Have A Billion Dollar Export Penalty? Let’s Not.

        
This is an old blog we lost during our transfer of site hosting.  

   A record-setting payment of $1,190,000,000.00 by ZTE Corporation of Richardson, Texas (“ZTE”) shows the enormous risks today of underestimating U.S. export enforcement. The International Emergency Economic Powers Act gives the President of the United States broad authority to regulate international transactions and exports.. Pursuant to two Executive Orders issued by President Clinton in the mid 1990’s, the Iranian Transactions and Sanctions Regulations (“ITSR”)  was created that prohibit, among other things, exportation or re-exportation of U.S. products to Iran without a license from the Office of Foreign Asset Control (“OFAC”).

Almost a year ago,  the Obama administration accused ZTE of violating ITSR and the Export Administration Regulations (“EAR”), restricting the export of products that could make a significant military contribution to Iran or other countries. Fast forward to today, and, ZTE has pleaded guilty to charges of unlawful conspiracy to export U.S. goods (to both North Korea and Iran), obstruction of justice and knowingly and willfully making a materially false statement during the investigation. ZTE settled the lawsuit for the largest sanctions penalty in history: $1.19 billion divided between the U.S. Department of Justice, OFAC and the Bureau of Industry and Service (“BIS”). Below are some ideas of how to avoid becoming the record holder for the largest trade sanctions penalty:

What ZTE did: Senior management was aware of, and even condoned, illegal activities and non-compliance with trade laws.

Best Practices: Create a company culture of honesty and compliance, starting with top level management. It is up to senior management to establish clear company policies regarding compliance with all export policies because they, better than anybody else, understand the high risks associated with non-compliance. Senior management behavior is an example for the rest of the company so it should clearly show what are acceptable export practices.

What ZTE did: ZTE sought out and used “isolation companies” to re-export U.S. products to embargoed countries in order to hide ZTE’s involvement.

Best Practices: Take a look at the process third parties which you may employ use to complete their business.  Request written verification that they comply with trade laws and memorialize this via a contract in which the third party commits to complying with U.S. trade laws. The main point is to create and maintain transparency – with teeth –  regarding interactions between your company and any third party involved in your business transactions.

What ZTE did:  Incredibly, once the investigation had begun, ZTE asked its employees to sign nondisclosure agreements to conceal the illegal trade with Iran.

Best Practices:  Concealment is almost always worse than the initial crime! Create a company plan that empowers employees to report compliance issues. Even if it turns out there is no compliance issue at the moment, you are given the chance to address a minor problem before it turns into a major (record setting) compliance issue.  See our January 20, 2016 post regarding Voluntary Disclosures, which can greatly lessen or even eliminate penalties  (“New BIS Export Enforcement Guidelines”.)

What ZTE did: After learning of the impending charges, ZTE instituted a “contract data induction team” whose purpose was to identify and remove data related to the Iran transactions.

Best Practices:  Again, the concealment activity failed and brought on a Billion Dollar (!) penalty. When establishing an effective compliance plan for your company, it should include a method of safe and reliable record keeping. The plan should include the types of records to keep and when they can be destroyed as well as steps to be taken should the company face an accusation of violating laws.

            Ultimately, your goal should be to establish company policies that respect and enforce compliance best practices.  If an issue should arise, the company is then prepared to assist with and minimize the effect of any violation and/or investigation, rather than hinder and thereby compound it.

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Resources for Exporting: A Visit to the Mississippi Gulf Coast

Last week I visited the beautiful Mississippi Gulf Coast to attend the Gulf States Trade Alliance’s 2012 Annual Export conference from April 10-12 at the Beau Rivage Resort.  The theme for the event was “Export Resources and New Market Opportunities for Small Business”, and the markets focused on during the conference were Central America, the Caribbean, and Canada.  First, a little background on the trade alliance.

The Gulf Coast Trade Alliance consists of economic development agencies from Louisiana, Mississippi, Alabama, and Florida who come together in organizing a regional conference each year focused on international trade and exporting.  The conference highlights tools and resources available to small businesses in each of these four states that enable small business to enter into the world of international trade or grow their existing international business.

After a warm welcome, the conference started out with a discussion of Caribbean market opportunities with discussions by Robert Jones, Counselor for Commercial Affairs for the Caribbean Region (U.S. Commercial Service, American Embassy, Santo Domingo, DR) and Gandy Thomas, Consul General of Haiti Atlanta.  Mr. Jones discussed the benefits of doing business in the Dominican Republic and other Caribbean nations and noted that among  the best prospects for exporting to the region are:  construction in support of tourism, medical equipment and supplies, and renewable energy.  As many businesses engaged in export already know, the United States also has a free trade agreement that encompasses the Dominican Republic making trade with that Caribbean country even more inviting for U.S. businesses.  Mr. Thomas spoke to the fact that demands in Haiti for energy and manufacturing is huge, and the plethora of languages spoken in the region suggests that Haiti is a prime location for businesses to locate call centers.  Each speaker identified that one of the most important aspects of doing business in the Caribbean is establishing relationships face to face and keeping up those relationships even after your visit to their sunny islands.

Later in the conference we heard from Leroy Sheffer, Managing Partner, ITAS Group (Specialized Services Firm, American Chamber of Commerce & Industry in Panama) and Bryan Smith (Counselor, Commercial Affiars for the U.S. Commercial Service at the U.S. Embassy in San Jose, Costa Rica regarding opportunities in Central America, specifically Panama and Costa Rica.

Rounding out the afternoon was Jennifer Rosebrugh, the Senior Trade Commissioner for the Consulate General of Canada located in Atlanta, Georgia.  Ms. Rosebrugh extolled the virtues of doing business with Canada, the United States largest trading partner.  Similar to Mr. Jones and Mr. Thomas, Ms. Rosebrugh said that a key to international trading is to do business with honesty, reliability, kindness, friendliness, compassion, civility, forgiveness, and generosity, and these actions are much more easily undertaken with someone who you’ve met face to face than with someone solely interacted with over email and phone.

Other conference speakers discussed services that will help a small business engage in international trade.  These services are provided by agencies such as the U.S. Commercial Service, the Small Business Administration, the Southern U.S. Trade Association, the Mississippi Development Authority (or other state development boards), banks with international departments, law firms with expertise in international trade issues, customs brokers, etc.  If you are considering entering into international trade business or looking to expand the business you already have, there are many resources available.  Using these resources from the outset to ensure you are making the right choices for your company will help you succeed in both the short and long term.  Understanding both the advantages and pitfalls of international trade will allow your company to make wise decisions that will help ensure your success.

Our firm provides not only legal services for those who have already encountered issues related to international trade, but we also provide business services for those seeking to engage in or expand their trade operations in a way that helps them avoid legal problems down the line.  With over three decades of experience in international trade from both the logistics and the legal sides, we can help you ensure your company is on the right track.  For more information, please visit our website at www.customscourt.com , email us at either nmooney@customscourt.com or smorrison@customscourt.com, or call us at (850) 893-0670 or (800) 583-0250.

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Customs Seizure Benefits Florida

In August 2008, a piece of America’s aviation history, the Douglas AD-4N Skyraider*, reentered its home territory under false pretenses, which ultimately led U.S. Customs and Border Protection (CBP) agents to seize the aircraft nearly a year later.  Import and export of military aircraft and other defense articles generally requires a license or permit under the Arms Export Control Act that neither the pilot or owner of the aircraft provided to CBP officers upon the plane’s arrival in Port of Buffalo, N.Y. from France.  Rather, the pilot provided false information to CBP in order to enter the country without the appropriate authorization.

The scheme may have worked had the aircraft’s 20mm cannons not been discovered in October 2008 at the Port of Savannah, Ga hidden inside containers being imported by the aircraft’s owner, Claude Hendrickson, president of Dixie Equipment in Woodstock, Ala.  Upon this discovery, U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HIS) unit launched an investigation into the circumstances surrounding the importation of the cannons, which revealed the unauthorized entry of the aircraft earlier that year.

Under 22 U.S.C. §2778(b)(2) “Control of Arms Export and Imports”, no defense article (as designated by the President on the United States Munitions List) may be imported or exported without a license, whether for export or temporary or permanent import from either the Department of State or the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF).  In this case, the importer would have required a license for importation from the ATF because the importation of the U.S. Munitions List Category 8 aircraft was permanent (as opposed to temporary import licenses, which are granted by the State Department).

The process of obtaining a permit from the ATF for importation of arms, ammunition and implements of war begins with an application Form 6, which must be signed, dated, and contain very specific information regarding the importer, foreign seller and shipper, and specifications of the article to be imported.  The regulations set forth in 27 C.F.R. §447.42 list the requirements in more detail.  Importers will generally have an answer from ATF on their permit within four to six weeks provided the importer properly completes the Form 6.  Once the importer receives the permit, it will be valid for one year from the issuance date, and the importer must then complete a Form 6A, “Release and Receipt of Imported Firearms, Ammunition and Implements of War”  in order to obtain release of the article from CBP upon its arrival into the United States.**

As a result of Mr. Hendrickson’s not following these guidelines for importing his aircraft, the plane and its log books, cannons, and other parts are now on their way to the National Naval Aviation Museum in Pensacola, Florida.

*This aircraft is an American single-seat attack aircraft that was used by both the U.S. and French military from the 1940s through the 1980s.  http://en.wikipedia.org/wiki/Douglas_A-1_Skyraider

**This is a simplified explanation of the arms licensing and permit procedure.  For more information on importing munitions, please visit the following website:  http://www.atf.gov/firearms/how-to/import-firearms-ammo-implements-of-war.html.  It is also highly advisable for importers to seek the advice of professionals engaged in the import and export of arms and munitions as well as the advice of legal counsel.

For more information see the following:

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