Author Archive

Jul

25

SEC List of Companies Doing Business in Terror States Taken Down

Posted by at 4:43 pm on July 25, 2007
Category: SEC

SEC SealWe’d like to think that our post critical of the SEC’s list of public companies doing business in Syria, Sudan, Cuba, North Korea, and Iran had something to do with the SEC’s decision to remove the list from its website. But, in all honesty, we’ll have to admit that a storm of protest from more important people on the Hill was more likely the cause.

The SEC press release announcing the removal of the list made clear that the list hadn’t been killed but, instead, was undergoing surgery:

We are temporarily suspending the availability of the web tool while it undergoes reconstruction. We will work to improve the web tool so that it meets the various concerns that have been expressed.

It’s not clear how the list can be fixed unless it is transformed from a list that compiles companies that mention sanctioned countries in their filings to one in which the SEC staff exercises discretion to cull the bad companies doing bad things in the sanctioned countries from the good companies that have more innocuous connections to the sanctioned countries. Traditionally, the SEC has been disinclined to engage in such a function, preferring that company disclosures speak for themselves.

Some other interesting facts can be found in the press release. First, the list was enormously popular, receiving 150,000 hits over approximately three weeks. We get about 8,000 hits in three weeks — about 400 per day — so our board is going to meet in our world headquarters this weekend to consider putting the SEC list back up on this site. That’s a joke, of course. Please don’t send any threatening emails.

Also, the press release indicated that the countries clicked on were, in descending order, Iran, Cuba, Sudan, North Korea and Syria. Frankly, I’m surprised that people were more concerned about who was doing business in Cuba than in North Korea or Sudan, but maybe a bunch of people were clicking through Cuba looking for an Internet source for Cuban cigars.

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Copyright © 2007 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Jul

24

Weatherford under Investigation for Operations in Iran

Posted by at 6:44 pm on July 24, 2007
Category: BIS • Criminal Penalties • Iran Sanctions

DeniedHouston-based oil-drilling and oilfield services company Weatherford announced yesterday in its 8-K filing with the SEC that the company has

been notified that the Bureau of Industry & Security and the U.S. Department of Justice are investigating allegations of improper sales of products and services by us in sanctioned countries. We are cooperating fully with this investigation. In cooperation with the government, we have retained legal counsel, reporting to our audit committee, to investigate this matter. The investigation is in its preliminary stages.

It’s probably not to hard to guess what sanctioned country is involved. A map of Weatherford offices published in the September 2005 edition of W magazine, a Weatherford publication, tells the story:

Map of Weatherford locations

Looks like three locations in Iran to me.

Of course, a foreign subsidiary of a U.S. company can do business in Iran provided that the foreign subsidiary has business in other countries (in other words, is not a device to evade the sanctions) and provided its operations in Iran are not controlled by the parent. Complying with the second condition — i.e. isolating the Iranian operation from control by the U.S. parent — is what normally creates a problem. Even something as innocent as U.S. approval of a travel and expense voucher in Iran from the foreign subsidiary can raise questions — particularly in an environment where U.S. officials are making louder and more frequent noises about swatting companies doing business in Iran.

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Copyright © 2007 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Jul

23

If You Have an Export Law Question, Don’t Ask the Wall Street Journal

Posted by at 8:29 pm on July 23, 2007
Category: BIS • Sanctions

DeniedAn editorial in Friday’s Wall Street Journal was critical of the United Nations Development Program (“UNDP”) for several supposedly illegal exports. The criticism seems to be largely based on the questionable claim that the UNDP was required to obtain export licenses from the Bureau of Industry and Security for certain items exported by UNDP from foreign countries to North Korea, including a spectrometer, some GPS equipment and some computer equipment. Sadly, the author of the editorial, Melanie Kirkpatrick, doesn’t appear to have consulted with anyone who actually knows anything about export law.

Ms. Kirkpatrick premises her analysis on a export license application by UNDP for GPS mapping software which was denied on September 16, 1999. She notes that the software was EAR99. Astute readers will recall that up until September 17, 1999, U.S. sanctions prohibited the export of EAR99 items to North Korea. Thereafter, EAR99 items were freely exportable to North Korea (although on January 26, 2007, new license requirements and prohibitions on exporting certain luxury items such as cognac and iPods to North Korea were put in place). Hence, the need then for a license application that would not be required now.

Even so, Ms. Kirkpatrick seems to think that such a license would still be required:

Yet seven years later, the UNDP procured and transferred sensitive technology to the same, unsafeguarded project — this time without bothering to apply for a license. And while there’s no evidence the UNDP went ahead and purchased the software for which it had been denied a license, that possibility must be considered, since GPS equipment is useless in such a project without mapping software.

If it’s EAR99 and was shipped before anuary 26, 2007, no license would have been required, meaning that UNDP could have freely exported the software to North Korea.

Nor is it clear that a license was required for the other items at issue. The commercial GPS system would be classified as ECCN 7A994 and would require a license for export to North Korea. Similarly, the computer equipment may well be ECCN 4A994, which would require a license for North Korea. We can’t tell from Ms. Kirkpatrick’s description what the ECCN would be for the spectrometer, but let’s also assume, for the sake of argument, that it wasn’t EAR99

Even so, the EAR wouldn’t require licenses for the export even of these items to North Korea unless exported from the United States, or unless exported by a U.S. person (which UNDP is not), or unless the item has U.S. content. And it’s not clear that any of these conditions were met. According to Ms. Kilpatrick:

Mr. Melkert says in the annex that the UNDP is investigating “whether the vendors [in the Netherlands and Singapore] were required to obtain export permits for these items”–which sure sounds like an effort to shift responsibility.

It may sound to the Wall Street Journal like an “effort to shift responsibility” but to anyone familiar with export law it sounds like a claim that the exports may not have been subject to U.S. law.

There may well be a number of good policy reasons that these items shouldn’t be in North Korea, but saying that the export of these items violated U.S. laws isn’t one of those reasons.

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Copyright © 2007 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Jul

20

One Man’s Trash Is Another Man’s Treason

Posted by at 4:03 pm on July 20, 2007
Category: Nonproliferation

K25 Building at the East Tennessee Technology ParkRoy Lee Oakley, an unskilled maintenance worker, was indicted on July 17 and charged with violating section 224 of the Atomic Energy Act (42 U.S.C. § 2274). The charges were based on Oakley’s alleged attempts to export gas diffusion barriers from a dismantled uranium enrichment plant to the French. But before you go check your supply of radiation pills and duct tape, I can assure you that this is a story more out of Austin Powers than Tom Clancy.

According to the Knoxville News-Sentinel, Oakley was an unskilled worker employed by Bechtel Jacobs which had a contract to dismantle the gaseous diffusion plant that was once used to enrich uranium at the East Tennessee Technology Park outside Knoxville. One of the tasks assigned to Oakley, according to Oakley’s attorney, was to break the gas diffusion barriers and associated equipment into pieces. The gas diffusion barriers are membranes used to separate isotopes of uranium.

Oakley’s attorney claims that although Oakley thought of these broken barriers as “trash,” they might still be of interest to the French. (It is not clear whether this is because Oakley didn’t really think the barriers were trash or because he thought that the French had an unusual interest in buying trash). So Oakley did what any patriotic American would do, he called the French Embassy in Washington, D.C., and offered to sell the pieces to them. The response of the French diplomats to Oakley’s call, again in the words of Oakley’s own attorney, was that “they laughed at him.” And then apparently they called the FBI. The FBI had an agent impersonate a French diplomat to conclude the transaction (or at least enough of it to indict Oakley). Am I the only one wondering whether the FBI agent put on a cheesy French accent as part of the sting?

If the facts are as presented above, Oakley’s prospects for acquittal do not look good and indeed he deserves to be punished. However, the huffing and puffing about the vast harm that might have occurred — from various government officials and the perpetual alarmists at Arms Control Wonk — needs to be tempered somewhat.

There is a reason that the gas diffusion enrichment plant had been in mothballs for some time and was being dismantled is that it was obsolete and had been replaced by cheaper and more efficient methods of uranium enrichment. According to a typically reliable assessment from GlobalSecurity.org:

Gaseous diffusion is unlikely to be the preferred technology of a proliferator due to difficulties associated with making and maintaining a suitable barrier, large energy consumption, the requirement for procuring large quantities of specialized stage equipment, large in-process inventory requirements, and long equilibrium times.

Nor is it clear even that providing the membrane itself would enable a potential proliferator to determine how it had been manufactured. So, Oakley probably broke the law, but probably doesn’t deserve to be seen as the latest Julius Rosenberg or AQ Khan.

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Copyright © 2007 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Jul

19

New BIS Regulations Discourage Voluntary Disclosures of Violations

Posted by at 5:40 pm on July 19, 2007
Category: Anti-Boycott • BIS

NooseThe Bureau of Industry and Security (“BIS”) has released new regulations explaining the treatment that BIS will give to voluntary disclosures of BIS’s antiboycott regulations. Those regulations, for example, prohibit exporters from certifying to Arab League countries that exported products do not contain Israeli content.

The new regulations set forth the procedures for filing a voluntary disclosure. These procedures more or less parallel the procedures adopted at other agencies, including permitting the filing of a bifurcated voluntary disclosure, i.e., an initial disclosure after the violation was discovered and a more detailed disclosure after the violation has been investigated by the company making the disclosure. The initial voluntary disclosure must be filed before BIS has learned of that information from another source and commenced an investigation. The new regulations make clear that disclosures made to the agency during telephone calls seeking guidance on the rules are not considered disclosure of the information from another source.

But, BIS being BIS, the new rules enshrine significant disincentives to companies to make voluntary disclosures. Most significantly, section 764.8(b)(4) says this:

Although a voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by BIS, it is a factor that is considered together with all other factors in a case. The weight given to voluntary self-disclosure is solely within the discretion of BIS, and the mitigating effect of voluntary self-disclosure may be outweighed by aggravating factors.

What BIS is saying here is that it may in certain circumstances give no weight whatsoever in mitigation because of the voluntary disclosure. This is a significant disincentive to voluntary disclosures because a company must weigh the possibility of there being no benefit to the voluntary disclosure against the possibility that BIS would never discover the violation if it hadn’t been disclosed. The only way to preserve the incentive to make a voluntary disclosure is to say that aggravating factors might be used to reduce the weight given to the voluntary disclosure but not to totally eliminate it.

But (and I’m sure some readers won’t be surprised by this) it gets worse:

Voluntary self-disclosure does not prevent transactions from being referred to the Department of Justice for criminal prosecution. In such a case, BIS would notify the Department of Justice of the voluntary self-disclosure, but the decision as to how to consider that factor is within the discretion of the Department of Justice.

Of course, a VSD shouldn’t be a “get out of jail free” card and there may be rare circumstances where such a disclosure should be referred to DOJ. But BIS by stating only that cases may be referred without the further qualification that the VSD at least makes it somewhat less likely that the case will be referred, erects another disincentive to voluntary disclosure. In my experience, the driving force behind most voluntary disclosures is the company’s desire to reduce the risk of prosecution.

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Copyright © 2007 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

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