17-0614 Wednesday “The Daily Bugle”

17-0614 Wednesday “Daily Bugle”

Wednesday, 14 June 2017

The Daily Bugle is a free daily newsletter from Full Circle Compliance, containing changes to export/import regulations (ATF, Customs, NISPOM, EAR, FACR/OFAC, FTR/AES, HTSUS, and ITAR), plus news and events.  Subscribe 
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  1. Commerce/BIS Corrects EAR Amendments Concerning WA 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates 
  2. Commerce/ITA Announces District Export Council Nomination Opportunity  
  3. DHS/CBP Reschedules Semi-Annual Customs Broker’s License Examination to 25 Oct 
  4. Treasury Seeks Comments Concerning Regulations That Can Be Eliminated, Modified, or Streamlined 
  1. Ex/Im Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS: (No new postings.)
  3. DHS/CBP Deactivates Several Port Codes
  4. State/DDTC: (No new postings.)
  5. United States v. Burden Concludes Magazines and Mounts are Defense Articles
  6. EU P2P Posts Summary of Capacity Building Seminar in Ukraine
  7. EU Amends for the 268th Time Restrictive Measures Concerning ISIL and Al-Qaida
  1. Reuters: “U.S. Weighs Restricting Chinese Investment in Artificial Intelligence”
  2. Washington Examiner: “Senate Defeats Effort to Derail Trump’s Saudi Arms Deal”
  1. J. Durree: “Assessing an Ethics and Compliance Program”
  2. J.M. Ganderson & F.M. Levy: “Buy American Order: What It Means” ABC
  3. J. Reeves: “Federal Court Case Concludes Magazines and Mounts are Defense Articles”ABC
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Changes: ATF (15 Jan 2016), Customs (27 Jan 2017), DOD/NISPOM (18 May 2016), EAR (14 Jun 2017), FACR/OFAC (10 Feb 2017), FTR (19 Apr 2017), HTSUS (7 Mar 2017), ITAR (11 Jan 2017) 
  3. Weekly Highlights of the Daily Bugle Top Stories 



1. Commerce/BIS Corrects EAR Amendments Concerning WA 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates

(Source: Federal Register) [Excerpts.]
82 FR 27108-27110: Wassenaar Arrangement 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates; Corrections
* AGENCY: Bureau of Industry and Security, Commerce.
* ACTION: Correcting amendments.
* SUMMARY: The Bureau of Industry and Security (BIS) maintains, as part of its Export Administration Regulations (EAR), the Commerce Control List (CCL), which identifies certain items subject to Department of Commerce jurisdiction. This rule corrects citations, replaces text that was inadvertently removed, and corrects other errors associated with the “Wassenaar Arrangement (WA) 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates” final rule published on September 20, 2016 (WA15 rule).
* DATES: This rule is effective: June 14, 2017.
* FOR FURTHER INFORMATION CONTACT: For general questions contact Sharron Cook, Office of Exporter Services, Bureau of Industry and Security, U.S. Department of Commerce at 202-482 2440 or by email: Sharron.Cook@bis.doc.gov.
For technical questions contact: Office of National Security and Technology Transfer Controls, Information Technology Control Division, Aaron Amundson at 202-482-0707.
* SUPPLEMENTARY INFORMATION: … This rule affects three sections of the EAR by correcting citations, replacing text that was inadvertently removed, and correcting other errors associated with the publication of the September 20th WA15 rule.
Part 740–License Exceptions, Sec. 740.13 Technology and Software Unrestricted (TSU)
The introductory paragraph of Sec. 740.13 (License Exception TSU) of the EAR is corrected by removing the reference to “encryption source code (and corresponding object code) that would be considered publicly available under Sec. 734.3(b)(3) of the EAR,” because the publicly available provisions for encryption were moved to Sec. 742.15(b) in the WA15 rule. This action also adds to the introductory paragraph a reference to “release of technology and source code in the United States by U.S. universities to their bona fide and full time regular employees” as that authorization was added in Sec. 740.13(f) of the EAR by the initial implementation rule (78 FR 22718), April 16, 2013.
Part 740–License Exceptions, Sec. 740.17 Encryption Commodities, Software, and Technology (ENC)
This correcting action makes three changes to Sec. 740.17 of the EAR, as described below.
In Sec. 740.17, a Note that was inadvertently removed by the WA15 rule is added to introductory paragraph (b). The Note was omitted by error when the mass market provisions were moved from Sec. 742.15(b) to Sec. 740.17(b) in order to consolidate these provisions in one place.
Also in Sec. 740.17, paragraph (b)(2)(i) is amended by replacing the incorrect reference to non-existing paragraph (a)(i)(A) and adding in its place the correct reference to paragraph (b)(2)(i)(A).
Supplement No. 3 to Part 774 (Statements of Understanding)
This correction rule amends the Notes to paragraph (a) by revising paragraph (6) to replace the reference to Note 1 to Category 5, Part II with a reference to Supplement No. 2 to part 774 of the EAR because Note 1 to Category 5, Part II was removed by the WA15 rule and replaced with the Supp. No. 2 reference. …
  Dated: June 7, 2017.
Matthew S. Borman, Deputy Assistant Secretary for Export Administration.


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2. Commerce/ITA Announces District Export Council Nomination Opportunity

(Source: Federal Register) [Excerpts.]
82 FR 27235-27236: District Export Council Nomination Opportunity
* AGENCY: International Trade Administration (ITA), Department of Commerce.
* ACTION: Notice of opportunity for appointment to serve as a District Export Council member.
* SUMMARY: The Department of Commerce is currently seeking nominations of individuals for consideration for appointment by the Secretary of Commerce to serve as members of one of the 60 District Export Councils (DECs) nationwide. DECs are closely affiliated with the U.S. Export Assistance Centers (USEACs) of the U.S. and Foreign Commercial Service (US&FCS), and play a key role in the planning and coordination of export activities in their communities.
* DATES: Nominations for individuals to a DEC must be received by the local USEAC Director by 5:00 p.m. local time on July 28, 2017.
* FOR FURTHER INFORMATION CONTACT: Please contact the Director of your local USEAC for more information on DECs and the nomination process. You may identify your local USEAC by entering your zip code online here. For general program information, contact Laura Barmby, National DEC Liaison, US&FCS, at (202) 482-2675.
  Nomination Process: Each DEC has a maximum membership of 35. Approximately half of the positions are open on each DEC for the four-year term that begins on January 1, 2018, and runs through December 31, 2021. All potential nominees must complete an online nomination form and consent to sharing of the information on that form with the DEC Executive Committee for its consideration, and consent, if appointed, to sharing of their contact information with other partners.
  Eligibility and Appointment Criteria: Appointment is based upon an individual’s international trade leadership in the local community, ability to influence the local environment for exporting, knowledge of day-to-day international operations, interest in export development, and willingness and ability to devote time to DEC activities. Members must be employed as exporters or export service providers or in a profession which supports U.S. export promotion efforts. Members include exporters, export service providers and others whose profession supports U.S. export promotion efforts. DEC member appointments are made without regard to political affiliation. DEC membership is open to U.S. citizens and permanent residents of the United States. As representatives of the local exporting community, DEC Members must reside in, or conduct the majority of their work in, the territory that the DEC covers. DEC membership is not open to federal government employees, or individuals representing foreign governments, including individuals registered with the Department of Justice under the Foreign Agents Registration Act. …
  Dated: June 6, 2017.
Laura Barmby, District Export Council Program Manager.

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3. DHS/CBP Reschedules Semi-Annual Customs Broker’s License Examination to 25 Oct

(Source: Federal Register) [Excerpts.]
82 FR 27274: New Date for the October 2017 Customs Broker’s License Examination
* AGENCY: U.S. Customs and Border Protection, Department of Homeland Security.
* ACTION: General notice.
* SUMMARY: This document announces that U.S. Customs and Border Protection has changed the date on which the semi-annual examination for an individual broker’s license will be held in October 2017.
* DATES: The customs broker’s license examination scheduled for October 2017 will be held on Wednesday, October 25, 2017.
* FOR FURTHER INFORMATION CONTACT: Neila Venne, Broker Management Branch, Office of Trade, (843) 579-6407, Neila.M.Venne@cbp.dhs.gov. …
  Dated: June 7, 2017.
Brenda B. Smith, Executive Assistant Commissioner, Office of Trade, U.S. Customs and Border Protection.

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4. Treasury Seeks Comments Concerning Regulations That Can Be Eliminated, Modified, or Streamlined

(Source: Federal Register) [Excerpts.]
82 FR 27217-2718: Review of Regulations
* AGENCY: Department of the Treasury.
* ACTION: Request for information.
* SUMMARY: On January 30, 2017, the President signed Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, to direct agencies to eliminate two regulations for each new regulation issued and to limit costs for this fiscal year to zero. On February 24, 2017, the President issued Executive Order 13777, Enforcing the Regulatory Reform Agenda, which requires agencies to convene a regulatory reform task force to assist in the implementation of Executive Order 13771. In furtherance of those Executive Orders, this notice invites members of the public to submit views and recommendations for Treasury Department regulations that can be eliminated, modified, or streamlined in order to reduce burdens.
* DATES: Comment due date: July 31, 2017. …
* FOR FURTHER INFORMATION CONTACT: Heidi Cohen, Office of the General Counsel (General Law, Ethics, and Regulation), 202-622-1142.
* SUPPLEMENTARY INFORMATION: Executive Order 13777, Enforcing the Regulatory Reform Agenda, requires agencies to convene a regulatory reform task force to assist in the implementation of Executive Order 13771 as well as Executive Orders 12866 and 13563. …
   In particular, the Department invites comments on regulations, forms, and guidance documents issued or promulgated by the Internal Revenue Service, the Alcohol and Tobacco Tax and Trade Bureau, the Bureau of the Fiscal Service, Departmental Offices (Office of the Secretary), the Financial Crimes Enforcement Network, the Community Development Financial Institutions Fund, the Office of Foreign Assets Control, and Treasury regulations and guidance issued under the Department’s Customs Revenue Function (19 CFR chapter 1). …
  Dated: June 8, 2017.
Brian Callanan, Acting General Counsel.

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OGS_a15. Ex/Im Items Scheduled for Publication in Future Federal Register Editions
(Source: Federal Register

* President; ADMINISTRATIVE ORDERS; Belarus; Continuation of National Emergency (Notice of June 13, 2017) [Publication Date: 14 June 2017.]

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CSMS #17-000343, 14 Jun 2017.)
The CBP ACE Business Office, in conjunction with the Office of Field Operations and U.S. Census Bureau, have identified port codes that are no longer active. They have been deactivated and removed from the appendix D of the AESTIR. The port codes are as follows:
* 1105 – PAULSBORO, NJ
* 1107 – CAMDEN, NJ
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(Source: 2016 U.S. Dist. LEXIS 154662) [Excerpts.]
* Case: United States v. Burden, Criminal Action No. 14-cr-0069 (RMC)
* Date: 8 Nov 2016
* Court: United States District Court for the District of Columbia
* Judge: Rosemary M. Collyer, U.S. District Judge.
* Opinion:
Defendants Pheerayuth Burden and Wing-On LLC moved at the close of the government’s case in their criminal trial and at the close of all evidence for judgment of acquittal. The Court heard arguments and denied both motions in open court. This Opinion explains those rulings.
By Superseding Indictment filed on July 16, 2015, Pheerayuth Burden and Wing-On LLC were charged with conspiracy to violate the Arms Export Control Act by exporting and attempting to export defense articles on the United States Munitions List without a license. The same count also charged both Defendants with conspiracy to defraud the United States by impeding its lawful function in administering its export laws by attempting to export defense articles on the Munitions List from the United States by deceit, craft, trickery, and dishonest means. See Superseding Indictment (Indictment) [Dkt. 48] ¶ 10 (Count 1). Further, both Defendants were charged in Count Two with knowingly and willfully exporting, attempting to export and causing to be exported on July 31, 2011, five (5) AR Style, NATO 5.56, 30-round magazines and one KAC-Knight Armament M203 Qd Mount, by which one could mount a grenade launcher onto an AR-15 rifle. See id. ¶ 16. Count Three charged both Defendants with conspiracy to commit money laundering. See id. ¶ 18. The Indictment also contained a forfeiture allegation demanding that Defendants forfeit to the United States any property, real or personal, which constitutes, or is derived from, proceeds traceable to a violation of the AECA.  See id. at 10-11. … 

Arms Export Control Act (AECA), 22 U.S.C. § 2778, authorizes the President “to control the import and the export of defense articles and defense services and to provide foreign policy guidance to persons of the United States involved in the
[*5] export and import of such articles and services.” 
22 U.S.C. § 2778(a)(1). In order to control the import and export of defense articles and services, the President “is authorized to designate those items which shall be considered as defense articles and defense services for the purposes of this section and to promulgate regulations for the import and export of such articles and services. The items so designated shall constitute the United States Munitions List.” 
Id. In order to import or export an item designated on the United States Munitions List, an individual or corporation must obtain a license. 
22 U.S.C. § 2778(b)(2).
The United States Munitions List is codified in the International Traffic in Arms Regulations (ITAR), 22 C.F.R. §§ 120-130. “The President has delegated to the Secretary of State the authority to control the export and temporary import of defense articles and services. The items designated by the Secretary of State for purposes of export and temporary import control constitute the U.S. Munitions List specified in part 121 of this subchapter.” 22 C.F.R. § 120.2.

Defendants argued that they should have been acquitted on Counts I and II of the Indictment because the government failed to prove beyond a reasonable doubt that the products at issue were defense articles. Specifically, both Counts I (conspiracy) and II (willful violation of the AECA) required proof beyond a reasonable doubt that either the five AR Style, NATO 5.56, 30-round magazines, or the KAC-Knight Armament M203 Qd Mount is a defense article. Defendants also argued for acquittal on Count II because (1) there was insufficient proof that Mr. Burden or Wing-On knowingly exported the magazines or mount to Thailand and (2) the Government did not prove that the magazines or mount were “components” as defined in the ITAR. … 
A. Did the Government Prove that the Gun Parts Are Defense Articles?
Defendants challenge the testimony, or lack thereof, by the government’s expert witness from the USDS Directorate of Defense Trade Controls, Robert Warren. According to Defendants, the Government failed to present sufficient evidence to establish that the gun parts at issue were defense articles because its witness, Mr. Warren, failed to testify that the gun parts in question were “specifically designed, modified, or adapted for military application,” or to seek a commodity jurisdiction [*7] determination as to whether either the magazines, designed to hold 30 rounds, or the KAC-Knight Armament M203 Qd Mount, designed to attach a grenade launcher to a rifle, were defense articles.

Defendants note that prior to October 14, 2013 (the time relevant herein), an article or service was a defense article if it:
  (a) [Was] specifically designed, developed, configured, adapted, or modified for a military application, and
     i. [Did] not have predominant civil applications, and
     ii [Did] not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications;
  (b) [Was] specifically designed, developed, configured, adapted, or modified for a military application, and [had] significant military or intelligence applicability such that control under this subchapter [was] necessary.
22 C.F.R. § 120.4 (2010) (tense altered); see also United States v. Chi Mak, 683 F.3d 1126, 1135 (9th Cir. 2012) (finding that “the determination or designation of articles or services turns on whether an item is ‘specifically designed, developed, configured, adapted, or modified for military application, and has significant military or intelligence applicability such that control under this subchapter is necessary'”). Defendants [*8] point out that, on cross examination, Mr. Warren testified that only those gun parts, components, accessories, and attachments that were specifically designed, modified, or adapted for military application can be designated as defense articles.
Defendants compared this testimony on cross-examination to the testimony on direct exam, when Mr. Warren testified that a variety of items constituted defense articles, explaining that each was a “critical” part or component of a firearm regulated under ITAR or that the type of item (e.g., a receiver) was specifically “called out” in the ITAR. Ex. F, Trial Tr. 9/23/16 PM [Dkt. 120-6] at 21:6-22, 25:3-16. Defendants surmise that “Mr. Warren used the word ‘critical,’ because that word is used in the version of 22 C.F.R. § 120.3 that came into effect on October 14, 2013,” after the charged events. Jt. Mot. at 6 (emphasis added). As amended, the regulation now provides that an article may be designated as a defense article if it “[m]eets the criteria of a defense article . . . on the U.S. Munitions List” or “[p]rovides the equivalent performance capabilities of a defense article on the U.S. Munitions List.” 22 C.F.R. § 120.3(a)(1)(2) (2013). Defendants also cite subsection (b) of the revised regulation which states that “a specific article or service shall be determined in the future as a defense article or defense service it if provides a critical military or intelligence advantage such that it warrants control under this subchapter.” 22 C.F.R. § 120.3(b) (emphasis added).
Defendants assail Mr. Warren’s testimony that a “flash hider” was a controlled item on the Munitions List when he testified that it was “specifically called out in the United States Munitions List under category e,” to which he added that category e included “[s]uppressors, flash suppressors or silence suppressors.” Jt. Mot. at 8 (quoting Ex. F, Trial Tr. 9/23/16 PM at 25:9-16). While Defendants acknowledge that “Category I of the munitions list ‘specifically calls out’ flash suppressors,” they argue that it was insufficient for Mr. Warren to testify to that effect without further explanation. Id. at 8. Their contention is that proving an item is on the Munitions List requires it to be “‘specifically designed, modified or adapted for military application'” and that Mr. Warren provided no such testimony. Id. at 9.
Defendants’ challenge to Mr. Warren’s testimony is based on United States v. Pulungan, 569 F.3d 326 (7th Cir. 2009). In that case, Mr. Pulungan was convicted of exporting 100 riflescopes. At trial, the government’s witness testified that the Directorate of Defense Trade Controls had found the scopes in question to be “‘manufactured to military specifications’-but he would not say what those specifications are or why the Directorate” had concluded that the scopes in question were manufactured to them; nor was the Directorate’s decision produced. Pulungan, 569 F.3d at 327-28. Nonetheless, at the government’s request, the Pulungan judge instructed the jury that, as a matter of law, the scopes were manufactured to military specifications and thus took the issue away from the jury’s determination. The Seventh Circuit was mightily offended:
The Directorate’s claim of authority to classify any item as a “defense article,” without revealing the basis of the decision and without allowing any inquiry by the jury, would create serious constitutional problems. It would allow the sort of secret law that Panama Refining Co. v. Ryan, 293 U.S. 388, 55 S. Ct. 241, 79 L. Ed. 446 . . . (1935), condemned.
 (That case dealt with an unpublished regulation that remained “in the hip pocket of the administrator,” as a serious problem apart from the nondelegation holding usually associated with Panama Refining.) A regulation is published for all to see. People can adjust their conduct to avoid liability. A designation by an unnamed official, using unspecified criteria, that is put in a desk drawer, taken out only for use at a criminal trial, and immune from any evaluation by the judiciary, is the sort of tactic usually associated with totalitarian regimes. Government must operate through public laws and regulations. See United States v. Farinella, 558 F.3d 695 (7th Cir. 2009). Thus the United States must prove, and not just assert, that the . . . riflescope is “manufactured to military specifications.”
Defendants’ argument misses the mark. Mr. Warren was accepted as an expert witness “in the application of the Arms Export Control Act [and] its related regulations, the International Traffic and Arms Regulations and in particular determination of whether firearms, parts and accessories are controlled under those regulatory provisions.” Ex. F, Trial Tr. 9/23/16 PM at 9:13-17. Defendants offered “[n]o objection.” Id. at 9:18-19. The Court then instructed the jury that “because of his experience and training[,] this gentleman can tell you not only facts, but can also give you his opinions. You should evaluate his testimony just like anybody else’s and you can accept it or accept part of it, whatever you decide as to its credibility and support, but he unlike most witnesses is allowed [*12] to offer his opinions to you.” Id. at 9:23-10:3.
Most critically, Defendants’ argument fails because, as the government reminded the Court and Defendants in oral argument on the motion for judgment of acquittal:

In fact, what Mr. Warren testified on direct when talking about what exactly a defense article is[,] on page 12, line 21 [Ex. F, Trial Tr. 9/23/16 PM] he was asked . . . . What exactly is a defense article? And then he explained, well a defense article as we termed it is anything that has a military significance or military application.
So what he testified to was defense articles have military significance or application. They’re placed on the United States Munitions List. He then determined whether the particular items we have here are defense articles as enumerated in the ITAR itself. And that’s exactly what he did, then he conducted the comparison. 
Trial Tr. 9/27/16 PM at 81:8-19.
Additionally, Mr. Warren testified to the history and development of the ACEA and the ITAR, commenting in part, “the law is somewhat hard to read okay, so the regulations simply simplify [it] and tell[] U.S. industry and the State Department quite frankly what they have to do to implement the law.” [*13] Ex. F, Trial Tr. 9/23/16 PM at 10:21-25. He testified that the ITAR “generally describes the articles that are controlled,” specifically, as relevant to this case, “automatic firearms, close assault weapons which we would consider carbine, scopes, barrels are called out specifically, receivers are called out specifically, breach mechanisms are called out specifically, suppressors are called out specifically. . . . And this final category is all parts, components and accessories of a firearm are called out in Category (h).” Id. at 11:1-18.
Clearly, Mr. Warren’s testimony was presented under materially different circumstances than those attending the government’s witness in Pulungan. First, as an unchallenged expert, he could testify to facts and opinions. Second, the jury was specifically instructed that it should treat his testimony as any other witness’s testimony, deciding for itself whether to credit it and, if so, how much to credit it. Third, Defendants had full opportunity to cross examine Mr. Warren and identify any weaknesses in his testimony to the jury in separate closing arguments on behalf of Mr. Burden and Wing-On. Fourth, the jury alone decided what weight, if any, to [*14] give Mr. Warren’s testimony. To be precise, the circumstances of these Defendants’ trial were exactly the opposite of Mr. Pulungan’s.
Defendants also argue that it was necessary for the government to submit formal commodity determinations as to the mount and magazine. Defendants read this requirement from the language of the regulation, which states: “[t]he commodity jurisdiction procedure is used with the U.S. Government if doubt exists as to whether an article or service is covered by the U.S. Munitions List.” 22 C.F.R. § 120.4(a). Defendants equate the “doubt” referenced in the regulation with the doubt that exists in a criminal trial before a jury verdict of proof beyond a reasonable doubt. See In re Winship, 397 U.S. 358, 364, 90 S. Ct. 1068, 25 L. Ed. 2d 368 (1970) (“Lest there remain any doubt about the constitutional stature of the reasonable-doubt standard, we explicitly hold that the Due Process Clause protects the accused against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute the crime with which [the defendant] is charged.”). Because Mr. Burden and Wing-On were presumed innocent until the Government proved each necessary fact beyond a reasonable doubt, Defendants argued that there was “doubt” and “doubt” required the Government to employ the commodity jurisdiction process.
The Court does not interpret the word “doubt” to have such a specific meaning as it is used in the ITAR. Defendants offer no case or background to support their interpretation of the word “doubt” in the ITAR, and the Court refuses to interpret the use of “doubt” in all statutes to constitute a direct connection to the standard for conviction in a criminal case. Without evidence of the specific intent of the drafters, “doubt” can just as easily be read to allow for commodity jurisdiction when an exporter or importer doubts whether an item is on the Munitions List and asks if it is subject to ITAR’s jurisdiction. The Government’s expert, Mr. Warren, testified that he had no “doubt” as to the designation of the magazine or the mount and, therefore, he did not institute the commodity jurisdiction procedure. The Court will not read a greater regulatory requirement into the ITAR.
Defendants also imply that it is possible that if the commodity jurisdiction procedure had been completed the magazine and mount would have been determined not to be included on the Munitions List. If Defendants believed a commodity jurisdiction determination could have contradicted Mr. Warren’s testimony that the items were defense articles and were included on the Munitions List, they too could have requested a commodity jurisdiction determination.
At the close of the evidence, there was clearly sufficient evidence from which a jury could convict. The jury credited Mr. Warren, whose testimony was fairly straight forward. That was clearly its role and the Court had no basis to take the question from the jury. The Court finds the Government provided sufficient evidence to allow a reasonable juror to conclude that the magazine and mount at issue here are defense articles under AECA and ITAR.
B. Was There Sufficient Evidence of Exportation by Defendants? …
C. Was There Sufficient Evidence that the Magazines or Qd Mount were “Components” as Required by ITAR?

Defendants also argue for acquittal on Count II because the Government failed to establish that the magazine or mount at issue were “components” as defined in the ITAR. Defendants explain that components must be “useful only when used in conjunction with an end-item” and without which the end-item is inoperable. 22 C.F.R. § 120.45(b). “An end-item is a system, equipment, or an assembled article ready for its intended use. Only ammunition or fuel or other energy source is required to place it in an operating state.” 22 C.F.R. § 120.45(a). The AECA prohibits the import and export of more than just end-items and components, however, as defense articles may include parts, accessories, and attachments. 22 C.F.R. § 121.1, Category I(h) (including “[c]omponents, parts, accessories and attachments for the articles in paragraphs (a) through (g) of this category” in the Munitions List). “Accessories and attachments are associated articles for any component, equipment, system, or end-item, and which are not necessary for its operation, but which enhance its usefulness or effectiveness.” 22 C.F.R. § 120.45(c). “A part is any single unassembled element of a major or a minor component, accessory, or attachment which is not normally subject to disassembly without the destruction or the impairment of designed use.” 22 C.F.R. § 120.45(d). Due to the nature of the magazine and mount, Defendants argue that the Government needed to establish that both were components and not mere parts or accessories. This argument was followed by noting the evidence that both items have dual uses, with real guns and airsoft guns. Defendants conclude that the magazines for bullets and the mount for a grenade launcher are “useful only when used in conjunction with an end-item,” as required to be a component. 22 C.F.R. § 120.45(b).
First of all, Defendants offer no testimonial or other support for their argument. Second, even assuming the magazine and mount could be categorized as components, rather than parts, accessories, or attachments, Defendants’ argument ignores the most reasonable interpretation of the ITAR. An item may be a component if, standing alone, it is not useful, but becomes “useful only when used in conjunction with an end-item.” 22 C.F.R. § 120.45(b). A magazine, for example, sitting on a table or in the hands of an assailant is not useful on its own. Once the magazine is used in conjunction with a firearm, it becomes useful and deadly for automatic fire. Therefore, the magazine is useful only in connection with an end-item, in this case a firearm.
As explained in the jury instructions for Count II-Willful Violation of Arms Export Control Act-the Government was required to establish the following:
   (1) That the defendant knowingly exported the five AR Style, NATO 5.56, 30 round magazines, or the KAC-Knight Armament M203 Qd Mount;
   (2) That the item exported was a defense article on the Munitions List that required a license from the U.S. Department of State for its export;
   (3) That the defendant failed to obtain a license from the U.S. Department of State; and
   (4) That the defendant acted willfully.
Jury Instructions at 40. As discussed above, the Court finds the evidence was sufficient to allow a reasonable juror to conclude (1) “[t]hat the defendant knowingly exported the five AR Style, NATO 5.56, 30 round magazines, or the KAC-Knight Armament M203 Qd Mount” and (2) “[t]hat the item exported was a defense article on the Munitions List that required a license from the U.S. Department of State for its export.” Id. Defendants do not dispute here the evidence applicable to the third and fourth prongs of Count II. Accordingly, the Court did not grant judgment of acquittal on Count II.

Having studied the brief submitted by Defendants before the argument on the motion for judgment of acquittal, having heard the parties’ arguments at the close of the government’s evidence and-more expansively-at the close of all evidentiary presentations, and having reviewed the briefs and transcripts again in the preparation of this Opinion, the Court is of the same opinion as it stated on September 27, 2016. “[T]here’s sufficient evidence from which a jury could reach [the] conclusion that at its crux Mr. Burden [and Wing-On] willfully violated the Arms Export Control Act.” Trial Tr. 9/27/16 PM at 83:11-13. The motion for judgment of acquittal was denied. A memorializing order accompanies this memorandum opinion.

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. EU P2P Posts Summary of Capacity Building Seminar in Ukraine

(Source: EU P2P)
The EU Partner-to-Partner (EU P2P) Program has published a summary of the following activity:
Note: A regional workshop for Eastern Europe, focused on the promotion of effective arms export controls, will be organized on 28-29 June 2017 in Chisinau, Rumania

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. EU Amends for the 268th Time Restrictive Measures Concerning ISIL and Al-Qaida

  – Commission Implementing Regulation (EU) 2017/998 of 12 June 2017 amending for the 268th time Council Regulation (EC) No 881/2002 imposing certain specific restrictive measures directed against certain persons and entities associated with the ISIL (Da’esh) and Al-Qaida organisations

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. Reuters: “U.S. Weighs Restricting Chinese Investment in Artificial Intelligence”

Reuters, 14 Jun 2017.) [Excerpts.]
The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security, current and former U.S. officials tell Reuters.
Of particular concern is China’s interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and perhaps even push it ahead in strategic industries.
The U.S. government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of U.S. companies on national security grounds.
An unreleased Pentagon report, viewed by Reuters, warns that China is skirting U.S. oversight and gaining access to sensitive technology through transactions that currently don’t trigger CFIUS review. Such deals would include joint ventures, minority stakes and early-stage investments in start-ups.
  “We’re examining CFIUS to look at the long-term health and security of the U.S. economy, given China’s predatory practices” in technology, said a Trump administration official, who was not authorized to speak publicly.
Defense Secretary Jim Mattis weighed into the debate on Tuesday, calling CFIUS “outdated” and telling a Senate hearing: “It needs to be updated to deal with today’s situation.”
CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State and Energy. The CFIUS panel is so secretive it normally does not comment after it makes a decision on a deal.
Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers. …

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. Washington Examiner: “Senate Defeats Effort to Derail Trump’s Saudi Arms Deal”

Washington Examiner, 13 Jun 2017.) [Excerpts.]
A group of Republican and Democrat senators teamed up on Tuesday to block the United States from completing part of a major arms deal with Saudi Arabia, but fell short of the votes they needed on the Senate floor.
Sens. Rand Paul, R-Ky., and Chris Murphy, D-Conn., introduced a resolution disapproving of President Trump’s plan to sell Saudi Arabia $510 million of precision-guided munitions, which make up a portion of the $110 billion deal Trump announced during his visit there.
The Senate failed to advance the resolution in a 47-53 vote, although supporters of the measure picked up new support since they last tried to block a similar deal last year. Last September, the Senate voted 26-71 to defeat similar language that opposed a $1.15 billion deal Saudi Arabia reached with the Obama administration.
This time around, however, Senate Minority Leader Chuck Schumer, D-N.Y., joined Paul and Murphy to vote for the measure, along with many other Democrats.
Tuesday’s vote followed a string of floor speeches from lawmakers criticizing Saudi Arabia over a broad range of human rights issues, in particular the nation’s treatment of Yemen, where a humanitarian crisis is raging and where its weapons are likely to be aimed. …

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14. J. Durree: “Assessing an Ethics and Compliance Program”

(Source: NDIA Magazine, June 2017 Issue)
* Author: Jim Durree, Vice president of Risk, Ethics and Compliance at Jacobs, Dallas TX.
The Department of Justice on Feb. 8 released guidance entitled, “Evaluation of Corporate Compliance Programs,” which provides insight into how it evaluates the effectiveness of corporate compliance programs as the result of an investigation.
Although the department is reluctant to be precise about how it conducts evaluations, the recent guidance does provide a list of common topics and questions to expect if programs ever come under that level of scrutiny.
Without repeating all the points made in the guidance, there is one notable passage worth examining: “Continuous improvement, periodic testing and review: A company should be ready to discuss how it reviews and assesses the compliance program on an ongoing basis, including what, if any, internal audits or reports were conducted, how those were reported to management and what is the company’s process to continually monitor the compliance program.”
Whether a company’s ethics-and-compliance program has recently been formalized or the company has a mature system, an independent, third-party review is a good way to get an expert perspective about developments in the industry and insight into best practices. It also becomes a good test, external and independent, about the company’s culture of compliance.
There is always room for improvement in a compliance system and it is challenging to keep these programs fresh. One way to get objective feedback and input is by engaging an ethics-and-compliance expert to perform a benchmarking review of the company’s current system.
Completing a benchmarking exercise should also reinvigorate the company’s risk assessment process. It is important to consider the ethics-and-compliance risks specific to the company as the design and structure of the overall program are reviewed. For Jacobs, it was productive to use the benchmarking firm to conduct interviews of a diverse selection of functional and operational leaders to probe their views on the ethics and compliance risks in their part of the organization. Surveys can also be used to collect data from a larger population of managers.
One of the biggest challenges for a benchmarking review is finding the right expert to perform the work, as there is a plethora of firms available, but ultimately cost is the biggest consideration related to scope and expert selection. Jacobs interviewed four law firms with excellent credentials and ultimately selected a firm previously used by the company in the past – one that had a good understanding of the company’s organizational structure and culture.
The selected benchmarking firm should also identify the standards against which they will evaluate the ethics-and-compliance program. The obvious choice for companies based in the U.S. with domestic operations is the U.S. Sentencing Commission Federal Sentencing Guidelines for Organizations, and if the company has international operations, the guidelines from the U.K. Bribery Act and/or the Organization for Economic Co-operation and Development should be included.
When initiating the work, also think about the importance of the attorney-client privilege. The need for the privilege is to ensure that the chief ethics and compliance officer and the general counsel are able to get enough information, good and bad, to use from the evaluation. The review will become the roadmap to improve the program, and if necessary, identify any deficiencies. If taken out of context, or if a deficiency doesn’t get remedied immediately, the report could be used against a company in the event of a regulatory investigation or litigation.
It is important to have executive support – including those at the board level – in order to initiate this type of review. Management should expect that gaps will be identified and that resources will be needed to address these gaps once the findings are received. There is plenty of literature on the development of corporate compliance programs – and most executives and board members are reading and discussing the topic in the context of corporate governance. At Jacobs, management sees the evolution of the program as a positive outcome of ongoing discussion of the company’s values and the importance to its clients, suppliers, partners and board.
The hardest part of designing the benchmarking review is defining the scope and deciding the best plan to collect data. Understanding the top risks to the company’s business strategy, through a risk assessment, will provide guidance on where to focus. The ethics-and-compliance team will be essential in collecting documents such as codes of conduct, relevant policies, hotline incidents and investigation reports as well as coordinating the list of executives and employees to be interviewed and/or surveyed. For a global enterprise, this can be a daunting task.
The firm that conducts the review will synthesize all the data into a detailed report with findings representative of what the company is doing well, and the identification of specific issues that require attention.
A company should be able to categorize and prioritize the findings into five major work streams: global policies and the code of conduct; tone at the top and in the middle; training; communications; and metrics.
Those findings were then used to prepare a project plan that described the tasks and timeline, allowing the company to design a dashboard to track progress and results, which was important for stakeholder reporting and for continuous improvement.
Undertaking a benchmark review will yield great value. Undoubtedly, areas for improvement will be identified, and the review will also validate that the company has many best practices in-place. Often, the ethics and compliance function engages with management when there is a report of a potential violation. This type of exercise is an opportunity to engage with management in a positive conversation with an eye toward continuous improvement.


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NDIA Magazine, June 2017 Issue)
* Authors: Justin M. Ganderson, Esq., jganderson@cov.com; and Frederic M. Levy, Esq., flevy@cov.com. Both of Covington & Burling LLP, Washington DC.
On the heels of his campaign promises to protect U.S. manufacturers and workers, President Donald Trump on April 18 issued Executive Order 13788, “Buy American and Hire American.”
It focuses on so-called “Buy American Laws,” defined to include all domestic sourcing preferences and restrictions such as the Buy American Act, the Berry Amendment and “Buy America” legislation.
The executive order has five key elements regarding U.S. manufacturing. It requires agencies to “scrupulously monitor, enforce and comply” with Buy American Laws, and to “minimize the use of waivers.”
It requires agencies to assess their “monitoring of, enforcement of, implementation of and compliance” with Buy American Laws and to “develop and propose policies . . . to ensure that . . . federal procurements maximize the use of materials produced in the United States.”
It also mandates that the “determination of public interest waivers shall be made by the head of the agency with authority over . . . procurement,” and requires the consideration of dumping or injurious subsidization.
It directs the secretary of commerce to submit a report to the president by November that will provide “specific recommendations to strengthen implementation of Buy American Laws.”
And finally, it requires the secretary of commerce and the U.S. trade representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American Laws.”
Although the executive order principally focuses on assessing the effectiveness of current domestic preference regimes and does not change existing law, it signals – in the words of Bob Dylan – that “the times they are a-changin’.”
There are several takeaways to consider.
One is to prepare for increased scrutiny and enforcement. Section 3 of the order mandates that executive agencies shall “scrupulously monitor, enforce and comply with Buy American Laws.” In its background briefing about the order, the Trump administration labeled enforcement regimes as “lax,” and indicated that agencies must crack down “on weak monitoring, enforcement and compliance efforts and at rooting out every single Buy American loophole.”
Contractors should expect increased scrutiny over the coming months, and should not be surprised when an identified – or even self-disclosed – non-compliance leads to a government investigation, threats of a contract termination, or even a suspension or debarment action. Contractors also should be cognizant of potential increases in whistleblower activity, including qui tam False Claims Act actions.
Now is the time for contractors to ensure that compliance programs in this complex area are in place and current.
They should also expect fewer “public interest waivers.” Section 4 of the order requires that agencies judiciously use “public interest waivers from Buy American Laws . . . to ensure the maximum utilization of goods, products and materials produced in the United States.” Although the order does not expound on whether the term “public interest waivers” is meant to encompass all waivers or just those commonly referred to as “public interest” exceptions, agencies presumably will be less likely to approve waivers absent a compelling need.
Contractors must be aware of changes to free trade agreements and “qualifying country sources.” The administration explained that if it determines that any free trade agreement fails “to meet the Trump standard of fairness and reciprocity so that the U.S. is a net loser, these findings will inform the president’s decision to rescind or renegotiate these deals.”
There is no clarity yet on what “the Trump standard of fairness and reciprocity” means, but it would not be surprising to see future limitations on the breadth of the Trade Agreements Act – which, when applicable, acts as a waiver to the Buy American Act and provides flexibility to contractors.
Similarly, contractors should not be surprised at a narrowing of the “qualifying country sources” exception for end products and components. Currently, the Defense Federal Acquisition Regulation Supplement provides a “public interest” exception for “the acquisition of qualifying country end products” and components from countries that have a reciprocal defense procurement memorandum of understanding with the United States that removes certain purchasing barriers.
While Section 8029(a) of the recently enacted Department of Defense Appropriations Act under the Consolidated Appropriations Act of 2017 requires the secretary of defense to “rescind” the waiver if the qualifying country has violated its agreement, further narrowing of this exception is likely.
Contractors should also closely follow how agencies plan to maximize the use of domestic components. Under the Buy American Act, a domestic end product or construction material manufactured in the United States may be comprised of foreign components so long as they represent less than 50 percent of the cost of all components. There is no cost of components test for commercially available off-the-shelf items. Section 3 of the executive order now directs agencies to “develop and propose policies . . . to ensure that . . . federal procurements maximize the use of materials produced in the United States, including . . . components of manufactured products.”
What actions will agencies take in response to this directive? Does this foreshadow a change to the cost of components test? Will the COTS exception be phased out? Changes of these sort may have significant ramifications for sourcing decisions and pricing.
Contractors should monitor these events and consider becoming engaged with their legislators, regulators and customers to inform them of the effects of proposed changes.
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(Source: Author) [See related Item #9, above.]

There is an interesting D.C case involving the export of firearm parts (magazines and grenade launcher mount) that the defendants claimed were not ITAR-controlled because, inter alia, the parts could be used in Airsoft guns.  The argument was not successful at the District Court level, but it is on appeal.
The published case, U.S. v. Burden, 217 F. Supp. 3d 348 (D.D.C. 2016), is on the Defendants Joint Motions for Judgment of Acquittal.  The court denied the motion, finding in part that the evidence was sufficient to allow a reasonable juror to conclude the magazines and mount are defense articles subject to the AECA and the ITAR.  
In their motion, the Defendants argued the government failed to prove the magazines and mount were ITAR-controlled “components” because ITAR-controlled “components must be ‘useful only when used in conjunction with an end-item’ and without which the end-item is inoperable.”  Burden at 356.  The Defendants pointed to evidence that the magazines and mount can be used in both firearms and airsoft guns, and because of this, argued the magazines and mount are useful only when used in conjunction with the end-item (bullets and grenade launcher, respectively).  The court rejected this reasoning, finding first that the ITAR controls components, parts, accessories, and attachments for firearms (citing to USML Cat. I(h)). The court also explained, “Defendants’ argument ignores the most reasonable interpretation of the ITAR.  An item may be a component, if, standing alone, it is not useful, but becomes ‘useful only when used in conjunction with an end-item.’  A magazine, for example, sitting on a table or in the hands of an assailant, is not useful on its own.  Once the magazine is used in conjunction with a firearm, it becomes useful and deadly for automatic fire.  Therefore, the magazine is useful only in connection with an end-item, in this case a firearm.”  Id. at 356 (citations omitted).  Consequently, the court found there was sufficient evidence from which a jury could conclude that the Defendants violated the AECA.
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Franklin P. Jones
(1908 – 1980, was a Philadelphia reporter, public relations executive and humorist, known nationally during the 1940s and 50s for his column “Put it this Way” in the Saturday Evening Post, which set a record as the longest continuously published feature in the Saturday Evening Post.”)

  – “The only problem with having nothing to do is you can’t stop and rest.”
  – “The trouble with being punctual is that nobody’s there to appreciate it.”

John Bartlett (14 Jun 1820 – 3 Dec 1905, was an American writer and publisher whose best known work, Bartlett’s Familiar Quotations.  The concordance, which Bartlett estimated consumed 16,000 hours of his time, was compiled with his wife Hannah.  It has been continually revised and reissued for a century after his death.  Although his book contains thousands of quotations, none are from John Bartlett himself.)
  – “Write a wise saying, and your name will live forever.”  – Anonymous

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. Are Your Copies of Regulations Up to Date?
(Source: Editor)

The official versions of the following regulations are published annually in the U.S. Code of Federal Regulations (C.F.R.), but are updated as amended in the Federal Register.  Changes to applicable regulations are listed below.
: 27 CFR Part 447-Importation of Arms, Ammunition, and Implements of War
  – Last Amendment: 15 Jan 2016: 81 FR 2657-2723: Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity With Respect To Making or Transferring a Firearm. 
: 19 CFR, Ch. 1, Pts. 0-199
  – Last Amendment: 27 Jan 2017: 82 FR 8589-8590: Delay of Effective Date for Importations of Certain Vehicles and Engines Subject to Federal Antipollution Emission Standards; and 82 FR 8590: Delay of Effective Date for Toxic Substance Control Act Chemical Substance Import Certification Process Revisions.

  – Last Amendment: 18 May 2016: Change 2: Implement an insider threat program; reporting requirements for Cleared Defense Contractors; alignment with Federal standards for classified information systems; incorporated and canceled Supp. 1 to the NISPOM  (Summary here.)

  – Last Amendment: 14 Jun 2017: 82 FR 27108-27110: Wassenaar Arrangement 2015 Plenary Agreements Implementation, Removal of Foreign National Review Requirements, and Information Security Updates; Corrections

: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
  – Last Amendment:
10 Feb 2017: 82 FR 10434-10440: Inflation Adjustment of Civil Monetary Penalties. 
: 15 CFR Part 30
  – Last Amendment: 19 Apr 2017: 82 FR 18383-18393: Foreign Trade Regulations: Clarification on Filing Requirements 
  – HTS codes that are not valid for AES are available
  – The latest edition (19 Apr 2017) of Bartlett’s Annotated FTR (“BAFTR”), by James E. Bartlett III, is available for downloading in Word format. The BAFTR contains all FTR amendments, FTR Letters and Notices, a large Index, and footnotes containing case annotations, practice tips, and Census/AES guidance.  Subscribers receive revised copies every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance website.  BITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR.
, 1 Jan 2017: 19 USC 1202 Annex. (“HTS” and “HTSA” are often seen as abbreviations for the Harmonized Tariff Schedule of the United States Annotated, shortened versions of “HTSUSA”.)
  – Last Amendment: 7 Mar 2017: Harmonized System Update 1702, containing 1,754 ABI records and 360 harmonized tariff records. 
  – HTS codes for AES are available
  – HTS codes that are not valid for AES are available
  – Latest Amendment: 11 Jan 2017: 82 FR 3168-3170: 2017 Civil Monetary Penalties Inflationary Adjustment
  – The only available fully updated copy (latest edition 10 Jun 2017) of the ITAR with all amendments is contained in Bartlett’s Annotated ITAR (“BITAR”), by James E. Bartlett III.  The BITAR contains all ITAR amendments to date, plus a large Index, over 800 footnotes containing amendment histories, case annotations, practice tips, DDTC guidance, and explanations of errors in the official ITAR text.  Subscribers receive updated copies of the BITAR in Word by email, usually revised within 24 hours after every ITAR amendment.  The BITAR is available by annual subscription from the Full Circle Compliance website.  BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please contact us to receive your discount code.

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Review last week’s top Ex/Im stories in “Weekly Highlights of the Daily Bugle Top Stories” published

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* The Ex/Im Daily Update is a publication of FCC Advisory B.V., edited by James E. Bartlett III and Alexander Bosch, and emailed every business day to approximately 8,000 readers of changes to defense and high-tech trade laws and regulations. We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOJ/ATF, DoD/DSS, DoD/DTSA, State/DDTC, Treasury/OFAC, White House, and similar websites of Australia, Canada, U.K., and other countries and international organizations.  Due to space limitations, we do not post Arms Sales notifications, Denied Party listings, or Customs AD/CVD items.

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* CAVEAT: The contents of this newsletter cannot be relied upon as legal or expert advice.  Consult your own legal counsel or compliance specialists before taking actions based upon news items or opinions from this or other unofficial sources.  If any U.S. federal tax issue is discussed in this communication, it was not intended or written by the author or sender for tax or legal advice, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any transaction or tax-related matter.

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