Time to make official what is already obvious -- this blog is on hiatus. I do hope to return in the near future, but there is no date certain. Thanks to everyone who has written wondering if I was taken down and subsequently sequestered by federal air marshals while attempting to access the 737's lavatory when departing National on my way home from Update.
Hope to see you soon. Until then feel free to email me with new corporate export control sites, tips, tidbits.
The Heritgage Foundation will host a panel discussion today at noon Eastern time on arms export controls featuring executives from Northrup Grumman, Boeing and the Aerospace Industry Association. If you can't make it in person, you can also watch live on the web.
Consider it a nice diversion from yet another soul-destroying lunch at your desk.
Doug Jacobson of International Trade Law News reports from today's OFAC breakout session:
Dennis Wood, OFAC's Assistant Director for Compliance, Outreach and Implementation, opened the program by providing some interesting quotes from the bible, the U.K. Government and others on compliance-related issues.
--Dennis noted that in January 2006 OFAC published enforcement guidelines for financial institutions, which are equally applicable to exporters. He mentioned that is likely that OFAC will make the enforcement guidelines "generic", i.e., applicable to all companies, in the future.
--He also noted that OFAC has authority to "visit" companies and that such outreach activities will continue.
--Dennis mentioned the ABN Amro enforcement case which led to the imposition of an $80 million penalty on the bank. In that case OFAC partnered with a number of other regulatory agencies to impose a multitude of penalties. He predicts that future fines will be increased as a result of inter-agency efforts to address compliance failures.
--After donning an OFAC jacket, Dennis turned the podium over to Hans Huber, a member of OFAC's compliance and outreach division.
--Hans presented an overview of OFAC's programs to the uninitiated. Hans presented a useful comparison between sanctions and export controls.
--Hans noted that the USA Patriot Act has increased awareness of what OFAC does.
--OFAC jurisdiction is broad and applies to U.S. citizens and permanent resident aliens located anywhere in the world or any individual physically located in the U.S., such as a Chinese national located in the U.S. With respect to companies, the issue of foreign subsidiaries is often the most problematic. Such decisions are made on a case-by-case basis, but OFAC could always take action against the U.S. parent if the subsidiary is beyond the reach of U.S. jurisdiction.
--Next, Hans discussed the comprehensive sanctions on Cuba, Iran and Sudan. Hans noted that his PowerPoint slide discussing comprehensive sanctions sent someone to jail as a result of an indirect export to Iran. When OFAC conducted a search of the target company, they found a copy of Hans' presentation which noted that Iran was a prohibited destination.
--Regarding North Korea, be sure to watch OFAC's website for any changes to the existing sanctions regime on North Korea.
--Hans noted that the U.S. Government is good at making acronyms and lists. The list of specially designated nationals and blocked persons (aka the SDN list) currently includes over 3,000 unique entities identified by OFAC.
--Next, Susan Hutner of OFAC's licensing division was introduced. She started by talking about Sudan, which changed dramatically on Friday. The Darfur Peace and Accountability Act restricts the President from lifting current sanctions and restricts OFAC from implementing certain sanctions on Southern Sudan. The new executive order issued by President Bush reimposed sanctions on the Government of Sudan. It also prohibits all transactions by U.S. persons relating to Sudan's petroleum or petrochemical industries, including, but not limited to, oilfield services and oil or gas pipelines. The problematic issue is that transshipments through Northern Sudan are still restricted, which further complicates transactions. Continue to watch OFAC's website for more information.
--Regarding the Palestinian Authority (PA), there are a number of general licenses that authorize certain transaction with the PA. Sanctions are not territorial, but apply to transactions with the PA (the government of West Bank and Gaza).
--The next speaker was David Brummond, one of OFAC's newest employees. David OFAC's senior sanctions advisor on insurance and will be responsible for working on insurance-related sanctions issues. He will be looking at a holistic and integrated approach to insurance-related sanctions violations.
--David noted that Lloyds uses a risk-based approach to determining risks to marine insurance. These lessons are useful in the enforcement of sanctions.
-OFAC issues associated with sanctions often relate to situations where purchaser of insurance is a prohibited party. Most issues relate to transactions with country-based programs of Cuba, Iran and Sudan.
Sanctions programs are so broad they will implicate the insurance associated with the goods. This is because OFAC prohibits transactions "related to" or "dealing in" goods or services. The insurer can be caught by sanctions due to the prohibition on facilitation. OFAC has faced a number of issues with reinsurance. OFAC hopes to clarify this issue in the future.
--Regarding best practices, he recommend including exclusions for sanctioned shipments in policies. Also need to exclude goods, parties, vessels and locations.
--Finally, David noted that risk-based compliance is important in the insurance business, which itself uses a risk-based approach to setting premiums.
--Next, Hans noted that another new topic is trade-related sanctions busting, such as trade-based money laundering activities. Techniques include collusion between the importer and exporter to over- or under-invoice the value of goods and services. Discussed some of the red flags to watch out for in transactions.
-- Allison Cooper, Chief of OFAC's investigation unit, discussed some compliance-related horror stories that led to enforcement actions. The common theme in each of theme will be a systemic breakdown in compliance. She also discussed some red flags, such as making sure that Iranian flag vessels are not involved in the shipment. She noted that most of the issues arose as a result of the payment for goods. Many of the enforcement actions also relate to subsidiaries of U.S companies.
--Regarding penalties and consequences, Hans noted that the proposed penalty is going to be the statutory maximum or the value of the goods. OFAC will take into account aggravating and mitigating factors.
--Regarding effective compliance strategies, the foundation to compliance is to screen the parties to the transaction. If you have a screening hit, the exporter has to do the necessary due diligence to determine if the hit is the intended target or not. For example, Hans noted that Cuba City, Wisconsin is not a prohibited destination.
--Exporters must ensure that their sanctions information is up-to-date.Sanctions are dynamic and changes to sanctions regimes must closely monitored.
--The last presentation related to issues relating to Cuba financing.
The speaker from OFAC's general counsel office said to keep in mind three main rules. First, the Cuba embargo is a country embargo, not a list-based embargo. Second, the general license for activities incident to BIS-authorized exports does not cover transactions that are not tied to a specific export. Third, the general license for financing agricultural sales does not allow the use of a letter of credit issued by a Cuban owned or controlled bank, wherever located.
--Unfortunately, only a few minutes were available for questions and only a few basic answers were provided. However, OFAC staff said they would be available to discuss issues with attendees at lunch or by telephone.
3:01 Deputy Assistant Secretary for Export Enforcement Wendy Wysong offers FY2006's enforcement statistics: 34 criminal convictions w/$3 million in criminal fines, 104 administrative cases w/$13.1 million in administrative penalties and 180 warning letters. That includes both export and antiboycott cases. [See the BIS FOIA site for full details of many of these.]
3:13 Antiboycott slice of the pie included 9 administrative settlements totaling $80,000 plus 3 warning letters, which is more than last year (but still seems quite limited).
3:18 Prohibited boycott requests from Kuwait, Yemen, and Iraq increased from 2005. Most requests originating in Iraq are from the Iraqi Government.
3:25 BIS completed 242 pre-license checks (23 unfavorable) and 700 post-shipment verifications (145 unfavorable) in FY2006. Based in part on these checks, BIS will soon be publishing additional names to the Unverified List.
3:26 Wysong makes the case for voluntary self-disclosure: it's a mitigating factor of great weight, BIS gives at least a 50% discount off the maximum fine as credit and acknowledges the exporter's cooperation. There are signs that her pitch may be working. The number of VSDs has increased from 78 in FY04 to 148 the following year and 157 in FY05. Only 7 of the resolved cases from the past three years have resulted in fines of any size.
3:34 You do know that the maximum IEEPA penalty for an EAR violation while the EAA is lapsed is now $50,000, don't you? Otherwise, Wysong says that the principles and procedures behind enforcement actions will remain the same despite the higher penalties.
12:55 Mi-Yong Kim introduces the panel: Mona Weaver (sp?) of Canada's Export and Import Controls Bureau, replaciing EICB director Michael Rooney and Brittmarie Berge, who works for Ericsson and is a member of the Swedish Export Control Society (Sveriges Exportkontrollförening).
1:07 Kim encourages attendees to ensure their foreign subsidiaries put compliance programs in place, especially those subs in emerging markets without much of a history of robust export controls.
1:13 Berge says Sweden didn't have an export control law until 1986 (which was coincidentally the last act signed by the prime minister of the day before he was assassinated).
1:19 The Swedish Export Control Society sounds like a great resource if you're in Sweden, of course. Sort of like a more intimate version of the Society for International Affairs.
1:27 As is the situation in most countries other than the US, the Canadian EICB controls both dual-use and military goods. A one-stop shop. However, Canada's export control regulators do not have their own enforcement branch.
1:29 That's interesting -- licensing officers in Canada are organized by company rather than commodity, so they get to know exporters a bit better.
1:33 Canada maintains an Area Control List (ACL), a sort of sanctions list, which for now has a membership of one -- Myanmar -- but is about to add another -- Belarus.
1:37 The Canadian official is heavily stressing all the similarities between the US and Canadian export control systems, perhaps not a bad strategy when attempting to stave off implementing of the Commerce's 2005 proposal to limit the export of items subject to MT controls to Canada.
1:39 In certain cases, the Canadians require their exporters to demonsrate US reexport authorization in order to obtain export approval from the EICB.
1:43 Q: What other countries have deemed export rules? A: Don't know of any, but never fear because BIS is still trying to convince them.
1:45 Q: Which countries are considering extraterritorial export controls (like the US)? A: Canada, Japan and someone from the audience suggests maybe Singapore.
1:46 Q: Can you provide examples of a good reexport program? A: Talk to Ericsson.
1:48 Q: How much of your time is spent on US reexport controls? (asked of Berge) A: 90%
1:50 Q: How does Canada treat Cuba and Iran? A: We mention the US controls in our guide and adminster some of our own based on the control lists, but there's no embargo.
1:51 Q: What are the most significant differences between US and Canadian export control systems? A: Reexports and deemed exports are not restricted by Canada.
1:54 Q: Do Canadian companies require licenses to reexport US origin items back to the US? A: Few exports from Canada to the US need a license.
1:56 Q: How does Canada feel about potentially losing the MT piece of the Canadian exemption? A: We want to keep it and hope US industry advocates for that position.
10:18 Gene Christiansen, the longtime and more than a little grandfatherly BIS engineer may well be the only guy who can tell a joke with the punchline "EAR99" and actually get a laugh.
10:22 The first of what I expect will be for than a few helpful tips from Christiansen -- classification isn't just about finding a spot for your product on the Commerce Control List. Don't exclude the other possibilities -- specifically, that the item is publicly available or that it is not subject to BIS jurisdiction (i.e. it's on the US Munitions List rather than the CCL).
10:29 If you take a published textbook, extract from it and modify it in some way, the resulting text is not necessarily publicly available. According to Christiansen, even just highlighting the pertinent piece could be construed as a modification which removes something from public availability.
10:33 Element One of a Classification System: Determine if Items are Publicly Available
10:37 Denzil Tice of DDTC: Commodity jurisdiction determination is the first step in trade compliance. It’s also an ongoing effort, since the ITAR captures not just items designed for a military use, but items modified or adapted for one.
10:43 Only about 300 CJs issued by State each year.
10:54 CJ Tips: Remember that you’re writing for two audiences. First, the non-technical reviewers and second the technical people. Be up front and limit the background and flag-waiving. Do your research. Don’t assume State understands the item up for CJ. Fully explain any government funding, including what type. MilSpec/MilStd does not necessarily mean subject to the ITAR, but you should explain fully. If your marketing materials or website indicate a predominantly military application, explain why that differs from your CJ request.
10:56 Element Two of a Classification System: Review for Jurisdiction
11:00 ECCNs change – don’t assume that the classification you made years ago is still accurate today.
11:03 Most software and technology controls are tied to related hardware, though a relative handful are standalone controls.
11:17 Tips when you ask BIS to classify your product: Limit your request to six items. Resolve public availability and jurisdiction before you come to Commerce. Provide information and backup consistent with the technical parameters of the CCL, even if those aren’t necessarily the most common in your industry. Be consistent with the descriptions on your website or, if not, then explain.
11:21 When processing a classification, BIS will assemble the data, review their database for precedents, if jurisdiction is unclear refer to State for 48 hour review, then move forward with the review.
11:24 Q: Can you elaborate on MilStd? If an item is designed to a military standard, but for a commercial application, is it still under the EAR? A: Yes. There are military specifications for chocolate chips and dog cookies. That doesn’t mean they’re subject to the ITAR.
11:28 Q: Can a reexporter trust the exporter/manufacturer with classifications? A: Usually, but if much time passed between the export and the reexport it could be that the ECCN changed.
11:30 Q: How long does it take to process a CJ? A: About 160 days right now. Items are getting more complex even though we’re not seeing a huge increase in numbers of requests.
11:35 Q: What about other agencies’ jurisdiction? NRC? Interior? A: Don’t mean to exclude them, they’re just pretty rare.
8:41 After his introduction, BIS Office of Nonproliferation and Treaty Compliance Director Steven Goldman introduces the panel -- Joan Roberts, Director of the BIS Foreign Policy Division, Dave Nelson, Director of the State Department's Office of Terrorism Finance and Economic Sanctions Policy, and Karen Nies-Vogel, who Goldman calls "Joan's deputy".
8:48 Goldman notes one of the oddities of current US sanctions policy -- you can still export EAR99 items to North Korea without need for a license.
8:53 BIS plans a policy of denial for Cuba for medical equipment intended for medical tourism there or in support of Cuban-Venezuelan medical care for petroleum exchanges.
8:56 Cuba licensing stats -- 303 applications, 175 of which were approved, 8 were denied and 119 returned without action. Also, 166 AGR notices, 163 of which were approved and 3 were incomplete. Average processing time 30 days.
8:58 Iraq licensing stats -- 112 applications, 76 approved, 36 RWA'd, 0 denied. Average processing time 29 days. Armored passenger vehicles, personal protective equipment and crime control item are the main exports, mostly to US forces and Iraqi Government.
9:03 As part of the recent rule removing AT controls, Roberts notes that Liyba was also moved from Country Group E:1 to D:1, opening up eligibility for a number of license exceptions.
9:04 US trade with Libya more than doubled between 2004 and 2005. Major exports were equipment vehicles, measurement and testing equipment, medical equipment, software computers, and diesel engines.
9:06 Libya stats -- 303 applications, 259 approved, 1 denied, 43 RWA'd. Avg processing time 35 days.
9:07 US has supported South Korean efforts in Kaesong Industrial Complex in the North through limited licensing
9:09 North Korea stats -- 9 applications, 1, approved, 1 denied, 7 RWA'd (all of the RWA's were related). 14 day average processing time.
9:13 Syria -- 249 applications, 169 of which were approved (no denial/RWA breakdown provided). Computer hardware, software, electronic equipment are among the items frequently denied. Average processing time 28 days.
9:16 Nies-Vogel, the BIS point woman on Syria, urges applicants to carefully consider quantities -- higher figures may slow down processing if you cannot provide a good justification. Also, specifically for aircraft, provide a clear link between each part and an aircraft tail number.
9:19 Sudan -- both OFAC and BIS have jurisdiction, submit applications to both simultaneously. Stats -- approved 17 licenses, avg. processing time 22 days (no application figure provided). Telecom, computers and software among the items authorized.
9:26 A curious addition to this year's program -- the United Arab Emirates. Goldman's preface included a disclaimed that there's no intention to sanction the UAE and it mainly seems to be included in the discussion in its role as a key transshipment hub for Iran (see General Order No. 3). UAE stats - 151 applications, 131 approved, 4 denied, 16 RWA'd with an average processing time of 37 days.
9:45 Q: Does BIS require a license for EAR99 medical equipment to Venezuela if Cuban interests are involved? A: If it's being transshiped to Cuba, then yes a license is required. If the item is staying in Venezuela for the benefit of a Cuban interest, see OFAC.
9:47 Q: Why can't Americans visit Cuba for humanitarian reasons? A: They can, under license. Going through Mexico doesn't avoid the license requirement.
9:48 Q: Can EAR99 items be exported to Libya wo/a license? A: Yes
[Are these really representative of the quality of the questions or is the panel just picking the easy ones to answer?]
9:50 Roberts reminds everyone that there's no concept of a deemed export in the OFAC regs on Iran, so see BIS for Iranian nationals w/access to technology in the US.
9:51 Q: Describe the level of effort an exporter is supposed to take in determining if their transaction involves installed base items? A: Re: Libya, you should understand the technology involved and whether installed base items are there.
9:52 Q: Is the de minimis rule for reexports applicable to Syria? A: Yes, at 10 percent controlled US content.
9:55 Q: Do you expect USG enforcement posture toward ILSA/IPSA will remain passive? A: I disagree that it's passive. It's a "useful and effective tool" to launch discussions with the private sector and foreign governments.
9:56 Q: What are luxury goods vis a visa North Korea? A: That hasn't been worked out yet.
9:56 Q: Any movement on Syria 6(j) cases (referring to State's determination that certain exports to Syria would contribute to Syria's military capabilities)? A: No, not really, we do not think these are so urgent.
9:58 Q: Does standard office equipment fall under the carve-out for free flow of information in Syria? A: It's a tougher call than equipment for Syrian telecom infrastructure.
9:59 Q: Will you publish a list of approved hospitals in Syria? A: No, not now.
9:59 Q: How do you handle spare parts for medial equipment to Syria? A: Best idea is to include spare parts with the new equipment if at all possible. Otherwise, it can be tough for us to distinguish what's appropriate.
Once again courtesy Doug Jacobson of International Trade Law News, here is a write-up of today's deemed export breakout:
Alex Lopes, Director, Deemed Exports and Electronics Division
Alex introduced the program by saying that compared to three years ago, everyone now knows what a deemed export is. They have come a long way in raising issue of awareness in deemed exports.
--Alex noted that three years ago BIS had few outreach events on deemed exports, which were limited to small number of companies in high-tech industries. BIS now conducts 120 outreach events per year. Increased staff in Deemed Export Division has helped their efforts (staff has doubled over the past few years).
--He noted that as a result of Inspector General’s report BIS has spent the last few years working on deemed export issues.
--Next, Alex introduced the members of the panel, which included:
--After the introduction, Alex discussed the deemed export year in review.
--Congress authorized an increased budget for deemed export compliance activities, which resulted in an increase in BIS deemed export staff from three to six.
--BIS published two deemed export related Federal Register notices in FY 2006, which included the withdrawal of the deemed export proposed rule and establishment of the DEAC, the Deemed Export Advisory Committee.
--BIS received 840 deemed export applications in FY 2006. BIS approved most applications received and less than 1% were denied. Almost 60% of the deemed export licenses received were for PRC foreign nationals, followed by India (13%), Iran (7%), Russia and Germany (2% each) and UK (1%).
--While some applications languish, most deemed export licenses are processed in 40 days (down from 70+ days a few years ago).
-Next, Alex discussed the clarification of "use" technology. This was a result of the OIG report indicating there was confusion in this area and suggested that BIS change definition. BIS did not change the definition, but provided clarification in the FR notice. The confusion related to the connector "and" in the definition. Applies to "required" technology, which means that it is peculiarly responsible for item to be export controlled. The May 31, 2006 Federal Register notice states that all six elements are required for "use" requirement to apply.
--Technology that is publicly available is classified as EAR99 and is not subject to licensing requirement in most cases (exceptions are Cuban-born nationals or prohibited uses). Take a look at the Q&As on BIS website regarding "use" technology issues.
--In the May 31, 2006 FR notice, BIS reaffirmed existing policy with respect to third-country nationals, rather than using OIG’s suggestion of using country of birth. The existing policy is based on most recent established citizens or permanent residence. U.S. citizens, green card holders, are not subject to deemed export licensing requirements.
--Scope of "fundamental research" also remains unchanged. Fundamental research exclusion based on technology that is ordinarily shared with scientific community. May be instances where preexisting controlled technology may be used and therefore deemed export requirements may come into play. Certain controlled fundamental research that is protected (placing a box around the research or technology), may be subject to the EAR. See the BIS advisory opinion on patents on research.
--Deemed Export Advisory Committee (DEAC). Purpose of the DEAC is to base policy on collaboration with affected communities. DEAC met for first time last Thursday. Program is only chartered for one year and is expected to make its recommendation by next Fall. Will meet several times over the next few months to get various perspectives and comments. Meeting will be published in FR in advance.
3:50pm: Bill Bostic, chief of the Census Foreign Trade Division kicks things off with a joke -- a series of jokes really -- about taking on his new job. It's all too much to do it justice here, but Bostic definitely wins the prize for most amusing routine of the day.
3:53 FTD ombudsman Jerome Greenwell takes over.
3:55 Where else but at Update can an appeal to master the intricacies of routed export transactions rouse the crowd?
4:01 There were 1.1 million shipments in AES in July alone, representing 97% of the total (the rest were on paper -- not sure if this includes a factor for all the exports not reported at all). I'm guessing any halfway decent software engineer could write a simple program to find countless export control violations in this treasure trove of instantly searchable AES data within a matter of few days.
4:04 Census beginning an audit project starting January. They will concentrate on companies which are non-compliant Option 4 filers, those reporting late, and those with numerous unresolved fatal errors.
4:09 Census will give USPPIs one year of past AES data upon request for free (older than that there's a fee), which could be a useful audit tool. (Of course, you should be keeping copies of everything you submit to Census in the first place.)
4:11 Paul Newman, AES client rep...
4:14 AES Fatal Error = No ITN = No Export, capish?
4:17 Don't forget AES proof of filing citation. See FTSR Letter 168 for more.
4:29 Census benchmark for AES compliance is 95 percent. Be below that for three consecutive months and you should expect to get a phone call (or worse).
4:34 Census recommends you read Appendix A - Commodity Filing Response Messages from their friends at CBP.
4:38 Q: Can something be done about the slow ITN response on Fridays? A: Yes, try another day.
4:41 Q: What's are the proportions of filings by USPPI or agent? A: 60-65% by agent, the balance by USPPI.
4:42 Q: Who gets fatal error reports? A: Always goes to filer, not necessarily USPPI.
4:44 Q: Will FTD visits to companies be announced in advance? A: Yes.
4:50 Q: Provide an example of a fixed mode of transportation. A: A pipeline.
4:51 Q: What happens after your third voluntary disclosure within a year? A: You get penalized (is this really how it's going to work? three strikes and your out? - ed.)
4:52 Q: Will post-departure filing go away? A: Don't know
4:52 Q: Will Option 4 open up again to new filers? A: Don't know
4:54 Q: How long does Census keep AES records? A: The USPPI should have or be able to obtain (from their agent) the past five years worth.
4:55 Q: When will AES recognize UPS Supply Chain Solutions as an air carrier? A: See me, we'll try to help.
4:55 Q: How do I confirm that no forwarders are using my EIN without authorization? A: Request records from Census. Hope to automate this.
4:58 Q: In a routed transaction, what does the USPPI need to provide? A: Nine elements specified in FTSR -- EIN, ECCN, Schedule B, etc.
5:00 Q: I asked a manufacturer for a classification and they said "the forwarded never asked me for it and I didn't know I needed it", then I recently asked a very well known forwarded and asked them why they didn't put an ECCN on a shipment and they said "if the manufacturer doesn't provide it we assume they don't need to classify". A: What a mess, they need help.
5:01 Q: Will Census be publishing a list of mitigating factors in the regulations? A: There will be a document that discusses voluntary disclosures on our website.
5:03 Q: Will AES be ready for HTS revision in 2007? A: Yes.
5:05 Q: Our Miami-based forwarders won't provide bills of lading or airwaybills? A: Tell us who they are, we'll give them a call.
5:09 Q: When will Schedule B go away? What's wrong with HTS? A: I don't disagree, but some people are used to HTS, so we keep it.