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Archive for October, 2010

Oct

19

Two Californians Charged With Illegal Export of ADC Technology to China

Posted by Clif Burns at 9:18 pm on October 19, 2010

A criminal complaint recently filed in the United States District Court for the Central District of California accuses David Zhang and Nicola Huang with exporting controlled analog to digital conversion technology to China without a required license from the Bureau of Industry and Security (“BIS”). At least part of the interest of this case is that it involves an export of EAR-controlled technology. Most cases arising under the EAR generally involve the export of controlled goods, and the reason for that is probably related to the increased difficulty of proving technology exports.

The complaint alleges that the defendants engaged two engineers to assist them in carrying out an agreement to design for the Sichuan Institute for Solid State Circuits two analog-to-digital conversion (ADC) devices. One of the devices was to be an 8-bit 1.5 GSPS device and the other was to be 14-bit 125 MSPS. The criminal complaint alleges that these devices were described in ECCN 3A001.a.5.a.1 and 3A001.a.5.a.4, which would mean that the technology would be classified as ECCN 3E001.

Of course, the first prerequisite to a criminal charge here is to prove that this was controlled technology. Sections 734.7 and 734.8 of the EAR exempt information that has been published or that is the product of fundamental research. Almost all of the technology involved in analog to digital conversion is well-known and subject to these exemptions. The critical element for high-speed ADC devices is the know-how involved in fabricating components with the high degree of timing accuracy required. Nothing in the criminal complaint establishes or even suggests that the defendants provided any technology that wasn’t well-known or that provided the know-how to manufacture the highly precise components.

A second obstacle in this prosecution is the wording of the relevant ECCNs. ECCN 3A001.a.5.a.1 covers devices with “a resolution of 8 bit [sic] or more, but less than 10 bit [sic], with an output rate greater than 500 million words per second.” ECCN 3A001.a.5.a.4 covers devices with “[a] resolution of more than 12 bit [sic] but equal to or less than 14 bit [sic] with an output rate greater than 10 million words per second.” The EAR does not define the term “word” and there seems to be no clear definition of “word” in the context of data transmission.

In many instances, the term “word” is used in conjunction with a set number of bits, such as “4-bit word.” In other instances, “word” is used as equal to the bit-depth of the sampling performed by the device. In other instances, “word” is used to denote the logical size of an address in system memory. And finally sometimes “word” is used as an arbitrary but fixed size that is specifically stated, such as a “10-bit word.”

Although word isn’t defined in the ECCN, there is a technical note that defines “words per second” as “samples per second.” That seems an odd definition based on other common uses of word in the context of data transmission. It also seems needlessly complex, since the ECCN should, given that definition, say directly that an x-bit ADC is covered if the ADC’s sample rate exceeds y-million samples per second. But, by that definition, both ADCs do fall within the respective ECCNs.

A final point of interest is that the complaint tries to bolster its case by noting that two agents of Immigration and Customs Enforcement made a Project Shield America presentation at the defendant’s company. Based on that, the government assumes that the defendants were thereafter fully cognizant of all elements of U.S. export laws discussed in that presentation. This demonstrates, I think, that Project Shield America presentations are a double-edged sword that although billed as a purely educational program are also intended to be used as evidence in subsequent prosecutions. In my view, exporters are better off obtaining information about export compliance from private sources so that these presentations won’t later be used against them.

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Oct

14

White House Authorizes Temporary Export of C-130s to China

Posted by Clif Burns at 9:06 pm on October 14, 2010

C-130 Last Friday the White House notified Congress that it intended to waive the arms embargo to permit the temporary export of C-130 cargo transport aircraft to China. The waiver was granted at the request of an unnamed European company that uses the aircraft in oil spill cleanup operations and would permit these aircraft to land in China. A temporary export license would be required and would be granted on a case-by-case basis, likely restricted to the oil spill scenario that served as a basis for the waiver.

Nevertheless, the usual suspects are predictably upset and see this as a slippery slope that culminates in the U.S selling fighter jets and atomic bombs to China

The C-130 proposal is obviously a toe in the water and, as such, should be rejected,” said John Bolton, former undersecretary of state for international security. “This administration seems to have two messages about America for foreign governments: weak and weaker.”

An administration official said that the waiver was not intended to allow the sale and export of C-130s to the Chinese government.

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Oct

13

The Bladerunner 51 Saga Continues

Posted by Clif Burns at 11:04 pm on October 13, 2010

Category: Iran Sanctions

This blog has reported here and here on the export of the Bladerunner 51, a high-speed boat that holds the speed record for circumnavigating Great Britain, from South Africa to Iran. A recent story in South Africa’s Mail & Guardian reports that the Iranian Republican Guard has reverse-engineered the boat and is now manufacturing clones capable of launching missiles and torpedoes. The story also provides some interesting details with respect to a South African company co-owned by Willem Ehlers, a former official of the apartheid-era government of P.W. Botha, that was involved in the export of the boat to Iran.

As this blog noted earlier, the boat was in the possession of South African firm Icarus Marine. The Bureau of Industry and Security (“BIS”) first issued a Temporary Denial Order in January 2009 against Icarus in an effort to persuade the South African government to prevent the export. BIS argued that the boat was subject to U.S. jurisdiction because it was equipped with U.S.-made engines. Because the TDO was faxed to the South African government on a weekend, no one in South Africa took action and the boat was loaded onto an Iranian vessel and shipped to Iran.

Nothing else was done with respect to the shipment until June 28 of this year when Icarus, its owners, and a company called Scavenger Manufacturing (Pty) Ltd were placed on the BIS Entity List by the inter-agency End User Review Committee on the grounds that the individuals and entities had acted contrary to the national security and foreign policy interest of the United States. The M&G article now supplies the missing detail as to why Scavenger was added to the Entity List as a result of this transaction:

The M&G independently verified Scavenger’s central role in the transaction: shipping sources confirmed that it was the “shipper” of the speedboat — the formal term for the party responsible for the cargo — as it transited South Africa.

Scavenger tried to rebuff inquiries from the M&G by claiming that the boat was a “recreational craft” and that its export violated no South African laws or U.N. sanctions.

One of the owners of Scavenger, Willem Ehlers, was a navy commodore who was assigned by the South African Defense Department to P.W. Botha as his private secretary. When Botha was deposed in 1989, Ehlers became involved in arms-brokering, including brokering 80 tons of rifles, grenades and ammunition to the Hutus in Rwanda during the period of Hutu-led genocide in that country. Ehlers argues that he believed the shipment was destined for Zaire and not to the Hutus. Ehlers was also implicated in 1996 shipment of fuel to Angola during the period it was under U.N. sanctions, although he claims not to have been involved in that shipment other than requesting permission for the flights themselves.

Finally, the G&M article indicates that the South African government is now investigating whether the shipment of the boat to Iran violated South African export laws.

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Oct

12

BIS Denial Order Issued Against Iranian Affiliate of California Company

Posted by Clif Burns at 10:02 pm on October 12, 2010

Category: BIS • Iran Sanctions

Back in April, I reported on a Bureau of Industry and Security (“BIS”) settlement with Aqua Loop Cooling Towers which arose out of the export of EAR99 items by Aqua Loop to a company in Iran by transshipment of those items through Dubai. Under the settlement agreement, Aqua Loop agreed to a ten-year denial order and a $100,000 suspended penalty.

Of particular interest, the original blog post noted that the Iranian recipient of the exported items, a company called Parto Abgardan, was oddly straight-forward on its website about it’s connection to Aqua Loop, calling Aqua Loop its “sister factory” in the United States. Such a relationship between Aqua Loop and the Iranian company would pose more problems, of course, than just the exports at issue in the Aqua Loop settlement agreement.

Although I know that some folks at BIS read these posts, I don’t know whether or not they were aware of the Patro Abgardan’s claims of a relationship with Aqua Loop before I pointed it out in my post on the settlement agreement. Whatever the case, about a month later, BIS sent a “Related Person’s Notice and Request” Letter to Parto Abgardan in Iran noting the website’s claim of having a “sister factory” in the United States at the same address as Aqua Loop.

Now comes the good part. Someone named Mahmoud Lazemizadeh responded to the letter, saying “”no connection of any kind between this company and Aqua-loop cooling towers Co. [sic].” Uh-huh. Just pay not attention to our website. Needless to say, it was everything BIS could do not to reply to Mr. Lazemizadeh with Judge Judy’s famous riposte: “Don’t p**s on my leg and tell me it’s raining. To make things worse, the the nephew of Mr. Lazemizadeh was transferred from Parto Abgardan in Iran to California in five years. No, there’s no connection of any kind.

As a result, BIS recently issued a new ten-year denial order against Parto Abgardan. The new denial order, except to the extent that it includes Parto Abgardan at Aqua Loop’s address in California, is somewhat superfluous. With or without that order, U.S. exports to Parto Abgardan at its various addresses in Iran are already forbidden. More interestingly, I have to wonder whether further action against Aqua Loop may be lurking in the background. Aqua Loop’s relationship with the Iranian company certainly poses problems under the Office of Foreign Assets Control’s Iranian Transaction Regulations which prohibits any U.S. person from providing services to Iranian companies (other than with respect to limited exceptions not applicable here.)

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Oct

7

Exporter CEO Fined $52k for Alleged Misrepresentations to BIS Agents

Posted by Clif Burns at 9:06 pm on October 7, 2010

Category: BIS

G-Men Never Forget Yesterday I posted an entry detailing an enforcement proceeding by the Bureau of Industry and Security (“BIS”) against Washington-based Edco, Inc., where the agency extracted a fine from the company based on a highly dubious claim that Edco had “evaded” a General Denial Order imposed on Hong-Kong-based Sunford Trading Company notwithstanding that Edco had not itself violated any of the provisions of the order that were applicable to it. BIS also went after Mark Vorobik, the C.E.O of Edco, on the grounds that during the investigation he had made a false statement to government agents in violation of section 764.2(g) of the Export Administration Regulations (“EAR”).

Allegedly he told the agents that he did not know that Sunford was on the Denied Persons List even though Sunford told him that they were. Settlement documents released by BIS reveal that Mr. Vorobkik was penalized $52,000 for this misstatement, of which half was suspended for one year on the condition that he commit no more violations of the EAR during that period.

Section 764.2(g) prohibits any from making

any false or misleading representation, statement, or certification, or falsify or conceal any material fact, either directly to BIS, the United States Customs Service, or official of any other United States agency, or indirectly through any other person â€¦ [i]n the course of an investigation

Like many other provisions of the EAR, this is not a model of drafting clarity. Although it forbids the falsification of a “material fact,” there is no materiality requirement for a “false statement.” In theory, you could be fined $250,000 for telling a BIS investigator that the sky is purple or that you are happy to see them. Materiality is important here because if Edco did not violate the Denial Order imposed on Sunford, this statement would not be considered material.

Another difficulty in misrepresentation cases is that the interviews are not recorded and so the entire case against the exporter is based entirely on the notes and recollections of the BIS agents. Even if the exporter did not make the representation, it will be difficult to overcome the contrary representations of the agents. Exporters always lose when it’s a matter of “he said, she said.” I sincerely doubt that Mr. Vorobik admits that he made this misrepresentation.

There is a lesson here for exporters when the friendly folks from BIS come knocking on your door, other than not to believe them when they tell you it’s a friendly visit. It almost never is.. If the government later claims you made false statements, you could be subject to enormous fines or even jail time under 18 U.S.C. Â§ 1001 simply because the agents misheard or misunderstood what you said. So when BIS shows up, tell the agents that you will cooperate with their investigation but that to avoid any misunderstandings, you would like to have your lawyer involved. And don’t say anything else until your lawyer is involved because the agents are likely trying to build a case against you. Responses to BIS should be in writing so that there cannot later be any question about what you did or did not say in response to the questions from the investigator. This is the best procedure even if you are absolutely convinced that you did not do anything wrong.

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