U.S. Department of Commerce
Bureau of Industry and Security

Update 2012 Conference

Remarks of
David W. Mills
Assistant Secretary for Export Enforcement
July 18, 2012

Thank you Dan, and good morning everyone!  I would like to express my thanks also to Bernie Kritzer, Toni Jackson and their staff, and to our many other colleagues who have contributed to this event.

This year, the Office of Export Enforcement is marking its 30th anniversary of securing America’s trade.  OEE is the only law enforcement organization in the federal government that is dedicated solely to enforcing export controls.  As you know, specialization enhances expertise.  It enables our people to deepen their knowledge about the export control regulations and about how international business is conducted.  It also enables them to develop sophisticated techniques for investigating and analyzing export and reexport transactions.  Their knowledge and expertise makes them very efficient and highly effective in their efforts to detect and shut down sophisticated export diversion networks operating in the United States and overseas.  Having well-recognized expertise in the broader law enforcement community also means that value can be added by including our special agents and analysts in key inter-agency task forces focusing on specific issues, such as countering Improvised Explosive Devices.  I am particularly delighted that, in recognition of the interagency role Enforcement at BIS plays, Director Mueller of the Federal Bureau of Investigation will be delivering the keynote address today at lunch.

Thanks to EE Managers and their Staff

I am honored to have the opportunity to work with our career law enforcement team.  I’d like to thank in particular Don Salo, our Deputy Assistant Secretary, for his terrific leadership and support, as well as Doug Hassebrock, Director of the Office of Export Enforcement, Kevin Kurland, Director of the Office of Enforcement Analysis, and Ned Weant, Director of the Office of Antiboycott Compliance.  They and their special agents, analysts and compliance officers are all doing extremely important work to protect our country.  I also would like to commend John Masterson and the attorneys in our Office of Chief Counsel for their very effective legal support.  We work very closely with our attorneys and could not accomplish our mission without them.

Let me share with you some statistics concerning our enforcement performance this past year, as well as some examples of major criminal and administrative penalty cases. 

As I go through these figures, I ask you to consider how the expertise demonstrated by Export Enforcement will be applied to the challenge of enforcing the new controls on items that will be transferred from the ITAR to the EAR. 

OEE Statistics

In 2011, the Office of Export Enforcement’s investigations resulted in the conviction of 29 individuals, who received prison sentences totaling 572 months.  There were criminal convictions of 10 companies.  With individuals being convicted three times as often as companies, you are seeing our emphasis on individual responsibility.  These cases resulted in the imposition of $20.2 million in criminal fines and $2.1 million in forfeitures.  In 2012 we are on track to meet or exceed those numbers.

Concerning administrative enforcement actions, in 2011 Export Enforcement and our Office of Chief Counsel resolved 39 cases, which imposed a total of $8.5 million in fines.  A total of 26 export denial orders were imposed.  These denial orders included Temporary Denial Orders as well as permanent denial orders.

So far in 2012, we have resolved 24 administrative cases, which imposed $6.4 million in fines and 24 export denial orders.  This underscores the importance of the variety of enforcement tools we at BIS bring to the table.  Criminal and administrative sanctions, including fines, denial orders and placement on BIS’s Entity List, can be pursued independently or in conjunction with each other, depending upon the circumstances of a particular case.

But importantly for many in this audience, not all of our investigations ended with the imposition of criminal and administrative penalties.  In 2011 the Office of Export Enforcement issued 227 Warning Letters.  This year to date, OEE has issued 181 Warning Letters.

Significant Cases

I want to highlight for you some of the really significant cases that Export Enforcement has worked on this past year.  These cases illustrate three characteristics about our organization that will tell you something about how we will enforce controls on items being transferred from the USML to the CCL.

• First, we continue to place a high priority on identifying and disrupting illicit global procurement networks for parts and components that are being used to make the Improvised Explosive Devices (or IEDs), that have been used against United States and coalition military forces in Iraq and Afghanistan.  Most of the components found in IEDs are electronic components with wide-spread consumer applications.  These components can be exported from the United States without a license to most destinations.  But they are being reexported to prohibited destinations and end-uses.  These IED cases show that our organization has the knowledge and skills, and the ability to work effectively with other law enforcement and intelligence agencies, to police the items that would be transferred from the ITAR to the EAR.  In particular, this organization has the specialized knowledge and skills necessary to police the use of License Exception STA by parties located in the United States and overseas.

• Second, this past year the Office of Export Enforcement has continued its pursuit of investigative leads systematically and thoroughly.  This can and often does result in one case leading to another case, and to still another case.  It shows that our organization, with its exclusive focus on this area of law enforcement, can be patient and persistent when pursuing violators.  These qualities will be useful in enforcing controls on “600 series” parts and components.

• Third, as you know, BIS strongly encourages exporters to submit Voluntary Self-Disclosures (or VSDs). In the great majority of cases a VSD results in a Warning Letter.  However, sometimes a VSD will result in a penalty.  But even if a penalty is imposed the fact that there was a VSD usually reduces the penalty substantially from the maximum amount that was possible. 

I will give you two examples where submission of VSDs enabled companies to avert criminal prosecution for egregious violations, and instead receive less than the maximum administrative fines, as well as requirements for remedial compliance measures.  This illustrates that BIS will do its best to treat exporters fairly.  But not all VSDs are guaranteed to result in Warning Letters.  Sometimes a stronger enforcement response is necessary.  The same will hold for future violations of the 600 series of items.  BIS will be fair.  But we will not hesitate to impose penalties where warranted.
In speaking about our cases, I suggest to you that, first and foremost, we should remember that national security concerns people.  We have a duty, in national security matters, to protect our own people, especially the men and women who serve in our armed forces.  Export Enforcement, through the outstanding leadership and commitment of Deputy Assistant Secretary Don Salo, (aka: the “Colonel”) continues to make one of its highest priorities investigations involving global networks that supply components to IED makers.  That brings me to the Corezing International case.

Corezing International

• On September 15, 2010, five individuals and four of their companies, including Corezing International, were indicted in U.S. District Court in the District of Columbia on charges of conspiracy, smuggling, the illegal export of dual use items from the United States to Iran, the illegal export of defense articles from the United States, false statements, and obstruction of justice.  The conspiracy involved the illegal export of thousands of radio frequency modules (or RFMs), through Singapore to Iran.  These are dual use telecommunications items.  At least 16 of these items were later found in remote detonation systems of unexploded IEDs in Iraq.

• Several of the same defendants are also charged with fraud and conspiracy involving exports of military antennas to Singapore and Hong Kong.  These military antennas are controlled under the ITAR and are used in airborne and shipboard environments.

• On October 25, 2011, BIS added these five individuals and 10 additional persons, including their companies, located in China, Hong Kong, Iran and Singapore to the Commerce Department's Entity List in connection with the procurement network. 

• The Government of Singapore arrested four of these individuals, at the request of the United States Government.  A fifth person remains a fugitive.

• On February 10, 2012, a court in Singapore ruled these four men could be extradited to the United States to stand trial. They appealed from this ruling and we are waiting for the appellate court’s final decision.

This has been a complex and lengthy investigation.  The RFMs were exported from the United States to Singapore under a License Exception.  Then the violators reexported them illegally to Iran.  This case demonstrates very well the type of expertise and skills our special agents and analysts have.  It also highlights their ability to work effectively with other law enforcement agencies, and with foreign government authorities.  We will continue to apply these skills and abilities when enforcing License Exception STA.

Now I will explain how true it is, in the world of law enforcement, for one thing to lead to another.  Over the past couple of years OEE has pursued a series of investigations relentlessly.  One successful case led to another, and then to yet another.
 
Kraaipoel

• First was the Kraaipoel case.  Last month, on June 12, 2012, Robert Kraaipoel, Neils Kraaipoel and Aviation Services International (ASI), their aircraft parts supply company in the Netherlands, were sentenced in U.S. District Court in the District of Columbia.  The Kraaipoels were sentenced to five years of probation and ASI was sentenced to five years of corporate probation and a $100,000 criminal fine. 

• On March 2, 2010, the Kraaipoels and ASI entered into settlement agreements with BIS and received a suspended $250,000 civil penalty due to their cooperation.  Robert Kraaipoel and ASI received an export denial order for seven years, and Neils Kraaipoel received a three-year export denial order. 

• Between 2005 and 2007, the Kraaipoels used ASI to purchase various electronic communications equipment from a U.S. company and falsely certify that the equipment would be used by the Polish Border Control Agency.  The equipment had potential applications in Unmanned Aerial Vehicles and the defendants exported the equipment through the Netherlands to a customer in Iran.  The defendants also used the United Arab Emirates and Cyprus as intermediate countries for illegal exports of aluminum sheets, rods, polymide film, and other equipment. 

Ulrich Davis

• Second, the Kraaipoel case led directly to their Dutch freight forwarder. 

• On August 6, 2011, Special Agents of OEE and U.S. Immigration and Customs Enforcement arrested Ulrich Davis, a Dutch citizen and former manager of a Dutch freight forwarder, at the Newark airport as he attempted to board an aircraft for the Netherlands.

• On February 6, 2012, Davis pled guilty in U.S. District Court in the District of New Jersey to one count of conspiracy to violate the International Emergency Economic Powers Act and the Iranian Transactions Regulations. The charge was that Davis conspired with others to export aircraft parts and chemicals through the Netherlands to Iran, and to violate the Temporary Denial Order (TDO) BIS had imposed against the Kraaipoels and their company.

• On May 15, 2012, Davis was sentenced to six months in prison and a $2,000 criminal fine.

ING Bank, N.V.

• Third, the Kraaipoel and Davis investigations led OEE to a bank that had financed their illegal transactions.  This information, along with other factors, led to an investigation by the FBI and the IRS, with assistance from OEE and OFAC, into the activities of ING Bank. 

• On June 11, 2012, ING Bank N.V., a financial institution headquartered in Amsterdam, agreed to forfeit $619 million to the U.S. Department of Justice and the New York County District Attorney’s Office as part of a deferred prosecution agreement.  The charges were that ING Bank illegally moved more than $2 billion in more than 20,000 transactions, including on behalf of the Kraaipoels’ company, Aviation Services International, through the U.S. financial system on behalf of sanctioned Cuban and Iranian entities.  ING Bank pled guilty to a criminal information charging it with one count of conspiracy to violate the International Emergency Economic Powers Act and the Trading with the Enemy Act.  The bank also entered into a civil settlement agreement with OFAC which requires the bank to review its policies and procedures, take risk-based sampling of U.S. dollar payments, and ensure that its OFAC compliance program is functioning effectively. 

• When the Office of Export Enforcement begins enforcing the new controls on 600 series items, it will apply these techniques and use its good working relationships with other law enforcement agencies.

Now let me tell you about two cases involving large global companies that suffered serious and systematic breakdowns in their internal compliance programs.

Ericsson de Panama

• On May 25, 2012, Ericsson de Panama S.A. of Panama City, Panama, a subsidiary of the Swedish company, entered into a settlement agreement with BIS in which the company agreed to pay a civil penalty of $1.753 million to settle 262 violations of the Export Administration Regulations.  The settlement also requires a company-wide export audit conducted by an independent third party of all transactions connected with Cuban customers. 

• BIS alleged that between 2004 and 2007, Ericsson de Panama knowingly implemented a scheme to route telecommunications items from Cuba through Panama.  The scheme included repackaging items to conceal their Cuban markings, forwarding the items to the United States for repair and replacement, and returning the items to Cuba. 

• Ericsson de Panama avoided possible criminal prosecution and heavier fines by voluntarily disclosing the violations to BIS and the Department of Justice and cooperating with the investigation. 

• While the penalty in this case was substantially mitigated from the maximum possible, it was still a significant penalty.  This was due to aggravating factors in the case concerning the subsidiary’s knowing and deliberate violations.  We believe the large civil penalty plus required remedial measures are necessary to correct a problem that ran so deeply.

Here is another example of a breakdown of a company’s internal compliance program.

Flowserve Corporation

• On October 3, 2011, Flowserve Corporation and ten of its foreign affiliates agreed to pay a civil penalty totaling $2.5 million to settle 288 charges for violating the Export Administration Regulations.  In addition, the Flowserve companies are required to conduct external audits of their compliance programs and submit the results to BIS.  Flowserve is headquartered in Irving, Texas, and is a supplier of goods and services to the oil, gas, chemical, and other industries. 

• Between 2002 and 2008, Flowserve and its foreign affiliates made unlicensed exports and re-exports of pumps, valves and related components to a variety of countries including China, Singapore, Malaysia and Venezuela. 

• Six of Flowserve’s foreign affiliates also caused the transshipment of controlled items to Iran and/or the re-export of controlled items to Syria without the required U.S. Government authorization. 

• In a related case, the Department of Treasury’s Office of Foreign Assets Control (OFAC) settled charges with Flowserve alleging a total of 58 violations of its Iranian, Cuban and Sudanese sanctions programs. Flowserve agreed to pay a $502,408 civil penalty to resolve the OFAC charges.

• Like Ericsson de Panama, Flowserve’s voluntarily disclosure of the violations and its cooperation with the investigation significantly reduced the penalty amount.  Nonetheless, in our view, the level of knowledge on the part of Flowserve’s subsidiaries and the systematic nature of the violations warranted the penalty and required corrective measures.

Voluntary Self-Disclosures

I have mentioned two VSD cases that resulted in penalties.  These are the exceptions to the general rule that VSDs do not lead to penalties.  Now I’ll discuss the rule that is proven by those exceptions. 

As I said earlier, BIS strongly encourages exporters to submit Voluntary Self-Disclosures under the provisions of EAR section 764.5.  And BIS assigns VSDs what we call “Great Weight” as a mitigating factor when we determine whether or not to seek to impose penalties.

I am pleased to report that we have made significant progress in speeding up our review and resolution of VSD cases.  In 2011, I directed that a review be done of the existing caseload of VSDs, and we formulated a strategy for resolving the older cases.  I wanted to attack not only the backlog, but I also set out to change the standard on the speed with which these cases are addressed. 

As a result, we have all but cleared out the old backlog.  In Calendar Year 2011, there were 213 VSD investigations opened nationwide.  Of those, approximately 60% have already been closed.  Furthermore, in Calendar Year 2012, so far there have been 68 VSD investigations opened nationwide.  Of those, approximately 30% have already been closed.  Nonetheless, there always will be room for improvement in this area and we will continue our efforts to speed up the resolution of VSD cases.

Let me highlight some general points concerning VSDs. 

• In 2011, and so far this year, OEE has not referred one case that met our criteria for a VSD to the Department of Justice for criminal prosecution.  Not one.

• Of the VSD cases resolved in 2011 and 2012, only 3% of the VSD cases have resulted in the imposition of an administrative penalty.  This is consistent with the historical trend for VSD cases handled by the Office of Export Enforcement.

I hope you will take this information back to the senior managers of your companies, and communicate to them the following three points. 

First, obviously it is in your company’s best interest to maintain an effective internal compliance program and to appoint a senior-level corporate officer to oversee it. 

Second, the data on VSDs show that if you discover violations, it is in your company’s best interest to submit a Voluntary Self-Disclosure to OEE, and to undertake appropriate remedial measures for your compliance program to prevent the recurrence of violations.  Once you discover violations have occurred, your managers must act –promptly–to fix the process that broke down.  To repeat, in 97% of the VSD cases, BIS has imposed no administrative penalty.

Third, if your company committed violations, discovered them, and decided not to submit a VSD, refer your management to my previous discussion of the criminal cases.  Our Office of Export Enforcement personnel have the expertise and commitment to uncover violations and pursue complex investigations.  Failing to submit a VSD and to undertake effective corrective measures only makes matters worse for your company and its managers.

Office of Enforcement Analysis

A few moments ago, I invited you to consider how Export Enforcement would apply its unique skills to enforcing controls on the 600 series of items that will be transferred from State to Commerce.   As Eric Hirschhorn mentioned yesterday, I will outline our six point plan for enhanced enforcement for the transferred items:

1. First, to complement our colleagues in Export Administration who run the EAR training seminars across the country, our field offices are gearing up for targeted outreach to companies affected by the transition.  We also will reach out to our counterparts in Customs and Border Protection to ensure that the transition phase does not inhibit legitimate transfers of 600 series items.
2. Second, we are working with the Census Bureau to establish new electronic validations in the Automated Export System to help exporters comply with the transition of defense articles to the CCL. This includes linking the use of License Exception STA to a valid State or Commerce license number to ensure that U.S. companies do not inadvertently ship 600 series items to foreign consignees that have not been previously vetted by the government.
3. Third, through the use of intelligence information via the Information Triage Unit, which is housed within the Office of Enforcement Analysis, we will provide reliable and objective data to facilitate licensing officers’ reviews of the bona fides of foreign parties to license applications.
4. Fourth, the Office of Enforcement Analysis, working with compliance officials within Export Administration, will systematically review transactions of License Exception STA to verify that the end-users are eligible and compliant.
5. Fifth, we are working with our colleagues at the Department of State to coordinate end-use checks at foreign firms receiving 600 series parts and components for incorporation into ITAR-controlled end-items.
6. Finally, we are prioritizing our enforcement work to focus on illicit procurement networks seeking not only weapons of mass destruction and IEDs, but also 600 series items and information suppression technology.

When coupled with our permanent law enforcement authorities and administrative and criminal penalties, these actions will help cement the higher fences being built around the most sensitive items.

In addition to providing analytical support to our Special Agents and vetting the bone fides of parties to license applications, one of the Office of Enforcement Analysis’s major responsibilities is to manage our End-Use Check program to confirm that controlled items are exported and reexported legally.  End-use checks are conducted primarily by our Special Agents located abroad with the Commerce Department’s Foreign Commercial Service, supplemented by Sentinel trips undertaken by our domestically-based Special Agents.  Here are some key statistics concerning End-Use Checks:

• In FY 2011 BIS completed 891 end-use verifications, for an increase of 25 percent over the previous year.

• BIS completed end-use check visits in 60 countries.

• Over 18 percent of those end-use check visits were rated unfavorable.  That means we detected a violation, a compliance issue, or identified unreliable recipients of U.S. items and technology.  The entities on those transactions were referred to OEE for appropriate investigative action or were placed on BIS’s Entity List.

Entities Listings based on Export Enforcement’s Work

With regard to the Entity List, I would like to share with you some examples of how our investigative and analytical work has resulted in additions to the Entities List that BIS maintains under Part 744 of the Regulations.

• Two parties were added to the Entity List based on evidence that they purchased U.S.-origin internet filtering devices and transshipped the devices to Syria. The same devices have been the subject of recent press reporting related to their potential use by the Syrian government to block pro-democracy websites and identify pro-democracy activists as part of Syria's brutal crackdown against the Syrian people.  OEE has initiated a number of investigations based on press reporting and information released on the internet by opposition members and internet hackers that identified the presence of U.S. equipment in Syria and in Iran. 

• Sixteen persons - four individuals and twelve companies in Afghanistan, Pakistan and the United Arab Emirates – were added to the Entity List for providing materials used to produce improvised explosive devices (IEDs) employed on the battlefield against U.S. and coalition forces in Afghanistan.  These followed the addition on November 21, 2011 of thirteen individuals and companies in Pakistan and Afghanistan on the same basis.

• And as mentioned earlier, fifteen parties located in China, Hong Kong, Iran and Singapore were added to the Entity List who were determined by the U.S. Government to be acting contrary to the national security or foreign policy interests of the United States because of their involvement in an IED component procurement network. 

Office of Antiboycott Compliance

Finally, no picture of Enforcement at BIS is complete without reference to the Office of Antiboycott Compliance, which is celebrating its 34th year.  In Fiscal Year 2011, OAC settled 8 cases totaling $129,300 in administrative penalties and issued 2 Warning Letters. In FY 2012 to date, OAC has settled 7 cases totaling $100,600 in penalties and issued 3 Warning Letters.

Education and Outreach
OAC does an excellent job of helping the business community to understand and comply with the complex antiboycott provisions of the Regulations. 
To illustrate:

• In Fiscal Year 2011 OAC answered over 1,000 advice line queries from the exporting community seeking guidance concerning the application of antiboycott provisions of the EAR to specific transactions. The information OAC provided through its advice line served to prevent violations of the antiboycott regulations in twenty five percent of these calls.

• In collaboration with the Department of State, OAC has met with government ministries of the boycotting countries issuing the most boycott-related requests to U.S. businesses. Through this process,  OAC has assisted these governments in identifying and removing boycott language. In one instance, OAC reached agreement with the commercial attaché of a boycotting country whereby the attaché will intervene on a real-time basis with its government to seek removal of prohibited boycott language.

• Ned Weant and his colleagues in OAC have not only prevented a lot of violations through these efforts, but have also worked hard to ensure a level playing field for U.S. companies doing business in that region of the world.

Conclusion

Eric Hirschhorn refers to the three “E’s” of Export Control Reform:  efficiency, education, and enforcement.  I am proud to be part of that third “E.”  This is a very challenging and exciting time for our organization.  We have assembled a top-notch management team for Enforcement at BIS, and you will be hearing from them later today and throughout this conference.  I also wish to acknowledge Mr. Mark Menefee, who serves now as my Senior Advisor and is also an indispensable part of our team.

Thank you for your attention this morning.  I look forward to meeting you and listening to your feedback during the rest of the Update.