When the FBI Comes Calling…®

Monday, October 3, 2005

Innocents Abroad: What Execs Don't Know About Export Law Can Hurt Them

By Douglas C. McNabb

An executive knows better than to do business with companies in certain countries against which the U.S. government has imposed trade sanctions, such as Iran and North Korea. But could it be that in today's global economy, American companies could unknowingly be trading with the enemy? Yes.

Let's look at a fictional example:

You are the CEO for AwesomeWidgets, which designs and builds widgets. The closest you have ever gotten to criminal law is watching "The Practice" and "Law & Order" on television. Sure, like most businesspeople, you regularly read about the ever-increasing number of businesspeople prosecuted by the federal government, but you have always thought of the whole issue as something that happens to other, less scrupulous folks.

You live by the same advice you give your people: Just apply common sense and ethics, and there won't be a problem. But now, you have received a letter from the U.S. Department of Justice. Your general counsel (GC), while an ace with contract and labor law, seems helpless. You have never been in any type of trouble with the law, and you need to know what is going on. You have a family, are active in the community and are liked within the company.

You quickly re-read the letter and realize that it has something to do with a project a French company commissioned with your company.

Four years ago, the French company approached AwesomeWidgets with a proposal. The French company needed a custom-designed widget that could be used to enhance another piece of technology commonly employed in the petroleum industry.

You accepted the proposal on an hourly fee basis, and AwesomeWidgets' chief engineer oversaw the completion of a design. Once the design was completed, you flew to Paris to meet with representatives of the French company. You presented the design via PowerPoint to a variety of people, some of whom you had previously met and others you had not. After your return to the United States, AwesomeWidgets learned that the French company had decided not to commission the construction of the widgets, after all, but thanked you and paid the bill.

Neither you nor your GC has any idea how any of this could be a crime. After all, AwesomeWidgets created a design for a widget, not a missile. You presented the design in Paris, not North Korea. AwesomeWidgets never even produced the widget because the French company declined to proceed.

Your first thought is to have the general counsel go to the federal prosecutor and explain everything. Your GC hesitates, however, wanting to know more about the applicable law. After several hours of online research, the general counsel arrives at a horrifying conclusion: You need a federal criminal-defense lawyer, because you could be in serious trouble.

A number of frequently overlapping federal rules, laws and regulations apply to exports such as the widget that AwesomeWidgets designed. The GC determines that he needs to know more about the U.S. Bureau of Industry Security (BIS) and the Office of Foreign Assets Control (OFAC).

The GC learns that the BIS is part of the U.S. Department of Commerce. For more information, he visits the BIS Web site and learns that "[t]he mission of the Bureau of Industry and Security is to advance U.S. national security, foreign policy, and economic interests." The BIS, through the use of Export Administration Regulations (EAR), regulates the export of particular goods from the United States.

The GC is also surprised to learn that virtually all exports are subject to EAR. He is shocked to learn that the widget AwesomeWidgets designed is considered a "dual-use" export because of its petroleum-industry potential and equally shocked to learn that exporting the widgets requires a license.

But AwesomeWidgets never actually produced or exported the widget. How can you, as the CEO, have criminal exposure for agreeing to create a design and making a presentation? Unfortunately, the GC learns, federal rules - Code of Federal Regulations 734.2 (b)(3)(ii) - loosely define "exports of technology" to include the mere "oral exchange of information in the United States or Abroad." That means the PowerPoint presentation of the widget design was an export, despite the fact that the widget never was physically exported - or even constructed.

Fines, Jail Time

After realizing that you could have real criminal exposure, the GC reads on and finds more unsettling law relating to the BIS and EAR. According to the law, exporting technology to a national of a foreign country is the equivalent of exporting the technology to the country itself. Since you made the presentation to a group that included strangers, you cannot rule out the possibility that some of them were nationals of trade-sanctioned countries such as Iran.

The next order of business is to get a sense of potential punishment. Hoping to find that a violation of the EAR carries a small fine, the GC instead learns that the federal government will fine an offender the greater amount of five times the value of the exports or $50,000, and imprison up to five years anyone who knowingly violates or conspires to violate the EAR. If the violation is willful, however, the fine increases to $250,000 and imprisonment for 10 years.

After more research, the GC comes across the OFAC, which is part of the U.S. Department of the Treasury. He learns that the OFAC administers and enforces sanctions against groups, individuals and countries such as Iran. After a quick investigation, the GC learns that the French company to which you made the presentation has owned an Iranian subsidiary for more than five years.

Now, the GC is concerned the presentation may have amounted to a prohibited transaction with Iran, with which all U.S. trade is restricted, subject to a few limited exceptions. He also learns that engaging in trade with Iran, and trading in petroleum-industry goods in particular, is prohibited by executive order.

Unfortunately, it appears the company itself has exposure, since the reach of the OFAC extends not only to U.S. citizens but also to permanent U.S. resident aliens, any person within the United States and entities organized under U.S. laws.

As with potential EAR violations, penalties for running afoul of the OFAC or violating an executive order, such as the one on transactions with Iran, can include a fine up to five times the value of the exports or $1 million, whichever is greater.

You and the GC reluctantly agree that both you and the company need a federal criminal-defense firm. You also direct the general counsel to study the law of exports more thoroughly so that he may implement a comprehensive compliance program to prevent similar issues from arising in the future.

You hope that you will be able to monitor the new compliance program in person and not just hear about it during visitation hours at a federal prison.

Douglas C. McNabb is the senior principal of McNabb Associates, a federal criminal-defense firm. He has more than 25 years of legal experience in many areas, including white-collar crime.


This article can also be found at law.com.