Little shop of compliance horrors!

Eight miles outside of Baltimore, along a railroad line dating back to late 1800s, lies a sleepy little town of just 10,000 people. You’ll find quiet, tree-lined streets. An old stone church. And just up the road, across from Panera Bread, in a nondescript, one-story brick industrial building, a few dozen employees work in a lab, creating microbial diagnostic tests.

Welcome to Linthicum Heights, Maryland. And to the U.S. research and development facility for Luminultra Technologies. But proceed cautiously, dear Compliance Officer … and beware! Things are not always as they seem. Especially in sleepy little towns. Behind the closed doors of nondescript, little labs.

Three years ago, in October 2022, as the leaves were changing colors, and as the residents of Linthicum Heights were setting out their pumpkins, and the brave teenagers were facing haunted houses, a real compliance horror story was about to unfold. Keep reading, if you dare!

What happened at Luminultra’s R&D lab?

The small staff at Luminultra’s U.S. facility help research and test new products for microbial testing. Specifically, they make luminometers and aqueous test kits. These products are used to test water—any kind of water system, including drinking water, source water, cooling water and ballast water. The luminometers and test kits help identify microbial activity to keep water systems running smoothly.

Both products are classified as EAR99 under the Export Administration Regulations (EAR). Practically harmless! After all, there are literally thousands of items manufactured in the United States and classified as EAR99. Everything from crayons to Krispy Kreme doughnuts. From defibrillators to flip-flops. But as is the case with many things in export compliance, it isn’t just the “what” in a box, it’s also the where.

In the fall of 2022, just days before Halloween, the folks at Luminultra finalized a sale and exported three luminometers and 25 aqueous test kits. The total value of the shipment was listed at just $33,681. The products were supposedly being sent to a freight forwarder in the UAE. (Is this giving you compliance chills yet?) In fact, they were destined for one of the worst, baddy-bad places on the export control map—Iran.

A series of unfortunate events

In the three years since that fateful day in October, the hardworking enforcement officers at the Bureau of Industry and Security (BIS) have dug up a trove of horrific mistakes—unearthing emails, documents and other communication that would make any respectable compliance officer scream!

Here’s a rundown of the juicy details:

• Luminultra negotiated the sale with a third-party sales representative, Fanavari Pishrafteh Jahan (FPJ), who made numerous references to the fact that the products were destined for end use in Iran, but who also asked to have FPJ’s name removed from all invoices or shipping documentation.
• The employee from FPJ even asked Luminultra to provide a discount on the sales price, due to “sanctions and critical economic conditions,”  but promised Luminultra more future business, stating: “Iran is a big market of [testing solutions] well as luminometers” and FPJ was “ready to work harder on your brand in Iran.” Shockingly, Luminultra agreed to the discount. (Pro Tip for U.S. Exporters: If a company overseas is “ready to work harder on your brand in Iran” it might be wise to get qualified trade compliance help. Or just say “no thanks.”)
• FPJ asked, and Luminultra agreed, to change all the shipping documentation to make no reference to Iran, and instead, to use ShipIt Freight Solutions in the UAE as the ultimate destination. They also asked to lower the shipment value to avoid a UAE import duty. The unwillingness to disclose FPJ or Iran on the shipping documentation, as well as the listing of a UAE-based freight forwarder as the ultimate consignee, were both “red flags.” These created a duty on the exporter (Luminultra) to resolve the red flags, otherwise, they could be charged with having “knowledge” of a pending violation of the EAR.
• When a Luminultra employee expressed concern about these requests, FPJ explained it away because the “goods can’t be shipped directly to us.” The extra steps were required to evade U.S. sanctions, and payments were setup to allow the flow of money without involving any sanctioned banks.
• A Luminultra employee also wrote to the company’s VP of Sales: “This is the FPJ order for Iran and we are very nearly at the finish line but they’re making some strange requests around the commercial invoice that sound slightly shady.” (Slightly shady?! Perhaps “horrifically noncompliant” is a better term here?)
• Despite all the shadiness, Luminultra proceeded with the terrifying transaction. The company falsified its EEI filing and provided FPJ with Canadian banking details to avoid the payment being sent through a U.S. bank in U.S. Dollars.

A hair-raising conclusion!

Despite all its efforts, Luminultra Technologies got caught, and the outcomes were anything but pretty. Some astute compliance folks might argue there are exemptions for certain “medicines” and “medical devices” going to Iran, and while this may be true, Luminultra’s products did not meet the definitions for these medical devices. In fact, Luminultra’s own invoice for the sale specifically states the luminometers and test kits were not for “human diagnostic or medical use.” (Cue evil laughter here!)

Here’s how our harrowing story ends, dear Compliance Officers …

• In exchange for its $33,000 order, Luminultra must pay a civil penalty in the amount of $685,051—a gruesome sales strategy, indeed.
• Should Luminultra fail to make this payment, BIS may revoke its export privileges for a period of one year.
• The company must complete a compliance audit by March 30, 2026, followed by two more years of audits, for a total of three. (Know any good export compliance auditors? We do.)
• All company employees must undergo export compliance training.
• The company is subject to a three-year probationary period, during which failure to meet any of these requirements may result in denial of its export privileges and further actions by BIS.

In conclusion, beware the red flags! Keep a close watch on your sales team! Develop a compliance program and train your hardworking staff to think twice the next time something “slightly shady” comes across their desks.

Because you never know what evil might be unearthed in a sleepy little town, behind the closed doors of a small testing lab with just forty souls. Take care, Compliance Officers, and pray you don’t find yourself in the next edition of “The Little Shop of Compliance Horrors.”

Until next time, BWAHAHAHAAAAA!

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