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The Export Control Update Newsletter
March 2007

CONTENTS

  1. ITT Fined $100 Million for Illegal Exports of Night-Vision Technology
  2. Chiquita Banana Company Pays $25 Million for Paying Terrorist Thugs
  3. US Seeking to Sell Arms to Allies in the Persian Gulf
  4. UN Approves New Sanctions Against Iran
  5. Banco Delta Asia Barred from Business with US Financial Institutions
  6. Axion Corporation Indicted for Illegally Exporting Black Hawk Helicopter Technology
  7. Varian, Inc., Coda International Tours, and Guidant Corporation Receive OFAC-Imposed Penalties
  8. Parties of Indian Origin Arrested for Illegal Export of Missile Technology
  9. ITAR Regulations on Dual-Nationals Could Cause Delays in Canadian Contracts
  10. European Union Adopts Proposal for New Trade Restrictions on Iran
  11. State Department Not Supportive of Bills Aimed at Tougher Sanctions on Iran

1. ITT Fined $100 Million for Illegal Exports of Night-Vision Technology

Who would have thought that a company right here in my peaceful Shenandoah Valley of Virginia would set the export fine record with a $100 million penalty? (And, no, ITT is not and was not a client of mine). ITT agreed to plead guilty to criminal charges of illegally exporting controlled night vision technology and omitting material facts in statements to the government. The penalties stemmed from ITT’s outsourcing of components for their leading edge night-vision goggles. According to government and published reports, ITT exported technical data without the required licenses to the UK and Singapore. ITT was aware of violations in the mid 1990’s and voluntarily disclosed some limited infractions but omitted large amounts of material information and provided false information to hide the full scope of the problem. It seems like in the course of looking into UK violations it was discovered that there were even more significant violations involving Singapore.

Based on public sources, it appears that ITT illegally transferred technical data to Singapore to source parts for the night vision goggles. The firm in Singapore employed Chinese nationals, thus, this violation involves “an illegal transfer to the PRC” because of US rules that say the release of technical data to a foreign national is an export to the home country of the national. Another important aspect of the case is that ITT alledgedly released technical data to a Singaporean national at its facility Roanoke, VA.

When a full scale investigation was begun, ITT tried to hinder it by “running out the clock” on the statute of limitations for several years, a strategy most experts in this field would consider to be nothing short of short-sighted, if not simply stupid, and certainly a strategy that deserves credit for racking up a significant portion of the record setting fine. It was only after the government informed them that they were prepared to seek an indictment in 2005 that ITT began to cooperate with the investigation. Government sources claim that documents show that officials at ITT saw export regulations as an obstacle to making money and tried to circumvent them accordingly.

So, ITT agrees to pay $100 million. If ITT spends $50 million in research and development of night vision technology, it can reduce the fine down to a measly $50 million. Seems like a good deal-part of your fine you must use to develop new technology? Well, don’t ever catch yourself being positive in this field-the government will own all the rights to the new technology ITT develops. The government will be able to share that new technology with whomever it wants, including ITT’s competitors who are bidding against ITT to selling night vision to the US Government, a move that could potentially create an alternative source of the advanced technology upon which the US military could rain its huge contracts for purchasing new equipment.

Also, ITT gets debarred. The debarment applies only to ITT’s Roanoke, VA company. The debarment notice says that the State Department may grant exceptions to the debarment as it sees fit. Debarment means that ITT Roanoke may not be involved in transactions under ITAR exemptions without specific State Department authorization and that all license and agreement applications involving ITT Roanoke will require that State grant an exception to the debarment.

And, of course, ITT must implement the standard full suite of corrective measures to enhance its compliance policies and procedures, including hiring an independent third party Special Compliance Officer to monitor ITT’s export activities and report them to the government. ITT also is open to spot check audits and increased government scrutiny across the board.

Lessons for Export Compliance People:

  1. If your lawyers are dumb enough to think they can fight the government and win, or even stall the government until the statute of limitations expires on potential violations, fire them. If you have a large and sensitive violation, try this strategy: Resistance is futile, try to negotiate the best deal you can while you cooperate with the government and absorb the costs of your loss.
  2. A transfer of technology to a company in Singapore who employs Chinese nationals will be characterized as an illegal export to China in press releases, which will make your company look bad.
  3. Here is a case to use to mention when somebody in your company wants to know the risk of violations that involve the release of ITAR technical data to foreign nationals in the United States.
  4. See above comments about strategy on dealing with government investigations of ITAR violations.
  5. Indictment or conviction for violations of US export controls rules makes a company ineligible (e.g., debarred) under the ITAR
  6. ITT Roanoke Debarrment: If you are not ITT, you need to remember about the prohibitions against using exemptions for transactions that involve ineligible parties such as ITT Roanoke. Realize that you may have a difficult time getting the State Dept. to approve a license or agreement that involves ITT. Add ITT Roanoke to the list of export denied parties against which you screen your transactions (the debarment applies only to transactions involving ITAR items and does not effect ITT’s involvement in transactions involving only EAR items). My advice: If you need to do business with ITT Roanoke (or any other ITT facility in the short term), you should contact the export compliance or legal people in ITT and discuss with them the status of their debarment at the time and whatever special arrangements they have worked out with State. You probably want to contact State also to discuss the same.
  7. Use this case to remind your purchasing department that US export controls have a direct impact on their overseas purchasing and procurement activities.
  8. Generally use this case to scare, err, motivate your company to comply.

More Background

The severity of the penalty reflects the seriousness of the technology that may have been compromised. The ability to operate around the clock with night-vision technology is one major advantage that US forces have on the battlefield. John Brownlee, Prosecuting US Attorney, (and law school classmate of BSA’s Maarten Sengers) said:

“The superior quality of our night vision technology gives the United States Armed Forces an enormous advantage on the battlefield. Sending sensitive information on these advancements overseas without the necessary licenses puts that advantage in jeopardy. We hope the agreement reached with ITT will send a clear message that any corporation who unlawfully sends classified or export-controlled material overseas will be prosecuted and punished. In addition, the remedial action plan that is part of this agreement is designed to bring ITT Corporation back into full compliance, which will benefit both the corporation and the United States.”

ITT maintains that the “tube technology” - the heart of the night vision goggles - was never compromised and remains secure.

This case has brought the spotlight on US manufacturers and the practice of outsourcing to pare costs. Many companies transfer technology related to outsourcing of components, mistakenly not looking at the components as defense articles. This case should be a serious warning to them.

Sources:

 

— John Black and Jill Kincaid

2. Chiquita Banana Company Pays $25 Million for Paying Terrorist Thugs

Ohio-based Chiquita Brands International has pled guilty to charges of engaging in transactions with a terrorist organization in Colombia. From 1997 until 2004, Chiquita paid over $1.7 Million to the United Self-Defense Forces of Colombia (AUC). According to Chiquita officials, this was paid resulting from a thinly veiled threat by the organization that personnel or property of Chiquita would be harmed if it was not. AUC controls areas where Chiquita bananas are grown and has long been know to use violent tactics to extort money. In 2002, the United States government added the AUC to their list of known terrorist organizations, making the payments from Chiquita illegal.

Chiquita officials claim that shortly after they realized that the AUC had been designated as a terrorist organization they stopped payments. They argued that the payments had been made to protect the lives of their employees. The payments were voluntarily disclosed by Chiquita in 2003.

The penalty assessed in the plea agreement was a $25 million fine. The government of Columbia is not being so quickly appeased and wants to find out more about Chiquita’s and the United States’ knowledge of gun smuggling and other illegal activities of the AUC. The government of Columbia says that it may seek the extradition of 8 US Chiquita executives to Columbia. The right-wing death squads of the AUC have killed thousands in the country’s ongoing civil conflicts. The names of the 8 executives who are being targeted are not being released.

Sources:

  • WashingtonPost.com March 21, 2007
  • The Daily Bugle, March 16, 2007, Item #13, “Banana Flambe”, Author: R. C. Burnes

 

— Jill Kincaid

3. US Seeking to Sell Arms to Allies in the Persian Gulf

In an effort to send a signal to Iran, the State Department is seeking Congressional approval to sell arms to US allies in the Persian Gulf. Countries such as Saudi Arabia, Qatar, Kuwait, Bahrain, Oman and the United Arab Emirates could have their defenses bolstered through the purchase of sophisticated air and missile defense systems, advanced early warning radar aircraft and light coastal combat ships. It is also believed that Northrop Grumman’s E-2D Hawkeye 2000 early warning aircraft is under consideration for sale. The United Arab Emirates had tried to acquire this aircraft in 2003 but the deal fell through due to the US Navy’s hesitation to sell the necessary communication software.

US officials have been rather quiet about the proposed arms sales. This could be due to the concern that building up Iran’s neighbors could bring the US closer to an Iranian confrontation. Officials state the need for Congressional support and the need for a low level of publicity from the countries involved as the reason for being so tight-lipped. Several countries have been reticent about agreeing to sales because of the fear of sending a message of aggression to Iran.

Source:

 

— Jill Kincaid

4. UN Approves New Sanctions Against Iran

Iran’s refusal to stop its uranium enrichment program has resulted in new sanctions against them being unanimously approved by the UN Security Council. On Saturday, March 24th, the United States, China, Russia, Britain, France and Germany all voted to enact the new sanctions.

Changes include a ban on Iranian arms exports and a freeze on the assets of 28 entities with involvement in Iran’s nuclear programs. Many of these entities are linked to Iran’s Republican Guard.

The new sanctions are considered modest by most standards. The United States and the Europeans favored stronger measures and the Chinese and Russians were in favor of a less stringent approach. The goal is the make it clear to the Iranians that their failure to comply with demands to suspend their enrichment activities will have consequences. Iran defiantly rejected the sanctions and stated that it would not suspend its nuclear programs. Iranian officials maintain that their nuclear activities are solely for the purposes of energy production.

Source:

 

— Jill Kincaid

5. Banco Delta Asia Barred from Business with US Financial Institutions

Due to the results of an 18-month investigation, the US Treasury Department recently announced that as of April 14, 2007 all US banks and financial institutions will be barred from doing business with Macau-based Banco Delta Asia (BDA). BDA was designated as an institution of “primary money laundering concern” regarding dealings with North Korean clients in 2005 and, subsequently, nearly $24 million in funds were frozen pending an investigation. These frozen funds have recently become an issue as North Korea has tied the release of these funds to their willingness to enter an agreement to halt its nuclear weapons program. The conclusion of the investigation resulting in the regulations against BDA will allow overseas regulators to possibly release some of the frozen funds.

The final rule affecting BDA falls under Section 311 of the US Patriot Act. The majority of US financial institutions have already voluntarily severed ties with BDA, however, they will now have to be more careful that other foreign clients are not being used to conduct business on BDA’s behalf.

Specific abuses by BDA include involvement with US counterfeit currency, counterfeit cigarettes and narcotics.

It is noted that Macau is not targeted as a jurisdiction of concern regarding money laundering, only BDA specifically as a financial institution.

Source:

 

— Jill Kincaid

6. Axion Corporation Indicted for Illegally Exporting Black Hawk Helicopter Technology

Axion Corporation, a defense contractor in Huntsville, Alabama, and its owner, Alexander Latifi, have been issued a 5-count indictment for charges which include illegally exporting military technology overseas. Other charges include fraud and submitting false documents to the government.

The indictment alleges that in September 2003 and after, Axion knowingly and willfully exported technical drawings of the bifilar weight assembly for the UH-60 Black Hawk helicopter to companies outside of the United States. US export regulations require that companies must obtain a State Department license before exporting any defense articles. No such license was applied for or obtained by Axion.

The maximum penalty for exporting defense articles illegally is 10 years in prison and/or a $1,000,000 fine. Assistant Attorney General Kenneth L. Wainstein said that “keeping sensitive U.S. military technology from falling into the wrong hands is a top priority for the Justice Department --and will be protected through criminal law enforcement where violations are found”. He added that this indictment should serve as a warning to companies to not attempt to increase their profits at the expense of our national security.

Source:

 

— Jill Kincaid

7. Varian, Inc., Coda International Tours, and Guidant Corporation Receive OFAC-Imposed Penalties

Enforcement information posted by Treasury/OFAC as of March 9, 2007 include the following:

1. Guidant Corporation paid $277,017 to settle charges of violations of the Iranian Transactions Regulations and Iraqi Sanctions Regulations occurring from 2000 to 2004. Guidant exported vascular intervention and cardiac surgery business units for ultimate resale to Iran and Iraq. They also provided training on such units. Guidant relayed this information to OFAC via a voluntary disclosure.

2. Varian, Inc. paid $114,958 to settle charges that their subsidiaries (Varian A.G. Switzerland & Varian Deutschland GMBH) had committed violations of the Iranian Transaction Regulations and the Iraqi Sanctions Regulations from 2001 to 2003. OFAC alleged that the subsidiaries had exported without a license or outside of the scope of the license. Varian provided this information via a voluntary disclosure.

This is the second time in a year that Varian has settled charges of violations of its overseas subsidiaries. Last year they paid $26,400 for computers and software shipped to Syria by a Dutch subsidiary.

3. Coda International Tours paid $3,500 to settle charges of violating the Cuban Assets Control Regulations. Coda did not voluntarily disclose this information.

Sources:

 

— Jill Kincaid

8. Parties of Indian Origin Arrested for Illegal Export of Missile Technology

The FBI has charged two persons of Indian origin of knowingly violating US export regulations by conspiring to export dual-use electronic components to organizations on the Entity List without obtaining the proper licenses. The two arrested parties are Parthasarathy Sudarashan, founder of Cirrus Electronics in Singapore, and Mythili Gopal, who launched Cirrus USA in Simpsonville, SC. Both are legal residents of the US. Two unnamed Indian government officials were referred to as co-conspirators.

The items exported were computer chips and other electronic components of a “dual-use” nature which can be used in missile guided systems and aircraft navigation systems. The modus operandi was to purchase the components in the US, illegally export them to Cirrus Singapore, and then re-export them to three Indian companies: Vikram Sarabhai Space Centre (VSSC) for possible use in missile production, Aeronautical Development Establishment (ADE) for use in the Tejas Light Combat Aircraft project, and Dharat Dynamics for an unnamed defense project. VSSC is on the Department of Commerce Entity List.

One of the unnamed alleged co-conspirators is posted at the Indian Embassy in the United States according to the FBI. The other is an official of ADE. Sudarashan and Gopal will have their first court appearance in early April according to a spokesperson for the US Attorney for the District of Columbia.

Source:

 

— Jill Kincaid

9. ITAR Regulations on Dual-Nationals Could Cause Delays in Canadian Contracts


US ITAR regulations are causing delays, and possible cancellations, in defense contracts between the United States and Canada. Briefing notes to Canada’s Defence Minister, Gordon O’Conner from last year show that American regulations have caused so many delays in Ottawa that the Canadian government had considered canceling a project to replace their 40-year old Sea King helicopters with 28 American-built Sikorsky Cyclone helicopters.

The situation is resulting from the conflict between the ITAR’s regulations on dual-nationals and Canada’s anti-discrimination laws. US regulations prohibit Canadians with dual citizenship from having any contact with regulated materials or information. This has created a real dilemma for Canadian defense companies who risk breaking Canadian laws by releasing employees from working on sensitive US contracts. Sources close to the “Sea King” project state that juggling employees to comply with US regulations is costing Canadian companies a lot in time and money.

Canadian officials have refused to sign certain TAA’s and licenses which contain ITAR restrictions because they say they call for discrimination against Canadian citizens. This, also, is causing delays on the production and delivery of the Cyclones.

As General Motors in London, Ontario was recently fined $20 million for failing to comply with ITAR regulations relating to dual-nationals, Canadian companies know well the risks of non-compliance.

Upcoming Canadian purchases of Boeing helicopters and Lockheed-Martin planes could also be hindered by the problems.

Source:

  • www.globeandmail.com, March 26, 2007

 

— Jill Kincaid

10. European Union Adopts Proposal for New Trade Restrictions on Iran

In mid-March, 2007, the European Union adopted a proposal specifying trade restrictions on Iran. The goal is to further the restrictions placed on Iran, with emphasis on those practices which could contribute to Iran’s nuclear program. The proposal includes the following:

  1. Guidelines for consistent implementation of the program
  2. Specifying which goods and technology will be affected. Companies who wish to export such goods will have to apply for proper authorizations from the appropriate member state
  3. Prohibition on providing technical or financial assistance to any parties listed in Annex I or Annex II of the Regulation
  4. Authorization for Member States to override the above prohibition when certain criteria are met:
    1. Confirmation by the UN that transaction will not contribute to Irans’s nuclear program
    2. Appropriate end-use guarantees in contract
    3. Commitment by Iran not to use transaction for nuclear program
  5. A freeze in funds or assets controlled by individuals or entities listed in Annex IV and Annex V

Penalties for violation of the regulations will be set out by individual Member States.

Source:

 

— Jill Kincaid

11. State Department Not Supportive of Bills Aimed at Tougher Sanctions on Iran

Bills currently being considered in the House and Senate aimed at hitting Iran’s economy are not popular with the State Department. The intent of the bills is to force companies to stop investing in Iran - primarily the oil and gas sector which comprise the country’s biggest source of revenue.

Nicholas Burns, US Undersecretary of State, stated Thursday, March 29th, that the State Department would not support the current legislation being discussed. This legislation would require the enforcement of penalties of companies investing in Iran. Mr. Burns said that the act as it reads currently would “turn the full weight of sanctions not against Iran but against our allies that are instrumental in our coalition against Iran.”

The bills currently under consideration would close loopholes that allow US companies’ foreign subsidiaries to invest in Iran and would require pension funds to name companies in their portfolios which are investing in Iran. US companies known to have interests in Iran include General Electric, Dresser-Rand, Xerox, Overseas Shipholding Group, Inc., and Halliburton among others. There are many companies who manage to do business with Iran and other sanctioned countries through offshore subsidiaries or with Treasury-granted licenses. These companies are getting increased criticism as tensions worsen between the US and Iran. Many of these companies state that they are severing connections, or at least will sever them when current contracts expire. The bills under consideration would ban much of this business unless a special export license was obtained.

The UN Security Council recently passed a second set of Iranian sanctions. These call for countries to be vigilant in restraining their export credit relationship but fall short of requiring a cessation of export credits. The administration continues to encourage international banks to cease transactions with Iran.

Sources:

 

— Jill Kincaid

 

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