BIS

The Bureau of Industry and Security has proposed to amend the Export Administration Regulations by making changes to ensure consistency within the language and terminology of Part 744. Because this is only a proposed rule, none of the changes are in force at this time.

Part 744 of the EAR deals with the end-user and end- use based control policy. Sections 744.3 (missile catch-all control), 744.4 (chemical/biological weapons catch-all control), and 744.6 (US persons involvement in weapons of mass destruction proliferation activities) all prohibit exports, reexports and transfers (in-country) of items subject to the EAR. 744.2 (nuclear catch-all control) presently only states it prohibits exports and reexports of items subject to the EAR. The proposed amendment would change the nuclear catch-all control language to prohibit export, reexport, and transfers (in-country) to conform to the other sections.

The rule also proposes to amend the “is informed” paragraph (B) of the sections of part 744 to ensure that the same terminology is used throughout all sections. Read More

The Bureau of Industry and Security (BIS) has issued a rule to amend the Export Administration Regulations to make technical corrections and clarifications after a review of the Commerce Control List. The rule will be effective April 18, 2008 and the BIS plans to publish another rule later this year to employ the second phase of corrections.

The rule revises “Related Controls” paragraphs found in the following Export Control Classification Numbers (“ECCNs”) by adding related controls references. BIS has even included related controls references in CCL entries to assist exporters in classifying items on the CCL and in some cases provide cross references for CCL items. Read More

Engineering Dynamics of Kenner LA has been fined $132,791.39 for export violations. (Editor’s note: I would love somebody to tell me how they came up with the 39 cents. — John Black) The company has been exporting an engineering software program from the US to Iran via Brazil without authorization from the Office of Foreign Assets Control (OFAC) from March 1995 into February 2007 to export the software until the US Department of Treasury discovered the illegal exports.

Over the years the company and its co-conspirators would market, sell, and service the engineering software program to their Iranian clients through another conspirator in Brazil. Engineering Dynamics will not be suspended from export transactions as long as their entire penalty is paid as agreed upon.

More information available at:
BIS - e2044.pdf (PDF)

French corporation, Cryostar France pleads guilty to conspiracy, illegal export, and attempted illegal export of Cryogenic Submersible Pumps to Iran. Cryostar has several businesses worldwide where they specialize in the design and manufacturing of cryogenic equipment. They were sentenced in the US to a criminal fine of $500,000 and corporate probation of two years.

Cyrostar was a middleman between Ebara International Corp., Inc. and “TN” a French company with a US subsidiary. Cryostar was to purchase the pumps from Ebara and then resell them to “TN” who would then forward the pumps to Iran. Cryostar falsely indicated that the final purchaser was the French company “TN” who would install the pumps in France, when all parties were in agreement that the pumps would go to Iran. The three companies created false purchase orders, and purchased as many component parts from non-US suppliers as possible to avoid any and all questions from US suppliers and to conceal their conduct. No export licenses were ever obtained for any of the items.

In 2004 penalties were imposed on Ebara and its former CEO Everett Hylton. At that time Ebara pled guilty to criminal violations and agreed to an administrative settlement, with combined fines of over $6.4 million dollars while Hylton agreed to personally pay $109,000. Ebara and Hylton’s schemed together to violate the embargo on Iran after some people in Ebara initially stopped an Ebara sale to Iran. Ebara falsified some documents and removed “made by Ebara” markings from certain items to evade US restrictions on Iran.

More information:

• DOJ Announces $500,000 Fine for Illegal Exports to Iran (WorldTrade Interactive)
• For the 2004 penalties: BIS News Release

On March 21, 2008, the BIS made clarifications involving the ECCN 1C210 and ECCN3A233.

The ECCN 1C210, thermoset resin is defined as those resins that, when cured by the action of a catalyst or heat and pressure, become an infusible and insoluble material. Once the thermoset is cured it can no longer be returned to the uncured state.

The ECCN 3A233, materials resistant to UF6 are limited to aluminum, aluminum alloys, nickel, and nickel alloys containing more than 60% nickel.

More information:

• BIS advisory opinion on ECCN 1C210 (PDF)
• BIS advisory opinion on ECCN 3A233 (PDF)

Secretary Mancuso delivered the keynote address on March 17, 2008 at the Export Control Forum in Newport Beach California. Mancuso emphasized the need to strengthen the US dual-use export control enforcement architecture and pushed for Congress to pass “a reauthorized Export Administration Act as quickly as possible.”

He also restated that his three highest policy priorities are still:

• Refining BIS’s enforcement efforts; focusing on terrorists, proliferators, and nations with transshipment concern;
• Reforming and updating dual-use export controls to enhance US national security and competitiveness;
• Accelerating and elevating international engagement with the most dynamic high technology markets in the world.

More information:

• BIS News Release

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)

A letter from a group of 12 trade organizations was sent to the Department of Commerce on February 15, 2008 opposing the many proposed changes to the US deemed export control policy. The Deemed Export Advisory Committee outlined these changes in their December 20, 2007 report. The letter argued that many of the approaches are not sufficient with the industry, urging Commerce “to go back to the drawing board” and work closely with industry to develop a more “balanced” approach.

Over the past 20 years the government has not been able to agree on meaningful reductions to the scope of the controlled technologies lists. The DEAC did not attempt to make any recommendations fro narrowing the list because of such criteria and the letter agreed.

The DEAC proposed a “probable loyalty” test in reference to foreign nationals, this test would significantly increase the number of foreign nationals subject to deemed export licensing and restrictions to US origin technological information. The letter argued that would lead to an expansion of both the list of countries whose nationals would become subject to deemed export controls and the number of such nationals that would be subject to licensing.

Overall, the group of 12 stressed the fact that the DEAC’s suggestions would harm US technological competitiveness and would lead to a license “logjam”, there will be increases in both the number of deemed export license applications and an increase in license denials fro nationals of more countries. All in all the US government is not prepared to process this many licenses.

The DOC has already announced that its Bureau of Industry and Security has begun to implement the committee’s recommendations. They has been directed to immediately create an Emerging Technologies Advisory Committee and the BIS is also beginning to improve outreach and engagement efforts to the academic and technology communities about the progress and scope of its deemed export policy efforts. The BIS has begun to work with the departments of Defense, State and Energy to consider other specific DEAC proposals.

More information:
BIS- The Deemed Export Rule in the Era of Globalization (PDF)

On March 11, 2008, BIS’ Acting Assistant Secretary of Export Administration, Matthew Borman addressed the Regulations and Procedures Technical Advisory Committee (RAPTAC) and described a number of Bureau of Industry and Security (BIS) regulatory initiatives of interest to exporters and reexporters.  This was welcome news after what seems like years of BIS preoccupation with China Military Catch All and Verified End User issues.  Some highlights include: 

New License Exception ICT - BIS is working on a rule to create a new license exception ITC or Inter-Company Transfers.  The new license exception would allow US companies to export (and deemed export) normally license required hardware, software and technology within their companies and overseas affiliates that they control.  It’s not clear yet if the new ICT will see the light of day, but a draft rule is currently circulating.  The new license exception could potentially make life a lot easier for US companies, especially on the deemed export front.  But the bad news is that the company must apply with BIS to use the license exception.  It’s not clear what BIS might expect to grant a company ITC status, but at a minimum you would probably have to demonstrate you have a strong compliance program, if not a host of other obligations. 

Encryption Rules Rewrite - Addressing one of the most convoluted sections of the EAR, Mr. Borman advised that BIS is working on rewriting the crypto rules.  Whenever anybody in Government talks about encryption they are more secretive than Client 9 arranging for a “date,” but Mr. Borman did offer up a few insights.  First, the rewrite would clear Key Management Infrastructure (KMI) references and other encryption related deadwood that no one ever uses anymore.  Second, he stated that the revisions would attempt to make the crypto rules more akin to other EAR controls to make it more understandable to regular EAR practitioners and less of a stand-alone specialty as it is now. 

De Minimis Reform is Still Alive - Before BIS got sidetracked with the whole China thing, BIS was discussing revising the long neglected de minimis rules. Mr. Borman indicated that BIS had not forgotten about de minimis, or in his words “It’s clear we needed to update de minimis requirements.”  When this reform proposal was discussed in the past, BIS indicated that the updated rules would allow a combined hardware and software de minimis calculation.  Currently, reexporters must calculate hardware and software separately, and if either is over the de minimis thresholds the item becomes subject to EAR jurisdiction.  The reality is that many products have hardware and software together, like a laptop.  To do separate calculations for laptop hardware and laptop software often resulted in US jurisdiction even when the total combined US hardware and software content on the laptop was well under US de minimis thresholds. 

Deemed Export Country of Affiliation Revisions - Mr. Borman indicated that BIS will be soliciting comments about changing the EAR’s deemed export focus to a “country of affiliation” test.  I must admit, I did not understand where BIS was trying to go with this, so this is a pretty worthless news report.  Mr. Borman used the example of a Canadian who recently worked for a company on the Entities List, stating that fact would be relevant for determining deemed export license requirements.  The implication would be that you could not use the standard Canada-No License Required (NLR) eligibility for deemed exports of technology to this type of person.  But in the example given, the current Red Flag rules would probably already suffice in potentially restricting technology deemed exports.  Hopefully the fog will lift on what BIS is really trying to do here in the coming months.

The Bureau of Industry and Security has proposed a rule that would require that export and re-export license applications, classification requests, encryption review requests, License Exception AGR notifications and related documents be submitted to the BIS (Bureau of Industry and Security) via its Simplified Network Application Process (SNAP-R) system.

The SNAP-R is an improvement of the BIS’s latter system, SNAP. The new system includes the ability to include documents related to a submission in the form of PDF files as “attachments” to the submission. The system also includes a feature that allows BIS personnel to request additional information from the submitting party and for the party to submit that information in a manner that ties the chain of communication to the submission.

SNAP-R is intended to reduce processing times and simplify compliance with the administration of export controls. The system should provide improved efficiency in submission and processing and will hopefully improve end-user security through rights management and an updated application and security infrastructure.

Under the proposal, paper submissions will only be accepted if:

1. The party has had only had one submission in the twelve months immediately preceding the current submission
2. The party does not have access to the internet
3. BIS has rejected the party’s electronic filing registration or revoked its eligibility to file electronically
4. BIS has determined that the party submit on paper for a particular transaction
5. BIS has determined that certain conditions justify allowing paper submissions on a particular instance.

More information:

Federal Register Notice (PDF)

It has been a few months since the US slapped new export/reexport controls on China to attempt to slow the growth of the Chinese defense industry, and thus hamper the growth of Chinese military capability. On October 17, 2007, BIS announced the names of the five new Validated End Users (VEUs) in China. (OK, I admit my prediction that the VEUs would be a long time coming was wrong.)

So, it after hearing a wide range of people talk about the new China military end use license requirement and the VEU program, maybe now is time for me to issue the last word analysis of the new China rules.

For the most part, what does exist today, and what companies must comply with today, is a new approach to restricting certain export/reexport to China that are imposed by the new set of export/reexport restrictions on China.

Let’s look at the details of the new requirements. Read More

In the October 19, 2007 Federal Register the Bureau of Industry and Security published the names of the five entities in China who are the first BIS has designated to be Validated End-Users (VEU) eligible to receive certain items without export/reexport licenses. The five VEUs are:

• Applied Material China: supplier
• Boeing Hexcel AVIC I Joint Venture National Semiconductor Corporation
• Semiconductor Manufacturing International Corporation
• Shanghai Hua Hong NEC Corporation
• National Semiconductor Corporation

Each VEU has a list of specific Export Control Classification Numbers (ECCNs) that they may receive license-free under the VEU program. The eligible ECCNs vary from one VEU to the next. The new rule also identifies which facilities for each VEU are eligible to receive license-free exports/reexports.

More information and the complete final rule are available at:

Federal Register Notice

BIS Announcement

On October 16, 2007, President Bush signed legislation increasing by a factor of five the civil and criminal penalties under International Emergency Economic Powers Act and penalties for violations of the Export Administration Regulations. Previously, civil penalties had been $50,000 per violation; the amended statute now calls for the greater of $250,000 or twice “the amount of the transaction that is the basis of the violation”. The news is worse than appears because a single export transactions can result in multiple violations, because of this: many times the BIS can double or triple count violations for one shipment. For example, Violation 1) would be the illegal export, Violation 2) would be acting with knowledge of an illegal export, Violation 3) would be making false statements on AES/SED records that no license is required). With this is mind, the practice of multi-counting counting, combined with the new fines could send the monetary amounts of the penalties into the stratosphere if companies are not careful.

The legislation also adds new activities that represent violations; in the past civil violations consisted of violating or attempting to violate the law. Now it is a violation to “conspire” or “cause a violation” of the law. The criminal side merely adds that it is a violations to “willfully conspire to commit” or “aid or abet” a violation.

On October 16, 2007 President Bush signed into law the International Emergency Economic Powers (IEEPA) Enhancement Act to enhance administrative and criminal penalties that can be imposed under the IEEPA. IEEPA currently is the underlying law that authorized the Export Administration Regulation (EAR) controls on commercial and dual use items. Certain aspects of the act have been amended to explain penalties that may be assessed for unlawful acts.

The Enhancement Act amends the current IEEPA by clarifying that civil penalties may be assessed against those who conspire to violate, or cause violation of any license, order, regulation or prohibition of the United States Code. Violators can now be fined up to $1,000,000 and/or up to 20 years in prison for criminal penalties. Criminal liability will also be included, and is described as anyone who “willfully conspires to commit, or aids or abets in the commission of” an unlawful act. Any criminal enforcement actions commenced on or after October 16, 2007 will be subject to the new penalties. Civil penalties will result in a fine amounting to the greater of $250,000 or twice the value of the transaction that is the basis of the violation. Any civil enforcement actions that are pending, meaning a Final Order has not been signed, or commenced on or after October 16, 2007 will be under the new civil penalties.

There are however, five circumstances that will be general exceptions to the IEEPA Enhancement Act. Those practices will include:

• Cases that settle before filing of a charging letter with an Administrative Law Judge, BIS usually charges only the most serious violation per transaction.
• Cases that settle before filing of a charging letter with an Administrative Law Judge BIS may also charge each violation not directly connected to a specific export or antiboycott related transaction which may include conspiracy, evasion, or false statements made to a Special Agent.
• If BIS chooses to file a charging letter with an Administrative Law Judge because of mutually agreeable settlement cannot be reached, then BIS will reserve its right to proceed with all available charges based on th4e facts presented.
• BIS draws meaningful distinctions based upon the relative seriousness of any offense. More serious offenses result in higher penalties for the purposes of settlement discussions.
• BIS affords great weight mitigation of up to a 25% reduction of the amount of penalties to be assessed for the existence of an effective export compliance program in place before the violation and later upgraded.
• For all valid Voluntary Self-Disclosures, BIS gives great weight mitigation that generally results in a reduction of at least 50% of the calculated penalty-and does so after considering the aggravating and mitigating factors in the case.

Mario Mancuso, Secretary of Commerce for Industry and Security, explains that, “The new law provides significant additional support for our cases, which we intend to apply in an equitable, deliberative and rigorous way. Most important, we think the enhancements will better align incentives to improve overall compliance with our regulations.”

More information:

BIS Factsheet: Charging and Penalty Practices (PDF)

BIS news release