Archive for May, 2018

May

16

DDTC’s Buzzer Beater to Save Brokering Authority over Firearms Misses the Hoop

Posted by at 10:49 am on May 16, 2018
Category: General

Pistol Heckler & Koch P9S by Hecklerfan [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via https://en.wikipedia.org/wiki/Heckler_%26_Koch_P9#/media/File:Heckler_%26_Koch_p9s.jpg [cropped]As noted in my post yesterday on the proposed rules to transition certain Category I, II and III items from the United States Munitions List to the Commerce Control List, DDTC attempted to preserve its brokering authority over the transferred firearms and related items by amending the brokering rules to contain items both on the United States Munitions List (“USML”) and the United States Munitions Import List (“USMIL”).  An alert reader pointed out, quite correctly, that this clever regulatory sleight-of-hand was, ahem, not authorized by the Brokering Amendment to the Arms Control Export Act. 22 U.S.C. § 2278(b)(1)(A)(ii).

The Brokering Amendment provides authority to DDTC to register brokers and license brokering transactions.   The problem is that it authorizes this only with respect to items on the USML.   It makes no reference to the USMIL and provides no authority to regulate brokers of, and brokering transactions related to, items on the USMIL.

Section 2278(b)(1)(A)(ii)(I) provides the statutory mandate and authority to require registration of brokers:

As prescribed in regulations issued under this section, every person (other than an officer or employee of the United States Government acting in official capacity) who engages in the business of brokering activities with respect to the manufacture, export, import, or transfer of any defense article or defense service designated by the President under subsection (a)(1), or in the business of brokering activities with respect to the manufacture, export, import, or transfer of any foreign defense article or defense service (as defined in subclause (IV)), shall register with the United States Government agency charged with the administration of this section.

Subclause III requires licensing for “brokering activities described in [the above-cited] subclause (I)”.

The relevant language here then is “any defense article … designated by the President under subsection (a)(1)” and “any foreign defense article … as defined in subclause (IV)”.  Both of these are, it turns out, references only to items on the USML

Subsection (a)(1), which gives the President the authority to designate defense articles subject to export controls, says this in the last sentence of the subsection:

The items so designated shall constitute the United States Munitions List.

Subclause IV only references the USML in its definition of “foreign defense article”:

For purposes of this clause, the term “foreign defense article or defense service” includes any non-United States defense article or defense service of a nature described on the United States Munitions List regardless of whether such article or service is of United States origin.

Not surprisingly, DDTC’s discussion of these proposed rules fails to mention this little problem in relying on the Brokering Amendment or where it believes it can otherwise find statutory authority to extend its brokering rules to items on the USMIL.

UPDATE: I just got off the phone with a spokesperson from DDTC who explained the agency’s theory as to how they could exert brokering authority over USMIL items. According to the spokesperson, section 2278(a)(1) gives the President the authority to “control the import and export of defense articles” and to “to designate those items which shall be considered as defense articles.” The USMIL and the USML are, thus, separate subsets of the broader “statutory” USML referenced in subsection (a)(1).  The USMIL administered by ATF lists those items subject to controls on permanent imports.  The USML  administered by DDTC lists items subject to controls on exports and temporary imports. While this argument is at least plausible, it does require taking the facially counter-intuitive position that the USMIL is really the USML and that the USML in the ITAR isn’t really the entire USML.

Photo Credit: Pistol Heckler & Koch P9S by Hecklerfan [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via https://en.wikipedia.org/wiki/Heckler_%26_Koch_P9#/media/File:Heckler_%26_Koch_p9s.jpg [cropped]. Copyright 2004 Hecklerfan

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Copyright © 2018 Clif Burns. All Rights Reserved.
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May

15

Export Control Reform Finally Announced for Guns and Ammo

Posted by at 7:04 pm on May 15, 2018
Category: BIS • CCL • DDTC • Export Reform • USMIL • USML

Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]The Directorate of Defense Trade Controls and the Bureau of Industry and Security today announced the proposed rules for the long awaited export control reform of Categories I, II and III of the United States Munitions List.  The proposed rules for DDTC are here; the proposed rules for BIS are here.

Under the proposed rules, the only items remaining in Category I will be firearms that fire caseless ammunition, are fully automatic, or are specially designed to integrate fire control, automatic tracking, or automatic firing.  Other small arms that were once in Category I will be moved to 0A501 and 0A502.  Small arms that are on Category I of the USMIL will still be subject to the brokering rules of the ITAR even if they have been moved to 0A501 or 0A502.

These new proposed ECCNs will be controlled by, among others, RS1 and FC meaning that licenses will be required for all destinations.  (RS1 captures every country but Canada and FC captures Canada).  The BIS proposed rules also exclude the use of most license exceptions so that the new regime will closely parallel the available exemptions that were available under the ITAR.   So the result of the transition of these items from the USML to the CCL will mostly be a change in the agency with licensing authority.

There are a few significant changes, however, worth noting.  First, the proposed rules would eliminate a particular bugbear of mine relating to the classification of rifle scopes.  Currently, rifle scopes are ITAR if they are “manufactured to military specifications,” whatever that means.   Foreign manufacturers of rifle scopes routinely decline to state whether their scopes are Category I(f) or 0A987 and do not provide enough information to decide whether a particular scope is manufactured to military specifications.  Under the proposed rules, a scope is on the USML only if it has night vision or infrared capabilities that would cause it to be captured under Category XII.  Everything else is now 0A987.

Second, these new rules will reverse the questionable position that DDTC has taken in the Defense Distributed case.   In that case, DDTC argued that posting 3D gun plans on the Internet is an export of controlled technical date on Category I firearms to every foreign person with access to the Internet.  BIS has a somewhat different take on posting things to the Internet.   Here’s what the proposed BIS rules say:

The EAR also includes well-established and well understood criteria for excluding certain information from the scope of what is “subject to the EAR.” (See part 734 of the EAR.) Items that would move to the CCL would be subject to existing EAR concepts of jurisdiction and controls related to “development” and “production,” as well operation, installation, and maintenance “technology.” While controlling such “technology,” as well as other “technology” is important, the EAR includes criteria in part 734 that would exclude certain information and software from control. For example, if a gun manufacturer posts a firearm’s operation and maintenance manual on the Internet, making it publicly available to anyone interested in accessing it and without restrictions on further dissemination (i.e., unlimited distribution), the operation and maintenance information included in that published operation and maintenance manual would no longer be “subject to the EAR.”

Part 734 makes clear that publication of technology on the Internet is not an export of that technology to the rest of the world; rather it is a release of that technology from export controls.

Third, the new rules will eliminate the issue as to whether firearms training is a defense service that cannot be provided by a U.S. person to a foreign individual without a license.  Both the existing and latest proposed DDTC rule defining defense services would require a license to provide basic firearms training to a foreign individual.  (The latest proposed rule permits basic training but only if there is an approved license to export the firearm to that individual.)  The BIS analysis of this is somewhat different.  The BIS notice of proposed rulemaking somewhat wryly states:

The EAR does not include a concept of “defense services,” and the “technology” related controls are more narrowly focused and apply in limited contexts as compared to the ITAR.

In fact, of course, under the proposed rules training a foreign individual in firearms use would require a license only if it involved a control of technology covered by proposed ECCNs 0E501 or 0E502.  However, neither ECCN covers information related to the use of 0A501 or 0A502 firearms.   As a result, firearms training that would have required a license under the old rules will not require a license if the new rules are adopted.

Photo Credit: Guns by Al [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/6gPGbx [cropped]. Copyright 2009 Al

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(No republication, syndication or use permitted without my consent.)
May

11

CBP Sued Over Requiring Hold Harmless Agreement for Return of Seized Property

Posted by at 8:15 pm on May 11, 2018
Category: BIS • CBP

OFO Officer via Flickr https://www.flickr.com/photos/cbpphotos/8406672912/in/album-72157632584772091/ [Public Domain - Work of U.S. Government]Okay, exporters, raise your hands if this has happened to you. You are exporting goods and some over excited and under informed U.S. Customs and Border Patrol Agent wrongfully seizes the item. For example, he decides that the EAR99 spark plugs that you are exporting are ECCN 3A228 triggered spark gaps. You file the necessary paperwork in response to the notice of seizure. In the meantime, your customer sues you for non-delivery. CBP finally admits after consulting with BIS that these are spark plugs and not triggered spark gaps and, six months later, agrees to return them. But here’s the catch:  they will return them only if you sign a standard release form absolving CBP from any liability for having wrongfully seized your spark plugs. Reluctantly you sign the papers, wait for your spark plugs and settle the lawsuit with your customer for unreimbursable damages caused by CBP.

Of course, the bitter taste here comes from the fact that these spark plugs are yours. You have the right to them unconditionally. You don’t have to waive your rights or promise to run naked through a public square as a prerequisite to the return of what is yours and which CBP should never have seized in the first place.

Now consider the case of Anthonia Nwaorie, a nurse who was traveling to Nigeria to establish a medical clinic for women and children in Nigeria. She had with her $41,377.  This was money which she had saved from her nurse’s salary.  It was intended to seed money for the clinic.   All of the money was seized by CBP at the airport because she did not file a declaration of the cash at the CBP Office six miles from the airport just before her departure.

When she received the Notice of Seizure under the Civil Asset Forfeiture Reform Act (“CAFRA”), she elected the option of having the matter referred to the U.S. Attorney for judicial resolution and filed that election along with the required CAFRA form. When the U.S. government did not file a judicial forfeiture action within 90 days of receiving the claim form, CAFRA required the government to “promptly release” the seized property and forbade the government from taking “any further action to effect the civil forfeiture of such property.” 18 U.S.C. § 983(a)(3)(B)(ii).

Thereafter CBP mailed her the all-too-familiar letter saying it would give her cash back to her but only if she signed a hold harmless agreement which would prevent her from filing suit against the government and would require her to indemnify the government against any future claims made against the released property. The letter also said that if she did not sign the hold harmless agreement within 30 days, administrative procedures to forfeit the cash would be instituted. Ms. Nwaorie refused to sign and instead called a lawyer. The Institute for Justice then took on her case, and, on May 2, filed a class action lawsuit against CBP alleging that CBP had no right to condition the return of forfeited funds on a hold harmless agreement. The suit requests return of Ms. Nwaorie’s seized property as well as that of the class members who also refused to sign the hold harmless agreement. It also seeks a judgment enjoining CBP in the future from conditioning release of seized funds on the hold harmless agreement.

The theory behind the suit is simple. Nothing in CAFRA authorizes conditioning the release of funds on a hold harmless agreement. Moreover, doing so violates the specific requirement to “promptly release” the funds if no forfeiture action has been filed within the statutorily mandated time period. And, of course, CAFRA’s prohibition on further forfeiture proceedings directly prohibits CBP from threatening administrative forfeiture if the hold harmless agreement is not signed.

Although this seizure, because it involved a currency reporting violation, was under CAFRA, the same logic would apply to seizures under the Tariff Act of 1930. If an exporter files a claim under 19 U.S.C. § 1608 and prevails in the subsequent federal court litigation or the government decides under 19 U.S.C. § 1604 not to prosecute the forfeiture action, nothing in the statute permits CBP to condition return upon a hold harmless or waiver of rights.

One thing to consider while waiting for the outcome of this lawsuit is this:  when signing and returning the hold harmless agreement, send it back with a cover letter indicating that the hold harmless was not signed voluntarily but was signed because of CBP’s unlawful demand that it be signed as a condition to return property that is lawfully yours.  Be aware, of course, that this is not something that should be done where Customs has lawfully seized the property and has decided to mitigate the forfeiture.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
May

8

Wind Down Woes By Any Other Name Would Smell As Rotten

Posted by at 8:16 pm on May 8, 2018
Category: Iran Sanctions • OFAC

Imam Khomeini by Kaymar Adl [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/kamshots/515002010/ [cropped]Today’s revocation of U.S. participation in the Iran nuclear deal principally resurrects a number of secondary sanctions aimed at European allies and other countries. Those that relied on the nuclear deal will now see that commercial arrangements with Iran that they entered into relying on that deal and on their false hopes that the U.S. would not later simply walk away from it will be the collateral damage of the White House’s new trade war on Iran.

Shortly after the announcement of the U.S. withdrawal from the deal, OFAC issued FAQs explaining the action. (Why on earth are these called FAQs? They were issued within seconds of the announcement. How can there already be “frequently asked questions”? Perhaps OFAC thinks that FAQs stands for something else — maybe “frightening answers to questions.”)

Those FAQs preface the explanation of the wind-down provisions with this:

The U.S. government has a past practice of working with U.S. or third-country companies to minimize the impact of sanctions on the legitimate activities of those parties undertaken prior to the imposition of sanctions.

Any hopes that this is a true statement are quickly dashed by looking at the wind-down provisions themselves. Depending on the sanctions, companies have either 90 or 180 days to finish up activities commenced before today’s date. For activities engaged in under General License H — which permits foreign subsidiaries of U.S. companies to engage in certain activities with Iran — the wind-down period is 180 days. If a company has a contract to deliver goods to Iran, then, according to FAQ 2.1, those goods must be “fully delivered” within the wind-down period. Payment can be made outside that period for those fully delivered goods provided that payment is made pursuant to the terms of the written agreement.

But suppose you’ve made an investment in producing a complex item, have started to manufacture it, but can’t complete it within the wind-down period. You’re out of luck. Plus, when the Iranian customer sues you and gets a judgment in the court of your home country, you can’t pay the judgment without violating U.S. law. That’s not a good position to be in.

Another conundrum: what’s meant by fully delivered? Is the item fully delivered if the contract specifies FOB Incoterms 2010 and the item is placed on the boat before the wind-down period expires but is delivered to the customer in Iran after the wind-down period? Your guess is as good as mine, even though under an FOB delivery term the seller has satisfied its delivery obligations once the item is on the boat.

FAQ 2.2 provides the answer, of sorts, to the question about new business in Iran that starts after today but is completed before the wind-down period expires. OFAC says in that case you’re okay, but that if there is an enforcement action based on things done after the period expires, these new activities undertaken after today will be considered in determining the penalty. In other words, engage in new activities after today at your own risk.

Of course, it’s not at all clear what might count as new activities. Suppose you have an office in Tehran to assist in completing the contract. Can you order more paper when the copying machine runs out? Can you order lunch for a working meeting in the office? Hire a temp?

There’s one thing that can be guaranteed by these wind-down provisions:  full employment for sanctions lawyers.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
May

3

De Minimis Rules Create De Maximis Confusion for ZTE Exports

Posted by at 7:53 pm on May 3, 2018
Category: BIS • Denied Party List

ZTE China via http://res.www.zte.com.cn/mediares/zte/Files/bannerCN/rmrb0424.jpg?h=270&la=en&w=470 [Fair Use]Trade wars, like all wars, inevitably inflict collateral damage on unintended targets. This article in the Wall Street Journal provides an interesting run-down of the collateral damage that the ZTE denial order has had on U.S. companies.  These are companies for which ZTE was a significant customer and which have seen significant drops in their stock prices on the heels of the denial order.

Although most of the attention has been focused on the scope of the order’s impact on exports to ZTE from the United States, less attention has been paid to the issue of foreign made products incorporating U.S. content. Consider the dilemma of the company that makes the Gorilla Glass used on ZTE smartphones:

Corning Inc., GLW -0.49% which makes Gorilla Glass screens used in smartphones from ZTE and others, said it was assessing whether the sales ban applies to its products made at its factories in Taiwan, Japan and South Korea. The company said it wasn’t sure whether Gorilla Glass includes content that falls under U.S. export controls.

There could be a number of reasons for this, including not knowing the origin of the raw materials. But more likely, it could be the confusion over how to apply the de minimis rules in the context of the denial order, which only covers items “subject to the Regulations,” i.e. items “subject to the EAR.” Section 734.4(d)(1) notes that the following items are not “subject to the EAR”:

Reexports of a foreign-made commodity incorporating controlled U.S.-origin commodities … valued at 25% or less of the total value of the foreign-made commodity.

The crucial, and confusing, part of this provision is what is meant by “controlled U.S.-origin commodities,” a term that is never defined in the regulations. The only guidance as to the meaning of this phrase is in Supplement 2 to Part 734 which says this:

To identify U.S.-origin controlled content for purposes of the de minimis rules, you must determine the Export Control Classification Number (ECCN) of each U.S.-origin item incorporated into a foreign-made product. Then, you must identify which, if any, of those U.S.-origin items would require a license from BIS if they were to be exported or reexported (in the form in which you received them) to the foreign-made product’s country of destination. In identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as “NLR”) or under License Exception GBS (see part 740 of the EAR).

Reading the above provision literally, “controlled U.S. origin commodities” for purposes of the ZTE Denial Order would not include EAR99 items and many other items that did not require a license to China because whether something is controlled for de minimis computation depends on whether it is controlled for the “country of destination,” not the recipient.

One suspects that BIS means, and would like to cover, all EAR99 or items that were NLR for China in the de minimis computation for foreign made products exported to ZTE on the notion that these exports are controlled to ZTE. But, of course, if wishes were horses, all beggars would ride or, more to the point in this context, if wishes were rules, all agencies would ride roughshod over fairness. I don’t think BIS can cure this by posting some slapdash FAQ on its website instead of going through the procedures required by the APA to amend Supplement 2 to Part 734 to decouple the meaning of controlled from the country of destination.

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)