2004 End of Year Summary

US EXPORT CONTROLS PAST, PRESENT AND FUTURE
(2004 EDITION)
BY Roszel C. Thomsen II and Antoinette D. Paytas

Introduction – Looking Back at 2004

There were a number of important changes to the export control laws and regulations in 2004. In addition, enforcement activity increased substantially in 2004, when compared with prior years. As is our custom, this memorandum summarizes these and other developments in the field of U.S. and multilateral export controls. It concludes with several suggested New Years Resolutions suitable for adoption by all companies that engage in the export of products and technologies that are subject to export controls.

Legislation

Congress adjourned (yet again) without passing Export Administration Act (EAA) renewal legislation. Thus, on August 6, 2004, President Bush issued (yet another) declaration of national emergency with respect to the EAA. President Bush will continue to control exports for another year under the authority of the International Emergency Economic Powers Act. In fact, prospects for passage of the EAA are not very good for next year. At the PLI “Coping with US Export Controls” seminar in December, Assistant Secretary Peter Lichtenbaum observed that a new EAA is not a top-tier issue like social security or tax reform.

The House and Senate finally reached agreement on the National Defense Authorization Act for Fiscal Year 2005 (HR 4200) before the Congress adjourned on Oct. 11. Opposition from industry groups, the White House and key senators, such as Sen. Mike Enzi (R-WY), succeeded in getting lawmakers to eliminate provisions in the House version that would have added new licensing requirements on items on the Militarily Critical Technologies List (MCTL) and threatened retaliation against foreign firms that sell defense equipment to China.

Regulations

It was a very busy year for new regulations at BIS. For fiscal year 2004, BIS published 29 regulation changes (twice as many as in FY 2003). Although there were many changes, most of them were minor.

EAR

Penalty Guidance from OEE

In February, BIS published a final rule on penalty guidance for the settlement of administrative enforcement cases under the EAR. This rule finalizes the proposed guidance issued in September 2003.

Removal of National Security (NS) Controls

In March, BIS published a final rule amending the Commerce Control List (CCL) to remove ‘National Security’ (NS) controls from, and to impose ‘Regional Stability’ (RS) controls on, certain items in order to conform with section 5(c)(6)(A) of the Export Administration Act (Act), which limits the duration of U.S. unilaterally imposed NS controls. This rule amends the CCL to remove NS as a reason for control with respect to those items which the Wassenaar Arrangement has removed from its control lists. However, BIS has decided to continue to control the export and reexport of these items pursuant to foreign policy-based RS controls because these items have the potential to contribute to military capabilities in a manner that could alter regional military balances contrary to the foreign policy interests of the United States. The affected items are as follows: (1) Power controlled searchlights and control units thereof, designed for military use, and equipment mounting such units; and specially designed parts and accessories thereof; (2) Bayonets, and the technology for the development, production or use of bayonets; and (3) Marine boilers designed to have any of the following characteristics: heat release rate (at maximum rating) equal to or in excess of 190,000 BTU per hour per cubic foot of furnace volume; or ratio of steam generated in pounds per hour (at maximum rating) to the dry weight of the boiler in pounds equal to or in excess of 0.83. This is a significant deviation from the standard practice, where items removed from the Wassenaar list generally are subject only to AntiTerrorism controls. We hope that it will not become a standard practice at BIS in the future.

Libya

In a move primarily benefiting the oil industry, the U.S. eased economic sanctions against Libya to reward its efforts to eliminate weapons programs. On April 23, President Bush terminated the application of the Iran and Libya Sanctions Act with respect to Libya, and the Treasury Department modified sanctions imposed on U.S. firms and individuals under the authority of the International Emergency Economic Powers Act to allow the resumption of some commercial activities, financial transactions, and investments. On September 20, President Bush formally ended the complete U.S. trade embargo on Libya. U.S. companies will be able to buy or invest in Libyan oil and products. U.S. commercial banks and other financial service providers will be able to participate in and support these transactions. Controls on exports with respect to Libya will be maintained consistent with Libya's continued presence on the State Sponsors of Terrorism List. Restrictions will continue to apply to exports of dual-use items with military potential, including potential for WMD or missile applications. Exports to Libya of defense articles and services on the U.S. Munitions List remain prohibited. Direct air service between the U.S. and Libya and third country code-sharing are not yet authorized, nor is the release of frozen Libyan Government assets. Sales of military items to Libya remain prohibited, and licenses are still required for export and reexport to Libya of all items on the Commerce Control List, except those items that are classified as EAR99.

On April 29, the Department of Commerce’s Bureau of Industry and Security (BIS) published an interim rule implementing the President's April 23, 2004, decision to revise United States sanctions against Libya. This rule also implements the transfer to the Department of Commerce from the Department of Treasury of the licensing jurisdiction for exports to Libya of items subject to the EAR. Under the new policy established by this rule, BIS will require a license for the export or reexport of most items on the Commerce Control List (CCL) to Libya. The highlights of BIS's new licensing requirements and policies for Libya are as follows: (1) items subject to the EAR but not listed on the CCL (i.e., EAR99 items) are generally not subject to a license requirement except as defined in the end-user and end-use controls set forth in Part 744 of the EAR, (2) Libya remains on the list of designated state sponsors of terrorism. As a result, most items controlled for anti-terrorism (AT) reasons will continue to require a license for export or reexport to Libya, and (3) the de minimis rules applicable to Libya remain unchanged. Reexports of items to Libya from abroad are subject to the EAR when U.S.-origin controlled content in such items exceeds 10% and would require a license if exported or reexported to Libya as an individual component. Additional details are summarized in greater detail in the document attached hereto. The Department of the Treasury's Office of Foreign Assets Control (OFAC) continues to maintain certain financial restrictions, including blocking the assets of named persons. Specific licenses previously issued by OFAC will be valid until the date specified on the license or May 1, 2005, if no expiration date is specified.

Very few licenses have been issued authorizing exports to Libya, to date. The policy appears to be rather restrictive.

Syria

On May 14, 2004, BIS published a final rule implementing the Syria Accountability and Lebanese Sovereignty Restoration Act (the Act) (Public Law 108-175). The Act requires the President to impose a mandatory prohibition on exports of items on the Commerce Control List (CCL) and US Munitions List (USML) and requires the President to impose two out of five other listed sanctions, including a prohibition on the export or reexport to Syria of products of the United States (other than food and medicine) and a prohibition on aircraft of any air carrier owned or controlled by the Syrian government to take off from or land in the United States. The new regulations revoke all previously issued export licenses for Syria. BIS will send a letter of revocation to all license holders. In the interim, you may not use your license to export or reexport to Syria.

All commodities, software and technology subject to the EAR (including those categorized under EAR99) now require a license except for EAR99 food and medicine and “deemed” exports or reexports of EAR99 technology and source code, which may be exported and reexported to Syria without a license. Informational materials and publicly available software are also exempt from the new export license requirement. Previously issued licenses with conditions requiring written US Government authorization for the reexport, transfer or resale of items already exported or reexported remain in effect. Requests for such authorization will require interagency approval. Items on dock for loading, on lighter, laden aboard an exporting carrier or en route to a port of export on May 14, 2004 remain subject to licensing rules applicable on May 13, 2003. Such items not actually exported or reexported before midnight on May 28, 2004 may be exported or reexported only if authorized pursuant to the general order.

All license applications will be subject to a presumption of denial except for the following items, which will be considered on a case-by-case basis: Medicine and medical devices listed on the CCL; Parts and components intended to ensure the safety of civil aviation and safe operation of commercial passenger aircraft (subject to a $2 million license ceiling, except in the case of complete overhauls); Items in support of activities of the US Government; Telecommunications equipment and associated computers, technology and software; Items in support of United Nations operations in Syria; and Deemed exports and reexports of technology and source code listed on the CCL.

All License Exceptions in EAR Part 740 are inapplicable for Syria except as follows: TMP for items for use only by the news media; GOV for items for personal or official use by personnel and agencies of the US Government; TSU for operation and sales technology and software and software updates; BAG for exports of items as personal baggage (except shotguns, shells and encryption items); and AVS for reexports of civil aircraft on temporary sojourn to Syria.

Commerce appears to be granting a number of licenses approving exports to the Syria Telecommunications Authority, subject to reasonable conditions, notwithstanding the tightening of the overall embargo of Syria.

Cuba

In June, BIS implemented changes on the export and reexport restrictions on Cuba in response to the President’s May 6, 2004 direction with respect to certain recommendations in the May 2004 Report to the President from the Commission on Assistance to a Free Cuba. Specifically, the rule narrows the list of eligible commodities that can be included in gift parcels to Cuba under License Exception GFT. The Commission found that, although gift parcels provide a critical humanitarian benefit to the Cuban people, they directly benefit the Castro regime by lessening the burden to provide for the basic needs of the Cuban people. Moreover, through delivery charges, the regime is able to generate additional sources of much needed hard foreign currency.

India

In September, BIS issued a regulation amending the Entity List to remove the Indian Space Research Organization (ISRO) headquarters, Bangalore from the Department of Commerce Entity List; to remove the export license requirements for items subject to the Export Administration Regulations (EAR) having a classification of EAR99 or a classification where the third through fifth digits of the Export Commodity Classification Number (ECCN) are ``999'', e.g. XX999, for the seven (7) ISRO subsidiaries listed on the Entity List; and establish a presumption of approval for items not multilaterally controlled for nuclear proliferation reasons going to the ``balance of plant'' portion of Indian nuclear facilities subject to International Atomic Energy Agency safeguards (Rajasthan 1 & 2 and Tarapur 1 & 2). Recent licensing experience confirms that applications to export items to ISRO are receiving favorable conditions, generally.

Knowledge Definition, Red Flags, Safe Harbor

In October, BIS published a proposed rule consisting of a three-way amendment that clarifies the definition of knowledge, expands the guidance on red flags and adds a safe harbor (voluntary provision) for liability for knowledge based violations. The rule revises the “knowledge” definition and expands its guidance on “red flags” in the Export Administration Regulations (EAR). The new rule would adopt an objective reasonable person standard. If the person should have known that a violation would occur, then that knowledge is sufficient to find him or her liable. How will the BIS decide that issue? Although it denies it, the BIS is making it easier on itself to nab violators. Currently, BIS needs to show that the person, with high probability, knew or should have known based on the existing circumstances. The new definition would replace the “high probability” language with “more likely than not” language. BIS also increased the number of red flags found in Part 732, Supplement 3 of the EAR from twelve to twenty three.

BIS is also proposing to create a safe harbor from liability caused by the expanded knowledge standard. The safe harbor will be found in a new section of the EAR: 764.7. If you actually knew of a violation, you don't get the safe harbor. To qualify for safe harbor, exporters must (1) classify the item and determine the licensing requirements, (2) screen the transaction against the various bad persons lists, and (3) follow the new red flags procedures, including filing a report with the BIS. The BIS will also allow an exporter to confirm through the agency that the exporter was correct in resolving the red flag. It is not mandatory for an exporter to file such a report, but it may be a good idea if the exporter wants official pre-shipment clearance. The issue for many exporters will be whether it is possible to wait forty-five days for the BIS to clear the shipment. A second concern is that reporting any red flag to the agency will cause the BIS to target the company for further review and investigation. We are speculating that very few exporters will avail themselves of this new safe harbor.

Computer Technology – Deemed Exports

In November, BIS published a final rule expanding the availability of license exceptions for certain deemed exports of computer technology and source code under the Export Administration Regulations (EAR), partially implementing the expansion set forth in a proposed rule published on October 24, 2003. In addition, this final rule clarifies certain provisions of License Exception CTP. This rule also establishes a new “Foreign National Review (FNR)” requirement for deemed exports of technology or source code under License Exception CTP.

Microprocessor Technology – Deemed Exports

In November, BIS published a final rule expanding the availability of License Exception CIV for certain deemed exports of microprocessor technology on the Commerce Control List (CCL) of the EAR under Export Classification Control Numbers (ECCN) 3E001 and 3E002. These ECCNs control technology that can be used for the development and production of microprocessors. This final rule partially implements a proposed rule published on October 24, 2003. The proposed rule included the export and reexport of general purpose microprocessor technology under License Exception CIV, while this final rule limits License Exception CIV eligibility to deemed exports for certain microprocessor technology. BIS has determined that further liberalization of controls on exports of microprocessor technology must await agreement in the Wassenaar Arrangement. This rule also establishes new “Foreign National Review (FNR)” requirement under License Exception CIV for deemed exports of microprocessor technology to certain eligible foreign nationals.

License Conditions

In November, BIS published an interim rule revising the EAR to require licensees to communicate in writing specific license conditions to the parties to whom the license conditions apply. This revision is in accordance with the Government Accountability Office's (GAO) post-shipment verification recommendations to the Bureau of Industry and Security (BIS) (found in GAO-04-357). The purpose of this rule is to ensure that license conditions are communicated to the parties to whom they apply, and to clarify the manner in which the conditions should be communicated. Such communication must be in writing (which includes recorded and retrievable media, such as e-mail).

Encryption

On December 9, BIS published changes to the encryption regulations as a final rule. Important changes include: (1) Expansion of the ENC license free zone to include new European Union members admitted on May 1, 2004, (2) Introduction of a "positive" list of items eligible for export under ENC "restricted" (formerly "non-retail"), (3) Fixed 30 day processing time for ENC "unrestricted" (formerly "retail") items, (4) Expanded eligibility for De Minimis treatment, and (5) Reduced filing requirements for open source under License Exception TSU. Details are included in the attached summary.

Wassenaar Implementation

Sticking to their promise to publish the Wassenaar changes in less than year BIS published a final rule in April implementing the changes from the December 2003 plenary meeting of the Wassenaar Arrangement. The rule revises certain entries controlled for national security reasons in Categories 1, 2, 3, 4, 5 Part I (telecommunications), 5 Part II (information security), 6, and 7. Details are included in the attached summary.

In May, BIS and the Department of State revised licensing jurisdiction for certain bio-chemical protective and detection equipment to bring U.S. controls in line with multilateral restrictions adopted by the Wassenaar Arrangement. On May 6, 2004, BIS amended the Export Administration Regulations (EAR) to reflect new controls for items covered by Export Control Classification Number (ECCN) 1A004 which includes gas masks, filter canisters, decontamination equipment, protective suits, gloves and shoes specially designed or modified for defense against biological agents or radioactive materials adapted for use in war or chemical warfare agents, and certain nuclear, chemical, and biological detection systems. These items will require licenses for exports or reexports to all destinations except Country Group A:1 and cooperating countries as listed in 15 CFR part 740, supp. No. 1. BIS also added a new ECCN 1A995 which will impose AT1 controls on personal radiation monitoring dosimeters and equipment limited by design or function to protect against hazards specific to civil industries, such as mining, quarrying, agriculture, pharmaceuticals, medical, veterinary, environmental, waste management, or to the food industry that are excluded from 1A004. Products in this ECCN will require licenses for exports to State Department-designated state sponsors of international terrorism. ECCN 1A995 includes a note that items for protection against chemical or biological agents that are consumer goods, packaged for retail sale or personal use and medical products are excluded from 1A995 and are EAR99.

MTCR Implementation

In November, BIS published an interim rule to the EAR that removes the list of missile projects of concern and expands license requirements for missile-related end-users and end-uses. This Rule adopts the new “catch-all” proposal discussed at the most recent MTCR Plenary Session. The MTCR “catch-all” rules are located under the “Guidelines” link on the MTCR website. The previous “catch-all” Rules focused narrowly on D4 countries. This rule expands the scope of end-uses to which a license requirement applies to include certain rocket and unmanned air vehicle activities in certain countries of concern for missile proliferation reasons. In addition, this rule implements a new license requirement for exports, reexports and transfers anywhere in the world that applies when you know or are informed that an item subject to the EAR will be used in rocket systems or unmanned air vehicles of any range for the delivery of chemical, biological or nuclear weapons. This means that exporters will have to assume more of the burden of determining whether a proposed customer poses an unacceptable risk of diversion of missile-related items to unauthorized end users or end uses.

ITAR

Quartz Rate Sensors

On January 9, the State Department published a final rule removing certain quartz rate sensors from U.S. Munitions List (USML) jurisdiction when the sensors are integrated into and included as an integral part of a commercial standby inertial navigation system for use on a civil aircraft or exported solely for integration into such systems.

In February, Commerce published a final rule to transfer jurisdiction over those sensors to Commerce when they are integrated into an instrument system (CSIS) of the type described in ECCN 7A994 or aircraft of the type described in ECCN 9A991 that incorporates a CSIS that has such a sensor integrated, or are exported solely for integration into such a system. This rule also excludes systems or aircraft integrating QRS11-00100-100/101 sensors from eligibility for the de minimis provisions of the Export Administration Regulations (EAR), and excludes the sensors from license exception eligibility.

By transferring quartz rate sensors to the Commerce Department’s jurisdiction, State avoided having to waive the see through rule. However, the quartz rate sensor case represents the first and (to our knowledge) only instance where the end-use of a product determines its jurisdiction for purposes of export controls. Thus, if you intend to incorporate a quartz rate sensor into a commercial standby inertial navigation system for use on civil aircraft, it is subject to the Commerce Department’s jurisdiction. However, if you intend to incorporate a quartz rate sensor into any other item – commercial or military – it is subject to the State Department’s jurisdiction. It is simply bizarre that the jurisdiction and licensing of an item should depend of the instrument into which it is integrated. Look for Commerce, Defense and State to review this, again, in 2005.

Registration of Brokers

In June, the DDTC has adopted a policy requiring that foreign persons outside of the U.S. who participate in U.S. defense trade register as brokers under ITAR 129.3. DDTC's policy, however, also extends to such foreign persons in instances in which they participate in transactions involving foreign-source defense articles and defense services. Thus, once "tainted" by doing business with a U.S. defense exporter, an independent distributor organized and doing business in a foreign country may be subject to ITAR's registration and licensing requirements in all cases involving defense trade, even those in which that distributor is dealing in non-U.S. source defense articles or services.

License Applications for Foreign National Employees

The DDTC published a new guide this year regarding applications for foreign national employees requiring access to ITAR-controlled items. (See DDTC’s website: http://pmdtc.org/index.htm). This was in response to the Office of Inspector General (OIG) reports entitled Review of Export Controls for Foreign Persons Employed at Companies and Universities and Department of State Controls Over the Transfer of Militarily Sensitive Technologies to Foreign Nationals from Countries and Entities of Concern. The OIG reports determined that DDTC needed to address its inability to accurately track (at a minimum by name, nationality and technology authorized) foreign persons employed in the United States with access to articles controlled on the United States Munitions List (USML). To satisfy this requirement, DDTC modified its internal policies and industry guidance (i.e., Guidelines for Completion of the Form DSP-5) with the intent that all foreign national employees in the United States in defense activities with access to USML articles would be authorized using the Form DSP-5.

OFAC

Boycotts

In January, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) published its list of countries requiring cooperation with an international boycott. The countries are: Bahrain, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates, and the Republic of Yemen.

Cuba

In June, OFAC implemented changes for traveling to Cuba in response to the President’s May 6, 2004 direction with respect to certain recommendations in the May 2004 Report to the President from the Commission on Assistance to a Free Cuba. The changes revoke OFAC specific licenses to engage in travel-related transactions incident to visiting close relatives in Cuba.

Enforcement

Recent amendments to the Federal Sentencing Guidelines applicable to organizations went into effect on November 1, 2004. The revisions to the Organizational Guidelines respond in part to Section 805 of The Sarbanes-Oxley Act of 2002, which directed the U.S. Sentencing Commission to re-evaluate the guidelines to determine whether they were sufficient to deter and punish organizational misconduct. One of the most significant developments in the guidelines is the requirement that a company's Board of Directors and executives take responsibility for oversight and management of the company's compliance and ethics programs. In addition, the standards for compliance and ethics programs have been made more rigorous. The Organizational Guidelines in effect before the most recent amendments contained a set of criteria, known as the "seven minimum steps," which were used to define an effective compliance program. The November 1, 2004 amendments provide more definition and include specific new requirements that a company must adopt in order to have an effective compliance program. The text of the recent amendments and the revised Organizational Guidelines (now codified at section 8B2.1) is available at http://www.ussc.gov/2004guid/RFMay04_Corp.pdf.

From the “we’re with the government and we want to help” department - On November 15, the Justice Department issued an order expanding the FBI’s authority in for criminal investigations under the export control laws if there is some connection to "foreign counterintelligence," which includes espionage, sabotage, subversive activities, and related matters, including potential violations of the various export control laws. The order was issued November 15, 2004 as a final rule in the Federal Register, and was presented as an order to resolve confusion relating to internal delegation of authority on such matters [69 FR 65542]. In the past, the FBI had ceded the field to the U.S. Customs Service and the export control agencies. Although the order expanded the FBI’s authority to help conduct investigations in the export control area where counterintelligence issues and issues such as arms smuggling involving terrorism are involved, OEE and ICE both retain their traditional role in export enforcement. However, it is never good news when the FBI finds your area of practice interesting. The focus of the first FBI squads will be terrorist groups and countries of concern, such as China.

BIS

This year BIS published its “Penalty Guidance in the Settlement of Administrative Enforcement Cases.” This guidance sought to clarify how BIS determines what penalty is appropriate for the settlement of an administrative enforcement case, however, the guidance is not binding on BIS. Thus, exporters still lack reassurance that BIS will settle administrative cases fairly and consistently.

Voluntary Disclosures

OEE emphasizes the importance of voluntary self-disclosures and claims that consistent with BIS’ civil penalty guidance issued in February 2004 voluntary disclosures are a great weight mitigating factor that can significantly lessen penalties. However, this year we saw OEE issue numerous six-figure civil fines even in cases where exporters voluntarily self-disclosed the violations and cooperated fully with the investigation. Companies who mistakenly violated the EAR yet accepted responsibility and disclosed the violations still faced steep civil fines. As terrorism and proliferation concerns increase BIS risks severing all communication with the exporting community if it continues to discourage disclosures and cooperation with OEE at a time when heightened vigilance and tips on suspicious transactions from exporters are needed the most.

Emcore Corporation of Somerset, New Jersey, agreed to pay a civil penalty of $400,000 to settle charges of exporting without an export license. Emcore’s filing of a voluntary disclosure may have been a factor in the agency's decision to allow the company to pay half the fine now and the rest in a year. The BIS charging letter contains 71 charges related to exports of metal organic chemical vapor disposition (MOCVD) equipment to Taiwan and China. The case reflects the new policy at BIS of imposing fines for more export violations than historically has been the case, even when firms voluntarily report the incidents.

Morton International, Inc., of Chicago, Illinois, and its affiliates Morton International, S.A.S., located in Semoy, France, and Rohm and Haas Japan K.K., located in Tokyo, Japan, agreed to pay a $647,500 civil penalty to settle charges in connection with the export and reexport of organo-inorganic compounds and the export of thiodiglycol in violation of the EAR. The export and reexport of organo-inorganic compounds is controlled for national security reasons. Morton International, Inc. voluntarily disclosed the violations relating to the shipments of organo-inorganic compounds to BIS and cooperated with the investigation. While the Export Administration Act (EAA) is currently in lapse, six of these transactions involving items controlled for national security reasons occurred while the EAA was in effect. Under the EAA, such violations are subject to a maximum civil penalty of $120,000 for each violation.

Roper Scientific, Inc. (Roper) of Trenton, New Jersey, agreed to a $422,000 civil penalty to settle charges that it exported night vision cameras to numerous countries in violation of the EAR. BIS charged that between March 13, 2000 and August 24, 2000, Roper knowingly exported certain night vision cameras without the required export licenses. These cameras were exported to various destinations, including South Korea, Japan, and Italy. Roper also was charged with failing to retain certain export control documents and making false statements on a Shipper’s Export Declaration. Roper voluntarily self-disclosed the violations and cooperated fully with the investigation.

Lattice Semiconductor Corporation (Lattice) of Hillsboro, Oregon, agreed to pay a $560,000 civil penalty to settle charges that it exported certain semi-conductor microchips and related technical data to the People’s Republic of China in violation of the EAR. BIS charged that, on six occasions between April 2000 and July 2001, Lattice exported extended temperature range programmable logic devices to China without the required export licenses. The extended temperature range programmable logic devices are military grade semiconductor microchips which have possible dual-use technology implications. BIS also charged that, on five occasions between July 2000 and January 2002, Lattice released related technical data to Chinese nationals in the United States without the required export licenses. BIS further charged that, on one occasion between August 2000 and September 2001, Lattice exported the related technical data to China without the required export licenses. Lattice failed to obtain export licenses for five Chinese nationals who, during the course of their employment with Lattice, were brought to the United States from China for technical training. Such technical training in the United States requires an export license. The "deemed export" provision of the EAR states that an export license is required for the release of technology to a foreign national in the United States if a license would be required for the release of technology to his/her country of citizenship. Lattice voluntarily self-disclosed the violations and fully cooperated with the investigation. Lattice has since taken steps to institute controls to help prevent the recurrence of any similar export compliance problems. Because six of the alleged violations occurred in 2000 and 2001 while the Export Administration Act (EAA) had been temporarily renewed, they could have drawn fines of $120,000 each. All together the potential fine on Lattice could have been $786,000. Thus, BIS rewarded the firm with a 29% discount for its voluntary self-disclosure of its actions.

Deemed Exports

The “deemed export” provision of the EAR states that an export license is required to release technology to a foreign national in the United States if a license would be required to export that technology to his/her country of citizenship. This year we saw tougher enforcement on deemed export violations, and there are no signs that the Office of Export Enforcement (OEE) plans to lessen its intensity in enforcing these violations. Rather, Julie Salcido, Special-Agent-in-Charge of OEE’s San Jose Field Office, warned exporters at the Update 2004 Conference to “be vigilant” regarding deemed exports. Regarding the first criminal conviction in a deemed export case former Assistant Secretary for Export Enforcement Julie L. Myers stated: “The first criminal conviction in a technology transfer context is a significant milestone in focusing and educating exporters on deemed export issues.”

First Criminal Conviction

We have now seen the first criminal conviction in a deemed export case. On April 26, 2004, Suntek Microwave, Inc. (Suntek) of Newark, California pled guilty in the Northern District of California to violating the EAR and was fined over $339,000. Charlie Kuan (Kuan), former President of Suntek, pled guilty on September 23, 2002, and is awaiting sentencing. Suntek agreed to a $275,000 civil penalty and a 20-year denial of export privileges and Charlie Kuan agreed to a $187,000 civil penalty and a 20-year denial of export privileges. Because Kuan is unemployed and Suntek is no longer in operation, BIS agreed to suspend the monetary part of the civil penalty.

BIS charged that, between 1996 and 2000, Suntek, under the direction of Mr. Kuan, failed to obtain the required export licenses for shipments of detector log video amplifiers (DLVA) to the People’s Republic of China (PRC). DLVA’s have military applications that include radar, missile, and satellite communications. BIS charged that, in 1997, Suntek knowingly made false statements to BIS on a license application by supplying false end-user information in order to obtain export authorization to ship DLVAs to the PRC, and that Kuan falsely certified to the truth of these statements. BIS also charged that, from 1996 to 2000, Suntek failed to obtain export licenses under the “deemed export” provisions of the EAR for Chinese nationals who worked at Suntek and were trained in DLVA manufacturing technology controlled by the EAR.

First Civil Penalty

New Focus of San Jose, California agreed to a $200,000 civil penalty to settle charges that it violated the EAR. New Focus voluntarily self-disclosed the deemed export violations and fully cooperated with the investigation. BIS charged that between 1997 and 2001, New Focus failed to obtain the required export licenses for shipments of amplifiers to the Czech Republic, Singapore, and Chile. BIS also charged that, from 2000 to 2002, New Focus failed to obtain export licenses under the “deemed export” provisions of the EAR for two Iranian nationals and one Chinese national who, in the course of their employment in the United States, were exposed to manufacturing technology controlled by the EAR.

Successor Liability

Successor liability also reared its ugly (and costly) head throughout 2004. Former Assistant Secretary for Export Enforcement Julie L. Myers stated that successor liability cases demonstrate the “risks that corporations can face if due diligence reviews are not conducted or do not include assessments of potential export control violations.” Therefore, companies should enhance their due diligence methodologies in corporate mergers and acquisitions, to avoid unpleasant surprises.

Saint-Gobain Performance Plastics, Inc. (SGPPL) of Garden Grove, California, agreed to pay a $697,500 civil penalty to settle charges that it exported controlled Teflon-coated valves and pumps in violation of the EAR. BIS charged that, on 189 occasions between November 1998 and September 2000, SGPPL or Furon Corporation (acquired by SGPPL in 1999) exported controlled valves and pumps to Israel and Taiwan without the required export licenses. BIS also charged that SGPPL failed to file a Shipper’s Export Declaration (SED) for some of these shipments and filed SEDs for others which falsely indicated that the shipments did not require an export license. Of the 189 violations that BIS claimed that SGPPL committed, 123 of the violations were committed by the Furon Corporation prior to its acquisition by SGPPL in 1999. According to Assistant Secretary for Export Enforcement Julie L. Myers: “Cases such as this demonstrate the importance of voluntary self-disclosures. Consistent with BIS’s recently issued civil penalty guidance, the penalty in this case could have been significantly less if the company had voluntarily self-disclosed the violations.”

Symmetricom, Inc. (Symmetricom), of San Jose, California, agreed to pay a $35,500 civil penalty to settle charges that Datum, Inc. (Datum), a company acquired by Symmetricom in 2002, exported cesium frequency standard equipment and an ovenized quartz crystal oscillator in violation of the EAR. BIS charged that, in April 1999, Datum exported cesium frequency standard equipment to Malaysia without the required Department of Commerce license in violation of the EAR. Cesium frequency standard equipment is controlled by BIS for national security reasons and all exports of such items to Malaysia require Department of Commerce licenses. In connection with this export, BIS charged that Datum made a false statement on a Shipper’s Export Declaration (SED). BIS also charged that, in May 1999, Datum exported an ovenized quartz crystal oscillator to an organization in India on BIS’s Entity List without the required Department of Commerce license. In addition, BIS charged that Datum forwarded the oscillator with knowledge that a violation of the EAR would occur and made a false statement on a SED. Former Assistant Secretary for Export Enforcement Julie L. Myers noted: "This settlement adds to the growing number of successfully resolved cases that involve exports to Entity List organizations.”

India Entity List Cases

Halear, Inc. of Placentia, California, doing business as Preston Scientific, agreed to pay a civil penalty of $60,000 to settle charges that it committed nine violations when it exported an amplifier classified under ECCN 3A992 in 1998 and a connector socket classified as EAR99 in 1999 to an to an organization in India on BIS’ Entity List without the required Department of Commerce license. In a related case, Bernard A. Spear, President of Halear, reached a settlement with BIS on the same charges. As a result of the settlement, Mr. Spear has been added to the denied persons list for a period of 3 years.

BNC Corp., also known as Berkeley Nucleonics Corporation (BNC), of San Rafael, California, agreed to a $55,000 civil penalty and a five-year denial of export privileges to settle charges that it made unlicensed exports in violation of the EAR. BIS agreed to suspend the denial of export privileges penalty for a period of one year and thereafter waive the denial penalty contingent on BNC not having committed further violations during the suspension period. BIS charged that between 1998 and 2000, BNC exported and attempted to export shipments of nuclear pulse generators to the Department of Atomic Energy (DAE) and the Nuclear Power Corporation (NPC) in India without the required licenses. At the time of the export, DAE and NPC were both on BIS’s Entity List and exports to DAE and NPC therefore required prior authorization. In related criminal cases, on June 9, 2004, BNC pled guilty in the Northern District of California to violating the EAR and was fined $300,000. On December 17, 2003, two former employees of BNC, Richard Hamilton and Vincent Delfino, also pled guilty to related charges. Hamilton pled guilty to misrepresenting and concealing facts on an export document. Delfino pled guilty to making a false statement on an export control document. Both were sentenced to a criminal fine of $1000, two years probation, and 100 hours of community service, and were prohibited from engaging in or facilitating export transactions.

Atlas Copco Compressors Inc. (Atlas), of Voorheesville, New York will pay a $13,000 civil penalty to settle charges that it exported oil and air seal components to a listed entity in India without the required export licenses. BIS charged that Atlas exported oil and air seal components to Bharat Heavy Electrical Ltd. (BHEL) in Ramachandrapuram, Hyderabad, India in July 2000. At the time of the export, BHEL was on the BIS’s Entity List and exports to BHEL therefore required a BIS license.

DDTC

As part of the general expansion of staff and resources that Congress has approved for State's export licensing responsibilities, the State Department’s Directorate for Defense Trade Controls (DDTC) has increased the number of people assigned to its compliance office. The DDTC's compliance office has been reshuffled into divisions covering enforcement, compliance and registration and research and analysis. State's compliance staff is putting its attention into several key areas; among them are information technology systems and especially the inadvertent transfer of ITAR technology through company intranets that don't have adequate controls. The compliance staff also is looking increasingly at foreign nationals, including employees of subcontractors and persons with dual citizenship. Another area of concern is ITAR-required recordkeeping, which often isn't kept up-to-date. They are also checking to see if firms are properly identifying and tracking U.S. Munitions List (USML) exports, including records of destruction of old items. In addition, State is examining the use of license exemptions to make sure they are being used properly.

Seven people from two New Jersey companies were arrested on July 1 on charges of selling weapons-related equipment to China. The president of Universal Technologies, Teng Fang Li; vice president Zhonghe Ji; and their employee Ronge Tong, have been charged with one count each of conspiracy, violation of the Export Administration Act regulations and wire fraud. Manten Electronics Company president Xu Weibo, purchasing agent Xiu Ling Chen, vice president Hao Li Chen, and company controller Kwan Chun Chan, face the same charges. The complaints allege that the defendants used their businesses to illegally transfer sensitive national-security controlled items to state-sponsored research institutes within the People's Republic of China.

Federal authorities allege that the defendants violated the Arms Export Control Act and International Traffic in Arms Regulations for shipping to China items used in a variety of defense weapons systems, including radar, smart weapons, electronic warfare and communications. According to prosecutors, the defendants concealed their activities by saying the items were being shipped to a U.S. company rather than the Chinese government, and falsely stating on shipping documents that no license was needed. The export violations carry a maximum penalty of 10 years in prison and a $1 million fine. Each count of conspiracy and wire fraud carries a maximum penalty of five years in prison and a $250,000 fine.

ITT Industries, Inc. agreed to pay liability and penalties of $8 million and other remedial actions resulting from 95 alleged violations of the ITAR. The alleged violations include unauthorized exports of night vision equipment and technical data, failure to return articles exported on temporary export licenses and Technical Assistance Agreement (TAA) provisos, and failure to keep adequate records. Most of the incidents were reported in voluntary disclosures. The ITT fine included $3 million in fines and $5 million for remedial compliance measures. The ITT consent also includes the establishment of an Ombudsman program for reporting of violations.

In a double-whammy case of deemed export violations and successor liability General Motors (GM) of Detroit, Michigan will pay a $10 million civil fine and spend another $5 million to correct export compliance program for the illegal release of defense-related technical data to foreign nationals and dual-nationals in Canada, Australia, Switzerland and several other countries. In addition, General Dynamics (GD) of Falls Church, Virginia will be required to spend $5 million to assure continued implementation of corrective export compliance measures. GD acquired parts of the GM defense business that were responsible for the release of the data therefore the State Department charged GD as a "legally liable successor.” GM and GD’s corrective measures action to improve their export compliance systems include new training programs for employees, new restrictions on access to databases, law department oversight of compliance, establishment of hotlines for employees to report ITAR violations and internal audits. GM was also ordered to appoint a Special Compliance Official (SCO) from outside the company for three years to monitor GM's compliance with the ordered corrective actions.

GM's GM Defense group designed and manufactured light armored vehicles for the U.S. military and several foreign governments, including Canada, Australia, New Zealand and Saudi Arabia. In 2003, GD acquired ownership of certain assets of GM Defense. Before the acquisition, GD in April 2002 performed a due diligence investigation of GM's operations. As part of that review, GD asked GM for information on the presences of "dual nationals" at GM's Canadian facilities. GD provided the results of those inquiries to State's Directorate of Defense Trade Controls (DDTC). In August 2002, GM made its own self-disclosure to DDTC concerning the release of defense technology at its GM Defense London (GMDL) operations in London, Ontario. GM told state that "nationals of third countries, including Canadian dual citizens had access to U.S. origin defense articles (hardware and technical data) and received defense services at GMDL's facility in London, Ontario, Canada, without the required State Department Approvals. DDTC has estimated that 750 GM Defense employees of proscribed and non-proscribed countries at GMDL had the ability to access the aforementioned databases containing technical data. GM Defense did have an approved TAA from State, but that approval covered the release of defense technology only to Canadian nationals and not to dual-nationals or nationals of other countries. The State Department found that time and again, ITAR-related matters (e.g., unauthorized access to technical data by foreign nationals to include foreign nationals of proscribed countries) were raised to management level officials, including legal and compliance officials, and these matters were not resolved."

OFAC

Throughout 2004, OFAC announced several settlements with the following dangerous organizations. In July, the Cable News Network, the Church Pension Fund, the International Music Network and USA Gymnastics all reached settlements with OFAC in connection with their activities in Cuba, in recent weeks. In August, Pace University, Rich Worldwide Travel and Trip Network, Inc. on behalf of Cheap Tickets, Inc. were penalized for violating the regulations governing unlicensed provision of travel services to embargoed countries. In September, Irridelco International Corp. (irrigation equipment), Sempra Energy Trading Corp. on behalf of Sempra Metal Ltd., and World Wide Sires (cattle genetics marketing) were penalized for violating the regulations governing trading with embargoed countries.

Personnel Changes and Reorganization

BIS

As happens toward the end of many Presidential cycles, Deputy Assistant Secretary Lisa Prager, Director of Export Enforcement Mark Menefee and Director of Antiboycott Compliance Dexter Price all left the Bureau of Industry and Security. At the sub-cabinet level, Julie Myers resigned as Assistant Secretary for Export Enforcement effective November 12. She is moving to the White House personnel office to work with appointees for the next Bush term. With her departure, BIS has lost all of its top enforcement agents.

Wendy L. Wysong has assumed the position of Deputy Assistant Secretary of Commerce for Export Enforcement at BIS effective December 14. Ms. Wysong will serve as the senior career executive in the Export Enforcement arm of BIS. She also becomes acting Assistant Secretary, pending the nomination and confirmation of a new Assistant Secretary to fill the current vacancy in that position. Prior to joining BIS, Ms. Wysong served in the Justice Department for 16 years, most recently as an Assistant United States Attorney for the District of Columbia. Working in the Transnational/Major Crimes Section, she was responsible for overseeing the investigation, indictment, and trial of export fraud cases. Before working in the international area, she also prosecuted public corruption cases.

At the Commerce Department, President Bush has selected Kellogg CEO Carlos Gutierrez as the new Commerce Secretary. Bush called Gutierrez a visionary and one of America's most respected business leaders, a man who rose to the top at Kellogg's from a first job as a truck driver in Mexico City peddling Frosted Flakes to local stores. If confirmed by the U.S. Senate, Gutierrez, 51, will replace Donald Evans, who in November said he was resigning. Guiterrez’s understanding of high technology issues is, ahem, unknown.

Kenneth Juster, the U.S. Undersecretary of Commerce, is leaving his post to become an executive vice president at Salesforce.com, which sells Internet-based customer-management software. Juster, 50, plans to leave his government job on January 7, 2005. In late January, he will become Salesforce.com's executive vice president of legal affairs and corporate development. His duties will include oversight of legal matters, internal audit and mergers and acquisitions.

DDTC

At the State Department, Colin Powell resigned. Bush has nominated his national security adviser, Condoleezza Rice, for the job. For U.S. companies, cumbersome and outdated arms export licensing requirements make it harder to operate in an increasingly competitive global marketplace. Reforming export regulations was never really a top-level issue at State, and after the terrorist attacks of Sept. 11, 2001, and the U.S. invasion of Iraq in March 2003, it fell out of the Secretary Powell’s field of vision, entirely. That’s unlikely to change under Powell’s successor.

At the working level, Robert "Turk" Maggi, former Managing Director, Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State, has left the DDTC for an assignment as Political Advisor to Joint Task Force Bagram, Bagram Air Base, Afghanistan.

OFAC

In early September, Richard Newcomb announced his intent to depart the Treasury after 17 years as Office of Foreign Assets Control (OFAC) Director. Treasury Secretary John Snow announced that Robert Werner will be the new Director OFAC. Werner's Directorship became official on October 1, 2004. Before coming to the Treasury, Werner served in the Justice Department's Office of Legal Counsel. He also served as a federal prosecutor in the U.S. Attorney's Office in Connecticut, Associate Attorney General in the State of Connecticut, and he headed Connecticut's gaming regulatory agency. His private sector experience includes work as a partner at Bingham Dana LLP (now Bingham McCutchen) and as an officer at The Phoenix Home Life Mutual Insurance Company (now The Phoenix Companies). Werner is also a former law clerk to Associate Justices Lewis F. Powell, Jr. (retired) and Anthony M. Kennedy. Werner earned his Juris Doctorate from New York University School of Law, his masters from Columbia University and his bachelors from Amherst College.

International Agreements

Wassenaar

The Wassenaar Arrangement held its 10^th Plenary Meeting in Vienna, Austria from December 8-9, 2004. The Plenary welcomed the adoption of the UN Security Council’s Resolution 1540, which decides, among other things that all states shall establish, develop and maintain effective export and trans-shipment controls. The Wassenaar Agreement will respond to any approach from the Chair of the UNSCR 1540 Committee and/or Participating States to provide assistance on the development of effective export controls. The Plenary welcomed Slovania as a new Particpating State in the Wassenaar Agreement. In October 2004, the Wassenaar Agreement undertook a major outreach initiative for the first time in its history. Participants represented more than 50 organizations covering a number of non-participating states, non-governmental organizations, academic industries, the media and industry. The seminar sought to raise awareness regarding responsible transfers of conventional arms and dual-use goods and technologies.

Category 3 – Electronics. ECCN 3A001.a.3.c was rewritten to read “More than three data or instruction bus or serial communication ports, each providing direct external interconnection between parallel “microprocessor microcircuits” with a transfer rate of 1000 Mbyte/s or greater.” In ECCN 3A001.a.5.a the control parameters for analog-to-digital converters were amended in subparagraphs a.1 to a.4 and subparagraph a.5 was added. The Technical Note to ECCN 3A001.a.5 was modified to include new paragraphs 2, 3 and 4. Specifically, paragraph 2 states “The number of bits in the output word is equal to the resolution of the analog-to-digital converter;” paragraph 3 states “The output rate is the maximum output rate of the converter regardless of architecture or oversampling. Vendors may also refer to the output rate as sampling rate, conversion rate or throughput rate. It is often specified in megahertz (MHz) or mega samples per second (MSPS);” and paragraph 4 states “For the purpose of measuring output rate, one output word per second is equivalent to one Hertz or one sample per second.” In ECCN 3A002.c the control parameter in paragraph one is amended from not exceeding 37.5 GHz to “not exceeding 37.5 GHz and having a 3 dB resolution bandwidth (RBW) exceeding 10 MHz,” a new paragraph two is added for signal analyzers whose frequencies exceed 43.5 GHz and the existing paragraph 2 was renumbered as 3, including the reference to paragraph 2 in the Note. In ECCN 3A001.B.c.1 the control parameter for anisotropic plasma dry etching equipment was changed from 0.3 µm or less to 180 nm or less. In ECCN 3A001.B.f.1.a the control parameter for light source wavelength was changed from 350 nm to 245 nm. The control parameter for minimum resolvable feature size in ECCN 3A001.B.f.1.b was changed from 0.35 µm or less to 180 nm or less. The Formula for minimum resolvable feature size (MRF) in the Technical Note to ECCN 3A001.B.f.1.b was changed - µm was changed to nm and K factor parameter was changed to 0.45. In ECCN 3B002 “Stored program controlled” is deleted. Finally, the Note and Technical Note to ECCN 3B002.b were deleted.

Category 4 – Computers. In Note 1 to ECCN 4A003.c the reference to 4A003.d was deleted. In ECCN 4D001.b.1 the control parameters on the composite theoretical performance (“CTP”) for digital computers was changed from 28,000 MTOPS to 75,000 MTOPS. In ECCN 4E001.b.1 the CTP valued was also changed from 28,000 MTOPS to 75,000 MTOPS.

Category 5 Part 1 – Telecommunications. In ECCN 5A001.d the control parameters for electronically steerable phased array antennae was changed from 31 GHz to 31.8 GHz. The controls on direction finding equipment and its specially designed components were moved from ECCN 7A007 to ECCN 5A001.e.

Category 6 – Sensors and Lasers. A new entry was added to ECCN 6A002, which controls optical sensors. ECCN 6A002.a.3.f was added for infrared focal plane arrays based on micro-bolometer material. A new Technical Note and Validity Note were also added.

Sensitive List. In ECCNs 4D001 and 4E001 the CTP value was changed from 75,000 to 190,000 MTOPS. A new entry was added for magnetometers in ECCN 6A006.a.

Category 9 - Propulsion Systems, Space Vehicles and Related Equipment. The Validity Note was deleted for unmanned air vehicles (UAVs).

Munitions List. Lighter than air vehicles, as known as blimps, were added to the Munitions List and are controlled under the ML chapeau, ML 10.b and ML 10.c.1.

However, the Wassenaar Arrangement once again failed to adopt a “no undercut” rule, whereby members would agree not to approve any export that had been rejected by another member.

Missile Technology Control Regime (MTCR)

The Missile Technology Control Regime (MTCR) held its 19th Plenary Meeting in Seoul, South Korea from October 6-8, 2004. The 19th Plenary was held against the backdrop of important developments in global non-proliferation, including Libya’s decision to forgo its WMD programs along with development of MTCR-class delivery systems and the revelation of the A.Q. Khan proliferation network. In response to UN Security Council Resolution 1540, the Regime decided to include a new and more expansive “catch-all” requirement in its Guidelines in order to focus on a broader range of countries. Resolution 1540 states that proliferation of WMD delivery systems constitutes a threat to international peace and security and decides that all States should take and enforce effective measures to establish national export controls to prevent the proliferation of WMD, their means of delivery, and related materials. The Plenary also recognized the necessity of enhancing export controls, strictly implementing them and keeping them up to date with the ever-advancing technological development. Finally, in response to increasingly sophisticated procurement attempts, the Plenary recognized the need to consider the issues of intangible transfer of technology; transit, transshipment and brokering controls; and the need to curtail the activities of intermediaries and front companies.

Australia Group

BIS also published a final rule implementing the understandings reached at the June 2003 plenary meeting of the Australia Group (AG) and to amend the Export Administration Regulations (EAR), as needed, to implement these AG understandings. Specifically, this final rule amends the EAR by adding twelve new viruses and two new bacteria to the list of AG-controlled human and zoonotic pathogens and toxins described on the Commerce Control List (CCL). The rule also updates the list of countries that are currently States Parties to the Chemical Weapons Convention (CWC) by adding nine countries that recently became States Parties: Afghanistan, Belize, Cape Verde, Kyrgyzstan, Libya, Sao Tome and Principe, Timor Leste, Tonga, and Tuvalu.

Nuclear Suppliers Group

On May 27, 2004, at the Plenary Meeting of the Nuclear Suppliers Group (NSG) in Göteborg, Sweden, the People’s Republic of China (PRC) was admitted into the NSG effective June 10, 2004. Also newly admitted are Estonia, Lithuania, and Malta. The NSG is a multilateral export control regime that controls the transfer of sensitive nuclear items and technologies. Membership will provide export control resources, a much-needed commodity in China, in addition to legitimacy and obligation through the formalization. Chinese officials have also declared their desire to join the 33-nation Missile Technology Control Regime (MTCR), which aims to curb the spread of technology that enables ballistic missiles and unmanned aerial vehicles to deliver weapons of mass destruction. This is the most recent in a series of attempts on behalf of the Chinese government to align Chinese export control policies with that of the current world standards.

Despite the assistance provided by China to the success of international nonproliferation efforts, the United States government is concerned with China’s latest action. First, skeptics explain that the China’s newfound interest in nonproliferation is driven by a desire to access otherwise-controlled technologies and gain legitimacy for its burgeoning nuclear industry. In addition, China entered the NSG with a grandfathered contract to furnish Pakistan with a $600 million atomic reactor to be built next to another Chinese-supplied nuclear power plant in Chashma. Even though NSG members are forbidden to engage in new nuclear cooperation with Islamabad due to a lack of international inspection of nuclear activities, China’s contract with Pakistan antedated membership and is permissible. The Bush administration endorsed China’s NSG membership; however, this stance is receiving criticism from those on the Hill. The administration explains its support by arguing that Beijing’s involvement in international agreements creates a venue for multilateral censure if China should collapse. Skepticism will remain as the world waits to see the extent to which membership will alter China’s checkered nonproliferation past.

New Year Resolutions

Export Management Systems should be enhanced to reflect the specific new requirements that companies must meet in order to have an effective compliance program under the Federal Sentencing Guidelines.
Screening and Training Programs should be enhanced to reflect the new “knowledge controls” guidance from BIS.