| | 9. R.C. Thomsen II, A.D. Paytas & M.M. Shomali: “Changes to Export Controls in September 2016”
(Source: Thomsen & Burke, LLP) [Excerpts.]
* Authors: Roszel C. Thomsen, Esq., Roz@t-b.com; Antoinette D. Paytas, Esq., Toni@t-b.com; and Maher M. Shomali, Esq., firstname.lastname@example.org. All of Thomsen & Burke, LLP.
This memo summarizes the regulatory, legislative, and enforcement developments with respect to U.S. and multilateral export controls during the month of September 2016. Changes to the regulations published in the Federal Register are explained at greater length in the Regulatory Summary, as is our custom.
Wassenaar and Encryption Changes
Earlier this month, we circulated two Updates summarizing the Changes to the Encryption Regulations and Revisions to the EAR to Implement the Wassenaar Changes. These changes resulted from a final rule amending the Commerce Control List (CCL) of the Export Administration Regulations (EAR) by
(1) Implementing the changes agreed to by the Wassenaar Arrangement (WA) at the 2015 Plenary by revising 58 Export Control Classification Numbers (ECCNs)and adding two ECCNs, as well as adding a General “Information Security” Note, revising WA reporting requirements, adding four (4) definitions , removing three (3) definitions, and revising twelve (12) definitions in the EAR.
(2) Adding license exception eligibility for two (2) ECCNs and removes license exception eligibility for four (4) ECCNs.
(3) Raising the Adjusted Peak Performance (APP) for high performance computers, as well as technology and software for the development and production of such computers.
(4) Updating license requirements and policies associated with Category 5 – Part 2. Lastly, this rule removes the Foreign National Review requirement associated with deemed exports under License Exceptions APP and CIV.
As we mentioned in the Encryption Update, this is perhaps the “last gasp” of the ECR process, which so far has resulted in extensive changes to the U.S. Munitions List of the ITAR and creation of the Commerce Munitions List of the EAR, but left the controls on Encryption Items essentially static since the last significant changes in 2010. We categorized the most significant changes as Process Improvements and Updates to the “Restricted Items,” as follows:
– ENC Registration and Annual Reporting Consolidation. The ENC Registration requirement will be eliminated. However, elements of the ENC Registration will be added to the required Annual Reports for items described in Sections 740.17(b)(1) or Section 742.15(b)(1) of the EAR. (These sections describe products frequently referred to as “Unrestricted” and “Mass Market” Encryption Items.). The new, updated requirements for the Annual Reports will be published in Supplement No. 8 to Part 742 of the EAR.
– CCATS Accepted as Substitute for Annual Reporting. Products described in a CCATS will not be subject to the new Annual Reporting requirement. This will eliminate the duplication of effort, where exporters obtain CCATS for Unrestricted and Mass Market Encryption Items that otherwise require Annual Reporting. In addition, once included in an Annual Report, products do not need to be included in subsequent Annual Reports.
– Exports to “Less Sensitive Government End-Users” Authorized under License Exception ENC. Previously, exporters had to obtain an export license or Encryption Licensing Arrangement (ELA) in order to export Encryption Items described in Section 740.17(b)(2) to Government End-Users located in countries outside of Supplement No. 3 to Part 740 of the EAR. (Section 740.17(b)(2) describes products frequently referred to as “Restricted” Encryption Items). Such products will now become eligible for export under License Exception ENC to “Less Sensitive Government End-Users” described in a new definition added to Part 772 of the EAR. These are the same types of end-users that have been previously authorized under Global ELAs. Exports to more sensitive Government End-Users will continue to require either an ELA or an individual license.
– Publicly Available Software and Source Code No Longer Subject to the EAR. After filing of a one-time Notification, encryption software and source code that is publicly available no longer will be subject to the EAR.
– Amendments to the Technical Questionnaire for Encryption Items. BIS has made additions, subtractions and clarifications to the technical questionnaire that must be submitted in connection with classification requests and other submissions for encryption products. The new requirements are described in the revised Supplement No. 6 to Part 742 of the EAR.
– Authorization of Intra-Company Transfers of Encryption Items. A new provision permitting intra-company transfers of encryption items will be added in a new Section 740.17(a)(1)(ii) of the EAR. This will authorize exports and reexports among related parties for internal use when the parent company is headquartered in a country that is listed in Supplement No. 3 to Part 740.
Updates to Section 740.17(b)(2) “Restricted Items”
The controls on Restricted Encryption Items described in Section 740.17(b)(2) of the EAR will be updated, featuring a new definition of “Network Infrastructure,” as well as some important, albeit modest, increases to the control parameters. Definition of “Network Infrastructure”. BIS will publish the following definition of “network infrastructure” as a Note to items controlled in Section 740.17(b)(2) of the EAR: 2. ‘Network infrastructure’ (as applied to encryption items). A ‘network infrastructure’ commodity or software is any “end item,” commodity or “software” for providing one or more of the following types of communications:”
(a) Wide Area Network (WAN);
(b) Metropolitan Area Network (MAN);
(c) Virtual Private Network (VPN);
(e) Digital packet telephony/media (voice, video, data) over Internet protocol;
(f) Cellular; or
to paragraph 2: ‘Network infrastructure’ end items are typically operated by, or for, one or more of the following types of end users:
(1) Medium- or large- sized businesses or enterprises;
(3) Telecommunications service providers; or
(4) Internet service providers.
Note 2 to paragraph 2: Commodities, software and component for the “cryptographic activation” of a ‘network infrastructure’ item are also considered ‘network infrastructure’ items. The underlying concept is that Encryption Items sold to medium and large enterprises, and telecommunications and internet service providers, should be controlled as “Network Infrastructure” items, whereas items sold for use in branch offices of such enterprises and consumers should be exempted.
BIS has since published a summary of the Information Security changes on its website.
Additional Regulatory Changes
Amendments to Existing Validated End-User Authorizations
BIS has published a final rule revising the existing Validated End-User (VEU) list for the People’s Republic of China (PRC) by updating the list of eligible destinations (facilities) for VEU Boeing Tianjin Composites Co. Ltd. (BTC). Specifically, BIS amends supplement No. 7 to part 748 of the EAR to change the written address of BTC’s existing facility. The physical location of the facility has not changed. BIS updated the facility address after receiving notification of the change from BTC. The End-User Review Committee reviewed and authorized the amendment in accordance with established procedures. The updated address contributes to maintaining accurate location information for BTC’s VEU.
Russian Sanctions: Additions to the BIS Entity List
BIS has published a final rule amending the EAR by adding eighty-one entities under eighty-six entries to the Entity List. The eighty-one entities who are added to the Entity List have been determined by the U.S. Government to be acting contrary to the national security or foreign policy interests of the United States. BIS is taking this action to ensure the efficacy of existing sanctions on the Russian Federation (Russia) for violating international law and fueling the conflict in eastern Ukraine. These entities will be listed on the Entity List under the destinations of the Crimea region of Ukraine, Hong Kong, India, and Russia.
This rule implements the decision of the ERC to add eighty-one entities under eighty-six entries to the Entity List. These eighty-one entities are being added on the basis of Sec. 744.11 (License requirements that apply to entities acting contrary to the national security or foreign policy interests of the United States) of the EAR. The eighty-six entries being added to the Entity List consist of seven entries in the Crimea region of Ukraine, two entries in Hong Kong, two entries in India, and seventy-five entries in Russia. There are eighty-six entries for the eighty-one entities because five entities are listed in multiple locations, resulting in five additional entries.
Additional information, including a list of these entities, can be found in our Regulatory Summary.
Russian Sanctions: Additions to the OFAC Sanctions List and New General License
OFAC updated the Specially Designated Nationals List and the Sectoral Sanctions Identifications List to target sanctions evasion and other activities related to the conflict in Ukraine. A list of these entries can be found in the attached Regulatory Summary.
Concurrent with the listed parties, OFAC also published Russia/Ukraine-related General License No. 10, “Authorizing Certain Transactions Otherwise Prohibited by Executive Order 13685 Necessary to Divest or Transfer Holdings in Certain Blocked Entities”. This general license authorizes certain transactions that are ordinarily incident and necessary to divest or transfer to a non-U.S. person holdings in PJSC Mostotrest.
Pakistani National Sentenced for Attempting to Export Sensitive Technology for Pakistani Military
Syed Vaqar Ashraf of Lahore, Pakistan, was sentenced to 33 months in prison this month. Ashraf previously pleaded guilty to conspiracy to export defense controlled items without a license. Ashraf attempted to procure gyroscopes and illegally ship them to Pakistan so they could be used by the Pakistani military. In an effort to evade detection, Ashraf arranged for the gyroscopes to be purchased in the name of a shell company and caused the gyroscopes to be transshipped to Belgium. Ashraf then traveled to Belgium to inspect the gyroscopes and arrange for their final transport to Pakistan.
On August 26, 2014, Ashraf was arrested by the Belgium Federal Police at the request of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) agents, who had been conducting an undercover investigation of Ashraf’s activities.
World Class Technology Corporation Settles with OFAC for Alleged Iranian Sanctions Violations
World Class Technology Corporation (WCT) of Portland, Oregon, agreed to pay $43,200 to settle potential civil liability for alleged violations of the Iranian Transactions and Sanctions Regulations (ITSR). The alleged violations involve WCT’s exportation of seven shipments of orthodontic devices, collectively valued at $59,886, from the United States to Germany, United Arab Emirates, and/or Lebanon, with knowledge or reason to know that the shipments were intended specifically for supply, transshipment, or reexportation to Iran, in apparent violation of Sections 560.204 and 560.206 of the ITSR between April 2008 and July 2010. OFAC determined that WCT did not voluntarily self-disclose the alleged violations, and that the alleged violations constitute a non-egregious case. The maximum statutory civil penalty amount for the alleged violations was $1,750,000, and the base penalty amount was $80,000.
PanAm Seed Company Settles with OFAC for Alleged Iranian Sanctions Violations
PanAmerican Seed Company (PanAm Seed) of West Chicago, Illinois, a division of Ball Horticultural Company (“Ball Horticultural”), has agreed to pay $4,320,000 to settle potential civil liability for alleged violations of the ITSR. Specifically, OFAC alleged that from on or about May 5, 2009 to on or about March 2, 2012, PanAm Seed violated Section 560.204 of the ITSR by indirectly exporting seeds, primarily of flowers, to two Iranian distributors on 48 occasions. OFAC determined that PanAm Seed did not voluntarily self-disclose the Alleged Violations to OFAC, and that the Alleged Violations constitute an egregious case. Both the statutory maximum and base penalty civil monetary penalty amounts for the Alleged Violations were $12,000,000. For a number of years, up to and including 2012, PanAm Seed made 48 indirect sales of seeds to two Iranian distributors. PanAm Seed shipped the seeds to consignees based in two third- countries located in Europe or the Middle East, and PanAm Seed’s customers arranged for the re-exportation of the seeds to Iran. Personnel (including several mid-level managers) from various business units within PanAm Seed and/or Ball Horticultural were aware of U.S. economic sanctions programs involving Iran and the need to apply for and obtain a specific license from OFAC in order to export the seeds in question. Despite this knowledge, PanAm Seed engaged in a pattern or practice designed to conceal the involvement of Iran and/or obfuscated the fact that the seeds were ultimately destined for distributors located in Iran. Chinese Nationals and Company Charged with Using Front Companies to Evade U.S. Sanctions
Four Chinese nationals and a trading company based in Dandong, China, were charged by criminal complaint with conspiring to evade U.S. economic sanctions and violating the Weapons of Mass Destruction Proliferators Sanctions Regulations (WMDPSR) through front companies by facilitating prohibited U.S. dollar transactions through the United States on behalf of a sanctioned entity in the Democratic People’s Republic of Korea (North Korea) and to launder the proceeds of that criminal conduct through U.S. financial institutions.
On Aug. 3, 2016, a U.S. Magistrate Judge Joseph A. Dickson of the District of New Jersey signed a criminal complaint charging Ma Xiaohong (Ma) and her company, Dandong Hongxiang Industrial Development Co. Ltd. (DHID), and three of DHID’s top executives, general manager Zhou Jianshu (Zhou), deputy general manager Hong Jinhua (Hong) and financial manager Luo Chuanxu (Luo), with conspiracy to violate the International Emergency Economic Powers Act (IEEPA) and to defraud the United States; violating IEEPA; and conspiracy to launder monetary instruments. OFAC also imposed sanctions on DHID, Ma, Zhou, Hong and Luo for their ties to the government of North Korea’s weapons of mass destruction proliferation efforts.
In addition, the department filed a civil forfeiture action for all funds contained in 25 Chinese bank accounts that allegedly belong to DHID and its front companies. The department has also requested tha the federal court in the District of New Jersey issue a restraining order for all of the funds named in the civil forfeiture action, based upon the allegation that the funds represent property involved in money laundering, which makes them forfeitable to the United States. There are no allegations of wrongdoing by the U.S. correspondent banks or foreign banks that maintain these accounts.
According to criminal and civil complaints, DHID is primarily owned by Ma and is located near the North Korean border. DHID allegedly openly worked with North Korea-based Korea Kwangson Banking Corporation (KKBC) prior to Aug. 11, 2009, when the OFAC designated KKBC as a Specially Designated National (SDN) for providing U.S. dollar financial services for two other North Korean entities, Tanchon Commercial Bank (Tanchon) and Korea Hyoksin Trading Corporation (Hyoksin). President Bush identified Tanchon as a weapons of mass destruction proliferator in June 2005, and OFAC designated Hyoksin as an SDN under the WMDPSR in July 2009. Tanchon and Hyoksin were so identified and designated because of their ties to Korea Mining Development Trading Company (KOMID), which OFAC has described as North Korea’s premier arms dealer and main exporter of goods and equipment related to ballistic missiles and conventional weapons. The United Nations (UN) placed KOMID, Tanchon and Hyoksin on the UN Sanctions List in 2006. In March 2016, KKBC was added to the UN Sanctions List.
In August 2009, Ma allegedly conspired with Zhou, Hong and Luo to create or acquire numerous front companies to conduct U.S. dollar transactions designed to evade U.S. sanctions. The complaints allege that from August 2009 to September 2015, DHID used these front companies, established in offshore jurisdictions such as the British Virgin Islands, the Seychelles and Hong Kong, and opened Chinese bank accounts to conduct U.S. dollar financial transactions through the U.S. banking system when completing sales to North Korea. These sales transactions were allegedly financed or guaranteed by KKBC. These front companies facilitated the financial transactions to hide KKBC’s presence from correspondent banks in the United States, according to the allegations in the complaints. As a result of the defendants’ alleged scheme, KKBC was able to cause financial transactions in U.S. dollars to transit through the U.S. correspondent banks without being detected by the banks and, thus, were not blocked under the WMDPSR program. …
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