Two weeks ago, we reported on a $14,613.24 fine imposed by the Bureau of Industry and Security (“BIS”) on Thermon Manufacturing after Thermon voluntarily disclosed to the agency that it had shipped heat-tracing equipment to Sudan in violation of the U.S. embargo on that country. That was not the end of the story, however, but rather merely the foreword to a more disturbing story.

Yesterday, BIS posted a press release on its website describing the rest of the tale. According to that press release, BIS fined five foreign subsidiaries of Thermon $176,000 because those subsidiaries had also exported heat-tracing equipment to “Iran, Syria, Libya and listed entities in India.” This violations had also been voluntarily disclosed by the parent company in Texas.

What makes this fine problematic is the following statement in the press release:

The Thermon subsidiaries did not inform Thermon Manufacturing of the ultimate destinations for the items and had been informed by Thermon Manufacturing in February 2005 that “products manufactured by Thermon US may not be sold to countries on the US trade sanctions list,” including specifically Iran, Syria and Libya. BIS alleged that the affiliates acted with knowledge of those violations involving shipments to sanctioned countries that occurred after this warning.

First, one has to wonder what else Thermon was supposed to do. Thermon had instructed its subsidiaries not to violate U.S. export laws, and specifically that they could not sell equipment to countries subject to U.S. economic sanctions. It also appears from the press release that the subsidiaries pulled the wool over the parent company’s eyes and placed orders for the equipment at issue without telling the U.S. parent that the equipment was destined for sanctioned countries. And although the fines were imposed on the subsidiaries rather than the parent, this is just an accounting nicety. Thermon ultimately pays this fine.

In essence, this fine is nothing more than a penalty imposed on U.S. companies for having foreign subsidiaries unless and until BIS provides industry some guidance as to how to avoid such fines other than simply shutting down foreign subsidiaries. Was the problem here that the instructions by the parent to the subsidiaries about exports to sanctioned countries weren’t frequent enough? Or was it that the parent didn’t threaten to guillotine any employees of the foreign subsidiaries who violated these rules? Perhaps BIS thought that these instructions should have been bilingual. Your guess is as good as mine at this point.

Second, and this is an even bigger irony of the case, the parent’s instructions to the subsidiaries appear to have made things worse for the parent. It was because of those instruction that BIS elevated the penalty through charging that these were “acting with knowledge” violations under section 764.2(e) of the Export Administration Regulations. Damned if you do, damned if you don’t, as they say.

The charging documents haven’t been released by BIS yet. Perhaps they will shed more light on this sorry situation.

In an ambitious display of extraterritorial overreach, the Bureau of Industry and Security (“BIS”) last week amended the Export Administration Regulations (“EAR”) to expand the scope of the regulations to cover in-country transfers to companies and individuals on the agency’s Entity List.

Most readers should be familiar with that list, but for those that may not be, the Entity List is a list of several hundred, well, entities in foreign countries. The companies and individuals have been placed on the list because of the U.S. government’s concern about their activities in nuclear proliferation, missile technology, chemical warfare agent development or other areas of foreign policy concern. The result of an Entity List designation is to require licenses for the export or re-export of specified items to the designated entity. In most cases the list indicates that the items which require licensing are “all items subject to the EAR,” which is BIS-ese for items with specified amounts of U.S. content. These need not be sensitive dual-use items listed on the Commerce Control List but include, for example, a U.S. flag (assuming it wasn’t made in China). And in most cases the Entity List indicates that there is a presumption of denial for license requests.

Under the new rules, a license would be required not only for exports of an item from the United States to the designated “entity” or exports of the item from a foreign country to the entity (“re-exports”) but also for in-country transfers to the designated entity. To understand the impact of the amendment, consider this example. The first entity on the list is one Ali Bakshien, a resident of Toronto, Canada. Ali’s mother goes to the American Apparel Store on College Street in Toronto and buys some trendy, and American-made, shirts, underwear and socks as a birthday gift for Ali. Unless she asks BIS for permission to give these shirts, socks and briefs to Ali, she becomes subject to a civil penalty of $250,000 under U.S. law when gives Ali his birthday present. And, if she knew that Ali was on the Entity List and knew that prohibited the unlicensed birthday present to Ali, did she commit a felony in giving him the items?

So what is BIS going to do? Send Ali’s mother a charging letter? If BIS thinks Ali’s mom knew about the Entity List designation and the in-country transfer restrictions, is it going to have the Department of Justice request extradition? (You don’t have to have a very vivid imagination to figure out what Canada’s likely response would be to an extradition petition in this situation, particularly if you picture a pounding hammer and a box of sand.) Will they arrest her at JFK if she takes a trip to catch a few Broadway shows?

Needless to say, I don’t believe the U.S. has jurisdiction, either under international or U.S. law, over this conduct simply because it involved a t-shirt made in LA shipped by the manufacturer to Canada where it was then bought and given to another Canadian. But U.S. export agencies — DDTC included — have continued to insist that jurisdiction can be hung on such a weak thread. And this recent amendment of the entity list rules continues down this misguided path.