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January 3, 2005 Trading With the Enemy GCs Need to Brush Up on Criminal Law As published in Texas Lawyer By Douglas C. McNabb A general counsel knows better than to allow the company to do business with companies in certain countries against which the U.S. government has trade sanctions, such as Iran and North Korea. But could it be that in today's global economy the company could unknowingly be trading with the enemy? Yes. Let's look at a fictional example: The general counsel for a small company called AwesomeWidgets, which designs and builds widgets, has never had to consider criminal law. Probably the last time he seriously considered it was during a final exam as a first-year law student. But now, the chief executive officer of the company has run into the GC's office in a panic because he received a letter from the U.S. Department of Justice. He is not only a co-worker and friend, but also the lifeblood of a company that employs more than 300 people. The CEO never has been in any type of trouble with the law, and he needs to know what is going on. He is a family man, active in the community and liked within the company. The GC quickly reads the letter and realizes that it has something to do with a project a French company commissioned. Four years ago, the French company approached AwesomeWidgets' CEO 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. The CEO accepted the proposal on an hourly fee basis, and AwesomeWidgets' chief engineer oversaw the completion of a design. Once the design was completed, the CEO flew to Paris to meet with representatives of the French company. He presented the design via PowerPoint to a variety of people, some of whom he had previously met, others he had not. Upon returning to the United States, AwesomeWidgets learned that the French company decided it was not going to commission the construction of the widgets, but thanked AwesomeWidgets' CEO and paid the bill. The GC has no idea how any of this could be a crime; after all, AwesomeWidgets created a design for a widget, not a missile. The CEO presented the design in Paris, not North Korea. AwesomeWidgets never even produced the widget, because the French company declined to proceed. But the CEO wants AwesomeWidgets' GC to go to the assistant U.S. attorney and explain everything. The 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: The CEO could be in serious trouble. There are a number of frequently overlapping federal rules, laws and regulations on exports such as the widget 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 the Economic Administration Regulations (EAR), regulates the export of particular goods from the United States. The GC is surprised to learn that virtually everything is subject to EAR. He is shocked to learn that the widget AwesomeWidgets designed is a regulated export because of its petroleum industry potential, and to learn that exporting the widget requires a license. But AwesomeWidgets never actually produced or exported the widget. How can the CEO have criminal exposure for agreeing to create a design and making a presentation? Unfortunately, the GC learns that the law - 15 Code of Federal Regulations 734.2 (b)(3)(ii) - loosely defines "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 the CEO 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 the CEO made the presentation to a number of people he did not know, the GC cannot rule out the possibility that some of them were nationals of prohibited countries such as Iran. The AwesomeWidgets CEO wants to know what he may face in terms of potential penalties. Hoping to find that a violation of the EAR carries a small fine, the GC instead learns that the federal government will fine 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 $1 million 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 for which AwesomeWidgets' CEO 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 not only extends 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 not only a fine, but also imprisonment for up to 10 years. The GC realizes that he must retain a federal criminal-defense firm for the CEO and AwesomeWidgets. But most importantly, the general counsel also decides 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. Hopefully, the CEO won't serve a sentence in federal prison. Douglas C. McNabb is the senior principal of McNabb Associates, a Houston-based national federal criminal-defense firm. He has more than 20 years of legal experience in many areas, including white-collar crime. | |