This past month we have seen multiple penalties handed down for illegal exports to prohibited destinations through the use of front companies and diversion. In three particular cases, the items were diverted to an end-user that was not originally disclosed and were shipped through an intermediary. Here is a brief overview of three recent cases where items were diverted illegally.
Illegal Exports to Iran
Mehrdad Ansari was sentenced on September 14th to 63 months in prison for violation of the International Emergency Economic Powers Act (IEEPA). Ansari was convicted of obtaining dual-use parts capable of being used in nuclear weapon systems, missile guidance, offensive electronic warfare, and multiple other controlled military end uses and parts used to test weapons systems for use by the Iranian government. During the course of about four years, two Taiwanese citizens operating Ansari’s companies, Gulf Gate Sea Cargo LLC and Global Merchant LLC (both located in the United Arab Emirates), assisted in obtaining or attempting to obtain 105,000 parts to the tune of around $2.6 million for export to Iran. The goods were obtained through various U.S. companies who were not notified that the ultimate destination was Iran. No licenses were obtained for these exports.
Chinese National Sentenced
Earlier this month, Shuren Qin, a Chinese national was sentenced to two years in prison, a $20,000 fine, and will face deportation proceedings after being convicted of illegally exporting over $100,000 worth of U.S. goods to Northwestern Polytechnical University (NWPU) , a Chinese military university which works closely with the People’s Liberation Army. Qin established a front company, LinkOcean Technologies, LTD, which he used to import goods and technology to China from locations in the U.S., Canada, and Europe. The end-user, NWPU, was not identified and the end-user information filed with the U.S. government was falsified. Additionally, Qin made false statements regarding LinkOcean’s activities, stating that the goods attached to a buoy, when in fact, they were used for side scan sonar systems, unmanned underwater vehicles, unmanned surface vehicles, robotic boats and hydrophones. Qin concealed that the items had military applications and were going to a military end-user. NWPU was on the BIS Entity List at the time of export.
Front Company in Bulgaria
Just yesterday, a settlement was reached with Vorago Technologies of Austin, Texas in relation to allegations of illegal export of 16 Mb SRAM silicon wafers to Russia without the required export license. The settlement includes a fine of $497,000. Vorago used a front company in Bulgaria to conceal the illegal export of the wafers to Russia. The front company, Multi Technology Integration Group EEOD, was established in Bulgaria to received controlled items from the U.S. for ultimate export to Russia. The SRAM wafers required a license to go to Russia. Additionally, the front company was also used to order $1.7 million worth of electronics destined to be sent to Bulgaria, repackaged, and shipped to Russia. Kevin J. Kurland, the Acting Assistant Secretary for Export Enforcement at the Bureau of Industry and Security noted, “BIS vigorously pursues companies that conspire with foreign actors to subvert export licensing requirements. The use of a ‘front-company’ to conceal the actual illicit export of radiation-hardened electronic components to Russia cannot be tolerated and those responsible for serious violations will be held accountable.”
What Can We Learn from This?
We can always learn from others. Just looking at these particular cases, there are quite a few red flags present. As with any scams, sometimes you can do all the due diligence and still fall victim. However, small steps can be taken to avoid being fooled.
If you aren’t a parent, you were undoubtedly a child once. As a child, you probably tried to pull a few things over on your poor parents (except for me, I was a perfect angel). The bad players in the export world are eager to fool you into thinking they aren’t up to anything. What can you do? Treat export transactions like you would children who might have a few tricks up their sleeves:
- Ask lots of questions. Where are you going? Who are you going with? What will you be doing? (Every parent asks these questions, right?) In the export world, those questions look like this: Who is the end-user? What is the end-use? Where will the item stop along the way to its final destination? These questions can best be answered via an end-user statement. While these aren’t necessary for every shipment, we suggest using these for countries or end-uses that are riskier, including those typically used in diversion schemes, or for end-uses that are highly controlled. An end-use statement is always a good idea for new customers, as well. If something doesn’t add up, an end-use statement can a good first line of defense.
- If something doesn’t seem right, it probably isn’t. Little Timmy doesn’t typically go to the library, but now he’s going there all the time? Something might be fishy. If something doesn’t seem right about a transaction, it probably isn’t. This might look like an item being shipped to a freight forwarding company with no end-user listed. Global Merchant LLC, the company used in the scheme to export goods illegally to Iran, appears to be primarily a company used for exporting foods, not electronics, according to a Google search. A very typical red flag, and one that we see often, is a company attempting to send items that are not consistent with that company’s typical market. Often, we also see bad players posing as large companies, when there are, in fact, only two employees. Do your research. Look into each company listed on the transaction, screen them, look for inconsistencies on their websites, don’t ignore red flags. BIS has a great resource which details red flags.
- Choose friends (in this case, your customers) wisely. We all know the saying, “A few bad apples can spoil the bunch,” but this doesn’t have to be the case. There are tools available to assist you in screening customers and ensuring they aren’t on any restricted party lists or owned by any companies that are. Screening can be a great first line of defense, but it shouldn’t be your only. Not all bad players are on a restricted party list (yet) and so when there are red flags or a higher risk transaction (think ECCN and destination), it is best to review all the details to make sure everything adds up. Ask questions. Review end-uses. Reconcile red flags. It will pay off in the long run.
These cases serve as a good reminder to always be aware of what is shipping and to where. Having a solid export compliance program with written procedures will help ensure that you don’t get caught up in any unlawful schemes.
If you need assistance “parenting” your customers and suppliers, or you need help identifying and addressing your compliance gaps, contact Export Solutions for a free consultation. Sorry in advance, but we cannot give any free advice on being actual parents.
Emmalie Armstrong is a Trade Compliance Consultant with Export Solutions – a firm specializing in U.S. import/export regulations.