DDTC Publishes Statutory Debarment List

The State Department's Directorate of Defense Trade Controls (DDTC) published a notice in today's Federal Register (pdf) listing the 53 companies and individuals that have been statutorily debarred from participating in ITAR-related transactions as a result of being convicted of violating or attempting to violate the Arms Export Control Act.

Persons subject to statutory debarment are prohibited from participating directly or indirectly in the export of defense articles, including technical data, or in the furnishing of defense services for which a license or other approval is required.

Exporters of defense articles, ITAR controlled technical data and defense services must check the statutory debarment list (and the other restricted party lists maintained by BIS and OFAC) to ensure that no person or company named on this list is involved in a proposed transaction.

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BIS Imposes $70,000 Civil Penalty on NY Freight Forwarder for Entity List Violation

Yet another company has been fined by the Bureau of Industry and Security (BIS) for an export-related violation involving a party on the Entity List.

Today BIS posted the settlement documents involving Eastways Shipping Corporation, a New York City-based freight forwarder. Eastways agreed to pay a $70,000 civil penalty ($23,333 per violation) for allegedly arranging for the export of scrap metal worth $95,335 to Allied Trading Company, a company in Karachi, Pakistan that is included on the Entity List. The scrap metal involved in these transactions was classified as EAR99.

As a result of its actions, BIS charged Eastways with three counts of aiding and abetting an act prohibited by the Export Administration Regulations (EAR) since the scrap metal was apparently exported to Pakistan without the required export licenses.

The Entity List, established in 1997 and modified periodically, is found in Supplement No. 4 to Part 744 (pdf) of the EAR. The Entity List includes non-U.S. businesses, research institutions, government and private organizations, individuals, and other types of entities whose activities are contrary to U.S. national security and/or foreign policy interests.

The inclusion of a party on the Entity List notifies exporters that certain exports and reexports to parties identified on the Entity List require an export license from BIS and that the availability of License Exceptions in such transactions is limited. The Entity List also includes the license review policy for each part listed. In some cases, there is a presumption that an export license will not be granted.

In this case, the Entity List states that for Allied Trading Company the license review policy is "case-by-case for all items listed on the CCL" and that there is a "presumption of approval for EAR99 items." Because the scrap metal was classified as EAR99, it appears likely that BIS would have approved the export license application submitted by the exporter in this case. BIS has yet to post the civil penalty against the exporter that attempted to sell the scrap metal to Pakistan.

This case once again demonstrates the need for all parties in U.S. export transactions to screen all of the customers and end-users against the Entity List and the other restricted party lists maintained by the U.S. Government.

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OFAC Imposes $5.75 Million Penalty on Bank for Violating U.S. Embargoes on Sudan and Cuba

The Treasury Department's Office of Foreign Assets Control (OFAC) today announced that the Australia and New Zealand Banking Group, Ltd. of Melbourne, Australia (ANZ), remitted $5,750,000 to settle allegations that it violated the Sudanese Sanctions Regulations and the Cuban Assets Control Regulations related to the processing of transactions through U.S. correspondent accounts.

OFAC alleged that ANZ "actively manipulated the SWIFT messages related to the Sudanese transactions by removing references to Sudan or the names of entities subject to sanctions in the United States, thereby concealing the identities of the targets of U.S. sanctions and impeding the ability of U.S. banks to detect these violations." OFAC's announcement did not discuss the alleged violations of the Cuban Assets Control Regulations.

This settlement involved 16 transactions totaling $28 million involving alleged violations of the Sudanese Sanctions Regulations and 15 transactions worth $78 million involving alleged violations of the Cuban Assets Control Regulations. All of the transactions occurred between 2004 and 2006.

In its announcement, OFAC indicated that it mitigated the total potential penalty based on ANZ's cooperation and stated that:

Although ANZ did not voluntarily self-disclose the apparent violations of the Sudanese Sanctions Regulations, ANZ substantially cooperated with OFAC by conducting an extensive review of transactions. This review identified additional apparent violations of the Sudanese Sanctions Regulations of which OFAC was not aware, as well as apparent violations of the Cuban Assets Control Regulations, which ANZ voluntarily self-disclosed to OFAC.

As part of its remedial response, ANZ re-engineered its current operating model to enhance its ability to identify and resolve operational gaps and weaknesses. ANZ enhanced key OFAC procedures and policies to establish more effective controls with respect to potential OFAC violations. As part of its settlement with OFAC, ANZ has agreed to examine and, as necessary, further revise its policies and procedures to ensure, to the best of its ability, that transactions that would be in violation of OFAC’s regulations are not processed by or through United States financial institutions. ANZ will report findings of its examination to OFAC. The Australian Prudential Regulation Authority, ANZ’s primary Australian regulator, has agreed to review the results of the examination conducted by ANZ and monitor the resolution of any adverse findings.

In a statement issued by ANZ following OFAC's announcement, Chris Page, the bank's Chief Risk Officer said: “ANZ recognises that during the 2004 to 2006 period, the Bank’s compliance with US economic sanctions did not meet the high standards we expect" and that the bank "worked hard with regulators over the past three and a half years to comprehensively address the issues identified. This has included more robust policies and procedures, and a Group-wide sanctions compliance training program for staff.”

ANZ's statement noted that the measures taken by ANZ to strengthen compliance with economic sanctions have included:

• Strengthening management and compliance oversight including new approval procedures.
• Establishing additional full time roles dedicated to sanction compliance.
• Enhancing sanction compliance awareness training.
• Undertaking technology investments to upgrade automated sanction filters

The statement also confirmed that OFAC applied the increased penalties imposed by the IEEPA Enhancement Act "applied to the matters ANZ had disclosed to OFAC and that were then pending a decision by OFAC." (Although it should be noted that the IEEPA Enhancement Act penalties do not apply to violations of the Cuban Assets Control Regulations.)

Finally, ANZ stated that the "Australian Prudential Regulation Authority (APRA) has been kept informed of ANZ’s US economic sanction review, its remediation program and the dialogue with US regulators and APRA will continue to review the resolution of final remediation actions."

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Cracking Down on Iran's Illicit Trade

Michael Jacobson, a senior fellow in the Washington Institute for Near East Policy's Stein Program on Counterterrorism and Intelligence, today published a policy paper entitled "Cracking Down on Iran's Illicit Trade."

The policy paper recommends that "strengthening the export control regime to prevent Iran from easily circumventing U.S. and international sanctions should be a key part" of the Obama Administration's recently announced review of the U.S. export control system.

Among other things, Jacobson describes the increased U.S. enforcement of export control violations involving Iran and discusses ways in which these efforts have fallen short. For example, he notes that while the "main challenge for U.S. export control efforts is on the international front, problems closer to home exist as well:

• Despite the presence of a national export control coordinator, no agency is officially in charge of U.S. government export control efforts, with responsibility spread between State, Justice, Treasury, Commerce, and DHS;


• The main statute governing this issue -- the Export Administration Act (EAA) -- has expired, forcing the United States to temporarily operate under the International Emergency Economic Powers Act, which does not allow for the full set of tools that the EAA provided;


• Sentences in export control cases are often light, in part because judges do not always view them as serious national security issues. Adding to this prevalent perception is the fact that export control offenses are not in Title 18 of the U.S. Code, where the vast majority of crimes are found."

The policy paper concludes by noting that "success in the arena depends on better understanding how Iran is procuring illegal goods -- with its various front companies and agents around the world -- and mobilizing other countries to move forward on this front."

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Despite Reports U.S. Export Control Policy on Syria Remains Unchanged

The Bureau of Industry and Security (BIS) recently posted an updated version of it guidance and frequently asked questions involving U.S. exports to Syria. The bottom line: Despite many news reports to the contrary, U.S. export controls involving Syria remains unchanged.

As we previously reported several weeks ago, various news reports, including an article in the New York Times, indicated that the U.S. Government was easing or lifting sanctions on Syria. While the Obama Administration has indicated that it will "process all eligible applications for export licenses to Syria as quickly as possible," the current export licensing requirements to Syria remain unchanged.

Here is the summary of the current restrictions on Syria that was recently posted by BIS:

BIS requires a license for the export or reexport to Syria of all items subject to the Export Administration Regulations (EAR), except food and medicines not on the Commerce Control List (CCL). Pursuant to the waiver authority exercised by the President in Executive Order 13338, BIS may consider several categories of items on a case-by-case basis including medicines on the CCL and medical devices; parts and components intended to ensure the safety of civil aviation and the safe operation of commercial passenger aircraft; and telecommunications equipment and associated computers, technology, and software. License applications for other exports and reexports to Syria are subject to a general policy of denial.

In our experience, BIS and the other U.S. government reviewing agencies involved in the export licensing process have consistently approved licenses to export controlled medicines and medical devices to Syria on a regular basis and in a fairly timely manner (much faster than OFAC's processing of TSRA licenses for Iran and Sudan). The only question is whether the U.S. will begin issuing licenses for the export of aircraft components, telecommunication products and other types of eligible products faster than it has in the past.

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Latest Posts on Recent BIS Export Enforcement Cases Updated

Yesterday's blog posts on the BIS export control enforcement cases involving RFMD and FMC have been updated to include additional information contained in the proposed charging letter and settlement agreements that were posted yesterday afternoon (see posts below).

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BIS Imposes Civil Penalties on U.S. Exporter and Export Controls Compliance Employee

The Commerce Department's Bureau of Industry and Security (BIS) has imposed a civil penalty on a U.S. manufacturer and an employee with export control compliance responsibilities for unlicensed exports of high performance semiconductor components to China.

RF Micro Devices, Inc. (RFMD), a Greensboro, N.C.-based manufacturer of high-performance semiconductor components, has agreed to pay a $190,000 civil penalty to settle allegations that it exported spread-spectrum modems in violation of the Export Administration Regulations (EAR) to the People's Republic of China. The unique aspect of this case, which was voluntarily disclosed by RFMD, is that BIS also imposed a $15,000 civil penalty on a RFMD manager with export compliance responsibilities for making false and misleading statements to BIS Special Agents during the investigation of RFMD.

BIS alleged that during 2002 and 2003 RFMD made 14 unlicensed exports of spread-spectrum modems, classified under Export Control Classification Number (ECCN) 5A001, to the People’s Republic of China with knowledge that a violation of the Regulations was occurring, was about to occur or was intended to occur in connection with the spread-spectrum modems. In addition, BIS alleged that on 13 occasions RFMD made false or misleading statements in connection with the submission of Shipper’s Export Declarations (SEDs). ECCN 5A001 covers controlled telecommunications systems, equipment, components and accessories. Certain products classified in ECCN 5A001 are controlled for National Security reasons and require an export license to China.

BIS also alleged that, in 2004, a RFMD manager with export control compliance responsibilities told a BIS investigator that an outside export control consultant had confirmed that RFMD’s products were not export-controlled to any region where the company was marketing or selling its products. However, BIS alleged that the RFMD manager "had been repeatedly advised that certain RFMD products may have been classified under the Commerce Control List and that these products may have required an export license."

In announcing this case, Kevin Delli-Colli, the Acting Assistant Secretary of Commerce for Export Enforcement said that "unlawful shipment of state-of-the-art micro devices is a serious national security concern.” Delli-Colli also added that "companies that voluntarily disclose violations must provide truthful and complete information to investigators. Self-serving, false or misleading statements only serve to further undermine corporate credibility.”

This is one of the very few cases in which a company's export compliance manager has been assessed civil penalties in an export enforcement case.

Update: The proposed charging letter and settlement documents in this case can be found here (employee) and here (RFMD).

The proposed charging letter issued to RFMD indicates that the controlled products exported to China were RF3000 and RF3002 spread-spectrum modems, classified under ECCN 5A001, despite being advised by an export controls consultant that a review of the classification and export control requirements of such products were "a priority issue for the company". BIS also charged the company with "acting with knowledge" of violations since the company had been advised of the possible licensing requirements. RFMD was also charged with 14 counts of making a false statement on a SED (now EEI) by indicating that no license was required (NLR) to export the products from the U.S.

The proposed charging letter issued to the RFMD manager with "export control compliance" responsibilities indicated that the employee advised a BIS special agent that "she had been advised . . . by an outside export controls consultant that had been hired by RFMD, that all of RFMD's products were classified as EAR99 and were not export-controlled to any region in which RFMD was marketing or selling its products." The employee also had been advised by the outside export controls consultant "on multiple occasions . . . that RFMD's export control classification review was incomplete."As a result, the employee was charged with one count of making a false statement to BIS in the course of an investigation and agreed to pay a $15,000 penalty to settle the matter.

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BIS Imposes $610,000 Penalty on Houston Company for Unlicensed Exports of Controlled Valves

In yet another export enforcement case involving controlled valves, the Commerce Department's Bureau of Industry and Security (BIS) announced late last week that FMC Technologies, Inc., a Houston-based provider of specialty products and services to the oil and gas sector, agreed to pay a $610,000 civil penalty to settle allegations that it exported controlled valves in violation of the Export Administration Regulations (EAR).

BIS said that FMC voluntarily disclosed the violations and cooperated fully with the investigation.

BIS alleged that between 2003 and 2007 FMC made 78 unlicensed exports of butterfly and check valves classified under Export Control Classification Number (ECCN) 2B350.

ECCN 2B350, which covers many valves and other type of equipment used in the chemical industry, is one of the most common ECCNs subject to BIS enforcement actions.

In its press release, BIS quoted Kevin Delli-Colli, Acting Assistant Secretary of Commerce for Export Enforcement, as saying that an "effective compliance program is only as good as its last revision" and "not staying up to date with regulatory changes can lead to violations of the export regulations." This statement apparently refers to the final rule issued by BIS on April 14, 2005 that amended the EAR to significantly increase the country scope of chemical/biological (CB) controls on chemical and biological equipment and related technology included on the Australia Group control lists.

As a result of the 2005 change, exports of products classified as ECCN 2B350 require an export license to all countries, except the 40 members of the Australia Group. Export licenses are required to export products classified in ECCN 2B350 to such common destinations as China, India, Israel, Russia, Taiwan and the United Arab Emirates. Many exporters, however, did not update their export compliance programs and internal controls to implement the 2005 changes to determine whether an export license was needed prior to exporting valves and other products controlled by ECCN 2B350. This breakdown in compliance has led to numerous BIS enforcement cases. Additional enforcement cases involving products covered by ECCN 2B350 are expected.

ECCN 2B350 was most recently amended by BIS on July 6, 2009 to implement recent changes made by the Australia Group.

Update: The proposed charging letter and settlement documents in this case, which can be found here, indicates that FMC was charged with six counts of making unlicensed exports of ECCN 2B350 check and butterfly valves to China, Mexico, Tunisia and Venezuela following the issuance of the April 2005 final rule noted above. FMC was also charged with making 72 unlicensed reexports of 2B350 butterfly valves from the company's warehouses in Singapore, UAE and the UK to 18 countries.

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President Obama Orders Export Control Review Initiative

Be sure to follow the International Trade Law News Twitter feed at http://twitter.com/tradelawnews for more regular news updates, including yesterday's announcement that President Obama has directed the National Economic Council and National Security Council to conduct a broad review of the U.S. export control system.

House Foreign Affairs Committee Chairman Howard Berman's statement on the White House announcement is reprinted below. Representative Berman plans to introduce a new Export Administration Act in 2010.

New Export Control Review Will Help Improve U.S. Security, Berman Says

Van Nuys, CA – Congressman Howard L. Berman (D-CA), chairman of the House Foreign Affairs Committee, today welcomed the Administration’s new initiative to review the U.S. export control system.

“I am very pleased to see the Obama Administration will undertake this thorough review,” Berman said. “It is years overdue. A modernized export control system is needed to deal more effectively with the security threats posed by global diffusion of dual-use technologies and to maintain continued U.S. technological leadership.

“Effective export controls are critical to U.S. national security, but they must be responsive to the challenges of the modern globalized world," Berman added. "That is why I have launched a congressional review of U.S. export controls on U.S. goods that have both commercial and military applications – so-called ‘dual-use’ items. I hope to introduce a new Export Administration Act in the beginning of next year that will overhaul the dual-use export control system.”

Dual-use items are those that can be used for both commercial and military purposes, and are therefore unlawful for export to certain countries without a U.S. license.

The fundamental basis for U.S. dual-use export controls, the Export Administration Act of 1979, expired in 1994. It was extended briefly in 2000, and has been kept in force only through the extraordinary authority of the International Emergency Economic Powers Act (IEEPA). Today the White House also announced that it was extending the Export Administration Act by a year.

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Professor Roth Released on Bond Pending Appeal; Roth's Co-Conspirators to be Sentenced Later This Month

Here is the latest update on the criminal export controls case involving Professor John Reece Roth and his alleged co-conspirators.

Dr. Roth Released on Bond Pending Appeal

Following Professor Roth's sentencing to 48 months in prison for violating the Arms Export Control Act (AECA) and being found guilty of one count of wire fraud, Professor Roth's defense counsel filed a Motion for Release Pending Appeal. On July 28, 2009, U.S. District Judge Thomas Varlan granted Professor Roth's motion and he will remain released on bond pending the outcome of the appeal to the Sixth Circuit Court of Appeals.

During the hearing on the motion, the U.S. Attorney's office conceded that Professor Roth is not likely to flee if released, he did not pose a risk to the community and did not contend that the appeal was for the purpose of delay. As a result, under the Bail Reform Act of 1984 the remaining question for Judge Varlan to consider was whether the appeal raises a substantial question of law or fact likely to likely to result in reversal, a new trial, a sentence that does not include a term of imprisonment, or a reduced sentence to a term of imprisonment less than the total of the time already served plus the expected duration of the appeal process.

In Professor Roth's motion, the defense argues that this appeal raised four substantial questions of law or fact, including:

1. Whether the items covered by the Indictment were defense services or technical data directly related to a defense article as those terms are defined in the United States Munitions List (“USML”);
   
2. Whether or not there was sufficient evidence to prove that the defendant willfully violated the AECA;
   
3. Whether the Court erred in refusing to instruct the jury on ignorance of the law as the defendant requested; and
   
4. Whether the Court was in error in denying the defendant’s motion to strike references in the Indictment to the national security interest of the United States.
   

Judge Varlan only addressed the second issue. After reviewing the various case law Judge Varlan found that that "there is a substantial question regarding the definition of willfully applicable to the AECA and the related issue of the extent to which ignorance of the law is a defense because there is a circuit split and the Sixth Circuit has not decided the substantial question of law." Specifically, Judge Varlan indicated that he reviewed the "available case law and determines that the level of knowledge defendant must have regarding the illegality of his action is an undecided issue and that there is not a clear trend such that the question could not be answered either way."*

As a result, Judge Varlan granted Roth's motion for release pending appeal since there is a substantial question of law that if resolved in Roth's favor would lead to a new trial and/or a reduction in Roth's sentence.

Dr. Roth's Release Order can be found here. Thanks to a loyal reader for providing this document to International Trade Law News.

Sentencing of Sherman and Atmospheric Glow Technologies

Two additional defendants in the case involving Dr. Roth have pleaded guilty and are awaiting sentencing.

Daniel Daniel Max Sherman, a physicist who was trained by Dr. Roth and was an employee, director and one of the original founders of Atmospheric Glow Technologies, Inc. , pleaded guilty to one count of conspiracy to violate the Arms Export Control Act. Sherman, who has been free on bond, will be sentenced on August 10th.

Atmospheric Glow Technologies, Inc. (AGT) will be sentenced by Judge Varlan on August 27th. AGT pleaded guilty in August 2008 to 10 counts of unlawfully exporting defense articles to a citizen of the People’s Republic of China in violation of the Arms Export Control Act. AGT, which for bankruptcy in 2008, was a plasma technology company located in Knoxville, Tennessee.

Thanks to another loyal reader for providing the updated information on the Sherman and Atmospheric Glow sentencing dates.

*Interestingly, in his review of the applicable case law Judge Varlan did not mention the recent Seventh Circuit decision in United States v. Pulungan, in which the court reversed the conviction on grounds that the evidence presented at trial was insufficient to show that the defendant knew that certain rifle scopes were "defense articles" that required export licenses since the rifle scopes were not included on the U.S. Munitions List and the Commodity Jurisdiction obtained by the manufacturer was not known to the defendant or the public.

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