Export Control News & Alerts

The Export Control Update Newsletter
March 2008

CONTENTS

1. New DDTC Requirements for DSP-5s Related to Agreements
2. Mazak to Modify Its Machines to Enhance Export Compliance
3. Westinghouse Agrees to $300,000 for FCPA Violations
4. Industry Groups Oppose Proposed Changes to EAR Deemed Export Rules
5. DDTC Publishes US-UK Defense Treaty
6. CSIS: US Export Controls Harming US Space Industry
7. For Once, Company Wins ITAR Case in Court - Now Company Is Asking for Compensation from Justice Department
   
8. Census Bureau Requests Comments on AES Proposal
9. OFAC Issues Guidance on Definition of Ownership
10. EAR Now Authorizes Exports under TMP to Sudan in Some Cases
    
11. Older stories are in the Export Control Update newsletter archive

1.  New DDTC Requirements for DSP-5s Related to Agreements

On March 11, 2005, in the Niagara Falls courtroom of Judge Robert M. Restaino, a cell phone began to ring. This annoyed Restaino, as is would most of us. However, unlike most of us, he was empowered by the State of New York to punish the offending party. Just one problem - no one stepped forward when the judge asked whose phone had rung. A less courageous bench might have let it go at that, but not the bold Restaino. His solution? Send a total of 46 people to the city jail for the crime of being unfortunate enough to be standing in Restaino’s courtroom that day.

DDTC’s Office of Defense Trade Controls Licensing does not operate its own jail (perish the thought), but it does operate with a great deal of discretion to complicate the international business of exporters. Exhibit A is an obscure-sounding announcement to the DDTC website around the beginning of the year. Despite its title, "Replacement of Section 9.4 of the Guidelines for Preparing Agreements", this recent missive from Foggy Bottom actually has limited impact on agreement preparation. Its real affect is to complicate the process for applications to export hardware in furtherance of an agreement.

Effective February 1, exporters of hardware in furtherance of an agreement must comply with a number of new procedures (these bullets are directly quoted from the announcement - the use capitalization and boldface are in the original):

• The agreement/amendment authorizing the subject hardware MUST be approved PRIOR to submission of the hardware license request. License requests prematurely submitted are subject to Return Without Action.
• The license request MUST be submitted by the agreement holder or another U.S. signatory of the identified agreement.
• The end-user identified on the license request MUST be a foreign licensee (signatory) or end-user on the subject agreement.
• The first foreign consignee (not including foreign intermediate consignees) to receive the subject hardware MUST be a foreign licensee (signatory) or end-user on the subject agreement.
• The purpose block of the license request MUST include the words "In Furtherance of TA/MA/DA/AG XXXX-XX" on the very first line.
• The license request must be submitted with following support documentation:
  • Purchase Order, Letter of Intent, Contract, or Request for Goods from the foreign party to the applicant. This documentation MUST identify the relevant agreement. The dollar value of defense articles does not need to be provided.
  • DSP-83 for significant military equipment (SME). If original was provided with the agreement, applicant must upload a copy with the license request.
  • Letter of Explanation from the Holder of the Agreement, signed by an empowered official, using the format provided in the attached example. The information in this letter is requested pursuant to 22 CFR 122.5.

The last bullet is a real kicker - a complex and often lengthy letter of explanation which must now accompany each and every license application for the export of hardware in furtherance of an agreement. Bad news folks - the time it takes you to prepare a typical DSP-5 in this scenario just doubled or tripled.

Like the proverbial man who shouts "Help! Help!" while beating you senseless, DTCL has some chutzpah to tell us that its seat-of-the-pants rulemaking "does not represent new data gathering requirements; instead it is a request for data review under the record keeping requirements of 22 CFR §122.5." Not coincidentally, the Paperwork Reduction Act requires that federal agencies get permission from the Office of Management and Budget before imposing new data gathering requirements. The approach here seems to be that if they don’t call it a data gathering requirement, it is not one. (Insert your own Orwell reference here, dear reader.)

Some of these requirements flow from a reasonable effort on the part of DTCL to keep tabs on agreement values approaching the threshold for congressional notification, which our regulator friends have a genuine obligation to do. But couldn’t this apparent problem be solved by making life difficult just for those exporters who inappropriately submit licenses related to agreements which are still pending or exceed the authorized hardware values of their agreements? If the plan is really to integrate these auditing functions into D-Trade, can we expect the letter of explanation requirement to go away once the audit enhancements go online (whenever that might be)?

At this point you may be wondering what happened to Judge Restaino of Niagara Falls. He never did find the phone. But the New York State Commission on Judicial Conduct had not trouble locating him and removing him from the bench. Can’t DTCL heed the lesson of this wayward jurist and not collectively punish all defense exporters for the misdeeds of a few?

— Scott Gearity

2. Mazak to Modify Its Machines to Enhance Export Compliance

Mazak Corporation, the North American manufacturing, sales and support arm of Japan-based Yamazaki Mazak Corporation announced that all of its products will have relocation detectors installed in them. Mr. Tomohisa Yamaszaki, president of Yamazaki Mazak Corporation has pushed the company to include these detectors on every machine produced and shipped from any Mazak plant to any location throughout the world.

The relocation detector is a permanent device that will be located in the electrical cabinet of the machine. Any repositioning of the machine or relocation will signal an alarm and in turn completely shut down the machine. A password will be required each and every time the machine is moved to verify the new location.

This technology has been available for quite some time. This is however, the first time it has ever been used to prevent violation of US and Japanese export laws.

— Danielle McClellan

3.  Westinghouse Agrees to $300,000 for FCPA Violations

Westinghouse Air Brake Technologies Corporations (WABTEC) has entered into an agreement with the Department of Justice regarding its violations of the Foreign Corrupt Practices Act. WABTEC has its headquarters in Wilmerding, Pennsylvania. One of their subsidiaries, Pioneer Friction Limited, is based in Calcutta, India where they manufacture low and high friction brake blocks for rail operations in India.

Pioneer’s employees and agents made several payments to officials of the Indian Railway Board (IRB) in order to assist them in obtaining and retaining business with the IRB; to schedule pre-shipping product inspections; to obtain issuance of product delivery certificates; and to curb what Pioneer considered to be excessive tax audits. WABTEC later discovered these payments and conducted an investigation which later led to the company openly disclosing its findings to the Department of Justice and fully cooperating in their investigation.

WABTEC has agreed to pay a $300,000 penalty, implement internal controls, and fully cooperate with the Department. The company has also entered into a settlement with the Securities and Exchange Commission where they have agreed to pay $288,000 in disgorgement of profits, and $89,000 in civil penalties in connection with Pioneer’s unlawful business practices.

— Danielle McClellan

4. Industry Groups Oppose Proposed Changes to EAR Deemed Export Rules

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)

— Danielle McClellan

5. DDTC Publishes US-UK Defense Treaty

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

— Danielle McClellan

6. CSIS: US Export Controls Harming US Space Industry

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
  

— Danielle McClellan

7. For Once, Company Wins ITAR Case in Court - Now Company Is Asking for Compensation from Justice Department

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

— Danielle McClellan

8. Census Bureau Requests Comments on AES Proposal

The Census Bureau is requesting comments by March 26 on their new proposed revisions to the Automated Export Systems record. Mainly the revisions entail changes that will reflect the following enhancements which have been made by the Census and US Customs and Border Protection:

• Edits for rough diamond shipments under the Kimberley Process
• E-mail messaging
• Created the validated end-user license code
• Automated carrier code updates
• Developed background Standard Carrier Alpha Code update process
• Developed SCAC maintenance log list
• Developed consignee screens
• Allowed Option 4 vessel shipments to proscribed countries
• Developed method of transportation maintenance screens
• Developed edit value type screens

If the proposed revisions are put into place the Census will be able to use the above collection of information to more accurately track what is being exported, how much and even how the goods are exported, who is exporting the goods, and even the date and place of the goods destination. With so much information the Census states that they will be able to detect and even prevent the export of certain items by unauthorized parties or destinations.

The information collected by the AES record will also be used by Federal agencies to plan and examine export promotion programs and development and assistance programs and aid in trade negotiations. The information will also be used by port authorities, airlines, steamship lines and many others to measure the volume of exports and any needs they may have for additional or new types of facilities.

— Danielle McClellan

9. OFAC Issues Guidance on Definition of Ownership

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)

— Danielle McClellan

10. EAR Now Authorizes Exports under TMP to Sudan in Some Cases

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)
  

— Danielle McClellan

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