Introduction – Looking Back at 2005
Parties Subject to State Department Sanctions
Weapons of Mass Destruction Proliferators and Their Supporters
Mandatory AES and Increased Penalties
Hunting Equipment Distributors
Compliance Assessments during Acquisitions
Personnel Changes and Reorganization
Missile Technology Control Regime
Introduction – Looking Back at 2005
There were a number of important changes to the export control laws and regulations in 2005. In addition, enforcement activity, including criminal penalties, increased substantially in 2005, when compared with prior years. As is our custom, this memorandum summarizes these and other developments in the field of U.S. and multilateral export controls. It concludes with several suggested New Years Resolutions suitable for adoption by all companies that engage in the export of products and technologies that are subject to export controls.
Legislation
Congress adjourned (yet again) without passing Export Administration Act (“EAA”) renewal legislation. Thus, on August 2, 2005, President Bush issued (yet another) declaration of national emergency with respect to the EAA. President Bush will continue to control exports for another year under the authority of the International Emergency Economic Powers Act. In December, House International Relations Committee Chairman Henry Hyde (R-IL) introduced H.R. 4572 to revise and extend the EAA. The text of the bill is not yet available.
The House and Senate finally reached agreement on the National Defense Authorization Act for Fiscal Year 2006 (H.R. 1850) on December 21. The bill has been forwarded to the President for signature and we expect him to sign it early in 2006. This legislation contains both good news and bad news for exporters. First, the good news, Conferees dropped Section 1212, which would have imposed a DOD contracting/procurement sanction on any entity (read EU) that transfers certain military items to China. On Section 1213 (banning DOD purchase of items or parts from Chinese “military companies”), Conferees included a significantly narrower-scope provision that will limit its impact on DOD suppliers/contractors. Now on to the bad news, Section 1205 increases the penalties, both civil and criminal, for violations of any regulation, etc. issued under the International Emergency Economic Powers Act (“IEEPA”). Civil penalties are increased from $11,000 to $250,000. Criminal penalties are increased from $50,000 to $500,000. The only good news regarding penalties is that the criminal intent standard remains “willful”. IEEPA remains the statutory authority for administering the Export Administration Regulations (“EAR”), as well as providing authority for numerous U.S. sanctions regulations.
Regulations
EAR
It was a very busy year for new regulations at BIS. For fiscal year 2005, BIS published 32 regulation changes (three more than were published in FY 2004). Although there were many changes, most of them were minor.
Libya
In March, BIS published the long-awaited regulation providing guidance to U.S. companies on dealing with “installed base” items in Libya and making other changes to export and reexport controls on Libya. Activities involving installed base items are divided into two categories: those that require a report to BIS, but not a license, in order to overcome the prohibition stated in Section 764.2(e), and those that require a license in order to overcome the prohibition. The rule also makes a number of other changes to the EAR involving Libya which are described in the attached regulatory summary – see Item # 10 in the summary of changes to the EAR.
In November, BIS published an interim rule amending the EAR by creating a new License Exception (United States Persons In Libya “USPL” at 740.19 of the EAR) authorizing the export or reexport of certain items controlled for anti-terrorism (“AT”) reasons only on the Commerce Control List (“CCL”) to U.S. persons in Libya. Items exported or reexported to Libya pursuant to the new License Exception USPL may only be used by U.S. persons or by non-U.S. person employees within the scope of their employment and must remain under the control and supervision of the U.S. person employer. They may not be transferred to non-U.S. persons in Libya. Further, AT-controlled items not specifically identified as eligible under License Exception USPL continue to require a license if exported or reexported to U.S. persons in Libya. Please see the attached summary for the complete list of applicable Export Control Classification Numbers (“ECCNs”). [Item #30 in the attached summary of changes to the EAR].
Iraq
In September, BIS clarified Section 748.8 of the EAR regarding the instructions for applying for authorization to transfer items subject to the EAR in-country using the BIS Multipurpose Application (Form 748-P) and its electronic equivalent in the Simplified Network Application Process (“SNAP”). In July 2004, the EAR was amended creating a new requirement for authorization to make certain in-country transfers in Iraq. BIS created a unique process to apply for authorization to transfer items in-country, which did not require use of either BIS Form 748-P or its electronic equivalent, but required the applicant to submit a letter request to BIS. From November 17, 2004 to June 17, 2005, BIS received 209 applications for in-country transfer authorization under Section 746.3 and part 744 of the EAR, and pursuant to conditions that had been placed on licenses issued by BIS. Only one of these applications was submitted according to the letter process set up in July 2004, and the rest were submitted using BIS Form 748-P. To improve the handling of these applications, BIS updated its software, which can now more effectively process and track in-country transfer application data received from the Multipurpose Application. [Item #24 in the attached summary of changes to the EAR].
New NATO Members
In November, BIS published a final rule changing the controls on new NATO members such that Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, Hungary, Iceland, and Poland, were granted treatment consistent with all other NATO member states with respect to national security license requirements (Sec. 742.2(a)) and Supplement No. 1 to part 738 (Country Chart)). This rule also removes Bulgaria, Estonia, Latvia and Lithuania from General Prohibition Eight, which requires a license for exports that transit through certain countries, (Sec. 736.2(b)(8)), and removes restrictions on License Exceptions related to crime control from Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Poland, Romania, Slovakia, and Slovenia (Sec. 740.2). Additionally, it adds Bulgaria, Estonia, Latvia, Lithuania and Romania to Country Group B, and removes them from Country Group D:1 (Supplement No. 1 to part 740). This means that these countries are now eligible for certain license exceptions (most importantly license exception GBS). It also means that all of the new NATO members (Bulgaria, Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) are no longer subject to certain national security licensing requirements (in particular, these countries are no longer listed in the country control chart with a license requirement X in the National Security column 2 (NS2 column). [Item # 28 in the attached summary of changes to the EAR].
Deemed Exports
In March, BIS requested comments on proposed changes to the deemed export policy based on the recommendations contained in the U.S. Department of Commerce Office of Inspector General Report entitled “Deemed Export Controls May Not Stop the Transfer of Sensitive Technology to Foreign Nationals in the U.S.” (Final Inspection Report No. IPE-16176-March 2004). Adopting the OIG’s recommendations would entail regulatory or other administrative action that would clarify the definition of “use” technology subject to the EAR, base the requirement for a deemed export license on a foreign national’s country of birth (instead of a foreign national’s most recent citizenship or permanent residency), and modify regulatory guidance on licensing of technology to foreign nationals working with government-sponsored research and research conducted in universities. In August, BIS published the comments from a total of 307 respondents. Some 1,100 pages of public comments rendered little, if any, support for the proposed change. In December, an op-ed article by U.S. Under Secretary of Commerce David McCormick appeared in the December 13 edition of the Financial Times. In the article, McCormick rejected the use of country of birth for deemed export licensing. According to the article, the Commerce Department will “soon publish a policy basing controls on access to sensitive technology on a foreign national’s most recent country of citizenship or permanent residency, not country of birth. We believe that by acquiring permanent residency or citizenship in another country, foreign nationals have demonstrated strong ties to their adopted country and are subject to rigorous screening processes by our closest allies. The U.S. will continue to deny the transfer of sensitive technology to foreign nationals who could pose risks to national security.” [Item # 11 in the attached summary of changes to the EAR].
Parties Subject to State Department Sanctions
In March, BIS published important changes to its policy with respect to entities sanctioned by the State Department under three statutes: Iran-Iraq Arms Nonproliferation Act of 1992 (Pub. L. 102-484); a sanction issued pursuant to the Iran Nonproliferation Act of 2000 (Pub. L. 107-178); or a sanction issued pursuant to Section 11B(b)(1)(B)(ii) of the Export Administration Act of 1979, as amended (also known as the Missile Technology Control Act of 1990). This new policy imposes a new license requirement for certain entities sanctioned by the State Department, and identifies one specific entity, Tula Instrument Design Bureau of Russia, subject to this new license requirement. This policy was finalized in June. Companies that may not be screening against such parties would be well advised to start doing so. [Item # 6 in the attached summary of changes to the EAR].
India
As a result of completion of the Next Steps in Strategic Partnership (“NSSP”) with India, BIS published two final rules to implement three steps the United States has agreed to take as part of the final phase of NSSP: (1) the removal of license requirements for export and reexports of items controlled for nuclear nonproliferation reasons to India, (2) the removal of six Indian entities from the Entity List, and (3) removal of the Import Certificate requirement for exports to Indian Government entities under Section 748.9(a)(2). See the attached summary for details. [Items # 23 and 31 in the attached summary of changes to the EAR].
Military End Use Restrictions
In the fall, BIS and industry had some heated discussions regarding the proposed Military End-Use Restrictions, sometimes referred to as the “China Catch-All” rule. This rule is an end use rule; not an end user rule. The end users caught by this rule could be civilian or military – the question is “what is the end use?” We had expected the proposed rule to be published after the President’s visit to China in November, but before the Wassenaar Plenary meeting in mid-December. However, the publication of the proposed China Catch-all regulation seems to have been slowed by the Administration. In fact, it was not published prior to the Wasseanaar plenary meeting in December. Rumor has it that Rep. Henry Hyde, Chairman of the House International Relations Committee, has asked that the proposed rule not go forward until he had a chance to review it and comment. This request will slow the process; however, the result may be recommendations from Chairman Hyde to toughen the regulation.
Wassenaar Implementation
In July, BIS published a final rule and later some corrections implementing the changes from the December 2004 plenary meeting of the Wassenaar Arrangement. The rule revises certain entries controlled for national security reasons in Categories 1, 2, 3, 4, 5 Part I (telecommunications), 6, 7, 8, and 9. The affected ECCNs are: 1C008, 2B001, 2B005, 2B006, 2B201, 3A001, 3A002, 3B001, 3B002, 3B991, 3B992, 4D001, 4E001, 5A001, 6A001, 6A002, 6A003, 6A006, 6A993, 6A996, 6E001, 6E002, 6E003, 6E991, 6E993, 7A002, 7A007, 8A002, and 9A001. [Items # 19 and 21 in the attached summary of changes to the EAR].
Category 6
The amendments to ECCNs 6A002 and 6A003 (and indirectly 6E001 and 6E002) were agreed to by the Wassenaar Arrangement because, while silicon infrared focal plane arrays (“SIIRFPAs”) are used in cameras and other systems for civilian fire fighting, commercial collision avoidance (e.g. automotive, aircraft, maritime), predictive/preventative maintenance, and medical imaging applications, they also have the potential to be used in strategic military applications including surveillance systems, vehicle systems, soldier systems, rifle sights, and unmanned vehicle systems. The focal plane array industry is changing rapidly and needs to be monitored. The amendments to ECCNs 6A002 and 6A003 are subject to a Validity Note. Control of these items is valid until December 5, 2007. Renewal of controls will require unanimous consent by all Wassenaar Arrangement Participating States. Applying a validity note on these items requires Participating States to reassess the need for controlling these items based on technological developments and strategic applications. The revisions to ECCNs 6A002 and 6A003 affect U.S. exporters of imaging cameras and non-space qualified SIIRFPAs, original equipment manufacturers who use non-space qualified SIIRFPAs in their products, and distributors of these products and technologies. Based on discussions with industry, BIS expects that the imposition of license requirements on systems that contain these non-space qualified SIIRFPAs and related software and technology will increase the number of Category 6 license applications received by BIS by more than 40 percent (i.e., 800 to 1000 applications) over the next 6 months.
CTP Limits
This rule also raises the Composite Theoretical Performance (“CTP”) eligibility limit from 75,000 MTOPS to 190,000 MTOPS for deemed exports of computer technology and source code to foreign nationals of Computer Tier 3 destinations, because doing so will assist the computer industry in the area of research and development to advance computer technology (be it for it consulting or for other sectors), and because it will not adversely affect the national security of the United States. Certain deemed exports to Computer Tier 3 foreign nationals are subject to a Foreign National Review requirement.
Slovenia
Slovenia was welcomed as a new Participating State to the Wassenaar Arrangement at the December 2004 Plenary Meeting. To reflect this change, this rule adds Slovenia to the list of Wassenaar Arrangement member Countries in Supplement No. 1 to part 743.
ITAR
In June, the State Department published several changes to the International Traffic in Arms Regulations (“ITAR”). The changes are relatively minor and are summarized in more detail in the attached regulatory summary. The changes included (1) the threshold amounts for Congressional notification for member countries of NATO, Australia, Japan, and New Zealand are established at $25 million for the export of major defense equipment sold under a contract and $100 million for the export of defense articles and services sold under contract; (2) a Congressional notification threshold level of $1 million is established for proposed exports to all countries involving firearms controlled under Category I of the USML; and (3) Section 126.5 (the Canadian exemption) was modified to clarify the range of defense articles, related technical data, and defense services that will continue to require a license issued by DDTC for export to or temporary import from Canada. [Item # 10 in the attached summary of changes to the ITAR].
In August, the State Department published a final rule amending various sections of the ITAR. Among other changes, this final rule includes an explanation of the requirements for registrants maintaining records in an electronic format. These include the ability to reproduce the records legibly on paper and the stored information, if altered, must keep track of all changes, who made them and when they were made. See the attached summary for details. [Item # 18 in the attached summary of changes to the ITAR].
The State Department published a notice on its website regarding support documentation for license applications. According to the website, the State Department finds it prudent to reiterate to exporters of defense articles the fundamental ITAR requirement for supporting documentation. In addition to requiring a purchase order, letter of intent, or other documentation, Licensing Officer’s may require a signed contract to be submitted with any application for the permanent export of defense articles. All applications submitted after September 16, 2005, not in compliance with this requirement will be Returned Without Action. The notice can be found at http://www.pmdtc.org/license_support.htm.
The State Department suspended the application of Section 564(a) of the Foreign Relations Authorization Act to Iraq. This act prohibits the sale or lease of any defense article or defense service by the United States Government to any country or international organization that, as a matter of policy or practice, is known to have sent letters to United States firms requesting compliance with, or soliciting information regarding compliance with, the Arab League primary or secondary boycott of Israel.
DDTC is also planning to update its website. During the week of January 3, 2006, the Web address for the Directorate of Defense Trade Controls will change to www.pmddtc.state.gov.
OFAC
Syria
In April, OFAC published a final Syrian Sanctions Regulation implementing President Bush’s May 11, 2004 Executive Order, which put into effect the restrictions imposed by the Syrian Accountability and Lebanese Sovereignty Act. The regulation puts into place sanctions on all property and interests in property of persons designated by the Secretary of the Treasury to be contributing to Syria’s support for terrorism, its military presence in Lebanon, its pursuit of weapons of mass destruction and its efforts to undermine the stabilization and reconstruction of Iraq. The new rules exempt certain activities related to informational materials, however, the new rules do not exempt donations of food, clothing, and medicine intended to relieve human suffering. Therefore the donation of food, clothing and medicine is prohibited unless authorized by OFAC or otherwise authorized by law. [Item # 4 in the attached summary of OFAC changes].
Burma
In August, OFAC amended and reissued the Burmese Sanctions Regulations, 31 CFR part 537, in their entirety to implement Executive Order 13310 of July 28, 2003, which placed new sanctions on Burma. Executive Order 13310 blocks all property and interests in property of the persons listed in the Annex to the Order and of certain persons determined, at a future point, by the Secretary of the Treasury, in consultation with the Secretary of State, to meet the criteria set forth in the Order. It also bans the importation into the United States of products of Burma (while waiving the ban where it would conflict with the international obligations of the United States under certain conventions on diplomatic and consular relations and similar agreements) and the exportation or reexportation to Burma of financial services from the United States or by U.S. persons. [Item # 6 in the attached summary of OFAC changes].
Weapons of Mass Destruction Proliferators and Their Supporters
In June, the President issued Executive Order 13382, blocking property of weapons of mass destruction proliferators and their supporters. These entities were added to OFAC’s SDN list and designated by [NPWMD].
Census
Mandatory AES and Increased Penalties
In February, Census Bureau published the long-awaited proposed rule to amend the Foreign Trade Statistics Regulations (“FTSR”). The Census Bureau proposes renaming the FTSR to “Part 30 – Foreign Trade Regulations” (“FTR”), requiring mandatory Automated Export System (“AES”) filing for all shipments requiring Shipper’s Export Declaration (“SED”) information, revising the post-departure (formerly Option 4) approval procedures, among others. Regarding penalties, the Census Bureau proposes increasing the penalties imposed for violations from $100 to $1,000 per each day of delinquency, to a maximum from $1,000 to $10,000 per violation. For knowing violations or for intentionally providing misleading information the civil penalty will not exceed $10,000 per violation and the criminal penalty shall not exceed $10,000 or imprisonment for not more than five years, or both, per violation. Finally, Census proposes delegating enforcement authority to BIS’ Office of Export Enforcement (“OEE”), the Department of Homeland Security’s CBP and Immigration and Customs Enforcement (“ICE”). We expect the final rule to be published in the first quarter of 2006. The trade community will be required to implement the changes in the regulations 90 days after publication of the final rule. [Item # 1 in the attached summary of changes to the FTSR].
Enforcement
BIS
This year saw more enforcement activity, particularly in criminal penalties. BIS continues to insist that voluntary disclosures are a great weight mitigating factor that can significantly lessen penalties. In fiscal year 2005, there were 31 criminal convictions, $7.7 million in criminal fines, 69 administrative cases, and $6.8 million in administrative fines. So, essentially administrative cases lead to half the amount of fines as criminal cases. What is interesting is that on the enforcement side, the trend is moving away from just exporter liability and moving toward conspirator liability. Charges are now being made against foreign corporations that aid the re-export of items without a license. The BIS is also going after transporters or those who store goods. We are also seeing more conduct remedies imposed as part of the settlement agreements. These remedies usually require the company to audit its internal compliance program and submit the audit report to BIS.
Criminal Penalties
Stoelting Company of Wood Dale, Illinois, and its president, LaVern Miller, were sentenced in connection with criminal violations of the EAA for illegally exporting polygraph machines to the People’s Republic of China (“PRC”). Between January 1998 and February 1999, Stoelting, under Miller’s direction, knowingly exported and attempted to export polygraph equipment to the PRC without the required licenses from BIS. Miller was sentenced to two and half years probation, including six months of electronically monitored home confinement, 500 hours community service and a criminal fine equivalent to the costs of probation and electronic monitoring, estimated to be $18,000. The Stoelting Company was sentenced to two and a half years corporate probation and a $20,000 criminal fine. In June, BIS announced that Stoelting and Miller each agreed to a $44,000 civil penalty and a five-year denial of export privileges in connection with this case.
Valtex International Corporation, a California export company, and its president and owner, Vladimir Alexanyan, pled guilty to separate felonies arising out of the attempted export by Valtex of thermal material used to insulate satellites and missiles for space travel to the People’s Republic of China. Vladimir Alexanyan, age 58, from Los Altos, California, pled guilty to submitting a materially false document to the United States Department of Commerce in which he represented that no export license was required from the Department of Commerce prior to shipping the thermal insulation to China. Separately, Valtex pled guilty to a violation of the export administration regulations administered by the Department of Commerce for attempting to export the contraband thermal insulation material to the Chinese Academy of Space Technology. In its plea agreement with the United States, Valtex agreed to pay a criminal fine of $250,000 for its violation of the export administration regulations. In addition to the criminal charges, the Department of Commerce has also reached a civil settlement with Alexanyan and Valtex in regard to the export violations described above. Specifically, Alexanyan was assessed a civil penalty of $88,000 and Valtex was assessed a $77,000 civil penalty. In addition, Alexanyan and Valtex were also both denied all export privileges to the People’s Republic of China for a period of five years for any items subject to the Export Administration Regulations. Also as part of the civil settlement, a conduct remedy was imposed and Valtex will be required to implement an export management system not later than December 29, 2005. Valtex International faces a maximum potential criminal fine of $500,000. Alexanyan faces a maximum potential penalty of five years in prison and/or a $250,000 fine. The actual sentences will be determined by Chief Judge James Rosenbaum. Sentencing dates have not been set.
BEF Corporation of Allentown, Pennsylvania paid $555,600 in criminal and civil fines, forfeitures and fees for its export of refurbished one-hour photo lab equipment to Iran and for making false statements about the shipments on their SED. A joint BIS-ICE investigation found that the company had exported the mini-labs to Iran without obtaining licenses from Treasury’s OFAC. BIS claimed the company and its co-conspirators “in furtherance of the conspiracy . . . tried to conceal the ultimate destination of the photo labs by exporting them through the United Arab Emirates to Iran.” BEF paid a $350,000 criminal fine, forfeited $11,000 in fees to Treasury, paid a special court assessment of $5,600 and paid a civil fine of $39,000 to BIS.
Metric Equipment Sales (“Metric”) of Hayward, California agreed to settle criminal and civil charges that it exported oscilloscopes from the United States to Israel in violation of the EAR. Metric pled guilty to one felony count of violating IEEPA by exporting an oscilloscope to Israel without a license. Metric was sentenced to pay a criminal fine in the amount of $50,000, placed on three years probation and ordered to serve 250 hours community service. In a related administrative case, Metric agreed to pay BIS a $150,000 civil penalty, and to a suspended five year denial of its export privileges under the EAR. A conduct remedy was levied and Metric will also perform an audit of its internal export compliance program and forward the results to BIS’ Office of Export Enforcement. BIS charged that between January 2001 and December 2001, Metric committed a total of 31 violations by exporting items without export licenses, by transferring items with the knowledge that a violation would occur and by making false statements on the Shipper’s Export Declarations.
Asher Karni, 51, of Cape Town, South Africa, was sentenced to 36 months of incarceration for conspiracy and export violations arising out of his unlawful exports of U.S. origin commodities that are controlled for nuclear non-proliferation reasons to Pakistan and India. Karni had arranged for the purchase of 200 trigger spark gaps from a firm in New Jersey. The triggered spark gaps have a dual use. Hospitals use them to break up kidney stones, but they can also be used to electronically trigger a nuclear weapon. These devices, which are listed under ECCN 3A228, don’t require an export license for South Africa but do need one for export to Pakistan.
Between November 2003 and November 2004, current and former officials of Maine Biological Laboratories, based in Winslow, Maine entered guilty pleas to various charges including receiving an avian influenza virus smuggled from Saudi Arabia, mail fraud, violation of the Virus-Serum-Toxin Act, making false statements to the government, and two violations of the Export Administration Act for unlicensed exports of virus toxins to Syria. The company was sentenced to five years probation and fined $500,000. The Court ordered the company to pay the fine over five years. The investigation resulted in the conviction of eight individuals with sentences ranging from probation to a year in federal prison. In August, the company’s president, vice president for production, vice president for quality assurance and regulatory affairs, and chief financial officer were each sentenced to a year in federal prison. U.S. Department of Commerce, the U.S. Department of Agriculture, and U.S. Immigration and Customs Enforcement jointly conducted this investigation. According to news reports, as of March 2005, the company spent about $360,000 on attorney’s fees to argue its case, and $34,000 on a new compliance program for its imports and exports. In a related civil case, the company agreed to pay a civil penalty of $100,000 to settle charges relating to unlicensed exports of virus toxins to Syria. In addition to the monetary fine, the company’s export privileges were denied for a period of 5 years.
Former North Carolina Senator John H. Carrington faces up to 10 years in prison after pleading guilty to a federal charge of illegally shipping law enforcement equipment to China. Carrington, who served five terms in the state Senate before losing in a Republican primary last year, entered the plea during an appearance before Chief U.S. District Court Judge Louise Flanagan in New Bern. Sentencing is scheduled for March 20. Under an agreement between prosecutors and defense attorneys, Carrington will pay a fine of $850,000 and lose his exporting privileges for five years. The felony conviction carries a possible maximum prison term of 10 years. Carrington, 71, had been president and chief executive officer of Sirchie Finger Print Laboratories (Sirchie) of Youngsville, North Carolina. In a related civil case, Sirchie agreed to pay a $400,000 civil penalty to settle charges that it committed 181 violations of the EAR by exporting fingerprint imaging equipment and fingerprint ink and power to the Hong Kong Special Administrative Region through Italy without the required export licenses. The company also agreed to be subject to a five-year denial of export privileges for all items subject to the EAR.
Robert E. Quinn, 54, of Lexington, Kentucky, was found guilty by a federal jury of one count of conspiring to violate the U.S. trade embargo against Iran and five counts of illegal exports to Iran. Sentencing is scheduled for February 23, 2006; he faces a likely range of 97 to 121 months in prison under the federal sentencing guidelines. The government’s evidence at trial showed that, beginning in February 2003, Quinn, who served as the former Vice-President of Global Parts Marketing for CMHC, agreed to supply forklift and tow tractor parts to Sepahan Lifter. In order to circumvent the embargo, Quinn arranged for the goods first to go to Sharp Line Trading, a broker in Dubai, United Arab Emirates, after which Sharp Line would immediately re-export the parts to Sepahan Lifter in Iran. Khalid Mahmood, Sharp Line’s president, previously pled guilty to related charges and testified for the government at trial. Between March 2003 and December 2003, Quinn directed five shipments of CMHC parts to Iran through Sharp Line in Dubai.
Voluntary Disclosures
In April, BIS has announced it will launch a new effort to publicize the benefit of making a voluntary self-disclosure of violations of the EAR. As part of this new push, BIS intends to give firms credit for voluntary action in any press releases it issues announcing the settlement of a case. BIS also plans to post on its website statistics on the level of settlements when voluntary disclosures are made compared to non-voluntary discoveries by BIS special agents. The goal of the increased publicity is to dispel the impression that voluntary disclosures do not reduce penalties which grew out of the large fines imposed on some firms that have made voluntary disclosures. For the first time, BIS quantified the potential reduction in the civil fine as a result of voluntarily self-disclosing export violations. BIS officials stated that a voluntary disclosure will lead to at least a 50 percent reduction in the civil fine that would be imposed, and that the “penalty would never go below 50 percent without a voluntary self-disclosure.”
At an export enforcement seminar this fall, Wendy Wysong, Deputy Assistant Secretary for Export Enforcement, noted that BIS conducted a review of voluntary self-disclosures over the last five years found all but three had fines imposed that were 50 percent or less than potential fines that might have been paid if the government had uncovered the violations. In the three cases where fines were higher than 50 percent there were significant aggravating factors or bigger problems than the company revealed to BIS. The agency had received 175 voluntary self-disclosures through mid-October compared to 75 in fiscal 2004. After examining voluntary self-disclosure data for the last five years, the BIS enforcement staff found that of the 75 voluntary self-disclosures in 2004, only five resulted in an administrative settlement, 28 cases are still open, and the rest either got only a warning letter or no action was taken. Of the 136 received in fiscal year 2005, 100 cases were still open and no cases have produced a charging letter. According to Wysong, no voluntary self-disclosure led to a criminal case. Seeking criminal action after getting a voluntary self-disclosure “would be a rare case,” she said.
Lam Research Singapore Pte. Ltd. (“LRS”), Singapore, agreed to pay a $40,000 civil penalty to settle charges that it knowingly reexported U.S.-origin pressure transducers to Malaysia in violation of the EAR. BIS charged that, on four occasions during November and December of 2000, LRS reexported U.S.-origin pressure transducers from Singapore to Malaysia without the required Department of Commerce licenses. Pressure transducers are controlled under the EAR for nuclear nonproliferation reasons. In addition, BIS charged that LRS reexported the pressure transducers with knowledge that violations of the EAR would occur. LRS voluntarily self-disclosed the violations and cooperated fully with BIS in the investigation.
Price Brothers (UK) Limited of the United Kingdom agreed to pay a $101,000 civil penalty to settle charges that it committed 29 violations of the EAR by supplying machinery spare parts to a company in the United Kingdom that subsequently reexported them to Libya or by directly reexporting the items to Libya without obtaining the required export licenses. The transactions occurred between January and June 2000. The company voluntarily self-disclosed the violations and cooperated fully in the investigation.
BJ Services Company USA, L.P. of Tomball, Texas, filed a voluntary disclosure and agreed to pay a $142,450 civil fine to settle charges that it committed 37 violations of the EAR by exporting certain chemicals classified under ECCN 1C350 without the required export licenses between 1999 and 2002. BJ Services also agreed to a conduct remedy – the company must perform an audit of its internal compliance program not less than 18 months from the date of entry of the Order and not more than 24 months from the date of entry of the Order. A copy of the audit report must be sent to BIS no later than 25 months from the date of entry of the Order.
Teledyne Energy Systems, Inc. (“Teledyne”) of Hunt Valley, Maryland has agreed to pay a $16,500 civil penalty to settle charges that it exported power plant technical data to an organization in India in violation of the EAR. BIS charged that on three occasions in 1999 and 2000, Teledyne exported technical information on proposed power plants, items subject to the EAR, from the United States to Bharat Heavy Electricals, Ltd. (“BHEL”) in New Delhi, India, without the required Commerce Department export licenses. At the time of the export BHEL was listed on BIS’ Entity List. Teledyne voluntarily self-disclosed the violations and cooperated fully in the investigation. It is significant to note that Teledyne successfully negotiated a proposed penalty of $33,000 ($11,000 per violation) down by half to $16,500, possibly as a result of having voluntarily disclosed the violations.
Deemed Exports
According to Michael Turner, director of the BIS Office of Export Enforcement, BIS is developing a compliance program to check on whether companies are meeting the conditions imposed on their deemed export licenses and plans to pilot test the program later this year with industry before implementing it fully. BIS has been criticized for failing to ensure compliance with deemed export license terms in reports issued by both the Commerce Department Office Inspector General (“OIG”) and the Government Accountability Office (“GAO”), the investigatory arm of Congress. The BIS compliance program is likely to include visits to firms holding deemed export licenses. If you have licenses for foreign national employees, it is time to review the conditions to be sure you are in compliance!
Hunting Equipment Distributors
In February, BIS imposed over $1 million in fines as part of settlement agreements for unlicensed exports after the agency discovered that licensing requirements imposed on crime control products and shotguns were ignored by many hunting equipment distributors and catalogue companies. BassPro of Springfield, Missouri, and its American Rod & Gun division agreed to pay a $510,000 civil fine in four installments to resolve BIS charges that it exported various optical sighting devices on 407 occasions without a export license from BIS. It was also charged with one count of failing to keep sales and shipping records. The total value of the exports was about $50,000. Cabela’s Inc., of Sidney, Nebraska, agreed to pay a $265,000 civil penalty for allegedly exporting various parts and scopes for sports shotguns on 685 occasions without BIS approval. Some of these exports were valued at only $3.99, the BIS charging letter showed. Most were under $100. The exports went to customers in Canada, Argentina, Brazil, Chile, Mexico, Colombia, Bolivia, Venezuela and Uruguay. BIS also fined North Pass Ltd., of Fort Collins, Colorado $214,500 for allegedly exporting rifle optical sighting devices on 135 occasions without licenses. The firm will be allowed to pay the fine in four installments over the next 10 months. BIS also agreed to suspend $160,875 of the fine until Dec. 31, 2005, and waive it after that, if the firm remains in compliance with U.S. export control rules.
Freight Forwarders
Federal Express Corporation (“FedEx”) of Memphis, TN, agreed to pay a $40,000 civil penalty to settle charges pertaining to a total of five violations of the EAR in connection with exporting on the behalf of a denied party, transporting with knowledge of a violation of the Regulations, aiding and abetting an export to Syria without the required license, and misrepresentations of license code on automated export system record. BIS first charged FedEx for exporting on the behalf of a denied party in 2001, and exporting clothing, items subject to the Regulations, on behalf of the Tetrabal Corp. of Richardson, Texas. The Tetrabal Corp. was at the time of export subject to a temporary denial of its export privileges. FedEx received a second violation for the same charge of exporting on the behalf of a denied party in 2001, when FedEx exported an amusement ride computer on behalf of Yuri Montgomery, M&M Avionics, Inc., of Olympia, WA. Yuri Montgomery was at the time of export subject to an order denying his export privileges. FedEx’s third charge was for transporting an amusement ride computer on behalf of Yuri Montgomery with knowledge that doing so was a violation of the order denying Yuri Montgomery’s export privileges. FedEx’s fourth charge was aiding and abetting an export to Syria of a computer to Syria without the required export license. FedEx’s fifth charge was misrepresenting a license code on Automated Export System Record in 2004, when FedEx filed an AES record represented falsely that the export in question did not require an export license. FedEx is not a reliable freight forwarder as this statement shows. If you’re looking for a company that offers professional freight forwarder services check out a website like seawaylogistics.co.uk instead. Sometimes it pays to do your research!
Freight forwarder Air Tiger Express of El Segundo, California agreed to pay a $49,500 civil fine as part of the settlement agreement with BIS related to charges that the company aided and abetted in the export of controlled items to organizations in India that were on the BIS Entity List without the required export licenses. This case is another example of BIS’ widening net of export control enforcement. In a speech in December 2004, Wendy Wysong stated that freight forwarders and shippers are targeted for 2005 as a “priority outreach focus” for BIS and that the agency “will not hesitate to hold liable all those in the export stream, including freight forwarders, who knowingly participate in an illegal transaction.” This just reiterates why it is so important for a business to choose the right company when choosing a freight forwarding partner. If you are looking for transportation solutions, then LTL (Less-than-truckload shipping) from CSA Transportation offers an inexpensive freight shipping option that you can trust.
Repeat Offenders
EMD Biosciences, Inc. (“EMD”) of San Diego, California, agreed to pay one of the largest civil penalties imposed by BIS – $904,500 to settle charges that it exported biological toxins to Canada in violation of the EAR. Under the terms of the Settlement Agreement, EMD’s export privileges under the EAR were denied for a period of two years, all of which is suspended provided that EMD commits no violations of the EAR during the next two years. BIS alleged that, between June 2002 and July 2003, EMD committed 134 violations of the EAR stemming from 67 exports of biological toxins to Canada that were made without obtaining required BIS export licenses. EMD, formerly known as CN Biosciences, Inc. (“CN”), previously paid civil fines for unlicensed exports of the same and similar toxins. In 1999 CN agreed to pay a civil penalty of $708,000 to the Commerce Department to settle charges that between July 1992 and January 1994, CN made 171 unlicensed shipments to various destinations in violation of the EAR. $354,000 of the civil penalty was suspended for one year provided that the company committed no further violations of the EAR during that time.
Successor Liability
Rockwell Automation agreed to pay a civil penalty of $46,750 to settle charges that Rockwell committed 17 violations of the Regulations, both in its own capacity and as successor to Entek-IRD International (“Entek-US”) and Entek IRD International Limited (“Entek-UK”). BIS charged that the companies exported balancing machines (ECCN4 2B229) to various countries, exported items to organizations on the Entity List without the required export licenses. Rockwell Automation filed a voluntary disclosure.
Pro345 Distribution (Proprietary) Limited and ProChem (Proprietary), Limited (“ProChem”) agreed to pay $1,540,000.00 to settle 220 charges of violations of the EAR. ProChem is the successor company to Protea Chemicals. BIS alleged that various branches of Protea Chemicals re-sold potassium cyanide and sodium cyanide (ECCN 1C350) that was exported from the United States to end users in South Africa in violation of conditions on Commerce Department export licenses. The licenses authorized the export of the chemicals from the United States to Protea and authorized Protea to resell the chemicals only to end-users listed on each license.
Thermal Imaging Cameras
E.D. Bullard of Cynthiana, Kentucky, agreed to pay a $330,000 civil penalty to settle charges that it exported and re-exported thermal imaging cameras to Austria, the Czech Republic, France, Germany, Israel, Spain, Switzerland, and Venezuela in violation of the EAR. In addition, Bullard Gmbh, of Bonn, Germany agreed to pay a $36,000 civil penalty to settle charges that it resold, re-exported, and transferred thermal imaging cameras to Austria, France and Switzerland in violation of the EAR. BIS charged that Bullard and its subsidiary, Bullard Gmbh, committed 61 violations of the EAR between February 2000 and March 2002. Bullard, with assistance from Bullard Gmbh, caused the export, re-export, reselling and transferring of thermal imaging cameras from the United States to the aforementioned countries without the required export licenses, to intermediate consignees not authorized under a license, after a license had expired, in quantities exceeding those authorized by a license, and in violation of the terms and conditions of a license. In addition, Bullard was charged with making false statements on Shipper’s Export Declarations in connection with many of the shipments.
Embargoed Countries
Wilden Pump and Engineering Co., LLC (“Wilden”), a company based in Grand Terrace, California, agreed to pay a $700,000 civil penalty to settle administrative charges that it violated the EAR in connection with unauthorized exports of diaphragm pumps from the United States to Iran, Israel, People’s Republic of China, Syria, and the United Arab Emirates without the required Department of Commerce export licenses. BIS charged that, between 2000 and 2003, Wilden committed 71 violations of the EAR. The size of the penalty assessed to Wilden is due to the significant number of violations, many of them with knowledge that the shipments were destined to an embargoed country. Wilden also agreed to be subject to a three-year denial of export privileges for items on the Department’s Commerce Control List. The denial will be suspended for two years provided that Wilden does not commit any violations of the EAR during the suspension period.
Antiboycott
Alison Transport of Oceanside, New York, has agreed to pay a $22,500 civil fine to settle BIS charges that it provided prohibited boycott information on three occasions to customers in Oman, Kuwait and Saudi Arabia. According to BIS’ proposed charging letter, Alison furnished information to customers in these countries “with intent to comply with, further or support an unsanctioned foreign boycott.” BIS charged that the company provided agent certificates that included such statements as: “The aircraft is allowed to land on Kuwait airport . . .”; “We certify that the carrying vessel is allowed to enter Arab ports”; and “We certify that the aircraft . . . is not black listed (sic) by the Arab League boycott committee.”
BIS imposed a $12,500 civil fine on Hord Crystal Corporation of Pawtucket, R.I., for alleged anti-boycott violations. According to BIS, Hord told a customer in Dubai, United Arab Emirates, that its goods were “neither of Israeli origin nor do they contain Israeli materials, nor are they being exported from Israel.” Hord also failed to report the request for this information to BIS in a timely manner as required, the agency charged.
Following the submission of a voluntary disclosure, Epstein, Edell, Shapiro, Finman & Lytle LLC of Rockville, Maryland, agreed to pay a $17,000 civil penalty to settle allegations that it violated the antiboycott provisions of the EAR. BIS alleged that in February of 2002, in connection with transactions involving the transfer of information from the United States to Syria, Epstein furnished prohibited information about another person’s business relationships with Israel in violation of the EAR. BIS also alleged that Epstein failed to report in a timely manner its receipt of the request to provide such certification from an intermediary in Jordan.
DDTC
As part of the general expansion of staff and resources that Congress has approved for State’s export licensing responsibilities, the DDTC has increased the number of people assigned to its compliance office. State’s compliance staff is putting its attention into several key areas; among them are information technology systems and the inadvertent transfer of ITAR technology through company intranets that don’t have adequate controls. The compliance staff also is looking increasingly at foreign nationals, including employees of subcontractors and persons with dual citizenship. Another area of concern is ITAR-required recordkeeping, which often isn’t kept up-to-date. They are also checking to see if firms are properly identifying and tracking U.S. Munitions List (“USML”) exports, including records of destruction of old items. In addition, State is examining the use of license exemptions to make sure they are being used properly.
Compliance Assessments during Acquisitions
The State Department is beginning to request that ITAR registered firms conduct compliance assessments of companies they acquire and to submit the results of those assessments as voluntary self-disclosures. DDTC has begun using the registration process under the ITAR to force defense firms to conduct these audits, which may go beyond the normal due diligence performed as part of merger and acquisition deals. Under ITAR, firms that are registered with DDTC as defense exporters must amend their registrations to reflect the acquisition of another company. So far, the extent to which State is requesting these compliance assessments is anecdotal and DDTC hasn’t issued any statement on the policy. The letters being issued are signed by Deborah Carroll, the new head of the registration and compliance office in DDTC, who was tough on exporters when she was the Chief of the Compliance and Enforcement Branch at DDTC.
Consent Agreements
DirectTV Group agreed to pay $6.5 million as part of a settlement agreement with the State Department due to the violation of the terms of a March 2003 consent agreement and new violations related to the unlicensed export of satellite ground stations. Many of the violations identified in a draft charging letter to the company allegedly occurred while DirecTV’s subsidiary Hughes Network Systems (“HNS”) was negotiating the 2003 deal. DirecTV, which acquired controlling interest in Hughes Electronics Corp., the parent of HNS, at the end of 2003, uncovered and voluntarily reported some of the violations to State in May 2004. It revealed more violations in three subsequent disclosures. The penalties imposed on DirecTV include the partial revocation of a waiver that had allowed Hughes to apply some of the fine imposed in the March 2003 settlement agreement toward improving its internal export compliance program. Hughes will have to pay $1.5 million initially applied toward compliance activities to State. In addition, DirecTV was fined $5 million, with a $1 million payment made in January and three more $1 million payments due annually for three years. DirecTV also agreed to spend $1 million over three years “for the purpose of defraying a portion of costs associated with remedial compliance measures.”
ORBIT/FR, Inc. of Horsham, Pennsylvania, a provider of microwave antenna test and measurement systems, reached a final settlement with the DDTC, terminating as of August 29, 2005 the statutory debarment that prohibited the Company’s direct or indirect participation in exports subject to the ITAR. Accordingly, under the terms of the Consent Agreement, DDTC will resume the normal processing of license applications involving the Company. On November 10, 1999, license applications involving the Company for the export of ITAR-controlled defense articles or defense services became subject to a policy of denial by reason of the Company’s conviction of violations of the Arms Export Control Act. The Company has entered into a Consent Agreement with DDTC regarding all civil charges, penalties and sanctions arising out of these export violations. The DDTC charged that the company had exported software and equipment for a radome measurement system to China and that the company had provided a defense service to China by modifying the software for its antenna measurement system so that the system would have sufficient accuracy to measure an antenna on a Patriot-type missile system. The Company has agreed to pay a penalty in the amount of $100,000, payable in three annual installments. An additional penalty in the amount of $200,000 has been assessed to cover the costs to be incurred by the Company and its affiliates during the next three years to implement compliance measures mandated by the Consent Agreement. Under the terms of the Consent Agreement, an additional penalty of $200,000 has been assessed, but is suspended on condition that the Company and its affiliates comply with the foregoing foreign export restrictions. The Company further agreed that, for a period of six years, its foreign subsidiaries will not export any non-US defense article or furnish any non-US defense service to any country identified in ITAR Part 126 without the consent of the Assistant Secretary of State for Political-Military Affairs. The Company’s foreign affiliates have agreed to comply with a similar restriction for a period of three years.
OFAC
OFAC made significant changes to its monthly compilation of civil enforcement actions. In OFAC’s monthly civil penalty report issued on October 12, 2005, OFAC, for the first time, released specific details about the alleged violation and other information regarding the terms contained in the settlement agreement. This information, which is being released as part of OFAC’s efforts to make the civil penalty process more transparent, will greatly assist counsel, exporters and financial institutions in understanding the types of activities that lead to violations of the sanctions regimes that OFAC administers and enforces. The civil penalty summary can be found on OFAC’s website at: http://www.treas.gov/offices/enforcement/ofac/civpen/penalties/
ABN AMRO Bank
In December, ABN AMRO Bank N.V. was ordered to pay an $80 million penalty in connection with findings the bank failed to comply with U.S. anti-money laundering laws. The Federal Reserve, New York and Illinois state bank supervisory agencies, the Financial Crimes Enforcement Network and the Treasury Department’s Office of Foreign Assets Control said they had found defects in the bank’s internal controls against money laundering in branches in New York and Chicago. The agencies have assessed penalties based on findings of unsafe and unsound practices; on findings of systemic defects in ABN AMRO’s internal controls to ensure compliance with U.S. anti-money laundering laws and regulations, which resulted in failures to identify, analyze, and report suspicious activity; and on findings that ABN AMRO participated in transactions that violated U.S. sanctions laws. ABN AMRO is also required to take ongoing measures to ensure compliance with U.S. sanctions laws. The U.S. bank regulators and supervisors said De Nederlandsche Bank N.V., the regulator of Dutch banks, had also participated in issuing the consent order. Regulators are also requiring ABN AMRO to improve compliance and risk management systems to ensure full oversight and compliance with U.S. laws.
Foreign Corrupt Practices Act
In March, the Titan Corporation, a military and intelligence contractor, agreed to pay $28.5 million to settle criminal and civil charges that it bribed the president of Benin. The combined penalties are the largest imposed on a company in the history of the Foreign Corrupt Practices Act. That 1977 law bars American companies from bribing presidents, princes and potentates in the pursuit of overseas contracts. Titan pleaded guilty to three felonies before a federal judge in San Diego and will pay a criminal fine of $13 million. It also agreed to a $15.5 million in civil penalties to settle with the Securities and Exchange Commission. The bribery investigation forced the Lockheed Martin Corporation to cancel its plans to acquire Titan. Although the bribery in Benin ran from 1999 to 2001, the commission said, Titan affirmed in a merger agreement with Lockheed on Sept. 15, 2003, that it had not violated the Foreign Corrupt Practices Act.
Trade Agreements Act
In October, Office Depot, Inc. agreed to pay $4.75 million to settle allegations that it submitted false claims when it sold office supply products manufactured in countries not permitted by the Trade Agreements Act to United States government agencies. The settlement resolves allegations that the company sold products from countries, such as China and Taiwan, that do not have reciprocal trade agreements with the U.S. Office Depot was required by its contract with the General Services Administration (“GSA”) to prevent such items from being offered for sale to U.S. government agencies. The settlement was a result of a False Claims Act case filed in January 2003 by a competitor, Safina Office Products, and two of its executives, Edward Wilder and Robert Hsi Chou Lee. Safina, Wilder and Roberts will collectively receive $712,500 of the total recovery as their statutory award. Under the whistleblower provisions of the False Claims Act, private parties can file an action on behalf of the United States and receive a portion of the proceeds of a settlement or judgment awarded against a defendant.
Personnel Changes and Reorganization
This year saw changes in personnel at BIS, DDTC, DTSA, and Homeland Security.
BIS
David H. McCormick was confirmed as the Under Secretary of Commerce for Export Administration replacing Kenneth Juster who left BIS in January 2005. McCormick was formerly the head of Ariba, Inc., a software company. Prior to Ariba, Mr. McCormick served as president and CEO of FreeMarkets, Inc., a publicly traded supply management software and services company. Before joining FreeMarkets, he was a management consultant with McKinsey & Company, Inc., and served as an officer in the U.S. Army where he held the rank of Captain. He is a West Point grad and served in the Army in the first Gulf War, where he was awarded the Bronze Star. He has a Masters in mechanical engineering from West Point and PhD from Princeton.
Darryl W. Jackson was confirmed as the Assistant Secretary of Commerce (Export Enforcement). He replaced Julie Myers who resigned as Assistant Secretary for Export Enforcement in November 2004. Mr. Jackson was a Partner in the law firm of Arnold & Porter, LLP. In addition, he is a Distinguished Lecturer in Law at the Columbus School of Law of The Catholic University of America. Prior to that, Mr. Jackson served as Executive Assistant United States Attorney for Operations in the District of Columbia. He received his bachelor’s degree from Lincoln University of Pennsylvania and his J.D. from Howard University School of Law.
DDTC
Robert Joseph was confirmed as the new Under Secretary of State for Arms Control and International Security. Joseph, who was director of studies at the National Institute for Public Policy, had been a special assistant to Bush and member of the National Security Council staff with responsibility for nonproliferation issues. He replaced John Bolton who was appointed by President Bush to be U.S. ambassador to the UN.
John Hillen, a former think-tank guru on security who was president of CGI-AMS Secure, was confirmed as Assistant Secretary of State for Political-Military Affairs. This position was formerly held by Lincoln Bloomfield who resigned in January 2005.
After a year’s tour of duty at the U.S. Embassy in Kabul, Afghanistan, Robert “Turk” Maggi has returned as Managing Director of the DDTC. In Afghanistan, he was Political Advisor to the Commanding General, Combined Joint Task Force 76, Bagram Airfield, Afghanistan, responsible for establishing a stable and secure environment to promote a competent, sovereign Afghan Government.
DTSA
At Defense, Beth McCormick continues as acting Deputy Undersecretary of Policy for Technology Security and head of DTSA, serving since Lisa Bronson left in the summer. No nomination has been made yet for a permanent successor.
DHS
Stewart Baker was confirmed as Assistant Secretary of Homeland Security for Policy. Baker’s new job places him in the prominent position of shaping policy on topics from data mining to the department’s planning for “what if” scenarios far off in the future. Those of you old enough to recall the Clipper, Clipper2, and Son of Clipper controversies already know that Baker’s career spans periods as general counsel for the National Security Agency during the period in the early 1990s when issues such as the export of strong\encryption technology and building snooping backdoors for law enforcement into communication networks (AKA key escrow) were hot political issues. Mr. Baker received his bachelor’s degree from Brown University and his J.D. from the University of California, Los Angeles. More recently he served as the general counsel for the Commission on the Intelligence Capabilities of the US Regarding Weapons of Mass Destruction.
Michael Garcia was confirmed as United States Attorney for the southern district of New York. Mr. Garcia was appointed Acting Commissioner of the Immigration and Naturalization Service on December 1, 2002, while serving as Assistant Secretary of Commerce for Export Enforcement (beginning August 2001).
International Agreements
Wassenaar
The Wassenaar Arrangement held its 11th Plenary Meeting in Vienna, Austria from December 13-14, 2005. The Plenary welcomed the participation of Croatia, Estonia, Latvia, Lithuania, Malta and Slovenia in the Plenary for the first time, and admitted South Africa as the first African state to join the Arrangement. The group considered growing international concerns about unregulated “intangible” transfers, such as by oral or electronic means, of software and technology related to conventional weapons and dual-use items. In view of the threat posed by terrorist acquisition of man-portable air defence systems (“MANPADS”), the Plenary welcomed practical steps by a number of Participating States in implementing Wassenaar Elements for Export Controls of MANPADS, for example through the destruction of stockpiles of such weapons. The Plenary especially encouraged Participating States to promote the Wassenaar Elements on MANPADS to non-Wassenaar States.
Category 3 – Electronics. ECCN 3A001.a.3.c was deleted. ECCN 3A001.a.3.b was included in ECCN 3A001.a.3 which now reads “‘Microprocessor microcircuits’, ‘micro-computer microcircuits’ and microcontroller microcircuits, manufactured from a compound semiconductor and operating at a clock frequency exceeding 40 MHz”. In ECCN 3A001.b.3 the word “discrete” was added before “microwave transistors”. In ECCN 3A001.b.4.f the parameter for operating frequencies changed to 3.2 GHz. In ECCNs 3A003 and 3D004 the validity notes were deleted. In ECCN 3B001.a.1 subparagraph (a) was deleted and the text of subparagraph (b) is now part of 3B001.a.1.
Category 4 – Computers. The Plenary adopted “adjusted peak performance”/”APP” replacing “composite theoretical performance”/”CTP”. For ECCN 4A003.b “composite theoretical performance” was replaced by “adjusted peak performance” and now reads “‘Digital computers’ having an ‘Adjusted Peak Performance’ (‘APP’) exceeding 0.75 Weighted TeraFLOPS (WT)”. ECCN 4A003.c replaced “computing elements” with “processors” and “CTP” was replaced with “APP”. ECCN 4D001.b was also modified and now reads ‘Software’, other than that controlled by 4D001.a, specially designed or modified for the ‘development’ or ‘production’ of:
- ‘Digital computers’ having an ‘Adjusted Peak Performance’ (‘APP’) exceeding 0.04 Weighted TeraFLOPS (WT); or
- ‘Electronic assemblies’ specially designed or modified for enhancing performance by aggregation of processors so that the ‘APP’ of the aggregation exceeds the limit in 4D001.b.1.
ECCN 4E001.b.1 was modified to read “‘Digital computers’ having an ‘Adjusted Peak Performance’ (‘APP’) exceeding 0.04 Weighted TeraFLOPS (WT); or“. ECCN 4E001.b.2 was modified by replacing “computing elements” with “processors” and “CTP” with “APP”. Finally, there is also a new Technical Note at the end of Category 4 regarding “Adjusted Peak Performance”.
Category 5 Part 1 – Telecommunications. In ECCN 5A001.b.6 a new Technical Note 2 was added that reads: “For the purpose of 5A001.b.6, ‘voice coding’ is defined as the technique to take samples of human voice and then convert these samples into a digital signal, taking into account specific characteristics of human speech”. ECCN 5A001.e now includes “radio” before “direction finding equipment”. In ECCN 5A001.e subparagraph (3) was deleted and a new paragraph (2) was added changing the entry to:
- “Instantaneous bandwidth” of 10 MHz or more; and
- Capable of finding a line of bearing (LOB) to non-cooperating radio transmitters with a signal duration of less than 1ms.
ECCN 5A001.f is a new entry for jamming equipment and reads:
Jamming equipment specially designed or modified to intentionally and selectively interfere with, deny, inhibit, degrade or seduce cellular mobile telecommunication services, having any of the following characteristics, and specially designed components therefor:
- Simulating the functions of Radio Access Network (RAN) equipment; or
- Detecting and exploiting specific characteristics of the mobile telecommunications protocol employed (eg., GSM).
N.B. For GNSS jamming equipment see the Munitions List.
In ECCN 5D001.c subparagraph (3) was deleted and the text in subparagraph (1) became part of 5D001.c which now reads: “Specific ‘software’ specially designed or modified to provide characteristics, functions or features of equipment controlled by 5A001 or 5B001”.
Category 5 Part 2 – Information Security. In ECCN 5A002.a.5 “not controlled in 5A002.a.6” was added to the entry. In ECCN 5A002.a.6 the term “time-modulated ultra-wideband” was replaced by “ultra-wideband modulation”, the network identification codes were added to the text, new sub-paragraphs (a) and (b) were added, the validity note was deleted and the definition of “time-modulated ultra-wideband” was deleted. The entry now reads:
Designed or modified to use cryptographic techniques to generate channelizing codes, scrambling codes or network identification codes, for systems using ultra-wideband modulation techniques, having any of the following characteristics:
- A bandwidth exceeding 500MHz; or
- A “fractional bandwidth” of 20% or more.
ECCN 5A002.a.9 is new entry with a new Technical Note that reads: Designed or modified to use “quantum cryptography”.
Technical Note
“Quantum cryptography” is also known as quantum key distribution (QKD).
In the Notes to 5A002, there is a new subparagraph 5A002.c.4 which reads: “Encryption and/or decryption for protection of libraries, design attributes, or associated data for the design of semiconductor devices or integrated circuits”.
Category 6 – Sensors and Lasers. ECCN 6A006.b is a new entry for underwater electric field sensors that reads: “Underwater Electric Field Sensors having a “noise level” (sensitivity) lower (better) than 8 nanovolt per meter per square root Hz when measured at 1 Hz”. According to the Wassenaar notes ECCN 6A006.c was deleted, however it still appears on the newly published control list. ECCN 6A006.d is a new entry for compensation systems for magnetic or underwater electric field sensor that reads: “Compensation systems for magnetic or underwater electric field sensors resulting in a performance equal to or better than the control parameters of 6A006.a, 6A006.b, or 6A006.c”. There were changes to the titles of the entries for 6A006, 6B006, 6C006, 6D003.f, and 6E003.f – Magnetometers was replaced by Magnetic and Electric Field Sensors.
Category 8 – Marine. In ECCN 8A002.f a new decontrol note was added indicating that this entry “does not control digital cameras specially designed for consumer purposes, other than those employing electronic image multiplication techniques”.
Category 9 – Propulsion Systems, Space Vehicles and Related Equipment. The majority of the changes were with respect to UAVs. In ECCN 9A001.a paragraph 2 of the Note was modified and now reads:
Intended to power non-military manned aircraft for which one of the following has been issued by a Participating State for the aircraft with this specific engine type:
- A civil Type Certificate; or
- An equivalent document recognised by the International Civil Aviation Organisation (ICAO).
In ECCN 9A012 the entry was rewritten to include associated systems, equipment and components. The entry now reads:
“Unmanned Aerial Vehicles” (“UAVs”), associated systems, equipment and components as follows:
- “UAVs” having any of the following:
- An autonomous flight control and navigation capability (e.g. an autopilot with an Inertial Navigation System); or
- Capability of controlled flight out of the direct visual range involving a human operator (e.g., televisual remote control).
- Associated systems, equipment and components as follows:
- Equipment specially designed for remotely controlling the “UAVs” controlled by 9.A.12.a.;
- Guidance or control systems, other than those controlled in Category 7, specially designed for integration into “UAVs” controlled by 9.A.12.a.;
- Equipment and components specially designed to convert a manned “aircraft” to a “UAV” controlled by 9.A.12.a.
Note: 9A012 does not control model aircraft.
ECCN 9B010 is a new entry for equipment specially designed for the production of “UAVs” and associated systems, equipment and components controlled by ECCN 9A012. There is a ECCN for corresponding software at 9D004.e and one for Technology in 9E001 (changing reference from 9A004 to 9A012).
The ECCN for 9E003.a.11 was modified to read: “Hollow fan blades”.
Sensitive List. In ECCNs 4D001 and 4E001 “composite theoretical performance”/”CTP” was replaced with “adjusted peak performance”/”APP”. There were minor editorial changes to ECCNs 6A001.a.2.a.1, a.2, a.3, a.5, and a.6.
Very Sensitive List. There were conforming minor editorial changes to ECCNs 6A001.a.2.a.1, a.2, a.3, a.5, and a.6.
Munitions List. Most of the changes were editorial and minor. There is a new decontrol Note 4 to ML1 noted that the entry “does not control optical weapon sights without electronic image processing, with a magnification of 4 times or less, provided they are not specially designed or modified for military use”. In ML7.a the term chemical warfare (“CW”) agents was deleted. There is a new paragraph b in ML7.b for CW agents. In ML11.a the term “specially designed components” was deleted from the text. ML17.o is a new entry for laser protection equipment (e.g., eye and sensor protection) specially designed for military use.
Missile Technology Control Regime
The Missile Technology Control Regime (“MTCR”) held its 20th Plenary Meeting in Madrid from 12 to 16 September 2005, in order to review its activities and further strengthen its efforts to prevent missile proliferation. The Madrid Plenary of the MTCR took place in a context of increased multilateral attention to non-proliferation engagements. Recalling the language in UN Security Council Resolution 1540, among other instruments, partners emphasized that the proliferation of WMD delivery systems constitutes a threat to international peace and security and stressed the need to reduce the risks associated with terrorism in this regard. Partners also welcomed India’s announcement that it intends to adhere unilaterally to the MTCR Guidelines, and encouraged all other countries to do so. Partners recognized that further action against missile proliferation remains a priority at the national and international level. Export controls remain an essential tool to address effectively these challenges. The Plenary renewed its commitment to strict implementation and enforcement of export controls, including adaptation and strengthening of existing rules to respond to technological development and the evolving security environment. In this regard, the Plenary agreed to a number of amendments to the MTCR Annex. Also, in response to increasingly complex procurement situations, the Plenary continued to examine matters such as intangible transfer of technology, transit and trans-shipment, brokering and the activities of intermediaries and front companies.
Australia Group
BIS published a final rule implementing the understandings reached at the April 2005 plenary meeting of the Australia Group (“AG”). Specifically, this final rule amends the EAR to clarify the types of pumps controlled under ECCN 2B350. For additional details on the other changes, please see the attached regulatory summary.
BIS published a final rule amending the EAR by expanding the country scope of the chemical/biological (“CB”) license requirements for CCL entries that contain CB equipment and related technology included on the Australia Group Common Control Lists from certain countries of concern for CB weapons reasons to all destinations, worldwide, except for those countries that participate in the Australia Group. In addition, this rule expands the EAR restrictions on certain chemical and biological weapons end-use to apply to exports, reexports, and transfers of items subject to the EAR or within any country or destination, worldwide. Prior to this new rule, such restrictions applied only to exports or reexports. Finally, this rule expands the country scope of the restrictions on certain activities in support of the design, development, production, stockpiling or use or chemical or biological weapons in or by any country or destination, worldwide.
Nuclear Suppliers Group
The 15th Plenary Meeting of the Nuclear Suppliers Group (“NSG”) took place from 23-24 June in Oslo, Norway. At this meeting Croatia was approved by the plenary as the 45th participating government to the NSG, effective 15 July 2005. The plenary took note of the developments since the 14th Plenary Meeting in 2004. Members reiterated a strong commitment to non-proliferation despite the lack of substantive outcome at the NPT 2005 Review Conference. Members also exchanged information on the current proliferation challenges, specifically naming the cases of the Democratic People’s Republic of Korea (“DPRK”) and Iran. During the meeting the NSG agreed to establish a “procedure towards suspending, through national decisions, nuclear transfers to countries that are non-compliant with their safeguards agreements.” In addition, it was agreed that the “supplier and the recipient states should elaborate appropriate measures to invoke fall-back safeguards if the IAEA can no longer undertake its Safeguard mandate in a recipient state.” Finally, NSG members agreed to “introduce the existence of effective export controls in the recipient state as a criterion of supply for nuclear materials, equipment and technology and a factor for consideration for dual use items and technologies.” NSG members also agreed to continue to place a high priority on continued discussions of the Additional Protocol as a condition of supply, as well as discussions to help further strengthen NSG guidelines with respect to enrichment and reprocessing technologies.
Recommendations for 2006
We anticipate the following actions in 2006, which you can begin preparing for now:
- Higher civil and criminal penalties will dramatically increase the potential exposure of exporters for violations of IEEPA in 2006. Therefore, this is an opportune moment to audit your existing compliance program, and implement new processes and procedures to ensure that you are not an early victim.
- BIS is likely to issue new regulations (at least in proposed form) affecting so-called “deemed exports”. We anticipate that BIS will not adopt the approach of considering a person’s country of birth as recommended by the Inspector General. However, we do anticipate revisions with respect to “use” technology that could presage greater enforcement activity. As part of your compliance review, you might wish to focus on “use” technology that is exported to foreign nationals.
- BIS is likely to issue new regulations (at least in proposed form) implementing new license requirements on exports to military end-uses in countries subject to arms embargoes, including China. Although industry has urged BIS to ensure that other allied countries impose similar requirements before proceeding, pressure is rising to implement commitments the United States made to participating member states of the Wassenaar Arrangement in 2003. This presents a good opportunity to review your screening under the Enhanced Proliferation Control Initiative and License Exceptions CIV and ENC, and to think about whether military end-use screening might be integrated into existing screening programs in your compliance environment.
- The Wassenaar Arrangement, Nuclear Suppliers Group, Missile Technology Control Regime and Australia Group all will review their control lists in 2006, resulting in changes (both elimination of existing controls and implementation of new controls) on various products and technologies. This would be a good time to consider industry-led initiatives that could reduce the controls on your products.
- The defendants in the Lachman case are likely to file an appeal. The outcome could affect classifications of products and technologies where the term “specially designed” is at issue. You might wish to consider the implications for your classification and licensing activities.
