The Administration of President George W. Bush begins its second year in January of 2002, so we would like to take this opportunity to reflect on its accomplishments in 2001 and comment on proposed strategies for 2002.

One might have thought that the events of September 11, 2001, would have led to a reevaluation of export control policy and procedures in the Bush Administration. However, there is little evidence that the terrorist attacks have had much of an impact. The Treasury Department’s Office of Foreign Assets Control has added a number of suspected terrorists and related organizations to its list of Specially Designated Terrorists. There were some minor relaxations of controls on India and Pakistan, our new allies in the war against terrorism. However, the Bush Administration spent most of 2001 getting its export control team in place in the various agencies, and attempting to define an agenda. There is scant evidence that the events of September 11^th have had much of an impact, so far.

The Bush Administration did not get its team of political appointees into place very quickly in 2001. Under Secretary for Export Administration, Kenneth I. Juster, was not confirmed by the Senate until May. Neither Assistant Secretary for Export Administration, James J. Jochum, nor Assistant Secretary for Export Enforcement, Michael Garcia, were sworn in to their positions until May and August, respectively. Appointments at other agencies similarly lagged.

Perhaps, these delays account in part for the relatively modest changes to export control in 2001. However, it also is important to note that as of this writing the political leadership of the various agencies still has not articulated a discernible vision of the export control system, for 2002 and beyond, other than a stated desire to make the trains run on time.

Consider the commentary of Eric Wemple at The Export Practitioner, who published the following remarks:

BXA’s upper management appears content to essentially sit on the looseleaf Export Administration Regulations (EAR), showing no eagerness to revise portions that continue to baffle export clerks everywhere.

Juster all but declared over the summer that his agenda for BXA could fit onto an Update conference cocktail napkin. In a meeting with reporters, the under secretary cited the improvement of interagency relations and strengthening the multilateral export control regimes, particularly the 33-country Wassenaar Arrangement.

The situation at other agencies is similar. Defense News reports that Jack Shaw, the new Deputy Under Secretary of Defense for International Technology Security, has the following objectives:

By the time I step down, I would like to be assured that I have not only a speeded up and streamlined system, but one … more transparent and user friendly.

The State Department has been equally vague. Lincoln Boomfield, the Assistant Secretary of State for Political and Military Affairs, said he plans a sweeping review of the Bureau’s role in the export licensing process. He would like to make the system more industry-friendly. In his remarks to the 14^th Annual Export Controls Conference in November, he said:

The Bush Administration recognizes that we need to balance the non-proliferation goal of export controls with the need for defense trade to bolster alliance interoperability and maintain the quality of the defense industry. In fact, we need to do both functions – denying risky exports and approving legitimate ones – better.

To summarize, the overarching agenda of the Bush Administration’s export control team appears to be as simple as trying to make the export control process function more efficiently. In fairness to the Bush Administration, it is barely one quarter of the way through its initial term of office. Nevertheless, its articulated objectives and accomplishments to date suggest that there are no major initiatives currently contemplated, either to expand or contract the scope of business affected by U.S. export controls.

Export Administration Act Renewal Legislation

The Bush Administration inherited a legislative process that was essentially broken. During the Clinton Administration, centrist bills to amend and extend the Export Administration Act (“EAA”, 50 USC App 2401-2411) typically died either because various committees attached amendments to the bill that were unacceptable to industry, or because time ran out on the legislative calendar.

The same situation prevailed during 2001. Senators Gramm (R-TX) and Enzi (R-WY) were able to push a centrist bill (S. 149) through the Senate, but the House International Relations Committee led by Representative Henry Hyde (R-IL) attached so many amendments to its counterpart bill (H.R. 2581) that industry had no alternative but to oppose it.

An intriguing question is why the Bush Administration let the process in the House move so far from the center of the export control debate. The House has a Republican majority, albeit a small one. The Bush Administration’s presence during the House International Relations Committee mark-up was barely visible. Given that six additional House committees (Agriculture, Armed Services, Commerce, Intelligence, Rules and Ways and Means) have referral rights, there is a lot of work to be done if a bill that is acceptable to industry can be salvaged.

Recommendation: Given the decidedly negative trend in the House, we recommend that industry oppose any EAA renewal legislation that departs radically from S. 149. Such opposition probably will be enough to kill EAA renewal legislation in the 107^th Congress.

Export Administration Regulations Amendments

The Bush Administration inherited a set of Export Administration Regulations (“EAR”, 15 CFR Part 730 et seq.) that were badly in need of reform in a number of areas. The Clinton Administration had promulgated important amendments to the regulations governing exports of computers, microprocessors, cryptographic products, and others. However, the reforms to the computer and microprocessor controls were merely incremental increases in the performance levels of products that qualified for export. The cryptographic controls were more liberal, but remained fiendishly complex.

Let’s look at computers first. When George H. W. Bush (the Elder) left the Presidency in 1993, computers having a Composite Theoretical Performance (“CTP”) of 12.5 Million Theoretical Operations Per Second (“MTOPS”) were subject to national security controls. When George W. Bush (the Younger) became President in 2001, computers having a CTP of 6,500 MTOPS were subject to national security controls. However, the current Bush Administration has failed to publish amendments to the EAR implementing Wassenaar’s agreement in December 2000 to decontrol up to a CTP of 28,000 MTOPS, let alone Wassenaar’s agreement in December of 2001 to decontrol up to a CTP of 190,000 MTOPS. The Administration has promised to increase the threshold for exports under License Exception CTP for Tier 3 countries to 190,000 MTOPS. Nevertheless, we have not seen any regulatory changes published in the Federal Register, to date.

In fact, other than minor revisions to Category 3 (Electronics) and 4 (Computers) published in April of 2001, the Administration still has not published any revisions to the Commerce Control List of the implementing Wassenaar’s agreement of December 2000!

Next, consider the export controls on cryptography. When George H. W. Bush (the Elder) left the Presidency in 1993, cryptographic products were controlled by the State Department as munitions under the International Traffic in Arms Regulations. The Clinton Administration made substantial progress, transferring jurisdiction to the Commerce Department under the EAR, and streamlining the circumstances under which cryptographic products could be exported. In the late 1990’s and continuing in to 2000, the Clinton Administration revised the export controls on cryptographic products once or twice each year. The current Bush Administration barely considered the export control on encryption until the events of September 11^th. To its credit, the Bush Administration resisted calls from Senator Judd Gregg (R-NH) for a rollback on cryptographic export controls. However, the Bush Administration has made limited progress in promulgating a new regulation that will clean up the remaining inconsistencies and vagaries of the current cryptographic export controls, or to bring them into conformance with the Wassenaar control list. No major reform initiative beyond this modest clean up currently is under consideration.

Recommendation: Industry should press the Administration to publish amendments to the computer and other regulations resulting from decisions by Wassenaar in 2000 and 2001. Industry also should insist on thorough reform of the cryptographic controls. In the longer term, the Bush Administration should consider eliminating controls on information technology altogether.

Export Enforcement

The most significant enforcement cases of 2001 were against McDonnell Douglas and Boeing. Boeing, the nation’s largest exporter, paid the largest export control fine in 2001. Its recently acquired subsidiary, McDonnell-Douglas, paid the second largest.

Boeing paid a $3.8 million fine to the State Department’s Office of Defense Trade Controls settling 110 allegations that it had violated the International Traffic in Arms Regulations in connection with proposals to sell Airborne Early Warning and Control aircraft to various counties. The case is noteworthy not only because of the size of the penalty. Boeing claims to have made a voluntary disclosure with respect to the activities at issue.

The case involving the export of machine tools to China by McDonnell-Douglas was among the most significant enforcement matters highlighted in the Cox Report. The government attempted for years to obtain criminal indictments of McDonnell-Douglas and its Chinese business partners for violations of export control laws. One of the Chinese business partners, TAL, entered a plea of nolo contendere. The government’s case against Robert Hitt, Director of McDonnell-Douglas’ China Office, was dismissed because the government failed to file it within the five-year statute of limitations. The government did not indict McDonnell-Douglass, but did enter into consent agreement where the company agreed to pay the second largest civil penalty in export control history, $2.12 million.

Recommendation: It is clear that BXA no longer views American companies as partners in the effort to prevent illegal exports, as it did until the mid-1990’s. In the last half decade, BXA increasingly has taken the position that American companies are part of the problem, rather than a part of the solution, and that tough enforcement will bring them to heel. Industry should be extra cautious about submitting voluntary disclosures to the State Department, in light of the harsh penalty assessed against Boeing. Companies should review their internal compliance programs, initiate internal audits, conduct investigations where appropriate, and take the necessary measures to protect themselves from a vigorous enforcement regime that increasingly is focused on American companies, as opposed to foreign targets of the export control regimes.

Wassenaar Arrangement

Members of the Wassenaar Arrangement concluded their seventh plenary meeting on December 7, 2001 in Vienna, Austria. The results for the United States were disappointing to say the least. The Administration arrived in Vienna with three items on the agenda. The Administration managed to garner support from the Participating States to work on preventing terrorist groups and individual terrorists from obtaining conventional weapons and dual-use goods and technologies. However, the Administration failed to obtain support (1) to promote denial consultations among Wassenaar members (no-undercut provisions), and (2) to institute “catch-all” procedures for preventing sales of dual-use goods and technologies to all military end-users and end-uses in countries that are not members of the Wassenaar Arrangement. In addition, members have not completed the review of the control list.

Recommendation: The Administration’s proposal to promote denial consultations is a worthy objective, but one which the Wassenaar members who recall the experience of COCOM are not likely to endorse. The “catch-all” provisions that would convert the licensing process from list based to include also end-user and end-use based is especially problematic. If adopted, it could provide the U.S. Department of Defense with wide latitude to deny licenses for countries of concern, like China. Furthermore, the list review process badly needs to be completed, with a comprehensive review of fast moving categories like 3 (Electronics), 4 (Computers) and 5 (Telecommunications).

Making the Trains Run on Time

Its professed objective is to make the trains run on time. Let’s evaluate how the Bush Administration accomplished this objective in three areas: (1) commodity jurisdiction with respect to space qualified items, (2) inter-agency review of export license applications submitted to BXA, and (3) streamlining of requirements with respect to munitions exports to allied countries.

On the commodity jurisdiction dispute with respect to “space qualified” items, the Administration has reached a settlement. However, it appears that the settlement is even less favorable to exporters that the status quo at the end of the Clinton Administration. It is difficult to determine the precise outcome, as the Administration still has not promulgated regulations in the Federal Register, but it appears that the State Department retains control over approximately 80% of the items in dispute, which is a disappointment for industry.

Regarding the inter-agency review of export license applications submitted to BXA, the situation appears to be far worse than it was at the end of the Clinton Administration. The processing of export license applications for China is a useful barometer of inter-agency cooperation. During the first nine months of 2001, the Bush Administration processed 1,237 applications for licenses for export to China. It denied only 21 applications, but it had 294 “pending” as of September 30, 2001. During 2000, the Clinton Administration processed 932 applications for licenses for export to China. It denied a higher number than the Bush Administration – 36 – but it only had 6 “pending” as of September 30. Plainly, the Bush Administration is having trouble getting the inter-agency review process to run at all, let alone on time.

With respect to the streamlining of requirements for the export of munitions items to allied countries, the negotiations with the United Kingdom and Australia have yet to bear fruit. Indeed, if one considers the situation to day with respect to Canada, the trend recently has been to increase the license requirements for exports to Canada, not only at the State Department but also recently as the Commerce Department!

Recommendation: The Bush Administration has a lot of work to do, if it wants to accomplish its objective of making the export control trains run on time. Its record on three major issues: jurisdiction for space qualified items, inter-agency review of license applications submitted to BXA, and reduction of license requirements for exports to close allies, is problematic. Industry should take note of the jurisdiction, licensing and allied consultation issues and demand improvement in these areas if, as professed, they are the priorities of the Bush Administration.

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 2001.) The third section of this memorandum describes several important enforcement cases.

I. Legislation

As you recall, on November 13, 2000, President Clinton signed H.R. 5239 enacting the so-called “Mini-EAA” through August 20, 2001 as Public Law 106-508. This expired and on August 17, President Bush signed Executive Order 13222 exercising his authority to control exports by invoking the International Emergency Economic Powers Act ("IEEPA", 50 USC 1701 et seq.). On November 27, the House passed H.R. 3189 sponsored by Henry Hyde (R-IL) which would extend the Export Administration Act until April 20, 2002 in the hope that this will provide sufficient time for the House to act on comprehensive Export Administration Act reform legislation.

The good news is that the lower penalties of IEEPA now apply. For example, the maximum civil penalty for violation of national security controls decreased from $100,000 under the EAA to $12,000 (indexed from $10,000) under IEEPA.

The bad news is that the confidentiality provisions in Section 12(c) of the EAA have lapsed. You may recall that in 2000, prior to enacting the Mini-EAA, a Florida newspaper and the Wisconsin Nuclear Arms Project had filed suits in the Federal District Courts of Florida and the District of Columbia, respectively, challenging the validity of the confidentiality provisions under the various Executive Orders and the International Emergency Economic Powers Act (“IEEPA”) that extended the EAA. In a statement in the Congressional Record, Senator Phil Gramm (R-TX), Chairman of the Senate Banking Committee, stressed that the Congress intends for the confidentiality protection to be considered as covering information obtained during the lapse of the EAA as if there had been no interruption of authority. However, this language was only in the legislative history, not in the Mini-EAA itself.

This Administration inherited S.149, the Export Administration Act (EAA), which was barely acceptable to industry and strongly opposed in the House. Throughout 2001, the exporting community watched as amendments were added making the bill even less desirable. In the wake of the September 11 attacks, compromise is even more difficult and the resulting legislation will likely become less favorable to exporters after referral.

On September 6, the Senate passed S.149, the EAA, by a vote of 85 to 14. The bill is available at: S.149. Unfortunately, the House did not file its report on the Export Administration Act (EAA), H.R. 2581 until late November, too late for passage this year. On December 14, Speaker Hastert extended his sequential referral of the House EAA, H.R. 2581, until February 28th. The action was expected. Six House committees have been given such referral (Agriculture, Armed Services, Commerce, Intelligence, Rules and Ways and Means). The bill is available at: H.R. 2581.

Strategy for 2002. Given the decidedly negative trend in the House, we recommend that industry oppose any EAA renewal legislation that departs from S. 149. Such a stand probably will be enough to kill EAA renewal legislation in the 107^th Congress.

II. Regulations

A. Computers and Microprocessors

On January 10, 2001, President Clinton announced changes to the export controls on high performance computers (HPCs). On January 19, 2001, the implementing regulation was published in the Federal Register. License Exception CTP was revised by removing Computer Tier 2 and merging its countries into Computer Tier 1. All HPCs are eligible for export to a Computer Tier 1 country under License Exception CTP. Additionally, HPCs with CTP up to 85,000 MTOPS may be exported to Computer Tier 3 countries under License Exception CTP, and exporters are no longer required to submit National Defense Authorization Act (NDAA) advance notifications for HPCs with CTP exceeding 85,000 MTOPS. This rule also moved Lithuania from Computer Tier 3 to Computer Tier 1.

On April 9, BXA published a final rule that revised the CCL to implement certain changes in Category 3 (Electronics) and Category 4 (Computers) of the Wassenaar List of Dual-Use Goods and Technologies, specifically in the areas of microprocessors, graphic accelerators, and external interconnects. This change was implemented to reflect rapid technological advances and controllability factors.

We are expecting a few new regulations to be published in next year. At their Experts Meeting in November, the U.S. Government and its allies at Wassenaar agreed upon a number of changes to the export controls on Electronics under Category 3 and to Computers under Category 4 on the Wassenaar Dual-Use List. We expect that these changes will be reflected in amendments to the U.S. Commerce Control List (CCL) of the Export Administration Regulations (EAR) early in 2002.

The Department of Defense (“DoD”) has developed proposals for modifying the export controls on microprocessors and computers controlled under Export Control Classification Numbers (“ECCN”) 3A001 and 4A003 on the CCL of the EAR. The most contentious item in the Wassenaar list review is the export controls on microprocessors. The DoD proposal on microprocessors attempts to differentiate between (1) microprocessors that are used in commercial and consumer applications, and (2) microprocessors with specifically enhanced computational characteristics that have critical military applications, even though they are also commercial products. The current metric for measuring the performance of microprocessors, the Composite Theoretical Performance (“CTP”), does not make this distinction. DoD is urging the U.S. government to submit a new proposal to the Wassenaar member countries, reflecting a two-tiered approach to controls on microprocessors. The DoD proposal on microprocessors is contrary to the trend toward decontrol. It remains to be seen whether Wassenaar would adopt a proposal along the lines suggested by DoD.

The DoD has problems with the current controls on computers, as well. DoD has proposed that a new parameter be adopted for measuring computer performance. This new parameter is referred to as “Rpeak” or “Adjusted Gflops”. In essence, you take the Rpeak (theoretical peak performance) combined with a normalizing (derating) factor to take into account architectural differences between three classes of machines: vector systems (0.9); parallel processing systems – MPP/SMP/NUMA/Constellations (0.7); and I/O (input/output) connected clusters (0.5). DoD has also proposed to control I/O connected clusters, regardless of whether or not they include special purpose clustering hardware. This would in effect eliminate Note 4 and Note 5 in the regulations. The DoD proposal on computers not only is contrary to the trend toward decontrol, but will be impossible to administer, in practice.

The Bush Administration is expected to announce a change to the export controls on high performance computers (HPCs). This change will raise the control for high-performance computers exported to "Tier III" nations from 85,000 millions of theoretical operations per second (MTOPS) to 190,000 MTOPS. The increase is expected to take effect in the first part of 2002. Meanwhile, an interagency group will continue to review possible changes to the export-control system to drop the congressionally mandated MTOPS system, which the technology industry has soundly criticized as too restrictive and outdated. We expect that industry will be consulted in the process of finding a new control metric. Changing the MTOPS system would require changing U.S. law, which would be accomplished by passage of a Senate-passed bill, S. 149, to restore and revise the Export Administration Act (EAA). That bill, which has Bush administration support, is stuck in the House, where a competing measure, H.R. 2581, is awaiting floor action.

B. Encryption

As we previously reported, BXA has been working on revising the encryption regulations for months, and we remain optimistic that it will be published in the first quarter of 2002. Proposed changes include conforming to Wassenaar’s decontrol of mass-market software, regardless of key length, providing more differentiation between “retail” and non-retail items, lifting some reporting requirements for “retail” items, and moving the technical reviews toward an immediate approval instead of waiting 30 days. Although one of the goals of the changes is simplification, a review of the draft indicates that this goal may not be realized.

C. Trade Sanctions Reform Act

In July, BXA and OFAC published the long awaited implementation of the Trade Sanctions Reform Act (TSRA). BXA’s regulations establish the License Exception Agricultural Commodities (AGR) to permit exports and reexports to Cuba of agricultural commodities that are not specifically identified on the Commerce Control List and are classified as EAR99. Two specific determinations are required prior to qualifying for BXA authorization under the TSRA procedures: that the product is an agricultural commodity as defined in part 772 of the EAR; and that it is classified as EAR99 under the EAR.

OFAC’s regulations implement TSRA as it relates to exports of agricultural commodities, medicines and medical devices to Iran, Libya, and Sudan. The TSRA defines the terms medicine and medical device by adopting the definitions of drug and device set forth in section 201 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 321). These definitions include prescription medicines and over-the-counter medicines for humans and animals that are classified as EAR 99. They also include medical supplies, instruments, equipment, and equipped ambulances that are so classified. They do not include general-purpose furniture and equipment (such as desks, tables, lamps, and office computers) used in medical offices and waiting rooms. Exporters may consult with the Food and Drug Administration for assistance in determining whether a particular item meets the definition of drug or device under the Federal Food, Drug, and Cosmetic Act. Although most medicines and medical devices are classified under the EAR as EAR 99, certain vaccines, biological and chemical products, medical devices and parts for such devices are listed on the CCL and are not eligible for export under this rule.

D. Embargoes

1. India and Pakistan

In the aftermath of the September 11 terrorist attacks, the Bush Administration amended the regulations implementing export controls pursuant to the Export Administration Act and the International Emergency Economic Powers Act in order to reward its new allies, Pakistan and India.

In October, BXA published amendments to the Export Administration Regulations lifting sanctions imposed several years ago against Pakistan and India for proliferating nuclear weapons and missiles, thereby implementing the President's announcement of September 22, 2001. This rule replaces the license review policy of denial with respect to exports of Nuclear Proliferation (NP) and Missile Technology (MT) items to India and Pakistan with a case-by-case analysis. It also restores the use of License Exceptions for these items for entities not listed on the Entity List. In addition, the rule removes several Indian and Pakistani entities from the Entity List. Nevertheless, the preamble to the rule states that the mere fact that an entity previously was on the Entity List should serve as a “red flag” triggering enhanced due diligence on the part of exporters that their products will not be used in proliferation activities.

In November, the Department of State announced that a determination was made on November 2, to waive missile proliferation sanctions imposed on November 21, 2000, on the Pakistani Ministry of Defense, its sub-units and successors. The prohibition on exports of items and technology and U.S. Government contracts as described in section 73(a)(2)(B) of the Arms Export Control Act (22 U.S.C. 2797b(a)(2)(B)) and the prohibition on new individual export licenses as described in section 11B(b)(1)(B)(ii) of the Export Administration Act of 1979 (50 U.S.C. app. 2410b(b)(1)(B)(ii)) were waived for transactions determined to be needed (1) to support Operation Enduring Freedom and (2) to permit sale or export to Pakistan of defense articles or defense services comparable to those delivery of which was blocked by the imposition of sanctions on May 30, 1998. It should be noted that this is not a complete waiver and the following missile proliferation sanctions will remain in place: (1) Sanctions against the Pakistani entities Space and Upper Atmosphere Research Commission (SUPARCO) and National Development Complex (NDC); (2) import sanctions against the Pakistani Ministry of Defense; and (3) prohibition on new State or Commerce export licenses to and new USG contracts with the Pakistani Ministry of Defense in the absence of a determination that the transaction is within the scope of the waiver described above.

2. Serbia

In March, the Bureau of Export Administration published a final rule generally restoring Serbia to the export control status it had prior to May 4, 1999. Under the new rule, many items may now be exported and reexported to Serbia without a license. However, certain special restrictions remain. The U.N.-mandated embargo on arms, including crime control and regional stability items, remains in force for all the Federal Republic of Yugoslavia (Serbia and Montenegro). In addition, U.S. persons may not export or reexport any item subject to the Export Administration Regulations (EAR) to any person designated pursuant to Executive Order 13088, as amended by Executive Order 13192 of January 17, 2001. (These persons include, Slobodan Milosevic, designated family members and close associates and persons under open indictment by the International Criminal Tribunal for the former Yugoslavia.).

3. Terrorists

The Bush Administration amended the regulations implementing export controls pursuant to the Export Administration Act and the International Emergency Economic Powers Act in order to punish terrorists. The Treasury Department amended Appendix A to 31 CFR chapter V by adding the names of 45 individuals and 21 entities who are listed on the annex to Executive Order 13224 of September 23, 2001 (Blocking Property and Prohibiting Transactions with Persons Who Commit, threaten to Commit, or Support Terrorism), or have been designated pursuant to Executive Order 13224 as blocked persons and by amending the notes to the appendices to 31 CFR chapter V to reflect the revisions to Appendix A. The list now includes Osama Bin Laden, the Al Qaeda Organization, and other terrorists supposed to be the perpetrators of the World Trade Center and Pentagon bombings.

The Bush administration froze the assets of Osama bin Laden’s financial networks in at least nine countries including the United States. The names of 62 entities and individuals were added to a list of suspected terrorist associates targeted by President Bush in the executive order signed last month. The new list of targeted entities, provided by the Treasury Department, covers groups and people affiliated with two suspected bin Laden financial networks: Al Taqua and Al-Barakaat. Both are informal, largely unregulated money exchanges, often called hawalas, that authorities believe funnel money to al-Qaida through companies and nonprofit organizations they operate. The Department of Treasury’s Office of Foreign Assets Control published a bulletin listing these entities and individuals as "Specially Designated Global Terrorists" [SDGT]s. Their names have been integrated into all versions of OFAC’s SDN list as well as OFAC’s brochure on Terrorism.

Responding to the suicide bombings in Israel in the first weekend in December, President Bush announced on December 4 that the United States was freezing the assets of a leading Islamic foundation in the United States and two other financial groups. According to the Administration, the groups help finance the militant Palestinian organization Hamas. The freeze applies to the assets of the Holy Land Foundation for Relief and Development, a foundation based in Richardson, Texas, that raised $13 million last year and that says it is the largest Muslim charity in the United States. The other two financial groups are Al Aqsa International Bank, based in the Palestinian-controlled region, and the Beit El-Mal Holdings Company, an investment group in the West Bank and Gaza. All three entities were designated as Specially Designated Global Terrorists [SDGT]. Their names have been integrated into all versions of OFAC's SDN list as well as OFAC's brochure on Terrorism.

III. Enforcement

There were some interesting developments in enforcement in 2001. We strongly recommend all exporters audit all areas of their compliance programs. These audits may done internally or be outside personnel. The key question to ask during the audit is can your company survive an enforcement investigation on one of the priority enforcement areas, like intangible exports, and should you make a voluntary disclosure in light of the penalties imposed against Boeing.

A. China and the Cox Report Returns

BXA imposed a $1.32 million penalty and a ten year denial of export privileges on TAL Industries, a U.S. subsidiary of a Chinese government-owned company, China National Aero-Technology Import and Export Corporation (CATIC) to resolve allegations of conspiracy, making or causing to be made false and misleading representations of material facts, and violating the terms and conditions of Commerce Department licenses. TAL also received criminal fines in the case. Several related entities, CATIC, CATIC USA, and CATIC Supply agreed to a five-year denial of their export privileges, which will be suspended as long as CATIC, CATIC USA, and CATIC Supply comply with the terms of the Order and the Export Administration Regulations.

In the criminal case, TAL entered a plea of nolo contendere to a felony violation of the Export Administration Act for making false and misleading statements in connection with an application submitted by the McDonnell Douglas Corporation and CATIC for a license to export machine tools to the PRC. Pursuant to the plea, TAL was sentenced to pay a criminal fine of $1 million and to the maximum 5-year period of corporate probation. This plea marks the first time in U.S. history that a corporate entity, wholly owned by the PRC, has waived sovereign immunity and been convicted of a criminal offense against the United States.

In November, BXA imposed a $2.12 million civil penalty against McDonnell Douglas Corporation as part of a settlement of charges that the company violated federal export control laws. The penalty is the maximum fine possible for the alleged violations. This settlement represents the second-largest civil fine ever imposed by the Commerce Department in an export control case. In addition to the civil penalty, the Order and settlement agreement require that McDonnell Douglas’ parent company, The Boeing Company, assume responsibility and liability for all exports under the Commerce Department’s jurisdiction made or to be made by McDonnell Douglas. This case is related to the TAL Industries case described above.

The press releases from BXA and Justice Department for this case did not mention the dismissal by the US Court of Appeals for the District of Columbia of the conspiracy charge against Robert Hitt, the Director of the China Program Office at Douglas Aircraft Company, a wholly-owned subsidiary of McDonnell Douglas. On October 19, 1999, the Grand Jury returned a sixteen-count indictment for alleged fraudulent misrepresentations made to the United States Department of Commerce in connection with the sale by the McDonnell Douglas Corporation to the People's Republic of China of machinery that was subject to export controls. Count One of the indictment charged Robert Hitt along with other defendants, with conspiring to violate the laws of the United States by deceiving the United States government in the process of completing the sale of the equipment. The district court ruled that the conspiracy alleged in Count One ended on September 14, 1994, when the Department of Commerce issued the export licenses required to sell the machinery, and that the prosecution of Hitt was therefore barred by the five-year statute of limitations. The government appealed the decision. The Court affirmed the decision of the district court.

B. Boeing

Boeing paid a $3.8 million fine to the State Department's Office of Defense Trade Controls settling 110 allegations that it had violated the International Traffic in Arms Regulations in connection with proposals to sell Airborne Early Warning and Control aircraft to various countries. The case is noteworthy not only because of the size of the penalty. Boeing claims to have made a voluntary disclosure with respect to the activities at issue. All of the transfers were intangible. All of the transfers were made before Boeing even had a contract with the recipient, in the form of "offers" to sell defense articles. Most interesting of all are the compliance measures that the State Department is requiring Boeing to undertake as a part of the settlement. In essence, Boeing has to appoint a special officer who has "power and authority" to oversee export control compliance at the company, notify all employees of that officer's power and authority, and provide the resources necessary for the special officer to carry out his duties and responsibilities, including consultants, auditors, accountants, attorneys and other assistants. State reserved the right to issue additional guidance to the special officer. Boeing has appointed its Vice President of Finance as the special officer, and claims that 13 out of the 300 workers in the division where the violation occurred are dedicated to export compliance, surely the largest export compliance team in any division of any company. There is ample food for thought in the design and implementation of a compliance program in the Boeing settlement, which all companies should consider carefully. This case could have a chilling effect on the willingness of companies to make voluntary disclosures, at least until the enforcement posture of the Bush Administration is better understood.

C. Project Shield America

In December, the Customs Service announced the launch of a new program designed to prevent international terrorist organizations from obtaining sensitive U.S. technology, weapons, and other equipment that could help them carry out attacks on America and its people. Called "Project Shield America," the initiative draws on the expertise of Customs in curbing illegal exports of Weapons of Mass Destruction (WMD) components, licensable technology, weapons, and other goods.

Customs field offices will identify the specific U.S. firms in their areas that manufacture or distribute materials on the list compiled by Customs. Customs agents will then visit these firms and provide them with materials about Project Shield America, information about U.S. export controls, and data about the items sought by terrorists. The agents will encourage these firms to notify Customs if they are approached by customers looking to acquire and export their products illegally.

At the same time, Customs agents will step up their efforts to investigate and prosecute those who attempt to acquire and illegally export sensitive technology, weapons, and equipment to international terrorist organizations. These efforts will include undercover probes and other investigative techniques. Customs Office of Strategic Investigations will redirect its resources towards the objective of denying terrorist organizations access to these materials.

Customs developed a list of about 100 items that they believe terrorists want to buy in this country. The terrorists' shopping list includes missiles, grenades, grenade launchers and other munitions; aircraft parts; computer encryption devices; and components of biological, chemical and nuclear weapons, as well as items that might be used to manufacture or deliver such weapons. In addition, the list includes equipment needed to grow anthrax bacteria and grind the spores; chemicals like thiodiglycol, a precursor of mustard gas; and electronic timers known as krytrons, which can be used to trigger nuclear devices.

IV. Wassenaar

Members of the Wassenaar Arrangement concluded their seventh plenary meeting on December 7, 2001 in Vienna, Austria. The results for the United States were disappointing to say the least. The United States failed to win agreement to strengthen the Wassenaar Arrangement on multilateral export controls in several key areas.

The Administration arrived in Vienna with three items on the agenda and only one was supported: the Administration managed to garner support from the Participating States to work on preventing terrorist groups and individual terrorists from obtaining conventional weapons and dual-use goods and technologies. The United States failed to win the endorsement by other Wassenaar countries of two other proposals it made at the Vienna meeting. The failed proposals were (1) to promote denial consultations among Wassenaar members and (2) to institute "catch-all" procedures for preventing sales of dual-use goods and technologies to non-Wassenaar military end-users and end-uses. In addition, members have not completed the review of the control list. In particular, Category 3 needs to be updated to keep up with rapid technological advances and controllability factors.

V. Making the Trains Run on Time

Given that the Administration’s major goal for export controls is to improve interagency relations and strengthen the multilateral export control regimes, particularly the 33-country Wassenaar Arrangement (Kenneth Juster, BXA), make the system more industry-friendly (State, Lincoln Bloomfield), and make the system more transparent and user friendly (DoD, Jack Shaw), the Administration has struggled to achieve even these modest goals, as demonstrated by the examples below.

A. Space Qualified

In August, the Departments of Commerce, Defense, State and NSC Staff settled a lengthy and contentious jurisdictional feud over exports of certain hardware qualified for space. The Departments plan to publish notices for the Federal Register, amending their regulations where appropriate, which specify the relevant details and technical parameters associated with export control of these items. This decision also permits a resumption of commodity jurisdiction determinations related to space technology, which had been deferred pending inter-agency agreement on “space qualified” items.

Now under State control are: traveling wave tubes above 31 GHz (ECCN 3A001.b.1.a.4.c), photovoltaic arrays other than those that are single, dual, trip junction silicon and GaAs (3A001.e.1.c), space-qualified atomic frequency standards (3A002.g.2), telecommunications equipment for use on board satellites (5A001.a.3), the technology for telecommunications equipment for use on board satellites (5E001.b.1), solid state optical detectors (6A002.b.2), imaging sensors (6A002.b.2), cryocoolers (6A002.d.1), optical system parts (6A004.c), and optical control equipment (6A004.d.1).

Under Commerce control are: photovoltaic arrays that are single, dual, trip junction silicon and GaAs (ECCN 3A001.e.1.c), tape recorders (3A002.a.3.b), non-space qualified atomic frequency standards (3A002.g.2), data recorders (3A992.b.3), telecommunications equipment for non-satellite uses (5A001.a.3), focal plane arrays and the technology to make focal plane arrays (6A002.e - note that there is a worldwide licensing requirement for hardware, software, and technology and no license exceptions apply), and laser radar (6A008.j.1 - note that there is a worldwide licensing requirement for hardware, software, and technology and no license exceptions apply).

Exporters are still awaiting the regulations implementing this agreement. In the meanwhile, there is guidance on ODTC’s website at (http://www.pmdtc.org/Space_QualItem.htm) and on BXA’s website at (http://www.bxa.doc.gov/Licensing/SpaceQualifiedDetermination083101.html).

B. OC/ACEP

The license review process has been stalled, not streamlined. For example, the China licensing workload has increased under the Bush administration, which received 1,237 during the period in question, as compared to 932 under the Clinton period. And even though the Bush administration has not taken to rejecting China license applications, the licenses are not being issued. Over the first eight months of the Bush administration, just 21 China cases were rejected, as compared to 36 under the Clinton period. However, the backlog of pending cases has swelled under the Bush team. Whereas only six China cases were pending under the Clinton administration as of September 2000, that number increased to 294 under Bush in September 2001.

Consider deemed exports. In 2000, Chuck Guernieri promised to ease compliance by saving companies from having to go through the entire licensing process every time they hired a foreign national. The proposal was to establish something approaching a bulk license for deemed exports. However, the Deemed Export License (DEL) is not working well. Problems include the inability to file applications electronically, the inability to track applications electronically, and that the reviewing agencies are not honoring the 30-day background check timeframe.

Somehow, though, Guernieri and his reforms have dropped off the BXA lecture circuit. No longer is his approach discussed at meetings of the Regulations and Procedures Technical Advisory Committee nor mentioned in speeches by BXA Under Secretary Ken Juster or Assistant Secretary James Jochum.

C. Trade with Allied Countries

Many of you will recall the announcement in the spring of 2000 by the Clinton administration from the State Department regarding the Defense Trade Security Initiative (DTSI). Under the DTSI, the governments of Australia and the United Kingdom are supposed to amend their export control laws to conform to U.S. law, and in return they are supposed to receive preferential export treatment, similar to that which is afforded to Canada. Apparently, both Australia and the U.K. are finding that it is more difficult to amend their laws than might have been expected. In particular, the need to conform to U.S. laws with respect to deemed exports and intangible transfers have been problematic. The State Department reportedly is considering alternatives, where some but not all of the treatment that is afforded to Canada might be extended to Australia and the U.K.

Using Canada as the poster child for preferential export treatment has its own irony. In February, the Department of State published a rule in the Federal Register (66FR10575) amending the International Traffic in Arms Regulations (ITAR) at 22 C.F.R. § 126.5 concerning exports to Canada. The changes include a requirement to obtain a license prior to export to Canada for all technical data and defense services for gas turbine engine hot sections covered by Categories VI(f) and VIII(b)--not to include hardware; developmental aircraft, engines and components identified in Category VIII(f); all category XII(c), except 1st- and 2nd-generation image intensification tubes and 1st- and 2nd-generation image intensification night sighting equipment and end items in Category XII(c) and related technical data limited to basic operations, maintenance and training information as authorized under exemption in Section 125.4(b)(5) when exported directly to a Canadian Government; chemical agents listed in Category XIV(a), biological agents in Category XIV(b), and equipment listed in Category XIV(c) for dissemination of the chemical agents and biological agents in (a) and (b); nuclear radiation-measuring devices manufactured to military specifications listed in XIV(d); all spacecraft in Category XV(a), except commercial communications satellites; XV(c), except end items when for use by the Federal Government of Canada; Category XV(d); certain systems, components and parts included within the coverage of XV(e); and, miscellaneous articles covered by Category XXI.

Recently, BXA announced that it was reviewing the existing license exemption contained within the EAR for the export of missile technology (MT) controlled items to Canada. The current MT controls maintained by BXA are set forth in the EAR in parts 742 (CCL Based Controls) and 744 (End-User and End-Use Based Controls). This review was prompted by a GAO Report that recommended amending the EAR to require a license for the export of dual-use items controlled pursuant to the Missile Technology Control Regime (MTCR) to Canada.

Conclusion

We anticipate that approximately one new change to the export control regulations will be published every third business day during 2002, based on historical patterns. In addition, we expect that there will be new bills introduced to the Congress and an additional enforcement cases worthy of note. As in the past, we will keep you informed of new developments monthly.

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