Yesterday I posted an entry detailing an enforcement proceeding by the Bureau of Industry and Security (“BIS”) against Washington-based Edco, Inc., where the agency extracted a fine from the company based on a highly dubious claim that Edco had “evaded” a General Denial Order imposed on Hong-Kong-based Sunford Trading Company notwithstanding that Edco had not itself violated any of the provisions of the order that were applicable to it. BIS also went after Mark Vorobik, the C.E.O of Edco, on the grounds that during the investigation he had made a false statement to government agents in violation of section 764.2(g) of the Export Administration Regulations (“EAR”).

Allegedly he told the agents that he did not know that Sunford was on the Denied Persons List even though Sunford told him that they were. Settlement documents released by BIS reveal that Mr. Vorobkik was penalized $52,000 for this misstatement, of which half was suspended for one year on the condition that he commit no more violations of the EAR during that period.

Section 764.2(g) prohibits any from making

any false or misleading representation, statement, or certification, or falsify or conceal any material fact, either directly to BIS, the United States Customs Service, or official of any other United States agency, or indirectly through any other person … [i]n the course of an investigation

Like many other provisions of the EAR, this is not a model of drafting clarity. Although it forbids the falsification of a “material fact,” there is no materiality requirement for a “false statement.” In theory, you could be fined $250,000 for telling a BIS investigator that the sky is purple or that you are happy to see them. Materiality is important here because if Edco did not violate the Denial Order imposed on Sunford, this statement would not be considered material.

Another difficulty in misrepresentation cases is that the interviews are not recorded and so the entire case against the exporter is based entirely on the notes and recollections of the BIS agents. Even if the exporter did not make the representation, it will be difficult to overcome the contrary representations of the agents. Exporters always lose when it’s a matter of “he said, she said.” I sincerely doubt that Mr. Vorobik admits that he made this misrepresentation.

There is a lesson here for exporters when the friendly folks from BIS come knocking on your door, other than not to believe them when they tell you it’s a friendly visit. It almost never is.. If the government later claims you made false statements, you could be subject to enormous fines or even jail time under 18 U.S.C. § 1001 simply because the agents misheard or misunderstood what you said. So when BIS shows up, tell the agents that you will cooperate with their investigation but that to avoid any misunderstandings, you would like to have your lawyer involved. And don’t say anything else until your lawyer is involved because the agents are likely trying to build a case against you. Responses to BIS should be in writing so that there cannot later be any question about what you did or did not say in response to the questions from the investigator. This is the best procedure even if you are absolutely convinced that you did not do anything wrong.

Last week the Bureau of Industry and Security (“BIS”) announced a settlement with Washington-based fabricator Edco, Inc., pursuant to which Edco agreed to pay a $52,000 fine, $26,000 of which was suspended for a year provided that Edco commits no further export violations. The transaction at issue was the export by Edco of an EAR99 saw to China in a transaction that had been brokered by Sunford Trading Limited, a Hong-Kong-based company that was at the time subject to a Temporary Denial Order. In what must be a new high (or low) in the creative charging department, BIS charged Edco with “evasion” under section 764.2(h) of the Export Administration Regulations.

Leaving aside the whole issue of BIS’s questionable authority to issue general denial orders while the Export Administration Act is in lapse, this case illustrates the continuing efforts of BIS to stretch the terms of denial orders to accuse third parties of violating those orders even though nothing done by the third party violates the terms of the denial order itself. The first section of the denial order dealt with actions by Sunford and forbade Sunford from being involved in any export transaction. Sunford, by brokering the deal between Edco and its customer in China, clearly violated that part of the denial order.

The second part of the denial order indicates what things people other than Sunford may do in connection with Sunford. Each of these restrictions deals with the third party engaging in activities with items exported or to be exported and owned or controlled by the denied party, e.g., exporting the item on behalf of the denied party, assisting the denied party in acquiring the item, acquiring the item from the denied party, or servicing the item for the denied party. Edco did none of these things here because the saw was never owned or controlled by Sunford. All Sunford did was introduce the buyer and the seller and receive a commission for that service.

BIS obviously understood that Edco didn’t violate the denial order because it didn’t charge Edco under section 764.2(a) for engaging in conduct prohibited by any order. And without any evidence that Edco was aware of the TDO, BIS could not charge Edco with aiding and abetting in violation of section 764.2(b) or acting with knowledge in violation of section 764.2(e). That pretty much left only a charge of evasion in violation of section 764.2(h).

The problem is that even though the concept of evasion is quite broad it is necessarily limited to cases where an person or company avoids its own obligations through some kind of improper manipulation, trickery or deceit. Here, Edco was not under any obligation by the terms of the denial order not to have an export transaction brokered by a denied party. Thus, there was no obligation of Edco’s here for it to evade. Moreover, Edco could not evade Sunford’s obligation not to engage in export transactions.

Clearly BIS is dissatisfied with the language of denial orders as prescribed in Supplement 1 to part 764. But the way to fix that is to amend the EAR, not to dream up questionable theories of liability. All BIS would have to do is add a prohibition to part 2 to prohibit third parties from engaging in transactions with the denied party that constitute a violation of the denied parties obligations under the denial order. How hard would that be?

Last week the Bureau of Industry and Security (“BIS”) released documents relating to two settlement agreements (here and here) arising out of charges brought by the agency against International Photo Equipment Company, Inc. in Orlando, Florida, and its owner Adam Karesh. Under the settlement documents, a $45,000 suspended penalty was imposed on International Photo and a $45,000 penalty was imposed on Mr. Karesh, of which only $20,000 was suspended.

BIS had Karesh digging into his pockets based on alleged exports of EAR99 photographic equipment, of unspecified value, shipped by International Photo to Syria through Lebanon. Both Karesh and the company were charged with “acting with knowledge” under 15 C.F.R. § 764.2(e). Here is what BIS thought was acting with knowledge:

Karesh had knowledge that a violation of the Regulations was about to occur . . . because on or about April 19, 2006, a freight forwarder informed Koresh that the photography equipment could not be exported to Syria due to the U.S. sanctions in place on Syria. After the freight forwarder told Karesh that it did not know of any U.S. restrictions on exports to Lebanon, Karesh instructed the freight forwarder to ship the photography equipment to Lebanon so that Karesh’s customer could pick up the items and drive them the rest of the way to Syria.

“Knowledge” apparently means something else to BIS than it does to the rest of the world because under BIS’s definition of knowledge, Karesh “knew” that the export was illegal even though the freight forwarder told him that the export to Lebanon was completely legal! The only knowledge of a violation that I see here is that BIS must know that it is violating its own rules if this is what it calls knowledge of a violation.

What BIS fails to confront or acknowledge here is that the vast majority of people would not think that they were violating the law when shipping an item to a country to which an export was legal if thereafter someone was going to pick up the items and ship them to a destination where a direct export from the United States would be illegal. BIS would better serve its own interests and the security of the nation by educating exporters that such exports are illegal rather than making an example of small businesses that probably didn’t understand they were breaking the law.

When Voltaire referred to the British hanging an admiral “pour encourager les autres,” this was not intended as a compliment.