Democrats Propose Legislation to Halt Export Reform of Commercially Available Firearms and Ammunition

2019/03/28

(Source: Reeves & Dola LLP Alert) [Available by subscription via J. Reeves.]

By: Johanna Reeves, Esq.,  jreeves@reevesdola.com; and Katherine Heubert, Esq., kheubert@reevesdola.com. Both of Reeves & Dola LLP.

On February 12, 2019, U.S. Senator Bob Menendez (D-N.J.), joined by Senators Chris Murphy (D-Conn.), Ed Markey (D-Mass.), Ben Cardin (D-Md.), and Dianne Feinstein (D-Ca.), introduced legislation to halt the proposed rewrite of U.S. Munitions List (USML) Categories I, II, and III. The text of the legislation is not yet available for review, but the text of the bill (S.459)should be accessible shortly through the Library of Congress on www.congress.gov.

In a press release the U.S. Senate Committee on Foreign Relations issued yesterday, the proposed Stopping the Traffic in Overseas Proliferation of Ghost Guns Act would:

  • “Prohibit the transfer of small arms/light weapons, and the technical manufacturing information related to them (including 3D Printed guns), to the Department of Commerce;
  • Maintain the statutory restriction on publishing 3D Printing gun information, including via the Internet;
  • Prohibit the ability of the State Department to suspend the International Trafficking in Arms Regulations without 30-day prior notice to Congress.”

Similar legislation appears to also have been introduced in the House (H.R.1134) to amend the Arms Export Control Act to prohibit the removal of certain items under category I, II, or III of the United States Munitions List. So far, the House bill has six cosponsors, all Democrats, from the states of New York, Rhode Island, Florida, Illinois, California and Massachusetts.

As we have covered extensively in our previous alerts on the transition rules, the proposed rewrite of USML Categories I, II, and III would revise the scope of the International Traffic in Arms Regulations (ITAR) to control only those articles that provide the United States with a critical military or intelligence advantage or, in the case of weapons, are inherently for military end use. Such items will remain on the USML, while items no longer warranting control under the ITAR will be transitioned to the Commerce Control List and be subject to the licensing provisions of the Export Administration Act, administered and enforced by the U.S. Department of Commerce, Bureau of Industry and Security.

As many of you already know, USML Categories I, II, and III are the last USML categories to actually go through the revision process, although they were among the first categories the Obama Administration drafted for transition back when Export Control Reform was initially rolled out. All other USML Categories have been officially revised already, some with multiple amendments. And so, it is important to restate in the face of predictable political push back, this is not a decontrol of the items identified for removal from the USML. Rather, it is a right-sizing of U.S. export controls. 

We will continue to monitor the progress of this legislation. While it is possible that the House version may pass, it is unlikely the Senate will take it up. However, this serves as a reminder that there is still a “tough row to hoe” for the final Congressional Notification process for the USML Category I, II, and III rewrites.


Lack of Export Compliance Program Results in DDTC Fine

2019/03/28

By: Danielle Hatch

Darling Industries, Inc. (ultimate parent of R.E. Darling) has reached an agreement with the State Department related to 6 violations of the International Traffic in Arms Regulations (ITAR) and Arms Export Control Act (AECA). R.E. Darling manufactures specialty fabricated rubber and composite products such as rocket motor insulation and exhaust components; oxygen breathing hose and related life support equipment; custom mixed rubber compounds; and compression molded rubber components. The company primarily manufactures defense articles and is registered with DDTC.

R.E. Darling hired an outside consulting firm in August 2014 to conduct an audit of the company’s compliance program. The outside review found that there were decades of systematic, reoccurring violations involving the manufacture and sale of ethylene propylene diene monomer coupon (EPDM), which is controlled under USML IV(h) as well as breathing hoses that are controlled under USML VIII(h). The firm’s report noted that R.E. Darling did not have an export compliance program or a way to determine the jurisdiction of its products. Employees were given export related responsibilities with no training and they often relied on personal knowledge or the customer to inform them if their products were ITAR controlled. Their understanding of export licensing requirements was driven by the advice of its foreign customers as opposed to their compliance program (in the company’s defense, they didn’t have one to refer to). In their voluntary disclosure, R.E. Darling admitted that its lack of qualified personnel, ITAR compliance training, classification system, and documented export compliance program are what ultimately led them to violate the ITAR.

Violations:

  • Failure to appoint a qualified empowered official: From 2012-2014 the company’s EO was not in a position to have authority for policy or management and did not understand the provisions and requirements of the ITAR.
  • Unauthorized export of defense articles and furnishing defense services:
    • From 1999-2014 the company exported EPDM related technical data and provided defense services to an aerospace company in Canada.
    • From 2009-2013 R.E. Darling exported many ITAR controlled breathing hoses and components to the UK, Australia, Denmark, Germany, and Italy for end use on military aircraft.

R.E. Darling was accessed a fine of $400,000 with $100,000 due this month and another $100,000 due in the next 18 months. $200,000 of the fine has been suspended on the condition that the company apply the money towards self-initiated, pre-Consent Agreement remedial compliance measures.

Full Enforcement Details: https://www.pmddtc.state.gov/?id=ddtc_kb_article_page&sys_id=384b968adb3cd30044f9ff621f961941


CNN Exclusive Report: ‘Sold to an ally, Lost to an Enemy’

2019/03/28

(Source: CNN, By: Nima Elbagir, Salma Abdelaziz, Mohamed Abo El Gheit and Laura Smith-Spark)

The U.S. shipped weapons and secrets to the Saudis and Emiratis. Now, some are in the hands of fighters linked to al Qaeda and Iran.

Saudi Arabia and its coalition partners have transferred American-made weapons to al Qaeda-linked fighters, hardline Salafi militias, and other factions waging war in Yemen, in violation of their agreements with the United States, a CNN investigation has found.

The weapons have also made their way into the hands of Iranian-backed rebels battling the coalition for control of the country, exposing some of America’s sensitive military technology to Tehran and potentially endangering the lives of US troops in other conflict zones…

Full Article: https://edition.cnn.com/interactive/2019/02/middleeast/yemen-lost-us-arms/


Tips on How to Resolve AES Fatal Errors

2019/03/28

(Source: census@subscriptions.census.gov)

When a shipment is filed to the AES, a system response message is generated and indicates whether the shipment has been accepted or rejected. If the shipment is accepted, the AES filer receives an Internal Transaction Number (ITN) as confirmation. However, if the shipment is rejected, a Fatal Error notification is received.

To help you resolve AES Fatal Errors, here are some tips on how to correct the most frequent errors that were generated in AES for this month.

Fatal Error Response Code: 138

  • Narrative: Port of Unlading Missing
  • Reason: The Port of Unlading Code is missing. All vessel shipments, and any air shipments between the United States and Puerto Rico must provide a Port of Unlading Code.
  • Resolution: The Port of Unlading Code is the foreign port where the exported merchandise is unloaded from the exporting carrier. Report a valid Port of Unlading Code for all vessel shipments, and any air shipments between the United States and Puerto Rico. Verify the Port of Unlading Code, correct the shipment and resubmit.

Fatal Error Response Code: 539

  • Narrative: Shipping Weight Must be Zero for MOT
  • Reason: The Mode of Transportation Code is not Vessel, Rail, Truck or Air and the Shipping Weight is not reported as zeros.
  • Resolution: When the Mode of Transportation is other than Vessel, Rail, Truck or Air and the Export Information Code is not HH for household goods, the Shipping Weight must be zero. Verify the Mode of Transportation and Shipping Weight, correct the shipment and resubmit.

For a complete list of Fatal Error Response Codes, their reasons, and resolutions, see Appendix A – Commodity Filing Response Messages.

It is important that AES filers correct Fatal Errors as soon as they are received in order to comply with the Foreign Trade Regulations. These errors must be corrected prior to export for shipments filed predeparture and as soon as possible for shipments filed postdeparture but not later than five calendar days after departure.

For further information or questions, contact the U.S. Census Bureau’s Data Collection Branch.

Telephone: (800) 549-0595, select option 1 for AES


So You Violated Sanctions, Now What? OFAC Offers a Tutorial on Remediating Violations

2019/03/28

By: Blake B. Goodsell

Two recent civil penalty actions by OFAC supply guidance for how entities should address sanctions violations after they are discovered.

In the first case, Kollmorgen Corporation settled civil liability for violations of Iranian sanctions for a mere $13,381. For perspective, the maximum statutory civil monetary penalty available for the violations was $1,500,000. So why the leniency from OFAC? The answer is swift and comprehensive remedial action. Specifically, Kollmorgen, an American company, acquired a Turkish company, Elsim. After the acquisition, Kollmorgen discovered that Elsim made sales to customers in Iran and continued to service the contracts on at least six different occasions. To make matters worse, Elsim employees actively concealed the Iranian transactions from Kollmorgen’s management. Elsim also falsified records to conceal the transactions.

Having uncovered the violations through a robust due diligence program, Kollmorgen took swift, strong, and effective remedial steps that fall into four broad categories:

  • Review – Kollmorgen’s due diligence program detected the violations (notwithstanding Elsim’s active suppression) in the first place. Then, having discovered the violations, Elsim implemented manual reviews of Elsim’s database to detect any other violations. Kollmorgen also implemented an ethics hotline for reporting future violations.
  • Control – In addition to firing the offending manager, Kollmorgen also required Elsim’s senior management to certify on a quarterly basis that no Elsim services or products were provided to Iran. Kollmorgen also hired outside counsel to investigate the matter.
  • Education – Kollmorgen conducted written and in-person training for Elsim employee’s on Kollmorgen’s trade compliance policies.
  • Blocking – Kollmorgen took steps to block the Iranian customers from future orders.

Contrast the Kollmorgen case against a $5,512,564 penalty against AppliChem, a German company acquired by Illinois Tool Works, Inc. There, AppliChem behaved in a similar manner to Elsim in that it actively masked blocked transactions, this time with Cuba, through an intermediary company. Although Illinois Tool Works self-reported, its response lacked the same sort of extensive preventative and remedial steps taken by Kollmorgen. AppliChem apparently lacked the robust due diligence program of Kollmorgen because it missed several red flags indicating that blocked transactions were ongoing. AppliChem also apparently failed to implement the same sort of strong remedial programs exemplified by Kollmorgen’s response. OFAC’s opinion of the two responses is exhibited by the divergence in the two penalties—AppliChem’s penalty represents 27% of the maximum civil penalty versus the penalty against Kollmorgen, which represents less than 1% of the possible penalty.

The message is clear—organizations that act proactively, swiftly, and decisively in response to discovery of likely sanctions will be granted greater lenience than those organizations that do not.

Article: https://www.financialservicesperspectives.com/2019/02/so-you-violated-sanctions-now-what-ofac-offers-a-tutorial-on-remediating-violations/


GAO Reviews Proposed Firearm Changes

2019/03/28

By: Danielle Hatch

The US Government Accountability Office (GAO) was asked to review the proposed changes to export controls of firearms, artillery, and ammunition from the State Department’s International Traffic in Arms Regulations (ITAR) control to the Commerce Department’s Bureau of Industry and Security (BIS) Export Administration Regulation (EAR) control. Their report evaluated the following:

  • The volume and value of commercial export license applications State reviewed for these items between 2013-2017
  • How certain export controls differ between the ITAR and EAR
  • What is known about the resource implications for State and Commerce due to the proposed transfer

GAO found that the State Department reviewed around 69,000 commercial export license applications for firearms, artillery, and ammunition valued at up to $45.4 billion over the 2013-2017 time frame. Approximately two-thirds of the applications were for firearms (the majority involved non-automatic and semi-automatic firearms). These are the proposed group of firearms that would move from ITAR-controlled to EAR-controlled.

The report noted the differences between Commerce and State’s export controls and how these differences would apply to firearms, artillery, and ammunition. Below is a quick breakdown of the biggest differences:

  • The ITAR requires manufacturers, exporters, and brokers to register for a fee. The EAR has no such requirement.
  • The State Department has an internal watch list which contains derogatory information from past screening of licenses for firearms, artillery, and ammunition exports which is used to screen parties in the licensing process. The Commerce Department screens parties to licenses but they do not have direct access to the internal watch list that State currently uses, meaning they lack critical information to effectively screen parties to exports of firearms and related items. (State and Commerce have held meetings but a decision on how to share the list has not yet been reached.)
  • Both agencies have end-use monitory programs to confirm the validity of end-users. State heavily relies on embassy staff to conduct end-use monitoring while Commerce uses several officers positioned overseas specifically for this purpose.
  • Currently there is a requirement to notify Congress of any proposed firearms exports over $1 million in the ITAR, the EAR has no such requirement so the proposed shift of items would remove this requirement for the sales of firearms that would potentially be controlled by the EAR.

Full GAO Report: https://www.gao.gov/products/GAO-19-307


Iranian Cement Clinker Lands Company $500,000 Fine

2019/03/28

By: Danielle Hatch

ZAG IP, LLC (ZAG) has reached a $506,250 settlement with the Office of Foreign Assets Control (OFAC) after voluntarily disclosing violations of the Iranian Transactions and Sanctions Regulations (ITSR Part 560). In 2014 the company was focused on global sourcing and services related to raw material selection for companies in the construction industry.

ZAG signed a contract with a company based in Tanzania where they agreed to supply 400,000 metric tons of cement clinker. ZAG planned on purchasing the cement clinker from a supplier in India, unfortunately the supplier had to back out of the deal shortly before ZAG was set to provide the cement clinker to the Tanzanian company. ZAG attempted to reschedule the first shipment with the Tanzanian company but they refused to reschedule and were opposed to any delays. Worrying that they would lose the contract, ZAG’s Managing Director found a trading company in the United Arab Emirates (UAE) that could provide the cement clinker on time to their client. The UAE supplier told ZAG that the cement clinker was not subject to US sanctions on Iran and ZAG proceeded with the purchase even though they knew the cement clinker was produced by an Iranian manufactured and shipped from a port in Iran.

ZAG’s purchase of the Iranian cement clinker resulted in 5 violations of the ITSR. The value of the five transactions was $14,495,961 and the maximum monetary penalty for the violations was $28,991,922. OFAC found that ZAG’s voluntary self-disclosure and the violations themselves constituted a non-egregious case, thus the company was only issued a penalty of $506,250.

OFAC considered the following to be aggravating factors: (1) although ZAG did exercise limited due diligence, it acted with reckless disregard for sanctions requirements by failing to substantively address the U.S. sanctions prohibitions in place with respect to Iran despite contemporaneous risk indicators; (2) ZAG’s senior management was aware that ZAG was purchasing and reselling goods of Iranian origin at the time of the conduct at issue; (3) the transactions giving rise to the apparent violations conferred significant economic benefits to Iran; (4) ZAG is a commercially sophisticated company operating globally with experience and expertise in international transactions; and (5) ZAG did not have an effective OFAC compliance program in place at the time of the transactions commensurate with its level of risk.

OFAC considered the following to be mitigating factors: (1) ZAG has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations; (2) ZAG was a small business entity as defined by the U.S. Small Business Administration’s standards; (3) ZAG undertook significant remedial measures by conducting a thorough internal investigation to determine the causes of the compliance failures associated with the apparent violations and enhancing its sanctions compliance policy and procedures, including by developing and implementing a U.S. Export Controls and Economic Compliance Manual and appointing a sanctions compliance officer; and (4) ZAG cooperated with OFAC’s investigation by providing all relevant information regarding the apparent violations in an organized fashion and by responding to OFAC’s requests for information in a timely and efficient manner.

OFAC Enforcement Details: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190221_zag.pdf


Company Fined $5 Million for Relentless Cuba Sales

2019/03/28

By: Danielle Hatch

AppliChem GmbH (AppliChem) has agreed to pay $5,512,564 for 304 violations of The Office of Foreign Assets Control (OFAC) Cuban Assets Control Regulations (CACR) that occurred between 2012 and 2016.

AppliChem is a German company that manufactures chemicals and reagents for pharmaceutical and chemical industries. On January 1, 2012, Illinois Tool Works Inc. (ITW), an Illinois-based company purchased AppliChem and added the German company into its Reagents Division (managed in Spain). During the acquisition phase ITW found references to countries subject to OFAC sanctions on the company’s website and advised AppliChem that all Cuban transactions must end after their purchase of the company.

Part of the acquisition agreement allowed AppliChem’s former owners to stay on as manager-employees (this is where the problem begins). Days after the purchase, ITW Reagents Division General Manager sent the former AppliChem owners (now manager/employees) a memo outlining guidelines for complying with US sanctions, to reiterate that the company’s policies regarding Cuba would be changing because of the new ownership. A few months later, in April 2012, ITW’s European legal department sent a warning to AppliChem’s former owners (still manager/employees) that all sales to Cuba must stop immediately after they discovered that the company continued to collect on existing orders with Cuban nationals under their pre-acquisition contracts.

ITW submitted a voluntary self-disclosure to OFAC in January 2013 based on AppliChem’s continued Cuban transactions. ITW stated that based on representations from AppliChem’s former owners, “all open Cuba transactions were cancelled.” The story doesn’t end here though…

Two and half years later, in 2015, OFAC sent a cautionary letter to ITW in response to AppliChem’s post-acquisition Cuba Sales. Then, in early 2016, an anonymous report was made through the ITW ethics helpline that alleged AppliChem was still making sales to Cuba. ITW began a full investigation and found that the former owners (still manager/employees) had continued AppliChem’s Cuba sales, but this time through a scheme to conceal the transactions from ITW.

ITW’s investigation found that between February and April 2012, AppliChem created a system, known as the “Caribbean Procedures” to hide its continued business with Cuba. Cuba was now referred to by the code word “Caribbean” by AppliChem employees; they hired an external logistics company as well as an independent hazardous materials consultant to prepare the necessary shipping documents and declarations that they have previously dealt with internally to conceal all shipments from ITW. AppliChem senior management conducted training sessions for those that worked in logistics to make sure they understood the “Caribbean Procedures” explained that they must be fully hidden from ITW. During the investigation, it was found that the Caribbean Procedures were “well known to AppliChem staff during the time” and were described as an “open secret” to its staff.

Between 2012 and 2016 AppliChem fulfilled 304 invoices for Cuba sales with the transaction values around $3,433,495. OFAC determined that since ITW voluntarily self-disclosed the violations on behalf of AppliChem and since the violations constituted an egregious case, the penalty of $5,512,564 was sufficient. The statutory maximum for the case was $20,045,688.

The penalty amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. OFAC determined the following to be aggravating factors: (1) the willful conduct of AppliChem’s management; (2) the use of written procedures to engage in a pattern of conduct in violation of the CACR; (3) AppliChem’s sales to Cuba of approximately $3,433,495 in 304 transactions over the course of five years caused significant harm to the sanctions program objective of maintaining a comprehensive embargo on Cuba; and (4) the size and sophistication of AppliChem, with an average annual revenue of around $23 million between 2012 and 2015, and the fact that it is a subsidiary of ITW, a large internationally active company. OFAC determined the following to be mitigating factors: ITW’s cooperation with OFAC on behalf of AppliChem by filing a thorough voluntary self-disclosure, providing prompt responses to requests for information, performing a thorough internal investigation, and by signing a tolling agreement on behalf of AppliChem.

Former owners of AppliChem are no longer employed by ITW.

OFAC Enforcement Details: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190214_applichem.pdf


Former CEO Makes BIS History

2019/02/20

By: Danielle Hatch

Eric Baird, former CEO of Access USA Shipping, has received the largest BIS penalty to ever be imposed on an individual. The Florida-based man has agreed to pay $17 million for willful violations of the Bureau of Industry and Security (BIS) regulations.

Baird plead guilty to 166 counts of administrative violations for misrepresenting values and item descriptions in order to hide exports that would have required a BIS license. Details available at https://www.learnexportcompliance.com/blog/2018/12/23/ceo-pleads-guilty-to-export-violations-and-agrees-to-pay-17-million/ and https://www.learnexportcompliance.com/blog/2017/03/30/florida-company-fined-27-million-for-150-intentional-ear-violations/.

Baird founded Access USA and developed the business model of providing foreign customers with a US address so that they could acquire US origin items for export without alerting US merchants of the item’s ultimate destinations. Over the course of several years Baird instructed employees to falsify shipping documents and had them purchase items for customers using their personal credit cards and have the items shipped to their homes to hide the real recipient of the goods. Baird was “willingly and intentionally” breaking the law. Baird also faces a five-year suspension of his export privileges and it is expected that he will be sentenced to two years of probation during his sentencing.


Wassenaar Releases Due Diligence Questions

2019/02/20

In December 2018, the Wassenaar Arrangement updated its current list of indicative questions that companies should use “in any export situation” in order to help companies recognize potential compliance issues and red flags before a violation occurs. The document states that, “Being vigilant for signs of suspicious enquiries or orders is vital for countering the risks of the proliferation of sensitive goods and technologies and destabilising accumulations of conventional weapons.”

The document contains 35 questions and notes that, “Corresponding answer(s) to any of the questions below should not be considered as the basis for an automatic rejection of an export. The intention of the questions is rather to flag the need for greater scrutiny while examining exports.”

List of Advisory Questions for Industry: https://www.wassenaar.org/app/uploads/2018/12/Advisory-Questions-for-Industry-Amended.pdf