Oct
30
Duped or Duplicitous?
Posted by Clif Burns at 10:07 pm on October 30, 2007
Category: General
The Bureau of Industry and Security (“BIS”) just released the decision of an Administrative Law Judge recommending a 15-year denial of export privileges to Megatech Engineering, a Mumbai-based distributor of MTS Systems products, and three of its employees. At issue were unlicensed exports of two MTS Systems products to the Indira Gandhi Centre for Atomic Research {“IGCAR”), a company on BIS’s Entity List. Based on the ALJ’s recommendation, Megatech and the named employees have been added to the Denied Persons List.
Megatech and the individual respondents argued before the ALJ that they were duped by IGCAR which set up front companies and then diverted the exported products from those companies. The ALJ rejected this argument on two grounds.
First, the ALJ noted that the orders that were allegedly destined to the front companies were negotiated by Megatech with an individual that Megatech knew to be an employee of IGCAR. This wasn’t a red flag as much as it was a smoking gun.
Second, the ALJ noted that Megatech departed from its routine procedures with respect to the sales that were diverted to the IGCAR. Normally, MTS Sytems employees would travel to India for installation and final acceptance of products sold by Megatech to its customers in India. For the sales at issue, however, the Indian customer traveled to the United States for pre-shipment inspection, and MTS Systems trained a Megatech engineer to install the equipment and handle final acceptance in its stead. This change guaranteed that MTS Systems would not travel to India to discover that the front companies were not the final end user of the products.
Of course, the change in procedures should have been a red flag not only to Megatech but also to MTS Systems. So, not surprisingly, MTS Systems agreed in March 2006 to a $36,000 civil penalty. The charging documents against MTS Systems noted that an employee working on the exports at issue sent an email stating that “all kinds of flags are being raised here.” Those “flags” weren’t specified, but chief among them had to be the change in routine installation and acceptance procedures.
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Copyright © 2007 Clif Burns. All Rights Reserved.
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6 Comments:
I find it particularly interesting that BIS’s investigation in this case stemmed from it receiving “two anonymous letters
alleging violations of the export regulations by IGCAR and other Indian organizations on
the Entity List. The letters alleged that MTS, Megatech, Massspec, and Technology Options were among the companies involved in such activities. As a result of the letters, BIS opened an investigation to determine the veracity of the allegations.”
(See Page 19 of the Recommended Decision and Order at the first link Clif was kinf enough to provide.)
Just goes to show that BIS does not necessarily need investigators in the field to discover violations. Has anyone ever put together any metrics to try to figure out how many investigations and/or penalties stem from third party complaints to BIS?
Disgruntled employees and ex-employees account for largest number of leads: If you’re going to violate export controls, make sure each and everyone of your employees are happy as can be. These are followed by freight forwaders who stab their clients in the back when ICE, CBP or OEE raise a question, even though the freight forwarders are probably the ones that said “. Suspicious vendors are next. The most fun are folks who ask questions or submit documents that clearly reveal that they don’t know what they’re doing. Finally, are seizures and informal detentions by CBP at the port of export.
AES may change things in the future, once it gets fully implemented, because it will give the agencies the ability to look at exports in real time (Unlike the days when I and my team had to go to Germantown, ND, to look at SEDs on microfiche). But angry workers are probably always going to be the best source of leads.
Sorry, these boxes cut and transpose lines: The last post should have read “… even though the freight forwarders are probably the ones that said “Oh, just enter EAR99 so everything will go smoothly.”
“These are followed by freight forwarders who stab their clients in the back when ICE, CBP or OEE raise a question” Comment by Mike Deal — October 31, 2007 @ 5:08 pm
What? Come again! Do freight forwarders “stab their clients in the back” when they are asked to provide true and correct information about an export to the government, and do so? Whoa!! Please note, providing false information to an executive branch investigator is a felony, 18 USC 1001. Not to mention that a freight forwarder could get in all sorts of other trouble for not complying with an subpoena or enforcement request. Actually, many freight forwarders do get in trouble for providing false and misleading information on SEDs.
Also, another comment:
“Just goes to show that BIS does not necessarily need investigators in the field to discover violations.” Comment by Matthew J. Lancaster — October 31, 2007
Again…What? I cannot even respond to this absurd comment. I guess that most police departments with tip lines don’t need police officers on patrol or detectives in the field.
[Comment edited by blog owner for spelling errors and incivility]
Clif Burns responds:
I think that our commenter “OOOPS!”, who trolls here frequently under other names (but the same IP Address) and hides behind a fake email address, has misconstrued what Mike and Matthew said. Matthew wasn’t recommending getting rid of export enforcement officials, like, presumably, “OOPS!”, but was instead making the reasonable point that there are other ways of getting caught and that companies should be aware of that. And Mike wasn’t suggesting that freight forwarders should lie, rather he was noting that often the forwarder goes unsolicited to BIS or DDTC to disclose his customer’s violation. This is an area of controversy, but I don’t think it’s frivolous to suggest that when a freight forwarder gets a package addressed, say, to Iran, that the forwarder should return it to his customer and note that such packages can’t go without a license. Now, if the freight forwarder returns the next day and the customer wants to ship the same package to the UAE, well, then a trip to BIS or DDTC by the freight forwarder might well be in order
In the Gas Tech case in which I helped defend, which involved allegations of small amount of equipment to Calgary for inclusion in Canadian-made equipment (all EAR99) to be sold to an English company for installation, the US freight forwarder, who was asked by a Canadia freight forwarder for a quote on part of one leg of the shipment indeed did not inform any of the US persons or the Canadians that there was a problem, but went straight to Customs. And its not the first time I’ve experienced that. I’ve also known freight forwarders to supply prohibited boycott statements and misclassify goods and use the wrong license exceptions. They often forget little things like the OFAC de minimis exception for US-content in foreign-made products going to Iran doesn’t apply to products intended for the Iranian petroleum and petrochemical industry. We won’t even talk about what they do to HTS numbers.
Way outside the Beltway where I live, freight forwarders compete for business by assuring their customers that they are a low-cost one-stop-shop for all their export “documentation” needs, and then often hand off the work to low-paid undereducated clerical staff who are under pressure to handle a high volume of documents for a relatively small amount of money. They treat an export classification and controls in general, as merely a paper exercise. When they get it wrong, they then try to blame the customer.
That said, I’ve known some freight forwarders who are exceptionally knowledgable and competent, and others who are careful to not do export control work themselves but clearly shift responsibility to their customer (at least in the boilerplate to the agreements).
Clif,
Thanks for the clarification capturing the gist of my original comment. I was not attempting to advocate a position for terminating the employment of enforcement officials and investigators in favor of an enforcement system relying solely on anonymous letters.
I do advocate a program to help trolls learn to read language within the context it’s presented.
