International Legal Affairs: Volume 3, Number 1
The arms trade is a multi-billion dollar global international market, with arms being traded by both small and large entities. Unfortunately, like any trade, the arms trade is made up of both honest and dishonest parties. Viktor Bout is a well known (potentially infamous) international arms dealer accused of allegedly violating numerous UN arms embargoes in Africa. While his case may be the most notorious within recent memory, there are literally thousands of other parties – some small, and other large – that have also committed U.S. arms export violations. If one wishes to stay compliant under U.S. law, conducting business with one of these parties must be avoided at all costs. How does one do so? While many transactions may not involve U.S. made goods, the U.S. Government makes an attempt to track parties known to have committed violations of international law, U.S. laws, and U.S. regulations.
The Department of Commerce, Bureau of Industry and Security maintains a central website by which parties may verify whether a party to a transaction is legally permitted to conduct business. While the list is not intended as the international version of the Better Business Bureau, the website clearinghouse acts as a single point by which all public watch lists may be accessed and verified. The website maintains five watch lists at the following web address www.bis.doc.gov/complianceandenforcement/liststocheck.htm. The five watch lists are:
The Denied Persons List. The Denied Persons list is maintained by the U.S. Commerce Department, and contains a list of individuals and entities that have been denied export privileges. As part of the process in denying export privileges, a denial order is usually issued to the party by the U.S. Commerce Department. Any dealings with a party on this list that would violate the terms of its denial order are prohibited.
- The Unverified List. The Unverified List is a list of parties where the Bureau of Industry and Security has been unable to verify the end-user in prior export transactions. The presence of a party on this list within a transaction should act as notice to all parties involved that the transaction may result in diversion to an alternate (and potentially illegal) end user. The status of the unverified party should be resolved before proceeding with the transaction.
- The Entity List. The Entity List is list of parties whose presence in a transaction can trigger a license requirement under the U.S. Export Administration Regulations. The list specifies the license requirements that apply to each listed party. These license requirements are in addition to any license requirements imposed on the transaction by other provisions of the Export Administration Regulations.
- The Specially Designated Nationals List. This is a list compiled by the U.S. Treasury Department, Office of Foreign Assets Control (OFAC). OFAC’s regulations may prohibit a transaction if a party on this list is involved. In addition, parties should be aware that the Export Administration Regulations (EAR) require a license for exports (or re-exports) to any party on this list that contains any of the suffixes SDGT, SDT, FTO, IRAQ2 or NPWMD.
- The Debarred List. The Debarred List is a list compiled by the U.S. State Department, Directorate of Defense Trade Controls (DDTC) of parties who are barred by §127.7 of the International Traffic in Arms Regulations (ITAR). The full regulation may be found at 22 CFR §127.7. Parties on this list are prohibited from participating directly or indirectly in the export of defense articles, including technical data or in the furnishing of defense services for which a license or approval is required by the ITAR.
Full and accurate export compliance requires parties to regularly check these lists, as parties are added and removed frequently. How important are the five watch lists? Three examples are offered to make the point:
Illegal Exports Abroad
In May, 2007, according to a U.S. Department of Justice press release, the ITT Corporation was charged with illegally transferring classified and export controlled night vision technology to foreign countries. The company pled guilty to two felony charges of conducting an illegal export, and agreed to pay $100 million dollars in fines and forfeitures.
The $100 million dollar fine was paid via a $20 million fine to the Department of State; a $2 million statutory fine as part of the guilty plea; and a $28 million forfeiture to the U.S. government, some of which was shared with state, local, and federal law enforcement agencies for their work during the investigation. The remaining $50 million dollars in fines was suspended for a period of five years, during which time ITT was required to invest and develop night vision technology for the U.S. military and the U.S. government. Any work developed by ITT during this period is subject to “Government Purchase Rights,” meaning that the U.S. Government may share any of the ITT technology with competing defense contractors in future contracts. Any of the $50 million that remains unspent after the five year period is to be paid to the U.S. government.
In addition to the five years of government oversight, ITT was also placed on the Debarred List, further restricting international business. By being placed on the Debarred List, ITT was unable to conduct any export of ITAR related goods or services to new or existing international clients. While the effect upon ITT’s business has not been announced publically, it most certainly had a $100 million effect on corporate profits.
In February, 2010, the U.S. State Department lifted the restriction and removed ITT from the Debarred list, allowing ITT to again conduct exports of defense articles and services.
Illegal Domestic Transactions
Unfortunately, one cannot think only in terms of foreign parties when checking the watch lists. There are a number of domestic entities and parties within the watch lists, all of whom are prohibited from being involved in an export transaction. Recall that the language of the Debarred List notes that Parties on [the] list are prohibited from participating directly or indirectly in the export of defense articles. Consider the following real life transaction: (Identities and specific acts committed have been obscured.)
ABC Sales, Inc. is a domestic U.S. importer and exporter of defense articles. ABC Sales exports a defense article improperly, which eventually results in a guilty plea within the resultant criminal case. As a result of violating the ITAR, ABC Sales is added to the Debarred List.
Unable to legally export defense articles, ABC Sales focuses on importing sporting rifles from European manufacturers in calibers and models that are not commonly available within the U.S. ABC Sales advertises the rifles for sale, which peaks the interest of a foreign buyer. The foreign buyer purchases a rifle, and has it shipped to a XYZ Exporting, Inc. for export abroad.
In order for XYZ Exporting to remain compliant with U.S. laws and regulations, XYZ Exporting must check the watch lists for the names of the foreign buyer, and the domestic seller – in this case, ABC Sales. Because ABC Sales has been placed on the Debarred List, the rifle is tainted and cannot be exported from the U.S. Recall that the regulation prohibits ABC Sales being indirectly involved in the export transaction. While the transaction could be masked (perhaps by passing through several parties prior to arriving at XYZ Exporters) the transaction cannot legally occur, as ABC Sales would always be indirectly involved in the transaction. U.S. parties must verify all parties to an export transaction, whether foreign or domestic.
Denied Parties NOT on the Lists
The five watch lists are available to anyone, worldwide. There are additional watch lists generated by other U.S. Governmental agencies that are not published, yet act to prohibit the listed parties from U.S. export transactions. In a recent case, a Canadian buyer was not listed within any of the five official watch lists. Nevertheless, export license applications involving the Canadian party were repeatedly denied. Efforts to determine the nature of the denial were rebuffed, with no clear or cogent answer provided as to why the license applications were denied. Parties conducting exports from the U.S. cannot (and are not) responsible for involvement with parties on any private watch list.
Parties buying or selling U.S. made defense articles should be aware that being omitted from the five watch lists is not in any way verification that the parties involved in the transaction are legitimate – only that there is no known information to show otherwise. In this trade, one must avoid the unscrupulous, dubious, and otherwise immoral parties if only to stay out of trouble personally. The five watch lists are updated regularly – check them frequently to verify that all parties to a transaction are legitimate and conducting business within the bounds of U.S. export law.