The Export Control Update Newsletter
April 2008

CONTENTS

1.  Cirrus President Pleads Guilty for Sales to Indian Missile Programs

Parthasarathy Sudarshan, president of Cirrus Electronics pleaded guilty to felony charges of conspiracy to violate the International Emergency Economic Powers Act and the Export Administration Regulations, and to violate the Arms Export Control Act and the International Traffic in Arms Regulations. Sudarshan faces up to five years in prison, a $250,000 fine and a maximum of three years supervised release.

Cirrus Electronics, an international electronics firm holds office in the United States, Singapore, and India. Sudarshan held himself as the company’s CEO and used the company to illegally export controlled microprocessors and electronic components to Indian state entities involved in developing ballistic missiles, space launch vehicles, and fighter jets. In particular the company sent US technology to Vikram Sarabhai Space Centre (VSSC) and Bharat Dynamics, Ltd. (BDL), both companies are on the Department of Commerce’s Entity List and any exports to these entities are restricted. Cirrus Electronics provided their US vendors with fraudulent certificates that claimed that the end users of these electrical components were non-restricted entities in India, when in fact they were not. Sudarshan also made sure to route the products through its Singapore office and then send the packages on to India to further conceal any misconduct from the US government.

Sudarshan is scheduled to be sentenced on June 16, 2008.

More information:

Danielle McClellan

2. Illegal Reexports to Iran and Lies Net Denial List Status

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:

Danielle McClellan

3. Mancuso Calls for Strengthening US Government’s Enforcement Tools

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

Danielle McClellan

4. No ITAR Exemptions for Sri Lanka - Unless You Want to Carry Some Guns When You Visit

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:

John Black

5. Directorate of Defense Trade Controls Posts Personnel List

DDTC has updated their key personnel list and it is now available at
pmddtc.state.gov/personnel.htm.

Note from DDTC: “Although telephone numbers for key personnel are supplied, please call the Response Team first when trying to reach us on any matter. The Response Team is prepared to respond to the full range of defense trade inquiries. If your inquiry requires the attention of others within DDTC, it will ensure a prompt answer to your call. For best service, call the Response Team first at (202) 663-1282.”

Note from John Black: Don’t ask ITAR questions to the Response Team unless you know the answer to the question. You might want to limit your questions to the Response Team to procedural or status questions. I have heard way too many stories of well meaning RT members giving absolutely wrong ITAR interpretations to exporters. Ultimately, many exporters have more ITAR experience than the people on the RT.

John Black

6. CSIS Says ITAR Hurting US Space Industry

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:

Danielle McClellan

7. DDTC Clarifies NATO+ Parts Exemption

The Department of State issued a final rule amending section 123.9(e) of the International Traffic in Arms Regulations to allow for NATO and its agencies, the governments of NATO members, and the governments of Australia and Japan to reexport or retransfer US origin components incorporated into a foreign defense article without any prior approval from the Directorate of Defense Trade Controls. Prior to the revision/clarification, 123.9(e) did not authorize retransfers to agencies of NATO-it only authorized retransfers to the member governments themselves, plus Australia and Japan.

To refresh your memory on the ITAR 123.9(e) NATO+ parts exemption, there are several limits however to what components can be reexported or retransferred. First of all, to qualify for the exemption the US origin components must have been initially authorized for export from the US either through license or an exemption. The following are US origin components that are NOT eligible for the exemption:

  • Significant military equipment;
  • Major defense equipment sold under a contract in the amount of US $14 million or more;
  • Defense articles or defense services sold under a contract in the amount of US $50 million or more;
  • Identified as items in the Missile Technology Control Regime of ITAR.

Finally the person reexporting the defense article must provide written notification to DDTC about the retransfer no later than 30 days after the transaction, and the notification must identify the articles reexported and the recipient government or NATO entity. After receiving this documentation the DDTC has the option to place restrictions on the component.

More information:

Danielle McClellan

8. Over-Charging the US Government: Bet You Wish You Had Exported Illegally!

OK, so you violate the Export Administration Regulations, you might get a fine between $50,000 and $500,000 in most cases. And in the small percentage of ITAR violations in which there is a monetary penalty, you normally are looking at a fine between $1 million to $20 million. But, ladies and gentleman, if you over charge the US Government for shipping costs, you might end up with a big fat $28 million fine.

National Air Cargo (NAC), a US military contractor, has paid $28 million to settle both criminal and civil allegations. NAC is said to have defrauded the Department of Defense, and the Justice Department by submitting fraudulent claims for payments for the shipment of freight. The company pleaded guilty to one count of knowingly making a material misstatement to the US.

From 1999 to 2005 NAC transported freight wholly by surface transportation rather than by air as required by the Department of Defense regulations. The company would then bill the DOD for freight charges and pocket the difference between air and land delivery. The company falsified documents to represent actual delivery dates.

The lawsuit was actually brought on by Mark Oehm, a former NAC employee, the “whistleblower” brought on the lawsuit under the False Claims Act, which permits private citizens to bring lawsuits on behalf of the US and receive a portion of the proceeds of any settlement or judgment. Oehm will be receiving $3.3 million as his share, he may not have his job anymore, but I am sure his share of the settlement will help him cope.

More information:

Danielle McClellan and John Black

9. US Government Mistakenly Sends Nuke Nose Cones to Taiwan

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:

Danielle McClellan and John Black

10. Engineer Gets 29 Months in Prison for Illegal Exports

Chi Mak, a former engineer for defense contractor Power Paragon, was sentenced to 293 months in federal prison and fined $50,000. Mak conspired with his wife, brother, sister-in-law and nephew to obtain naval technology and then export the material to the People’s Republic of China.

Co-conspirators from the PRC provided a task list for Chi Mak that requested specific defense information, including research regarding nuclear-powered submarines. The list contained instructions for Mak to take part in seminars and then compile information he obtained from the seminars onto computer disks. Nearly all of the information he obtained from the seminars was sensitive and subject to restrictions regarding its distribution, storage and handling.

Chi Mak and his wife would copy the information onto CD-ROM disks and then forward the disk to Mak’s brother, Tai Mak who would have his son take the data and encrypt it onto the CD-ROM disk. Tai Mak and his wife then took the disk and hid it in their luggage as they traveled to the PRC to deliver it, when they attempted to board the plane in Los Angeles they were arrested along with Chi Mak and his wife at their home and their son was apprehended and charged seven months later.

All conspirators have pleaded guilty and all face deportation back to the PRC.

More information:

Danielle McClellan

11.  MTS Gets $400,000 Penalty for Lying on Export License Applications

Have you ever been in a meeting where you are gathering information to put together a license application, and one of your engineers or sales people says, “Don’t put that information in the application.” That will make the government deny the license.” Well, as you know, if you fail to include in an application certain information that would make the government deny the application, you probably are “omitting materials facts,” or as we say out here in my mountains, “lying.” Here is a story that validates that lying on an application can get you in trouble if the government finds out.

A Minnesota-based test system manufacturer, MTS Systems Corp. agreed to plead guilty to violating US export laws. The company submitted two false export license applications for exports to India. MTS now has to pay $400,000 penalty, implement a model export compliance program, and be on probation for two years.

Here is the story of the two “false” applications:

In Nov. 21, 2002, MTS received an inquiry to purchase its equipment from the Electrical Research and Development Association (ERDA), located in India. A MTS representative in India then confirmed to MTS employees that ERDA would be using the MTS equipment for testing nuclear power plant components. MTS, therefore, was required to obtain an export license from the Commerce Department. MTS did not initially apply for a license because the MTS employee in charge of export compliance stated that it was “extremely unlikely” that it would be approved unless the customer could make a “strong and convincing” argument that this test system would not and could not make a significant contribution to India’s nuclear energy programs. Neither the customer nor MTS ever attempted to make this argument to the Commerce Department.

On Jan. 13, 2003, MTS received a follow-up inquiry from its representative in India, which included an end- use statement provided by ERDA that did not reflect MTS’s already-existing corporate knowledge of a nuclear end-use. On March 20, 2003, MTS electronically filed a license application stating the end-use was “for seismic vibration testing facility to test motors and other electronic equipment under earthquake conditions.” The license application did not reflect the corporate knowledge or suspicion of nuclear end-use based on the initial end use information. Leaving out that key detail, “made the application false,” according to the US Government.

The plea agreement also highlights a separate second offense. Prior to Nov. 14, 2003, MTS was aware that the Structural Engineering Research Center (SERC) in India was seeking to purchase approximately $3 million of seismic testing equipment from MTS, and that at least some of SERC’s funding was being provided by India’s Department of Atomic Energy (DAE), which is an entity prohibited by the U.S. government from receiving U.S. exports without an export license. At least one MTS representative believed that SERC might use the MTS equipment to test nuclear power plant systems in India. On Nov. 14, 2003, MTS electronically submitted to the Commerce Department a license application for the sale noting that support documents would follow. MTS provided an end-use statement, based on a letter provided by SERC, which said the system would be used only for testing prototype components and other non-nuclear uses. The license application did not state that SERC was receiving funding from India’s DAE or the possibility of a nuclear end-use. Not telling Commerce about the DAE funding and possible nuclear end-use “made the application false.” The US Government emphasized that MTS did not reveal the possible nuclear end-use information in either the initial application or its is later correspondence with the Commerce Department when MTS tried to rebut a letter from the Commerce Department indicating its intent to deny the application for SERC because it “would pose a risk of diversion to a prohibited nuclear end use.”

More information:

John Black

12.  New Guidelines for Supporting Docs for DSP-73 and DSP-61

The DDTC has published the new guidelines for supporting documentation requirements for license types DSP-73 and DSP-61. These requirements became effective April 15, 2008 and any stand alone license applications that are submitted after this date are subject to Return Without Action.

DSP-73

All license applications will need to be supported by:

  • A transmittal letter from the applicant explaining the need for the export and the responsibility of each party to the license. The letter is required, even if all of the information is included in the actual application.
  • The application must also be limited to one end-use and it is recommended that the application be limited to a geographic region.

Any replacement/renewal license applications will need to be accompanied by a

  • Transmittal letter describing the need for the continued export activity and the current disposition of the article in question
  • Complete copy of the precedent license
  • Must be received by DDTC 60 days prior to expiration

DSP-61

Any License applications for overhaul/repair and modification/upgrade transactions must now include:

  • Request from the foreign owner of the defense articles
  • Transmittal letter describing why the temporary import does not meet the exemption, including the full modification and upgrade performed

Any Licenses relating to the temporary imports or foreign-manufactured defense articles for a trade show demonstration:

  • Supported documentation from the US entity responsible for the defense article while it is in the US
  • Supported documentation showing the US party that is requesting the demonstration

Military exercises at US bases/ranges

  • Documentation from foreign government identifying the participation of the foreign country in the exercise
  • License must clearly identify the defense articles to be imported and the specific identity of the military exercise
  • Must be submitted by a foreign embassy on behalf of its military

Transit to a Third Country/Transshipment Requests for Non-US origin articles

  • Documentation to represent the transaction between the foreign entities
  • The applicant should only by acting as a freight forwarder, if not, a transmittal letter must be attached explaining the situation

Transit to a Third Country/Transshipment Requests for US origin articles

  • An approved General Correspondence letter for retransfer of the defense articles to the new end-user

Replacement/Renewals

  • Transmittal letter explaining the need for the continued activity and the current disposition of the subject defense article
  • Complete copy of precedent license
  • Must be submitted 60 days prior to expiration of license

The main reasoning behind the DDTC requiring so much more information from applicants is the sheer fact that they will not have to search for the information in their past records. If the applications are submitted with all of the above mentioned information they will actually be able to approve license applications in their new 60 day deadline. In essence, the DDTC will now no longer search for related documents involving submissions, now applicants will spend their time creating them and attaching them to their applications.

More information:

Danielle McClellan

13.  DDTC Publishes Deal with Australian Government

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.

Danielle McClellan

14. Motion that ITAR Is Unconstitutionally Vague Fails for Now

Even though our booming seminar business seems to confirm that the ITAR is vague on many points, it seems for now that a court has decided the ITAR is not unconstitutionally vague as it relates to the case of Qing Li.

Last year Qing Li was charged with conspiracy to export defense articles without a license and to smuggle goods from the US. Li attempted to export Endevco 7270A-200K accelerometers without a license to China and was caught by undercover agents.

Her case is now scheduled to go to trial. Qing Li’s legal defense ordered motions to dismiss the indictment and to suppress evidence but were shot down indefinitely. Li argued that the indictment should be dismissed on the grounds that the AECA and its implementing regulations are unconstitutionally vague as they are applied to her case. Her defense disputes that a person of ordinary intelligence could not have been able to determine if the Endevco accelerometer was a “military accelerometer” that required an export license. They supported this argument by showing a two page manufacturer-provided “public information” sheet regarding the accelerometers. The defense argued that, “[a] person of ordinary intelligence would likely deem that data sheet incomprehensible, and that the sheet does not indicate whether the device is for military or weapons use.”

The court denied her motion to dismiss claiming that the defendant failed to cite a single case in where the court found the AECA unconstitutionally vague, and whether or not she knew that the accelerometers were on the munitions list will be for the jury to decide. Her motion to suppress evidence was also denied as the subpoenas were all authorized, she had no reasonable expectation of privacy, and she lacked standing to assert any fourth amendment violations.

More information:

Danielle McClellan

15.  ECCNs 1C210 and 3A233 Clarified

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:

Danielle McClellan

16.  Exporter Sues to Recoup Legal and Other Expenses

Alex Latifi, owner of Axion Corp. has won yet another case against the US government. His criminal case was thrown out because of lack of evidence and poor witnesses, after the success, Latifi’s lawyers filed for reimbursement of legal fees, filing costs and money spent on expert witnesses during his trial. The Civil Asset Forfeiture Reform Act is designed “to give owners innocent of any wrongdoing the means to recover their property and make themselves whole after wrongful government seizures.” Latifi is expected to receive around $500,000.

Lawyers around the country are in agreement to say that this is going to change the way people look at arms-export cases. Cliff burns, an arms-export expert from Powell Goldstein explained, “This is the first time and it will create quite a stir, No one I know has ever recovered legal fees against the federal government in an arms-export case.”

More information:

Danielle McClellan

17.  Northrop Grumman Agrees to $15 Million Penalty for a Jurisdiction Mistake

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.

Here is a rundown of the charges from the proposed charging letter:

  • Charge 1: Export of SME source code like that used on Air Force One to Russia
  • Charges 2-28: Export of SME to 126.1 countries (China, Angola, Ukraine, Indonesia)
  • Charges 29-55: Failure to notify DDTC re: exports to 126.1 countries
  • Charges 56-110: Various violations including
    • 46 exports of SME to Austria, Brazil, Brunei, Greece, Israel, Malaysia, Singapore, South Korea, Thailand, UK, Yemen
    • 1 violation when provided defense services to Brazil, Indonesia, Israel, Malaysia, Singapore
    • 1 export of SME technical data in form of software to Canada
    • “[One time]” Litton Canada reexported without authorization SME including embedded software to Romania, South Korea, Indonesia, and UK
    • Five times exported SME software to UK
    • “[One time]” failed to get DSP-83 for export and reexport of SME software

A few interesting notes from the list of charges:

  1. It is never good to have a violation involving source code like that used on Air Force One. If I were a lawyer, I would call the fact that the source code is like that used on Air Force One, an aggravating factor. Even though I am not a lawyer, I would still say that I think that violation probably aggravated the White House.
  2. Violations involving the ITAR 126.1 prohibited countries also fall into the aggravating category.
  3. Charges 29-55 are based on ITAR 126.1(e) which says it is an additional violation if you do not tell the State Department that you have illegally export to the 126.1 countries - the illegal export is one violation, failure to tell the State Department is a second violation for the same illegal export. Finally, the last violation on the list is for failure to get a DSP- 83-bet you never thought you could get a violation for merely failing to get a DSP-83.

Northrop agreed to pay a $10 million fine and spend an additional $5 million to improve its export compliance program. In addition, it agreed to allow DDTC to conduct compliance audits with minimal notice. As is often the case now, NG also agreed to appoint a Special Compliance Officer who is responsible for watching the company’s export activities and then reporting everything to DDTC. Finally, NG also agreed to implement a wide range of other burdensome compliance measures that are described in an 8-page annex to the consent agreement.

If you want to get an idea of the details of what you will have to do if you have significant ITAR violations, take a look at that 8-page “Annex of Compliance Measures.” For that annex and a copy of the consent agreement and the proposed charging letter, go to pmddtc.state.gov/ca_northrop_grumman_corporation.htm.

John Black

18.  DDTC Wants You!

The Department of State has posted job opportunities for Compliance Specialists. The salaries range from $58k to $127k: the posted openings can be accessed at USAJobs.gov.

Just think you can hit the ground running by turning in your former company after you get the job!

Danielle McClellan


See more newsletters

 

News & Alerts by Email

Stay informed with our free monthly newsletter.




Sample newsletters/archive


Upcoming Seminars

Get practical advice on complying with US export regulations.

San Diego
January 26-29

Singapore
March 2-4

Austin
March 23-26

Munich
May 4-6

Montréal
May 20-22


More information and complete schedule


About the links inside our news stories

Our stories have links to pages and documents on other Web sites. We’ve been publishing export control updates for a very long time (since 1999). Web sites change all the time; sometimes they remove files from their sites. We apologize if you encounter links in our news stories that do not work anymore.