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Archive for the ‘Criminal Penalties’ Category

May

15

Florida Man Charged With “Brokering” His Own Defense Exports

Posted by Clif Burns at 4:47 pm on May 15, 2008

38 caliber jacketed soft point ammunition This recently unsealed criminal complaint against a Florida man shows that the FBI agents and the federal prosecutors haven’t a clue as to the correct reading of the definition of a “broker” in Part 129 of the International Traffic in Arms Regulations (the “ITAR”). In fact, it appears that the prosecutors and investigators have charged the defendant as an unlicensed broker merely because he had begun to negotiate for the export of a shipment of ammunition before getting the export license. If that’s a criminal offense, there are certainly lots of people who better get their affairs in order and contact a criminal defense attorney.

The defendant, Lance Brooks, had been awaiting sentencing after pleading guilty to the unauthorized export of defense services arising out of a trip he made to the UAE to train customers in the use of a grenade launcher. While Brooks was awaiting sentencing, the FBI obtained a warrant to search a DHL package to Brooks from the Firearms Coastal Security Branch in Jamaica. Inside the package was an End Use Certificate (DSP-83) from Jamaica’s Ministry of National Security pertaining to 270,000 rounds of jacketed soft point ammunition, most of it .38 caliber.

The FBI Joint Terrorism Task Force contacted the Jamaican government to obtain further details about the transaction. According to the Jamaican government, Brooks had bid in response to a government proposal to purchase the ammunition, had won that bid, had faxed an invoice for the ammunition to the government, provided banking information for payment for the ammunition, and requested and received an End User Certificate (DSP-83) from the Jamaican government for the ammunition. The FBI inquired with the Directorate of Defense Trade Controls (“DDTC”) to determine if Brooks had a license to export the ammunition. When it learned that Brooks had not yet applied for the license, it charged him with engaging in unlicensed brokering activities without first having registered as a broker with DDTC.

Significantly there is no evidence alleged in the complaint that Brooks had attempted to export the ammunition without a license or that he had no intention of applying for the license. Indeed, his request that the Jamaican Government execute and send to him the End User Certificate (DSP-83) — a document that had to be obtained before a license could be granted — suggested that Brooks had every intention of obtaining a license prior to export. Lacking any evidence of an attempted export or a conspiracy to export, it would appear that the FBI and prosecutors cooked up the brokering charge.

The definition of “broker” in section 129.2 of the ITAR doesn’t cover Brooks’s activities with respect to the contemplated sale of ammunition to the Jamaican government. The key part of that definition is that a broker is someone who acts “as an agent for others” in arranging for the sale of defense articles “in return for a fee.” The allegations of the criminal complaint do not provide any evidence that Brooks was acting for anyone other than himself in arranging this contract or that he was going to receive any fee from that other person. Instead, it appears that Brooks was engaged in a transaction on his own behalf and expected a sales profit on the deal rather than a third-party fee or commission.

If what Brooks did — namely, negotiating a contract for a defense article prior to receiving an export license — is brokering, than almost every exporter will be subject to criminal penalties if they haven’t registered as a broker. Worse, those exporters may need to obtain brokering licenses from DDTC before even talking to potential customers with respect to transactions that fall within the brokerage licensing requirements of section 129.6.

Exporters that had such a poor understanding of the ITAR as these federal enforcement officials would likely be fined or worse when their misunderstandings led to rule violations; no such negative consequences, however, await these enforcement officials who appear not to have even a rudimentary understanding of Part 129 or the definition of a “broker” under that Part. One can only hope that Brooks’s public defender reads Part 129 with slightly more care and gets these charges dismissed.

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May

13

Is There A Secret United States Munitions List?

Posted by Clif Burns at 5:54 pm on May 13, 2008

Leupold Rifle Scope A magistrate hearing pretrial motions in the criminal export case against Doli Syarief Pulungan wondered in a recently issued Report and Recommendation¹ whether there might be a secret version of the USML which lists actual items rather than categories of items. Of course it’s impossible for me to say whether or not there is a “secret” list of that sort with any certainty, since if I knew about it, it wouldn’t be so secret. I don’t think such a list exists, however, but I do think its useful to see what caused the magistrate to wonder about such a list.

As we reported in an earlier post, Pulungan is charged with conspiring to export 100 Leupold Mark 4 CQ/T Rifle Scopes to Indonesia without a license. One of Pulungan’s pretrial motions was for a bill of particulars describing “the specifications to which the subject riflescopes were manufactured that make them defense articles on the Munitions List.” According to the magistrate’s report:

The government’s initial response is that its expert will testify at trial that Leupold Mark 4 CQ/T Riflescopes are on the Munitions List. Pulungan rejoins with an obvious observation: the list itself does not specify any brand or model of riflescope, nor does it list the specifications that would make the scopes defense articles; so what relevant testimony could this ostensible expert possibly provide? Pulungan wants a breakout of the implied syllogism: a riflescope that possesses characteristics x, y and z is deemed to be manufactured to military specifications; a Leupold Mark 4 CQ/T Riflescope possesses characteristics x, y and z; therefore, a Leupold Mark 4 CQ/T Riflescope is manufactured to military specifications. What, asks Pulungan, are x, y and z?

Of course the answer to that question is hardly a deep, dark secret. Leupold’s web site reveals that the scope was designed for the M16. Rather than saying this, however, the prosecution tried to be cute, and that’s where the trouble begins. The magistrate continues:

The government responds that it doesn’t work this way. There is no x, y or z factor that lands a riflescope on the Munitions List in Category I(f). The only logical way to interpret the government’s response is that there is another list, prepared by the DDTC, which determines whether any particular item is a defense article included on the Munitions List as part of ITAR.

The magistrate goes on to note that the government in its pleading says that an item “is designated as a ‘defense article’ on the United States Munitions List” or “defined by the ITAR as a ‘defense article’ covered by Category I(f)”:

If I am interpreting Count 1’s passive-voice declaration and the government’s explanation correctly, then some person or committee within the DDTC has declared that the Leupold Mark 4 CQ/T Riflescope is a “defense article” because it fits within Category I(f) of the Munitions list. But this doesn’t answer Pulungan’s actual complaint: how did it get there? Where, precisely, might a potential exporter actually find this ITAR designation of the Leupold Mark 4 CQ/T Riflescope? What is the foundational basis for the testimony of the government’s trial witness from the DDTC? Does the DDTC have some other real list by make and model? Is there a memo specific to the Leupold scope’s I(f) designation? If so, where is it and why hasn’t it been provided to Pulungan as pretrial discovery?

Following this logic to its end, the Magistrate ordered the prosecution to provide the who, how and why of the designation:

[T]he government promptly must explain in detail who designated the Leupold Mark 4 CQ/T Riflescope a “defense article,” how they did it (the procedural mechanisms) and why they did it (the actual and specific reasons for the designation).

To which we can anticipate the government will respond: nobody designated the Mark 4, there was no procedure that designated it, and no specific reasons were given. The scope is a USML item because it was manufactured to be used on the M16.

You can easily see how the government’s loose language got it into this silly predicament. Items aren’t on the USML; just categories are on the USML and items are either in a USML category or not. The Mark 4 scope isn’t designated on the USML. “Riflescopes manufactured to military specifications” are designated category I(f) on the USML and the Mark 4 either is or isn’t a “riflescope manufactured to military specifications.”

And the issue before the court is not the designation of milspec rifle scopes as category I(f), a designation which is not reviewable under section 38(h) of the Arms Export Control Act, 22 U.S.C. Â§ 2778(h), but simply whether the Mark 4 is or is not a “riflescope manufactured to military specifications.”

It is only a semantic distinction to note that the category not the scope itself is on the USML, but failing to observe that distinction clearly resulted in the magistrate issuing an order that he might not have otherwise issued.

¹ Westlaw subscription required.

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Apr

21

A Costly Favor

Posted by Clif Burns at 8:03 pm on April 21, 2008

Category: Criminal Penalties • Iran Sanctions

ABOVE: Iran’s 9th Olefin Petrochemical
Complex

Earlier this month, French corporation Cryostar SA entered a guilty plea to various export violations arising from its role in a scheme to export cryogenic pumps for installation in the 9th Olefin Petroleum Complex in Iran.

In 2001 a French company, identified only as “TN,” approached Ebara International Corp., Inc., a manufacturer and distributor of cryogenic pumps, i.e., pumps designed to work with liquids at very low temperatures, and sought to purchase various cryogenic pumps worth almost $750,000. The two companies enlisted Cryostar to act as an intermediary in the plan. The pumps were sold to Cryostar in France, which then resold the pumps to “TN,” which, in turn, exported the pumps to Iran. Cryostar created false invoices indicating that it was the end user of the pump.

Cryostar has no offices in the United States, and it does not appear that any company employees entered the United States in connection with this transaction. Rather the jurisdictional bases for the prosecution are (1) the questionable theory that the items involved were U.S.-origin items and (2) the much sounder theory that Cryostar participated in misrepresentations to U.S. authorities.

Of course, the real question is what motivated Cryostar to get involved in this deal in the first place. Why weren’t the items exported directly to “TN,” which could have held itself out as the end user of the items in France? Well the answer to that question becomes clearer once a reasonable surmise is made as to the identity of “TN.”

The DOJ press release on the guilty plea identifies “TN” as “a a French company with a U.S. subsidiary.” An article on the Chemicals Technology website, notes that French company “Technip and its Iranian partner Nargan were awarded the engineering, procurement and construction contract for the” petrochemical facility. And Technip has a U.S. subsidiary.

Now, this is not proof that Technip is the same company as “TN,” but it is certainly a reasonable surmise. Additionally, since Technip’s participation in the Iranian project was well-known, this explains why it would have sought an intermediary to make the false claim that the pumps were being installed in France. Such a claim from Technip would have been less believable.

Under the written plea agreement, Cryostar has agreed to a fine of $500,000 and two years corporate probation. I imagine that the execs at Cryostar are now ruing the day that agreed to a corporate favor for another French company. They may have been hoping for a few dinners at Pierre Gagnaire paid for by Technip, but wound up getting more than they bargained for.

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Apr

16

More Fun with Scienter

Posted by Clif Burns at 9:18 pm on April 16, 2008

Category: Arms Export • Criminal Penalties

ABOVE: Vibro-Meter Pressure
Indicators

A story by Dan Browning in the Minneapolis Star-Tribune alerted me to an investigation of Global Engineering Associates (“GEA”), a company located in a Minneapolis suburb. According to a recently unsealed search warrant (which Dan Browning was kind enough to send to me), GEA is being investigated for alleged shipments of pressure indicators and radio mounts to Singapore.

A search warrant needs to show probable cause for all elements of the crime and, of course, the scienter element of the violation — i.e. evidence that the defendant knew that the exports were in violation of the law — is, as usual, the hardest part to establish. The affidavit supporting the search warrant places its main emphasis on a visit made to GEA by agents of Immigration and Customs Enforcement under “Project Shield America,” a national outreach program initiated by ICE to inform exporters of export licensing requirements. According to the affidavit:

Special Agent Cramsey and Leff [the CEO of GEA] discussed the Project Shield America program in detail and exchanged business cards. Leff was given copies of the Project Shield America brochures for his review. Leff stated that he would be happy to review the literature to ensure his company was in compliance with all US export laws and regulations.

I don’t think I’m being too much of a cynic to suggest that this is a thin reed upon which to base scienter, and it’s not the first time that ICE has tried to use Project Shield America as a basis for claiming that export violations were willful. There is no question that the project teaches exporters that licenses are required for military and dual-use items. The problem is it provides little guidance to exporters in how to determine whether items are military or dual-use items.

In this case, the items in question aren’t obviously military items. Vibro-Meter, the manufacturer of the pressure indicators in question, produces pressure indicators for both civil and military aircraft. Nor does a “radio mount” have anything about it that inherently suggests that it is a military item. Indeed, ICE needed to request a specific determination from the Directorate of Defense Trade Controls to get the information necessary to conclude that these were military items on the USML. So, a friendly visit from ICE agents and a short brochure aren’t going to establish that GEA knew that these items were military items and therefore subject to export licensing requirements.

There are two other facts alleged in the affidavit that might support probable cause on the scienter element. First, there is a claim that the invoice inside the shipping packages differed from descriptions of the items in the shipping documents. However, it appears from the affidavit that the enclosed invoice simply had more detail than the descriptions in the shipping document, not necessarily an indication of criminal intent by the exporter. Second, the affidavit indicates that GEA never inquired about the two shipments containing the allegedly export-controlled items, both of which were seized by customs. That is, admittedly, somewhat more suspect, but there could be a number of innocent explanations.

The important consideration here is an issue that increasingly needs to be addressed. Export prosecutions have begun to veer from prosecution for exports of items that reasonable people would clearly realize were export-controlled — guns, tanks, night vision and the like — to less obvious items such as involved in this case. Some procedure needs to be implemented to assist exporters in determining export classification, and the current commodity jurisdiction procedure, which can take a year or more, is broken and not the answer.

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Apr

15

Work by Chinese Grad Student Leads To Deemed Export Conviction

Posted by Clif Burns at 9:52 pm on April 15, 2008

Category: Criminal Penalties • Deemed Exports

Unmanned aerial vehicle Daniel Max Sherman, a former employee of Knoxville-based Atmospheric Glow Technologies, entered a guilty plea today in federal court to a conspiracy with a former University of Tennessee professor to provide controlled technical data to a Chinese student research assistant in violation of the Arms Export Control Act. AGT had given a subcontract relating to its research on a military drone aircraft to UT’s Plasma Sciences Laboratory, and the professor and the Chinese research assistant were working on the project.

Sherman’s plea hearing went a little off track when Sherman declined to admit to one of the essential elements of the crime which led to a little prompting — and a misstatement of the law — by the prosecutors:

Sherman indicated to [Judge] Varlan that although he was admitting guilt he maintains he was unaware of the provisions of the Arms Export Control Act that would have restricted the work to U.S. citizens only barring a special permitting process. However, [prosecuting attorney]Theodore noted that the law states a person violating the action either must know or should have known about the act’s requirements and Sherman’s claim of ignorance would not pass muster.

Sherman then conceded that point and formally entered his guilty plea.

The AECA’s requirement of willfulness as an element of a criminal charge is a requirement that the defendant knew that the export was illegal. It is not whether the defendant knew or should have known that the export was illegal. Increasingly, it seems, U.S. attorneys are finding the scienter requirement to be too pesky to bother with and are looking for novel ways to disregard it.

[Thanks to Mike Deal for alerting me to this story.]

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