ExportLawBlog

May

8

Wind Down Woes By Any Other Name Would Smell As Rotten

Posted by Clif Burns at 8:16 pm on May 8, 2018

Imam Khomeini by Kaymar Adl [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/kamshots/515002010/ [cropped] Today’s revocation of U.S. participation in the Iran nuclear deal principally resurrects a number of secondary sanctions aimed at European allies and other countries. Those that relied on the nuclear deal will now see that commercial arrangements with Iran that theyÂ entered into relying on thatÂ deal and on their false hopes that the U.S. would not later simply walk away from it will be the collateral damage of the White House’s new trade war on Iran.

Shortly after the announcement of the U.S. withdrawal from the deal, OFAC issued FAQs explaining the action. (Why on earth are these called FAQs? They were issued within seconds of the announcement. How can there already be “frequently asked questions”? Perhaps OFAC thinks that FAQs stands for something else — maybe “frightening answers to questions.”)

Those FAQs preface the explanation of the wind-down provisions with this:

The U.S. government has a past practice of working with U.S. or third-country companies to minimize the impact of sanctions on the legitimate activities of those parties undertaken prior to the imposition of sanctions.

Any hopes that this is a true statement are quickly dashed by looking at the wind-down provisions themselves. Depending on the sanctions, companies have either 90 or 180 days to finish up activities commenced before today’s date. For activities engaged in under General License H — which permits foreign subsidiaries of U.S. companies to engage in certain activities with Iran — the wind-down period is 180 days. If a company has a contract to deliver goods to Iran, then, according to FAQ 2.1, those goods must be “fully delivered” within the wind-down period. Payment can be made outside that period for those fully delivered goods provided that payment is made pursuant to the terms of the written agreement.

But suppose you’ve made an investment in producing a complex item, have started to manufacture it, but can’t complete it within the wind-down period. You’re out of luck. Plus, when the Iranian customer sues you and gets a judgment in the court of your home country, you can’t pay the judgment without violating U.S. law. That’s not a good position to be in.

Another conundrum: what’s meant by fully delivered? Is the item fully delivered if the contract specifies FOB Incoterms 2010 and the item is placed on the boat before the wind-down period expires but is delivered to the customer in Iran after the wind-down period? Your guess is as good as mine, even though under an FOB delivery term the seller has satisfied its delivery obligations once the item is on the boat.

FAQ 2.2 provides the answer, of sorts, to the question about new business in Iran that starts after today but is completed before the wind-down period expires. OFAC says in that case you’re okay, but that if there is an enforcement action based on things done after the period expires, these new activities undertaken after today will be considered in determining the penalty. In other words, engage in new activities after today at your own risk.

Of course, it’s not at all clear what might count as new activities. Suppose you have an office in Tehran to assist in completing the contract. Can you order more paper when the copying machine runs out? Can you order lunch for a working meeting in the office? Hire a temp?

There’s one thing that can be guaranteed by these wind-down provisions:Â full employment for sanctions lawyers.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

May

3

De Minimis Rules Create De Maximis Confusion for ZTE Exports

Posted by Clif Burns at 7:53 pm on May 3, 2018

ZTE China via http://res.www.zte.com.cn/mediares/zte/Files/bannerCN/rmrb0424.jpg?h=270&la=en&w=470 [Fair Use] Trade wars, like all wars, inevitably inflict collateral damage on unintended targets. This article in the Wall Street Journal provides an interesting run-down of the collateral damage that the ZTE denial order has had on U.S. companies.Â These are companies for which ZTE was a significant customer and which have seen significant drops in their stock prices on the heels of the denial order.

Although most of the attention has been focused on the scope of the order’s impact on exports to ZTE from the United States, less attention has been paid to the issue of foreign made products incorporating U.S. content. Consider the dilemma of the company that makes the Gorilla Glass used on ZTE smartphones:

Corning Inc., GLW -0.49% which makes Gorilla Glass screens used in smartphones from ZTE and others, said it was assessing whether the sales ban applies to its products made at its factories in Taiwan, Japan and South Korea. The company said it wasnâ€™t sure whether Gorilla Glass includes content that falls under U.S. export controls.

There could be a number of reasons for this, including not knowing the origin of the raw materials. But more likely, it could be the confusion over how to apply the de minimis rules in the context of the denial order, which only covers items “subject to the Regulations,” i.e. items “subject to the EAR.” Section 734.4(d)(1) notes thatÂ the following items are not “subject to the EAR”:

Reexports of a foreign-made commodity incorporating controlled U.S.-origin commodities â€¦ valued at 25% or less of the total value of the foreign-made commodity.

The crucial, and confusing, part of this provision is what is meant by “controlled U.S.-origin commodities,” a term that is never defined in the regulations. The only guidance as to the meaning of this phrase is in Supplement 2 to Part 734 which says this:

To identify U.S.-origin controlled content for purposes of the de minimis rules, you must determine the Export Control Classification Number (ECCN) of each U.S.-origin item incorporated into a foreign-made product. Then, you must identify which, if any, of those U.S.-origin items would require a license from BIS if they were to be exported or reexported (in the form in which you received them) to the foreign-made product’s country of destination. In identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as â€œNLRâ€) or under License Exception GBS (see part 740 of the EAR).

Reading the above provision literally, “controlled U.S. origin commodities” for purposes of the ZTE Denial Order would not include EAR99 items and many other items that did not require a license to China because whether something is controlled for de minimis computation depends on whether it is controlled for the “country of destination,” not the recipient.

One suspects that BIS means, and would like to cover, all EAR99 or items that were NLR for China in the de minimis computation for foreign made products exported to ZTE on the notion that these exports are controlled to ZTE. But, of course, if wishes were horses, all beggars would ride or, more to the point in this context, if wishes were rules, all agencies would ride roughshod over fairness. I don’t think BIS can cure this by posting some slapdash FAQ on its website instead of going through the procedures required by the APA to amend Supplement 2 to Part 734 to decouple the meaning of controlled from the country of destination.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Apr

25

Well, That Didn’t Last Long: DDTC Finds Backdoor To Reimpose Access Rule

Posted by Clif Burns at 10:31 pm on April 25, 2018

Category: DDTC • Deemed Exports

HD Thermal Camera via https://www.flir.com/news-center/professional-tools/the-new-t1010---flirs-latest-hd-thermal-camera/ [Fair Use] Yesterday the Directorate of Defense Trade Controls (“DDTC”) and FLIR entered into a consent agreement under which FLIR consented to a civil penalty of $30 million, half of which was suspended on the condition that this amount was and would be applied to previous and future compliance costs. The fine was based on a number of export violations in various categories that FLIR voluntarilyÂ disclosed.Â These violations included instances where disclosed violations continued after their disclosure and where promised remedial actions to cureÂ disclosed violations were not taken.

One part of the Charging Letter is interesting because it appears to be effectively a reversion to the old DDTC standard, clearly articulated in the 2004 General Motors Charging Letter, that access to ITAR-controlled information by a foreign national is a deemed export violation even if the controlled information was never in fact seen by the foreign national. As you may recall, back in 2016 DDTC retreated from that position, saying this in the Federal Register NoticeÂ in which “export” was redefined by DDTC:

Several commenters requested that the Department remove the portion of (a)(6) that addressed the provision of physical access to technical data. The Department has removed paragraph (a)(6). However, as described above for paragraph (a)(7), while the act of providing physical access does not constitute an “export,” any release of technical data to a foreign person is an “export,” “reexport,” or “retransfer” and will require authorization from the Department. If a foreign person views or accesses technical data as a result of
being provided physical access, then an “export” requiring authorization will have occurred and the person who provided the foreign person with physical access to the technical data is an exporter responsible for ITAR compliance.

Now look at this part of the Charging Letter:

Approximately 1,350 foreign-person employees had access to all ITAR-controlled technical data (over 1,400 files) located on Respondent’s servers in 22 non-U.S. facilities â€¦ While access does not mean that the employees viewed the information, Respondent lacked the IT records which could confirm which employees actually accessed ITAR-controlled files. â€¦ It is the Department’s position that Respondent transferred technical data to foreign-person employees that was necessary for their job performance on its servers without authorization.

What DDTC is saying here, in effect, is that if you don’t have logs showing every access to the controlled technical data â€”Â and who will have that? â€” then DDTC is just going to assume that the controlled technical data was transferred to everyone who had access to it. So we’re back where we started and access, not disclosure, is the violation. Sigh.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Apr

18

ZTE Snapback Order Based on Condition Not In Original Order

Posted by Clif Burns at 7:05 pm on April 18, 2018

Category: BIS • Civil Penalties

ZTE Stand 6 via http://www.zte.com.cn/cn/events/ces2013/show/201301/t20130110_381605.html [Fair Use] Earlier this week, the Bureau of Industry and Security re-imposed on Chinese telecom giant ZTE a seven-year export denial order which the agency imposed and suspended on March 23. 2017. That March 2017 order noted that the suspension could be lifted and the order reimposed if various probationary conditions detailed in the order were not met.

This week’s order re-imposing the previously suspended export denial order is premised on misrepresentations made in two letters sent by ZTE to BIS. The first, sent on November 30, 2016, and before the March 23, 2017 order itself, referred to “employee disciplinary measures” that ZTE had taken or would take in the future. The second, sent on July 20, 2017, said it was sent “to confirm that the measures detailed by ZTE with respect to discipline have been implemented.” In fact, according to BIS, the promised letters of reprimand were not sent out when these letters were written and the employees at issue had received their full 2016 bonus.

Now, of course, lying to BIS is a very bad thing. But, honestly, are these two letters enough for BIS to back out of the deal and rescind the suspension of the export denial order?

In fact, if you look at how the new order justifies this action, it is clearly playing fast and loose with the facts, leaving the undeniable impression that U.S. trade policy and our broader disagreements with China had more to do with this action than these two letters. Here is the relevant language from the new order:

The Settlement Agreement and March 23, 2017 Order require that during the probationary period, ZTE is to, among other things, complete and submit six audit reports regarding ZTE’s compliance with U.S. export control laws. The Settlement Agreement and March 23, 2017 Order also include a broad cooperation provision during the period of the suspended denial order. This cooperation provision specifically requires that ZTE make truthful disclosures of any requested factual information. The Settlement Agreement and March 23, 2017 Order thus, by their terms, essentially incorporate the prohibition set forth in Section 764.2(g) of the EAR against making any false or misleading representation or statement to BIS during, inter alia, the course of an investigation or other action subject to the EAR.

Of course, the whole game is given away by the statement that certain provisions “essentially incorporate” section 764.2(g) of the EAR. “Essentially incorporates” means, of course, that the probationary conditions did not include 764.2(g) but BIS firmly wishes that they had.

The “Tenth” section of the Order clearly indicates that suspension is premised on compliance with the “probationary conditions set forth above.” So that doesn’t include the “cooperation provision” which is referenced in the above quoted language of the order and which is contained in the “Twelfth” section.Â Last time I checked, “Twelfth” is below not above the “Tenth” Section. And even if you suspend the laws of geometry and physics to put it above the “Tenth” section, that provision requires ZTE “to continue to cooperate.” There’s nothing in it at all that says anything about statements made before the order was even entered such as those in the November 2016 letter.

In fact, the probationary conditions are in the “Third,” “Fourth,” and “Fifth” sections of the Order. These deal with the monitor’s reports, compliance training, maintaining a compliance program, and retention of records in a fashion accessible in the United States. You won’t find in these sections, which are the probationary conditions “above” the “Tenth” section, any requirement that ZTE send reprimand letters, dock bonuses, comply in the future with section 764.2(g) of the EAR, or have fully complied with that section in the past.

As I said, lying to federal agencies is bad. But so is not abiding by the rule of law.

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Apr

11

Cuba Export Indictment Mangles U.S. Export Laws

Posted by Clif Burns at 6:27 pm on April 11, 2018

Category: BIS • Criminal Penalties • Cuba Sanctions

Image via https://pixabay.com/p-1202440/?no_redirect [Public Domain] Last week Bryan Singer, a Texas resident, was indicted for attempting to export to Cuba certain items that U.S. Customs found on his boat in a harbor in the Florida keys. The items are involved are Ubiquiti Nanostation M2 modems classified as 5A002, TP Link modems classified as 5A992 and cable box circuit boards classified as EAR99. The brief indictment states that Singer did not obtain a license from “DOC or OFAC” to export these items to Cuba. It also notes that he failed to file an Electronic Export Information covering the export of these items.

There is supposed to be an adult at the Export Enforcement Coordination Center who reviews these export indictments, but that would appear not to be the case. To begin with, two of the items mentioned in the indictment, the TP Link Modems and the cable box circuit boards, were eligible for license exceptions and would not have needed licenses. The TP Link modems are a no brainer and are clearly covered by BIS License Exception CCD. The EAR99 cable circuit boards if they went to private companies or private individuals probably were eligible for export under License Exception SCP. Mr. Singer says in press reports that he was relying on that exemption, and nothing in the indictment alleges that the intended export did not qualify for License Exception SCP.

So that leaves the 5A002 Ubiquiti modems, which would not have been eligible under either License Exception CCD or License Exception SCP. Of course, when the government itself does not understand the export laws (witness including the TP Link modem in the indictment), it is hard for it to establish that Singer had criminal intent when he apparently thought, albeit incorrectly, that he could send the Ubiquiti modem to private individuals in Cuba.

The indictment’s efforts to cobble together a violation due to the failure to file an EEI are equally unavailing. No allegation is made, or proof offered, that items with the same Schedule B number in the shipment had a total value of $2500 or more. Under section 30.37(a) of the Foreign Trade Regulations no EEI was required if that were not the case. And it seems clear that these values weren’t met. The Ubiquiti and TP Link modems share the same schedule B number (8517.62), but given that the Ubiquiti modem retails for 50 bucks and the TP Modems were probably close to that, we would be talking about 50 or more of them needed before an EEI was required. And it’s hard to imagine that the cable circuit boards, which would have a different Schedule B number, were worth more than $2500. So, once again, if the AUSA who signed this indictment can’t figure out the law, how can he criminally prosecute Mr. Singer for not understanding it?

UPDATE: A reader notes in the comments below:

On the EEI issue, section 30.37(a) has no bearing on shipments to Cuba, as itâ€™s in Country Group E:2. The only exceptions that apply are those in section 30.37(y). If none of those apply, then an EEI filing is required under section 30.16(d).

The FTR is poorly drafted here, so I’m not sure I agree. Section 30.7(a) does not say anything like “except as otherwise provided in 30.7(y).” Nor does section 30.7(y), which sets forth certain conditions where exports to E:2 countries do not require an EEI filing, state that these are the only situations where an EEI filing is not required, notwithstanding other exceptions set forth in section 30.7. I admit that the reader’s interpretation is one possible interpretation, but certainly give the plain language of 30.7(a) which does not limit its application creates too much ambiguity to support a criminal prosecution. Additionally, if the CCD-eligible items qualified under License Exception GFT, which is possible here, even 30.7(y) by its own terms would not be relevant.

The EAR, in section 758.1 is clearer about the $2500 threshhold not applying to Cuba, although that provision is not cited by the indictment, which only cites 30.37 of the FTR.Â But that section doesn’t alter the availability of an EEI exemption for exports to Cuba of CCD items made under the GFT exception.

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