SyrVet, Inc., an Iowa-based distributor of livestock products, agreed to pay a $250,000 fine to the Bureau of Industry and Security (“BIS”) in connection with its unlicensed exports of cattle prods. Cattle prods and other discharge type arms such as stun guns are controlled by ECCN 0A985 and require a license for all destinations except Canada.

The $250,000 is payable, under the settlement agreement with BIS, in six quarterly installments of $16,666. The remaining $100,000 of the fine is suspended provided that Syrvet commits no further export violations between the date of the entry of the order and May 1, 2010.

I have wondered in a previous blog post the extent to which agricultural supply houses may be aware that cattle prods and the like require export licenses. In this case, the charging documents certainly suggest that SyrVet was aware of the license requirement.

Syrvet had reason to know that a license was required for the exports since, inter alia, they were sent a letter in October 2000 from a manufacturer of electric cattle prods which were sold by Syrvet, informing Syrvet that the items required a Department of Commerce (“DOC”) license to be exported. Additionally, Office of Export Enforcement (“OEE”) special agents conducted an outreach visit to SyrVet in August 2001, where they informed Syrvet employees of the licensing requirements for electric cattle prods.

Another factor suggesting that SyrVet was aware of the license requirement is that twelve of the exports charged by BIS were for exports to end-users for whom BIS licenses that SyrVet had already obtained had expired.

This case was commenced by BIS prior to enactment of legislation increasing permissible fines from $11,000 to $250,000 per violation, so BIS engaged in a little piling on to turn 16 exports into 38 counts of charged export violations. If each separate export had been a single violation, the maximum penalty would have been $176,000, not $250,000. The “piling on” was accomplished by charging each export as an illegal export under section 764.2(a) of the Export Administration Regulations and as an illegal export with knowledge of the violation under section 764.2(e), even though section 764.2(a) is a “lesser included offense” of any section 764.2(e) violation. Six of the exports were turned into three violations each by additional charges that SyrVet filed false shipper’s export declarations stating that no license was required for those exports in violation of section 764.2(g).

It’s hard to compare the fine imposed here to the value of the exported goods because BIS failed to post the schedule of violations that was attached to the charging letter and which would have revealed the value of the exported items.

The Bureau of Industry and Security (“BIS”) recently released an advisory opinion stating that stab vests are classified under ECCN 1A005. That ECCN controls “body armor … not manufactured to military standards or specifications.”

According to that advisory opinion:

ECCN 1A005 does not set a minimum level of protection that body armor must provide to be controlled. It does specify in the Related Controls section that body armor meeting NIJ protection levels III and IV are subject to the licensing authority of the Department of State. Therefore, the U.S. Department of Commerce considers body armor that does not meet the State Department criteria, but that provides protection to the wearer against nonballistic threats, such as stabbing weapons, to be a classified commodity under ECCN 1A005.

This is an oddly-broad argument that would arguably classify as ECCN 1A005 an umpire’s vest or any other garment that provides any level of protection against any threat of bodily injury.

More significantly, BIS’s analysis should have taken into account whether a stab vest poses any concerns with respect to the reasons for control stated for items classified under ECCN 1A005, namely national security and anti-terrorism. If the U.S. military were using knives to attack terrorists and foreign enemies, then there might be a reason to classify stab vests under ECCN 1A005. But last time I checked, our military was using, for obvious reasons, guns and other weapons against which a stab vest affords not a single ounce of protection.

The advisory opinion is also hard to reconcile with an explicit exception set forth in ECCN 1A005 and not discussed at all by the advisory opinion:

This entry does not control body armor designed to provide frontal protection only from both fragment and blast from non-military explosive devices.

This is clearly a reference to the bomb vests worn by law enforcement personnel who have the perilous job of defusing criminal explosive devices. Obviously, BIS felt that such vests aren’t of much use to foreign enemies and terrorists in defending themselves from our military, largely, I suppose, because only frontal protection is provided. But if such vests aren’t beneficial to those who would pose terrorism or national security threats, certainly stab vests are even less useful. (Frankly, a bomb vest such as described in the exception might be of some use to a terrorist engaged in making a bomb, whereas there appears to be little reason for a terrorist or an enemy soldier to wear a stab vest.)

The BIS ruling seems even less justifiable in light of the reason for the current increased demand for exports of stab vests. The growth market for stab vests is in the United Kingdom, where knife violence is reaching epic proportions and where local governments are ordering stab vests for certain at-risk “front-line” government employees, including “emergency room staff, hospital porters, teachers, social workers and parking enforcement officers.” Needless to say, there are plenty of non-U.S. sources for these vests, and this advisory opinion will simply unfairly disadvantage U.S. companies in meeting this legitimate need for the stab vests.

The Bureau of Industry and Security (“BIS”) released today the text of its proposed rule which would implement a new license exception for intra-company transfers and which the agency dubs, not surprisingly, license exception ICT. The new license exception will permit, among other things, transfers of technology between U.S. and foreign subsidiaries. It will also allow transfers of technology by a company to its foreign national employees working in the United States or for the company’s foreign subsidiaries. However attractive the exception is in concept, it is much less so as implemented by the rule, which runs to 23 pages of complex eligibility requirements and even contains what most would consider not one but two poison pills. Not to mention a raft of unanswered questions.

In order to be eligible to use the ICT license exception, a company must first submit a detailed application to BIS which requires, among other thing, a compliance program that meets certain requirements set forth in the proposed regulation, including corporate commitment to export compliance, a physical security plan, an information security plan, personnel screening procedures, a training and awareness program, a self-evaluation program, and non-disclosure agreements by foreign employees. In addition to providing the plan itself, the application must submit documentary evidence by the company of its compliance with each of the mandatory requirements just described. Only upon approval of this submission may a company begin to use the license exception.

So what are the poison pills? First, if the self-evaluation program required for ICT eligibility reveals any export violations they must be “voluntarily” disclosed, which could lead to criminal penalties including jail time and civil penalties of up to $250,000. Second, the exporter relying on the exception must agree to a BIS audit every two years. I suspect that for many companies, the mandatory “voluntary” disclosure and the mandatory biennial audit may constitute a strong deterrent to utilizing the new license exception.

As for the unanswered questions, the rule is less than clear about how it operates in the context of a merger or takeover of a company using the exception. Without further clarification it would seem that a company that uses the exception would need to have the merger or takeover “approved” by BIS prior to closing. Otherwise all technology transfers subject to the exception would have to cease at closing, something which is likely to be quite impractical.

Another significant limitation of the proposed rule permits use of the license exception in only 37 of the 194 countries of the world. Countries eligible include the countries of Europe, including Eastern Europe and Scandinavia, as well as Turkey, Japan, Australia, and New Zealand. The only eligible countries in the Western Hemisphere are Canada and Argentina. Mexico, Brazil and Costa Rica, among others, were deemed unworthy by BIS, as were Russia and the former Soviet States, the entirety of Africa, the Middle East and Asia. Luxembourg is eligible but, strangely, Liechtenstein is not. H.S.H. Prince Han-Adam II is said to be not amused at all.