With each export violation for an item on the Commodity Control List, there is always the possibility that not only will the exporter have BIS to deal with, but also the freight forwarder and shipper will have an unpleasant encounter with the agency. This is a lesson that UTi Worldwide, a global logistics company, just learned the hard way.

The story starts in February 2002 when Extreme Networks, Inc., a NASDAQ-listed provider of communications hardware, shipped a telecommunications switch to Beijing University of Aeronautics and Astronautics (Beihang University). The switch was classified as ECCN 5A991, which is controlled for AT reasons and normally would not require a license to China. Beihang, however, is on BIS’s “Entity List” and therefore a license was required for shipment of the switch to Beihang. According to the BIS charging letter, Beihang knew this because it had previously applied for, and been denied, a license to ship comparable items to Beihang. Extreme Networks agreed in May 2006 to pay a $35,000 civil penalty to settle BIS’s charges.

UTi was the freight forwarder in the transaction. The BIS charging letter accused UTi of aiding and abetting Extreme Networks’ export violation, of aiding and abetting Extreme Network’s false statement on the SED that the goods were destined for Hong Kong, making a false statement on the SED by stating that the item was EAR99, and transporting the item from Hong Kong to China. UTi agreed to to a fine of $33,000, or just $2,000 less than the fine paid by the exporter Extreme Networks.

There is considerable controversy about when a freight forwarder should pay for the sins of the exporter. The charging letter for UTi is, not surprisingly, devoid of many details describing the transaction, so it is difficult to determine why BIS sought to hold UTi culpable here. UTi is charged with aiding and abetting the export and with making a false statement that the item being exported was EAR99. It seems likely that UTi took Extreme Network’s claim that the item was EAR99 at face value. Having done so, it was then charged with making a false statement on the SED. The question here is what does a freight forwarded need to do to protect themselves? Should the forwarded open the package, inspect the goods, and attempt to classify them itself?

Perhaps what actually got UTi in hot water here is revealed in the third charge — that UTi exported the item from Hong Kong to China. (For BIS purposes, Hong Kong and China are still separate countries.) That was likely done by simple transshipment through Hong Kong. This should, under any interpretation, have been recognized by UTi as a red flag warranting further investigation of the shipment.

UTi’s woes did not end with the $33,000 civil penalty for the Extreme Network’s shipment. On the same date that UTi entered into the settlement relating to the Extreme Network’s violation, it entered into a separate settlement agreement for 34 other exports. The charging letter accused UTi of omitting the exporter’s EIN on one SED and of providing false EINs for the exporter on the other 33 exports. To settle these charges, UTi agreed to pay a civil penalty of $76,500.

It is easy to see how UTi should be culpable for failing to provide an EIN on the SED because it certainly knows that one must be provided. However, as to the false EINs, culpability seems less clear. That information was provided to UTi by the exporter and there appears to be no reason that UTi shouldn’t have accepted the exporter’s word as to its own EIN. Are shippers required to demand that exporters provide a document from the IRS attesting to the accuracy of the EIN? That would appear to be the only safe course but is a solution that is impractical both for exporters and their shippers and freight forwarders.

Earlier we reported on the misfortunes of The Springer Magrath Company, a Nebraska-based agricultural supply house that had shipped cattle prods to South Africa without a license. Cattle prods are controlled because they can be used in human rights violations and require licenses from BIS for exports to all destinations. Criminal charges based on those exports were settled for an agreement by Springer Magrath to pay a fine of $50,000.

Of course, wherever you find the DOJ prosecuting an export violation for dual-use goods, BIS isn’t far behind. BIS rode into Nebraska and wanted to show Springer Magrath that it was rougher and tougher than the U.S. Attorney’s Office. After a little prodding from BIS, Springer Magrath agreed to pay a fine of $451,000 or face a denial of export privileges of one year. The Settlement Agreement also imposed a three-year denial of export privileges which would be suspended provided that Springer Magrath committed no further export violations for one year.

The charging letter details violations in addition to those alleged in the criminal proceeding. According to that letter, Springer Magrath shipped approximately $555,000 worth of cattle prods and related equipment to South Africa, Mexico, Ireland, Australia, Brazil and Germany, all countries where the prods were more likely to be used on cattle than on cattle-rustlers or other criminals.

On September 18, BIS entered an order against Mohammad al-Mashan and and order against the Mohammad al-Mashan Group denying both of them export privileges for ten years. The Mohammed al-Mashan Group is a Kuwait-based exporter of molds made from recycled plastics.

The denial arises from allegations that on two occasions al-Mashan and his company, both located in Kuwait, transferred an uncooled infrared camera to an individual in the U.A.E. in violation of the conditions of the BIS export license under which the camera had been shipped to al-Mashan and the al-Mashan Group. That license had a condition prohibiting re-transfer or export of the item without a further license from BIS.

The extended time line of this proceeding is interesting. The re-exports in question occurred in October 1999 and February 2000. The charging letter didn’t issue until October 25, 2004. A default judgment on the charging letter was not issued by the ALJ until August 30, 2006. The denial order was signed on September 18. As of today, however, BIS has yet to add al-Mashan and the al-Mashan Group to the Denied Parties list.

Some of the delay was consumed by the three unsuccessful attempts by BIS to mail the charging letter to al-Mashan in Kuwait. Still it seems that if al-Mashan were truly of significant concern to BIS the agency could have been more diligent.

The failure to add al-Mashan and the al-Mashan group to the Denied Party list is equally baffling. When OFAC announces a new SDN, that entity is usually added immediately to the SDN list. Given the BIS delay in adding parties to the Denied Parties list, exporters should probably also check the list of recent orders found in the BIS Electronic Reading Room as well as the Denied Parties list.

Supermicro, Inc., a computer hardware manufacturer based out of San Jose, California, pleaded guilty on Monday to a criminal export violation and agreed to pay a criminal penalty of $150,000. Supermicro admitted that on or about December 28, 2001, it shipped 300 motherboards, worth just under $30,000, to a company in the U.A.E. knowing that the motherboards would be immediately re-exported to Iran. At the time of the export, the motherboards were subject to National Security controls and required a license for export to Iran.

Previously, on September 7, Supermicro and BIS agreed to settle claims made by BIS in a charging letter alleging violations arising out of other exports by Supermicro that were destined to Iran. The charging letter lists exports by Supermicro of motherboards, superservers and computer chassis. Supermicro settled these allegations in the charging letter by an agreement to pay a civil penalty of $125,400.

Interestingly, the exported computer chassis referred to in the BIS charging letter are EAR99, i.e. not subject to a BIS license requirement. BIS premised the violations for the exports of the chassis on EAR § 746.7 which notes that OFAC authorization is required for shipments to Iran under the Iranian embargo. Failure to obtain that authorization for an EAR99 item was then viewed by BIS as a violation of EAR § 764.2(a).

UPDATE: Richard Pettler, a partner at Fragomen, Del Rey, Bernsen & Loewy in San Francisco and counsel to Supermicro, contacted me to provide additional details that were not in the press accounts that I relied on. This post has been updated to reflect his comments.