The Bureau of Industry and Security (“BIS”) announced late this afternoon that starting April 28, 2008, an Export Control Classification Number (ECCN) would be required by the Automated Export System when exporters sought to export items under license exceptions TSR, RPL, GOV, GFT, TSU, BAG, AVS, APR, KMI, TAPS and ENC. Currently, the ECCN is required by the AES entry form only for exports under exceptions LVS, GBS, CIV, AGR, and APP.

This should not be a burden to exporters. Any reasonably robust export compliance program should assure that before any item is exported, it is classified either under a particular ECCN or as EAR99.

The Validated End User program of the Bureau of Industry and Security (“BIS”) has experienced a fox-in-the-henhouse moment and may come crashing to a screeching halt. Apparently two of the five companies first awarded Validated End User status have ties to the Chinese military, prompting an inquiry by one U.S. lawmaker as to how this might have occurred.

Back in October, BIS announced its first participants in the Validated End User program in China. Chinese companies with a “record of using [dual-use] items responsibly” are eligible for the status of a Validated End User after review by BIS. Under the program, certain dual use items may be exported and re-exported to the Validated End User without a license from BIS.

Unfortunately, according to this AP wire report, two of the five Validated End Users — Shanghai Hua Hong NEC Electronics Co. Ltd. and BHA Aerocomposite Parts Co. Ltd. — have links to the Chinese military. Hua Hong NEC is owned by China Electronics Corp., which provides electronics to China’s People’s Liberation Army. And BHA Aerocomposite is partly owned by China Aviation Industry Corporation I, a state-owned company that makes Chinese military aircraft. Its other owners are two U.S companies: Boeing and Hexcel.

As a result of these revelations, first reported by the Wisconsin Project on Nuclear Arms Control, U.S. Representative Edward Markey sent a letter of inquiry to the Department of Commerce questioning whether BIS’s Validated End User program “has unwisely reduced controls on the sale of dual-use American products with significant links to the the People’s Liberation Army.” The letter requests information relating to the process by which the two companies were designated under the Validated End User program.

Although the designation of Hua Hong NEC clearly seems problematic, I am less convinced that BHA Composites wasn’t properly designated as a Validated End User. After all, BHA is a joint venture that includes two U.S. companies, which should significantly reduce the risk of diversion of dual use products to the Chinese military. The Chinese partner, AVIC I, owns only one-third of the joint venture. The Wisconsin Project argued that Boeing and Hexcel “have a history of violating U.S. export controls that should have barred BHA from consideration.” Admittedly, both companies have entered into settlement agreements relating to export violations, but none of the violations involved illegal exports to the Chinese military or otherwise suggest that the two companies would engage in illegal exports to the Chinese military.

The Bureau of Industry and Security (“BIS”) released, on January 23, a settlement agreement under which freight forwarder Elite International Transportation, Inc. agreed to pay $156,000 in penalties for export violations. According to the Settlement Agreement, Elite made a false statement on a Shipper’s Export Declaration (“SED”) that it prepared when it stated that no license was required for the export of triethanolamine to Mexico. Triethanolamine, which is covered by ECCN 1C350.c.9 is a common ingredient in shampoos, shaving creams and other cosmetics but is also a precursor to nitrogen mustards, which can be used as chemical warfare agents and which cause blistering similar to the sulfur-based mustard gases used in WWI and WWII.

This blog has often criticized certain enforcement actions against freight forwarders that appear to impose upon the freight forwarder an undue burden of due diligence verifying statements made to it by the exporter. This, however, isn’t really such a case. The SED would have described the product as triethanolamine. Even if the exporter indicated to Elite that no license was required, it was a simple matter for Elite to check this statement. After all, triethanolamine is listed in the alphabetical index to the Commerce Control List. Making the classification here wasn’t rocket science.

Freight forwarders are also not doing any favor to their customers by not double checking the classification of exported items. No doubt the exporter here has already received a nastygram from BIS and is negotiating a settlement agreement under which it will pay an ouch-worthy fine to BIS. If the freight forwarder had double checked the classification of triethanolamine and told the exporter of the mistake (rather than ratting it out), both Elite and the exporter wouldn’t be the subject of a post on this blog.

Clif adds: Be sure to read the comment below from Jim Dickeson. Jim, who is the import and export compliance manager for a freight forwarder, makes a persuasive case that in this instance the freight forwarder was sandbagged by the exporter. Still, I think there’s plenty of fault to go around in this case because the name of the chemical was listed on the index to the CCL. This wasn’t an instance where you had to know the temperature resistance of a composite material or the size and inclination of a borehole in a turbine. It was one where one only had to look under T in the index and there is was: “triethanolamine.”