May

19

BIS Publishes Tips You Can Use (or Not) to Unmask Russian Straw Purchasers


Posted by at 9:48 pm on May 19, 2015
Category: BISRussia Sanctions

By Daderot (Own work) [CC0], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3APatent_quote_-_United_States_Department_of_Commerce_-_DSC05103.JPGThe Bureau of Industry and Security (“BIS”) just released new guidance, snappily titled “Guidance on Due Diligence to Prevent Unauthorized Transshipment/Reexport of Controlled Items to Russia,” which attempts to reveal ways in which U.S. exporters can detect whether a purchaser is sneakily trying to buy things not for itself but for the bad guys in Russia. This, of course, is a laudable purpose, not just for the Russians, but for the many other countries and entities that know they can’t directly buy certain export-controlled goods and have a straw purchaser do their dirty work. But, sadly, most of the advice for sniffing out secret Russian intermediaries is about as useful as the secret decoder rings that used to be found in cereal boxes.

Here it is:

When inquiring into the ultimate destination of the item, an exporter should consider e-mail address and telephone number country codes and languages used in communications from customers or on a customer’s website. The exporter should also research the intermediate and ultimate consignees and purchaser, as well as their addresses, using business registers, company profiles, websites, and other resources. … Furthermore, exporters should pay attention to the countries a freight forwarder serves, as well as the industry sectors a distributor or other non-end user customer supplies.

Particularly risible is the advice to pay attention to the “email address and … languages used in communications from customers or on a customer’s website.” Because, of course, if you’re trying to hide the fact that your acting on behalf of the Russians you’re going to put up a website in Russian, email from a .ru domain, and say “Nyet” when asked if you’re secretly working for the Russkis.

It’s not quite clear why BIS mentions these factors — which may from time to time catch a really stupid Russian intermediary who slips and starts babbling in Russian — rather than more reliable red flags. The most frequent indicators that you’re dealing with an imposter is a purchaser who appears to have no clear understanding of, or use for, the item he or she is seeking to purchase. Small purchasers that your company has never dealt with or who say that they are simply a reseller should set off alarm bells. And here’s a personal favorite: Google Maps Street View is your friend. If you track down the address in Amsterdam and see that the purchaser of a controlled accelerometer is a bicycle store or a car repair garage, well, your work is done.

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May

12

Federal Court Strikes Down Warrantless Border Search in Iran Export Case


Posted by at 11:23 pm on May 12, 2015
Category: Criminal PenaltiesIran Sanctions

Los Angeles International Airport by Daniel Betts [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/redlegsfan21/13789084574A federal district court judge in the District of Columbia last week granted a motion to suppress evidence obtained by a DHS Special Agent after a laptop was seized from a departing passenger at LAX and subsequently subjected to a comprehensive forensic search. Prosecutors attempted to defend the search as a routine border search which could be conducted without reasonable suspicion of any kind and without any warrant. The court held that the search was impermissible both because the government had no reasonable suspicion of “ongoing or imminent” criminal behavior and because the search was an extensive forensic search conducted away from the border after the passenger had long departed the country.

In the case at issue, the DHS had some evidence that the defendant, five years prior to the search, had shipped items to China knowing that they were going to be transshipped to Iran. When the investigating special agent learned that the defendant had traveled to the United States, the agent decided to have CBP seize the defendant’s laptop at LAX when he departed the country. The laptop was then shipped to San Diego where the hard drive was imaged. Specialized software was then used to search the contents of the hard drive. More than 20,000 files and a large number of emails were retrieved which, after review by the special agent, provided evidence of the Iran exports that occurred five years earlier. The special agent then applied for, and obtained, a search warrant seeking authority to seize those emails and documents which then served as a basis for the prosecution before the federal district court in the District of Columbia.

The Court’s decision that the search was unreasonable relied on a number of factors. First, the court noted that suspicion of prior criminal activity was not a reasonable suspicion that could support a warrantless search at the border. Such a search could only be justified on the basis of a suspicion of imminent or ongoing criminal activity, not past criminal activity, and there was no reason for the agent to suspect ongoing or imminent criminal activity. Instead he was just fishing for evidence of past criminal activity.

Second, the court distinguished the type of search that occurred from a routine border search that could be justified by reasonable suspicion of ongoing or imminent criminal activity. The court noted that the actual search occurred long after the passenger had departed and at hundreds of miles from the border where the laptop was seized. Additionally, it was a search of unlimited scope and unlimited duration. This, the court felt, was far different from opening and examining a passengers luggage or briefcase at the border for a search prior to departure.

The court also seemed troubled by misrepresentations made by the DHS Special Agent when he did finally apply for a warrant to seize the documents obtained from the defendant’s hard drive. The affidavit in support of the application for a warrant represented to the court that the warrant was needed to enable a search of the “mind-boggling” amount of data on the hard drive and that the extraction of the data “may take weeks or months.” In fact, this was all a charade (to use a polite term); all of the extraction had already occurred and no further searches of the hard drive were thereafter conducted by the DHS special agent or the government.

Although the court did not directly focus on this, another factor seems dispositive here. Warrantless searches are normally justified by some exigency for the search which makes it difficult to obtain a warrant in advance. In a typical border search, the luggage or briefcase being examined is about to leave the country and seeking a warrant before that departure would be impractical. Here, however, the government had the luxury of all the time in the world to image the hard drive and examine its contents. There is no possible reason as to why it was impractical to get a warrant before extracting the data and rifling through its contents.

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May

7

When Economists Write Regs, Everybody Loses


Posted by at 9:38 pm on May 7, 2015
Category: General

Brian Moyer via http://www.bea.gov/about/images/moyer-brian.png [Public Domain]
ABOVE: Dr. Brian Moyer,
BEA Director


Are you an individual residing in the United States? Do you have no ownership interest in any foreign enterprise? Have you filed yet a Form BE-10 with the Bureau of Economic Analysis (“BEA”) informing them that you don’t have any ownership interest in any foreign business? No, you haven’t? Well if you don’t file that form with the BEA by May 29, 2015, you can be fined $10,000. You’re welcome.

So get to it and get that BE-10 Claim for Not Filing filed. You can file it electronically here. Oh, and where else but in DC would you have to file a claim for not filing?

Now, it may not actually be the case that you have to file, but that is not what BEA’s regulations say. They say clearly that you have to file. The relevant section is 15 C.F.R. § 801.8, which establishes the mandatory filing requirement for U.S. persons with respect to their interests, or lack thereof, in foreign business enterprises. It says this:

(a) Response required. A response is required from persons subject to the reporting requirements of the BE-10, Benchmark Survey of U.S. Direct Investment Abroad—2014, contained herein, whether or not they are contacted by BEA. …

(b) Who must report. (1) A BE-10 report is required of any U.S. person that had a foreign affiliate—that is, that had direct or indirect ownership or control of at least 10 percent of the voting stock of an incorporated foreign business enterprise, or an equivalent interest in an unincorporated foreign business enterprise, including a branch—at any time during the U.S. person’s 2014 fiscal year.

(2) If the U.S. person had no foreign affiliates during its 2014 fiscal year, a “BE-10 Claim for Not Filing” must be filed by the due date of the survey.

This couldn’t be much clearer, could it? Everyone must file who is required to report, even if they are not contacted by BEA. And section (b) which defines “who must report” includes in subsection (2) U.S. persons without foreign affiliates and therefore must file a BE-10 Claim for Not Filing.

It is possible, indeed quite likely, that what BEA meant to say, but could not manage to actually say, is that the BE-10 Claim for Not Filing only must be filed by persons contacted by BEA to file and who did not have a 10 percent or greater interest in a foreign enterprise. So even though section (b) purports to define “who must report” that definition only means to cover people described in (b)(1) — who have a 10 percent interest — and not those described in (b)(2) who don’t.

First moral of the story: Economists shouldn’t write regulations and lawyers shouldn’t run the economy

Second moral of the story: If you are a U.S. person (business or individual) and you do have an 10 percent in a foreign enterprise, you have to file a BE-10 by May 29, 2015, something which I suspect many companies don’t know right now

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May

6

On a Slow Boat to Cuba


Posted by at 8:48 pm on May 6, 2015
Category: Cuba SanctionsOFAC

Cuba Capitole by y.becart(Own work) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/yoh_59/13697566663Yesterday, the Office of Foreign Assets Control issued “guidance” on the new Cuba travel regulations. In fact, the “guidance” says little that isn’t already in the regulations, but it does serve as a reminder of at least one of the quirks in the Cuba sanctions that persists despite recent reforms.

In particular, the guidance points out that the regulations only provide for the transport of authorized travel between the United States by aircraft. No cruises allowed, unless the boat gets a specific license to provide service to Cuba for persons authorized to go to Cuba.

Now let’s dive down the rabbit hole into the “Wonderland” of export control, where if OFAC and the Bureau of Industry and Security (“BIS”) “had a world of [their] own, everything would be nonsense.”

You might think that once the boat got a license to provide service to Cuba, that would be the end of it, right?

(“‘You don’t know much,’ said the Duchess, ‘And that’s a fact.’”)

No, because OFAC licenses providing the travel service to Cuba and BIS licenses the export of the boat to Cuba.

(“At last the Dodo said, ‘everybody has won, and all must have prizes.’”)

And, yes, once the boat crosses into Cuban waters, you’ve “exported” the boat to Cuba, even if the boat turns around and heads straight back for the United States.

(“‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’”)

If travel is provided by an airplane “of U.S. registry operating under an Air Carrier Operating Certificate” instead of a boat, then the short little foray into Cuban territory is covered by License Exception AVS, and no license is required.

(“When I used to read fairy-tales, I fancied that kind of thing never happened, and now here I am in the middle of one!”)

So what is the difference, for any conceivable policy purposes, between an airplane and a boat?

(“The Hatter opened his eyes very wide on hearing this; but all he said was, ‘Why is a raven like a writing-desk?’”)

All I can figure, is that a boat is more comfortable and has better food than the coach cabin of an airplane and the U.S. doesn’t want to make it all that easy to get to Cuba.

(“No, I give it up,” Alice replied: “What’s the answer?” “I haven’t the slightest idea,” said the Hatter.)

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May

5

Export Control Reform Comes to USML Category XII


Posted by at 11:25 pm on May 5, 2015
Category: BISDDTCNight Vision

AN/PSQ-20 Enhanced Night Vision Goggle (ENVG) by Program Executive Office Soldier [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0) and/or Public Domain (work of government employee)], via Flickr https://www.flickr.com/photos/peosoldier/16086876469 [cropped]Well, who would have thought? Contrary to broad expectations that export control reform would never in a million years come to Category XII, which contains tactical gamestoppers such as night vision and laser designators and markers, export control reform came today to Category XII in the form of proposed rules. The BIS proposed rules are here; the DDTC proposed rules are here.

While it may be surprising that Category XII is being reformed, it is not so surprising that the new “positive” list of items controlled in the new proposed Category XII has expanded considerably, growing from less than a page in the Code of Federal Regulations to five densely packed pages in the Federal Register. And what is and isn’t on this extensive new list will be the subject, I assume, of extensive industry comments due, by the way, on July 6, 2015.

Because of the much-publicized interagency squabbling between BIS and DDTC over which agency license which night vision system, a quick look at the new provisions relating to night vision is instructive. Obviously, the new rules do not simply cover infrared focal plan array detectors (“IRFPAs”) and image intensification tubes (“IITs”) designed for military use but instead cover IITs and IRFPAs with specified peak response levels. IITs meeting the peak response rate for IITs must have either second or third generation photocathodes. Interestingly, the definition of second and third generation photocathodes is completely different in the proposed rules from the definition given in the current USML, reinforcing the general conception that nobody really knows what the difference is between second and third generation night vision beyond the obvious: third is better than second.

A note to be included to subparagraph (c), which covers night vision, in Category XII appears to maintain, more or less, the current principle, at least for certain components, that when they are incorporated into commercial systems, the commercial system is not subject to ITAR controls, but the parts in question will be subject to ITAR controls if exported separately from the commercial system. However, a new qualification to this principle, that is not currently expressed in Category XII, is added: for this rule to apply, the component must not be removable from the system “without destruction or damage to the [component] or render [sic] the item inoperable.” What the practical impact of this new qualification will be is hard to predict, but my guess is that it may gut the exception and expand control over commercial system given that I can’t imagine many situations where the item can’t be removed without destroying it. But I’ll defer to any engineers who may know better whether this is the case or not.

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