Export Control News & Alerts

The Export Control Update Newsletter
May 2008

CONTENTS

1. State Department Proposes Clarification of Export Jurisdiction over Aircraft Components
2. Professor Pleads Guilty & Faces 5 Years and $250,000... Maybe They Should Apply the Deemed Export Rule to US Citizens
3. Ebara Violation Part Deux: $500,000 Fine and Probation Falls Short of Initial $6.4 Million Penalty
4. US Citizen Spies for Government of Israel-Maybe They Should Apply the Deemed Export Rule to US Citizens
5. Congress Ponders AES Modernization Bill
6. OFAC Posts Penalties - Iranian Rugs and Cuban Cigars Net Biggest Fines
7. Software Exports to Iran via Brazil Net $132,791 Fine
8. OFAC Reports on Licensing Activities to Embargoed Countries
9. DDTC Announces Licenses Processing Times
10. Ouch: Agreement Rebaselining
11. Commerce Corrects and Clarifies Various ECCNs
12. BIS Proposes to Add Nuclear Retransfer Controls and Clarify other Aspects of EAR
13. Letter to the Editor from R. Edelstein
14. Job Opening at Parker Hannifin
    
15. Older stories are in the Export Control Update newsletter archive

1.  State Department Proposes Clarification of Export Jurisdiction over Aircraft Components

On April 11, 2008 the Department of State, Directorate of Defense Trade Controls (DDTC) published a proposed change to the International Traffic in Arms Regulations (ITAR). The notice of proposed rulemaking would add language intended to clarify the application of Section 17(c) of the Export Administration Act of 1979 (EAA) to the implementation of the ITAR and the Department of State’s obligations under the Arms Export Control Act (AECA). The proposed change would affirm that jurisdiction over exports of certain civil aircraft parts and components lies with the Department of Commerce under the Export Administration Regulations (EAR), and not with the Department of State under the ITAR. Comments on the proposed amendment will be accepted by the Department of State through May 12, 2008.

Export Administration Act Section 17(c)

Section 17(c) provides that any product (1) which is standard equipment, certified by the Federal Aviation Administration (FAA), in civil aircraft and is an integral part of such aircraft, and (2) which is to be exported to a country other than a controlled country, shall be subject to export controls exclusively under the EAA and not the AECA. As defined in that legislation, a “controlled country” included members of the (then) Soviet Bloc and other countries subject to national security export restrictions.

The EAA originally lapsed in 1989, was briefly renewed, and lapsed again in 2001. Many of its provisions nonetheless remain in effect through a Presidential Executive Order issued under the International Emergency Economic Powers Act. However, Section 17(c) has not been referenced in the ITAR since 1996, and the Department of State has not consistently applied Section 17(c) in making commodity jurisdiction determinations. The end result of having legislation with an uncertain legal foundation and unpublished agency practices has caused confusion and forced companies to request agency rulings to determine whether State or Commerce has export jurisdiction over a number of components that are used as standard equipment in civil aircraft. The goal of the amendment is to reduce that confusion and clarify which civil aircraft parts and components can be deemed controlled by the EAR without the need to request rul¬ings from the Department of State.

Industry and certain Members of Congress have urged that the scope of the ITAR as applied to civil aircraft parts be clarified, because DDTC’s assertion of jurisdiction over even minor components contained in civil aircraft parts results in the aircraft themselves being regulated as military equipment. The uncertainties created by DDTC’s current policy have caused significant regulatory burdens and operational difficulties for aerospace manufacturers and airlines.

Proposed Clarification to USML Aircraft Component Coverage

The proposed rule would clarify that the EAR applies when an aircraft part or component is (a) standard equipment; (b) covered by a civil aircraft type certificate (including amended type certificates and supplemental type certificates) issued by the Federal Aviation Administration for civil, non-military aircraft (expressly excluding military aircraft certified as restricted and any type certification of Military Commercial Derivative Aircraft); and (c) is an integral part of such civil aircraft. Any such part or component that is not designated as Significant Military Equipment (SME) on the U.S. Munitions List would not require an agency ruling to determine jurisdiction, unless the exporter is doubtful as to whether all three criteria have been met. Where the part or component is designated as SME, a ruling would be required, although the ruling requirement for SME items would not be applicable to parts and components that were integral to civil aircraft prior to the effective date of the rule.

In order to protect its jurisdiction over certain dual-use aircraft engine components developed from military technology after the proposed rule goes into effect, the Department of State would shift all military “hot section” engine components and digital engine controls from their current non-SME designation to SME. Examples of such hot section components include combustion chambers and liners; high pressure turbine blades, vanes, disks and related cooled structure; cooled low pressure turbine blades, vanes, disks and related cooled structure; cooled augmenters; and cooled nozzles. Digital engine controls include Full Authority Digital Engine Controls (FADEC) and Digital Electronic Engine Controls (DEEC).

The proposed Note to USML Category VIII(h) would provide some guidance for determining whether the three proposed criteria for EAR control have been met. The exporter would have to evaluate whether the part or component, without modification, is common to both civil and military applications. The proposed rule provides the following examples of parts and components that DDTC does not consider common to both civil and military aircraft applications: tail hooks, radomes, and low observable rotor blades. The proposed Note would define the first criterion, standard equipment, as “a part or component manufactured in compliance with an established and published industry specification or an established and pub¬lished government specification (e.g., AN, MS, NAS, or SAE).” It also includes as standard equipment parts and components that are manufactured and tested to established but unpublished civil aviation specifications and standards, and provides as examples pumps, actuators and generators. Parts and components would not be considered standard equipment if there are any performance, manufacturing or testing requirements beyond established civil aviation industry or government standards. Mere testing of standard civil parts and components for military requirements would not change the determination, unless the parts or components were designed or modified to meet the military requirement. Finally, the Note defines “integral” as a “part or component that is installed in the aircraft.”

Although the intent of the proposal is to clarify and simplify the current rules, the proposed regulation, as drafted, contains a number of ambiguities and leaves many questions unanswered, and therefore may not accomplish its stated goal. Aerospace industry companies may wish to consider submitting comments providing suggested improvements to the proposed rule to the Department of State by May 12, 2008.

— Thomas M. deButts & Michael J. Noonan

© 2008 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved. Pillsburylaw.com

2. Professor Pleads Guilty & Faces 5 Years and $250,000... Maybe They Should Apply the Deemed Export Rule to US Citizens

Daniel Max Sherman a former physicist from Atmospheric Glow Technologies, Incorporated plead guilty to conspiracy with J. Reece Roth a professor at The University of Tennessee to transmit export controlled technical data to the People’s Republic of China. Between January 2004 and May 2006 the two worked with a Chinese graduate research assistant at the university where the professor and student researched military drone aircraft to develop plasma actuators.

In the court documents, prosecutors claim that Sherman and Roth both agreed amongst themselves to assign the Chinese student, Xin Dai, to the military development project. They never advised the Air Force or sought any special export licenses or consul.

At this time Sherman faces up to 5 years imprisonment and a $250,000 fine, the charges for the professor and student have yet to be released.

Patrick Rowan, Assistant Attorney General for National Security made a point, “Knowingly disclosing restricted US military data to foreign nationals represents a very real threat to our national security, particularly when we know that foreign governments are actively seeking this information for their military development.”

More information:

• DOJ News Release

— Danielle McClellan

3. Ebara Violation Part Deux: $500,000 Fine and Probation Falls Short of Initial $6.4 Million Penalty

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

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

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

More information:

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

— Danielle McClellan

4. US Citizen Spies for Government of Israel - Maybe They Should Apply the Deemed Export Rule to US Citizens

Ben-Ami Kadish has been arrested on several charges of spying conspiracy. From 1979 into 1985 he was employed at the US Army’s Armament Research, Development, and Engineering Center. Beginning in 1980 Kadish, a US citizen, would take classified documents home and provide them to an unnamed citizen of Israel who would photograph the documents.

The Israel citizen was employed by the Government of Israel as the Consul for Science Affairs at eh Israeli Consulate General in Manhattan. He would direct Kadish on what documents he needed and met Kadish at his home to photograph them.

Of the numerous documents photographed over the years the most alarming were documents classified as restricted containing nuclear weaponry, major weapon systems of an F-15 fighter jet, and major strategies of the US patriot missile air defense system, noted as being “Secret”.

On March 20, 2008 Kadish received a phone call from the unnamed co conspirator instructing him deny any contact with him to federal law enforcement officials. The next day Kadish followed the conspirator’s orders and denied any contact with the individual and even the phone conversation from the previous evening.

Kadish is charged with 4 counts of conspiracy, that which include disclosing documents of US national defense to the Government of Israel, acting as an agent of the Government of Israel, hindering a communication to a law enforcement officer, and making a materially false statement to a law enforcement officer.

More information:

• DOJ News Release

—Danielle McClellan

5. Congress Ponders AES Modernization Bill

On April 17, 2008 Don Manzullo (R-Illinois) and Adam Smith (D-Washington), introduced new legislation to modernize the Automated Export System. The Securing Exports Through Coordination and Technology Act is described as being able to, “clarify the confusing US export system that punishes mistakes with costly fines” as well as “strengthen the government’s ability to crack down on deliberate violators” as described by Smith and Manzullo. The bill will also include provisions designed to improve the use and operation of e AES.

Under the Act the AES would be required to:

• Reject data submitted for exports that would violate US export control or sanction regulations by virtue of the destination country or entity;
• Alert the exporter of potential export license requirements under the EAR and/or the ITAR based on codes;
• Issue a fatal error notice when the data submitted includes: names, addresses or restricted entities or destination countries subject to US sanctions and embargoes;
• Issue compliance alerts or other warnings to the filer if: the data submitted includes an inconsistent classification number, a license exception which is not available for the country or ultimate consignee or if there is no license number

Exporters say that these types of errors happen often because of the many different export control laws and regulations they have to handle.

Provisions to the bill include:

• Licenses for AES Filers, the DOC could establish a program to license those who file information in the AES on their behalf;
• Shipper’s export declarations and AES filings would be exempted from disclosure to the public, but could be shared with other federal agencies if deemed necessary;
• The DOC would required to work with other relevant agencies to ensure that appropriate personnel are made available to participate in seminars, training and meetings whose purpose will be to educate exporters about US export laws and regulations and the AES in particular.

This bill is far from becoming something that actually requires that exporters take action. As a practical matter, exporters should not even think about doing anything to comply with this potential change. Yet.

—Danielle McClellan

6. OFAC Posts Penalties - Iranian Rugs and Cuban Cigars Net Biggest Fines

The US Department of the Treasury’s Office of Foreign Assets Control has posted a summary of civil penalties it recently assessed:

• Mahdavi’s A&A Rug company in Norcross, Georgia remitted $9,240 to settle violations of the Iranian Transactions Regulations. The company allegedly imported goods in violation and did not voluntarily disclose the matter to OFAC
• Morgan Stanely remitted $3162 for violations of the Narcotics Trafficking Sanctions Regulations. He issued instructions to a bank for a wire transfer from a SDNT’s account without an OFAC license.
• United Advantage Federal Credit Union paid $2,970 to settle allegations of violations of the Cuban Assets Control Regulations. The credit union acted without an OFAC license by processing a funds transfer destined to Cuba.
• Good Hope International, Inc. remitted $900 to resolve violations of the Iranian Transactions Regulations. The company used services of an Iranian vessel to transport goods from India to Holland without an OFAC license.
• Four separate individuals paid an amount totaling $4,648 for purchasing Cuban-origin cigars off the internet.

The full report is available at:

• OFAC - 04042008.pdf (PDF)

— Danielle McClellan

7. Software Exports to Iran via Brazil Net $132,791 Fine

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

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

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

— Danielle McClellan

8. OFAC Reports on Licensing Activities to Embargoed Countries

OFAC has released its Quarterly Report of Licensing Activities involving the Trade Sanctions Reform and Export Enhancement Act of 2000. Of the 276 license applications received, 10 were denied, 100 were issued and 26 were amended. The overall average processing time was 67 days, most licenses took 80 days and Return Without Action letters were processed in 18 days.

OFAC claims that the increased complexity and length of the license applications joined with the scrutiny from other reviewing agencies is continuing to affect processing times, especially in this quarter.

The majority of licenses were issued for Iran for medical devices, only 29 of the 276 applications pertained to Sudan products.

The report is available at:

• OFAC Report of Licensing Activities October - December 2007

— Danielle McClellan

9. DDTC Announces Licenses Processing Times

The Directorate for Defense Trade Controls (DDTC) has posted an updated chart to show the past year’s license processing times. DDTC says it gives out these processing times so that US defense firms can clearly predict the amount of time required for license submissions. In the past year the average processing times have been cut from 35 days down to 15. These processing times are only for applications submitted electronically via the D-TRADE system. Beginning in May DDTC will release April 2008 hardcopy statistics which will provide a more accurate average processing time.

Editor’s Note: 15 days average processing times..hmmm. Well, if I were you, I wouldn’t tell anybody in my company that the average license processing time is 15 days because when all of your staffed applications take well over 15 days, everybody in your company is going to blame you for the delays. — John Black

More information:

• DDTC License Processing Time

— Danielle McClellan

10. Ouch: Agreement Rebaselining

The Directorate of Defense Trade Controls has issued Guidance for Agreement Rebaselines. An agreement rebaseline is used as a tool to bring currently approved agreements into compliance with new policies and amendments. So, for example, if you have an agreement that was approved a while back and does not contain all the latest DDTC provisos, requirements and burdens, your agreement is a candidate for rebaselining.

Currently agreements officers of the DDTC will be auditing agreement files and will initiate a rebaseline if action is needed to bring the agreement up to par with newly passed policies. Applicants will be notified via a proviso in an approval letter for an amendment.

The industry is encourages to review their current approved agreements at this time and proactively request a rebaseline. Any agreements that are 10 years or older should be inspected as well as the number of amendments and proviso reconsiderations that are attached to the agreement. Users should submit an application package which will assign the agreement rebaseline a new case number, the currently approved agreement will remain valid throughout the review of the rebaseline submission.

The application package should include:

• An amendment transmittal letter in the format provided in the “Guidelines to Preparing Agreements” and the subject line must read, “rebaseline”.
• The valuation table must feature 3 columns, the first titled “currently approved under AG XXX-XX”, the second should be titled “rebaseline addition” and lastly the final column must read “new total”.
• The rebaseline agreement must be submitted as a “new” agreement to be executed by all parties and include any information on sublicensing and TCNs.

The DDTC is answering FAQs at:

• www.pmddtc.state.gov/docs/FAQs_rebaselining_agreements.doc (DOC)

More information:

• pmddtc.state.gov/docs/rebaselining_agreements.doc (DOC)

— Danielle McClellan

11.  Commerce Corrects and Clarifies Various ECCNs

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

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

• 0A018
• 1A001, 1A003, 1A005
• 1C004, 1C006, 1C008, 1C009, 1C011, 1C012
• 1D001, 1D018
• 1E002
• 2A983
• 2B004, 2B005
• 2E101, 2E201
• 3A002
• 3B002
• 3B992
• 3D002
• 4D003
• 5E002

The new rule will also amend the “Unit” in following CCL entries in order to have the unit of measurement in the “unit” paragraph conform to that of standard quantities.

• 1B003
• 2B001, 2B003, 2B004
• 4A001, 4A003, 4A004
• 5B001
• 6A002, 6A004, 6A005
• 8A001
• 9A004
• 9B009

In 6D003, 8D001, and 8E001 the rule will remove the reference, “License Exceptions” section of each of these CCL entries that incorrectly referred to License Exception TSR for items under Missile Technology reasons. These three entries are not controlled for MT reasons, so the reference to restriction will be removed.

BIS says it also will be publishing certain advisory opinions and creating new web guidance to provide greater clarity to exporters and reexporters regarding existing provisions of the CCL.

More information:

• Federal Register Notice

— Danielle McClellan

12.  BIS Proposes to Add Nuclear Retransfer Controls and Clarify other Aspects of EAR

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

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

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

Section 744.1 will also be changed to clarify that a party cannot proceed with an export, reexport, or transfer (in-country) that is in transit at the time the party is informed by BIS that a license is required. This will be in accordance with the end-user/end-use controls in Sections 744.2, 744.3, 744.4, and 744.6 of the EAR. The rule further explains that once a person “is informed” by BIS that a transaction is subject to a prohibition, they would be required to apply for authorization from BIS before proceeding with the transaction. The amendment would also provide these individuals with steps to take if an item is included in such a transaction is already in transit when a person “is informed” by BIS.

Comments regarding the amendments must be received by the BIS on June 17, 2008. Comments can be sent to www.regulations.gov, or by email to publiccomments [at] bis.doc.gov, please include RIN 0694-AD59 in the subject line of the message.

It is reasonable to assume that it will take at least several months before BIS publishes a rule that causes the above proposed changes to enter into force.

More information:

• Federal Register Notice

— Danielle McClellan

13. Letter to the Editor from R. Edelstein

John,
Reading your (slightly) tongue in cheek article on the ITAR status of Sri Lanka sent my deranged mind wandering on strange interpretations for the ITAR exemption permitting Americans to export three weapons and a thousand rounds of ammo temporarily “for personal use”. Now a gun exported and returned would be a temporary exportation, in the spirit of the regulations.

But if you USE the weapon abroad, you would expend some of the rounds, so wouldn’t that constitute a permanent export? Even if you picked up your brass and recovered the bullets, the powder would be gone and it would be in a vastly altered state. And if you fired the bullets into another person, wouldn’t that constitute a transfer of ownership? Or are you presumed to own the bullets even after they reside inside the body of another?

What if you were to fire the weapon across the border with another country. Wouldn’t that be a “reexport”? Or if you shoot someone and they manage to drag themselves across the border into another country? (Some of those countries are so small that just in falling, you could cross the line!) The “Expended Round Report” could become quite complicated.

Ronald E. Edelstein, CHB
Global Trade Compliance Manager
Freescale Semiconductors

Ron,
Thanks for you insight regarding the potential trap of using the ITAR exemption for temporary exports of 3 guns and 1000 rounds of ammo for personal use. I like the way you think.

For the record, ITAR 123.17(e) authorizes permanent exports of ammo for personal use and 123.17(c) authorizes temporary exports of ammo for personal use. So, if you plan to not bring any of the ammo home, you might want to use the 123.17(e) exemption.

You pointed out the risks of using 123.17(c) for a temporary export of ammo. I guess the risk is that if you declare 123.17(e) for your 1000 rounds of ammo for permanent export, you can’t bring it back home with you and, since 123.17(3) is personal use only, I guess you gotta load all of it into your gun and shoot it off until you use up all 1000 rounds because you can’t give the ammo to somebody else overseas. (And don’t forget to destroy those spent shell casings!)

Thanks,
John Black

14. Job Opening at Parker Hannifin

Parker Hannifin Corporation, Aerospace Group

Contract Senior Contracts Administrator

Parker Electronics Systems, an industry leader in the design and mfr of fuel mgmt systems and controls, seeks individual to administer contracts for complex programs and ensure fulfillment of contractual, fiscal & performance obligations. The successful candidate will demonstrate their ability to perform the essential functions of proposal preparation, contract review and negotiation of price, terms and other performance requirement in accordance with FAR/DFAR. Candidate shall also possess a strong working knowledge of ITAR, EAR administration (i.e. TAA’s, MLA’s DSP-5’s). Requires a Bachelors degree in Bus Admin or related field and 6+ years of related experience, preferably in the military aerospace Industry.

We offer competitive salaries & benefits. To be considered, please email: hresd [at] parker.com, fax 631.273.2817, or send your resume to: HT Dept-CC, Parker Hannifin Corp., Electronics Systems, 300 Marcus Blvd, PO Box 9400, Smithtown, NY 11787.
EOE

www.parker.com

— Danielle McClellan

 

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