Key Takeaways from a Spate of Recent Enforcement Actions

Recently there have been an increased number of enforcement cases from the Bureau of Industry and Security (“BIS”), Office of Foreign Asset Controls (“OFAC”), and Directorate of Defense Trade Controls hitting the compliance newsletter circuit and we thought it worthwhile to outline the issues for our readership and note some key takeaways from the agency’s actions.

BIS Enforcement Cases

• Photonics Industries International, Inc., Long Island, NY, was charged on May 28, 2021 and fined $350,000 for the following:
  • Five (5) violations of exporting picosecond laser systems to China as EAR99 when the systems are classified as ECCN 6A005.b.6.b and required an export license for National Security (“NS”) and Anti-Terrorism (“AT”) concerns, (i.e. §764.2(a)).
  • Allowing their freight forwarder to file misinformation in the Electronic Export Information (“EEI”) listing the ultimate destination/ultimate consignee as Hong Kong but knowing the end customer and destination was China.
  • Lastly, the company exported a laser system correctly classified as EAR99 to Sichuan University in China, who has been on the BIS Entity List since September 2012.
• Alsima Middle East General Trading, located in Dubai, United Arab Emirates was charged on May 28, 2021and fined $25,000 for the following:
  • Misleading statements in their export license application for “powder grade nickel,” which would be used to produce “self-lubricating seal rings.”
    • Alsima stated the product would be used in the UAE.
    • BIS found in their Post Shipment Verification process that the company planned to export the ‘rings’ to an Azerbaijani company; or ship the nickel powder to India or South Africa; all of which would require additional BIS licensing.
• USGoBuy, LLC, of Portland, Oregon, was charged on June 17, 2021 and fined $20,000 for the following:
  • Two (2) violations of exporting rifle scopes classified as 0A987.a to the United Arab Emirates and China without obtaining the appropriate export license for Crime Control reasons.
• Skyline USA, of Sanford, Florida, was charged on June 23, 2021 and fined $140,000 for the  following:
  • Failure to obtain an export license for shipments of stun guns (0A985), police batons (0A987), handcuffs (0A982), and/or pepper spray (1A984), which are controlled  for Crime Control Reasons under the EAR, to Colombia, Guatemala, Mexico, Nigeria, Pakistan, Panama, Trinidad and Tobago, or Uruguay.
  • Failure to maintain an export compliance program with documented procedures to determine classification, denied parties and export licensing requirements.
  • Failure to maintain records and comply with the recordkeeping requirements of §762 of the EAR.

• Patriot 3 Inc., of Fredericksburg, Virginia, was charged on June 28, 2021 and fined $200,000 for the following:
  • Failure to obtain the appropriate export license for shipments of maritime jet boots with underwater propulsion systems, which were knowingly destined to Russia’s Federal Guard Service, in direct conflict with §764.2(e) and Section 744.21 of the EAR.

 OFAC Enforcement Case

•  Two subsidiaries of the Sweden-based Alfa Laval AB were charged with violations of the U.S. Iranian Transactions and Sanctions Regulation (31 CFR Part 560). Alfa Laval Middle East Ltd. agreed to a settlement of $415,695 for their role in the violation, while Alfa Laval Inc., agreed to a settlement of $16,875:
  • Alfa Laval Inc. received a request from an Iran-based oil distributor to purchase a U.S. manufactured fluid cleaning unit.
  • Alfa Laval Inc. correctly told the Iranian customer they could not export the products to Iran, but then referred the Iranian customer to the UAE-based Alfa Laval Middle East Ltd.
  • Alfa Laval Middle East Ltd. continued with the transaction despite Alfa Laval AB’s warnings concerning the prohibitions under the US sanctions.
  • The charging letter indicates Alfa Laval Middle East Ltd. conspired with several other companies to mislead its US business unit ‘by obfuscating the end-user’s identity from its affiliate, who in turn allowed the products to be released for export without further due diligence on their part.

DDTC Enforcement Case

•  Five (5) individuals were accused of unlawfully exporting thermal imaging riflescopes and night- vision goggles to Russia in violation of the Arms Export Control Act. They were charged with:
  • Falsely obtaining the riflescopes and night-vision goggles from U.S. companies with the assurance the defense articles were not being exported.
  • Not obtaining the appropriate export license from the Directorate of Defense Trade Control (“DDTC”).
  • Providing false statements on the export declaration that the items were not export- controlled and not valued over $2,500.

Key Takeaways

When reviewing these cases, it is important to look at where each company went wrong and then learn from their mistakes. The following is an outline of the issues that lead to the violations:

•  Failure to understanding the export classification of products and the associated export licensing requirements.
  • This is a critical element to any compliance program and deserves more than a cursory look at either the ITAR or EAR regulations to confirm a jurisdiction/classification of any manufactured product.
• Consistent failure to maintain a compliance program that includes documented process and procedures specific to classification/licensing/recordkeeping.
• Failure to understanding the Restricted Party Screening process, specifically as it relates to the Entity List.
• The lack of a Sanctions Compliance Program with policies and procedures and specific sanctions training for all employees involved in the export process.
  • OFAC has stated many times the expectation that U.S. companies implement a Sanctions Compliance Program to help alleviate any violation of U.S.-based sanctions.
• Failure to perform assessments and desktop audits of shipments to ensure they were exported in compliance.
• Providing misinformation that is filed through AES/EEI that will obfuscate the ultimate country of destination and end-user.
• Misleading information in the applicant’s export license applications which contributed to BIS’ findings that an export license was required for the ultimate destination of the shipment.
• Willful and purposeful violations of the export regulations.

 These enforcement cases, whether BIS, OFAC or DDTC, point to the fact that to export responsibly there are more factors in the process than pleasing your foreign affiliate or foreign end-user. Ss the U.S. exporter of record, you must be in compliance with the U.S. export regulations, not what makes it easier for your foreign customer. If you need assistance developing or enhancing your compliance program in order to avoid violations, please contact ESI for a free consultation.