ExportLawBlog » 2010

Archive for March, 2010

Mar

18

Voluntary Disclosure Leads to Criminal Prosecution (UPDATED)

Posted by Clif Burns at 8:43 pm on March 18, 2010

Bycosin AB SEE IMPORTANT UPDATE AT THE END OF THIS POST

The headline to this post — “Voluntary Disclosure Leads to Criminal Prosecution” — will probably send a chill down the spine of every export and sanctions lawyer who reads this post. How many times have all of us said to clients that, although there is no guarantee, voluntary disclosures almost never lead to criminal prosecutions? After the guilty plea today of Innospec, Inc., arising from sales of fuel additives to Cuba by Innospec’s former Swedish subsidiary Bycosin AB to Cuban power companies, we won’t be able to say that voluntary disclosures almost never lead to criminal prosecutions without mentioning that in Innospec’s case it did.

According to a Department of Justice press release, the guilty plea for the Cuba embargo violations* was part of a larger plea agreement which included guilty pleas by Innospec to charges under the Foreign Corrupt Practices Act (“FCPA”) that it had bribed Iraqi officials in connection with sales of tetraethyl lead to Iraqi fuel refineries. That press release also noted:

According to the plea agreement, Innospec also admitted that a subsidiary sold nearly $20 million in oil soluble fuel additives from 2001 to 2004 to state-owned Cuban power plants without a license from OFAC, in violation of the Trading With the Enemy Act. â€¦ Innospec agreed to pay $2.2 million to resolve outstanding matters with the [sic] OFAC related to the U.S. embargo against Cuba.

Further details about the Cuba sales can be found in an SEC Form 10-Q filed by Innospec in 2006. That 10-Q notes that Innospec, in a routine internal audit of sanctions compliance conducted in 2004, discovered that Bycosin AB, a Swedish subsidiary it acquired in 2001 had been selling fuel additives to Cuba. Innospec shortly thereafter sold Bycosin and, undoubtedly as part of the sales agreement, filed a voluntary disclosure with OFAC detailing the sales to Cuba by Bycosin.

As a result of additional internal investigations, Innospec made a further disclosure to OFAC of sales to Cuba by one of its U.S. subsidiaries as well as by a French subsidiary. The company also disclosed that a subsidiary of Bycosin maintained an office in Cuba in connection with its sales activities in Cuba and that employees of one of Innospec’s U.S. subsidiaries traveled to Cuba twice in connection with the Cuban sales. Innospec’s 10-Q noted, not surprisingly, that E.U. Council Regulation No. 2271/96 made it illegal for the company’s E.U. subsidiaries to comply with the U.S. embargo on Cuba.

It’s not clear why any of this would justify turning a routine voluntary disclosure to OFAC into a criminal prosecution by DOJ, particularly in light of the fact that the activities of the foreign subsidiaries were compelled by the E.U. directive. Perhaps the differentiating factor here is that the company was also engaged in FCPA violations and the Cuba sanctions charges were simply piled on by the DOJ as a negotiating tactic with Innospec. Still this prosecution is bound to have a chilling effect on voluntary disclosures to OFAC.

*UPDATE: When this item was posted last night, the Innospec plea agreement had not yet been made available on PACER. A friend of mine at DOJ emailed me to note that the plea agreement recited the TWEA violations but that Innospec was not charged with TWEA violations and was only charged with the FCPA violations. The DOJ press release on which I relied did not make this clear. A copy of the plea agreement can be downloaded or viewed here.

Even with this clarification, I am still disturbed that information provided in a voluntary disclosure would be used at all in connection with a criminal prosecution, particularly where it is used with the implicit threat that criminal charges would be filed on the disclosed matters if the discloser did not settle the other criminal charges.

Permalink

Comments (3)

Mar

17

The Washington Times Makes a Shocking Discovery

Posted by Clif Burns at 8:44 pm on March 17, 2010

Category: BIS • North Korea Sanctions

Rev. Sun Myung Moon’s media arm, the Washington Times, has made a shocking discovery: lawyers represent clients. Washington Times reporter Jim McElhatton reveals this horrifying discovery in a piece he wrote on Eric Hirschhorn, the Obama administration’s nominee to head up the Bureau of Industry and Security (“BIS”). The headline to the article says it all: “Exports [sic] nominee tied to 2 watch list firms.”

The article itself continues this ominous tone and hints that Hirschhorn plans to dismantle BIS and hand the keys over to Iran and other terrorist interests:

President Obama’s pick to oversee export controls at the Commerce Department is a trade lawyer whose recent clients include two companies on a government watch list and a shipping business that agreed to pay millions of dollars last year to resolve a federal probe into shipments to Iran, Sudan and Syria.

All three companies have had recent interests before the government office that Eric Hirschhorn would oversee if he is confirmed as undersecretary of commerce for industry and security [sic].

The companies referred to by the Washington Times article are DHL as well as two companies that were put on the BIS Entity List because of suspected ties to Mayrow Trading Company. Why the DHL representation is an issue isn’t explained given that under current rules, Hirschhorn would not be allowed to be involved in any case involving DHL for two years. Nor is it clear why representing the two companies on the entity list is a problem given that, as administration officials quoted at the end of the article state, Hirschhorn’s representation of the two companies occurred after the companies were placed on the list and involved advice to the two companies on how to comply with U.S. export laws.

McElhatton’s fainting couch routine about Hirschhorn’s legal work for these companies rings more than a little hollow when you consider this: throughout the 1990s, the Moon organization, which pays Mr. McElhatton’s salary, paid millions of dollars to the regime of North Korea when such payments were forbidden by the United States because of concerns with respect to that regime’s WMD and missile program.

UPDATE: I had a nice conversation with Jim McElhatton who wrote the article that is the subject of the post. He said that his intent was not to criticize or to derail the Hirschhorn nomination but simply to provide some transparency as to clients that Hirschhorn has represented in private practice. He also noted that he had quoted a former Commerce official who said that Hirschhorn’s representation of these companies could be seen as a positive: “It shouldn’t be seen as a negative at all. In fact, it should be seen as a positive. In order to get off the entity list, companies need to show that they are complying with U.S. export controls. Advising companies on how to comply with U.S. export controls is what lawyers do.” After our conversation, I suspect that the major disagreement between McElhatton and myself is more a matter of emphasis than it is of substance. I would have given greater emphasis to Hirschhorn’s undisputed qualifications for the post.

Permalink

Comments (3)

Mar

15

Obama Hints at Specific Export Reforms

Posted by Clif Burns at 8:30 pm on March 15, 2010

Category: BIS • DDTC • Deemed Exports • Encryption

Blackberry Last week, in his speech before the Ex-Im Bank, President Obama provided some details about the specific export control reforms which might be in the offing. The first relates to our ludicrously archaic and burdensome system of encryption controls. Obama promised to streamline the review process for “products with encryption capabilities like cell phone and network storage devices.” He promised to cut the review process required before exporting such devices from 30 days to 30 minutes. While a welcome change, even 30 minutes is too much. The U.S. should acknowledge the widespread availability of commercial encryption outside the U.S. and deregulate exports of all encryption products other than military encryption.

Second, Obama promised reform in a somewhat obscure area of export law mostly known to export control junkies and geeks:

And second, weâ€™re going to eliminate unnecessary obstacles for exporting products to companies with dual-national and third-country-national employees. Currently, our exporters and foreign consumers of these goods have to comply with two different, conflicting set of standards. Theyâ€™re running on two tracks, when they could be running just on one. So weâ€™re moving towards harmonizing those standards

What Obama is referring to here is the conflict between the standards applied by the State Department and the Commerce Department on “deemed exports.” Under the deemed export rules, exports of technology are deemed to be exports to the country of which the recipient is considered a national.

Under Commerce’s deemed export rules, an export to a foreigner with multiple citizenships or countries of permanent residencies is considered an export to the country of the most recently acquired citizenship or permanent residency. Under State Department rules, the export is considered to be an export to each of the countries — with the most restrictive licensing policy applied.

Obama doesn’t say which of these conflicting rules will yield to the other as they are “harmonized.” We can only hope that the Commerce rules will prevail.

Permalink

Comments (2)

Mar

11

OFAC Returns To Its Senses On Cuba Ag Export Payments (Temporarily)

Posted by Clif Burns at 8:56 pm on March 11, 2010

Category: Cuba Sanctions

Havana Yesterday the Office of Federal Assets Control (“OFAC”) published a notice in the Federal Register that reversed, at least temporarily, the absurd interpretation that it had adopted of the statutory requirement in the Trade Sanctions Reform and Export Enhancement Act (“TSRA”) that exports of agricultural and medical goods to Cuba required “payment of cash in advance.” In February 2005, OFAC changed its interpretation of that language to require that payment be made prior to the departure from the U.S. of the ship loaded with the goods destined for Cuba.

By yesterday’s Federal Register notice OFAC restored its previous interpretation of TSRA’s statutory language. That previous interpretation was consistent with prevailing commercial law which holds that delivery of goods is made, and payment is due, when a negotiable bill of lading for the goods is delivered to the buyer or its agent. The notice re-adopted the “cash against documents” rule that states that payment must be made “before the transfer of title to, and control of, the exported items to the Cuban purchaser” which would occur at the delivery of a negotiable bill of lading or other document of title.

This change is effective through September 30, 2010, at which point the old interpretation will become effective again. This is apparently because section 619 of the 2010 Omnibus Appropriation Act (P.L. 110-117), which required the change, was restricted to fiscal year 2010 which, obviously, ends on September 30, 2010. However, there is no reason that OFAC needed Congressional authorization to return to its previous “cash against documents” rule and to make that rule effective beyond 2010.

Permalink

Comments Off

Mar

10

GAO Report on Iran Sanctions Blasts OFAC’s Dead Tree Licensing System

Posted by Clif Burns at 8:26 pm on March 10, 2010

Category: Iran Sanctions

Piles of Paper The Government Accountability Office released a report last Thursday on the Iran Sanctions and there is, you might say, good news, bad news and old news in the report.

First, the good news. The GAO’s audit of the licensing process of the Office of Foreign Assets Control (“OFAC”) found that all of the licenses that OFAC had granted for exports of food, medicine and medical devices to Iran under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”) were properly granted. The 58 licenses examined by GAO all involved exports of items authorized under TSRA for export to Iran. Additionally, none of the licenses involved exports to anyone on the SDN list.

Next, the bad news.

Treasury cannot provide other agencies or Congress with complete and timely information concerning the licenses it has issued. It cannot do so because it relies on paper-based information systems that cannot be searched to identify licenses for the export of goods to Iran. â€¦ In January 2009, an internal Treasury budget request characterized the TSRA information system as a â€œlargely paper-basedâ€ system that hinders â€œthe speed, efficacy, reliability, and security of [Treasuryâ€™s] licensing, enforcement and compliance activities.â€ Treasury officials must manually review all TSRA licensing data for Iran to identify licenses that authorize the export of goods. Because the TSRA system is not integrated with Treasuryâ€™s primary licensing information system, TSRA licensing officials must manually enter the same data into both systems.

Finally, the old news. GAO discovered that U.S. goods were being successfully exported to Iran through the use of intermediary companies and transshipment of U.S. goods through other countries to Iran.

More than 50 percent of the cases listed involved use of intermediaries in the UAE for transshipment. About 20 percent involved the use of Malaysia and Singapore

Regular readers of this blog will be forgiven if they can’t suppress a yawn while reading these shocking revelations, particularly with regard to the diversion of exports to the U.A.E. Still, GAO’s report should emphasize for exporters that exports to UAE, Malaysia and Singapore deserve extra scrutiny to assure that items aren’t merely transiting those countries on their way to Iran.

Permalink

Comments (5)