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Archive for August, 2007

Aug

10

The Fat Man and the Imams

Posted by Clif Burns at 2:55 pm on August 10, 2007

Fouad Al Zayat, a Syrian businessman and high-stakes gambler better known by London casino staff as “The Fat Man,” just lost an appeal he filed to have the U.K. to release property that the U.K. had blocked at Iran’s request. Yes, you read that correctly, property that had been blocked at Iran’s request.

Part of the reason for this post is to add a little levity to the blog on a steamy Friday afternoon in August. The other reason is because, believe it or not, there is actually a U.S. export law angle to this story, as reported today by Bloomberg.

The story begins almost five years ago when Al Zayat made a $120 million deal with Iran to buy an Airbus 340 from the Sultan of Brunei to convert it into a VIP plane for high muckety-mucks in the Iranian government. In a not-very-focused moment, the imams gave Al Zayat the $120 million before they got the plane. (Note to Iran: don’t give money to notorious high-stakes gamblers without getting the goods first).

Instead of being a good boy and actually using the proceeds from Iran to buy the Sultan’s A340, Al Zayat apparently used the funds to settle multi-million dollar gambling debts he owed to Ritz Hotel Casinos Ltd and to buy property in London. The imams were not amused, and so they enlisted an army of solicitors and the U.K. judicial system to freeze Al Zayat’s assets in Great Britain.

Al-Zayat appealed the blocking order and — alert: export law angle ahead — claimed that there was a commercial dispute between him and Iran, in large part over the cost of refitting the plane and still complying with U.S. sanctions:

Al Zayat told the court his expenses were “enormous” because even though he planned to buy the plane for $85 million, Deutsche Lufthansa AG had a $20 million interest in it and the aircraft had to be converted in a way that ensured U.S.-imposed economic sanctions against Iran were respected.

As you’ll see below, Al Zayat had a plan for complying with the Iran Sanctions law that wouldn’t have cost more than about $50,000.

Now, you may be scratching your head and thinking that you’ve heard about Fouad Al Zayat before. And you have. He has a walk-on role in the affair of Bob Ney, the Ohio Congressman now languishing in the slammer for bribery. Al Zayat was mentioned in the Ney indictment as the “foreign businessman” who flew Ney and two staffers to London for a night of gambling, with an enormous pile of free chips included courtesy of Al Zayat.

Why, you ask, was Al Zayat bribing Ney? It’s all about the imam’s VIP A340. Al Zayat wanted to get an exemption to put U.S. parts in the VIP plane. Paul Kiel at TPMmuckracker finishes the story:

Ney walked away from their night of gambling with over $50,000 … . But Ney didn’t want to declare the full amount to customs when he re-entered the U.S. So he gave $5,000 to one of his staffers … to carry through customs. And in order to save Ney the trouble of depositing the money into a bank once they returned, “Heaton stored this money in the safe of Ney’s Congressional Office,” according to the charging documents, “opening the safe as requested so that Ney could make repeated withdrawals.”

Bob Ney was, apparently, the only person in the United States who ever got rich because of the U.S. sanctions against Iran. And Al-Zayat’s plan to fix his Iran Sanctions problem for the cost of a Congressman didn’t work out so well, either for him or the Congressman.

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Aug

8

There Will Always Be an England

Posted by Clif Burns at 9:21 pm on August 8, 2007

Category: Criminal Penalties

Periodic Table Entry for Hf Devotees of the New Yorker will no doubt remember items that used to be short entries titled “There Will Always Be an England.” A typical item under that heading recounted humorous but true anecdotes of quaint English behavior. You know, the story of an eccentric don who wins the lottery and uses the proceeds to buy first-class plane tickets to Sardinia for two voles that he nursed back to health after they were run over by a lorry in Dorset.

So I couldn’t help using the same title for the story of Avocado Research Chemicals Ltd of Heysham, Lancashire and its unfortunate and unlicensed export of two chemicals from the U.K. In July 2005, the company exported to Egypt without a license small quantities of 2-diisopropylaminoethyl chloride hydrochloride, a precursor to VX nerve gas, and hafnium, a component used in producing control rods for nuclear reactors. The company was fined Â£600 and ordered to pay Â£100 in costs, or just over $1400 in fines and costs. And, no, we aren’t missing several zeros in those figures. Those are the actual fines.

But it gets better. The illegal exports were discovered by the Department of Trade and Industry after it reviewed the company’s annual export report and noted that licenses had not been obtained for the exports in question. The company then made a voluntary disclosure of the unlicensed exports. Is that great or what? The agency can discover the violation but you can still make a voluntary disclosure. That’s better than getting two mulligans on the eighteenth hole. A subsequent internal audit disclosed that the exports were “a result of human error” – or, translated from the British, inadvertent.

Wait, there’s still more. A spokesman for the Revenue and Customs Prosecutions Office put on a very serious face and said this:

Today’s successful result shows how important it is for companies to make sure that correct exporting procedures are in place. ARC Ltd did the right thing once they noticed their mistake and contacted the authorities. But other companies should note that, even in a case where small quantities and genuine human error are involved, some action must be taken. The unlicensed export of potentially lethal substances is too serious to be ignored at any level.

Come on, he’s kidding isn’t he? Something can be “too serious to be ignored at any level” and the appropriate result is a $1400 fine for a company that “voluntarily” discloses the export after it got caught? The great sucking noise you are hearing is the sound of U.S exporters looking for office space in Lancashire.

So, to paraphrase another famous expression, next time your company is getting, er, worked over for an export violation, just lie back and think of England.

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Aug

7

DDTC to Change Rules on Foreign Employees of Defense Companies

Posted by Clif Burns at 10:48 pm on August 7, 2007

Category: DDTC

Stephen Mull Stephen D. Mull, formerly the U.S. Ambassador to Lithuania and now the Acting Assistant Secretary for Political Military Affairs at the State Department, testified last week at the House Foreign Affairs Subcommittee’s hearing on export control. Most of the testimony was a not very convincing effort to defend the long processing times for Technical Assistance Agreements at the State Department’s Directorate of Defense Trade Controls (“DDTC”). Mull repeatedly referred to the “complexities” of TAAs to justify these processing times.

Another part of his testimony, however, suggested a possible change in procedures relating to employment by defense contractors of foreign nationals from NATO, E.U and the “plus three” countries (i.e. Japan, Australia and New Zealand):

We are set to initiate a policy change that will permit employees of foreign companies who are nationals from NATO or EU countries, Japan, Australia and New Zealand to be considered authorized under an approved license or TAA. This will alleviate the need for companies to seek non-disclosure agreements for such nationals and recognizes the low risk to of transferring technologies to nationals of these countries under an approved license or TAA.

A welcome change to be sure, but if there is such a low risk of transferring non-classified defense technologies to such nationals, why not eliminate the requirement for a DSP-5 license application for them as well?

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Aug

6

When Foreign Subs Go Bad

Posted by Clif Burns at 8:37 pm on August 6, 2007

Category: BIS

Viking Sprinkler Head Another day, another foreign subsidiary of a U.S. company caught shipping stuff to Iran. This time it’s the Luxembourg-based subsidiary of Viking, a leading manufacturer of fire protection systems. The fire extinguishing systems were shipped by the sub through the UAE (natch!) to Melli Etfae Iran Co. (National Iranian Safety & Fire Fighting Company).

An interesting twist here is that the subsidiary made the shipment notwithstanding direct orders from the COO of the U.S. parent company that shipments to Iran required a license. Indeed, this order was given the subsidiary less than a week before the first illegal shipment. Even so, under settlement agreements with both companies, the Bureau of Industry and Security (“BIS”) fined the parent $22,000 and the subsidiary $44,000. The exports came to light when a freight forwarder figured out what was going on and blew the whistle.

Several observations seem in order. First, fining the parent company after it had properly instructed the subsidiary that the shipments required a license seems harsh. After all, what more was the parent to do? Fly to Luxembourg and lock the staff in the basement?

Second, both the parent and the subsidiary were required by BIS to conduct an internal compliance audit substantial similar to BIS’s Export Management System Review Module. I don’t recall having seen this requirement imposed since it was imposed in the settlement agreement with Norman, Fox & Co. back in November 2005. It’s too early to judge, but I wouldn’t be surprised, based on the two Viking settlements, if we see this requirement cropping up more frequently.

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Aug

3

Padilla Disses DDTC During House Subcommittee Hearing

Posted by Clif Burns at 3:44 pm on August 3, 2007

Category: BIS • DDTC

An article (subscription only) in today’s edition of Inside U.S. Trade reports on the hearing held last Friday by the House Foreign Affairs Subcommittee on export controls. We have previously described the prepared testimony of Christopher Padilla, who heads Export Administration at the Bureau of Industry and Security (“BIS”), which he gave during that hearing. During the Subcommittee’s questioning of Padilla, the subject of processing times for license applications at the Department of State’s Directorate of Defense Trade Controls (“DDTC”) came up:

Padilla also criticized the staffing level of DDTC, which processes several times the licenses processed by … [BIS] with roughly half the staff. “In my personal opinion, I don’t think the State Department has sufficient resources to do the job,” Padilla said at the hearing.

Foreign Affairs Subcommittee Chairman Brad Sherman has been considering a user fee for export license applications processed by DDTC in order to try to speed up processing times. According to the Inside U.S. Trade linked above, aides to Sherman are circulating a draft of the proposal and are trying to keep the fees low enough to attract sufficient support and yet still be sufficient to ameliorate the processing delays.

Not everyone, however, is happy with the user fee proposal. The Vice-Chairman of the Subcommittee David Scott, who represents Marietta, Georgia, where Lockheed has operations, had this to say:

Any move toward a user fee to process a license could severely restrict the ability of industries to do business in a free market way

That’s what they might call hogwash in Georgia since the requirement to get an export license has pretty much tossed the ability “to do business in a free market way” out the window. Obviously, Scott just wants the taxpayer to bear the costs of processing the licenses and not the companies benefiting from them.

However, there is a compromise position that might have a better chance of acceptance by everyone involved. DDTC could impose, in the same way that the Citizenship and Immigration Services does, a premium processing fee, so that companies that need export licenses on a faster track would have that option but would have to pay for the privilege.

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