The International Law Firm of Fulbright & Jaworski - International Trade
J. Scott Maberry, Stephen M. McNabb, Thaddeus Rogers McBride, Mark L. Jensen, Gwen Shirl Green and Stefan Reisinger
June 10, 2010
- UN Security Council Passes Fourth Round of Iran Sanctions
- U.S. Moves Toward Export Control Reform
- OFAC Adds New Somalia Sanctions, Attempts to Fight Piracy
- Keeping Quiet About the U.S. Munitions List: the United States v Roth Appeal
On Wednesday June 9, 2010, the UN Security Council passed by a vote of 12-2 a fourth round of sanctions against Iran in response to that country’s nuclear enrichment program. Lebanon abstained from the vote, and Brazil and Turkey voted against the measure. The resolution follows weeks of negotiations among permanent members of the UN Security Council concerning the details of the [Iran Briefing] sanctions.
The new sanctions target Iran’s defense and financial industries. The provisions prohibit Iran from buying heavy weapons such as attack helicopters and missiles and bar Iran from participating in nuclear proliferation activities. Language in the resolution reinforces an earlier measure calling for member states to authorize their naval and coast guard forces to board ships on the high seas in search of contraband items headed to or from Iran. The sanctions also toughen rules on financial transactions with Iranian banks and increase the number of Iranian individuals and companies targeted by asset freezes and travel bans. The new provisions build on previously enacted sanctions but do not place an embargo on oil or other petroleum products or services.
A proposed fuel swap negotiated with Iran by Brazil and Turkey, under which Tehran would have deposited low-enriched uranium with Turkey in return for reactor fuel, was formally rejected by the permanent members of the Security Council and Germany. Many members of the Security Council considered the deal a ploy to stave off another round of sanctions. Iran called the latest sanctions resolution “politically motivated,” and appears intent on pursuing its nuclear ambitions.
On March 11, 2010, President Obama issued an Executive Order creating a National Export Initiative (“NEI”) that, in the Obama administration’s view, would improve the private sector's ability to export U.S. goods. Under the NEI, President Obama hopes to double U.S. exports over the next 5 years by, in part, working to remove trade barriers abroad and by fundamentally reforming the current U.S. export control system.
The need for fundamental export reform under the NEI was described by U.S. Secretary of Defense Robert Gates in April 2010 when he noted that the United States’ current export system “fails at the critical task of preventing harmful exports while facilitating useful ones.” He also indicated that “our security interests would be far better served by a more agile, transparent, predictable, and efficient regime,” which Gates suggested could be achieved through a simplified system.
In an effort to address concerns regarding the U.S. export control system, President Obama initiated a year-long comprehensive interagency review of both the scope and administration of U.S. export control laws in August 2009. Based on its review, the interagency group proposed four key reforms. First, the group proposed creating a single agency that would be responsible for licensing exports. Second, the group proposed creating a single control list outlining which items require licenses for export. Third, the group proposed creating a single primary export enforcement coordination agency. Finally, the group proposed creating a single information technology system to track exports. These recommendations are proposed to be implemented in three phases. The first phase - to establish the framework and funding for the new system - is currently well underway. During phase two, specific reforms identified in the first phase would be introduced; in the third phase, the transition to the new export control system would be completed. The Obama administration appears to be pursuing completion of the remaining phases on an aggressive timetable.
Although the specifics of the initiative are still being finalized and are subject to change, the proposed reforms have the potential to fundamentally alter how U.S. export control and sanctions laws are administered. These proposed reforms could also have a dramatic impact on how companies implement their internal export control policies and procedures. We will continue to monitor the situation and provide updates on the proposed changes as appropriate.
In May 2010, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) issued the Somalia Sanctions Regulations, 31 C.F.R. Part 551, The regulations implement Executive Order 13536 of April 12, 2010, which imposed blocking sanctions on certain named individuals identified by the U.S. Government as contributors to the instability in Somalia.
To provide immediate guidance to the public, OFAC's initial regulations were published in an abbreviated form, which will be supplemented at a later date. The more comprehensive regulations likely will include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy. A copy of Executive Order 13536 currently appears in Appendix A to 31 CFR Part 551.
The new regulations and Executive Order 13536 significantly affect parties such as ship owners, maritime insurers, charterers, and cargo interests. In particular, the new sanctions limit permissible responses to acts of piracy off the Somali coast. The Executive Order 13536 prohibits “the making of any contribution or provision of funds” to a blocked person. To the extent that a pirate is identified as a blocked person, any payment to that pirate by a U.S. person would be prohibited. Determining whether a particular pirate operation is affiliated with a blocked person, however, may not be an easy task. Specifically, parties may not be able to ascertain with certainty the identity of pirates on board a vessel and may not have access to screening information in a ransom situation.
The Executive Order 13536 also authorizes OFAC to designate as a blocked person anyone that (i) threatens the security and stability of Somalia by delivering or selling arms to Somalia, (ii) interferes with the Djibouti Agreement (a UN-brokered peace agreement between Somalia's warring factions), (iii) interferes with peacekeeping missions in Somalia, (iv) obstructs the delivery of humanitarian aid in Somalia, or (v) has acted or purported to act for or on behalf of any person whose property and interests in property are blocked pursuant to the Executive Order 13536.
These new sanctions make it more important than ever that international shipping companies and others involved in international trade continue to monitor regulatory developments and update their understanding of U.S. sanctions laws and regulations.
Summary. In an appellate brief submitted to the United States Court of Appeals for the Sixth Circuit, the U.S. government urged the Court to uphold the lower court’s decision in United States v. Roth, 08-CR-69 (E.D. Tenn. July 28, 2009), arguing that the question of whether technical data constitutes a defense article on the U.S. Munitions List (“USML”) involved a factual determination that was properly made by a jury. The argument may be part of a U.S. government strategy to limit a decision by the U.S. Court of Appeals for the Seventh Circuit in United States v. Pulungan, 569 F.3d 326 (7th Cir. 2009) that criticized determinations by the Directorate of Defense Trade Controls (“DDTC”) of what is included on the USML. If successful, the government’s argument may help predict how future prosecutions for illegal exports of defense articles might be conducted under the Arms Export Control Act and the International Traffic in Arms Regulations. Equally important, the case may help illustrate the types of information DDTC intends to provide to the public regarding its jurisdiction over any given military items.
Background. On September 3, 2008, a jury in the U.S. District Court for the Eastern District of Tennessee convicted 71-year-old retired University of Tennessee Professor John Reece Roth of conspiring with Atmospheric Glow Technologies, Inc. to unlawfully export 15 different “defense articles” to a citizen of the People’s Republic of China in violation of the Arms Export Control Act, 22 U.S.C. § 2778. These illegal exports related to technical information about plasma actuators which were being developed for use in U.S. Air Force drones. Professor Roth was also convicted of one count of wire fraud for defrauding the University of Tennessee. Based on these convictions, on July 1, 2009 a federal judge sentenced Roth to four years in prison (See Fulbright Briefing: Former University of Tennessee Professor John Reece Roth Sentenced to Four Years in Prison for Arms Export Violations). Roth is currently appealing the convictions.
Pulungan overturned the conviction of a seller of rifle scopes for attempting to export defense articles without a license on the grounds that the seller did not know that the rifle scopes he exported were manufactured to military specifications, and therefore subject to the USML. The court’s determination that the seller lacked knowledge was based in part on the fact that the only evidence presented by the government on the question of what constitutes “military specifications” for rifle scopes was a statement by the DDTC that the subject scopes were included in the USML definition. The court reasoned that the DDTC’s claim of authority to classify any item as a “defense article” without revealing the basis of the decision or allowing inquiry by the jury “would create serious constitutional problems,” and went on to say that “[g]overnment must operate through public laws and regulations.” Pulungan, 569 F.3d at 328. One potential solution suggested by the court was to list in the text of the regulations all rifle scopes that the DDTC had tested and found to be covered by the USML.
The Government’s Argument. In its brief to the Sixth Circuit in Roth, the government attempts to distinguish the reasoning in Pulungan on the grounds that the government presented testimony to the jury regarding the technical data exported by Professor Roth to establish that the data was controlled by the ITAR. The government’s brief argues that the classification of the data was a factual question properly submitted to and answered by the jury, and should not be overturned by the appellate court.
Conclusions. Although the success of the government’s approach in Roth is yet to be determined, it appears to reflect a continued strategy by DDTC to not provide increased public information on determinations of what is included in the USML, or how such decisions are made. Instead, it appears that the government may argue those points to a jury at the time of prosecution. If successful, this approach may quell some of the Constitutional problems that were raised by the 7th Circuit, i.e., where the court had merely relied on a written determination by DDTC. However, because such an approach means that any information made available about individual USML determinations would likely arise during the course of enforcement or criminal proceedings, the government’s strategy also reinforces the need for companies and individuals to exercise extreme caution when seeking to export materials that may be controlled on the USML, and to gather in advance as much individual guidance and information from DDTC as possible.
 At least one other court has declined to follow what it considered to be dicta in Pulungan regarding the impropriety of the DDTC’s classification of items, noting that the First Circuit had held that to establish a violation of the ITAR the Government need not prove that the defendant knew that the item he or she was accused of exporting was on the USML. See United States v. Wu, No. 08-10386, 2009 U.S. Dist. LEXIS 108723, at *12-14 (D. Mass. Nov. 20, 2009)
We would like to thank our legal assistant, Corey Phelps, for his valuable contributions to this issue.
J. Scott Maberry
Stephen M. McNabb
Thaddeus Rogers McBride
Mark L. Jensen
Gwen Shirl Green