Export Misdirection: Cracking Down on Third Country Transshipment Violations
Note: The following article appeared in the Winter 2008 edition of the American Bar Association Section of International Law's International Trade Committee Newsletter and has been reprinted with permission.
By: Jordan Collins, Esq.*
Transshipment Concerns Aggressively Pursued
Towards the end of 2007, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) reached two civil settlements with U.S. companies that allegedly violated the Export Administration Regulations (EAR). In addition to the two settlement agreements, BIS issued a Temporary Order denying export privileges to a Dutch company. In a parallel proceeding, a criminal complaint was filed against the Dutch company by the Department of Justice (DOJ) for violating US embargoes and making false statements on export control documents.
What makes these cases noteworthy is the common theme - in all three cases, the exporting company tried to disguise prohibited exports to Iran by transshipping the goods through an intermediate destination prior to reaching their ultimate end-user. While transshipment is a commonly used practice in legitimate trade, transshipment can also serve as a strategy to disguise exported goods intended country of destination.
Commerce’s Civil Export Enforcement Initiatives
To help combat transshipment violations, both the Department’s Commerce and Justice have made export control enforcement a growing priority. In 2003, BIS launched the Transshipment Country Export Control Initiative
“The illicit transshipment, re-export, and diversion of goods and technologies in international commerce compromise the effectiveness of U.S. trade agreements and export control laws. In so doing, such illicit transshipments harm U.S. industry, threaten U.S. security, weaken confidence in the international trading regime, and undermine international efforts to liberalize trade.”
BIS has identified a number of countries that are common transshipment hubs, including the United Arab Emirates (UAE), Singapore, Hong Kong, Thailand, Malaysia, Cyprus, Malta, and Panama. A primary country exporters use to illegally transship goods in the Middle East is the UAE. While the UAE is a growing market for legitimate trade
Over the past few years, the U.S. government has increased pressure on the UAE and other common transshipment countries to clamp down on prohibited transshipments by adopting domestic export control laws. One method the U.S. applied this pressure was by proposing amendments
As a result of U.S. pressure, UAE’s government subsequently passed a “stringent new export control laws that included stiffer penalties for parties involved in the diversion of controlled shipments.”
Department of Justices’ Criminal Export Control Initiatives
The Department of Justice (DOJ) handles all export-related criminal cases. In June 2007, DOJ appointed Steven W. Pelak, an 18-year veteran federal prosecutor, to serve as the Justice Department’s first-ever National Export Control Coordinator (NECC) to improve the investigation and prosecution of illegal exports of U.S. arms and sensitive technology. The NECC is detailed to the Counter-Intelligence Section of Justice’s National Security Division. Mr. Pelak is also responsible for ensuring full coordination between the Justice Department and the many other U.S. law enforcement, licensing and intelligence agencies that play a role in export enforcement.
The creation of the NECC underscores a trend towards heightened export control enforcement. The U.S. government views export controls as vital tools to protect national security, the last several years witnessed a consistent increase in government resources focused on export enforcement.
U.S. Sanctions on Iran
Exports and re-exports of U.S. origin goods to Iran are subject to comprehensive export controls, due to the nation’s status as an embargoed country since 1977. Such restrictions are governed by regulations issued by both the Treasury Department’s Office of Foreign Assets Control (OFAC) and Commerce’s Bureau of Industry and Security (BIS).
As a general rule, pursuant to OFAC’s Iranian Transactions Regulations, U.S companies and individuals are prohibited from exporting all U.S.-origin goods, technology or services directly or indirectly to Iran. However, exceptions have been carved out of the regulations for certain types of humanitarian products, including medicines, medical devices and agricultural commodities which can be exported to Iran upon the receipt of a one-year specific license issued by OFAC pursuant to the Trade Sanctions Export Reform and Enhancement Act of 2000 (TSRA).
The International Emergency Economic Powers Act
Concurrently, BIS governs the re-export of U.S. origin goods to Iran. Under 15 C.F.R. §764.7
“BIS is required to deny licenses for items controlled to Iran for national security or foreign policy reasons absent contract sanctity or a Presidential waiver. License applications for which contract sanctity is established may be considered under policies in effect prior to the enactment of that Act. Otherwise, licenses for such items to Iran are subject to a general policy of denial (Emphasis Added).”
Recent Domestic Enforcement Proceedings
Turning to the recent cases, Jennifer L. Reul-Marr, a resident of Ridgefield, Connecticut, was alleged by BIS to be a co-conspirator involving the re-export of dental equipment (classified as EAR99 under the EAR regulations) to Iran. Ms. Reul-Marr allegedly conspired to export the dental equipment by transshipping the goods to the UAE, an illegal export activity without a proper license.
According to BIS, Ms. Reul-Marr failed to obtain the proper license for such an export, as required by law. Subsequently, BIS brought an enforcement case
Within the same industry, Centerpulse Dental, Inc.
Like Ms. Reul-Marr, Centerpulse allegedly attempted to export dental equipment to Iran by transshipping the goods through the UAE. Centerpulse/Zimmer Dental received a $175,000 civil penalty under the terms of the settlement agreement. A $75,000 portion of that penalty was suspended for one year, and will be waived if Zimmer Dental commits no further violations of the EAR. Failure to comply with the terms of the settlement agreement would result in the full enforcement of the penalty and the denial of all export privileges for one year.
Although it is not clear whether Ms. Reul-Marr and Centerpulse knew that obtaining a TSRA license from OFAC would have allowed them to legally export dental equipment to Iran, both Ms. Reul-Marr and Centerpulse could have avoided the significant expense, time, and the negative publicity associated with their cases if a specific license had been obtained.
Foreign Entities & Export Proceedings
BIS took a different tactical approach to thwarting a third company from exporting goods to Iran via transshipment through UAE and Cyprus. Aviation Services International, B.V.
One transaction involved controlled receivers and video transmitters. The respondents claimed that the end-user was the Polish Border Control Agency (PBCA), and the goods were to be used in unmanned aircraft vehicles operated by the PBCA. BIS ultimately determined the end-user was not in fact Poland, but rather Iran. Such a determination was made obvious by fact that the PBCA did not have any unmanned aircraft vehicles in its arsenal, nor had it ever contracted with Aviation Services. Instead, Aviation Services provided false information to the U.S. government, stating that the end-user was Lavantia, Ltd., a Cyprus-based company, known as a transshipment intermediary for Iranian businesses.
Even more covertly, Aviation Services used a shell corporation, Delta Logistics, to facilitate the exportation of polyamide from the U.S to Iran. Again, Aviation Services provided false information to the U.S. in their efforts to illegally transship goods subject to the EAR and ITR to Iran. The Aviation Services case is an excellent example at different techniques employed by a company to circumvent U.S. export law. An ex parte adjudicatory proceeding conducted by BIS determined that the issuance of a Temporary Denial Order
Based on the evidence provided, the TDO was granted by the administrative law judge and Aviation Services had its export privileges denied for 180 days. The criminal enforcement case appears to remain pending as of this writing.
The recent string of cases prosecuted by BIS and DOJ highlights the ongoing attention given to transshipment practices by companies attempting to export goods to Iran without proper governmental approval and licenses. Based upon BIS, OFAC, and DOJ’s efforts, the U.S. government is making it evident that they will continue to pursue transshipment violations to the full extent of the law, regardless of the daunting task enforcement of these complex transactions pose.
*Jordan Collins is with the Overseas Private Investment Corporation. Please contact Jordan Collins at firstname.lastname@example.org with comments or questions regarding this article.
 For an overview of the new UAE Regulations, see www.wam.org.ae/servlet/Satellite?c=WamLocEnews&cid=1188290221292&p=1135099400295&pagename=WAM%2FWamLocEnews%2FW-T-LEN-FullNews. The law authorizes penalties of up to imprisonment for one year and/or fines totaling over US$270,000 for violating the UAE’s export control law.
 On May 6, 1995, President Clinton signed Executive Order 12959, pursuant to the International Emergency Economic Powers Act (50 USC § 1705) as well as the International Security and Development Cooperation Act of 1985 ("ISDCA"), substantially tightening sanctions against Iran.
 See 31 C.F.R. § 560. President Reagan, on October 29, 1987, issued Executive Order 12613 imposing a new import embargo on Iranian-origin goods and services. Section 505 of the ISDCA was utilized as the statutory authority for the embargo giving rise to the Iranian Transactions Regulations.
 For an overview of OFAC Regulations involving sanctions against Iran, see http://treas.gov/offices/enforcement/ofac/programs/iran/iran.pdf.
 Pub. L. No.106 387. (October 28, 2000).
 50 USC § 1701, et al.
 Pub. L. No. 110-96 (October 17, 2007).
 Pub. L. No. 109-177 (March 9, 2006).
 BIS may issue an order temporarily denying to a person any or all of the export privileges described in part 764 of the EAR maybe issued upon a showing by BIS that the order is necessary in the public interest to prevent an imminent violation of the EAA, the EAR, or any order, license or authorization issued thereunder. A violation may be "imminent" either in time or in degree of likelihood. To establish grounds for the temporary denial order, BIS may show either that a violation is about to occur, or that the general circumstances of the matter under investigation or case under criminal or administrative charges demonstrate a likelihood of future violations. 15 C.F.R. § 766.24(a),(c).
 15 C.F.R. § 764(b)(4).