On Wednesday, October 3, 2012, a Department of Justice (DOJ)
indictment was unsealed charging eleven U.S. and Russian companies
and individuals for their alleged involvement in a scheme to
illegally export high-tech microelectronics from the United States
to Russian military and intelligence agencies. The scheme
allegedly involved a systematic conspiracy to obtain cutting-edge
microelectronics manufactured in the United States and export them
for use by Russian military and intelligence government end-users
without obtaining the required export authorizations from the
Department of Commerce, Bureau of Industry and Security
(BIS). Sound like the latest Bond movie?
The microelectronics, including analog-to-digital converters,
static random access memory chips, microcontrollers, and
microprocessors, were exported by Houston-based Arc Electronics,
Inc., to a Russian-based procurement firm, Apex Systems, LLC.
To evade the U.S. export licensing requirements, the defendants
provided false end-user information in connection with the purchase
of the goods, concealed the fact that the goods were intended for
export, and falsely classified goods on export records submitted to
BIS. For example, Arc reported to U.S. suppliers that it was
a manufacturer of benign products such as traffic lights, rather
than an exporter. Both firms, as well as certain of the
firms' owners and employees, are charged with conspiring to
violate and violating the International Emergency Economic Powers
Act and the Arms Export Control Act, and with conspiring to commit
How Might this Clandestine Scheme Affect Your Business?
Concurrent with unsealing the indictment, BIS issued a final
rule adding 165 foreign individuals and entities to the BIS
Entity List for their role in connection with the illegal
export scheme. These newly listed individuals and companies
are located in a number of countries, including those not typically
identified as transshipment zones, including: Belize, Canada,
Cyprus, Estonia, Finland, Germany, Greece, Hong Kong, Kazakhstan,
Russia, Sweden, the United Kingdom and the British Virgin
For each new listing, a BIS license is now required to export,
reexport, or transfer (in-country) all items "subject to the
EAR," including all EAR99 items. And, no
license exceptions may be applied. Moreover, BIS is enforcing
a policy of "presumption of denial" in its license
review. A full copy of the unpublished final rule is
available here. The new listings have not yet been
updated in the "Entity List" on BIS' website
(Supplement No. 4, Part 744 of the EAR).
Importantly, BIS includes a "Savings Clause," which
states that exports or reexports carried out under a License
Exception or without a license (NLR) that involve one of the newly
listed entities may proceed, so long as the items were
"en route aboard a carrier to a port of export or
reexport" on the date of BIS' publication of the
final rule. The export license requirement therefore goes
into effect when the Entity List changes are formally published in
the Federal Register, likely next week.
What Does this Mean for Your Company?
Comprehensive company-wide customer screening and due diligence
practices for all potential export transactions are the best
mechanism for protecting your company from engaging in unlawful
conduct. The newly listed entities and persons involved here
range from the actual foreign end-user to those involving the
receiving, transshipping, and facilitating of the illegally
exported controlled commodities. Thus, the new listings
include end users as well as other logistics providers and supply
Remember, the BIS end-user and end-use requirements apply to
all individuals and entities, U.S. and non-U.S. alike, who
export, reexport, or transfer items subject to the
EAR. Therefore, it is essential to closely monitor the BIS
Entity List, as well as the other restricted end-user lists
maintained by the U.S. government, prior to engaging in any export
transactions. Once again, this case highlights that companies
must undertake "know your customer" reviews of new and
existing accounts, and inquire about any "red flags" that
arise during the course of a transaction and indicate that the
items may be destined for a prohibited end-use, end-user, or
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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