Transshipment under the Export Administration Regulations: An Attempt to Get Around the Regulations Ends Badly For a Florida Company

The Export Administration Regulations (EAR), at Part 736, General Order No. 2 of Supplement No. 1, prohibits export of all items covered by the EAR to Syria unless they are licensed shipments of food or medicine. This broad prohibition applies to all goods within the United States or U.S.-origin goods abroad, regardless of whether they are identified on the EAR’s Commerce Control List.

According to settlement documents made public by the Bureau of Industry and Security, International Photo Equipment Company (IPE), of Tavares, Florida, was asked by a would-be customer in Syria to determine whether it would be legal to directly ship to it photography equipment from the United States. Because this would-be customer was apparently helpful and outgoing, it further offered to pick up the proposed shipment of photo equipment in nearby Lebanon and drive it to back to Syria should there be any legal prohibition upon shipping directly to Syria.

IPE asked its freight forwarder whether it could ship directly to Syria. The forwarder, apparently being familiar with the General Order prohibiting virtually all exports to Syria, answered in the negative. It is at that point that things got interesting. The forwarder, also apparently being helpful and outgoing, advised IPE that the shipment would have to go through Lebanon or the UAE. Knowing that its customer had advised that a pickup in Lebanon was possible, IPE agreed to send the equipment to Lebanon so that its customer could drive there to pick it up and return with it to Syria.

All of this landed IPE and its proprietor, Adam Karesh, in trouble. Whether they realized it or not at the time, they were engaging in illegal “transshipment” of goods to a prohibited destination. Here, IPE knew that its goods were destined to Syria, a prohibited country. As explained in Part 732 of the EAR, “[t]he country of ultimate destination for an export . . . determines its licensing requirements.” Part 734 further states that “[f]or purposes of the EAR, the export . . . of items subject to the EAR that will transit through a country or countries or be transshipped in a country or countries to a new country or are intended for reexport to the new country are deemed to be exports to the new country.” IPE, pursuant to its forwarder’s advice, engaged in a classic act of prohibited transshipment.

BIS fined the company $45,000 and Mr. Karesh individually $45,000 on September 29, 2010, for the attempted export. The penalty amounts are subject to mitigation should the parties refrain from committing another offense. Interestingly, the forwarder here does not seem to have been penalized, although Part 764.2(b) of the EAR makes it illegal to aid and abet an illegal export, and this provision has been used by BIS in the past to impose forwarder liability. Moreover, it appears that it was the forwarder that originally wrongfully conceived the plan to transship to Syria via a third country – a fairly egregious act. One can only speculate that perhaps the forwarder voluntarily disclosed the violation and received extreme mitigation as a result.

It is worth noting that the above actions would have constituted a separate violation of the Census’s Foreign Trade Regulations had the country of end use been identified as Lebanon, when in reality it was to be Syria. Simply put, one cannot lie to the government when submitting export data via the Automated Export System. If one knows that the end-user is in Syria and the country of ultimate destination is Syria, it is fraudulent to state that the goods’ ultimate destination is Lebanon.

The moral of the story is that, while creativity is a virtue, creative “work arounds” to attempt to avoid the provisions of the EAR can land exporters and forwarders in trouble. In the world of export controls, it should be assumed that no means no.