Archive for 2012

Our License Expired Last Month and We Shipped Today: Our Penalty is Double the Value of the Export


By: John Black

Times are tough.  Sometimes even an export valued at $14,000 may seem to be worth the risk of a violation.  (I personally prefer the math of committing violations on the $2. billion dollar order.)  Unfortunately, the US Government has at its disposal plenty of potential penalties and a willingness to impose them that can make that shipment after the license expired less than worthwhile.

Consider PhibroChem, who had a license to export sodium fluoride (classified as 1C350)  to a customer in Mexico.  The PhibroChem export license expired in December 2007.  In January, 2008, PhibroChem made a $14,000 export of sodium fluoride to the same customer in Mexico but it did not have a valid export license.  PhibroChem agreed to pay a $31,000 in a settlement agreement with the Commerce Department.  While $31,000 pales in comparison to the huge penalties we often talk about, it is notable that even though the chemicals went to a trusted recipient in a trusted country, the company’s penalty amount was more than twice the value of the export.  And the penalty amount does not include the likely significant amount PhibroChem paid in legal fees and administrative costs to enhance its compliance program.

(Sodium fluoride:  Is that the stuff in toothpaste?   I cannot imagine a toothpaste additive is a chemical weapons precursor, but it doesn’t surprise because I know the germs that cause cavities are nasty things because I have seen pictures of them in TV commercials.  I wonder if the government is on the lookout for a shipment of a million tubes of toothpaste to a terrorist cell that might try to extract the sodium fluoride to make a chemical weapon.)    

Former Sergeant Pleads Guilty to Participation in Firearm Smuggling after Chinese Government Grabs Import


By: Britain Black

Joseph Debose, a former Staff Sergeant in a U.S. Special Forces National Guard Unit, pled guilty to violating the Arms Export Control Act.  After learning Chinese police had found a suspicious package of firearms shipped from New York, the U.S. sent law enforcement officials to China to examine the evidence. The package contained firearms with defaced serial numbers. One of the guns was linked back to its original purchase in North Carolina and ultimately, led officials to Debose.

The North Carolina resident could face up to 20 years for his involvement in smuggling arms to China, including semi-automatic handguns, rifles, and shotguns. These types of weapons are on the United States Munitions List and cannot be exported without a license from the U.S. State Department. Debose was arrested during a sting operation set up where Debose believed he was receiving a truckload of guns for his next shipment.  As it turned out, he got a truckload of trouble, not a truckload of guns.

Illegal Computer Exports to Iran Get 4 Years Prison Time and $10 Million Penalty


By: John Black

U.S. District Judge Virginia M. Hernandez Covington sentenced Mohammad Reza “Ray” Hajian of Tampa, Florida to 4 years in federal prison for conspiracy to violate the International Emergency Economic Powers Act and the Iranian Transaction Regulations. The court also ordered Hajian to serve a one-year term of supervised release, upon his release from prison, and to forfeit $10 million, which are traceable to proceeds of the offense.   Hajian shipped approximately $14.85 million worth of computer and related equipment.

Between 2003 and 2011, Hajian conspired with others (aka “co-conspirators”) to illegally export enterprise level computers and related equipment from the United States to Iran, in violation of the U.S. embargo.  Ray and friends apparently went to great lengths to get away with this crime, but ultimately did not prove to be best criminals.

According to the US Government, to hide what they were doing Hajian and his co-conspirators shipped the computers and related equipment and moved the payments  to move to and from the United States and Iran through the United Arab Emirates.   (The UAE is a well-known and highly monitored diversion point for illegal trade with Iran.  Note to Ray and friends—next time try using a less obvious diversion point, perhaps one that is not being closely monitored by the US Government.)  Hajian and his co-conspirators communicated with each other via e-mail (thus creating records of their misdeeds). They employed fake identities, fake end-users, and coded language (I imagine an email saying “Dear Frank Roosevelt, I am glad you are not Iran and are in Cairo.  I will be sending the wedding cakes for the orphans in Lagos, Nigeria.  We will be shipping the CAKES on Al Italia directly to your office which is not in Dubai.  Please initiate the financing and payments for $3.2 hundred (not million) dollars.”)   I wonder if they also used those fake glasses/nose/mustache combo things.

DDTC Slips in Change to 123.9(b) ITAR Destination Control Statement


By: John Black

Under the deep regulatory cover of the Federal Register notice with the new ITAR UK exemption, the Directorate of Defense Trade Controls (DDTC) slipped in some changes to the ITAR 123.9(b).  Depending on how you read the changes, they may create a troublesome hassle to change your automated systems and export paperwork, or they also may create a significant new compliance burden.

It seems to me that the likely case is that you, unlike many of your colleagues, have not even read the changes yet.   Based on my analysis, this change creates at least two issues you should address.

If I read the new 123.9(b) literally, see three primary changes, based on the words in bold face below in the new 123.9(b):

ITAR 123.9(b) The exporter shall incorporate the following statement as an integral part of the bill of lading, airway bill, or other shipping documents, and the invoice whenever defense articles are to be exported or transferred pursuant to a license, other written approval, or an exemption under this subchapter, other than the exemptions contained in § 126.16 and § 126.17 of this subchapter (Note: for exports made pursuant to § 126.16 or § 126.17 of this subchapter, see § 126.16(j)(5) or § 126.17(j)(5)):

‘‘These commodities are authorized by the U.S. Government for export only to [country of ultimate destination] for use by [end-user]. They may not be transferred, transshipped on a noncontinuous voyage, or otherwise be disposed of, to any other country or end-user, either in their original form or after being incorporated into other end-items, without the prior written approval of the U.S. Department of State.’’

Issue 1) The ITAR now requires the statement be on “the airway or other shipping documents” in addition to the previous requirement that it be on the bill of lading and invoice. The new “other shipping documents” words seem to expand the documents on which the statement is required to include, but the ITAR, in its typical fashion, does not define what other shipping documents means, so you have to come with your best educated guess, or  interpretation.  Some other documents that might be shipping documents are for example, packing lists and shipper’s letters of instruction.

Issue 2) The ITAR now requires that the statement be used when defense articles are to be transferred in addition to previous requirement that is be used when defense articles are to be exported. The ITAR does not define “transfer” or “transferred.” Since the ITAR does not control transfers within the United States, I do not think the statement is required for transfers within the United States. The ITAR defines and controls “retransfers.” It could be logically inferred that all retransfers are also transfers so for the first time DDTC wants this statement put on documents for retransfers in addition to exports.  If you were naïve, you might assume that DDTC would either use a defined term such as “retransfer” or define a term it uses.

Issue 3) In the actual required new 123.9(b) statement, the word “to” replaces the former word “in” and the words “or end-user” was added after “country.” This means that all such statements need to be updated to reflect the new language.  Take care of this means tracking down all the automated systems and non-automated procedures that apply the statement to documents and updating the language.

My issues 1) and 3) above require the attention of companies in the United States, at least.  My issue 2) creates issues primarily for companies outside the United States who transfer/retransfer defense articles—companies outside the United States have to decide whether they think this extends the 123.9(b) requirement to retransfers and take appropriate steps to revise their compliance programs accordingly.

Sanctions Against Iran Target Foreign Entities Owned or Controlled by U.S. Companies and Hold U.S. Companies Responsible for Their Violations


By: Suzanne Reifman, Vinson & Elkins, 202-639-6577,

Over the past two years, the United States has continued to escalate sanctions against Iran, targeting both U.S. and non-U.S. persons and particularly those persons dealing with or supporting Iran’s energy and financial sectors. On July 1, 2010, the U.S. passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). CISADA amended the existing Iran Sanctions Act of 1996 (ISA) and was designed to expand restrictions on non-U.S. entities that provide goods, services, or other support meeting particular monetary thresholds to Iran’s petroleum industry. The goal of the ISA, as amended by CISADA, is essentially to force non-U.S. companies to choose between doing business with Iran and doing business with the U.S. Following the passage of CISADA, the U.S. has continued to target non-U.S. companies that provide support to Iran through a series of laws and executive orders that have broadened the scope of sanctionable conduct and isolated Iran’s financial sector.

On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA). The law contains many new prohibitions that affect a broad range of industries. In particular, the TRA addresses what many have described as a “loophole” in prior sanctions. Prior to the enactment of the TRA, in many instances foreign subsidiaries of U.S. companies could continue to legally engage in business with Iran as long as the business did not involve the provision of U.S. origin equipment or technology or require facilitation from U.S. persons. The prior sanctions were decidedly less restrictive than U.S. sanctions targeted against Cuba, under which foreign entities owned or controlled by U.S. companies are considered “U.S. persons” and fully subject to all of the sanctions’ requirements. However, under the TRA, any entity “owned or controlled by a United States person and established or maintained outside the United States” is now subject to the range of prohibitions applicable to U.S. persons or persons located in the U.S. with respect to dealings involving Iran.

It should be noted that the definition of “own or control” in TRA is broad, and means “holding more than 50 percent equity interest by vote or value in the entity;” “holding a majority of seats on the board of directors of the entity;” or “otherwise control[ling] the actions, policies, or personnel decisions of the entity.” The TRA does not identify the circumstances in which an entity can be “otherwise control[led]” and no other guidance has been issued. As such, U.S. companies that are parties to foreign joint ventures or similar entities in which they do not hold a majority equity interest or control a majority of board seats will still need to assess their level of control in order to determine whether these foreign entities could be construed as controlled by a U.S. company and, thus, subject to the Iran sanctions that apply to U.S. persons.

The TRA provided that the President would have to implement this provision within 60 days after the law’s enactment. Accordingly, Section 4 of the October 9, 2012 EO formally satisfied this statutory requirement. The EO provides that the penalties for violations of the prohibitions may be assessed against the U.S. person that owns or controls the entity that engaged in the prohibited transaction. The EO also provides that penalties shall not apply if the U.S. person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013. Therefore, given the short grace period allowed for divestment/termination, U.S. companies will need to promptly determine:

  • Does the U.S. company own or control foreign entities that are engaged in conduct involving Iran that would violate U.S. sanctions against Iran? Note that in cases where U.S. companies are involved in joint ventures or other arrangements, it may be difficult to immediately identify all circumstances in which they control an entity based on the broad description set forth in the TRA.
  • If the foreign entity is engaged in business involving Iran, can this business be discontinued prior to February 6, 2013? Note that there is no general license or other authorization that would enable a U.S. company to provide unauthorized facilitation during this process. For example, a U.S. company could not participate in negotiations involving a foreign subsidiary and its Iranian customer to try and mitigate any breach of contract claims that would result from the foreign subsidiary’s termination of a contract.
  • If the owned or controlled foreign entity is either unable or unwilling to discontinue its business with Iran, can the U.S. company divest or terminate its interest in the foreign entity prior to February 6, 2013? Note that unlike the more general ISA sanctions, there is no “safe harbor” provision or other exception that would be granted to a foreign entity owned or controlled by a U.S. company that continues to do business with Iran (even if the entity is in the process of winding down or reducing its business).
  • Does the U.S. company have any of its own licenses from OFAC to engage in transactions involving Iran? If so, the company needs to consider whether it will need to cover any of its foreign owned or controlled foreign entities under these licenses going forward.
  • Can the U.S. company put the appropriate policies and procedures in place at its owned or controlled foreign entities to ensure compliance on a going-forward basis?

Given these issues, compliance with the TRA, as implemented by the October 9 EO, will present a major challenge for many U.S. companies and their owned or controlled foreign entities.

US – PRC – UAE – Iran Coke Transactions Net $402,000 Penalty


By: John Black

The Office of Foreign Assets Control (OFAC) penalized Grade Resources USA, Inc. (GR-Duratech) of Houston, Texas $402,000 for its involvement  it transactions with Iran and with the Islamic Republic of Iran Shipping Lines (IRISL).  The high dollar amount of the penalty is largely based on OFAC’s determination that GR-Duratech  demonstrated “reckless disregard” for the regulations and “willful concealment and evasion involving GR-Duratech’s senior-level management.”

In 2005, GR-Duratech negotiated a sale of graphitized petroleum coke to a UAE company knowing that the material was destined to Iran. After negotiating the deal including the letter of credit, GR-Duratech referred the sale to its parent company, Grand Resources Co., Ltd. (“Grand Resources”), in Beijing, China.  GR-Duratech later received a commission payment from Grand Resources for the sale.

In July 2009 and August 2009, GR-Duratech dealt in property in which IRISL had an interest, and “engaged in transactions or dealings in or related to services of Iranian origin.”  Specifically, GR-Duratech was involved in the shipment of cargo aboard the blocked vessel “Sabalan,” a vessel in which IRISL had an interest.  GR-Duratech also presented trade documents related to the shipment to its bank for payment pursuant to a letter of credit referencing the blocked vessel.  In addition, GR-Duratech was also involved in removing references to Iran and an Iranian entity from the trade documents association with the shipment.  Then in September 2009, GR-Duratech dealt in property in which IRISL had an interest by transferring the trade documents related to the shipment to its customer in Turkey.

OFAC said that GR-Duratech’s senior management was involved in the activities, including concealment and evasion, IRISL.  This case was not based on a voluntary disclosure.  (I have to wonder if maybe a bank involved in the letter of credit reported this to OFAC.)  Those aggravating factors were slightly offset by GR-Duratech’s cooperation with the OFAC investigation and its agreement to waive the expiration of the statute of limitations for this case.

BIS Creates New Webpage for Commodity Classifications


By: Holly Thorne

The Bureau of Industry and Security (BIS) has created  a webpage in which companies can give information about the ECCN classifications (or an export control point of contact from which to obtain ECCNs) of their products and technologies.    BIS is not telling that the classifications are accurate, it is just trying to facilitate the exchange of information regard ECCNs.

If you want to post your ECCN classifications (or your export control point of contact) of the new website, contact

In your email, provide any of the following information you would like to be posted on the BIS website:

1) Company name

2) General description of the products/services

3) Commodity classification information website address

4) Export control point of contact (may be a general telephone number or email address)

My colleague Scott Gearty, is already way ahead of BIS on this.  Some years ago Scott created a website from which you may obtain ECCN information.  Scott’s webpage likely will have more ECCN information that the BIS for the foreseeable future.   To get ECCN information go to:

Stella Gets Online: BIS Has New Online Licensing Status Tracking System


By: John Black

BIS has updated its System for Tracking Export License Applications (STELA). You may now check the status of your export / re-export license applications, classification requests and AGR notifications at Applicants must input their BIS assigned application control number (ACN).  Formerly, STELA was an electronic telephone based system.

OFAC Drops CISADA Bomb on Two Banks


By: R. Clifton Burns, Esq., Bryan Cave LLP, Wash DC, 202-624-3949,, Export Law Blog, Reprinted by permission.

The Office of Foreign Assets Control (“OFAC”) today applied sanctions under the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 against the Bank of Kunlun in China and the Elaf Islamic Bank in Iraq. Under these sanctions, U.S. financial institutions are “prohibited from opening or maintaining a correspondent account or a payable-through account” for the two banks, effectively cutting them off from foreign exchange and the U.S. financial system. This is the first time these sanctions have been applied. OFAC does not supply details on the basis for these actions other than to state that they were imposed under 561.201 of its Iranian Financial Sanctions Regulations.

Back in April, the Wall Street Journal identified Kunlun as significant player in providing financial services to Iran. Kunlun, which is controlled by state owned China National Petroleum Corp., on its website identifies the petroleum and petrochemical industries as its main customer base. Sanctions under section 561.201 are aimed at financial institutions that assist the Government of Iran to acquire WMD or support terrorist organizations, unlike 561.203 which is directed at foreign persons that facilitate transactions with blocked Iranian financial institutions such as the Central Bank of Iran or Bank Tejerat. Therefore, it seems reasonable to surmise that OFAC is taking the broad position that banks that help Iran sell petroleum products are, at least indirectly, furthering Iran’s nuclear program.

DDTC Announces Change to Yemen Policy


By: John Black

The Directorate of Defense Trade Controls revised the International Traffic in Arms Regulations (ITAR) to update the policy toward Yemen. Licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Yemen will be reviewed, and may be issued, on a case-by-case basis.   This replaces the former policy, which began on December 16, 1992, and states that the defense export policy for Yemen include a “presumption of denial” for proposed exports of lethal defense articles or items supporting such articles.  Just last year, on August 8, 2011, DDTC amended the ITAR to include Yemen in Sec.  126.1, which describes prohibited exports, imports, and sales to or from certain countries. That policy allowed for the export of non-lethal defense articles and defense services and non-lethal, safety-of-use defense articles for lethal end-items. License applications for the export of lethal defense articles and defense services were denied.