Prosecutions for Violation of Export Controls on Dual-Use Items

Since 9/11, the government has stepped up the enforcement of laws and regulations relating to the control of exports, especially so-called “dual-use” items that have both military and non-military applications. Department of Commerce policy “seeks to keep terrorists and other criminals from possessing sensitive technologies — in essence, to prevent export violations before they occur,” according to Julie L. Myers, Assistant Secretary of Commerce for Export Enforcement.

Typically, dual-use items include both high-tech goods and software and ordinary goods, such as fertilizer. Criminal penalties for violations are harsh, especially if the violation affects national security. For practitioners, the dual-use laws present an unusual thicket of statutes, regulations and executive orders.

The Statutory and Regulatory Regime

The source statute is the Export Administration Act of 1979, which has expired. See 50 U.S.C. App. 2401-2420. Pursuant to the EAA, the Bureau of Industry and Security (BIS) of the Department of Commerce promulgated the Export Administration Regulations (EAR), 15 C.F.R. ” 730-774, which are now authorized by executive order under the International Emergency Powers Act (IEEPA), 50 U.S.C. '' 1701-06.

The EAR regulate dual-use items (commodities, technology and software) and are principally concerned with exports. However, other government agencies have parallel export licensing responsibilities for items other than dual-use goods. The Department of State regulates defense articles and services, and the Department of Energy and the Nuclear Regulatory Commission regulate exports of nuclear materials. The Treasury Department controls exports to countries such as Iran and Cuba that are the target of broad trade embargoes and economic sanctions. Criminal cases are investigated by special agents of the BIS or Customs Service and Border Patrol and are prosecuted by the U.S. Attorneys' Offices.

The Application of the EAR

The core provisions concern exports from the United States. However, “export” is anything but straightforward and can apply to the re-export abroad of dual-use items which originated in the United States and to the release of technology or software to a foreign national within the United States, such as through a demonstration or oral briefing (known as a “deemed export”).

In general terms, absent a license from the Department of Commerce, the EAR prohibits, inter alia, exports of items specifically listed on a Commerce Control List (CCL); exports to embargoed countries, such as North Korea; exports to entities listed on the so called Entities List even if such entities are in a non-embargoed country; exports with prohibited end uses, such as the development of nuclear weapons; and exporter conduct that will support a proliferation project.

A person or organization that violates the EAR risks significant criminal, administrative, and civil penalties. Criminal convictions require either a “knowing” or a “willful” violation. For “knowingly” violating the regulations, the maximum corporate criminal fine is the greater of $50,000 or five times the value of the export involved; for “willfully” violating the EAR, the maximum is the greater of $1 million or five times the export value. Individual prison sentences for willful violations can be a maximum of 10 years; the Sentencing Guidelines provide for a harsh 22-level increase in the base fine if the offense violates national security or nuclear proliferation controls. Administrative sanctions can include suspension of export privileges (through a denial order) and even outright revocation of such privileges.

'Know Your Customer'

Many EAR requirements depend on knowledge of the end-use, end-user, ultimate destination or other facts relating to an export of a dual-use item. Under the EAR, an exporter can be criminally prosecuted for ignoring so-called “red flags” that the export is inappropriate, such as when:

• the customer or purchasing agent is reluctant to provide information about the end use of a product;
• the product is incompatible with the technical level of the country to which it is being shipped;
• the customer has little or no business background and is willing to pay cash;
• the customer is unfamiliar with the product's performance characteristics but still wants the product;
• the customer declines routine installation, training or mainentance services;
• delivery dates are vague, or deliveries are planned for unusual, out-of-the way destinations;
• a freight forwarding firm is listed as the product's final destination, or the shipping route or packaging is abnormal for the product and destination;
• the buyer, when questioned, is evasive or unclear about whether the purchased product is for domestic use, export, or re-export.

If such flags are raised, the exporter has a duty to investigate suspicious circumstances, including determining the end-use, end-user or ultimate country of destination. As stated in a BIS guidance, the exporter “can rely upon representations from the customer and repeat them in documents it files unless red flags oblige the exporter to take verification steps.” 15 C.F.R. Part 732 Supp. 3.

An exporter cannot look the other way by avoiding or cutting off the flow of information that it may receive in the ordinary course of business. Instructing a sales force, for example, not to discuss end-use or end-user with a customer, on a theory that “what you don't know can't hurt you” will only make matters worse. An affirmative policy of avoiding “bad” information will not insulate a company from liability and, in fact, may be considered an aggravating circumstance in an administrative enforcement proceeding or evidence of “willful avoidance” in a criminal one.

Compliance with the 'Dual-Use' Regulations

More than 96% of US exporters are small- or mid-sized companies, two-thirds of which have fewer than 20 employees. These companies account for nearly 30% of all US exports. Most enforcement actions have been brought against such companies, which lack resources and expertise to develop compliance programs. The following are several low-cost but effective compliance measures that small companies can adopt:

• Circulate a statement by senior management that compliance with export regulations is a high priority;
• Designate a high-level officer or employee with adequate background, training and authority to ensure compliance;
• Create written export compliance procedures and distribute them to all employees involved in export transactions;
• Conduct regular training sessions for all employees and agents involved in exports with particular emphasis on “red flags”;
• Establish a procedure to obtain written representations from the forwarding agent or customer as to the end-user and end-use of the exported item; and
• Use an outside consultant to periodically review the company's export compliance program.

The BIS has developed tools for exporters to use in implementing and strengthening compliance systems, called the “Export Management Systems,” which contain a useful checklist of compliance procedures. See www.bis.doc.gov. BIS also sponsors training across the country, operates a help desk in Washington, DC and in the Western Regional Office, responds to inquiries about product classification, and provides advisory opinions.

In 2002, the Commerce Department announced that corporations will be held accountable for violations committed by companies they acquire. A company now must scrutinize the export control practices of any acquired business to avoid buying substantial liability along with the new assets.

Defending Dual-Use Prosecutions

Both prosecutors and defense attorneys find themselves in a confusing and contradictory criminal scheme. For example, a company has been prosecuted for exporting accelerometers (used in everyday applications such as automobile crash testing) and high-school physics laboratory level measuring instruments to Pakistan just when the Nuclear Regulatory Commission permitted license-free exports to Pakistan of small amounts of deuterium — a nuclear material that can be used to boost the yield of a nuclear weapon.

Similarly, companies and individuals have been prosecuted for exporting dual-use items without a license to entities on the CCL, even though identical items could be ordered by these companies online from competitors outside the United States. Indeed, so glaring are the inconsistencies that both the Clinton and Bush Administrations have supported proposed legislation that would allow the export of dual-use items without a license if such items are “readily available” from a foreign competitor.

These inconsistencies do not create legal defenses. The defense lawyer advising a company facing possible criminal prosecution for illegal exports of dual-use items should consider:

• First, if the violation is not yet known to law enforcement officials, the company has the option to make a voluntary disclosure in exchange for leniency. However, unlike the Antitrust Division's leniency program, the Department of Justice has no leniency program for export violations. Thus, any leniency decision by the Department of Justice will be based on the principles set forth in the Thompson Memorandum. Even under the BIS Penalty Enforcement Guidelines, which give “great weight” to disclosure, companies have been administratively fined — in some cases harshly — notwithstanding their voluntary disclosure of an export violation.
• Second, the attorney will need an expert familiar with the maze of laws and regulations, many of which involve highly technical product specifications.
• Third, the defense attorney should consider an investigation in the country to which the goods were shipped to develop facts that can rebut the government's claim as to end use or end user or at least demonstrate that the company's conduct at most was negligent.

Finally, aside from developing evidence to negate knowledge or willfulness or dispute end use or end-user allegations, a defense lawyer should identify anomalies in the prosecution's case and the regulations. For example, because of the constant changes to the Entities Lists, prosecutors may not realize that their theory of the case is based on an export to an entity that, since the export, was removed from the list. While such removal is not a legal defense to criminal charges, it should favorably influence the prosecutor's decisions in charging and plea-bargaining.

Since 9/11, the government has stepped up the enforcement of laws and regulations relating to the control of exports, especially so-called “dual-use” items that have both military and non-military applications. Department of Commerce policy “seeks to keep terrorists and other criminals from possessing sensitive technologies — in essence, to prevent export violations before they occur,” according to Julie L. Myers, Assistant Secretary of Commerce for Export Enforcement.

Typically, dual-use items include both high-tech goods and software and ordinary goods, such as fertilizer. Criminal penalties for violations are harsh, especially if the violation affects national security. For practitioners, the dual-use laws present an unusual thicket of statutes, regulations and executive orders.

The Statutory and Regulatory Regime

The source statute is the Export Administration Act of 1979, which has expired. See 50 U.S.C. App. 2401-2420. Pursuant to the EAA, the Bureau of Industry and Security (BIS) of the Department of Commerce promulgated the Export Administration Regulations (EAR), 15 C.F.R. ” 730-774, which are now authorized by executive order under the International Emergency Powers Act (IEEPA), 50 U.S.C. '' 1701-06.

The EAR regulate dual-use items (commodities, technology and software) and are principally concerned with exports. However, other government agencies have parallel export licensing responsibilities for items other than dual-use goods. The Department of State regulates defense articles and services, and the Department of Energy and the Nuclear Regulatory Commission regulate exports of nuclear materials. The Treasury Department controls exports to countries such as Iran and Cuba that are the target of broad trade embargoes and economic sanctions. Criminal cases are investigated by special agents of the BIS or Customs Service and Border Patrol and are prosecuted by the U.S. Attorneys' Offices.

The Application of the EAR

The core provisions concern exports from the United States. However, “export” is anything but straightforward and can apply to the re-export abroad of dual-use items which originated in the United States and to the release of technology or software to a foreign national within the United States, such as through a demonstration or oral briefing (known as a “deemed export”).

In general terms, absent a license from the Department of Commerce, the EAR prohibits, inter alia, exports of items specifically listed on a Commerce Control List (CCL); exports to embargoed countries, such as North Korea; exports to entities listed on the so called Entities List even if such entities are in a non-embargoed country; exports with prohibited end uses, such as the development of nuclear weapons; and exporter conduct that will support a proliferation project.

A person or organization that violates the EAR risks significant criminal, administrative, and civil penalties. Criminal convictions require either a “knowing” or a “willful” violation. For “knowingly” violating the regulations, the maximum corporate criminal fine is the greater of $50,000 or five times the value of the export involved; for “willfully” violating the EAR, the maximum is the greater of $1 million or five times the export value. Individual prison sentences for willful violations can be a maximum of 10 years; the Sentencing Guidelines provide for a harsh 22-level increase in the base fine if the offense violates national security or nuclear proliferation controls. Administrative sanctions can include suspension of export privileges (through a denial order) and even outright revocation of such privileges.

'Know Your Customer'

Many EAR requirements depend on knowledge of the end-use, end-user, ultimate destination or other facts relating to an export of a dual-use item. Under the EAR, an exporter can be criminally prosecuted for ignoring so-called “red flags” that the export is inappropriate, such as when:

• the customer or purchasing agent is reluctant to provide information about the end use of a product;
• the product is incompatible with the technical level of the country to which it is being shipped;
• the customer has little or no business background and is willing to pay cash;
• the customer is unfamiliar with the product's performance characteristics but still wants the product;
• the customer declines routine installation, training or mainentance services;
• delivery dates are vague, or deliveries are planned for unusual, out-of-the way destinations;
• a freight forwarding firm is listed as the product's final destination, or the shipping route or packaging is abnormal for the product and destination;
• the buyer, when questioned, is evasive or unclear about whether the purchased product is for domestic use, export, or re-export.

If such flags are raised, the exporter has a duty to investigate suspicious circumstances, including determining the end-use, end-user or ultimate country of destination. As stated in a BIS guidance, the exporter “can rely upon representations from the customer and repeat them in documents it files unless red flags oblige the exporter to take verification steps.” 15 C.F.R. Part 732 Supp. 3.

An exporter cannot look the other way by avoiding or cutting off the flow of information that it may receive in the ordinary course of business. Instructing a sales force, for example, not to discuss end-use or end-user with a customer, on a theory that “what you don't know can't hurt you” will only make matters worse. An affirmative policy of avoiding “bad” information will not insulate a company from liability and, in fact, may be considered an aggravating circumstance in an administrative enforcement proceeding or evidence of “willful avoidance” in a criminal one.

Compliance with the 'Dual-Use' Regulations

More than 96% of US exporters are small- or mid-sized companies, two-thirds of which have fewer than 20 employees. These companies account for nearly 30% of all US exports. Most enforcement actions have been brought against such companies, which lack resources and expertise to develop compliance programs. The following are several low-cost but effective compliance measures that small companies can adopt:

• Circulate a statement by senior management that compliance with export regulations is a high priority;
• Designate a high-level officer or employee with adequate background, training and authority to ensure compliance;
• Create written export compliance procedures and distribute them to all employees involved in export transactions;
• Conduct regular training sessions for all employees and agents involved in exports with particular emphasis on “red flags”;
• Establish a procedure to obtain written representations from the forwarding agent or customer as to the end-user and end-use of the exported item; and
• Use an outside consultant to periodically review the company's export compliance program.

The BIS has developed tools for exporters to use in implementing and strengthening compliance systems, called the “Export Management Systems,” which contain a useful checklist of compliance procedures. See www.bis.doc.gov. BIS also sponsors training across the country, operates a help desk in Washington, DC and in the Western Regional Office, responds to inquiries about product classification, and provides advisory opinions.

In 2002, the Commerce Department announced that corporations will be held accountable for violations committed by companies they acquire. A company now must scrutinize the export control practices of any acquired business to avoid buying substantial liability along with the new assets.

Defending Dual-Use Prosecutions

Both prosecutors and defense attorneys find themselves in a confusing and contradictory criminal scheme. For example, a company has been prosecuted for exporting accelerometers (used in everyday applications such as automobile crash testing) and high-school physics laboratory level measuring instruments to Pakistan just when the Nuclear Regulatory Commission permitted license-free exports to Pakistan of small amounts of deuterium — a nuclear material that can be used to boost the yield of a nuclear weapon.

Similarly, companies and individuals have been prosecuted for exporting dual-use items without a license to entities on the CCL, even though identical items could be ordered by these companies online from competitors outside the United States. Indeed, so glaring are the inconsistencies that both the Clinton and Bush Administrations have supported proposed legislation that would allow the export of dual-use items without a license if such items are “readily available” from a foreign competitor.

These inconsistencies do not create legal defenses. The defense lawyer advising a company facing possible criminal prosecution for illegal exports of dual-use items should consider:

• First, if the violation is not yet known to law enforcement officials, the company has the option to make a voluntary disclosure in exchange for leniency. However, unlike the Antitrust Division's leniency program, the Department of Justice has no leniency program for export violations. Thus, any leniency decision by the Department of Justice will be based on the principles set forth in the Thompson Memorandum. Even under the BIS Penalty Enforcement Guidelines, which give “great weight” to disclosure, companies have been administratively fined — in some cases harshly — notwithstanding their voluntary disclosure of an export violation.
• Second, the attorney will need an expert familiar with the maze of laws and regulations, many of which involve highly technical product specifications.
• Third, the defense attorney should consider an investigation in the country to which the goods were shipped to develop facts that can rebut the government's claim as to end use or end user or at least demonstrate that the company's conduct at most was negligent.

Finally, aside from developing evidence to negate knowledge or willfulness or dispute end use or end-user allegations, a defense lawyer should identify anomalies in the prosecution's case and the regulations. For example, because of the constant changes to the Entities Lists, prosecutors may not realize that their theory of the case is based on an export to an entity that, since the export, was removed from the list. While such removal is not a legal defense to criminal charges, it should favorably influence the prosecutor's decisions in charging and plea-bargaining.