Archive for the ‘Enforcement’ Category

ZTE Chairman Promises No MORE Violations & US Imposes Most Severe Penalty to Date

2018/06/29

By: Danielle Hatch

ZTE Chairman Yin Yimin released a letter in the first part of June to customers and employees promising that there would be no further compliance violations. He apologized to customers for the disruption that the violations of US export controls caused and apologized to ZTE’s 80,000 employees whose jobs were in jeopardy after ZTE was put on the US denial list and no longer had access to US technology which suspended most of the company’s operations. **An employee who asked not to be identified further confirmed Yin sent a letter but would not confirm its contents.

The US did agree to restore ZTE’s access to US components in hopes of reducing the likelihood of a prolonged escalation of tensions over tariffs.

Yimin’s letter did say that the issue will not be fully resolved until the US government approves the agreement and unspecified conditions are met. Below you will find the conditions specified by BIS.

BIS will remove ZTE from the DPL Denied Persons List after ZTE makes the required payment and deposit into escrow. Under the new agreement, ZTE must pay $1 billion and place an additional $400 million in suspended penalty money in escrow before BIS will remove ZTE from the Denied Persons List. These penalties are in addition to the $892 million in penalties ZTE has already paid to the U.S government under the March 2017 settlement agreement.Within 30 days of the date of the order, BIS will select and ZTE shall retain at its expense an independent Special Compliance Coordinator (“SCC”) to coordinate, monitor, assess, and report on compliance by ZTE and its subsidiaries and affiliates worldwide. This team of Special Compliance Coordinators will be answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. This is the first time BIS has achieved such stringent compliance measures in any case. These collectively are the most severe penalty BIS has ever imposed on a company.

ZTE must also:

  • Replace the entire board of directors and senior leadership for both entities
  • Complete and submit nine audit reports of its compliance with U.S. export control laws;
    Ensure that all records required to be kept or retained under the Regulations are stored in or fully accessible from the United States;
  • Publish on its website all Export Control Classification Numbers as necessary to determine applicable requirements;
  • Hold two public symposia in China regarding compliance with applicable U.S. export control regulations.
  • Suspended Debarment: 10 years from the date of this order, unless ZTE completes the full and timely payment as described above.

BIS Press Release: https://www.commerce.gov/news/press-releases/2018/06/secretary-ross-announces-14-billion-zte-settlement-zte-board-management

Order: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1181-e2556/file

Details: https://www.mytwintiers.com/news/report-zte-chairman-promises-no-more-violations-apologizes/1225834182


Trilogy International Associates, Inc. and William Michael Johnson Each Receives $100,000 Civil Penalty for Export Violations

2018/04/04

By: Ashleigh Foor

On or about January 23, 2010, April 6, 2010, and May 14, 2010, Trilogy International Associates, Inc., of Altaville, CA exported an explosives detector and a total of 115 analog-to-digital converters to Russia. These items are subject to the EAR and controlled on national security grounds. The items were classified under Export Control Classification Numbers 1A004 and 3A001, respectively, and valued in total at approximately $76,035. Each of the items required a license for export to Russia pursuant to Section 742.4 of the EAR.

Between, on, or about January 20, 2010 and May 14, 2010, William Michael Johnson of Angels Camp, CA, caused, aided, and/or abetted three violations of the EAR, specifically three exports from the United States to Russia of items subject to the EAR without the required BIS export licenses.

Charges include:

  • Three Charges of 15 C.F.R. § 764.2(a) – Engaging in Prohibited Conduct
  • Three charges of 15 C.F.R. § 764.2(b) – Causing, Aiding, or Abetting a Violation

Penalty:

  • Civil penalty of $100,000 against Trilogy International Associates, Inc.
  • Civil penalty of $100,000 against William Michael Johnson
  • Debarred: Both Trilogy International Associates, Inc. and William Michael Johnson are denied export privileges for a period of 10 years from the date of this Order, until 26 February 2028.

Date of Order: 26 February 2018


Miltech, Inc. of Northampton, MA Receives 18 Charges of Alleged Export Violations

2017/11/15

By: Ashleigh Foor

On September 25, 2017, Miltech, Inc. of Northampton, MA was charged a civil penalty of $230,000 due to engaging in conduct prohibited by the EAR when it exported items subject to the EAR from the United States to China and Russia without the required BIS Licenses. On eighteen separate occasions between, on, or around October 14, 2011 and July 14, 2014, Miltech exported active multiplier chains, items classified under Export Control Classification Number (“ECCN”) 3A001.b.4 and valued in total at approximately $364,947, without seeking or obtaining the licenses required for these exports pursuant to section 742.4 of the EAR. These items are controlled on national security and anti-terrorism grounds.

Miltech received 18 charges of 15 C.F.R. § 764.2(a) for engaging in prohibited conduct. $180,000 of the $230,000 penalty must be paid within 30 days, and the remaining $50,000 will be suspended and waived after two years if Miltech fulfills the terms of its settlement agreement and this order.  The company will not be debarred if penalty is paid as agreed and Miltech complies with other terms of this settlement.


Beware of Contracts Signed by Specially Designated Nationals

2017/08/03

(Source: Commonwealth Trading Partners)

By: Chalinee Tinaves, Esq., Commonwealth Trading Partners, ctinaves@ctp-inc.com.

On July 20, 2017, the Office of the Foreign Assets Control (OFAC) announced a $2 million penalty against ExxonMobil Corporation and two of its subsidiaries for violating the Ukraine-Related Sanctions Regulations. According to OFAC, ExxonMobil violated the sanctions when its execs dealt in services with Igor Sechin, President of Rosneft OAO, when they signed eight legal documents relating to oil and gas projects in Russia between May 14, 2014, and May 23, 2014.

If you’ll travel back in time to March 2014, as tensions were heating up regarding Russian deployment of military forces in the Crimea region of Ukraine, President Obama issued Executive Order 13661, “Blocking Property of Additional Persons Contributing to the Situation in Ukraine,” in response to actions deemed to constitute an unusual and extraordinary threat to the national security and foreign policy of the U.S. Section 1(a)(ii) authorized the Secretary of the Treasury to designate officials of the Government of the Russian Federation, block any property or interests in property, and prohibit dealing in any property and interests in property of a person listed on the Specially Designated Nationals and Blocked Persons List (SDN List). Section 4 of E.O. 13661 prohibited US persons from making “any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order” as well as receiving “any contribution or provision of funds, goods, or services” from a designated person.

On April 28, 2014, OFAC designated Igor Sechin as an official of the Russian government, thereby generally prohibiting US persons from conducting transactions with him. Although Rosneft OAO is:

  • designated on the Sectoral Sanctions Identifications List (SSI List) pursuant to Executive Order 13662 “Blocking Property of Additional Persons Contributing to the Situation in Ukraine;”
  • subject to Directive 2 (prohibiting transacting in, providing financing for, or otherwise dealing in new debt of greater than 90 days maturity if that debt is issued on or after the sanctions effective date by, on behalf of, or for the benefit of the persons operating in Russia’s energy sector); and
  • subject to Directive 4 (prohibition against the direct or indirect provision of, exportation, or reexportation of goods, services, or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation or in maritime area claimed by Russian Federation and extending from its Territory); nonetheless, Rosneft OAO is not designated on the SDN List and is therefore not subject to blocking sanctions.

As you can see, the conflict lies in how to conduct business transactions with an organization that is not blocked with an executive who is. According to the release, OFAC rejected ExxonMobil’s position that Sechin was acting in his professional capacity as President of Rosneft OAO when they signed the legal documents. Specifically, ExxonMobil referenced comments by a Treasury Department spokesman in April 2014 allowing BP Plc Chief Executive, Bob Dudley, to remain on the board of directors of Rosneft OAO so long as he did not discuss personal business with Sechin. In rejecting this argument, OFAC indicated that statement did not address ExxonMobil’s conduct nor did the plain language of Ukraine-Related Sanctions Regulations include a distinction between “personal” or “professional.” Further, OFAC has not interpreted the Regulations to create a carve-out for designated parties acting in their professional capacity.

Interestingly, in support of its position, OFAC pointed to its Frequently Asked Question #285 published on March 18, 2013, regarding the Burma Sanctions Program. Although conveniently now removed from OFAC’s FAQs and website following the termination of the Burma Sanctions Regulations, an archived link detailing FAQ #285 captured the full text of OFAC’s response to ministry dealings with a designated Burmese Government minister. According to OFAC:

A government ministry is not blocked solely because the minister heading it is an SDN. U.S. persons should, however, be cautious in dealings with the ministry to ensure that they are not, for example, entering into any contracts that are signed by the SDN.

However, in Treasury’s restatement of FAQ #285 in the ExxonMobil announcement, OFAC indicated that US parties should “be cautious in dealings with [a non-designated] entity to ensure that they are not providing funds, goods, or services to the SDN, for example, by entering into any contracts that are signed by the SDN.”

Rejecting ExxonMobil’s rebuttal that OFAC regulations state that different interpretations may exist among and between the sanctions programs that it administers, FAQ #285 “clearly signaled” that OFAC views the signing of a contract with an SDN as prohibited, even if the entity on whose behalf the SDN signed was not sanctioned in situations where sanctions programs also involve SDNs. These reasons, in addition to the definitions of “property” and “property interest” in the Ukraine-Related Sanctions Regulations, E.O. 13661, and statements issued by the White House and the Department of Treasury, served to provide ExxonMobil with notice that signing the legal documents with Sechin would violate the prohibitions in the Ukraine-Related Sanctions Regulations.

In assessing the penalty based on OFAC’s Economic Sanctions Enforcement Guidelines, among other aggravating factors, OFAC viewed ExxonMobil’s transaction to be a show of “reckless disregard for U.S. sanctions requirements when it failed to consider warning signs associated with dealing in the blocked services of an SDN” and contributed “significant harm” to the objectives of the Ukraine-Related Sanctions Program. Following the announcement, ExxonMobil stood by its position that it acted in full compliance with the sanctions guidelines in 2014 and argued that the Treasury Department is “trying to retroactively enforce a new interpretation of an executive order that is inconsistent with the explicit and unambiguous guidance from the White House and Treasury issued before the relevant conduct and still publicly available today.”

What does all this mean for U.S. companies? While FAQ #285 was initially crafted to address contracts with a designated government official (which Sechin satisfied based on his designation as a Russian official), it is unclear whether this interpretation would also be applicable in situations involving non-government SDNs and their corporate dealings. Further, the prohibited conduct of entering into a contract signed by an SDN in FAQ #285 was listed as an example. It is entirely possible that a range of other contract activities are prohibited by SDNs like negotiating a contract. Companies must be aware of the risks associated with projects that would require authorization by an SDN. Further, companies can mitigate their risk by screening all the parties involved in a transaction to avoid potentially violating a sanctions program.


Florida Company Fined $27 Million for 150 Intentional EAR Violations

2017/03/30

By: Danielle McClellan

Access USA Shipping, LLC (Access) of Sarasota, Florida was charged with 150 violations beginning in April 2011 and spanning to February 2013. The company went out of its way to conceal the fact that foreign customers were purchasing products through them without their US merchants knowing who the end users of their items were. Access mis-described, undervalued, and destroyed and/or altered export control documents to conceal the illegal exports. They also made sure that their foreign customers had a direct employee to order through to avoid any export scrutiny. They went as far as allowing foreign customers to send “wish lists” to Access employees who would then purchase the products from their US merchants with US credit cards and PayPal accounts in the name of Eric Baird, Access’s founder and then-owner and CEO or cards opened in the name of the employee making the order. The foreign customer would then reimburse Access or the employee; there were even situations when the shipments were delivered to the homes of Access employees to ensure that the US merchants would not become suspicious of the order and the end user.

Access also exported (or attempted to) items classified as ECCN 0A987 which are controlled for Crime Control reasons to Argentina, Austria, Hong Kong, Indonesia, Libya, South Africa, and Sweden without a BIS export license. It was also found that the company exported (or attempted to) items classified as ECCN 5A990 and controlled for anti-terrorism reasons as well as EAR99 items to Transsphere Oy, a company on the Entity List.

The company is ordered to pay $10 million right away and the other $17 million will be suspended for two years and waived if the company does not commit any violations during the two year probationary period.

Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2015/1102-e2490/file


Justice Publishes Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret, and Embargo-Related Criminal Cases

2017/03/30

2017/03/30

(Source: Justice)

The U.S. Department of Justice (DoJ) has published its Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret, and Embargo-Related Criminal Cases, (January 2014 to the present: updated February 17, 2017), available at here.

The list contains a brief description of some of the major export enforcement, economic espionage, theft of trade secrets, and embargo-related criminal prosecutions by the Justice Department since January 2014. These cases resulted from investigations by the Homeland Security Investigations (HSI) [formerly Immigration and Customs Enforcement (ICE)], the Federal Bureau of Investigation (FBI), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), and other law enforcement agencies.


Pakistani National Extradited and Sentenced to 33 Months in Prison for Conspiracy to Export Gyroscopes to Pakistan

2016/10/12

By: Danielle McClellan

Syed Vaqar Ashraf (71) of Lahore, Pakistan (also known as Vaqar A. Jaffrey) was sentenced to 33 months in prison after being extradited from Belgium on July 31, 2015. According to court documents, in June 2012 Ashraf began asking a Tucson-based company, who shall remain nameless, for price quotes for unmanned aerial vehicles (drones). The company specializes in the design, development, and manufacturing of drones for the US military. The company immediately tipped off Homeland Security Investigations (HIS) agents about Ashraf’s requests.  HSI quickly assigned special agents to work undercover as employees of the Tucson-based company and they began dialoging with Ashraf directly.

From June 2012 to August 2014, Ashraf negotiated with special agents. He represented himself as the head of I&E International, based in Lahore, Pakistan.  Most of the correspondence was done via email where he agreed to purchase 18 gyroscopes that were intended to help medium-sized drones fly longer distances as well as 10 optical receiver modules and laser diodes intended to be installed in the aircraft for approximately $440,000.

In September 2013, HSI agents met with Ashraf in Vienna, Austria to work out details regarding the sale. Ashraf explained during the meeting that Pakistan’s nuclear program had been developed using technology exported from the west without a license. This led the agents to believe that Ashraf was working for Pakistan’s Advanced Engineering Research Organization and the intended use for the electronics was for the Pakistani military UAV program.

From January to March 2014 Ashraf asked agents for suggestions to get around the US export controls after agents requested a license from the Commerce Department and were told that the items would require a special license because the optical receive modules could be used in “activities related to nuclear, chemical, or biological weapons or missile delivery systems.” Ashraf asked if there were any alternative descriptions that would appear to cover the items on documents, but would clear arms control hurdles from State and Commerce departments.  Secret agents offered Ashraf with a few different descriptions and asked him if the customer was aware that transaction was “being done without a license.” Ashraf told the agents that they (customer) were “absolutely aware of everything.” Later in an email, Ashraf wrote, “He (customer) is well aware that he cannot get these gyros in a normal way; he’s well aware of that.” The ultimate plan was to transship all of the items; they would be shipped to Pakistan through Belgium.

HIS agents met with Ashraf three more times in face-to-face meetings, including one in the US where they agreed on a series of wire transfers, including one for $67,000. On August 26, 2014 agents set up a final meeting with Ashraf in Belgium to deliver some of the technology. Before the meeting began Belgian police showed up and arrested Ashraf. A little less than a year later Ashraf was extradited to the US to face trial on charges of conspiracy to export defense controlled items without a license which he later pled guilty to.

Read more: https://www.justice.gov/opa/pr/pakistani-national-extradited-and-sentenced-attempting-export-sensitive-technology-pakistani


Israel’s Defense Ministry Raises Export Violation Fines

2016/10/12

By: Danielle McClellan

Currently, the Ministry of Defense is capable of imposing a maximum fine of NIS 1 million for companies who violate the Defense Export Controls Act.  The head of Defense Control Agency, Dub Lavi, announced that Israel will be raising the maximum fine to NIS 5 million for violations by companies with sales exceeding NIS 80 million during 3 consecutive years.  The Ministry of Defense does require marketing permits as well as receipts of export permits before items are exported.

Dub Lavi explained that, “The vast majority of Israel’s defense industries are disciplined, responsible, and abide by the Defense Export Controls Act. During the decade in which the Ministry of Defense Exports Agency has been operating, both establishment and the companies themselves have matured: even the largest companies do not like reaching a situation in which they are invited to a hearing due to suspected violation.” Over the past few years, Israel has worked to simplify the exports of non-classified means and has continued to add to the current list of 98 states that can receive exports without a permit.  They are also doing the following to aid in simplifying rules for exporters:

  • Fast-tracking export and marketing licenses in special cases;
  • Exemption from further marketing permits for intermediate agents-an exporter with a marketing permit will not be required to file a further permit for a foreign company that will market its products abroad;
  • Extending the license duration from 3 to 4 years;
  • Updating non-controlled technologies in Combat Equipment Act to include unmanned aerial vehicles and satellites for civilian ends corresponding to the standards defined in the Wassenaar Arrangement on the Export Controls for Conventional Arms and Dual-Use Goods and Technologies

Data shows that in 2015 the Export Control Agency received 40,000 new applications for marketing permits for arms, systems, and components to 190 states. They also received about 9,000 export permit applications which is the preliminary process preceding a marketing permit. In the past year they had 176 cases in which defense companies or exporters were suspected of violating the Defense Export Controls Act, but only a few exporters were fined with a total of NIS 2.8 million in penalties received. Israel’s defense exports totaled $5.7 billion last year.

Read more: http://www.globes.co.il/en/article-defense-ministry-mitigates-export-restriction-while-increasing-fines-1001150528


Justice Department Publishes Major Export Enforcement Cases

2016/08/09

(Source: Justice)

The link below provides a brief description of some of the major export enforcement, economic espionage, theft of trade secrets, and embargo-related criminal prosecutions by the Justice Department since January 2008. These cases resulted from investigations by the Homeland Security Investigations (HSI) [formerly Immigration and Customs Enforcement, (ICE)], the Federal Bureau of Investigation (FBI), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), and other law enforcement agencies. This list of cases is not exhaustive and only represents select cases.

The Department of Justice, National Security Division, has posted its “SUMMARY OF MAJOR U.S. EXPORT ENFORCEMENT, ECONOMIC ESPIONAGE, TRADE SECRET AND EMBARGO-RELATED CRIMINAL CASES (January 2009 to the present: updated August 12, 2015)” at the DOJ website.


State/DDTC Relaunches “Company Visit Program”

2016/08/09

(Source: State/DDTC) [Excerpts.]

What is the Company Visit Program?

The Company Visit Program (CVP) entails visits by Directorate of Defense Trade Controls (DDTC) officials to U.S. entities registered with DDTC as manufacturers, exporters, or brokers of defense articles and defense services, as well as others involved in ITAR-regulated activities, to include foreign companies and foreign governments. The CVP is administered by the Office of Defense Trade Controls Compliance (DTCC); however, representatives from DDTC’s Licensing and Policy offices, or other entities in the Department or elsewhere in the U.S. government, may also participate in the visits.

What is the purpose of the Company Visit Program?

The CVP has several purposes. First, the CVP ensures DTCC understands how compliance programs are implemented in accordance with the International Traffic in Arms Regulations (ITAR). Second, the program enables DDTC to gather information to support the Directorate’s development of regulatory policy and practice. Finally, DTCC uses site visits to glean, assess, and disseminate industry best practices, provide feedback to individual companies on their compliance programs, and share information on compliance programs industry-wide. Note that the CVP includes two (2) types of visits:

  1. CVP-Outreach (“CVP-O”) is an extension of DDTC’s outreach activities, e.g., speaking at conferences. These visits are intended to be a learning exercise for both parties, and provide an opportunity to discuss challenges (such as adapting to changes associated with Export Control Reform) and offer suggestions or best practices. CVP-O site visits are unrelated to specific compliance matters. The purpose of the visit is to understand how companies implement ITAR compliance requirements, not to evaluate compliance failures or violations.
  2. CVP-Compliance (“CVP-C”) visits are designed for DTCC oversight activities, for example as part of consent agreement monitoring. These visits may include a more in-depth look at a company’s compliance program.

Is a CVP visit considered an audit or inspection? What is DDTC looking for during a CVP visit?

Both CVP-O and CVP-C type visits are neither an audit nor an inspection. Visits do not produce a grade or pass/fail assessment for internal or external use, and generally do not include review of transactional records. DDTC will request information from the company to gain a better understanding of their compliance program. CVP-C visits may require a more in-depth look at a company’s compliance program because the visits are focused on overseeing compliance matters already known to DTCC.

How is the visit not an audit if DDTC provides recommendations for improvements to our program?

DDTC may provide recommendations for improvements to a company’s compliance program during both CVP-O and CVP-C type visits. If we make recommendations, it is an effort to offer assistance, help prevent violations and share best practices. The CVP is intended to serve as a learning tool for both parties.

What happens if the DDTC team discovers or learns of a violation during the visit?

DTCC will recommend that the company review the issue and submit a disclosure, if appropriate.

How many companies does DDTC plan to visit each year?

DDTC plans visits for each quarter based on other engagements requiring travel and available resources. Generally, DDTC aims to conduct between two and four CVP visits per quarter. In 2015, DTCC conducted eight company visits under CVP auspices; three of those visits were pursuant to consent agreement monitoring.

How are companies selected for a CVP visit?

DTCC selects companies based on its CVP goals. DTCC considers a variety of factors when selecting companies to visit, including proximity to other activities DDTC is participating in, registration status, volume of licensed activity, experience conducting ITAR activities, nature of business, type and sensitivity of technology, geographic location, monitoring of an existing consent agreement, and value to ongoing work within the Directorate.

How is the DDTC team staffed for each CVP visit?

A CVP team typically consists of two or more staff from DTCC, depending on the size of the individual company/site being visited and number of companies/facilities visited per trip. On some CVP visits, staff members from the Offices of Defense Trade Controls Licensing and Policy, or other relevant agencies, may participate. One DTCC team member serves as team lead and primary point of contact with the company. This primary contact is responsible for coordinating the site visit with the company.

How is a CVP visit conducted and what should a company expect?

  • Once a company is selected for a potential CVP visit, DTCC contacts the company. The company can elect not to participate in the visit. If the company would like to participate, DTCC will propose visit dates and begin planning with the company.
  • Once visit dates are finalized, DTCC sends the company a formal visit notification letter outlining the visit. DTCC may request pre-visit materials from the company for review and preparation purposes. Before the visit, DTCC will work with the company to finalize the agenda.
  • At the visit’s opening, DTCC meets with senior management to explain the visit’s purpose and the agenda. The company should provide an overview of its operations and export activity during opening discussions. Visits generally last one to two days, depending on the purpose, and occur on the company’s premises in offices and conference rooms, and through tours of business operations within the facility (e.g., business development, contracts, procurement, design, manufacture, security, IT, personnel, and shipping).
  • At the visit’s conclusion, the DDTC team briefs company senior management and export control staff to share information the team gathered. DDTC invites the company to provide feedback, ask questions, or raise concerns for follow-up.
  • The DDTC team returns to the Department and generates an internal report. The team also follows up on company feedback. DTCC will send a formal close-out letter to the company. Close-out letters summarize the visit, indicate best practices, recommend areas for improvement or suggest best practices, and address feedback, questions, or concerns raised by the company. DTCC also requests feedback on the visit’s quality and usefulness and suggestions for improving the program.

State also published a slideshow overview of the program, which can be found here.