Now we know. They surf websites looking for sanctioned countries, like Syria and Sudan, in drop down address lists on the websites of U.S. companies. Allegedly this is to advise U.S. investors about publicly-traded companies that supposedly jeopardize their stockholders’ investments by dealing with sanctioned countries.

After a heavy day of web surfing the Office of Global Security Risk fired off this missive to UPS in respect to a price table it found on the UPS site.

We also note an Air Freight peak season surcharge table on your website which lists surcharge amounts for regions including Latin America and Europe, Middle East, Africa in the Destination section. According to the notes section, the destinations listed include Cuba under “Latin America (All Other Countries)” and Iran, Sudan and Syria under “Europe, Middle East, Africa.” Iran, Sudan and Cuba are identified by the U.S. State Department as state sponsors of terrorism and are subject to U.S. economic sanctions and export controls.

Apparently the SEC thinks that all exports to these countries are banned. The time that the OGS staff spent surfing the web apparently did not extend to researching economic sanctions laws and discovering, say, TSRA, which permits exports of agricultural products, medicine and medical devices to sanctioned countries. Or the Berman amendment which permits export of informational materials. Never mind any of the other exceptions.

UPS replied by saying this:

The appearance of any country on the sanctions list on a UPS listing of surcharge amounts, explained [UPS Vice-President Norman] Brothers, applies only to lawful deliveries. “During the period July 10, 2006 through December 31, 2010, UPS rejected at least 55 shipments destined for Syria because they were determined to be impermissible under U.S. export controls.”

The SEC was reportedly unembarrassed its crude understanding of U.S. export laws and immediately returned to more web surfing. You can start humming that Gershwin tune: “Nice work if you can get it.”

A letter from an OFAC official explained the agency’s decision not to unblock the funds by saying that U.S. financial institutions are required to “block all wire transfers in which a sanctions target has an interest and that come within the institution’s possession or control, even if the institution is an intermediary and an underlying transaction does not otherwise involve a person subject to US jurisdiction.” Section 541.201 of the Zimbabwe sanctions does require the blocking of “property or interests in property of” designated entities that come within the control of U.S. financial institutions or their overseas branches. And section 541.308 of the Zimbabwe sanctions regulations defines property broadly enough to include wire transfers of funds.

But that hardly ends the inquiry. The wire transfer can only be blocked if it is the “property or [an interest] in property of” the intermediary financial institution, in this case, ZB Bank, Ltd. Nothing in OFAC’s regulations anywhere defines “property of.” And it stretches any conceivable meaning of that term to say that the funds being wired were the property of the bank rather than the property of the U.K. couple and/or Chinhoyi municipality. If that’s not clear on its face, consider this: if I had a judgment against ZB Bank (leaving aside the blocking issue), could I get a court anywhere in the world to allow me to levy on the wire transfer in this case? Of course not.

OFAC might be free to promulgate a regulation blocking funds that are about to come into the possession or control of a blocked person or entity, which it hasn’t done here or anywhere else. But the agency is not free to say that words such as “property of” mean something that those words simply don’t mean or to say that bank accounts are “property of” the bank. And once OFAC engages in such behavior, is the agency any better than the tin-pot dictator that the U.S. seeks to sanction?

According to one of the Wikileak cables published by the Guardian, Armenia, in 2003, sold machine guns and rockets to Iran which were later used in a fatal attack on U.S. forces in Iraq by Shia militants. Secretary Rice discussed this with Armenian President Serzh Sarkisian, who denied any involvement in the arms transfer.

In December 2008 the State Department sent a letter to Sarkisian threatening U.S. sanctions on Armenia unless Armenia signed a written agreement that it would undertake certain specified steps to prevent further arms transfers to Iran or other terrorist states. Those steps were to include:

• Adopt the Wassenaar Arrangement control lists
• Ensure that Armenian-based brokers aren’t involved in arms transfers
• Accept periodic unannounced inspections by the United States
• Consult with the United States on all arms transfers to countries that are not members of NATO, the E.U., or the Wassenaar Arrangement.

There is no indication that Armenia entered into such an agreement other than, of course, the absence of current U.S. sanctions against Armenia.

Consider this example cited in the article:

John Iliff, general manager of American Forge & Foundry, says the single shipment of oil-drainage tanks it received in 2006 from the CPMIEC unit set off no alarms. “Trading in illegal goods certainly never crossed our minds,” he says.

The shipment came from China JMM Import & Export Shanghai Pudong Corp., which didn’t appear on any sanctions list until Thursday. Records indicate the company shares an address and phone number with a CPMIEC unit that was previously banned: CPMIEC Shanghai Pudong Corp. The Treasury determined that the two companies are affiliated.

That designation of JMM Import & Export occurred just a few days ago on December 31, 2009, almost three years after the cited shipment. But there were several red flags that American companies might have picked up on before OFAC’s belated designation of the CPMIEC affiliate. Not only is there a similarity in the names of the two companies, but they shared the same street address. Standard procedure should be not only to check names on the SDN list but addresses as well.

But the larger issue here is that the obvious ease with which Chinese companies can morph into new entities effectively renders company-based sanctions almost completely ineffective. It’s obviously as easy for Chinese companies to rename themselves as it is for underage Chinese gymnasts to acquire new, earlier and eligible birth dates on official documents. I’m not so sure what the solution is here but it doesn’t appear to be imposing penalties or additional compliance obligations on U.S. companies that deal with affiliates of companies on the SDN list.

When you try to sign in to Windows Live Messenger, you receive the following error message:

810003c1: We were unable to sign you in to the .NET Messenger Service.

Microsoft has discontinued providing Instant Messenger services in certain countries subject to United States sanctions. Details of these sanctions are available from the United States Office of Foreign Assets Control ["OFAC"].

Why it took Windows so long to get with the program when arch-rival Google had disabled downloads to Sudan and other sanctioned countries ages ago is not clear.

Although the shutoff applies to Cuba, North Korea, Iran, Sudan and Syria, Sudan seems to have taken it most to heart, judging from this report on the shutoff in the Sudan Tribune, a Paris-based on-line newspaper covering Sudan:

The software, Microsoft’s Windows Live Messenger, allows users to chat directly with one another, send photos, play games or send messages to mobile phones. The Messenger is widely used by the Sudanese diaspora to contact their families and until last week had been available for free downloading in the countries targeted by US sanctions.

Of course, Microsoft’s action is incredibly easy for users to circumvent. First, users can log back into their accounts and change their country to a non-sanctioned country. (Oddly, Microsoft’s drop-down list for countries on its Live Messenger sign up page- still includes Sudan — not to mention Cuba, North Korea, Iran and Syria!) Second, if Microsoft is also using geolocation filters on the IP addresses, the user can always connect through a proxy server located in a non-sanctioned country. Et voilà, the Sudanese (or Syrian, Cuban, Iranian or North Korean) resident can IM to his or her hearts content, Microsoft is in full compliance with the law, and OFAC is none the wiser and can still believe that it has hastened the downfall of these governments by keeping their citizens from communicating with their family and friends.

Notwithstanding the 59 pages of the indictment, it can all be boiled down to a few sentences. LIMMT was added to the Department of Treasury’s Specially Designated Nationals (“SDN”) list in 2006. This meant that any funds destined to LIMMT which passed through the U.S. banking system would be blocked. In order to avoid this outcome, LIMMT, and its manager Li Fang Wei, told its customers, all foreign, to send U.S. dollar payments to other accounts held by LIMMT under other names or by related companies at various Chinese banks. Some of these transactions transited New York banks 118 times. The indictment claims that each of these 118 transactions constituted the falsification of business records which is a criminal offense under New York Penal Law § 175.10. And there you have, in under two minutes, all 59 pages and all 118 counts.

I think that even if your legal training consists solely in watching Law and Order marathons on cable, you can probably see a glaring flaw in the theory of the indictment. In order for a crime to have been committed, the entries that each bank made when wiring funds at the request of LIMMT’s foreign customers had to be false. But these were all the real names of real accounts held at real Chinese banks, and the indictment does not try to claim otherwise. It’s not clear, then, what was falsified, particularly in the context of a statute that appears principally directed at cooking the books — i.e., entering a wrong dollar amount in the ledger and pocketing the difference.

Beyond that, there is of course the question of the jurisdiction of New York state courts over Chinese citizens for acts that occurred in China, that were legal in China, and, even to the extent that they fostered trade with Iran, didn’t have concrete effects in the United States. Even if there were a credible theory of prescriptive jurisdiction here, hell will freeze over before China will allow the U.S. to extradite Li Fang Wei under these charges.

Finally, of course, there is the legitimate question as to why a state prosecutor, even a New York state prosecutor, is mucking around in matters of U.S. foreign policy that are more properly in the purview of the Office of Foreign Assets Control (“OFAC”) which designated LIMMT in the first place. After all, OFAC had been blocking these attempts by LIMMT to alter its corporate identity by amending the SDN listing for LIMMT to include the aliases that are the subject of the New York state indictment. That was an appropriate response by OFAC to LIMMT’s shenanigans. I think it’s safe to say that OFAC doesn’t need, and probably doesn’t want, the efforts of a state DA and inveterate publicity hound to handle the foreign policy issues created by LIMMT’s trading activities.

What next? Is Morgenthau going to indict Syria’s Bashar al-Assad for supporting designated terrorist groups?

The story starts two weeks ago when the U.S. Navy stopped the ship in the Red Sea on the suspicion that it was carrying an arms shipment to the Gaza Strip. The U.S. Navy boarded and searched the ship with the permission of its captain. According to U.S. military officials, the search uncovered “small munitions.”

Adm. Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, said his country had done all it could to intercept the ship’s suspected arms shipment to Hamas militants in the Gaza Strip, but its hands were tied. …

“The United States did as much as we could do legally,” Mullen said Tuesday. “We were not authorized to seize the weapons or do anything like that.”

Mullen’s statement is consistent with U.N. Resolution 1747 which requires the U.S. to prohibit U.S. citizens from procuring arms from Iran and from using U.S.-flag vessels to carry U.S. arms, both of which are already prohibited under U.S. law by the Iranian Transactions Regulations and the International Traffic in Arms Regulations (“ITAR”). Nothing in 1747 authorizes the U.S. to seize the weapons or the ship; instead the ship was escorted by the U.S. Navy to Cyprus

Cyprus, on the other hand, can do a bit more. Resolution 1747 forbids Cyprus from using a Cypriot-flagged vessel from carrying Iranian arms or related materiel. That would, in theory, permit Cyprus to require the ship to offload any prohibited Iranian cargo in Cyprus. Cyprus, however, is asking the U.N for guidance on what to do. The Cyprus Mail quoted the Cypriot Foreign Minister Markos Kyprianou on the affair:

Cyprus filed a report to a United Nations sanctions committee on Tuesday and would await a verdict before taking further action, Foreign Minister Markos Kyprianou said.

He declined to specify what the Cypriot report said, saying it was confidential.

“There is an issue because of the origin of the cargo, and there should be an assessment on whether the specific cargo falls within the prohibitions of the (Security Council) resolutions. That is where we are expecting guidance from the United Nations,” Kyprianou told reporters.

He said the vessel, anchored off the southern port of Limassol from January 29, would remain there until a definitive decision is taken.

It’s not clear why Kyprianou needs guidance whether the cargo consists of “arms or related materiel.” Even if the ship only contains small munitions, as stated by U.S.-military officials, those clearly fall within the definition. The Jerusalem Post claims that the cargo includes “propellant and casings for artillery and tank rounds.” Debka File, not always an entirely credible source, claims that ship is carrying “10 containers of Iranian rockets.” If any or all of this is true, Kyprianou can’t let a Cypriot-flagged ship carry this cargo.

• The Iranians aren’t very happy about the sanctions imposed yesterday by the Treasury Department on the Export Development Bank of Iran (“EDBI”), so they issued a press release decrying the sanctions. According to the Iranians, the sanctions were imposed “as a propaganda move in order to cover up the consequences of the recent American economic crisis.” That, I guess, would explain why yesterday’s entire news cycle was dominated by the sanctions on EDBI and absolutely no coverage was given at all to to the the decline of the Dow Jones or other economic news. The Iranians also threatened to file complaints with unnamed “relevant authorities.” Let’s see how well that works out for them.
• At the same time the U.S. is tightening sanctions on Iran, the U.S. continues to lay the groundwork for a U.S. “interests section” in Tehran. This would be the first time the U.S. has had a diplomatic presence in Tehran since the 1979-81 hostage crisis. According to this report by McClatchey Newspapers, the Bush administration intends to announce these plans in mid-November. No word yet on whether Iran is on board with this idea, although Iranian President Mahmoud Ahmadinejad said last month that he’d consider the idea.
• Cuba has announced that its recently-discovered oil reserves have 20 billion barrels of oil instead of the 5-10 billion previously estimated. To put this number in context, the U.S. has estimated reserves of 29 billion barrels. This has caused some skeptics to scoff that the new estimate is “off the charts” and might simply be a ploy to rekindle investor interest despite falling oil prices. Even so, there are reports of proposals on the Hill to exempt U.S. oil companies from the embargo so that they could get a piece of the action. Embargo hardliners are countering with proposals to prevent executives of foreign companies that drill in Cuba from visiting Disneyland.
]]> http://www.exportlawblog.com/archives/413/feed 0 http://www.exportlawblog.com/archives/392 http://www.exportlawblog.com/archives/392#comments Thu, 18 Sep 2008 01:51:18 +0000 Clif Burns http://www.exportlawblog.com/?p=392 The winner of today’s breathlessly exaggerated headline contest goes to the Bureau of Industry and Security (“BIS”) for this:

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.

]]> http://www.exportlawblog.com/archives/392/feed 3 http://www.exportlawblog.com/archives/372 http://www.exportlawblog.com/archives/372#comments Fri, 01 Aug 2008 20:37:14 +0000 Clif Burns http://www.exportlawblog.com/?p=372 Donald Wayne Hatch, the owner of Rigel Optics, an online distributor of Russian night vision equipment, entered into a plea agreement yesterday in connection with an indictment that alleged that he had illegally exported night vision equipment without a license. Hatch had been the subject of a 14-count indictment accusing him, inter alia, of violations of the Arms Export Control Act. Under the plea agreement, the government would drop 13 of the 14 counts in the indictment and Hatch would plead guilty to the one remaining count, which alleged that he made misrepresentations to the government in violation of 18 U.S.C. § 1001(a)(2). At the same time, Rigel Optics entered into a plea agreement under which, in exchange for the government dropping the remaining counts in the indictment against Rigel, Rigel would plead guilty to one count of violation of the Arms Export Control Act.

The plea agreement for Hatch sets forth the factual predicate for his plea and describes two exports of generation 2 night vision rifle scopes by Hatch. At his instruction, a shipping employee entered the notation “NLR” — or “No License Required” — on the Shipper’s Export Declaration (“SED”) filed in connection with the exports, even though a license from the Directorate of Defense Trade Controls (“DDTC”) was required.

To support a violation of 18 U.S.C. § 1001, the misrepresentation must have been with knowledge that it was false. The only factual predicate for knowledge by Hatch that the NLR notation was false is an allegation that the Office of Export Enforcement (“OEE”) of the Bureau of Industry and Security (“BIS”) sent Hatch a letter:

In November, 2002, the Department of Commerce, BIS, OEE, sent a letter via U.S. certified mail to the attention of Mike Hatch c/o Rigel Optics at 1510 Ninth Street, DeWitt, Iowa. The letter advised that the night vision scopes sold by Rigel Optics were subject to the export licensing authority of the Department of State, Office of Defense and Trade Control (DTC). The letter further instructed Rigel Optics to cease exporting all night vision rifle scopes until the rifle scopes were properly classified by the Department of State, and any applicable export licenses had been received.

Oddly, there is no allegation that Hatch signed for or read the letter or even that the certified mail receipt was returned to OEE. Nor does the plea agreement allege that Hatch mislabeled the exported scopes — an oft-cited and usually reliable indicium of knowledge and criminal intent. Instead, all we have is a letter mailed to him saying that the rifle scopes required DDTC licenses. It’s not clear why no agents visited Mr. Hatch and directly informed him of the export requirement, a more common practice used to establish criminal intent by defendants for exports after the visit.

UPDATE: The Associated Press report on Hatch’s and Rigel’s plea agreements can’t seem to get things right, referring to the “Arms Exportation Control Act” and, better yet, the “U.S. Missions List.” Don’t reporters at the AP have access to Google?

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