Archive for the ‘Customs, Import & Trade Law’ Category

Trade Based Money Laundering in the News: Miami-Area Electronics Exporters Targeted in FinCEN Anti-Money Laundering Initiative

Wednesday, April 22nd, 2015

On April 21, 2015, the Financial Crimes Enforcement Network (FinCEN) issued a Geographic Targeting Order (GTO) to approximately 700 businesses in the Miami, FL area which export electronics, including mobile phones.  The GTO implements several reporting requirements for these businesses when they are involved in currency transactions over $3,000, which is significantly lower than the usual $10,000 threshold.  The report to the government (typically referred to as an Form 8300) includes information about the transaction and the people involved.

According to the FinCEN press release, the purpose of the GTO is to “shed light on cash transactions that may be tied to trade-based money laundering schemes.”  Criminal organizations including drug cartels, crime syndicates, and terrorist-financing operations use trade-based money laundering to move and launder incredibly large sums of money just by buying and selling merchandise in international markets.

According to the Financial Action Task Force (FATF), an intergovernmental body formed in the late 1980s to combat money laundering and other financial crimes, anywhere from $590 billion to $1.5 trillion in illegally obtained money was laundered world-wide in 2012 through trade based money laundering.  There are four basic techniques for laundering money through trade:

  • over- and under-invoicing of goods and services;
  • multiple invoicing of goods and services;
  • over- and under-shipments of goods and services; and
  • falsely described goods and services.

A common method of  bringing “clean” money into a country, involves a company undervaluing its imports or overvaluing its exports.  To move money out of a country, the opposite would occur.  For example, a U.S. company could sell $2 million in products to a cartel-linked company or customer in Latin America.  The U.S. company then invoices these products upon export for only $1 million.  The foreign customer obtains the products – for which they paid only $1 million – and resells them in country for the full $2 million.  This creates $1 million in laundered money.  The problem of import-export invoice discrepancy is so large, that the Global Financial Integrity and the International Monetary Fund estimate that the difference between the declared value of Mexican exports to the United States in 2013 was almost $40 billion higher than the declared value of those same imports into the U.S. Of course, this is only one example of a trade based money laundering transaction. The list of other trade based money laundering transactions is seemingly endless, but FinCEN is clearly mobilizing to reign it in.

Under the GTO, select businesses operating in the area immediately around Miami International Airport, as well as their agents, subsidiaries, and franchisees, must now file FinCEN Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business,” anytime they receive currency, cashier’s checks, or money orders in an amount over $3,000 in an export transaction.  (As noted in the title of the Form, such reporting normally is required for transactions in excess of $10,000, not $3,000.)  The businesses must also obtain the customer’s telephone number, a copy of a valid photo identification, and written certification from the customer as to whether he or she is conducting the transaction on behalf of another person.  With respect to the transaction itself, the Form must also include a description of the goods involved in the transaction, the name and phone number of the person receiving the goods, and the final address to which such goods are being shipped.

FinCEN has been using GTOs to combat money laundering since August 1996, when certain licensed money transmitters in the New York metropolitan area were required by FinCEN to report information about the senders and recipients of all cash-purchased transmissions to Colombia of $750 or more.  Over the last two decades, other GTOs have targeted such areas as the Los Angeles Fashion District, armored car and money couriers in San Diego County, and wire transfer agents in Arizona.

In issuing the GTO, FinCEN Director Jennifer Shasky Calvery stated, “We are committed to shedding light on shady financial activity wherever we find it.  We will continue issuing GTOs, as necessary, as well as exercising FinCEN’s other unique anti-money laundering authorities, to ensure a transparent financial system that impedes money launderers and other criminals from masking their identity and illicit activity.”

And certainly GTOs can have an enormous impact on money-laundering operations.  In the aftermath of the first GTO involving New York area money transmitters, the U.S. Department of Treasury found that the targeted money transmitters’ business volume to Colombia dropped approximately 30%; the volume of transactions at other, non-targeted businesses fell at a similar level.  This would imply that in addition to the government-stated goals of collecting data and transparency, the practical effect of a GTO is to shift money laundering activity away from the targeted area.  Returning to the August 1996 New York GTO, U.S. Customs (now U.S. Customs and Border Protection) reported a marked increase in interdiction and seizure activity involving cash smuggling at the U.S.-Mexico border immediately after the GTO went into effect.

It will be interesting to see where the money laundering activities will shift as a result of the new Miami-area GTO.  According to Export-Import Bank figures, the top 10 electronics exporters operating in the GTO-targeted area accounted for over $212 Million in exports over the last seven years.  Therefore, if the historical effectiveness of GTOs in squeezing trade-based money laundering into other geographic areas is any indication, the Miami export trade community is in for a major hit.

Exporters and Trade-Based Money Laundering

Thursday, March 19th, 2015

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

You arrived at work today to find the perfect storm of export issues: a shipment of mobile phones to one of your most established South American customers has been detained by the Commerce’s Office of Export Enforcement (OEE); the federal government has seized $40,000 from your company’s checking account; and the banks have frozen all of your accounts. The only clue you have to this mess is from your freight forwarder. When the OEE seized your merchandise, one of the agents told your shipper that the merchandise was being seized, because it is “involved in money laundering.”

You are now afraid to make any other shipments, your company can no longer receive or send payments and that $40,000 is a huge hit to your revenues. And what do they mean by money laundering? You deal only with established customers and you have great relationships with them. They pay their invoices promptly, usually in cash or wire transfers (so no credit card fees), and they order thousands of phones per month. In fact, they send you so much business that you even give them significant discounts off of the regular invoice prices for most of the products you sell.

Where do you even begin to sort out this mess?

In the “old days” (like 10-15 years ago), illicit organizations such as drug cartels, terrorist networks and crime syndicates used to move their ill-gotten dollars, euros and pesos in cash by using couriers in cross-border travel. When law enforcement largely shut down those traditional systems, these criminals turned to a more potent option: trade-based money laundering (TBML). Through export (and import) transactions, criminals can move and launder incredibly large sums of money just by buying and selling merchandise in international markets.

According to the Financial Action Task Force (FATF), an intergovernmental body formed in the late 1980s to combat money laundering and other financial crimes, anywhere from $590 billion to $1.5 trillion in illegally obtained money was laundered world-wide in 2012 through TBML. There are four basic techniques for laundering money through trade:

  • over- and under-invoicing of goods and services;
  • multiple invoicing of goods and services;
  • over- and under-shipments of goods and services; and
  • falsely described goods and services.

To bring “clean” money into a country, a company need only undervalue its imports or overvalue its exports. To move money out of a country, the opposite would occur. For example, a U.S. company could sell $2 million in products to a cartel-linked company or customer in Latin America. The U.S. company then invoices these products upon export for only $1 million. The foreign customer obtains the products – for which they paid only $1 million – and resells them in country for the full $2 million. This creates $1 million in laundered money. The problem of import-export invoice discrepancy is so large, that the Global Financial Integrity and the International Monetary Fund estimate that the difference between the declared value of Mexican exports to the United States in 2013 was almost $40 billion higher than the declared value of those same imports into the U.S.

The company in this scenario may have unwittingly triggered several “red flags” that would indicate an involvement in TBML. According to U.S. Immigration and Customs Enforcement (ICE), indictors of TBML include:

  • Payments to vendors by unrelated third parties;
  • False reporting, such as commodity misclassification, commodity over- or under-valuation;
  • Commodities being traded that do not match the business involved;
  • Unusual shipping routes or transshipment points;
  • Packaging inconsistent with the commodity or shipping method;
  • Double-invoicing;

and many more. The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) have identified other “red flags” that you can read about here.

In this case, the “significant discounts” to customers could appear as undervaluations, depending on how invoices are prepared. Additional factors may also contribute to exports being labeled as trade-based money laundering transactions; for example, accepting payments in cash, receiving wire transfers from unrelated parties and customer orders for products or in quantities that law enforcement officials may believe are unreasonable, given the customer.

When enforcement comes in money laundering cases, it can take several forms and come from several fronts. Enforcement measures include seizure and forfeiture of merchandise, seizure of funds that can be traced to the money laundering activity, civil penalties and/or criminal charges. These measures are being used by the federal government, state governments and even local governments which take part in multi-jurisdictional task forces (which are often funded by the seizures they make). In addition, banks and credit card companies may suspend accounts to avoid being seen by law enforcement as being complicit in money laundering activities. In 2013, banking giant HSBC agreed to pay $1.92 billion to U.S. authorities in fines for its complacency in laundering drug money for Mexican cartels; no bank wants that to happen to them.

Now understanding what the situation may be, the challenge is responding quickly and appropriately to the seizures. “Red flags” which otherwise could indicate money laundering may also have completely legal business rationales. For example, is the South American company that is buying the large quantities of mobile phones the largest reseller of mobile phones in that country? If so, such sales volume may be reasonable. Did you perform due diligence on the customer to ensure they are who they say they are? Are the discounts properly noted on invoices and in keeping with discounts offered by other industry leaders? Do the funds represented by the seized bank deposits line up perfectly with invoices for shipments? These are the types of arguments that must be made in negotiations with law enforcement and in petitions seeking return of seized property. The real key is assembling and presenting strong documentary evidence demonstrating that money laundering is not taking place; merely professing innocence usually will not result in mitigation of the seizures.

Money laundering charges are notoriously difficult to fight; however, a company’s best practice to keep itself from unwittingly participating in a money laundering violation is to have a strong anti-money laundering (AML) program. An AML program is a set of procedures designed to guard against someone using your company to launder money. It derives from requirements for financial institutions under the Bank Secrecy Act and the USA PATRIOT ACT (Title 31 of the United States Code), and includes such features as a customer identification or “know your customer” (KYC) program. [These requirements are akin to verifying the consignee and end-user of an export against denied party lists and understanding the intended end use of merchandise before export.] Though not technically required for most exporters, any company selling products into high-risk regions or receiving payments from third parties would be advised to have an AML program in place.

Assuming you have vigilantly and rigorously implemented and maintained your AML program (and your export compliance program), your company should be able to identify and avoid those situations which may result in your company inadvertently becoming involved in a money laundering transaction. If your company exports its products from the United States and does not have an effective AML compliance program, your company faces an enhanced risk of enforcement measures that could put it out of business for good.

Personal Liability for Export Violations: Civil Penalties for Individuals May be Trekking Toward You

Tuesday, January 27th, 2015

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

You run a small tech company that customizes other manufacturers’ desktop and laptop computers for your customers. You can install special chipsets, encryption hardware and software, upgrade the fans and power units to make them “ruggedized” for field use-whatever your clients need. You are the sole owner of the company and, except for occasional part-time help, the only employee.

One of your customers is an American research scientist with whom you have been working for years. He is on a special project at a university in a former Soviet republic and his team liked what you had done for his computer so much, you upgraded multiple machines for them and sent them out. Today, Special Agents from the Office of Export Enforcement visited your office and told you that you may have violated export control laws, because these computers required some sort of license. From your own research after they left, you have learned that your company could be liable for hundreds of thousands of dollars in civil penalties. The Special Agents told you that they didn’t see any potentially criminal liability issues.

If your company got hit with those sorts of penalties, you would have to close it down. You’re wondering if there are any other risks that you need to consider.

Generally speaking, the owners (equity holders), directors and officers of corporations and limited liability companies do not face personal liability for their corporate actions. Under the Business Judgment Rule, there is a presumption against individual liability if decisions are made on an informed basis, in good faith and with the best interests of the corporation at heart.

However, personal liability can attach for company actions under multiple circumstances; for example, if company officials intentionally act in a criminal or fraudulent manner, breach their fiduciary duties to the company or if the company is found to be an “alter ego” of the individual. The “alter ego” doctrine is especially important for small or closely held companies. As an attorney, I recommend to my smaller, corporate clients that they strictly observe corporate formalities (have regular director and shareholder meetings, execute formal resolutions, have company bank accounts that are separate from their personal accounts, not commingle personal and company assets, etc.) as a means to avoid a court “piercing the corporate veil” and extending corporate liability to a company’s owner(s), director(s) and officers.

Until recently, I would have said taking such actions to ensure that a company is not considered to be the alter ego of its owners/operators would protect an exporter from individual civil liability in the event that a company has export violations. And then came Trek.

In United States v. Trek Leather, Inc., and Harish Shadadpuri, 781 F.Supp.2d 1306, (CT.Int’l Trade, 2011), a company had improperly imported merchandise into the United States. The U.S. government (U.S. Customs and Border Protection) brought legal action against both the company and its president, individually. The applicable customs law in Trek provides “no person by fraud, gross negligence, or negligence” may “enter, introduce or attempt to introduce any merchandise into the United States by means of” misrepresentations or omissions. 19 U.S.C. § 1592(a)(1)(A) (emphasis added). The court in the Trek case applied the laws of agency – which state that an agent who actually commits a civil wrong is generally liable for the act along with the principal, even though the agent was acting for the principal – to find that not only is the company (i.e., the principal) liable for the import violation, but the president (its agent) is personally liable as well. Further ruling that the company’s president, Harish Shadadpuri, was indeed a “person” within the meaning of the statute, and is therefore covered by the statute, the Court of International Trade found both the company and its president liable on a theory of gross negligence.

On appeal to the Federal Circuit, the court held that corporate officers may be held personally liable for civil penalties even without the government piercing the corporate veil or when the officers themselves do not act in a manner that violates the Customs statute. United States v. Trek Leather, Inc., 767 F.3d at 1288, 96-99 (Fed. Cir. 2014) (en banc).The Trek court found that to impose personal liability, the corporate officer or his or her agent must only take some action that “introduce[s]” goods into the United States.

So what does the Trek decision mean for exporters? It may mean that individuals who take actions which violate export control laws can face civil liability in the form of monetary penalties for their actions.

Just like the customs law at issue in Trek, the Export Administration Regulations (EAR) provides:

No person may engage in any conduct prohibited by or contrary to, or refrain from engaging in any conduct required by, the EAA, the EAR, or any order, license or authorization issued thereunder.

15 C.F.R. §764.2(a) (emphasis added). Similarly, under the ITAR regulations,

Any person who is granted a license or other approval or who acts pursuant to an exemption under this subchapter is responsible for the acts of employees, agents, and all authorized persons to whom possession of the defense article or technical data has been entrusted regarding the operation, use, possession, transportation, and handling of such defense article or technical data abroad.

22 C.F.R. §127.1(c). In the same manner that the court in Trek found that company’s president to be a “person” covered by the statute and, therefore, personally liable for civil penalties arising from import violations, BIS, DDTC or a court could impose civil penalties on individual persons for their company’s export violations as well.

While individuals have often been charged, convicted, fined, and imprisoned for criminal violations of export control laws, I can think of no instance in which an individual has been assessed civil penalties for export violations committed by his or her company. Trek may now open the door for such civil penalties. With federal budgets tightening and the ruling of Trek relieving the government of any obligation to pierce the corporate veil, enforcement agencies may use the ruling to increase their assessments of civil penalties against companies and their principals. On December 18, 2014, for example, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) filed a lawsuit seeking $1 Million in civil penalties against the former compliance officer of MoneyGram for violations of the Bank Secrecy Act. This is the first attempt by this enforcement agency to hold an individual personally responsible for the anti-money-laundering failures of his employer.

It is likely that smaller exporters, and especially closely-held companies, may have a higher risk, because day-to-day operations – including export matters – are usually vested in just a few people. The fewer the people involved in an export transaction at a company, the easier it may be for government investigators and enforcement officials to affix individual liability. However, export program managers, compliance personnel, and even the “front line” employees responsible for export operations at larger exporters may also be at risk.

The ruling in Trek highlights the importance of an exporter- large or small – having a strong compliance program, using robust compliance procedures and safeguards which are implemented and maintained on an on-going basis and relying on agents such as freight forwarders and attorneys with proven compliance experience. Each of these measures will help ensure that companies and their individual officers, directors and employees are remaining compliant with respect to export matters.

Trek may also highlight the need for individuals involved in a company’s export operations to seek certain protections from their employers. Such individuals may well demand proper insurance and indemnification from the company for their export activities. They may also need to review company governance documents (such as bylaws and board resolutions) to ensure that the company is adequately protecting them from possible risks.

Confession: Good for the Soul, but Bad for Business?

Tuesday, November 11th, 2014

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

A few days ago, your company filed a voluntary disclosure with the Directorate of Defense Trade Controls stating that you violated the ITAR in an export transaction. Your in-house counsel told you that you had to file quickly and that you were legally obligated to disclose your violation voluntarily. You really didn’t have time to do anything other than gather all of the documents related to the transaction and send those papers to the government along with a summary of what happened and what you had done to fix the problem.

Last night, you told this story to a friend who is a criminal defense lawyer. She shocked you by asking why you would EVER voluntarily “confess to a crime.” Your legal department told you that you would escape serious legal liability by making the voluntary disclosure to the DDTC. But now you are not so sure.

Did your company do the right thing, or did you just make a serious mistake?

The question of whether or not a company should make a disclosure to the government in any regulatory matter – including exports, imports, food and drug, anti-money laundering – should never be evaluated in normative, ethical constructs of doing the “right” or the “wrong” thing. Instead, a company should carefully consider all of the business and legal implications of disclosure and then decide. If your company did that here, then the decision would always be the “right thing,” regardless of whether you ended up making the disclosure or not.

In your particular case, however, it doesn’t sound like your company carefully evaluated all of the angles before dashing off a letter to Washington.

Federal regulations provide for the voluntary disclosure of compliance violations by exporters, and making such disclosures can be very beneficial in enforcement matters. The Office of Export Enforcement, Bureau of Industry and Security notes that a voluntary disclosure will be given “great weight” as a mitigating factor in administrative sanction decisions. The Office of Foreign Assets Control (OFAC) states that voluntary self-disclosure will result in a capping of maximum penalties at 50% of their normal level. (31 C.F.R. § 501, App. A.) U.S. Customs and Border Protection offers similar, strong mitigation of administrative penalties for voluntary disclosures in matters involving Automated Export System (AES) violations under the Census regulations (15 C.F.R. § 30.74, CBP Dec. 08-50 (“Extraordinary Mitigating Factor”)).

But these benefits of voluntary disclosures are not automatically accorded by all export enforcement agencies. DDTC regulations state, “the Department may consider a voluntary disclosure as a mitigating factor in determining the administrative penalties, if any, that should be imposed” (22 C.F.R. § 127.12(a) (emphasis added)). Therefore, it is possible that no mitigation of administrative penalties may occur upon the filing of a voluntary disclosure under the ITAR.

The fundamental truth is that a voluntary disclosure is an admission that your company has violated export control laws. A company must be aware, therefore, of the ramifications of a voluntary disclosure:

  • It will result in an investigation of the company and its export activities.
  • It most likely will result in sanctions which can range from a warning letter up to significant fines and even jail time.
  • If a disclosure (or the subsequent investigation) reveals other violations (e.g., of tax laws or securities laws), those matters will be referred to other enforcement agencies.
  • If a disclosure reveals the clear intent of a company to violate export laws and/or egregiously violative activities, the case most likely will be referred to the Justice Department for criminal prosecution (in addition to administrative sanctions).

While the voluntary disclosure can significantly mitigate sanctions and even convince an agency to proceed administratively instead of criminally in some circumstances, every effect on the company must still be considered before making the disclosure.

What Should Companies Consider?

Given the significant risks and benefits involved in voluntary disclosures, what should companies consider when evaluating whether to make such a disclosure? There are myriad factors and many are particular to the company, its compliance history and the particular facts of the violation(s); however, the following are some important elements that must be considered by every exporter:

  • Is Disclosure Required? Under some circumstances, voluntary disclosure is not just a good idea, but is required by law. For example, under 22 C.F.R. §126.1(e) (ITAR), “Any person who knows or has reason to know of such a final or actual sale, export, transfer, reexport or retransfer of such articles, services or data [to certain listed, embargoed countries] must immediately inform the Directorate of Defense Trade Controls” (Emphasis added). In fact, the ITAR regulation’s general policy statement would seem almost to compel voluntary disclosure: “Failure to report a violation may result in circumstances detrimental to U.S. national security and foreign policy interests, and will be an adverse factor in determining the appropriate disposition of such violations” (22 C.F.R. § 127.12(a) (emphasis added)).
  • Will the Government find out about the violation anyway? A company must ask itself whether, absent disclosure, the Government will likely find the violation on its own. If your company has aggressive competitors or disgruntled employees who may learn of the violation and contact enforcement officials, the odds of discovery increase. Similarly, if the violation involved a recurring transaction or an item that may be returned for repair or replacement, the Government is more likely to find out about the violation eventually. If the chance for discovery is higher, you might as well disclose the violation(s) to take advantage of potential mitigation of sanctions. Voluntary disclosure can also avoid an inference of a company’s intent to violate export control laws (in a potential criminal investigation) when the violation was, in fact, an accident or unintended.
  • Is this an isolated or recurring issue? Does it involve potentially criminal activity? Before making a disclosure of an export violation, a company needs to know all of the facts surrounding the issue. Since the Government will launch a complete investigation upon receiving the voluntary disclosure, your company needs to thoroughly investigate the transaction(s) and audit its export compliance program to determine if there is a systemic problem, or if criminal activity is present. Factors such as these could significantly increase penalties and even result in prison sentences for company employees; all things you will want to know before making the disclosure.
  • What are the effects of disclosure on other aspects of my business? Voluntary disclosures can result in public pronouncements (charging letters, consent agreements) that can adversely affect a company’s goodwill (and revenues). Moreover, disclosures of export violations may implicate potential issues in import transactions, tax returns, accounting records, shareholder and Securities and Exchange Commission (SEC) disclosures. Making a voluntary disclosure without a complete understanding of the nature of the violation(s) and the ripple effects on your business is playing Russian roulette with your company’s future.

The fact of the matter is that voluntary disclosure is a double-edged sword. It can be a powerful way for an exporter to “clean the slate” of its violations and greatly mitigate penalties. It can also launch a Government investigation (of a matter the Government may never have found on its own) and serve as your signed confession to a federal crime. However, for these reasons, even if your company has an in-house attorney, you may want to consult with an unbiased outside counsel before deciding whether to make a prior disclosure.

Upstream Assessment of Downstream Export Issues

Tuesday, October 21st, 2014

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

Your company is a midsize manufacturer of computer network hardware and software, some of which is really cutting-edge technology. A significant portion of your products is exported overseas, either by you directly or by your U.S. distributors. For these U.S. distributors, you ensure that product labeling and literature is in the language of the final user.

You just received a phone call from one of your distributors in Los Angeles. Their customer in Hong Kong just called and told them that officials from the U.S. Department of Commerce just conducted an “end-use check” there in Hong Kong and found “major problems” involving your products. Your distributor is letting you know, so that you can take what your distributor called “appropriate action.”

You don’t know what to do. If there are any problems in Hong Kong, it’s not your problem, right? Especially because this distributor is here in the United States. Should your company be doing something?

Your company needs to take immediate action as a result of this reported “problem.”

If you do nothing, when – not “if,” but “when” – special agents from the Office of Export Enforcement, Bureau of Industry and Security (BIS/OEE) come calling, you will not be prepared and that could result in higher sanctions if they find any export compliance issues at your company.

What risks and/or liabilities do you face?

End-use checks are physical, on-location verifications with the recipient of exported U.S. goods to determine if the party is a reliable recipient of those goods and that items are, or will be, used in accordance with the Export Administration Regulations (EAR). These checks are conducted by the Departments of Commerce, State and Defense, and take place every day in dozens of countries around the world.

If an end-use check found a “major problem” with respect to your company’s merchandise, it could arise from numerous sources. For example, the end-user may have misrepresented itself to the seller or may be transshipping the merchandise illegally. Provided that your company did everything it was supposed to do under the regulations – including investigating red flags, knowing your customer, etc. – you may face little-to-no scrutiny. However, an end-use check could unearth one or more export violation(s) that your company – the manufacturer – may be committing. Depending upon how you manufacture, describe and sell the product, there may be issues with commodity classifications (through CCATS), licenses, etc. Is your company publishing inaccurate Export Control Classification Number (ECCN) or license information on its website and inviting your distributors and customers to rely on such data? This could lead to problems for you.

Moreover, you state that you are aware that your products are being exported. Remember that under export regulations, “All parties that participate in transactions subject to the EAR must comply with the EAR” (15 C.F.R. § 758.3). Are you taking the steps required to ensure that your distributors and customers are compliant with export regulations? Furthermore, if your company is the exporter of record (aka, the U.S. Principal Party in Interest or “USPPI”), you are ultimately responsible for the electronic export information (EEI) that is being filed through the Automatic Export System (AES) and for all classification and license matters.

What should your company do?

Knowing that there is a downstream problem with your exports, it is highly prudent that your company conducts an immediate self-assessment of its export compliance activities-but remember that time is of the essence; if BIS is aware of issues with your exports, it is only a matter of time before they come to call.

You should start by examining the particular transaction(s) involved with this customer. You should be looking to ensure that any export information (e.g., ECCNs, license information) you provided to the customer and/or the distributor was accurate and complete. Expanding your assessment radially, you should examine any and all transactions with this customer, this distributor, and the product(s) involved to ensure that transaction is being performed in accordance with your export compliance management program (ECMP). Then, as time allows, you can review your overall ECMP and perform audits on other, randomly selected export transactions to ensure compliance. An excellent resource to help organize and conduct your company’s self-assessment is the audit module tool developed by BIS. (Click here to view the tool.)

Once you have conducted a thorough self-assessment, you will know if there are any issues with your export compliance program and the export of this product, through this distributor, to this end-user. At that point, you can assess whether any issues you find are systematic problems with your export compliance plan or anomalies that need to be isolated. Regardless of their nature, any issues you find need to be well documented and fixed at once.

As you are remediating any issues you find, your company can decide whether it wants to make any voluntary self-disclosures (VSDs) to BIS. BIS strongly encourages VSDs from exporters, and such disclosures usually result in significant mitigation of any monetary penalties or other sanctions. That said, there are risks to a company making a voluntary self-disclosure and these risks need to be weighed against the benefits.

Also, because your company’s technology is “cutting edge,” your products may embody proprietary, “trade secret” information (such as product materials, designs, and algorithms). Moreover, the end-user and/or your distributor may have commercially sensitive information belonging to your company, such as pricing, training and use information. Because some of this trade secret or commercially sensitive information could be made public during the course of an investigation, you may need to notify BIS/OEE of the need to protect this information from disclosure. Generally, BIS can take steps to help ensure that any disclosure of protected information is tightly controlled. But certainly, the more your company propounds the need for confidential treatment with BIS, the more likely it is that such information will be protected to your satisfaction.

In short, when it comes to export transactions, whether you are the manufacturer, the distributor, the freight forwarder, any other “middle man” or the end-user, compliance with export regulations is always your responsibility, and any “problems” in these transactions should always be addressed as if they were your problems.

Exporter Liability for Freight Forwarder Issues

Friday, October 10th, 2014

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

You are a small company that exports a wide variety of merchandise all over the world. Years ago, to save money, you contracted out all of your logistics functions to a third-party company which also serves as your warehouse and freight forwarder for export shipments. They take care of all the details of exports for you: licenses, government filings, paperwork…

Today, however, you had a visit from Homeland Security Investigations and the agents said that YOU may have broken the law with regard to certain shipments that were improperly exported. You have a very detailed Services Agreement with your logistics provider and they are responsible for everything. You don’t understand how your company could now be liable for something that your freight forwarder has done!

The question of who is responsible for export compliance, and who may be liable for violations, is very simple and yet may be very complex at the same time. Typically, the “exporter” is responsible for export compliance, but figuring out who exactly is the “exporter” depends on the roles that the various parties in a transaction may play and who may have accepted the mantel of the “exporter” under a contract or agreement.

The EAR defines an exporter as the “person in the United States who has the authority of a principal party in interest to determine and control the sending of items out of the United States” (15 C.F.R. § 772.1). That is why the EAR talks about U.S. Principal Parties in Interest (USPPI) and Foreign Principal Parties in Interest (FPPI). The ITAR does not formally define the term “exporter,” but imposes license and other compliance requirements on “any person who intends to export … a defense article” (22 C.F.R. § 123.1(a)). The FTR adopts the term “USPPI” as the “exporter” of merchandise (15 C.F.R. §30.1(c)). For our purposes here, we will just use the term “exporter.”

In traditional export transactions – and most situations except for “ex works” sales (Incoterms 2012) – the seller of the goods is the exporter. However, both the USPPI/exporter and the FPPI can authorize an agent in the United States to represent them in export transactions; this is where most logistics providers and freight forwarders most often enter the picture.

These agents – which can only act with a proper power of attorney from the exporter – can take over many export responsibilities for the exporter. An authorized agent can enter electronic export information (EEI) into AES and can request and obtain licenses for export. In “routed transactions” the agent can even serve as the “exporter” for export compliance purposes.

However, in all cases except certain routed transactions, using such authorized agents does not relieve an exporter of its legal responsibilities for export compliance or its potential liabilities in the case of most export violations.

The exporter of merchandise from the United States (the USPPI/FPPI) ultimately bears the responsibility for:

  • providing the agent with accurate EEI for the merchandise being exported;
  • determining the commodity jurisdiction of the merchandise;
  • determining the export classification (under the CCL and USML) of the goods;
  • determining license requirements (BIS/DDTC/OFAC); and
  • keeping all required export records.

Even a detailed Services Agreement that may shift all of these duties onto a freight forwarder does not mean that the exporter is not still responsible and liable for these obligations under U.S. export laws. In our experience, federal export enforcement officials truly frown on exporters that try to make their freight forwarder solely responsible for export compliance. This practice usually results in higher sanctions for exporters when violations are found.

Given that you can never relieve yourself of export compliance responsibilities and liabilities, what should exporters do to effectively manage their third-party freight forwarders and mitigate their compliance risks?

  1. Own your company’s export compliance. Your company – and not your agent – should be responsible for jurisdiction, classification and license determinations, as well as for consignee/end-user screening. Also, you should know exactly who has powers of attorney to act on your behalf in export transactions.
  2. Accurately convey information regarding each shipment. Using an old-school Shipper’s Letter of Instruction (SLI) (or providing the equivalent information in another form) for each export transaction helps ensure that your freight forwarder has the most recent, accurate, and complete information for export shipments.
  3. Ensure you receive export documentation, then audit transactions. You must ensure that you receive copies of shipping documents, AES entry summaries and supporting documents (licenses, special certifications, etc.) for every export shipment. Then, you must periodically audit the shipment information against your invoices, purchase orders and the SLI to make sure that exports are being correctly handled.
  4. Do your due diligence, and keep it up. From the moment you select your freight forwarder, until the day the relationship ends, you should be in constant contact with your agent to understand their business, assess their general compliance posture and ensure that they are taking export compliance as seriously as you are.

While an exporter can never totally relieve itself of liability for the acts and omissions of its authorized agent in export transactions, following the steps above should greatly mitigate any potential risks and liabilities that your company may face in the event that there are problems.

When “Minor” Export Violations Can Become Federal Crimes

Thursday, July 10th, 2014

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute,and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

Your foreign customer has been complaining to you about the high duties on your products when they are imported into his country. He asks if you could manifest an item as a “Return of Goods under Warranty.” That way, his company will avoid having to pay customs duties when the merchandise is imported.

 You know that the merchandise will be properly valued and described (other than the “warranty return” label) when your freight forwarder inputs the Electronic Export Information into the Automated Export System (AES). This will really help the customer, so this isn’t a big deal, right?

There is an old proverb that states, “What you don’t know can’t hurt you.” However, when it comes to export regulation and enforcement matters, the “First Law of Blissful Ignorance” is probably more accurate:

What you don’t know will always hurt you.

Improperly declaring export information in AES is a violation of the Foreign Trade Regulations (FTRs), which are codified at title 15 of the Code of Federal Regulations (C.F.R.) part 30. Specifically, 15 C.F.R. § 30.3(a) requires that electronic export information (EEI) be “complete, correct, and based on personal knowledge of the facts stated or on information furnished by the parties to the export transaction.” This requirement of accuracy applies (in this case) to the merchandise information that is submitted pursuant to 15 C.F.R. § 30.6(a)(13), which calls for a description of the commodity.

Therefore, even if you disregard the guidance contained in the FTRs regarding the “reporting of repairs and replacements” (15 C.F.R. §30.29) and accurately report the price and the commodity classification number, misrepresenting that merchandise as a warranty return, when it is not, is still a violation of the FTRs.

Subpart H of the FTRs (15 C.F.R. §§ 30.71-74) outlines the penalty provisions for export violations; these penalty provisions are enforced by U.S. Customs and Border Protection (CBP). Penalties for this type of infraction can be as high as $10,000 per violation, but CBP mitigation guidelines could reduce the penalties to as low as $500, if this is your company’s first offense. Moreover, according to CBP:

For first violations of the FTR, CBP may take alternative action to the assessment of penalties, including, but not limited to, educating and informing the parties involved in the export transaction of the applicable U.S. export laws and regulations, or issuing a warning letter to the party.

(U.S. Customs and Border Protection, “Guidelines for the Imposition and Mitigation of Civil Penalties for Failure to Comply with the Foreign Trade Regulations in 15 CFR Part 30,” CBP Dec. 08-50 (Feb. 2009)).

But that may not be the end of your potential enforcement liabilities.

In 2005, the U.S. Supreme Court considered the case of Carl and David Pasquantino and Arthur Hilts who were arrested and convicted of smuggling large quantities of liquor from the United States into Canada to evade Canada’s high alcohol import taxes. In this case, the men were convicted of criminal wire fraud, in violation of 18 U.S.C. § 1343.

The federal criminal wire fraud statute prohibits the use of the “instrumentalities of interstate or international telecommunications in furtherance of any scheme or artifice to defraud.” The Court in Pasquantino held that a scheme to deprive a foreign government of lawful duties and taxes comes within the scope of a “scheme or artifice to defraud” in the U.S. federal wire fraud statute. (Pasquantino v. United States, 544 U.S. 349, 354-55 (2005)).

The bottom line is that whenever a U.S. exporter knowingly falsifies any export information or export documents with the result that a foreign country is deprived of its lawful import duties, that action may constitute a Pasquantino violation.

Therefore, if you electronically transmit your EEI to AES with the erroneous “warranty return” information, under Pasquantino, you could be guilty of criminal wire fraud, because you are using your U.S. computer to deprive your customer’s foreign government of its duties. Also, if you mail copies of the export documents with that same false information, that may be a violation of the federal criminal mail fraud statute (18 U.S.C. § 1341).

While the penalties for the AES violations may be as negligible as informed compliance from CBP, a warning letter, or a mitigated penalty of $500, a criminal conviction of federal wire fraud and/or mail fraud can carry prison sentences up to 20 years per violation and a fine of up to $250,000 for each violation. Such serious potential consequences of even “minor” export violations is why your company – and every U.S. exporter – should religiously adhere to all export laws and regulations, and make export compliance a top corporate priority.

Export Compliance Update: OFAC Issues General License Easing Restrictions On Exportation Of Communications Services, Software, and Hardware To Iran

Monday, June 10th, 2013

On May 30, 2013, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury announced the issuance of a general license authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. The general license will allow U.S. persons to export consumer communications equipment and software to Iranian citizens. As described by Bloomberg Businessweek, the general license will cover a wide variety of software and hardware including mobile phones, satellite phones, laptop computers, modems, broadband hardware, and routers. A copy of the general license can be read here.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by OFAC. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person. However, pursuant to the Iran-Iraq Arms Non-Profileration Act of 1992, the President has the authority to waive the imposition of certain sanctions if such waiver is “essential to the national interest” of the United States. General information regarding economic sanctions against Iran can be found at OFACs website.

While the decision to grant this general license may appear on the surface to run counter to recent OFAC sanctions, (more information on these restrictions can be read on our prior report here), two points must be noted. First, the general license does not authorize the export of any equipment to the Iranian government or to any individual or entity on the Specifically Designated Nationals (“SDN”) list. Second, general licenses permitting the sale and export of telecommunications equipment and technology currently exist in other OFAC administered sanctions regimes.

For example, similar general licenses exist within the Cuban Sanctions program. 31 C.F.R. § 515.542(b) provides that U.S. telecommunications services providers are authorized to engage in all transactions incident to the provision of telecommunications services between the United States and Cuba, the provision of satellite radio or satellite television services to Cuba, and the provision of roaming services involving telecommunications services providers in Cuba. In addition, section 515.542(c) authorizes persons subject to U.S. jurisdiction to contract with and pay non-Cuban telecommunications services providers for services provided to particular individuals in Cuba (other than certain prohibited Cubans). More information on the Cuba Sanctions regime can be found on OFAC’s website here.

Similar general licenses also exist under the Syrian Sanctions program. Pursuant to General License No 5, U.S. persons, wherever located, may export to persons in Syria services incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, and blogging, provided that such services are publicly available at no cost to the user.

The purpose of such general licenses is to help facilitate the free flow of information between persons located within countries subject to U.S. Sanctions and the outside world. As explained by the Treasury Department in its press release announcing the new general license:

The United States is taking a number of coordinated actions today that target persons contributing to human rights abuses in Iran and enhance the ability of the Iranian people to access communication technology. As the Iranian government attempts to silence its people by cutting off their communication with each other and the rest of the world, the United States will continue to take action to help the Iranian people exercise their universal human rights, including the right to freedom of expression.

The people of Iran should be able to communicate and access information without being subject to reprisals by their government. To help facilitate the free flow of information in Iran and with Iranians, the U.S. Department of the Treasury, in consultation with the U.S. Department of State, is issuing a General License today authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. This license allows U.S. persons to provide the Iranian people with safer, more sophisticated personal communications equipment to communicate with each other and with the outside world. This General License aims to empower the Iranian people as their government intensifies its efforts to stifle their access to information.

A copy of Treasury Department’s press release can be read here.

Fuerst Ittleman David and Joseph, PL will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact us at 305-350-5690 or

Announcing the Fuerst Ittleman David & Joseph Mini-Blog

Friday, June 7th, 2013

This week, Fuerst Ittleman David & Joseph is launching a Mini Blog, which will be submitted to its readers on a weekly basis. Unlike its usual Blog, which will continue to be updated here, the Mini Blog will allow FIDJ to communicate with its readers in a short and to-the-point style, delivering critical news updates with just enough commentary to explain why the updates are critical. We believe that this Mini Blog will be a valuable resource for our readers, and will allow subscribers to stay up to date on issues affecting all of our practice areas, including Tax & Tax Litigation, Food Drug & Cosmetic Law, Complex Litigation, Customs Import & Trade Law, White Collar Criminal Defense, Anti-Money Laundering, Healthcare Law, and Wealth & Estate Planning. Additionally, subscribers may sign up to receive only the content relevant to their interests on a subject-by-subject basis. As always, please feel free to reach out to us with comments regarding our content or suggestions regarding how we may better keep you up to date.

Click here to sign up.

Here is a sampling of what you can expect to receive in our Mini Blog:

Food and Drug:

On May 28, 2013, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidelines for voluntary “serving facts statements” that alcoholic beverage manufacturers may include on their packaging. A copy of TTB’s press release can be read here. The serving facts statements are similar to the nutrition panels currently found on non-alcoholic foods and beverages. According to the rule, serving facts statements will include: 1) the serving size; 2) the number of servings per container; 3) the number of calories; and 4) the number of grams of carbohydrates, protein, and fat preserving. In addition, serving fact statements may also include the percentage of alcohol by volume and a statement of the fluid ounces of pure ethyl alcohol per serving. TTB is providing the interim guidance on the use of voluntary serving facts statements on labels and in advertisements pending the completion of rulemaking on the matter. A copy of the TTB Ruling can be read here.


A new bill in the U.S. House of Representatives, the Medicare Audit Improvement Act of 2013, seeks to amend title XVIII of the Social Security Act to improve operations of recovery auditors under the Medicare integrity program and to increase transparency and accuracy in audits conducted by contractors. A few proposals include limiting the amount of additional document requests, imposing financial penalties on auditors whose payment denials are overturned on appeal and publishing auditor denials and appeals outcomes.

In related news, the Department of Health and Human Services c/o the Centers for Medicare and Medicaid Services  (“CMS”) is proposing to increase the maximum reward for reporting Medicare fraud from “10 percent of the overpayments recovered in the case or $1,000, whichever is less, to 15 percent of the final amount collected applied to the first $66,000,000”¦” In case you don’t have a calculator handy, that’s a change from $1,000 to a potential maximum windfall of $9,900,000. It’s safe to assume that the number of whistleblower reports of alleged Medicare fraud are going to skyrocket. As the saying goes, you miss 100% of the shots you don’t take.

As decided by the United States Court of Appeals for the Eleventh Circuit, HIPAA preempts Florida’s broad medical records disclosure law pertaining to a decedent’s medical records. In Opis Management Resources, LLC v. Secretary of Florida Agency for Health Care Administration, No. 12-12593 (11th Cir. Apr. l 9, 2013), the 11th Circuit Court of Appeals ruled that Florida’s broad medical records disclosure law did not sufficiently protect the privacy of a decedent’s medical records. The Court noted that Florida allows for “sweeping disclosures, making a deceased resident’s protected health information available to a spouse or other enumerated party upon request, without any need for authorization, for any conceivable reason, and without regard to the authority of the individual making the request to act in a deceased resident’s stead.” In contrast, HIPAA only permits the disclosure of a decedent’s protected health information to a “personal representative” or other identified persons “who were involved in the individual’s care or payment for health care prior to the individual’s death” to the extent the disclosed information is “relevant to such person’s involvement”.


On May 29, 2013, the New York Times reported that the Swiss Government will allow Swiss Banks to provide information to the U.S. Government in exchange for assurances that Swiss banks would only be subject to fines and not be indicted in an American criminal case. Per the New York Times,

The New York Times article reports that: But [Ms. Widemer-Schlumpf (Switzerland’s finance minister)] said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement”¦. Ms. Widmer-Schlumpf said the government would work with Parliament to quickly pass a new law that would allow Swiss banks to accept the terms of the United States offer, but said the onus would be on individual banks to decide whether to participate.

This appears to be the beginning of the end of Swiss bank secrecy. If the Swiss relent to the U.S., the European Union will be next in line to obtain the same concession.

Anti-Money Laundering:

Our thoughts on the United States government’s attack on Mt. Gox can be read here, and Bitcoin continues to remain a hot topic all across the internet; see here, here, and here. Another virtual currency, Liberty Reserve, has also made a splash since being shut down by the Feds last week in what many have described as the largest money laundering scheme of all time; see here for details of the takedown, as well as the following articles describing the initial bits of fallout from the Liberty Reserve takedown: online anonymity, anti-money laundering compliance,Barclays Bank involvement, and the not guilty pleas entered by Liberty Reserve’s proprietors on Thursday. We will keep our eyes on these two cases as the fallout continues.

Customs Sharing Hard Times with Importers and Travelers

Tuesday, March 5th, 2013

Sequestration budget cuts only add to CBP’s focus on increasing revenues.

While much has been made in the press about the effect of the sequestration on U.S. Customs and Border Protection (CBP), with experts and even CBP officials anticipating longer lines at immigration check-points and longer times to clear cargo, the sequestration is only another thorn in the budgetary side of CBP. And CBP seems to want to share that pain with importers and travelers alike.

Some Historical Perspective

While CBP’s official mission statement discusses such noble (and critical) roles as guarding our nation’s borders and protecting us against terrorists and instruments of terror, it also mentions “ fostering our Nation’s economic security through lawful international trade and travel.” What do these words mean? Money.

Many people do not realize that the second act of the 1st Congress of the United States, passed on July 4, 1789, authorized the collection of duties and tariffs on imports. Twenty-seven days later, the fifth act of that first Congress established the progenitor of CBP to collect those duties. Congress created Customs (CBP) even before the Bill of Rights.

The reason for this Congressional urgency was money. In 1789, the nation desperately needed to pay the costs of the Revolutionary War. In fact, since 1789, with the exception of temporary taxes and bonds to fund little government projects like the War of 1812 and the Civil War, the sole source of revenue for the U.S. Government was customs duties. This was true for the first 124 years of our nation’s existence, up until the passage of the Sixteenth Amendment in 1913, which established the income tax systems we know today.

With collecting money so firmly rooted in its DNA, it stands to reason that when economic times get hard for CBP, it returns to its roots and its mission of “economic security.” And now with the sequestration, times are hard for CBP.

Sequestration Squeezes the Agency

Under current sequestration provisions, CBP will have to cut $754 Million, or roughly 6.5% of its budget. The Agency reports that an immediate consequence will be deep cuts in overtime pay for its CBP officers and staff. These cuts, combined with 12-14 day furloughs, means that fewer inspectors will be available at immigration checkpoints, and fewer officers will be available to clear incoming cargo. In addition, we can expect to see longer processing times for bonded-activity applications (like bonded warehouses and container freight stations) and for adjudications of protests and fines, penalty and forfeiture cases.

But these proposed and hypothesized cuts only tell half of the story.

As budgetary times have become harder for the Agency and perhaps in anticipation of the sequestration, we have seen a significant trend in those CBP fines, penalty and forfeiture cases as well as in its adjudication of rulings affecting duties and tariffs. The bottom line is that CBP is looking for more money from its enforcement measures.

Take offers-in-compromise, for example. In penalty cases, if an importer is unable to pay a proposed or levied penalty, the importer can make an offer-in-compromise to the Agency. The importer offers to pay a percentage of the penalty, and usually provides documentation (tax, sales, and banking records) describing the financial straits that render the importer unable to pay the full amount. In years gone by, depending on the circumstances, CBP has been willing to accept pennies on the dollar, often approving offers for 5% – 25% of the original penalty amount.

Recently, however, we have seen offers as high as 50% and 67% of a penalty amount refused by CBP, even though the importer in each case provided documentation that it has steadily lost money in each of the prior three years and didn’t have enough money in the bank to cover the full amount of the penalties. When pressed for additional information on these rejected offers, CBP sources confirmed that the Agency is seeking higher revenues these days. This same mindset explains the trends we have seen in recent months of reduced mitigation of liquidated damages and claims for higher initial penalties than would have been previously expected.

At the same time, we are seeing increased enforcement and revenue collection efforts across a variety of avenues. More and more CBP officers are screening both incoming and outgoing travelers for currency and monetary instrument reporting compliance. Also, the Agency has been challenged by Congress to better enforce antidumping and countervailing duty collection.

The bottom line for importers and travelers for CBP’s budget woes is this: it will take longer to get you and your products into the United States, and if you break any laws, the penalties will be higher and the levels of possible forgiveness will be lower. And if the current negotiations on the sequestration are any indication, we should expect this new status quo for the foreseeable future.