Export Control News & Alerts

The Export Control Update Newsletter
June 2007

CONTENTS

1. Bush Administration Still Working Hard to Relax Military Export Controls on the UK
2. The Dust Settles (a Bit) on New Export Restrictions on China
3. State/DDTC Provides Copy of Registration and Compliance Briefing
4. Senator Dodd Wants Bigger Fines for Exporters and Reexports under the International Emergency Economic Powers Act (IEEPA)
5. Commerce Nails Cooper Tools Industrial Ltda. $27,000 for Antiboycott Violation
6. Gonzales and Justice Department Raises Their Export Control Enforcement Profile
7. Commerce Amends EAR General Order No. 3 re Mayrow General Trading and Affiliated Entities
8. State/DDTC: “Update on Promotion to D-Trade2”

1. Bush Administration Still Working Hard to Relax Military Export Controls on the UK

The U.S. and British governments signed, in a video conference call, a Defense Trade Cooperation Treaty through a joint statement, June 21, 2007. Financial Times’ Demetri Sevastopulo, indicated earlier in June 15, 2007 both the U.S. and British governments are creating controversy in attempting to make a treaty enabling UK to buy U.S. defense products without obtaining export licenses, which would also allow reciprocal opportunities for US exports from Great Britain.

The interesting thing about the treaty is that the Bush Administration can avoid the US House Representatives, which has been a road block to past efforts to relax military export controls on the UK. In the past, the Administration wanted to change the Arms Export Control Act (AECA) to relax export controls for the UK but the House of Representatives has made it clear it would not support any such change. The House, however, has no say in treaties. The US Senate is the legislative body that must ratify a treaty signed by the Bush Administration.

While there is no guarantee the Senate will ratify the treaty, there appears to be some hope that the Senate might be willing to go along with treaty military exports to the UK in a manner similar to how the US regulates military exports to Canada.

Senior Republican Senator John Warner declared the agreement would deliver a strong message that the UK is “one of our most trusted allies.” (Don’t you love how we Virginians think!) Former senior defense official for the Bush administration Dov Zakheim also embraces the deal saying, “It’s about time such agreement was reached.”

As early as 2000, Washington has promised to grant both the UK and Australia waivers from ITAR outlined in the AECA. Up until now only Canada has a waiver. In 2005, then Foreign Affairs committee Chairman of the House Henry Hyde foiled the plan pointing out the need for the UK to strengthen its laws governing exports to third countries.

A British government official pointed out the treaty will not apply to purely commercial transactions but to “reasonably tightly defined projects” where the end user would be the ministry of defense.

In the agreement, the UK and the US committed to improving the interoperability of equipment and systems enabling their respective forces to work more closely together, and to better transatlantic defense information sharing by lessening the barriers in exchanging defense goods, services and information.

Both governments aim to finalize implementing arrangements by the end of the year and finalize steps needed to implement the treaty.

There have been some concerns expressed that the Bush Administration did not consult with Congress in advance of signing the treaty. U.S. State Department spokesman Sean McCormack said the Bush administration was working with U.S. lawmakers to get the treaty ratified by the U.S. Senate. Hopefully the Bush Administration will be able to placate any Congressmen whose feelings were hurt by not being consulted in advance.

— John Black

2. The Dust Settles (a Bit) on New Export Restrictions on China

OK, it has been a month since the US slapped new export controls on China to attempt to slow the growth of the Chinese defense industry, and thus hamper the growth of Chinese military capability. A considerable amount of concern about the rule was exhibited when more than 700 persons joined in the BIS conference call to discuss the new rule on June 20. Since the rule was published in the June 19, 2007 we have had plenty of opportunities to hear the US Government and other parties focus on how the new rule relaxes exports to China by establishing a procedure for license-free exports to Validated End-Users (VEUs) even though no VEUs actually exist.

What does exist today, and what companies must comply with today, is a new approach to restricting certain export to China that are imposed by the new set of export restrictions on China. So, let’s look at the details of the new requirements.

The new rule requires an export license for exports of certain formerly no license required (NLR) items to “military end use” in China. The new provisions in the Export Administration Regulations (EAR) are intended to have a direct impact on manufacturers of military items in the PRC, and, by impacting the manufacture of military equipment in the PRC, the new rule will impact the Chinese military. The new rule does not impact as many items as the Commerce Department original proposal. For example, the original proposed rule applied to exports of commercial aircraft parts classified as ECCN 9A991 to “military end use” in China, while the new rule does not restrict exports of commercial aircraft parts. The new rule, however, does require an export license for exports of commercial aircraft, commercial aircraft engines, and 9E991 technical data related to commercial aircraft, engines and parts.

OK, let’s get more specific and look at the details of the new restrictions.

Main Impact:

The EAR now requires an export license for items listed in the new Supplement 2 to Part 744 when the items are intended for a “military end use” in the PRC. So, it is a two part control — for the control to apply, the items must be listed in the new Supp. 2 and they must be destined to a “military end use.” If either of those facts are not present, the new rule does not apply.

So, review the new Supp. 2 to see if it includes any items you export. If it doesn’t, the new rule doesn’t impact your exports. If you do have stuff in the new Supp 2, then take the next step.

The key issue is that “military end use” activities are what cause there to be an export license requirement for Supp 2 items. If you “know” (think of it as you know or suspect) your Supp 2 item is destined for a “military end use” you now need an export license.

“Military end use” means:

• Incorporation into a military item;
• For the “use”, “development”, or “production” of military items;
• Deployment of 9A991 items

Notes:

Military items as used above means military items controlled in the US Munitions List, military items controlled by the Wassenaar International Munitions List (http://www.wassenaar.org/); and military items classified in xx018 ECCNs (e.g., 9A018) in the Commerce Control List. Generally speaking, the USML plus the xx018 ECCNs has usually been the equivalent of the Wassenaar International Munitions List.)

As defined in Part 772 of the EAR:

“use” means operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing

“development” is related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, layouts

“production” means all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, quality assurance.

For purposes of this section:

operation means to cause to function as intended

installation means to make ready for use, and includes connecting, integrating, incorporating, loading software, and testing

maintenance means performing work to bring an item to its original or designed capacity and efficiency for its intended purpose, and includes testing, measuring, adjusting, inspecting, replacing parts, restoring, calibrating, overhauling

deployment means placing in battle formation or appropriate strategic position.

The rule is not an across the board ban on exports to military end users. If the Chinese military is flying an unmodified Cessna, you can send 9E991 technical data to it without an export license because the use of an unmodified commercial aircraft by the military is not a “military end use” under the new China requirements. And, be careful because things can get tricky — for example, the new rule does not prohibit you from exporting 9A991 parts to “military end use” but it does prohibit the export of 9E991 data to “military end use.”

You need to realize that you should not base your new compliance procedures on simply determining who your customer or end user is-the new rule is not a prohibition against exports to military end users, it is a prohibition against exports to “military end uses.” In many cases the new rule will apply when you export to a manufacturer or somebody doing service, for example, if they are making or servicing a military item. So, you need to know what your customer will do with your stuff to know whether there is a “military end use.”

Secondary Impact:

The EAR authorizes the Commerce Department to grant a special Validated End User (VEU) status to certain entities in China and not require export licenses for those entities. The items that will not require an export license may vary from one approved VEU to another and will be whatever items the US Government decides should be license free to a specific entity. If a Chinese entity agrees to be audited by the US Government whenever the US Government requests to do so, and the US Government decides it can trust the Chinese entity, the entity might get the VEU status.

People who like to put a positive spin on the new rule (aka, people who don’t like to admit the new rule is intended to slow or impede the growth of the Chinese defense industry), love to focus on the VEU program. But, those of us who have to comply with rules don’t have time to focus on the benefits of license free exports to parties who do not yet exist.

Tertiary Impact:

The new rule also adds a lot of information related to US export license approval policy for exports that may directly or indirectly involve military-type activities in China. The bottom line is if the US Government wants to deny your license for whatever reason, the licensing policy gives it plenty of explicit policies upon which it may base its denial. In the past the US Government normally was able to find a legal basis for denying any license it wanted to deny for China, so I wouldn’t have even brought up this aspect of the new rule if it weren’t for the fact that it gives me a chance to use the word “tertiary.”

Well, I hope that helps. One thing I will not do here is ask why the US Government is doing this. I will not mention that the US defense budget is six times as large as the Chinese defense budget. I will not mention that the US has the largest defense budget in the world, and if you combine the defense budgets of the countries ranked 2-30 in the world, the combined figure for all of those countries would not be as much as the US defense budget. And, lastly, I will not discuss the fact that the United States accounts for over 50% of all arms sales in the world.

View the Final Rule

— John Black

3. State/DDTC Provides Copy of Registration and Compliance Briefing

If you find enforcement stats from Feb 2004-2006 interesting, check out this DDTC PowerPoint:

Arms Export Control Act (PPT)

This 25-slide presentation was presented by David Trimble and Daniel Cook, the Director and the Senior Compliance Specialist of DDTC respectively, last May 23, 2007.

By the way, if you find enforcement statistics interesting — TAKE A VACATION FAST!!!!!

— John Black

4. Senator Dodd Wants Bigger Fines for Exporters and Reexports under the International Emergency Economic Powers Act (IEEPA)

Senator Christopher Dodd introduced a bill to increase the fines for export violations under IEEPA. This bill would increase maximum penalties for violations of EAR and OFAC controls from $50,000 to $250,000, or twice the amount of the transaction; and increase criminal penalties to $1,000,000 with a maximum jail sentence of 20 years. In its present form Dodd’s bill would be retroactive to catch any enforcement action in process on the day the bill is passed. The proposed legislation has not only the support of the Treasury Department, but also been approved by the Senate Banking, Housing and Urban Affairs Committee.

— Hannah Bandalan

5. Commerce Nails Cooper Tools Industrial Ltda. $27,000 for Antiboycott Violation

Cooper Tools Industrial Ltda. has been issued a civil monetary penalty amounting to $27,000 for engaging in transactions with a boycotted country, committing 15 violations of Section 760.2(d) of the EAR. The violations were related to transactions with Kuwait and United Arab Emirates.

Details from Department of Commerce (PDF)

— Hannah Bandalan

6. Gonzales and Justice Department Raises Their Export Control Enforcement Profile

The first-ever National Export Control Coordinator for the Department of Justice was appointed last June 20, 2007. Steven W. Pelak, a veteran prosecutor for 18 years, has been an Assistant U.S. Attorney and Senior Litigation Counsel in the National Security Section of the U.S. Attorney’s Office for the District of Columbia and, since September 2001, has served as the Anti- Terrorism Coordinator for the U.S. Attorney’s Office. Mr. Pelak is detailed to the Counter-espionage Section of the Justice Department’s National Security Division, wherein he will have some of the following responsibilities:

• development of comprehensive training materials on export control investigations and prosecutions for federal prosecutors nationwide
• solicit and receive regular progress reports from U.S. Attorneys’ offices on the development of export control cases
• coordinate between the Justice Department and the many other U.S. law enforcement, licensing and intelligence agencies that play a role in export enforcement.

Attorney General Alberto Gonzales mentioned in his June 11 speech on nuclear terrorism that the Justice Department’s National Security Division where federal prosecutors were provided instruction and guidance on export control cases, with trainers from the Justice Department and the relevant investigative agents on hand providing comprehensive prosecutorial instruction.

In the past months, the Justice Department brought charges or prosecuted cases involving illegal exports of Naval warship technology to China, technology to Indian missile facilities, arms to terrorists in Sri Lanka, military night vision data to China, as well as military helicopter data to foreign nations.

According to Justice, some recent export control prosecutions are:

U.S. Naval Warship Data to China

On May 10, 2007, following a six-week jury trial, Chi Mak, a former engineer with U.S. Navy contractor Power Paragon, was found guilty on all counts of a superseding indictment charging him and four others with a variety of offenses stemming from the illegal export of military technical data on the U.S. Navy warships to China. Court documents in the case alleged that co-conspirators from China provided Mak with lists that requested specific information, including U.S. Naval research related to nuclear-powered submarines, for delivery to China. The investigation was conducted by the FBI and the Naval Criminal Investigative Service. The case is being prosecuted by the U.S. Attorney for the Middle District of California.

Missiles, Arms to LTTE Terrorists, Indonesian Military

On May 10, 2007, Thirunavukarasu Varatharasa pleaded guilty to conspiracy to provide material support to a designated foreign terrorist organization and attempted export of arms and munitions. Varatharasa conspired with Haji Subandi, Haniffa Osman and Erik Wotulo to provide surface-to-air missiles, machine guns, night vision devices, and other weapons to the Liberation Tigers of Tamil Eelam (LTTE) in Sri Lanka. All four have pleaded guilty in connection with the scheme. Two additional defendants, Reinhard Rusli and Helmi Soedirdja, have also pleaded guilty to arms export violations as part of a plot to provide arms to the Indonesian military. The investigation was conducted by ICE, DCIS, and the FBI. The case is being prosecuted by the U.S. Attorney for the District of Maryland.

Ivory Coast

Yssouf Diabate was sentenced to 48 months in prison for attempting to illegally export handguns, semi-automatic firearm components and laser sights to the Ivory Coast. The investigation was conducted by ICE and DCIS. The case is being prosecuted by the U.S. Attorney for the Southern District of California.

Technology to Ballistic Missile Facilities in India

On April 3, 2007, Parasarathy Sudarshan was arraigned in federal court in Washington, D.C. on charges of illegally exporting restricted U.S. technology to Indian state entities involved in ballistic missile development; acting as an illegal agent of India and exporting military technology to India for the development of a new fighter jet. He was one of four defendants indicted in the case. He and another defendant, Mythili Gopal, were arrested in South Carolina on March 23. The investigation was conducted by the FBI, the Commerce Department and ICE. The case is being prosecuted by the U.S. Attorney for the District of Columbia.

Black Hawk Helicopter Technical Data Overseas

On March 28, 2007, Axion Corporation, an Alabama defense contractor, and its owner, Alexander Latifi, were charged with illegally exporting Black Hawk military helicopter technical data overseas, fraud involving aircraft parts and submitting false documents. The investigation was conducted by the National Aeronautics and Space Administration (NASA) Office of Inspector General, DCIS, ICE, FBI, and the IRS, and is being prosecuted by the U.S. Attorney for the Northern District of Alabama.

Ballistic Helmets to Surinam

On March 28, 2007, Virginia-based company, Alpine Armoring, Inc., pleaded guilty to the illegal export of ballistic helmets to Surinam. The company and its president, Fred Khoroushi, also pleaded guilty to making false statements on a shipper’s export declaration. The investigation was conducted by the Commerce Department, ICE, and DCIS. The case was prosecuted by the U.S. Attorney’s Office for the District of Columbia.

Military Night Vision Technology to China, Singapore, U.K.

On March 27, 2007, ITT Corporation, the leading manufacturer of military night vision equipment for the U.S. Armed Forces, agreed to pay a $100 million penalty and admitted to illegally exporting restricted night vision data to China, Singapore, and the United Kingdom. The company also pleaded guilty to charges that it omitted statements of material fact in required arms exports reports. The $100 million penalty is believed to be one the largest ever in a criminal export control case. As part of the plea agreement, ITT Corporation must invest $50 million of the penalty toward the development and deployment of the most advanced night vision systems in the world for the U.S. Armed Forces. The investigation was conducted by DCIS and ICE. The case is being prosecuted by the U.S. Attorney for the Western District of Virginia.

Machine Guns, Arms to Indonesia

On Jan. 18, 2007, Hadianto Djuliarso pleaded guilty to charges of conspiracy to violate the Arms Export Control Act and money laundering in a scheme to purchase and illegally export more than $1 million worth of machine guns, sniper rifles and other weapons to Indonesia. Djuliarso also made inquiries into purchasing Sidewinder missiles and strafing ammunition. Three other defendants have pleaded guilty in this scheme. The investigation was conducted by ICE and DCIS, and is being prosecuted by the U.S. Attorney for the Eastern District of Michigan.

Military Combat Simulation Software to China, Malaysia, Thailand

On Dec. 14, 2006, Xiaodong Sheldon Meng was charged with stealing military combat and commercial simulation software from Quantum3D, his former employer in California, and using these materials in demonstration and sales proposals to the government of China, the Malaysian Air Force and the Thailand Air Force. Much of the software was designed exclusively for military applications and for precision training of fighter pilots in night vision scenarios. The investigation was conducted by the FBI and ICE. The case is being prosecuted by the U.S. Attorney for the Northern District of California.

— Hannah Bandalan

7. Commerce Amends EAR General Order No. 3 re Mayrow General Trading and Affiliated Entities

On June 5, 2007, Assistant Secretary of Export Administration Christopher A. Padilla has issued the following: BIS is revising the EAR by amending a general order published in the Federal Register on June 5, 2006 and later amended on September 6, 2006 to add nine additional persons. The general order imposed a license requirement for exports and reexports of all items subject to the EAR where the transaction involved Mayrow General Trading (“Mayrow”) or entities related, as specified in that general order. The order also prohibited the use of License Exceptions for exports or reexports of any items subject to the EAR involving such entities.

This rule will expand the general order and add sixteen additional persons to it. Pursuant to the expansion, the general order will cover: (i) Persons regarding whom the U.S. Government possesses information of affiliation or relationship to Mayrow; and (ii) other persons regarding whom the U.S. Government possesses information concerning the acquisition or attempted acquisition of commodities capable of being used to construct IEDs, as well as persons who are related to or affiliated with such persons 2E The order will apply to persons specifically listed who fit within either of these two groups. To reflect this expansion, this rule will update the heading of the general order to use the term “persons”.

Details from Department of Commerce

— Hannah Bandalan

8. State/DDTC: “Update on Promotion to D-Trade2”

The promotion to D-Trade2/Version 5.0, scheduled for late June, has now been postponed to late July. Additional information will be posted on the DDTC Web site on how operations will be handled during this period, including new and improved features available in D-Trade2/Version 5.0. Exact dates will be provided shortly.

—Hannah Bandalan

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