U.S. Imposes New Export Controls on Russia’s Energy Sector and Adds Russian Shipbuilder to Entity List

On 1 August, Under Secretary of Commerce for Industry and Security, Eric L. Hirschhorn, signed a rule amending the Export Administration Regulations (EAR) to “impose additional sanctions implementing U.S. policy toward Russia,” and address the ongoing developments in Ukraine.  Under the rule, the Bureau of Industry and Security (BIS) imposes export controls on items used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects.  The rule also adds state-owned shipbuilder, United Shipbuilding Corporation, to the Entity List.  On 31 July, the Office of Foreign Assets Control (OFAC) added United Shipbuilding Corporation, to the Specially Designated Nationals and Blocked Persons (SDN) List.

The new rule adds 15 CFR § 746.5 to the EAR, “Russian Industry Sector Sanctions,” and imposes export, reexport, and transfer controls on items classified under the following Export Control Commodity Numbers (ECCNs): 0A998 (Oil/gas exploration equipment, software, and data ), 1C992 (Commercial charges and devices containing energetic materials ), 3A229 (Firing sets and equivalent high-current generators), 3A231 (Neutron generator systems), 3A232 (Detonators and multipoint initiation systems), 6A991 (Marine or terrestrial acoustic equipment ), 8A992 (Vessels, marine systems or equipment, “specially designed” “parts” and “components” therefor), and 8D999 (“Software” “specially designed” for operation of unmanned submersible vehicles used in oil/gas industry).  These new controls apply “when the exporter, reexporter or transferor knows or is informed that the items will be used directly or indirectly in Russia’s energy sector” for exploration and production from deepwater (more than 500 feet depth), Artic offshore, and shale oil/gas projects.  The rule goes on to identify, without limitation, examples of items that are specifically covered by the new Russian Industry Sector Sanctions, as follows: drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Artic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing (“fracking”), high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers.  The rule makes clear that “[n]o license exceptions may overcome the licensing requirements under new § 746.5,” except for license exception GOV, and that the license review policy is a presumption of denial.

The rule also adds Supplement No. 2 to Part 746, Russian Industry Sector Sanctions List.  This new supplement includes the ECCNs referenced above, but also includes more than 50 “Schedule B” numbers.  Schedule B numbers are a commodity classification number used for exports, administered by the U.S. Census Bureau and used for reporting foreign trade data.  The following main Schedule B numbers and items are listed: 7304, 7305, and 7306 (line pipe, drill pipe, casing), 8207 (rock drilling or earth boring tools and bits), 8413 (oil well pumps and elevators), 8421 (industrial gas cleaning and separation equipment), 8430 (offshore drilling and production platforms and boring/sinking machinery), 8431 (oil/gas field machinery parts), 8479 (oil/gas field wire line and downhole equipment), 8705 (mobile drilling derricks), and 8905 (floating or submersible drilling or production platforms and floating docks).

For U.S. companies and foreign companies that are subject to U.S. export controls and the jurisdiction of BIS, these new Russian energy sector sanctions pose new compliance challenges and risks.  As with any economic sanctions and export controls, but particularly with the progressing multilateral Ukraine-related sanctions, companies are urged to exercise enhanced due diligence in their compliance efforts.  U.S. and foreign companies that currently export, reexport, or transfer commodities, technology, and software covered by the ECCNs and Schedule B, should be alerted to this new rule and its compliance requirements.  U.S. companies and foreign companies that are subject to U.S. export controls that might only sell or transfer such items domestically should also undertake additional due diligence and not “self-blind” on determining whether Russia is the ultimate destination of the items.

The new rule can be found at this link, http://1.usa.gov/1okGBSH.

For assistance with understanding and complying with this new BIS rule, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

International Trade Presentations in Buffalo to Ring in the New Year!

International trade and business attorney, Jon Yormick, will discuss Export Control Reform (ECR) and economic sanctions in 2 separate presentations in Buffalo next month.

On January 15, the Law Offices of Jon P. Yormick Co. LPA is co-sponsoring a 2-hour workshop, Export Control Reform, Revisited, with Mohawk Global Trade Advisors and Daemen College. The event will be held at Daemen College, with check-in beginning at 8:30 am.  The program will run from 9:00-11:00 am. In addition to Jon, the workshop will feature Jim Trubits of Mohawk Global Trade Advisors, and Rae Perrott of Moog, Inc. They will discuss and share experiences with the recently implemented ECR from the perspectives of a global exporting company, a freight forwarder, and legal counsel. The focus will be on the transition of defense articles from the ITAR to the EAR, new AES documentation requirements, and tips for export compliance based on lessons learned from recent consent decrees. The cost is $35 and includes breakfast. For registration, contact Abby Frank at 315.552.3001 or at afrank@mohawkglobal.com.

Also on January 15, Jon will give a presentation at the Buffalo World Trade Association’s monthly dinner meeting. The BWTA was founded in 1921 and has the mission of expanding international business knowledge and activity of U.S. and Canadian companies in the Buffalo Niagara region.  In his presentation, Navigating Economic Sanctions Successfully, Jon will discuss economic sanctions regimes, OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases.  The meeting will be held at the Millennium Hotel, 2040 Walden Ave., with cocktails beginning at 5:30 and dinner at 6:30 pm. For registration and membership information, visit www.bwta.us.

Lost in the Headlines about FCPA Violations, one Northeast Ohio Company Settles an Export Control Civil Penalty Case

On October 22, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced they had reached an agreement with Diebold, Inc. to settle allegations that the company violated the Foreign Corrupt Practices Act (FCPA). The ATM manufacturer, headquartered in North Canton, Ohio, settled with the DOJ and SEC by agreeing to pay nearly $50 million to resolve allegations that it violated the FCPA by bribing government officials in China and Indonesia and falsifying records in Russia in order to obtain and retain contracts to provide ATMs to state-owned and private banks in those countries. According to the DOJ press release, the company made payments and provided gifts and non-business travel to bank employees, recording leisure travel for bank employees as “training.” The DOJ acknowledged that Diebold cooperated in the investigation, including making a voluntary disclosure regarding the FCPA violations.

A few weeks later, in mid-November Cleveland-based Park-Ohio Holdings, Inc. stated in its quarterly SEC filing that it received a subpoena from the SEC in August in connection with a third-party and that the DOJ was conducting a criminal investigation of the third-party. According to the company’s SEC filing, the third-party paid a foreign tax official on behalf of the company in 2007 and that the activity “implicates” the FCPA. The country where the payment was made was not identified.

In the middle of those reports, on October 25, the U.S. Department of Commerce, Bureau of Industry and Security (BIS), released a settlement agreement and order relating to GrafTech International Holdings, Inc., with global headquarters in the Cleveland suburb of Parma. The company settled 12 proposed charges that it exported without required licenses, agreeing to pay $300,000.00 and complete an external audit of its export controls compliance program and those of three overseas operations. While the case did not result in eye-catching multi-million dollar penalties, it is noteworthy nonetheless.

BIS alleged that on four occasions between 2007 and 2009, GrafTech violated the export control regulations when it exported CGW grade graphite to China without an export license. The graphite was classified under ECCN 1C107.a and controlled for missile technology reasons. The shipments had a value of approximately $276,000.00. BIS also alleged that on eight occasions between 2007 and 2010, GrafTech exported CGW grade graphite to India, without required export licenses. The value of those shipments totaled approximately $248,000.00. The settlement agreement stated that GrafTech made a voluntary self-disclosure regarding the violations. Notably, in April 2010, BIS, Office of Technology Evaluation, issued Critical Technology Assessment: Fine Grain, High Density Graphite which addressed U.S. export controls, among other key topics. That report can be found here.

As mentioned, in addition to the $300,000.00 penalty, GrafTech agreed to complete an external audit export controls compliance program and the compliance programs’ three subsidiaries, located in France, Italy, and South Africa. The settlement agreement and BIS order did not detail the involvement of the subsidiaries in the violations, if any, but it can be presumed that the company’s export controls compliance program at each location were a concern to BIS.

According to the terms of settlement, GrafTech must hire a third-party consultant with expertise in U.S. export control law to conduct the audit with respect to all exports and re-exports of items on the Commerce Control List (CCL). The audit must cover a twelve-month period preceding the date of the order and must be delivered to BIS within eighteen (18) months. The order also requires the company to identify actual or potential violations by any of the four entities being audited, including the directive that GrafTech “promptly provide copies of the pertinent air waybills and other export control documents and supporting documentation” to BIS.

Why there is an apparent recent rash of enforcement actions involving Northeast Ohio companies doing business globally is a mystery. Certainly, these revelations should be a “wake-up call” for companies in the region that conduct business globally and have global operations. More broadly, of course, these reports emphasize the need for all U.S. companies to re-double their FCPA and export control compliance efforts in order to avoid costly civil and criminal penalties, additional enforcement expenses, and the reputational harm that violations can cause.

For assistance with understanding and complying with the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

Sales Department Wake-up Call: Costly Antiboycott Violations Lurk in Documents and Communications

Violations of the U.S. Antiboycott sections of the Export Administration Regulations (EAR) tend to not get much attention compared to other violations of the EAR, such as those involving evasion, acting with knowledge, or aiding and abetting.  Antiboycott violations tend to lead to fewer civil penalty settlements with the Office of Antiboycott Compliance (OAC), Bureau of Industry and Security, U.S. Department of Commerce (BIS). When settlements are reported, they tend to be relatively minimal, but that might be changing in the wake of 2 settlements in the last several days.

In general, the OAC explains that the Antiboycott regulations “prohibit U.S. companies from furthering or supporting the boycott of Israel sponsored by the Arab League, and certain other countries, including complying with certain requests for information designed to verify compliance with the boycott.”  Sales forces of U.S. companies that are well-trained in export control compliance know that complying with these requests might be prohibited under the EAR and just the request to comply may be reportable to BIS.

The June 7, 2013 Proposed Charging Letter to the Director of Sales & Marketing Operations at one of the companies that recently settled its alleged Antiboycott violations seems to show that the sales teams (and maybe the Credit Department) at some  companies might not be knowledgeable enough about the Antiboycott regulations and compliance with them.  The first case involved a $32,000 settlement with the OAC on 16 violations occurring between 2009-11 – one violation of furnishing information about business relationships with boycotted countries or blacklisted persons and 15 violations of failing to report the receipt of requests to engage in a restrictive trade practice or foreign boycott against a country friendly to the U.S. aka Israel.  The company was alleged to be involved with selling or transferring goods or services from the U.S. to Bahrain, Oman, Qatar, and the UAE, all of which are generally friendly to the U.S. as well.

A table attached to the Proposed Charging Letter shows that the company provided information in a transport certificate for Oman stating “…the ship is permitted to enter Port Sultan Qaboos, in accordance with the Laws of Sultanate of Oman.”  The company failed to report boycott compliance requests from Bahrain and Oman found in various transaction documents (possibly emails) and letters of credit.  The requests included requests to ensure that the company “Delete all products, manufactured in Israel as they are banned in Bahrain,” or noting that “All Produce of Israel are Banned” and that the shipping company or agent was to issue a certificate that the ship was permitted to enter Muscat or Sultan Qaboos.

The second settlement with OAC involved 63 violations of the Antiboycott regulations – 5 for furnishing information and 58 for failing to report requests to comply with the boycott. This case was settled for $56,000.  The 5 violations of furnishing information arose from emails and invoices, each confirming certain parts sold to a UAE party were not made in Israel.  Additionally, 57 sales orders from the UAE and one from Malaysia each requested that the U.S. company cancel portions of the order because parts originated from Israel, requested substitute parts, confirm that parts were not made in Israel, of otherwise made clear that Israeli-origin products were prohibited.

As with all civil penalty settlements that are released to the public, these recent settlements with the OAC should be a “wake up call” for U.S. companies doing business in the Middle East and in other countries that support the Arab League boycott against Israel.  The failure to train the sales and credit teams on identifying boycott requests, properly analyzing those requests for potential reporting to the OAC and complying with the U.S. Antiboycott regulations can be costly in terms of penalties and reputational harm.

For assistance with understanding and complying with the Antiboycott regulations, other provisions of the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

 

September Presentations will Highlight Export Control Compliance

Upcoming presentations by international business and trade attorney, Jon Yormick, will focus on Export Control Reform (ECR) and the “deemed export” rule.

On September 9, Jon will speak at the Ohio Foreign Commerce Association’s luncheon meeting.  His presentation on Preparing for Compliance and Enforcement Under Export Control Reform, will address the impact of ECR on a company’s export compliance program and how the enforcement landscape is changing with ECR.

In Albany, New York on September 20, immediately following the Annual Northern Border Update of the Upstate New York Chapter – American Immigration Lawyers Association, Jon will present at a day-long CLE conference, Where Immigration Meets Other Law.  The conference will be held at Albany’s historic Ft. Orange Club and is presented by the Upstate New York Chapter – AILA and the Albany County Bar Association.  Jon will present What Immigration Lawyers Should Know About Export Controls and explain  how business immigration counsel can effectively assist technology sector clients in meeting their export controls compliance burdens, including the I-129 Part 6 certification and the Department of Commerce, Bureau of Industry and Security’s enforcement of the “deemed export” rule.  He will be joined by Jim Trubits of Mohawk Global Trade Advisors.  Seating is limited.  For more information, please visit http://bit.ly/14TwonL or register now for this event at http://conta.cc/12CLwsa.

Lying to Federal Investigators Leads to 15 Year Denial of Export Privileges

“Honesty is the best policy” is an age-old adage, attributed to patriot Benjamin Franklin, but one not followed by a couple who recently had their export privileges denied by the Department of Commerce, Bureau of Industry and Security (BIS).  BIS administers and enforces U.S. commercial export control laws and regulations, the Export Administration Regulations (EAR).  The EAR is often said control “dual use” items and technologies, meaning those goods and technologies that have both commercial and military applications.

According to a pair of July 16 Orders and underlying settlement agreements, Yaming Nina Qi Hanson and her husband, Harold Hanson, made false or misleading statements to a BIS special agent and an FBI special agent during January, 2009 interviews.  The interviews were part of an investigation of unlicensed exports to China of 20 miniature unmanned aerial vehicle (UAV) autopilots.  Qi Hanson stated that several university classmates in China provided her with $75,000 to purchase the autopilots from a Canadian seller, knowing this was false.  In truth, the president of Xi’an Xiang Yu Aviation Technical Group in Xian, China had provided the purchase money.  Meanwhile, Harold Hanson stated to investigators that he did not provide the Canadian seller with an end-use of the autopilots.  In truth, he had sent emails to the company stating the autopilots would be used for studying thunderstorm and tornado development in the Great Plains, knowing the autopilots were to be exported to China.

The denial order prohibits the Hansons from being involved, directly or indirectly, in any transaction involving the export of commodities, technology, or software from the U.S. that is subject to the EAR for 15 years.  The complete details of the denial orders can be found on the BIS website at http://1.usa.gov/14uUgmr.

The denial order represents a BIS administrative penalty in a case that included the Hansons pleading guilty, in 2009, to criminal charges of making false statements regarding the illegal exports.  A summary of the case is found in the BIS 2010 publication, “Don’t Let this Happen to You!” also found on the BIS website at http://1.usa.gov/15zw7HT.

Here, the (attempted) cover-up only served to aggravate the EAR violation.

For assistance with understanding and complying with the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS and in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

 

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