In one EAR, out the other
How does the U.S. Commerce Department describe transshipment in its Export Administration Regulations?
'For purposes of the EAR, the export or re-export of items subject to the EAR that will transit through a country or countries or be transshipped in a country or countries to a new country or are intended for re-export to the new country, are deemed to be exports to the new country.'
If you didn't get what it said the first time, or the second or third, you're not alone. This is one example of many clumsily worded regulatory definitions in the EAR. The regulations are difficult for the most seasoned industry veterans, as well as for the Commerce Department's agents in charge of enforcing the nation's export licensing regulations, to decipher. Unfortunately, the lawbreakers know this too and use it to their advantage.
The purpose of the regulations is to keep 'dual-use' exports, or items with both commercial and military applications, out of the hands of terrorist organizations and nations with militaries considered unfriendly to the United States.
Yet, a review of recent significant cases indicates that overseas technology acquirers, particularly in Iran and China, have used this lack of regulatory clarity to dupe U.S. companies and logistics services providers to becoming participants in their illicit activities.
Take for example the May 17 announcement by the U.S. District Court in Massachusetts, which said a jury found two Chinese nationals guilty of illegally conspiring to violate U.S. export laws and illegally exporting electronic equipment from the United States to Chinese military entities.
Zhen Zhou Wu, also known as Alex Wu; Yufeng Wei, also known as Annie Wei; and Shenzhen Chitron Electronics Co. Ltd. (Chitron-China) and its U.S. office in Waltham, Mass., made the illicit exports on 'numerous occasions' from 2004 to 2007, and conspired to violate U.S. export laws over a 10-year period.
According to charging papers filed with the court, Chitron-China is ranked among the top 10 Chinese electronics distributors. In addition to its headquarters and U.S. branch office, the company has three branch offices in mainland China and a branch office in Hong Kong. The company also has about 200 workers.
Led by Special Agent Edward J. Hayden of the Commerce Department's Office of Export Enforcement in Boston, the federal investigation uncovered an elaborate scheme devised by Chitron to knowingly use unclear U.S. export control regulations to its advantage. Starting in 1998, Chitron in Waltham began ordering and shipping its first military parts from the United States to China.
Chitron in the United States allegedly found it could skirt U.S. export laws by falsely listing foreign freight forwarders in Hong Kong as the 'ultimate consignee' or end user of the products being shipped, and by causing shipping companies to file false shipper's export declarations with the Commerce Department. Chitron also classified the items on the shipper's export declarations as 'electronics components' and stated 'no license required.' The ultimate destination for all of Chitron's U.S.-origin exports was either Chitron-China's Shenzhen headquarters or another branch office in mainland China, a violation of U.S. export controls.
Chitron-China also established an elaborate telephone system for its office in Waltham, using a toll-free telephone number. Calls from U.S. suppliers/vendors to this toll-free number were forwarded to Chitron-China's offices in Shenzhen, where Chinese employees answered the calls.
Papers filed with the court said this phone system 'masked outgoing calls from the Shenzhen headquarters, such that it appeared that the call was being placed from the Chitron-U.S. office' to the U.S. suppliers/vendors.
To shield the fact that the electronics sold to Chitron were intended for end-users in mainland China, Chitron-China employees told U.S. suppliers/vendors that they were employees of the Waltham office, the court papers said.
By 2007, Chitron-China had become so comfortable with the results of its scheme that these illicit U.S. exports made up 25 percent of its business. It ultimately took a whistleblower to bring the scheme to federal regulators' attention.
Hayden, along with investigators from several federal agencies in the Boston area, including Immigration and Customs Enforcement, FBI and Defense Criminal Investigative Service, as well as lawyers from the U.S. Attorney's office, painstakingly developed the case against Chitron. This included data recovery of erased documents from Chitron's computers, which revealed the Chinese military entities that received the U.S. exports (See 'Chinese nationals guilty of illicit U.S. exports,' at www.AmericanShipper.com/links).
Upcoming changes to U.S. export control regulations may help American shippers and their logistics providers from becoming unwitting suppliers to overseas companies like Chitron. The Commerce Department's Bureau of Industry and Security is reviewing how to more clearly define transshipment as it pertains to export licensing compliance, while the department's Census Bureau has developed proposed regulations so that the Automated Export System's information fields for 'ultimate consignee' are not interpreted as being the 'ship to party' but rather the 'known end user at the time of the export from the United States.'
The Obama administration has also launched an aggressive initiative this spring to centralize and update the country's export control system.
Until these changes are in place, Paul DiVecchio, a consultant with 30 years of experience at advising companies about export regulatory compliance, said U.S. suppliers of controlled products to U.S. resellers need to be diligent by:
' Reviewing the parties to the transaction against the 'restricted parties list.'
' Not releasing controlled products unless assured in writing that the reseller will comply with the export regulations.
' Finalizing with notations on the invoice as to the classification of the products.
' 'Using common sense and letting your instincts drive the legitimacy of the transaction.'
'The forwarder should be cognizant of any deviations related to transshipments whereby the country of ultimate destination is different than that stated by the USPPI (U.S. principal party in interest) on their instructions,' DiVecchio said. 'Remember, any investigation regarding non-compliance of the export regulations will lead back to both the original supplier and logistics provider.' ' Chris Gillis