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Jan

6

Livestock Company Prodded Into Settlement of Export Violations

Posted by at 7:57 pm on January 6, 2009
Category: BIS

MoooooooSyrVet, Inc., an Iowa-based distributor of livestock products, agreed to pay a $250,000 fine to the Bureau of Industry and Security (“BIS”) in connection with its unlicensed exports of cattle prods. Cattle prods and other discharge type arms such as stun guns are controlled by ECCN 0A985 and require a license for all destinations except Canada.

The $250,000 is payable, under the settlement agreement with BIS, in six quarterly installments of $16,666. The remaining $100,000 of the fine is suspended provided that Syrvet commits no further export violations between the date of the entry of the order and May 1, 2010.

I have wondered in a previous blog post the extent to which agricultural supply houses may be aware that cattle prods and the like require export licenses. In this case, the charging documents certainly suggest that SyrVet was aware of the license requirement.

Syrvet had reason to know that a license was required for the exports since, inter alia, they were sent a letter in October 2000 from a manufacturer of electric cattle prods which were sold by Syrvet, informing Syrvet that the items required a Department of Commerce (“DOC”) license to be exported. Additionally, Office of Export Enforcement (“OEE”) special agents conducted an outreach visit to SyrVet in August 2001, where they informed Syrvet employees of the licensing requirements for electric cattle prods.

Another factor suggesting that SyrVet was aware of the license requirement is that twelve of the exports charged by BIS were for exports to end-users for whom BIS licenses that SyrVet had already obtained had expired.

This case was commenced by BIS prior to enactment of legislation increasing permissible fines from $11,000 to $250,000 per violation, so BIS engaged in a little piling on to turn 16 exports into 38 counts of charged export violations. If each separate export had been a single violation, the maximum penalty would have been $176,000, not $250,000. The “piling on” was accomplished by charging each export as an illegal export under section 764.2(a) of the Export Administration Regulations and as an illegal export with knowledge of the violation under section 764.2(e), even though section 764.2(a) is a “lesser included offense” of any section 764.2(e) violation. Six of the exports were turned into three violations each by additional charges that SyrVet filed false shipper’s export declarations stating that no license was required for those exports in violation of section 764.2(g).

It’s hard to compare the fine imposed here to the value of the exported goods because BIS failed to post the schedule of violations that was attached to the charging letter and which would have revealed the value of the exported items.

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Copyright © 2009 Clif Burns. All Rights Reserved.
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Jan

5

Luxembourg Company Agrees to $25 Million Fine for Illegal Exports

Posted by at 8:07 pm on January 5, 2009
Category: DDTC

Night Vision ImageLuxembourg-based Qioptiq S.A.R.L. agreed in mid-December to a $25 million fine in connection with its unlicensed exports of military-grade night vision items and technology without required licenses from the Directorate of Defense Trade Controls. Most of the unlicensed exports were undertaken by a company acquired by Qioptiq and occurred prior to the acquisition. Of the $25 million, $10 million was suspended — $5 million in consideration of expenses already incurred by Qioptiq in its investigation of the illegal exports and $5 million to be used to defray the costs of the compliance initiatives mandated by the consent agreement.

A review of the charging letter that DDTC proposed as a basis for the consent agreement reveals two things of particular interest. First, successor liability at DDTC is alive, well, and thriving. Second, emails sent by Qioptiq’s predecessor in interest provide an object lesson about what companies shouldn’t say about export compliance. Clearly DDTC’s desire to impose a significant penalty seems motivated by these emails.

The DDTC has long said that it considers an acquiring company to be strictly liable for export violations committed by the acquired company. Many people, myself included, have questioned the wisdom of such a policy inasmuch as it could deter companies with a demonstrated record in export compliance from acquiring, and cleaning up, bad export citizens. The DDTC’s charging letter, however, casts most of these issues aside, asserting that these might be mitigating factors, but not enough to “mitigate away” the violations:

Given the significant national security interests involved as well as the systemic and longstanding nature of the violations, the Department has decided to charge the Respondent with one hundred sixty-three (163) violations at this time. Had the Department not taken into consideration as significant mitigating factors the Respondent’s Voluntary Disclosures, the fact that the violations were committed prior to the Qioptiq Group acquisition of the violating business units and the remedial measures implemented, the Department could have charged the Respondent with additional violations, and could have pursued more severe penalties.

DDTC’s hard line approach here seems to have been motivated by its discovery of emails sent by the acquired company that one might charitably call extreme indifference to export compliance. DDTC singled out the following instances of the acquired company’s cavalier attitudes towards compliance

  • An internal training program of the acquired company “advised its employees that one factor to consider when deciding whether to make (and implicitly for deciding not to make) a disclosure to the Department is the risk of discovery of the violation by a U.S. company or U.S. authorities
  • An email from a corporate export compliance officer of the acquired company questioned the need for seeking export advice noting “By experience when you call for a US advisor on export control, he will play by the book and drive you to implement a strict (and so a costly) procedure. If you hire a US advisor you will not finish with the only voluntary disclosure we are having in mind today, but he will push you to clean up all the past!”
  • An engineer concerned about illegal exports contacted the U.S. office of the acquired company and was directed to talk to outside counsel, which he did. The U.S. office decided not to file a voluntary disclosure and advised the engineer that “no further action was necessary.” According to the company’s outside counsel further requests for ITAR guidance by this engineer went unanswered because the acquired company would not authorize the outside counsel to advise the engineer on other ITAR issues.

Of course, these are merely allegations by DDTC. But, if true, they would certainly raise serious questions about a company’s commitment to export compliance.

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Copyright © 2009 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Dec

24

How the OFAC Stole Christmas

Posted by at 2:15 pm on December 24, 2008
Category: General
Santa Flanked by F-16

A spokesman for the Treasury Department’s Office of Foreign Assets Control (“OFAC”) told Export Law Blog this morning that discussions between OFAC and the North Pole over Santa Claus’s Christmas Eve itinerary had broken down and were not expected to be resumed before Santa’s scheduled departure on December 24 at 10 pm EST.

The dispute arose from a dilemma that the U.S. sanctions against Cuba posed for Santa’s planned delivery of toys to children in Cuba. If Santa delivers toys for U.S. children first, there will be toys destined for Cuba in the sleigh in violation of 31 C.F.R. § 515.207(b). That rule prohibits Santa’s sleigh from entering the United States with “goods in which Cuba or a Cuban national has an interest.” On the other hand, if Santa delivers the toys to Cuban children first, then 31 C.F.R. § 515.207(a) prohibits the sleigh from entering the United States and “unloading freight for a period of 180 days from the date the vessel departed from a port or place in Cuba.”

A press release from the North Pole announced that the OFAC rules left Santa no choice but to bypass the children of the United States this Christmas. A spokesman from OFAC warned that if Santa attempted to overfly the United States, his sleigh would be forced to land and his cargo seized. He continued:

We know that the outcome is harsh, but we cannot allow Fidel Castro’s regime to continue to be propped up by Santa’s annual delivery of valuable Christmas toys to Cuban children.

Congressional leaders had left for the holiday recess and could not be contacted for comment.

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Copyright © 2008 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Dec

22

Aerospace Company Settles Charges of Aiding Chinese Rocket Program

Posted by at 8:10 pm on December 22, 2008
Category: BIS • China
Long March 3B Rocket
ABOVE: Chinese Long March 3B
rocket blasts off on July 6, 2007

As the end of the year approaches, the Bureau of Industry and Security (“BIS”) has been busy releasing a flurry of settlement agreements for export violations. In the latest batch is a settlement agreement by Interpoint Corporation, a subsidiary of Washington-based Crane Aerospace and Electronics.

Crane agreed to pay BIS a $200,000 fine to settle charges that it engaged in 37 illegal exports of EAR99 items to China. In two instances, the exports were destined for the 13th Institute, an end-user in China on BIS’s Entity List. The remaining exports were alleged to violate section 744.3 of the Export Administration Regulation (“EAR”) because Interpoint had been informed that the items would be for use “in the PRC’s Long March [Chang Zheng] rocket program or in other commercial rocket programs.”

Section 744.3(a)(1) requires a license for any export to a country in Country Group D:4, which includes China, if the exporter knows that the item will be used for commercial (or other) rocket systems with a range in excess of 300 kilometers. The Chinese Long March rockets are designed to carry satellites into geosynchronous orbit, i.e. 35,786 kilometers above sea level on the Earth’s surface.

In instances in which the items weren’t destined for the Long March rockets, Interpoint knew that they were destined for other “commercial rocket programs,” although there is no allegation that Interpoint knew which rocket programs or that the rockets had ranges in excess of 300 kilometers. These exports were probably covered by section 744.3(a)(3), which requires a license for exports used in rocket systems by a country in group D:4 if the exporter is “unable to determine … [t]he characteristics (i.e., range capabilities) of the rocket systems.”

Although section 744.3(a) clearly embodies a knowledge requirement, the scope of that knowledge requirement is unclear, and the Settlement Agreement casts little light on this confusing issue. Was Interpoint required to know that the items were for use in the Long March rocket program and to know that the Long March rockets had a range in excess of 300 kilometers? Or was it enough that Interpoint knew that the items were destined for Long March rockets which, whether Interpoint knew it or not, had a range far in excess of 300 kilometers?

Section 744.3(a)(3) appears to answer part of this question by imposing a duty to investigate the range of the rocket: an export to a D:4 country requires a license if the exporter is unable to determine the range of the rocket. But that still doesn’t answer a more intransigent case. Suppose that the exporter is told falsely that the rocket is only designed to carry a payload to a Low Earth Orbit less than 300 kilometers? Of course, an exporter can avoid having to put itself in the uncomfortable position of answering that question by simply refusing to export parts without a license to a D:4 country if that part is to be used for a rocket of any range.

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Copyright © 2008 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Dec

18

Blackwater Order Not As Bad As It Sounds

Posted by at 6:35 pm on December 18, 2008
Category: General

Blackwater BearLooking at the title of today’s notice from the State Department’s Directorate of Defense Trade Controls (“DDTC”), which reads “Policy of Denial Regarding ITAR Regulated Activities of EP Investments, LLC (a/k/a Blackwater),” one might think it’s “Bye, Bye, Blackwater.” But the actual content of the notice isn’t quite so bad since it provides significant exceptions to this policy of denial, exceptions which seem designed to allow Blackwater’s contracts with the United States Government to proceed unimpeded as long as Blackwater files some additional paperwork for its new license applications.

In fact, the policy of denial doesn’t apply to applications that are in “direct support to the U.S. Government” and where certain conditions are met. Those conditions are the following:

  • The license application is accompanied by a letter from Blackwater’s celebrity export compliance committee (the “ECC”) certifying the accuracy of the information in the license application and certifying that necessary training and internal controls are in place
  • The ECC submits, for each application, follow-up letters thirty and sixty days later certifying that the necessary training and internal controls are still in place

Applications that are not in direct support of the U.S. government are subject to a policy of denial unless the license request “is based on overriding U.S. national security, foreign policy or law enforcement grounds or present other compelling reasons.” In cases found to meet that criteria, the ECC must submit the same certification letters, including the 30- and 60-day followups, as described above.

Finally, Blackwater isn’t allowed to use any ITAR exemptions from licensing, such as the spare parts exemption in section 123.16(b)(2). Instead, license applications must be filed for each exemption and those applications will be considered on a case-by-case basis.

Outside of requiring a bundle of additional paperwork for each Blackwater license, the biggest effect of the new policy is probably that Blackwater won’t be able to follow through on its proposed pirate-chasing gig.

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Copyright © 2008 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

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