ExportLawBlog

Archive for the ‘BIS’ Category

Jun

14

Proposed USML Category X Reforms Praised by Jason Voorhees

Posted by Clif Burns at 6:28 pm on June 14, 2012

Machete The Bureau of Industry and Security (“BIS”) and the Directorate of Defense Trade Controls (“DDTC”) have announced proposed reforms to Category X of the United States Munitions List (“USML”). Category X covers protective personnel equipment and shelters.

For those wondering about the title of the post, one aspect of the reforms has nothing to do with Category X. The proposed rules published by BIS indicate that machetes, favorite of many rebel forces and villains in teen slasher flicks, are to be classified as EAR99. Machetes are currently controlled under ECCN 0A988 and require licenses for exports to Iraq, North Korea and Rwanda. One of the advantages of taking machetes off of the Commerce Control List is that it would eliminate the need to figure out the difference between what is considered a machete controlled by the rule as opposed to a really big knife which, presumably, is not.

The thrust of the proposed reforms deals with hard and soft body armor. Currently body armor is controlled based on the level of protection as measured by the NIJ Standard, with types IIIA and below subject to BIS control under ECCN 1A005 and everything above that (Types III and IV) are on the USML in Category X. (A frequent source of confusion is the NIJ standard for Type IIIA is, somewhat counter-intuitively, below, and provides less protection than, Type III). Current controls do not depend upon whether the body armor was specifically designed for military use or not.

Under the proposed rules, soft armor that meets Type III standards or that is “manufactured to military standards” would be moved to the new ECCN 1A613. Hard armor plates meeting Type III standards would also be moved to the new ECCN 1A613. All Type IV armor would remain in Category X of the USML. The new ECCN 1A613 would be subject to NS Column 1 controls which are stricter than the NS Column 2 controls applicable to the body armor covered by ECCN 1A005. Items controlled under NS Column 1 require a license to all destinations other than Canada. The proposed rule would mitigate this restriction somewhat by making items controlled by ECCN 1A613 eligible for license exception STA which permits unlicensed exports, if certain other conditions are met, to a number of countries including most of Europe.

Probably the most significant of the proposed changes is that body armor, other than Type IV armor still on the USML, may now be exported under license exceptions TMP and BAG. This means that body armor may be exported, in checked luggage or separately, for personal use without the requirement for a license. There has been considerable public criticism of the current regime which makes it difficult, if not impossible, for U.S. employees travelling to dangerous destinations to carry protective gear with them.

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May

30

PRC Citizen Arrested For Manometer Exports

Posted by Clif Burns at 7:12 pm on May 30, 2012

Category: BIS • China • Criminal Penalties

MKS Manometer Qiang Hu, a Chinese national who was sales manager at MKS Instruments Shanghai Ltd. was arrested while he visited the Shanghai company’s U.S. parent, MKS Instruments, Inc. in Andover, Massachusetts. He was arrested on charges that he illegally exported manometers, classified as ECCN 2B230, without the required licenses from the Bureau of Industry and Security (“BIS”).

What is interesting about this case is that the items were exported to the PRC pursuant to licenses, but the licenses were allegedly for persons who were not the ultimate end-users of the exported items. According to the affidavit supporting the criminal complaint, Hu used licenses for existing customers of MKS where those licenses had remaining quantities available for exports. Additionally, Hu is alleged to have applied for new licenses for front companies and then used those to export manometers that were then diverted to a number of other end-users in the PRC. One of the alleged front companies was Shanghai Racy System Integration Co., Ltd., surely one of the best front company names ever. The affidavit alleges that “thousands” of items were exported improperly by Hu, with items worth $4.5 million going to Shanghai Racy alone.

The affidavit does not allege, with one rather odd exception, that Hu would have been unable to obtain licenses for the ultimate end users. Instead, the affidavit cites emails from Hu to his customers and co-conspirators in the PRC which suggested that he used existing licenses to service end-users in the PRC who only needed small quantities of the items on the grounds that the export process was too cumbersome and expensive for the small quantities involved.

As I noted above, there is one instance in which the affidavit tries to suggest that the end-user was problematic. This involved an export to “Parr Lab Technical Solutions” in Hong Kong which the affidavit noted was on BIS’s Unverified List. That is presumably a reference to Parrlab Technical Solutions, Ltd., which is on that list. However, licenses are not necessarily denied to parties on the unverified list. When an end-user is on that list, the exporter is simply required to engage in heightened due diligence to assure that the exported item will not be diverted to a prohibited end-use or end-user.

The DOJ press release on this case indicates that the parent company, MKS Instruments, Inc., is not a target of any investigation in this matter.

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May

29

NetApp Under Investigation For Spying Equipment Used in Syria

Posted by Clif Burns at 5:44 pm on May 29, 2012

Category: BIS • Syria

NetApp Headquarters A recent story from Bloomberg indicates that California-based NetApp, which manufactures and sells network storage solutions, is under investigation by the Bureau of Industry and Security (“BIS”) in connection with one of NetApp’s storage devices winding up in Syria. The NetApp equipment was made part of a massive system built by Syria’s Bashar al-Assad to intercept and review all email sent in Syria.

According to the story, the Italian company Area SpA, which built the surveillance system, bought the NetApp equipment from one of NetApp’s distributors in Italy. Area then exported the equipment to Syria and incorporated it into the surveillance system.

That in and of itself would not have posed problems for NetApp or led to an investigation. However, the Bloomberg story reports, “workers for Area and NetApp communicated directly, e-mailing each other after the sale about configuring the equipment.” That could indicate that NetApp knew of the sale before it occurred. More likely, if true, these emails might be construed as provision of services to the Syrian government which would have been problematic if they occurred after the Executive Order issued on August 17, 2011, banning export of services to Syria.

A NetApp spokesperson indicated that the company was finishing its internal review of the matter and declined to provide a comment to Bloomberg on the investigation.

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May

25

Panamanian Company Fined For Violating U.S. Embargo on Cuba

Posted by Clif Burns at 2:46 pm on May 25, 2012

Category: BIS • Cuba Sanctions

Mobile Phone

The Bureau of Industry and Security (“BIS”) issued a press release today announcing a consent decree between the agency and Ericsson de Panama S.A. in Panama City, Panama. Under the consent decree, Ericssonâ€™s Panamanian subsidiary agreed to pay $1.753 million to settle charges that it violated the U.S. embargo on Cuba. BISâ€™s press release alleges that Ericsson de Panama imported mobile telephones from Cuba into Panama for repair. The company is then alleged to have re-packaged the telephones to conceal their Cuban origin. The phones were sent to the United States for repair and then returned by the company to Cuba once the repaired phones had been received back from the United States. The press release noted that the company avoided criminal prosecution, notwithstanding the â€œegregiousâ€ nature of the violations, because the matter had been voluntarily disclosed and the company had cooperated with the agencyâ€™s investigation.

The agency could assert jurisdiction over a Panamanian company here because the Panamanian company imported and exported the Cuban phones from and to the United States. This is different from situations, such as we discussed in our last post where none of the activity at issue occurred in or had any nexus with the United States.

Of even more significant interest, the press release indicates that the agency required, and the company consented to, a â€œcompany-wide export audit conducted by an independent third party of all transactions connected with Cuban customers.â€ Unlike other cases where BIS has permitted part of the fine to be allocated to compliance costs, it appears that in this case the cost of the audit will be a cost to the company above and beyond the hefty monetary fine exacted by BIS.

Finally, it should be noted that the items involved here are personal communications devices that since 2009 have been eligible for export and re-export to Cuba. However, the exports in questions occurred between 2004 and 2007, before the new rules were in effect. The new rules also apply only to donated mobile phones, and it seems doubtful that all the phones involved in this case had been donated to people in Cuba.

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May

7

The Sum of the Parts May Sometimes Be Greater than the Whole

Posted by Clif Burns at 6:39 pm on May 7, 2012

Category: BIS

Mattson Technology The Bureau of Industry and Security (“BIS”) recently released documents detailing a settlement that it entered into with Mattson Technologies relating to Mattson’s unlicensed exports of pressure transducers classified under ECCN 2B230. That ECCN covers pressure transducers with pressure sensing elements made of aluminum, nickel or certain alloys thereof and which meet a certain standard of accuracy set forth in the ECCN. Transducers of those specifications are needed for centrifuges producing weapons-grade uranium, and there is some evidence that the Iranians are actively acquiring or trying to acquire such devices.

The violations were voluntarily disclosed by Mattson. According to an SEC filing, the disclosure occurred in 2008 and the violations were said to be “inadvertent.” None of the transducers were shipped to Iran. However, transducers were shipped to Israel, Malaysia, Singapore, PRC and Taiwan and were valued at “approximately $78,000” according to the Charging Letter.

BIS disputed that the exports were inadvertent and claimed that, even though “in May 2006, one of Mattson’s supply chain partners informed it that pressure transducers that Mattson [used] required export licenses when shipped to Mattson customers in certain foreign countries,” Mattson went ahead and shipped these items without license. As a result, BIS fined Mattson $850,000, suspending all but $250,000 of that fine, which is still a hefty fine for matters that involved $78,253 in exports and were voluntarily disclosed. (I know, I know, the agency could have fined Mattson 43 trillion dollars — actually $11,750,000 at $250,000 for each of the 47 counts — but decided to cut Mattson some slack.)

One interesting takeaway from this case — other than that VSDs can be expensive — is how it appears that Mattson got into trouble here. Mattson, according to its website, “designs, manufactures, and markets semiconductor wafer processing equipment used in the fabrication of integrated circuits.” Apparently, these machines utilize pressure transducers; and it is likely that the transducers at issue were shipped as spare or replacement parts for these machines to foreign customers that had purchased Mattson’s processing equipment. The machines themselves may have been classified as EAR99. Often companies do not realize that even if a system may not require an export license, its component parts might when shipped separately from the system. That is an understandable area of confusion and likely what, at least in part, happened here. An essential part of export training is to teach employees that parts and components may have different ECCNs from the equipment to which those parts and components belong.

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