Radio frequency modules from a company in Hennepin County, Minnesota were diverted some 4,500 miles to Iraq, where coalition forces found them fixed to roadside bombs.
In a friendlier world, the devices would have been used for a telecom project in Singapore, where the Midwestern company Digi International thought they were bound.
But the company was duped – and 6,000 modules were shipped from Singapore to Tehran, according to a superseding indictment unsealed in October. It’s one in a growing number of recent export cases in which American companies have unwittingly sold to deceptive buyers — often working for Iran, and other restricted countries, including China — that hope to illegally acquire U.S. technology.
In the case of the Minnesota radio frequency modules, Iranian Hossein Larijani and four individuals in Singapore concealed the final destination to skirt U.S. export laws, prosecutors charged.
At least 16 of the modules illegally diverted to Iran were found in unexploded IEDs in neighboring Iraq, where they were used as remote trigger mechanisms with a range of up to 40 miles.
According to the indictment, Digi had asked its customer for an end-user statement to confirm that the shipment would stay in Singapore and told the buyer in writing that diversion would violate U.S. law.
The U.S. government even detained a shipment of 2,000 modules in 2007 but released it when the buyer provided end-user verification. The devices were found in roadside bombs between 2008 and 2010.
The company did not respond to requests for comment but said in an October statement that it “finds the use of products for these purposes reprehensible.”
A Singapore court ruled Feb. 10 that four alleged conspirators may be extradited to face prosecution in the United States. Larijani has escaped capture and is believed to reside in Iran.
‘Got to cover your butt’
In 2005, a New Hampshire company thought it was shipping surveillance equipment through a Dutch aviation company for use by the Polish Border Control Agency in unmanned aircraft.
Instead, the equipment was bound for Iran, a destination prohibited by U.S. law.
“You’ve got to cover your butt, and you have to make sure you try to protect your company,” said Stephanie Kilroy, director of business operations for DTC Communications., the New Hampshire company, which she said checks government lists for prohibited buyers and requires customers to sign end-user statements.
The export ruse was discovered when the deputy director of the Polish Border Guards told an inquiring FBI official that his agency didn’t even use unmanned surveillance aircraft.
When a shipment involving other U.S. companies was detained for inspection in 2007, Robert Niels Kraaipoel, sales manager of the Dutch company Aviation Services International B.V., told the U.S. Office of Export Enforcement that they had no dealings in Iran, though Dutch officials said ASI had transferred 297 shipments from the United States to Iran in 2006, according to an August 2007 affidavit in support of a criminal complaint. ASI had ordered equipment from companies in Arizona, Connecticut, Florida and Kansas.
Niels Kraaipoel and his father, Robert Kraaipoel, director of ASI, pleaded guilty in September 2009 to conspiracy to violate the International Emergency Economic Powers Act (IEEPA) and the Iranian Transactions Regulations.
In both these cases, seemingly innocuous “dual use” items were shipped to customers acting as middlemen for Iran. The companies – and even the U.S. government – asked where the shipments were destined, and simply enough, the customers lied.
“This type of deception has been employed for many years and continues to be a broad and active threat,” said Dean Boyd, spokesman for the Justice Department’s National Security Division.
The State Department requires licensing for nearly all munitions exports, but the Commerce Department, which regulates “dual use” items that can be put to military and commercial use, requires licensing only for some exports and only if bound for certain countries. Buyers looking to avoid scrutiny can illegally divert shipments from a country subject to more lenient controls.
Shipping munitions and dual use goods without a required license is a violation of export law.
Lots of front companies
“What makes it complicated is you have a lot of front companies actively trying to procure controlled items for China and Iran in particular,” said Michael Burton, partner at Arent Fox LLP. “What you want to be able to represent to the government is, ‘We conducted appropriate due diligence based on the identified risks. We didn’t stick our heads in the sand.’ ”
Under the Export Administration Regulations, which are enforced by the Commerce Department’s Bureau of Industry and Security, companies have an obligation to watch for potential red flags – things like buyers who won’t say how the item will be used or a destination country with little connection to an industry that would need the product.
If red flags are apparent, or should have been apparent, a company may be liable if an illegal sale goes on without scrutiny.
“You can’t obviously turn a blind eye to suspicious circumstances, but you’re really supposed to vet these things,” said Darryl Jackson, former Assistant Secretary of Commerce for Export Enforcement at BIS, now a partner at Kelley Drye & Warren LLP. “I don’t think there are a lot of real excuses.”
BIS guidance says companies can take buyers at their word, but only in the absence of red flags.
A company selling a laser to a bakery in Dubai, for instance, might be deceived but still face penalty for not asking questions if the shipment is diverted.
Burton gives the hypothetical example of a distributor with a Lebanese billing address hoping to pay cash in advance for controlled vacuum pumps, which it wants shipped to a freight forwarder in Dubai’s Jebel Ali Free Zone. If the address also matches that of Iran’s shipping fleet, for example, the company has clearly missed red flags.
But due diligence only goes so far, and the initial threat isn’t always foreign.
For instance, Nadeem Akhtar, sentenced Jan. 6 in Maryland for supplying equipment to nuclear programs in Pakistan, told at least one American company that the sensitive material he hoped to purchase wasn’t even leaving the country.
According to an unsealed indictment, a Pennsylvania company asked Akhtar about the end user of the nuclear-grade resins it sells and told him approval from the U.S. government was needed if they were going to Pakistan. The next month, Akhtar had the owner of a company in Illinois ask for a quote for resins that were allegedly bound for Maryland.
Akhtar, who was living in Silver Spring and used his address there for transactions, also bought from companies in Maryland, Massachusetts, North Dakota, Tennessee and Texas. According to the indictment, he ordered the resins in May and June 2006 on behalf of what he said was a company in Cerritos, Calif.
He then had a freight forwarder in Virginia send undervalued shipments labeled “resin for water purification” to a trading company in Dubai, according to the indictment, where they were quickly reshipped to Pakistan.
Destinations like the United Arab Emirates, Singapore and Malaysia are sometimes considered hubs for diversion, but recent cases have shown that buyers use a variety of routes to evade regulations.
“It’s easier these days than ever to set up what we would call a front company,” Jackson said. “And they can move from one side of the world to the other with just setting up a website.”
Boyd said the Justice Department often sees small operations with just a few employees that can operate by computer in 10 or more countries. As companies change names, money and exports change hands from country to country.
Know your customer
To protect themselves, some U.S. exporters adapt safeguards that they use to verify customers in the normal course of business.
“Companies will often leverage off existing business procedures like a standard credit approval process and say, ‘Wow, this is a company in Nauru, and it looks like it’s privately held, and they won’t disclose their shareholders – this might be sketchy,’ ” Burton said.
Know Your Customer Guidance from BIS says companies that tell their employees not to ask questions or stop the flow of information in the normal course of business may be liable if they fail to see red flags.
If a buyer seems suspicious and their information can’t be satisfactorily verified, a company is supposed to either cancel the sale or seek a license from the Commerce Department, if licensing is not already required.
During screening, companies are also advised to check the Commerce Department’s Denied Persons List and other government lists for buyers with known connections to terrorism, drug-trafficking or embargoed countries. BIS published an updated set of best practices in August to help exporters guard against diversion.
Les Carnegie, counsel at Latham & Watkins LLP, said that effective compliance requires commitment and resources both from management and employees who deal directly with customers.
“Training, training, training is critical to be sure your sales staff, which really is on the front lines, is inquisitive,” Carnegie said. “You shouldn’t put walls in place to limit the amount of information you know about a customer.”
To criminally prosecute a company, the Justice Department must show that a company has willfully broken the law. This counts out accidental or negligent export violations, but companies who are negligent can face civil and administrative penalties from the Commerce and State Departments, along with the Treasury Department, which oversees sanctions.
In many cases, U.S.-based companies have intentionally violated export law, either for profit or sometimes while directly working for outside governments. Many other companies are wary of schemes and report suspicious activity to the proper agencies.
But as recent prosecutions show, schemes often aren’t uncovered until sensitive exports are already overseas and put to use in ways that regulators most hope to prevent.
“The illegal export of technology, know-how and other materials from the United States is not new,” said Boyd. “However, we believe this is a growing problem, and the stakes have never been higher.”