“Compliant exporters are all alike; every non-compliant exporter is non-compliant in its own way.” Leo Tolstoy never wrote those words, but if the plot of Anna Karenina involved export control compliance instead of a doomed love triangle, perhaps something similar would have been in there.
The point is, we rarely see stories about exporters that do not violate United States export control and sanctions requirements; it’s precisely because their compliance programs are effective that they avoid such drama. The companies that show up in the news are there because something went wrong. Each penalty decision published by the Bureau of Industry and Security and Office of Foreign Assets Control identifies one or more factors that caused the violation as well as the level of culpability and resulting penalty assessment.
While these penalty decisions are specific to the violating parties involved, they do give guidance to other exporters regarding the types of violations that can arise and the ways in which BIS and OFAC may treat them. By examining the holes in someone else’s compliance program, or the misadventures that can occur when a program is lacking in the first place, compliant companies can increase the likelihood that they will not commit similar violations.
Here are a few recent cases.
Aban is an Indian company. Its subsidiary in Singapore ordered oil rig supplies from a United States firm. While the export to the United Arab Emirates, the Singaporean company intended all along to reexport the items to territorial waters of Iran. The error appears to have been in not realizing that the reexport transaction would violate OFAC’s Iranian Transactions and Sanctions Regulations, rather than a deliberate scheme to do so.
Why was this a violation? OFAC’s regulations prohibit foreign companies from procuring merchandise from the United States with the intent of shipping it to Iran. The Singaporean company apparently overlooked this point. OFAC took this lack of awareness into account in determining that the violation was “a non-egregious case.” Other factors the agency noted were Aban’s lack of a compliance program and the assistance that the reexport provided to the Iranian energy industry.
There are two lessons that I see here: first, foreign purchasers from the United States must school themselves on all U.S. restrictions, from both BIS and OFAC, concerning reexports and transfers to third countries. Second, no matter who or where you are, don’t provide any items of U.S. origin to Iranian oil interests. As a result of ignoring these rules, Aban was penalized $17,500 and is now immortalized in OFAC’s Hall of Fame.
This one involves a Taiwanese shipping company that permitted one of its vessels to take on oil from an Iranian tanker that was on the Specially Designated Nationals list. Why would OFAC penalize a company in Taiwan for doing this? Because B Whale Corporation was the debtor in bankruptcy proceedings before a United States court, making it a “United States person” under the regulations. Moreover, because the vessel involved was subject to U.S. court jurisdiction, OFAC determined that “the oil transferred to the vessel was an importation from Iran to the United States.”
Compounding the severity of the violation, OFAC found that B Whale had shown “reckless disregard” for the U.S. sanctions and attempted to cover-up the transaction. The fact that the Iranian oil industry received a benefit made things worse. Because B Whale’s assets already were liquidated in bankruptcy, OFAC issued a finding of violation without a penalty.
The lessons: be aware of the regulatory definition of “United States persons”, since even minimal contact with the U.S. may trigger coverage; don’t try to hide prohibited transactions by falsifying records and, again, steer clear of the Iranian energy industry.
The exporter here seems to have been a clearinghouse with a business model based on export control avoidance. While apparently not a buyer-reseller, the company assisted foreign customers to purchase goods from vendors in the United States. The unique services it offered included creating bogus invoices that falsified products’ values to fall below the threshold for mandatory Electronic Export Information filing, destroying the real documents and misdescribing the exported articles to hide their controlled nature (labeling “optical sights as ‘garage door kits’”; simply brilliant!). By presenting false information to BIS and the Census Bureau, the company enabled unauthorized exports to elude detection.
As the BIS charging letter noted, the exporter was well aware of the applicable regulations and that it was violating them. The internal message cited by BIS saying “I know we are WILLINGLY AND INTENTIONALLY breaking the law” was only the most glaring giveaway.
The good news for the exporter was that the United States government did not bring a criminal prosecution. The bad news is that BIS levied a penalty of $27 million.
I won’t dwell on the most obvious lesson: don’t premise your export program on violating the regulations. Even though most exporters would never consider doing so, they still may learn from the types of violations that BIS found. Be certain that the product description and value information provided on export documents is correct, since even inadvertent errors can result in violations. If BIS has an outreach visit to your company, as it did with Access USA Shipping, take its advice seriously. And, if you get an inkling that there is a weakness in your compliance system, don’t ignore it but take whatever action is needed to ensure it’s corrected.
The Milwaukee Electric Tool case seems prosaic by comparison. The company exported controlled items, thermal imaging cameras, to destinations requiring a BIS license. The only problem was that it failed to get licenses before exporting. That oopsie cost it $301,000.
While short on detail, the BIS settlement agreement and proposed charging letter imply to me that the exporter failed to determine the correct Commerce Control List classification of the thermal imaging cameras. Without a correct classification, it could not determine the product’s control status to a particular destination.
This case highlights the need for exporters to ensure that they have correctly classified their products, know which countries are controlled destinations and the required BIS authorization. A mistaken classification does not provide a defense against a charge of violation nor, depending on the circumstances, would it even necessarily qualify as a mitigating factor to reduce the size of a possible penalty.