On August 31, 2011, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced its publication of a new set of best practices, aimed at curbing the practice of transshipment of dual-use items. Transshipment is a shipping practice whereby items are sent to an intermediate destination before being shipped again for arrival at the goods’ ultimate destination. While transshipment undoubtedly has legitimate and beneficial uses in our globalized economy, some argue that the practice is being used in a way that creates heightened security risk to the United States, particularly when dual-use items are involved.

BIS-regulated “dual-use” items are those goods that have both commercial and military applications. When dual-use items are exported, transshipment may be used to disguise the ultimate destination of the goods from the U.S. government and the U.S. exporter. Or on the other hand, transshipment can serve as a means for a U.S. exporter who has knowledge that it is violating an embargo to have a way to deny knowledge of the export’s ultimate destination. So, for example, transshipment can be used to hide the fact that a dual-use item is being exported to an embargoed country like Iran by first having the item shipped to a non-embargoed country like Singapore. The shipping documents would show that the U.S. exporter sent the dual-use item to a friendly, non-embargoed country, but then the intermediate consignee in Singapore, perhaps a front for the Iranian government, would then turn around and ship the item to the Iranian military, thus violating the U.S. embargo against Iran. Thus, BIS issued its Best Practices in order to gain cooperation from the U.S. export industry in an effort to thwart these dangers.

Found here, the BIS-issued 2011 Best Practices details seven practices that U.S. exporters are urged to follow. In particular, the practices direct companies to notify BIS when a buyer’s order for export is denied, in addition to using due-diligence when gathering information about potential customers. While many of these practices emphasize cooperation between industry and government, there may be consequences for willful disregard of these practices in the future. Because companies may no longer be able to turn a blind eye to the potential transshipment of their dual-use items, these Best Practices could be the first step to imposing liability on companies whose goods wind up in the wrong hands.

Fuerst Ittleman lawyers are experienced in representing companies and individuals under investigation for engaging in illegal exporting activity, including transshipment of dual-use items to embargoed countries. Fuerst Ittleman can also assist exporters with their compliance efforts to avoid export violations. For more information concerning BIS regulations or other trade-related issues, please contact us at contact@fuerstlaw.com

Reaffirming its commitment to keeping counterfeit merchandise from reaching consumers, U.S. Customs and Border Protection (CBP) has been busy in recent months. Recently, CBP announced that its officers at the Detroit Metropolitan Airport seized 192 separate shipments of fake merchandise between November 1, 2010 and January 17, 2011. During this period, the seizures included counterfeit designer purses, sunglasses, cell phones, and sports jerseys. According to CBP estimates, the seized items totaled an estimated worth of $2 million.

Additionally, CBP announced that its inspectors at the Los Angeles/Long Beach seaport complex were able to seize a shipment of counterfeit Marlboro cigarettes. The shipment from China contained over 22,000 cartons of fake Marlboro cigarettes. In an effort to get the shipment through customs, the shippers of the merchandise provided false invoicing information, identifying the contents as “hang tags and hang plugs.” However, an examination of the shipment by CBP import specialists and inspectors revealed its true contents.

With countless seizures of illegal goods being made, CBP has signaled that stopping counterfeit goods is a main priority. According to CBP, the sale of counterfeit goods is problematic for a few key reasons. First, fraudulent goods may be dangerous to consumers, as the imposters often appear to be of the same quality but have the potential to be inferior and present added safety risks to unsuspecting consumers. Additionally, CBP notes that counterfeit products negatively affect trademark owners who have invested time and money developing their products. Lastly, criminal organizations are often involved in the sale of counterfeit merchandise to launder the organization’s illegal profits.

With the amount of counterfeit goods being attempting make entry into the U.S. is unlikely to slow, CBP is expected to have a busy year ahead.

Lawyers at Fuerst Ittleman PL are experienced in handling issues and litigation regarding products that are either counterfeit or otherwise infringe on legal trademarks.

In another example of the recent enhancement in enforcement of the Foreign Corrupt Practices Act, (FCPA) a global freight forwarder and five oil and gas service companies resolved FCPA investigations conducted by the Department of Justice and the Securities and Exchange Commission by agreeing to pay $156,565,000 in criminal penalties and civil disgorgement, interest and penalties in the sum of $80,000,000.

A criminal information was filed on November 4 charging Panalpina World Transport (Holdings) Ltd., the global freight forwarding company based in Switzerland , (“Panalpina”)with conspiring to violate the anti-bribery provisions of the FCPA. In a deferred prosecution agreement and a plea agreement filed in federal court in the Southern District of Texas, Panalpina, and its U.S. subsidiary Panalpina, Inc., admitted that they engaged in a scheme to pay bribes to numerous foreign government officials on behalf of their many customers in the oil and gas industry. These bribes allowed them to circumvent local rules and customs regulations governing the importation of cargo into numerous foreign countries. Panalpina admitted paying bribes totaling $27,000,000 to foreign officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan.

Panalpina’s customers, Shell Nigeria Exploration and Production Company Ltd., Transocean Inc. and Tidewater Marine International, Inc. admitted in deferred prosecution agreements that they knew of and condoned the bribes paid on their behalf. These companies recorded the bribes as legitimate business expenses in their corporate books and records. These companies agreed to pay criminal fines in excess of $50,000,000 . Under the terms of the deferred prosecution agreements, Panalpina and its customers are required to cooperate fully with U.S. and foreign authorities in any ongoing investigations of the companies’ corrupt payments. Each company is also required to implement and adhere to a set of enhanced corporate compliance and reporting obligations.

In recent years, the Department of Justice has made FCPA prosecutions a priority, allocating substantial resources to a team of FBI agents and prosecutors dedicated solely to bringing FCPA cases against companies and their executives. Compliance with the FCPA, along with expanded due diligence, anti-bribery prevention programs and regular auditing of foreign payments are now essential for businesses with international operations and sales. As shown in this case, failure to abide by the FCPA can have catastrophic consequences and is at a company’s (and its executives’) peril.

On November 16, 2010, the Office of Foreign Assets Control (“OFAC”), of the U.S. Department of the Treasury announced that it reached a settlement with Pinnacle Aircraft Parts, Inc. (“Pinnacle”) for alleged violations of OFAC’s Reporting, Procedures, and Penalties Regulations (“RPPR”). The alleged violations stem from Pinnacle’s sale and delivery of a jet engine destined for Iran in February 2004. OFAC is a part of the U.S. Department of the Treasury and administers and enforces economic sanctions against targeted foreign countries, regimes, terrorists, international narcotics traffickers, among others.

OFAC alleged that Pinnacle violated the RPPR, found at 31 C.F.R. part 501, when it failed to provide documents in response to an administrative subpoena issued by OFAC as part of its investigation into Pinnacle’s jet engine sale. The administrative subpoena ordered Pinnacle to provide copies of all transactional documents and all other documents pertaining to the payment or transportation of the jet engine shipment. According to OFAC, while Pinnacle responded to the subpoena with 260 pages of documents, Pinnacle’s outside counsel failed to submit a copy of an e-mail that indicated that the engine was likely destined for Iran as well as other documents concerning the terms of sale.

Compounding the problem for Pinnacle was the fact that Pinnacle did not voluntarily self-disclose the error to OFAC. As a result of Pinnacle’s actions, Pinnacle faced a penalty of $250,000. However, this amount was reduced in the settlement agreement to $225,000. The settlement amount reflects OFAC’s consideration of several factors including that Pinnacle had no prior OFAC enforcement history, Pinnacle agreed to settle the matter, and that Pinnacle relied in good faith on the advice of legal counsel in not producing the e-mail and other documents. OFAC did note that while Pinnacle did rely on the advice of counsel, it remained the party that is legally responsible for compliance with OFAC regulations. As a result, the actions of Pinnacle’s counsel are attributable to Pinnacle for the purposes of calculating a base penalty and settlement amount.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fuerstlaw.com.

On October 29, 2010, the Office of the Chief Counsel of the Internal Revenue Service (IRS) issued Chief Counsel Advice (CCA) 2010-43-028, which discusses the effect of the First Sale Rule under customs law on Internal Revenue Code (IRC) § 1059A.

Under the Customs Modernization Act, it is the responsibility of the importer of record to enter, classify and value goods entering the United States and provide any other information necessary to enable U.S. Customs and Border Protection (CBP) to properly assess duties, collect statistics, and determine whether all legal requirements are met. Under U.S. law, the transaction value of imported merchandise is the primary or preferred method for determining the value of imported goods. Generally, the transaction value is the price actually paid or payable for merchandise when sold for exportation to the United States, plus certain statutorily enumerated additions.

Before merchandise reaches the United States, however, it may have been subject to a series of sales. For example, it may be sold by its manufacturer to a middleman (in the same or a different country), who in turn sells the merchandise to a U.S. importer. In the case of a series of sales, the importer may, under criteria prescribed by CBP, choose a sale that occurred earlier in the chain and use the price paid at that point, as long as the importer can establish that the earlier sale was a sale for exportation to the United States. The option to choose the earlier sales price as the transaction value is known as the “First Sale Rule.” The United States International Trade Commission has provided guidance to ensure proper use of the First Sale Rule in customs law.

In CCA 2010-43-028, the IRS Office of the Chief Counsel discussed how this alternative valuation is treated for purposes of Federal Income Tax.

Given the option afforded by the first sale rule, importers often choose the first sale value because it minimizes custom duties. Use of first sale rule generally results in a disparity between the custom valuation and the income tax valuation because the income tax valuation is based on a later more valuable sale.

As discussed in the CCA, the conflict in tax law is apparent in IRC § 1059A(a), which provides:

If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of section 482), the amount of any costs (1) which are taken into account in computing the basis or inventory cost of such property by the purchaser, and (2) which are also taken into account in computing the customs value of such property, shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such custom value.

>> To read the complete Chief Counsel Advice Memorandum, click here.

In addressing the conflict for taxpayers who choose to take advantage of the First Sale Rule, the Office of the Chief Counsel cited to Treas. Reg. § 1.1059A-1(c)(2). The cited regulation allows taxpayers to increase the customs value of imported property by certain amounts that are properly not included in customs value, but which are incurred by the taxpayer and properly included in the transfer price of the property for income tax purposes.

Thus, the IRS Office of the Chief Counsel concluded that “an adjustment under section 1059A with respect to a value differential that results solely from an importer’s correct application of the first sale rule and subsequent real value added under Treas. Reg. § 1.1059A-1(c)(2) is not proper.”

Note, however, that the Office of the Chief Counsel limited its conclusion to only those situations where the taxpayer both correctly applied the first sale rule and subsequent real value was added. Thus, all other adjustments under § 1059A may nonetheless be appropriate.

Treas. Reg. § 1.159A-1(c)-7 stresses the independence of IRC § 1059A from IRC § 482. As discussed in the regulation, IRC § 1059A “in no way limits the authority of the Commissioner to adjust the taxpayer’s transfer price under IRC § 482 or other provision of the law. Consequently, where the basis or inventory value is determined under the arm’s-length standard of IRC § 482 as an amount less than the customs value, the taxpayer cannot adjust the basis or inventory value upward to equal such customs value by virtue of IRC § 1059A.

Not surprisingly, IRS Chief of Appeals Diane Ryan implied that the Commissioner’s discretion to adjust transfer price under IRC § 482 is frequently exercised. While speaking at the fall meeting of the American Institute of Certified Public Accountants Tax Division, she indicated that transfer pricing cases were “the largest deficiency cases in appeals.” Due to the increasing number of transfer pricing and other complex cases involving international issues, IRS Appeals now has a standalone unit for this area.

If you have any questions regarding correct application of the First Sale Rule, IRC § 1059A, or any other transfer pricing issues or regulations, please contact Fuerst Ittleman at contact@fuerstlaw.com.

By Ryan Davis

Law360, New York (November 03, 2010) — In the past, a sweeping election win for Republicans reliably translated into wide support for free trade measures. That may not be the case after Tuesday’s election results, lawyers say, because the Tea Party movement that powered the GOP to victory is largely an unknown commodity when it comes to trade and may be hostile to the traditional GOP agenda on the issue.

Congress has gotten relatively little done on the international trade front since President Barack Obama took office, but the Republican gains and divided legislature brought about by the election will likely push trade even further down on the congressional agenda, attorneys say.

While the new leaders in the House, including presumptive House Speaker John Boehner, R-Ohio, and Majority Leader Eric Cantor, R-Va., have a track record of supporting free trade policies, the freshman class of Tea Party-backed Republican representatives could be far less supportive, though their positions on trade are still largely unknown, lawyers say.

The conservative rhetoric in this year’s election was fueled by populist anger about the economy and fear about the threat open trade policies pose to American jobs, lawyers say.

“It’s interesting, you would expect a high number of additional Republicans would translate into additional support for free trade,” said Behnam Dayanim, a partner at Axinn Veltrop & Harkrider LLP. “But we’re not in normal times.”

Nevertheless, few of the newly elected Republican representatives have extensive background in trade or ran on an explicitly trade-based platform, so it is difficult to guess how they will vote, said Russell L. Smith, special counsel at Willkie Farr & Gallagher LLP.

Given the economic climate and the circumstances of the election, Smith said it’s possible the freshman GOP lawmakers will be inclined to support protectionist trade policies to curry favor with constituents.

That could create tension with House leaders who are more supportive of free trade and lead to a “battle for the soul of the Republican Party,” Smith said. Whether the leadership will be able to wrangle the votes to pass legislation in support of free trade “is a big unknown,” he added.

Dayanim said he could envision a scenario in which Tea Party Republicans and liberal members of Congress who support more protectionist policies form an unusual coalition to oppose some pieces of free trade legislation.

Republicans who are skeptical of free trade “will have to do a delicate straddle on this issue because their corporate supporters like those policies just fine,” said Stanley J. Marcuss, a partner with Bryan Cave LLP.

“It’s a peculiar time,” said Mitchell S. Fuerst, managing partner at Fuerst Ittleman PL. “There are rules we thought we knew about Democrats and Republicans, but new rules are getting written.”

Any ideological schism between Republicans of different stripes will only become visible when trade legislation comes up for a vote, but many lawyers say they don’t expect trade to be a significant part of the agenda in the new Congress.

“Unfortunately, I don’t think trade will be a priority issue,” said Ashley W. Craig, a partner at Venable LLP. “The Republicans in the House have said they will focus on financial issues and repealing health care reform, so trade may get caught in the crossfire and fall victim to a further lack of consideration.”

Thompson Hine LLP partner David Christy said he doesn’t see any way for the newly elected Congress to score political points by pushing potentially unpopular free trade measures that may just get vetoed by the president anyway.

“Given the state of the economy, it won’t be a golden age for free trade,” he said.

One litmus test for how the new Congress will handle trade issues will be how it addresses the three pending free trade agreements with South Korea, Colombia and Panama. The U.S. signed the deals years ago, but they still require approval by both houses of Congress.

There has been little action so far during the Obama administration about getting the agreements approved by Congress, although the U.S. and Korea are seeking to finalize details of the plan in advance of next week’s G20 meeting in Seoul.

Jennifer Choe Groves, a partner at Hughes Hubbard & Reed LLP, said the free trade agreements “might provide an opportunity for cooperation between the White House and Congress.”

She said that even with the unknown quantity of the Tea Party’s stance on trade and the fact that Obama has voiced support for getting the deals approved, she’s optimistic the House, if not the Senate, could vote to implement the trade deals.

“Passage of the free trade agreements would be good for the country,” she said. “I don’t think the Republicans would vote against them just to spite Obama.”

Craig was less certain that the House GOP leaders would have the appetite for a vote on trade deals that conservative new members could portray as aiding foreign countries at the expense of American jobs.

“The big question is whether they want to tackle something that could blow up in their face,” he said.

Still, Craig said, Republican leaders inclined to seek a less risky approach to supporting free trade and set themselves apart on trade issues could issue statements putting pressure on the administration to begin negotiating new free trade agreements with other trading partners.

As it has for the past several years, China will be the focus of most trade-related policy and discussion, and legislators on both sides of the aisle could ramp up anti-China rhetoric, Dayanim said, and even seek to strip away some favorable trade provisions the country now enjoys.

“I suspect China is going to be an even bigger bogeyman for many members of Congress than it has been in the past,” he said.

Smith said that although the new Republican leaders have pledged to tackle the very difficult task of fixing the economy first, if they become frustrated in that effort, they may find it politically expedient to capitalize on public suspicion of China and by imposing punitive trade measures.

Mario Mancuso, a partner at Fried Frank Harris Shriver & Jacobson LLP, said that ultimately U.S. policy toward China may not change much under the new Congress, but in terms of public comments about Chinese policies, “there will be more fireworks.”

While Democrats retained control of the Senate, they now have a slimmer margin that could open the door for passage of free trade measures, lawyers say. Free trade proponents are also encouraged by the election of Republican Rob Portman, a former U.S. trade representative in the George W. Bush administration, to a Senate seat in Ohio.

Some parts of Obama’s trade agenda could be significantly hampered by the Republican victory, Mancuso said.

For one, the administration has placed a high priority on reform of the country’s Cold War-era export control system, a plan that requires congressional approval for some measures, but not others.

While export control reform is not typically viewed as a partisan issue, the aspects that need a vote by the legislative branch may run up against the same skepticism about free trade that could hinder other policies, he said.

Members of Congress who oppose the plan could also slow down parts of the process that don’t need a vote by requiring members of the administration to testify more frequently and answer more questions about the project, he said.

The election may also have brought the Obama administration’s efforts to open trade with Cuba, such as relaxing regulations on family travel and some exports, to a screeching halt, Mancuso said.

That’s because Ileana Ros-Lehtinen, a Cuban-American Florida Republican who strongly supports the embargo, is expected to become new chairwoman of the House Foreign Affairs Committee, which handles most Cuba-related legislation.

“To the extent that there was a mini-trend toward easing up on the embargo, that mini-trend stopped last night,” Mancuso said.

On October 28, 2010, a federal grand jury indicted Floyd Stilwell, president and CEO of Marsh Aviation Co., an Arizona company for violating the Arms Export Control Act. The indictment charges that Stilwell and his company were part of a conspiracy to ship arms to Venezuela from November 2005 until February 2008.

The indictment alleges that Stilwell and his company shipped military engines to the Venezuelan air force and provided training on how to maintain them in violation of federal law. The engines sold are listed on the United States Munitions List. Under federal law, the export of arms on the US Munitions List is illegal without a federal export license or written authorization issued by the Department of State. Since 2006, the U.S. government has forbidden the export of military hardware to Venezuela because Venezuela does not cooperate with United States anti-terrorism efforts. Additionally, the Office of Foreign Assets Control also issues regulations regarding the import and export of goods to countries which do not comply with U.S. counter-terrorism efforts. These regulations can be found at the OFAC Website.

According to the indictment, Stilwell and Marsh Aviation agreed to upgrade turboprop engines for use on Venezuelan air force reconnaissance planes. The indictment further alleges that Stilwell agreed to disassemble the upgraded engines, disguise them as civilian models when exporting them, and that Marsh Aviation sent employees to Venezuela to reassemble the engines once they had arrived.

U.S. Authorities also allege that Stilwell received $1.8 million in his personal bank account for his role in the arms exporting scheme. If convicted, Stilwell faces up to 15 years in federal prison for the arms violations and conspiracy charges.

For information about Fuerst Ittleman’s experience litigating white collar criminal cases, as well as information regarding OFAC and strategies on maintaining compliance with federal customs regulations please contact us at contact@fuerstlaw.com.

CBP recently proposed to amend federal regulations to allow customs brokers greater leeway in sharing confidential client information, with the client’s written consent.

Under the proposed amendments to 19 C.F.R. § 111.24, “Permissible Sharing of Client Records by Customs Brokers,” brokers possessing prior, written authorization from their clients would be allowed to share a client’s information with:

• affiliated entities related to the broker in order to offer non-customs business services to its clients;
• third-party service providers to perform photocopying and scanning of client records (with a signed non-disclosure agreement); and
• third-party messenger services for transporting and/or delivering client documents on behalf of the broker (if those documents are sealed to prevent viewing, altering or amending).

The proposed regulations acknowledge that many companies affiliated with customs brokers are now offering a wider array of logistics services to its clients. Moreover, customs brokers increasingly face the need to use third-party service providers to meet client and CBP demands. Under existing regulations, brokers are only allowed to share importer information with the importer’s surety (on a particular entry), certain U.S. Customs and Border Protection offices and officials, and other U.S. government agents, “except on subpoena by a court of competent jurisdiction.”

CBP hails the proposed regulations as allowing brokers to offer services that are “streamlined with modern and efficient business practices, while protecting the confidentiality of client (importer) information.” We believe that it the proposed rules will allow these tireless trade professionals to do their jobs more effectively, at a lower cost to importers, and with greater benefits to both brokers and their clients.

Comments on this proposed regulation is due by December 27, 2010.

The U.S. Court of International Trade has ruled this month that Customs and Border Protection (CBP) unfairly targeted U.S. shrimp importers with its enhanced bonding requirement (EBR). The ruling stems from a lawsuit filed by the National Fisheries Institute (NFI) on behalf of 27 shrimp importers. Previously, the Court had determined that CBP had “arbitrarily and capriciously” singled out U.S. shrimp importers and they had been irreparably harmed as a result of application of the EBR.

CBP had originally adopted the EBR in 2004 to prevent tariff evasion. However, the measure was applied at that time only to shrimp, which had no history of tariff evasion. Shrimp importers had their bonds increased from $50,000 to millions of dollars in some cases. Now, following the Court’s ruling this month, CBP has 60 days to cancel all of the bonds or appeal the Court’s decision. Once the bonds are canceled, shrimp importers will be able to ask the surety companies to release their collateral securing the bonds. As such, an onerous bonding requirement that singled out one class of importers has now been removed.

On September 28, 2010, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury issued new regulations amending the Iranian Transactions Regulations, (“ITR”), of the Code of Federal Regulations. The new regulations come as OFAC continues its efforts at implementing the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”). Passed on July, 1, 2010, CISADA supplements the Iran Sanctions Act of 1996 by expanding sanctionable activities and providing for additional types of sanctions.

The new regulations revoke 31 C.F.R. §§ 560.534 and 560.535 from the ITR. As a result, OFAC will no longer authorize, by either general or specific license, the commercial importation or dealing in of certain foodstuffs and carpets of Iranian origin into the United States. Additionally, the new regulations implement the import and export prohibitions in section 103 of the CISADA. Section 103 economic sanctions include prohibitions on the importation of goods or services of Iranian origin directly or indirectly into the US and on US origin goods, services, or technology from the US or a US person to Iran. A copy of the OFAC Federal Register announcement can be at Iranian Transactions Regulations amendment.

While the new regulations prohibit the import and export of goods and services to and from Iran, numerous exceptions, such as the exportation of goods for humanitarian assistance and the exportation of technology necessary for personal internet communication, exist under both the CISADA and the ITR. Additionally, importers must be aware of the definition of “goods of Iranian origin” under the ITR. Under the ITR, goods “of Iranian origin” not only include goods grown, produced, manufactured, extracted, or processed in Iran but also goods which have entered into the stream of commerce in Iran. Therefore, foodstuffs and carpets of third-country origin which are transshipped through Iran become goods of Iranian origin under the ITR and thus prohibited from importation into the US.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fuerstlaw.com.