Volume 23 No. 23 -- June 9, 2003

IN THIS ISSUE:

* BIS Plans to Issue Penalty Guidelines For Enforcement Actions
* Housekeeping Regulation Will Clarify Encryption Controls
* Customs Balking at Short Advance Notice for Exports and Imports
* BIS Has Drafted Rules to Resume Licensing Jurisdiction for Iraq
* Direct Business in Iraq Likely to Be Delayed
* BRIEFS: Fraud Warning, Chile, Export Enforcement, India
* Gilston Communications Announces Merger
 

BIS PLANS TO ISSUE PENALTY GUIDELINES FOR ENFORCEMENT ACTIONS

Exporters should get a better idea of the practices that could mitigate or aggravate any enforcement action the Bureau of Industry and Security (BIS) might take against them under penalty guidelines the agency will publish in the Federal Register shortly.  "This is a project we have been working on to give companies a sense of what to expect when they have enforcement proceedings" with the agency, said BIS Under Secretary Kenneth Juster.  BIS has already taken a number of steps to regularize its enforcement of export cases, including the creation of the Administrative Case Review Board last year, Juster told a BIS advisory committee (see WTTL, June 10, 2002, page 3).

Industry groups have been urging BIS for sometime to issue penalty guidance similar to advice State and Treasury give on trade enforcement matters.  Industry representatives have participated in talks with BIS in the drafting of the coming guidelines.

The guidance will be more comprehensive then the Best Practices suggestions BIS recently published.  It will "try to give guidance as to what factors are aggravating or mitigating," said Karan Bhatia, the BIS deputy under secretary.  "We are making good progress with the draft," he said, promising to share the text with BIS private-sector advisors before it is published for comment.

Juster said one of the guiding principles for BIS is "to have regularity of process."  The agency's goal is for people to see the agency "as transparent, fair and reasonable in how we approach things and that we are not arbitrary and capricious," Juster said.  He was not willing to say that BIS would adopt a policy of making self-disclosure of violations a mitigating factor in any enforcement case.  "You could never have an ironclad rule of no penalty no matter what the self-disclosure," he said.  "Obviously it matters to some degree what is being disclosed, but I think clearly that is an important mitigating factor that one would take into account," he added.
 

"HOUSEKEEPING" REGULATION WILL CLARIFY ENCRYPTION CONTROLS

BIS staffers have drafted a proposal, which they are calling the Encryption Housekeeping Regulation of 2003, to clarify and simplify the often confusing and complex export controls on encryption products.  The proposal, which has already gone through interagency clearance and is being prepared for Federal Register publication, is seen as a refinement of the current rules and not a wholesale change or liberalization of them, according to Norman LaCroix, head of the BIS encryption licensing staff.  "No one is taking a machete" to the rules, LaCroix told the BIS Regulations and Procedures Technical Advisory Committee June 2.

"The set of rules we have in place, we recognize, is a difficult labyrinth of regulations, much of which reflects the work that went into reducing by 70% the licensing requirements," he explained. "The compartments, bins and buckets that your encryption reviews might land or end up in basically renders this process very difficult, if not impossible, to flow chart," he said.

Although the number of licenses filed for encryption products is starting to rise again, they are down sharply from three years ago.  In the first five months of fiscal year 2003, which began Oct. 1, 2002, BIS processed 284 licenses, with an average processing time of 34 days.  "The preponderance of these license are being approved," he said.  Only two were denied for "less than well regarded end users."  Generally, technology, source code for foreign product development, routers and switches, and communications equipment to government end users are being approved, he said.

Through May, BIS completed 925 encryption reviews, with an average processing time of 51 days and reviewed 1,120 classification requests.  Of these, 83% have been classified as either retail or mass market.  Just for mass-market applications, BIS reviewed 449 products, of which 84% were validated as no license required (NLR), LaCroix reported.  These reviews are being completed on average in 26 days. The coming housekeeping proposal will:

• Implement 2002 Wassenaar Arrangement changes to multilateral encryption controls, including changes in License Exception BAG rules;
• Clarify that the EAR "does not control medical equipment on account of the information security that might be incorporated into the specially designed medical equipment," LaCroix said.
• Clarify that encryption source code and corresponding object code that has been released from EI controls under license exception TSU does not require another de minimis review prior to bring made eligible for de minimis treatment;
• Clarify that "tools of trade" in baggage aren't limited to software preloaded on a laptop;
• Include a checklist that will help firms determine whether their engineers have put encryption into a product in a way that would affect the control status of that product.

CUSTOMS BALKING AT SHORT ADVANCE NOTICE FOR IMPORTS AND EXPORTS

Hopes that Customs was prepared to move far away from its original "straw man" proposals and closer to the trade community's proposals for much shorter advance notifications on imports and exports may have been premature.  While backing away from the eight to 12 hours time periods suggested in the straw man documents, Customs won't accept industry recommendations for notices that are closer to one hour in advance of entering or leaving the U.S.  While looking for a compromise with industry, the one-hour proposal "won't get us there," declared Customs Deputy Commissioner Douglas Browning, speaking at a June 4 program in Washington.

"The issue for us is to have the time that we can run the information on the cargo and decide whether or not that cargo should come into the United States," he explained.  Customs is using the same approach in examining sea containers under the Container Security Initiative and for passengers.  Discussions with the Transportation Security Administration (TSA) have looked at possibly getting advanced passenger information 72 to 48 hours in ahead of arrival.

"The problem with one hour before it arrives is that it is too late for us to make a decision to do anything with that cargo," he stated.  "And the truth of the matter from the industry's standpoint, and I will challenge any industry person to say differently, we know, particularly in the air freight area, that weight and distribution are very important. Those load plans are done well in advance of one hour before that aircraft gets here," he asserted.  "So they have to tell me something better than one hour before that aircraft gets here is the best they can do," he stated.
 

BIS HAS DRAFTED RULES TO RESUME LICENSING JURISDICTION FOR IRAQ

BIS has begun receiving export applications for Iraq but is sending them back and refusing to accept anymore, agency officials said June 3.  Until licensing jurisdiction is formally transferred to BIS from Treasury's Office of Foreign Assets Control (OFAC), "this is still an OFAC game," said Joan Roberts, director of BIS' division of foreign policy controls.   BIS has drafted a proposal to amend the Export Administration Regulation (EAR) to return licensing to Commerce and has circulated it for interagency comment, Roberts reported (see WTTL, June 2, page 4).

The regulation, which she said will be published "soon,"  aims to erase over a decade of laws and regulations that have restricted trade with Iraq.  The new rules will be "very trade friendly," Roberts told a BIS advisory committee.  "You are close to back to where you were in 1990," she said.

BIS prepared one draft of the new rules before the United Nations lifted its sanctions.  It had to revise the text to reflect the final conditions in the UN resolution and the general licenses that OFAC issued.  This has required BIS to recirculate the document for interagency review, which probably will delay its publication.   Under the new requirements, most licenses for Iraqi trade will get the same treatment given to goods going to the Middle Eastern region.

BIS staffers say they expect most items controlled only for Anti-terrorism (AT) reasons won't require an export license. The exceptions will be eight Export Control Classification Numbers (ECCNs) with only AT controls. These are chemical products under ECCNs 1C350, 1C395, 1C355, 1C995, 1C997, and explosive detection devices under ECCNs 2A983, 2D983 and 2E983.  The only License Exceptions that initially are expected are BAG, GFT and GOV.  Meanwhile, Canada June 4 said it has lifted most of its export restrictions on trade and financial dealings with Iraq, but will need to take other measures to implement the end of UN sanctions fully.  The United Kingdom reportedly has also taken steps to ease its trade and investment rules.
 

DIRECT BUSINESS IN IRAQ LIKELY TO BE DELAYED

It may be months before American companies will be able to seek any direct trade and investment in Iraq outside of official, U.S.-government backed reconstruction and development programs, industry executives are learning.  In addition to the security concerns about operating in Iraq, U.S. citizens who aren't participating in an official project or humanitarian program will face State visa restrictions, according to a department official.

While unofficial business in Iraq may have to wait, projects funded by the U.S. Agency for International Development (USAID) and other federal agencies have drawn thousands of people to briefings on how to get a piece of the Iraqi action.  Conferences in the U.S., London and Kuwait sponsored by Bechtel, one of USAID's prime contractors for Iraq, on how to become a subcontractor or supplier for its programs have attracted over 5,000 attendees, a State official reported.

At a meeting with business community representatives June 4, State and USAID officials outlined the numerous programs the U.S. is funding for Iraq.  It was clear from their presentation, however, that U.S. officials still don't have answers for many of the legal and practical problems facing industries wanting to operate in Iraq.   The government-funded programs are aimed at rebuilding -- or building for the first time -- Iraqi health, aviation, telecommunications, transportation, education, civil society and governance infrastructure.  For most of these projects, USAID or other agencies have already selected prime contractors to manage the work and procurement.

State officials said they hope the private sector will ultimately take over these programs and services.  But business executives at the meeting cautioned State about expecting industries to be able to finance or manage development in Iraq without continued U.S. government support.  An executive of one major telecommunications firm noted the poor financial health of his industry and warned that his "the days of private business building that infrastructure are long gone."

An investment banker added a cautionary note on Iraq's lack of currency and the expected legal battles over any Iraqi assets that are uncovered.  "In Iraq, there are a lot of potential financial claims" against those assets, he said.  Aviation specialists noted the continuing uncertainty over which U.S. and foreign airlines and air cargo carriers will get rights to fly into Iraq and what legal authority the U.S. has to negotiate aviation agreements for Iraq.  The recreation of an Iraqi civil air service will be difficult because most managers of the old system were tied to the now-outlawed Baath Party and to Iraq's military.

* ** BRIEFS * * *

BIS FRAUD WARNING: BIS posted alert on its Website to exporters that organization called International Sponsor's Associations has been phoning and faxing firms claiming they have won sweepstakes but have to wire funds to Costa Rica to collect their money.  Faxes use graphics from BIS and letters are signed by person claiming to be Under Secretary ISA. "There is no International Sponsor's Association within BIS, nor is there an International Sponsor's Association within the U.S. government," agency declares.

CHILE: There was a Bush at June 6 signing of U.S.-Chile FTA in Miami, but it was Florida Governor Jeb Bush and not President Bush.  USTR Robert Zoellick signed accord for U.S.  Senate Finance Committee Chairman Charles Grassley (R-Iowa) praised agreement and promised to hold hearing on Chile and Singapore pacts in June.  House Ways and Means Committee will hold hearing on both FTAs June 10.

ENFORCEMENT: E.H. Wachs of Wheeling, IL, will serve 24 months probation and pay $506,000 fine as part of guilty plea in federal court to shipping pipe cutters to Iran without approved export licenses.  He also has agreed to pay BIS maximum civil penalty of $159,000 and to pay OFAC $85,000.  Wachs divided orders for 50 machines into small shipments of parts and sent items through Canada to conceal transfers.

MORE ENFORCEMENT: Voluntary disclosure of 20 unlicensed petroleum exports to Canada from U.S. didn't help Flint Hill Resources, formerly known as Koch Petroleum Group, from having to pay $200,000 civil fine to BIS as part of settlement agreement announced June 3.

POLYVINYL ALCOHOL: U.S. industry is threatened with injury by dumped imports of polyvinyl alcohol from Japan but not injured by imports from Germany, ITC ruled in final determination June 2.

CHINESE IMPORTS: Coalition for Preservation of American Brake Drum and Rotor Aftermarket Manufacturers filed Section 421 petition at ITC June 4 asking for investigation and relief from surge in imports of brake drums and rotors from China.

INDIA:  As part of new bilateral effort to increase U.S.-India trade, Bush administration is examining possibility of further liberalizing export controls on Indian trade, BIS Under Secretary Kenneth Juster reported June 3.  "The Indians, of course, are anxious to have a liberalization of our dual-use export licensing system," he noted.  There was substantial liberalization in 2001 when Washington lifted sanctions on number of Indian companies and entities.  "We are in the process of reviewing overall our licensing policies primarily in the non-nuclear and non-missile areas," he told agency advisory committee.  This process will also look at whether additional Indian entities can be removed from the entities list, Juster said.  BIS is working with Indian to help them enhance their own export control system, he reported.

TRANSFER RIBBONS: IIMAK International Imaging Materials May 30 filed antidumping complaints at ITC and ITA against import of wax/wax resin transfer ribbons from France, Japan and South Korea.

PIGMENT: Four color firms filed countervailing duty petition at ITA and ITC June 5 against imports of colored synthetic organic oleoresinous pigment dispersion from India.

GILSTON COMMUNICATIONS MERGES WITH PUBLISHER OF EXPORT PRACTITIONER

Gilston Communications Group, publisher of the Washington Tariff & Trade Letter, is pleased to announce that it merged on June 5 with the publishing division of Spark Media, Inc., publisher of The Export Practitioner, a monthly magazine that provides in-depth news and analysis focused primarily on export controls.  The newly created firm, Gilston-Kalin Communications, LLC, will continue to publish the two publications.  Samuel M. Gilston and Martin Kalin will become co-publishers of the two publications, with Mr. Gilston serving as editor of both.  The merger brings together the experience, expertise and resources of two of the oldest and most well regarded publications in the international trade and export control fields.  The Washington Tariff & Trade Letter has been published since 1981 and The Export Practitioner has been published since 1987.  WTTL subscribers can obtain a free copy of The Export Practitioner to review by calling Elayne Gilston or emailing her at tgilston@comcast.net.

Copyright 2003 by Gilston Communications Group.  Reproduction or retransmission in any form is prohibited. Washington Tariff & Trade Letter is published weekly 50 times a year.  E-mail: Info@WTTLonline.com