosecution. Latifi and Axion were accused of violating the Arms Export Control Act by emailing to a Chinese company technical drawings of a part used in the Black Hawk helicopter. The defense successfully argued that the drawing was available on the Internet and subject to the public domain exception under the International Traffic in Arms Regulations.

This is the first time, at least that I am aware of, where the U.S. government has been ordered to reimburse legal fees and costs incurred by defendant during an unsuccessful prosecution for export violations. Sources close to the case cited statements by prosecutors that they didn’t care whether the prosecution was successful and that their only goal was to put Latifi and Axion out of business.

There’s an interesting angle to the award aside from its uniqueness. We had previously noted that the defense team filed a motion under the Hyde Amendment (18 U.S.C. § 3006A Note) for recovery of attorneys’ fees, but in fact the court awarded the fees under the Civil Asset Forfeiture Reform Act (”CAFRA”) which provides for larger recoveries by acquitted defendants and a looser standard for recovery. Under the Hyde Amendment the acquitted defendant must prove that the prosecution was “vexatious, frivolous, or in bad faith.” Additionally, legal fees recovered under the Hyde Amendment are subject to the $125 per hour fee cap provided in 28 U.S.C. § 2412(d)(2)(A). CAFRA, on the other hand, imposes no such fee limit and provides for recovery in a forfeiture proceeding in which the defendant “substantially prevails.”

The reason that CAFRA was deemed applicable in this case was because the prosecutors included civil forfeiture counts in the indictment. This has been an increasing practice where prosecutors seek forfeiture of all profits related to the illegal exports. The decision of the district court in the Axion case to use the forfeiture claims as a basis for awarding all costs incurred by the defendant as a result of the forfeiture claim may cause prosecutors to rethink including such claims in the indictment.

(Full disclosure: I was interviewed and quoted in the linked article about the award of attorneys’ fees to the defendants in the Axion case)

This post is only peripherally related to export law, but it does involve Iran, blocked assets, terrorism, Persian antiquities and a fascinating conundrum of statutory construction. So bear with me, you won’t be sorry.

The conundrum is posed by the decision of a federal district court on March 31 in Rubin v. The Islamic Republic of Iran, 2008 WL 857522* (D. Mass. 2008). The plaintiffs obtained a default judgment against Iran after being injured in a Hamas terrorist attack and are trying to levy on Persian antiquities alleged to be the property of Iran but in the custody of Harvard University and Boston’s Museum of Fine Arts. The district court held that the plaintiffs could levy against those assets under section 201 of the Terrorism Risk Insurance Act.

The antiquities at issue were initially blocked in 1979 by Executive Order 12170. After the release of the U.S. hostage, Executive Order 12281 unblocked “all uncontested and non-contingent liabilities and property interests of the Government of Iran.” The Terrorist Risk Insurance Act of 2002 provides that “blocked assets” are subject to execution in satisfaction of a judgment against the blocked party. And that’s where the fun begins.

Harvard and the MFA argued, quite reasonably, that the plaintiffs could only execute against the antiquities if it was uncontested that Iran owned them, in which case they were unblocked by Executive Order 12281 and therefore not subject to execution under the Terrorist Risk Insurance Act. The court rejected this argument, also quite reasonably, by saying that the plaintiff’s motion to execute on the antiquities made the ownership contested, meaning that the items were blocked and subject to the provisions of the Terrorist Risk Insurance Act.

In other words, Catch 22 is that the antiquities are only subject to levy if Iran’s ownership is uncontested, but Iran’s ownership isn’t uncontested because the antiquities are subject to levy. All liability for headaches caused by trying to solve this paradox is hereby expressly disclaimed.

*Westlaw subscription required.

ABOVE: Strait of Hormuz

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Some excellent reporting by Eric Lipton in an article in today’s New York Times suggests that the UAE is mostly giving lip service to export control.

Yousef al-Otaiba, an adviser to the crown prince of the United Arab Emirates, said his country was more closely monitoring goods that it re-exported while blocking items that might help Iran build weapons systems. But trade experts and Iranian traders in Dubai said there was little evidence that the new export control law was being broadly enforced.

“It has virtually had no effect, to be honest,” said Nasser Hashempour, deputy president of the Iranian Business Council in Dubai. “If someone wants to move something — get it to Iran — it is easy to be done.”

Both Commerce and State have a more optimistic assessment, but, sadly, any proof of this was classified:

At the Commerce and State Departments, officials said they were encouraged by actions the Emirates had taken in some recent cases — the details of which are classified — that relied on their new authority under the export law. But they said an export licensing system must still be introduced and other enforcement steps taken.

Even so, Lipton quotes interviews with business in the UAE claiming that it’s business as usual with Iran:

S. M. Mir Ebrhimi, chief executive of Reza Nezam Trading, which operates mostly out of Iran, said he continued sending products with American-made components as usual. Mohammad Kazem, supervisor at Al Musafer Tourism and Cargo, said he had not even known his business was on the warning list. He said that the company followed the law, disputing any suggestion by American authorities that he had shipped prohibited items to Iran. He also said that he had seen no more inspections or spot checks by Emirati authorities.

(Full disclosure: Eric Lipton interviewed me in connection with the article, which includes a quote from me)