U.S. Export Control Reform News and Upcoming Deadlines for Public Comments

Resumption of Weekly Wednesday Export Control Reform Update Conference Calls and Addition of Conference Call on Monday, December 19th

BIS Assistant Secretary Kevin Wolf will resume his weekly teleconferences on Wednesdays at 2:00 pm EST to answer questions about the Department of Commerce’s proposed rules regarding the Administration’s Export Control Reform (ECR) Initiative. These calls are intended to foster public understanding of ECR and to assist the public in submitting informed comments to the proposed regulations that are pending (see below). The dial-in number for the conference calls is 1-877-389-6079, Participant Code: 905168. Advance written questions are encouraged and should be sent to oesdseminar@bis.doc.gov with a subject line of “Teleconference questions.”

Because of the overwhelming response to last Wednesday's call, a number of people were not able to join the call. BIS has now added the ability to allow more participants to join the calls.

In addition, an additional call with Assistant Secretary Wolf has been scheduled for Monday, December 19 from 3:30 to 4:30 pm EST (using same number as above).

Deadline for Comments on Moving Aircraft and Related Items from USML Category VIIII to CCL is December 22, 2011

The Directorate of Defense Trade Controls' (DDTC) proposed rule issued on November 7, 2011 would amend the International Traffic in Arms Regulations (ITAR) to revise U.S. Munitions List (USML) Category VIII (aircraft and related parts) to describe more precisely the military aircraft and related defense articles warranting control on the USML and under the ITAR.

The BIS proposed rule also published on November 7, 2011 describes how aircraft and parts determined no longer to be subject to USML Category VIII would be controlled under the Commerce Control List (CCL) in new Export Control Classification Numbers (ECCNs) 9A610, 9B610, 9C610, 9D610, and 9E610. This proposed rule also would control military aircraft and related items now controlled under ECCNs 9A018, 9D018 and 9E018 under new ECCNs 9A610, 9D610 and 9E610. This proposed rule also addresses license exception STA availability for items controlled by the five new ECCNs that would be created.

Comments on these proposed rules are due on December 22, 2011 and should be submitted by email or via www.regulations.gov. See the text of each proposed rule for the applicable reference number (RIN).

Deadline for Comments on Proposed Changes to Export Administration Regulations is February 1, 2012

In addition to considering how to modify the CCL to control items moved from the USML, on August 5, 211, BIS issued a Notice of Inquiry in the Federal Register requesting public comments on how the EAR, Chemical Weapons Convention Regulations, Additional Protocol Regulations, and National Defense Industrial Base Regulations can be clarified or streamlined to be more effective or less burdensome. This is being done as part of President Obama's January 2011 Executive Order directing government agencies to review and improve regulations. BIS regulation review will focus on issues outside the context of Export Control Reform and extends to the entire EAR, including license exceptions and documentation requirements. Any changes from this review that do away with unnecessary complexity will reduce exporters' licensing and compliance burdens and go beyond the significant reductions expected from the Export Control Reform Initiative.

BIS is seeking comments on the following topics:

• Identifying unnecessary compliance burden caused by regulations that are unduly complex, outmoded, inconsistent, or overlapping;
• Specific comments on ways to improve the existing regulations or eliminating outmoded ones;
• Aspects of the regulations the public considers effective or well designed;
• Information on foreign countries’ implementation of export controls.

Comments can submitted until February 1, 2012 to BIS by email or via www.regulations.gov. The regulations.gov ID for this Notice of Inquiry is: BIS–2011–0027.

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BIS Publishes New Best Practices for Preventing Unlawful Diversion of Dual-Use Items Subject to the Export Administration Regulations

The U.S. Department of Commerce's Bureau of Industry and Security today published on its website a series of new "Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade."

These seven new best practices are being issued by BIS following last year's publication in the Federal Register of a notice of inquiry requesting public comments on a draft version of the first update to best practices on transit, transshipment and reexport of dual-use items since 2003.

In response to the notice of inquiry, BIS received written comments from industry and many additional comments through meetings with trade associations, exporters, freight forwarders, carriers, software vendors, advisory committees and other government agencies. As a result of this input, BIS substantially modified several of the proposed best practices in the final version, including combining two of the proposed best practices into one and adding a new best practice (No. 7) regarding the use of information technology.

In publishing these seven industry best practices BIS noted that, while this guidance  practices as it applies to items and transactions that are subject to the EAR, it has broader potential applications. BIS indicated that it envisions this guidance as a step toward a strengthened dialogue with all members of the export logistics supply chain industry, other agencies that administer export controls, and foreign governments in a manner that may make the guidance pertinent beyond its application to the EAR.

Best practice No. 4 is particularly noteworthy, and is likely to generate the most interest among exporters and freight forwarders, since it recommends that companies "avoid routed export transactions when exporting and facilitating the movement of dual-use items unless" there is a "long standing and trustworthy relationship" between the exporter, foreign buyer and the foreign buyer's freight forwarders. A "routed export transaction is defined in Census' Foreign Trade Regulations (15 CFR Part 30) is when a Foreign Principal Party in Interest (e.g., a non-U.S. buyer) authorizes a freight forwarder or other agent in the U.S. to facilitate export of items from the United States on its behalf and prepare and file the Electronic Export Information (EEI). Many exporters of controlled items, whether they are subject to the EAR or ITAR, already prohibit routed export transactions unless they are confident that the buyer of the goods will comply with any restrictions on the diversion or transfer of the exported products. On the other hand, many non-U.S. customers prefer to hire their own freight forwarder in the U.S., particularly when they want to consolidate shipments in the U.S. prior to being exported.

It is important to note that these best practices are recommendations only. While exporters and freight forwarders are recommended to implement these best practices, to the extent possible, there is no legal obligation to comply with these best practices, absent a legal requirement that is set forth elsewhere in the Export Administration Regulations (EAR). In addition, compliance with these best practices creates no defense to liability for the violation of export control laws. However, BIS has indicated that demonstrated compliance with these best practices by a company will be considered an "important mitigating factor in administrative prosecutions arising out of violations of provisions of the EAR that apply to transit, transshipment or reexport transactions."

While these best practices are issued by BIS and are intended for exports of dual-use items subject to the EAR, many of the same principles are applicable to exporters that export defense articles subject to the jurisdiction of the ITAR.

2011 Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade

The following reflect new best practices that guard against diversion risk, particularly through transshipment trade.

Best Practice No. 1 – Companies should pay heightened attention to the Red Flag Indicators on the BIS Website and communicate any red flags to all divisions, branches, etc., particularly when an exporter denies a buyer’s order or a freight forwarder declines to provide export services for dual-use items.

Best Practice No. 2 - Exporters/Re-exporters should seek to utilize only those Trade Facilitators/Freight Forwarders that administer sound export management and compliance programs which include best practices for transshipment.

Best Practice No. 3 - Companies should “Know” their foreign customers by obtaining detailed information on the bona fides (credentials) of their customer to measure the risk of diversion. Specifically, companies should obtain information about their customers that enables them to protect dual-use items from diversion, especially when the foreign customer is a broker, trading company or distribution center.

Best Practice No. 4 - Companies should avoid routed export transactions when exporting and facilitating the movement of dual-use items unless a long standing and trustworthy relationship has been built among the exporter, the foreign principal party in interest (FPPI), and the FPPI’s U.S. agent.

Best Practice No. 5 - When the Destination Control Statement (DCS) is required, the Exporter should provide the appropriate Export Control Classification Number (ECCN) and the final destination where the item(s) are intended to be used, for each export to the end-user and, where relevant, to the ultimate consignee. For exports that do not require the DCS, other classification information (EAR99) and the final destination should be communicated on bills of lading, air waybills, buyer/seller contracts and other commercial documentation. For re-exports of controlled and uncontrolled items, the same classification and destination specific information should be communicated on export documentation as well.

Best Practice No. 6 - An Exporter/Re-exporter should provide the ECCN or the EAR99 classification to freight forwarders, and should report in AES the ECCN or the EAR99 classifications for all export transactions, including “No License Required” designation certifying that no license is required.

Best Practice No. 7 - Companies should use information technology to the maximum extent feasible to augment "know your customer" and other due-diligence measures in combating the threats of diversion and increase confidence that shipments will reach authorized end-users for authorized end-uses.

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DDTC Publishes Final Rule Adding ITAR Exemption for Certain Transfers to Dual Nationals and Third-Country Nationals Employed by End-Users

Today the State Department's  Directorate of Defense Trade Controls (DDTC) published a final rule in the Federal Register modifying the policy on providing access to ITAR-controlled defense articles and technical data to dual national and third-country nationals that are employed by authorized end-users that are not otherwise eligible to receive controlled items or information under an existing ITAR exemption.

This final rule, which will not take effect until August 15, 2011, culminates a process that began when the proposed rule was published by DDTC on August 11, 2010 (75 Fed. Reg. 48,625) as part of the Obama Administration's export control reform process. Because of the impact of the proposed rule and the interest and sensitivity of this issue outside of the U.S. DDTC received 32 comments, including comments submitted by foreign governments, the American Bar Association, manufacturers and exporters of defense articles, and other interested trade associations. 

While the public comments submitted were unfortunately not been released to the public, DDTC noted that "the overwhelming majority of commenting parties expressed dissatisfaction with the current rule regarding dual and third-country nationals, citing conflicts with foreign human rights laws as well as the burden of compliance, and welcomed the Directorate of Defense Trade Controls' (DDTC) efforts to reform current practice."

It is important to note that this final rule does not completely address President Obama's goal announced in his speech to the Ex-Im Bank on March 10, 2010 where he pledged to harmonize the EAR and ITAR's conflicting standards on dual and third country nationals, to eliminate the double standard between how the United States treats its own dual nationals and what it demands of other countries; and resolve the inherent conflict between U.S. policy and other countries’ privacy, employment discrimination, and human rights laws.

What today's final rule does do is is to amend Parts 120, 124, and 126 of the ITAR to allow dual national and third-country nationals that are employees by approved end-users once specific procedures have been implemented. Specifically, the final rule adds a new exemption in section 126.18 that allows for intra-company, intra-organization, and intra-government transfers of unclassified defense articles and technical data to dual national and third-country nationals who are bona fide regular employees of the foreign consignee or end-user as long as the transferor has "effective procedures" to prevent diversion to destinations, entities, or for unauthorized purposes. With respect to the scope of effective procedures, section 126.18(c) provides that a security clearance approved by the host nation government for its employees or  a Non-Disclosure Agreement will be sufficient. However, the end-user or consignee must also screen its employees for substantive contacts with restricted or prohibited countries listed in Section 126.1 of the ITAR (which includes China, Venezuela, among others). While the "substantive contacts" screening process was widely criticized, DDTC responded by stating that "It is not DDTC's intent to deny access based solely upon relationships or contacts with family members in a context posing no risk of diversion." However, DDTC also stated that "contacts with government officials and agents of governments of Sec. 126.1(a) countries, be they family or not, would require higher scrutiny."

In response to overwhelming criticism, DDTC left in place the "special retransfer authorizations" in section 124.16 of the ITAR when a Technical Assistance Agreement or Manufacturing License Agreement is in place and the foreign nationals are citizens of NATO and certain other countries. However, DDTC amended section 124.16 section to include workers who have long term employment relationships with licensed end-users, in accordance with the new definition of "regular employee'" added in part 120.

To give readers of International Trade Law News an idea of the international reaction to today's final rule, below is an analysis of DDTC's final rule by two experienced export controls practitioners in the Toronto office of McCarthy Tétrault, a leading Canadian law firm.

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Guest Post: Final US ITAR Rule on Dual and Third Country Nationals Raises New Challenges for Canadian Business

Guest Post: Final US ITAR Rule on Dual and Third Country Nationals Raises New Challenges for Canadian Business

by: John W. Boscariol, Brenda C. Swick

Today, the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) published in the Federal Register the final rule containing its long-awaited amendments to the International Traffic in Arms Regulations (ITAR) governing the access of dual and third-country nationals to ITAR-controlled defence articles, including technical data. These, together with ongoing changes to Canada’s Controlled Goods Program (CGP) generally covering similar goods and technology, are anticipated to have a significant effect on Canadian companies in the aerospace, defence and satellite sectors, and in particular on their security, compliance and screening processes.

Up to now, Canadian firms have faced numerous difficulties with ITAR rules that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence goods and technology in Canada. In order to comply with these restrictions, Canadian companies have had to risk violating provincial and federal anti-discrimination laws, as well as exposure to human rights complaints, when denying employees access to projects involving ITAR-controlled items because of their nationality or country of birth. Companies in affected sectors have had to address, defend and settle costly, and in some cases very public, anti-discrimination claims arising from ITAR compliance.

DDTC officials have stated that the final rule is intended to move away from nationality-based screening and avoid the human rights conflicts that have plagued trade partners in Canada and other countries.

These proposed changes were first released on a preliminary basis for comment by DDTC in August of 2010. Our legal update discussing the preliminary rule can be found here. The final rule retains the essence of what was initially proposed, with some minor changes to the text and some other more significant revisions referred to below.

ITAR Defence Articles May Now be Transferred to 3rd Country or Dual National Employees

Under new ITAR section 126.18, DDTC approval will not be required for the transfer of defence articles, including technical data, to a foreign business entity, foreign government entity, or international organization that is an approved end-user or consignee for those items, "including the transfer to dual nationals or third-country nationals who are bona fide regular employees, directly employed by the foreign consignee or end-user." This exemption will apply provided the transfer takes place completely within the territories where the end-user is located or where the consignee operates, and must be within the scope of an approved export licence, other export authorization, or licence exemption.

Key Condition — Effective Procedures to Prevent Diversion

As a condition of transferring to foreign person employees under this provision, the recipient of the defence article is required to have in place "effective procedures to prevent diversion to destinations, entities, or for purposes other than those authorized by the applicable export licence or other authorization in order to comply with the US Arms Export Control Act and the ITAR."

In order to be considered to have such effective procedures, Canadian firms that are consignees or end-users of the defence articles must either (i) require a security clearance approved by the Canadian government for its employees or (ii) implement a screening process for their employees and execute Non-Disclosure Agreements that provide assurances that employees will not transfer any information to persons or entities unless specifically authorized by the employer.

Under the new rule, Canadian firms will be required to screen all employees who are to access controlled items for "substantive contacts" with the 25 restricted or prohibited countries under the ITAR— including China, Vietnam, Haiti, Venezuela and other countries subject to US military sanctions. The final rule has expanded upon what is meant by substantive contacts — these now include:

regular travel to those countries;
recent or continuing contact with agents, brokers and nationals of those countries;
continued demonstrated allegiance to those countries;
maintenance of business relationships with persons from those countries;
maintenance of a residence in those countries;
receiving salary or other continuing monetary compensation from those countries; or
acts otherwise indicating a risk of diversion.

The amendments provide that, although an employee’s nationality is not in and of itself a determinative factor prohibiting access to defence articles, if an employee is determined to have substantive contacts with persons from the ITAR-restricted or prohibited countries, this is presumed to raise a risk of diversion "unless DDTC determines otherwise".

Companies are also required to maintain a technology security/clearance plan that includes procedures for screening employees’ substantive contacts and maintaining records of the same for five years. The technology security/clearance plan and screening records are to be made available to DDTC or its agents for civil or criminal law enforcement upon request.

Other Significant Aspects of the New Rule

The final rule and DDTC’s accompanying commentary address a number of additional significant issues for Canadian companies:

Perhaps most significant from the Canadian perspective is that, despite requests from parties commenting on the proposed changes, DDTC did not agree to an explicit exemption for companies that comply with other countries’ domestic industrial security programs that provide for effective screening and other security measures for the protection of these controlled items. This means that Canadian companies that are registered and comply with Canada’s Controlled Goods Program (which applies to essentially the same items) must still review and revise existing security measures to ensure compliance with this new ITAR rule for all their employees that will access ITAR-controlled goods or technology.
A number of commenting parties had expressed concern that contract employees would not be subject to the new rule. Although DDTC resisted applying the rule to all contract employees, they agreed to narrowly extend it to workers who have a long-term employment relationships with licensed end-users. This is reflected in a new definition of "regular employee". In addition to an individual permanently and directly employed by the company, "regular employee" now also includes "an individual in a long term contractual relationship with the company where the individual works at the company’s facilities, works under the company’s direction and control, works full time and exclusively for the company, and executes nondisclosure certifications for the company, and where the staffing agency that as seconded the individual has no role in the work the individual performs (other than providing that individual for that work) and the staffing agency would not have access to any controlled technology (other than where specifically authorized by a license)".

Many Canadian companies currently benefit from ITAR section 124.16 special retransfer authorizations. They permit retransfers of defence articles and technical data to employees of foreign (including Canadian) entities who are nationals exclusively of NATO or EU countries or Australia, Japan, New Zealand or Switzerland. DDTC initially proposed to eliminate 124.16 with the implementation of the new rule. In its final rule, however, DDTC reconsidered its position and noted a major concern expressed by commenting parties was that the proposed dual national rule did not include transfer to approved sub-licencees (which are included under section 124.16). Under the new amendments, section 124.16 is now retained and its definition of "regular employee" has been amended to include workers who have long-term employment relationships with end-users as discussed above.
Academic institutions in Canada have encountered particular challenges with compliance issues arising in the context of ITAR-controlled goods and technology. Any uncertainty regarding the application of the new rule to Canadian universities was put to rest by DDTC when it noted in its commentary that it is not prepared to extend the exemption to academic institutions at this time.

Interaction with Canada’s Controlled Goods Programs

Despite DDTC’s refusal to allow an explicit exemption for CGP-registrants at this time, Canada is developing measures to accommodate these new ITAR requirements in an attempt to facilitate compliance for Canadian companies. Following a security threat and risk review, Canada’s Controlled Goods Directorate at Public Works and Government Services (CGD) recently implemented its Enhanced Security Strategy which includes the development of a risk matrix for identifying individuals at risk of unauthorized transfer of controlled goods.

New Questionnaire Developed for Canadian Companies

CGD has indicated that a screening questionnaire is being developed and will be provided to Canadian companies to assist them to identify risks during the security assessment of their employees under the CGP. Factors to be considered in such an assessment are not unlike those in the "substantive contact" analysis under the new ITAR rule and include the following:

contacts with government officials, agents or proxies;
business and/or family contacts;
continuing allegiance to a foreign country;
relationship with a foreign country government (e.g., employment);
frequent travel:
residence and/or bank accounts in a foreign country; and
affiliations within or outside Canada.

CGD has also indicated that the nature and substance of these contacts will be used to determine if an individual should be subject to broader security assessment or denied registration. Where the risk threshold is exceeded, CGD, working with a number of other government departments, will undertake a risk assessment of the individual to determine whether or not access should be granted.

Additional Measures Under the Enhanced Security Strategy

Also included in CGD’s Enhanced Security Strategy are measures to tighten security requirements for Canadian registrants under the CGP in a number of areas, including: students, interns and collectors; broader security assessments of foreign temporary workers and visitors; broader security assessments of transportation companies (together with Transport Canada); additional requirements for a company’s security plan, especially relating to cyber-security risks; more in-depth inspection processes; and the development of a list of debarred individuals and companies.

Next Steps

The new ITAR rule becomes effective August 15, 2011. This, along with Canada’s new CGP requirements, will require Canadian companies to implement enhanced security measures, including screening of all employees requiring access to controlled items. What this exactly entails will have to be determined on a case-by-case basis for each particular employer. It is expected that there will be challenges for Canadian companies undertaking these measures to ensure their procedures satisfy the diligence required by ITAR but at the same time do not expose them to risk of non-compliance with human rights and privacy laws in Canada.

It will be important for Canadian companies in the military, aerospace and satellite sectors that access controlled goods and technology to work closely with their US and Canadian counsel to ensure compliance with the applicable defence control regimes in both countries as well as the requirements for employment, privacy and human rights laws.

McCarthy Tétrault’s International Trade and Investment Law Group has extensive experience in dealing with defence trade control measures and is available to advise on related enforcement, compliance and strategic planning issues.

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Engineer Sentenced to 32 Years in Prison for Export Control and Other Violations Involving Sale of Stealth Technology to China

An engineer who had once worked on the B-2 stealth bomber program was sentenced today by a federal judge in Hawaii to 32 years in prison after being convicted of violating the Arms Export Control Act; communication, delivery and transmission of national defense information; conspiracy; money laundering; and filing a false tax return.

Noshir Gowadia, who was arrested in October 2005, was convicted by a jury in August 2010 on 14 of the 17 counts brought against him.

Among other things, Gowadia was charged with performing defense services for China by agreeing to design, and later designing, a low observable cruise missile exhaust system nozzle capable of rendering the missile less susceptible to detection and interception. Gowadia allegedly faxed a foreign official a proposal to develop infrared suppression technology for a foreign military aircraft and containing top secret level information concerning a U.S. defense system. He was also accused of submitting various proposals to persons in third countries to develop classified infrared suppression technology for foreign commercial aircraft. He allegedly used the funds received for selling the technical data to pay for a house in Maui, Hawaii.


Gowadia served as a visiting professor at Purdue University and worked as a consultant for a number of other universities.

Update: Justice Department's press release announcing Gowadia's sentencing can be found here.

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When Truth is Stranger Than Fiction: California Man Pleads Guilty After Attempting to Export Fighter Jet and Defense Articles to Iran, Hungary and Russia

In a case that reads a work of fiction, a California man last week pleaded guilty in federal court in Delaware to one count of violating the International Emergency Economic Powers Act and one count of violating the Arms Export Control Act in connection with the export and attempted export of defense articles to Iran, Hungary and Russia, including the attempted export of a F-5 fighter jet. 

Mark Knapp was accused of engaged in a seven-month course of conduct involved the illegal export and attempted export of the following United States defense articles:

• 1 F-5B Tiger II fighter jet;
• 5 CSU-13 Anti-Gravity Flight Suits, which are worn by pilots to counteract the forces of gravity and acceleration;
• 1 F-14 NATOPS emergency procedures manual, which is designed for use by pilots during in-flight emergencies in F-14 Tomcat (Iran received , F-5 and F-4B fighter jets;
• 3 electronic versions of the NATOPS emergency procedures manual;
• 4 AN/PRC-149 Survival radios, which are hand-held search and rescue radios used primarily by U.S. Navy pilots as an emergency locator beacon; and
• 2 F-14 Ejection Seats.

The following is the U.S. Government's summary of the scope Knapp's activities that led to his arrest:

A cooperating defendant introduced Knapp to an undercover HSI special agent (“UC”). Between December 2009 and July 2010, the UC met with Knapp on several occasions, at locations in California, Pennsylvania, Delaware, and Budapest, Hungary. During the meetings, Knapp informed the UC that he had various defense items for sale. He also admitted to procuring an F-14 (GRU-7A) Ejection Seat, which was sold to the UC by the cooperating defendant. Over the course of their interaction, Knapp provided the UC with various lists containing items for sale, and he sent photographs and descriptions to the UC via email.

On two occasions, Knapp exported items outside the United States. On February 22, 2010, Knapp exported two (2) CSU-13Anti-Gravity flight suits and a NATOPS emergency procedures manual to an address in Hungary; and on May 13, 2010, Knapp exported an additional three CSU- 13 Anti-Gravity flight suits to an address in Hungary. On a third occasion, Knapp sold the UC an F-14 (GRU-7A) ejection seat. On March 17, 2010, Knapp delivered the seat to a shipping company located in California. Knapp identified the item to the shipping company as a “museum display chair,” and he provided the shipping company with a consignee’s address in Denmark from which it was to be transshipped to Iran. After Knapp left the shipping company, HSI agents seized the ejection seat prior to its export outside the United States.

Knapp first broached the idea of obtaining an F-5 fighter jet from a source in California to sell to the UC in January 2010. Knapp told the UC that the “Iranians” might be interested in various items, including the F-5 fighter jet, and stated that he was not concerned whether the jet or the other items ended up in Iran. Knapp stated on January 4, 2010: “We’re essentially ... for lack of a better term, ... leveling the playing field....”

Knapp also asked the UC whether he had customers in China or Russia who would be interested in pilot emergency radios for use in locating downed pilots. Knapp explained that the customers would be able to “just listen in” to locate the downed pilot, and would therefore be interested in reverse-engineering the radios.

During a January 13, 2010 meeting in California, Knapp took the UC to an airport to inspect the aircraft. Over the course of the next several months, the UC and Knapp had multiple conversations regarding transporting the aircraft from California to a freight forwarder in Delaware; determining appropriate transshipment points to Iran; and devising a payment scheme. They also arranged to meet in Budapest, Hungary, to discuss the purchase.

On April 29-30, 2010, the UC and another undercover law enforcement officer posing as an Iranian intermediary, met with Knapp in Budapest. During the meetings, Knapp explained that he would have a contact fly the F-5 from California to the East Coast, where it would subsequently be crated and shipped to Hungary for transshipment to Iran. Knapp said that the F-5 would be flown cross country using “uncontrolled” airports. Knapp also displayed additional photographs of the F-5 on his laptop computer. Knapp also discussed making payment for the F-4 into a “trust” and setting up documents to make the payment look like a “gift” or a “loan”. Knapp also stated: “...[A]s more and more time goes on, I’m starting to hate the U.S. more and more....”

On July 9, 2010, Knapp sent a contract for the F-5 fighter jet to the UC via the United States mail. The body of the contract (entitled “Contract for acquisition and transport of F-5B from CA to DE”) set forth in detail the purchase price and terms for the sale of the aircraft. The contract further set forth the timing (approximately four weeks) for flying the F-5 to Delaware after the UC transferred $3.25 million into a bank account specified by Knapp. In addition, the contract provided terms for insurance, registration, and operational costs of flying the aircraft from California to Delaware. Knapp further noted that his requested commission would be $500,000, “with 50% paid on the date of arrival and landing of the aircraft at the DE (New Castle) or other agreed on airport, and 50% paid at the time of arrival at destination.”

On July 20, 2010, Knapp met with the UC at a location in Wilmington, Delaware. Knapp brought to the meeting various defense items, including the four AN/PRC-149 handheld search and rescue radios, which the UC agreed to purchase for $11,000.00. The UC told Knapp the customer was Russian, to which Knapp replied: “Awesome.” Knapp amplified: “Whoever your customer is, I’m happy with.”

Knapp stated that he was going to open an offshore bank account for the proceeds of the F-5 sale. Knapp and the UC discussed the logistics of flying the F-5 fighter jet from California to Delaware, and preparing the jet for transshipment to Iran. UC told Knapp that the Iranians expected Knapp to make a personal guarantee that the aircraft would arrive in Iran and that it would be operational. Knapp explained that the Iranians would know that it was in working order based upon his transport of the plane from California to Delaware. He further stated that what the Iranians had already seen in photographs was what they would get. According to Knapp, the only thing he would not be able to test was the weapons systems. The UC asked whether he could tell the Iranians that Marc Knapp personally guaranteed the aircraft, to which Knapp replied that he could. The parties then signed the contract.

Knapp was provided with a power of attorney form for use in exporting the F-5. He stated that he would use a false name and said that he would describe the item to be shipped as a “Museum Display Shell.”

Following the meeting, HSI and DCIS agents placed defendant under arrest.

Knapp faces a maximum prison sentence of 20 years in prison and a $2 million fine when he is sentenced later this year.

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Texan Pleads Guilty to Exporting ITAR-Controlled Weapons Sights to Russia

A Latvian born woman currently living in Texas pleaded guilty in federal court in Brooklyn, New York last Friday to one count of violating the Arms Export Control Act after attempting to export ITAR-controlled weapons sights to Russia without the required export licenses from the State Department's Directorate of Defense Trade Controls.

Ann Fermanova was arrested in July 2010 at JFK airport while returning to the U.S. from an overseas trip. She had been detained by U.S. Customs and Border Protection (CBP) several months earlier prior to boarding a flight to Moscow after it was determined that her luggage contained three night vision riflescopes worth $15,000, including a Raptor 4X Night Vision Weapons Sight. Riflescopes manufactured to military specifications are covered by USML Category I(f) and riflesights with night vision capabilities are included in USML category XII(c).

The weapons sights were confiscated by CBP, but she was allowed to continue her trip to Russia. When returning to the US several months later Fermanova was apprehended by FBI agents at JFK airport and charged with having "knowingly and intentionally" attempted to export "from the U.S. to Russia defense articles on the United States Munitions list".

Various reports indicated that Fermanova claimed that the weapons sights were either a gift to her father or were intended for sale by her husband in Russia to hunters, although she allegedly removed identifying information from the sights and blacked out the serial numbers.

Fermanova faces a maximum prison term of 10 years and a $1 million fine when she is sentenced in April 2011, although the sentencing guidelines provide for a reduced sentence.

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News and Update on Export Controls Certification Requirement in New U.S. Immigration Form I-129

The following guest post, by Brian Graham, an experienced immigration attorney with the law firm of Strasburger & Price LLP in Austin, Texas, discusses the new export control certification requirements contained in the U.S. Citizenship and Immigration Services' (USCIS) new I-129 form that must be used starting tomorrow.

Note that because of concerns and other inquiries raised by immigration attorneys and the business community about this new export certification requirement, USCIS announced today that petitioners will not be required to complete the export control certification contained in the form until February 20, 2011.

IMMIGRATION FORM I-129 UPDATED TO REFERENCE EXPORT CONTROLS

Effective December 23, 2010, a new I-129 Petition for Nonimmigrant Worker form will be required by all employers filing visa petitions with U.S. Citizenship and Immigration Services (USCIS) for foreign workers in the H-1B, H-1B1, L-1 and O-1A categories. These visa categories cover professionals and workers in specialty occupations, intra-company transfers of company executives and people with "extraordinary ability".

Among the key revisions to the I-129 form is a new Part 6 requiring a certification regarding the release of controlled technology or technical data to foreign person in the U.S., which is commonly referred to as the "deemed export" rule. Under the Department of Commerce's Export Administration Regulations (EAR), an export of technology or source code (except encryption source code) is "deemed" to take place when it is released to a foreign national within the United States. A similar concept is contained in the International Traffic in Arms Regulations (ITAR) with respect to ITAR-controlled technical data.

Part 6 of the new I-129 form requires the petitioning employer to attest that it has reviewed the EAR and ITAR and has determined that either: (1) A license is not required from either U.S. Department of Commerce or the U.S. Department of State to release such technology or technical data to the foreign person; or, (2) a license is required from either the U.S. Department of Commerce's Bureau of Industry and Security (BIS) or the U.S. Department of State's Directorate of Defense Trade Controls (DDTC) to release such technology or technical data to the beneficiary and the petitioner will prevent access to the controlled technology or technical data by the beneficiary until and unless the petitioner has received the required license or other authorization to release it to the beneficiary.

Although the EAR and ITAR's export licensing requirements for controlled technical data are certainly not new, the inclusion of this certification requirement in the new I-129 form marks the first time USCIS has made these questions a part of the mainstream immigration process. It is widely believed that the employer's responses to Part 6 of the new I-129 form will be used for data collection and enforcement purposes. The new questions are not expected to change the process of obtaining an employment visa at U.S. consulates abroad, since the consular posts retain independent jurisdiction to investigate whether issuing a visa might trigger a deemed export violation.

Since the export certification is signed by the employer under penalty of perjury, it is imperative that employers filing I-129 petitions for H-1B, H-1B1, L-1, or O-1A workers undertake the review with the assistance of attorneys, consultants or in-house staff who have experience with the EAR and ITAR in order to determine whether an export license is required and, if so, to take the necessary precautions to avoid violating either the ITAR or the EAR prior to receipt of the license.

Editors Note: The "deemed export" rule appears in section 734.2(b)(2)(ii) of the Export Administration Regulations (EAR) and provides that:

"any release of technology or source code subject to the EAR to a foreign national . . . is deemed to be an export to the home country or countries of the foreign national. This deemed export rule does not apply to persons lawfully admitted for permanent residence in the United States and does not apply to persons who are protected individuals under the Immigration and Naturalization Act (8 U.S.C. 1324b(a)(3)). Note that the release of any item to any party with knowledge a violation is about to occur is prohibited by 736.2(b)(10) of the EAR."

A similar concept is contained in section 120.17(4) of the ITAR, which states that an export includes "disclosing (including oral or visual disclosure) or transferring technical data to a foreign person, whether in the United States or abroad." As a result, an export license or other authorization is required to be obtained from DDTC in order to permit the disclosure of ITAR controlled technical data to foreign persons in the U.S.

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U.S. Export Controls/Sanctions Programs to be Held in Frankfurt, Germany on January 17-18, 2011

The AWA Foreign Trade Academy is holding two one-day programs on U.S. export controls and sanctions on January 17 and 18, in Frankfurt, Germany.

The first day of the program will focus on what European companies need to know about ITAR and U.S. defense trade controls.

The second day of the program will feature information on U.S. dual-use export/reexport controls and economic sanctions programs and their impact on European companies, including information on recent export controls and sanctions developments from BIS and OFAC.

Further information on these programs, including the agenda for each day, speaker bios and registration information, can be found below.
AWA ITAR-Export Controls Programs

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U.K. Issues Notice to Exporters on Implementation of US-UK Defense Trade Treaty

As a follow-up to our previous post on the U.S. Senate's ratification of the U.S.-United Kingdom and U.S.-Australia Defense Trade Cooperation Treaties, the U.K.'s Export Control Organisation issued the following notice to U.K. exporters reminding them that ". . . the ratification of the Treaty by Congress has no immediate impact on controls of exports from the UK to the US. If you needed an export licence before, you still need one now."

In addition, the notice indicates that the "UK will . . . proceed to implement the Treaty over the course of the coming year."

UK Export Control Organisation Notice re US-UK Defence Trade Cooperation Treaty

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Better Late Than Never: U.S. Senate Approves U.S.-U.K. and U.S.-Australia Defense Trade Treaties

More than three years after they were signed, yesterday the U.S. Senate ratified the U.S.-United Kingdom and U.S.-Australia Defense Trade Cooperation Treaties. While the Treaty Clause of the U.S. Constitution require two-thirds vote of Senators present to concur, both treaties were approved by an unrecorded division vote.

The two treaties allow for the export or transfer of certain defense articles and defense services controlled pursuant to the International Traffic in Arms Regulations (ITAR) between certain persons in the U.S. and the United Kingdom or between certain persons in the United States and Australia without the need for export licenses or other ITAR authorizations to be issued by the State Department's Directorate of Defense Trade Controls (DDTC).

Specifically, the treaties create Approved Communities of government and private sector entities that may receive defense articles and defense services under the treaties. To qualify for membership in these communities, private entities must meet specific requirements, which for U.K. and Australian private entities includes approved for inclusion by the USG and their respective governments.

Under the treaties, it will be possible for most U.S. defense articles to be exported into, and within, these communities without licenses or other authorizations pursuant to the ITAR as long as the exports are in support of:

• Certain combined military and counter-terrorism operations;
• Certain cooperative security and defense research, development, production, and support programs;
• Certain Mutually agreed security and defense projects where the end-user is the Government of the United Kingdom or the Government of Australia; or
• Certain U.S. Government end-uses.

The United States and the U.K., and the U.S. and Australia must jointly agree on which projects, programs and operations qualify for processing under the terms of the treaties. U.K. and Australian retransfer or re-exports of items originally exported pursuant to either treaty to a person outside the respective Approved Communities will require U.S. Government approval and U.K. or Australian authorization as appropriate.

The full text of the treaties, along with the implementing arrangements, list of exempted defense articles and definitions, can be found here.

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State Department Imposes $42 Million in Civil Penalties on Xe Services for Numerous ITAR Violations

The U.S. Department of State announced today that on August 18, 2010, Xe Services LLC (formerly Blackwater Worldwide) entered into a civil penalty agreement with the State Department's Directorate of Defense Trade Controls (DDTC) to settle numerous alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).
The 41 page Proposed Charging Letter issued by DDTC indicates that Xe allegedly committed 288 violations of the ITAR involving the unauthorized export of defense articles and provision of defense services to foreign end-users in multiple countries between 2003 and 2009.

While the charging letter noted that Xe had taken efforts to implement compliance measures and to cooperate with DDTC during the "latter part of the investigation", the Proposed Charging Letter stated:

At the same time, the Department considered aggravating factors in determining what charges to pursue, including that Respondent's historic inability to comply with ITAR controls were system failings; the frequency and nature of Respondent's violations; that Respondent did not fully cooperate with the Department during the initial 18 months of this multi-year investigation; Respondent failed to comply with record-keeping requirements, further impeding the investigation; many of the violations by Respondent were disclosed only after the Department issued a directed disclosure; several of the Respondent's statements were false and some disclosures contained misrepresentations or omissions of material fact that had to be revised as prior reports were determined to be inaccurate or incomplete; and implications for national security.

The State Department noted that many of the alleged ITAR violations occurred while Xe was providing services in support of U.S. Government programs and military operations abroad between 2003 and 2009 and they did not involve sensitive technologies or cause a known harm to national security.
Under the four-year term Consent Agreement, Xe will pay in fines and in remedial compliance measures an aggregate civil penalty of $42 million to complete settlement of civil violations. $12 million of this amount will be suspended for pre-and post-Consent Agreement remedial compliance measures.

In announcing the settlement agreement, the State Department stated that it will not impose an administrative debarment of Xe in this case. The State Department is also rescinding the general policy of denial on export license applications with respect to Xe because the Department is satisfied that the company has taken the necessary steps to address the causes of its ITAR violations, identify compliance problems, and resolve these violations.

The remedial measures included:

• Replacement of senior management; 
• Established an independent Export Compliance Committee to oversee its remedial compliance efforts;
• Improved ITAR compliance procedures; 
• Conducted various ITAR training; and 
• Conducted a targeted ITAR audit to confirm the effectiveness of its compliance measures. 

DDTC stated that:

. . . had the Department not taken into consideration Respondent's Voluntary Disclosures, remedial compliance measures, cooperation in the latter part of the investigation, change in management, support of U.S. Government programs, and the absence of disclosure of sensitive technologies or actual harm to national security as significant mitigating factors, the proposed charges against and penalties imposed upon Respondent would likely have been more significant. 

The Consent Agreement also provides that Xe will take a number of additional compliance steps, including external compliance oversight and to continue and improve compliance measures.

The Proposed Charging Letter, Consent Agreement and Order can be found here.

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State Department's Proposed Policy Change on Foreign National Employees May Not Resolve All Concerns

The State Department's Directorate of Defense Trade Controls (DDTC) published a proposed rule in the August 11, 2010 Federal Register that would amend the International Traffic in Arms Regulations (ITAR) to modify U.S. policy regarding end-user employment of dual national and third country nationals. This policy change, which is billed as part of the President's export control efforts, if implemented would eliminate the need for end-users of defense article or controlled technical data located outside of the U.S. to obtain an export license (DSP-5) from DDTC prior to the transfer of defense articles within a foreign business entity or organization or providing access to that information to company employees with the approved destination country.

However, this license free treatment comes with several additional requirements, including employee screening for "substantive contacts" with restricted or prohibited countries listed in section 126.1 of the ITAR (such as China, Venezuela and other countries subject to U.S. sanctions), non-disclosure agreements and technology security/clearance plans.

While this policy change is intended to minimize the human rights concerns that have arisen in several countries, this proposed policy change may not be enough to overcome all of these concerns. Of particular concern will be how to screen employees "for substantive contacts with restricted or prohibited countries" without violating local law.

A summary of these issues from the Canadian perspective is provided below. This article was written by Toronto-based attorney John Boscarial, who serves as the head of McCarthy Tétrault's International Trade and Investment Law Group, and is reprinted by permission.

Proposed US Defence Control Changes Aim to Resolve Conflicts with Canadian Human Rights Law

          By John Boscariol, McCarthy Tétrault

Canadian companies dealing in aerospace and military goods and technology have long struggled with requirements under the US International Traffic in Arms Regulations (ITARs) that prohibit employees of certain nationalities or born in certain proscribed countries from accessing US-controlled defence services and technology in Canada. In order to comply with these restrictions, Canadian companies have had to risk violating provincial and federal anti-discrimination laws, as well as exposure to human rights complaints, when denying employees access to projects involving US-controlled defence items because of their nationality or country of birth.

There may now be some light at the end of the tunnel for companies subject to these conflicts between Canadian and US law. Today, the US State Department released its proposal to amend the ITARs to address the conflicts with human rights policies in Canada and other countries and the administrative burden associated with compliance with these restrictions — see Amendment to the International Traffic in Arms Regulations: Dual Nationals and Third-Country Nationals Employed by End-Users. Comments on the proposed amendments may be submitted until September 10, 2010.

The proposal provides that no approval from the US State Department Directorate of Defense Trade Controls (DDTC) will be required for the transfer of defence articles within a foreign business entity that is an approved end-user or consignee for those items, “including the transfer to dual nationals or third-country nationals who are bona fide, regular employees, directly employed by the foreign business entity.” Further, the transfer must take place completely within the territories where the end-user is located or where the consignee operates, and must be within the scope of an approved export licence, other export authorization, or licence exemption.

There are significant conditions, however, that Canadian companies will have to satisfy in order to take advantage of this exemption. They include:

1. obtaining security clearances for their employees from the Canadian government or having a process in place to screen employees and execute Non-Disclosure Agreements ensuring that the employee will not transfer any information to unauthorized parties; and
2. screening employees for substantive contacts with the prohibited or restricted countries, and establishing and maintaining a technology security/clearance plan for such screening and related record-keeping (such plan to be available to the DDTC upon request).

The proposed amendments set out those considered to be “substantive contacts” with the restricted countries, and include recent or regular travel, recent or regular contact with agents or nationals of such countries, continued allegiance to such countries, or acts otherwise indicating a risk of diversion. An employee with substantive contacts with persons from restricted countries “shall be presumed to raise a risk of diversion, unless DDTC determines otherwise.”

Canadian companies dealing with aerospace and defence products, technology or services should review these proposals carefully to assess their potential impact on current and future operations. In particular, the amendments appear to impose on Canadian companies a significant due diligence burden with regard to the gathering of information on employee activities outside of the workplace.

Even if these amendments are finalized, Canadian aerospace and defence companies will continue to face challenges in ensuring they are compliant with a patchwork of applicable US and Canadian law in this area, including the ITARs, Canadian privacy and human rights law, as well as Canadian defence controls under Canada's Defence Production Act and Export and Import Permits Act.

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Overview and Summary of DDTC Consent Agreement with AAR International Involving Presidential Airways

By John Priecko*

Below is a detailed summary of the the State Department's Directorate of Defense Trade Controls (DDTC) July 2010 Consent Agreement with AAR International, Inc (AAR).  This is a unique successor liability case in several respects. Unlike some previous cases involving alleged violations of the Arms Export Control Act and the International Traffic in Arms Regulations (ITAR) DDTC did not impose any monetary penalty on AAR, the successor in interest to Presidential Airways.

In addition, DDTC did not mention in the Proposed Charging Letter, Consent Agreement or Order that AAR acquired Presidential from Xe Services LLC (formerly Blackwater Worldwide). That omission raises a number of interesting questions and expectations regarding a related settlement involving Xe Services and/or Blackwater for these alleged violations.

Thoroughly reading settlements and monitoring various U.S. Government enforcement and compliance resources on an ongoing basis should be a integral part of any trade compliance professional’s reading and an essential element in any comprehensive Trade Compliance Program. One-page summaries like these will help get the word out and more quickly and allow readers to digest and compare individual cases.

*Mr. Priecko is the President of Trade Compliance Solutions, a network of experienced compliance-related professionals. He is a trade compliance veteran with more than 15 years of experience. He can be reached at 703-895-1110 or jpriecko@comcast.net.

AAR 071510 Settlement Summary 081210

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DDTC Publishes Final Rule Requiring CJs to be Submitted Electronically Using DS-4076 Form

The State Department's Directorate of Defense Trade Controls (DDTC) published a final rule in today's Federal Register amending the International Traffic in Arms Regulation (ITAR) that will require commodity jurisdiction (CJ) determinations to be submitted electronically using the DS-4076 CJ Determination Request Form that was introduced by DDTC last year.

The regulation specifies that paper CJs may be submitted for 29 days after the effective date, which means that  September 2, 2010 will be the last day to submit CJs the old fashioned way. Starting on September 3, however, CJs will have to be submitted electronically via DTrade2, DDTC's defense export electronic licensing system.

DDTC has yet to make any changes to the DS-4076 CJ form to incorporate the suggestions submitted by industry during the public comment period.

Determining the proper government agency that has jurisdiction over products, technology or software to be exported is an important first step in the U.S. export controls system.

The purpose of submitting a CJ to DDTC is to obtain a determination whether a product, technical data or service is covered by the U.S. Munitions List (USML) and is subject to the ITAR's export licensing requirements or not.
 A commodity classification (commonly known as a CCATS) can be obtained from the Commerce Department's Bureau of Industry and Security (BIS) to determine the proper Export Control Classification Number (ECCN) if the CJ determination states that the article is subject to the Commerce Department's jurisdiction. 

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Interim Final Rule Intended to Clarify Purpose of BIS Commodity Classifications and Advisory Opinions Has Been Misinterpreted

The Bureau of Industry and Security published an interim final rule in today's Federal Register intended to clarify the purpose of the commodity classifications (commonly known as CCATS) and advisory opinions that it issues. Unfortunately, the purpose of this interim rule, which was to help educate exporters with export compliance, has been widely misinterpreted.

The interim final rule amends sections 734.3 and  748.3 of the Export Administration Regulations (EAR) by adding language noting that: 

• Commodity classifications and advisory opinions may not be relied upon as determinations that the items in question are "subject to the EAR" as described in section 748.3 of the EAR.
• Those who request commodity classifications and advisory opinions should have determined that the items at issue are not subject to the exclusive export control jurisdiction of one of the other U.S. Government export control agencies, such as the Directorate of Defense Trade Controls, OFAC, and Nuclear Regulatory Commission.
• Advisory opinions are limited to BIS's interpretation of EAR provisions and may not be relied upon or cited as evidence that the items in question are not subject to the to the export control jurisdiction of another U.S. Government agency.

The interim final rule also indicates that BIS will begin inserting the following reminder language on all future commodity classifications (CCATS):

This commodity classification sets forth the classification of the above-listed items if they are subject to the EAR. This commodity classification is not a determination by BIS as to whether the above-listed items are ‘‘subject to the EAR.’’ As defined and  described in sections 734.2 through 734.4 of the EAR, the term ‘‘subject to the EAR’’ means, among other things, that the item(s) are not exclusively controlled for export or reexport by another agency of the U.S.
Government. See 15 CFR 734.3(b)(1). Thus, this document is not, and may not be relied upon as, a U.S. Government determination that the above-listed items are not, for example, subject to the export control jurisdiction of the International Traffic in Arms Regulations (ITAR) (22 CFR Parts 120– 130), which are administered by the U.S. Department of State.

BIS's interim final rule was intended to remind exporters that the purpose of a commodity classifications, which is to provide the Export Control Classification Number (ECCN) of products, technology or software as described on the Commerce Control List (CCL), is only one part of the export analysis. Prior to seeking a commodity classification from BIS, an exporter should first determine the proper government agency that has jurisdiction over their item, technology or software. For example, products that are included on the U.S. Munitions List or are considered to be "defense articles" under the International Traffic in Arms Regulations (ITAR) are subject to the export licensing jurisdiction of the State Department's Directorate of Defense Trade Controls (DDTC).

Under the current U.S. export control regime, DDTC is the only agency that can issue commodity jurisdictions, commonly known as CJs, to advise an exporter whether an item or service is subject to the ITAR or not. Because of the intended purpose of CJs and commodity classifications, the information submitted to BIS to obtain a commodity classification (product specifications, etc.) is very different than the information submitted to DDTC to obtain a CJ (design intent, application, military versus commercial sales, etc.).

The modifications made to the EAR, as well as the new language included on commodity classifications, is also intended to eliminate, to the extent possible, those cases where a person or company exporting a defense article can avoid criminal prosecution under the Arms Export Control Act by claiming that they had obtained a CCATS from BIS for an item when the item was actually subject to the jurisdiction of the ITAR.

The interim final rule also sought to educate those in law enforcement who prosecute export control violations by helping to distinguish commodity classifications from commodity jurisdictions.

Despite the clear purpose of this rule, there have been headlines in various publications indicating that this interim final rule is confusing as it seems to indicate that BIS will not accept responsibility for its decisions, that such classification are not dependable or that exporters can not rely on commodity classifications or advisory opinions issued by BIS.

These interpretations are incorrect. BIS classifications and advisory opinions can certainly be relied upon for issues relating to the EAR. However, under the current export control regime, which provides that different agencies have jurisdiction over dual-use and defense articles, exporters must be certain that their item is "subject to the EAR" before relying on a commodity classification or advisory opinion issued by BIS. While this confusion may be eventually eliminated by the creation of a single export control list and single licensing agency, the clarification in this interim final rule is useful and is long overdue.

October 1, 2010 is the deadline for submission of public comments to BIS on the interim final rule.

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New Charges Filed by U.S. Grand Jury Against Irish Trading Company and its Executives for Exporting Military Aircraft Parts to Iran

The Justice Department announced today that a federal grand jury in Washington, D.C., has charged Mac Aviation Group, a Sligo, Ireland-based trading company, and two of its officers in a 27-count superseding indictment with purchasing F-5 fighter aircraft parts, helicopter engines and other aircraft components from U.S. firms illegally exporting them to Iran via companies in Malaysia and the United Arab Emirates.

Among the alleged recipients of the aircraft parts was a company was designated by the U.S. for being owned or controlled by entities involved in Iran’s nuclear and ballistic missile program.

The defendants, Thomas and Sean McGuinn, were originally charged in July 2008 in a sealed 25-count indictment with two counts of conspiracy, 19 counts of violating the International Emergency Economic Powers Act (IEEPA) and Iranian Transactions Regulations, four counts of false statements and forfeiture allegations.

According to the original indictment, beginning in 2005 and continuing through 2008, the defendants solicited purchase orders from customers in Iran for U.S.-origin aircraft engines and parts and then sent requests for aircraft components to U.S. companies. These parts included helicopter engines, aircraft bolts and vanes, and canopy panels for the F-5 fighter aircraft. The defendants wired money to banks in the U.S. as payment for these parts and concealed from U.S. sellers the ultimate end-use and end-users of the purchased parts. The defendants caused these parts to be exported from the United States to Iran via third countries, including Malaysia.
The superseding indictment alleges that from 2005 and continuing until 2006, the defendants caused canopy panels designed for the F-5 fighter aircraft to be exported from the United States to Iran in violation of the Arms Export Control Act (AECA). The defendants allegedly stated that the end user for the F-5 panels was Nigeria. Instead, the panels were sold by the defendants to a company in Tehran, Iran. The purchase was allegedly arranged through the Iran Aircraft Manufacturing Industrial Company (HESA), which was added to OFAC's SDN List in September 2008 for providing support to the Iranian Revolutionary Guard Corps.

The defendants were previously charged with purchasing 17 helicopter engines from Rolls Royce Corporation in Indiana for $4.27 million dollars on behalf of an Iranian trading company, some of which were ultimately sent to HESA, and also causing U.S.-origin airplane vanes and bolts to be exported from the United States to Iran.

If convicted, the defendants face a maximum sentence of 10-20 years in prison for each of the IEEPA counts, 10 years in prison for the AECA charge, 5-20 years in prison for each of the conspiracy counts, and five years in prison for each of the false statement counts.

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International Trade News and Notes for June 30, 2010

• Iran Sanctions - At 6:15 pm EDT tomorrow, July 1st, President Obama will sign into law H.R. 2194, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. 

• Export Control Reform - In a speech today before the Senate Aerospace Caucus General James L. Jones announced, that as part of the export reform process, the Obama Administration intends to propose a new, single and independent agency that will merge export licensing activities at the State and Commerce departments under a board of directors reporting to the president. Under the proposal, the new agency’s board of directors would be consist of the secretaries of the departments of Defense, State, Commerce, Treasury and Homeland Security. However, the online DoD Buzz published a story this afternoon noting Congressional opposition to the idea of a single licensing agency. Nobody said that export control reform would be easy.

• Antidumping - The AP published an interesting story on the use of "honey-laundering" to evade antidumping duties on U.S. imports of Chinese honey. 

• The Bureau of Industry and Industry and Security published in today's Federal Register a proposed rule to amend the Export Administration Regulations by adding Export Control Classification Number (ECCN) 6A981 to the Commerce Control List to control passive infrasound sensors because of their military and commercial utility. If finalized, items under this new ECCN would be controlled for Regional Stability (RS) and Anti-Terrorism (AT) reasons. BIS also proposes to control technology and software for the development, production, or use of these items for RS and AT reasons under revised ECCNs 6D991 and 6E991. Comments on this proposed rule must be submitted by August 30, 2010.

• The Directorate of Defense Trade Controls has posted the agenda for the July 7, 2010 Defense Trade Advisory Group (DTAG) meeting. 

• This afternoon the House Committee on Agriculture will mark up H.R. 4645, the Travel Restriction Reform and Export Enhancement Act, which would: 

1. lift the restrictions on U.S. citizens traveling to Cuba, 
2. require agricultural exports to Cuba to have same payment requirements as exports to other countries (i.e., lift cash in advance requirement);
3. eliminate current requirement that payments to U.S. agricultural exporters must pass through banks in third countries. 

[Update: The House Agriculture Committee voted this afternoon to report H.R. 4645 to the House floor with a favorable recommendation by a vote of 25 in favor and 20 against. Prospects for final passage of this bill in this term of Congress remain slim. House Foreign Affairs Chairman Howard Berman (D-CA) released a statement indicating his support for the bill and noting that the "travel ban to Cuba simply has not worked to help the Cuban people in any way. It has not hurt the Castros as it was intended to do, but it has hurt U.S. citizens.]

• National Export Initiative - The Obama Administration, through the interagency Trade Promotion Coordinating Committee (TPCC), published an announcement today seeking comments from exporters, other private businesses, trade associations, academia, labor organizations, non-governmental organizations on export programs and other information as part of the National Export Initiative. Comments are due on July 26, 2010,
  

• SNAP-R Maintenance - BIS will be performing updates that will affect SNAP-R this weekend. SNAP-R users will continue to be able to submit their applications via the SNAP-R system. However applications received after midnight on Friday, July 2, 2010 until midnight Monday July 5, 2010 will not be processed until Tuesday July 6, 2010. In addition, the STELA Web application will be unavailable during this time. 

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DDTC Issues Announcement on New and Pending ITAR Licenses to Kyrgyzstan

As a result of this week's ousting of the President of Kyrgyzstan by the opposition, the State Department's Directorate of Defense Trade Controls (DDTC) today issued the following announcement regarding delays in license applications for the export of ITAR-controlled items to Kyrgyzstan:

In response to recent events in the Kyrgyz Republic (Kyrgyzstan), DDTC wishes to inform exporters that although there is no current U.S. or UN arms embargo on Kyrgyzstan, the final decision of license applications for the export of U.S. Munitions List (USML) items to Kyrgyzstan received from this date or currently in the review process may be delayed. License applications will continue to be reviewed on a case-by-case basis, but approval should not be assumed. We encourage exporters to take the current situation into account and if applying for a new license to export or re-export USML items to Kyrgyzstan, that the license application provide detailed information on the end-use and end-user of the USML items.

The PDF version of the DDTC's announcement, which also includes the text of the White House statement on Kyrgyzstan, can be found here.

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President Announces Details of National Export Initiative at Ex-Im Bank's Annual Conference

In a speech today at the Export-Import Bank of the United States' annual conference in Washington, DC, President Obama provided more details on the National Export Initiative (NEI) and his goal of doubling U.S. exports in the next five years that was announced in his State of the Union Speech in January.

The following is a summary the important points made in today's speech:

• Four aims of NEI are (1) increasing export financing; (2) increasing export advocacy; (3) providing assistance for American businesses to locate, set up shop, and win in new markets; and (4) focusing on making sure American companies have free and fair access to those markets, including enforcing existing trade agreements.

• Signed an Executive Order instructing the federal government to use every available federal resource in support of that mission. That order created an Export Promotion Cabinet, made up of the Secretaries of State, Treasury, Agriculture, Commerce and Labor, along with our U.S. Trade Representative, Small Business Administrator, the Export-Import Bank President, and other senior U.S. officials whose work impacts exports. That cabinet will convene its first meeting in April. 

• Re-launched the President’s Export Council, the principal national advisory committee on international trade. Named Jim McNerney, the President and CEO of Boeing, as its chair; and Ursula Burns, the CEO of Xerox, as vice chair (White House announcement on these appointments here).

• Export promotion efforts will extend throughout the Administration. Secretary Locke is issuing guidance to all senior government officials who have foreign counterparts on how they can best promote our exporters. Secretary Clinton is mobilizing a commercial diplomacy strategy, directing every one of our embassies to create a Senior Visitor Business Liaison who will manage our export advocacy efforts locally.

• Will unleash a battery of comprehensive and coordinated efforts to promote new markets and new opportunities for American exporters. Will bring together the Ex-Im Bank, the SBA, the Departments of Commerce and Agriculture, and the Trade Development Agency to set up one-stop-shops across the country and in the 250 embassies and consulates abroad, to help American businesses gain a foothold in the fastest-growing markets with the most demand. And we’ll provide a comprehensive toolkit of services – from financing to counseling to promotion – to help potential exporters grow and expand.

• Will increase funding for existing promotion efforts, including International Trade Administration at the Department of Commerce, and strengthen the USDA’s ability to connect farmers with new customers overseas.

• Working to reform the U.S. Export Control System for strategic, high-tech industries, which will strengthen our national security. Will concentrate our efforts on enforcing controls on the export of our most critical technologies, making America safer while enhancing the competitiveness of key American industries. Have conducted a broad review of the Export Control System, and Secretary Gates will outline our reform proposal within the next couple weeks.

• Regarding exports, the President announced two specific changes in export control laws that the Administration will work to implement:

1. A new one-time online review process for products containing encryption that is intended to reduce the current 30 to 60 day review process to "30 minutes".
2. Will eliminate unnecessary obstacles for exporting products to companies with dual-national and third-country-national employees by harmonizing the EAR and ITAR standards, making it easier for American and foreign companies to comply with U.S. export control requirements without diminishing national security. 

The video of the speech is below:

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