[a] [c]ertificate issued by the owners, agents or master of the vessel carrying the goods stating that the vessel carrying the goods is allowed to enter the Arab port as per laws and regulations of such states.

Seasoned readers of this blog who read this post back in 2008 will immediately recognize the problem — the word “agent.” As we noted in that post, under Supplement 1 to the antiboycott rules:

the owner, charterer, or master of a vessel may certify that the vessel is “eligible” or “otherwise eligible” to enter into the ports of a boycotting country in conformity with its laws and regulations.

This would prevent a certification from an agent, but since United Source One isn’t accused with complying with the boycott, it is clear that the certificate must have come, if actually supplied, from the owner, charterer or master of the vessel.

But even if United Source One didn’t provide prohibited boycott information, these is still the question as to whether the request was reportable. Under section 760.5(a)(5)(viii) of the antiboycott rules, an exporter need not report:

A request to supply a certificate by the owner, master, charterer, or any employee thereof, that a vessel, aircraft, truck or any other mode of transportation is eligible, otherwise eligible, permitted, or allowed to enter, or not restricted from entering, a particular port, country, or group of countries pursuant to the laws, rules, or regulations of that port, country, or group of countries.

Since the request went beyond a certificate by the owner, master, charterer, or any employee and permitted a certification from the agent. The operative logic here (and I use the word “logic” very loosely here) is that if the agent makes the certification this is not a certification that the agent is complying with the laws of the country involved but is instead a certification that the agent isn’t doing business with anyone subject to the boycott.

Don’t try to spend too much time trying to make sense of this distinction unless you want to risk having your brain explode.

THE GOODS SHIPPED ARE NOT OF ISRAELI ORIGIN NOR DO THEY CONTAIN ANY ISRAELI MATERIALS. THEY ARE NOT DESIGNATED TO VISIT ANY ISRAELI PORTS NOR ARE THEY EXPORTED FROM ISRAEL. THEY ARE OF USA ORIGIN.

The OAC said it was closing the matter with just a warning letter because CENTRIA had voluntarily disclosed the violation.

As usual, the OAC provided little commentary as to why this language was problematic and merely asserted simply that “Section 760.2(d) of the Regulations prohibits providing such information.” OAC’s bare bones explanation is certainly not the result of OAC being too busy to spend the time explaining its reasoning. Perhaps it’s an admission that the Anti-Boycott regulations, with their 101 pages of densely packed legalese and eleventy trillion or so hypothetical examples of what’s naughty and what’s nice, are simply too complex to explain and summarize in any meaningful sense in less than, well, a hundred or so pages.

The problem here is that the absence of such an explanation, even a brief one, might give the wrong impression to exporters. The letter could be read as saying that the regulations prohibit supplying the information that the goods are made in the U.S.A. The warning letter might have at least provided an explanation of the difference between a negative certificate of origin (mostly naughty) and a positive certificate of origin (mostly nice). A positive certificate of origin is generally acceptable unless the person supplying that certificate knows that it is being used to enforce a boycott as, for example, when the request for the positive certificate comes from an anti-boycott compliance office of an Arab League country.

The failure to report this request does appear to violate the anti-boycott rules, but only as a result of an excessively narrow and technical reading of the rules. Of course, the interpretation of the lengthy and detailed anti-boycott rules requires the patience of Talmudic scholar or a medieval casuist and is a task that has been known to reduce grown men and women to tears. But let’s make a stab at it.

The charges here were for failure to report, so it is important to remember that a failure to report can be a violation of the rules even in instances where the exporter could legally supply the information. Under Supplement 1 to the antiboycott rules:

the owner, charterer, or master of a vessel may certify that the vessel is “eligible” or “otherwise eligible” to enter into the ports of a boycotting country in conformity with its laws and regulations.

However, under section 760.5(a)(5)(viii) of the antiboycott rules, an exporter need not report:

A request to supply a certificate by the owner, master, charterer, or any employee thereof, that a vessel, aircraft, truck or any other mode of transportation is eligible, otherwise eligible, permitted, or allowed to enter, or not restricted from entering, a particular port, country, or group of countries pursuant to the laws, rules, or regulations of that port, country, or group of countries.

So why doesn’t this exclusion from the reporting requirement apply? It would appear that it doesn’t apply because the request could have been satisfied by a certificate from an “agent” and not just by a certificate from “the owner, master, charterer, or any employee” of the vessel. That certainly seems to be a narrow and technical distinction on which to premise a $30,000 fine, but that is what appears to have happened here.

And there are additional nitpicks which would prevent the exemption from applying. The request refers to Arab authorities and Arabian ports although BIS has apparently said that “Arab” doesn’t refer to a “group of countries” within the meaning of the exception. Additionally, the language requesting the certificate didn’t track the exemption inasmuch as it did not add the qualification that the vessel wasn’t restricted “pursuant to the laws, rules, or regulations of” the countries involved.

In short, exporters can only safely rely on the reporting exceptions in section 760.5(a)(5) if the language tracks the wording of the exception virtually word for word.

[Thanks to Doug Jacobson for confirming that, in his view, the addition of the word "agent" to the boycott information request led to the exporter's downfall here.]

According to the charging documents, Rohde & Liesenfeld supplied to Al Furat Petroleum, on 36 occasions, invoices from Tropwind Trading Ltd. containing the phrase

We certify that the goods enumerated in this Invoice are not of Israeli origin and do not contain any Israeli materials.

The problem here is that the invoice was supplying a negative certificate of origin, even though section 760.3(c) of the Export Administration Regulations (the “EAR”) makes clear that a U.S. person, in connection with an export to a boycotting country, may only supply a positive certificate of origin stating where the product originates. A negative certificate of origin certifying where the product does not come from is prohibited.

The problem here is that there is another requirement for a violation of the anti-boycott regulations which does not appear to have been met. Section 760.1(e) of the EAR requires that the information be furnished “with intent to comply with, further, or support an unsanctioned foreign boycott.” Here, although it seems clear that Tropwind made the negative certification with such intent, Tropwind is not a U.S. person and isn’t subject to the regulations.

The case for intent against Rohde & Liesenfeld is a bit shakier. A logistics provider does not necessarily inspect all the shipping documents, and if Rohde & Liesenfeld was unaware of this negative certification in the invoice, it’s delivery of the invoice with the shipping documents wouldn’t constitute intent. There is nothing to suggest whether the clause at issues was conspicuous and on the face of the document or buried among the 6 point terms and conditions printed on the back of the invoice If BIS is seeking to impose liability on freight forwarders, logistics providers, and the like, it should provide some notice to the export community in the settlement documents of the basis for its finding that the freight forwarder or logistics provider had an intent to comply with the boycott.

COMMERCE DEPARTMENT, GOVERNMENT PARTNERS, BREAK UP IRANIAN RING CHARGED WITH PROCURING IED COMPONENTS

Although this headline conjures up a Eliot Ness raid with the culprits being led off in shackles and at gunpoint never to export again, the reality is a bit more mundane. In fact, the headline refers, in part, to a federal grand jury indictment unsealed in Miami today against eight individuals and eight corporations, all allegedly part of the Mayrow General Trading Company network. The defendants were charged in connection with dual-use exports that wound up in Iran, including exported items which could be used in the manufacture of IEDs deployed against U.S. troops in Iraq.

None of the eight individuals or corporations are located in the United States. Whether Britain, Germany, Iran and Malaysia, where the defendants are located, will permit the extradition and prosecution of the individual defendants is a close question, particularly if the defendants’ only contacts with the United States were the purchase of U.S.-origin goods and if the exports to Iran did not break the laws of their countries of residence. (For those individuals located in Iran, of course, it’s not even a close question, and these individuals will be subject to prosecution only if they decide to visit, say, Disneyland or the Grand Canyon or travel to a country that will allow rendition or extradition.)

In addition, the Commerce Department release indicated that 75 companies and individuals had been added to the Entity List in connection with the Mayrow network exports. (The State Department release on the indictment, however, states that there were 100 additions to the Entity List). All exports of U.S.-origin goods to companies and individuals on the Entity List will require a license from the Department of Commerce. Naturally such licenses will generally be denied.

As of this writing, however, the BIS website doesn’t indicate any additions to the Entity List, but it can reasonably be assumed that these additions will appear sooner rather than later. Unlike indictments of foreigners over which the U.S. has precarious criminal jurisdiction, putting members of the network involved in these exports on the Entity List is much more likely to be effective in shutting down the troublesome exports. Once these additions are made, I’ll post a link identifying the companies and individuals involved.

The goods are neither of Israeli materials nor [sic] they contain any Israeli materials nor are they exported from Israel.

We declare that no raw material of Israeli origin has been used for production or preparation of the goods mentioned in this invoice.

AR-AM was alleged to have included this language in three invoices and agreed to a fine of $7,200. DMA was alleged to have included this language in one invoice and agreed to a proportionate fine of $2,400. Both companies agreed to a “non-standard” two-year denial order forbidding them from engaging in exports to Bahrain, Iraq, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates and the Republic of Yemen. Both fines were suspended for two-years contingent upon compliance with the non-standard denial order and no further export violations by the companies.

Since the language was contained in the invoices generated by both companies, this is not a case where the company simply missed the boycott language in terms and conditions or other documents supplied by the purchaser. As a result, neither company was in very good position to claim that it was an oversight or a failure to read all documents thoroughly. This probably explains the two-year denial order.

However, the “non-standard” denial order is hard to defend even in this circumstance. Section 764.3(a)(2) of the EAR permits a “non-standard” denial order which is described as “narrower in scope” than a “standard” denial order. The order at issue is non-standard because it is restricted to specific Arab countries. Since only four instances of anti-boycott compliance were alleged, and three of those for Syria and the fourth was for an unspecified country, these aren’t the countries that were involved in the transactions in dispute. Nor or these all the countries in the Arab League.

Instead, the list seems to be derived from the list of countries reported in the 2007 BIS report to have been involved in anti-boycott requests, excluding Egypt and Jordan which were involved in only a handful of such requests. That being said, it seems more than a little ironic that a boycott would be punished not be a general denial order but by an order that in effect was itself a boycott of specific countries.

A recent article in the Jerusalem Post provides some interesting detail on the settlement agreement and the circumstances that led to it. The reporter interviewed Pam Lehrer, general counsel for the Berwind Group, a private investment firm that owns Colorcon. She said that the violations were the result of an “oversight”:

This matter occurred at Colorcon’s UK subsidiary. The requests were typically in the fine print of the terms and conditions, and the UK subsidiary’s employees were not aware of the requirement to look carefully for these matters and report them. We became aware of the issue through an internal audit review. We felt it was important to review our compliance with the antiboycott laws and performed an audit of our subsidiaries. As a result, we found the issue and voluntarily reported it to the US Commerce Department.

That statement differs from what Colorcon admitted in the settlement documents. In those documents, the company conceded that the anti-boycott certifications “with intent to comply with, further or support an unsanctioned foreign boycott.” This specific intent requirement is contained in section 760.1(e) of the Export Administration Regulations. If the information was buried in the fine print and the U.K. employees were not aware of the requirement to find such provisions, it’s hard to say that the U.K. employees signed these contracts with the intent to participate in the boycott against Israel.

Of course, agreeing to pay $39,000 to BIS may make more sense than paying much more to lawyers to litigate with BIS over whether the U.K. subsidiary had the requisite intent to comply with the Syrian boycott of Israel.

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.

Once again we have an example of a company winding up in the soup because of non-compliance by one of its foreign subsidiaries. It is easy to forget the broad scope of the anti-boycott regulations in Part 760 of the EAR. Section 760.2(d) prohibits “U.S. Persons” from providing information about its relationship with a boycotted country. A “U.S. Person” is defined in Section 760.1(b)(1)(v) as including foreign subsidiaries that are “controlled in fact” by a U.S. company. Section 760.1(c)(2) makes clear that, not surprisingly, a wholly-owned subsidiary will be presumed to be “controlled in fact.”

Violations by foreign subsidiaries can easily occur without anyone really understanding that a violation has occurred. Cooper’s Brazilian subsidiary no doubt understood itself as subject to Brazilian law and not to U.S. law. So it behooves companies, in my view, to spend the extra bucks to send their foreign employees to export compliance training. And, of course, plenty of lawyers are more than happy to fly down to Rio to do the training there.

In its recently released annual report for 2006, the US Commerce Department’s Bureau of Industry and Security noted that there had been 31 cases in which the Iraqi government had engaged in restrictive trade practices last year.

In 2005, according to the previous year’s report, there were a total of just eight such cases involving Iraq.

. . .

It was unclear why Iraq began enforcing the Arab boycott of Israel more energetically last year. However, the Iraqi government sent an official representative to take part in the annual meeting of international liaison officers of the Arab League boycott Office in Damascus last May.

The aim of the meeting was to discuss ways of intensifying the trade embargo against the Jewish state.

When the Jerusalem Post contacted the U.S. Embassy in Tel Aviv about this increase, the Embassy only said that it was “disappointed” in this and anticipated that it would raise the issue again with Iraqi officials.

Although it seems likely that Iraqi boycott activity has increased, the BIS reports don’t fully support the figures cited by the Jerusalem Post. First, the BIS tables on Iraqi boycott activity are inconsistent. One table (Appendix E-3) cites 31 reports of boycott activity by Iraq between October 2005 and September 2006 while another (Appendix E-4) shows 26 reports during the same period. The tables do not explain the reason for this inconsistency.

Second, the figures given by BIS are reports of boycott requests, and there may be multiple reports of the same boycott request, e.g., by both the exporter and the freight forwarder. In the 2005 Annual Report, footnote 1 to both Appendix E-3 and Appendix E-4 stated:

All figures are enhanced to the extent that an exporter and one or more other organizations reports on the same transaction.

The 2006 Annual Report contains the footnote number but the footnote text has, inexplicably, gone missing. (Does anyone edit documents at BIS before they are released?) Presumably, however, the footnote was intended to reference the same text as in 2005.