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Archive for September, 2009

Sep

17

BIS Fines U.S. Firm For Having Foreign Subsidiaries

Posted by Clif Burns at 7:26 am on September 17, 2009

Category: BIS

Two weeks ago, we reported on a $14,613.24 fine imposed by the Bureau of Industry and Security (“BIS”) on Thermon Manufacturing after Thermon voluntarily disclosed to the agency that it had shipped heat-tracing equipment to Sudan in violation of the U.S. embargo on that country. That was not the end of the story, however, but rather merely the foreword to a more disturbing story.

Yesterday, BIS posted a press release on its website describing the rest of the tale. According to that press release, BIS fined five foreign subsidiaries of Thermon $176,000 because those subsidiaries had also exported heat-tracing equipment to “Iran, Syria, Libya and listed entities in India.” This violations had also been voluntarily disclosed by the parent company in Texas.

What makes this fine problematic is the following statement in the press release:

The Thermon subsidiaries did not inform Thermon Manufacturing of the ultimate destinations for the items and had been informed by Thermon Manufacturing in February 2005 that “products manufactured by Thermon US may not be sold to countries on the US trade sanctions list,” including specifically Iran, Syria and Libya. BIS alleged that the affiliates acted with knowledge of those violations involving shipments to sanctioned countries that occurred after this warning.

First, one has to wonder what else Thermon was supposed to do. Thermon had instructed its subsidiaries not to violate U.S. export laws, and specifically that they could not sell equipment to countries subject to U.S. economic sanctions. It also appears from the press release that the subsidiaries pulled the wool over the parent company’s eyes and placed orders for the equipment at issue without telling the U.S. parent that the equipment was destined for sanctioned countries. And although the fines were imposed on the subsidiaries rather than the parent, this is just an accounting nicety. Thermon ultimately pays this fine.

In essence, this fine is nothing more than a penalty imposed on U.S. companies for having foreign subsidiaries unless and until BIS provides industry some guidance as to how to avoid such fines other than simply shutting down foreign subsidiaries. Was the problem here that the instructions by the parent to the subsidiaries about exports to sanctioned countries weren’t frequent enough? Or was it that the parent didn’t threaten to guillotine any employees of the foreign subsidiaries who violated these rules? Perhaps BIS thought that these instructions should have been bilingual. Your guess is as good as mine at this point.

Second, and this is an even bigger irony of the case, the parent’s instructions to the subsidiaries appear to have made things worse for the parent. It was because of those instruction that BIS elevated the penalty through charging that these were “acting with knowledge” violations under section 764.2(e) of the Export Administration Regulations. Damned if you do, damned if you don’t, as they say.

The charging documents haven’t been released by BIS yet. Perhaps they will shed more light on this sorry situation.

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Sep

15

Malaysia Fast Becoming a Diversion Destination for Exports to Iran

Posted by Clif Burns at 7:38 pm on September 15, 2009

flags An excellent article that appeared today on the Bloomberg website indicates that Malaysia may be nudging the U.A.E. out of the position as top transhipment destination for items headed from the U.S. to Iran. According to that article, increasing crackdowns by the U.A.E. on exports to its neighbor across the Strait of Hormuz has caused Iran to increase its usage of middlemen and front companies in Malaysia to source equipment that Iran seeks to acquire from the United States.

One case in particular that is highlighted by the article involves the criminal prosecution of Majid Kavakand, an Iranian citizen who was provisionally arrested in France on March 6, 2009, where he is awaiting a determination by French courts on the United States’ request for extradition. The criminal complaint filed in the case provides interesting details on Kakavand’s modus operandi. Typically Kakavand would receive requests from Iran and then would use his company in Malaysia, Evertop Services, to solicit over the Internet small businesses in the U.S. to ship the items to Evertop, at which point the goods would be shipped to Iran.

Although the complaint doesn’t identify the U.S. companies in question, it provides enough detail (product model numbers, company addresses, etc.) that it was a simple matter for me to ascertain the identity of the companies. I won’t specifically name them here, but suffice it to say that each of the companies was a small business with a website that advertised the companies’ willingness to export items to overseas customers. In other words, they all were companies that Kakavand might suspect lacked the sophistication or motivation to make much inquiry into Kakavand’s purchase orders.

And, inf fact, not one of the companies involved in the charges filed against Kakavand appeared to perform any due diligence on Evertop or Mr. Kakavand other than to ask for confirmation that the end-user was Evertop in Malaysia. And none seemed to have been bothered by a substantial, no, gigantic red flag. In each case, Kakavand asked that the items be shipped to Evertop in care of “K” Line Logistics, it’s freight forwarder in Malaysia. If Evertop was the end user, why on earth would it want the goods sent to a freight forwarder in Malaysia? Needless to say, “K” Line Logistics appeared to have had instructions to ship the goods immediately upon receipt to Tehran.

Another interesting detail from the Kakavand case is that the prosecution made a large part of its case from emails sent by Kakavand from his Yahoo! mail account. Yahoo! coughed up all the emails after it was served a search warrant. Similarly, as Sharon Weinberger recently noted, the case made against Monsieur Monsieur was aided by a search warrant served by the government on Google to obtain emails sent by M. Monsieur through his gmail account. It’s hard to imagine why people busy trying to violate U.S. export laws would use a U.S.-based email provider, but there you have it. It’s not much different, I suppose, from a bank robber writing his demand note on the back of one of his own personal checks.

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Sep

14

New BIS Rules Stretch U.S. Jurisdiction To The Breaking Point

Posted by Clif Burns at 7:15 pm on September 14, 2009

Category: BIS

Do What I Say! In an ambitious display of extraterritorial overreach, the Bureau of Industry and Security (“BIS”) last week amended the Export Administration Regulations (“EAR”) to expand the scope of the regulations to cover in-country transfers to companies and individuals on the agency’s Entity List.

Most readers should be familiar with that list, but for those that may not be, the Entity List is a list of several hundred, well, entities in foreign countries. The companies and individuals have been placed on the list because of the U.S. government’s concern about their activities in nuclear proliferation, missile technology, chemical warfare agent development or other areas of foreign policy concern. The result of an Entity List designation is to require licenses for the export or re-export of specified items to the designated entity. In most cases the list indicates that the items which require licensing are “all items subject to the EAR,” which is BIS-ese for items with specified amounts of U.S. content. These need not be sensitive dual-use items listed on the Commerce Control List but include, for example, a U.S. flag (assuming it wasn’t made in China). And in most cases the Entity List indicates that there is a presumption of denial for license requests.

Under the new rules, a license would be required not only for exports of an item from the United States to the designated “entity” or exports of the item from a foreign country to the entity (“re-exports”) but also for in-country transfers to the designated entity. To understand the impact of the amendment, consider this example. The first entity on the list is one Ali Bakshien, a resident of Toronto, Canada. Ali’s mother goes to the American Apparel Store on College Street in Toronto and buys some trendy, and American-made, shirts, underwear and socks as a birthday gift for Ali. Unless she asks BIS for permission to give these shirts, socks and briefs to Ali, she becomes subject to a civil penalty of $250,000 under U.S. law when gives Ali his birthday present. And, if she knew that Ali was on the Entity List and knew that prohibited the unlicensed birthday present to Ali, did she commit a felony in giving him the items?

So what is BIS going to do? Send Ali’s mother a charging letter? If BIS thinks Ali’s mom knew about the Entity List designation and the in-country transfer restrictions, is it going to have the Department of Justice request extradition? (You don’t have to have a very vivid imagination to figure out what Canada’s likely response would be to an extradition petition in this situation, particularly if you picture a pounding hammer and a box of sand.) Will they arrest her at JFK if she takes a trip to catch a few Broadway shows?

Needless to say, I don’t believe the U.S. has jurisdiction, either under international or U.S. law, over this conduct simply because it involved a t-shirt made in LA shipped by the manufacturer to Canada where it was then bought and given to another Canadian. But U.S. export agencies — DDTC included — have continued to insist that jurisdiction can be hung on such a weak thread. And this recent amendment of the entity list rules continues down this misguided path.

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Sep

10

New Cuba Rules Expand Exports

Posted by Clif Burns at 7:39 pm on September 10, 2009

Category: Cuba Sanctions

Visit Cuba In my last post on the new Cuba regulations, I hadn’t yet seen the regulations published by the Bureau of Industry and Security (“BIS”) in the Federal Register on September 8 but had only seen press reports about their supposed contents. Both BIS and the Office of Foreign Assets Control (“OFAC”) issued regulations to implement the White House’s relaxation of parts of the embargo as announced in April of this year. Both agencies needed to issue regulations because OFAC regulates payments and provision of services to Cuba while BIS regulates exports of goods to Cuba.

The new BIS regulations amend existing License Exception GFT which covers gift parcels and create a new license exception CCD which covers exports of certain consumer communications devices to Cuba. Although both license exceptions expand unlicensed exports to Cuba, they differ in significant ways.

Prior to the amendments, license exception GFT permitted individuals to send gift packages to members of their immediate family (excluding designated officials of the Cuban government and the Communist Party) of food, medicine, medical devices, and certain mobile phones. Packages were limited in value to $400 for all items other than food As amended, license exception GFT now covers gift parcels with a value up to $800 for all items other than food. The recipients of these packages no longer need to be immediate family members of the sender but can be anyone in Cuba (other than Cuban government and party officials). And the items in the package can now include clothing, personal hygiene items, veterinary items, fishing equipment and soap-making equipment. Significantly the packages can now also include items normally sent as gifts between individuals.

The new license exception CCD covers consumer communication devices and specifically lists, among other things, computers and peripherals, mobile phones, storage media, audio and video players and recorders, digital cameras and batteries and chargers for these devices. Although there are some overlaps between license exceptions GFT and CCD, there are some significant differences. For example, in terms of overlap, many of the items listed as eligible for exception CCD might also qualify under GFT as items normally sent as gifts between individuals.

Even if a computer might be exchanged as a gift, three computers would not normally be such a gift, meaning that multiple computers would not be eligble under exception GFT but would be eligible under exception CCD. Additionally, license exception CCD can cover exports from groups and companies, whereas exception GFT only covers exports by individuals. Finally, there is no limitation on the value of items sent under exception CCD. Nor is there a frequency limitation under exception CCD as opposed to the one parcel per month limitation under exception GFT. In essence, the only significant restriction under exception CCD, at least for the specific consumer communications devices enumerated, is that they can’t be sent to Cuban government or Communist Party officials.

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Sep

4

New Cuba Rules Out Today, er, Tomorrow, er, Really Soon (Maybe)

Posted by Clif Burns at 10:54 am on September 4, 2009

Category: Cuba Sanctions

Visit Cuba An article published Wednesday in the Miami Herald breathlessly announced that the reporter had been told that the new OFAC and BIS rules implementing the changes to the Cuba embargo announced by the administration in April would appear in Thursday’s Federal Register. But that didn’t happen. Late on Thursday afternoon, OFAC’s new regulations appeared at the Federal Register Public Inspection Desk with an indication that they would be published next Tuesday, September 8, but were effective as of September 3 when they were made available to the Public Inspection Desk.

The BIS’s implementing regulations, however, are still missing in action, notwithstanding the newspaper article’s indication that they too would be published on Thursday. And there is no indication at the Public Inspection desk of any future publication date for the BIS’s piece of this action.

The OFAC regulations pretty much track what was promised in the April announcement with some interesting additions. First, the definition of family for purposes of travel to Cuba now includes “persons who share a common dwelling as a family with a licensed family traveler,” which apparently means that common-law spouses and, perhaps, domestic partners are authorized to travel to Cuba with persons who have close relatives in Cuba.

Second, although the new regulations, as promised, increase the amount that can be spent during family visits to Cuba from $50 per day to the maximum per diem rate payed for government travel to Cuba, the comments to the new regulations state that no imports into the United States of Cuban merchandise by returning travelers is allowed. So, for those of you hoping that the war on Cuban cigars might be coming to an end in the foreseeable future, dream on. (By the way, I think that the maximum per diem for Cuba is $180 per day, but I’ll be darned if I can verify that from the link given by OFAC for computing that rate.)

The BIS regulations, when they appear, will deal with authorized exports to Cuba, including increasing the baggage weight limitation for travelers to Cuba. The article in the Herald suggests that the BIS regulations might also be somewhat broader than the description of changes in the April announcement:

Among the changes that take effect Thursday afternoon:

â€¢ The items people can send to Cuba now include things like digital cameras, personal computers, seeds, fishing equipment, TVs and radios. (Before, packages were limited to food and medicine.)

â€¢ The limit on the value of those packages was doubled to $800.

The April announcement indicated that gift parcels could contain “clothing, personal hygiene items, seeds, veterinary medicines and supplies, fishing equipment and supplies, and soap-making equipment” as well as reasonable quantities of items “normally exchanged as gifts by individuals.” No explicit mention was made of several of the items listed in the news report, namely digital cameras, personal computers, televisions and radios. Perhaps these items are going to added because they aren’t clearly things normally exchanged as gifts and because these items are generally consistent with the goal of the rules to increase and enhance communications by Cubans among themselves and with the outside world.

NOTE:Export Law Blog is taking brief vacation for the Labor Day weekend, so the next new post won’t appear until the end of next week. Comments will be checked periodically to release them from the moderation queue. Have a pleasant and safe holiday, everyone, and we’ll see you all again next week.

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