Ace Systems, a Georgia-based reseller of refurbished voice cards and other PC-based telephony products, agreed to a fine of $36,000 to settle these charges as set forth in the Bureau of Industry and Security’s Charging Letter:

On or about July 3, 2006, Ace attempted a violation of the Regulations by attempting to export dialogic [sic] voice cards to Mayrow General Trading (“Mayrow”) in Dubai, United Arab Emirates,
without the Department of Commerce license required by General Order No. 3 of Supplement No. 1 to Part 736 of the Regulations. Dialogic voice cards are items subject to the Regulations and are designated as EAR99 items. Ace tendered ten dialogic [sic] voice cards items to its freight forwarder with instructions to export such items to Mayrow. The export did not reach Mayrow because the U.S. Government ordered its return pursuant to the Regulations. In so doing, Ace committed one violation of Section 764.2(c) of the Regulations.

It seems reasonable to suppose that Ace Systems was more than a little surprised when this charging letter showed up in its mailbox. The Dialogic voice cards were, after all, EAR99, and weren’t headed for a country subject to sanctions. Like many other exporters, Ace Systems had probably never heard of General Order No. 3.

There is, of course, no question here that Ace Systems attempted to violate the law and that, technically, more than a $36,000 fine could have been imposed. But is only Ace Systems at fault here? What has BIS done to inform companies like Ace, which appears to be a relatively small Internet-based merchant with little export experience, about General Order No. 3? Wasn’t this attempted export more an occasion for an educational outreach visit from BIS than a fine? Granted there may be facts not stated in the Charging Letter that justify a significant whack in this case, but at least on the face of it, Ace was more in need of education than correction.

BIS also issued a press release on the Ace Systems settlement. That press release, arguably, vastly overstates the situation:

“We have reason to believe that Mayrow General Trading and its affiliates have been acquiring U.S.-made components for use in improvised explosive devices (IED) in Iraq and Afghanistan,” said Mario Mancuso, under secretary of commerce for industry and security. “We will do everything in our power to protect our forces in the field by prosecuting those who illegally export sensitive U.S. technology.”

Clearly Mancuso is trying to imply that the Dialogic voice cards could have been used in IEDs in Iran and Afghanistan, even though I could find no evidence that these computer boards have ever been used, or could be reasonably used, for IEDs. Nor is his claim that these EAR99 voice cards were “sensitive U.S. technology” very convincing.

Frankly, it’s not clear that anyone at BIS had a clear idea what the exported product was. The Charging Letter, Settlement Agreement, Order and press release all make multiple references to “dialogic voice cards” as if “dialogic” is a generic description of the product. In fact, Dialogic is the name of the Intel subsidiary that makes the cards and is the brand name of these cards.

To be clear, BIS had every right to fine Ace Systems here. My point is that a more sensible outcome, at least based on the facts set forth in the documents posted by BIS, was a warning. If after being made aware of General Order No. 3, Ace violated it again, then, as they say, “book ’em, Danno.”

If you thought BIS could only come after you for exports of dual-use items, you would be wrong — a lesson learned the hard way by P.R.A. World Wide Trading Co., Inc., a freight forwarder which was fined $250,000 pursuant to a Settlement Agreement released last week. According to the Settlement Agreement, P.R.A. understated the value of exports on 41 separate Shipper’s Export Declarations (SEDs) filed in 2001 and 2002. The BIS agreed to suspend $90,000 of the penalty contingent upon PRA not committing any further violations for one year.

The Settlement Agreement alleged that PRA’s conduct violated two provisions of the Export Administration Regulations (“EAR”). First, since PRA conspired with its shippers to understate the value of the shipments, PRA violated section 764.2(d) which prohibits conspiracies to violate the EAR. Second, the false statements on the SEDs violated section 764.2(g)(1)(ii) which prohibits making any false statement on an “export control document.”

For a company that didn’t voluntarily disclose the violations, that’s a fairly good deal, since BIS could have fined PRA up to $462,000, i.e. $11,000 for 42 violations (41 false statements and 1 conspiracy). Perhaps the fine reduction reflected the fact that the President and owner of PRA, Igor Cherkassky, pleaded guilty in December 2006 to a conspiracy to file false SEDs and was sentenced to two months of imprisonment, three years of supervised release, a $5,000 criminal fine, and a $100 special assessment.

False statements on SEDs not only violate the EAR and the criminal provisions of 50 U.S.C. § 1705(b), but also violate other federal laws. Willful misstatements on an SED are punishable under 13 U.S.C. § 305, which provides for civil penalties and for a criminal penalty of five years imprisonment. And, of course, such false statements are also punishable under 18 U.S.C. § 1001(a)(3), which also can result in up to five years in jail.

So it might be said that PRA got off fairly lightly. One question I have is what happened to the exporters themselves? BIS charged a conspiracy between PRA and its exporters to understate the value of the shipments. Clearly the exporters were doing this to try to reduce their liability for import duties imposed by the destination country. They would, therefore, seem just as culpable, maybe even more culpable, than the freight forwarder in this case.

Another day, another foreign subsidiary of a U.S. company caught shipping stuff to Iran. This time it’s the Luxembourg-based subsidiary of Viking, a leading manufacturer of fire protection systems. The fire extinguishing systems were shipped by the sub through the UAE (natch!) to Melli Etfae Iran Co. (National Iranian Safety & Fire Fighting Company).

An interesting twist here is that the subsidiary made the shipment notwithstanding direct orders from the COO of the U.S. parent company that shipments to Iran required a license. Indeed, this order was given the subsidiary less than a week before the first illegal shipment. Even so, under settlement agreements with both companies, the Bureau of Industry and Security (“BIS”) fined the parent $22,000 and the subsidiary $44,000. The exports came to light when a freight forwarder figured out what was going on and blew the whistle.

Several observations seem in order. First, fining the parent company after it had properly instructed the subsidiary that the shipments required a license seems harsh. After all, what more was the parent to do? Fly to Luxembourg and lock the staff in the basement?

Second, both the parent and the subsidiary were required by BIS to conduct an internal compliance audit substantial similar to BIS’s Export Management System Review Module. I don’t recall having seen this requirement imposed since it was imposed in the settlement agreement with Norman, Fox & Co. back in November 2005. It’s too early to judge, but I wouldn’t be surprised, based on the two Viking settlements, if we see this requirement cropping up more frequently.