Potential Illegal Export Cases in Overseas Subsidiaries

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Potential Illegal Export Casesin Overseas
Subsidiaries
February 20, 2007, Bangkok Center for
Information on Security Trade Controls
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Assumed illegal export cases and the measures
taken at overseas subsidiaries (1)
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Assumed illegal export cases and the measures
taken at overseas subsidiaries (2)
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Assumed illegal export cases and the measures
taken at overseas subsidiaries (3)
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1.Organization
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Organizational Structure
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Trade control organization is established
Where the company established trade control
organization, Chief security officer know any
violation or chance of violation.
Chief security trade control officer
report
( Administrative Dep. )
report
Person in charge
Where the company doesnt have any trade control
organization, or person in charge is unclear, CEO
cannot grasp information about any violation or
chance of violation. Persons in Sales Dep. etc.
dont know whom he/she should report to.
Trade control structure is unclear
CEO
Report?
Sales Dep. etc.
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Export Control Violation Exposure
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Export without authorization
Country A
IAEA Inspection group detected the machine
Balancing machine (Controlled
commodity) Diversion of military-related use
Maker X
Libya
Ignorance of the law Without knowledge of Legal
system
Maker X was accused of violating Foreign trade
act, but dropped Sanction one year prohibition
of export of strategic products
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2.Classification
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Classification Table of Country B is different
from Japans
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Country A
Must classify with Country Bs table!
Customer (Purchaser)
?Made Classification with Japans table and EAR.
?Not made classification with Country Bs table.
?Direct Export of Materials(Drop Shipment)
?Selling Agreement
Xs Subsidiary
(Manufacturer)
?Materials Purchase Contract
Country B
COMPANY X
Japan
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Return shipment
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Country A (having export control law and/or
regulations)
JAPAN
Company X
When Y returns the products Z to X for following
reasons. 1. Z is defective products or 2.
End-user cancelled the order. etc. Y should
classify Z based on the law of country A. If Y
failed to classify Z (license required),
Classify the products Z based on the Exchange
and Foreign Trade Law. If Z are classified as
List Control Products.
Violation
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3.Transaction screening
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Transaction screening Case 1 Drop Shipment
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Country A
India
They didnt classify items in EAR.
?Direct Export of Materials(Drop Shipment)(2)
Customer (Purchaser)
Vender
ECCN Items subject to EAR
?Materials Purchase Contract
?Direct Export of Materials(Drop Shipment)(1)
?Selling Agreement
Xs Subsidiary
COMPANY X
Country B
0 Inclusive Contract
Japan
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Transaction screening Case 2 Customer screening
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Denied Person 1988-2008
Fine US30,000
Export
U.S. lt forwarder gt Company X
Switzerland lt forwarder gt Company Y
Perfume
In 1995 and 1996
U.S. lt Exporter gt Company W lt Cosmetics Company gt
Switzerland lt Importer gt Company Z lt Cosmetics
Company gt
Contract
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Transaction screening Case 3 Circumvention
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Ask for procurement
Order
South Africa Agent Y
USA Maker X
Pakistan Company Z
Reexport
US Authority detection
Not to disclose the true destination
Nuclear related Equipment (Electronic switch,
Oscilloscope)
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Transaction screening Case 4Customer screening
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Japan
Russia
Authority detection
Maker X
Laboratory Z (nuclear development)

No communication with Maker X
Shipment
contract
Subsidiary X
Agent Y
Subsidiary X access to the information on Z
labos nuclear activity
Shipping Instruction
Forward agent W
Trucking
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4.Release Technology or Software
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Classification of technology/software
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Country A
Company X
Country B
Company Y
Export without license
Not controlled by law
Built-in software(controlled) is not classified.
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Control of technology/software (technical advice
to customers)
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Country B
Controlled software released with a license (two
years ago)
Country A
Company X
Company Y
Request to upgrade the software
sales
Upgrade guidance
Release without a license
Customers
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Control of technology/software (business trip
overseas)
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Country A
Country B
Draft for a controlled items
Company X Engineer K
Company Y sales-engineer
Release without a license
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Sends Program(which is classified Country As
list) by e-mail before gets Authorities E/L.
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Country A
Country B
Authorities
Not permitted yet
(2) E/L is being applied for.
Sales Dept.
Headquarter
(1) Agreement
Factory
(3) pressing
SE Dept.
(4) Sent program by e-mail
SE Dep. didnt know about E/L.
before gets Authorities E/L
Company X
Company Y
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5.Disposal of assets
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Disposal of Assets
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Country A
Country B
Company Ys Parent Company
Exported without E/L
Company Y (Purchaser)
Used EQUIPMENT
SOLD
X didnt notify this equipment was classified
on control list.
Classified on Control List
Company X
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6.Shipment control
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Shipment Control 1
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Country A
Country B
Exported from Country X under Export License
Company X
Machine Controlled Item E/L Application (in
Country A) End User Subsidiary End Use
Subsidiarys Production

• Reexport,
• Move to Stock for Sale,
• Sale in Country B
• are violations.

x
x
x
Move to Stock for Sale
Sale in Country B
Re-export
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Shipment Control 2
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Sales Dept.
Authority
Waiting for E/L
Logistic Dept.
Not sending office memo
Country A
Export without E/L
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7.Export permit
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Circumvention Case
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South Korea
Sep. 03 S. Korea Authority detection
Export without Authorization
North Korea
Company Y
Company X
China
A
A
Sodium cyanide (Raw material of toxic gas
Tabun)
Other transit countries Thailand (May 05)
Malaysia (Aug. 04)
Jun.-Sep. 03 Export
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Insufficient compliance of license requirements
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Japan
Singapore
Stock sales of machine tool

Exporter X
Company Y
Written PledgeShall consult with METI when
importer seek prior agreement on reexport.
Written PledgeShall obtain exporters prior
agreement when Importer plans to reexport

Reexport without Exporters consent
Written Pledge
Authority (METI)
Malaysia
Written Pledge
License application
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8.EAR
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EAR Reexport
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USA
UK
Recognition of destination
Company X
Oil Production Equipment (EAR 99) Export
Subsidiary Y
Reexport
Iran
Partner in crime Violation of 764.2(e)
No license ( required by746.7 (former785.4))
?with knowledge of Xs export without license
required
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Why did the Exporter have to give up this
transaction?
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Manufacturer (JAPAN)
Export
Exporter X
Importer Y
Canada
Iran
US subsidiary of the manufacturer ltAdvise
Exporter X to sell The goods to Irangt
Construction machine
Stocked in Canada
Not subject to international regime
Japan origin
The US subsidiary would be penalized under the
OFAC regulations due to facilitation. Facilitatio
n by the US subsidiary can be considered as
violation against OFAC regulations.
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9. Actual Violation Cases
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Export Control Violation Exposure

• In Germany
• May 2003
• Aluminum pipes that may be diverted to uranium
  concentration systems used to manufacture nuclear
  weapons were smuggled to North Korea. The
  president of a German precision equipment
  manufacturer was detained.
• Aug. 2004
• There were suspicions about an individual trying
  to send centrifugal separator components procured
  from South Africa to Libya through Dubai.
• A Hessen-resident businessman was arrested for
  smuggling nuclear technology to Libya.

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Export Control Violation Exposure

• In Singapore
• July 05
• Far Eastron (S) Co has been fined for exporting
  so-called dual use electronic chips, which
  could be used in weapons manufacture, without the
  required permit.
• He exported S36,820 worth of controlled dual-use
  integrated circuits on Dec 23, 2003, which it
  said went to clients in Germany, China and Taiwan
  for commercial satellites and aircraft
  navigational equipment.
• The company pleaded guilty to not obtaining the
  necessary permit and was fined S20,000.

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Export Control Violation Exposure

• In China
• May 04
• Two Chinese companies were fined millions of yuan
  for violating regulations on missile export
  control, the Ministry of Commerce said Tuesday in
  Beijing.
• The two companies are in the eastern provinces of
  Jiangsu and Shandong, the ministry said, but did
  not give the concrete amounts of the fines and
  the names of the companies.
• A ministry official said the Chinese government
  always stands against the proliferation of
  weapons of mass destruction and terrorism, and
  has already issued a series of regulations on
  export control concerning nuclear, biological and
  chemical items, missiles and other sensitive
  items.
• The official warned related companies to abide by
  laws and regulations, which will "not only
  benefits national security and public interest,
  but also the companies themselves."

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Nuclear black market Dr. Khan confessed on
05/04/2
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Key words, reminders Via a third country
Never tells the fact of export, destination
Disguise the end use (Order of Centrifuge was
declared use for oil gas plant) Try
to procure by parts or materials
very slicky, it seems that involved
company never found these concerning signs.
(From press story)
European companies
Exchange of Nuclear Tech(Pakistan) and Missile
Tech (N Korea) From 1997
Germany, Netherlands, Swiss,England,Belgium, Austr
ia,Cyprus
Nuclear Tech-Related equipments
North Korea

Agent
Russia
Nuclear related equipments (03/10Smokeout)
Iraq
Nuclear TechHigh enriched uranium
China
Nuclear Laboratory in Pakistan
Buildup
Nuclear Tech, Design of Nuclear warhead
Nuclear related equipments
Iran
Discovery of Parts made in Japan
Japanese company
Centrifugal parts
Libya
UAE(Dubai) Core of the black market
Malaysia
Centrifugal Design of Nuclear warhead
Production and Export of Centrifugal parts
U.S. company
AgentMr. Takhir (Imprisoned in 04, May)
Nuclear related equipment
Nuclear related equipments(oscilloscope,electronic
switch)
Via third country disguising end use,(medical
application) very slickly
Sale to Libya via Black market(5 billion 300
million yen)
Pakistan companys procuring activity via agent
South Africa
From IAEA research, New York Times, etc
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Procurement of Nuclear related goods by Libya
International Network
Pakistan
Spain Italy
Tahir
Dubai
Uranium hexafluoride UF6
Producing machine of Centrifuges
Centrifuge machine
Libya
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Procurement of Centrifuge machine by Libya
International Network
Tahir
End use (False)
Manufacture of oil/gas components
Technical support
Automobile parts Precision instrument
SCOPE (Malaysia)
End Use
Manufacture of centrifuge components
Dubai
End user (False)
Oct. 03
BBC China
Italy
End user
Seizure
Libya
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10. Dual Use in Chemicals
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Examples of Dual Use in Chemicals
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• Activated carbon
• Common applications As a catalyst in
  water/sewage treatment in pharmaceuticals in
  recovery of solvents etc
• But ? can also be used in Gas masks
• (for mining and other private sector
  applications, and military use)

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• -Acrylic plate
• For aquariums?
• Or for windows of missile control
• center??? ? mass-destruction.
• -PVC Corrugated plate
• (Needed for roof of warehouse)
• ? Warehouse for what?
• Storing missiles???
• ?mass-destruction purpose.

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• Ammonium nitrate
• (fertilizers, cosmetics, insecticides, offset
  printing, production of NO2, penicillin, etc.)
• UK authorities seized 500Kg from a suspected
  terrorist group after the bombings in Spain
• Di-nitrotoluene (Dyes, explosives) salt ?
  Ammonium nitrate explosives
• -Glycerin
• (cosmetics, printing inks, antifreeze agents,
  foods, perfume, soap, confectionary, medicine,
  solvents, etc.)
• ?Nitroglycerine (explosives)

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• Chlorine gas Sodium hydroxide (NaOH)
  Ammonium gas (NH3) Xylene ? Hydrazine (foaming
  agents, deoxidizing agents, pesticides, reagents
  used in water treatment, etc.)
• Monochloroacetic acid (herbicides, surfactants,
  perfumes, plasticizers, medicines) Sodium
  Nitrate (whitening agents, foaming agents,
  reagents) ? Nitromethane (pharmaceuticals,
  surfactants, insecticides, fungicides, etc.)
• Hydrazine Nitromethane
• ? Rocket propellant

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• Tributyl Phosphate (TBP)
• Common applications As solvents for
  extracting metal, plasticizers for synthetic
  rubber, antifoaming agents for paper textiles,
  etc.
• but can also be used for separation and
  purification of uranium and plutonium for nuclear
  weapons.
• Such was the intended use of a quantity of
  this chemical seized by Chinese authorities in
  the summer of 2003, during an attempt to smuggle
  it into North Korea

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• Sodium cyanide
• (pigments, plating, smelting gold, metal
  smelting,reagents, deoxidizing, metal hardening,
  photographic chemicals, medicines)
• Chemical weapons
• From the 733 tons originally exported from
  South Korea to Thailand between February and
  April, 2003, between 70 and 142 tons were
  re-exported from companies in Thailand to North
  Korea in May of this year, however the rest was
  seized by authorities in August.
• 30 tons exported from Germany to Singapore were
  seized on suspicion of being re-exported to
  North-Korea.
• (May 2003)

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Unlawful export requests may be difficult to spot
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• Requests may come through bogus, deliberately
  misleading company names, such as SAFE PEACE
  LOVING Co., LTD.
• The true end-use will be disguised.
• Requests for required goods/substances may be
  separated so as not to arouse suspicion.
• ?We must have extremely accurate and sensitive
  DETECTION MEASURES to pick up on the slightest
  suspicion at the earliest possible stage

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They can be very deceptive
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• Do not simply assume that all our sales are used
  for normal, peaceful purposes, and all who
  enquire about our products are saints like you or
  me.
• Accepting one false enquiry is enough to ruin all
  our daily, compliance-related efforts.
• Get in the habit of paying extra attention to the
  smallest details. This requires much less time
  and effort than coping with a problem once it has
  occurred.
• A mistake can be disastrous, not only to
  yourself, but to our company to the Group
  Companies
• and to the world.

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• Hone your SENSITIVITY to the following
• The nature of the chemical,
• The nature of the sales channel,
• The character and attitude of the agent or
  end-user,
• The final destination,
• The nature of the enquiry
• (Was it too casual? Too easy? Surprisingly
  little negotiation?)
• Did anything above strike you as odd or
  peculiar?
• Be CURIOUS

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11. US Export Controls
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Be careful about EAR!
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• Export Administration Regulations of the U.S.A.
• In case of re-export of U.S. products, the
  re-exporter shall follow EAR rules.(Need to
  apply for export license)
• Parties that violate the rules may be listed on
  the DPL and prevented from doing business with
  the U.S. Thus we must abide by EAR.

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In case of violation of U.S. export control Law
Regulations
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The overseas group company will be prohibited
from procurement of U.S. origin commodities,
software and technology . (Extraterritorial
application of U.S. Law Regulations)
Export
Company in Another Country.
US Company
Application region of U.S. Export Control Law
Regulations
Export
Re export
Violation
Overseas Group Company
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What is subject to the EAR?
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• Items in the United States, except
• -Items subject to the exclusive jurisdiction
  of another
• Federal Department or Agency
• -Publications that are artistic or non-technical
  in nature
• -Publicly available technology software
  (excluding
• encryption)
• Items located outside the United States
• Activities of U.S. Persons Foreign Nationals

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Subject to the EAR
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• U.S. Persons Foreign Nationals
• -Certain activities of U.S. persons
  
• Foreign nationals(744.6)
• e.g. Reexport of U.S. products without license
  where that person knows the items will be used in
  the design of nuclear explosive devices in a
  country listed in country group D2
• -Deemed exports and reexports of
• technology or source code released to
• foreign nationals(734.2(b)(4)(5))

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Export Control Decision Tree (Supp. No.1 to Part
732)
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Are you subject to the EAR?(See 734.2-5)
Exit the EAR
N
Y
Is your item classified under an ECCN on the
CCL? (General Prohibitions 1,2, 3) (See Supp.
Co.1 to Part 774
N
EAR99
ECCN
Y
Do General Prohibitions 4-10 apply? (See
736.2(b)(4 -10))
Do General Prohibitions 4-10 apply? (See
736.2(b)(4 -10))
Y
N
Is there an X in the box? (Using the Commerce
Country Chart and the CCL) (Supp. No.1 to Part
738 Supp.No.1 to Part 774)
N
Ship NLR (See 758.1(a)(3))
N
Y
Y
Ship using License Exception (See Part 740)
Y
Is a License Exception Available? (See Part 740)
N
Submit an application for license (See Part 748)
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General Prohibitions 1,23
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You may not without a License Exception

• No.1 Export or reexport controlled items to
  listed countries(736.2(b)(1))
• No.2 Re-export foreign-made items
  incorporating more than de minimis amount of
  controlled U.S. content(734.4 Suppl. No.2 to
  part 734)
• No.3 Re-export foreign produced direct product
  of U.S. technology or software (736.2(b)(3))

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Know Your Customer GuidanceSupplement 3 to
Part 732
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• Decide whether there are red flags
• If there are red flags - inquire
• Do not self-blind
• Reevaluate transaction
• Absent red flags or special EAR provision, no
  affirmative duty on exporter to go behind
  customers representations

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RED FLAGS
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• Possible indicators that an unlawful diversion
  might be planned by the customer
• Abnormal or suspicious circumstances
• -Product capabilities do not fit buyers
• business
• -Buyer evasive about destination or use
• -Routine on-site service is declined
• Unverified list

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Denied Persons List (DPL)
General Prohibition 4
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• Parties denied export privileges
• Supplement No. 2 to Part 764
• Denial orders published in Federal Register when
  issued
• Available on-line at www.bis.doc.gov