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Oct

8

Intel Sub Fined for Encryption Exports

Posted by Clif Burns at 9:14 pm on October 8, 2014

Category: BIS • Encryption

Wind River Convention Booth via https://twitter.com/WindRiver/media [Fair Use] The Bureau of Industry and Security (“BIS”) announced today that it had convinced Wind River, an Intel subsidiary, to pay a whopping $750,000 to settle charges that it exported products with encryption functionality without required licenses. There were also four unlicensed exports of the items to parties on the BIS Entity List. Â This is the first announced fine (at least to my knowledge) involving encryption exports, and it has created a bit of a stir among those of us who handle encryption export matters.

Basically the encryption rules try to prevent the export of technology that every twelve-year-old in Estonia already has. Door to empty barn, meet escaping horses; escaping horses, meet door to empty barn. It is a not-so-well-kept secret that the encryption rules are not really there to protect sensitive U.S. technology but as a means to permit the NSA to see who is using what encryption where in order to better snoop on everyone using encryption.

As usual, details are scarce in the settlement documents as to what exactly went on, with the documents simply saying that Wind River exported items classified as 5D002 to government end users in China, Hong Kong, Russia, Israel, South Africa and South Korea. A little snooping of our own showed that the items involved, mostly real time operating systems, were classified by Wind River as 5D002 “ENC restricted.” All ENC restricted items require licenses to government end users in countries other than those countries listed in Supplement 3 to Part 740 of the EAR. The countries involved in the exports at issue are not Supp. 3 countries and, hence, required a license.

The BIS press release justified the size of the fine, despite Wind River’s voluntary disclosure of the violation, because it would “serve as a reminder to companies of their responsibility to know their customers and, when using license exceptions, to ensure their customers are eligible recipients.” This suggests that Wind River’s problemsÂ may have arisenÂ because it was dealing with entities that it did not realize were government end users.

However the BIS definition of government end users is hardly a model of clarity:

A government end-user is any foreign central, regional or local government department, agency, or other entity performing governmental functions; including governmental research institutions, governmental corporations or their separate business units (as defined in part 772 of the EAR) which are engaged in the manufacture or distribution of items or services controlled on the Wassenaar Munitions List. â€¦

Consider the portion of the definition that includes “governmental corporations or their separate business units (as defined in part 772 of the EAR) which are engaged in the manufacture or distribution of items or services controlled on the Wassenaar Munitions List.” Â For starters, does the qualifier “engaged in manufacture â€¦ of items â€¦ on the Wassenaar Munitions List” qualify just “separate business units” or both “governmental corporations” and “separate business units”? And what are government corporations? Companies that have a government charter but private ownership? Companies that have a significant percentage owned by the government? Private companies given a government monopoly and that perform a traditional government function? Who knows? But if you get it wrong, expect to be fined by BIS and to be the object of a snide comment that it’s your own darn fault for not figuring out that the company was a government corporation under an essentially meaningless definition.

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Oct

7

De Minimis Rule? What De Minimis Rule?

Posted by Clif Burns at 10:40 pm on October 7, 2014

Robbins & Myers Belgium HQ via Google Maps http://goo.gl/P9oIwo [Fair Use]
ABOVE: Robbins & Meyers Belgium

Robbins & Myers Belgium, a Belgian subsidiary of Robbins & Myers, Inc., which was recently acquired by National Oilwell Varco, pleaded guilty last week to charges that it violated U.S. sanctions on Syria when it exported stators that it manufactured in Belgium to Syria. According to the Bureau of Industry and Security (“BIS”) press release, the Belgian company was charged with violating U.S. criminal law because of the following:

The guilty plea stemmed from actions by Robbins & Myers Belgium that, in 2006, caused four illegal exports, reexports and/or transshipments of statorsâ€”important components of oil extraction equipmentâ€”that had made [sic] from steel that had been milled in the United States to a customer operating oil fields in Syria.

Say what? Is it really criminal for a foreign company to export an item just because it has some U.S. content in it? What happened to the de minimis rule? How hard would it be to say that the item consisted of more than 10 percent U.S.-origin steel to avoid suggesting that the export was illegal if there was any U.S. content? Â Even though BIS used up three paragraphs in the press release patting itself on the back, it could not manage to add a sentence somewhere, anywhere, to correct this misstatement of the law?

The factual proffer that served as a basis for the guilty plea, which is supposed to contain facts sufficient to support the plea, is no better on this issue.

At all times pertinent to this case, the stators shipped by RMB to Company A in Syria were made from steel tube that Company B had milled in the United States.

Nope, being “made from steel tube â€¦ milled in the United States” is not enough to support the plea. Section 746.9(a) of the BIS rules forbids exports to Syria of items “subject to the EAR.” And section 734.3(c)(1), otherwise known as the de minimis rule, states that foreign-made items destined for Syria are not “subject to the EAR” if they contain “controlled U.S.-origin commodities â€¦ valued at 10% or less of the total value of the foreign-made commodity.” Although the rule is not clear, BIS takes the position that “controlled” here means “controlled for Syria” under section 746.9 and therefore includes any EAR99 item other than food or medicine. Â Under that reading the EAR99 steel tubes would be controlled U.S.-origin commodities for purposes of the de minimis rule. We just don’t know if the tubes were more than 10 percent of the value of the foreign-made stators. And we don’t know this because the supposedly completely proffer leaves out this crucial element of the crime.

I do not doubt that in fact the U.S.-origin content here was in excess of de minimis as required by the rule for foreign-made products. My point is, however, that the BIS press release and the proffer incorrectly and misleadingly state that a criminal violation occurred because the stators contained any amount of U.S. origin goods. That is simply not a correct statement of the law, and those charged with enforcing the law should also correctly state it.

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Oct

2

Newest Sanctions Crime: Buying a Condo while Iranian-American

Posted by Clif Burns at 11:12 pm on October 2, 2014

Category: Iran Sanctions • OFAC

By Don-vip (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3AU.S_Treasury_Department_in_Washington%2C_D.C..jpg One of the possibly unintended consequences of the heavy fines imposed on banks by the Office of Foreign Assets Control (“OFAC”) for violations of the vaguely and confusingly written Iran sanctions regulations is that banks overreact, exhibiting a Pavlovian response to anything with the word Iran involved and blindly blocking everything in sight. As a result, Iranian-Americans often have a difficult and unpredictable relationship with their own banks here in the United States. As recently reported by the Arizona Republic, Neda Tavassoli, an Iranian-American, had difficulty closing her purchase of a condominium when one of the banks involved needlessly blocked the account holding her funds for the down payment.

The story begins, improbably enough, when her ex-husband, who is also a U.S. citizen, was visiting his family in Iran and checked their joint account from a computer in Iran. The bank then froze that account. Subsequently the bank even froze an unrelated escrow account to which Ms. Tavassoli’s parents, also U.S. citizens, wired the down payment for the condo in issue. Neither Ms. Tavassoli, her ex-husband, Â her parents nor the U.S. bank from which the parents wired the funds are on the SDN list, so there is no conceivableÂ reason for these accounts to be blocked. None of these parties are even in Iran so there was not even a reason to reject the wire transfer to the escrow account, much less to block it.

Most importantly, checking the account from Iran, which got the whole business started, would not serve as a basis for blocking the account. Whether the bank broke any rules by providing the information back to Iran in response to the account query depends on whether that communication was “incident to the exchange of personal communications over the Internet” and therefore permitted by section 560.540 of the Iran regulations. But even if the exception in section 560.540 for Internet communications does not apply, the proper response by the bank was simply not to respond to the request, not to block the account.

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Sep

30

BIS Kicks Dirt in Face of Utah Dirt Bike Dealer

Posted by Clif Burns at 9:35 pm on September 30, 2014

Category: BIS

Xtreme Motors via Google Maps [Fair Use] Like many Washingtonians, I have grown weary of marauding packs of dirtbags on dirt bikes and ATVs that terrorize drivers and pedestrians by speeding down the wrong side of streets and on sidewalks defying the police to chase them down. So it was with a slight frisson of Schadenfreude when I read that BIS todayÂ issued a Temporary Denial Order against X-TREME Motors, a dirt bike and ATV dealer in Utah. According to BIS, the TDO was based on a number of unlicensed exports of items requiring licenses, such as rifle scopes, which X-TREME misdescribed in export documents as ATV parts. It seems that the dirt bike and ATV business might have been a cover to smuggle controlled items from Utah to Russia and China, among other places

The dirt bike dealer, as you can still tell from its web site, had a side eBay business in which it sells a number of items that don’t seem particularly related to dirt bikes and ATVs, like rifle stocks, rifle scopes, ammo magazines and rifle barrels, and which will in many cases require export licenses. The BIS press release said that X-TREME was selling “crime control” equipment to China and Russia. It does not say what that equipment was, but I found two pairs of handcuffs for sale on X-TREME’s eBay site. After all, what fun is riding a dirt bike if you don’t have a few pairs of handcuffs along for the ride.

Between when I first looked at X-TREME’s eBay site and just now, someone has added at the top, in big red letters, this legend:

Hello we will not be offering any international shipping at this time. Please check back soon

Duh. Â But “soon” might be a tad optimistic.

UPDATE: Â As a commenter noted, and as I forgot when I wrote this post, riflescopes are also controlled for crime control reasons.

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Sep

24

Get Smart: Chinese Spy Edition

Posted by Clif Burns at 4:51 pm on September 24, 2014

Category: Arms Export • Criminal Penalties • DDTC • Technical Data Export

By General Artists Corporation-GAC-management. [Public domain], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ADonAdams.jpg Meet Charlie and Alice, two self-professed PRC spies who branched out from smuggling crystal meth into the United States to attempting to export airplanes and military technology from the United States to the PRC. Things did not turn out so well for Charlie and Alice who probably should have stuck with drug trafficking. So, find a comfortable chair, grab a bag of popcorn, and prepare to be entertained by the story that unfolds in the Criminal Complaint filed against them and to which they just pleaded guilty.

It was a dark and stormy evening in Manila when a counterfeit cigarette smuggler introduced two undercover agents working for the United States to Hui Sheng Shen, a/k/a â€œCharlie,â€ and Huan Ling Chang, a/k/a â€œAlice.â€ According to Mr. Counterfeit Cigarette Guy, Alice and Charlie could help the UCs obtain methamphetamine.

Alice and Charlie, explaining to the UCs that email was insecure, set up a drop email account, gave the UCs the credentials for the account, and said that they should communicate via messages left in the draft folder. (This method is not particularly effective in hiding communications from the government when you’re dealing with undercover agents but, whatever, it’s the trendy spycraft du jour.) Using this method, a deal for a kilo of meth was consummated and shipped to the UCs in tea bags hidden in computer towers. (Of course, no customs inspector would ever be suspicious of tea bags in computer towers so this is yet another example of top notch spycraft by Charlie and Alice.)

Emboldened by their world-class narcotics deal, Charlie and Alice decided to move on to bigger things and just kinda casually dropped into a subsequent conversation with the UCs that they would, oh, by the way, like to buy a military aircraft. Because, naturally, guys who buy drugs normally have a warehouse of military aircraft that they can sell to the people they buy drugs from. Â And Charlie and Alice wanted not just any airplane but a honking huge E-2 Hawkeye reconnaisance aircraft. “Sure, Charlie, I’ll leave one for you at the front desk of your hotel after you wire me $100 million dollars.”

Of course, knowing the sensitivity of such an operation, Charlie and Alice wanted to refer to the Hawkeye in code as the “Big Toy.” That way, they could always claim, if caught, that they were really talking about a 12-ton toy Tonka truck. At this point, one of the UCs hits comedy gold when he says to Charlie and Alice:

â€œDo you guys realize what this thing is?.. . This thing is like a um 757 plane â€” itâ€™s on aircraft carriers. Those things donâ€™t just disappear.â€

Undeterred, Charlie and Alice still kept negotiating to buy the “big toy,” stating that their buyer, which they described as the “Chinese C.I.A.,” could afford it. The UCs, however, managed to steer them to something more manageable, something that could fit in a backpack, namely, a Raven RQ 11B UAV. Charlie and Alice explained that they could smuggle the UAV out of the United States by having scuba divers or remote-controlled submersible vehicles carry the items to an off-shore Chinese ship. They also planned to get the manuals out by taking pictures of the manuals, deleting the pictures from the memory cards and then having their friends in China recover the deleted images.

There were, of course, two problems with the deleted image trick. First, everyone (even Customs) knows about it and can easily detect and recover deleted images on digital camera memory cards. Second, Charlie and Alice were arrested while taking the pictures.

For those who want to try at home the recovering deleted images trick, here’s a quick guide on how to do that.

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