Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Deemed Exports

Most companies have little difficulty determining whether or not their goods are subject to an export license. However, it can be far more difficult to interpret the deemed export rule. "Deemed export" is a term recognized by the Department of Commerce to cover the circumstances in which a foreign visitor, while visiting a U.S. company, obtains technology or technical details about a product subject to a license when exported. By contrast, the Department of State considers such activities to be just another export. Either way, the sentencing last July of Professor John Reece Roth brought the issue to the foreground once more.

Professor Roth was convicted of conspiring with Atmospheric Glow Technologies, Inc. (AGT), of unlawfully exporting 15 different "defense articles" to a citizen of the People’s Republic of China in violation of the Arms Export Control Act ("AECA"), 22 U.S.C. § 2778, and one count of wire fraud for defrauding the University of Tennessee as he concealed his actions from his then employer despite several opportunities to be forthright.

Roth’s problems arose in conjunction with a contract AGT won with the U.S. Air Force. AGT was a 2000 University spin-off. The Air Force contract involved developing a plasma actuator that was intended to reduce the drag on the wings of drones. Under the terms of the contract, Roth was prohibited from sharing sensitive data with foreign nationals. In 2006, the University’s Export Control Officer warned Roth about his obligations to keep such data guarded. Despite this clear warning, Roth took his laptop containing project plans to China with him. While there, he asked a colleague to send him an email with data about the project to the email account of a Chinese colleague. Upon receipt, Roth shared the contents with that Chinese colleague. Further deemed export violations arose because Roth had two foreign students working with him on the project – one Chinese and one Iranian – without government knowledge or approval.

Why he took these actions remains a mystery. Professor Roth claimed he thought the AECA regulations applied only to the finished product, a defense that was clearly rejected by the jury, undoubtedly relying in large measure on the fact that the documentation that accompanied the project repeatedly mentioned AECA. In addition, Professor Roth signed many documents attesting to his acknowledgment of that protocol and other conditions of employment, including deemed export controls. He was also questioned by University authorities at one point and denied deemed exports were taking place.

For international traders, it is important to keep in mind that transfer of controlled defense technical data to foreign nationals, even when taking place in the United States, violates AECA if done without preauthorization from the government. A similar ban exists under the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701–1706, for technical data, goods, and services controlled by the Bureau of Industry and Security (BIS).

The Roth case is unique only in that it involved a university professor. The more typical setting is for such data to be transferred within the business community. A representative of a foreign buyer visits the seller’s office in the U.S. and is given access to or provided with plans or product specifications for controlled goods. There have even been cases where that foreigner is allowed to walk out of the plant with those plans or specifications.

The goods and technical data subject to control under AECA are articulated at the U.S. Munitions List, which can be found at 22 C.F.R. § 121, also referred to as the International Traffic in Arms Regulations (ITAR). Technical data includes information required for the design, development, production, testing, or modification of defense articles. Defense services are also regulated, an example of which is the furnishing of assistance to foreign persons in the design, development, testing, or use of defense articles, whether this takes place in the U.S. or elsewhere. In terms of goods, technical data, and services controlled by BIS, they can be found at 15 C.F.R. 730, et seq. The Commerce Control List itself is located at 15 C.F.R. 738.

Those deemed to be a U.S. person for these purposes are defined at 8 U.S.C. § 1324b(a)(3). A "protected individual" is defined as a U.S. citizen or national or an alien who is a permanent resident or has been lawfully admitted for temporary residence under § 1160 (agricultural worker), or §1255a (pre-1/1/82 status adjustment provision), or has been granted asylum under § 1158. If the foreign-born person with whom you are dealing does not fall within one of these definitions, and you are discussing controlled goods, you likely need a license before having those discussions and exchanging any information about product specifications or designs.

The Roth case surely serves as a reminder that current and strong internal controls must be established and maintained when dealing with military projects, but also in any other context where foreign nationals are involved, even if the exchange of information takes place in the U.S.

One area that has not received much attention when it comes to deemed exports is how the freight forwarder handling the export for the U.S. seller manages the documentation he receives. Many forwarders are multinational and so have intranets on which all documentation for a given shipment is posted and made available to all business partners (employees and agents, domestic and foreign). When it comes to controlled goods, how does the forwarder ensure that foreign nationals do not have improper access to any controlled product details? Even if the forwarder is not multinational, how does he make sure that paper documents do not fall into unauthorized hands? It is one thing to have a brief description on an invoice, but quite another to have detailed descriptions made available to foreign nationals. What do you show on your invoices? How does your forwarder handle your documents? How does your forwarder insure that any individual inspecting a shipment under the TSA cargo screening regulations is properly authorized? Can you be sure your forwarder is not engaging in deemed exports?

The cases most often prosecuted involve obvious bad guys, such as those who want to send the controlled goods they have purchased to an enemy nation, but route the shipment through a third country. A recent example is Jacques Monsieur. He was arrested in early September on charges that he conspired to illegally export F-5 fighter jet engines and parts from the U.S. to Iran. In this case, the parts were routed through an entity in Columbia before being sent to Iran. Another example involves Majid Kakavand, who is the subject of a 15-count indictment claiming he, too, sought to smuggle controlled defense items to Iran, but in this case via Malaysia.

What makes the Monsieur case noteworthy is that he used gmail and so the server for his email was in the U.S. Not surprisingly, Justice executed a search warrant on Google and obtained extensive incriminating evidence from various email exchanges stored on Google’s server. In the Kakavand case, the noteworthy event was the complete lack of regard displayed by the freight forwarders. They were instructed to ship goods to Evertop Services in Kuala Lumpur c/o K Line Logistics. Would a service provider such as K Line Logistics ever qualify as the address of an end user? Obviously not, but the forwarders apparently never asked any questions. How severely should they be fined?

As we watch the number of prosecutions rise, it is not surprising to hear government officials say that electronics illegally exported from the U.S. to Iran through Dubai and Malaysia are the same type found in roadside bombs in Iran and Afghanistan. View this

While much attention has been paid to the ramp-up by the FBI, we should expect that ICE, BIS, DOD’s Defense Criminal Investigative Service, and CBP are all actively involved in these investigations. Additionally, we have heard that task forces formed between Justice and investigating bodies in cities such as Los Angeles, New York, Seattle, San Francisco, Sacramento, Detroit, Boston, Washington, D.C., Miami, and Denver.

While we can expect Justice to focus strictly on willful violations of the law given the standard of proof that applies in criminal cases, the exporting community should expect the remaining cases will be vigorously enforced in the civil fine setting. Are you ready?

article for more details. See the following news release for information about U.S. versus Mayrow. Iran is certainly at the top of the list of governments trying to lay their hands on U.S. technology, but how about Syria, Sudan, Hezbollah, and Myanmar? The U.S. Attorney’s Office has now established a National Security Section, and as the FBI agents and U.S. Attorneys assigned to it become more familiar with how these schemes work, we should expect more prosecutions. There is one U.S. Attorney, Steven Pelak, who is the national coordinator. There are approximately 150 attorneys in the National Security Section divided into the Counterespionage, Office of Intelligence (FISA), and Counterterrorism sections. As a result of these efforts, we can expect greater coordination among the investigatory agencies and with the licensing agencies and the intelligence community. All of this will inevitably lead to increased contact with the exporting community.

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