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Aug

30

DDTC Eliminates Requirement for Prior Notice of SME Proposals

Posted by Clif Burns at 8:10 pm on August 30, 2010

Category: DDTC

As has been anticipated since March 29, 2010, when the State Department’s Directorate of Defense Trade Controls (“DDTC”) issued a Notice of Proposed Rulemaking eliminating the advance notice and approval requirements of section 126.8 of the International Traffic in Arms Regulations (“ITAR”), the agency has now officially eliminated those requirements and deleted the section from the ITAR. During the rulemaking, DDTC received submissions from three — count ’em, three — commenters, probably because the defense industry as a whole prefers to fly well below DDTC’s radar and avoid doing anything that might possibly annoy the regulators.

The rationale for the change was simple and justified. It was too much trouble for the agency to have to review certain export transactions twice, particularly where the average time to process a license had dropped from sixty or more days to fifteen days. If an exporter is concerned that a license might not be granted, the exporter retains an option to request an advisory opinion under section 126.9 of the ITAR. Prior written approval is still required under section 126.1(e) for any sales proposals to a country subject to an arms embargo under section 126.1.

In response to a comment that elimination of section 126.8 would eliminate a requirement to keep records of sale proposals, DDTC had an interesting comment:

We do not agree, since the Â§ 126.8 requirement to report certain proposals is an obligation separate and independent from recordkeeping requirements. It will continue to be good practice to maintain records of such transactions for an appropriate duration in compliance with Â§ 122.5, particularly to rebut any post hoc allegations that ITAR controlled technical data were transferred without a license or authorization.

I added the emphasis to the quotation to underscore DDTC’s interesting locution here. I’m not sure that all of the documents relating to a proposal — particularly one that is never consummated — fit comfortably within the records covered by Â§ 122.5, namely records concerning the “manufacture, acquisition and disposition” of defense articles. That is no doubt why DDTC talks about this being a “good practice” rather than a requirement of the regulations. Of course, DDTC is right that maintenance of these records, regardless of whether required or not, can help rebut any subsequent allegations that the exporter improperly transferred controlled technical data without a DDTC license.

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Aug

26

Export Licenses For Radar Sales to Taiwan Complicate US-China Relations

Posted by Clif Burns at 8:51 pm on August 26, 2010

Chinese Military Poster There was an interesting colloquy on Tuesday during the State Department’s daily press briefing. After Assistant Secretary Philip Crowley announced the approval of export licenses to permit sale of military radar systems and components to Taiwan, one reporter asked what China’s reaction would be to the sale. China, of course, objects to all military sales to Taiwan, but Crowley dodged the question, saying ” Iâ€™ll let China react to this as they see fit.”

QUESTION: Just a quick one. As far as this â€“ the Pentagon report to Congress on China, how much concern do you have as far as Chinese military buildup?

MR. CROWLEY: Well, it is a â€“ it is something that we watch closely. Itâ€™s something that other countries in the region watch closely. We would like to have a fuller military-to-military relationship and dialogue so that we can better understand Chinaâ€™s long-term military plans, and that is something that we continue to seek.

What Crowley doesn’t mention is that it was China that cut off military-to-military contact between the U.S. and China last January after the last announcement of U.S. arms sales to Taiwan. These new sales aren’t likely to change the situation.

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Aug

25

OFAC Trifecta

Posted by Clif Burns at 9:59 pm on August 25, 2010

Category: OFAC

Department of Treasury [This is the third post in a row on OFAC, which is just a coincidence. The blog is not about to be renamed OFACLawBlog.]

Last week the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) announced a settlement with Colombian bank Colpatria S.A. under which Colpatria agreed to pay $91,849 to settle allegations of 26 violations of the Narcotics Trafficking Sanctions Regulations (“NTSR”). The violations occurred in 2004 and 2005 at Colpatria’s now closed Miami branch office. Although the Miami branch checked beneficial owners of accounts against the SDN list prior to opening the account, it did not do so thereafter and only checked the name of the account holders against SDN list updates. As a result, it processed transactions for an account after the beneficial owners had been designated under the NTSR.

OFAC said that the base penalty amount was $229,623. It was reduced to $91,849 because Colpatria voluntarily disclosed the violation, had no previous OFAC violations, revised its procedures for checking the SDN list, and signed a tolling agreement. Interestingly, OFAC mitigated the penalty because

Colpatria Miami revised its software configuration to review automatically the names of authorized signatories and beneficial owners of accounts rather than just the names of the account holders when performing account opening and periodic name checks against OFACâ€™s SDN List

This suggests that Colpatria was checking accounts at regular intervals rather than each time the SDN list was updated. This seems inconsistent with the position that OFAC took back in June in its settlement with GEICO in which it seemed to insist that companies must rescrub their customer list each time the SDN list is updated and not simply periodically.

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Aug

23

OFAC Issues Iranian Financial Sanctions Regulations

Posted by Clif Burns at 6:38 pm on August 23, 2010

Category: Iran Sanctions • OFAC

Last week, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) published a final rule in the Federal Register adopting the Iranian Financial Sanctions Regulations as required by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). A major focus of CISADA was to extend U.S. sanctions to foreign banks that engaged in transactions that assisted the nuclear proliferation efforts of the Iranian Government.

In particular, section 104(c) of the Act required OFAC to issue regulations within 90 days of the passage of CISADA imposing conditions on the opening of correspondent accounts with U.S. financial institutions by any foreign bank that provided such assistance to Iran. These regulations satisfy that requirement. Section 561.201(c) provides that no U.S. financial institution shall open or maintain a correspondent account for foreign banks providing such assistance. OFAC plans to list all such foreign banks subject to this condition in Appendix A to the new regulations. No bank is currently listed on Appendix A.

Compliance with section 561.201(c) should not cause any particular heartburn for U.S. financial institutions, because it is simply another list that banks must check when opening new accounts and when scrubbing existing accounts for compliance. Another portion of CISADA, however, was the subject of much speculation and concern that it would pose complex and laborious due diligence obligations on U.S. financial institutions doing business with foreign financial institutions. Section 104(e) of CISADA requires OFAC to promulgate regulations requiring U.S. financial institutions with foreign bank correspondent accounts to undertake one or more of four activities designed to determine whether the foreign banks are providing services to Iran in aid of its proliferation goals. These include audits and “due diligence” on the foreign banks.

However, section 104(e) imposes no time limit on when OFAC must promulgate such regulations, and they were not included in the new Iranian Financial Sanctions Regulations. This comes as a relief — perhaps only a temporary one — because few financial institutions are keen on engaging in these extra activities with respect to foreign correspondent accounts.

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Aug

18

OFAC Whacks Bank for $600k Because of Three Wires to Sudan

Posted by Clif Burns at 8:53 pm on August 18, 2010

Category: OFAC

BBVA Compass Branch The latest batch of civil penalties released by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) has a real eye-opener. Alabama-based Compass Bank, a subsidiary of the Spanish global banking company BBVA, agreed to pay $607,500 to settle charges that it processed three wires “on behalf of one of its clients related to the petroleum or petrochemical industries in Sudan.” That’s right, you didn’t misread that. The predicate violations for the $607,500 fine were three (3) wire transfers, not thirty, not three hundred, but three.

Consistent with OFAC’s “keep-em-guessing” policy, OFAC provides as little information as possible about the violation, which was not voluntarily disclosed by Compass, making it completely impossible to determine why Compass was hit with such a high fine. The maximum possible fine here was $750,000, and for some reason OFAC shaved very little from the maximum. This is even more puzzling given OFAC’s statement that the violation was “a non-egregious case.” Moreover, the description of the wire as related to one clients activities in Sudan suggest the possibility that Sudan might not have even been mentioned in the wire. An article (subscription required) in Law 360 quoted a bank spokesman as saying that the transfer was not “intentional.”

Your guess is as good as mine as to the reason for the harsh treatment of Compass. Perhaps somebody from Compass used a naughty word and irritated one of the regulators. My theory is that OFAC was giving Compass the Admiral John Byng treatment, which Voltaire described when he said “il est bon de tuer de temps en temps un amiral pour encourager les autres.” (“Every now and then it’s a good idea to kill an admiral in order to encourage the others.”)

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