The common wisdom is that the Directorate of Defense Trade Controls (“DDTC”) has a “see-through” rule for exports of defense articles, but that the Bureau of Industry and Security (“BIS”) does not have a see-through rule for exports of dual use items regulated by it. A “see-through” rule will impose export controls on an item if one of its parts is export controlled.

Well, as the recently released Settlement Agreement with Nalco Company illustrates, it is not strictly the case that BIS doesn’t have “see-through” rules. Nalco agreed to a $115,000 fine for thirteen unlicensed exports of water hardness testing kits to the Bahamas, the Dominican Republican, and Angola. One of the reagents in those kits contained triethanolamine, a chemical weapons precursor classified as ECCN 1C350.

The reason for the “see-through” rule here can be found in the ECCN’s “License Requrement Notes” which indicate that “mixtures” (as opposed to “compounds”) with specified percentages of the listed chemical weapons precursor are controlled by 1C350. Although there is no definition of “compound” or “mixture” in the Export Administration Regulations, it seems reasonable to assume that a “compound” refers to a new substance created by a chemical reaction of the component compounds, whereas a “mixture” refers to a separable commingling of various components. In layman’s (and somewhat simplistic) terms, bread is a “compound” of flour, yeast and water and salad dressing is a “mixture” of oil and vinegar. In the case of triethanolamine, the relevant percentage is 30 percent.

Mixtures containing 30 percent or more of chemical weapons precursors that are used as reagents in testing kits are excluded from 1C350 but are instead classified under ECCN 1C395. Items classified under ECCN IC395 require licenses to any country not a member of the Chemical Weapons Convention. Those countries are listed on Supplement 2 to Part 745 of the EAR and, needless to say, do not include the Bahamas, the Dominican Republic and Angola, the destinations for the exports by Nalco.

Yesterday the Treasury Department’s Office of Foreign Assets Control (“OFAC”) added the Islamic Republic of Iran Shipping Lines (“IRISL”) and its related companies to the Specially Designated Nationals and Blocked Persons (“SDN”) list. As part of this designation, 123 vessels believed to be operated by IRISL were added to the SDN list. As a result of these designations, U.S. persons are forbidden to engage in any transactions with IRISL, it’s related entities or the designated vessels. Freight forwarders and shippers are now forbidden to ship any cargo — including licensed cargo — on the 123 designated vessels. Furthermore any property of the IRISL that comes under the control of a U.S. person must be blocked.

Simultaneously with the designation Adam Szubin, Director of OFAC, and several State Department officials held a press briefing on the new designations. Szubin explained that the designation was based on IRISL’s shipment of proliferation materials. He also did a little jaw-boning:

And when that is combined with the demonstrated pattern of deceptive practices, where IRISL has misled maritime authorities and other companies about the nature of the goods it’s shipping, it leads one to a very difficult question, if one is considering doing business with IRISL consistent with international requirements.

So to the question you ask, every company and insurance company will have to ascertain for itself whether it is comfortable that the cargos and the shipments that it is insuring are consistent with international requirements not to assist Iran’s proliferation program. I don’t know how easily they can reach a state of comfort with that. If they can, then they ought to proceed. But I think it’s presenting, at the very least, a very risky proposition.

What’s going on here is that an insurer of a shipment transiting on IRISL isn’t dealing directly with IRISL and thus isn’t strictly prohibited from insuring the shipment, so Szubin is trying to jaw-bone insurers into not insuring the shipments.

What about banks that issue letters of credit covering shipments carried by IRISL? Like insurers, the banks may not be dealing directly with IRISL. Here the situation is somewhat more complicated. The designation order instructs banks to reject (but not block) any funds transfer referencing a designated vessel. Moreover,

Banks must contact OFAC’s Compliance Programs Division for further instructions should the name of an SDN vessel appear in shipping documents presented under a letter of credit or if noticed in a documentary collection.

Presumably the concern here is that part of the payment under the letter of credit may be used to pay freight charges to IRISL and thus involve prohibited direct dealings with IRISL.

One problem with any vessel designation is that names and flags of the vessel can be easily changed. In the press briefing Szubin attempted to address this problem by noting the vessel information contained in the designation:

Something that I haven’t mentioned yet today, but Treasury has also made available on its website, through its specially designated nationals list, a list of 123 IRISL vessels with special identifier numbers, the flags of registry, all the information that we have, including tonnage, so as to facilitate those around the world identifying whether an IRISL ship and IRISL is involved in a given shipment. … That is the – that is the full list of vessels that we’ve been able to identify with certainty and with the types of identifiers — I was mentioning earlier the tonnage that – the unique identifying number that belongs to a ship even if it changes its name, and that’s a key point when it comes to IRISL.

Director Szubin seems to be somewhat confused and to be suggesting that the vessels net weight is a unique identifying number that should checked for each vessel. In fact, he should — and probably intended to — reference the IMO number, a unique number assigned to each vessel by the International Maritime Organization and which survives name and flag changes. Accordingly, no freight forwarder or shipper should use a vessel without obtaining the vessel’s IMO and checking that number on the SDN list.

A federal grand jury in the District of Columbia indicted an Indian national, Siddabasappa Suresh, and an Indian company, Rajaram Engineering Corporation, for unlicensed exports of U.S.-origin export-controlled goods to the Vikram Sarabhai Space Center, an Indian government agency listed on the Bureau of Industry and Security’s Entity List. All exports to individuals and companies on the Entity List of U.S.-origin goods require a license.

Although the indictment has not yet been released, a Department of Justice press release describes in more detail the facts supporting the indictment as well as showing how BIS’s Sentinel Program played a role in the indictment. Under the Sentinel program, BIS officials travel to foreign countries to verify the end-use of items that BIS has licensed for export. According to the press release, the agents conducting the investigation learned that items licensed for export to Rajaram Engineering Corporation, one of the indicted defendants, were diverted to the Vikram Sarabhai Space Center. No license was obtained from BIS to permit those items to be delivered to the space center.

The indictment further reveals that Suresh and Rajaram conspired with an unnamed Indian subsidiary of an unnamed U.S. company to divert the goods to Vikram Sarabhai Space Center. The U.S. company appears to have been the manufacturer of the exported goods. It is not clear why the U.S. company and its subsidiary were not named, nor why the Indian subsidiary and co-conspirator was not indicted.

Last week the Office of Foreign Assets Control (“OFAC”) released its monthly report on civil penalties imposed by OFAC. Among those listed was a $1,769 fine imposed on Aero Vacations, a small travel agency in Los Angeles serving Spanish-speaking customers. According to the Penalty Notice, Aero Vacations violated the Cuban Assets Control Regulations when it initiated the wire transfer of USD $2,709 to to Scotiabank Inverlat, Mexico City for the account of Viajes Viñales Tours, S.A. de C.V., a company which OFAC alleges is on the Specially Designated Nationals and Blocked Persons List.

Aero Vacations filed a response to OFAC’s Pre-Penalty Notice claiming that “absent access to Viñales documents, Aero Vacations had no reason to suspect that Viñales was a sanctioned entity.” It’s not quite clear what Aero Vacations meant by that defense, but OFAC rejected it, chiding Aero Vacations that “[a]ll U.S. businesses have an obligation to ensure that their international business partners are not listed” on the SDN list — including, apparently, tiny travel agencies where little English appears to be spoken.

Aero Vacations had, I think, at least one better defense to the Pre-Penalty Notice. As is often the case, it was not at all clear that Viajes Viñales Tours to whom the money was transferred was the same entity, or could reasonably be thought to be the same entity, as the “VINALES TOURS, Mexico City, Mexico [CUBA]” that appears on the SDN list, given the different name, the absence of a specific address, and the different spelling of Viñales that appears on the list. (In Spanish, the letters “n” and “ñ” are different letters, each with their own place in the alphabet and not simply the same letter with different diacritical markings.)

Rather than chasing down a Spanish-speaking storefront travel operator in Los Angeles for allegedly dealing with Vinales Tours, perhaps OFAC should consider speaking with Network Solutions, which is the domain registrar for Vinales Tours’s website, www.vinalestours.com. Network Solutions, as registrar, also provides the Whois Server for that Website. Although Network Solutions may be just as unaware that it is dealing with an SDN as Aero Vacations was, OFAC would do much more to stymie Vinales Tours by shutting down its website than by fining one travel agent for one wire transfer.

According to this report from the website of the Knoxville News Sentinel, the trial of Professor J. Reece Roth for violation of the Arms Export Control Act continued today with the testimony of Daniel Max Sherman, the only officer of Atmospheric Glow Technologies (“AGT”) to be indicted in the matter. AGT was the company that contracted Professor Roth to work on the military UAV contract during the course of which it is alleged that Professor Roth disclosed controlled technical data on the project to a Chinese graduate student. Sherman previously pleaded guilty to export violations in connection with his involvement in the project and, it would appear, there is no love lost between Sherman and Professor Roth or between Sherman and his former employer.

According to Sherman, the proverbial [insert expletive here] hit the fan when Roth went to AGT and indicated that, in addition to the Chinese grad student already working on the project, he wanted an Iranian graduate student to the work on the project. [Are there no competent U.S. grad students at the University of Tennessee?] AGT, although happy to export controlled technical data about military technology to a national of China, a country subject to a U.S. arms embargo, had a sudden crise de conscience and decided to draw the line at a national of Iran.

AGT’s refusal prompted Roth to do something that I’ll bet he now sincerely regrets. He marched off to Robin Witherspoon’s office, who was UT’s Export Control Officer, and, according to Sherman, asked her to get a license for the Iranian grad student to work on the project. During the course of this discussion he revealed that a Chinese grad student was already working on the project. From there things went rapidly downhill, to say the least. Witherspoon, according to the government’s pre-trial brief, told him that one couldn’t get a licenses for either Iran or China, and that the participation of the Chinese grad student was illegal.

Witherspoon also informed AGT that the participation of the Chinese grad student was illegal. According to Sherman, AGT went into damage-control mode and feigned ignorance that any foreign nationals were working on the project. They were shocked, shocked, as they say, to find out that export violations were going on. Sherman testified that, in fact, he and others at AGT not only knew about the Chinese student’s participation but also shared controlled technical data with him. When Sherman indicated to company officials that he wanted to tell the truth to government investigators, he was told that the company would not provide him with legal representation. So, he told federal investigators during the early part of the investigation that AGT had no inkling that Roth was using foreign nationals.

By putting Sherman on the stand, the prosecution is endorsing his testimony that others at AGT knew what was going on and knew that it was illegal. Why Sherman is the only one to get indicted, while his equally culpable superiors appear to have escaped prosecution, is far from clear, and may erode the jury’s confidence in the government’s case.

Sherman’s testimony does no favors for Professor Roth either. If indeed Roth asked Witherspoon to apply for a license for the Iranian student, it’s hard to credit the defense’s assertion that Roth disagreed with Witherspoon’s assertion that the participation of the Chinese student was illegal.

NOTE: Export Law Blog will be going on a brief hiatus for the Labor Day holiday starting tomorrow, but we’ll be back on Tuesday, September 2, with more on the Roth trial and other export law matters of interest. Also, August 21 was our second anniversary, and I’d like to take this opportunity to thank the many readers, friends and commenters, without whom a first anniversary, much less a second one, wouldn’t have been possible.