I was going to title this post “Exporter Temporarily Loses Export Privileges for Having Copy of the EAR in Its Offices.” However, after the uproar that a similar title (“BIS Fines Exporter for Filing Voluntary Disclosure“) created at BIS, I thought that a more anodyne title would be appropriate. The actual post title “Shake, Rattle and Roll” is a reference to the core business of Data Physics Corporation, a company which provides vibration testing equipment and which is in hot water with BIS for shipping that test equipment to the PRC.

BIS released today on its website an order, dated November 17, which renewed a previous temporary order denying export privileges against Data Physics based on its export of test shakers (and related equipment) to two end-users in the PRC in violation of section 744.3 of the EAR. Section 744.3 prohibits unlicensed exports to companies that are engaged in missile proliferation and that are located in countries, such as China, which are listed in the D:4 Country group set forth in Supplement 1 to part 740 of the EAR. Data Physics objected to the renewal of the denial order and a hearing was held. As a result, we have considerably more information than usual in the Order about the facts that led to the renewal of the temporary denial order.

Two exports of test shakers and related equipment were at issue. The first was an export of a vector vibration controller in September 2005 to Shanghai Xinyue Instrument Factory in the PRC. Shanghai Xinyue Instrument Factory is not on the Entity List. BIS contended that the export violated section 744.3 of the EAR because Data Physics knew that Shanghai Xinyue was engaged in the development of missile technology. BIS relied on an email that Data Physics received in 2002 from a BIS Special Agent in Charge and that identified Shanghai Xinyue as involved in missile proliferation.

When Data Physics responded that the email was three years before the export, BIS responded with evidence that investigators executing a search warrant had found a copy of part 744 in Data Physics offices. (Hence, what almost became the title of this post). BIS also noted that a manager for Data Physics attend a training session of part 744 where he would have learned, among other things, to do an internet search on proposed end-users. This latter argument is significant because the first result of a Google search on “Shanghai Xinyue Instrument Factory” is a page that clearly identifies Shanghai Xinyue as involved in missile development.

Although exporters should always do such Internet searches on end-users, the standard of section 744.3 is that the exporter knew that the end user in China was involved in missile proliferation, not that it “should have known” of such involvement. Frankly, BIS’s evidence here appears flimsy. Fortunately for BIS, and not so fortunately for Data Physics, the evidence on the second export is on much firmer ground.

The second export involved the shipment of a test shaker to China Hai Yang Electro-Mechanical Academy (a.k.a. “3rd Academy”). Here BIS produced evidence of internal emails instructing employees to use a false end-user name — 27th Locomotive — in place of 3rd Academy. That, of course, isn’t just a smoking gun, it’s a smoking locomotive, clearly suggesting that Data Physics was well aware of the missile proliferation concerns posed by a shipment to 3rd Academy.

One other point not raised by BIS but which seems significant to me. Companies that have pictures of rockets taking-off on their home page should pay careful attention to section 744.3 and know exactly what their customers are doing with exported items.

Last Friday, BIS released a final rule implementing certain understandings of the annual plenary of the Australia Group in June. The new rules apply controls to pipes, vessels, valves and related equipment made of niobium or niobium alloys. It also changed the classifications for shiga-like ribosome inactivating proteins and for the fungi coccidioides immitis and coccidioides posadisii from ECCN 1C360 to ECCN 1C351, which appears to have stricter controls. This change will also make coccidioides immitis and coccidioides posadisii the first fungi to be controlled under 1C351.

Some interesting background information on the two fungi is provided by Tom Volk, a biology professor at the University of Wisconsin at LaCrosse. According to Professor Volk infection with either of the related fungi often results in a mild disease that confers then confers lifetime immunity to the disease. In other cases it may result in much more serious, and possibly fatal, illness. It is endemic to semi-arid areas, most notably the San Joaquin Valley in California. Infection occurs by inhalation of the spores.

Professor Volk has this to say about the weaponization of the fungi:

Since this is the most virulent of the fungal pathogens, it should never be grown out in culture except under very controlled conditions, such as using gloved transfer hood and in screw cap vials. The fungus produces its small arthrospores in abundance in culture. If these escape, they can cause lab infections. These arthrospores can pass through a 2 mm filter found in normal biological safety cabinets/ hoods! It is a very dangerous organism. There have been persistent rumors that it is being developed for use in biological warfare, but it could probably not be grown in a large enough quantity to be used for use in bioterrorism because of the danger it would pose for the people growing it.

Professor Volk’s page on the two fungi has more interesting information, including some unpleasant pictures of the effect of the pathogens, all of which will convince you that even if they don’t have much use as CBW agents it is still probably a good idea to regulate their export.

BIS released a public notice today revising the country chart to reflect that Montenegro seceded from Serbia and Montenegro. Not surprisingly, the column entries for Montenegro and the column entries for Serbia on the country chart will be identical.

Updating the Country Chart probably shouldn’t be one of the highest priorities over at BIS, but then again Montenegro has been independent of Serbia since June 3, 2006. The State Department got the news and only 10 days later, on June 13, 2006, recognized Montenegro as an independent state.

Of course, we shouldn’t complain since this is, frankly, a relatively rapid response by BIS. Western Sahara is still listed on the Country Chart even though it has been part of Morocco since 1979. And Hong Kong is still hanging on with its own row on the country chart even though it became part of the PRC on July 1, 1997.

MARK YOUR CALENDARS. I’ll be participating in an Audio Briefing with Mike Turner, Director of BIS’s Office of Export Enforcement, on Wednesday, November 29, at 2:00 pm E.S.T. The briefing was put together by Export Practitioner and Washington Tariff & Trade Letter. A brochure for the briefing, with sign-up and phone-in information, can be downloaded here.

In a clever marketing ploy timed to coincide with the release of the latest James Bond film, BIS has issued new rules relating to the export of surreptitious listening devices (“SLDs”). The Notice announcing the final rule, however, is hardly a model of clarity so that you might really require the services of a super-spy like 007 to figure out what BIS is trying to do. Or you could read this post.

Under the current rules, SLDs are classified under ECCN 5A980. Licenses are required for exports to all destinations of items classified under ECCN 5A980.

This classification was adopted some time ago by BIS pursuant to the provisions of the Omnibus Crime Control and Safe Streets Act of 1968. The Omnibus Crime Act prohibits the export of any device “primarily useful” for the “surreptitious interception of wire, oral, or electronic communications.” (18 U.S.C. § 2512). Congress enacted this provision after the private detective Hal Lipset demonstrated to the Senate Subcommittee on Civil Rights his prototype of a “martini olive” transmitter, which created a national press sensation. Even though it is unclear whether a martini olive transmitter was ever used to intercept any actual communication, it became the paradigmatic SLD and is specifically cited as an example by BIS in EAR § 742.13(2) which further defines the SLDs covered by ECCN 5A980.

The new rule doesn’t affect any of this. Rather, it adds three refinements to the current rule.

First, two new related ECCNs are added: 5D980 and 5E980. The first, 5D980, controls software “primarily useful” for the surreptitious interception of wire, oral and electronic communications or “primarily useful” for the development, production or use of SLDs. You might call me a cynic, but I rather doubt that, given the “primarily useful” test, there is any software that is actually covered by this new ECCN. I mean is there really someone out there offering a CAD program which is really only meant to produce drawings of martini olive transmitters and other SLDs? The other new ECCN, 5E980, is technology “primarily useful” for development, production or use of SLDs. Again I’m not so sure that there is any technology that fits in this newly minted ECCN.

Second, the rule creates a brand new control reason or SL which means — you guessed it! — surreptitious listening. The reasons for the new control category is unclear since SLDs require licenses to all destinations. All this does is add a new column to the Country Chart where every country will be checked. Perhaps this is a subtle indication that BIS sees the future possibility that controls on exports of SLDs to certain countries may be lifted.

Third and finally, the new rules amend EAR § 742.13 to restate the licensing policy for SLDs. Under the old rule, license were generally approved for telecommunications providers and government agencies. Under the new rule, the policy of general approval will apply except where the telecom provider or government agency seeks to export the SLD to a country controlled for AT reasons, e.g., North Korea and Iran. Although I can understand why BIS might want to clarify that telecom providers can’t export SLDs to Iran or other AT-controlled countries, I’m not so sure what is going on here with respect to government agencies. I mean, if an undercover CIA agent wants to export a martini olive transmitter to Korea to bug Kim Jong Il’s palace, who is the BIS to say no?

If anybody has an alternate take on what BIS is doing here, please share them in the comments section.

I admit that this is an inflammatory headline. But the recent settlement agreement entered in the EP MedSystems matter does little to refute the common wisdom that companies should never file a voluntary disclosure with BIS unless they are almost certain that BIS will otherwise discover the problematic export.

At issue are six shipments of seven items of heart monitor equipment valued at $510,590. The equipment was shipped by EPMed to Iran between March 2001 and April 2004 without a license. Shipments of these devices after July 26, 2001 would have been permissible under the Trade Sanctions Reform Act of 2000 provided that an OFAC license had been obtained. Five of the six shipments in question occurred after that date. The company agreed to settle the charges for payment of a fine of $244,000.

The company filed two voluntary disclosures relating to the shipments. The first was a preliminary disclosure that was filed on October 13, 2003, approximately two weeks after one of the shipments at issue had taken place. The second was a final disclosure which the company filed on November 20, 2003. Normally it would have been significant mitigating factor that most of the shipments described in the voluntary disclosure would have been granted a license if an application had been filed. BIS, however, paid no attention to that factor and, instead, focused on alleged misrepresentations in the voluntary disclosures themselves.

Four false statements in the preliminary and final voluntary disclosures were alleged by BIS. The first was the claim in the October 13 preliminary disclosure that the Company filed the disclosure “immediately” after learning of the shipments to Iran. The charging letter alleged that this was false because the company first learned of the shipments based on one email dated May 22, 2003, between unnamed EPMed officials A five-month delay is, perhaps, not immediate, but it hardly seems a sufficient justification for a significant fine for misrepresentation. Moreover, it may well have been the case that the Company had not yet discovered the May email or other earlier documents when it filed the preliminary disclosure in October.

Second, the charging letter took issue with the claim in the initial October 13 voluntary disclosure that the company did not know before October 2003 about the exports to Iran. This claim is also based on that single email in May 2003 between unidentified company officials and which the company may not have discovered at the time of the preliminary disclosure.

The third false statement pointed to in the charging letter allegedly occurred in the final version of the voluntary disclosure filed on November 20. According to the BIS charging letter:

In its disclosure EPMed stated that it “has no record of ever having sold any of its products to any customer in Iran.” This statement, representation or certification is false or misleading because, at the time it was made, EPMed had in its possession a number of documents indicating that the company had sold its products to Iran. These documents include an email between EPMed officials dated on or about May 22, 2003, which listed five hospitals that were operating EPMed equipment.

This is a confusing allegation since the preliminary voluntary disclosure made by the Company on October 13 appears to have indicated and admitted that the Company had such records. Indeed, how could the Company have made either the preliminary voluntary disclosure or the final one without such records? Here it looks like BIS’s charge either takes the sentence in question out of context or deliberately misreads it.

Fourth and finally, the BIS charging letter attacks a statement in the final voluntary disclosure that its European Sales Manager was “totally unfamiliar with the U.S. Government restrictions on exports to Iran.” This statement was false, according to BIS, because the European Sales Manager “had been informed of the U.S. embargo of Iran and knew that certain equipment required a license for export to Iran.” Again, BIS seems intent on stretching the likely meaning of the voluntary disclosure to find a misrepresentation in it. What was likely meant by the disclosure was not that the sales manager didn’t know that the U.S. forbade shipments to Iran. Rather, it seems likely that the company was truthfully representing that the sales manager didn’t know that U.S. law was violated by a company shipment to a German distributor who then shipped the goods from Germany to Iran.

So what lessons should be taken away from this? First, it remains clear that companies file voluntary disclosures with Commerce at their peril. Second, and more significantly, if a company feels that a voluntary disclosure is prudent (because, for example, discovery of the violation by BIS is likely), then the company should not file a preliminary voluntary disclosure under any circumstances. The danger of such a preliminary disclosure is that subsequent discoveries can later be used by BIS to claim that the initial disclosure constituted a misrepresentation. Third, and this should almost go without saying, if a company does file a voluntary disclosure, it should be careful that everything in it is accurate.