Apr

25

Well, That Didn’t Last Long: DDTC Finds Backdoor To Reimpose Access Rule

Posted by at 10:31 pm on April 25, 2018
Category: DDTC • Deemed Exports

HD Thermal Camera via https://www.flir.com/news-center/professional-tools/the-new-t1010---flirs-latest-hd-thermal-camera/ [Fair Use]Yesterday the Directorate of Defense Trade Controls (“DDTC”) and FLIR entered into a consent agreement under which FLIR consented to a civil penalty of $30 million, half of which was suspended on the condition that this amount was and would be applied to previous and future compliance costs. The fine was based on a number of export violations in various categories that FLIR voluntarily disclosed.  These violations included instances where disclosed violations continued after their disclosure and where promised remedial actions to cure disclosed violations were not taken.

One part of the Charging Letter is interesting because it appears to be effectively a reversion to the old DDTC standard, clearly articulated in the 2004 General Motors Charging Letter, that access to ITAR-controlled information by a foreign national is a deemed export violation even if the controlled information was never in fact seen by the foreign national. As you may recall, back in 2016 DDTC retreated from that position, saying this in the Federal Register Notice in which “export” was redefined by DDTC:

Several commenters requested that the Department remove the portion of (a)(6) that addressed the provision of physical access to technical data. The Department has removed paragraph (a)(6). However, as described above for paragraph (a)(7), while the act of providing physical access does not constitute an “export,” any release of technical data to a foreign person is an “export,” “reexport,” or “retransfer” and will require authorization from the Department. If a foreign person views or accesses technical data as a result of
being provided physical access, then an “export” requiring authorization will have occurred and the person who provided the foreign person with physical access to the technical data is an exporter responsible for ITAR compliance.

Now look at this part of the Charging Letter:

Approximately 1,350 foreign-person employees had access to all ITAR-controlled technical data (over 1,400 files) located on Respondent’s servers in 22 non-U.S. facilities … While access does not mean that the employees viewed the information, Respondent lacked the IT records which could confirm which employees actually accessed ITAR-controlled files. … It is the Department’s position that Respondent transferred technical data to foreign-person employees that was necessary for their job performance on its servers without authorization.

What DDTC is saying here, in effect, is that if you don’t have logs showing every access to the controlled technical data — and who will have that? — then DDTC is just going to assume that the controlled technical data was transferred to everyone who had access to it. So we’re back where we started and access, not disclosure, is the violation. Sigh.

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Apr

18

ZTE Snapback Order Based on Condition Not In Original Order

Posted by at 7:05 pm on April 18, 2018
Category: BIS • Civil Penalties

ZTE Stand 6 via http://www.zte.com.cn/cn/events/ces2013/show/201301/t20130110_381605.html [Fair Use]Earlier this week, the Bureau of Industry and Security re-imposed on Chinese telecom giant ZTE a seven-year export denial order which the agency imposed and suspended on March 23. 2017. That March 2017 order noted that the suspension could be lifted and the order reimposed if various probationary conditions detailed in the order were not met.

This week’s order re-imposing the previously suspended export denial order is premised on misrepresentations made in two letters sent by ZTE to BIS. The first, sent on November 30, 2016, and before the March 23, 2017 order itself, referred to “employee disciplinary measures” that ZTE had taken or would take in the future. The second, sent on July 20, 2017, said it was sent “to confirm that the measures detailed by ZTE with respect to discipline have been implemented.” In fact, according to BIS, the promised letters of reprimand were not sent out when these letters were written and the employees at issue had received their full 2016 bonus.

Now, of course, lying to BIS is a very bad thing. But, honestly, are these two letters enough for BIS to back out of the deal and rescind the suspension of the export denial order?

In fact, if you look at how the new order justifies this action, it is clearly playing fast and loose with the facts, leaving the undeniable impression that U.S. trade policy and our broader disagreements with China had more to do with this action than these two letters. Here is the relevant language from the new order:

The Settlement Agreement and March 23, 2017 Order require that during the probationary period, ZTE is to, among other things, complete and submit six audit reports regarding ZTE’s compliance with U.S. export control laws. The Settlement Agreement and March 23, 2017 Order also include a broad cooperation provision during the period of the suspended denial order. This cooperation provision specifically requires that ZTE make truthful disclosures of any requested factual information. The Settlement Agreement and March 23, 2017 Order thus, by their terms, essentially incorporate the prohibition set forth in Section 764.2(g) of the EAR against making any false or misleading representation or statement to BIS during, inter alia, the course of an investigation or other action subject to the EAR.

Of course, the whole game is given away by the statement that certain provisions “essentially incorporate” section 764.2(g) of the EAR. “Essentially incorporates” means, of course, that the probationary conditions did not include 764.2(g) but BIS firmly wishes that they had.

The “Tenth” section of the Order clearly indicates that suspension is premised on compliance with the “probationary conditions set forth above.” So that doesn’t include the “cooperation provision” which is referenced in the above quoted language of the order and which is contained in the “Twelfth” section.  Last time I checked, “Twelfth” is below not above the “Tenth” Section. And even if you suspend the laws of geometry and physics to put it above the “Tenth” section, that provision requires ZTE “to continue to cooperate.” There’s nothing in it at all that says anything about statements made before the order was even entered such as those in the November 2016 letter.

In fact, the probationary conditions are in the “Third,” “Fourth,” and “Fifth” sections of the Order. These deal with the monitor’s reports, compliance training, maintaining a compliance program, and retention of records in a fashion accessible in the United States. You won’t find in these sections, which are the probationary conditions “above” the “Tenth” section, any requirement that ZTE send reprimand letters, dock bonuses, comply in the future with section 764.2(g) of the EAR, or have fully complied with that section in the past.

As I said, lying to federal agencies is bad. But so is not abiding by the rule of law.

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


Apr

11

Cuba Export Indictment Mangles U.S. Export Laws

Posted by at 6:27 pm on April 11, 2018
Category: BIS • Criminal Penalties • Cuba Sanctions

Image via https://pixabay.com/p-1202440/?no_redirect [Public Domain]Last week Bryan Singer, a Texas resident, was indicted for attempting to export to Cuba certain items that U.S. Customs found on his boat in a harbor in the Florida keys. The items are involved are Ubiquiti Nanostation M2 modems classified as 5A002, TP Link modems classified as 5A992 and cable box circuit boards classified as EAR99. The brief indictment states that Singer did not obtain a license from “DOC or OFAC” to export these items to Cuba. It also notes that he failed to file an Electronic Export Information covering the export of these items.

There is supposed to be an adult at the Export Enforcement Coordination Center who reviews these export indictments, but that would appear not to be the case. To begin with, two of the items mentioned in the indictment, the TP Link Modems and the cable box circuit boards, were eligible for license exceptions and would not have needed licenses. The TP Link modems are a no brainer and are clearly covered by BIS License Exception CCD. The EAR99 cable circuit boards if they went to private companies or private individuals probably were eligible for export under License Exception SCP. Mr. Singer says in press reports that he was relying on that exemption, and nothing in the indictment alleges that the intended export did not qualify for License Exception SCP.

So that leaves the 5A002 Ubiquiti modems, which would not have been eligible under either License Exception CCD or License Exception SCP. Of course, when the government itself does not understand the export laws (witness including the TP Link modem in the indictment), it is hard for it to establish that Singer had criminal intent when he apparently thought, albeit incorrectly, that he could send the Ubiquiti modem to private individuals in Cuba.

The indictment’s efforts to cobble together a violation due to the failure to file an EEI are equally unavailing. No allegation is made, or proof offered, that items with the same Schedule B number in the shipment had a total value of $2500 or more. Under section 30.37(a) of the Foreign Trade Regulations no EEI was required if that were not the case. And it seems clear that these values weren’t met. The Ubiquiti and TP Link modems share the same schedule B number (8517.62), but given that the Ubiquiti modem retails for 50 bucks and the TP Modems were probably close to that, we would be talking about 50 or more of them needed before an EEI was required. And it’s hard to imagine that the cable circuit boards, which would have a different Schedule B number, were worth more than $2500. So, once again, if the AUSA who signed this indictment can’t figure out the law, how can he criminally prosecute Mr. Singer for not understanding it?

UPDATE: A reader notes in the comments below:

On the EEI issue, section 30.37(a) has no bearing on shipments to Cuba, as it’s in Country Group E:2. The only exceptions that apply are those in section 30.37(y). If none of those apply, then an EEI filing is required under section 30.16(d).

The FTR is poorly drafted here, so I’m not sure I agree. Section 30.7(a) does not say anything like “except as otherwise provided in 30.7(y).” Nor does section 30.7(y), which sets forth certain conditions where exports to E:2 countries do not require an EEI filing, state that these are the only situations where an EEI filing is not required, notwithstanding other exceptions set forth in section 30.7. I admit that the reader’s interpretation is one possible interpretation, but certainly give the plain language of 30.7(a) which does not limit its application creates too much ambiguity to support a criminal prosecution. Additionally, if the CCD-eligible items qualified under License Exception GFT, which is possible here, even 30.7(y) by its own terms would not be relevant.

The EAR, in section 758.1 is clearer about the $2500 threshhold not applying to Cuba, although that provision is not cited by the indictment, which only cites 30.37 of the FTR.  But that section doesn’t alter the availability of an EEI exemption for exports to Cuba of CCD items made under the GFT exception.

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Apr

3

The Export Control Nightmare Act of 2018 (UPDATED)

Posted by at 6:08 pm on April 3, 2018
Category: BIS • Export Control Proposals • Export Reform
Ed Royce via https://royce.house.gov/uploadedphotos/mediumresolution/320ee60e-b83a-4f74-9767-a0e68f3095f6.png [Fair Use]
ABOVE: Rep. Ed Royce

When the Export Administration Act lapsed years ago, it meant that every year the President had to issue an executive order under the International Emergency Economic Powers Act (“IEEPA”) resurrecting the Export Administration Regulations for another year.  (Declarations of emergency, the premise for any IEEPA resuscitation of the EAR, can only last one year under the National Emergencies Act.)  The proposed bi-partisan Export Control Reform Act of 2018, sponsored by Rep. Ed Royce (R-Ca) is mostly designed to give the President the authority to re-promulgate the Export Administration Regulations on a more permanent basis.  He or she will still have to renew annually the Executive Orders that impose economic sanctions on people, places, and things (mostly boats).

Nobody can really argue with the elimination of the annual renewal requirement for the EAR.  Presumably the President has better things to do, like Easter Egg rolls, Thanksgiving turkey pardons and the such.  But Congress took the opportunity to meddle with the definition of a U.S. person to create a whole new class of exports that are certain to cause headaches, if not nightmares.  Under the proposed new definition, a U.S. business entity is not a U.S. person for export purposes if foreign citizens or corporations own 50 percent or more of the corporation.  Under the old definition, a business entity was a U.S. person if  it was organized under the law of any jurisdiction in the United States.

If you previously thought that “deemed exports”  already were the stuff of nightmares, well, as they say, you ain’t seen nothin’ yet.  Here are some scenarios that I’m optioning to start a new horror series on Netflix.

  • Company A in Chicago wants to sell some microprocessors classified as ECCN classified as 3A001 to Company C, a U.S. corporation, in Detroit.  It can’t do that until Company C gives it information on foreign ownership and, if Company C is owned 51% by Chinese corporation, then Company A cannot send the items from Chicago to Detroit without a [bad word] export license.  Scared yet?
  • Company D, a manufacturer of computers in Seattle wants to use Company F in Boston to manufacture certain components specially designed for its computers.  The computers and the specially designed parts are classified as ECCN 4A001.  In order to do that, Company D must transfer 4E001 technology relating to the production of these parts to Company F.   Company F is owned 60 percent bought by a Russian-Italian joint venture.  Is Company F Russian or Italian?  If the latter, no license is required; if the former, it is.  This gives Freddie Kruger a run for his money.
  • Company G, which is 60 percent French owned, creates designs for a CNC-machine.   That technology can be exported without license to France.  Can the French parent build the machine and ship it to China without license?  That will depend on whether the designs created by the U.S. company that is now a foreign person in the United States are U.S. technology or foreign technology.  Warning: violent ending for mature audiences only.

You have to imagine that these nightmare scenarios never crossed the minds, such as they were, of the drafters of this legislation.  Nor did they focus on the numerous compliance questions and problems that the new definition would create.  But not to worry:  section 108 is designed to provide “compliance assistance.”   Whew.  In fact, in section 108(c)(1), Congress mandates that the President “shall develop and submit to Congress a plan to assist small- and medium-sized United States [sic] in export licensing and other processes under this title.”  I always thought we were a big, indeed great, United States, so I’m not so sure who are the small- and medium-sized United States that Congress hopes to help.

UPDATE: Kevin Wolf, who you may remember was running export control reform at BIS during the Obama administration, points out, in the comments, that the definition of U.S. person which resulted in the nightmares described above was, ahem, a mistake:

Everyone should relax. The definition of US person in the bill was a drafting error. The title I export definition got combined with the title II antiboycott definition. Committee staff is aware of the issue and will fix it during mark-up to get it back to the EAR status quo. You were not wrong in pointing out the absurdities as written, btw. When things seem weird though, it is good to ask the drafters if that is what they really meant. They did not in this case. Reg and leg writers do make mistakes.

That’s good news. It also goes to show that we all would have been better off if the antiboycott regulations had been left to die a deserved death. Those regulations never put even a dent in the Arab boycott but instead merely enriched lawyers (myself included) who had to decipher their ridiculously byzantine complexity and seventeenth-century syntax to advise clients on what language could and could not appear in letters of credit.

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


Mar

27

Indictment of Iranian over Housing Project in Venezuela Raises Questions

Posted by at 9:49 am on March 27, 2018
Category: Criminal Penalties • Iran Sanctions • OFAC
Ali Sadr Hasheminejad via http://www.prweb.com/releases/2017/07/prweb14531762.htm [Fair Use]
ABOVE: Ali Sadr Hasheminejad

Last week, Iranian national Ali Sadr Hasheminejad was arrested at Dulles Airport outside Washington DC in connection with a Venezuelan housing construction project undertaken by his family’s business in Iran. According to the indictment, the governments of Venezuela and Iran in 2005 agreed that Iran would cooperate in the building of new housing in Venezuela. Under the agreement, the parties would sign “commercial contracts” to complete the project. Thereafter, the Stratus Group, a private Iranian conglomerate, assumed the construction project.

Stratus incorporated Iranian International Housing Corporation (“IIHC”), an Iranian company which was responsible for carrying out and completing the housing project in Venezuela. IIHC then entered into an agreement with a Venezuelan company to construct the housing for $475,000,000 dollars. Mr. Hasheminejad, the defendant, was a member of the family that controlled the Stratus Group and its subsidiary IIHC.  He was responsible for overseeing the projects finances. Pursuant to Mr. Hasheminejad’s direction, the Venezuelan company transferred funds to IIHC to pay for the project. These funds, because they were to be in US Dollars, transited various unnamed banks in New York. As a result, the indictment alleges that Mr. Hasheminejad caused these banks to export financial services from the United States to Iran in violation of the Iran Transactions and Sanctions Regulations.

For reasons that are not entirely clear, the indictment does not provide any information as to where those wire funds ended up. As IIHC was engaged in a construction project in Venezuela it seems likely, indeed almost certain, that it had accounts in Venezuela and the funds in question were wired to that Venezuelan account so that materials and labor costs for the housing project could be met. There is no reason to believe that the Venezuelan company wired funds to Iran for the Venezuelan project and the indictment never even alleges that this happened.

The destination of the funds is a crucial piece of information. The Iranian Transactions and Sanctions Regulations (“ITSR”) prohibit exporting financial services (e.g. transferring funds) from the United States “to Iran or the Government of Iran.” The wire transactions at issue allegedly caused the U.S. banks to provide financial services, according to the indictment, “to Iran.” But, as those familiar with the ITSR know, the transfer to funds to an Iranian company or individual outside Iran is not a transfer of those funds “to Iran” and is not a violation of those rules. If the funds at issue went ultimately, as it seems they must have, to an IIHC account in Venezuela there would be no violation. Yet the indictment, in tracing the funds transfers, stops at bank accounts in the British Virgin Islands with the exception of some funds that went to the United States to buy property in California.

Perhaps the prosecution does have evidence that some of this money wound up in Iran but, if it does, it oddly chose to leave it out and instead wound up presenting an indictment that does not adequately allege a violation of law.

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


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