© Willcox & Savage, P.C. 2013 1 OWIT Hampton Roads INTRODUCTION TO EXPORT CONTROLS: ISSUE SPOTTING FOR TRADE PROFESSIONALS Presented by Leonard L. Fleisig,

1 © Willcox & Savage, P.C. 2013

OWIT Hampton Roads

INTRODUCTION TO EXPORT CONTROLS:ISSUE SPOTTING FOR

TRADE PROFESSIONALS

Presented byPresented by

Leonard L. Fleisig, Esq.Leonard L. Fleisig, Esq.PartnerPartner

February 12, 2013


Introduction

• I never make stupid mistakes. Only very, very clever ones. John Peel

• Mistakes are part of the dues one pays for a full life. Sophia Loren.

© Willcox & Savage, P.C. 2011

The Three Keys


1. Know Your Buyer

• Office of Foreign Assets Control– Specially Designated Nationals and Blocked Persons List– Specially Designated Narcotics Traffickers– Specially Designated Terrorists– Terrorism List Governments– Foreign Terrorist Organizations– Weapons of Mass Destruction Parties

• Bureau of Industry & Security– Denied Persons List and Entity List

• Office of Defense Trade Control– Debarred Parties List

• There is now a unified list.


Why?

Ace Systems Inc. (Ace) has agreed to pay a civil penalty to settle allegations that the company attempted to export items to Mayrow General Trading in Dubai, UAE. BIS alleged that Ace, located in Gainesville, Ga., attempted to violate the General Order by acting to export dialogic voice cards to Mayrow in Dubai, UAE without the required license. Ace tendered ten cards to its freight forwarder with instructions to export them to Mayrow. The BIS special agents intervened and the cards never reached their destination. The maximum civil penalty in this case was $50,000 pursuant to the USA PATRIOT Act Improvement and Reauthorization Act of 2005.


2. Know Your Product

• Do you need an export license?– Export Control Classification Number (ECCN)– Commerce Control List (CCL)– Dual Use Product?

• Items that can be used both in military and other strategic uses (e.g. nuclear) and commercial applications.


Why?

• ITT Corp.– $100 million penalty for exports of military night vision

technology to China, Singapore, and the U.K.

• Novamet– The Violation: On 32 occasions between April 2003 and

January 2008, New Jersey-based Novamet Specialty Products Corporation (Novamet) exported nickel powders without the required licenses to the People’s Republic of China, Singapore, Taiwan, Thailand, India, Israel, the Dominican Republic and Mexico. Nickel powders are controlled for nuclear non-proliferation reasons.

– The Penalty: On October 1, 2009, Novamet agreed to pay a $700,000 civil penalty, and to complete an internal export compliance audit and submit the results of that audit to BIS.


3. Know Your Destination

• Balkans

• Belarus

• Burma (Myanmar)

• Cuba

• Iran

• Liberia

• North Korea

• Sudan

• Syria


Why?

• Stena Bulk LLC– $426,486 for violation of Sudan sanctions

• Minxia Non-Ferrous Metals, Inc.– $1,198,000 for violations of the Cuban Assets

sanctions

• A.G. Edwards & Sons– $122,358.35 for violation of Narcotics

Trafficking sanctions


Questions

• What is being exported?

• Where is it going?– Including transshipments

• Who will receive it?

• What will they do with it?


Dual Use Items

• Items that have both commercial and military or proliferation applications – but purely commercial items without an obvious military use are also subject to the EAR.


The Export Control Classification Number and the Commerce Control List

• Commerce Control List Categories– 0 = Nuclear materials,

facilities and equipment (and miscellaneous items)1 = Materials, Chemicals, Microorganisms and Toxins2 = Materials Processing3 = Electronics4 = Computers5 = Telecommunications and Information Security6 = Sensors and Lasers7 = Navigation and Avionics8 = Marine9 = Propulsion Systems, Space Vehicles, and Related Equipment

• Five Product Groups– A. Systems, Equipment

and ComponentsB. Test, Inspection and Production EquipmentC. MaterialD. SoftwareE. Technology


Cattle prods?

• Yes. Cattle prods.» The Violation: Syrvet, Inc., a veterinary supply

wholesaler made sixteen unlicensed exports of electric cattle prods to Mexico, South Africa, Dominican Republic, Colombia and El Salvador. The Penalty: On December 24, 2008, Syrvet, Inc. agreed to pay a $250,000 civil penalty.


There is help

• http://www.bis.doc.gov/licensing/cclrequestguidance.html

• http://www.bis.doc.gov/snap/index.htm


The License Process

• Most license requests are granted– But you cannot argue later that a license

would have been granted if you applied.


What to Look Out For: Red Flags

• The customer or purchasing agent is reluctant to offer information about the end-use of a product.

• The product’s capabilities do not fit the buyer’s line of business. For example, a small bakery places an order for several sophisticated lasers.

• The product ordered is incompatible with the technical level of the country to which the product is being shipped. For example, semi-conductor manufacturing equipment to a country without an electronics industry.

• The customer has little or no business background.


What to Look Out For: Red Flags

• The customer is willing to pay cash for an expensive item.

• The customer is unfamiliar with the product’s performance characteristics but still wants the product.

• Routine installation, training or maintenance services are declined by the buyer.

• Delivery dates are vague, or deliveries are planned for out-of-the way destinations.

• A freight forwarding firm is listed as the product’s final destination.

• The shipping route is abnormal for the product and destination.


Red Flags 2

• Packaging is inconsistent with the stated method of shipment or destination.

• When questioned, the buyer is evasive or unclear about whether the purchased product is for domestic use, export or re-export.

• If Red Flags are raised – you cannot rely on the buyer’s representations without more.

• Do not self-blind. Affirmative steps to avoid unpleasant information does not insulate you from liability.


So when mistakes happen . . .

• And they can happen for any number of reasons:– The sales/compliance disconnect;– Simple oversight;– Failure to spot a red flag;– Shipment while license application pending.

What do you do?????


Voluntary Disclosure

• OFAC, BIS, and DDTC know that violations can inadvertently occur.

• They encourage voluntary disclosures and act accordingly.

• A disclosure pursuant to a compliance plan is an indication of good corporate governance.


VSDs

• Largest share of DDTC and BIS enforcement caseload is from VSDs.

• They do mitigate fines and penalties.

• Failure to self-report will put different penalty dynamics and parameters in play.

• Generally speaking: disclosure represents corporate self-interest because it reduces risk level.


Example 1

• VSD to BIS– Submersible/Libya/Disclosure/Investigation.– Result: Warning letter, no fine, and ongoing

consultation with BIS about product line


Example 2

• VSD to OFAC– Petrochemicals from Belarus to Houston– Shipper added to OFAC list while goods in

transit• Takeaway: these lists are updated. Check them

regularly• Warning letter (and emergency license application)

– But for the VSD the goods could have been seized at the port or the vessel could have been denied entry.


Likely outcomes?

• Warning or no-action letter

• Audit/investigation

• Seizure/forfeiture of goods

• Settlement

• Consent agreement

• Full civil or criminal investigation


Keep in Mind

• VSDs and cooperation will minimize your exposure.– This is not litigation. The dynamics are

different.


A word to 3PLs

• From BIS• Freight forwarders or other

agents acting on behalf of the principal parties are responsible for their actions, including the representations they make by signing an export declaration or other export control document.

• In August 2009, DHL agreed to pay a civil penalty of $9,444,744 and conduct external audits covering exports to Iran, Syria and Sudan from March 2007 through December 2011.

• Between 2000 and 2004, Elite International Transportation, Inc. (“Elite”), a freight forwarder in Houston, Texas, misrepresented the licensing authority on Shipper’s Export Declarations (SEDs). Elite filed SEDs on behalf of an exporter, Equistar Chemicals LP (“Equistar”), of Houston, Texas, stating that exports of the chemical Triethanolomine to Mexico were authorized pursuant to NLR (“No License Required”), when, in fact, a license was required for the exports. Elite agreed to pay a $156,000 civil penalty. In a related matter, Equistar agreed to a civil penalty of $39,650. Equistar had filed a Voluntary Self-Disclosure (VSD) with BIS in 2004.


Compliance Planning

• Don’t buy a Lexus if you only need a Honda;

• Make sure it is tailored to your needs; and

• Make sure that it is a workable document that you can actually put into use.

• Why?– Cost ≠ value.

• Sensory overload makes mistakes easier to come by.

– The only thing worse than not having a compliance plan is having one and not living up to it.

© Willcox & Savage, P.C. 2013

Leonard L. FleisigWillcox & Savage, P.C.

440 Monticello Avenue, Suite 2200Norfolk, VA 23510-2243

757-628-5605www.willcoxsavage.com

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© Willcox & Savage, P.C. 2013 1 OWIT Hampton Roads INTRODUCTION TO EXPORT CONTROLS: ISSUE SPOTTING FOR TRADE PROFESSIONALS Presented by Leonard L. Fleisig,