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Greetings!
The import/export news highlights from May & June include: enforcement actions against companies and individuals for millions of dollars and/or criminal penalties; BIS and DDTC seeks comments on the proposed "Specially Designed" definition; OFAC posts civil penalty information; ING foreits $619M for transactions with sanctioned entities; new Executive Order targets foreign sanction evaders; and CBP holds that transaction vlaue should include post-importation adjustments to transfer prices. As always, thank you for reading! Jennifer Kessinger, Tammie Krauskopf
& Ruta Riley
globaltradeexpertise
info@globaltradeexpertise.com
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Company and Subsidiaries Agree to $75 Million Settlement for Illegally Exporting U.S.-Origin Military Software to China
On June 28, 2012, U.S. Department of Justice (DOJ) reported that Pratt & Whitney Canada Corp. (PWC), a Canadian subsidiary of the Connecticut-based defense contractor United Technologies Corporation (UTC), pleaded guilty to violating the Arms Export Control Act (AECA) and making false statements in connection with its illegal export to China of U.S.-origin military software used in the development of China's first modern military attack helicopter, the Z-10.
UTC, its U.S.-based subsidiary Hamilton Sundstrand Corporation (HSC) and PWC have all agreed to pay more than $75 million as part of a global settlement with the DOJ and State Department in connection with the China arms export violations and for making false and belated disclosures to the U.S. government about these illegal exports.
The court documents allege that, beginning in the 1990s, after Congress had imposed the prohibition on exports to China of all U.S. defense articles and associated technical data, China sought to develop its attack helicopter under the guise of a civilian medium helicopter program in order to secure Western assistance. The Z-10, developed with assistance from Western suppliers, is China's first modern military attack helicopter.
During the development phases of China's Z-10 program, each Z-10 helicopter was powered by engines supplied by PWC. Despite the military nature of the Z-10 helicopter, PWC determined on its own that these development engines for the Z-10 did not constitute "defense articles," requiring a U.S. export license, because they were identical to those engines PWC was already supplying China for a commercial helicopter. In addition, PWC knowingly supplied to Chinese entities via PWC Canada the Electronic Engine Control software, made by HSC in the U.S. to test and operate the PWC engines. Because it was modified for a military helicopter application, it was a defense article and required a U.S. export license.
According to the court documents, PWC knew from the start of the Z-10 project in 2000 that the Chinese were developing an attack helicopter and that supplying it with U.S.-origin components would be illegal, but failed to notify UTC or HSC about the attack helicopter until years later and purposely turned a blind eye to the helicopter's military application. By early 2004, HSC and UTC learned there might an export problem and stopped working on the Z-10 project.
Today, the Z-10 helicopter is in production and initial batches were delivered to the People's Liberation Army of China in 2009 and 2010.
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BIS and DDTC Seek Comments on the Proposed "Specially Designed" Definition
Comments must be received no later than August 3, 2012
On June 19, 2012, Bureau of Industry and Security (BIS) and the State Department Directorate of Defense Trade Controls (DDTC) concurrently posted proposed rules (BIS rule & DDTC rule) in the Federal Register modifying the term "specially designed" for use in the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR).
On July 15, 2011, BIS proposed a single definition of the term "specially designed" as it would be used in the proposed "600 series" and the rest of the Commerce Control List (CCL).
The overall goal of the new definition is to differentiate between those articles "enumerated" on the United States Munitions List (USML) and those articles not enumerated but captured in "catch-all" paragraphs. The government objectives for the "specially designed" definition are to:
1 Preclude multiple or overlapping controls of similar items within and across the two control lists;
2 Be easily understood and applied by exporters, prosecutors, juries, and the U.S. Government;
3 Be consistent with definitions used by the international export control regimes;
4 Not include any item specifically enumerated on either the USML or the CCL and, in order to avoid a definitional loop, do not use "specially designed" as a control criterion;
5 Be capable of excluding from control simple or multi-use parts such as springs, bolts, and rivets, and other types of items the U.S. Government determines do not warrant significant export controls;
6 Apply to both descriptions of end items that are "specially designed" to have particular characteristics and to parts and components that were "specially designed" for particular end items;
7 Apply to materials and software because they are "specially designed" to have a particular characteristic or for a particular type of end item;
8 Not increase the current control level to "600 series" control or other higher end controls of items (i.e., not moving items currently subject to a lower control status to a higher level control status), particularly current EAR99 items, that are now controlled at lower levels; and
9 Not, merely as a result of the definition, cause historically EAR controlled items to become ITAR controlled.
The revised "specially designed" definition provided in the notice proposes a simplified two paragraph structure. Paragraph (a) is to identify what commodities, as a result of development, are "specially designed," and paragraph (b) is to identify what parts, components, accessories, and attachments are excluded from "specially designed."
This current proposed rule would revise that proposed July 15, 2011 definition. DDTC is concurrently publishing a proposed rule to create, to the extent possible, a common definition of "specially designed" in the ITAR.
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OFAC Posts Civil Penalty Enforcement Information
On June 14, 2012, Office of Foreign Assets Controls (OFAC) posted recent civil penalty enforcement information on their website:
National Bank of Abu Dhabi (NBAD) has agreed to remit $855,000 to settle potential civil liability for 45 transactions that appear to have violated the Sudanese Sanctions Regulations (SSR). The apparent violations occurred from November 2004 to December 2005.
In response to inquiries made by OFAC related to certain transactions, NBAD provided information to OFAC revealing that certain of its clerical staff removed or omitted Sudan-related references in payment instructions processed on behalf of its Sudan branch for payments routed through financial institutions located in the United States in apparent violation of the prohibition against the exportation of services from the U.S. to Sudan. The combined value of the 45 electronic funds transfers was close to $4.4 million.
NBAD did not voluntarily self-disclose the apparent violations; however, the company extended substantial cooperation throughout OFAC's review of these matters. OFAC determined that the apparent violations constituted a non-egregious case. The base penalty amount for the apparent violations was therefore $4,276,000. In calculating the penalty amount, OFAC considered that NBAD took prompt and appropriate remedial action; NBAD provided substantial cooperation; and NBAD has not received a penalty notice or finding of violation in the five years preceding the transactions at issue.
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ING Bank N.V. Forfeits $619 Million for Illegal Transactions with Sanctioned Entities
On June 12, 2012, the U.S. Department of Justice announced that ING Bank N.V. (ING Bank), headquartered in Amsterdam, has agreed to forfeit $619 million for knowingly and willfully conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) and for violating New York state laws by illegally moving billions of dollars through the U.S. financial system on behalf of sanctioned Cuban and Iranian entities. The bank has also entered into a parallel settlement agreement with the Treasury Department's Office of Foreign Assets Control (OFAC).
According to the court documents, starting in the early 1990s and continuing until 2007, ING Bank violated U.S. and New York state laws by moving more than $2 billion illegally through the U.S. financial system on behalf of Cuban and Iranian entities subject to U.S. economic sanctions. ING Bank eliminated payment data that would have revealed the involvement of sanctioned countries and entities, including Cuba and Iran; advised sanctioned clients on how to conceal their involvement in U.S. dollar transactions; fabricated ING Bank endorsement stamps for two Cuban banks to fraudulently process U.S. dollar travelers' checks; and threatened to punish certain employees if they failed to take specified steps to remove references to sanctioned entities in payment messages.
ING Bank's actions caused unaffiliated U.S. financial institutions to process transactions that otherwise should have been rejected, blocked or stopped for investigation pursuant to OFAC regulations.
ING Bank agreed to forfeit $619 million as part of the deferred prosecution agreements reached with the Justice Department and the New York County District Attorney's Office. The fine is the largest ever against a bank in connection with an investigation into U.S. sanctions violations.
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Chinese National Charged with Illegal Export of Sensitive Technology to China
 On May 23, 2012, the Bureau of Industry and Security (BIS) issued a press release stating that Qiang Hu, a/k/a Johnson Hu, 47, a Chinese national in Massachusetts on business, was arrested for illegally supplying U.S. origin parts to end-users in China in violation of U.S. export laws.
Hu was charged in a complaint with conspiracy to violate the Export Administration Regulations (EAR) and the International Emergency Economic Powers Act (IEEPA). Specifically, the complaint alleges that Hu has been the sales manager at MKS Instruments Shanghai, Ltd. (MKS-Shanghai) since 2008. MKS-Shanghai is the Shanghai sales office of MKS Instruments, Inc. (MKS), which is headquartered in Andover. Hu's employment gave him access to MKS manufactured parts, including export-controlled pressure-measuring sensors (manometer types 622B, 623B, 626A, 626B, 627B, 722A, and 722B), which are commonly known as pressure transducers. Pressure transducers are export controlled because they are used in gas centrifuges to enrich uranium and produce weapons-grade uranium.
The complaint alleges that beginning in 2007, Hu and others caused thousands of MKS pressure transducers worth millions of dollars to be exported from the United States and delivered to unauthorized end-users using export licenses that were fraudulently obtained from the U.S. Department of Commerce. The conspirators either used licenses issued to legitimate MKS business customers to export the pressure transducers to China, and then caused the parts to be delivered to other end-users who were not themselves named on the export licenses or authorized to receive the parts; or obtained export licenses in the name of a front company and then used these fraudulently obtained licenses to export the parts to China, where they were delivered to the actual end-users.
MKS is not a target of the government's investigation into these matters. If convicted, Hu faces a maximum sentence of 20 years in federal prison to be followed by up to three years of supervised release, and a $1 million fine.
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Two Individuals and Company Sentenced for Illegal Exports to Iran
 On May 16, 2012, the Bureau of Industry and Security (BIS) issued a press release stating that Massoud Habibion, 49, a U.S. citizen, Mohsen Motamedian, 44, a U.S. citizen, and their Costa Mesa, CA, company, Online Micro LLC, were sentenced in the U.S. District Court in the District of Columbia in connection with a scheme to illegally export millions of dollars worth of computer-related goods from the U.S. to Iran through the United Arab Emirates (UAE).
Specifically, in November 2009, and continuing through December 2010, Habibion and Online Micro conspired with a company operating in Dubai and Tehran, to procure U.S. -origin computer-related goods and export those goods to Iran via the UAE. During the scope of the conspiracy, Online Micro and Habibion sold to that company and exported from the U.S. numerous shipments of computer-related goods, worth a total of more than $4,904,962, with knowledge that the majority of those goods were destined for Iran.
Online Micro also filed false Shipper's Export Declarations (SEDs) with U.S. Customs and Border Protection (CBP) identifying the ultimate destination of the goods as the UAE. During the course of the investigation, Habibion and Motamedian told a government cooperator to lie to U.S. law enforcement officials about Iran being the true ultimate destination for the goods and counseled him to tell U.S. law enforcement agents that the computer-related goods remained in Dubai.
Habibion and Motamedian were arrested on a criminal complaint in California on April 7, 2011, and indicted on April 21, 2011. Habibion was sentenced to 13 months in prison for conspiracy to violate the International Emergency Economic Powers Act (IEPA) and to defraud the U.S. Motamedian was sentenced to three years supervised release for obstruction of justice.
Under the terms of their guilty pleas and related civil settlements with the Department of Commerce's Bureau of Industry and Security (BIS) and OFAC, Habibion and his company have agreed to forfeiture of $1.9 million seized from Online Micro's bank accounts by ICE's Homeland Security Investigations (HSI) during the course of the investigation. In addition, Habibion and Online Micro are denied export privileges for 10 years, although the denial order will be suspended provided that neither Habibion nor Online Micro commit any export violations during the 10-year probationary period and comply with the terms of the criminal plea agreements and sentences. Motamedian separately agreed to a $50,000 monetary penalty to settle a civil charge that he solicited a false statement to federal law enforcement agents.
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Freight Forwarder Sentenced to Prison for Conspiracy to Facilitate Illegal Exports to Iran
 On May 15, 2012, U.S. Attorney Paul J. Fishman announced that the U.S. District Court in Newark, NJ, sentenced Ulrich Davis, a Dutch citizen of Pumerend, The Netherlands, to six months in prison for conspiring to defraud the United States by facilitating the illegal export of goods to Iran.
Davis, a former manager of a Netherlands-based freight-forwarding company previously pleaded guilty to an Information charging him with conspiracy to defraud the United States through the violation of a U.S. Department of Commerce Temporary Denial Order.
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President's Executive Order Targets Foreign Sanctions Evaders
 On May 1, 2012, President Obama signed an Executive Order (E.O.), "Prohibiting Certain Transactions with and Suspending Entry into the United Stated of Foreign Sanctions Evaders with Respect to Iran and Syria."
The E.O. targets foreign individuals and entities that have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions against Iran or Syria, or that have facilitated deceptive transactions for persons subject to U.S. sanctions concerning Syria or Iran. With this new authority, Treasury now has the capability to publicly identify foreign individuals and entities that have engaged in these evasive and deceptive activities, and generally bar access to the U.S. financial and commercial systems.
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Transaction Value Should Include Post-Importation Adjustments to the Transfer Price, CBP Holds
 On May 30, 2012, U.S. Customs and Border Protection (CBP) issued a revocation of Headquarters Ruling Letter (HRL) 547654, dated November 8, 2001, relating to transfer pricing and the acceptability of post-importation adjustments, claimed pursuant to a formal transfer pricing policy. In addition, CBP also revoked any treatment previously accorded by it to substantially identical transactions. (Notice of the proposed revocation was published on December 28, 2011, in the Customs Bulletin, Vol. 46, No. 1. According to CBP, multiple comments were received concerning the notice of the proposed revocation).
In HRL 547654, Customs held that transaction value did not apply because the price was not fixed or determinable pursuant to an objective formula prior to importation as the price was within the control of the buyer and/or the seller. It is now CBP's position that subject to certain conditions, the transaction value method of appraisement will not be precluded when a related party sales price is subject to post-importation adjustments that are made pursuant to formal transfer pricing policies and specifically related (directly or indirectly) to the declared value of the merchandise. These adjustments, whether upward or downward, are to be taken into account in determining transaction value.
Specifically, in HRL W5148314, dated May 16, 2012, CBP considered whether the related party price determinable pursuant to the transfer pricing policy, constitutes a formula at the time of importation for purposes of determining transaction value, and if so, is it acceptable to take post-importation price adjustments (upward and downward) into account in determining transaction value.
Based on the comments CBP received in response to the proposed revocation of HRL 547654, CBP revised the list of factors used to determine whether an objective formula is in place prior to importation for purposes of determining the price within the meaning of 19 CFR 152.103(a)(1) as follows:
* A written "Intercompany Transfer Pricing Determination Policy" is in place prior to importation and the policy is prepared taking Internal Revenue Service (IRS) code section 482 into account;
* The U.S. taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return;
* The company's transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted;
* The company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States; and
* No other conditions exist that may affect the acceptance of the transfer price by CBP.
CBP stated in HRL W5148314 that it, "is of the view that post-importation adjustments (both downward and upward), to the extent they occur, may be taken into account in determining the transaction value under 19 U.S.C. §1401a(b). We find the downward adjustments in the transfer price made pursuant to the valid transfer pricing study are not rebates of, or other decreases in, the price actually paid or payable that are made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States [...]. Instead, the post-importation adjustments represent an element of the determination of the price actually paid or payable in accordance with 19 CFR §152.103(a)(1). Therefore, the post-importation adjustments made pursuant to the transfer pricing policy in this case simply reflect what should have been reported as the invoice price upon entry, had the exact price information of the imported merchandise been available at the time."
CBP urged importers who may anticipate post-importation adjustments to use the Reconciliation program. While not mandatory, reconciliation will allow importers to collect information to document their transactions as at arm's length. If importers claim the adjustments outside of the Reconciliation program, they are expected to demonstrate at the time of entry that the price is at arm's length and to provide supporting information.
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Calendar of Events
Upcoming Trade Events & Seminars
 Our website has a comprehensive listing of import and export conferences held throughout the country, as well as Customs training, EAR training, ITAR training, and other training. Below is a small sampling of what's available in the coming months:
25th Annual Update Conference on Export Controls & Policy - Bureau of Industry and Security
July 17-19, 2012 - Washington, DC
Complying with U.S. Export Controls - Bureau of Industry and Security
August 8 - 9, 2012 - Universal City, CA - $450
How to Develop an Export Management and Compliance Program - Bureau of Industry and Security
August 29 - 30, 2012 - Dallas, TX - $446
Complying with U.S. Export Controls - Bureau of Industry and Security
September 12-13, 2012 - West Chester, OH - $375
Complying with U.S. Export Controls - Bureau of Industry and Security
September 12-13, 2012 - Milpitas, CA - $475
Complying with the International Traffic in Arms Regulations - Bureau of Industry and Security
September 14, 2012 - Cincinnati, OH - $325
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Who's Hiring?
A Summary of Current Trade Job Opportunities
 As a service to the international trade community, Global Trade Expertise compiles links to trade job opportunities from many different sources. New trade job listings are posted frequently on our website.
To sort the job opportunities by region, fields, or levels, click on the appropriate category or tag in the right column on our Trade Jobs webpage. |
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Thanks again for your interest in our newsletter!
Sincerely,
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Jennifer Kessinger, Tammie Krauskopf & Ruta Riley
Attorneys & Consultants
jk@globaltradeexpertise.com
Tel. 925.876.1381 (Jennifer Kessinger)
tk@globaltradeexpertise.com
Tel. 708.707.4087 (Tammie Krauskopf)
rr@globaltradexpertise.com
Tel. (630) 862-8123
www.globaltradeexpertise.com
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