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Sep

24

The Firefox in the Win House?

Posted by Clif Burns at 7:55 pm on September 24, 2009

firefox_iran Last week an obviously confused reporter at internetnews.com reported what he thought were the details of a letter from the Bureau of Industry and Security (“BIS”) received by Mozilla, the open-source project responsible for Firefox, Thunderbird and other Internet applications, relating to downloads of the program by computer users in Iran. The article seemed to suggest that Mozilla had filed a voluntary disclosure with BIS that it had allowed downloads of its open-source encryption source code by Iranians. The article seemed to suggest further that Mozilla had received a letter from BIS stating that this was not a violation.

But that’s not what happened. BIS released yesterday an Advisory Opinion that, although identifying details have been removed, clearly addresses the situation described in the internetnews.com article. And, significantly, the advisory opinion doesn’t address exports of source code but instead addresses export of compiled source code and, specifically, compiled source code including mass market encryption software. Under section 746.7(a)(1) of the Export Administration Regulations (“EAR”) exports of compiled mass market encryption software (or any other compiled encryption software) to Iran would require a BIS license. The Advisory Opinion held that as long as the IP address of the party downloading the software in Iran (or other sanctioned country) was logged by Mozilla’s server but not otherwise used by Mozilla (say, for example, to serve to the user a web page in Farsi), the company did not have sufficient knowledge of an export of encryption software to Iran to be liable under the regulations.

Even though I don’t believe that, as a matter of policy, downloads of web browsers with encryption features ought to be subject to export controls, the reasoning of the Advisory Opinion is, to say the least, a bit odd. It seems fairly well-established that knowledge is not a required to establish a violation of the EAR. Specifically, section 764.2(a), which defines violations of the EAR, doesn’t contain a knowledge requirement, nor does General Prohibition No. 1 which would be the predicate to a violation of section 764.2(a). Perhaps this signals a retreat by BIS from its traditional concept of strict liability for violations of the EAR.

Even so, the final sentence of the Advisory Opinion may nullify, as a practical matter, any significance the opinion may have with respect to software downloads in sanctioned countries:

Please note that this advisory opinion is confined to interpretation of the EAR, and does not address the sanctions regulations implemented by the Office of Foreign Assets Control [“OFAC”]

And, as we all know, other major software companies, such as Google and Microsoft, have prohibited downloads in sanctioned countries due to fears of OFAC penalties.

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Sep

23

Good News and Bad News

Posted by Clif Burns at 11:43 am on September 23, 2009

Category: DDTC • Part 129

ABOVE: Andrew Shapiro

Let’s take the good news first.

It comes from Andrew J. Shapiro, Assistant Secretary, Political-Military Affairs at State, in his Keynote Address to ComDef 2009, earlier this month:

I am also happy to report that we are making significant strides in the administration of defense trade, which I know has been a focus of our industry partners over the years. In 2006, DDTC adjudicated just over 70,000 cases in the entire year — with an average processing time of 43 days. In the past eight months, DDTC staff have already acted on nearly 60,000 license applications — and the processing time for each now averages just over two weeks. While we are proud of this improvement, it does not mean we will become complacent. I am committed to ensuring that we continue to be as efficient and transparent as possible in reviewing and processing export license applications.

A similar effort is now being made in the review of Commodity Jurisdiction (CJ) requests. One of the first actions of the new Administration was to streamline CJ adjudication procedures. I now meet with my counterparts at DoD, Commerce, and the National Security Council on a weekly basis to review and resolve outstanding CJ cases. DDTC is building on this process by developing new implementation procedures, including the use of new submission criteria and electronic staffing and adjudication processes that should cut determination time in half by the end of the year.

And Shapiro also had interesting things to say about the U.K. and Australia Defense Cooperation Treaties:

Finally, I would like to give you a brief update on the U.S.-UK and U.S.-Australia Defense Cooperation Treaties — a priority for the Obama Administration. These are a critical element of my defense trade agenda. I am fully engaged with key Members and Senate Foreign Relations Committee staff in seeking a way forward and I’m working to address their concerns about implementing legislation, which the Administration believes is unnecessary. As former Senate staffer, I’m particularly appreciative of the important role that the legislative branch plays in our foreign policy, and I will continue to work closely with Committee staff on a way forward on these treaties.

In other words, the Obama administration has pretty much adopted the position of the former Bush administration on the two defense cooperation treaties and will, if necessary, pass its own rules to implement these treaties even if Congress won’t ratify them. Or at least the White House threatening to do that.

Now for the bad news.

Part 129 Several reliable sources have contacted this blog and said that they’ve heard someone over at DDTC saying that “for others” in the definition of “broker” found in section 129.2(a) of the International Traffic in Arms Regulations (“ITAR”) doesn’t mean what you think it means. Traditionally that phrase has been read by the export bar to mean, in a corporate context, unrelated companies or individuals. Now it appears that DDTC may be saying that “for others” applies to other companies in a corporate group. If a company has a wholly-owned foreign subsidiary that assists it in the sale of a defense article, that would, under this strained reading of the definition, mean that the foreign subsidiary is a broker for the parent company.

The registration issues caused by this reading aren’t so hard to handle, at least as long as the parent company makes sure that its subsidiaries are listed on its registration form or amends the form to include its subsidiaries using the procedures described in section 122.4 of the ITAR. The problem is that some of these newly-discovered “brokering” transactions by subsidiaries for parents might require either prior approval or prior notice if those transactions meet the criteria set forth in sections 129.7 and 129.8.

The brokering amendment was meant to capture exports of defense articles by U.S. individuals and companies that would otherwise escape licensing requirements because the export was being made between two foreign countries. It was not meant to cover exports from the United States assisted by foreign subsidiaries of the exporter. So this position by DDTC represents not only an unprecedented intrusion into intra-corporate dealings and structure but also represents an unwarranted departure from the agency’s statutory authority.

Has anybody else gotten wind of this? If so, please share your experience, if you feel comfortable doing so, in the comments section. No need for you to identify yourself or your company, of course. And please, please don’t reference or name any specific officials at DDTC.

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Sep

21

German Court Orders Retrial in Iran Export Case

Posted by Clif Burns at 6:49 pm on September 21, 2009

Category: Criminal Penalties • EU • Nonproliferation

iran_bomb The Institute for Science and International Security recently released an interesting report on Germany’s criminal prosecution of Vanaki Mohsen, who was accused of exporting various dual use items to Iran in violation of Germany’s War Weapons Control Act. The prosecution arose from Vanaki’s brokering of the export of certain high-speed cameras that could be used in the development and testing of nuclear weapons. Vanaki brokered this sale from a Russian company to an Iranian front company in the U.A.E.

Although the ISIS report isn’t clear on this, it appears that Vanaki must have been charged under section 19 of the German law. Although the law prohibits exporting or brokering of “war weapons,” it is likely that the high-speed cameras were considered a dual-use item rather than a war weapon. In that case, section 19 would prohibit the brokering of the item to Iran if, and only if, Iran has a nuclear weapons program.

This lead to an unusual step by Vanaki’s defense which introduced the United States’ 2007 National Intelligence Estimate (“NIE”) on Iran which, the defense claimed, concluded that Iran had abandoned its nuclear program in 2003 and had not resumed it by 2007 when the high-speed cameras at issue were sold to Iran. The German trial court agreed and acquitted the defendant.

The prosecution appealed, and the appeals court sent the case back to the trial court for another trial. In reaching its decision, the appeals court pointed out that the trial court put too much reliance on the 2007 NIE. The NIE’s conclusion that it was “moderately confident” that Tehran had not resumed its nuclear weapons program was far from proof that it had, in fact, not resumed that program. The appeals court also relied on a supplemental report from the Bundesnachrichtendienst (“BND”), Germany’s foreign intelligence service, which discussed the development by Iran of a missile launcher as well as similarities in procurement practices by Iran and countries known to have nuclear weapons programs, such as Pakistan and North Korea. Based on this report, the appeals court found that it was now likely that Vanaki would be convicted on a retrial and sent the case back to the trial court.

Two things bear noting here. First, Germany’s export laws in this case, and in other cases that involve dual-use items, impose an intolerably heavy burden of proof in export prosecutions. In effect, the state has to prove that the country in question has a nuclear program, an element of proof that would be difficult and almost necessarily speculative in the case of many countries which are believed to be developing nuclear weapons but have not yet admitted that fact. Second, it appears that the BND assessment must provide some fairly certain intelligence demonstrating the existence and scope of Iran’s nuclear program. This may explain why Germany, unlike some other EU countries, has recently seemed more interested in restricting certain exports to Iran.

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Sep

17

BIS Fines U.S. Firm For Having Foreign Subsidiaries

Posted by Clif Burns at 7:26 am on September 17, 2009

Category: BIS

Two weeks ago, we reported on a $14,613.24 fine imposed by the Bureau of Industry and Security (“BIS”) on Thermon Manufacturing after Thermon voluntarily disclosed to the agency that it had shipped heat-tracing equipment to Sudan in violation of the U.S. embargo on that country. That was not the end of the story, however, but rather merely the foreword to a more disturbing story.

Yesterday, BIS posted a press release on its website describing the rest of the tale. According to that press release, BIS fined five foreign subsidiaries of Thermon $176,000 because those subsidiaries had also exported heat-tracing equipment to “Iran, Syria, Libya and listed entities in India.” This violations had also been voluntarily disclosed by the parent company in Texas.

What makes this fine problematic is the following statement in the press release:

The Thermon subsidiaries did not inform Thermon Manufacturing of the ultimate destinations for the items and had been informed by Thermon Manufacturing in February 2005 that “products manufactured by Thermon US may not be sold to countries on the US trade sanctions list,” including specifically Iran, Syria and Libya. BIS alleged that the affiliates acted with knowledge of those violations involving shipments to sanctioned countries that occurred after this warning.

First, one has to wonder what else Thermon was supposed to do. Thermon had instructed its subsidiaries not to violate U.S. export laws, and specifically that they could not sell equipment to countries subject to U.S. economic sanctions. It also appears from the press release that the subsidiaries pulled the wool over the parent company’s eyes and placed orders for the equipment at issue without telling the U.S. parent that the equipment was destined for sanctioned countries. And although the fines were imposed on the subsidiaries rather than the parent, this is just an accounting nicety. Thermon ultimately pays this fine.

In essence, this fine is nothing more than a penalty imposed on U.S. companies for having foreign subsidiaries unless and until BIS provides industry some guidance as to how to avoid such fines other than simply shutting down foreign subsidiaries. Was the problem here that the instructions by the parent to the subsidiaries about exports to sanctioned countries weren’t frequent enough? Or was it that the parent didn’t threaten to guillotine any employees of the foreign subsidiaries who violated these rules? Perhaps BIS thought that these instructions should have been bilingual. Your guess is as good as mine at this point.

Second, and this is an even bigger irony of the case, the parent’s instructions to the subsidiaries appear to have made things worse for the parent. It was because of those instruction that BIS elevated the penalty through charging that these were “acting with knowledge” violations under section 764.2(e) of the Export Administration Regulations. Damned if you do, damned if you don’t, as they say.

The charging documents haven’t been released by BIS yet. Perhaps they will shed more light on this sorry situation.

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Sep

15

Malaysia Fast Becoming a Diversion Destination for Exports to Iran

Posted by Clif Burns at 7:38 pm on September 15, 2009

Category: Criminal Penalties • Iran Sanctions

flags An excellent article that appeared today on the Bloomberg website indicates that Malaysia may be nudging the U.A.E. out of the position as top transhipment destination for items headed from the U.S. to Iran. According to that article, increasing crackdowns by the U.A.E. on exports to its neighbor across the Strait of Hormuz has caused Iran to increase its usage of middlemen and front companies in Malaysia to source equipment that Iran seeks to acquire from the United States.

One case in particular that is highlighted by the article involves the criminal prosecution of Majid Kavakand, an Iranian citizen who was provisionally arrested in France on March 6, 2009, where he is awaiting a determination by French courts on the United States’ request for extradition. The criminal complaint filed in the case provides interesting details on Kakavand’s modus operandi. Typically Kakavand would receive requests from Iran and then would use his company in Malaysia, Evertop Services, to solicit over the Internet small businesses in the U.S. to ship the items to Evertop, at which point the goods would be shipped to Iran.

Although the complaint doesn’t identify the U.S. companies in question, it provides enough detail (product model numbers, company addresses, etc.) that it was a simple matter for me to ascertain the identity of the companies. I won’t specifically name them here, but suffice it to say that each of the companies was a small business with a website that advertised the companies’ willingness to export items to overseas customers. In other words, they all were companies that Kakavand might suspect lacked the sophistication or motivation to make much inquiry into Kakavand’s purchase orders.

And, inf fact, not one of the companies involved in the charges filed against Kakavand appeared to perform any due diligence on Evertop or Mr. Kakavand other than to ask for confirmation that the end-user was Evertop in Malaysia. And none seemed to have been bothered by a substantial, no, gigantic red flag. In each case, Kakavand asked that the items be shipped to Evertop in care of “K” Line Logistics, it’s freight forwarder in Malaysia. If Evertop was the end user, why on earth would it want the goods sent to a freight forwarder in Malaysia? Needless to say, “K” Line Logistics appeared to have had instructions to ship the goods immediately upon receipt to Tehran.

Another interesting detail from the Kakavand case is that the prosecution made a large part of its case from emails sent by Kakavand from his Yahoo! mail account. Yahoo! coughed up all the emails after it was served a search warrant. Similarly, as Sharon Weinberger recently noted, the case made against Monsieur Monsieur was aided by a search warrant served by the government on Google to obtain emails sent by M. Monsieur through his gmail account. It’s hard to imagine why people busy trying to violate U.S. export laws would use a U.S.-based email provider, but there you have it. It’s not much different, I suppose, from a bank robber writing his demand note on the back of one of his own personal checks.

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Author Archive

The Firefox in the Win House?

Good News and Bad News

German Court Orders Retrial in Iran Export Case

BIS Fines U.S. Firm For Having Foreign Subsidiaries

Malaysia Fast Becoming a Diversion Destination for Exports to Iran

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