Keynote Speech of David W. Mills

Assistant Secretary for Export Enforcement

West Coast Forum, February 24, 2015

It is a pleasure to be back at the 10th Annual West Coast Forum for my 5th visit to speak with you on export enforcement priorities and accomplishments. Previously, I have focused on strategies to help companies establish a pro-active compliance posture to navigate the Export Control Reform transition process. This year, allow me to paint a more strategic approach of export enforcement that weaves together public-private partnerships to create a network of enhanced compliance. My message to you is simple: strong enforcement is good for legitimate U.S. business by ensuring that all companies that invest in an export compliance program are placed on a level playing field against their competitors.

Transition to Post-Export Control Reform Normalcy

The U.S. Department of Commerce plays an integral role at the intersection of economic growth and national security. Within the department, BIS’s goal is to facilitate secure trade. My organization in particular is responsible for detecting, investigating, preventing, and deterring the unauthorized export and reexport of U.S.-origin items to parties involved with: (1) weapons of mass destruction programs; (2) terrorism; (3) unauthorized military modernization efforts; or (4) human rights abuses. We do this through a robust criminal and administrative enforcement program. Export Enforcement also discourages, and in some circumstances, prohibits, U.S. companies from furthering or supporting any unsanctioned foreign boycott (specifically, the Arab League boycott of Israel).

With the exception of a small handful of items – namely night vision devices, chemicals and biologicals, we are moving from a period of Export Control Reform (ECR) transition to a new era of export controls. What this means is that companies can return to focusing on their core mission of understanding export markets instead of Washington policymaking. Make no mistake about it – ECR has fundamentally altered export control administration by focusing controls on the most sensitive items through the transition of less sensitive military and satellite-related items from the U.S. Munitions List (USML) to the Commerce Control List (CCL). But as we turn to the new "normalcy" that is ECR implementation, it is time for companies to ensure that export compliance is a routine part of your business practice – in other words, that it is ingrained in your exporting culture, just as finding new products and markets is.

For the organization that I lead, we are making this transition as well. All of our analysts and agents have been educated on the USML to CCL changes and we are focusing 100 percent of our energies on illicit procurement chains. This also includes vigorously enforcing new regulations aimed at unauthorized provision of items for military modernization efforts by Russia and Venezuela, as well broader military end use and end user controls on integrated circuits for any D:1 country and certain Russian oil and gas projects.

BIS-Industry Cooperation

Let me start with our most important touchstone, and that is you, the exporting community. The partnerships we build with you are by far the most important. You are our eyes and ears; you are the ones receiving the suspicious inquiries; you are the ones most damaged reputationally when your items get diverted; you are the ones that are spending hard-earned profits on compliance programs while some of your competitors may not be. We ask you to be ever-vigilant, as all unsolicited inquiries or unauthorized intrusions, such as cyberthefts, should trip your compliance system into motion, and we encourage you to contact one of our field offices for advice.

And we have a responsibility to you: to provide you with information about foreign parties seeking to illicitly procure your items under our Guardian Lead program; to inform you about parties of concern identified by export control agencies; to give you great weight mitigation if you have an export management and compliance system in place that results in voluntary self-disclosures; and to take enforcement action against parties that divert or steal your items without your knowledge.

  • Over the past year, we have conducted more than 110 Guardian outreaches alerting companies of foreign parties seeking to divert your items.
  • In November, we unveiled a new Consolidated Screening List that allows companies to search proscribed parties over the internet, including from your smart tablet or phone, and in an "open" format that permits you to seamlessly integrate these lists into your own information technology infrastructure to help identify parties of concern at no cost to you.

This new screening list, of course, incorporates BIS’s Entity List and our new and improved Unverified List. Both lists are geared toward changing the behavior of overseas parties to either put in place internal compliance programs to comply with the EAR, or risk being denied access to U.S.-origin items. We have been aggressively using these administrative enforcement tools to help U.S. and multinational companies to screen customers and secure their supply chains. In the past year, Export Enforcement has played a critical role in the addition more than 150 parties to the Entity List and has added 33 parties to the UVL, one of which has been subsequently removed. Moreover, our international partners are also using these lists to screen export transactions, further strengthening the lists’ utility.

  • We continue to focus our enforcement outreach efforts on the importance and requirements of effective internal compliance programs so that you can hopefully avoid making mistakes, or at least proactively identify them to avoid costly enforcement penalties. The revised publication Don’t Let This Happen to You – available on our website - provides important examples of how cutting compliance corners and flouting our export control rules will result in painful consequences for culpable individuals and companies.
  • We investigate your notifications of illicit actors and utilize all of our tools to protect your company’s reputation. For example, last August we sanctioned a Chinese party and his companies involved with stealing controlled military technology from a U.S. aerospace firm. We are currently working with the Department of Justice, FBI, and State’s Directorate for Defense Trade Controls to facilitate criminal and administrative enforcement actions against this cyber hack, thus demonstrating how the U.S. Government has taken coordinated action to redress the actions of a cyber-crime involving controlled technology.
  • With regard to Voluntary Self-Disclosures , the number of overall disclosures has increased 50% from FY2013 to FY 2014, although the number of Series 600 VSDs still remains relatively low at 64. Nonetheless, the outcome of those VSDs has remained fair and consistent, and the Enforcement panel coming on next will discuss that in detail.

When you put these tools together, we have woven an effective web of risk mitigation measures together to differentiate friend from foe and export compliance from violation.

I am very proud of our administrative enforcement capabilities. These unique regulatory tools give us great leverage against those who violate the EAR and harm our national security and foreign policy interests. But as I’ve discussed before with you, we have a personal interest in providing you and your company with more clarity in terms of what you may expect from a Voluntary Self-Disclosure. We are in the process of developing new BIS Administrative Enforcement Guidelines modeled on those promulgated by the Office of Foreign Assets Control (OFAC). OFAC has a robust and comprehensive administrative enforcement program for cases involving more serious violations. The OFAC Guidelines provide greater transparency and predictability for the exporting community, which is an important objective of Export Control Reform.

So you should expect to see a continuing robust and comprehensive administrative enforcement program at BIS involving cases where aggravating factors are present, particularly cases involving knowledge, willful conduct and/or harm to U.S. national security or foreign policy interests, whether or not those cases arise in the context of criminal prosecutions.

Leveraging Resources to Enforce Higher Fences

From a government-to-government perspective, Export Enforcement continues to thread together the capabilities of engineers, intelligence analysts, and law enforcement Special Agents across agencies, to monitor, prevent, and deter unauthorized exports. A key effort in this regard is our Information Triage Unit (ITU), which provides information to licensing officers on the bona fides of foreign parties to the most sensitive license applications. This is important to the exporting community because it actually facilitates interagency review of your license applications. No longer does the interagency review process entail time debating the facts about the parties; it now focuses its full attention on the policy aspects of approving the export. This quickens deliberations and creates more predictability.

Last year, the ITU supported approximately 1,000 licenses. And as our sanctions on Russia have broadened, to include most recently controls on occupied Crimea, the ITU has played an increasingly important role in ensuring that U.S.-origin items are not finding their way into supply chains supporting Russia military activities. On this point, I urge you to aggressively monitor inquiries that could have an ultimate destination of Crimea or a military end use or military end user in Russia. If you sense a suspicious request, for example proposals to use circuitous shipping routes through intermediaries in Europe and the Middle East, alert our Field Offices.

We continue to closely monitor exports for military utility reasons not only to Russia, but to a number of countries with which we have concerns about destabilizing accumulations of weapons. Export Enforcement played a key role in updating the military end use and user controls on integrated circuits for D:1 countries this past December; and we continue to prioritize enforcing the military end use/user controls of part 744, which have been expanded in the past year to include not only China but Russia and Venezuela as well.

We also work closely with our partners across the law enforcement community to ensure that we have coordinated outreach and investigative efforts with U.S. companies. The Export Enforcement Coordination Center (E2C2) plays a key role in this regard, ensuring that export enforcement-related activities are deconflicted and the lead investigative agency has access to all relevant information from other agencies. Over the past 18 months, the E2C2 has deconflicted almost 3,500 activities, finding that in more than 50 percent of the time another agency had information to support the investigation. This has encouraged information sharing and broadened the array of criminal and administrative tools that can be employed to enforce our export control regulations.

In a similar fashion as E2C2 coordination, we are expanding our footprint across the United States with the assistance of our law enforcement partners. Currently, 35 percent of all BIS investigations are jointly conducted. Recognizing the value of working shoulder-to-shoulder with Special Agents from other agencies, we have begun to co-locate with organizations such as the FBI and Defense Criminal Investigative Service in high profile locations across the country to bring our unique enforcement authorities to the table on a daily basis. We have placed agents in Atlanta, Cincinnati, Minneapolis, Phoenix, Portland, and San Antonio. When added to existing field and resident offices located in Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York, San Jose, and Washington, our export enforcement expertise is being leveraged across 15 cities responsible for a majority of U.S. high technology exports. This time next year I expect to be paying a courtesy call to the FBI in San Diego to thank them for hosting one of our agents there.

Similar to our domestic outreach program, our end-use check program is meant to build confidence between U.S. suppliers and their foreign customers that the Export Administration Regulations are being complied with. However, sometimes, it provides the first vibration of illicit activity that triggers an enforcement action.

We work closely with our colleagues in the Foreign Commercial Service (FCS) to conduct end-use checks overseas. Last year, Export Enforcement conducted a record 1,044 checks in 51 countries. The majority of these checks were conducted in countries proximate to where our seven Export Control Officers reside: China, Russia, India, Hong Kong, Singapore, and the United Arab Emirates. ECOs are Special Agents temporarily assigned as Foreign Commercial Service Officers, and we rely heavily on the support of Commerce’s International Trade Administration to assist our end-use check effort, which can include FCS employees conducting, for example, pre-license checks in countries where we do not have ECO coverage.

In addition, almost one-third of end-use checks were conducted in countries that are eligible for License Exception Strategic Trade Authorization (STA). For example, many of these checks in Europe are conducted by our Sentinel Program, which consists of domestically-based Special Agent-led teams that conduct routine end-use monitoring where our ECO program does not have geographic coverage. With the transfer of military and satellite items to BIS’s jurisdiction and our increasing focus on unauthorized military modernization, our end-use check program is critical in safeguarding exports from onward diversion, including where authorizations such as STA are eligible.

This is an opportune time for a history lesson. Many of you will recall the Cox Commission report which resulted in the transfer of commercial satellites from the CCL to the USML in 1999 because of unauthorized technical exchanges between U.S. engineers and China involving the Long March missile. Fifteen years later, with commercial satellites having returned to the CCL, I want to underscore the vigor with which Export Enforcement will enforce controls on these items. It is important for you to screen your customers and understand that like 600 series items, we have a zero de minimis content rule for 515 series items for countries subject to arms embargoes. That means if the 515 item is exported to Germany for integration into a major system that is then reexported to France for final assembly into a satellite, that satellite must not be reexported to any country subject to an arms embargo, including for launch or operational control.

International Partnerships

Finally, our international partners play a critical role in enhancing compliance. Certainly the harmonization of control lists across supplier countries creates a network of complementary export controls helping ensure that the most sensitive items are subject to government review and authorization. Part of this effort involves ensuring that exports denied by the United States are not backfilled by foreign competitors. In addition, Export Enforcement continues to deepen its cooperation with STA countries to address common diversion concerns.

Moreover, transshipment countries play a critical role in facilitating international trade, and BIS has been working closely with three of the most important – Hong Kong, Singapore, and the UAE – to increase the effectiveness of their export control systems. Last year, we developed best practices for exporters, which included guidance for complying with these countries’ export control rules. For example, Hong Kong requires an import and export license for all multilaterally controlled items. Singapore requires an export permit for the transshipment and transit of certain items through its free trade zone, and the UAE recently adopted controls on dual-use nuclear items requiring an import and export permit. More recently, we changed our regulations to complement Hong Kong’s import license requirement by imposing an export license on certain National Security-controlled items. This will help ensure that U.S.-origin items are not diverted through Hong Kong.

By weaving together domestic and international export control rules, we can help ensure that U.S. companies are not placed at an economic disadvantage vis-a-vis their international competitors caused by discrepancies in overseas export control implementation, administration and enforcement .

Export Enforcement Case Examples

To demonstrate how a strong enforcement posture is good for U.S. business interests, let me provide some recent case examples:

Last October, Wind River Systems of Alameda, CA, a wholly-owned subsidiary of Intel Corporation, agreed to pay a $750,000 civil penalty to settle charges that it sold encryption software products to foreign government customers and persons on BIS’s Entity List without the required BIS licenses.

This case caused some industry consternation and concern that BIS has changed policy on how it deals with voluntary self-disclosures of encryption exports. In reality this penalty is not at all a departure from BIS policy. In the past, cases involving encryption exports that resulted in issuance of a warning letters had several characteristics in common that the Wind River case did not. The shared characteristics include the following:

1) Generally, most of the exports would not have required a license and were all ENC eligible;

2) In instances where a license was required, BIS would likely have issued the licenses;

3) The exporters were often newer companies without a robust compliance plan and were unaware of their obligations; and

4) There were no, or very few, exports to embargoed destinations or prohibited end-users.

In the case of Wind River, however, the exports involved were not ENC eligible, would have required a license, and BIS would likely not have issued the license or would have required additional information before making a decision. Additionally, Wind River had a compliance program in place, had utilized experienced outside counsel, and was owned by Intel, a company with vast knowledge of export control laws. Wind River employed a compliance manager who knew the product classifications but was not implementing the compliance program as called for in their own policy.

When a new compliance manager applied for a license based on national security concerns, it was denied, and that triggered their audit that led to the voluntary self-disclosure. During the investigation, BIS charged exports to customers that were very clearly government, and branches of government that should have triggered further review by compliance personnel. The total value of exports charged was in the millions. With a maximum penalty of twice the value of the exports, the starting penalty value was extremely high.

Great weight mitigation was given to Wind River for their exceptional cooperation during the investigation, and because the new export compliance manager identified the problem and initiated the internal audit. The overall lesson for industry is that Wind River avoided criminal penalties but a company’s compliance program must go beyond a written plan. It must be effectively implemented.

Another recent significant investigation by our Office of Export Enforcement involved the transshipment of electronic equipment and information technology services to Iran via the UAE, and resulted in criminal sanctions being levied against several defendants. This is the most common case scenario – illegal exports to Iran using transshipment countries.

From 2009-2011, two employees conspired to defraud Hitachi Data Systems by making materially false statements to purchase computer equipment that they knew was being diverted to unauthorized front companies in the UAE involved with reexporting the items to Iran. Randy Dale Barber was sentenced to five years of probation for conspiracy to commit mail fraud, a forfeiture of $413,106 and (joint) restitution in the amount of $37,921 to Hitachi Data Systems. Co-conspirator Michael Dragoni was sentenced to five years of probation, with eight months of home detention. Two of Dragoni’s companies involved in the diversion were each sentenced to five years of probation and a joint forfeiture of $498,706, as well as joint restitution to Hitachi Data Systems.

In another case arising from the same investigation, John Alexander Talley was sentenced to 30 months in prison in April 2014 for conspiracy to violate IEEPA and Iranian Transaction and Sanctions Regulations. Talley’s company, Tallyho Peripherals, Inc., was also sentenced to one year of probation. According to court documents, from 2009 to September 2012, Talley and his company conspired with others to unlawfully export and provide support for sophisticated enterprise level computer equipment from the United States to Iran, and to provide computer information technology support services for the equipment. In an effort to conceal their activities, the conspirators in the United States caused shipments of the computers and related equipment, as well as the payments for same, to transit to and from the United States and Iran through the United Arab Emirates. Similarly, payments for Talley’s support services were wired through the UAE. And finally, Ray Hajian and three of his companies pled guilty to charges involving the same conspiracy and were all sentenced criminally in July 2012.

Another noteworthy case involved the illegal export of weapons-grade carbon fiber to the People’s Republic of China. Lisong Ma (aka Ma Li), a Chinese citizen, attempted to export up to five tons of carbon fiber without the required BIS licenses. The carbon fiber has applications in the defense and aerospace industries, and was controlled for nuclear nonproliferation reasons. Ma was arrested in April 2013 in Los Angeles after attempting to acquire the specialized materials. In May 2014, Ma was sentenced to 46 months in prison. In October 2014, a Final Order was issued denying Ma’s export privileges for a period of ten years.

These cases demonstrate the specialized resources and knowledge of the EAR that BIS Export Enforcement brings to bear to stop the diversion of U.S.-origin items to countries of concern, hold persons and companies liable for actions contrary to U.S. national security, and at the same time, protect the name of legitimate businesses whose products are being illicitly diverted.

Antiboycott Activities

Let me now turn to the important responsibilities and accomplishments of the Office of Antiboycott Compliance or OAC. OAC carries out its mandate in three ways:

  1. it counsels U.S. businesses on the substance and application of the EAR to particular transactions;
  2. it monitors and analyzes trends with respect to the source and type of boycott-related requests received by U.S. businesses; and
  3. it maintains a vigorous enforcement program bringing enforcement actions and imposing penalties, where necessary.

As some recent case examples will demonstrate, OAC enforces the antiboycott provisions of the EAR in an effort to assure that no export transaction is encumbered by a restrictive trade practice to the detriment of U.S. business interests.

In its case against Electro-Motive Diesel, Inc. (EMD), OAC alleged that EMD, an exporter, on thirty-one occasions, failed to report receipt of a goods directive in Invitations to Bid from Bangladesh, which stated that goods and related services from Israel were not eligible.

Similarly, in its case against BWI Corporation (BWI), OAC alleged that BWI, a freight forwarder, furnished prohibited information in a certificate which stated that the vessel was permitted to enter Arabian ports. OAC further alleged that BWI, on six occasions, failed to report its receipt of requests from Oman and the UAE to furnish a vessel eligibility certificate signed by other than the owner, master or charterer of the vessel. Because BWI voluntarily disclosed these transactions to BIS, the company benefited from great weight mitigation, in accordance with the Antiboycott Penalty Guidelines.

These cases are representative of the kinds of antiboycott issues any company might confront in doing business in a boycotting country and, even more importantly, of the benefit of voluntarily disclosing, fully and promptly, should a company discover a violation.

Of course, if anyone has any boycott issues or concerns in a transaction, OAC is available all day, every day through their Advice Line to counsel and guide you.

Conclusion

As we finalize the last categories of the USML to CCL transition under Export Control Reform and reflect on recent expansions of controls on unauthorized military end uses and end users, it presents an opportunity to reexamine the fundamentals of an effective export compliance program. Effective compliance requires a network of private sector, government, and international partners working together to facilitate secure trade.

Knowing your customer continues to be at the core of this effort for responsible U.S. companies. Export Enforcement is committed to working with industry to help identify threats, facilitate licensing decisions and party screening, and mitigate penalties where companies have taken the appropriate actions to manage export compliance.

As Under Secretary Hirschhorn likes to say, a vigorous enforcement posture on the part of BIS and the larger law enforcement community is only problematic for the individual or company that is purposely trying to flout the law. For those persons, our criminal and administrative enforcement penalties are meant to bite. However, for those that seek to comply with our export control rules, enforcement is meant to level the playing field, domestically and internationally. I wish you another prosperous year of secure trade!

   
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