00003382 1600 CISTEC

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Published on January 10, 2008

Author: Raulo

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Potential Illegal Export Cases in Overseas Subsidiaries:  Potential Illegal Export Cases in Overseas Subsidiaries February 20, 2007, Bangkok Center for Information on Security Trade Controls Assumed illegal export cases and the measures taken at overseas subsidiaries (1):  Assumed illegal export cases and the measures taken at overseas subsidiaries (1) Assumed illegal export cases and the measures taken at overseas subsidiaries (2):  Assumed illegal export cases and the measures taken at overseas subsidiaries (2) Assumed illegal export cases and the measures taken at overseas subsidiaries (3):  Assumed illegal export cases and the measures taken at overseas subsidiaries (3) 1.Organization:  1.Organization Slide6:  Person in charge ( Administrative Dep. ) Chief security trade control officer Trade control organization is established Where the company established trade control organization, Chief security officer know any violation or chance of violation. report report Trade control structure is unclear Sales Dep. etc. CEO Report? Where the company doesn’t have any trade control organization, or person in charge is unclear, CEO cannot grasp information about any violation or chance of violation. Persons in Sales Dep. etc. don’t know whom he/she should report to. Organizational Structure 6 Slide7:  Export Control Violation Exposure Balancing machine (Controlled commodity) || Diversion of military-related use Export without authorization Ignorance of the law Without knowledge of Legal system Maker X Libya   ・Maker X was accused of violating Foreign trade act, but dropped ・Sanction: one year prohibition of export of strategic products IAEA Inspection group detected the machine 7 Country A 2.Classification:  2.Classification Slide9:  Classification Table of Country B is different from Japan’s COMPANY X Japan X’s Subsidiary Customer (Purchaser) Country A ①Selling Agreement Country B ③Direct Export of Materials(Drop Shipment) ②Materials Purchase Contract (Manufacturer) ④Made Classification with Japan’s table and EAR. ⑤Not made classification with Country B’s table. Must classify with Country B’s table! 9 Slide10:  When Y returns the products Z to X for following reasons. 1. Z is defective products or 2. End-user cancelled the order. etc. Y should classify Z based on the law of country A. If Y failed to classify Z (license required), Classify the products Z based on the Exchange and Foreign Trade Law. If Z are classified as “List Control Products. Company X JAPAN Country A (having export control law and/or regulations) Violation Return shipment 10 3.Transaction screening :  3.Transaction screening Slide12:  Transaction screening Case 1; Drop Shipment COMPANY X Japan X’s Subsidiary Vender Customer (Purchaser) India ①Selling Agreement ②Materials Purchase Contract ④Direct Export of Materials(Drop Shipment)(2) ECCN Items subject to EAR Country B ③Direct Export of Materials(Drop Shipment)(1) 0 Inclusive Contract They didn’t classify items in EAR. 12 Country A Slide13:  U.S. < forwarder > Company X U.S. < Exporter > Company W < Cosmetics Company > Switzerland < forwarder > Company Y Switzerland < Importer > Company Z < Cosmetics Company > Perfume Contract Export In 1995 and 1996 Denied Person 1988-2008 Fine :US$30,000 Transaction screening Case 2; Customer screening 13 Slide14:  Transaction screening Case 3; Circumvention US Authority detection USA Maker X Pakistan Company Z South Africa Agent Y Not to disclose the true destination Nuclear related Equipment (Electronic switch, Oscilloscope) 14 Reexport Ask for procurement Order Slide15:  Transaction screening Case 4;Customer screening Subsidiary X Laboratory Z  (nuclear development) Agent Y  Forward agent W contract  Maker X Russia Trucking Shipment No communication with Maker X Subsidiary X access to the information on Z labo’s nuclear activity Shipping Instruction Authority detection 15 Japan 4.Release Technology or Software :  4.Release Technology or Software Slide17:  Classification of technology/software Company Y Country A Country B Built-in software (controlled) is not classified. Export without license Not controlled by law Company X 17 Slide18:  Company X Company Y Country A sales Controlled software released with a license (two years ago) Customers Control of technology/software (technical advice to customers) Upgrade guidance Release without a license Request to upgrade the software Country B 18 Slide19:  Control of technology/software (business trip overseas) Company X Engineer K Draft for a controlled items Country A Company Y sales-engineer Release without a license Country B 19 Slide20:  Sends Program(which is classified Country A’s list) by e-mail before gets Authorities’ E/L. Country A Country B Authorities Company X SE Dept. Sales Dept. Factory Headquarter (1) Agreement (4) Sent program by e-mail (3) pressing Not permitted yet SE Dep. didn’t know about E/L. Company Y before gets Authorities’ E/L (2) E/L is being applied for. 20 5.Disposal of assets:  5.Disposal of assets Slide22:  Company X Country A Company Y’s Parent Company  Company Y (Purchaser) SOLD Classified on Control List Country B Exported without E/L X didn’t notify this equipment was classified on control list. Used EQUIPMENT Disposal of Assets 22 6.Shipment control:  6.Shipment control Slide24:  Country A Country B Company X Exported from Country X under Export License x x x Machine: Controlled Item E/L Application (in Country A) End User: Subsidiary End Use: Subsidiary’s Production Re-export Sale in Country B Move to Stock for Sale Shipment Control 1 24 Reexport, Move to Stock for Sale, Sale in Country B are violations. Slide25:  Shipment Control 2 Sales Dept. Authority Waiting for E/L Logistic Dept. Not sending office memo Country A Export without E/L 25 7.Export permit:  7.Export permit Slide27:  Circumvention Case Sep. ’03 S. Korea Authority detection Export without Authorization Company X Company Y China A Jun.-Sep. ’03 Export A Sodium cyanide (Raw material of toxic gas “Tabun”) Other transit countries ; Thailand (May ’05)   Malaysia (Aug. ’04) 27 South Korea North Korea Slide28:  Insufficient compliance of license requirements Written Pledge   Company Y Authority (METI) Written Pledge Shall obtain exporter’s prior agreement when Importer plans to reexport Stock sales of machine tool Malaysia Reexport without Exporter’s consent Written Pledge Shall consult with METI when importer seek prior agreement on reexport. Written Pledge License application Exporter X 28 Singapore Japan 8.EAR :  8.EAR Slide30:  EAR Reexport Company X Oil Production Equipment (EAR 99) Export Subsidiary Y Iran Reexport Recognition of destination No license ( required by§746.7 (former§785.4)) Partner in crime Violation of § 764.2(e) ⇒with knowledge of X’s export without license required 30 USA UK Slide31:  Exporter X Importer Y ・The US subsidiary would be penalized under the OFAC regulations due to facilitation. ・Facilitation by the US subsidiary can be considered as violation against OFAC regulations. Manufacturer (JAPAN) Canada Iran US subsidiary of the manufacturer <Advise Exporter X to sell The goods to Iran> Not subject to international regime Japan – origin Stocked in Canada  Construction machine Export Why did the Exporter have to give up this transaction? 31 Slide32:  9. Actual Violation Cases Slide33:  In Germany May 2003 Aluminum pipes that may be diverted to uranium concentration systems used to manufacture nuclear weapons were smuggled to North Korea. The president of a German precision equipment manufacturer was detained.   Aug. 2004 There were suspicions about an individual trying to send centrifugal separator components procured from South Africa to Libya through Dubai. A Hessen-resident businessman was arrested for smuggling nuclear technology to Libya. Export Control Violation Exposure Slide34:  In Singapore July 05   Far Eastron (S) Co has been fined for exporting so-called “dual use” electronic chips, which could be used in weapons manufacture, without the required permit. He exported S$36,820 worth of controlled dual-use integrated circuits on Dec 23, 2003, which it said went to clients in Germany, China and Taiwan for commercial satellites and aircraft navigational equipment. The company pleaded guilty to not obtaining the necessary permit and was fined S$20,000. Export Control Violation Exposure Slide35:  In China May 04   Two Chinese companies were fined millions of yuan for violating regulations on missile export control, the Ministry of Commerce said Tuesday in Beijing. The two companies are in the eastern provinces of Jiangsu and Shandong, the ministry said, but did not give the concrete amounts of the fines and the names of the companies. A ministry official said the Chinese government always stands against the proliferation of weapons of mass destruction and terrorism, and has already issued a series of regulations on export control concerning nuclear, biological and chemical items, missiles and other sensitive items. The official warned related companies to abide by laws and regulations, which will "not only benefits national security and public interest, but also the companies themselves." Export Control Violation Exposure Slide36:    South Africa U.S. company Russia Iran European companies Libya Nuclear Tech-Related equipments Exchange of Nuclear Tech(Pakistan) and Missile Tech (N Korea) From 1997 Nuclear related equipment Production and Export of Centrifugal parts Nuclear related equipments (03/10Smokeout) Nuclear Tech High enriched uranium Nuclear related equipments From IAEA research, New York Times, etc Nuclear Laboratory in Pakistan Pakistan company’s procuring activity via “agent” “Agent” “Agent”Mr. Takhir (Imprisoned in 04, May) Centrifugal parts Sale to Libya via Black market(5 billion 300 million yen) Iraq Buildup North Korea Nuclear Tech, Design of Nuclear warhead China Malaysia UAE(Dubai) Core of the black market Japanese company Germany, Netherlands, Swiss,England,Belgium, Austria,Cyprus Centrifugal Design of Nuclear warhead Via third country disguising end use,(”medical application”) very slickly… Nuclear related equipments(oscilloscope,electronic switch)  Nuclear black market   Dr. Khan confessed on 05/04/2 Discovery of Parts made in Japan Key words, reminders  ・“Via a third country”  ・Never tells the fact of export, destination  ・Disguise the end use    (Order of Centrifuge was declared “use for oil gas plant”)  ・Try to procure by parts or materials              ・・・・・ very slicky, it seems that involved company never found these concerning signs.      (From press story) 36 Slide37:  Procurement of Nuclear related goods by Libya International Network Tahir Libya Pakistan Dubai Spain Italy Uranium hexafluoride [UF6] Producing machine of Centrifuges Centrifuge machine 37 Slide38:  Procurement of Centrifuge machine by Libya International Network Tahir Libya SCOPE (Malaysia) Technical support Manufacture of oil/gas components Dubai End user (False) End use (False) Manufacture of centrifuge components Italy Seizure “BBC China” Oct. ’03 Automobile parts Precision instrument End user End Use 38 10. Dual Use in Chemicals:  10. Dual Use in Chemicals Examples of Dual Use in Chemicals:  Examples of Dual Use in Chemicals Activated carbon: Common applications: As a catalyst; in water/sewage treatment; in pharmaceuticals; in recovery of solvents; etc… But → can also be used in Gas masks (for mining and other private sector applications, and military use) 40 Slide41:  -Acrylic plate: For aquariums? Or for windows of missile control center??? ⇒ mass-destruction. -PVC Corrugated plate: (Needed for roof of warehouse) ⇒ Warehouse for what? Storing missiles??? ⇒mass-destruction purpose. 41 Slide42:  Ammonium nitrate: (fertilizers, cosmetics, insecticides, offset printing, production of NO2, penicillin, etc.) [UK authorities seized 500Kg from a suspected terrorist group after the bombings in Spain] + Di-nitrotoluene (Dyes, explosives) + salt ⇒ Ammonium nitrate explosives -Glycerin: (cosmetics, printing inks, antifreeze agents, foods, perfume, soap, confectionary, medicine, solvents, etc.) ⇒Nitroglycerine (explosives) 42 Slide43:  Chlorine gas + Sodium hydroxide (NaOH) + Ammonium gas (NH3) + Xylene ⇒ Hydrazine (foaming agents, deoxidizing agents, pesticides, reagents; used in water treatment, etc.) Monochloroacetic acid (herbicides, surfactants, perfumes, plasticizers, medicines) + Sodium Nitrate (whitening agents, foaming agents, reagents) ⇒ Nitromethane (pharmaceuticals, surfactants, insecticides, fungicides, etc.) Hydrazine +Nitromethane ⇒ Rocket propellant 43 Slide44:  Tributyl Phosphate (TBP): Common applications: As solvents for extracting metal, plasticizers for synthetic rubber, antifoaming agents for paper & textiles, etc.… but can also be used for separation and purification of uranium and plutonium for nuclear weapons. = Such was the intended use of a quantity of this chemical seized by Chinese authorities in the summer of 2003, during an attempt to smuggle it into North Korea= 44 Slide45:  Sodium cyanide: (pigments, plating, smelting gold, metal smelting,reagents, deoxidizing, metal hardening, photographic chemicals, medicines) Chemical weapons + From the 733 tons originally exported from South Korea to Thailand between February and April, 2003, between 70 and 142 tons were re-exported from companies in Thailand to North Korea in May of this year, however the rest was seized by authorities in August. + 30 tons exported from Germany to Singapore were seized on suspicion of being re-exported to North-Korea. (May 2003) 45 Unlawful export requests may be difficult to spot:  Unlawful export requests may be difficult to spot Requests may come through bogus, deliberately misleading company names, such as SAFE & PEACE LOVING Co., LTD. The true end-use will be disguised. Requests for required goods/substances may be separated so as not to arouse suspicion. ⇒We must have extremely accurate and sensitive DETECTION MEASURES to pick up on the slightest suspicion at the earliest possible stage 46 They can be very deceptive…:  They can be very deceptive… Do not simply assume that all our sales are used for normal, peaceful purposes, and all who enquire about our products are saints like you or me. Accepting one false enquiry is enough to ruin all our daily, compliance-related efforts. Get in the habit of paying extra attention to the smallest details. This requires much less time and effort than coping with a problem once it has occurred. A mistake can be disastrous, not only to yourself, but to our company… to the Group Companies… …and to the world. 47 Slide48:  Hone your SENSITIVITY to the following: The nature of the chemical, The nature of the sales channel, The character and attitude of the agent or end-user, The final destination, The nature of the enquiry (Was it too casual? Too easy? Surprisingly little negotiation?) = Did anything above strike you as odd or peculiar?= ****Be CURIOUS**** 48 Slide49:  11. US Export Controls Be careful about EAR!:  Be careful about EAR! Export Administration Regulations of the U.S.A. In case of re-export of U.S. products, the re-exporter shall follow EAR rules. (Need to apply for export license) Parties that violate the rules may be listed on the DPL and prevented from doing business with the U.S. Thus we must abide by EAR. 50 In case of violation of U.S. export control Law & Regulations:  US Company Company in Another Country. Overseas Group Company Application region of U.S. Export Control Law & Regulations In case of violation of U.S. export control Law & Regulations The overseas group company will be prohibited from procurement of U.S. origin commodities, software and technology .     (Extraterritorial application of U.S. Law & Regulations) Export Export Re export Violation 51 “What is subject to the EAR?”:  “What is subject to the EAR?” Items in the United States, except: -Items subject to the exclusive jurisdiction of another Federal Department or Agency -Publications that are artistic or non-technical in nature -Publicly available technology & software (excluding encryption) Items located outside the United States Activities of U.S. Persons & Foreign Nationals 52 Subject to the EAR:  Subject to the EAR U.S. Persons & Foreign Nationals -Certain activities of U.S. persons & Foreign nationals(§744.6) e.g. Reexport of U.S. products without license where that person knows the items will be used in the design of nuclear explosive devices in a country listed in country group D;2 -Deemed exports and reexports of technology or source code released to foreign nationals(§734.2(b)(4)&(5)) 53 Export Control Decision Tree (Supp. No.1 to Part 732):  Export Control Decision Tree (Supp. No.1 to Part 732) Are you subject to the EAR?(See 734.2-5) Is your item classified under an ECCN on the CCL? (General Prohibitions 1,2,& 3) (See Supp. Co.1 to Part 774 EAR99 Do General Prohibitions 4-10 apply? (See 736.2(b)(4 -10)) Is there an “X” in the box? (Using the Commerce Country Chart and the CCL) (Supp. No.1 to Part 738 & Supp.No.1 to Part 774) Is a License Exception Available? (See Part 740) Ship NLR (See 758.1(a)(3)) Ship using License Exception (See Part 740) Submit an application for license (See Part 748) ECCN Exit the EAR Y N N Y Do General Prohibitions 4-10 apply? (See 736.2(b)(4 -10)) N Y N Y N Y N Y 54 General Prohibitions 1,2&3 :  General Prohibitions 1,2&3 No.1 : Export or reexport controlled items to listed countries(§736.2(b)(1)) No.2 : Re-export foreign-made items incorporating more than de minimis amount of controlled U.S. content(§734.4 & Suppl. No.2 to part 734) No.3 : Re-export foreign produced direct product of U.S. technology or software (§736.2(b)(3)) You may not without a License Exception 55 “Know Your Customer” Guidance Supplement 3 to Part 732:  “Know Your Customer” Guidance Supplement 3 to Part 732 Decide whether there are “red flags” If there are “red flags ” - inquire Do not “self-blind” Reevaluate transaction Absent “ red flags” or special EAR provision, no affirmative duty on exporter to “go behind” customer’s representations 56 RED FLAGS:  RED FLAGS Possible indicators that an unlawful diversion might be planned by the customer Abnormal or suspicious circumstances -Product capabilities do not fit buyer’s business -Buyer evasive about destination or use -Routine on-site service is declined Unverified list 57 Denied Persons List (DPL) General Prohibition 4:  Denied Persons List (DPL) General Prohibition 4 Parties denied export privileges Supplement No. 2 to Part 764 Denial orders published in Federal Register when issued Available on-line at www.bis.doc.gov 58

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