Last week we reported on the settlement agreement that Cabela’s, the outdoor supply store, entered into the the Bureau of Industry and Security (“BIS”) to settle allegations that the company had exported 76 rifle scopes without the required BIS licenses. This was the company’s second settlement of illegal export charges, the first covering allegations covering unlicensed exports of 685 rifle scopes between 1999 and 2000. The company agreed to a fine of $680,000 to settle the most recent charges.

The settlement documents are now available on the BIS website and provide details not available in the press release that served as the basis for our initial report on the settlement. Not surprisingly given Cabela’s repeat offender status, the settlement also includes a requirement that Cabela’s conduct a compliance audit substantially in accord with BIS’s Export Management System audit module.

The audit requirement imposed in the settlement agreement is purely an internal audit. Even so, the audit module requires extensive review of company compliance procedures, including compliance with many outmoded requirements. This is because the audit module was created in 2000 and hasn’t been revised since then. Extensive coverage in the audit module is devoted to inquiring whether the company’s export procedures provide instructions on filling out and retaining copies of the Shipper’s Export Declaration (“SED”), even though filing an SED is now a violation of applicable regulations. The module also seems to hark back to the pre-Internet dark ages by requiring the company to keep hard copies of the Export Administration Regulations and the Denied Party List.

It seems to me that if BIS wants to tout the EMS audit module as the touchstone of export compliance, it might want to update it a little more often than every decade.

ABOVE: Marina Hemingway, Cuba

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In 2003 Michele Geslin and Peter Goldsmith, residents of the Conch Republic, otherwise known as Key West, organized the Conch Republic Regatta, a sailboat race between Key West and the Marina Hemingway outside Havana, Cuba. The organizers traveled on two boats owned by participants. The day after their return they were dragged from their bedrooms in their pajamas and indicted on charges that they violated the Trading with the Enemy Act and, more specifically, 31 C.F.R. 515.572(a)(1), which prohibits, among other things, the provision of unlicensed travel services to Cuba.

Judge James Lawrence King was not amused and dismissed the indictment, noting that the provisions of section 515.572(a)(1) were not violated by independent coordinated travel to Cuba where the defendants didn’t provide the travel or provide lodging in Cuba. In the case of the regatta, the sailors traveled to Cuba on their own boats, not on boats provided or arranged by the defendants. The court further noted that none of the regatta fees collected by the defendants were spent in Cuba and that the indictment did not allege any expenditures in Cuba or other financial benefit to Cuba.

Four years later, in December 2007, the Bureau of Industry and Security (“BIS”) decided not to let bygones be bygones and issued a charging letter accusing Geslin and Goldsmith of aiding and abetting the unlicensed temporary export of two vessels in the regatta to Cuba. Geslin and Goldsmith, thinking no doubt that the dismissal of the indictment settled the matter, sent letters to BIS contesting the charges but participated no further in the proceeding.

In particular, the two failed two respond to requests for admissions filed by BIS, so the Administrative Law Judge (“ALJ”) assigned to BIS’s case deemed that all the requested admissions had been admitted and entered summary judgment against Geslin and Goldsmith. On November 4, BIS entered an order, just published in its website, imposing and $11,000 fine against the two as well as a conditional denial of export privileges that would not go into effect if Geslin and Goldsmith paid the fines in a timely fashion.

It does not appear that any of the boat owners was fined or prosecuted for the export of the boats to Cuba. Rather only the regatta organizers were fined by BIS for “aiding and abetting” the export. The charging letter and the ALJ decision make much of the fact that the duo rode the boats to Cuba but there is no evidence that they raised a spinnaker, took control of the rudder, or otherwise did anything but sit on their keisters during the brief voyage between Key West and Havana. The regatta fees that they collected were all spent in Key West and so also don’t serve as much of a basis for an “aiding and abetting” charge. At most, they publicized and coordinated the regatta, activities that Judge King said didn’t constitute provision of travel services. Perhaps that is alone enough to be seen as aiding and abetting, but you have to wonder whether BIS doesn’t have more compelling things to do than to carry on a grudge match against two regatta organizers, particularly where the boat owners were apparently allowed to sail off into the sunset.

After ABC News alleged that Blackwater was exporting weapons and other defense articles to Iraq hidden inside bags of dog food, Blackwater issued a press release with the following reply to that charge:

Blackwater has never hidden anything inside a bag of dog food – not a gun, not a radio, nor anything else. A recent news story cited “former employees” who claim that Blackwater hid weapons “in large sacks of dog food.” This sensational claim is false. The company has, however, packed shipping pallets with valuable and pilferable items, including weapons, interior to bags of dog food or other low-theft items. This common practice is done to prevent corrupt foreign customs agents and shipping workers from stealing the valuables. U.S. export statutes require licensing of controlled materials but do not dictate their placement within packaging.

If you read that statement closely, Blackwater is saying that weapons weren’t put in the dog food bags themselves but were instead buried in pallets of dog food bags. The purpose of this was to keep foreign customs agents from stealing the guns.

Blackwater is technically right that there isn’t anything in the ITAR which says you can’t bury a legally-exported gun in between 100 40-lb packages of dog chow. ITAR section 123.22, which covers the mechanics of exporting defense articles, is notably silent on this point. Even so, I’m not so sure this is a particularly good anti-pilferage strategy, and it certainly would make me very nervous.

First, for this to work, at least with respect to foreign customs officials, the packing slips and the foreign customs entry declaration would have to say “Two Tons Dog Food” and not “Two Tons Dog Food and 4 Semi-Automatic Assault Weapons.” So, at the outset, such a shipment might very well constitute a violation of the smuggling laws of the destination country.

Second, I also can’t imagine that such a shipment wouldn’t attract a fair amount of attention from U.S. Customs. If the packing label refers only to dog food and the XTN or ITN numbers accompanying the shipment relate to Automated Export System (“AES”) entries for licensed exports of firearms, one has to imagine that U.S. Customs may want a more detailed “look-see” at the pallet, thereby holding up the shipment.

Third, and worse yet, the language of 18 U.S.C. § 1001, which criminalizes false representations to federal agents, is broad enough to potentially cover the false invoices, packing labels and other shipping documents that would be presented to U.S. customs when the items were being exported. That seems a rather large risk to run to keep an Iraqi customs inspector from pilfering a rifle.

The safest strategy it seems to me would be to insure the guns rather than hide them. Another issue, perhaps the decisive one, is this: walking around with a gun that smelled like dog food would likely mean that every dog in the neighborhood would be your new best friend forever.

Cabela’s, the mammoth hunting and outdoor supplies retailer, was recently smacked with an equally mammoth $680,000 fine by the Bureau of Industry and Security (“BIS”). The fine was paid by Cabela’s to settle charges that it exported rifle scopes without a BIS license. According to the BIS press release, Cabela’s engaged in 76 unlicensed exports of rifle scopes between 2004 and 2005 to such destinations as Argentina, Brazil, Canada, Chile, Finland, Ireland, Malaysia, Malta, Mexico, Pakistan, the Philippines, South Africa, Sweden, and Taiwan. BIS also alleged that Cabela’s failed to file shipper’s export declarations for these unlicensed exports.

In 2007, the publicly-traded firm had over $2.3 billion in revenues and earned almost $90 million in profits. The $680,000 fine is substantially higher than the normal BIS fine, even after the penalty increase passed by Congress last year. BIS likely took the company’s size into account in reaching a penalty that wouldn’t be easily forgotten.

Another reason for the high fine is that this isn’t Cabela’s first time at the export rodeo either. In 2005 Cabela’s settled similar charges relating to 685 unlicensed exports of rifle scopes between 1999 and 2000 and agreed to pay a $265,000 fine to BIS. It seems likely that the exports involved in the current settlement occurred, at least in part, after BIS had informed Cabela’s of its investigation of the 1999-2000 exports.

Notwithstanding these run-ins with BIS, the website for Cabela’s still says nothing about the requirement for export licenses for rifle scopes to most destinations. Ironically, however, the website’s terms and conditions state that customers leaving product reviews agree not to submit any content that “violates any law, statute, ordinance or regulation (including, but not limited to, those governing export control. …)” Perhaps the company should worry less about whether product reviewers are violating export laws and more about whether its own sales and shipping departments are violating those same laws.

The Office of Foreign Assets Control (“OFAC”) announced today that it was eliminating the general license for so-called U-turn transactions involving Iran. A U-Turn transaction, formerly permitted under section 560.516(a)(1) of the Iranian Transaction Regulations, is one which starts and ends with an offshore, non-US, non-Iranian bank.

For example, an Iranian entity could direct Deutsche Bank in Berlin to transfer funds from the Iranian entity’s Deutsche Bank account in Berlin to Banque National de Paris in Paris. This might be done, for example, to pay for goods purchased by the Iranian entity in France. If the transaction was in dollars, it would likely transit Deutsche Bank’s U.S. correspondent bank or some other bank in the United States, and the U-Turn exception would permit that to occur. Now that U-turn transactions are no longer permitted, the U.S. bank will reject the transaction.

Prior to this action, OFAC had blocked U-turn transactions involving two Iranian banks — Bank Saderat and Bank Sepah. The current action eliminates all U-Turn transactions involving all persons and entities in Iran. The most likely effect of the new rule is to encourage Iran to seek to settle its transactions in Euros or currencies other than the U.S. dollar.