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Jun

23

Export Issues Arise in Shot Show FCPA Prosecution

Posted by Clif Burns at 7:55 pm on June 23, 2010

ABOVE: Richard Bistrong

Well, it now seems that some export issues may be arising in the much-publicized “Shot Show” Foreign Corrupt Practices Act (“FCPA”) prosecution. In that case, law enforcement officials perp-marched owners and officials of gun and law enforcement supply businesses from the Las Vegas Shot Show and then charged them with violating the FCPA.

This is the first and only FCPA prosecution that has arisen from a sting operation. The prosecution alleges that the defendants had agreed to make kickbacks to African officials in connection with the potential award by those officials of a $15 million contract. The transactions were fictional and cooked up by investigators. The African officials were imposters played by FBI agents with thespian inclinations.

The chief cooperating witness, who undertook a major role in setting up the sting, is Richard Bistrong, a former official of a body armor company who is himself now charged with paying actual bribes to actual officials in actual transactions. Specifically, Bistrong is the subject of a criminal information filed in a federal district court charging Bistrong with bribing UN officials to rig bids which resulted in awards of large body armor contracts to his company. In the Shot Show prosecutions, Mr. Bistrong pretended to be the broker in the phony African transactions and introduced the defendants to the FBI undercover agents who were playing various roles in the sting.

The defendants have argued that they were entrapped by the FBI through Bistrong’s inducement and that they had no predisposition to commit the crimes charged. In effect, Bistrong dangled $15 million contracts in front of the defendants, many or some of whom were store-front businesses and had never had such large contracts offered to them before. Key to the defense in this case is to discredit Bistrong above and beyond the issues raised by his own FCPA prosecution. According to this recent post at the blawg Main Justice, the defendants have asked for copies of Mr. Bistrong’s tax returns, alleging that they will reveal tax violations by Bistrong. The judge hearing the trial has indicated that if the government doesn’t turn over the tax returns voluntarily, then he will grant an order forcing them to do so.

The defense has also asked for “any export licenses [Bistrong] had been given by the federal government.” (And you thought I would never get to the export angle, didn’t you?). This request did not just come out of the blue. The criminal information filed against Bistrong alleges export violations in addition to the FCPA violations. Specifically it alleges that Bistrong shipped vests and helmets with level IIIa ballistic protection to the Kurdistan Regional Government in Iraq without the required licenses from the Department of Commerce’s Bureau of Industry and Security (“BIS”). It looks like the defendants here are gathering impeaching evidence to support the government’s charges against Bistrong, evidence which the government certainly won’t introduce on its own in the Shot Show FCPA prosecution.

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Jun

22

Get Your Flying Carpets and Beluga Caviar Before It’s Too Late

Posted by Clif Burns at 3:40 pm on June 22, 2010

Flying Carpet House and Senate conferees announced yesterday that they had reached agreement on the Iran sanctions legislation passed earlier this year by the House and Senate. The conferees also released the text of the newly agreed bill, now titled the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010.

The act’s most significant feature is its extraterritorial scope: it imposes sanctions on foreign persons and companies outside the United States that engage in transactions in Iran that violate the act. Such secondary boycotts have prompted objections from our allies in the past with respect to the Iran Sanctions Act of 1996, 50 U.S.C. Â§ 1701 note, which the new act, if signed into law, would amend. And these same allies are likely to object once again to the enhanced extraterritorial effect of the new provisions.

The extraterritorial sanctions relate to foreign entities that (a) invest in Iran’s petroleum sector, (b) provide refining technology to Iran or (c) export refined petroleum to Iran. Since these activities by U.S. persons are already prohibited by current sanctions, the focus of this legislation is clearly on persons and companies outside the United States.

Threshold amounts of investments and exports are specified in the new act before sanctions are imposed. For example, for exports of refining products or refined petroleum, the threshold is a value of $1 million for one export or more than $5 million for all exports in a 12-month period. The thresholds for investment in Iran’s petroleum sector would be halved from the current limit of $10,00,000 per transaction and $40,000,000 over a 12-month period to $5,000,000 and $20,000,000 respectively. If those thresholds are exceeded, then mandatory sanctions would have to be imposed.

The number of mandatory sanctions that must be imposed would be increased from two to three and the list from which those three mandatory sanctions must be chosen would be increased from six to nine. The three new mandatory sanctions are denial of access to U.S. foreign exchange markets, denial of access to U.S. financial institutions and, even more significantly, an order prohibiting the import or export of any items from or to the United States by the sanctions party. Under the 1996 Act, the equivalent sanctions only included a possible ban on exports from the United States of military, dual-use and nuclear items.

The new act would forbid all imports from Iran except for informational materials (books, DVDs, etc.) and “accompanied baggage for personal use.” Gifts under $100, carpets, and foodstuffs, all permitted by current regulations, would no longer be able to be imported into the United States if this act becomes law.

Less change would be effected by the new act if signed into law with respect to exports to Iran. Exports of agricultural products, medicine and medical, as permitted under the Trade Sanctions Reform and Export Enhancement Act of 2000, would continue to be permitted, as would exports of informational materials, humanitarian assistance and parts and technologies necessary to assure the safety of civilian aviation. The law does codify, at least with respect to Iran, recent exceptions that the Treasury Department’s Office of Foreign Assets Control (“OFAC”) made to the export ban for goods and services incident to the exchange of personal communications over the Internet or for access to the Internet.

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Jun

19

Malware Spam Uses OFAC as Bait

Posted by Clif Burns at 12:02 pm on June 19, 2010

Category: OFAC

OFAC Spam Commercial computer security firm Sophos reports the recent appearance of spam emails that attempt to get the recipient to click on an Excel file attachment described as a “report of the declined deposit by OFAC.” If the attachment is opened, it delivers as its payload a variant of the Koobface malware which, once it installs itself on the victim’s computer, attempts to harvest financial and other confidential data and allows the computer to be controlled remotely as part of a botnet. The sender’s address is often spoofed and appears to be coming from the Treasury Department.

Most readers of this blog, however, would probably have had their suspicions alerted by the description of the attachment as a “report of the declined deposit by OFAC.” OFAC, of course, doesn’t decline deposits. Banks and financial institutions do. OFAC’s only role is to penalize banks that fail to decline or block deposits when required to do so by OFAC’s rules.

So now you can add malware protection to the list of the many invaluable services provided by this blog to its readers!

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Jun

16

France Prohibits Export of Flight Control Software to European Rocket Program

Posted by Clif Burns at 9:23 pm on June 16, 2010

Category: Foreign Export Controls

A report in Space News reveals that French export officials have prevented export of French-developed flight control software that was intended for the Vega rocket. The Vega rocket, a joint launch vehicle project of the European Space Agency and the Italian Space Agency, is destined for Arianespace SA. As you probably know, Arianespace SA is a French company founded in 1980 as the first private launch company. France also is a 15 percent participant in the Vega rocket program, making France the largest participant in the program after Italy, which is a 65 percent participant.

France did grant an exemption for the software to be used on the first flight and possibly on the second flight depending upon the status of development of new software to replace the yanked French software. Apparently all involved in the Vega program were blindsided by the French action:

[ESA Launcher Director Antonio] Fabrizi said he is not certain exactly what transpired in the case of the Vega flight-control system. Other French technology, in particular the filament-wound P-80 first stage, was subject to export approval and received authorization without a hitch.

â€œI have been told that it could have been a problem with the way the export license application was made, or its timing,â€ Fabrizi said.

Although French bureaucratic stubbornness is second to none, I’m not buying Fabrizi’s story that the French blocked export of the flight control forever because the application was too late or violated some procedural rule. More likely, the French stopped the export because of the technology itself.

That France denied the export even though it is knee-deep in the Vega program itself is perplexing. The only conclusion that can be drawn from this is that the United States isn’t the only country that has used export controls to shoot itself in its own foot.

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Jun

15

So Easy Even a Kingpin Can Do It

Posted by Clif Burns at 7:51 pm on June 15, 2010

Category: OFAC

Bad Gecko Yesterday when I posted on the latest release of civil penalty information by the Office of Foreign Assets Control (“OFAC”), I promised to do a second post on the $11,000 penalty paid to OFAC by GEICO General Insurance Company (“GEICO”). The penalty was paid to settle charges that GEICO provided an automobile insurance policy to a Specially Designated Narcotics Trafficker (“SDNTK”).

There is no indication whether this violation was voluntarily disclosed. My cynical guess (not based on a single fact) is that the whole deal came to light when the SDNTK ran into someone. GEICO then suddenly discovered its insured was an SDNTK and tried to use that as an excuse not to pay out for the damages to the other driver.

But here’s what is most interesting about OFAC’s announcement of the GEICO penalty settlement. The agency noted:

The settlement amount reflects OFACâ€™s consideration of the following General Factors: GEICO does not screen its existing policyholders database for SDNs as the SDN list is updated but only on an annual basis. GEICO has committed to making improvements to remedy this gap in its OFAC compliance program.

Based on this statement, it would appear that the SDNTK was listed as such by OFAC after GEICO had issued the policy. Because GEICO screened its database of customers annually, it continued to provide insurance for a period of time after the designation. Bad gecko.

But this is a problem that bedevils every compliance program. How often should customer lists be scanned? Based on this statement from OFAC, annually is not enough. Instead the agency seems to suggest that every company must rescan its customer list each and every time OFAC adds someone to the SDN list. This seems overly burdensome and not justified by any significant benefit. A better policy would be for OFAC to establish a safe harbor for companies that rescan their customer lists at specified intervals, such as monthly or bi-weekly.

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