ExportLawBlog

Archive for the ‘BIS’ Category

Mar

20

UAE Moved From Naughty to Nice List

Posted by Clif Burns at 11:10 am on March 20, 2007

Category: BIS

Happy Camel in the UAE According to an article by Guy Dinmore in today’s Financial Times, the UAE has escaped the ignominy of being listed on the Bureau of Industry and Security’s forthcoming list of countries “of diversionary concern.” When BIS issued an Advance Notice last month announcing its intent to fill in Country Group C of Supplement 1 to Part 740 with such countries of diversionary concern, we speculated that the UAE was BIS’s prime target.

While the UAE may have been an initial target, they aren’t anymore according to Dinmore:

Late last week Christopher Padilla, assistant secretary for export administration, told US officials the UAE would not be included in a new “country group C” designation that would require tighter US export controls to “destinations of diversion concern”.

The apparent change is an indication of the UAE’s close co-operation with Washington a year after the Dubai Ports World controversy, in which the state-owned UAE company resold its newly purchased American ports operations following staunch congressional opposition.

. . .

The decision followed talks in Washington with Sheikha Lubna al-Qassimi, the UAE economy minister, and the approval by the UAE cabinet this month of a draft law on export control.

For the conspiratorially-minded, there may be another explanation — aside from recent talks and a new export control law drafted by the UAE — of what led to BIS’s change of heart. Perhaps it was Halliburton’s recent announcement of its intention to move its offices to Dubai. Anyone think that a phone call from the office of the VPOTUS to BIS might have played a role in BIS’s decision?

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Mar

14

“Specially Designed” May Not Mean What You Think It Means

Posted by Clif Burns at 5:20 pm on March 14, 2007

Fiber Materials Logo On March 14 the Bureau of Industry and Security (“BIS”) added Maurice Subilia, Walter Lachman and Fiber Materials, Inc. to the Denied Persons List and deprived them of export privileges until November 2015. Fiber Materials hasn’t apparently gotten that news since its web page still lists an “International Sales Office” in Biddleford, Maine.

Subilia, Lachman and Fiber Materials were sentenced on November 21, 2005 for criminal export violations. Even though BIS participated in the investigation and prosecution of the case, it apparently forgot about the three defendants, which explains the seventeen month delay in adding them to the Denied Parties List.

The story behind the convictions of Subilia, Lachman and Fiber Materials is interesting. The two individuals and the company were convicted of shipping a control panel for a hot isostatic press to India without a BIS license in 1988. At that time, hot isostatic presses were classified under ECCN 1312A. BIS and the Department of Justice argued that the “control panel” was covered because it was a “specially designed . . . component” for a hot isostatic press controlled under ECCN 1312A.

After the defendants were convicted in a jury trial, the judge granted a motion to set aside the verdict on the ground that the language “specially designed” was unconstitutionally vague. The government appealed to the First Circuit Court of Appeals, which reversed holding that the “specially designed” standard was not unconstitutionally vague.

The opinion of the Court of Appeals finding that the phrase “specially designed” was not unconstitutionally vague does so by providing a definition of “specially designed” which arguably is itself overly vague. The court noted that “specially designed” had two possible and separate meanings — either (1) a component that could be exclusively used for the controlled item or (2) a component designed with properties that make it capable of working with the controlled item but also capable of working with items that are not controlled. Because of the broad legislative goal behind the Export Administration Act, the Court held that the second definition, which is both broader and vaguer, applied.

The defendants had shipped the control panel as a part of a hot isostatic press that was of a size that was not controlled by ECCN 1312A and that therefore did not require a license. The prosecution occurred because the control panel could also be used with a larger hot isostatic press that would be covered by the ECCN thereby making it, allegedly, a “specially designed” component for a larger controlled hot isostatic press. The Court of Appeals, by applying the broader definition, affirmed that view; and, as a result, Messrs. Subilia and Lachman are currently wearing ankle bracelets, and Fiber Materials has lost its export privileges.

If that scares you, it should. If that rule is followed, a decision to export an item requires an analysis of whether every component of that item is capable of being used as part of a controlled item. Can the power supply of an uncontrolled item be used for the controlled version? Does it require a license even if the item with which it is being exported does not?

The Court of Appeals vaguely sensed this conundrum and so it tweaked its broader definition somewhat to add an intention requirement:

A device is “specially designed” for use with an embargoed commodity if it is intentionally created for use, and in fact capable of being used, with the embargoed commodity. At the same time, this definition does not extend the embargo to devices simply because they could in theory be used with embargoed commodities, thus ensuring that legitimate exports are not prohibited.

This distinction might have some force in the case of the control panel since there was evidence presented that it had been designed with capabilities that exceeded the requirements of the smaller press. But in many other instances, how is it to be determined whether the device is intended to work with the controlled item or just happens to work with the controlled item? That will be a difficult line to draw and one which the exporter draws at its own peril.

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Mar

12

Subs Gone Wild!

Posted by Clif Burns at 5:24 pm on March 12, 2007

Category: BIS • OFAC

Varian Logo The Office of Foreign Assets Control (“OFAC”) released on Friday its civil penalty information for February 2006 and reported that Varian, the Palo Alto scientific instrument giant, agreed to pay $114,958 to settle allegations that its Swiss and German subsidiaries had sold software to customers in Iraq and Iran without an OFAC license or outside the scope of an existing license. The payment was made after a voluntary disclosure by Varian.

So does that give you a little twinge of dÃ©jÃ vu? It should. It was only last July when Varian entered into settlement agreements with the Bureau of Industry and Security (“BIS”) over similar antics by its overseas subsidiaries. Varian paid $26,400 for computers and associated software shipped to Syria by its Dutch subsidiary without a BIS license. The Dutch subsidiary paid an additional $39,600 for separate unlicensed shipments of computer hardware and software to Syria. Finally, the company’s Swiss subsidiary paid $8,800 for shipment of computers and associated software to North Korea without a BIS license. All of these settlements also followed voluntary disclosures.

In my view the single weakest link in current compliance programs are overseas subsidiaries. All too often the foreign subsidiaries believe that only the local law of their own country governs the re-export of merchandise once they have received it. Moreover, shipment of merchandise from the subsidiaries to North Korea, Iran or other sanctioned countries won’t raise the red flags that such shipments do in the United States. Companies that do not make sure that their compliance training also covers employees of their subsidiaries really should set aside several hundred thousands dollars in reserves for the inevitable day when a European subsidiary sends a shipment to Iran.

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Mar

8

Trade Group Calls For Revision of BIS’s Deemed Export Rules

Posted by Clif Burns at 4:59 pm on March 8, 2007

Category: BIS • DDTC

Another Kind of Dual Use At the same time that The Coalition for Security and Competitiveness called for a reform of DDTC procedures and policies, it also took aim at the Bureau of Industry and Security (“BIS”) with a separate report. The Coalition’s recommendations included streamlining encryption controls, updating the commodity control list, enhancing procedural transparency, and revising the rules relating to foreign availability and to re-exports.

In my view, the Coalition’s most interesting recommendation came with respect to BIS’s deemed export rule. The report stated:

Licensing requirements can also apply to â€œdeemed exportsâ€ to company employees in the United States (i.e., the release of controlled technology to a foreign national within the U.S.). The regulations do not take into account the fact that many U.S. companies have company-wide policies on export compliance that apply to their foreign facilities and employees and serve to protect national security. U.S. companies have their own incentives to maintain strong controls to protect their intellectual property.

Commerce should create a license exception for intra-company transfers, including â€œdeemed exportsâ€, for companies that have strong compliance programs. This approach would streamline the export authorization process, reduce the licensing burden on U.S. exporters and enhance international competitiveness without compromising U.S. national security concerns.

The Coalition doesn’t explain why it argues for reform of BIS’s “deemed export” rules without seeking revision of the “deemed export” rules administered by DDTC. Nor does the Coalition suggest how BIS should determine whether a company has the requisite “strong compliance program.” My guess is that given the choice between requesting a BIS audit of compliance procedures and continuing to apply for deemed export licenses, there may be no more than one or two companies in the United States that would opt for the former. This leads me to believe that this recommendation by the Coalition stands about as much chance of being adopted as my dog stands of finally catching that squirrel in the park.

In related news, the Coalition’s complaints on DDTC processing times that we reported yesterday may have already had some impact. The Pentagon announced yesterday that it would examine industry concerns about long processing times at the DDTC and that it would carefully review the Coalition’s complaints regarding these delays.

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Mar

6

“Whatever It Takes”

Posted by Clif Burns at 3:40 pm on March 6, 2007

Category: BIS

Thumbcuffs The Bureau of Industry and Security (“BIS”) released today a notice of a final rule amending certain of the rules relating to crime control commodities. Items covered by BIS’s crime controls are controlled because of the fear that these items will be used for torture and other human rights violations. Three parts of the new rule seem worthy of comment.

First, the new rule amends the classification for thumbcuffs. Thumbcuffs have been moved from ECCN 0A982 to ECCN 0A983. the reason for the change is the stricter licensing policy applicable to items in ECCN 0A983. Items in ECCN 0A983 are subject to a general policy of denial whereas items in ECCN 0A982 are subject to favorable case-by-case consideration unless there is civil disorder or a history of human rights violations in the country to which the cuffs are being exported. (Newlyweds with adventurous tastes might keep this in mind when packing for their honeymoon, since the License Exception BAG, which covers personal effects carried in baggage, doesn’t apply to ECCNs 0A983 or 0A982.)

Second, the new rule amends section 740.2(a)(4) of the EAR — which eliminates the use of license exceptions in most instances for exported goods subject to crime controls. The new rule replaces the word “commodities” in the prior version of the rule with the word “items.” The purpose of this change was to make clear that the restrictions of section 740.2(a)(4) apply to software and technology and not just to physical commodities.

Finally, the new rule amends section 740.2(a)(4) to allow license License Exception GOV to be used for exports of crime control items to U.S. government personnel and agencies. BIS’s notice of the Final Rule explained this change as follows:

Although this change applies to any U.S. Government agency, BIS is making it at this time because of the need to supply U.S. armed forces in locations that, prior to publication of this rule, would be subject to the geographic restriction on use of License Exceptions for crime control items.

Okay, now everyone who believes that, raise your hands. Hmm. I only see a couple of hands. Now, everyone who believes that the purpose of the change is to permit exports of crime control items to U.S. government employees using “enhanced interrogation techniques” on suspected terrorists, raise your hands. Just what I suspected. A lot more of you have raised your hands. Of course, we can’t be sure that this was BIS’s motivation but we can be sure that if it was, BIS wouldn’t say so.

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