Archive for 2018

BIS Extends Comment Period for Emerging Technologies

2018/12/23

The Bureau of Industry and Security issued a notice extending the comment period for the proposed rulemaking (ANPRM), “Review of Controls for Certain Emerging Technologies” until January 10, 2019 (recently the comment period would end on December 19, 2018).

You may submit comments through either of the following:

  • Federal eRulemaking Portal: http://www.regulations.gov. The identification number for this rulemaking is BIS 2018–0024.
  • Address: By mail or delivery to Regulatory Policy Division, Bureau of Industry and Security, U.S. Department of Commerce, Room 2099B, 14th Street and Pennsylvania Avenue NW, Washington, DC 20230. Refer to RIN 0694–AH61.

FOR FURTHER INFORMATION CONTACT: Kirsten Mortimer, Office of National Security and Technology Transfer Controls, Bureau of Industry and Security, Department of Commerce. Phone: (202) 482–0092; Fax (202) 482–3355; Email: Kirsten.Mortimer@bis.doc.gov.

Federal Register: https://www.govinfo.gov/content/pkg/FR-2018-12-14/pdf/2018-27148.pdf


CEO Pleads Guilty to Export Violations and Agrees to Pay $17 Million

2018/12/23

By: Danielle Hatch

Eric Baird, former owner and CEO of Access USA Shipping, LLC d/b/a MyUS.com (Access USA), had his criminal plea accepted by the Bureau of Industry and Security (BIS) on December 12, 2018. BIS imposed a civil penalty of $17 million, with $7 million suspended, along with a 5-year denial of export privileges with one year being suspended. This is historically the largest penalty to be paid to BIS by an individual.

Are you wondering what this guy must have done to get the largest personal penalty? He went out of his way to hide illegal exports from the government…something they really frown upon. 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. Baird created policies and practices where it was normal for the values and descriptions of items on export documentation to be falsely identified. At one point, laser sights for firearms were described as “tools and hardware,” and rifle scopes were described as “sporting goods” or “tools, hand tools.” Baird even created a personal shopper program where Access USA employees purchased items for foreign customers from a shopping list and presented themselves as the domestic end users. At one point, Baird and Access USA employees were personally paying for the items and being reimbursed later by their foreign customers.

Access USA’s Chief Technology Officer emailed Baird in 2011 saying, “I know we are WILLINGLY AND INTENTIONALLY breaking the law.” In the same email thread Baird said, “if warned by the government,” then the company “can stop ASAP.”

Access USA settled with BIS in 2017 and agreed to a penalty of $27 million with $17 million suspended. You can read an article outlining the charges at: https://www.learnexportcompliance.com/blog/2017/03/30/florida-company-fined-27-million-for-150-intentional-ear-violations/

Department of Justice: https://www.justice.gov/usao-mdfl/pr/former-florida-ceo-pleads-guilty-export-violations-and-agrees-pay-record-17-million


OFAC Dings U.S. Defense Contractor for Sanctions Violations, Inadequate Screening

2018/12/23

By: Thad McBride on December 12, 2018

POSTED IN INTERNATIONAL TRADESANCTIONS (OFAC)

  • Penalties imposed for violations of U.S. sanctions on Russia and Ukraine
  • Violations identified during pre-acquisition due diligence on contractor
  • Denied persons screening was conducted but missed prohibited parties

In late November 2018, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) announced that Cobham Holdings, Inc. agreed to pay $87,507 to settle violations of U.S. sanctions on Ukraine and Russia.

Violations Identified During Pre-acquisition Due Diligence

According to OFAC, the violations were committed by Cobham’s former subsidiary, Metelics, prior to the sale of Metelics to MACOM. It was MACOM that identified the violations during due diligence related to its acquisition of Metelics. And it was presumably MACOM that required Cobham to make the voluntary disclosure to OFAC that led to the penalty in this matter.

The penalty is small by recent OFAC standards. (For example, it is about 620 times less than Societe Generale paid to OFAC as part of its global settlement of sanctions violations.)

But as a cautionary tale, the Cobham matter is important to any exporter.

Products Sold to Entity Blocked Under U.S. Sanctions

According to OFAC, during a six-month period in 2014 and 2015, Metelics sold products through distributors in Canada and Russia to a blocked entity under U.S. sanctions. That entity – Almaz Antey Telecommunications LLC (AAT) – was not explicitly named as a blocked party on the OFAC List of Specially Designated Nationals and Blocked Persons (the SDN List).

Yet AAT was nonetheless a blocked person because it was 51 percent-owned by a party – JSC Almaz-Antey – that was named on the SDN List. As OFAC has made abundantly clear, any entity that is owned 50 percent or more by one or more blocked persons is a blocked entity itself.

Any blocked person, whether named on the SDN List or not, is effectively off limits to U.S. companies and individuals.

Screening Challenges Lead to Violations

The chronology of this matter demonstrates the challenges exporters face when screening third party business parties.

According to OFAC, on June 18, 2014, Metelics agreed to sell products to AAT through a Canadian distributor. On June 19, Metelics screened AAT against its prohibited parties screening software. At that time, JSC Almaz-Antey was not a prohibited party – and thus neither was AAT.

On June 27, Metelics shipped products to AAT. In connection with that shipment, Metelics again conducted denied parties screening and identified no match for AAT.

None of this is surprising or problematic from OFAC’s standpoint because JSC Almaz-Antey was not designated as an SDN until July 16, 2014. That is when things get more interesting.

On July 31, 2014, Metelics made another shipment to AAT. In connection with this shipment, Metelics again conducted denied parties screening for AAT and again did not identify any matches – even though JSC Almaz-Antey, the majority owner of AAT, was now named on the SDN List.

Based on this, OFAC deemed the screening effort to be insufficient. OFAC emphasized that Metelics proceeded with shipment to AAT “despite the inclusion of two uncommon terms [‘Almaz’ and ‘Antey’] in the names of both the SDN and [AAT].” OFAC’s statement suggests that the screening software should have identified at least a potential match, which Metelics would presumably have reviewed further before continuing with the transaction.

Notably, there is no indication that Metelics somehow set the software or screening mechanism to avoid identifying a match with AAT. In fact, in its press release, OFAC states that the screening software was set-up to identify “fuzzy” search criteria yet missed the similarities between AAT and JSC Almaz-Antey.

It thus appears that Metelic was not entirely to blame for these apparent violations. Yet in explaining the penalty in this case, OFAC also notes that Metelics “was subject to a consent agreement for violations of the International Traffic in Arms Regulations [ITAR]… resulting from recurring compliance failures.” Arguably those ITAR compliance failures should have made Metelics particularly vigilant about protecting against failures with its screening system.

While OFAC does not name the provider of the screening software in this case, the agency does state that “[p]ersons employing sanctions screening software should take steps to ensure it is sufficiently robust.” In other words, simply because a company uses software to conduct screening does not mean that software is adequate to protect against violations.

Analysis

This may be a tough lesson for exporters to absorb.  It’s not clear that many exporters conduct quality control checks of their screening software. The raison d’etre for such software is to identify actual or potentially prohibited parties based on name similarities. That is exactly what Metelics expected its software to do.

The proliferation of prohibited and restricted parties – and the lists of such parties – makes it impossible for most companies to keep up-to-date with those lists on their own. That’s the reason so many companies seek software solutions to help meet their compliance obligations. It is the responsible thing to do.

Which makes it a little jarring to read the following exhortation from OFAC:

It is essential that companies engaging in international transactions maintain a culture of compliance where front line staff are encouraged to follow up on sanctions issues, including by promptly reporting to compliance personnel transactions suspected to involve sanctioned parties.

That is surely good advice but it is not clear how it pertains to the facts in the Cobham matter. There is no indication that any Metelics employee was aware of a transaction suspected to involve sanctioned parties – or that any employee ducked their head in the sand.

Nevertheless, it is useful to remember the value of periodic risk assessments during which compliance policies, procedures, and processes are reviewed. Potential weaknesses can be identified and addressed before they lead to violations.

The Bass, Berry & Sims trade lawyers work closely with clients to assist in risk assessments and other compliance exercises. Our targeted, efficient approach to such matters leads to practical, effective solutions. Feel free to contact us anytime if we can assist you.

Article: https://www.bassberrygovcontrade.com/ofac-dings-u-s-defense-contractor-for-sanctions-violations-inadequate-screening/


BIS Denies Export Privileges and OFAC Announces $2,774,972 Settlement with Jereh Group

2018/12/23

By: Danielle Hatch

The Bureau of Industry and Security (BIS) announced a settlement with Yantai Jereh Oilfield Services Group Co., Ltd., of Yantai Shandong Province, China (“Yantai Jereh”) in conjunction with the Office of Foreign Assets Control (OFAC).

BIS alleges that the company committed four violations of the EAR (Acting with knowledge of a violation and making false statements to BIS during the course of an investigation. Yantai Jereh has agreed to pay $600,000 to BIS and the company’s 5-year denial period will be suspended if the company pays the BIS fine, in addition to the penalty under their OFAC Settlement Agreement (details below). If at any time, the company commits any violations of the Regulations or fails to pay its penalties on time, BIS can revoke the denial suspension.

The settlement between the OFAC and Yantai Jereh is concurrent with the BIS settlement. The main difference is that the company had 11 violations of the Iranian Transactions and Sanctions Regulations causing a much larger fine of $2,774,972. All 11 violations involved exportation or rexxeportation or the attempted exportation or reexportation of US goods to Iran by way of China. Two of the 11 shipments of oilfield equipment spare parts (coiled tubing strings and pump sets) were seized by US Customs and Border Protection before they left the US.

OFAC determined that the violations constituted an egregious case and the company did not voluntarily disclose their violations.

BIS Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1206-e2573/file

OFAC Settlement: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181212.aspx


Washington Must Wake Up to The Abuse of Software That Kills

2018/12/23

By: Josh Rogin (Josh.Rogin@washpost.com)

Dictators are using spyware to persecute dissidents and journalists at an alarming rate, while the foreign firms that sell these tools assure the public that everything is just fine. It’s time Washington policymakers and lawmakers rein in the proliferation and abuse of software that ends up killing innocent people. This isn’t just a human rights issue. It’s also a matter of U.S. national security.

Israel-based NSO Group is only one in a growing group of companies that has put powerful spyware tools previously available only to a few governments out on the open market. Its Pegasus software, according to human rights groups and independent investigators, has been used in as many as 45 countries, often by authoritarian leaders to aid the persecution of dissidents, journalists and other innocent civilians.

Read Full Article: https://www.washingtonpost.com/opinions/2018/12/12/washington-must-wake-up-abuse-software-that-kills/?noredirect=on&utm_term=.0a610535c165


Commerce Department Proposes Export Controls on Emerging Technologies

2018/12/23

By: George W. Thompson of Thompson & Associates, PLLC (gwt@gwthompsonlaw.com)

“It’s tough to make predictions, especially about the future.” Yogi Berra’s aphorism notwithstanding, the Commerce Department is attempting to do just that with its Review of Controls for Certain Emerging Technologiesand has enlisted all of us to help.

As provided by the Export Control Reform Act of 2018, Commerce seeks to identify “emerging and foundational technologies” that are “essential to the national security of the United States.” The goal is to restrict foreign access to designated technologies without hampering their development in the United States.

The end result will be an expansion of the Commerce Control List beyond its current coverage. Although the levels of control on such newly-designated items are open to discussion, the agency pointed out that “at a minimum it must require a license for the export of emerging and foundational technologies to countries subject to a U.S. embargo, including those subject to an arms embargo”.

That “arms embargo” language should catch your eye, since China is among the countries covered. This means that sharing of “emerging and foundational technologies” with China, as well as “deemed exports” to Chinese nationals, would become licensable transactions in place of their current license-free authorization.

Commerce has identified the following sectors to consider for designation as “emerging technologies”. (1) Biotechnology, (2) Artificial intelligence (AI) and machine learning technology, (3) Position, Navigation, and Timing (PNT) technology, (4) Microprocessor technology, (5) Advanced computing technology, (6) Data analytics technology,

(7) Quantum information and sensing technology, (8) Logistics technology, (9) Additive manufacturing (such as 3D printing), (10) Robotics, (11) Brain-computer interfaces, (12) Hypersonics, (13) Advanced materials and (14) Advanced surveillance technologies.

The agency seeks comments on such points as defining emerging technologies and their levels of development in the United States and abroad, identifying those important to national security, inclusion of other categories and the impact that “controls would have on U.S. technological leadership.” Although “foundational technologies” will be covered at a later date, Commerce also seeks comments “on treating emerging and foundational technologies as separate types of technology.”

Given that imported products from industry sectors within the “Made in China 2025” initiative have been covered by the Section 301 tariffs, the “emerging and foundational technologies” initiative seems like another full-bore effort to slow China’s technological development; in fact, there is some overlap between the two lists. The portents for U.S. companies and their foreign partners, of course, is that previously-unrestricted sharing of whatever technologies ultimately are designated is coming to a close.

Comments to the Department of Commerce, Bureau of Industry and Security are due by January 10, 2019.


Huawei CFO Arrested at Request of US

2018/12/23

By: Danielle Hatch

On December 1, 2018 Huawei Chief Financial Officer Meng Wanzhou was arrested in Vancouver, Canada at the request of the United State. Huawei is the world’s biggest supplier of telecom network equipment and the second biggest smartphone seller across many countries in Europe, Asia and Africa.

The US is accusing Meng and Huawei of defrauding several banks such as HSBC and Standard Chartered, by hiding payments from Iran in violation of US sanctions regulations. US officials believe that Huawei was trying to use the banks to move money out of Iran in addition to possible illegal exports to Iran and other sanctioned countries since 2016. The US case against Meng involves Skycom Tech Co. Ltd, which has been described as one of Hauawei’s “major local partners” in Iran, the company often used Skycom Tech’s Tehran office to provide mobile network equipment to major telecommunications companies in Iran. Reuters has reported that Skycom was more of an “unofficial subsidiary” of Huawei and basically conducted business in Iran for Huawei. The US believes that Meng and other Huawei representatives misled banks about Huawei’s control of Skycom so that they could gain access to more than $100 million worth of transactions related to Skycom.

Huawei has said that its Iran operations were “in strict compliance with applicable laws, regulations and sanctions” of the United Nations, United States and European Union, according to Canadian court documents that were released earlier this month. Chinese Vice Foreign Minister Le Yucheng said, “The actions of the US seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty.”

If the case makes it to the US (depending on Canada), it will likely involve several government forces including the Department of Justice (DOJ), the Office of Foreign Assets Control (OFAC), the Commerce Department’s Bureau of Industry and Security (BIS), and US Customs Enforcement.

More information: https://www.reuters.com/article/us-usa-china-huawei/huawei-cfo-seeks-bail-on-health-concerns-canada-wants-her-in-jail-idUSKBN1O80GL

https://www.cnbc.com/2018/12/18/huawei-cfo-meng-wanzhou-extradition-case-what-happens-next.html


US Announces Bilateral Tariff Ceasefire

2018/12/23

The G-20 summit concluded at the beginning of this month and provided some relief to Chinese and American importers for 2019 as a 90-day ceasefire from the current tariff wars. A White House press release explained that on January 1, 2019, tariffs on $200 billion worth of imported Chinese products will not be raised to 25% from the existing 10%. In response, China agreed to purchase a substantial amount of agricultural, industrial, and energy products from the US, although an exact amount has not been determined. This is only a 90-day ceasefire and if the US and China cannot reach an agreement on issues like forces transfer of technology, intellectual property protection, non-tariff barriers, cyber intrusion and a whole other host of issues by March 1, 2019 the tariffs will be raised from the 10% to the 25%.

In March of this year the Trump administration raised the import duties on aluminum and steel from 10% to 25% which caused China to create retaliatory tariffs, creating a trade war. Since this change, the US has imposed tariffs on $250 billion worth of Chinese goods and China has imposed tariffs on $110 billion worth of US goods.

More Information: https://blogs.integrationpoint.com/en-us/25-global-trade-management-gtm/8019-amidst-the-trade-war-china-u-s-announce-bilateral-tariff-ceasefire.html


Reimposition of Iran Sanctions Starts

2018/12/23

On November 5, 2018 the Office of Foreign Assets Control (OFAC) began to re-impose several sanctions on Iran related to the 180-day wind-down period and the reimposition of US sanctions that had been lifted or waived in connection with the Joint Comprehensive Plan of Action (JCPOA).

The biggest change you will see is that over 700 people have been designated or identified and added to the SDN list, including those that had been recently removed from the list in connection with JCPOA. In addition, person and associated block property that was previously identified on Executive Order (EO) 13599 have been moved to the SDN list and OFAC has removed EO 13599 from its website.

An amendment to the Iranian Transactions Sanctions Regulations (ITSR) has taken affect and will reimpose certain sanctions pursuant to EO 13846 and technical changes that remove references to EO 13599.

OFAC Frequently Asked Questions: https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#630

Notice: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181105.aspx


US Government Wants Hong Kong to Enforce Export Controls

2018/12/23

The US has been pushing Hong Kong to enforce more of the United Nations sanction on North Korea and Iran, as well as export controls on controlled items. The US Department of State and US Department of Commerce met with Hong Kong government agencies this month to look over recent steps that Hong Kong has taken to implement the sanctions. Hong Kong has passed new laws that will make it harder to register and operate shell companies in the city in hopes of keeping people from using the city as a “safe harbor” for illicit trade with North Korea.

In November, an annual report of the US-China Economic and Security Review Commission suggested that the US Department of Commerce review its export control policy for civilian technology with military applications in relation to Hong Kong and China. The report said that Hong Kong was moving closer to becoming “more like any other Chinese city,”

More Details: https://www.hongkongfp.com/2018/12/10/us-urges-hong-kong-better-enforce-export-controls-un-sanctions-north-korea-iran/