San Antonio Businessman Sentenced to Two Years in Prison for Allegedly Attempting to Export ITAR Controlled Items

Yet another individual has been sentenced to prison for attempting to export items subject to the ITAR without the required State Department export license.

In the latest in a growing number of cases, the U.S. Attorney for the Western District of Texas announced today that a San Antonio businessman was sentenced to two years in federal prison and three years probation after pleading guilty to one count of violating the Arms Export Control Act.

The defendant, who was in the business of purchasing surplus Department of Defense equipment and then reselling it, admitted that he sold one, and subsequently attempted to sell three more, Naval Radar Control Unit parts, also known as a Sensitivity Time Control Generator Assembly, for approximately $6,500 each to an undercover U.S. Immigration and Customs Enforcement agent.

The undercover agent told Silcox he was a broker for a buyer in the United Arab Emirates and inquired as to how Silcox would get the export license. The defendant admitted that he knew he needed an export license, however, he never attempted to obtain the license and used false information on the shipping labels to disguise the actual contents.

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Freight Forwarder Proposed Debarment Update: CEVA Logistics Removed from EPLS

As a follow-up to our previous post on the impact that the proposed debarment will have on ITAR transactions, CEVA Logistics LLC and its subsidiary EGL Inc. have successfully challenged their debarment and have been reinstated by the Air Force. As a result these two entities have been removed from the EPLS.

DDTC has confirmed there is no further need for exporters to submit a "transaction exception" request for pending authorizations involving CEVA Logistics LLC.

DDTC today updated its February 24, 2012 guidance to reflect this change.

Yesterday's post has been updated to reflect the latest information.

Reminder: Today is the deadline for submission of transaction exception requests for pending authorizations that were received by DDTC after February 18, 2012 that included a freight forwarder included on the EPLS.

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The Proposed Debarment of Certain International Freight Forwarders and the Impact on ITAR Shipments: What Exporters Need to Know

On February 16, 2012, several major international freight forwarding companies were added to the U.S. Government's Excluded Party List System (EPLS) when the U.S. Air Force proposed these companies for mandatory debarment after they pleaded guilty to violating the Sherman Antitrust Act for their role in an alleged price-fixing scheme involving certain surcharges for international airfreight forwarding services.

The inclusion of these freight forwarders on the EPLS, all of whom play a major role in the movement of goods to and from the U.S. that are subject to the International Traffic in Arms Regulations (ITAR), caught several of these forwarders and their customers off guard and sent reverberations through the U.S. defense and freight forwarding communities last week.

There has been a good deal of misinformation and misunderstanding as to why these forwarding companies were proposed for mandatory debarment and the impact that this debarment will have on transactions involving current and future ITAR licenses and authorizations.

Fortunately, this past Friday the State Department's Directorate of Defense Trade Controls (DDTC) issued guidance on how the debarment of these freight forwarders will impact current, pending and future license applications and authorizations issued by DDTC. While DDTC's guidance is very useful and the agency should be commended for issuing this guidance in a timely fashion, as explained below there is a great deal of information that was not included in DDTC's guidance, as well as some useful lessons for companies involved in U.S. defense related transactions.

February 27, 2012 Update: Today DDTC updated its guidance to reflect the reinstatement of one of the freight forwarders and the subsequent removal from the EPLS.


Which Freight Forwarders Are Affected and Why? 

In September 2010, as a result of the U.S. Department of Justice's antitrust investigation of the freight forwarding industry, the following six international freight forwarders agreed to plead guilty and to pay criminal fines totaling more than $50 million for their roles in alleged conspiracies to fix a variety of fees and charges in connection with the provision of freight forwarding services for international air cargo shipments between 2003 and 2007:

• EGL Inc., based in Houston, Texas (EGL was acquired by U.K.-based CEVA Logistics in 2007)
• Küehne + Nagel International AG, based in Switzerland
• Panalpina World Transport (Holding) Ltd., based in Switzerland (and parent of Panalpina Inc.)
• Schenker AG, based in Germany
• BAX Global Inc., based in Toledo, Ohio (now owned by Schenker AG); and 
• Geologistics International Management (Bermuda) Limited, based in Bermuda.

While these companies agreed to plead guilty in September 2010, the Plea Agreements were not finalized and approved by the Court in Washington, DC until November and December 2011. In the meantime, an important development had taken place in the U.S. Congress.

On December 23, 2011, President Obama signed into law the Consolidated Appropriations Act of 2012 (Pub. L. 112-74) which contained a number of provisions that debarred companies from receiving federal funds, including from the Department of Defense, that have been "convicted of a felony criminal violation under any Federal law within the preceding 24 months." (See Division A, Section 8125 for the Department of Defense language.)

As a result of the guilty pleas, on February 16, 2012 the Air Force added the following companies to the EPLS using the CT codes A and A1, which refer to parties proposed for debarment and debarred parties, respectively: 

• CEVA Logistics LLC   (removed from EPLS on February 24, 2012)
• EGL Inc. (now owned by CEVA Logistics) (removed from EPLS on February 24, 2012)
• Kuehne and Nagel International AG (removed from EPLS in March 2012)
  
• Panalpina Welttransport (Holding) AG (removed from EPLS on March 16, 2012)
  
• Panalpina Inc. (removed from EPLS on March 16, 2012)
  
• Schenker AG (removed from EPLS on April 11, 2012)
  
• BAX Global Inc. (now part of DB Schenker) (removed from EPLS on April 11, 2012)
  

At the beginning of last week Panalpina World Transport, Panalpina, Inc., Kuehne + Nagel International AG, Schenker AG and CEVA Logistics LLC each received a proposed "Notice of Mandatory Debarment" from the Air Force advising that these companies would be suspended from engaging in federal contracts. In addition, companies that screened their customers and proposed transactions against the EPLS and other restricted party lists maintained by the U.S. Government began receiving "hits" on these forwarders and rumors began circulating as to whether or not these forwarders had in fact, been debarred from involvement in ITAR transactions.

It has been DDTC's long-standing policy and practice that parties listed on the EPLS as either proposed for debarment or debarred are considered to be "ineligible" parties under section 120.1(c) of the ITAR. DDTC will Return Without Action (RWA) DSP-5 applications and other requests for authorizations that include parties named on the EPLS. In fact, DDTC will RWA applications that seek authorization to export an ITAR-controlled product when the manufacturer that produced the product is on the EPLS, even if the product was purchased from a third party or produced many years ago. 

Section 127.1(c) of the ITAR prohibits any person with knowledge that another person is ineligible pursuant to section 120.1(c)  or subject to debarment or interim suspension from participating, directly or indirectly, in any transaction that may involve a defense article or defense service for which a license or other approval is required where the ineligible person may obtain any benefit or have any direct or indirect interest.

As a result, the forwarders named above are effectively prohibited from being involved in ITAR-licensed shipments. While DDTC can issue exceptions to this policy, known as "transaction exceptions" or TEs, these exceptions are issued on a case-by-case basis. It is important to note that this proposed debarment has no impact on transactions involving non-ITAR products that are subject to the jurisdiction of the Export Administration Regulations.

Because these forwarders play a major role in the movement of ITAR-controlled goods, particularly for transactions involving Europe, the prohibition of these companies in ITAR-related transactions will have a major adverse impact on U.S. companies and their customers. DDTC's guidance makes clear that current licenses and authorizations will not be affected. However, pending and future license applications and other authorizations that include these companies will be affected.

Only the specific corporate entities named above are impacted. For example, Schenker Inc., the U.S. subsidiary of Schenker AG, is not listed on the EPLS and that entity may be included on future DSP-5s and other authorizations and used for ITAR-related exports. However, because section 127.1 of the ITAR prohibits dealing with a debarred, suspended, or ineligible person "where such debarred, suspended, or ineligible person may obtain any benefit therefrom or have any direct or indirect interest therein"  there is a question as to whether as to whether the non-debarred U.S. entities can participate in defense trade transactions as it is likely that there parent companies will be involved in some aspect of the transaction or obtain some benefit from the transaction. It would be useful for DDTC to provide guidance on this issue.

These freight forwarders are now working with the U.S. Air Force to have the proposed debarment rescinded and will be presenting information to and meeting with the debarring official in order to demonstrate that they are  “presently responsible contractors,” the applicable legal standard. While submissions are normally made within 30 days, at least one forwarder has already scheduled a meeting for the second week of March to make their case. While these companies are certain to move quickly to challenge their debarment, there is no specific timetable for debarment decisions to be made by the U.S. Government.

Because this is a fluid situation, applicants for ITAR authorizations are encouraged to monitor the EPLS for any changes to the status of the remaining entities.

March 21, 2012 Update: As noted above, several of these freight forwarders have been removed from the EPLS and are no longer "ineligible to participate" in ITAR Transactions. See subsequent posts for more information.

What is the Impact of the Debarment on ITAR-Related Exports and Imports?

Because the forwarders listed are deemed by DDTC to be "ineligible" written authorization from DDTC would normally be required before a company or person applies for, obtains or uses an export control document involving one of the forwarders named above.  However, DDTC has issued the following guidance on how to manage existing, pending, and future authorizations involving these seven entities as follows:

• Existing authorizations -- Existing DSP-5s and other authorizations approved by DDTC prior to February 24, 2012 are not impacted. Authorizations that include any individual entity, or combination of entities, listed above as intermediate consignee, consignor, or freight forwarder may continue to be utilized by the applicant without need to amend or obtain other written authorization from DDTC. 

•  Pending Authorization Requests -- License applications and other authorization requests received by DDTC prior to February 18, 2012, will be reviewed by DDTC in the normal course of business, without the submission of a transaction exception request for approval in accordance with § 127.1(c) of the ITAR to include an ineligible party. Authorization holders may utilize the named entity(ies) in their approved roles.  Authorization requests received by DDTC February 18, 2012, and after, and which are pending with the Department as of February 24, 2012, involving any one or more of the parties above, but that do not include a transaction exception request
  will be Returned Without Action, unless a transaction exception request is submitted via DTrade2 within 72 hours from the date of this notice (i.e., by 5 pm on February 27, 2012). Requests that include a TE request will be reviewed.

• Future Authorization Requests -- License applications and other authorization requests received by DDTC after February 24, 2012 involving any one or more of the parties above, must include a TE request or they will be Returned Without Action. Those that do include such a request will be reviewed.

TEs will be made by DDTC on a case-by-case basis. Under standard DDTC policy, policy exception will  be granted only after a full review of all circumstances and the following factors:

• Whether an exception is warranted by overriding United States foreign policy or national security interests; or
• Whether an exception would further law enforcement concerns that are consistent with the foreign policy or national security interests of the United States; or
• Whether other compelling circumstances exist that are consistent with the foreign policy or national security interests of the United States and that do not conflict with law enforcement concerns.

In this case, TE requests should include, at a minimum, an explanation of why the request should be considered, why the generally ineligible entity should be part of the transaction (i.e., why the applicant is unable to utilize a different freight forwarder), and how the inclusion of the ineligible entity is in the interests of U.S. foreign policy or national security. This will likely be a difficult hurdle to overcome, although a number of specific-business scenarios could meet these requirements.

Why Companies Involved in ITAR Transactions Should Include the EPLS in Their Restricted Party Screening Process

This case demonstrates why exporters and other parties involved in ITAR-related transactions must screen their transactions against the EPLS. It should be noted that the new Consolidated Restricted Party List maintained by the Bureau of Industry and Security does not include parties on the EPLS. In addition, not all commercial restricted party screening software systems screen against the EPLS or include immediate updates to parties added to or removed from the EPLS. Parties involved in ITAR-related transactions that utilize commercial screening software should therefore ask their software companies whether the EPLS is one of the lists used in the screening process and should perform tests to see whether these forwarders are included as a "hit". While inclusion of a party on the EPLS does not mean the party will be prohibited from all export transactions, an EPLS "hit" is a "red flag" that needs to be resolved prior to the export from taking place.

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Business Groups Send FCPA "Wish List" to DOJ and SEC

Today the U.S. Chamber of Commerce and a number of other leading business and professional groups sent a letter (see below for full text) to senior officials at the Justice Department (DOJ) and Securities Exchange Commission (SEC) containing their "wish list" of items that they would like to see in the FCPA guidance that is supposed to be issued later this year.

The letter requests DOJ and SEC to address the following issues in any future FCPA-related guidance:

1. Definitions of “Foreign Official” and “Instrumentality” of a Foreign Government – Requests further clarification of those terms in the FCPA context, including the percentage ownership or level of control by a foreign government that ordinarily will qualify a corporation as an “instrumentality” of a foreign government.

2. Consideration of Compliance Programs in Enforcement Decisions – Guidance is requested on what types of things should be included in an effective FCPA compliance program that would receive favorable consideration in enforcement decisions.  The letter also requests guidance on the impact that voluntary disclosures have on enforcement decisions.

3. Clarification on parent-subsidiary liability in FCPA enforcement actions – The letter notes that the FCPA is not clear on whether a parent company can be held liable for a foreign subsidiary’s FCPA violation and the SEC and DOJ have taken different positions on this. Thus, the guidance requests DOJ and SEC to clarify and confirm that they consider parent company liability under the FCPA’s anti-bribery provisions to extend only to circumstances in which the parent actually authorized, directed or controlled the improper activity of its subsidiary.

4. Successor Liability – FCPA guidance should outline reasonable standards for conducting FCPA acquisition due diligence and identify factors that will be considered in determining whether such due diligence was adequate.

5. De Minimis Gifts and Hospitality – The guidance should identify a clear standard for gifts and hospitality that ordinarily will not be subject to enforcement action and to address common scenarios that arise in the course of business interactions with foreign officials. U.S. companies spend a great deal of time and effort on these types of issues and specific guidance would be extremely helpful. However, some senior DOJ officials have indicated that they do not think that bright lines or specific values will be useful as it could be misused or misinterpreted and they would prefer the status quo. 

6. Knowledge Standard for Corporate Criminal Liability – Because the FCPA does not explicitly address the “willful knowledge” standard required for corporate criminal liability, the letter requests DOJ to clarify its position on that standard and state its views on whether a company may be criminally sanctioned for FCPA bribery violations of which the company had no direct knowledge.

7. Declination Decisions – The letter requests DOJ to reconsider its practice of not providing information about its decisions to close FCPA-related investigations with no enforcement action. However, senior DOJ officials have expressed reservations about making declination decisions public.

8. Other Common FCPA Issues – The letter requests DOJ and SEC to issue guidance on the following FCPA issues:

• The guidance should outline recommended “best practices” and examples of prophylactic measures that would be expected by DOJ and SEC with regard to business relationships with relatives of foreign officials.
• What standards should govern corporate donations to charities that have connections with foreign governments?

The letter closes by requesting the guidance to apply to civil and criminal enforcement cases and should carry sufficient precedential weight to be reliable and meaningful for businesses seeking to comply with the FCPA.

Neither the DOJ nor SEC have indicated when their FCPA guidance will be issued.

FCPA Guidance Request Letter 02-21-2012

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