Exportfolio News and Events

BIS Freight Forwarder Guidance Updated

U.S. Department of Commerce, BIS.

January 7, 1010.

Members of the international forwarding community play a key role in ensuring the security of the global supply chain, stemming the flow of illegal exports, and helping to prevent Weapons of Mass Destruction (WMD) and other sensitive goods and technologies from falling into the hands of proliferators and terrorists.

Responsibilities of the Forwarding Community

Forwarding agents have compliance responsibilities under the Export Administration Regulations (EAR) even when their actions are dependent upon information or instructions given by those who use their services. However, hiring an agent, whether a freight forwarder or some other agent, to perform various tasks, does not relieve a party of its compliance responsibilities.

Agents are responsible for the representations they make in filing export data. Moreover, no person, including an agent, may proceed with any transaction knowing that a violation of the EAR has, is about to, or is intended to occur. It is the agent's responsibility to understand its obligations.

Agents, especially those acting as the "exporter" in routed export transactions (see below), should understand the "Know Your Customer" guidance and "Red Flags" found in supplement no. 1 to part 732 of the EAR. Agents and exporters should determine if Red Flags are present, exercise due diligence in inquiring about them, and ensure that suspicious circumstances are not ignored. Failure to do so could constitute a violation of the EAR.

Agents should be thoroughly familiar with the ten General Prohibitions set forth in part 736 of the EAR, and with the violations outlined in part 764 of the EAR. Engaging in prohibited conduct or committing the violations set out in the EAR may subject violators to significant penalties -- up to 20 years imprisonment and fines of up to $1,000,000 upon criminal conviction, and penalties of up to $250,000 per violation and/or a denial of export privileges for administrative offenses.

Routed and Non-Routed Export Transactions

Primary responsibility for compliance with the EAR falls on the "principal parties in interest" (PPI) in a transaction. Generally, the PPIs in an export transaction are the U.S. seller and foreign buyer. See the following parts and sections of the EAR for additional information: section 748.5, regarding parties to a transaction; part 758 on export clearance; and relevant definitions in part 772.

In a "routed export transaction," in which the foreign PPI authorizes a U.S. agent to facilitate the export of items from the United States, the U.S. PPI obtains from the foreign PPI a writing in which the foreign PPI expressly assumes responsibility for determining licensing requirements and obtaining authorization for the export. In this case, the U.S. agent acting for the foreign PPI is the “exporter” under the EAR, and is responsible for determining licensing authority and obtaining the appropriate license or other authorization for the export.

An agent representing the foreign PPI in this type of routed export transaction must obtain a power of attorney or other written authorization in order to act on behalf of the foreign PPI.

In this type of routed export transaction, if the U.S. PPI does not obtain from the foreign PPI the writing described above, then the U.S. PPI is the “exporter” and must determine licensing authority and obtain the appropriate license or other authorization. This is true even if the transaction is considered a routed export transaction for purposes of filing electronic export information pursuant to the Foreign Trade Regulations (15 C.F.R. part 30).

In a routed export transaction in which the foreign PPI assumes responsibility for determining the appropriate authorization for the export, the U.S. PPI obtains from the foreign PPI a writing wherein the foreign PPI expressly assumes responsibility for determining licensing requirements and obtaining licensing authority. The EAR requires the U.S. PPI to furnish the foreign PPI and its agent, upon request, with the correct Export Control Classification Number (ECCN) or sufficient technical information to determine the ECCN. In addition, the U.S. PPI must provide the foreign PPI and its agent with any information that it knows will affect the determination of license authority. The U.S. PPI also has responsibility under the Foreign Trade Regulations (15 C.F.R. part 30) to provide certain data to the agent for the purposes of filing electronic export information.

In a transaction that is not a routed export transaction, if the U.S. PPI authorizes an agent to prepare and file the export declaration on its behalf, the U.S. PPI is the “exporter” under the EAR and is required to:

(A) provide the agent with the information necessary to complete the AES submission;

(B) authorize the agent to complete the AES submission by power of attorney or other written authorization; and

(C) maintain documentation to support the information provided to the agent for completing the AES submission.

If authorized by either the U.S. or foreign PPI, the agent is responsible for:

(A) preparing the AES submission based on information received from the U.S. PPI;

(B) maintaining documentation to support the information reported on the AES submission; and

(C) upon request, providing the U.S. PPI with a copy of the AES filed by the agent.

Both the agent and the PPI who has authorized the agent are responsible for the correctness of each entry made on an AES submission. Good faith reliance on information obtained from the PPI can help protect an agent, but the careless use of "No License Required," or unsupported entries, can get an agent into trouble. Agents without the appropriate technical expertise should avoid making commodity classifications and should obtain support documentation for ECCNs.

Additionally, upon written request, Census will provide companies with twelve months of AES data free of charge every 365 days. The Census Bureau’s Foreign Trade Division currently provides U.S. PPIs, and other filers requesting their AES data, with all ten data elements required in routed export transactions.

Mitigating the Risk and Building a Private-Sector/Public-Sector Partnership

As noted above, forwarders may be subject to criminal prosecution and/or administrative penalties for violations of the EAR. BIS has not hesitated to hold forwarders liable for participating in illegal transactions. Bad publicity alone can cost companies incalculable sums, in terms of future business, not to mention costs associated with lengthy and costly litigation, or administrative or criminal penalties. For example, in August 2009, after a government investigation lasting for more than five years, DHL reached a $9,444,744 Settlement Agreement with BIS and Treasury’s OFAC in a case involving hundreds of shipments to Iran, Sudan, and Syria, and a failure to adhere to government recordkeeping requirements.

This case, and many others involving forwarders, demonstrate the need for forwarders to know their customers and be aware of suspicious circumstances and Red Flags that may be present in an export transaction. When presented with Red Flags, forwarders have an obligation to inquire about the facts of the transaction, evaluate all of the information after inquiry and refrain from engaging in the transaction if the Red Flags cannot be resolved. These steps help protect not only the forwarder but also the forwarder’s client, who may be unknowingly engaging in a prohibited transaction.

Forwarders can take steps to mitigate their own and their clients' risks of liability by establishing a compliance program that scrutinizes export transactions and checks the parties to transactions against BIS's and other U.S. Government agencies' various Lists to Check. Forwarders should also familiarize themselves with the types of activities to avoid in suspicious transactions as described in the BIS publication, Don't Let This Happen To You.

Although in a non-routed transaction the primary burden of compliance rests with the U.S. PPI, section 758.3 of the EAR states that "[a]ll parties that participate in transactions subject to the EAR must comply with the EAR." Therefore, some compliance responsibility also rests with the freight forwarder. Parts 744, 760, 736, 732 supplement no. 3, and 764, among others, discuss how export transactions may not be conducted with certain parties, that dealing with certain parties may have additional licensing requirements, that dealing with certain parties should raise Red Flags for exporters, and that certain countries, activities, and items have certain restrictions under the EAR.

While the EAR allows flexibility in the manner in which U.S. companies meet these compliance requirements in a number of different methods, BIS strongly recommends that all parties dealing with export transactions maintain a vigorous and effective Export Management and Compliance Program (EMCP), incorporating the nine key elements (check the EMCP weblink at http://www.bis.doc.gov/complianceandenforcement/emcp.htm), and especially the screening of all parties to transactions, as part of their overall due diligence.

BIS, however, also recommends striking the right balance. Compliance activities would differ depending on the nature of the items being exported and the destinations to which they are exported, but err on the side of caution to ensure that our U.S.-origin dual-use goods and technologies are exported in compliance with the EAR.

Freight forwarders and exporters are symbiotically situated to work together to develop compliance procedures for their mutual benefit and sustainability. Building compliance partnerships and sharing compliance strategies with each other and other parties to transactions as part of Standard Operating Procedures will give all involved a competitive edge. Once the investment is undertaken and the procedures are in place and continually maintained, export transactions will proceed predictably, safely, and with consistent application of the appropriate research and analysis of parties and uses/applications. The more compliance processes are integrated into existing business processes, the more seamless your entire export process will be. As you share and learn compliance techniques with your business partners and build synergies while also building business relationships, you will ensure your mutual longevity and bottom lines.

Even if forms like the BIS-711, the Destination Control Statement, and the Letter of Acceptance of License Conditions are not required by the EAR from your overseas business partners, as part of your own compliance processes, you may wish to draft a document including language similar to these and require their use in certain situations to enhance compliance.

Concerning documentation requirements, refer to the EAR's part 762 (applicable to all transactions subject to the EAR) regarding records that have to be maintained, records that don't have to be maintained, requirements for producing records, retention period, etc. There are also recordkeeping requirements from, inter alia, Customs (19 CFR part 163), the Department of State (ITAR and 22 CFR part 122.5), the Census Bureau (15 CFR 30.66(c)), and Treasury’s OFAC (31 CFR part 501).

BIS’s Export Management and Compliance Division (EMCD, at 202-482-0062 and through the BIS website) is available to assist with compliance questions; our Outreach and Educational Services Division (OESD, at 202-482-4811, 949-660-0144, and through the BIS website) is available to assist with general questions involving exporting, and, for licensing issues, it may be helpful to speak with one of BIS’s expert Licensing Officers who deals with your particular line of products. Your local Export Enforcement Field Office would also be able to give you guidance; to find your local office call (202) 482-1208, or check here, and for a regulatory perspective, you may also contact BIS’ Regulatory Policy Division (RPD) at (202) 482-2440 and through the BIS website.

Notably for freight forwarders, in the EAR, see, inter alia, sections 758.1 through 758.6, 748.4, and 750.7(d). Section 758.3(b) notes the difference in definitions between Census and BIS for the term "exporter." Section 758.8 discusses the return or unloading by forwarders, or other entities, of shipments at the direction of U.S. government officials, and part 730, supplement no. 3, notes that export control responsibilities for Ocean Freight Forwarders are with the Federal Maritime Commission's Office of Freight Forwarders.

You may additionally set up information briefings, whereby you invite EMCD, Customs and Border Protection (CBP), BIS’s Export Enforcement, and/or representatives from other government entities to make presentations to your company and your business partners, in order to support you in educating all regarding compliance. Make use of the BIS website and the other government websites, and send staff to BIS seminars and seminars offered by other government agencies.

Parties who believe they may have committed a violation of the EAR are encouraged to submit a Voluntary Self Disclosure (VSD) to BIS. VSDs are an important indicator of a party's desire to bring their export activities into compliance, and also may provide important information to BIS helping to identify foreign proliferation networks. Parties submitting VSDs may be eligible for significant reductions in administrative penalties, and those with well-implemented EMCPs may expect further significant reductions of administrative penalties. Procedures for submitting VSDs may be found in section 764.5 of the EAR. The procedures detailed in section 764.5 do not apply to VSDs involving violations of the antiboycott provisions of the EAR. Procedures for submitting VSDs for boycott violations are found in section 764.8 of the EAR.

The Office of Export Enforcement (OEE) and the Office of Exporter Services (OExS, which includes EMCD, OESD, and RPD) welcomes the opportunity to work with the international forwarding community to help ensure compliance with U.S. export requirements. While it is important to protect yourselves and your clients from engaging in transactions that might constitute violations, it is equally important that BIS be able to fulfill its mission of keeping the most sensitive goods out of the most dangerous hands. Development of effective, well-integrated and well-implemented EMCPs, prompt notification by forwarders to OEE of suspicious transactions, and assistance to OEE Special Agents in gathering the evidence necessary to disrupt illicit proliferation networks and bringing export violators to justice, are important steps in helping to achieve these private-sector and public-sector goals.

http://www.bis.doc.gov/complianceandenforcement/freightforwarderguidance.htm

12/16/2009

House votes to renew two expiring trade accords

WASHINGTON — Two trade programs allowing developing nations to sell their products duty-free in the United States would be extended for a year under legislation approved by the House Monday.

The first program, implemented in 1976, allows some 132 developing countries to export about 3,400 types of products without paying duties. Among those, the 44 least developed may export an additional 1,400 types of products.

The second program, enacted in 1991, provides duty-free treatment to Colombia, Ecuador and Peru as a means of helping those countries develop economic alternatives to drug production and trafficking.

Bolivia was also part of the original Andean Trade Preferences Act, but the Obama administration ended its benefits earlier this year because of lack of cooperation in counternarcotics efforts.

Both programs are set to terminate at the end of the year. The bill to extend them now goes to the Senate. The House approved the measure by voice vote.

The House Ways and Means Committee, which oversees trade, said the cost of the one-year extension is $785 million, to be paid for by extending customs user fees.

The two programs enjoy wide support among U.S. textile, apparel and footwear groups because imports, particularly from the Andean region, use U.S. cotton, yarn and fabric.

With time running out in this session, Congress was unable to consider legislation to overhaul the first program, known as the Generalized System of Preferences, and make more countries eligible.

"There is broad agreement that our trade programs need to be stable, they need to be simplified, and they need to be more effective, and they need to help more people," said Rep. Jim McDermott, D-Wash., author of legislation to modernize the program.

There was also some support for removing Ecuador from the Andean program because of its corruption, anti-American politics and withdrawal from a bilateral investment treaty.

"Unfortunately, this legislation fails to recognize the serious questions that surround Ecuador's compliance with the eligibility criteria for this program," said Rep. David Camp of Michigan, top Republican on the Ways and Means panel.

The bill is H.R. 4284.

By JIM ABRAMS (AP)

02/16/2009

Syrvet Slammed With $100,000 Fine For Cattle Prod Exports

WASHINGTON, D.C. –The Commerce Department's Bureau of Industry and Security (BIS) announced today that Syrvet, Inc., a veterinary supply wholesaler based in Waukee, Iowa, has agreed to pay a $250,000 civil penalty to settle allegations involving sixteen unlicensed exports of electric cattle prods, from the United States to Mexico, Chile, South Africa, Dominican Republic, Columbia and El Salvador in violation of the Export Administration Regulations.

These items are listed on the Commerce Control List for crime control reasons. Syrvet and the BIS have agreed to suspend $150,000 of the fine provided that no additional violations occur and payment of the remaining $100,000 is made in accordance with the agreed upon payment schedule. Supplement 1 to Part 766 of the EAR allows BIS to suspend part of a penalty under certain circumstances.

"Preventing the illegal export of items that can be used to commit human rights abuses is an enforcement priority,” said Mario Mancuso, the Under Secretary of Commerce for Industry and Security.

10/31/2008

MORE THAN 145 DEFENDANTS CHARGED IN NATIONAL EXPORT ENFORCEMENT INITIATIVE DURING PAST FISCAL YEAR

Three Charged Today in Plot to Export Sensitive Technology to China Space Entity

New Counter-Proliferation Task Forces & Training Part of National Effort

WASHINGTON - A multi-agency initiative to combat illegal exports of restricted military and dual-use technology from the United States has resulted in criminal charges against more than 145 defendants in the past fiscal year, with roughly 43 percent of these cases involving munitions or other restricted technology bound for Iran or China, the Justice Department and several partner agencies announced today.

Over the past fiscal year, the National Export Enforcement Initiative has also resulted in the creation of Counter-Proliferation Task Forces in various judicial districts around the country. Today, there are approximately 15 such task forces or versions of them nationwide. In addition, the initiative has resulted in enhanced training for more than 500 agents and prosecutors involved in export control and the creation of new mechanisms to enhance counter-proliferation coordination among law enforcement agencies, export licensing agencies and the Intelligence Community.

Among the most recent cases brought in connection with the initiative was an indictment returned today in the District of Minnesota charging three individuals, Jian Wei Ding, Kok Tong Lim, and Ping Cheng, with conspiring to illegally export to the People’s Republic of China (PRC) controlled carbon-fiber material with applications in rockets, satellites, spacecraft, and uranium enrichment process. According to the indictment, the intended destination for some of the material was the China Academy of Space Technology, which oversees research institutes working on spacecraft systems for the PRC.

Unveiled in Oct. 2007, the National Export Enforcement Initiative is a cooperative effort by the Justice Department’s National Security Division (NSD), the Department of Homeland Security’s U.S. Immigration and Customs Enforcement (ICE), the Federal Bureau of Investigation (FBI), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), the State Department’s Directorate of Defense Trade Controls, the Treasury Department’s Office of Foreign Assets Control and other agencies.

http://www.bis.doc.gov/news/2008/doj10282008.htm

10/12/2008

Chemical Maker Nalco Settles Export Violations Charges

Oct. 6, 2008 -- Chemical manufacturer Nalco Co. has agreed to pay a $115,000 civil penalty to settle allegations that it made 13 unlicensed exports in violation of the Export Administration Regulations, the Bureau of Industry and Security (BIS) announced Oct. 3.

The allegations involved exports of items containing triethanolamine (TEA) to Angola, the Bahamas and the Dominican Republic between April 2003 and September 2006. According to the BIS, TEA can be used as a precursor for toxic agents and is controlled for chemical/biological, anti-terrorism and chemical weapons reasons.

Nalco voluntarily self-disclosed the exports to the BIS

Compiled By Jill Jusko

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10/12/2008

Blackwater to check itself on US arms export law

RALEIGH, N.C. -- Amid a federal probe into whether Blackwater Worldwide smuggled weapons into Iraq, the private security contractor said Thursday it has established a panel of defense experts and former prosecutors to ensure it follows U.S. export laws.

In a move that acknowledges the company may not have adequately complied with those laws in the past, founder and CEO Erik Prince said the creation of a three-person oversight committee directly responds to some of the challenges the company has faced in following U.S. controls.

"Our company has experienced remarkable growth in the last few years," he said in a news release. "This growth, our work for the U.S. government around the world, and the nature of the services we offer have created compliance challenges."

Federal authorities have been investigating since last year whether Blackwater improperly brought weapons into Iraq, allegations the company has strongly denied. Earlier this year, two former employees were sentenced on gun-running charges after the company said they stole from Blackwater's armory. And in June, federal agents seized 22 automatic rifles from a company vault.

Export control laws limit how companies and individuals handle sensitive resources, including weapons and information.

Andrew Howell, Blackwater's general counsel, said the company has had trouble integrating compliance controls into a global business that works under tight time constraints and in dangerous environments.

"Ongoing reviews by the Departments of Justice, State and Commerce have highlighted the need for a significant and systems-wide initiative," Howell said in a release.

A federal grand jury has also been investigating the fatal shooting of 17 Iraqi civilians who were killed in September 2007 when Blackwater guards opened fire in a crowded Baghdad square.

The compliance committee will include two former U.S. attorneys _ Robert C. Bonner and Asa Hutchinson _ and former Lockheed Martin Corp. ethics executive Carol R. Marshall. Karen Jones, who oversaw import and export operations at Raytheon Co.'s missile division, will serve as Blackwater's new vice president of export compliance.

Blackwater's rapid growth spurt, which began following the bombing of the USS Cole in 2000, has placed the company on the track to reach $1 billion in annual revenues. The company protects U.S. diplomats in Iraq and helps train authorities and military at its 7,000-acre compound in northeastern North Carolina.

Blackwater executives said in July that they never intended for its security business to make up such a large chunk of its operations. The company will fulfill its remaining contracts but would like to scale back its security business as it focuses on other areas of growth, such as international training and aviation logistics.

By MIKE BAKER

The Associated Press
Thursday, October 9, 2008; 11:14 AM

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08/26/2008

Ex-Tenn. professor denies he violated secrets law

By DUNCAN MANSFIELD

Associated Press Writer

A retired University of Tennessee professor accused of passing secrets from his work on a U.S. Air Force contract to two foreign graduate students testified Friday that he didn't break the law because he hadn't even proven that his research worked.

J. Reece Roth, an expert in plasma physics, is charged with 18 counts of conspiracy, fraud and violating the Arms Export Control Act. Prosecutors claim Roth gave two graduate students - one from China and another from Iran - access to sensitive information while they researched a plasma-guidance system for unmanned aircraft.

Prosecutors presented several documents suggesting research by Roth's university laboratory or a spinoff company, Atmospheric Glow Technologies Inc., was restricted.

But Roth insisted he didn't violate the law.

"My understanding was that it only applied to things that worked, and we had not shown that. We had a lot of work to do," Roth testified.

Roth, 70, is also accused of taking reports and related studies in his laptop to China during a lecture tour in 2006, and having one report e-mailed to him there through a Chinese professor's Internet connection.

The government seized materials from Roth's office and took his computer from him at the airport when he returned from the trip. Prosecutors claim he violated the export control act simply by taking the laptop with sensitive materials outside the country, even if, as forensic evidence showed, he didn't open all of those files while he was in China.

"I have always obeyed the law," Roth said.

The charges involve work performed from 2004 to 2006 on two Air Force contracts by Roth, graduates students Xin Dai of China and Sirous Nourgostar of Iran, and university spinoff company Atmospheric Glow Technologies Inc. of Knoxville.

Roth said he never tried to hide that Dai worked on the project. He said the Air Force, the university and Atmospheric Glow Technologies all knew or should have known that he was from China.

It didn't become an issue until the university denied Roth's request to hire Nourgostar to replace Dai after he graduated.

Roth testified that if he had known from the outset that hiring foreign grad students as lab assistants would be a problem, "I simply wouldn't have submitted a proposal or participated in the proposal."

The jury will hear closing arguments Tuesday. Roth faces up to 160 years in prison and more than $1.5 million in fines if convicted.

Atmospheric Glow Technologies recently pleaded guilty to 10 counts of exporting defense-related materials and Roth protege Daniel Sherman has pleaded guilty to related charges. They are awaiting sentencing.

Over 30 years, Roth established a widely respected plasma lab in the university's electrical engineering department, attracting top students from around the world. Before arriving at the school in 1978, the MIT and Cornell graduate spent 15 years as a researcher with NASA.

07/16/2008

Sun Settles Export Violation Charges

Sun Microsystems has agreed to pay $291,000 in fines to settle U.S. Commerce Department charges that the server maker violated rules in exporting equipment to China and Egypt. Several of the 24 charges stemmed from exporting without a license a 14-processor E5000 server to a Chinese military customer, the Changsha Institute of Science and Technology, the Commerce Department said in letters to Sun and in a statement Monday. Other charges included exporting a server to a military customer in Egypt without a license; failing to send the government copies of shipping information; altering a document after the Commerce Department issued a subpoena; and exporting computer upgrades to Colombia and Venezuela but not being able to verify the ultimate recipients. Sun agreed to the settlement "without admitting or denying the allegations," the Santa Clara, Calif.-based company said in a statement. In addition, Sun said it has strengthened its monitoring of exports to ensure full compliance with laws. Sun disclosed the export violation charges in September 2002 and said in May 2003 it was in settlement negotiations. Sun headquarters is paying $269,000, while two Hong Kong subsidiaries--Sun Microsystems China and Sun Microsystems California--each paid $11,000. In addition, Sun had its export privileges revoked for a year, but under the settlement terms the revocation is suspended. In addition, Automated Systems--another Hong Kong company that the Commerce Department said was involved in the export to the Changsha Institute of Science and Technology--will pay a $22,000 fine as part of a settlement, the department said.

By Stephen Shankland Staff Writer, CNET News.com

07/01/2008

Customs and Border Protection Reiterates Policy on Computer Searches

2008-07-01T09:32:38.235-04:00 CBP Posts Statement in Defense of Searches of Laptop Computers and Other Digital Devices In defense of U.S. Customs and Border Protection's (CBP) policy regarding the search of laptop computers and digital devices possessed by travelers returning to the U.S. from abroad, CBP Deputy Commissioner Jayson Ahern posted an article on Leadership Journal, the Department of Homeland Security's blog. The post states that:

Our ability to inspect what is coming into the United States is central to keeping dangerous people and things from entering the country and harming the American people. One of our most important enforcement tools in this regard is our ability to search information contained in electronic devices, including laptops and other digital devices, for violations of U.S. law, including potential threats.

These searches have helped limit the movement of terrorists, individuals who support their activities, and other threats to national security. During border inspections of laptops, CBP officers have found violent jihadist material, information about cyanide and nuclear material, video clips of Improvised Explosive Devices (IEDs), pictures of high-level Al-Qaeda officials, and other material associated with people seeking to do harm to our country.

The article also notes that:

It is not our intent to subject legitimate travelers to undue scrutiny, but to ensure the safety of the American public. In conducting these searches, we are fully dedicated to protecting the civil rights of all travelers. Similar to our efforts with respect to vehicles, suitcases, backpacks, hard-copy documents, and conveyances, our examinations of laptops and other digital devices are consistent with longstanding constitutional authorities at the border and have been affirmed by federal courts throughout the country, including most recently the U.S. Court of Appeals for the Ninth Circuit.

Moreover, CBP officers adhere to strict constitutional and statutory requirements, including the Trade Secrets Act, which explicitly forbids federal employees from disclosing, without lawful authority, business confidential information they may access as part of their official duties. We also protect information that may be uncovered during examination as well as private information that is not in violation of any law.

We have a responsibility to ensure that any item brought into the country complies with the law and is not a threat to the American public. To treat our inspections of digital media at the border differently from any other documents or conveyances would give terrorists and criminals an advantage they should not have and that our nation cannot afford.

Last week, the Senate Judiciary Committee's Subcommittee on the Constitution, Civil Rights and Property Rights held a hearing earlier on "Laptop Searches and Other Violations of Privacy Faced by Americans Returning from Overseas Travel." At the hearing, subcommittee chairman Russell Feingold (D-WI) expressed concern that the Department of Homeland Security did not send a witness to testify and criticized the written statement that CBP provided to the Subcommittee.

Douglas N. Jacobson

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07/01/2008

All SED's Must Be Submitted Via the Automated Export System (AES)

Mandatory AES Rule Effective Today This is a reminder that today is the effective date of the the final rule issued by the Census Bureau on June 2, 2008 requiring that all Electronic Export Information (formerly known as Shipper's Export Declarations or SEDs) be filed via the Automated Export System (AES) prior to the departure of the cargo from the U.S.

The Census Bureau has adopted a 120 day implementation period. During the 120-day implementation phase, the Census Bureau will use “informed compliance” to reach out to filers identified as violating provisions of the AES rule. Parties submitting paper SEDs after September 30, 2008 will be considered to be in violation of the Foreign Trade Regulations and can be subject to monetary penalties.

The new AES filing deadlines for non-USML shipments set forth in the final rule are:

Sea: 24 hours prior to departure
Truck: 1 hour prior to truck arriving at U.S. border
Air: 2 hours prior to scheduled departure time
Rail: 2 hours prior to train arriving at U.S. border
Mail: 2 hours prior to export

Pursuant to section 123.22(b) of the ITAR, the AES filing deadlines for USML shipments remain as follows:

Air: 8 hours prior to scheduled departure time
Truck: 8 hours prior to truck arriving at U.S. border
Rail: 24 hours prior to train arriving at U.S. border
Sea: 24 hours prior to departure

In addition, for those using AESDirect to file EEI should be aware that starting on October 1, 2008 AESDirect will have heightened security measures and user authentication practices. These changes include:

- Individual User Account Administration
- Stronger Password Requirements
- Shorter Password Expiration Time frames
- Automatic Inactive Account Deactivation
- Session Timeout/Concurrent Login Limit
- Account Lockout after 3 Unsuccessful Logins
- New Account Administration Functions

Douglas N. Jacobson

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06/23/2008

U.S. Government Steps Up Enforcement

Exporters Beware: U.S. Government Significantly Steps Up Enforcement Efforts

By Douglas N. Jacobson, Mark Andrews and Laura Martino (Reprinted from Strasburger & Price LLP's Business and Law Newsletter)

Earlier this year, a Minnesota company was hit with $800,000 in criminal and civil penalties for omitting certain facts in license applications submitted to the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) for the export of seismic testing equipment to India. These penalties were assessed for violations of the Export Administration Regulations (EAR), which impose licensing requirements and other controls on the export of controlled goods, software and technology. Last year, the maximum penalty would have been $122,000 for the same infractions.

The increased penalties resulted from the enactment of the International Emergency Economic Powers Enhancement Act (“IEEPA Enhancement Act”) on October 16, 2007, which raised the maximum civil penalty from $50,000 per violation to the greater of $250,000, or twice the amount of the transaction that is the basis of the violation.1 The law also raised the maximum criminal penalty for violations of U.S. export control laws from $50,000 to $1,000,000 and imposed a maximum jail sentence of 20 years.

The U.S. government has signaled that it will pursue a wide range of violations of U.S. export laws with greater vigor than ever before. In addition to bringing more criminal cases for export control violations, the government has indicated that it will start enforcing even relatively minor violations of export laws, such as late or inaccurate filing of export data required by the U.S. Census Bureau. In response to this enforcement crackdown, companies can prevent violations of export control laws and reduce the risk of exposure to the enhanced export penalties by reviewing, updating and improving their export compliance programs.

IEEPA Enhancement Act

The dramatic increase in potential civil and criminal penalties under the IEEPA Enhancement Act marks a major change in the enforcement landscape for companies involved in U.S. export transactions. The new IEEPA penalties apply not only to EAR violations detected by BIS, but also to various economic sanctions programs established and enforced by the Office of Foreign Assets Control (OFAC).

When IEEPA was originally passed in 1977, the maximum civil penalty was only $10,000 per violation. Other than an inflation adjustment raising the maximum penalty amount to $11,000, the first time that export penalties were increased was in 2005, when the civil penalties were raised to a maximum of $50,000 per violation.2 In the belief that even this amount was insufficient to deter violations of export control laws, BIS and other agencies involved in export enforcement pressed Congress to increase the penalties. The result of this effort was the IEEPA Enhancement Act with its $250,000 maximum for civil penalties and escalation of criminal penalties. Even after this latest legislation, BIS is still seeking even higher penalties. A bill now pending in Congress, the Export Enforcement Act (S. 2000), would increase the maximum civil penalties for violating export control laws to $500,000 per violation and increase the criminal penalties on companies violating export laws to the greater of $5 million or ten times the value of the exports involved.

Exporters should also be aware that IEEPA Enhancement Act civil penalties may be applied retroactively. Under current law, BIS and OFAC have the discretion to apply the increased civil penalties on violations that occurred prior to the October 16, 2007 effective date of the IEEPA Enhancement Act. For example, a company planning to file a voluntary self-disclosure for a violation that occurred prior to that effective date could be subject to the increased penalties.

Stepped-Up Justice Department Export Enforcement

Other departments of the U.S. government, including the U.S. Department of Justice (DOJ), have stepped up enforcement of criminal penalties for violating export control laws. Last year, DOJ and several partner agencies launched the Export Enforcement Initiative. Led by DOJ’s National Security Division, the initiative is now training law enforcement officers, federal prosecutors and others to work in task forces to investigate and prosecute illegal exports and technology transfers. As a result of the new initiative, U.S. attorneys are better equipped to prosecute criminal cases involving export controls, which has resulted in more such cases being brought. For example, according to DOJ statistics in fiscal year 2007 there was more than a 50 percent increase in defendants charged with violating the primary export control laws compared to the previous year.

Recent Cases

While only a small number of cases brought under the enhanced penalty provisions of the IEEPA Enhancement Act have been closed to date, it is clear that BIS and DOJ are moving aggressively to use their new powers, oftentimes pursuing parallel civil and criminal cases involving the same export violations.

For example, BIS assessed increased IEEPA penalties in the amount of $400,000 against MTS Systems Corporation, the Minnesota company noted above. BIS charged MTS Systems with violating U.S. export law because its application to export seismic testing equipment to India failed to mention that the equipment would be used to test nuclear power plant components. The company also failed to mention in a second export license application that a U.S. restricted party in India provided funding for the sale or the possibility of a nuclear end-use. For each violation, BIS assessed a $200,000 civil penalty – 80 percent of the maximum under the IEEPA Enhancement Act.

In a companion criminal case, DOJ obtained a sentence of two years probation and a criminal fine of $400,000 against the same company for the same misrepresentations discussed above in its license applications. The plea agreement also required MTS Systems to implement and maintain a model export compliance program and sponsor an export compliance conference. This case is just one example of DOJ’s expanded role in export enforcement.

As part of a similar multi-pronged attack, BIS assessed a civil penalty of $132,791 against Engineering Dynamics, Inc. for violating export laws. The company was charged with conspiring with its agent in Brazil to sell Iran a U.S.-origin engineering software program for designing offshore oil and gas structures. The civil penalty assessed was equivalent to 53 percent of the maximum penalty under the IEEPA Enhancement Act. Furthermore, OFAC imposed an additional penalty of $132,791 on Engineering Dynamics for violating OFAC’s Iranian Transactions Regulations.

These civil penalties were supplemented with criminal penalties assessed against Engineering Dynamics’ corporate owners and officers and the co-conspirator in Brazil for the same transaction. In the criminal case, DOJ obtained a guilty plea by two owners and officers of the company for one count of conspiracy to violate U.S. export laws by exporting engineering software to Iran through Brazil without proper government authority. Each of these defendants will face a maximum of five years in prison and a $250,000 fine when they are sentenced in August 2008.3 The Brazilian co-conspirator was recently sentenced to 13 months in prison, while also being ordered to pay $100,000 in fines and to forfeit more than $109,000 in profits for his role in the prohibited exports to Iran.

Other Enforcement Initiatives

Another area of stepped up enforcement is the mandatory filing of Electronic Export Information (EEI), previously known as Shipper’s Export Declarations (SEDs). The U.S. Census Bureau recently issued a new rule requiring exporters to submit export data electronically on the Automated Export System (AES) prior to exporting goods from the U.S.4 The new regulation will go into effect on July 2, 2008 but will not be enforced until September 30, 2008. It imposes criminal penalties for knowingly failing to file EEI or for knowingly submitting false export information, while increasing civil penalties for filing mistakes or late filings. This new regulatory scheme transforms what used to be routine paperwork requirements into a new area for export enforcement.

Previously, the Census Bureau allowed exporters to submit export data either by filing paper SEDs or by transmitting the data electronically. As a result of the new rule, exporters, freight forwarders and carriers may only file such data electronically and must do so within stated time frames prior to exportation. The time frames depend on the mode of transportation used to carry the goods out of the U.S. For example, exporters must file EEI for ocean cargo with the exporting carrier 24 hours prior to loading of the cargo on the vessel at the port of export, while EEI for truck shipments must be filed one hour prior to arrival of the outbound truck at the U.S. border crossing.

Under the new regulation, exporters, forwarding agents and carriers are subject to civil penalties of $1,100 per day or a maximum of $10,000 per violation for filing failures or delays. Exporters may also face criminal penalties of up to $10,000 or up to five years imprisonment (or both) for knowingly submitting false or misleading export information through AES.5

The Census Bureau has indicated that BIS and the Department of Homeland Security (DHS) – including Customs and Border Protection (CBP) – will have enforcement authority over export violations under the new rules, such as filing errors made via AES. The escalated penalties and enhanced enforcement authority under the new regulation require a new level of due diligence by exporters, freight forwarders and carriers in submitting export data.

Export Compliance Programs

As U.S. export enforcers intensify their enforcement activities, there is a greater need for companies to increase their compliance efforts. An effective internal compliance program can help prevent companies from committing violations of export control laws and regulations, and can also help to substantially reduce penalties when violations occur. According to BIS’s penalty enforcement guidelines, the presence of an effective compliance program is a mitigating factor to which BIS accords “great weight” in determining penalty amounts.

BIS’s Office of Export Enforcement has set out nine specific factors that are considered in assessing whether a compliance program is effective, such as the existence of a customized training program for personnel and management, compliance manuals, centralized oversight, and evaluation plans that prompt remedial measures for violations.6 BIS will also consider such factors as to whether a party’s export compliance program was effective in uncovering a problem (thus suggesting that the program will help prevent further violations), and whether the party has taken steps to correct deficient internal procedures that may have led to the violation.7

Conclusion

The U.S. government now has greater discretion and capacity than ever before to enforce U.S. export laws and to apply higher penalties for export control violations. It is clear that companies having effective compliance programs can reduce their exposure to penalties for export control violations. It is increasingly important, therefore, for companies and their management -- working with export compliance experts as appropriate -- to understand the laws that apply to the export of their products and to enhance their export compliance programs.

------------------------------------

1 Pub. L. 96-110, 50 U.S.C. § 1705.

2 USA Patriot Improvement and Reauthorization Act of 2005, Pub. L. 109-177, March 9, 2006.
3 DOJ has agreed not to impose the increased IEEPA criminal penalties retroactively.

4 See Foreign Trade Regulations: Mandatory Automated Export System Filing for All Shipments Requiring Shipper’s Export Declaration Information; Final Rule, 73 Fed. Reg. 31,548 (June 2, 2008).

5 15 CFR § 30.71 (effective July 2, 2008).

6 www.bis.doc.gov/complianceandenforcement/pec_program.pdf.

7 See 15 CFR Part 766, Supplements 1 and 2. Douglas N. Jacobson

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06/19/2008

Two Men Charged with Helping Iran

MIAMI (Reuters) - U.S. authorities have charged two men with conspiring to ship parts for American-made F-14 fighter jets and other military aircraft to Iran in violation of a U.S. embargo, prosecutors said on Monday.

Hassan Saied Keshari, 48, and Traian Bujduveanu, 53, who own U.S.-based aviation companies, received e-mailed orders directly from Iran and then procured and illegally shipped parts through Dubai to Iran, prosecutors said.

Both men are naturalized U.S. citizens, Keshari originally from Iran and Bujduveanu from Romania, prosecutors said.

"In essence they are charged with helping Iran build up its military ... by illegally exporting American-made military parts to it," U.S. Attorney Alexander Acosta said at a briefing in Miami.

The men, neither of whom had the needed export licenses, allegedly obtained and shipped parts for the AH-1 attack helicopter and the CH-53 heavy-lift transport helicopter as well as the F-14 Tomcat fighter jet in violation of the arms export control act and the Iran embargo.

Keshari, the owner of Novato, California-based Kesh Air International, and Bujduveanu, owner of Orion Aviation of Plantation, Florida, were arrested late last week and arraigned in a federal court on Monday. They face up to 20 years in prison and fines of up to $1 million.

U.S. authorities said numerous procurement networks use suppliers in the United States and around the world to obtain and ship American products to Iran.

Prosecutors said they had identified those who sent the parts orders to Keshari and Bujduveanu from Iran but declined to disclose their identities and would not say if the orders came from the Iranian government.

(Reporting by Jim Loney, editing by Michael Christie and Sandra Maler)

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06/15/2008

Engineer Sentenced to 2 Years for Spying

STOLE MILITARY SECRET, TRIED TO SELL TO CHINA

By Howard Mintz

Mercury News

Article Launched: 06/19/2008 01:31:57 AM PDT

A former Silicon Valley software engineer was

sentenced Wednesday to two years in federal prison

for stealing military technology and trying to sell it

to the Chinese government.

Xiaodong Sheldon Meng, 44, was the first to be

convicted under a 12-year-old anti-espionage law.

In sentencing Meng, U.S. District Judge Jeremy Fogel

agreed with federal prosecutors' recommendation of

a two-year prison term. Meng, a Cupertino resident

and Chinese national, pleaded guilty last year to

violating the Economic Espionage Act of 1996 and

federal export laws, admitting he stole technology

from his former employer, Quantum 3D.

The espionage act makes it a crime to steal trade

secrets to benefit a foreign government, and was

passed by Congress in response to concerns that

engineers were robbing U.S. companies of valuable

technology and secretly shipping it overseas.

There are a number of other pending local cases

involving defendants accused of trying to shop

stolen valley technology to China. Those include Fei

Ye and Ming Zhong, two former engineers at

Transmeta who face sentencing next week in San

Jose federal court for violating economic espionage

laws in their dealings with China.

In Meng's 4-year-old case, federal prosecutors said

he stole a trade secret from Quantum known as

"Mantis," a product used to simulate real-world

motion for military training purposes. The

government alleges that Meng installed a

demonstration unit of Mantis on the China Navy

Research Center site, using stolen technology that

Quantum officials have called the "crown jewel" of

their company.

Federal prosecutors also said Meng stole other

Quantum technology that he intended to provide to

the Chinese government. While prosecutors depicted

Meng as a man motivated by greed, not spying, they

warn that his conduct still posed a threat to national

security.

"The United States maintains a military advantage

during night time operations," the Justice

Department wrote in a 30-page sentencing memo in

Meng's case. "Most foreign countries do not have

the same or similar night time capabilities. In the

wrong hands, this advantage would be lost."

Meng's lawyers dispute the scope of the Bush

administration's allegations of espionage. In court

papers and in the hearing before Fogel, Meng's

federal public defender sought a sentence of oneyear

home detention, arguing that Meng's actions

were driven by a feud with his former company, not

to spy for China.

"He is not a spy for the Chinese," said Manual

Araujo, an assistant federal public defender. "It is

overblown. As in most of these kinds of economic

espionage cases, a lot of this has to do with

disgruntled employees."

Contact Howard Mintz at hmintz@mercurynews.

com or (408) 286-0236.

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06/14/2008

Aviall Singapore Facility Pays Fine

Did you know that you have to report companies who include Israeli Boycott language in their Purchase Orders? And, that you cannot fulfill such an order?

Neither did Boeing subsidiary Aviall, Inc.

Here is the Settlement Agreement:

http://efoia.bis.doc.gov/antiboycott/violations/a692.pdf

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06/14/2008

NY Man Guilty of Illegal Sale of Jet Parts - $1M fine, 30 Years in Jail

Man guilty in NY case involving fighter jet parts

The Associated Press

A man has pleaded guilty in New York to conspiracy in a case involving the shipment of fighter-jet parts to Malaysia.

The plea was entered Thursday in federal court by 59-year-old Jilani Humayun (jil-AH'-nee hoo-mah-YOON').

He pleaded guilty to counts including conspiracy to violate the Arms Export Control Act and to commit money laundering.

Sentencing is set for December. He could face up to 30 years in prison and $1 million in fines.

Authorities say 11 shipments between 2004 and 2006 included F-5 and F-14 jet parts and Chinook helicopter parts to an unidentified company in Malaysia.

Humayun is a citizen of Pakistan.

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05/24/2008

Since 2001 The Government Has Charged More Than 40 Individuals on Prohibited Exports of Night-Vision Equipment

USA Today Reports on Prohibited Exports of Night-Vision Equipment and Technology USA Today has reported on efforts by terrorist and other groups to obtain advanced U.S. military night-vision equipment and the U.S. Government efforts to prevent and prosecute such efforts:

The government has prosecuted more than two dozen businesses and individuals over the past 18 months for stealing night-vision gear or skirting prohibitions on foreign sales, according to a USA TODAY review of federal documents and public records.

In at least five cases, prosecutors linked shipments to terrorist groups, such as al-Qaeda and Hezbollah. A few others were headed to Iran and Taliban forces in Afghanistan, court records show; several were destined for China and Japan.

"It's extremely serious — you're talking about adversaries of the United States getting equipment that we make to give our soldiers an advantage in the field," says Charles Beardall, the Pentagon's deputy inspector general for investigations.

The Pentagon joined the departments of Justice, Homeland Security, Commerce and State last year in a crackdown on illegal exports of combat-use military items and sensitive civilian goods with military uses. Night-vision goggles, scopes and cameras used by U.S. troops account for more cases than any other technology, says Steven Pelak, Justice's export enforcement coordinator.

The article notes that "since 2001, the government has charged more than 40 individuals or businesses with theft or illegal exports of night-vision technology" and "besides the two dozen cases prosecuted since late 2006" USA Today "also identified at least eight more under investigation."

A related story, U.S. Foes Seek Edge in the Dark, reports on efforts to obtain U.S. night-vision technology. Douglas N. Jacobson

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05/24/2008

Brazilian Man Sentenced to 13 Months in Federal Prison

NELSON S. GALGOUL, age 57, a resident of Rio de Janeiro, Brazil, was sentenced yesterday by U. S. District Judge Lance M. Africk to thirteen (13) months imprisonment for violating the International Emergency Economic Powers Act and the Iranian Transactions Regulations, announced U.S. Attorney Jim Letten. In addition to the term of imprisonment, Judge Africk imposed a fine of $100,000 and ordered GALGOUL to forfeit an additional $109,291. Judge Africk also imposed three (3) years of supervised release following the term of imprisonment during which time the defendant will be under federal supervision and risks an additional term of imprisonment should he violate any terms of his supervised release.

According to court documents, GALGOUL is the director of SUPORTE, a Brazilian consulting engineering firm which acted as an agent for Engineering Dynamics, Inc. (EDI), a Kenner, Louisiana engineering company that designed, produced, marketed, and supported Structural Analytical Computer Software (SACS), an engineering software program intended to assist in the design of offshore oil and gas structures. Due to the product’s sophistication and its potential use, SACS is a controlled product under various United States laws and regulations.

On August 2, 2007, NELSON S. GALGOUL entered a guilty plea before Judge Africk admitting that beginning in March, 1995 and continuing through February, 2007,GALGOUL knowingly conspired to violate the International Emergency Economic Powers Act and the Iranian Transactions Regulations by exporting and attempting to export the SACS engineering software program to Iran without having first obtained the required authorizations from the Office of Foreign Assets Control. Specifically,GALGOUL acted as an agent for EDI in the marketing and support of SACS and also provided training to engineers and technical personnel in the use of SACS. In particular, GALGOUL marketed and serviced SACS and trained users of the software in Iran from 1995 through 2007.

The Court imposed a sentence within the recommended guidelines range. GALGOUL was ordered to surrender to the Bureau of Prisons on June 9, 2008.

This investigation was conducted by Special Agents of U.S. Immigration and Customs Enforcement, the Department of Commerce, and the Federal Bureau of Investigation. The prosecution was handled by Assistant United States Attorneys Michael W. Magner and Gregory Kennedy.

Press release is available at: http://www.usdoj.gov/usao/lae/press/2008/2008_05_23_nelson_galgoul_sent.htm

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05/07/2008

Export - The Biggest Issue Boeing Faces

Separation anxiety: The wall between military and commercial technology

By Dominic Gates

Seattle Times aerospace reporter

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The B-2 stealth bomber

Last April in Everett, in a tense meeting with an investigator sent by Boeing headquarters, a small group of 787 engineers dropped a bombshell.

The engineers, veterans of Boeing's work on the B-2 stealth bomber two decades ago, told investigator Rick Barreiro that technology and know-how developed for that secretive military program would be used in manufacturing the company's newest commercial jet.

The engineers refused to sign forms declaring that the 787 program is free of military data. One said he feared signing would leave him open to federal indictment.

Their assertions set off flashing red lights at Boeing. Federal law prohibits U.S. companies from letting militarily sensitive technical expertise go abroad.

Yet Boeing's entire global manufacturing plan for the 787 hinges on having foreign suppliers build large structures out of advanced composite materials.

The standoff with the engineers caught Boeing managers by surprise. "We all underestimated the amount of screening we needed to do" for military technology, said Walt Gillette, head engineer and vice president for airplane development on the 787.

In the months that followed, outside lawyers pored over 1970s-era documents in search of proof that some key manufacturing techniques originated in the commercial business, not in military programs.

And to satisfy the letter of the law, Boeing workers have embarked on some surreal tasks.

One example: Boeing's B-2 work showed that the plasticized carbon-fiber tape used to make composites can be safely frozen and stored for up to a year — twice as long as previously thought.

That fact is now well-known in the composites industry, yet 787 engineers can't inherit that knowledge from the B-2 program, Gillette said. So they conducted fresh tests to prove a result they already knew.

"It is our clear intent to make sure we comply with the law," Gillette said.

The underlying issue is whether Boeing's plan to outsource high-tech 787 composites manufacturing could put U.S. government technology in the hands of either enemies or potential future economic competitors.

Yet Boeing's internal response to Barreiro's findings suggests a reverse perspective: that the laws designed to protect military secrets create barriers to legitimate sharing of commercial technologies, which executives see as essential in the globalized aviation marketplace.

Gillette portrayed the issue as a regulatory headache rather than a genuine threat to Boeing's 787 plan. And he insisted that the questions raised by Barreiro and the engineers are being resolved.

Furor in Everett

Boeing can't take the technology-export issue lightly because it previously ran afoul of the restrictions.

Internal documents show the Department of Commerce found export-license irregularities during the 1990s in Boeing's sharing of composites technology with its Japanese partners on the 777, which has a tail made from composites.

Commerce closed that previously undisclosed investigation last year and issued a warning letter to Boeing. Neither the company nor the Commerce Department would discuss details.

And last summer, the State Department prepared civil charges against Boeing alleging 94 violations of the Arms Control Act because the company sold commercial jets without obtaining an export license for a tiny gyrochip that has defense applications.

Boeing regards that case as an overzealous application of export-control laws, but the issue hasn't been resolved.

Senior vice president and general counsel Douglas Bain told a private meeting of top Boeing executives in Orlando, Fla., earlier this month that the State Department is taking a hard line on the gyrochip case and that "it's probably their intention to hammer us."

On the new 787 program, Boeing is taking composites technology much further than it did on the 777. The whole 787 airframe, like that of the B-2, will be made from plasticized carbon-fiber composites rather than the conventional aluminum.

Boeing developed new manufacturing methods, molding enormous single-piece fuselage barrels out of composite plastic. When production starts, those fuselage sections will be made in Italy and Japan.

To ensure it didn't cross the line on potential military input, Boeing's Office of Internal Governance sent in Barreiro to lead a so-called "Red Team" review.

The story of his investigation and its aftermath was revealed in company documents obtained by The Seattle Times. Barreiro declined to comment. Some detail was confirmed by engineers who were involved.

The uproar over Barreiro's findings stemmed from how he reclassified some of the manufacturing processes.

Technology with both commercial and military applications — so-called dual-use items — is generally exportable with a Department of Commerce license.

But after hearing from the engineers, Barreiro retagged a list of 787 technical specifications as defense items, not dual-use items, meaning they are subject to stricter State Department jurisdiction under the International Traffic in Arms Regulations (ITAR) law.

Bottom line: The 787 must be "ITAR-free." With even a single ITAR item on a commercial airplane, it cannot be sold overseas.

Barreiro's ITAR classification prompted a furor. Local 787 export-control manager Vanessa Gemmell angrily confronted Barreiro, then stormed out to complain to his boss.

Next day, Barreiro threatened to quit. He stayed only after Boeing legal staffers upheld his concerns.

Gillette, in a later interview, minimized the internal clashes.

He said some engineers had initially balked at signing a form declaring the 787 free of military know-how only because it was poorly worded. Once the wording was changed to attest only to what they personally knew, the engineers were ready to sign.

The outside review by Barreiro's "Red Team" delivered a helpful jolt, Gillette said, since "our knowledge of the depths of the law was still coming up to speed."

Boeing must identify every "little piece of data that came from a military source," Gillette said. "We have to find it, and we have to remove it and replace it with a commercial source of the data."

A Boeing spokeswoman said the meticulous process now under way has reduced the number of potential ITAR items on the program from 20 in July to "only a few" now.

Cutting edge or not?

In a plant across from the Flight Museum, Boeing has worked for more than a year with its Japanese and Italian partners to perfect the pioneering robotic production of 787 wings and large, single-piece fuselage barrels.

Gillette described the 787 airframe as a "black aluminum" design — meaning its structure is identical to earlier aluminum airplanes, except made with composite plastics, which are black.

In other words, not so revolutionary. Boeing isn't the only one with those skills, he said. "All of our big airframe partners, they all make various kinds of primary composite structure already."

Gillette also said commercial-aerospace research on composites predated the military uses.

He produced copies of NASA documents outlining 1970s research programs conducted by Boeing, Lockheed Martin and McDonnell Douglas that culminated in the first use of composites on primary aircraft structures in civil jets.

Under the legislation that guides NASA, he said, the results of that work were "put into the public domain for all to use," generally within a year of completion.

Though secret research on the stealth bomber had already begun in the late 1970s, it was publicly launched only in 1981. Gillette said five special-issue Boeing 737s with carbon-fiber tails entered scheduled service in 1982, a year later.

Likewise Airbus was manufacturing A310 passenger jets with carbon-fiber vertical fins by 1985, three years before the first B-2 was publicly displayed.

If some engineers think B-2 technology has migrated to the 787, he suggested, they may simply be unaware of such earlier commercial applications.

Regardless of how the technology was developed, Loren Thompson, a defense analyst with the Lexington Institute, agreed with Gillette that the 20-year-old material design of the B-2 is no longer state-of-the-art. He dismissed the idea that any composites technology on the 787 could still be militarily sensitive.

"Knowing how to work with composites, by itself, would not greatly aid an enemy," Thompson said.

He sees the export laws as outdated, reflecting a control system designed for the Cold War rather than the new reality of economic globalization.

"At some point people need to lift their eyes from their military concerns and look around at how the global market has changed," Thompson said.

Nevertheless, Boeing must satisfy the government.

In late October, Commercial Airplanes Chief Executive Alan Mulally sent employees a memo on the importance of complying with the laws controlling export of technical data.

On a visit to Seattle this month, David McCormick, undersecretary of Commerce responsible for export control, said his department is in constant dialogue with Boeing on the subject. After a period of intense scrutiny and delay, Commerce in November granted a license that will allow manufacture of the 787 rudder in Chengdu, China.

"There is a national-security issue around composites," McCormick said, specifically citing China. "That's certainly something Boeing has tried to be sensitive to."

According to a Boeing insider, at the company's private annual leadership retreat in Orlando on Jan. 5, top lawyer Bain said that the 787 program has more than 100 people dealing with export-control matters.

He described export-license problems throughout the company as "the biggest issue we face."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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05/07/2008

Commerce Fines Northrop Grumman $400,000 For Illegal Exports of Navigation Equipment

WASHINGTON – The Commerce Department’s Bureau of Industry and Security (BIS) announced today that Northrop Grumman Corporation (Northrop) of Los Angeles, Calif., has agreed to pay a $400,000 civil penalty to settle allegations that it committed 131 violations of the Export Administration Regulations, both in its own capacity and as successor to Litton Industries, Inc., which Northrop acquired in April 2001.

“This settlement is a reminder that comprehensive export control compliance is vital and obligatory. The Bureau of Industry and Security will continue to work with industry to increase awareness of the importance of comprehensive export control due diligence in corporate transactions, particularly in the post-9/11 environment,” said Mario Mancuso, Under Secretary of Commerce for Industry and Security.

The allegations primarily involved unlicensed exports of specially designed components for navigation equipment and module manufacturing data that were to destinations in the Philippines, Singapore, Malaysia, Italy, and the United Kingdom between January 1998 and September 2002.

Northrop voluntarily self-disclosed the violations and cooperated fully in the investigation. BIS considers voluntary self-disclosures to be a significant mitigating factor when negotiating settlements of administrative cases.

Under Secretary Mancuso praised the Office of Export Enforcement's Washington Field Office for its work on this case.

BIS controls exports and re-exports of dual-use commodities, technology and software for reasons of national security, missile technology, nuclear non-proliferation, chemical and biological non-proliferation, crime control and regional stability. Criminal civil and administrative sanctions can be imposed for violations of the Export Administration Regulations. For more information, please visit www.bis.doc.gov.

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