As 2012 draws to a close, many companies involved in exporting are conducting internal audits or other reviews to ensure that they begin the next year with effective export compliance programs. A review of export enforcement actions over the course of the year is a good reminder of the dangers of gaps in compliance programs and the potential for significant penalties for violations. They also serve as a lesson for exporters about what they should and shouldn’t do.
Enforcement Actions Under the Export Administration Regulations
As often stated, freight forwarders and logistics providers are not immune to export violations. Even so, every year freight forwarders and logistics providers are charged with various types of export violations. On March 8, the Bureau of Industry and Security (BIS) published a settlement agreement with RIM Logistics, Ltd. (RIM), a logistics provider based in Illinois, for two violations of the Export Administration Regulations (EAR). RIM, in its capacity as a freight forwarder, participated in the export and attempted export of diesel engine parts classified as EAR99 on the Commerce Control List (CCL) to Syria via the United Arab Emirates without the required licenses. RIM received a $50,000 penalty for the violations.
In another example, on July 24, BIS published a settlement agreement with Kesco Shipping Corporation (Kesco) and Multi-link Container Line, LLC (Multi-link) for one violation of the EAR. Kesco and Multi-link arranged for the export of scrap steel, classified as EAR99 on the CCL, to the People’s Steel Mills in Pakistan without the required license. The People’s Steel Mills is listed on BIS’s Entity List. Kesco and Multi-link received a $28,000 penalty for the violation.
Companies often mistakenly assume that violations of one export-control regime are isolated from other regimes, or underestimate the impact that violations can have on the entirety of their export operations. On July 27, BIS published an order denying export privileges for Universal Industries Limited, Inc. (Universal). In 2011, Universal was convicted of violating the Arms Export Control Act (AECA) for knowingly attempting to export military aircraft parts, items which are designated as defense articles on the United States Munitions List (USML), to Singapore without the required licenses. Universal received a year of probation, a $1,000 fine and a special assessment of $400. Based on Universal’s conviction, BIS issued an order suspending the company’s export privileges for three years, and revoked all licenses issued under the EAR in which Universal had an interest.
We also often see companies ignore or underrate the risk of potential violations posed by their foreign branches, subsidiaries or other foreign entities. On July 24, BIS published a settlement agreement with Technetics Group Singapore Pte. Ltd. (Technetics Singapore) for five violations of the EAR. Technetics Singapore released manufacturing instructions for edge-welded metal bellows used in semiconductor manufacturing equipment to two Chinese nationals working for Technetics in Singapore, without the required licenses. The technology was exported from the U.S. pursuant to license exception Technology and Software Under Restriction (TSR). License exception TSR permits the export and re-export of technology and software controlled on the CCL for reasons of national security only. The consignee must give written assurance prior to the usage of the exception. As such, Technetics Singapore’s Director of Operations signed a letter of assurance on behalf of the company stating that Technetics Singapore received the technology pursuant to license exception TSR, and would not disclose or make the technology available to foreign nationals of certain countries, including China. In addition, Technetics Singapore sold edge-welded metal bellows valued at $20,625 to a customer in China without the required license. The bellows were controlled under the EAR as a foreign-manufactured direct product of U.S.-origin technology. Technetics Singapore received a $110,000 penalty. Additionally, the company was ordered to complete an audit of its export controls compliance program in conjunction with its parent company, Technetics Group Daytona, Inc. The companies are required to submit the audit results to BIS no later than 15 months from the date of BIS’s order. It is important to note that in this case, Technetics Singapore filed a Voluntary Self-Disclosure (VSD) with BIS in connection with the violations. Without any mitigation weight afforded to Technetics Singapore under the VSD, the penalties for the violations could have been much higher.
Exporters should be aware that they have an obligation to conduct due diligence throughout the life of an export transaction, and that a “knowing” violation doesn’t always require actual, concrete knowledge of the specifics of a violation. “Willful blindness” or a “head-in-the-sand” approach can also result in a “knowing” violation if the exporter “should have known” of the potential for a violation. On February 14, PRC Laser Corporation (PRC Laser) entered into a settlement agreement with BIS for one knowing violation of the EAR. In 2010, PRC Laser sold an industrial laser valued at $32,000 to Iran via the United Arab Emirates without the required license and with knowledge that a violation was occurring or about to occur. BIS stated that no authorization was sought for the transaction even though PRC Laser “knew or had reason to know” that the laser was intended for supply, transshipment or re-exportation to Iran. PRC Laser arranged for the sale of the laser to Impex Intercontinental Trading, LLC (Impex) in the United Arab Emirates. PRC Laser requested the name and address of the laser’s ultimate end-user from the agent brokering the sale on three occasions, and also informed the agent that PRC Laser needed the end-user information because it could not list a trading company on export documents as the end-user for the item. PRC Laser did not receive the end-user information but proceeded with the transaction anyway. PRC Laser provided the transaction documents to its freight forwarder, listing Impex as the consignee and the laser was subsequently transshipped to Iran. In concluding that PRC Laser committed a knowing violation, BIS found that the company knew or should have known the following:
- Impex was not the ultimate consignee or end-user of the item;
- Impex had offices in Tehran, Iran; and
- Impex’s promotional and marketing material stated that Impex was a “special agent” for the Islamic Republic of Iran Shipping Lines, an entity on the Specially Designated Nationals (SDN) list.
Additionally, PRC Laser knew that laser was paid for through a wire transfer from Tehrani Exchange, which the company should have known was headquartered in Tehran. The brokering agent’s refusal to provide the identity of the ultimate end-user is only one of many red flags that occurred in this transaction, and this case illustrates the importance of conducting thorough due diligence on every export transaction.
Enforcement Actions under the International Traffic in Arms Regulations
There were also several significant enforcement actions under the International Traffic in Arms Regulations (ITAR) this year. In March, the Directorate of Defense Trade Controls (DDTC) charged Alpine Aerospace Corporation (Alpine) and TS Trade Tech Inc. (TS Trade) with nine violations of the AECA and the ITAR for the unauthorized export of defense articles, the misrepresentation and omission of material facts on export controls documents, and for failing to obtain required non-transfer and use certificates. Alpine and TS Trade were in the business of selling replacement parts, many of which are controlled on the USML, to the aerospace industry in South Korea. Tae Hoon Kim, president of Alpine and chief executive officer of TS Trade, was responsible for all international sales and obtaining any export authorizations. The DDTC stated that due to what it called “serious weaknesses” in Alpine and TS Trade’s export compliance programs, Kim arranged several foreign sales without the required licenses, failed to obtain a DSP-83 non-transfer and use certificate for those exports and, in certain cases, utilized licenses for sales that did not actually authorize those exports.
TS Trade submitted a VSD in connection with the violations, and TS Trade and Alpine each appointed a new vice president for compliance. The DDTC considered these actions to be mitigating factors, and noted that without them it “would have charged Respondents with additional violations and the penalty imposed would likely be more significant.” Alpine received a $30,000 penalty, with the penalty to be suspended on the condition that Alpine apply that dollar amount to the costs of the remedial compliance measures authorized in the consent agreement with the DDTC. At 12 and 24 months from the date of the consent agreement, Alpine must provide the DDTC with an itemized accounting of all consent agreement-authorized remedial compliance expenditures. The consent agreement ordered Alpine to arrange for two compliance audits to be conducted by an outside consultant with specific expertise in the ITAR within 12 and 24 months from the date of the order. Under the consent agreement, Alpine also agreed to allow the DDTC to conduct on-site reviews with minimal notice for the duration of the consent agreement. Alpine further agreed to dedicate adequate resources to ITAR compliance and institute strengthened export compliance procedures within 12 months of the date of the order.
The largest export enforcement action under the ITAR this year was the highly publicized case against United Technologies Corporation (UTC). The company was charged with 576 violations of the AECA and the ITAR for the unauthorized export and transfer of defense articles and technical data, as well as the provision of unauthorized defense services. The case involved several U.S. and Canadian subsidiaries of UTC, including Hamilton Sundstrand Corporation, Sikorsky Aircraft Corporation, Derco Aerospace, Inc., Kidde Technologies, Inc., Pratt & Whitney Rocketdyne, Pratt & Whitney U.S., and Pratt & Whitney Canada.
While the violations with which UTC were charged were widely varied, the majority of the violations charged were for the failure to abide by the terms and conditions of DDTC-approved Technical Assistance Agreements (TAAs), Manufacturing Licensing Agreements (MLAs), and Warehousing Distribution Agreements (WDAs). Of the 576 violations the company was charged with, 437 were for the failure to abide by the terms of DDTC-approved TAAs, MLAs, and WDAs. Agreements such as TAAs and MLAs can be complicated, and time and resources are required to ensure that the terms of the agreements are properly complied with. As shown by the large penalties assessed in this case, any form of non-compliance can result in significant consequences.
As our look back at 2012 shows, it has been an active and costly year in export enforcement for exporters. As mentioned, violations can happen in a number of ways, and no type of company is immune from the risk. Exporters should take this time to identify and correct any gaps or other deficiencies in their compliance programs, and remember that a proactive, rather than a reactive approach, to export violations is less costly.