Chinese National Pleads Guilty for Involvement in Scheme to Export "Massive Quantities" of Controlled Carbon Fiber to China

On August 19, 2013, the U.S. Department of Justice announced that Mr. Ming Suan Zhang, a citizen of the People's Republic of China, pled guilty to violating the International Emergency Economic Powers Act (IEEPA) by attempting to export "massive quantities" of "aerospace-grade" carbon fiber from the U.S. to China in 2012 without the required BIS export license.

At first glance this case appears to be yet another example of the attempted acquisition of controlled U.S. origin products by China. However, the court documents filed by the Justice Department in this case (see below) include some interesting facts, including the methods  that U.S. law enforcement is using to combat prohibited exports and the means by which prospective buyers will take to acquire controlled U.S. products.

According to the complaint in support of the arrest warrant, Mr. Zhang first came to the attention of U.S. law enforcement because of his affiliation with two Taiwanese citizens who submitted a request via a website operated by Immigration and Customs Enforcement's Homeland Security Investigations directorate, part of the Department of Homeland Security. The website "purports to be for a company that deals in high-technology commodities, including commodities with aerospace and military applications." The website allows visitors to submit online requests via email

According to the court documents, in April 2012 the two Taiwanese citizens later contacted an undercover agent via telephone to negotiate the acquisition of "multiple tons" of carbon fiber. "During the conversation the undercover agent explained to them that an export license would be required to export the type of carbon fiber that they were seeking. The buyers mentioned that obtaining an export license "would be problematic because the acquisition related to a 'military matter' and was therefore sensitive."

The Taiwanese buyers requested the undercover agent whether he could ship the carbon fiber to a third-country that would not require an export license. When the undercover agent declined to do so, the prospective buyer asked if the carbon fiber could be mislabeled. The potential customer then requested the undercover agent to sell a "trial order" of three case cases of the carbon fiber.

With respect to payment, they parties agreed to meet with the undercover agent in the U.S. to pay for the goods in cash. The agent declined payment via cash and suggested a wire transfer made to a U.S. bank. The buyers later wire transferred $1000 to a U.S. bank account maintained by the U.S. Government. The Taiwanese buyers then suggested traveling to the U.S. to arrange a "multi-million dollar" purchase.

In July 2012, the Taiwanese buyers contacted Mr. Zhang to discuss exporting a sample of the carbon fiber back to China.  A second undercover agent, purporting to be the U.S. based seller, informed Mr. Zhang that it is illegal to ship the samples to China without the proper export license. The second undercover officer emailed Mr. Zhang to set up a face-to- face meeting in the U.S. regarding the transaction.

Before the meeting, Mr. Zhang requested to be provided with samples of the carbon fiber. Mr. Zhang subsequently met with the undercover agent and mentioned that he had an urgent need for the carbon fiber as it was connected to the test flight of a Chinese fighter plane. Mr. Zhang sought to purchase the sample so he could send it to China to be analyzed for authenticity. Mr. Zhang was arrested after he arrived at the meeting.

Mr. Zhang faces up to 20 years in prison and a fine of up to $1 million when he is sentenced in November 2013.

The particular type of carbon fiber involved in this case was made by Toray Industries and is classified as ECCN 1C210.a. Items classified as ECCN 1C210.a are controlled for nuclear non-proliferation and anti-terrorism reasons. As a result, an export license is required to export the this type of carbon fiber to China and many other countries. 

This is not the first time that individuals have been arrested and charged for trying to procure this type of carbon fiber. In 2008, three individuals in the U.S. and Singapore were indicted for conspiring to export the identical product to China's Academy of Space Technology. In that case, one of the persons was sentenced to 46 months in prison, one individual was sentenced to one year in prison and the last person was received probation. One of the individuals was also assessed a civil penalty of $100,000 by BIS and received a 25 year denial order. 
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Our law clerk Andrew Azorsky contributed to this report.

Ming Zhang Complaint

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DDTC Issues Interim Final Rule Significantly Amending ITAR "Brokering" Provisions

Today DDTC published an interim final rule in the Federal Register that makes significant changes to the current definition of “brokering” and related brokering activities in the International Traffic in Arms Regulations ("ITAR").

These revisions to the ITAR's brokering provisions have been eagerly anticipated by the defense trade community since the DDTC’s December 19, 2011 proposed amendment to the brokering provisions were widely criticized. In formulating the revised brokering provisions published today, DDTC took into account many of the public comments, as well as the input of the Defense Trade Advisory Group (DTAG).

This interim final rule, which will become effective on October 25, 2013, dramatically revises the definition of a “broker” in section 129.2(a) of the ITAR. The new definition of a “broker” is as follows:

(a) Broker means any person (see Sec. 120.14 of this subchapter) described below who engages in the business of brokering activities:
(1) Any U.S. person (see Sec. 120.15 of this subchapter) wherever located;
(2) Any foreign person (see Sec. 120.16 of this subchapter) located in the United States; or (3) Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person. 

The revised definition of “brokering activities” in section 129.2(b) of the ITAR reads as follows: 

(b) Brokering activities means any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin.
(1) Such action includes, but is not limited to:
(i) Financing, insuring, transporting, or freight forwarding defense articles and defense services; or
(ii) Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service. 

These changes dramatically narrow the current ITAR definition, which provides that a “broker” is “ any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee, commission, or other consideration.”

It has been DDTC’s long-standing policy and practice to treat non-U.S. persons as a broker if the non-U.S. person acted as an agent in negotiating a contract for the delivery of U.S. defense articles or defense services, even if they had no other U.S. contacts and were not physically located in the U.S.

In this interim final rule, DDTC stated that it has: “clarified that foreign persons that are required to register as brokers are those that are in the United States and those foreign persons outside the United States that are owned/controlled by a U.S. person.”

DDTC also stated that it has “removed from the definition of ‘brokering activities’ the activities of any foreign person located outside the United States acting on behalf of a U.S. person.”

The interim final rule also addresses the types of activities that are not brokering activities, including an important issue that was raised in the December 19, 2011 proposed brokering rule regarding legal advice provided by attorneys. Specifically, the interim final rule makes clear that "activities by an attorney that do not extend beyond the provision of legal advice to clients'' is not a brokering activity and that "legal advice" includes the provision of export compliance advice by an attorney to a client.

As a result of this change, DDTC has estimated that “approximately 1,300 of the currently-registered brokers will not need to maintain registration following implementation of this rule, and that approximately 300 brokers will be eligible to consolidate into their manufacturer/exporter registration and no longer be required to pay a broker registration fee.”

This interim final rule will become effective on October 25, 2013 and DDTC will accept public comments on the interim final rule until October 10, 2013. While DDTC will eventually publish a final brokering rule, the basic concepts and definitions included in this interim final rule are not likely to change.

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OFAC Announces Rare "Finding of Violation" for Failing to File Blocked Property Reports

OFAC's Office of Enforcement last week issued a rare "Finding of Violation" to Visa International Service Association for failing to file blocked property reports in a timely manner. Visa International Service Association (VISA), a subsidiary of Visa, Inc., operates retail electronic payment networks worldwide.

In this case, OFAC found that in 2007 VISA failed to file two initial blocked property reports in connection with accounts in which Iran's Bank Melli had an interest within 10 business days from the date that the property was blocked, as required by section 501.603(b)(1) of OFAC's Reporting, Procedures and Penalties Regulations. OFAC also found that VISA failed to file its 2008 annual blocking report in connection with the blocked Bank Melli accounts. Both of these alleged violations were voluntarily disclosed by VISA to OFAC in 2009.

OFAC also found that VISA violated the blocked property reporting requirements when VISA failed to report to OFAC blocked funds from a transaction with Syria's Real Estate Bank. VISA advised OFAC that it failed to meet the reporting deadline since it was attempting to determine whether or not fees owed to the bank should be deducted from funds before filing its blocked property report. 

Under OFAC's Enforcement Guidelines, which are found in Appendix A to Part 501 of the Reporting, Procedures and Penalties Regulations, a Finding of Violation is one of several outcomes resulting from an OFAC enforcement case. OFAC's Enforcement Guidelines make clear that a Finding of Violation will be issued if:

OFAC determines that a violation has occurred and considers it important to document the occurrence of a violation and, based on an analysis of the General Factors . . . .  [in the] Guidelines, concludes that the Subject Person's conduct warrants an administrative response but that a civil monetary penalty is not the most appropriate response . . . . A Finding of Violation may also convey OFAC's concerns about the violation and/or the Subject Person's OFAC compliance policies, practices and/or procedures, and/or identify the need for further compliance steps to be taken.

In this case, OFAC found that a Finding of Violation, rather than a civil penalty, was appropriate in this case for several reasons, including: 

• A Finding of Violation is appropriate given that VISA is a large and commercially sophisticated financial institution whose failure to submit the initial and annual blocking reports to OFAC denied the U.S. government the benefit of accurate information in making its policy decisions, but did not result in an economic benefit being conferred to a sanctioned party. 
• VISA had not received an OFAC penalty notice or Finding of Violation from in the five years prior to the date of the failure to report the blocked property. 
• A Finding of Violation is likely to promote compliance with OFAC reporting obligations.

OFAC has issued Findings of Violation in very few cases. Unlike "Cautionary Letters", which can be issued when OFAC determines a civil penalty is not warranted, Findings of Violations can be made public.

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Our law clerk Andrew Azorsky contributed to this report.

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BIS to Hold Webinar on Impact of Export Control Reform on EAR License Exceptions on August 14, 2013

Instead of the weekly teleconference, on August 14, 2013 at 2:30 pm EDT, the Commerce Department's Bureau of Industry and Security (BIS) will hold a webinar on the changes to various license exceptions under the Export Administration Regulations (EAR) as a result of the current Export Control Reform initiative.

This webinar will discuss implementation of the various changes to the EAR's license exceptions, which will take effect on October 15, 2013, that will facilitate the realignment being made to the Commerce Control List and International Traffic in Arms Regulations.
 
The webinar will include a detailed overview of license exceptions that are available for "600 series" items and explain the steps needed to determine whether these licenses exceptions may be used for a particular export, reexport or transfer (in-country) of a "600 series" item.

The speakers include Hillary Hess, Director of BIS's Regulatory Policy Division and William Arvin, a Senior Export Policy Analyst at BIS's Regulatory Policy Division

There is a $35.00 charge for this webinar. For instructions on registration and how to join the webinar on the day of the broadcast click here.

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