More on the 2013 shutdown and export issues:

Commerce: BIS yesterday updated its website to inform exporters that the SNAP-R licensing page was closed until the government shutdown is ended. Emergency license applications will be accepted but only if justified on grounds of national security. It is probably safe to say that your need to export cattle prods to Estonia won’t meet that standard.

Treasury: News reports (like this one) indicate that the offices of OFAC have been pretty much emptied out by the shutdown. The folks on the Hill are lamenting that these means that OFAC won’t be deterring Iran from its nuclear ambitions. No one seems to mention that it also means that means that medicines and medical devices not covered by the general licenses but eligible for specific licenses won’t be making it to Iran. No big surprise there, I suppose.

State: DDTC is still saying it has staff through Friday, October 4, and only emergency licenses after that.

With export licensing and classification decisions shut down for the duration, you have to wonder whether the result of the Shutdown of 2013 will be a bumper crop of voluntary disclosures in the same way that there was a bumper crop of babies after the Great Blackout of 1965*

*Yes, I know that’s an urban legend.

ABOVE: Joe Wolverton II J.D.

Various press reports have suggested that the White House recently waived restrictions on providing arms to the Syrian rebels, but a review of the Presidential Determination itself reveals something much more limited.

In fact, the determination waives portions of the Arms Export Control Act but only to authorize a specific transaction providing defense articles to “vetted” members of the opposition and to NGOs in Syria. The defense articles are described as those “necessary for the conduct of … operations inside or related to Syria, or to prevent the preparation, use, or proliferation of Syria’s chemical weapons.” Who the “vetted” members are is not specified nor are the particular articles involved detailed.

Significantly this is not a general waiver but is a waiver only with respect to one specific contemplated transaction. Defense companies do not now have a blanket license to ship their wares to the Syrian opposition.

My favorite comment on the affair comes from one “Joe Wolverton II J.D.” writing for something called “The New American.” Joe Wolverton II J.D. offers up these comments in an article with the catchy headline “President Breaks Arms Export Laws to Send Shipments to Syrian ‘Rebels'” Apparently one of the things Joe Wolverton II J.D. failed to learn as part of getting the right to append J.D. to his name is that it is a good idea to read a law before declaring that someone, particularly a President, has broken that law.

Section 40(g) of the Arms Export Control Act, 22 U.S.C. § 2780(g), the “broken” law in question, specifically gives the President to waive the provisions of the Act with respect to a specific transaction if he finds that the waiver is “essential to the national security interests of the United States” and he makes the requisite report on the waiver to Congress. The determination makes that finding and directs the Secretary of State to make the required report to Congress. So, in the matter of proper interpretation of the Arms Export Control Act, the score is White House 1 and Joe Wolverton II J.D. 0.

Shawn James Hartnell, a Canadian citizen, pleaded guilty last week to charges he attempted to export rifles from the United States to Canada without a license. Hartnell had been nabbed when he tried to sell rifles to U.S. and Canadian agents in the parking lot of the felicitously named Settle Inn in Grand Forks, North Dakota.

Apparently, Hartnell had been engaged in gun running from the United States to Canada for quite some time and had been under investigation by the Feds and the Mounties for over a year. During the course of the investigation, the resourceful Mr. Hartnell had told undercover agents that they could always smuggle the guns into Canada using a snowmobile.

Hartnell’s sentencing hearing has not yet been scheduled.

The latest technical amendments promulgated last Friday by the Office of Foreign Assets Control (“OFAC”) make me wonder where the people who write these rules come from. Mars, perhaps? No, further out. I’m guessing they come from Saturn because even someone from Mars might have a better idea about how things actually work here on planet Earth.

These technical amendments add to the Terrorism Sanctions Regulations and the Global Terrorism Sanctions Regulations a rule reflecting OFAC’s infamous guidance dealing with ownership interests by blocked parties. First, let’s quote the regulation in question and then, in case you don’t speak Saturnian, translate it into English as spoken here on Earth.

A person whose property and interests in property are blocked pursuant to § 594.201(a) has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest.

Translated from Saturnian into English this means, more or less:

Terrorists have an interest in things in which they have a 50 percent or greater interest.

Who says you can’t make a living printing tautologies in the Federal Register? People have an interest in things that they have an interest in. Who would have thought?

Next we have this:

The property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to § 594.201(a), regardless of whether the entity itself is listed in the Annex to Executive Order 13224, as amended, or designated pursuant to § 594.201(a)

Again, for those of you who haven’t made it through the Rosetta Stone DVDs on Saturnian, this says in English:

You have to block the assets of companies who aren’t on the SDN list if they are owned 50 percent or more by someone who is on the list

Now this may make sense on Saturn, at least if you’re a business on Saturn and are deciding whether to sell a light phaser or flying saucer fuel to a three-legged, four-eyed alien who has just walked into your shop. But, here on Earth, not so much.

To begin with, how does anyone screen for blocked parties who aren’t on the list of blocked parties? Simple, you say, just ask every company you’re screening for the name of all its 50 percent or greater owners. Okay, so I do that and I find out that the majority owner isn’t on the list. Home free! Not so fast. Who owns the majority owner? Because if he is owned by a blocked party, then his property is blocked, meaning the company you are screening is blocked and its assets must also be blocked. Okay, so you ask for the names of owners greater than 50 percent and owners of owners with more than a 50 percent interest. But wait, even if the owner of the owner isn’t on the list, the owner of the owner of the owner might be and so forth.

And, of course, there’s another problem with this rule as some innocent investors in Illinois learned. These blocking rules apply not just to the interest of the blocked party but to the interest of the minority investors as well. And they apply even if the majority investor (or the majority investor in the majority investor) is designated after the investment. So, let’s say that Mr. A owns 51 percent of Company B which owns 51 percent of company C and that, several years after his investment, he’s designated by OFAC as an SDN. The 49 percent investors in both Company B and C now have their investments blocked. How can anyone protect themselves against that? What crystal ball are people supposed to use to predict whether a person they are doing business with won’t become an SDN in the future?

ABOVE: Carlyle Group DC HQ

A major headache in complying with the notice requirement in section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 has been determining the scope of the statutory requirement for publicly traded companies to file notices with the SEC of their own activities, and those of their “affiliates,” with Iran. Unfortunately, the law does not provide a definition of “affiliate” making it difficult for companies to be certain of the required scope of the disclosure.

A disclosure (subscription required) last Friday by HD Supply Inc. illustrates how broadly the affiliate net may reach. In that disclosure filed with the SEC the company disclosed the presumably legal dealings in Iran of a Spanish company in which one of HD’s investors had invested. Specifically, the notice disclosed some services provided by Applus+ to Iran’s Industrial Development and Renovation Organization (“IRDO”), an Iranian government agency. One of Applus’s investors, the Carlyle Group, was also an investor in HD Supply.

So at this point, what are the limits on what constitutes an “affiliate”? If another investor in Applus+ had an investment in a company that had an investment in a company doing business in Iran, would that need to be disclosed as well? Your guess is as good as mine.