USA Regulations

The Bureau of Industry and Security, US Department of Commerce has denied export privileges to Winter Aircraft Products SA of Madrid for a period of 10 years. The company was denied privileges because the BIS found that the company had taken actions with intent to transship aircraft part subject to the Regulations without a license.

Although the company did not actually follow through with the transshipment, their intent was enough to deny them exporting privileges from the US. It is now an export violation to directly or indirectly export, reexport or even “think” of doing business with this company beginning on May 19, 2008.

More information:

• efoia.bis.doc.gov/exportcontrolviolations/e2047.pdf (PDF)

The Treasury Department’s Office of Foreign Assets Control has posted amendments to General License Number 14 and posted a new general license, General License number 15 under the Burmese Sanctions regulations.

The Burma Sanctions are available at:
http://www.treas.gov/offices/enforcement/ofac/programs/burma/burma.pdf (PDF)

General License Number 14 previously only authorized the transfer of funds in support of not-for- profit humanitarian or religious activities in Burma only if they involved US or third-country NGO’s. The amendment will expand the authorization for a period of 120 days to allow funding to any organization or individual engaged in not-for-profit humanitarian or religious activities in Burma. This amendment is a result of the devastation left by Cyclone Nargis, in .Myanmar, Burma

General License Number 15 allows US financial institutions to process transfers of funds, unlimited in amount, for noncommercial, personal remittances to or from Burma, or for or on behalf of an individual ordinarily resident in Burma. Before the issuance of this license noncommercial, personal remittances to Burma were permitted only insofar as total remittances did not exceed $300 per Burmese household in any consecutive three month period. This new license has no such limitations.

More information:

• General License Number 14:
  www.treas.gov/offices/enforcement/ofac/programs/burma/gls/burmagl14_amend.pdf (PDF)
• General License Number 15:
  http://www.treas.gov/offices/enforcement/ofac/programs/burma/gls/burmagl15.pdf (PDF)

The “soon” is now, to paraphrase the late, great football coach George Allen. For quite a while, the Census Bureau has been saying soon it will publish the rewritten rules for the submission of Shipper’s Export Declarations (SEDs) and the Automated Export System (AES). The new rules enter into force on July 2, 2008, and on that day the SED will no longer be valid. The SED will be replaced by Electronic Export Information (EEI) that must be submitted via the AES (or AESDirect) electronic reporting system.

Nearly six years ago on September 30, 2002 the President signed the Foreign Relations Act that authorized the Commerce Department to eliminate the paper SED for all exports and require that exporters submit export information electronically. (Commerce is the mother agency of the Census Bureau’s Foreign Trade Division, which is the organization that administers the AES EEI regulations, technically known as 15 CFRP Part 30—Foreign Trade Regulations.) In the June 2, 2008 The Federal Register, the Census Bureau published the new FTR, to entirely replace the former Foreign Trade Statistics Regulations (FTSR).

So, background information aside, let’s look at the key highlights of the new FTR. Generally speaking, the FTR is quite similar to its FTSR predecessor. Based on my first read of the new FTR, here are some key changes that enter into force on July 2, 2008:

Electronic Filing Required for EAR99 Items: Formerly you could use paper SEDs for items classified as EAR99 in the Export Administration Regulations (EAR). Now everything has to be submitted via the AES EEI mechanism now. Read More

On April 17, 2008 Don Manzullo (R-Illinois) and Adam Smith (D-Washington), introduced new legislation to modernize the Automated Export System. The Securing Exports Through Coordination and Technology Act is described as being able to, “clarify the confusing US export system that punishes mistakes with costly fines” as well as “strengthen the government’s ability to crack down on deliberate violators” as described by Smith and Manzullo. The bill will also include provisions designed to improve the use and operation of e AES.

Under the Act the AES would be required to:

• Reject data submitted for exports that would violate US export control or sanction regulations by virtue of the destination country or entity;
• Alert the exporter of potential export license requirements under the EAR and/or the ITAR based on codes;
• Issue a fatal error notice when the data submitted includes: names, addresses or restricted entities or destination countries subject to US sanctions and embargoes;
• Issue compliance alerts or other warnings to the filer if: the data submitted includes an inconsistent classification number, a license exception which is not available for the country or ultimate consignee or if there is no license number

Exporters say that these types of errors happen often because of the many different export control laws and regulations they have to handle. Read More

So, you got some commercial hardware controlled by the Export Administration Regulations, and then you load some military software on to it. What do you have? You have an item that is now controlled by the International Traffic in Arms Regulations.

And even if the Commerce Department gives you many licenses for many exports of those things, you still have ITAR violations.

That seems to be what happened in this case in which Northrop Grumman Corp. reached a settlement agreement related to exports that Northrop Grumman discovered after it acquired Litton Industries in 2001. The violations Northrop discovered occurred from 1994-2001. According to documents provided to the State Department from Northrop the company had committed over 110 violations involving sales of 73 aircraft navigation systems. Northrop Grumman discovered the violations as it was working to install its compliance procedures in its new acquisition.

Read More

The DDTC has published Implementing Arrangement for US-Australia Defense Trade Cooperation Treaty (Word doc). The 24-page Word document consists of 16 sections that recognize principals established between the two governments concerning their Defense Trade Cooperation.

Early in 2007 Taiwanese officials reported that four packages they received from the US military did not contain the helicopter batteries that they were expecting. US officials told the Taiwanese officials to simply dispose of the incorrect items. Last week however posed a serious issue for the US Defense Department; apparently the Taiwanese officials opened the packages before disposing of them and alerted the US that they contained “warheads”.

It is uncertain how long the Taiwanese officials actually knew that the packages contained warhead-related material, but the drums had been in their possession for over 18 months and the US never noticed that the sensitive materials were missing. The items inside the barrels were labeled “secret” and they included Mark 12 nose cones, which are used in intercontinental ballistic missiles.

President Bush has ordered an immediate investigation to focus on whether the Air Force properly labeled the packages for shipment to the DLA, how it was stored, tracked and shipped overseas. Authorities claim that the packages were inappropriately stored in an unclassified warehouse and the outer packages might have been mislabeled. “The investigation will determine the integrity of the shipping containers and their contents during the foreign military sales process,” explained Air Force Secretary Michael Wynne in announcing the erroneous shipment.

So we should be concerned for various reasons here. First, the US Government didn’t notice that these nuclear bomb widgets were missing. Should we worry that there is other unknown missing nuclear bomb stuff? Second, should we assume this is the first time this has happened? Are there other boxes in some foreign government warehouse that contain nuclear weapons parts? And third, despite the fact that several mistakes were made in this case, the US Air Force should thank its lucky stars that it is not a regular exporter. If an exporter were to make the same mistake and ship the wrong military equipment to Taiwan, it would have an ITAR violation, which could result in significant penalties in some cases, and even if you don’t end up paying an ITAR fine, you could end up paying your lawyers a lot of money if you report the violation. And I am thinking that a company that would mis-label and illegally export nuclear bomb components would get both a fine and a large legal bill.

More information:

The Center for Strategic and International Studies (CSIS) released their report of the health of the US space industry in February 2008, and there has been controversy since. The report concluded quantifiable data about the consequences that the ITAR has brought onto American second and third-tiered suppliers of commercial satellites and their components.

Large companies and organizations such as NASA have resources to overcome the obstacles set forth by the ITAR, although they dispute that their profit margins are depleting as they continue to cope with regulations. Small companies and individual researchers are slowly falling out of the space industry because they can not survive the financial issues brought on by the ITAR regulations.

Former AIA President and CEO John Douglass recommended that, among other things, “removing commercial communications satellites and components from the US Munitions List.” He also suggested a “further study to determine whether other non-military systems should be available for export.”

Many have made the strong point that the US is the only country which classifies commercial satellites as “weapons systems” and the fact that a rebalancing of the government’s approach must take place. Many are looking towards the upcoming President and Congress to make changes that will allow US companies to sell their products in the global market place. The major issue in question is how to balance our indefinite need for security and our need for trade.

More information:

• Itar’s failure (The Space Review)
• Aerospace Industries Association

The US Department of State, Directorate of Defense Trade Controls (DDTC) amended the International Traffic in Arms Regulations to add Sri Lanka to the list of prohibited countries. Effective March 24, 2008, DDTC will not approve any licenses or agreements for Sri Lanka. There will be a possibility that licenses may be issued for technical data or equipment for maritime or air surveillance and communications, but only after a case-by-case review by DDTC.

Importantly, this means that exemptions may not be used for Sri Lanka.

But, of course you can use the ITAR 123.17 exemption to carry three guns and a thousand rounds of ammo with you if you travel to Sri Lanka, or to any other ITAR 126.1 country for that matter. You gotta love the 123.17 availability so that Americans can be fully armed when they take a vacation to Venezuela or Belarus. No sir, you can’t use the temporary import exemption in ITAR 123.4 to fix a broken military radio, but you can be packing heat when you go to see Panduwasnuwara in Sri Lanka. Only in America would we require an export license for a company to send some spare parts to the US Army fighting a war in Iraq but let me carry a thousand rounds of ammo and 3 guns on my family vacation to Costa Rica.

More information:

• Amendment to ITAR: Sri Lanka (22 CFR Part 126)

The Bureau of Industry and Security has issued an order suspending all export privileges for 180 days for several businesses associated with Balli Holdings of the UK. The companies commencing in the UK, Armenia and Iran all knowingly violated the Export Administration Regulations.

The companies are charged with:

• re-exporting three US origin aircraft to Iran and had prepared to send an additional three before being caught;
• making false statements to the BIS in an attempt to conceal the end-user of the aircrafts;
• failing to comply with a BIS order to return the three additional aircraft

More information:

• US Sanctions British, Armenian firms for Iran exports (Iran Focus News)

On February 28, 2008 the Department of the Commerce, Bureau of Industry and Security issued a final rule amending the Export Administration Regulations. The rule will expand authorization for temporary exports and reexports to Sudan under EAR License Exception TMP (”Temporary Imports, Exports, and Reexports”), 15 C.F.R. Part 740.9.

The revision will now allow for an expanded list of “tools or trade” usually characterized by “usual and reasonable kinds of quantities of commodities, software, and technology for lawful use”. Software must be solely used for servicing or in-king replacement of software legally exported, which must remain loaded on exempted equipment while in Sudan. Before the final rule, all software was required to be loaded on to the hardware prior to sending the hardware to Sudan.

The new regulation will now permit reexports, they must however, be shipped to Sudan to and by eligible users for eligible uses. A permissible “eligible” user includes any non-governmental organizations or an individual staff member, employee, or contractor of such an organization.

All revisions are said to be effective immediately, but many are cautioned that there are still several restrictions involving TMP. For a complete list of restrictions and newly authorized component please see the final rule.

More information:

• Federal Registers
• BIS - Sudan Web Guidance (PDF)

The Department of Treasury’s Office of Foreign Assets Control has issued a guidance document to give much need direction banks, importers, and exporters regarding blocked property and interests in blocked property. The main issue the OFAC is attempting to answer in this document is, what if a company is not on the SDN list, but one of its partners/ shareholders/ members is? Can we do business with the company? The answer is not so clear however, it actually is that it depends. If the SDN lists any partners/ shareholders/ members who have 50% or more interest in the company than the answer is no, but if they only have 49% or less interest in the company than you can in fact do business with the company but you should act with strong caution.

This all may sound a bit clear until the fact arises of how to actually find out if the SDN has 50% or greater interest therein the company. The OFAC does not give any opinions or options to generate an answer for this problem. If in fact a company fails to detect a SDN interest in 50% or more in one of their customers and ends up engaging in business the company will be treated by the OFAC as if they dealt with an SDN directly.

OFAC warns and reminds companies, “In certain OFAC sanctions programs (e.g., Cuba and Sudan), there is a broader category of entities whose property and interests in property are blocked based on, for example, ownership or control.”

More information:
OFAC Guidance Document (PDF)

After announcing an “enhanced counter-proliferation effort” the government has lost a major Arms Export Control Act (AECA) trial under the new Justice Department initiative.

The AECA is the law that authorizes the International Traffic in Arms Regulations (ITAR). Although it seems that the there is a high success rate in many AECA prosecutions, the fact is that nearly all cases result in guilty pleas before a trial ever begins.

In 2003 Axion Corp, a small family owned contracting business won a contract with the government to make weight assembly systems for the Black Hawk. The company made the block of tungsten that attaches to the propeller rotors to reduce vibrations. As the company began filling orders, Axion’s owner Alex Latifi found that he could save time, weight and money in the process. Latifi, an engineer found that if he used virgin tungsten instead of the recycled blocks he would save the government millions. The only problem Latifi faced was the fact that virgin tungsten is only available in China, Latifi was not concerned because the Black Hawk plan furnished to him from the Defense Department did not contain any markings restricting them from export.

On April 13, 2004 the FBI and Army criminal investigators began to investigate only after an Axion secretary had been secretly providing the Army criminal investigators with information to indict Latifi. The investigators seized equipment, supplies, computers and records, including cell phones belonging to Latifi, his wife and children. Latifi, an American citizen, born in Iran, and Axion were charged with sending technical data drawings of Blackhawk helicopter parts to China in violation of the AECA. The government went on further to allege that the company and its owner falsified test reports for the Blackhawk and pushed for a forfeiture of Axion’s assets and a significant prison term for Latifi.

Over the course of 4 years Axion lost all of its business, and its reputation. Oddly enough, the secretary who was secretly informing the investigators was convicted of forging Latifi’s name on nearly $13,000 in company checks. Her disinformation of the case was eventually proven to be immaterial and flat out not true.

Latifi made the choice to have a bench trial simply because of the negative connotation that his Iranian background may have had on a jury. During the trial it was shown that there were no customary warnings on the Blackhawk drawings that were sent to China. Latifi’s lawyers were also sure to make the point that the drawings were made available on the internet, making them public domain, in turn exempting them from certain arms control provisions. Two days later the judge acquitted Latifi on the grounds that the government had no means to prove that any AECA criminal violations were committed by the defendant and that the undisputed evidence demonstrated that the Axion and Latifi had acted in good faith.

Latifi and his lawyers have now filed a claim for compensation from the government, known as a Hyde motion. The motion allows acquitted federal criminal defendants to argue that the Justice Department engaged in wrongful prosecution and allows them to collect whatever money they spent on their legal defense. Henry Frohsin, Latifi’s lead lawyer explained, “It will be a mini-trial, I plan to put Alice Martin (secretary) on the witness stand. I plan to subpoena federal agents. If this doesn’t qualify as a vexatious, misguided prosecution, then nothing will.” The trial is set for April 15, 2008.

So, will this case change the way many businesses handle AECA charges? Nearly all of the AECA cases are settled with negotiated pleas, this may have been why they continued with the indictment against Latifi even after their only witness was convicted of embezzlement and the only real evidence they had was weak at most. It could be that this case may have a positive effect on the government to the extent that it might focus its attention on the new initiative of developing strong cases and leave the weak, marginal cases to ensure that errors of this caliber are never taken to this level of the court system. It could be that the lesson is if the government is desperate to make a case against you, it will ignore ethics and not hesitate to ruin your small business by dragging you through long and costly legal proceedings.

More information:
The Birmingham News article

The Center for Strategic and International Studies, a Washington research group has released a 63 page report on the Health of the US Space Industrial Base and the Impact of Export Controls. The main concern from the report was that the US export controls that were tightening almost 10 years ago are hindering the US share of the global space markets.

The US tightened space technology-transfer rules in 1999 after investigators found China has acquired sensitive technology from US built commercial satellites. When the new rules were implemented they put commercial communications satellites, subsystems, and components on a munitions list that became subject to State Department licensing even if the product could be easily purchases worldwide.

The overall health of the top-tier manufactures in the industry such as Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp. all had “good financial health” despite the US industry’s loss of shares overseas. The report shows that Russia, China and others are gaining space market share aided by the US policy. Jeffery Foust, a space and telecommunications expert at Futron Corp explained that the US policy backfired in space. “The US is actually hurting national security by making it more difficult for the space companies it depends on to compete in the global market,” he said.

The study concluded that the ability for the government and industry to meet program execution commitments is inadequate and that there was a unanimous agreement that the export control process can be improved without adversely affecting national security.

More information:

• CSIS Briefing
• International Trade Law News article

The US Department of State’s Bureau of Political-Military Affairs, under the Directorate of Defense Trade Controls has published the Implementing Arrangement for the proposed US-UK Defense Trade Cooperation Treaty. This initial review of the arrangement still leaves many questions as to how the treaty will work unanswered.

The main points that were referenced in the Implementing arrangement were:

• Defense articles are termed as being, “articles, services, and related technical data, including software, tangible or intangible form, listed on the Munitions List of the International Traffic in Arms Regulations, as modified or amended. Many will notice throughout the document that no mention of ITAR controlled information is referenced although the Treaty is expected to cover the export controlled ITAR information.
• The bulk of the arrangement procedures focused on what UK participants must do to be eligible to receive US Defense Articles under the Treaty
• The criteria for determining whether a nongovernmental UK entity will be included in the UK Approved Community includes:
  • Entity or facility must be on Her Majesty’s Government’s “List X” of approved facilities
  • UK defense companies under foreign ownership, control, or influence will be handled on a case-by-case basis
  • Previous US convictions of US or UK export control laws or regulations will be considered by the US Government
  • US export licensing history of the entity or facility
    National security risks, for both the US and UK
• Any individuals working at UK companies must have security clearance from the UK, and a need to know to be eligible to have access to US Defense Articles.
• In order to “Retransfer” or Reexport” US Defense Articles to entities outside the UK Approved Community must request approval through the UK MOD process for the approval of the release of classified material, as well as apply US authorities approval.

The approved lists of operations, programs, and US and UK Defense Articles which are exempt under the treaty have yet to be published.

More information:
Implementing Arrangement