ExportLawBlog » Clif Burns

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Dec

8

Exporter and Former Exec At Odds Over Export Charges

Posted by Clif Burns at 7:39 pm on December 8, 2009

Category: BIS

For any exporters who may be thinking of ignoring prior export violations hoping that no one will find out, this SEC filing and its tale of a whistleblower might give them an occasion for pause. Law Enforcement Associates just disclosed in an 8-K filed with the SEC that a former executive that the company had dismissed had charged the company with export violations.

The charges by the former executive, Mr. Paul Feldman, are contained in a letter that Feldman filed with the Department of Labor in connection with his dismissal. According to that letter, Law Enforcement Associates appears to have sold items to a company called Safesource for export to the Dominican Republican. Thereafter, Feldman learned that John Carrington, a former owner of Law Enforcement Associates, was a 50 percent owner of Safesource. That was problematic, according to Feldman’s letter, because Carrington was subject to a BIS denial order.

Feldman, another company director and company counsel then contacted the BIS agent that had investigated Mr. Carrington to inform the agent of the exports and its discovery that Carrington was involved in the exports. A week later federal agents raided Safesource.

Three other directors at Law Enforcement Associates, who Feldman alleges were friends of Carrington, became upset about the disclosures to federal authorities. They fired the company’s general counsel who had met with the BIS agent and replaced him with the personal attorney of one of the three Board members. The three directors also sought to have Feldman tell them what he had said to the BIS agent. When Feldman refused, claiming that the three other directors were leaking information about the matter to Carrington, the newly-appointed general counsel, according to Feldman’s letter, called the BIS agent “demanding” that he reveal what Feldman had told the government. Not surprisingly, the BIS agent is said to have told the new general counsel to “tread lightly.” (Practice note to budding export lawyers: this was not a good move by the new general counsel.) Feldman was later fired by a vote of the three directors.

Notwithstanding the ill-advised board-room theatrics — it’s generally a bad idea to try to shut down a company official trying to report export violations — it’s not clear that an export violation by the Company even occurred here. Of course, as regular readers are aware, I do not believe that BIS has the authority to impose general denial orders under the International Emergency Economic Powers Act, BIS’s current governing statute. Even if BIS did have that authority, the portion of the Denial Order that deals with actions by third parties, such as Law Enforcement Associates, would prohibit Law Enforcement Associates from assisting the Denied Person from acquiring any item to be exported from the United States. Here, the items exported were acquired by Safesource, which was not a Denied Person, and not by Carrington, who was.

Law Enforcement Associates disputes the claims made in the Feldman letter and states its belief that the allegations are simply an “attempt by a disgruntled former executive to seek retribution from the Company.”

Stay tuned. I don’t think this show is over yet.

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Dec

7

New Processing Time Exception Announced by DDTC

Posted by Clif Burns at 7:52 pm on December 7, 2009

Category: DDTC

Stopped Clock The Directorate of Defense Trade Controls (“DDTC”) published today in the Federal Register a Notice indicating that it was adding a sixth exception to National Security Presidential Directiveâ€“56 which mandated a 60-day processing time for export license applications. According to the Notice, the 60-day time frame will not apply

[w]hen a related export policy is under active review and pending final determination by the Department of State.

Of course, this announcement makes me wonder whether a significant number of export policies have been under review by DDTC. Has the new administration begun a significant review of DDTC’s export polices? More importantly, is this new exception good or bad for exporters? Will the delay result in more applications being granted because the DDTC review winds up eliminating a denial policy? Or will it result in more applications being refused because DDTC’s review results in a new denial policy? Both actual experience and rampant speculation welcomed in the comments as answers to these questions.

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Dec

3

Answered Prayers (Part 2)

Posted by Clif Burns at 9:33 pm on December 3, 2009

We Are The Champions of the World In addition to changing the definition of “broker,” the proposed new rules under Part 129 of the International Traffic in Arms Regulations expand the jurisdictional reach of those rules over foreign persons. Part 129 currently covers brokering activities by U.S. persons wherever located, foreign persons in the United States and foreign persons “otherwise subject to the jurisdiction of the United States.”

The controversy over these rules has centered on the meaning of “otherwise subject to the jurisdiction of the United States.” Most exporters and export lawyers interpret this to be a reference to traditional concepts of jurisdiction, so that foreign brokers with pervasive contacts with United States would be covered but foreign brokers with few or no contacts with the United States would be excluded.

DDTC had claimed, however, that this language also referred to foreign brokers involved in transactions involving U.S.-origin defense articles. The proposed rules now explicitly state that the rules cover:

any foreign person located outside the United States who engages in brokering activities involving a U.S.-origin defense article or defense service, by any foreign person located outside the United States who engages in brokering activities involving the import into the United States of any defense article or defense service, or by any foreign person located outside the United States who on behalf of a U.S. person engages in brokering activities involving any defense article or defense service.

One of the objections to such an expanded jurisdictional scope of Part 129 was that it departed from the intent of Congress in passing the Brokering Amendment to the Arms Export Control Act in the first place. The House Report on the Brokering Amendment made clear that the intent of Congress was to close a loophole that allowed brokers in the United States to be engaged in the export of defense articles from one foreign country to another in ways that might be inimical to the foreign policy interests of the United States but which could not be prevented because no export license was required. Brokering activities by foreign persons with respect to U.S.-origin defense articles, however, aren’t subject to that loophole because the export of the U.S.-origin defense article will ultimately require an export license.

The new rules attempt, sort of, to address this issue by providing an exemption from the requirement for brokers to obtain a license where the transaction involves activities by a registered broker involving U.S.-origin defense articles as long as the registered U.S. manufacturer

has obtained a license or other approval to authorize the broker to participate in the export of such defense articles or defense services associated with the brokering activities, and the brokering activities are carried out in accordance with the license or other approval

This is presumably a reference to the exporter having obtained an export license where the broker is listed as an intermediate foreign consignee on the license application. The problem here is, of course, that, as a practical matter, the foreign broker often begins its activities prior to the license being granted. Another problem is that not all brokers are foreign consignees of the exported articles and won’t be listed on the license application. In both of those cases, exporters are back in the position of having to get two separate authorizations for one export transaction where a foreign broker is involved.

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Dec

2

Answered Prayers

Posted by Clif Burns at 8:00 pm on December 2, 2009

Category: DDTC

Tears As the saying goes, more tears are shed over answered prayers than unanswered ones. And a sad example of this may be the amendments that the Directorate of Defense Trade Controls (“DDTC”) has proposed to the definition of brokering activities contained in Part 129 of the International Traffic in Arms Regulations. The export community has been clamoring for some time for DDTC to amend the definition of brokering to clarify its scope. DDTC’s response was to amend the regulations, but instead of clarifying the scope of the regulations, it has demonstrably made things worse by making the scope of the regulations even broader and the boundaries even more unclear.

Under the current definition, a broker is defined as a person that (1) acts as an agent for others (2) in negotiating transfers of defense articles (3) in exchange for a fee or commission. The new definition changes (1) and (2) and eliminates (3). Under the new definition a broker is a person that (1) acts as an intermediary (2) to facilitate the manufacture, export, re-export, import, transfer or retransfer of a defense article or defense service.

“Acts as an agent” was fairly specific, whereas taking an “action of an intermediary nature” is much less so and arguably covers a broader and less-easily defined class of activities. Any hopes otherwise are dashed by fourth example that the regulations give of brokering activities: “taking any other action to assist a transaction involving a defense article or defense service.” And that is so broad that it covers activities that aren’t even close to what Congress had in mind when it passed the Brokering Amendments.

A hotel that provides conference facilities used to negotiate a contract involving the sale of a defense article is now a broker. The taxicab driver that drives the participants to the meeting is a broker. Because no fee need be paid under the new definition, your Aunt Harriet is a broker if she drives you to that meeting. Accounting firms that provide advice on how to structure the transaction are brokers. The catering company that provides sandwiches for the meeting also fits in the definition. Probably the public utility that provides the electricity that powers the lights and the computers at the meeting is a broker as well. Microsoft, which supplied the software, had better get its DS-2032 on file. The list is pretty much endless if a broker is anyone who assists a transaction involving a defense article or defense service.

It gets worse when you consider that the new definition broadens the definition to include facilitating the manufacture of defense articles. If you work at a defense contractor and your wife drives you to work, she’s a broker. All the manufacturer’s vendors are brokers too.

The elimination of the phrase “for others” in the definition of brokering brings corporate subsidiaries back into play as well. A specific exemption is provided for “U.S. person subsidiaries listed in their [parent companies’] Statements of Registration. Pointedly this exemption is not provided for foreign subsidiaries. For defense exporters who had been subjected to claims by DDTC officials that they had to register foreign subsidiaries this comes as no big surprise. But now the argument that the subsidiary wasn’t a broker because it didn’t receive a fee for brokering is gone. (DDTC had been making the fairly risible argument that any payments made to a foreign subsidiary, even if unrelated to defense articles, satisfied the fee requirement.)

Does anybody else sniff a revenue measure here?

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Nov

30

Update to 11/25/09 Post

Posted by Clif Burns at 5:38 pm on November 30, 2009

Category: General

The previous post, dated November 25, quoted an article in Crain’s Chicago Business in which an export attorney was quoted as saying:

â€œAt the very least, you should have your freight forwarder check compliance, so if they identify a problem, they can stop the order before it ships.â€

I said in that post that, knowing what I did about the law firm in question, I was “absolutely certain” that the lawyer was misquoted or the statement was taken completely out of context. The attorney involved has since spoken with me and confirmed that I was right and that the article misquoted the lawyer.

Significantly, during the interview the lawyer had become concerned that the reporter was not understanding what was being said and asked to review any attributed quotations prior to publication, a request that the reporter did not honor. Another reason, of course, not to believe everything you read in a newspaper or magazine. Blogs, on the other hand, can always be trusted completely.

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