BIS Partially Reverses Historic EAR Penalty on ZTE—Red Flags Remain for All ZTE Transactions
By: John Black
In the March 24, 2106 Federal Register the Bureau of Industry and Security temporarily reversed part of the most significant export control penalty in at least 32 years (i.e., as long as I have been in export compliance) which BIS imposed when it placed Chinese telecommunications giant ZTE in the EAR Entity List on March 8, 2016. The result of that action was to prohibit all exports and reexports of all items subject to the EAR to four named ZTE entities—this penalty far exceeds the multi-million dollar penalties BIS has imposed on others who have violated the EAR. For me, the only EAR action that approaches the significance of the ZTE penalty is the addition of 20 plus Delft companies to the Denial List back in the 1980s.
Please see Doug Jacobson’s excellent article on the original BIS action against ZTE after this article.
On March 24, 2016, BIS announced a temporary general license authorizing the use of EAR license exceptions and No License Required (NLR) according to the EAR in place prior to BIS adding these two ZTE entities that were put on the Entity List on March 8, 2016:
Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)
ZTE Kangxun Telecommunications Ltd.
These two ZTE entities remain on the EAR Entity List:
Beijing 8 Star International Co.
By creating a temporary general license that is valid through June 30, 2016, BIS gives some relief to companies all over the world who do business with these two important entities which are critical companies that contribute significantly to ZTE’s global sales of over $16 billion. No doubt, in response to BIS’ addition of ZTE to its Entity List, ZTE and its lawyers flooded into a wide range of US Government entities requesting some sort of relief from the historically significant penalty. I would have to guess that many non-ZTE companies expressed their concern to the US Government about how they were being harmed by the listing of ZTE.
Of course, BIS may at any time cancel the temporary general license. Not only that, but the general license expires at the end of June if BIS takes no further action. If you do business with ZTE, you should prepare for the worst even if you benefit now from the temporary general license.
Your Compliance Challenge Now: Red Flags When Dealing with ZTE
Many exporters and reexporters have overlooked the fact that it may be prudent to consider that there is a Red Flag indicating a high risk of illegal diversion of EAR items any time you do business with any ZTE company. In its original action against ZTE, BIS published documents showing how ZTE constructed a network of entities to hide illegal shipments to Iran. In the case of ZTE, the illegal diversion scheme was not limited to the actions of a few unscrupulous sales people but involved senior ZTE officials creating a complex system, which may demonstrate that ZTE policy has been to make significant efforts to hide intentional violations of US trade controls.
It is unusual for BIS to publish such documents that show the evidence and background of illegal actions. Without a doubt, everyone now knows that ZTE, at a high level, has taken extensive actions both to intentionally violate US trade controls and to hide its violations. So, now that you know it, thanks to BIS publishing evidence, it can be argued that you should presume there is a significant risk of ZTE illegally diverting the items it gets from you to unauthorized countries or recipients (e.g., the two ZTE entities that remain on the Entity List). If there is a Red Flag that indicates a risk that ZTE will illegally divert the items it gets from you, that means that you should exercise more than average due diligence for your transfers of items controlled by the EAR to any ZTE entity. That does not mean that you may not do business with ZTE, but it does mean it would be prudent to ask additional questions or obtain additional assurances in writing from ZTE to give you confidence that ZTE will not illegally transfer your items.
China's ZTE Added to BIS Entity List: The Impact on ZTE, US and Non-US Companies
By: Douglas N. Jacobson, Esq., Jacobson Burton Kelly PLLC, email@example.com, 202-431-2407
Editor’s Note: See the article above for a March 24, 2016 update for the status of two of the ZTE entities. This article is included here because it provides excellent information and insight regarding the original action.
The Commerce Department's Bureau of Industry and Security published a notice on March 8, 2016 in the Federal Register (reprinted below) announcing that China's ZTE Corporation (ZTE or ZTEC), and three of its affiliates, have been added to the Entity List.
Founded in 1985 and headquartered in Shenzhen China, ZTE, whose shares are traded on the Shenzhen, China and Hong Kong stock exchanges, is China's second largest telecommunications company. ZTE is also the world's seventh largest producer of smartphones and has operations in the US and more than 160 other countries. ZTE has annual revenues of more than $12 billion per year.
ZTE is being added to the BIS Entity List for allegedly reexporting US origin products to sanctioned countries, including Iran, and for planning "a scheme to establish, control, and use a series of "detached" (i.e., shell) companies to evade US export controls.
This action, which comes after a four-year investigation of ZTE by BIS's Office of Export Enforcement and the Federal Bureau of Investigation, will have a major impact on ZTE and US and non-US companies.
BIS Entity List
The BIS Entity List, found at Part 744 of the US Export Administration Regulations (EAR), includes non-US businesses, research institutions, government and private organizations, individuals, and other types of legal persons, that are subject to specific license requirements for the export, reexport and/or transfer (in-country) of specified items. Parties are added to the Entity List by BIS when there is an increased risk of diversion of US-origin items or where the parties engaged in activities contrary to U.S. national security and/or foreign policy interests. BIS has been using the BIS more frequently in the past few years.
Specific entries on the Entity List identify the items that are subject to a license requirement and BIS's licensing policy regarding any license applications that are submitted.
Parties Added to Entity List and Licensing Requirements
As a result of BIS’s action, which takes effect immediately, BIS will impose a license requirement for all persons and companies, wherever located, to export, reexport or transfer to "all items subject to the EAR" to the following four companies:
Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)Address: ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, China;
Beijing 8 Star International Co. Address: Unit 601, 6thFloor, Tower 1, Prosper Center, No. 5, Guanghua Road, Chaoyang District, Beijing, China;
ZTE Kangxun Telecommunications Ltd. Address: 2/3 Floor, Suite A, Zte Communication Mansion Keji (S) Road, Hi-New Shenzhen, 518057 China
ZTE Parsian. Address No. 100, Africa Ave., Mirdamad Entersection [sic], Tehran, Iran.
The license review policy for all four entities is "presumption of denial", meaning that is not likely that BIS will approve any license applications to these four parties.
Because the license requirement for all four companies applies to all "items subject to the EAR", as defined in section 734.3 of the EAR, a license will be required to export, reexport or transfer all US-origin goods, software or technology, wherever located, whether classified as EAR99 or listed on the Commerce Control list (i.e., identified with an ECCN number, such as ECCN 3A001).
This will also have an impact on non-US companies because the license requirement will also apply to any item produced outside the US and sold to the four ZTE entities that incorporates US-origin parts, components, software if the total value of the controlled US content exceeds the de minimis level in section 734.4 of the EAR (e.g., 25% for reexports to China).
Impact on ZTE and US and non-US companies
This action will have a major impact on ZTE and many US companies as it has been estimated that ZTE sources more than 40% of its parts and components from US suppliers. As a result of ZTE's size and international footprint, US and non-US companies should immediately screen their customer databases to make sure that ZTE is flagged as a party subject to Entity List restrictions and that any shipments be stopped. While the BIS notice contains a "savings clause" for certain items that were already en route aboard a carrier to ZTE, there is no "grandfathering" of items that had been ordered but have not been shipped.
Unlike parties included on OFAC's SDN List, the addition of ZTE to the Entity List does not prohibit US or non-US persons from engaging in financial transactions with ZTE or require that any of the listed companies' assets be frozen. Rather, BIS is restricting the export, reexport or transfer of any goods, technology, or software to these ZTE companies. Also, unlike OFAC, BIS does not control the export of services to a listed party. However, the term "technology" is broadly defined in the EAR to include certain types of information, including specific information necessary for operation, maintenance, repair, overhaul and refurbishing of items subject to the EAR.
In addition, BIS does not have a 50% rule that applies to companies owned by the four ZTE companies listed. BIS has stated that the licensing requirements imposed on a listed entity by virtue of its being listed do not per se apply to its subsidiaries, sister companies, or other legally distinct affiliates that are not listed on the Entity List. However, BIS has also stated that if affiliates of the listed company act as an agent, a front, or a shell company for the listed entity in order to facilitate transactions that would not otherwise be permissible with the listed entity, then the company is likely violating General Prohibition 10 and other provisions of the EAR. Therefore, exporters are encouraged to take extra steps in an effort to make sure that items are not ultimately destined for the listed entities.
Reasons for Adding ZTE to Entity List
The Federal Register notice specifies that ZTE was added to the BIS Entity List because it reexported controlled US origin items to Iran in violation of US law. In addition, BIS noted that the company created an internal document entitled: "Proposal for Import and Export Control Risk Avoidance" describing how ZTE planned and organized a scheme to use a series of shell companies to reexport controlled items to Iran in violation of US export control laws.
In an unusual move, BIS published on its website documents obtained during its investigation of ZTE to support its findings. These documents, which are published below, are very thorough and read like a playbook on how to circumvent US export controls.
These documents, which were posted by BIS in their original Mandarin and translated English versions, provide detailed information on ZTE's understanding of how US export control laws applied to them and the repercussions if they were unable to continue with their work in the US sanctions countries, including Iran, Sudan, North Korea, Cuba and Syria. The documents even included a summary of the enforcement actions that could be taken against the company, including listing the US supply chain, and provided examples of prior export control issues the company had faced, and recent enforcement cases brought against other Chines companies. The documents show that ZTE tried to attract members to its export control team by paying a bonus.
For example, the "Proposal for Import and Export Control Risk Avoidance" describes how ZTE planned to establish and use "detached" (i.e., shell) companies and other measures to avoid "risks of import and export control". The document suggests that the company use the Jebel Ali Free Zone in Dubai as the "primary choice" to locate one of the companies. The document also describes ways to properly handle and pack the goods to minimize the risks to ZTE.
Because ZTE is a major telecommunications company the addition of ZTE to the Entity List has already had ripple effects. ZTE's stock has been suspended from trading on the Hong Kong and Shenzhen Stock Exchanges and China's Ministry of Foreign Affairs denounced the BIS actions in the following statement:
"The Chinese side is firmly opposed to the US using domestic laws to place sanctions on Chinese companies. The Chinese side urges the US side to call off the wrong action lest it should jeopardize economic cooperation and relationship between China and the US."
Representative Eliot L. Engel (D-NY), Ranking Member of the House Committee on Foreign Affairs, called for further sanctions on ZTE in the following statement:
"Today's (March 8, 2016) action to impose a virtual embargo on exports to China's number-two telecom company, ZTE, reveals publicly for the first time that this company has systematically violated U.S. sanctions on Iran, North Korea, and other proscribed countries. ZTE bought U.S. telecom equipment and illegally incorporated it into communications systems for the Iranian and North Korean security, military, and intelligence agencies. I commend the federal agents at the Commerce Department, FBI, and Homeland Security Department for carrying out this four-year investigation. Additional criminal charges are likely to be brought. I believe that the U.S. sanctions should be extended to cut off all ZTE commercial activity and investment in the United States."
It has been widely reported that BIS and the FBI commenced an investigation on ZTE's compliance with US export control laws in 2012. It has also been reported that senior ZTE executives have not traveled to the US over the past few years for fear of being arrested.
Given the activities described in the ZTE documents and the language in the Entity List notice, it appears likely that ZTE will remain in the crosshairs of the US Government for some time to come.
BIS & OFAC Slightly Relax Controls on Cuba
By: Danielle McClellan
On March 16, 2016, the Bureau of Industry and Security (BIS) published a final rule amending the Export Administration Regulations (EAR) by allowing vessels departing the US on temporary sojourn to Cuba with cargo for other destinations to travel to Cuba under a license exception instead of having to obtain a license for the cargo. The rule also allows exports of certain items to persons authorized by the Department of the Treasury to establish and maintain a physical or business presence in Cuba. Finally, the rule adopts a licensing policy of case-by-case review for exports and reexports of items that would enable or facilitate export of items produced by the private sector in Cuba (subject to certain limitations).
Specific Changes to the EAR:
This rule revises § 736.2(b)(8) of the EAR, which prohibits shipments from transiting certain destinations, to explicitly state that the prohibition does not apply if a license or license exception authorizes the in-transit shipment.
This rule revises § 740.15(d)(6) of the EAR to authorize temporary sojourn to Cuba of a vessel carrying cargo destined to other countries provided that such cargo departs with the vessel at the end of its temporary sojourn to Cuba, does not enter the Cuban economy and is not transferred to another vessel while in Cuba.
This rule revises § 740.21(e) to remove the individual references to categories of persons authorized by OFAC to establish and maintain a physical or business presence in Cuba pursuant to 31 CFR 515.573, and to authorize exports and reexports to all such persons and to persons whose physical or business presence is authorized by a specific license issued by OFAC.
This rule revises § 746.2(b)(3)(i), to add a paragraph(b)(3)(i)(D), which sets a policy of case-by-case review of items that will enable or facilitate export from Cuba of items produced by the Cuban private sector.
It also revises Note 1 to clarify that the license condition described therein is intended to preclude use of items authorized by licenses bearing that condition from being reexported from Cuba or being used to enable or facilitate exports from Cuba that primarily generate revenue for the state.
Federal Register Notice: https://www.gpo.gov/fdsys/pkg/FR-2016-03-16/pdf/2016-06019.pdf
In addition to the changes to the EAR, The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is amending the Cuban Assets Control Regulations to further implement these changes along with facilitating travel to Cuba for authorized financial transactions, and authorize additional business and physical presence in Cuba.
Specific Changes to the Cuban Assets Control Regulations:
OFAC is amending section 515.565(b) to remove the requirement that people-to-people educational travel be conducted under the auspices of an organization that sponsors such exchanges. This section now authorizes individuals to travel to Cuba provided that, among other things, the traveler engage while in Cuba in a full-time schedule of educational exchange activities that are intended to enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities, and that will result in meaningful interaction between the traveler and individuals in Cuba.
OFAC is amending section 515.571 to remove the limitation on the receipt of compensation in excess of amounts covering living expenses and the acquisition of goods for personal consumption by a Cuban national present in the United States in a non- immigrant status or pursuant to other non-immigrant travel authorization issued by the U.S. government. New section (a)(5)(i) explicitly authorizes the receipt of any salary or other compensation consistent with the individual’s non-immigrant status or other non-immigrant travel authorization, provided that the recipient is not subject to any special tax assessment by the Cuban government in connection with the receipt of the salary or other compensation.
New section 515.571(e) authorizes all transactions related to the sponsorship or hiring of a Cuban national to work in the United States and provides that an employer may not make additional payments to the Cuban government in connection with the sponsorship or hiring of a Cuban national. Section 515.571(e) also authorizes transactions in connection with the filing of an application for non- immigrant travel authorization. OFAC is also making conforming edits in section 515.560(d)(3) and the Note to section 515.565(a)(5).
OFAC is adding section 515.585(c) to authorize individuals who are persons subject to U.S. jurisdiction and who are located in a third country to engage in the purchase or acquisition of merchandise subject to the prohibitions in section 515.204, including Cuban-origin goods, for personal consumption while in a third country, and to receive or obtain services from Cuba or a Cuban national that are ordinarily incident to travel and maintenance within a third country. This provision does not authorize the importation of such merchandise into the United States, including as accompanied baggage. OFAC is making a conforming change to section 515.410.
OFAC is amending section 515.584(d) to authorize U-turn transactions in which Cuba or a Cuban national has an interest to be conducted through the U.S. financial system. This provision authorizes funds transfers from a bank outside the United States that pass through one or more U.S. financial institutions before being transferred to a bank outside the United States where neither the originator nor the beneficiary is a person subject to U.S. jurisdiction. Transactions through the U.S. financial system that do not meet these criteria, including all transactions where the originator or beneficiary is a person subject to U.S. jurisdiction, remain prohibited unless otherwise authorized or exempt under the Regulations.
OFAC is also making conforming edits to section 515.584(e), regarding unblocking of certain previously blocked funds transfers.
OFAC is adding new section 515.584(g) to authorize U.S. banking institutions to process U.S. dollar monetary instruments presented indirectly by Cuban financial institutions. Correspondent accounts used for transactions authorized pursuant to this section may be denominated in U.S. dollars. This section does not authorize banking institutions subject to U.S. jurisdiction to open correspondent accounts for banking institutions that are nationals of Cuba.
OFAC is adding new section 515.584(h) to authorize banking institutions to open and maintain accounts solely in the name of a Cuban national located in Cuba for the purposes only of receiving payments in the United States in connection with transactions authorized pursuant to or exempt from the prohibitions of this part and remitting such payments to Cuba. This provision would allow, for example, a Cuban national author located in Cuba to open an account with a bank or online payment platform in the United States to receive payments for sales of her book. This provision is in addition to the two existing authorizations for banking institutions to operate certain accounts on behalf of certain Cuban nationals. See Note to paragraph (a) of section 515.571(a)(5) and section 515.585(b).
To avoid confusion, OFAC also is making conforming edits to the Note to section 515.571(a)(5) to clarify that all three account authorizations extend to banking institutions.
OFAC is amending section 515.573 to authorize additional persons subject to U.S. jurisdiction to establish a business and physical presence in Cuba.
OFAC amended section 515.573 to authorize certain persons subject to U.S. jurisdiction to establish a physical presence, such as an office or other facility, in Cuba, to facilitate authorized transactions. OFAC is now expanding this authorization to include the following additional categories of persons subject to U.S. jurisdiction: entities engaging in non-commercial activities authorized by section 515.574 (Support for the Cuban People); entities engaging in humanitarian projects set forth in section 515.575(b) (Humanitarian projects); and private foundations or research or educational institutes engaging in transactions authorized by section 515.576.
OFAC is also adding a note to clarify that the activities that may be carried out by exporters of items exported or reexported pursuant to authorization by the Department of Commerce or OFAC, or that are otherwise exempt, at a physical presence authorized by this section include the assembly of such items.
OFAC is adding a new provision in section 515.565 to authorize the provision of educational grants, scholarships, or awards to a Cuban national or in which Cuba or a Cuban national otherwise has an interest. This could include, for example, the provision of educational scholarships for Cuban students to pursue academic studies for a degree. OFAC is also adding a note to section 515.575(b) to clarify that the existing authorization includes provision of grants or awards for humanitarian projects in or related to Cuba that are designed to directly benefit the Cuban people as set forth in that section. Telecommunications and internet- related services.
OFAC is amending section 515.578 to allow the importation of Cuban-origin software. OFAC is also making several technical and conforming edits. In particular, OFAC is correcting a typographical error in section 515.533(d)(2).
OFAC is also conforming the language of the general authorization in section 515.559(d) to the corresponding authorization in section 515.533(d).
Federal Register Notice: https://www.gpo.gov/fdsys/pkg/FR-2016-03-16/pdf/2016-06018.pdf
Belgium Company Pays $350,000 after Exporting Coatings, Pigments and Paints to Iran
By: Danielle McClellan
Chemical Partners Europe (CPE) S.A. of Brussels, Belgium has been charged with 6 counts of Evasion after exporting coatings, pigments and paints from the US to their facility in Brussels and then to Iran. The exported items were suitable for use in nuclear facilities and had marine applications, making them subject to the Export Administration Regulations (EAR) as well as the Iranian Transactions Regulations (Governed by the Department of Treasury’s Office of Foreign Assets Control (OFAC)).
Between January 2010 and March 2011, the company purchased the coatings, pigments and paints, valued at $244,358, from a US company and concealed the fact that the ultimate destination was actually Iran. The shipper’s export declarations filed listed CPE as the ultimate consignee and Belgium as the country of ultimate destination. Once CPE received the items they transferred them directly to Iran without proper authorization.
CPE has agreed to pay $350,000 to settle the charges; they will not be debarred. Charging Letter
Legacy AESDirect Accounts with prefixes “20-39” Now Deactivated!
By: Danielle McClellan
On March 14, 2016, Legacy AESDirect Accounts with prefixes “20-39” will be deactivated. AESPcLink applications will be terminated in stages over the next two months. All legacy AESDirect filers have received notices about the mandatory transition date to the Refactored AESDirect system upon login and have provided a specific date their account will be closed off based upon their Filer ID.
Complete Transition Schedule:
Prefixes 00-19 on 02/29/2016
Prefixes 20-39 on 03/14/2016
Prefixes 40-59 on 03/28/2016
Prefixes 60-79 on 04/11/2016
Prefixes 80-99 on 04/25/2016
Once your account is deactivated, there will be no further access to legacy AESDirect to file or amend Electronic Export Information. You will only have access to the Shipment Manager application to view previously submitted shipments.
For further information or questions, contact the U.S. Census Bureau's Data Collection Branch.
Telephone: (800) 549-0595, select option 1 for Data Collection Branch
BIS EAR Licensing Requirements for EAR-Controlled Items Destined to ISIL-Controlled Facilities or Territory
BIS prohibits the shipment of items subject to the Export Administration Regulations (EAR) to the Islamic State of Iraq and the Levant (ISIL) absent a license in conjunction with regulations administered by the Department of the Treasury's Office of Foreign Assets Control (OFAC). OFAC has designated ISIL as a Specially Designated Global Terrorist (SDGT) and the Department of State has designated ISIL as a Foreign Terrorist Organization (FTO).
As part of its efforts against ISIL, the U.S. Government is targeting not only ISIL's abilities to raise revenue but also its purchase and use of U.S.-origin items. BIS is committed to preventing ISIL from procuring U.S.-origin items, like oilfield equipment, that generate wealth as well as components useful for improvised explosive devices to support terrorist activities. Our goal is to provide industry with information on potential diversion risks to safeguard the export, reexport, and transfer (in-country) of U.S.-origin items and protect national security.
ISIL controls facilities located in the areas which it controls and uses the facilities to generate revenue; some of these facilities require U.S.-origin parts and accessories to operate. A list of ISIL-controlled facilities in Iraq and the addresses thereof is incorporated into Attachment A of this notice (see below). BIS advises persons exporting or reexporting U.S.-origin items to Iraq to review Attachment A on a regular basis; it will be updated as necessary. BIS also reminds persons exporting or reexporting U.S.-origin items to Syria of the existing license requirements for all items subject to the EAR, other than food or medicine classified as EAR99. The full text of BIS's licensing requirements and policy specific to Syria is found here.
Exporters/reexporters are advised that sanctions administered by other agencies, including those administered by OFAC, may also impact transactions in the region. Exporters/reexporters should note that U.S. entities/persons are generally prohibited from engaging in activities with any entities/persons who are on the OFAC administered Specially Designated Nationals and Blocked Persons List.
Pursuant to Section 744.12 of the EAR, BIS requires a license for the export or reexport to an SDGT of any item subject to the EAR. However, to avoid duplication, U.S. persons are not required to seek authorization for an export or reexport to an SDGT of an item that is subject to both the EAR and OFAC's regulatory authority from both OFAC and BIS. Rather, if OFAC authorizes an export from the United States or an export or reexport by a U.S. person to an SDGT, no separate authorization from BIS is necessary. However, U.S. persons must seek authorization from BIS for the export or reexport to an SDGT of any item subject to the EAR that is not subject to OFAC's jurisdiction and non-U.S. persons must seek authorization from BIS for any export from abroad or reexport of any item subject to the EAR to an SDGT. BIS will generally review license applications for exports or reexports to SDGTs under a policy of denial. No license exceptions or other BIS authorizations are available for the export or reexport to an SDGT of an item subject to the EAR. Additionally, the EAR does not make contract sanctity available for export or reexport license applications to SDGTs.
BIS's license requirements for shipments of items subject to the EAR to FTOs are found in Section 744.14 of the EAR. Note especially the guidance in Section 744.14(e), which is specific to FTOs that are also designated as Specially Designated Terrorists (SDTs) or SDGTs, and directs that the guidance specific to SDTs or SDGTs, as applicable, will apply instead.
BIS also notes that an export, reexport, or transfer (in-country) to geographic areas controlled by ISIL carries a "red flag" and suggests that you exercise caution and strong oversight if you opt to engage in an EAR transaction within these areas. A list of geographic areas known to be under ISIL control is contained in Attachment B (see below).
For additional information on this FAQ or attachments, please contact the Office of Enforcement Analysis at the following: EEinquiry@BIS.DOC.GOV or 202-482-1881.
CEO Sentenced to 7 years in Prison and Will Pay $1.1 Million
By: Danielle McClellan
Founded in 1996, Valley Forge manufactured momentum wheels that were used in spacecraft. Between 2004 and 2008 the company’s revenues declined and the company moved into the direction of weapon detection systems found in airports and photonuclear detection systems used to find bio-chemical weapons and explosives on cargo ships beginning in 2009.
During this time, Louis Brothers was the CEO of Valley Forge and began selling nearly $37 million worth of semiconductors to China. He hid the transactions and concealed the profits from the sales which would later lead to 31 counts of conspiracy, aiding and abetting illegal exports of defense articles, and conspiracy to launder money. These charges were in violation of the US Arms Export Control Act and the violations occurred to boost Valley Forge’s business finances.
US Securities and Exchange Commission filings show that Valley Forge’s revenue grew from $132,000 in 2008 to $3.2 million in 2009 and finally peaked at $18.6 million in 2010. The large jump in revenue was explained to have come from the sale of aerospace products and other mechanical devices, including two orders worth a gross profit of $2 million…no sales to China were mentioned.
In 2013 the US Attorney’s Office seized $1.5 million in the company’s bank accounts and later explained to stockholders about the investigation. The stockholders did not deny any sales to Hong Kong, however they believed the transactions were legal. A year later, Louis Brothers and his wife were arrested and eventually released on a $500,000 bond related to the charges. At that time they both pleaded not guilty and denied all sales to China. A pending class-action lawsuit was also brought on by shareholders against them.
In late 2013 Valley Forge filed for bankruptcy with assets of $500,000-$1 million and debts in excess of $1-10 million.
Brothers entered into a guilty plea to seven of the 31 counts and will serve a total of 93 months in prison for selling military-grade microchips to Hong Kong. He will also forfeit $1.1 million in a monetary judgement. He could have faced 125 years in prison based on all charges. He admitted in the agreements that between 2009 and 2013 he intentionally avoided notifying the Department of State about the illegal exports and proceeded to label his shipments as “computer parts” in order to conceal the true identity of the items. Brothers also admitted that he falsified paper work to make it appear that the money he received from the sales of the illegal microchips were profits from another business that he personally owned in Kentucky.
Additional Details: http://www.bizjournals.com/cincinnati/news/2016/03/04/former-cincinnati-ceo-sentenced-to-7-years-in.html and https://www.justice.gov/opa/pr/former-chief-executive-officer-sentenced-over-seven-years-prison-illegally-exporting
BIS Posts Letter from Secretary Pritzker Regarding Implementation of Wassenaar Controls Concerning "Intrusion Software"
Dear Sir or Madam,
Thank you for your letter to Secretaries Kerry, Johnson, and me regarding implementation of the Wassenaar Arrangement "intrusion software" and surveillance technology provisions.
Since the publication of our proposed regulation last May to implement these controls, we have received substantial commentary from Congress, the private sector, academia, civil society, and others on potential unintended consequences of the 2013 Wassenaar controls, as well as on our proposal to implement them in U.S. regulation.
In response to these concerns, and as a result of extensive outreach efforts and further U.S. Government review, the United States has proposed in this year's Wassenaar Arrangement to eliminate the controls on technology required for the development of "intrusion software." We will also continue discussions both domestically and at Wassenaar aimed at resolving the serious scope and implementation issues raised by the cybersecurity community concerning remaining controls on software and hardware tools for the command and delivery of "intrusion software."
These discussions will include significant consultations with other Wassenaar members and those in the U.S. government, private sector, and academic cybersecurity communities. The goals of these discussions will be materially address the concerns raised during the rulemaking process. They will also give the Administration a chance to share with our counterparts in other countries the U.S. cybersecurity communities' concerns regarding the unintended consequences such controls could have.
Because changes in Wassenaar controls must be approved by all 41 members, we cannot predict the outcome of these discussions and negotiations. The Department of Commerce and our Federal partners, however, will continue to consult with the cybersecurity communities during the negotiations and we commit that we will not implement domestically any regulations on these specific controls without first giving the public an opportunity to participate through the notice and comment process of a proposed rule.
President Obama has identified cybersecurity as one of the greatest national security challenges we face as a Nation. Cognizant of this, we commit to ensuring that the benefits of controlling the export of the purpose-built tools at issue outweigh the harm to effective U.S. cybersecurity operations and research. We will also continue to analyze the role that appropriately scoped export controls could play within the larger strategy of countering the growing capability of malicious actors to cause harm through cyberspace.
Thank you again for your letter, and we look forward to working with your associations and your membership on this critical issue.