By Keil J. Ritterpusch, Esq., Senior Associate, FD Associates, Inc.
On June 16, 2015, Teledyne LeCroy, Inc. of Chestnut Ridge, New York (“Teledyne LeCroy”) entered into a Settlement Agreement with the United States Department of Commerce’s Bureau of Industry & Security (“BIS”) related to two violations of the Export Administration Act of 1979, as amended, (“EAA”) that occurred in 2010.
The Settlement Agreement is related to a Charging Letter issued by BIS regarding two violations of the EAA by the predecessor of Teledyne LeCroy, LeCroy Corporation, who BIS alleged knowingly exported oscilloscopes controlled for export under Export Administration Regulations (“EAR”) Export Control Classification Number (“ECCN”) 3A292.d, an ECCN controlled for nuclear non-proliferation and anti-terrorism reasons, to an organization listed on the Entity List set forth at Supplement No. 4 to Part 774 of the EAR, without an export license: Beihang University of Aeronautics and Astronautics (“BUAA”) of Beijing, People’s Republic of China, also known as Beihang University or BUAA.
This case is interesting for a few reasons: (1) the value of the penalty ($75,000) compared against the value of the unauthorized exports (just under $16,000) and (2) the violations happened before Teledyne Technologies Incorporated (“Teledyne”) acquired LeCroy Corporation in 2012.
Civil Penalty Nearly Five Times the Value of the Products Exported
The facts of this case are illustrative for exporters of the potential costs associated with failure to adequately screen international transactions (end users and consignees) against the various debarred party lists published by the United States Government.
In this case, BIS established that LeCroy Corporation had knowledge that the ultimate end user of the oscilloscopes, BUAA, was listed on the BIS Entity List and thereby prohibited from receiving U.S. exports, except with an export license from BIS. BUAA was added to the Entity List on May 14, 2001 (66 Fed. Reg. 24264). Pursuant to the Federal Register Notice adding BUAA to the entity list, an export license is required to export any item on the EAR to BUAA and, “export license applications will be considered on a case-by-case basis to determine whether the export would make a material contribution to the proliferation of missiles. When an export or reexport is deemed to make a material contribution, the license will be denied.”
LeCroy Corporation exported the oscilloscopes without applying for and receiving the required export license, despite knowing that BUAA was on the Entity List.
Generally, exports of ECCN 3A292 oscilloscopes, transient recorders, and “specially designed” parts and components only require export licenses for export to Iraq, Israel, Libya, and Pakistan, as well as the countries for which a trade embargo exists (e.g., Cuba, Iran, North Korea, and Syria). A license is not required for export to end users or for end use in China, unless: (1) the items being exported are “digital oscilloscopes and transient recorders, using analog-to-digital conversion techniques, capable of storing transients by sequentially sampling single-shot inputs at greater than 2.5 giga-samples per second” and are for “military end use” in China, per Section 744.21 of the EAR or (2) the end user is a prohibited party, as was the case with BUAA. In the Teledyne LeCroy case, we do not have sufficient information to indicate whether the oscilloscopes met the requirements of EAR Section 744.21 or were for “military end use”. However, LeCroy Corporation had knowledge that the oscilloscopes were for end use by BUAA. Therefore, LeCroy Corporation needed to obtain an export license for the shipments.
Beyond the failure to apply for an export license, BIS found that LeCroy Corporation failed to properly complete the Shipper’s Export Declarations (“SEDs”) in connection with the two export shipments from 2010. Rather than listing BUAA as the ultimate consignee on the SEDs, LeCroy Corporation listed Beijing Tianhua International Co., Ltd. (“Beijing Tianhua”) as the “ship to” party. LeCroy acknowledge that Beijing Tianhua was the intermediate consignee based on end user statements received from BUAA for the transaction.
These are the only facts stated in the Charging Order, the Settlement Agreement, and the Charging Letter explaining the violations by LeCroy Corporation that were imputed to Teledyne through the acquisition of LeCroy Corporation two years after the violations occurred. It is interesting that nowhere in the Charging Order, the Settlement Agreement, or the Charging Letter is there any explanation as to why BIS was imposing a civil penalty nearly five times greater than the value of the exports. None of the documents go into any detail regarding the calculation of the civil penalty in this case. Perhaps this is because Teledyne LeCroy agreed to work with BIS after BIS issued the charging letter and quickly arrived at the Settlement Agreement value with BIS.
It should be noted that BIS has published at Supplement No. 1 to Part 766 of the EAR, “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases”. Supplement No. 1 to Part 766 of the EAR provides exporters with very useful information on what it considers in arriving at civil penalty determinations in enforcement actions. Beyond what is provided in Supplement No. 1 to Part 766 of the EAR, it should be noted that pursuant to the International Emergency Economic Powers Act (“IEEPA”), the maximum amount for administrative (i.e, non-criminal) penalties for export violations is the greater of $250,000 or twice the amount of the unauthorized transactions. Likewise, although this case does not involve a finding of criminal liability, the maximum penalty for criminal, willful violations of the EAR is the greater of $1,000,000 or five times the value of the unauthorized transactions.
The general factors considered by BIS in establishing penalties for violations of the EAR are listed in Section III, Subsection A of Supplement No. 1 to Part 766 of the EAR, and they are: the degree of willfulness, the destination involved, related violations, multiple unrelated violations, timing of settlement, and related criminal or civil violations.
Mitigating factors are listed in Section III, Subsection B of Supplement No. 1 to Part 766 of the EAR, and they include: the filing of a voluntary self-disclosure, the effectiveness of the company’s export compliance policy, the isolated nature of the violation, whether the export would have been licensed, the degree of assistance provided to BIS in the investigation, the degree of harm created by the violation, and the level of export compliance competency held by the violator at the time of the export violation.
Aggravating factors are also listed in Section III, Subsection B of Supplement No. 1 to Part 766 of the EAR, and they include the deliberate attempts to hide or conceal the violation, a serious disregard for export compliance responsibility, the significance of the export violation due to the sensitivity of the item exported, the value of the unauthorized exports was high, multiple violations of export law and regulation, and the lack of a system-wide export compliance program despite conducting routine exporting.
Examples of possible aggravating factors in the instant case include: the export to a denied party, potential nuclear end-use, potential efforts to hide who the end user was, and a failure to disclose the unauthorized export. As noted above, none of the documents released that pertain to this case discuss in any way how or why the $75,000 civil penalty was imposed. Thus, we must assume there was no mitigation by the taking of steps that demonstrated a willingness to improve the export compliance program.
Voluntary Self-Disclosure Under the EAR and Successor Liability
We believe, based on our experience with BIS’s Office of Exporter Enforcement (“OEE”), that had Teledyne performed the appropriate pre-acquisition due diligence of LeCroy Corporation, it is possible that they would have discovered the violation before the acquisition and could have mitigated this outcome. If Teledyne had discovered the violation and required either LeCroy Corporation or Teledyne LeCroy to file a voluntary self-disclosure to BIS (before or immediately after the acquisition), Teledyne LeCroy could have avoided having to pay as large a civil penalty in this case.
Along these lines, as referenced above, the filing of a voluntary self-disclosure is a key mitigating factor that BIS examines when arriving at civil penalty determinations. With respect to voluntary self-disclosures Section III, B. of Supplement No. 1 to Part 766 provides:
“All voluntary self-disclosures meeting the requirement Section 764.5 will be afforded ‘great weight’, relative to other mitigating factors not designated as having ‘great weight’. Voluntary self-disclosures receiving the greatest mitigating effect will typically be those concerning violations that no BIS investigation in existence at the time of the self-disclosure would have been reasonably likely to discover without the self-disclosure.”
As discussed above, the willful nature of the violations in question, coupled with the fact that BIS was not likely to have issued a license for the export of the oscilloscopes to BUAA led, in our opinion, to the issuance of a civil penalty nearly five times the value of the items exported. However, we also believe, based on the language in Supplement No. 1 to Part 766 of the EAR and our practice history, that had Teledyne or Teledyne LeCroy taken action independently and self-reported the violations of the EAR, they could have lowered the civil penalty, and possibly avoided the civil penalty altogether.
Successor Liability Responsibilities
It is clear from this case that successor liability is alive and well at BIS. Successor liability involves the application of responsibility for past export compliance under the EAR and the International Traffic in Arms Regulations (“ITAR”) on companies that acquire other companies or assets of other companies where there was a violation of the applicable export rules by the company that was acquired -- or pertaining to the assets that were acquired -- before the acquisition. Successor liability provides that the acquiring company picks up complete legal responsibility for the export violations of the acquired company or assets as though the acquiring company committed the violations on its own.
The export violations at issue in this case happened more than two years before Teledyne acquired LeCroy Corporation. Based on the language in the Charging Order, the Settlement Agreement, and the Charging Letter, it does not appear that Teledyne or Teledyne LeCroy voluntarily self-disclosed the violations by LeCroy Corporation in 2010 pursuant to Section 764.5 of the EAR.
It is not known whether Teledyne performed export due diligence on the LeCroy Corporation before the acquisition, and, if so, whether Teledyne had knowledge that LeCroy Corporation had made unauthorized exports to China. It is also unknown whether Teledyne conducted a post-acquisition audit the identified the violations at issue.
The fact that there is no statement regarding the knowledge possessed by Teledyne of the export violations of the LeCroy Corporation underscores the nature of successor liability. The acquiring company assumes liability for the export compliance of the acquired company without any ability to disclaim liability because of a lack of knowledge or involvement with the violation by the acquiring company. Rather, the acquiring company is treated under the EAR and the ITAR as if the acquiring company had committed the violations directly.
Export Compliance Lessons Learned
There are two critical “lessons learned” for exporters arising out of this Teledyne LeCroy case.
The first is that every company that actively exports EAR or ITAR-controlled items needs to employ a restricted party screening tool that actively verifies whether any party to an export transaction is prohibited from receiving U.S. exports and whether there are any specific licensing requirements for exporting to or through a foreign party. Any entities that are questionable hits on the restricted party screening should be reviewed by key export compliance personnel before proceeding with an export involving the party.
The second critical lesson is that companies acquiring other companies that are involved with exporting need to conduct due diligence, pre- and post-acquisition, on the companies they acquire. A comprehensive review of the prior five years of export activities is expected by the U.S. Government agencies involved with export control.
A review of export transactions for the preceding five years and a run of foreign end users and intermediary consignees by Teledyne may have uncovered the unauthorized exports by LeCroy Corporation, which violations Teledyne could have mitigated fairly easily. Teledyne could have required LeCroy Corporation to self-disclose before the acquisition or required LeCroy Corporation to place a certain amount of money in an escrow account to cover the cost of any export violations by LeCroy Corporation that were imputed to Teledyne in the future.
 The EAA is the legal authority for the Department of Commerce’s Export Administration Regulations (“EAR”). While Congress allowed the EAA to lapse in 2001 and has not taken any steps to cure the lapse, the EAR has been maintained by way of the emergency powers granted to the President by the International Emergency Economic Powers Act of 1977 (“IEEPA”).
 None of the documents released related to this case expound on how BIS established that LeCroy Corporation knew that BUAA was a denied party on the Entity List.
 Interestingly, Beijing Tianhua was added to the Entity List after these transactions occurred, on December 12, 2013 in relation to their efforts to support BUAA.