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October 03, 2012 

U.S. Indicts U.S. and Russian Companies and Individuals Involved in Russian Military Procurement Network and Adds 164 Parties to BIS Entity List

As a result of an investigation involving an alleged Russian military procurement network, the U.S. Department of Justice announced today that it had unsealed an indictment against two companies and 11 individuals located in the U.S. and Russia and executed a number of search warrants at various residences, businesses and banks in the U.S. 

In a coordinated action, the Commerce Department's Bureau of Industry and Security (BIS) also issued a final rule (PDF) amending the Export Administration Regulations (EAR) to add 164 foreign persons and companies to the Entity List who allegedly received, transshipped or facilitated the exports of the items to Russia.

The Indictment

According to the indictment, the defendants were allegedly involved in: 
a surreptitious and systematic conspiracy to obtain advanced, technologically cutting-edge microelectronics from manufacturers and suppliers located within the United States and to export those high-tech goods to Russia, while carefully evading the government licensing system set up to control such exports. The microelectronics shipped to Russia included analog-to-digital converters, static random access memory chips, microcontrollers, and microprocessors” that were subject to the jurisdiction of the Export Administration Regulations (EAR) or International Traffic in Arms Regulations (ITAR).
The Justice Department also stated that the defendants:
allegedly exported many of these high-tech goods, frequently through intermediary procurement firms, to Russian end users, including Russian military and intelligence agencies. To induce manufacturers and suppliers to sell them these high-tech goods, and to evade applicable export controls, the defendants often provided false end user information in connection with the purchase of the goods, concealed the fact that they were exporters, and falsely classified the goods they exported on export records submitted to the Department of Commerce. For example, in order to obtain microelectronics containing controlled, sensitive technologies, Arc claimed to American suppliers that, rather than exporting goods to Russia, it merely manufactured benign products such as traffic lights. Arc also falsely claimed to be a traffic light manufacturer on its website. In fact, Arc manufactured no goods and operated exclusively as an exporter.
In addition to the 11 individuals named in the announcement, the two companies that were indicted are:
  • Arc Electronics, Inc., Houston, Texas
  • Apex System, L.L.C., Moscow, Russia

Addition of 164 Parties to BIS Entity List

The 164 parties that will be added to the Entity List are located in Belize, Canada, Cyprus, Estonia, Finland, Germany, Greece, Hong Kong, Kazakhstan, Russia (119 of the 164), Sweden, United Kingdom and British Virgin Islands. (There are actually 165 entries added, one of which is an alternate address for one party). 

The Entity List, found at Supplement No. 4 to Part 744 of the EAR, includes the names of non-U.S. businesses, research institutions, government organizations and individuals that have been identified as being involved in activities that merit additional scrutiny and licensing requirements. The entries on the Entity List specify the license requirements and license review policy that are applicable to shipments to each listed entity. In some cases, a license will be required to ship items classified as EAR99 to the customer, even when a license would not normally be required. In other cases, all items subject to the Export Administration Regulations will require a license. The export license review policy also varies from entity to entity. In some cases, there is a presumption of approval or denial and, in other cases, the license will be reviewed by BIS on a case-by-case basis. Exporters, freight forwarders and other parties that are involved in shipping items to parties on the Entity List without the required export license are subject to civil penalties of up to $250,000 per violation or twice the value of the underlying transaction.

In this case, the Entity List license requirement for 164 parties is “presumption of denial” and applies to “all items subject to the EAR.” As a result, an export license issued by BIS is required before any item subject to the EAR can be exported, reexported or transferred to these persons or companies, and establishes a presumption that no such license will be granted. In addition, no License Exceptions contained in the EAR can be used for exports, reexports or transfers to any of the 164 named parties.

The export license requirement will go into effect upon publication of the Entity List changes in the Federal Register, which should take place early next week. 

While the Entity List announcement contains a "saving clause" authorizing shipments of items to these parties that were en route aboard a carrier to a port of export or reexport, on the date of publication of the notice in the Federal Register, U.S. exporters and non-U.S. exporters of U.S. origin items should review the names to be added to the Entity List to ensure that there are no pending transactions with any of these parties that may be ready to be shipped. 

While restricted party screening software vendors will update their restricted party screening list databases to include these 164 new names, some software vendors will not update their databases until the notice is published in the Federal Register next week.

Finally, while Arc Electronics in Houston, Texas is not included on the Entity List since it is located in the U.S., it is recommended that Arc Electronics and the other named U.S. defendants not included on the Entity List be considered as restricted parties for export compliance purposes pending the outcome of the court proceedings (although it is my understanding that Arc Electronics was shut down today and could be added to the Denied Persons List in the future).  

Request by Law Enforcement for Assistance

In an unusual development, the press release includes the following request by the law enforcement agencies involved in this matter:
As a result of this case, there may be victims and witnesses who need to contact the agencies involved in the investigation. If your business has been approached by one of the defendants, or by someone trying to obtain export-protected, sensitive technology who appeared not to be legitimate, please report that information to businessoutreach@leo.gov. The information will remain confidential and will be handled by the appropriate authorities.
The leo.gov website is the FBI's Law Enforcement Online (LEO) system that is used to support investigations and other law enforcement communication-related activities. 

Exporters should consider consulting with qualified export controls counsel before submitting information via the LEO website.


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