A website notice mysteriously appeared today in the advisory opinion section of the website for the Bureau of Industry and Security (“BIS”). Titled “Website Notice on Transfers of Licenses,” I’m not so sure what its doing in the advisory opinion section, but I’ll bet there’s a story behind it, and it’s not a pretty one. The Website Notice cautions exporters that the licensee must apply to transfer licenses before it is swallowed up in the merger and can no longer make license applications.

Entering into full speculation mode, what prompted this notice was no doubt the aftermath of a merger where the surviving company woke up one morning and discovered it had export licenses, rather like Gregor Samsa waking up and finding himself with four extra legs. Hopefully the overlooked licenses were discovered before the company tried to export anything under those licenses. A meeting was hastily convened and the General Counsel proposed that the company file transfer applications under section 750.10 of the Export Administration Regulations (“EAR”). The application letter dropped a footnote explaining the inconvenient disappearance of the licensee as justification for the application being filed not by the licensee but by the proposed transferee. BIS was not amused. BIS denied license transfer. Company, through a veil of copious tears, regrets and apologies, pleadedthat the result was unfair, that it was the triumph of form over substance. BIS stood firm. Website Notice mysteriously appears.

Granted that section 750.10 requires a letter from the licensee as part of the transfer procedure, but little of substance is required in that letter which the proposed transferee couldn’t provide. Certainly the transferee could reasonably attest to the reasons for the transfer (that would, of course, be the merger), the licenses involved, identifying information about the transferee, and a description of the merger documents. So, if something like our hypothetical did in fact occur, the charge that BIS exalted form over substance and enforced the literal language of the rule without a particularly salient policy justification would be true.

Still, the rule is the rule. Rather than having to fuss with BIS over the unfairness of this requirement, companies that are about to acquire exporters need to remember that at least one component of their due diligence needs to cover export issues.

Yesterday the Bureau of Industry and Security (“BIS”) released four settlement agreements arising out of a scheme by a large Taiwanese company to use its U.S. subsidiary to export products (mostly chemicals, metals and electronic components) on the Commerce Control List without the required export licenses. The parent company, with an improbably soothing name for a distributor of toxic chemcals, Well-Being Enterprise Co., Ltd. signed a settlement agreement pursuant to which the company agreed to pay a $250,000 fine, $220,000 of which would be suspended if the company committed no further export violations during the next five years. The company also agreed to a 20-year suspension of its export privileges with respect to items listed on the Commerce Control List (“CCL”). Hui-Fen Chen a.k.a. Angela Chen, an employee of the company also agreed to a similar 20-year suspension of export privileges.

Well-Being’s U.S. subsidiary, a San-Francisco-based company named Elecmat, Inc. signed a settlement agreement under which it agreed to a twenty-year suspension of all export privileges for all U.S.-origin items (not just items on the CCL). Elecmat’s manager, Theresa Huei-Min Chang, agreed to a two-year suspension of export privileges for all U.S.-origin items.

The charging documents contain a number of allegations that suggest that the companies and individuals involved in this scheme knew exactly what they were doing was in violation of U.S. export laws. Well-Being told Elecmat what products to buy and instructed Elecmat not to tell or reveal to its vendors that the items were for export. In instances where Well-Being was concerned that the vendor might be aware of the connection between Well-Being and Elecmat, Well-Being instructed Elecmat to buy the products to be exported under a false name. Ms. Chang, the manager of Elecmat, apparently wanting to distance herself from Elecmat’s activities with Well-Being, claimed that she received no individual compensation from Well-Being and ran the company as a “favor,” even though it was subsequently learned that Well-Being transferred approximately $6500 per month to her brother’s account.

As in every case where people are engaged in illegal unlicensed exports, it’s hard not to speculate why they didn’t apply for a license. As a distributor of, rather than a user of, the illegally exported items, it is likely that Well-Being didn’t want to license the exports because the products were destined for end users, likely in Mainland China, that wouldn’t be approved.

Another interesting issue here is why Well-Being’s suspension of export privileges was limited to items on the CCL while the denial for Elecmat was for all U.S.-origin goods. The answer seems to be that Well-Being was in Taipei and beyond BIS’s jurisdiction. If the denial order for Well-Being had covered all U.S. origin goods, Well-Being wouldn’t have had any practical motivation to sign the Settlement Agreement and pay the requested fines.