Danger Zone: Tightening Export Controls

BIS maintains the Commerce Control List and can classify both civil and dual-use exports as 'subject to the authority of BIS.' 15 C.F.R. ' 774.1. However, various export control regulations overlap with the authority of BIS, creating a jurisdictional 'grey area.' For example, the Departments of Commerce and Treasury share jurisdiction over exports to embargoed countries such as Iran. The Treasury's Office of Foreign Assets Control (OFAC) administers trade and investment embargoes against Iran and other countries, while Commerce's BIS oversees licensing requirements for exports, reexports, and deemed exports under the Export Administration Regulations (EAR). Which department assumes the lead in an initial investigation often turns on which received the complaint or caught the violation.

A case in point is Commerce's civil action against Petrom GmbH International Trade for reexporting check valves, regulatory valves, and similar items to Iran without authorization and in violation of the Treasury's OFAC regulations. In the Matter of Petrom GmbH International Trade, No. 04-BIS-11, 2005 WL 1318688 (June 6, 2005). In addition to the jurisdictional overlap, the Petrom GmbH case is noteworthy for two reasons. First, it demonstrates that in addition to fines, civil sanctions can include the denial of export privileges. Petrom's privileges were suspended for 20 years. Second, strict liability can apply. The seminal case in this regard is Iran Air v. Kugelman, 996 F.2d 1253, 1258-59 (D.C. Cir. 1993), in which the D.C. Circuit affirmed Iran Air's strict liability for the unlicensed reexportation of U.S.-manufactured signal generators to Iran via Germany in violation of the EAR.

Other notable examples of recent civil enforcement actions include a $2.8-million fine that BIS imposed against WesternGeco LLC and related entities for the unlicensed export of underwater geophysical mapping equipment to China, and an $82,850 OFAC fine against Zimmer Dental, Inc. for the unlicensed export of dental equipment to Iran. Recent BIS criminal prosecutions have focused on items with potential military applications such as aircraft parts, night vision equipment, and ballistic helmets, as well as items with less direct military applications including graphite products, computer equipment, and tractor and forklift parts.

Criminal prosecutions for export violations feature a low mens rea threshold. In United States v. Shetterly, 971 F.2d 67, 73 (7th Cir. 1992), the defendant attempted to ship a Commerce-controlled microwave amplifier to Germany without authorization. The Seventh Circuit held that if a defendant is alleged to have 'knowingly' attempted to export a controlled commodity without securing the required license, the prosecution does not have to prove 'specific intent' to violate the regulatory scheme or even knowledge that a license was required at all. The Seventh Circuit arrived at this conclusion in part by distinguishing 'knowing' from 'willful' violations, which also exist in the EAR, require proof of 'specific intent' and carry a stiffer penalty.

An Odd Quirk

The authorizing statute for the EAR ' the Export Administration Act of 1979 ('1979 Act'), 50 U.S.C. App. 2401 ' has long since expired pursuant to its sunset provision. President Bush, like his predecessors, invoked his authority under the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. ' 1701, to 'reauthorize' the EAR and has done so annually so that BIS may carry on its work.

The resuscitation of the EAR by resort to a different statute has created significant litigation regarding the validity of ongoing enforcement actions under the EAR. At least one judge in the District of Columbia dismissed a criminal conspiracy charge on the ground that the IEEPA 'cannot confer authority on the President to promulgate regulations criminalizing conspiracies,' which neither IEEPA nor the original, lapsed 1979 Act criminalizes. United States v. Quinn, 401 F. Supp. 2d 80, 96-97 (D.D.C. 2005). Prosecutors did not appeal.

Since 2005, Congress has twice amended the IEEPA to impose stricter penalties for export violations. The USA Patriot Improvement and Reauthorization Act of 2005 raised civil penalties from $10,000 to $50,000 and prison terms from 10 years to 20 years. Pub. L. No. 109-177, 120 Stat. 192. In 2007, the International Emergency Economic Powers Enhancement Act increased civil fines to $250,000 or twice the amount of the violation at issue, whichever is greater, and increased criminal penalties from $50,000 to $1 million. Pub. L. No. 110-96, 121 Stat. 1011. Despite the recent increases in penalties, the Administration is proposing to raise them again.

On the Horizon

The Bush Administration last year sent Congress a proposed 'Export Enforcement Act' to amend the 1979 Act and extend it for five years. S. 2000, 110th Cong. (2007). The bill, currently before the Senate Committee on Banking, Housing, and Urban Affairs, would add new offenses to the list of prosecutable violations, expand the authority of BIS agents to conduct undercover and overseas investigations, and drastically increase criminal and civil penalties for violations as follows:

• Maximum corporate criminal fine: from $1 million to $5 million per violation or 10 times the value of the exports, whichever is greater.
• Maximum civil fine: from $250,000 to $500,000 per violation or twice the value of the exports, whichever is greater.

Avoiding the Landmines

The proposed Act's focus on enhancing the enforcement provisions of the 1979 Act should alert companies to the heightened importance of calibrating their export transactions to avoid violations. Although small and mid-sized companies are more affected by large fines, the potential consequences of violating export control laws ' including the denial of export privileges ' could put any exporter on the path to financial hardship. U.S. exporters need to redouble their attentiveness to compliance.

A traditional starting point is BIS's list of red flags. See U.S. Dep't of Commerce, Red Flag Indicators, available at http://www.bis.doc.gov/enforcement/redflags.htm. The list identifies common features of unlawful transactions. Periodic use of this and other BIS resources provides a check on whether company policies are up to date with the ever-changing regulations. The following best-practice tips will also help avoid stumbling into an export enforcement action:

• Create a strategy for compliance and charge a company officer with implementing it.
• Train employees, make compliance a significant component of performance, and create a bonus or merit-pay system to reward it.
• Foster a 'top-down' culture in which employees can raise concerns where uncertainty exists and obtain answers.
• Conduct periodic self-audits, and invite external evaluations to detect and fill gaps in compliance where they exist.

BIS's red flags and these tips can help companies focus on export regulations and make compliance a priority. Companies without compliance strategies are flying blindly into a highly dangerous new era.

Jeffrey T. Green ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Washington, DC, office of Sidley Austin LLP and a member of the firm's White Collar Group. Robert Torresen ([email protected]) is a partner at the firm and a member of its International Trade/Arbitration Group, where A'ssatou Diop ([email protected]) is an associate.

Export controls are a morass of overlapping jurisdictions dotted with strict liability and criminal landmines. Worse, criminal and civil penalties have been severely ratcheted up recently, and more appear on the horizon. An October 2004 article by George Prettyman and Gregory Wallace in this newsletter described the regulatory regime governing 'dual-use' products. But even since 2004, prosecution resources have swollen and priorities have shifted markedly. As part of its recently established National Security Division, the Department of Justice (DOJ) appointed a National Export Control Coordinator tasked with building the DOJ's capacity to investigate and prosecute export violations. Specifically, the Coordinator is to create greater synergy between the DOJ and other export enforcement and licensing agencies, oversee prosecutorial training for U.S. Attorneys, and monitor the progress of their export control prosecutions nationwide. For their part, U.S. Attorneys have increased funding and implemented new legal tools (including sending agents overseas or having them work 'undercover') to enable them to carry out their mandate in support of the Coordinator's work.

What's Covered?

Exports are defined broadly. They include items and services transferred by any means, including electronically, to a foreign destination or a foreign national in the United States. Most items can be exported without a license. Controlled items fall under two categories: 1) defense articles and services, and 2) civil and 'dual-use' items. The first category falls under the purview of the Department of State, which maintains the U.S. Munitions List of regulated export items. Dual-use exports under the second category are also regulated for 'national security reasons,' 15 C.F.R.
' 738.2, because they have both civil and military applications. Such items include high-speed cameras, metal alloys, restraint devices, and certain types of computers and software. The principal regulatory agency for these items, however, is the Department of Commerce, which, through its Bureau of Industry and Security (BIS), investigates unlawful exports of civil and dual-use items.

BIS maintains the Commerce Control List and can classify both civil and dual-use exports as 'subject to the authority of BIS.' 15 C.F.R. ' 774.1. However, various export control regulations overlap with the authority of BIS, creating a jurisdictional 'grey area.' For example, the Departments of Commerce and Treasury share jurisdiction over exports to embargoed countries such as Iran. The Treasury's Office of Foreign Assets Control (OFAC) administers trade and investment embargoes against Iran and other countries, while Commerce's BIS oversees licensing requirements for exports, reexports, and deemed exports under the Export Administration Regulations (EAR). Which department assumes the lead in an initial investigation often turns on which received the complaint or caught the violation.

A case in point is Commerce's civil action against Petrom GmbH International Trade for reexporting check valves, regulatory valves, and similar items to Iran without authorization and in violation of the Treasury's OFAC regulations. In the Matter of Petrom GmbH International Trade, No. 04-BIS-11, 2005 WL 1318688 (June 6, 2005). In addition to the jurisdictional overlap, the Petrom GmbH case is noteworthy for two reasons. First, it demonstrates that in addition to fines, civil sanctions can include the denial of export privileges. Petrom's privileges were suspended for 20 years. Second, strict liability can apply. The seminal case in this regard is Iran Air v. Kugelman , 996 F.2d 1253, 1258-59 (D.C. Cir. 1993), in which the D.C. Circuit affirmed Iran Air's strict liability for the unlicensed reexportation of U.S.-manufactured signal generators to Iran via Germany in violation of the EAR.

Other notable examples of recent civil enforcement actions include a $2.8-million fine that BIS imposed against WesternGeco LLC and related entities for the unlicensed export of underwater geophysical mapping equipment to China, and an $82,850 OFAC fine against Zimmer Dental, Inc. for the unlicensed export of dental equipment to Iran. Recent BIS criminal prosecutions have focused on items with potential military applications such as aircraft parts, night vision equipment, and ballistic helmets, as well as items with less direct military applications including graphite products, computer equipment, and tractor and forklift parts.

Criminal prosecutions for export violations feature a low mens rea threshold. In United States v. Shetterly , 971 F.2d 67, 73 (7th Cir. 1992), the defendant attempted to ship a Commerce-controlled microwave amplifier to Germany without authorization. The Seventh Circuit held that if a defendant is alleged to have 'knowingly' attempted to export a controlled commodity without securing the required license, the prosecution does not have to prove 'specific intent' to violate the regulatory scheme or even knowledge that a license was required at all. The Seventh Circuit arrived at this conclusion in part by distinguishing 'knowing' from 'willful' violations, which also exist in the EAR, require proof of 'specific intent' and carry a stiffer penalty.

An Odd Quirk

The authorizing statute for the EAR ' the Export Administration Act of 1979 ('1979 Act'), 50 U.S.C. App. 2401 ' has long since expired pursuant to its sunset provision. President Bush, like his predecessors, invoked his authority under the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. ' 1701, to 'reauthorize' the EAR and has done so annually so that BIS may carry on its work.

The resuscitation of the EAR by resort to a different statute has created significant litigation regarding the validity of ongoing enforcement actions under the EAR. At least one judge in the District of Columbia dismissed a criminal conspiracy charge on the ground that the IEEPA 'cannot confer authority on the President to promulgate regulations criminalizing conspiracies,' which neither IEEPA nor the original, lapsed 1979 Act criminalizes. United States v. Quinn , 401 F. Supp. 2d 80, 96-97 (D.D.C. 2005). Prosecutors did not appeal.

Since 2005, Congress has twice amended the IEEPA to impose stricter penalties for export violations. The USA Patriot Improvement and Reauthorization Act of 2005 raised civil penalties from $10,000 to $50,000 and prison terms from 10 years to 20 years. Pub. L. No. 109-177, 120 Stat. 192. In 2007, the International Emergency Economic Powers Enhancement Act increased civil fines to $250,000 or twice the amount of the violation at issue, whichever is greater, and increased criminal penalties from $50,000 to $1 million. Pub. L. No. 110-96, 121 Stat. 1011. Despite the recent increases in penalties, the Administration is proposing to raise them again.

On the Horizon

The Bush Administration last year sent Congress a proposed 'Export Enforcement Act' to amend the 1979 Act and extend it for five years. S. 2000, 110th Cong. (2007). The bill, currently before the Senate Committee on Banking, Housing, and Urban Affairs, would add new offenses to the list of prosecutable violations, expand the authority of BIS agents to conduct undercover and overseas investigations, and drastically increase criminal and civil penalties for violations as follows:

• Maximum corporate criminal fine: from $1 million to $5 million per violation or 10 times the value of the exports, whichever is greater.
• Maximum civil fine: from $250,000 to $500,000 per violation or twice the value of the exports, whichever is greater.

Avoiding the Landmines

The proposed Act's focus on enhancing the enforcement provisions of the 1979 Act should alert companies to the heightened importance of calibrating their export transactions to avoid violations. Although small and mid-sized companies are more affected by large fines, the potential consequences of violating export control laws ' including the denial of export privileges ' could put any exporter on the path to financial hardship. U.S. exporters need to redouble their attentiveness to compliance.

A traditional starting point is BIS's list of red flags. See U.S. Dep't of Commerce, Red Flag Indicators, available at http://www.bis.doc.gov/enforcement/redflags.htm. The list identifies common features of unlawful transactions. Periodic use of this and other BIS resources provides a check on whether company policies are up to date with the ever-changing regulations. The following best-practice tips will also help avoid stumbling into an export enforcement action:

• Create a strategy for compliance and charge a company officer with implementing it.
• Train employees, make compliance a significant component of performance, and create a bonus or merit-pay system to reward it.
• Foster a 'top-down' culture in which employees can raise concerns where uncertainty exists and obtain answers.
• Conduct periodic self-audits, and invite external evaluations to detect and fill gaps in compliance where they exist.

BIS's red flags and these tips can help companies focus on export regulations and make compliance a priority. Companies without compliance strategies are flying blindly into a highly dangerous new era.

Jeffrey T. Green ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Washington, DC, office of Sidley Austin LLP and a member of the firm's White Collar Group. Robert Torresen ([email protected]) is a partner at the firm and a member of its International Trade/Arbitration Group, where A'ssatou Diop ([email protected]) is an associate.