U.S. Export Control and Sanctions Agencies Issue Two Important Enforcement Actions
The exporting community should be aware of two important enforcement actions issued this week by the U.S. Department of Commerce, Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC):
DHL Agrees to Pay $9.4 Million Fine to BIS/OFAC. On August 6, 2009, BIS and OFAC announced the largest-ever joint settlement agreement between the two agencies in which DHL agreed to pay a $9.4 million fine for allegedly aiding and abetting illegal exports to Iran, Sudan and Syria and failing to comply with BIS and OFAC recordkeeping requirements. Additionally, DHL agreed to retain an external auditor to review transactions involving Iran, Sudan and Syria from March 2007 to December 2009, which were apparently not part of the settlement, and undergo yearly audits in 2010 and 2011—suggesting the possibility of additional penalties. This case highlights the continuing coordination between BIS, OFAC and U.S. Customs and Border Protection (CBP) to investigate and prosecute alleged violations of U.S. export control and sanctions laws, including the recordkeeping provisions of those laws. Criminal Penalties Assessed for Illegal Exports to China.
On August 3, 2009, three individuals in two separate cases were sentenced to federal prison for attempting to export sensitive technology to the People’s Republic of China. These individuals were targeted by the Export and Anti-proliferation Global Law Enforcement (EAGLE) Task Force, which is a special unit created by the U.S. Attorney’s Office for the Central District of California, in conjunction with federal law enforcement agencies, to combat the illegal export of weapons and sensitive technology. This most recent example of rigorous enforcement of U.S. export control laws through criminal penalties illustrates the U.S. government’s continued prioritization of these violations—particularly when they involve exports to China.
SUMMARY OF ENFORCEMENT ACTIONS
A. DHL Agrees to Pay $9.4 Million Fine to BIS/OFAC
DHL agreed to pay a $9.4 million fine to BIS and OFAC today to settle alleged violations of the Export Administration Regulations (EAR) and the OFAC regulations in connection with “thousands” of shipments to Iran, Sudan and Syria.
BIS charged that, in 2004, DHL caused, aided and abetted violations of the EAR on eight occasions by transporting items subject to the EAR to Syria and failed to retain airway bills and other export control documents for the required five-year period with regard to 90 exports. OFAC charged that, between 2002 and 2007, DHL made more than 300 illegal shipments to Iran and Sudan and failed to maintain the required records for a significant number of shipments to Iran. BIS and OFAC strictly control exports to Iran, Sudan and Syria and require exporters and their agents, including freight forwarders, to maintain records for five years from the date of export.
The settlement is important to the exporting community for a number of reasons, including:
- Largest Joint BIS/OFAC Settlement. The $9.4 million fine is the largest-ever BIS/OFAC joint settlement agreement.
- Alleged Violations Primarily Involve Recordkeeping Requirements. Unlike most BIS and OFAC enforcement actions that focus on provisions of the EAR and OFAC regulations that restrict exports to controlled destinations, this case primarily involves alleged violations of BIS and OFAC recordkeeping requirements.
- Coordinated BIS/OFAC/CBP Investigation. The settlement agreement culminates a 5 1/2-year coordinated investigation between BIS, OFAC and CBP in which many of the violations resulted from CBP interception of shipments at the U.S. border.
- DHL Must Retain an External Auditor. As part of the settlement, DHL agreed to retain an external auditor to review transactions involving Iran, Sudan and Syria from 2007 to 2009, which suggests that the case may result in further enforcement action. Additionally, the independent auditor will conduct yearly reviews in 2010 and 2011 to assess DHL’s compliance with the EAR and OFAC regulations, including the recordkeeping requirements.
B. Criminal Penalties Assessed for Illegal Exports to China
On August 3, 2009, three individuals were sentenced to federal prison for attempting to export sensitive technology to the People’s Republic of China. The three defendants were charged under the International Emergency Economic Powers Act (IEEPA) and EAR for the procurement and illegal export of sensitive dual-use technology, i.e., items with potential military applications as well as non-military uses. William Chi-Wai Tsu, vice president of Cheerway Trading, was sentenced to 40 months in prison for exporting more than 400 high-tech integrated circuits to China without prior U.S. government approval. Prosecutors argued that Mr. Tsu advertised the military uses of the circuits in his Beijing-based company’s catalogs and that he sold the restricted technology to a customer affiliated with the state-owned China Aerospace Science & Technology Corporation. In an unrelated case, Tah Wei Chao was sentenced to 20 months in prison and his co-defendant, Zhi Yong Guo, was sentenced to five years’ imprisonment for their attempt to smuggle 10 advanced thermal imaging cameras to China.
This aggressive prosecution of individuals involved in the export of dual-use items to China highlights the continued focus of the U.S. government on identifying and penalizing export control violations. The use of the EAGLE Task Force—a federal entity entirely focused on enforcement in the state of California—further emphasizes that exports to China in particular have become a high priority for enforcement. EAGLE pulls from a number of government agencies that focus on export issues, including BIS, U.S. Immigration and Customs Enforcement, the Federal Bureau of Investigation, CBP, the Diplomatic Security Service and the Transportation Security Administration. With this specialized task force in place, drawing from the resources and experience of the other federal agencies, exports to China will undoubtedly continue to be actively monitored by the United States.
Both of these cases reflect a sustained emphasis within the U.S. government with respect to U.S. export control and sanctions enforcement. This heightened activity is the result of a number of factors, including: (i) a greater visibility and importance attributed to these issues in recent years within key sectors of government; (ii) the devotion of more resources and more interagency coordination; (iii) significantly enhanced penalty authority; and (iv) more leads from the private sector partners with respect to suspect transactions.
The DHL settlement sends an important signal to the larger exporting community at all levels of the supply chain regarding the importance of having in place effective internal controls on export control and sanctions compliance, including recordkeeping and effective management of third-party relationships in export transactions. Moreover, while the use of an external auditor or monitor has been common in other areas of international trade enforcement (notably, the Foreign Corrupt Practices Act and defense trade controls), it has not previously been standard practice with either OFAC or BIS. It remains to be seen whether the DHL case signals the beginning of a similar trend for these agencies.
Moreover, the most recent convictions involving illegal exports to China reflect the U.S. government’s resolve to actively monitor and aggressively prosecute export control violations, with a particular focus on items destined for China. As underscored by the case of William Chi-Wai Tsu, who was acting as vice president of Cheerway Trading when he illegally exported sensitive technology, this action illustrates that principals will be held individually and criminally responsible for violations committed through corporate entities.
The exporting community should view these two cases as evidence of increased collaboration between U.S. government agencies to investigate and prosecute alleged violations of the U.S. export control and sanctions laws, including the applicable recordkeeping requirements.
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