International Trade Law News

While there have been many export control reform proposals issued in the past few months, very few of them have focused on the legal aspects of the U.S. export control regime.

Neena Shenai, an adjunct scholar at the American Enterprise Institute for Public Policy Research, has added an interesting perspective to the export control reform debate in her working paper entitled Export Control Reform 2010: Transforming the Legal Architecture of Dual-Use and Defense Trade Controls (available here in PDF format). Ms. Shenai, an attorney, is well-suited to provide this perspective given her experience in the private sector and in government, which includes serving as a law clerk to a judge at the U.S. Court of International Trade, practicing international trade law at a leading law firm and serving as an advisor to the Assistant Secretary for Export Administration at the Commerce Department's Bureau of Industry and Security.

The paper offers the thesis that improvements in the export control system’s legal architecture, including administrative procedural safeguards and limited judicial review while also protecting classified information and national security determinations, will improve the workings of the system in general.

Ms. Shenai reaches that conclusion by discussing the existing legal framework of dual-use and defense-related export controls, examining the various shortcomings of the existing export controls legal regime and discussing what can be learned from other U.S. international-related legal regimes that could serve as useful models for reform of the U.S. export control system. The regimes examined include the licensing of nuclear products by the Nuclear Regulatory Commission, the administration of trade remedy laws, the administration of U.S. customs laws and the treatment of national security information protected from disclosure under the Freedom of Information Act.

The paper then provides a number of general and specific recommendations to improve the legal framework of the export control system, including improvements to the commodity jurisdiction (CJ), commodity classification and licensing processes. For example, the paper advocates having agency decisions provide applicants with detailed information on why licenses were granted or denied, the grounds on how CJ determinations are made and allowing applicants the ability to appeal such decisions to a federal court, preferably the Court of International Trade, given its longstanding history of hearing cases under the U.S. trade laws.

Ms. Shenai concludes by noting that "the recommendations made in this paper, if implemented, would serve to ensure that the U.S. export control laws are administered in a fair, transparent, predictable, and accountable fashion, while simultaneously maintaining national security protections."

It should be noted that this working paper has not yet been finalized and Ms. Shenai welcomes comments and corrections. Information on how to contact Ms. Shenai can be found in the document.

Labels: BIS, Export Controls, ITAR

Finding a Willing Buyer Only One Part of the Export Process

Exporters Looking to Boost Business Need to Mind Rules and Regulations Too

The Obama administration is launching a government-wide effort to double U.S. exports over the next five years as part of a plan to increase domestic employment and boost the U.S. economy. However, companies looking to take advantage of the new National Export Initiative to break into new markets should be aware that shipping goods overseas comes with potential perils as well as opportunities.

As part of the NEI, the federal government plans to increase its trade advocacy efforts, including educating U.S. companies about opportunities overseas, directly connecting them with new customers and advocating more forcefully for their interests. The NEI will also include a focus on improving access to export financing and helping to remove barriers that prevent U.S. companies from getting access to foreign markets. Only a very small percentage of U.S. companies currently export their products, and of those that do, 58% export to only one country. The Obama administration is looking to increase these figures in the expectation that doing so will also increase employment.

However, warns Doug Jacobson, head of Sandler, Travis & Rosenberg’s export controls practice group, while increasing the number of U.S. companies that export and increasing trade promotion assistance are laudable goals, U.S. exporters must be aware that finding a willing buyer is only the first step in the exporting process.

“In addition to taking the necessary steps to ensure they are paid for their goods, U.S. exporters must be aware of the wide range of U.S. regulatory and legal issues applicable to exports,” Jacobson said. “The benefits of exporting can be great for U.S. companies, but the penalties for violating export laws and regulations can be severe. ST&R often represents exporters in enforcement actions that learn of their export compliance obligations only after they receive an administrative subpoena from the Bureau of Industry and Security or the Office of Foreign Assets Control. Many of those violations could have been avoided if the exporters understood their export compliance obligations in advance.”

Examples of the important compliance-related issues that U.S. exporters should be aware of when selling goods overseas include the following.

Ultimate Destination. U.S. export restrictions and licensing requirements vary by the country of destination. Some countries are subject to comprehensive embargoes, while others are subject to targeted sanctions directed at certain individuals and companies.

Jurisdiction and Classification of Goods. Proper jurisdiction and classification of goods under the Export Administration Regulations or the International Traffic in Arms Regulations is required to determine export licensing requirements and end-use and end-user restrictions for all products being exported from the U.S. In addition, the proper export classification is required to be declared in the Electronic Export Information filing that must be transmitted via the Automated Export System.

Know Your Customer. To avoid engaging in transactions with parties that have been denied export privileges or are subject to U.S. sanctions, exporters should screen all customers and parties involved in the export against the government’s various restricted party lists.

Anti-boycott Compliance. Boycott requests, which often contain the words “boycott” or “blacklist” or provisions prohibiting the importation of goods from certain countries, are often found in documents involving sales to the Middle East, including purchase orders, tenders, contracts, shipping requests and letters of credit. Certain boycott requests must be reported to the Bureau of Industry and Security.

Foreign Corrupt Practices Act. The FCPA prohibits U.S. persons and their agents from making prohibited payments to foreign government officials to obtain and keep business.

For more information on these issues, or how ST&R can help you increase your exports while remaining compliant with applicable laws and regulations, please contact Doug Jacobson at (202) 216-9307.

You can also stay up-to-date on the latest developments on this issue by subscribing to ST&R’s WorldTrade\INTERACTIVE daily e-newsletter.

Sandler, Travis & Rosenberg, P.A., is a customs and international trade law firm concentrating in assisting clients with the global movement of goods, ideas and personnel and the setting of global trade policy. Our affiliated consulting company, Sandler & Travis Trade Advisory Services Inc., is a leading provider of trade-related management and consulting services to government and industry. For more information about ST&R and STTAS, please visit our Web site.

Reprinted with permission of Sandler, Travis & Rosenberg, P.A.

Labels: Export Controls, Exports, Sanctions

Balli Aviation Ltd., a subsidiary of the United Kingdom-based Balli Group PLC (collectively "Balli"), pleaded guilty today in the U.S. District Court for the District of Columbia to a two-count criminal information in connection with its illegal export of commercial Boeing 747 aircraft from the United States to Iran.

In a related civil enforcement case, Balli entered into a joint settlement agreement with the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS) to settle alleged violations of U.S. export controls and sanctions laws..

Under the criminal plea agreement, Balli agreed to pay a $2 million criminal fine and be placed on corporate probation for five years. In the civil settlement with BIS and OFAC, Balli agreed to pay a $15 million civil penalty (payable in five installments over two years) to settle alleged violations of the Iranian Transactions Regulations and Export Adminstration Regulations. The terms of the civil settlement agreement provide that $2 million of Balli's civil penalty will be suspended and waived if Balli remains in compliance with U.S. export control laws.

According to count one of the criminal information, from 2005 through 2008, Balli conspired to export three Boeing 747 aircraft from the United States to Iran via a subsidiary without first having obtained the required export license from BIS or authorization from OFAC, in violation of the EAR and Iranian Transactions Regulations. The criminal information also states that the Boeing 747 was purchased  with financing obtained from Mahan Airlines, the first private airline in Iran. (Mahan Airlines prominently features the Boeing 747 on its home page).

Count two of the information states that Balli violated a Temporary Denial Order (TDO) issued by BIS in March 2008 that prohibited the company from conducting any transaction involving any item subject to the EAR. The Justice Department alleged Balli subsequently violated the TDO by carrying on negotiations with others concerning buying, receiving, using, selling and delivering U.S.-origin aircraft.

In the civil case, Balli was charged with conspiracy to violate the EAR by working with the Iranian airline to export the U.S.-origin aircraft to Iran. BIS also charged Balli with one count of acting contrary to the terms of a TDO by attempting to sell and export three additional 747s to Iran.

In addition to the civil monetary penalties, BIS suspended Balli's export privileges for five years (as noted, Balli was previously subject to a BIS TDO that was later lifted), although BIS agreed to suspend the denial order as long as the penalty is timely paid and the company remains compliant with the EAR. Mahan Airways remains on BIS's Denied Persons List.

In addition, the civil settlement agreement requires Balli to hire an unrelated third-party consultant with expertise in U.S. export control laws and sanctions regulations to conduct audits of Balli's U.S. export control and sanctions compliance on an annual basis during the next five years and to submit the audit results to BIS and OFAC.

The OFAC and BIS joint settlement agreement, which contain additional details on Balli's alleged activities, can be found here (pdf).

SIDEBAR: On a somewhat related note, last month marked the 40th anniversary of the first commercial flight of the Boeing 747 from New York to London by its launch customer Pan American World Airways.  The Flightglobal website has put together a special section marking the 40th anniversary of the Boeing 747 here.

Labels: BIS, OFAC, Sanctions; Iran

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.

Labels: DDTC, Export Controls

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.

Labels: BIS, Congress

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.

Labels: Export Controls, Sanctions; Iran

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.

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.

Labels: Belarus, OFAC

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.

Labels: North Korea

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. 

Labels: ITAR

In a surprise move, the Senate this evening passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act (S. 2799) on a voice vote after very little debate.

The vote occurred only a day after Senators John McCain (R-AZ), Evan Bayh (D-IN), Jon Kyl (R-AZ), Joe Lieberman (I-CT), Chuck Schumer (D-NY), Robert Casey (D-PA), Johnny Isakson (R-GA), Ben Cardin (D-MD), and David Vitter (R-LA) sent a letter to President Obama warning that his own year-end deadline for diplomacy with Iran expired and urging the President to make use of existing authorities under U.S. law to pursue "parallel and complementary" measures to increase pressure against Iran.

The Senate bill must now be reconciled with the Iran Refined Petroleum Sanctions Act of 2009 (H.R. 2194), which passed the House by a wide margin in December.

While the bills include many similar concepts, the Senate bill contains several additional provisions, including some export control-related provisions, that are not included in the House bill that will have to be reconciled in a conference committee. In addition, Senator McCain reportedly wants to amend the bill to impose sanctions targeted at Iranian Government officials who have committed human rights abuses or acts of violence against civilians that engage in peaceful political activity.

As we previously reported, both versions of the Iran sanctions bills have been criticized in a variety of circles, including the U.S. business community, groups that oppose the imposition of sanctions that would adversely impact average Iranians and would hamper the President's ability to conduct foreign affairs by requiring the imposition of mandatory additional sanctions. In addition, the bills have been criticized for their extraterritorial application of sanctions.

In addition to the gasoline and refinery equipment sales provisions in the House bill, S. 2799 would, among other things:

1. Restore the prohibitions on imports of carpets and certain food products from Iran that were lifted in 2000;

2. Would make U.S. parent companies liable for the acts of their non-U.S. subsidiaries that engage in transactions with Iran;

3. Would prohibit the U.S. Government from entering into contracting with firms that sell equipment to Iran which can be used to censor or monitor Internet usage in Iran;

4. Require the Director of National Intelligence to submit a report to the Secretary of Commerce, the Secretary of State, the Secretary of the Treasury and the appropriate congressional committees that identifies all countries determined to be of concern with respect to transshipment, reexportation, or diversion of items subject to the provisions of the Export Administration Regulations to Iran.

5. Authorizes the imposition of a new licensing requirement for exports of certain products to countries designated as “Destinations of Possible Diversion Concern.”

6. Authorizes state or local governments to divest from companies that engage in certain enery sector investments in Iran.

Labels: Sanctions; Iran

Several leading U.S. business organizations and associations sent a letter today to National Security Advisor James Jones and National Economic Council Director Lawrence Summers urging the Obama Administration to oppose the Iran sanctions bills currently pending in Congress.

The bills, the Iran Refined Petroleum Sanctions Act of 2009 (H.R. 2194), which passed the House in December by a wide margin, and the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2009 (S. 2799), which was approved by the Senate Banking Committee and placed on the Senate calendar, would expand the scope of current U.S. sanctions on Iran in a variety of ways, including making a number of changes to the Iran Sanctions Act, requiring certain sanctions to be imposed against non-U.S. companies that supply refined petroleum products to Iran and broadening the circumstances in which a U.S. company
could be penalized when one of its non-U.S. subsidiaries engages in business with Iran.

The letter states:

While we agree that preventing Iran from developing the capability to produce nuclear weapons is an urgent U.S. national security objective, the unilateral, extraterritorial, and overly broad approach of these bills would undercut rather than advance this critical objective.

The proposed sanctions would incite economic, diplomatic, and legal conflicts with U.S. allies and could frustrate joint action against Iran. They could prohibit any U.S. company from transacting routine business with critical partners from around the globe even if these transactions have no bearing on business with Iran. These provisions could encompass a very large portion of the global trade community with consequences that in our view have not been adequately assessed.

The proposals could have a large impact on the U.S. Export-Import Bank, precluding it from partnering with counterpart agencies abroad to co-finance U.S. exports that have no relation to Iran’s energy sector. A significant portion of the bank’s portfolio could be impacted, compromising its ability to boost U.S. exports.

The letter concludes by requesting the Obama Administration to "weigh in vigorously with Congress to eliminate these highly problematic proposals."

The letter was signed by the National Foreign Trade Council, the U.S. Chamber of Commerce, USA*Engage, the Business Roundtable, the Coalition for Employment through Exports, the Emergency Committee for American Trade, the National Association of Manufacturers, the Organization for International Investment and the U.S. Council for International Business.

The full text of the letter can be found here.

In other Iran sanctions-related news, German engineering firm Siemens announced at its annual shareholder meeting today that starting in mid-2010 the company  would no longer accept any new orders from Iran.

In addition, Bloomberg today published a detailed story today entitled "Dubai Helps Iran Evade Sanctions as Smugglers Ignore U.S. Laws," describing how Dubai is used as a conduit to supply U.S. goods to Iran.

Labels: Belarus, Sanctions; Iran