Next NCITD Meeting to Feature Speakers Discussing Export Control Reform and ITAR Issues

The next meeting of the National Council on International Trade Development (NCITD) will take place on Wednesday, February 10, 2010 in Washington, DC and will feature the following speakers:

• Bill Reinsch, President, National Foreign Trade Council
  Topic: Export Control Reform Update

• Charles B. Shotwell, Director, Office of Defense Trade Controls Policy, Directorate of Defense Trade Controls, U.S. Department of State                                                                                                   Topic: Commodity Jurisdiction: Trends and Statistics; Automation Update  

For information on how to join NCITD or to attend the meeting, see www.ncitd.org or contact the NCITD Secretariat at 202-872-9280.

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Two BIS Nominees Approved by Senate Banking Committee

Yesterday the Senate Committee on Banking, Housing, and Urban Affairs approved the nominations of Kevin Wolf to serve as Assistant Secretary of Commerce for Export Administration and David Mills to be Assistant Secretary of Commerce for Export Enforcement.

The Senate Banking Committee held a hearing to consider these and other Obama Administration nominees on January 21, 2010. The webcast of the hearing can be viewed here. 

On November 5, 2009, the Senate Banking Committee held a hearing on the nomination of Eric Hirschhorn to serve as Under Secretary of Commerce for Export Administration, the most senior position at the Bureau of Industry and Security. Mr. Hirschhorn's nomination was reported to the full Senate and has been included on the Senate calendar since December 17, 2009. However, the Senate has not yet held a vote on Mr. Hirschhorn's nomination or the nominations of several other nominees.

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Taiwan National Arrested on Charges of Exporting Dual-Use Products From United States to Iran

The Justice Department announced today that Mr. Yi-Lan Chen, aka “Kevin Chen,” who holds a Taiwan passport, was arrested yesterday in Guam on charges of illegally exporting commodities for Iran’s missile program in violation of the International Emergency Economic Powers Act (IEEPA) and the Iranian Transactions Regulations administered by the Treasury Department's Office of Foreign Assets Controls

According to the affidavit filed in support of the criminal complaint filed in federal court in Miami, Florida, Mr. Chen allegedly facilitated the purchase and export of various dual-use products from the U.S. to Iran by way of Taiwan and Hong Kong, including P200 turbine engines and spare parts, sealing compound, glass to metal pin seals, and circular hermetic connectors.

Federal agents learned of Chen’s efforts to obtain and export U.S. goods and commodities after Chen apparently attempted to export detonators through a California company. An investigation allegedly revealed that Chen’s ultimate customers were located in Iran and included Electro SANAM Industries, which has been linked to Iran's ballistic missile program, and the owner of a company in Tehran linked to chemical research and development facilities in Iran.

After receiving orders from customers in Iran, Chen apparently requested quotes, usually by e-mail, from U.S. businesses and made arrangements for the sale and shipment of the goods to freight forwarders in Hong Kong and Taiwan. Once in Hong Kong or Taiwan, the goods were then shipped to Iran.

If convicted, Chen faces a statutory maximum sentence of up to 20 years in prison and fines of up to $1 million.

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2010 Quadrennial Defense Review Highlights Need to Reform U.S. Export Control System

On February 1st, Secretary of Defense Robert Gates delivered the 2010 Quadrennial Defense Review (QDR) report to Congress. The QDR, which was mandated by Congress in the National Defense Authorization Act for Fiscal Year 1997 (10 USC 118(a)), is intended to be a "comprehensive examination of the national defense strategy, force structure, force modernization plans, infrastructure, budget plan, and other elements of the defense program and policies of the U.S."

In addition to discussing U.S. defense capabilities, strategy and objectives, the 2010 report focused on reforming the way that that the Pentagon does business and included an extensive discussion on the need to reform the U.S. export control system. While export control reform was mentioned in previous QDRs, the 2010 report contained an extensive discussion of the need to reform U.S. export control laws and called the current system "a relic of the Cold War" and noted "system itself poses a potential national security risk."

The export control section of the 2010 QDR is reprinted below:

Today’s export control system is a relic of the Cold War and must be adapted to address current threats. The current system impedes cooperation, technology sharing, and interoperability with allies and partners. It does not allow for adequate enforcement mechanisms to detect export violations, or penalties to deter such abuses. Moreover, our overly complicated system results in significant interagency delays that hinder U.S. industrial competitiveness and cooperation with allies.

The United States has made continuous incremental improvements to its export control system, particularly in adding controls against the proliferation of weapons of mass destruction and their means of delivery. The United States has also been a leader in international export controls, creating and improving the multilateral regimes made up of U.S. allies and trading partners that control what is exported to countries of concern to the United States. The regimes also have
become a global control standard via United Nations Security Council resolutions. They help ensure that key technologies and items available in numerous countries are controlled in order to prevent their acquisition by actors who would use them contrary to U.S. and allied interests.

However, the current system is largely out-dated. It was designed when the U.S. economy was largely self-sufficient in developing technologies and when we controlled the manufacture of items from these technologies for national security reasons. Much of the system protected an extensive list of unique technologies and items that, if used in the development or production of weapons by the former Soviet Union, would pose a national security threat to the United States.

The global economy has changed, with many countries now possessing advanced research, development, and manufacturing capabilities. Moreover, many advanced technologies are no longer predominantly developed for military applications with eventual transition to commercial uses, but follow the exact opposite course. Yet, in the name of controlling the technologies used in the production of advanced conventional weapons, our system continues to place checks on many that are widely available and remains designed to control such items as if Cold War economic and military-to-commercial models continued to apply.

The U.S. export system itself poses a potential national security risk. Its structure is overly complicated, contains too many redundancies, and tries to protect too much. Today’s export control system encourages foreign customers to seek foreign suppliers and U.S. companies to seek foreign partners not subject to U.S. export controls. Furthermore, the U.S. government is not adequately focused on protecting those key technologies and items that should be protected and ensuring that potential adversaries do not obtain technical data crucial for the production of sophisticated weapons systems.

These deficiencies can be solved only through fundamental reform. The President has therefore directed a comprehensive review tasked with identifying reforms to enhance U.S. national security, foreign policy, and economic security interests. Reform efforts must reflect an inherently interagency process as current export control authorities rest with other departments. Similarly, meaningful reforms will not be possible without congressional involvement throughout the process. The Department of Defense has a vital stake in fundamental reform of export controls, and will work with our interagency partners and Congress to ensure that a new system fully addresses the threats that the United States will face in the future.

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OFAC Publishes Belarus Sanctions Regulations

The Treasury Department's Office of Foreign Assets Control (OFAC) published in yesterday's Federal Register the Belarus Sanctions Regulations (31 C.F.R. Part 548) to implement Executive Order 13405 issued by President Bush in June 2006 that authorized the blocking of assets of individuals and entities determined to be responsible for undermining democratic processes or institutions in Belarus or engaging in political repression or public corruption.

The Belarus Sanctions Regulations are targeted only at certain persons and entities who have been specifically designated by the U.S. and do not prohibit trade or the provision of banking or other financial services involving  Belarus, unless the transaction or service involves a person whose property and interests in property have been blocked.

The names of persons and entities in Belarus and elsewhere whose property and interests in property are blocked pursuant to EO 13405 are included on OFAC's Specially Designated Nationals and Blocked Persons List (‘‘SDN’’ list) with the identifier "[BELARUS]." Included on the SDN List is Belneftekhim, the largest enterprise in Belarus and was previously the largest exporter of Belarusian products to the United States.

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President Obama Advises Congress That North Korea Will not be Redesignated as State Sponsor of Terrorism

In a notification required by the National Defense Authorization Act for Fiscal Year 2010, President Obama today sent a letter to Congress stating that the Obama Administraition will not reinstate North Korea as a state sponsor of terrorism since it "does not meet the the statutory criteria to again be designated as a state sponsor of terrorism."

Former President George W. Bush announced in June 2008 that North Korea would be removed as a state sponsor of terrorism and in October 2008 Secretary of State Rice signed an order rescinding the designation of North Korea as a state sponsor of terrorism.

Currently, Cuba, Iran, Syria and Sudan are designated as state sponsors of terrorism by the U.S.

Although North Korea is no longer designated as a state sponsor of terrorism is rescinded, North Korea is still included in Country Group E:1 and an export license is required to export or reexport any item subject to the EAR to North Korea, except food and medicines classified as EAR99. While many products are subject to the policy of denial of export licenses, certain humanitarian and other products are subject to a licensing policy of approval.

North Korea also remains subject to a U.S. arms embargo and is subject to a variety of OFAC sanctions, including a prohibition on the import of North Korean products.

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DDTC Imposes $1 Million Penalty on German Company and U.S. Affiliate for ITAR Violations

The State Department's Directorate of Defense Trade Controls (DDTC) announced today that it entered into a consent agreement this week with Kaltenkirchen, Germany-based Interturbine Aviation Logistics GmbH, and its Grand Prairie Texas branch office, Interturbine Aviation Logistics GmbH, LLC, to resolve violations of the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR) allegedly committed in 2004. The Interturbine companies are distributors of a wide range of products for the international commercial aviation sector.

This case marks the first penalty action taken by DDTC in 2010. It is widely expected that DDTC this year will conclude many more than the consent agreements that were finalized in 2009.

According to the Proposed Charging Letter, DDTC alleged that Interturbine committed seven violations of the ITAR associated with the unlicensed export to Germany of  400 kilograms of a heat resistant protective coating classified in USML Category IV(f) that can be used on missiles to protect high heat areas. The Proposed Charging Letter notes that even though the product was indicated in the company's inventory system as export controlled, some senior members of the company in Germany bypassed the company's normal procedures to order the product from its U.S. affiliate for shipment to a customer in Germany. After the product was shipped from Texas to Germany as NLR, the German customer later contacted Interturbine about the lack of an export license, suspended payment and quarantined the shipment. The material was subsequently returned to the U.S. and seized by U.S. Customs and Border Protection. A criminal investigation was then initiated by U.S. Immigration and Customs Enforcement.

Although the criminal case was later dropped as a result of the company's remedial measures, DDTC charged the company with one count of exporting the ITAR-controlled material to Germany without the proper license, one count of misrepresentation and omission of facts, two counts of willfully causing an unauthorized export, one count of exporting a defense article without being registered with DDTC, one count of failing to obtain a non-transfer and use certificate (DS-83) and one count of an unauthorized retransfer.

Under the consent agreement, Interturbine agreed to pay a civil penalty of $1,000,000, of which $900,000 will be suspended. DDTC agreed to suspend $500,000 of the penalty on the condition that Interturbine has already applied that amount to self-initiated, pre-consent agreement remedial compliance measures. In addition, $400,000 will be suspended on the condition that Interturbine maintains its self-initiated exclusion from all ITAR regulated activities.

If within the two-year term of this Consent Agreement Interturbine decides to become involved in ITAR regulated activities, Interturbine agreed to use this $400,000 for additional remedial compliance measures agreed to by the Department.  Interturbine will also be subject to an independent audit to ensure that its company-wide Automated Export Control system prevents its involvement in all ITAR regulated activities and agreed to on-site reviews by DDTC. 

According to DDTC, Interturbine acknowledged the seriousness of its conduct and cooperated with the investigation, expressed regret for these activities, and took appropriate steps to improve its export compliance program, which is now prominently featured on the company's website.

DDTC also determined that an administrative debarment of Interturbine is not appropriate at this time since the company has already begun implementing the remedial compliance actions specified in this consent agreement.

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

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