Flowserve Corporation, a Texas-based manufacturer of pumps, valves, seals and components for the oil, gas, chemical and other industries, and ten of its foreign affiliates, agreed in late September to pay $2.5 million to settle 288 charges of making illegal exports and re-exports to Iran, Syria and other countries in violation of the Export Administration Regulations of the U.S. Department of Commerce.  In addition, Flowserve will be required to have an external audit of its compliance program and have the results submitted to the Bureau of Industry & Security. 

That’s not all.  Flowserve also paid a civil penalty of $502,408 for 58 violations of the Foreign Assets Control Regulations of the Department of Treasury for making exports and re-exports to embargoed countries.
The specific charges against Flowserve included:

• Exports of articles classified under Category 2B350 of the Commerce Control List to various countries, including China, Singapore, Malaysia and Venezuela, without obtaining export licenses.  (2B350 applies to chemical manufacturing equipment and facilities.)
• Re-export of articles classified under EAR99 to Iran and Syria through subsidiaries in Europe.
• Violations of the Office of Foreign Assets Control’s Iranian, Cuban and Sudanese sanctions programs.

Although very serious, these violations were not considered egregious and no criminal charges were filed against Flowserve and its affiliates.  Flowserve apparently failed to take measures to ensure that articles were correctly classified and licensed and that no exports or re-exports would take place in violation of U.S. sanctions and embargoes. 

It seems to us that if Flowserve had instituted and maintained internal controls based on the COSO (Committee of Sponsoring Organizations of the Treadway Commission) example, they could have reduced these violations, or avoided them altogether.   Applying the COSO model to the Flowserve circumstances, here are examples of the controls they could have put in place:

Control environment:

• A management policy requiring compliance with export-import laws and regulations
• Sufficient tools and training for compliance personnel so they can properly do their jobs

Risk assessment

• Awareness of the risks of illegally exporting controlled articles or making shipments directly or indirectly to embargoed or sanctioned destinations

Control activities

• Policies and procedures specifically aimed at mitigating or eliminating the identified compliance risks

Information and communication

• Ensured Flowserve compliance personnel knew what was being exported and where the company and its affiliates were conducting sales activity
• Communicated export control requirements for Flowserve products and U.S. embargo and sanction information to Flowserve’s business units and affiliates

Monitoring

• Required that compliance personnel review Flowserve’s export transactions to ensure they were properly carried out
• Reviewed sales activities by Flowserve and its affiliates to determine the countries to which sales have been proposed or carried out

This case serves as a reminder that compliance needs to be taken seriously, and that good internal controls are essential to establishing and maintaining compliance.  The controls don’t need to be complicated, but they do need to be effective.

All exporters – and importers too – need to take heed of the Flowserve example and make sure their own compliance houses are in good order.

Dr. John Reece Roth, the 73-year-old former professor of electrical engineering at the University of Tennessee in Knoxville, will not see a reversal of his criminal conviction by the U.S. Supreme Court. In January of this year, the U.S. Court of Appeals for the Sixth Circuit upheld a federal jury’s 2008 conviction of Dr. Roth on one count of conspiracy, 15 counts of exporting defense articles and defense services without a license, and one count of wire fraud. On October 3, the Supreme Court denied his petition for writ of certiorari.

Dr. Roth was hired by Atmospheric Glow Technologies, Inc. as a consultant on a U.S. Air Force project to develop plasma technology for use on military aircraft. The jury found Dr. Roth guilty of releasing technical data related to the project to two graduate students in the U.S., who are foreign nationals from China and Iran. He was also convicted of exporting technical data related to the project while on a trip to China. Following the trial, the district court sentenced Dr. Roth to 48 months in prison and two years of supervised release. He was released on bail pending the appeal of his conviction.

Section 2778(c) of the Arms Export Control Act (AECA) makes it a crime to “willfully violate” any provision of the AECA, including the International Traffic in Arms Regulations (ITAR) and the United States Munitions List (USML). In his petition to the Supreme Court, Professor Roth argued the Sixth Circuit erred in finding that a willful violation of the AECA may be established by proof that a defendant intended to violate any law whatsoever. Dr. Roth maintained that the government was required to prove there was sufficient evidence for a jury to find that he knew the information he exported was specifically covered by the USML. He relied on the Eighth Circuit’s decision in United States v. Gregg, 829 F.2d 1430 (8th Cir. 1987) to argue that the jury instructions under the AECA must include a specific intent requirement that the defendant knew the items exported were on the USML.

Because the export control regulations are highly complex and technical, Dr. Roth argued that the term “willful” in the context of the AECA requires a higher level of specificity than in other criminal prosecutions. He pointed to the prosecution of certain tax offenses such as money structuring and tax evasion in which the Supreme Court required the government prove that the defendants had specific intent to violate the provisions of the tax code they were charged with violating. Without proving such intent, defendants would be at risk of conviction for apparently innocent conduct. Dr. Roth equated the complexities of the tax laws with the broad language and technical nature of the AECA. In both cases, he argued, the complex regulations make it difficult for average citizens to understand their obligations. As a result, the government should be held to a higher standard in prosecuting violations of the AECA. Presumably, the jury instruction proposed by Dr. Roth would have prevented his conviction based on his testimony at trial that he always believed the technical information at issue was in the public domain and never subject to the AECA. 

The government’s brief in opposition to Dr. Roth’s petition argued that every court that has directly reviewed the willfulness question under 2778(c) has rejected the claim that the AECA requires the government to prove the defendant knew an exported item was on the USML. In response to Dr. Roth’s reliance on United States v. Gregg, the government noted that although the Eighth Circuit approved a jury instruction that contained a specific intent requirement that the defendant knew the item at issue was on the USML or the Commerce Control List, the court of appeals did not affirmatively state that it would have rejected the jury instruction if it had not made specific reference to the USML. Finally, the government distinguished the U.S. Supreme Court tax and banking cases requiring the jury to find that the defendants were aware of the specific statutory provisions at issue. The government maintained that those cases are entirely distinguishable because the evidence at trial made clear that Dr. Roth “was not at risk of being ensnared for apparently innocent conduct.” The facts presented at trial supported the jury’s findings that Dr. Roth knew his conduct was unlawful. The government pointed to evidence that he was warned by his colleagues and university officials that the technical information at issue was subject to the ITAR and did not maintain that he was unaware of the AECA or its licensing requirements.

With no additional relief available, Dr. Roth’s case will continue to serve as a cautionary tale not only for university professors and researchers, but for anyone engaging foreign nationals in projects involving technical data subject to the ITAR. The outcome of this case highlights the importance of a strong compliance program that adequately addresses employee conduct with respect to releases of technical data to foreign nationals within the U.S. Together with the deemed export certification requirement on U.S. Citizenship and Immigration Services Form I-129 implemented in February of this year, this case serves as a reminder of the government’s heightened interest in identifying deemed exports and pursuing enforcement actions.

The Foreign Corrupt Practices Act of 1977 (FCPA) was enacted to make it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the act’s anti-bribery provisions prohibit offers, payments, promises to pay, or authorization of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.

A once seldom-enforced law, the FCPA is now enforced regularly, and the penalties are very high for both civil and criminal violations. In fact, enforcement of the FCPA has been at historically high levels for the past several years and will likely continue to increase.

The most recent high-profile case involves the sentencing of the former president of Terra Telecommunications Corp., Joel Esquenazi, who received 15 years in prison for a scheme to bribe officials to obtain advantages for the state-owned Terra Telecommunications in Haiti. Esquenazi’s is the longest sentence ever imposed in a case involving the FCPA.  The former executive vice president of Terra, Carlos Rodriguez, was also sentenced to 84 months in prison for his role in the bribery scheme. Both men were convicted in August 2011 following a jury trial that culminated with one count each of conspiracy to violate the FCPA, wire fraud, money laundering, and seven counts each of FCPA violations. They were also ordered to forfeit $3.09 million.

“This sentence – the longest sentence ever imposed in an FCPA case – is a stark reminder to executives that bribing government officials to secure business advantages is a serious crime with serious consequences,” said Assistant Attorney General Lanny Breuer.  “A company’s profits should be driven by the quality of its goods and services, and not by its ability and willingness to pay bribes to corrupt officials to get business.  As today’s sentence shows, we will continue to hold accountable individuals and companies who engage in such corruption.”

At trial, the evidence showed that the defendants participated in a scheme to commit foreign bribery and money laundering from November 2001 through March 2005, during which time the telecommunications company paid more than $890,000 to shell companies to be used for bribes to telecommunications officials. 

The bribes were used to obtain advantages from Haitian officials for Terra, including preferred telecommunications rates, reductions in minutes for which payments were owed, and the continuance of Terra’s telecommunications connection with Haiti.

To conceal the bribe payments, the defendants used various shell companies to receive and forward the payments.  In addition, they created false records claiming that the payments were for “consulting services,” which were never intended to be performed or actually performed.

The case is United States v. Esquenazi, 09-21010, U.S. District Court, Southern District of Florida (Miami). The indictment can be found at: http://www.justice.gov/criminal/pr/documents/12-7fraudhaiti-indict_0.pdf.

To learn more about the government’s FCPA enforcement efforts, go to www.justice.gov/criminal/fraud/fcpa.

On November 7, 2011 pursuant to the President’s ongoing Export Control Reform Initiative, the U.S. Department of State, Directorate of Defense Trade Controls (“State”), and the U.S. Bureau of Industry and Security (“BIS”) cooperatively published separate rulemaking proposals to amend their respective export control regulations covering aircraft and related items.  These changes would represent major changes in how aircraft and related items, including components and technology, are regulated for export control purposes.

The Directorate of Defense Trade Controls, U.S. Department of State, administers the International Traffic in Arms Regulations (ITAR) (22 CFR parts 120-130). The items subject to the jurisdiction of the ITAR, i.e., “defense articles,” are identified on the ITAR's U.S. Munitions List (USML) (22 CFR 121.1).  Aircraft and aircraft components considered to be defense articles are included under Category VIII of the USML.

Items not subject to the export control jurisdiction of the ITAR, are subject to the jurisdiction of the Export Administration Regulations (“EAR,” 15 CFR parts 730-774, which includes the Commerce Control List in part 774), administered by the Bureau of Industry and Security.  Items not subject to the ITAR or to the exclusive licensing jurisdiction of another agency, such as the Nuclear Regulatory Commission, are subject to the EAR.   Presently Category 9 of the Commerce Control List includes many aircraft and aircraft components not covered under the ITAR.

In December 2010, State and BIS published rulemaking proposals designed to make the USML and the CCL “positive”, “tiered”, and “aligned” so that eventually they can be combined into a single control list.  The notices also called for the establishment of a “bright line” between the USML and the CCL to reduce government and industry uncertainty regarding export jurisdiction by clarifying whether particular items are subject to the jurisdiction of the ITAR or the EAR.
These proposals were welcomed in the export community due to the complexity and potential pitfalls associated with navigating through both the USML and the EAR to determine jurisdiction and the fundamental differences in how each set of regulations applies.

In July, 2011, BIS published a proposed rule that set forth a framework for how articles would no longer warrant control on the USML, but instead would be controlled on the Commerce Control List (CCL). With that proposed rule, BIS also described its proposal for how military vehicles and related articles in USML Category VII that no longer warrant control under the USML would be controlled on the CCL.

In a tranched approach, the present rule describes BIS's proposal for how a second group of items—various military aircraft and related articles that are controlled by USML Category VIII—would be controlled on the CCL.

The corresponding proposed rule by State revises USML Category VIII to narrow the types of aircraft and related items controlled on the USML to only those that warrant control under the stringent requirements of the Arms Export Control Act. Changes include moving similar articles currently controlled in multiple categories into a single category or subcategory.  For example inertial navigations systems for aircraft formerly controlled under Category VIII(e) will likely be moved to controls either in Category XII or the CCL, and gas turbine engines will likely be moved to a proposed USML Category XIX, which will be the subject of a separate notice in future proposed rules.

Most significantly, and of special interest to clients in the aviation components industry,  the State proposal does not contain controls on all generic parts, components, accessories, and attachments that are specifically designed or modified for a defense article, regardless of their significance to maintaining a military advantage for the United States. Rather, it contains, with one principal exception, a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. The exception pertains to parts, components, accessories, and attachments “specially designed” for the following U.S.-origin aircraft that have low observable features or characteristics: B-1B, B-2, F-15SE, F/A18E/F/G, F-22, F-35 (and variants thereof), F-117, or United States Government technology demonstrators.

All other parts, components, accessories, and attachments “specially designed” for a military aircraft and other articles now subject to USML Category VIII would become subject to new “600 series” controls in Category 9 of the CCL.  These would include new Export Control Classification Numbers 9A610, 9B610, 9C610, 9D610 and 9E610.

This would be a welcome departure from the current requirements where exporters often are required to determine the design intent of a particular component, regardless of age of the component, when making a jurisdiction determination to determine if an article was specially designed for a defense article.

Finally, the proposals would prohibit the use of License Exceptions STA (Strategic Trade Authorization) or GOV (Government and International Organizations) for export or re-export, except to U.S. government agencies or personnel of certain of the new ECCN 600 items, and would impose a general policy of denial for 600 series items for destinations that are subject to a United States arms embargo under the regional stability reasons for control.

BIS and State are requesting public comment on both rules.  Interested parties must submit comments no later than December 22, 2011

In a move that could prove a boon to guitar aficionados, a Tennessee lawmaker has introduced legislation whereby musicians and instrument retailers would no longer be subject to penalties for unknowingly possessing illegal woods.

The Retailers and Entertainers Lacey Implementation and Enforcement Fairness (RELIEF) Act, or H.R. 3210, would exempt any plant product imported or manufactured prior to May 22, 2008, the date amendments to the Lacey Act went into effect. The law, first written in 1900 to protect endangered animals, was amended in 2008 to include certain plants and trees, in an effort to prevent illegal logging.

The Lacey Act is administered by the Departments of the Interior, Commerce, and Agriculture through their respective agencies. These include the U.S. Fish and Wildlife Service, National Marine Fisheries Service, and Animal and Plant Health Inspection Service.

U.S. Representative Jim Cooper, D-Tenn., who introduced the legislation in late October, said it would clarify a “well-intentioned” law that has been effective in disrupting illegal logging but has left anyone with a product containing rare wood subject to criminal penalties.

“In theory, anybody who travels outside the country or even across the state line with an old guitar right now would be in legal jeopardy,” Cooper said in a statement announcing the legislation. “The RELIEF Act protects guitar pickers and small businesses, and it treats them fairly.”

According to Cooper, under the RELIEF Act any foreign wood products that a person owned prior to May 22, 2008 would be exempt from the law. Anyone who has wood that violates the Lacey Act, but didn’t know it, will not be penalized, and the government won’t be allowed to seize their property. Under the proposed law, the government would also compile an Internet database of forbidden wood to warn the public. The bill would not affect pending Lacey Act cases.

Cooper introduced his legislation in response to a Justice Department raid of Gibson Guitar Corp. facilities in Nashville and Memphis in August. . The company was also raided in 2009, in which authorities seized ebony imported from Madagascar. In total, authorities seized more than $1 million of rosewood, ebony, and finished guitars suspected to have been illegally imported.

Dates to Note:

Don't miss out on these upcoming events featuring Braumiller Schulz's knowledgeable attorneys:

December 6 - 7, 2011
Jim Wickstead, Adrienne Braumiller, and Michelle Shulz will conduct training at the main office location.(5220 Spring Valley Rd. Suite #200 Dallas, TX 75254)

The topic is: Managing Your Import Export Business:A Deep Dive into Process Management.

To register online click here.

December 16, 2011
MK Data Services webinar: Determining Proper Classification for Your Commercial Goods.
Join Adrienne Braumiller of Braumiller Schulz LLP, George Tuttle III, of Tuttle Law Offices, and Cindy Shull Lakey of MK Data Services as they present an understanding of how to classify commercial products using the EAR.

In this informational webinar you will hear from a qualified Classification Consultants who will walk you through the process. A representative from MK Data Services will then share the full library of regulations environment which includes the electronic classification system, and license determination tool.

To register online click here.

January 25 – 26, 2012
Adrienne Braumiller to speak at ACI’s EAR Boot Camp at The Adolphus Hotel in Dallas.
Back by popular demand, American Conference Institute’s 2nd National EAR Boot Camp will allow you to hear from Government experts on export controls compliance expectations, and benchmark your compliance practices with a wide range of industries, including technology, aerospace, software, and oil & gas. At this practical, nuts and bolts course, exporters, carriers, freight forwarders, consignees and all other parties to an export transaction will benefit from practical, in-depth sessions on how to satisfy the gamut of key EAR requirements affecting your supply chain.

For more information click here.

February 7, 2012
D/FW French American Chamber - ITAR Boot Camp
Michelle Schulz and Mark Weaver of Braumiller Schulz LLP are keynote speakers at the event to take place at the main office of Braumiller Schulz LLP, 5220 Spring Valley Rd., Suite #200,Dallas, TX 75254

This comprehensive seminar is designed for the practitioner, focusing on export licensing and compliance practices when exporting goods and technology subject to the International Traffic in Arms Regulations (ITAR). This seminar is designed for beginners, intermediates and experts. You will want to make this seminar a part of your company's export controls training program. Meet your ITAR training requirements and take advantage of the substantive information and discussions being offered. Guest speakers are experienced industry compliance specialists and attorneys with expertise in these issues.

See: http://www.faccdallas.com/ for updated information.

February 23 - 25, 2012
Partnerships International Presents the 11th Annual Partnering for Compliance-East Coast.
Adrienne Braumiller and Bruce Leeds will be joining the Commerce, Defense, Homeland Security, Census Bureau, and US Trade speaking as the conference will focus on a broad spectrum of export/import regulatory and compliance matters of current relevance to companies, organizations, and individuals involved in trading commodities and technologies.

Pegasus Ballroom (Student Union Building)
University of Central Florida, Orlando Campus
4000 Central Florida Boulevard, Building 52 (Student Union Building); Orlando, FL 32816-3250

For agenda and registration click here.

March 19, 2012
Sue Ann Linnemann will speak at the ICPA Compliance Strategy Conference in Atlanta from 9:00 – 10:00am

Topic: "Common Mistakes" presentation that is a combination of both frequent mistakes at entry and summary.  It covers corrections, remote entries, protests, PEA's  and census errors.

To register click here.

If your company is interested in any of our professionals speaking at your upcoming event under the topics listed below…..please let us know adrienne@braumillerschulz.com.

Partners Michelle Schulz & Adrienne Braumiller
michelle@braumillerschulz.com
adrienne@braumillerschulz.com
Braumiller Schulz LLP
5220 Spring Valley Road, Suite 200
Dallas, Texas 75254
Phone: 214-348-9306
Toll Free: 877-277-5987
Fax: 214-217-9303
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