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18-1212 Wednesday “Daily Bugle”

18-1212 Wednesday “Daily Bugle”

Wednesday, 12 December 2018

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The Daily Bugle is a free daily newsletter from Full Circle Compliance, containing changes to export/import regulations (ATF, DOE/NRC, Customs, NISPOM, EAR, FACR/OFAC, FAR/DFARS, FTR/AES, HTSUS, and ITAR), plus news and events.  Subscribe 
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  1. Justice/ATF Publishes 2018 Annual List of Explosive Materials
  1. Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS Extends Comment Period Concerning New Export Controls on Emerging Technologies
  3. Commerce/BIS Renews TDO Concerning Mahan Airways
  4. DHS/CBP: “Importer/Consignee Create/Update ABI CATAIR Available for Testing in ACE”
  5. State/DDTC: (No new postings.)
  6. Treasury/OFAC Announces $2,774,972 Settlement with “Jereh Group” of Yantai, China, for Iranian Transactions and Sanctions Regulations Violations
  7. EU Council Tightens Controls on Explosive Precursors
  8. Singapore Customs Circulars of Interest
  1. Global Trade News: “Amidst the Trade War, China, U.S. Announce Bilateral Tariff Ceasefire”
  2. Reuters: “Canada Frees CFO of China’s Huawei On Bail; Trump Might Intervene”
  1. H.C. Boehning, J.S. Carrey & M.E. Gertzman: “OFAC Reaches Settlement with Cobham Holdings, Inc. for Violations Resulting from Deficient Screening Software”
  2. J.S. Maberry, R. Whitten & C.M. Dombek: “Comment Deadline Extended: Export Controls on Emerging Technologies”
  3. M. Volkov: “The Growing Problem of Corporate Fraud (Part I of III)”
  1. ECS Presents “Seminar Level II: Managing ITAR/EAR Complexities” in Scottsdale, AZ on 26-27 Mar 2019
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Amendments: ATF (15 Jan 2016), Customs (29 Nov 2018), DOD/NISPOM (18 May 2016), EAR (2 Nov 2018), FACR/OFAC (15 Nov 2018), FTR (24 Apr 2018), HTSUS (1 Nov 2018), ITAR (4 Oct 2018) 
  3. Weekly Highlights of the Daily Bugle Top Stories 

EXIMITEMS FROM TODAY’S FEDERAL REGISTER

EXIM_a1

1. 
Justice/ATF Publishes 2018 Annual List of Explosive Materials
(Source: 
Federal Register, 12 Dec 2018.) [Excerpts.] 
 
83 FR 63906-63908: Commerce in Explosives; 2018 Annual List of Explosive Materials
 
* AGENCY: Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF); Department of Justice.
* ACTION: Notice of List of Explosive Materials.
* SUMMARY: . . . The 2017 Annual List of Explosives inadvertently omitted a letter in one of the explosive materials. This notice does not make any substantive changes to the 2017 annual list; however, it corrects the list and publishes the 2018 Annual List of Explosive Materials.
* DATES: 
The list becomes effective December 12, 2018. 
* FOR FURTHER INFORMATION CONTACT: Krissy Carlson, Chief; Firearms and Explosives Industry Division; Bureau of Alcohol, Tobacco, Firearms, and Explosives; United States Department of Justice; 99 New York Avenue NE, Washington, DC 20226; (202) 648-7120.
* SUPPLEMENTARY INFORMATION: 
  Pursuant to 18 U.S.C. 841(d) and 27 CFR 555.23, the Department must publish and revise at least annually in the Federal Register a list of explosives determined to be within the coverage of 18 U.S.C. 841 et seq. The list covers not only explosives, but also blasting agents and detonators, all of which are defined as “explosive materials” in 18 U.S.C. 841(c).
  Each material listed, as well as all mixtures containing any of these materials, constitute “explosive materials” under 18 U.S.C. 841(c). Materials constituting blasting agents are marked by an asterisk. While the list is comprehensive, it is not all-inclusive. The fact that an explosive material is not on the list does not mean that it is not within the coverage of the law if it otherwise meets the statutory definition in 18 U.S.C. 841. Explosive materials are listed alphabetically and, where applicable, followed by their common names, chemical names, and/or synonyms in brackets.
  On December 28, 2017, the Department published in the Federal Register the 2017 Annual List of Explosive Materials (Docket No. 2017RR-19, 82 FR 61589). The Federal Register inadvertently omitted the letter “A” from “ANFO” which is the acronym for ammonium nitrate-fuel oil. This notice does not make any substantive changes to the 2017 annual list; however, it corrects this error and supersedes the List of Explosive Materials dated December 28, 2017.
 
Notice of the 2018 Annual List of Explosive Materials
 
  Pursuant to 18 U.S.C. 841(d) and 27 CFR 555.23, I hereby designate the following as “explosive materials” covered under 18 U.S.C. 841(c): . . .  
 
  Date approved: November 26, 2018.
Thomas E. Brandon, Deputy Director.

* * * * * * * * * * * * * * * * * * * * 

OGSOTHER GOVERNMENT SOURCES

OGS_a12. Items Scheduled for Publication in Future Federal Register Editions
(Source: Federal Register)

[No items of interest noted today.]

* * * * * * * * * * * * * * * * * * * *

OGS_a2
3. 
Commerce/BIS Extends Comment Period Concerning New Export Controls on Emerging Technologies

(Source: 
Commerce/BIS, 11 Dec 2018.)
 
The new deadline for submission is 
Thursday, 10 January 2019. The government announced the extension of the deadline on 11 December during a public meeting of the U.S. Department of Commerce Regulations and Procedures Technical Advisory Committee (RPTAC).

* * * * * * * * * * * * * * * * * * * *

OGS_a34.
 
Commerce/BIS Renews TDO Concerning Mahan Airways

(Source: 
Commerce/BIS, 12 Dec 2018.)
 
* Respondent: Mahan Airways of Tehran, Iran, and others.
* Order: Pursuant to section 766.24 of the Export Administration Regulations, the request of the Office of Export Enforcement (“OEE”) to renew the Temporary Denial Order (“TDO”) concerning Mahan Airways, and others, issued on 14 June, has been granted. BIS finds it necessary in the public interest to prevent an imminent violation of the EAR. This order is effective immediately and shall remain in effect for 180 days.
* Date of Order: 11 December 2018.

* * * * * * * * * * * * * * * * * * * * 

OGS_a45. 
DHS/CBP: “Importer/Consignee Create/Update ABI CATAIR Available for Testing in ACE”

(Source: 
CSMS# 18-000729, 12 Dec 2018.)

As of Tuesday December 11, 2018, the Importer/Consignee Create/Update capability for the revised CBP Form 5106 has been deployed in ACE for testing in the Certification environment. The importer bond query functionality will be deployed in the ACE Certification environment in the coming weeks. A PDF copy of the updated Importer/Consignee Create/Update chapter of the Customs and Trade Automated Interface Requirements (CATAIR) can be found 
here.

Technical questions about the new Importer/Consignee Create/Update capability should be sent to CBP Client Representatives at

 
gmb.clientrepoutreach@cbp.dhs.gov while questions about the ABI CATAIR operations and policy should be sent to 
5106@cbp.dhs.gov.

For additional information on the current and future functionality for creating and updating Importers of Record (IORs) in ACE, please go 
here.  

* * * * * * * * * * * * * * * * * * * * 

OGS_a56
State/DDTC: (No new postings.)

(Source: 
State/DDTC)

* * * * * * * * * * * * * * * * * * * * 

OGS_67. 
Treasury/OFAC Announces $2,774,972 Settlement with “Jereh Group” of Yantai, China, for Iranian Transactions and Sanctions Regulations Violations

(Source: 
Treasury/OFAC, 12 Dec 2018.)
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced a $2,774,972 settlement with Yantai Jereh Oilfield Services Group Co. Ltd. and its affiliated companies and subsidiaries worldwide (collectively referred to hereafter as the “Jereh Group”).  The Jereh Group’s 
settlement with OFAC is concurrent with a settlement agreement between the Jereh Group and the U.S. Department of Commerce’s Bureau of Industry and Security.
 
The Jereh Group, headquartered in the city of Yantai, China, has agreed to settle potential civil liability for 11 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR).  
 
The apparent violations involved the exportation or re-exportation, and attempted exportation or re-exportation of U.S.-origin goods ultimately intended for end-users in Iran by way of China.  The Jereh Group also exported certain U.S.-origin items with knowledge or reason to know that the items were intended for production of, for commingling with, or for incorporation into goods made in China to be supplied, transshipped, or re-exported to end-users in Iran.  Two of the 11 shipments were seized by U.S. Customs and Border Protection prior to exiting the United States.  
 
The goods in question include oilfield equipment such as spare parts, coiled tubing strings, and pump sets in violation §§ 560.203 and 560.204 of the ITSR.  OFAC determined that the Jereh Group did not voluntarily self-disclosed the apparent violations and that the apparent violations constitute an egregious case.
 
 
Yantai Jereh Oilfield Services Group Co., Ltd. Settles Potential Civil Liability for Apparent Violations of the Iranian Transactions and Sanctions Regulations: Yantai Jereh Oilfield Services Group Co., Ltd., headquartered in Yantai, China, and its affiliated companies and subsidiaries worldwide (collectively referred to hereafter as the “Jereh Group”), have agreed to pay $2,774,972 to settle the company’s potential civil liability for 11 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR). 
The Jereh Group’s settlement with OFAC is concurrent with a settlement agreement between the Jereh Group and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). 
 
Specifically, from on or about October 2, 2014 to on or about March 4, 2016, the Jereh Group appears to have violated §§ 560.203 and 560.204 of the ITSR on at least 11 occasions when it exported or reexported, or attempted to export or re-export, U.S.-origin goods ultimately intended for end-users in Iran by way of China. Jereh Group also exported certain U.S.-origin items with knowledge or reason to know that the items were intended for production of, for commingling with, or for incorporation into goods made in China to be supplied, transshipped, or re-exported to end-users in Iran. Two of the 11 shipments were seized by U.S. Customs and Border Protection (CBP) prior to exiting the United States. The goods in question included oilfield equipment such as spare parts, coiled tubing strings, and pump sets. 
 
OFAC determined that Jereh Group did not voluntarily disclose the apparent violations, and that the apparent violations constitute an egregious case. The base civil monetary penalty amount for the apparent violations equaled the statutory maximum civil monetary penalty amount, which in this case totaled $3,083,302. 
 
Beginning in late 2013, a former Jereh Group Sales Executive and a former Jereh Group Business Manager arranged meetings in Iran and/or with Iranian customers. Through these and other communications with potential buyers, both the former Sales Executive and the former Business Manager developed a scheme whereby they utilized intermediary companies, including a Chinese based trading company named Jinan Tongbaolai Oilfield Equipment Co., Ltd. (“JNTBL”) and a distribution company located in the UAE named Dubai Great Technology Trading LLC (“DGT”), in order to sell and ship Jereh Group products to Iran – many of which relied upon and incorporated U.S.-origin goods. In a report submitted to OFAC, the company summarized the interactions and relationships amongst and between these parties as follows: 
 
DGT was contracted by the Iranian end-user to act as an intermediary between Jereh [Group] and [JNTBL]. [JNTBL] was the Chinese company that executed purchase orders and contracts with Jereh Group while separately contracting for the resale of Jereh [Group] merchandise indirectly through DGT and directly to other Iranian end-users. For these multi-party arrangements, two separate contracts were signed: one between Jereh [Group] and [JNTBL] and one between [JNTBL] and [DGT], for the sale and shipment of Jereh [Group] equipment through the UAE to the end- users in Iran. 
 
An external review of the company’s compliance program in late 2015 and early 2016 noted that Jereh Group’s compliance controls were largely non-existent and, when in place, were ineffective and easily circumvented. The circumvention could and did go undetected. In addition, although the company had changed its contracts in or around June 2011 to include an explicit provision prohibiting the re-exportation of Jereh Group products to countries subject to U.S. economic sanctions, the legal contracts signed between the Jereh Group and the aforementioned intermediary countries excluded this language. 
 
In the summer of 2014, CBP detained a shipment of goods destined for the Jereh Group, and BIS officials interacted with multiple employees from Jereh Group and American Jereh International Corporation – the Houston, Texas affiliate of the Jereh Group – regarding U.S. economic and trade sanctions against Iran. Although the Chairman of the Jereh Group appears to have issued instructions to several employees and business units to cooperate with the U.S. Government’s inquiries, the former Sales Executive falsely denied having engaged in any business dealings with Iran. Nine of the 11 transactions constituting the apparent violations of the ITSR occurred in or after January 2015, more than four months after BIS officials began communicating with the Jereh Group. The apparent violations did not cease until BIS added several Jereh Group companies and related individuals to its Entity List on March 21, 2016. 
 
For more information regarding the conduct that led to the apparent violations, please see the Settlement Agreement between OFAC and the Jereh Group 
here.
 
The settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. 
 
OFAC considered the following to be aggravating factors: (1) Jereh Group willfully violated U.S. sanctions on Iran by engaging in and systematically obfuscating conduct it knew to be prohibited by company policy and economic sanctions, and continued to engage in such conduct even after the U.S. Government began to investigate the conduct; (2) Jereh Group employees, including several management-level personnel, had contemporaneous knowledge of the transactions giving rise to the apparent violations in Iran; (3) Jereh Group employees took actions, including establishing intermediaries, to conceal the nature of the transactions from the U.S. Government; (4) Jereh Group falsified information on Electronic Export Filings and made other false statements to the U.S. Government in the course of this investigation; (5) Jereh Group engaged in this pattern of conduct over a period of years, providing more than $500,000 of U.S.- origin goods for the economic benefit to Iran; and (6) Jereh Group is a commercially sophisticated, international corporation with subsidiaries in Canada, Central Asia, Hong Kong, Indonesia, the Middle East, and the United States. 
 
OFAC considered the following to be mitigating factors: (1) Jereh Group has no prior sanctions history with OFAC, and has not received a penalty notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations; (2) Jereh Group cooperated with OFAC’s investigation by disclosing possible violations involving other sanctions programs and responding to OFAC’s requests for information regarding Iran; (3) Jereh Group agreed to toll the statute of limitations for a total of 298 days; and (4) Jereh Group took remedial steps and corrective actions to prevent a recurrence of the apparent violations. 
Upon terminating the conduct which led to the apparent violations, the Jereh Group’s remedial response and compliance program enhancements included the following: 
 
  • The Jereh Group terminated the employment of the individuals determined to be directly responsible for and involved in the above-referenced shipments to Iran; 
  • The Jereh Group engaged an external organization with specialized experience in U.S. economic and trade sanctions and export control laws and regulations, which conducted an internal review of the company and developed a trade and sanctions compliance program; 
  • The same external organization provided detailed, technical, and operational training to the Jereh Group’s employees and senior executives regarding, among other items, the company’s legal obligations with respect to the laws and regulations administered by OFAC and other U.S. Government Departments; 
  • The Jereh Group established an International Business Compliance Department and a Compliance Committee comprised of representatives from its legal, sales, procurement, logistics, engineering, and finance departments to oversee the company’s sanctions compliance across all Jereh Group business units, subsidiaries, and affiliates; 
  • The Jereh Group hired full-time compliance personnel, including a dedicated and U.S.- trained Chief Legal Officer, as well as a Deputy Director of Compliance, and appointed senior managers with experience working at global companies and handling international business transactions with a commitment to compliance; 
  • The Jereh Group prepared and circulated a Sanctions and Export Compliance manual, and implemented trade and sanctions compliance policies and procedures; and 
  • The Jereh Group proactively contacted its suppliers and issued sanctions compliance certifications requiring these companies to not sell, transfer, re-export, or divert any Jereh Group products to countries subject to U.S. economic and trade sanctions programs. 
 
This enforcement action highlights the importance of the implementation of audits, reviews, and control measures to ensure compliance with U.S. export controls and sanctions regulations. OFAC encourages companies to develop risk-based compliance programs that include control mechanisms to prevent violations of U.S. export controls and sanctions regulations. 
For more information regarding OFAC regulations, please go to: 
www.treasury.gov/ofac.   

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OGS_a78. 
EU Council Tightens Controls on Explosive Precursors

(Source: 
Council of the European Union, 12 Dec 2018.) 
 
The EU is to subject access to explosive precursors by the general public to even tighter controls. EU ambassadors meeting in Coreper today agreed on stricter rules concerning the availability, introduction, possession and use of explosive precursors throughout the EU.
 
Explosives precursors are chemical substances that can be used for legitimate purposes, but can also be misused for the manufacture of illegal homemade explosives.
 
The new rules will limit the availability of explosive precursors to the general public and ensure the appropriate reporting of suspicious transactions throughout the supply chain.
 
The proposed regulation provides for two distinct categories of explosive precursors:
  (1) ”
restricted“, which cannot be made available, introduced, possessed or used by members of the general public above certain concentration levels, and
  (2) ”
regulated“, for which suspicious transactions should be reported by economic operators, including online marketplaces.
 
Subject to the conditions set out in the regulation, member states retain the possibility of setting up licensing schemes, by virtue of which certain restricted explosive precursors can still be made available to the general public.
 
Subject to control by the Commission, member states will also be able to apply the rules relating to restricted explosive precursors to chemical substances not covered by the regulation.
 
The new rules also impose a number of training and awareness-raising obligations on:
  (1) economic operators engaging in the manufacturing or selling explosive precursors and
  (2) national inspection authorities.
 
The regulation shall apply two years after its entry into force.
 
Next steps
 
This agreement opens the way for negotiations with the European Parliament for the swift adoption of the regulation.
 
Background
 
With a view to preventing the illicit manufacture of explosives, regulation (EU) No 98/2013 on the marketing and use of explosives precursors restricts the availability, introduction, possession and use of selected explosives precursors to the general public and sets up rules on the reporting of suspicious transactions.
 
The existing restrictions and controls have proved to be insufficient to prevent the illicit manufacture of homemade explosives. For instance, the requirement of registering transactions does not deter or prevent criminals from acquiring explosives precursors. Furthermore, the existing regulation is not clear enough as regards several of the obligations it imposes, including those that seek to ensure transmission of information along the supply chain.
 
  – Read the agreed text 
here.

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OGS_a89. 
Singapore Customs Circulars of Interest

(Source: 
Singapore Customs, 12 Dec 2018.) 
 

Circular No: 14/2018: Claiming of Preferential Tariff Treatment for Imports under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) 

Circular No: 13/2018: Rules of Origin under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

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NWSNEWS

NWS_a0
10

Global Trade News: “Amidst the Trade War, China, U.S. Announce Bilateral Tariff Ceasefire” 

(Source: 
Integration Point Blog, 11 Dec 2018.)
The G-20 summit concluded in Buenos Aires on December 1 and brought relief to Chinese and American importers as the leaders from both nations mutually agreed to halt new trade tariffs for 90 days.
 
The 
press release issued by the White House reads that on January 1, 2019, tariffs on $200 billion worth of imported Chinese products will not be raised to 25% from the existing 10%, as was initially announced by the United States. In return, China agreed to purchase a substantial amount of agricultural, industrial, and energy products from the U.S., though the exact amount has yet to be agreed upon. This ceasefire aims to reduce the trade conflict that has steadily escalated in the recent months between the two countries.
 
Existing Contention
 
The Trump administration inflicted import duties on aluminum and steel to the tune of 10% and 25%, respectively, in March of this year, thereby attracting Chinese retaliatory tariffs and igniting the era of the trade war. So far, the U.S. has imposed tariffs on $250 billion worth of Chinese goods. China answered by incurring tariffs on $110 billion worth of U.S. goods.
 
The 90-day ceasefire was established in order to negotiate contentious trade issues such as forced transfer of technology, intellectual property protection, non-tariff barriers, cyber intrusions, and cyber theft, according to the White House press release. If both parties fail to reach a consensus after this period, tariffs will be raised from 10% to the proposed 25% on March 1, 2019.
 
Promises of The Ceasefire
 
U.S. President Trump tweeted his approval for the G-20 Summit meeting with President Xi, citing positive impacts for both the U.S. and China. The U.S. agriculture industry, especially the soy bean producers who were severely affected by the tariff rise, is set to get a relief from the promise of increased exports to China.
In accordance with the ceasefire, Chinese President Xi agreed to designate Fentanyl as a controlled substance. This decision comes in light of the opioid seemingly driving up cases of drug addiction and drug-related deaths in the U.S. Fentanyl is thought to be mostly made in and imported from China. President Xi also expressed his intention to approve the Qualcomm-NXP deal, provided it should be presented again for the approval. The U.S.-based company Qualcomm Inc., the world’s biggest smartphone-chip maker, failed to forge a $44 billion merger with the Netherlands-based NXP Semiconductors, due to Chinese regulatory disapproval in June of 2018.
 
The Task Ahead
 
Though 90 days is a short period of time to reach a consensus on sensitive issues such as intellectual property theft and forced technology transfer between world’s largest trading nations, the delegations from each nation are exploring all available possibilities to fructify this short-term deal. The negotiating team from the U.S. and China are expected to continue meetings in mid-December.

* * * * * * * * * * * * * * * * * * * * 

NWS_a1
11
Reuters: “Canada Frees CFO of China’s Huawei On Bail; Trump Might Intervene”

(Source: 
Reuters, 11 Dec 2018.) [Excerpts.] 
 
A top executive of Chinese telecoms giant Huawei Technologies Co Ltd was granted bail by a Canadian court on Tuesday, 10 days after her arrest in Vancouver at the request of U.S. authorities sparked a diplomatic dispute.
 
Meng Wanzhou, Huawei’s chief financial officer and the daughter of its founder, faces U.S. claims that she misled multinational banks about Iran-linked transactions, putting the banks at risk of violating U.S. sanctions.
 
In a court hearing in Vancouver, British Columbia, Justice William Ehrcke granted C$10 million ($7.5 million) bail to Meng, who has been jailed since her arrest on Dec. 1. The courtroom erupted in applause when the decision was announced. Meng cried and hugged her lawyers.
 
Among conditions of her bail, the 46-year-old executive must wear an ankle monitor and stay at home from 11 p.m. to 6 a.m. Five friends pledged equity in their homes and other money as a guarantee she will not flee.
 
If a Canadian judge rules the case against Meng is strong enough, Canada’s justice minister must next decide whether to extradite her to the United States. If so, Meng would face U.S. charges of conspiracy to defraud multiple financial institutions, with a maximum sentence of 30 years for each charge.
 
The arrest of Meng has put a further dampener on Chinese relations with the United States and Canada at a time when tensions were already high over a trade war and U.S. accusations of Chinese spying.
 
U.S. President Donald Trump told Reuters on Tuesday he would intervene in the U.S. Justice Department’s case against Meng if it would serve national security interests or help close a trade deal with China. . . . 
 
China had threatened severe consequences unless Canada released Meng immediately, and analysts have said retaliation from Beijing over the arrest was likely.
 
The U.S. State Department is considering issuing a travel warning for its citizens, two sources said on Tuesday.
 
The Canadian government was considering issuing a similar warning, Canada’s CTV network reported. Reuters was not able to confirm the report. . . . 
 
The case against Meng stems from a 2013 Reuters report here about Huawei’s close ties to Hong Kong-based Skycom Tech Co Ltd, which attempted to sell U.S. equipment to Iran despite U.S. and European Union bans. . . . 

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COMMCOMMENTARY

COMM_a00
12. 
H.C. Boehning, J.S. Carrey & M.E. Gertzman: “OFAC Reaches Settlement with Cobham Holdings, Inc. for Violations Resulting from Deficient Screening Software”

(Source: 
Compliance & Enforcement, 3 Dec 2018.)
 
* Authors: H. Christopher Boehning, Esq., 
cboehning@paulweiss.com; Jessica S. Carey, Esq., 
jcarey@paulweiss.com; and Michael E. Gertzman, Esq., 
mgertzman@paulweiss.com. All of Paul Weis. 
 
On November 27, 2018, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced a nearly $90,000 settlement agreement with Virginia-based Cobham Holdings, Inc. (“Cobham”), a global provider of technology and services in aviation, electronics, communications, and defense, on behalf of its former subsidiary, Aeroflex/Metelics, Inc. (“Metelics”). [FN/1] 
The settlement involves three shipments of goods through distributors in Canada and Russia to an entity that did not appear on OFAC’s Specially Designated Nationals and Blocked Persons List (the “SDN List”), but was blocked under OFAC’s “50% rule” because it was 51% owned by a company sanctioned under the Russia/Ukraine sanctions program. This is the second OFAC action of which we are aware that has relied on the 50% rule.  The apparent violations appear to have been caused by Metelics’s (and Cobham’s) reliance on deficient third-party screening software.
 
While difficult to predict, OFAC’s decision to pursue this action-involving only three shipments, a violation of the 50 percent rule, and where the root cause of the apparent violations is attributable to deficient sanctions screening software-may signal a raising of OFAC’s compliance expectations, consistent with Treasury Under Secretary Sigal Mandelker’s warning in a recent speech that private sector companies “must do more to make sure [their] compliance systems are airtight.” [FN/2]
 
Below, we describe the settlement, OFAC’s penalty calculation, and several lessons learned.
 
The Apparent Violations
 
The apparent violations stem from three shipments by Metelics to end user Almaz Antey Telecommunications (“AAT”), an entity 51 percent owned by Joint-Stock Company Concern PVO Almaz-Antey (“JSC Almaz-Antey”), a Russian SDN. JSC Almaz-Antey was added to the SDN List on July 16, 2014, after the first shipment by AAT occurred but before three further shipments-constituting the apparent violations-were made.
 
Prior to JSC Almaz-Antey’s designation, Metelics entered into an agreement (the “Order”) to sell AAT several thousand switches and switch limiters through a distributor in Canada on June 18, 2014. On June 19, 2014, Metelics performed a denied party screening, which returned warnings for Russia generally, but not for AAT specifically. [FN/3] On June 27, Metelics prepared the first of two shipments pursuant to the Order and ran another denied party screening, which yielded the same results as the first.  Pursuant to Metelics’s internal compliance procedures involving shipments to Russia, the screening results and end-use certificates were forwarded to Metelics’s Director of Global Trade Compliance for review and approval.  The Director of Global Trade Compliance approved the shipment, which shipped on June 27, 2014.
 
On July 16, 2014, over two weeks after the first shipment, OFAC designated JSC Almaz-Antey and added it to the SDN List. JSC Almaz-Antey is a Russian entity engaged in the research, development, and manufacture of air defense missile systems, radar systems, and arms control systems, as well as other military, dual-use, and civil products. [FN/4] JSC Almaz-Antey was designated pursuant to Executive Order 13661, “Blocking Property of Additional Persons Contributing to the Situation in Ukraine,” dated March 16, 2014, for operating in the arms sector in Russia.  At all times relevant to the conduct at issue, JSC Almaz-Antey owned 51 percent of AAT, which meant AAT was also blocked as of July 16, 2014 under operation of OFAC’s 50 percent rule. [FN/5]
 
On July 31, 2014, Metelics prepared the second shipment of the Order, consisting of switch limiters and switches valued at $745,322, and again performed a denied party screening. Cobham’s denied party screening software failed to return any matches or warnings for AAT, despite the fact that JSC Almaz-Antey was on the SDN List and both its name and that of AAT, the specified end user, contain the uncommon terms “Almaz” and “Antey,” and the fact that Cobham had selected “fuzzy” search criteria to detect partial matches. Again, because the shipment involved Russia, it was elevated to Metelics’s Director of Global Trade Compliance, who relied on the screening results to approve the shipment.  Metelics completed the second shipment on July 31, 2014.
 
In October 2014, Metelics received an order for 20 sample switch limiters for AAT through a Russian distributor. Metelics performed the same denied party screening process it performed in July, which again generated no warnings for AAT. The sample switch limiters were sent in two shipments, one in December 2014 and one in January 2015.  As with the prior shipments, these shipments were reviewed and approved by Metelics’s Director of Global Trade Compliance.  Each shipment was valued at ten dollars.
 
Cobham discovered the problematic shipments during sale negotiations and related due diligence prior to its December 14, 2015 sale of Metelics.
 
Factors Affecting OFAC’s Penalty Determination
 
Pursuant to Ukraine Related Sanctions Regulations (the “URSR”), [FN/6] Cobham faced a maximum civil monetary penalty of $1,990,644. Cobham voluntarily self-disclosed the apparent violations, which OFAC determined to be non-egregious, resulting in a base penalty of $125,010. In arriving at the final settlement amount of $87,507, OFAC considered both aggravating and mitigating factors pursuant to its Economic Sanctions Enforcement Guidelines. [FN/7]
 
OFAC determined the following to be aggravating factors:
  – “Metelics failed to recognize warning signs when exporting goods on multiple occasions through distributors to the subsidiary of a blocked person with nearly the same name as the blocked person”;
  – Metelics’s “Director of Global Trade Compliance reviewed and approved the transactions constituting the apparent violations”;
  – “[T]he apparent violations resulted in harm to the sanctions program objectives of the URSR by conferring an economic benefit to a blocked person tied to Russia’s defense industry”;
  – “Metelics and Cobham are large and sophisticated entities operating in a sensitive industry”;
  – “Cobham and its compliance personnel were involved in prior apparent violations of the Iranian Transactions and Sanctions Regulations administered by OFAC”; and
  – “Metelics was subject to a consent agreement for violations of the International Traffic in Arms Regulations administered by the U.S. Department of State resulting from recurring compliance failures.” [FN/8]
 
OFAC determined the following to be mitigating factors:
  – “Metelics has not received a penalty notice or finding of violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the Apparent Violations”;
  – “Cobham cooperated with OFAC by submitting a detailed disclosure”;
  – “[T]he primary transaction underlying the Apparent Violations straddled changes in the URSR such that a portion of the transaction occurred prior to it being prohibited”; and
  – “Cobham implemented certain remedial measures,” including:
    • terminating the alleged problematic conduct;
    • acquiring and implementing new screening software to address the deficiency in the prior screening software;
    • acquiring and implementing a new tool capable of identifying persons known to be owned by parties on the SDN List;
    • implementing a process of enhanced due diligence for transactions that are high risk from the OFAC perspective; and
    • circulating a “lesson learned bulletin” to all U.S.-based international trade compliance personnel. [FN/9]
 
As is its standard practice, OFAC did not disclose how it weighed these aggravating and mitigating factors in reaching the settlement amount.
 
Implications
 
Despite the relatively low settlement amount, this case provides a few key lessons.
 
First, this is only the second instance of which we are aware in which OFAC resolved a public enforcement action for the processing of transactions with an entity that was not on the SDN List, but was blocked by operation of the 50% rule. The first such action was against Barclays in 2016, where OFAC provided guidance suggesting that it would pursue enforcement actions involving the 50% rule particularly where, among other things, information concerning the SDN ownership of a customer is publicly available, such that a company should have been able to realize the blocked nature of the entity (for example, in the Barclay’s case, similar transactions had been rejected by other financial institutions). [FN/10] Although OFAC does not offer an explanation, it appears here that the similarity in name between the SDN and its owned entity-such that either arguably should have triggered an alert during sanctions screening-justified a monetary penalty.  More broadly, OFAC’s action based on the 50% rule highlights the need for companies, at a minimum, to understand the ownership structure of their customers, particularly when such counterparties are operating in a high-risk jurisdiction (such as Russia). 
 
Second, in describing the company’s remedial measures, OFAC noted that the company acquired and implemented a “screening and business intelligence tool” with the capability of flagging persons “known to be owned by parties identified on the SDN List . . . to conduct enhanced due diligence on higher risk transactions.” [FN/11] Companies in a variety of sectors have increasingly utilized vendors to enhance their ability to identify entities that are blocked pursuant to the 50% rule, and OFAC’s recognition of this practice may offer further encouragement to adopt these techniques. OFAC also recognized other steps that companies may wish to emulate, including providing employees training on the 50% rule. [FN/12]  OFAC also stressed that “it is essential that companies engaging in international transactions maintain a culture of compliance where front line staff are encouraged to follow up on sanctions issues, including by promptly reporting to compliance personnel transactions suspected to involve sanctioned parties.” [FN/13]
 
Third, the Cobham settlement serves as an important reminder to entities conducting international business “in high-risk industries (
e., defense) to implement effective, risk-based compliance measures, especially when engaging in transactions involving high-risk jurisdictions.” [FN/14] In the past, OFAC may, depending on the circumstances, have excused a screening error with a cautionary letter, particularly where, as here, a company had implemented procedures to elevate high-risk transactions for review and approval by its compliance department, and failed to identify an SDN connection not through a failure to perform party screening, but through a deficiency in the validity of its third party screening software. OFAC’s decision to pursue a penalty against Cobham may suggest that OFAC is increasing its expectations that companies-and particularly “large and sophisticated entities operating in a sensitive industry”-will thoroughly pressure test their screening software to avoid these sorts of errors.  OFAC stated that “persons employing sanctions screening software should take steps to ensure it is sufficiently robust and that appropriate personnel are trained on its functionality.” [FN/15] In light of this guidance, companies should consider periodically testing their screening software, including by ensuring that they do not utilize an “all word” match criteria, such that no hit will be generated if a search subject’s name shares only some words in common with a prohibited party. 
 
Finally, an unusual facet of the Cobham settlement is the fact that Metelics is no longer a subsidiary of Cobham.  Generally OFAC will not pursue a former owner, but will instead bring its enforcement action against the company being sold or the acquiring entity.  In this instance, it could well be the case that Cobham submitted its voluntary self-disclosure prior to its December 2015 sale of Metelics, and Cobham’s willingness to accept responsibility for the Metelics’s conduct may have resulted from negotiations with the buyer.  OFAC also describes the deficient screening software as “Cobham’s,” so it is also possible that Cobham undertook a larger internal investigation in connection with the software deficiencies identified in relation to Almaz-Antey and that OFAC felt Cobham, as the provider of the software to its subsidiary, was itself responsible for the apparent violations.  Regardless, the settlement underscores that compliance with sanctions regulations can be a critical element of due diligence in mergers and acquisitions.  Here, the apparent violations were discovered during diligence related to Metelics’s sale, presumably giving the parties the opportunity to contractually allocate the risk of any future OFAC enforcement action related to the apparent violations.
 
———-
  [FN/1]
 See 
U.S. Dep’t of the Treasury, “Enforcement Information for November 27, 2018”, (“OFAC Web Notice”).  In settling these apparent violations, the companies did not admit liability.
  [FN/2] Sigal Mandelker, Under Sec’y for Terrorism and Fin. Intelligence, U.S. Dep’t of the Treasury, Speech before the Foundation for the Defense of Democracies (June 5, 2018).
  [FN/3] The name of the specific software used to screen these transactions has not been disclosed.
  [FN/5] Under OFAC’s 50 percent rule, an entity that is owned 50% or more by one or more SDNs must be treated as though it itself is on the SDN List.  
See 
U.S. Dep’t of the Treasury, “Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked” (Aug. 13, 2014).
  [FN/6] 31 C.F.R. part 589.
  [FN/7] 
See 31 C.F.R. part 501, app. A.
  [FN/8] OFAC Web Notice 2-3.
  [FN/9] 
Id. at 3.
  [FN/11] OFAC Web Notice at 3.
  [FN/12] 
Id.
  [FN/13] It is unclear however, how OFAC’s statement regarding a “culture of compliance” fits into the Cobham settlement, given that each of the three shipments at issue were elevated to and approved by the company’s Director of Global Trade Compliance.
  [FN/14] OFAC Web Notice at 3.
  
[FN/15] Id.

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COMM_a01
13
J.S. Maberry, R. Whitten & C.M. Dombek: “Comment Deadline Extended: Export Controls on Emerging Technologies”
(Source: Sheppard Mullin LLP, 11 Dec 2018.) 

 
* Authors: J. Scott Maberry, Esq., Sheppard, 
smaberry@sheppardmullin.com
; Reid Whitten, Esq., 
rwhitten@sheppardmullin.com
; and Curtis M. Dombek, Esq., 
cdombek@sheppardmullin.com
. All of Sheppard Mullin LLP.
 
[Authors’ Note: This is an updated version of the December 10th blog post.]

Key Takeaways:
  1. Emerging technology sectors are being reviewed now for new export controls that could take effect in 2019 (list below).
  2. You may submit comments on the criteria the U.S. government will use to determine what technologies are subject to export controls.
  3. The deadline for comments has been extended to January 10, 2019.
Background:
 
As we reported 
here, the U.S. government has 
published an invitation to comment on the criteria for establishing new export controls on what it calls “emerging and foundational technologies.” The list of technology fields targeted for review is as follows:
  1. Biotechnology
  2. Artificial intelligence (AI) and machine learning technology
  3. Position, Navigation, and Timing (PNT) technology
  4. Microprocessor technology
  5. Advanced computing technology
  6. Data analytics technology
  7. Quantum information and sensing technology
  8. Logistics technology
  9. Additive manufacturing
  10. Robotics
  11. Brain-computer interfaces
  12. Hypersonics
  13. Advanced Materials
  14. Advanced surveillance technologies
Why Comment?
 
If your company makes products or creates any know-how in any of these sectors, new export controls could limit your exports and restrict your ability to disclose know-how to foreign nationals, even within the United States, even within your own company.
 
You may submit public comments on the proposed rule. The current
deadline for submission is now Thursday, January 10, 2019. The government announced the extension of the deadline today (December 11, 2018) in a public meeting of the U.S. Department of Commerce Regulations and Procedures Technical Advisory Committee (RPTAC).

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COM_a3
14
M. Volkov: “The Growing Problem of Corporate Fraud (Part I of III)”

(Source: 
Volkov Law Group Blog, 10 Dec 2018. Reprinted by permission.) 
 
* Author: Michael Volkov, Esq., Volkov Law Group, 
mvolkov@volkovlaw.com, 240-505-1992. 
 
For the love of money is the root of all evil — 1 Timothy 6:10, King James Version, The Bible
 
Corporate bribery requires money.  How is that for something obvious.
 
Companies face a variety of threats – one enduring threat is the risk of fraud or theft. Unfortunately, employee fraud is all too common.
 
PWC’s 2018 Global Economic Crime and Fraud Survey reported that “only 49% of global organizations said they’d been a victim of fraud and economic crime.  (See 
here).  However, we know this number should be much higher.  So what about the other 51%?”  PWC suggests that the other 51% of corporate organizations are blissfully ignorant and ignoring their obvious fraud problem.
 
In the new environment of aggressive enforcement, governance surveillance, and stakeholder focus over corporate organizations, corporations can no longer view fraud as a simple cost of doing business.  The risks and problems are increasing and the consequences of ineffective fraud controls are significant.
 
There is no question that fraud awareness is increasing.  Companies are recognizing that fraud is growing concern.  The PWC survey result of 49 percent is the highest level of awareness over the last 18 years.
 
Companies are experiencing increased fraud as part of an overall increase in economic crime around the globe.  Reported economic crime has increased over the last few years and is continuing to increase.  As a result, companies face ever-increasing risks of fraud.  In response, companies are increasing their spending on fraud prevention and detection strategies.  The cornerstone of this effort is technology and data analytics. Companies are exploring the use of whistleblower programs to encourage reporting and detection.
 
Like many other risks, companies have to adopt proactive measures, beginning with a risk assessment. Many companies are beginning to conduct regular fraud or economic crime risk assessments on a regular basis. Such an assessment could easily be included in an anti-corruption, anti-money laundering and trade controls risk assessment.
 
Companies are not going to be surprised by the results of their risk assessments.  Asset misappropriation, consumer fraud and cybercrime are likely to round out the top-3 risks.
 
The PWC survey confirmed what we already know – the incidence of economic crime committed by internal actors has increased to 52 percent.  Interestingly, the proportion of economic crimes committed by senior management increased from 2016, 16 percent, to 24 percent in 2018.
 
Fraud, however, is not a problem limited to internal actors – it extends to a company’s third parties. Add that to the list of risks requiring due diligence and third-party risk management.  According to PWC, 68 percent of external actors committing fraud are agents, vendors, shared services providers and customers.
 
The cost of fraud to an organization is much more than the theft itself.  Secondary costs include investigations and other interventions. In response, companies are definitely increasing their spending on fraud prevention and detection.  Forty-two percent of responding companies have increased their spending on economic crime and fraud.
 
Companies have access to a number of technologies to defend themselves against fraud, which are aimed at monitoring, analyzing and predicting human conduct, including machine learning, predictive analytics and other artificial intelligence techniques. Technology is expensive and difficult to implement across an organization.

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TEEX/IM TRAINING EVENTS & CONFERENCES

TE_a115ECS Presents “Seminar Level II: Managing ITAR/EAR Complexities” in Scottsdale, AZ on 26-27 Mar 2019

(Source: S. Palmer, spalmer@exportcompliancesolutions.com.)
 
* What: Seminar Level II – Managing ITAR/EAR Complexities; Scottsdale, AZ
* When: March 26-27, 2019
* Sponsor: Export Compliance Solutions (ECS)
* ECS Speaker Panel:  Suzanne Palmer, Lisa Bencivenga
* Register here or by calling 866-238-4018 or e-mail 

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ENEDITOR’S NOTES


Gustave Flaubert (12 Dec 1821 – 8 May 1880; was a French novelist. Highly influential, he has been considered the leading exponent of literary realism in France. He is best known for his debut novel 
Madame Bovary (1857). The celebrated short story writer Guy de Maupassant was a protégé of Flaubert.)
  
– “The most glorious moments in your life are not the so-called days of success, but rather those days when out of dejection and despair you feel rise in you a challenge to life, and the promise of future accomplishments.”

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EN_a317
. 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.  The latest amendments to applicable regulations are listed below.
 
*
ATF ARMS IMPORT REGULATIONS
: 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. 
 
*
CUSTOMS REGULATIONS
: 19 CFR, Ch. 1, Pts. 0-199
  – Last Amendment: 19 Sep 2018: 83 FR 47283-47284: Extension of Import Restrictions Imposed on Archaeological Material From Cambodia  

 
DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM): DoD 5220.22-M

  – 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 cancelled Supp. 1 to the NISPOM (Summary 
here
.)


EXPORT ADMINISTRATION REGULATIONS (EAR)
: 15 CFR Subtit. B, Ch. VII, Pts. 730-774

  – Last Amendment: 2 Nov 2018: 
83 FR 55099: Wassenaar Arrangement 2017 Plenary Agreements Implementation [Correction to 24 Oct EAR Amendment Concerning Supplement No. 1 to Part 774, Category 3.]


*
FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR)
: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders

  – Last Amendment: 15 Nov 2018: 83 FR 57308-57318: Democratic Republic of the Congo Sanctions Regulations

 
*
FOREIGN TRADE REGULATIONS (FTR)
: 15 CFR Part 30
  – Last Amendment: 24 Apr 2018: 3 FR 17749-17751: Foreign Trade Regulations (FTR): Clarification on the Collection and Confidentiality of Kimberley Process Certificates
  – HTS codes that are not valid for AES are available
here.
  – The latest edition (30 Apr 2018) 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 approximately 250 footnotes containing case annotations, practice tips, Census/AES guidance, and explanations of the numerous errors contained in the official text. Subscribers receive revised copies in Microsoft Word every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance websiteBITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR. Government employees (including military) and employees of universities are eligible for a 50% discount on both publications at www.FullCircleCompiance.eu.  
 
*
HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES (HTS, HTSA or HTSUSA)
, 1 Jan 2018: 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: 1 Nov 2018: 
Harmonized System Update 1819, containing 1,200 ABI records and 245 harmonized tariff records.

  – HTS codes for AES are available 
here.
  – HTS codes that are not valid for AES are available 
here.
 
INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130.
  – Last Amendment:
4 Oct 2018: 83 FR 50003-50007: Regulatory Reform Revisions to the International Traffic in Arms Regulations.

  – The only available fully updated copy (latest edition: 4 Oct 2018) 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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EN_a0318
Weekly Highlights of the Daily Bugle Top Stories

(Source: Editor) 

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

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EPEDITORIAL POLICY

* The Ex/Im Daily Update is a publication of FCC Advisory B.V., compiled by: Editor, James E. Bartlett III; Assistant Editors, Alexander P. Bosch and Vincent J.A. Goossen; and Events & Jobs Editor, Alex Witt. The Ex/Im Daily Update is emailed every business day to approximately 6,000 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, DOE/NRC, DOJ/ATF, DoD/DSS, DoD/DTSA, FAR/DFARS, 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.

* RIGHTS & RESTRICTIONS: This email contains no proprietary, classified, or export-controlled information. All items are obtained from public sources or are published with permission of private contributors, and may be freely circulated without further permission, provided attribution is given to “The Export/Import Daily Bugle of (date)”. Any further use of contributors’ material, however, must comply with applicable copyright laws.  If you would to submit material for inclusion in the The Export/Import Daily Update (“Daily Bugle”), please find instructions here.

* 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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