Speech of David W. Mills
Assistant Secretary of Commerce
for Export Enforcement
BIS Annual Update Conference, November 3, 2015
It is a great pleasure to be speaking for the sixth time at BIS’s annual Update on Export Controls and Policy Conference. Over these past six years, I have been part of an incredible era of change at BIS, especially as a result of the President’s Export Control Reform or “ECR” initiative and shifting geopolitical events across the globe. We at Export Enforcement have embraced these changes and challenges, and have worked proactively with you, our private sector partners, as well as our licensing and interagency colleagues, to implement the President’s vision through our “Securing America’s Trade” initiative.
What this means is that we are working hard every day to help U.S. companies differentiate between legitimate and illegitimate business inquiries; to ensure that companies with strong internal compliance programs are not placed at an economic disadvantage by those seeking to flout U.S. export rules; and to differentiate between inadvertent compliance failures and less serious violations reported to BIS under our voluntary self-disclosure (VSD) program from the more egregious, more serious violations which typically cause harm to U.S. national security and may involve willful acts.
Export Enforcement Philosophy in Action
From my days at the Office of Foreign Assets Control (OFAC) at the U.S. Treasury Department to my current responsibilities leading Export Enforcement at BIS, assisting industry to comply with export control rules has been a guiding principle of mine. Industry is the first line of defense in preventing unauthorized exports. And having an internal compliance program to identify suspicious inquiries and developing a two-way street of communication between Export Enforcement and your sales force complements the actions that our Special Agents and analysts take to secure America’s trade.
The U.S. Department of Commerce plays an integral role at the intersection of economic growth and national security. My organization is responsible for detecting, investigating, preventing, and deterring the unauthorized export and reexport of U.S.-origin items contrary to the Export Administration Regulations (EAR), particularly 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 enforcement program that leads to both criminal and administrative penalties. Export Enforcement also discourages, and in some circumstances, prohibits, U.S. companies from furthering or supporting the Arab League boycott of Israel.
Congress has most succinctly described Commerce’s export control responsibilities in the FY16 Senate committee report on our appropriations: “BIS is the principal agency involved in the development, implementation, and enforcement of export controls for commercial technologies and for many military technologies as a result of the President’s export control reform initiative. Export Enforcement…detects, prevents, investigates, and assists in the sanctioning of illegal exports of such items.” Our successes over the past year, from industry outreach to licensing reviews to bona fides checks to criminal and administrative penalties, all demonstrate the value that an expert team of agents and analysts brings to countering proliferation and terrorism.
Transition to Post-Export Control Reform Normalcy
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). And there is still more work to do, including harmonizing terms between the ITAR and EAR and completing the last few categories of list review.
As we turn to the new “normalcy” that is ECR implementation, it is time for companies to recommit to making export compliance a routine part of their business practice – in other words, that it is as ingrained in your exporting culture as finding new products and markets is.
From a geopolitical perspective, we have come full circle from the Cold War era as Russia export cases make up a growing percentage of our overall investigations. China also continues to be a significant subject of export investigations. And while we are working to implement an agreement with Iran on the civilian nuclear side, primary U.S. export controls remain in place; and we will continue to fully enforce them. Finally, as we watch the horrors that ISIL is inflicting in Iraq and Syria, I am proud to say that Export Enforcement is working to counter these efforts by targeting ISIL’s procurement of U.S.-origin items, like spare parts for oil refining, which fund their reign of terror across the Levant.
Combatting these destabilizing activities requires a dedicated and expert enforcement cadre linked to licensing officers and engineers, and armed with a multitude of administrative and criminal tools to mitigate these threats. That’s where our Special Agents and enforcement analysts excel. But first and foremost, we need your support.
BIS-Industry Cooperation
The partnerships we build with the exporting community are by far the most important. You are our eyes and ears; you are the ones receiving the suspicious inquiries; you are the ones whose reputation is most damaged when your items get diverted; you are the ones 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 support the licensing process by making sure relevant and timely intelligence and enforcement information is factored into a decision.
• To provide you with information about foreign parties seeking to illicitly procure your items. In fact, last year, our Guardian Lead program resulted in more than 150 outreaches to industry involving suspicious inquiries, an all-time high for this program. Additionally, we updated transshipment guidance involving Russian firms seeking to circumvent our enhanced controls on Russia.
• To inform you about parties of concern through our enhanced Consolidated Screening List, which now allows exporters to conduct web-based searches and seamlessly integrate the list into their IT infrastructure.
• To give you appropriate mitigation for violations if you have an export management and compliance system in place – especially if brought to our attention through a VSD.
• And to take enforcement action against parties that divert or steal your items without your knowledge.
On this last issue, if you take one thing away from today’s discussion, it is this: 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. To further underscore the point, check out our updated publication Don’t Let This Happen to You – available on our website – which provides important examples of how cutting compliance corners and flouting our export control rules will result in painful consequences for culpable individuals and companies.
BIS-Interagency Cooperation
For our part, Export Enforcement is placing a special emphasis on diversionary tactics and end-use- and end-user-based controls. This includes: monitoring efforts by Russia, China, and Venezuela to circumvent military end-use controls, including through allied and partner countries; identifying proliferators supporting weapons of mass destruction programs; and impeding terrorist activities and human rights abusers around the globe. We are doing this through increased collaboration with our interagency and international partners.
During the licensing process, we are evaluating the legitimacy of foreign parties to licenses through the Office of Enforcement Analysis’ (OEA) management of the Information Triage Unit (ITU), which was established as part of the ECR initiative. For example, last fiscal year, every license under dispute resolution procedures received an ITU scrub, which created efficiencies for policymakers in deciding whether or not to approve a controlled transaction. In Fiscal Year 2015, the ITU can be credited with producing reports that supported 30 percent of all BIS denials. The ITU also plays a critical role in supporting Entity List nominations. It’s not an understatement to say that when the ITU gets involved with the licensing process, the likelihood of diversion of U.S.-origin item significantly decreases.
Working cooperatively with our international partners, our end-use check program continues to ferret out sophisticated networks of proliferators. Our end-use check program is anchored by BIS Export Control Officers or ECOs stationed in six locations around the globe -- China, Hong Kong, India, Russia, Singapore, and the United Arab Emirates – which have geographical reach to an additional 38 countries. And while our Russia ECO will be moving to Frankfurt, Germany next month, he will continue to focus on securing U.S. exports to Russia. When combined with our Sentinel Teams of domestic field agents deployed abroad and U.S. Commercial Service colleagues that also conduct end-use checks, we achieve global end-use monitoring of U.S.-origin items. Last year, Export Enforcement conducted 1,031 end-use checks in 55 countries and our ECOs conducted 173 outreaches to help train foreign governments and companies on compliance with the EAR.
Of course, cooperation with our law enforcement partners remains paramount to our success. Whenever the Office of Export Enforcement (OEE) initiates an investigation, we work with our partners at the Export Enforcement Coordination Center (E2C2) to bring relevant enforcement agencies together for a whole-of-government approach. We want to ensure that U.S. Government resources are managed wisely and leveraged, which has resulted in more collaboration among law enforcement agencies and broader focus on proliferation networks.
Penalties as a Deterrent
We wield a powerful deterrent to proliferators by using our criminal and unique administrative enforcement tools, including administrative fines and denial of export privileges. Office of Export Enforcement (OEE) Special Agents harness their export control expertise and close working relationship with BIS licensing officers to bring to justice the most sophisticated criminal networks. Currently, we have Special Agents stationed in a record 16 cities across the United States with a 17th coming in early next year when we expand to San Diego, CA.
The following are examples of recent compelling cases that demonstrate our wide-ranging powers and contributions in protecting U.S. national security and foreign policy interests.
As you may have heard about in today’s “Anatomy of an Investigation” session, one of our recent landmark cases involves Schlumberger Oilfield Holdings, Ltd.. The criminal penalty assessed in this case represents the largest to date in a sanctions investigation conducted under the International Emergency Economic Powers Act (IEEPA), and OEE was the sole investigative agency. Starting about 2004 and continuing through June 2010, a U.S.-based subsidiary of Schlumberger Ltd. provided oilfield services to customers in Iran and Sudan. Although Schlumberger had policies and procedures designed to ensure that it and its U.S. subsidiary did not violate U.S. sanctions, both companies failed to train their employees adequately to ensure that all U.S. persons, including non-U.S. citizens who resided in the United States, complied with Schlumberger’s sanctions policies and compliance procedures.
As a result, U.S. sanctions against Iran and Sudan were violated through the acts of these employees residing in the United States. Schlumberger entered a plea of guilty in May 2015 and agreed to pay over $232.7 million for conspiring to violate IEEPA by willfully facilitating trade with Iran and Sudan. Schlumberger also agreed to the following additional terms during the three-year term of probation: (1) maintaining its cessation of all operations in Iran and Sudan, (2) reporting on the parent company’s compliance with sanctions, (3) responding to requests to disclose information and materials related to the parent company’s compliance with U.S. sanctions laws when requested by U.S. authorities, and (4) hiring an independent consultant to review the parent company’s internal sanctions policies and procedures and the parent company’s internal audits focused on sanctions compliance.
You also may remember Secretary Pritzker’s comments yesterday regarding our landmark case involving an international procurement network that obtained and smuggled millions of dollars in electronics from the United States to Russia in violation of export control laws. As an update for you, on September 9, 2015, Alexander Fishenko, a dual citizen of the United States and Russia, pled guilty in Brooklyn, New York to all charges pending against him, including acting as an agent of the Russian government within the United States without prior notification to the Attorney General, conspiring to export, and illegally exporting, controlled microelectronics to Russia, conspiring to launder money, and obstruction of justice. Four members of the conspiracy previously pled guilty. On September 21, 2015, a jury trial commenced in EDNY on three remaining individuals. On October 26, 2015 those three individuals were found guilty on all counts.
Another case, involving illegal exports to Iran by Helmut Oertmann and his company Hetran Inc., combines the totality of Export Enforcement’s capabilities, from internal targeting and analysis to an end-use check to a criminal investigation. Upon identification of a suspect export by our New York Field Office, our ECO in Dubai conducted two end-use checks that confirmed that the item was not staying in the UAE, but rather was being transshipped to Iran. Based on the ECO’s assessment, Special Agents then used their authorities to order the illegally exported item returned to the United States while the item was on the high seas on its way to Iran.
Previously, Oertmann and Hetran pled guilty in April 2014 to smuggling goods from the United States in connection with the illegal export of a horizontal lathe to Iran, which is used in the production of high-grade steel for the aerospace and automotive industries. Aware that it was unlikely that a license for Iran would be granted, Hetran, Oertmann and other co-conspirators agreed to falsely state on the shipping documents that the end-user of the machine was Crescent International in Dubai.
Both parties were sentenced in U.S. District Court for the Middle District of Pennsylvania to 12 months of probation each. In addition, a final order was issued holding Oertmann and Hetran jointly and severally liable for a civil penalty of $837,500. They must pay an out-of-pocket penalty of $337,500 with the remaining $500,000 suspended for two years and thereafter waived in its entirety subject to certain conditions during a two-year probationary period.
And finally, to provide you an example of why it’s important to pay attention to our Consolidated Screening List, I will mention the Russell Marshall/Universal Industries case involving the violation of a Denial Order. For some background on the original investigation, in October 2006, Immigration and Customs Enforcement (ICE) received information that Universal Industries may be exporting USML controlled turbine blades to Singapore without the required Department of State export license and may be undervaluing the export-related shipping documents for these transactions.
In April 2007, Customs and Border Protection (CBP) officers intercepted and detained a shipment from Universal of 200 Stage-1 Turbine Blades and 9 Stage-2 Turbine Blades destined to Singapore without the required export license. In 2009, the investigation was transferred to Florida and ICE contacted our Miami Field Office to request assistance in investigating this matter. Eventually, Universal pled guilty to one count of violating the Arms Export Control Act (AECA), and was sentenced to 1 year probation, a $1,000 fine, and $400 special assessment. Universal’s VP Russell Marshall pled guilty to one count of making false statements relating to the undervaluing of the shipping documents. He was sentenced to only 3 years probation, 180 days of home confinement, 150 hours of community service, and a $100 special assessment. Remember that light sentence for later.
As a result of the AECA conviction, in July 2012, BIS imposed a three-year denial period on Universal retroactive to the date of conviction. Remember, the 11(h) provisions allow for denial of export privileges for export violations.
Apparently, Mr. Marshall was not impressed with his penalties, because in November 2012, Defense Criminal Investigative Services (DCIS) Ft. Lauderdale, FL, received a hotline tip that Universal may be selling counterfeit or fraudulent aircraft parts. DCIS' initial review revealed that Universal may also be exporting contrary to the previously filed BIS Denial Order.
The investigation eventually revealed that in 2012 and 2013, Marshall and Universal violated IEEPA and the BIS denial order. Specifically, the defendants brokered the sale of military aircraft parts identified as three temperature transmitters used on F-16 fighter jets and a saddle part for the J-69 engine used on 737 military trainer aircraft to Thailand and Pakistan, respectively, which were subject to license controls by BIS, and which the defendants knew were intended to be illegally exported to Thailand and Pakistan. The items are currently controlled under ECCN 9A619.
On April 24, 2015, Marshall was sentenced in U.S. District Court for the Southern District of Florida to 41 months in prison, two years of supervised release and a $200 special assessment. At the same time, Universal was also sentenced to one year of probation and an $800 special assessment.
VSDs and New BIS Administrative Enforcement Guidelines
As I mentioned earlier, we are also in the process of developing new Administrative Enforcement Guidelines to improve transparency and predictability, and to bring them more into alignment with those promulgated by OFAC. OFAC administers the bulk of its sanctions programs under the same statutory authority, IEEPA, and uses the transaction value as the point of departure for determining civil penalties pursuant to its Economic Sanctions Enforcement Guidelines. Under IEEPA, criminal penalties can reach 20 years imprisonment and $1 million per violation and administrative monetary penalties can reach $250,000 or twice the value of the transaction, whichever is greater. Both agencies coordinate and cooperate on investigations involving violations of export controls that each agency enforces, including programs relating to Weapons of Mass Destruction, Terrorism, Iran, Sudan, Specially Designated Nationals and Specially Designated Global Terrorists.
The Guidelines reflect several changes to the current Guidelines set forth in Supplement No. 1 to Part 766. First, the Factors set forth in the Guidelines are reconstituted into the following Factors: 1) Aggravating Factors (e.g., willfulness or recklessness); 2) Mitigating Factors (e.g., remedial measures taken); 3) General Factors that could be considered either aggravating or mitigating depending upon the circumstances (e.g., the absence or presence and adequacy of an internal compliance program); and 4) other Relevant Factors on a case-by-case basis (e.g., related violations or other enforcement action).
Second, in accordance with OEE’s existing posture that enhanced maximum civil penalties authorized by the International Emergency Economic Powers Enhancement Act (Enhancement Act) (Pub.Law 110-96, 121 Stat. 1011 (October 16, 2007) should be reserved for the most serious cases, the Guidelines will now formally account for the substantial increase in the maximum penalties for violations of IEEPA and distinguish between egregious and nonegregious civil monetary penalty cases. Egregious cases are defined as those representing the most serious violations, with substantial weight given to considerations of willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, and harm to the regulatory program objectives, taking into account the individual characteristics of the parties involved. The Guidelines generally provide for significantly higher civil penalties for egregious cases than BIS has historically imposed. We anticipate that the majority of violations identified in OEE investigations will fall in the non-egregious category.
Third, reference in the Guidelines to ‘‘transaction value’’ provides sufficient flexibility to allow for the determination of an appropriate transaction value in a wide variety of circumstances. Amounts set forth in a schedule provide for a graduated series of penalties based on the underlying transaction values, reflecting appropriate starting points for penalty calculations in non-egregious cases not voluntarily disclosed to OEE. The base penalty amount for a non-egregious case involving a VSD equals one-half of the transaction value, capped at $125,000, per violation of the EAR. The base penalty calculation ensures that the base penalty for a VSD case will always be one-half or less than one-half of the base penalty for a similar case that is not voluntarily self-disclosed. This is intended to serve as an additional incentive for the submission of VSDs. In the interests of providing greater transparency and predictability to OEE administrative enforcement actions, OEE will also allot penalty reductions – all from the base penalty amount - of between 25-40% for exceptional cooperation, and up to 25% for first offenses and for transactions that were otherwise licensable. In rare cases, if you have enough mitigation we may end up owing you money… just kidding….
OEE encourages the submission of VSDs by parties who believe they may have violated the EAR. The purpose of an enforcement action includes raising awareness, increasing compliance, and deterring future violations, not merely punishing past conduct. VSDs are a compelling indicator of a party's intent to comply with U.S. export control requirements in the present and the future. The purpose of mitigating the enforcement response in voluntary self-disclosure cases is to encourage the notification to OEE of apparent violations about which OEE would not otherwise have learned. OEE’s longstanding policy of encouraging the submission of VSDs involving apparent violations is reflected by the fact that, during my time as Assistant Secretary, the percentage of VSDs submitted that have resulted in a civil penalty has declined to only 2%. The vast majority of cases brought to the attention of OEE through VSDs results in the issuance of warning letters.
OEE expects that VSDs submitted under the 600 Series for non-egregious violations will also generally result in warning letters. The number of overall VSDs has increased 22% from FY14 to FY 15. With respect to VSDs generally, OEE will issue warning letters in cases involving inadvertent violations and cases involving minor or isolated compliance deficiencies, absent the presence of aggravating factors.
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.
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 ensure 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., OAC alleged that the company, 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 to fulfill the contract.
Similarly, in its cases against two related Houston companies, Vinmar International, Ltd and Vinmar Overseas, Ltd, OAC alleged that the companies, on seven occasions, furnished prohibited information in bills of lading or vessel certificates regarding the blacklist status or eligibility status of the vessel to enter Arab ports. OAC further alleged that, on ten occasions, they failed to report receipt of requests from Lebanon, Libya, Oman, Qatar, Syria, and Yemen to furnish a vessel eligibility certificate signed by other than the owner, master or charterer of the vessel and that Vinmar Overseas Ltd., on three occasions, failed to report receipt of a directive from the UAE requiring the exclusion of parties of Israeli origin.
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
Abraham Lincoln once said, “A law without enforcement is just good advice.” When it comes to protecting national security and the lifeblood of the U.S. economy, the intellectual property and innovative products resulting from your ingenuity, effective enforcement is essential.
My organization is committed to partnering with industry to comply with the EAR. Enhanced compliance and enforcement measures create effective safeguards to deter the diversion and misuse of EAR items and protect your reputation, investments, and profitability. Export Enforcement stands ready to assist you to assist us in securing America’s trade. Thank you.