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(1999 Edition)
by Roszel C. Thomsen II and Antoinette D. Paytas
A. Export Administration Act Renewal
A. Computers and Microprocessors
6. Serbia, Kosovo, and Montenegro
A. China Cases Arising Out of the Cox Committee Report
There were four major legislative developments in 1999:
EAA Renewal – The Senate Banking Committee unanimously approved S. 1720, which would amend and extend the Export Administration Act. The House International Relations Committee is expected to take up EAA renewal early in 2000. S. 1720 is neither wonderful nor awful. Industry must decide whether to actively engage in the debate, or revert to damage control mode.
Encryption – The SAFE Act (H.R. 850) was poised for a vote on the floor of the House when the Administration announced that it would implement reforms to the regulations implementing export controls on encryption. The bill was removed from the legislative agenda, but the sponsors have said that they will push for a vote, if the Administration fails to deliver the promised reforms in 2000. We should know by January 14, 2000, when the Administration expects to publish the new encryption regulations.
Sanctions – Congress gave the Executive Branch authority to waive certain sanctions with respect to India and Pakistan. Perhaps, sanctions fever in the Congress has broken. It may be time to start affirmative lobbying against sanctions, arguing that popular access to information technology undermines dictators at least as effectively as sanctions.
Automated Export System – Congress made the Automated Export System mandatory for exports of items controlled under the EAR and ITAR, beginning 270 days after the Executive Branch certifies that the system is fully operational. Savvy exporters are beginning to exercise AES Option 4, beginning in January of 2000.
There were five major regulatory developments in 1999:
Computers and Microprocessors – The Administration issued rules increasing the thresholds for exports of computers and microprocessors under license exception on several occasions and stressed its intention to make additional increases in 2000. The Administration’s room to maneuver is significantly circumscribed by the National Defense Authorization Act, however, so progress is likely to remain slow and incremental.
Encryption – As pointed out above, the Administration took the wind out of the sails of the legislative reform efforts by promising to amend the implementing regulations by January 14, 2000.
Satellites – Transfer of satellites from the Commerce Department to the State Department has led to an inter-agency wrangle over the proper jurisdiction with respect to such items as radiation hardened integrated circuits, space qualified devices and similar items. Exporters are left in a quandary over where to obtain licenses. Resolution in 2000 is highly desirable.
Exporter of Record – The Bureau of Export Administration and Census Bureau are revising their regulations regarding the Shipper’s Export Declaration in a development that could increase the responsibility (and potential liability) of exporters with respect to ex works transactions.
Embargoes – The Bureau of Export Administration and the Office of Foreign Assets Control modified the various country-specific embargoes on numerous occasions in 1999. Some are more stringent, like Serbia, but the trend is toward loosening the various embargoes.
There were four major developments in the enforcement of export controls.
Cox Committee/China Cases – The Office of Export Enforcement reinvigorated a number of old cases involving export of technology to China. McDonnell-Douglas and its Chinese partner, CATIC, were indicted, and major cases against high performance computer companies were scrutinized afresh.
MK Technologies – The Under Secretary for Export Administration excoriated his own Office of Export Enforcement for its mishandling of charges that MK Technologies had illegally exported computers to China.
Alcoa – Alcoa made a big mistake when it failed to notice certain chemicals that it had been exporting to its subsidiaries for years had become licensable as “chemical weapons precursors”. No harm was done to the national security, as the chemicals were used by Alcoa’s subsidiaries for benign purposes, but the company paid a $750,000 fine.
Bernstein – Daniel Bernstein’s First Amendment challenge to the export controls on encryption source code is two steps closer to resolution. The Court of Appeals for the Ninth Circuit upheld the District Court’s ruling that software source code was subject to protection under the First Amendment, and the Administration floated a draft rule that would allow posting of “unrestricted” encryption source code with concurrent notification to the Commerce Department. If published, such a rule would render the Bernstein case moot.
There were a number of important changes to U.S. export controls in 1999. The statutory changes are described in Section I of this memorandum. The regulatory changes are described briefly in Section II of this memorandum. (They also are described in greater detail, with accompanying citations to the Federal Register, in our Summary of Final Rules, Proposed Rules and Notices Published in the United States Federal Register by the Commerce, State and Treasury Departments Amending Provisions of the Export Administration Regulations, International Traffic in Arms Regulations, Foreign Asset Control Regulations and Foreign Trade Statistics Regulations During 1999.) The third section of this memorandum describes several important enforcement cases.
As you will recall, the Export Administration Act (“EAA”, 50 USC App 2401 et seq.), which provided the statutory basis for the imposition of U.S. export controls during the Cold War, expired in 1994, five years after the fall of the Berlin wall. Since then, the President has retained his authority to control exports under the Export Administration Regulations (“EAR”, 15 CFR 730 et seq.) pursuant to various Executive Orders invoked under authority of the International Emergency Economic Powers Act (“IEEPA”, 50 USC 1701 et seq.).
Most legislators and regulators, not to mention the public at large, recognize that Executive Orders and IEEPA are a poor substitute for a reauthorized EAA. Although they agree that the EAA needs to be updated to reflect the realities of the post-Cold War world, there has been little consensus on how to develop EAA renewal legislation that balances legitimate national security interests with commercial realities, in the absence of a threat like the Evil Empire.
As a result, all attempts to reauthorize the EAA in the 1990’s have failed. In 1999, however, the Senate Banking Committee made a serious effort to develop compromise legislation, under the bipartisan leadership of Senators Gramm (R-TX), Enzi (R-WY), Sarbanes (D-MD) and Johnson (D-SD).
The culmination of this effort, S. 1720, was the product of unprecedented consultations with industry. The staff of the Banking Committee shared several drafts with industry, and integrated numerous suggested measures into the final bill, which the Banking Committee approved unanimously. The Senate leadership had hoped to bring the bill to a vote in late 1999, but wrangling over the budget delayed consideration, and it was pulled late in the session.
Despite the frequent consultation with industry and the many changes that were made to the various drafts, about the best that one can say about S. 1720 from the perspective of industry is, “it is not as bad as it might have been”.
Let’s focus for a moment on what the bill does not do, from the perspective of industry. It does not replace the hydra-headed inter-agency review monster with a more tractable beast. It does not impose discipline on unilateral foreign policy controls. It does not provide for judicial review of arbitrary and capricious acts by the executive branch.
In fact, there are some aspects of the bill that are downright hysterical. For example, the bill would increase the penalties for violation of the EAA, substantially. Indeed, the penalties for violation of the EAA would dramatically exceed the penalties for the acts that gave rise to the indictment of Wen Ho Lee for allegedly transferring nuclear secrets to China.
S. 1720 is by no means a “done deal”. Both the Senate Armed Services and Foreign Affairs Committees have raised significant substantive and jurisdictional issues that must be resolved before the full Senate can vote on the bill. On the House side, the International Relations Committee has barely begun to consider EAA renewal. The House may choose to draft its own bill, rather than use S. 1720 as its starting point. In light of the fact that 2000 is an election year, the Senate and House would have to send their respective bills to conference by early summer, if the 106th Congress is going to enact EAA renewal legislation.
Industry has basically three options. The first option is to aggressively support S. 1720 and/or a House bill. It is difficult to generate much enthusiasm for S. 1720, however, and the House International Relations Committee’s views on EAA renewal have not taken shape. The second option is to aggressively oppose S. 1720 and/or a House bill. There is little in S. 1720 that is patently awful, except perhaps the increased penalties, and no CEO is going to lead the charge against increased penalties, so this option is not especially attractive. The third, and perhaps the default, option is to do nothing, and let the fragile coalition supporting S. 1720 collapse of its own weight.
Both the House and Senate have introduced legislation that would reduce the onerous export controls on encryption. The most significant bill is the Security and Freedom through Encryption (SAFE) Act, H.R. 850. Representatives Robert Goodlatte (R-VA) and Zoe Lofgren (D-CA) enlisted a majority of Members as co-sponsors of H.R. 850, and they steered it through a gauntlet of five committees, including the House Armed Services and Intelligence Committees, which traditionally have been the “graveyards” for encryption reform legislation.
H.R. 850 was poised for a vote on the floor of the House in mid-September when the Administration announced its preemptive strike, promising to reform the regulations governing encryption exports under the EAR. These proposed changes to the EAR are described in Section II.B. of this memorandum. Representatives Goodlatte and Lofgren promptly declared victory, and the H.R. 850 was taken off the legislative calendar, pending the implementation of the promised reforms by publication of a rule amending the EAR.
On the Senate side, the most significant bill to reform encryption export controls is the PROTECT Act (S. 798) sponsored by Senator John McCain (R-AZ). S. 798 was positioned initially as a “centrist” bill, between the sweeping reforms promised by the SAFE Act and the recalcitrant Administration. However, Senator McCain never succeeded in getting the bill out of the Commerce Committee, of which he is the Chairman, so prospects for passage were not (and are not) very good.
The important question at this point is whether the reforms promised by the Administration have taken the wind out of the sails of the legislative reform efforts. We will have to study the interim rule, which the Bureau of Export Administration has promised to publish by January 14, 2000, in order to make a final determination, but it is going to be a close call. If the Administration in fact implements the reforms that it announced on September 16, 1999, then it may be difficult to generate substantial support for another charge up Capitol Hill.
Throughout the 1990’s, enactment of legislation imposing sanctions against foreign countries was one of the most popular means at Congress’s disposal to deal with activities by foreign governments that are unpopular. Targets of sanctions ranged from rogue regimes, like Libya and Iran, to proliferators, like India and Pakistan, and even from time to time included allies, like Canada and Italy.
Last year, we predicted that the sanctions imposed against India and Pakistan might have been the high point in the use of sanctions. At the end of the 105th Congress, the so-called Brownback Amendment (Pub. L. 105-277, Sections 901-905) lifted some of the sanctions related to financial investments in India and Pakistan, and we predicted that other sanctions also might be waived selectively, once Congress provided authority to do so.
Finally, at the end of the First Session of the 106th Congress, authority to waive sanctions selectively was included in H.R. 2561, Title IX, Waiver of Certain Sanctions Against India and Pakistan, which was passed as a part of the Department of Defense Authorization Act, 2000 (Pub. L. 106-79). In addition to providing waiver authority, the legislation expressed the sense of the Congress that “broad application of export controls to nearly 300 Indian and Pakistani entities is inconsistent with the specific national security interests of the United States” and “export controls should be applied only to those Indian and Pakistani entities that make direct and material contributions to weapons of mass destruction and missile programs and only to those items that can contribute to missile programs or weapons of mass destruction programs”.
Simultaneously, BXA was reviewing the so-called “entities list” with an eye toward reducing its scope. In December, Assistant Secretary Roger Majak announced that 51 entities would be removed from the list. However, BXA must publish a rule in the Federal Register in order to implement this decision. One might also hope that BXA would narrow the list of items requiring a license under the Indian sanctions program. At this time, it is not clear whether such an announcement is planned.
As the enthusiasm for sanctions fades in the Congress, perhaps it is a propitious time to consider a broader attack against embargoes, generally. Such an argument might be based on the so-called “Dictator’s Dilemma”. As articulated by (former) Secretary of State George Shultz:
Totalitarian societies face a dilemma: either they try to stifle these [information and communication] technologies and thereby fall further behind in the new industrial revolution, or else they permit these technologies and see their totalitarian control inevitably eroded. In fact, they do not have a choice, because they will never be able entirely to block the tide of technological advance.”
A sound intellectual basis exists for the proposition that sanctions are not only useless, but counterproductive. Industry, which has been on the defensive for selling to rogue regimes for too long, should argue aggressively that exports of information technology undermine dictators just as effectively as, and perhaps more effectively than, sanctions.
Making the transition from paper filing of Shipper’s Export Declarations (“SEDs”) to electronic filing sounds like a good idea, in principal. However, the primary benefits of electronic filing accrue to the enforcement community, not to exporters. Unfortunately, the 106th Congress has decided to make electronic filing mandatory, sometime in 2000.
In Subtitle E – Automated Export System Relating to Export Information of the Consolidated Appropriations Act, 2000, Congress mandated electronic filing of SEDs through the Automated Export System for all items on the Commerce Control List of the EAR and the Munitions List of the International Traffic in Arms Regulations (“ITAR”, 22 CFR Part 130 et seq.). This provision will take effect 270 days after certification to the Congress that the Automated Export System is fully functional.
Although not required, many exporters will want to get a head start using the popular AES Option 4, in order to avoid unnecessary delays in the processing of paper SEDs during the transition period.
As you may recall, on November 18, 1997, Congress passed the National Defense Authorization Act for Fiscal Year 1998 (“NDAA”, Public Law 105-85). Title 12, Subtitle B, Sections 1211-1215 of the NDAA imposed new requirements on exports of computers under License Exception CTP.
On July 1, 1999, the President issued a statement announcing the first positive reforms to the export controls on computers since 1995. The changes to the export controls on computers fell into several broad categories: changes to country lists, changes to licensing thresholds, and changes to notification thresholds. For so-called “Tier 2” countries, the President announced that he will raise the licensing level from 10,000 to 20,000 MTOPS. For so-called “Tier 3” countries, the President announced that he intends to raise the licensing level from 2,000 to 6,500 MTOPS for military end-users and from 7,000 to 12,300 MTOPS for civilian end-users. The President also announced that he intends to increase the NDAA notification threshold from 2,000 to 6,500 MTOPS, which is subject to Congressional notification requirements, so it would not take effect until early 2000. The Administration also committed to reviewing the thresholds on a biannual basis. It has indicated that it intends to increase the threshold for Tier II to the 32,000-36,000 range in six months, and to make corresponding adjustments for Tier III.
On August 3, 1999 (64 FR 42009), BXA amended the EAR by raising the performance parameters for those computers that can be exported and reexported under License Exception CTP. The upper threshold for Computer Tier 2 countries was raised from 10,000 MTOPS to 20,000 MTOPS. The upper threshold for Computer Tier 3 countries was raised from 7,000 MTOPS to 12,300 MTOPS for civilian end-users and end-uses. For military end-users and end-uses in Computer Tier 3 destinations the CTP parameter remains at 2,000 MTOPS. The upper parameter for military end-users and end-uses to Computer Tier 3 countries will be raised from 2,000 MTOPS to 6,500 MTOPS on the same date the threshold for advance notification for high performance computers (HPC) exports to Tier 3 countries is raised from 2,000 MTOPS to 6,500 MTOPS. The threshold for advance notification for exports of HPCs to Tier 3 countries is raised to 6,500 MTOPS, effective approximately 180 days following the submission of a statutorily mandated report to Congress. The President sent this report to Congress on July 26, 1999. In addition, the following countries were moved from Computer Tier 2 to Computer Tier 1: Brazil, the Czech Republic, Hungary, and Poland.
On December 29, 1998 (63 FR 71580), BXA increased the License Exception CIV eligibility level for microprocessors controlled ECCN 3A001 from a composite theoretical performance of 500 MTOPS to 1200 MTOPS.
On July 8, 1999 (64 FR 36779), BXA published an interim rule with request for comments raising the threshold for licensing of microprocessors from 1,200 to 1,900 MTOPS.
On November 26, 1999 (64 FR 66372), BXA published an interim rule with request for comments on adjusting the threshold for licensing of microprocessors from 1,900 MTOPS to 3,500 MTOPS. This rule also adjusts the License Exception CIV eligibility level for graphics accelerators controlled by Export Control Classification Number (ECCN) 4A003 from 10 million vectors per second to 75 million vectors per second.
Like the computer controls, the microprocessor controls will have to be revisited every six months or so, in order to avoid controlling Intel’s latest Pentium III processors used in IBM-compatible computers and PowerPC chips used in Macs. The Administration has indicated that it intends to make such adjustments, in order to avoid controlling anything except general-purpose microprocessors that are sold in small quantities for high-end computers and application specific microprocessors that have military applications.
On December 31, 1998 (63 FR 72156), BXA published an interim rule implementing the Vice President’s announcement of September 16, 1998 with respect to cryptographic export controls. This rule increased the decontrol limit from 40 to 56 bits for general-purpose cryptographic products. It also extended favorable licensing treatment to include insurance companies, health and medical end-users and on-line merchants. In addition, the rule created a category of so-called “recoverable” products exportable to foreign commercial end-users in 42 countries.
On September 16, 1999, the Clinton Administration announced reforms to the encryption export controls that will make it much easier for American companies to compete with their foreign competitors. The export control reforms are part of a broader package designed to assist the Defense Department and intelligence community with critical infrastructure protection and to assist the law enforcement community with the development of new investigative techniques.
Discussion drafts were circulated on November 19, 1999 and December 20, 1999. Regulations should be published on or before January 14, 2000. Here are a few preliminary observations on some of the critical points:
The definition of "retail" now looks a lot like the old mass-market software note. Specifically, distribution via mail order, telephone and electronic transactions now may qualify as distribution methods allowing a product to be classified as “retail”. The definition of “retail” also includes products with “equivalent functionality” to retail products. The major stumbling block to being classified as “retail” is the exclusion of “network infrastructure products" which is intended to exclude routers, switches, and firewall/virtual private network type products that are marketed to carriers, large enterprises and governments. Another troubling new aspect of the December draft is a new limitation that appears to restrict eligibility of web servers to those which are “low end”. It is not clear what this really means.
Another welcomed new addition is a provision stating that "network services" may be retail. This should help to avoid the preference for “shrink wrap” products at the expense of network-centric products under the November draft.
The definition of “government” is narrower than in the November draft. For example, Telco/ISPs are explicitly excluded from the definition of government. Unfortunately, however, regional and local governments are explicitly included. Uncertainty surrounds other terms, like "governmental research institutions" and "governmental corporations". The preferred approach would be to exclude from the definition of “government” all civil end-users, as currently is the case with License Exception CIV. We should push for a similar rule, for encryption.
The November draft included an artificial distinction between a Telco/ISP that is privately owned vs. one that has some government ownership. The ownership of the Telco/ISP determined how the Telco/ISP could use encryption products received under License Exception. Although this ownership criterion has been eliminated, there remains a restriction on how Telco/ISPs, irrespective of their ownership, may use products received under License Exception. In place of a "white list" of services that were authorized in the November draft, now there is a "black list" of services that may not be provided. This list is limited to backbone encryption and services specifically for governments. (It is an open question whether the "cheapskate VPN" is permitted or prohibited.)
Open source software now is characterized as “publicly available” (if it is for weak crypto), or “unrestricted” (if it is for strong crypto and distributed under a GNU-style license) or “commercial” (if it is available only for non-commercial use). In general, such source code can be posted on the internet, but different notification, screening and reporting requirements apply, depending on which category the source code falls into.
The definition of “export” has been modified to provide a “safe harbor” for downloads of software via the Internet. In essence, it consists of “export control on the honor system” with additional screening for embargoed countries and government end-users based on blocking of certain domain names (e.g., .gov for “government” and .ly for “Libya”).
The reporting requirements have been relaxed. In general, only the first export (whether to end-user or distributor) is reportable, with an exclusion for exports to individuals (a nod in the direction of the EU privacy directive). In addition, it is clear that exports to US subsidiaries and US banks (but not other banks) are not reportable.
A section in the November draft that was entitled "Encryption Licensing Arrangements" has been extended to include individual licenses. It provides:
(3) Encryption Licensing.Applicants may submit license applications for exports and re-exports of encryption items not eligible for export under license exception in unlimited quantities for all destinations except Cuba, Iran, Iraq, Libya, North Korea, Sudan or Syria, including exports and re-exports of encryption technology to strategic partners of U.S. companies (as defined in part 772). For Encryption Licensing Arrangements, the applicant must specify the sales territory and class of end-user. Encryption Licensing Arrangements are valid for four years and may require reporting. Licenses required for exports of encryption items to governments, or internet and telecommunications service providers for the provision of specific services to governments may be favorably considered for civil uses, e.g. social or financial services to the public, civil justice, social insurance, pensions and retirement, taxes and communications between governments and their citizens. Applications for the export and re-export of all other encryption items will be reviewed on a case-by-case basis.
You may recall that the State Department transferred jurisdiction with respect to commercial satellites to BXA in 1996. In Section 1513 of the National Defense Authorization Act for the Fiscal Year 1999 (Pub. L. 105-261) Congress formally transferred all satellites and related items from the Commerce Control List to the United States Munitions List. The statute also made it clear that Congress is unhappy with BXA’s approach to safeguarding the national security. “United States business interests must not be placed above United States national security interests . . .. Due to the military sensitivity of the technologies involved, it is in the national security interest of the United States that United States satellites and related items be subject to the same export controls that apply under United States law and practice to munitions.”
On March 18, 1999 (64 FR 13338), BXA amended the EAR by removing commercial communications satellites and related items from the Commerce Control List and retransferring these items to the United States Munitions List. On March 22, 1999 (64 FR 13679), the Department of State published its final rule amending the ITAR by reasserting export control jurisdiction with respect to commercial communications satellites under the U.S. Munitions List.
Aerospace companies in the U.S. and abroad have been dismayed at the regulations accompanying the transfer of jurisdiction from Commerce to State as well as the time required to process a license application. Exporters are concerned about the requirement for DOD monitoring in non-NATO, non-major-ally countries and the requirement for a Technology Transfer Control Plan (“TTCP”) for each transaction. DTC has set an internal goal of processing applications within 90 days, but it is just a goal.
Controversy also surrounds the Commodity Jurisdiction process and determining exactly what was transferred back to State. At issue are space qualified items, radiation hardened devices, and night vision equipment. Commerce believes that some of these items are subject to Commerce jurisdiction as dual use items. State is holding fast to its position that these items are subject to State’s jurisdiction.
On October 4, 1999, BXA (64 FR 53853) and the Bureau of the Census (64 FR 53861) published proposed regulations that would revise the requirements for completion and filing of Shipper’s Export Declarations (“SEDs”). There is not much good news. For example, there is a new requirement to obtain a written confirmation if a party other than the original seller is assuming responsibility for compliance with the EAR. There is a new requirement to enter the ECCN on the SED for all products, except those that are classified under EAR99. Clearly, concerns expressed by the Census Bureau with respect to poor reporting have taken a back seat to enforcement concerns, which are paramount.
A major concern is that the proposed revisions may require a party to be listed as “exporter of record” that is not the party that has the authority “to determine and control the export of items.” This fundamental change in policy makes it more likely that some U.S. principal parties in interest will have to expend precious financial and personnel resources fending off unwarranted export investigations that would not have taken place, but for their listing as the so-called “Exporter” on the SED.
A modification is necessary to reduce the risk in routed export transactions that U.S. export enforcement agencies other than BXA will hold “U.S. Principal Parties in Interest” responsible for export violations committed by forwarding agents over which the former have no effective control. BXA makes this point in a note to § 758.2(c) of its proposed rule, which states that the information in Block (1a) of the SED is required by the Census Bureau for statistical purposes and that “[f]or purposes of licensing responsibility under the EAR . . . the U.S. agent of the foreign principal party in interest may be the exporter, regardless of who is listed in Block (1a) of the SED”. It is useful for BXA regulations to state the limitations of the Census regulations, but it would be preferable for the Census regulations to also make this statement directly.
On May 13, 1999 (64 FR 25807), BXA amended the EAR to implement a part of the January 5, 1999, Presidential initiative to enhance the United States' support of the Cuban people to promote a transition to democracy. This final rule authorized the issuance of licenses for exports of food and certain agricultural commodities sold to individuals and independent non-governmental entities in Cuba. Agricultural commodities that may be authorized for sale under the new policy include, but are not limited to, insecticides, pesticides, herbicides, seeds and fertilizer. Agricultural equipment is not eligible for consideration under this policy.
Also on May 13, 1999 (64 FR 25808), the Treasury Department amended the Cuban Assets Control Regulations (31 CFR 515) to modify certain provisions with respect to remittances and travel-related transactions and to make other clarifying and conforming amendments to the regulations. The regulations also implement a statutory provision excluding from an existing general license transactions involving certain intellectual property used in connection with a business or assets that were confiscated.
On April 26, 1999 (64 FR 20168), the Treasury Department amended the Iranian Transaction Regulations (31 CFR part 560) to implement Executive Order 13059, which clarifies the steps taken in Executive Orders 12957 and 12959 with respect to the declaration of national emergency and imposition of new and additional sanctions against Iran. In summary, it substantially increases the controls on the importation of goods and information from Iran and exports and reexports of goods and information to Iran.
On August 2, 1999 (64 FR 41784), the Treasury Department issued its revised policy with respect to donations and sales to embargoed countries of food, medicine and goods that meet basic human needs. The Treasury Department amended the Iranian Transactions Regulations to add statements of licensing policy with respect to commercial sales of agricultural commodities and products, medicine, and medical equipment under both general and specific licenses.
On November 1, 1999 (64 FR 58789), the Treasury Department amended provisions relating to the financing of agricultural and medical sales appearing in the Iranian Transactions Regulations. While general licenses continue to prohibit financing of sales by entities of the Government of Iran, the amendments remove language prohibiting the issuance of specific licenses authorizing financing by entities of those governments. New appendices were added to identify approved eligible procurement bodies of the Government of Iran. Technical changes were made in the regulations with respect to licensing requirements of other Federal agencies. Technical changes were made concerning debits and credits to Iranian accounts on the books of U.S. depository institutions and concerning eligible purchasers. Finally, technical changes were made to revise language on informational materials and language on informational materials and on “H” (temporary worker) visas.
There were no changes during 1999.
On August 2, 1999 (64 FR 41784), the Treasury Department issued its revised policy with respect to donations and sales to embargoed countries of food, medicine and goods that meet basic human needs. The Treasury Department amended the Libyan Sanctions Regulations (31 CFR part 550) to add statements of licensing policy with respect to commercial sales of agricultural commodities and products, medicine, and medical equipment under both general and specific licenses.
On September 13, 1999 (64 FR 49382) BXA amended the EAR by reinstating provisions of License Exception AVS for temporary reexports to Libya of foreign registered aircraft subject to the EAR. This limited action is taken in response to suspended United Nations sanctions.
On November 1, 1999 (64 FR 58789), the Treasury Department amended provisions relating to the financing of agricultural and medical sales appearing in the Libyan Sanctions Regulations. While general licenses continue to prohibit financing of sales by entities of the Government of Libya, the amendments remove language prohibiting the issuance of specific licenses authorizing financing by entities of those governments. New appendices were added to identify approved eligible procurement bodies of the Government of Libya. Technical changes were made in the regulations with respect to licensing requirements of other Federal agencies.
In October, the Administration announced that it would ease the licensing requirements under the oldest embargo currently on the books. Basically unchanged since 1950, the embargo of North Korea has been reformed about as little as its Stalinist regime, over the years. Under the new policy, which requires implementing regulations before it becomes effective, we anticipate that the Administration will authorize financial investments in non-strategic industries, like agriculture, travel and tourism, and perhaps exports of products classified under EAR99 without a license. The embargo of North Korea might, in due course, be similar to the current embargo of Syria.
In his address to the nation on March 24, 1999, President Clinton announced that the Armed Forces of the United States had joined those of our NATO allies in air strikes against Serbian forces responsible for brutal attacks on ethnic Albanians in the province of Kosovo. On May 4, 1999 (64 FR 24018), Executive Order 13121 was published amending the embargo of Serbia. This rule imposes a license requirement for exports and reexports to Serbia of all items subject to the EAR.
On November 5, 1999 (64 FR 60339), BXA amended the EAR to exempt the Serbian province of Kosovo (“Kosovo”) from certain license requirements for exports and reexport to Serbia of items subject to the EAR. For purposes of the EAR, this rule eliminated the term “Federal Republic of Yugoslavia” and established Serbia, Kosovo, and Montenegro as distinct destinations under the EAR. This distinction clarifies the applicability of export controls under the EAR to different destinations. Although comprehensive sanctions on Serbia (excluding Kosovo) remain in place, both Kosovo and Montenegro retain, for License Exception eligibility purposes, membership in “Country Group B” and “Computer Tier 3”. Serbia, Kosovo, and Montenegro are now listed separately in the Commerce Country Chart (see Supplement No. 1 to part 738).
On August 2, 1999 (64 FR 41784), the Treasury Department issued its revised policy with respect to donations and sales to embargoed countries of food, medicine and goods that meet basic human needs. The Treasury Department amended the Sudanese Sanctions Regulations to add statements of licensing policy with respect to commercial sales of agricultural commodities and products, medicine, and medical equipment under both general and specific licenses.
On November 1, 1999 (64 FR 58789), the Treasury Department amended provisions relating to the financing of agricultural and medical sales appearing in the Sudanese Sanctions Regulations. While general licenses continue to prohibit financing of sales by entities of the Government of Sudan, the amendments remove language prohibiting the issuance of specific licenses authorizing financing by entities of those governments. Technical changes were made in the regulations with respect to licensing requirements of other Federal agencies.
On September 16, 1999 (64 FR 50247), BXA amended the EAR by revising the license review policy for the export and reexport of certain aircraft parts and components to ensure safety of flight for civil passenger aircraft. License applications for the export and reexport of aircraft parts and components for Syrian civil passenger aircraft will be reviewed on a case-by-case basis with a presumption of approval.
On August 12, 1999 (64 FR 43924), the Treasury Department amended the UNITA (Angola) Sanctions Regulations to implement Executive Order 13069 of December 12, 1997, and Executive Order 13098 of August 18, 1998, prohibiting certain transactions with respect to the National Union for the Total Independence of Angola (“UNITA”) and to make other technical and conforming changes.
In October, the Administration announced very modest changes with respect to the India-Pakistan sanctions, authorizing the Agriculture Department to extend credits for exports of food, and authorizing the State Department to provide assistance to the Asian Elephant Conservation Fund, the Rhinoceros and Tiger Conservation Fund, and the Indo-American Environmental Leadership program. A more detailed review of the India-Pakistan sanctions is rumored to be imminent.
As discussed in section I.C of this memorandum, on December 16, BXA announced that 51 Indian entities will be removed from the list of entities originally sanctioned in 1998 in response to the detonations of nuclear explosive devices by India and Pakistan. The changes will take effect after a rule is published in the Federal Register.
The release of the so-called Cox Committee report on the export of sensitive products and technologies such as high performance computers and satellites to China and Russia in 1999 did not excoriate the BXA licensing process, as many had feared. However, it did persuade the Office of Export Enforcement (“OEE”) to dive back into the dumpster and retrieve several cases that previously had been discarded.
On October 19, 1999 the Justice Department announced that a federal grand jury in the District of Columbia had returned a 16-count indictment setting forth criminal charges against McDonnell-Douglas Corporation (“MDC”, a subsidiary of the Boeing Company) and the China National Aero Technology Import and Export Corporation (“CATIC”) for making false and misleading statements and material omissions in connection with the exportation by MDC to CATIC of machine tools used to build aircraft parts. Along with two Chinese nationals employed by CATIC, Robert J. Hitt, who was the Director of the China Program Office at MDC also was indicted. The defendants have indicated that they intend to contest the charges, vigorously.
BXA and the Justice Department also may be tempted to revive cases against exporters of high performance computers to China and Russia. There was a lot of saber rattling last summer, followed by a quiet period. The obstacles to obtaining evidence in countries like China and Russia is formidable, but these cases are never over until the five year statute of limitations runs.
Speaking of the statute of limitations, exporters did get some very welcomed news In the Matter of MK Technologies. OEE filed a charging letter alleging that MK Technologies had violated the EAR in connection with the export of certain computers to China. MK responded that the charges were barred by the statute of limitations, because MK and OEE never entered into a valid extension agreement. OEE contended that the changes it had made to the extension agreement were “minor” and “immaterial”, but the Administrative Law Judge disagreed. In his order, Under Secretary Reinsch wrote:
This is more than a question of contact [sic] law. My decision in this case will guide Bureau of Export Administration employees in dealing with the public. Even if the changes OEE’s counsel made without consulting respondent’s counsel would not have prevented the formation of a commercial contract, they prevent an extension of the statute of limitations in this bureau. In the Bureau of Export Administration, at least, we do not change someone’s words without his consent. This agreement could have had handwritten portions, it could have been faxed, it could have been e-mailed. But both the parties had to have agreed on all the same words. It is important that agreements to which this agency is a party are clear, unambiguous, and agreed to by all sides.
I hasten to add that there is not evidence in the record that the respondent’s counsel was operating in other than good faith. On two occasions before the statute ran, he sent documents to counsel for OEE that, had the latter not rejected them, would have extended the statute. But even if counsel had been acting in bad faith, OEE’s remedy was simple. It should have filed a charging letter.
The result in this case should encourage counsel to treat the statue of limitations with more respect. The Office of Export Enforcement should review its procedures to “old” cases such as this. The parties here were trying to extend the statute for the fourth time. While I understand the value of resolving cases by settlement, and I agree that it is appropriate to extend the statute of limitations to facilitate that, such extensions should not be infinite.
This case represents OEE’s most humiliating defeat in recent memory. However, exporters also suffered a startling defeat in 1999, In the Matter of Alcoa.
In 1991, BXA amended the Commerce Control List imposing new license requirements on certain chemical weapons precursors. No one at Alcoa noticed, and the company kept shipping the chemicals to its subsidiaries in Jamaica and Suriname for company use without obtaining licenses.
Although Alcoa only made 50 actual shipments, BXA alleged that each shipment constituted two violations – one for exporting without a license and one for false statements on the SED. Alcoa made the usual arguments that the regulations were opaque, that the exports would have been approved by BXA if applications had been filed, and that the company had improved its compliance program.
Neither the Administrative Law Judge nor Under Secretary Reinsch were impressed by Alcoa’s defenses. The Administrative Law Judge recommended a per-violation sanction of $10,000, for a total of $1,000,000. Under Secretary Reinsch reduced the per violation sanction to $7,500, for a total of $750,000, which is still considerably more than the average sanction of $2-5,000 per violation. Ouch.
The Court of Appeals for the Ninth Circuit issued its opinion in Bernstein v. United States in 1999, and it was another victory for the plaintiff asserting his First Amendment right to post encryption source code on the internet. The Justice Department succeeded in convincing the Ninth Circuit to hold a re-hearing en banc, but the case may be moot by the scheduled hearing date in March of 2000. Discussion drafts of the new encryption regulations would permit anyone to post “unrestricted” encryption source code on the internet, provided that they send a complementary copy to BXA.
We anticipate that approximately one new change to the export control regulations will be published every third business day during 2000, based on historical patterns. In addition, we expect that there will be new bills introduced to the Congress, an additional enforcement cases worthy of note, including possible dismissal of the Bernstein case. As in the past, we will keep you informed of new developments monthly.