Exporters must read between the lines to avoid running afoul of export-control regulations


The U.S. government stresses that all parties involved in an export transaction are responsible for ensuring export compliance. Unfortunately, however, government agencies don’t say much about managing third-party relationships and risks. Instead they have provided only limited guidance narrowly tailored to specific scenarios. There is no comprehensive set of concrete rules that would allow exporters to minimize their liability exposure.

Until relatively recently, enforcement actions against third parties have not been as pronounced or publicized as those against manufacturers or exporters. However, enforcement officials have consistently stressed that all parties in the export chain will be viewed as potential culprits in an export violation. But enforcement officials have also intimated that if the exporter takes all the proper steps and no red flags are present, the exporter may be bypassed in the enforcement proceedings.

Of course, the $250,000 question is: What are the proper steps to ensure that you are acting in a fully compliant manner? While by no means providing a clear answer, recent enforcement cases shed some light on this topic and add to an important, growing body of data that suggests there are concrete steps that exporters and third parties can take to minimize their liability exposure.

In both Lawrence Scibetta (E1008) and Univision Technology Inc. (E1016), the Bureau of Industry and Security specifically noted that the suppliers advised the exporters that the items to be exported required licenses from BIS, which administers licenses governed by the Commerce Department’s Export Administration Regulations. These regulations apply to goods, services and technology with both commercial and military applications.

(The “E” number refers to the case number on the BIS Freedom of Information Act page, located at http://efoia.bis.doc.gov/exportcontrolviolations/tocexportviolations.htm.)

When the exporters ignored this information and exported the items without the required license, they were penalized. Of particular note, to date, it appears that BIS has only pursued the exporters and not the suppliers. Thus, suppliers who put their customers on notice and do not ignore red flags have a good chance of not being held liable for the subsequent activities or actions of their customers who violate the regulations. A related question is how much notice is enough in order to shift liability. Is it sufficient to write a general letter to your U.S. and foreign customers/distributors saying that “some” of your products are controlled for export by the regulations or must you specifically identify those items that are controlled? Specific identification can be time-consuming and errors and failures to update the information could come back to haunt you. That said, a general letter might not be enough to convince government agencies that your notice was sufficient.

Another case, Proclad International Pipelines Ltd. (E2021) involved a much more elaborate scheme resulting in a $100,000 penalty and a seven-year denial of export privileges. In Proclad, the foreign customer faced 10 charges ranging from aiding and abetting a violation to conspiracy to misrepresentation and concealment of facts to BIS’s Office of Export Enforcement.

Proclad was alleged to have provided false and misleading shipping documentation and altered markings for use on crates and then provided them to the U.S. manufacturers and freight forwarders intending to disguise the true ultimate destination of the items. While the facts in the Proclad case documents appear egregious, it is still important to note that it appears that the U.S. exporter, manufacturer and freight forwarders were not targeted by OEE — only the foreign customer was targeted.

Good and bad forwarders

Historically, enforcement officials have often considered freight forwarders to be weak links in the export chain — viewing some as largely unregulated, poorly trained and just looking to make a buck. But officials have noted that forwarders, as the last link in the export chain, have a unique opportunity to ensure export compliance. There is no question that a good, compliance-oriented forwarder can be an exporter’s best friend, while an untrained, negligent, or even unscrupulous forwarder can be an exporter’s worst nightmare. One only need consult the cases below.

In many cases, such as OSPECA Logistics Management (E847) and Honeywell International Inc. (E798), there is true shared compliance. In others, however, the fault or liability was assessed on just the freight forwarder (see DSV Samson Transport Inc. (E763) or just the exporter (see Maria Elena Ibanez — E739).

In the Honeywell-OSPECA cases, Honeywell made a voluntary self-disclosure that resulted in a $36,000 penalty for 13 exports of controlled chemicals to Mexico without licenses.

OSPECA, apparently turned in by Honeywell’s self-disclosure, was penalized for the same underlying exports but also faced 12 charges of misrepresentation of fact — for filing or causing to be filed records asserting that the exports did not require export licenses. OSPECA was penalized $60,000 and was also required to perform and submit the results of an internal audit tracking BIS’s Export Management System module.
Also instructive are the DSV Samson and Ibanez cases. In the DSV Samson case, the forwarder was charged both civilly and criminally. On the civil side, BIS fined DSV Samson $399,000 for 59 total violations involving unlicensed exports to prohibited entities and false statements on shipper export declarations.

On the criminal side, DSV Samson was penalized $250,800 and subjected to five years probation for 30 shipments to prohibited entities after being warned on multiple occasions by BIS special agents. According to the Department of Justice press release, DSV Samson forwarded these shipments with the knowledge that its customers had not obtained the required export licenses.

In the Ibanez case, she and her company, International High Tech Marketing, were also charged both civilly and criminally. Ibanez allegedly instructed employees to understate values on commercial invoices, submit falsified shippers export declarations and supply their forwarders with undervalued commercial invoices that caused the forwarders to prepare and submit inaccurate shippers export declarations and air waybills. In March 2000, her company was subjected to a $250,000 criminal fine and ultimately went out of business. Ibanez paid a $115,000 civil penalty and was subjected to a five-year denial of export privileges for 265 alleged violations. On the criminal side, Ibanez paid a $5,000 fine and faced 18 months of probation.

Other dangerous behaviors

A recent criminal case involving Aviation Services International BV., (E2010 and E2077) provides further insight and guidance from the regulators. According to the criminal complaint, ASI and its affiliates purchased various aircraft components from U.S. companies and then re-exported more than 290 U.S.-origin aircraft components to customers in Iran without U.S. authorization. It was also alleged that Aviation Services and its executives made numerous false statements to U.S. exporters and freight forwarder regarding end-users, end uses and destinations. The exporters and forwarders then unknowingly made fraudulent statements on SEDs submitted to the U.S. government.

As a result, Aviation Services International, its affiliates, executives and owners are under civil and criminal investigation in the U.S. and the Netherlands, where ASI is based. The U.S. has issued and renewed a temporary denial of export privileges, and an arrest warrant has been issued for the owners, Robert Kraaipoel and his son Niels Kraaipoel, who now face possible extradition to the U.S., potential prison sentences and significant monetary fines.

Cases such as these often involve elaborate evasion efforts such as the provision of false end-user statements to U.S. vendors to conceal the intended actual end-users of the items, indications that the items were for sale domestically, repackaging the items in third countries, agreements to assume any licensing obligations, seeking of alternative vendors when advised of their export obligations, and advising parties to the export that the shipments are do not require a license.

What does all this mean?

What can we take away from all this? What lessons, best practices and guidance can we glean from the enforcement record? Unfortunately, again, not much in terms of actionable line drawing and liability protection. Exporters must read between the lines, piece together threads of enforcement cases and disparate regulations and then adopt common sense practices to avoid running afoul of the export control regulations. The basic lesson is that affirmative or proactive compliance as opposed to reactive compliance is really the way to go. And when the rules are not clear, a conservative approach is usually prudent.

From the cases discussed above, it is clear that the U.S. government is increasingly “rewarding,” or at least not penalizing, affirmative or proactive compliance by declining to pursue cases where exporters have taken appropriate steps, such as properly notifying third parties when they are handling controlled items, and not ignoring red flags not ignored.

The fact that the U.S. government will prosecute foreign and domestic parties for misrepresentation and false statements made by third parties even if they are only made to the exporter and not directly to the government has generated surprisingly little discussion in the exporting community. For compliant companies, this should provide some relief – to others, this should send shivers up their spines.

Our next and final article will focus on practical strategies and steps that both exporters and third parties can take to maximize their understanding with each other and to minimize their liability exposure. 

Eric McClafferty is a partner with the law firm Kelley Drye Warren LLP. He can be reached at 202-342-8841 or emcclafferty@kelleydrye.com. Scott E. Sullivan is vice president, group counsel-global trade and strategic transactions, with Flowserve Corp. He can be reached at 469-420-3239 or ssullivan@flowserve.com.

Editor’s Note: This is the second of three articles regarding the need for exporters to pay close attention to their partners in order to ensure full compliance with U.S. export control laws and regulations. The first part, headlined “Self defense: How exporters should manage relationships with third parties to minimize liability risks,” was published in the Sept. 22 issue of Shipping Digest. It looked at the various third parties in an export transaction and the roles they play.