Protected: Week 1 Discussion • Global Trade & WMD

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  • I found that article interesting in that it seemed, to me, in reading it that the Canadian government (likely much like the pre-Toshiba incident Japanese government) seems quite lax in its enforcement of the laws against exportation of restricted dual-use items. I also found quite disconcerting the apparent utter incompetence of the company in not seeing the “red flags” in the multiple, ongoing changes of destination for the O-rings. There appears to have been very little training and/or oversight of the export control section of that company and it begs the question: what else might they have exported that made it through their “sieve” that seems to desribe their export controls. The Canadian government should have made (or should make) an example of this violation, as the Japanese government did (according to the videos) and instituted a industry-wide training and education program to better help Canadian companies identify attempts at illegal procurement of dual-use items. The company seems to have been let off quite easily and the Canadian governnment’s response quite bland when, given the nature of the violation (and the destination country, Iran) its product could have benefited Iran’s nuclear program (and likely increased the global risks of WMD proliferation).

    Dr. Tom Hunter31 May 2014
  • This case highlights a particular export control challenge: even companies producing and selling low-priced goods have to invest in compliance mechanisms.

    Marco Fey2 June 2014
  • The example also illustrates the difficulties of a company that may surpass export controls on an item that is cheap. However, not processing the inexpensive part of the order could place other orders in jeopardy that could results in millions of dollars of lost profits.

    Ashley2 June 2014
  • This case emphasizes the need for basic awareness training within companies, from mail room to CEO, and also the need for human intelligence. Much compliance today is “automated” by software, but humans need to catch the red flag of constant address changes, lack of clarity on the “account” location. The latest version of the order with both addresses of UAE would have sailed right through screening software. This case also emphasizes the need for special compliance procedures when dealing with the UAE or other known transshipment hubs.

    Shelley2 June 2014
  • I think that this article demonstrates how easily it can be for a company to violate these policies in a small, but potentially important, way without intending to. I have sympathy for the company, even as I understand the significance of dual use technology. This strikes me as similar to issues surrounding money laundering and financial sanctions. Banks have had to dramatically increase the number of compliance officers to deal with the new regulations and see all the laws as a hindrance to business. The way in which there are different fronts and addresses being used to obtain these dual use items is similar to money laundering. Companies, in order to follow these regulations, will have to invest large amounts of money in compliance departments and give up chances for profit. Even with this, countries like North Korea and Iran have invested heavily in setting up illicit procurement networks that are opaque and efficient, so even with due diligence these items have a high probability of ending up where the shouldn’t eventually.

    Leon Whyte2 June 2014
  • It seems to me that there were indications that the O-rings and other products were going to end up getting shipped outside the UAE. The fact that the order was originally made from Iran should have tipped off the company where the product was going. The company probably could have found, if they did not already know, that information with further inquiries. This incident shows how export control compliance is necessary, even for small items that may not seem like they will have a military application. The fact that the rings were about 30 cents may have contributed to why the company did not pay much attention.

    In the long run, Governments like Canada must come up with policies that incentivize complying with export controls. In this case, the fine given the company outstripped the potential benefit for selling the items. But a good policy will convince companies it is more profitable to comply with the regulations.

    Aaron Kiesler2 June 2014
  • What strikes me is the way in which the client placed the order: Over $6,000 worth of “fittings, couplers and o-rings,” of which only $15 was for the Viton o-rings. If each ring is worth 30 cents, the number of rings ordered here was just 50. It was very clever for the client to mask, or subsume, this desired product within a larger order.

    Unlike the Karni/Khan case, in which it was the number of spark gaps that sent up red flags with the producer company, it seems Lee Specialities — even if at the time of this incident it did have export control programs/checks/software in place — would never have become suspicious of this order, since the number of o-rings ordered was so low. In fact, if it were not for the constantly changing shipping and account addresses — as Aaron above pointed out —then this order likely would not have been noticed by the Canadian authorities at all.

    Rizwan3 June 2014
  • There were clear red flags involved with this transaction. Any robust compliance program should have immediately identified the attempted Iranian sale as a concern, especially given the subsequent attempts at evasion. I have to agree with the previous comments that were it not for the RCMP, this sale would have gone through as if it were a normal transaction.

    The export compliance programs I’ve seen all identify different “tiers” of risk and appropriate due diligence. Any transaction in the Middle East, for instance, would be examined more closely than one in South America, especially if the transaction passed through a known transshipment hub.

    As for the company in question and the penalty handed down, it’s hard to say the “real” impact of any sanction without knowing the size of the business.

    Jack Slagle3 June 2014
  • Having no export compliance program in place a red flag should have come up when UAE and Iranian account and address has been discussed. Company should have also consult with Canadian goverment on the deal and project any possible risk on completing transaction. The penalty for breaking trade compliance seems a bit low however there might have been more damage to the reputation of the company.

    Zoltan4 June 2014
  • It seems questionable that Lee Specialties could really blame this on a “mail-room mix-up” – there were clear red flags about the purchasing company due to its original Iranian address and the subsequent address changes throughout the transaction. The company should have contacted Canadian authorities about the transaction, especially given their knowledge that the o-rings are banned from export to Iran, even though the o-rings were only a small part of the overall order.

    It is fortunate that the Canadian authorities at the airport put a stop to the transaction, but the company should have had a stronger internal compliance program to take notice of attempts to hide banned exports in a larger order to an Iranian company. The Canadian government could also take more measures to provide models of successful and effective internal compliance programs for companies to monitor banned dual-use items that they produce and export. Perhaps the charges brought against the company will warn other Canadian companies to avoid making the same “mix-up” by recognizing the importance of monitoring and adhering to export regulations.

    E. Corcoran4 June 2014
  • We have seen in the previous Toshiba Machine case the importance of the support given by the government to implement an internal export control program (or an internal compliance program) in order to ensure that all transactions made by the company follow the national laws, in this case of Canada. This should be the fist measure that could be taken by Lee Specialties Ltd. regarding the prevention of dual-use items illegal exports.

    Moreover if the company, as a manufacturer of oil field equipment, work with Viton o-rings, that are well known as dual-use item likely to be used, amognst other uses, for nuclear programs too, as sais by RCMP. Taking this into considetation national authorities should have more attention in the issue of the export licence, in accordance also with the Canadian prohibition policy reflected both the Special Economic Measures Act and the United Nations ACt, legislation that address trade with countries that are considered potential threats to internatinal peace.

    In this sense, the government of Canada can release the list of controlled items, in which are included the Viton o-rings as commodities ban by Canada from being exported to Iran, as well as the two pieces of legislation mentioned above.

    There were almost a pair of “red flags” that may be considered in this case, like the back and foths in the account and the shipping addresses in several times, as well as, that only the o-rings were sent to an address in Teheran via shipping company DHL (unlike other items ordered, as fittings and couplers).

    Karina Hinojosa4 June 2014
  • Of course this company could have done more to prevent such a transaction from occurring but I feel this was not a purposeful mistake and was based off of a mail room mix up or the incompetence of a worker. I do not feel a company would risk so much for just a $6,000 transaction. Whoever was in charge of this deal should have noticed that Iran was involved and the address kept switching to insure that no purchases occurred that violated the law. A major red flag would be he changing address.

    Governments can help prevent such trades occurring by providing a degree of oversight. It would be impossible to account for everything but by providing assistance (logistical and financial) governments can support the laws that they pass.

    Christopher W4 June 2014
  • In the public view, it seems the Canadian government has come to a point where they finally need to begin enforcing their trade sanction laws. This could have been through international pressure on lax enforcement, or an event not publicized, but they find themselves now in the same situation (albeit with much less at stake) as the Japanese government during the Toshiba incident. The company claims that the entire incident was a “mail-room mix-up,” though the entire ordering process went through five different adaptations, and the original purchase originated from Iran, which should have been cause in itself to cancel the situation. The company could have simply not followed through with any transaction of the dual-use commodities with any purchaser with ties to Iran.

    Outside of that initial connection, the fact that the location of the trade changed 5 times in the course of the transaction was a major red flag.

    Canada can begin heavily enforcing their trade sanctions to encourage companies to behave lawfully. Educating businesses with international trade on the importance of trade regulations and restrictions is also a very helpful step. If these companies understood the reasoning (both basic and nuanced) of the restrictions, then they would be more likely to follow them.

    Cory Alpert4 June 2014
  • This particular case highlights the importance of a company knowing their product line and having the proper export classification for each item somewhere in their system(s). In addition it points out that when a company deals in dual use or military listed products training must be provided for each level of involvement in the transaction. Beginning with the sales/order entry to order fullfilment to the shipping separtment. Also, there was an obvious “red flag” in this case — the ship to location in Iran that was bantered back and forth.

    Rae P5 June 2014
  • It seems to me that Lee Specialities was not or is not doing enough internally to ensure that its dual use items are properly handled and shipped. For a company that specializes in oil field equipment, their mail-room staff do not seem to be trained as to how to follow international and national regulations when shipping dual use items. I would think that Lee Specialities would have many clients in the Middle East, given their focus on oil fields, and so they would need to pay extra attention to controlled materials. Calling it a “mail room mix-up” seems to downplay the seriousness of the offense.

    The many address changes, especially when the account holder was initially located in Iran, should have been a major red flag to Lee Specialities. Their shipping staff should be trained to be vigilant and aware of these kinds of red flags and the possibilities of middle-men and brokers.

    I agree with the judgement that nothing nefarious seemed to be occurring, but Canada, international partners, and industries should work to prevent such “mix-ups” from happening by mandating training at all levels of staff, especially those who directly handle dual use items on a regular basis.

    Emma Fredieu5 June 2014
  • As numerous commenters have pointed out above, there were certainly red flags the employees of Lee Specialties should have noticed when filling this order. Further, the internal compliance mechanisms in place within the company did not adequately prepare employees at every level to ensure observance with export controls.

    The miniscule scale of the o-ring order, as well as its inclusion in a larger equipment purchase as Rizwan pointed out, likely alleviated concerns that the Viton o-rings were being purchased for nefarious purposes. This is an important point, as compliance programs must prevent not only industrial-scale technology transfers, but also small, seemingly innocuous purchases of dual-use items. This complicates the export control problem immensely for all parties.

    National governments can encourage and ease compliance by providing constantly updated and easy-to-access information on the latest trade controls as well as on (security permitting) known attempts to circumvent them. Governments should in particular focus on establishing regular communications with industry and trade associations and groups, which in turn can ensure compliance information and best practices can be communicated to relevant firms large and small.

    Pat D.5 June 2014
  • I found this article quite interesting, and a good way to break into the course. The fact that the original address was listed in Iran, the shipping address in Dubai, and then the account and shipping addresses changed 5 times should have been a dead giveaway. Still, if no one initially thought to question that it was going to Iran, then the mere fact that O-rings are resistant to high temperatures and chemicals should have also raised a red flag. I’m not sure that $90,000 dollars was much of a fine to enforce this doesn’t happen again, as banks and chemical companies can be fined huge sums of money when they illegally do business with a known foreign entity that is heavily sanctioned.

    For future reference, I would tell companies to double- and triple-check both account and shipping addresses and if things suddenly start changing frequently, that should be the first sign. Also, when dealing with technology that can seem harmless, like a dual-use component, it should always be remembered what else it is capable of serving. Both these instances are especially vital when dealing with international brokers that can make it harder to detect the ultimate destination.

    Scott Sharon5 June 2014
  • Seems very easy detect “red flags” in an export procedure, when we supposed that everything is done and the people have the right knowledge. The true thing is that sometimes the companies did not adequately trained and prepare their personnel for export controls or in internal compliance mechanisms, besides a position that have to control exports have to be a person with extensive technical knowledge. Then, yes the company has done anything to prevent this happening in that time.
    The fact that the originally account address (Iran) location of the trade, changed five times during the process were the major red flags to noticed “that some estrange things were happens”. Is not usually to change addresses many times in a export process, having Iran as account address, would have been cause in itself to cancel the procedure.
    The Canadian government had international instruments to follow, one of these are the Canada´s Special Economic Measures Act, the Customs Act and the Unite Nations Act; and could help companies avoid the types of mistakes presented in this case, by implementing a national program of that encourage and ease compliance of the instruments by providing dual use commodity identification training and constantly updated and easy-to-access information to the office of the export control of the Canadian Government.

    RODOLFO GAMBOA6 June 2014
  • I see multiple red flags in this case. The first is the initial end destination in Iran. I am not familiar with Canadian export regulations but in the US this would prompt a closer examination. Another red flag is the multiple changes in account and shipping address.
    I would recommend these improvements to the company’s compliance program.
    The first would be an increased awareness of the end uses of its product line. In this case, the employees should have been aware that the seemingly innconcent o-rings had multiple applications: a commercial application in the oil fields and also a potential military application in a nuclear application.
    The companyy needs to have an internal system of identifying dual use products. In this way, the potential sale of a dual use product can be examined in greater detail before completing the order and not get overlooked because of a relatively low dollar value.
    I would also recommend a strong training program in the importance if identifying the end user of an item. This program should take into account signs that a purchaser may be taking steps to conceal the end user, whether the item in the order seems appropriate for the company placing the order, a reasonable quantity for an order, and a method of identifying parties suspected of previous illegal purchases.
    Governments can assist companies in preventing the transfer of dual use goods for potentially harmful uses by assisting in the identification of parties that may be involved in the purchase, shipment, or receipt of dual use items for harmful purposes. This could take the form of a list of individuals or companies that have been involved in this type of activity as well as sharing any knowledge gained about the method these parties have used to attempt to obtain dual use items.

    Sarah6 June 2014
  • I agree with many of the good observations in the above comments.
    I’d like to add that one major difference I see between this week’s 2 prior case studies and this case is that the spark gap and Toshiba cases involved intentional evasion of the law by people intent on breaking it. Here we see the risks of non-compliance that come from people making mistakes. Export compliance is a very complex undertaking. And people, by nature, are prone to making mistakes. Sure the bad guys will continue to work on recruiting people who for a price will deliberately break the law, but many of them and their illicit export networks are out there devising ways to take advantage of mistakes. This presents a tremendous challenge to industry and compliance programs.
    Effective compliance programs have to have a presence at all levels in any business that operates internationally. I see the statement from the company blaming the problem on a mailroom mixup as a sign of some of what may be wrong in this company. While the ultimate cause of the breakdown in this case may have been in the mail-room, company management, starting at the top and flowing through every level must be committed to their company acting compliantly. Each level of management must look at the processes that they are responsible for and what can be done at their level to help prevent a compliance escape.
    There had to be several levels and processes at work in this case. The entire process, from order intake to shipment did not take place in the mail-room. There had to be an order intake process, an order approval process and a shipping process. Depending on the sophistication and size of the company, each probably has several steps. Each step of each process has an opportunity to help the company be compliant. But for this to happen, the leadership, top-down, has to set the tone and let it be known that compliance is everyone’s responsibility.

    George7 June 2014
  • For many manufacturers, O-ring are ” open bin” supplies. Nobody needs to submit a request to take them for use. I ndeed, they are low value and low rik key in terms of export controls.
    However, considering “comprehensive embargo” against Iran; we all should bear in mind that nothing subject to EAR can be shipped to Iran without license.
    The key to export controls compliance is education. Agreed with all comments above, a systematic training program covering all levels of an entity is necessary: From CEO to people on the floor. Also, blocking embargo countries in ERP systems is a “must”.

    Bachlien Scanlan7 June 2014
  • I think this article shows the clear need for a better system for end-use/destination verification than what is currently available. This requires much closer collaboration between corporations and export control offices than those that were available to this company so that it can be done effectively without excessively compliance burdens for commercial entities. In it’s simplest form this could be an export control database of controlled parts, materials, etc. as well as blacklisted companies, countries, and individuals designed to integrate effectively into a companies ERP system that is regularly maintained and updated by the export control office. Such program should also include random compliance checks to ensure the ERP system correctly identifies export controlled items. Finally there should be collaboration between the intelligence and export control offices of the country to ensure that the exported items ended up in their declared end-use and to blacklist entities that violate this. There clearly also needs to be training and support for export control compliance that extends to some level of understanding the tactics of possible adversaries so that attempts to get around restrictions can be detected and stopped.

    It also clearly demonstrates issues of internal export control compliance verification with the companies ERP system and to some extent an implied level of complicity by the company to avoid export control restrictions to Iran. These situations can be complex and difficult for companies to navigate particularly when dealing with an adversary that is attempting to acquire a product they know is export controlled and therefore are actively trying to defeat the safeguards put in place to prevent that export. This could possibly be mitigated by better training within the company to report suspicious behavior and readily available information provided by the government of whom to contact when suspicious behavior is observed.

    Cameron7 June 2014
  • It appears the company had not trained its employees to recognize potentially problematic orders. The changes of address, the transshipment by way of Dubai, and the ultimate destination itself should have triggered questions and follow up. A government can be of assistance in the prevention of such lapses by providing information about what types of technology may have a potential dual use. Thereafter, the companies can then train their employees to recognize aspects of transactions and orders that are potential red flags.

    patricia8 June 2014
  • The company should have seen the “red flags” in the ongoing changes of destinations and therefore could have investegated more carefully what the purpose of the transactions was and where it was originally supposed to go. The gorvernment can advice companys (especially their compliance officers) how to prevent such mistakes and enforce the law more determined in cases of violation. Compliance Officers have to become more sensitive and also train the other employees in charged with export.

    Lisa8 June 2014
  • Interesting article. It appears this company needs to institute a comprehensive operational compliance program. It would help to have a procedure for screening customers, carriers, and countries. The screening procedure should include high-risk transactions to combat illegal exports/retransfers. I agree with the comments here that suggest additional training for all employees to prevent these errors in the future.

    Don McCammon8 June 2014
  • One challenge industry faces with export controls is that seemingly innocuous items in low amounts may lower their guard to the possibility of doing business with entities that they should not be shipping to. Red flags such as the changing addresses, an initial billing address in Iran, paired with orders coming from the UAE, which has large free-trade zones prone to diversion, were missed or discounted because the commodities in question were rubber o-rings. As soon as the company saw an Iranian billing address, they should have began asking questions about where the o-rings were going and for what purpose were they going to be used.

    Governments can increase outreach efforts to industry to increase understanding of their export control laws and processes as well as foster a sense of cooperation, prompting industry to engage with government when concerns arise in the future.

    Cameron L.8 June 2014
  • What stands out to me in this case is what else Canada could do. Looking at this from a business perspective, 50 rings at 30 cents is about $15. Even if we are to view all of that $15 as profit (even though it clearly isn’t) this economic punishment is a 6,000-fold increase on their expected profit (and whatever their legal fees were, which may have been significant). Not adjusting for other factors, such as morality, damage to reputation, legal fees, etc., a company would hypothetically view this transaction beforehand as profitable if there was less than a 1/6,000 chance of being detected/stopped.

    The problem that Canada would therefore seem face is that of raising awareness that the punishment clearly outweighs the crime. Setting an example worked in the past because the companies stepped up and became industry leaders in export compliance. This would seem to conflict with Lee Specialties’ desire to minimize the damage to its reputation. By settling, not commenting on articles, etc., it would seem that Lee Specialties has a desire to sweep all this under the rug. Making the punishment more known, and having Lee become an industry leader (which doesn’t seem likely) could cause smaller/mid-size companies to axe a prospective deal if they even get a whiff of Iran. At the very least it could cause companies to stop being reckless.

    Matt8 June 2014
  • Although there were certainly red flags in the form address changes and shipment to a relatively open trade country in the form of the UAE, organizations like these are likely to have little oversight on such problems. Those working on shipping the items are likely separated from legal teams and those capable of catching such red flags.

    I think this may have been a case of stove-piping and absence of clear internal compliance mechanisms. Governments should establish programs to not only make such sanctions and restrictions clear, but assisting companies in establishing effective compliance systems.

    Mark A.8 June 2014
  • As with many complex issues, technical solutions are only a part of the answer. At a technical level, this should be relatively easy to solve with items like a geolocator or RFID tags. The real issue is in getting companies to agree on certain standards. And there is a function for nation-states (all of which operate in mostly anarchic international system) to agree to implement industry-developed standards of identifying and tracking the equipment.

    Legislating (wmd) morality is noble and should be done, but with the realization that in the cat and mouse game, the mouse has some initial advantages. Kudos to those who do catch even things as small as 30 cent O-rings.

    Roger8 June 2014
  • Value does not matter when it comes to “dual use”. Similarly, the fact that an item might seem innocuous on its face does not matter either. Companies need to be familiar with these regulations and how they apply to the parts / technologies they deal with. The red flag which was overlooked (multiple changes of address) as well as the fact that an economically sanctioned country was involved makes it clear that the company did not devote the required resources to educate its employees on compliance with export control regulations. This story also illustrates that the Canadian government must be more active in conducting industry outreach programs. This is a problem the world over, not just in Canada. That being said, the fact that this was the first time a company was charged under Canada’s Special Economic Measures Act, and the third time UN Act charted have been levied in Canada, illustrates that the Canadian authorities are taking these regulations (and the threat of proliferation) more seriously.

    James8 June 2014
  • With the myriad of dual-use materials, how can governments and the international community better equip private vendors of products, in this case as small as an viton o-ring (also used in SCUBA equipment), to recognize red flags? In this article, it should have been an apparent red-flag from the multiple address and changes made that something was fishy.

    Leslie W8 June 2014
  • It obviously should have been a “red flag” to the Lee Specialties Ltd representative receiving the order when the account and shipping addresses were changed five times. Alarms should have gone off.

    The Canadian company should have an internal compliance programme in place to monitor such transactions, as well as ensure that all company representatives are updated on the list of commodities that Canada bars from being exported to certain countries. A mechanism should be in place to make it easy for Canadian companies to contact the authorities when receiving “suspicious” transaction requests.

    Amanda9 June 2014
  • The type of commodity (dual-use item identified as such), the initial final destination (Iran), the change of the shipping address (five times) and the last listed address (Dubai, a trans-shipment hub) would have raised “red flags” in an effective export control system.

    From the company’s perspective, I’d say they could have done more identifying a dual-use commodity intended to be exported to a non-authorized country in the first place. Improvements on their Internal Compliance Programme in cooperation with the Canadian authorties could help to prevent this type of situations. For example:

    1. Dual-Use Commodity Identification Training
    2. End-User Warning Indicators Training
    3. Geographic-Shipment Indicators Training

    However, what should be the role of the canadian government in preventing these type of cases? Is it enough to provide capacity training to private companies when international secuirty is at stake? Is it worth to establish an export control system to issue export licenses in a case by case basis for dual use listed items?

    Finally, what would have happened if Kan Dana Middle East LLC does not make changes in the address or does not place the original order to Iran? It seems to me that they were not able to get the shipment because of their own mistakes. How many others companies could be smuggling these items without the Canadian government noticing? Are they caughting the smart ones too?

    Manuel Martínez9 June 2014
  • Companies may be prone to violating export control regulations and impacting global security, by not having a comprehensive internal compliance programs that would help them closely monitor key dual-use items before their are sold and shipped, despite their commercial cost. Based on the story, the company was either not fully aware that the Viton o-rings were controlled dual-use items, or did not have the procedures in place to ensure that employees–including mail room employees– were trained in handling the selling and shipping of these controlled items. Perhaps the low monetary value of their o-rings failed to draw attention their their potential dual-use purpose, including in nuclear weapons activities. However, a company should know which items in their inventory are controlled, and properly communicate and train employees on how to handled these when prospectively selling and shipping them, regardless of their monetary value.

    One key red flag that appeared to elude the attention of the company employees, was the existence of an Iran address in the account order and potential Iranian shipping address. The shipping address constantly changed between one in Iran and one in Dubai. At the onset of an Iran mention or link, the company’s employees should have flagged the order and proceeded with deep scrutiny, because Iran is one of the countries that the international community currently has placed sanctions on for nuclear weapons-related items and technology.

    Karen Villafana9 June 2014
  • Very interesting article and many enlightening comments & observations.
    On Googling Lee Specialities it seems clear that their product-range & services should have required additional control-measures to be in place.
    However, it did not seem to be a sizeable Company, thereby, possibly not being in a financial position to cover the costs necessary to support an extensive ITC Compliance Programme.
    That said Export Controls is not a “new discipline” to have to comply with and in 2011 I would have expected the Red-Flags to have been established and acted upon.
    Unfortunately, Companies tended to only learn from their own mistakes rather than learning lessons and implimenting improvements from widely publicised cases.

    Ray Burgin9 June 2014
  • This article is interesting to read and shuddersome to professionals in compliance. As a member of the compliance community, there is an existing struggle and balance of compliance and risk management and expediency of delivery to customers. These stresses and depending on volume can exacerbate human error.

    Of course there were red flags for this transaction and yes there are ways for the company to screen for these flags. However, depending on human competency and filtering for red flags leaves room for error, egregious such as this. It takes a dedicated compliance program in cahoots with a proactive government that monitors adherence to regulations but also adaptable to be accommodating to businesses needs. CBP’s ACE and Centers for Excellence could be such portals as these develop.

    Derek W9 June 2014
  • It will be interesting to follow up on this story down the road regarding if/how Lee Specialties Ltd. improves their internal compliance program, just as Toshiba’s infraction resulted in the “gold standard” of internal compliance programs. Further, I would like to see what an investigation turns up regarding the clear red flags in this case: multiple address changes and the disparity between the description and the packages contents. To speculate: the fact that the description did not match the actual contents raises my eyebrow particularly high — this could have been more than a “mail room mixup”.

    Brett9 June 2014
  • I think this case is a great example for not knowing is not an excuse. Surely Lee Specialities has implemented some internal controls to prevent such a violation again. Perhaps this was a new scenario for them. However, I think the presence of red flags is indisputable. We have learned arlready, if not previously known, that Dubai is a popular transship port. Also, the address changing so many time prior to fulfilment is defintely a flag. It is incumbent upon personnel handling international shipments to posess some level of sensitivity around this. Also, I think this a great example for companies shipping commodities they consider benign to review for any possible dual use.

    Erin9 June 2014
  • It’s interesting to ponder how much and for how long the potential for future reputational damage will continue to disincentivize the company concerned – or its peers. The financial disincentive, too, over time seems likely to become “water under the bridge.” Are near-misses like this case the only way of raising concerns about export control compliance to the forefront?

    “What can governments do to help?” is an equally important question without a clear answer. While sharing information – such as that which likely led to the Canadian authorities’ successful prevention of this transaction – is likely a nonstarter for the intelligence communities of many governments, governments should seek to facilitate the exchange of such “intel” among companies themselves through neutral third parties. Knowledge about suspicious ordering patterns, lessons-learned about illicit purchaser tactics, and so forth is valuable to strengthening export control, but is likely often lost.

    Casey M.9 June 2014
  • Without knowing the details of the emails back and forth, it seems that the account address changing from Iran, a country known worldwide as being of concern, to other addresses should have caught someone’s attention at Lee. It’s easy to picture a lax company culture at Lee, bordering on redneckish owing to the cowboy/oilman reputation most of Alberta has. This seems a very unfortunate case for Lee, but overall a wakeup call to a country and a business culture on two issues; that items of proliferation concern can and will be hidden as part of a larger order, and that you business is safe from the danger of dealing with unsavory international and state actors. Solid week 1.

    Peter Culberson10 June 2014
  • The case illustrates several key issues in addressing control of dual use items: (i) Prevention – The need to provide training to staff and personnel on even the basic notions discovered in the case – what are dual-use items? What countries pose a more sensitive proliferation threat? What are control lists and what do they (should they) contain? If operatives at the various levels are povided training in these fields, and their awareness on the possible occurrence of incidents of this nature in their own backyard is raised, then there is a higher probability of preventing these incidents. (ii) Red flags: Again related in generally to training, but specifically on sensitive geographical locations. Trade with certain countries requires higher control standards, and Iran would ceratinly be very high up on that list of sensitive countries that warrant stricter controls and monitoring. (iii) Engagement with the industry – Government and national authorities need to better cooperate with industry and companies to raise awareness, discuss obligations and due diligence measures and to generally understand the balance between fluid and swift trade, but also secure trade.

    Nicolas L.10 June 2014
  • This example tells us that it is simple to violate dual use rules. It would be very important to have a strong support in training by the governments. Clear ideas on what a company has to do for a good export. But by the other side, the company demonstrates not to have a compliance in export. First step know your buyer as like as the End User and the end use. Second if there is a problem of diversion during the shipment inform you authority.

    laura10 June 2014
  • There were red flags that were missed with the numerous changes. The company would need to implement an internal compliance system to avoid a repeat of this incident. The relevant government agency could educate Canadian exporters and the business industry about these laws and the potential for breach. Also the various trade associations could also partner with industry and government to develop an internal compliance measures especially helpful to small and medium sized enterprises.

    DeborahD10 June 2014
  • Couple of thoughts in addition to the odd shipping information exchanges others have mentioned:

    1. It is helpful for the Canadian government to start to enforce these provisions of their export control laws even in cases of possibly minor violations. These types of signals are important and help encourage companies to police themselves since governments will be unable to catch every single export violation (unless they devote tremendous amounts of resources and slow international trade).

    2. The O-rings were a relatively small part of a larger order, both in terms of quantity of items and monetary value. Compared to the Karni case — large number of triggered spark gaps that seemed to be the only item in that round of trade — it might have been difficult for Lee Specialties Ltd. to assess a dual-use purpose or notice any “red flags.”

    3. The monetary penalty amount seems appropriate as well. The company did not appear to act with illicit intent, but needed to feel a consequence. Similarly sized companies in Canada need to know there is an impact to failing to follow internal and national export regulations. Anything higher than $90,000, however, may inflict too high of a regulatory burden on free trade. Furthermore, a higher amount may backfire as companies no longer cooperate with government on possible accidental violations in fear of self-incriminating a large penalty.

    4. Repetitional costs to the company are clearly evident here, but not crippling to their future. The company can learn from the experience, change its shipping procedures, and teach the experience to similarly sized businesses.

    Tim Westmyer10 June 2014
  • A challenge is the dual use. The Viton o-rings are common in oil fields so their shipment to the middle east isn’t surprising. However, the fact that Iran was at all involved should have sent up a big red flag.

    Lee Specialties Ltd. lacked an internal trade control compliance system. Had they such a system in effect the shipment should have been flagged in the early stages of the order.

    Laura Guay10 June 2014
  • The Iranian address on the order and numerous changes in addresses should have been the initial red flag. The company blaiming this on a “mail room mix-up” is a cop out for their lack of internal controls. They are lucky the fine was only $90,000, and even luckier that they shipment was halted at the airport before any grave damage could occur.

    R. Fletcher10 June 2014
  • This incident seems like an excellent first step in the utilization of Canada’s Special Economic Measures Act for the first time. It made international press at minimal financial cost to the company, who decidedly took the ethical approach and pleaded guilty, while at the same time raising awareness domestically in Canada, and worldwide. The Iranian emphasis also spun a poignant point home, insofar as every shipment to an unstable country should come under a microscope in order to mitigate reputational impact to the shipping company or inadvertent (or intentional) WMD proliferation.

    The red flags were quite apparent, from the shipping and account addresses changing (a classic masking tactic of using accommodation addresses), to the Viton O-rings no longer going to Iran, but to Dubai, or to the very company requesting the shipment (Kan Dana Middle East, LLC). I know it may sound naïve, but every time I see an “LLC” as part of a compliance issue, my eyebrow raises. Too many times have I seen them be a single individual who set the LLC up for a rapid set of transactions, only to have it taken down shortly thereafter. One might notice that this company has a website; You may note the apparent lack of information about it, or the multitude of industries with only one point of contact which (of course) is a P.O. Box. These are all red flags that would give me concern had I been wearing a pair of “Lee Specialties” through the evaluation of this transaction.

    To Canada’s credit, this was caught early, and dealt with in an appropriate manner. This transparency no doubt will have long-term effects on export controls in the Canadian industry sector.

    Brandon10 June 2014
  • Acquiring dual-use items via middlemen in trans-shipment hubs seem surprisingly feasible. I am curious about what would have happened had there not been red flags (address changes). If Kan Dana used a broker in UAE, and the dual-use products ended up in Iran, does that absolve Lee Specialties of responsibility?

    Bo K.10 June 2014
  • This case reveals much about the relationship between government and industry in the context of export controls. First, as in the Toshiba Machine case, the company in question proved to be very responsive to government actions taken to enforce the export control regime. The guilty plea, cooperation with investigators, statements by legal representatives, and internal review of compliance programs all indicated that Lee Specialties took the incident seriously. Despite the relatively minor financial penalties (other articles on this incident suggested that a U.S.-based company could have faced fines in the hundreds of thousands of dollars), Lee Specialties clearly placed much value on its reputation as a legitimate company.

    Second, this seemed to be the first time that industry in Canada had been confronted with the costs of not complying with regulation measures enacted under the Special Economic Measures Act. Whether or not employees Lee Specialties violated the law consciously or by accident, the company nevertheless did not face any costs for non-compliance prior to being charged. In other words, companies will likely only be responsive to an issue if it faces the prospect of monetary or reputational repercussions. This highlights the importance of enforcement mechanisms and tangible consequences for violators of export restrictions. Perhaps the best thing government can do to help companies avoid the mistake made by Lee Specialties is to set a clear example of the penalties for non-compliance.

    Steven Yu10 June 2014
  • I would restate many of the comments made by other participants in the course! The changing order and delivery addresses and original account address in Iran are bright red flags. The need for a culture of sensitivity and compliance to export regulations in every area of the company, from the CEO’s office to the mailroom, and the responsibility of the Canadian government to both educate business leaders and give teeth to its laws by enforcing them with penalties that far surpass any probability of profit to the company are all lessons to be learned.
    What about DHL? When I send packages internationally, I have to list the contents. Shouldn’t an international shipping company as large as DHL also know that the O-rings shouldn’t be going to Tehran?
    I found it particularily distasteful that the judge would comment on the “innocence” of a mail room mistake. This sounds to me as if the Canadian government needs to plan some workshops for judges, as well, as business leaders.
    As others have stated, it’s interesting to contemplate the changes within Canadian political circles, perhaps with nudging from the U.S., that led to prosecution of this first case under the Special Economic Measures Act.
    Thinking I should refresh my memory on what was going on politically with Iran in 2012, I Googled and found this June 10, 2014, article from The Economic Times, based on Hillary Clinton’s new book, Hard Choices. Here we see that creating a solid front internationally was a State Department priority, in order to bring Iran back to the negotiating table. The context is specifically related to India’s use of Iranian oil, but she writes:

    “In May 2012, I visited New Delhi to make the case in person. I argued that maintaining a unified international front was the best way to persuade Iran to return to the negotiating table, achieve a diplomatic solution to the impasse, and avoid a destabilizing military conflict.

    Here’s the article:

    So, this was a very tense year in relations with Iran over its nuclear program, as this timeline from Wikipedia demonstrates. Pres. Obama added more sanctions against Iran and Canada closed its embassy in Iran, as well as ordering all Iranian diplomatic staff to leave Canada.

    July 17 – United States President Barack Obama announces additional sanctions against Iran for its nuclear program.[19]
    August 4 – Iran claims to have successfully test fired a fourth generation Fateh-110 missile.[20]
    August 11 – Two earthquakes, the strongest a magnitude 6.4, strike near the northwestern Iranian cities of Tabriz and Ahar, killing at least 250 people and injuring up to 1,800 others.[21]
    August 21 – Iran unveils a new version of a short range surface-to-surface ballistic missile, named the Fateh-110 or Conqueror, and five pieces of military hardware.[22][23]
    August 26 – Heads of state meet at the 16th Summit of the Non-Aligned Movement in Tehran, Iran, until August 31.[24][25][26]
    August 30 – The International Atomic Energy Agency releases a report on the Nuclear program of Iran, stating that Iran has doubled its number of centrifuges at the Fordow facility and highlighting concern over the nuclear program.[27]
    August 30 – Iran and Egypt describe each other as “strategic allies” at the 16th Summit of the Non-Aligned Movement in Iran.[28]
    September 7 – Canada closes its embassy in Iran and orders all Iranian diplomatic staff out of Canada, citing Iran’s support for Syrian President Bashar al-Assad, Iran’s “among the worst” human rights record, its lack of respect for the Vienna conventions, its nuclear program and the security of Canadian diplomatic personnel. It sees Iran as the world’s “most significant threat to global peace and security.” Minister of foreign affairs Baird says the Canadian government files Iran as a “state sponsor of terrorism” under the Canadian Justice for Victims of Terrorism Act.[29][30]

    Valerie "Terry" Ellis10 June 2014
  • One of the previous comments mentioned that the two addresses in the UAE would have “sailed right through screening software.” Perhaps, but that is why the best type of screening program is multi-pronged, and needs to have a good country-risk scoring system. In the area of dubious trade transactions, and especially sanction evasion, all roads inevitably lead to Dubai. But I would have been even more alarmed by the company address and shipping address simply being “changed five times.” That was the biggest red flag, imho. Another comment above asks if the Dana company had used a middleman in Dubai, would the shipment have sailed right through. If this is a dual-use item, the company would have had to ask specific questions about the end-user. I suppose they could have lied. But again, any company worried about it’s reputation should be wary of exporting any dual use items to Dubai.

    Moyara Ruehsen11 June 2014
  • Though it was dubbed an “innocent” mistake, there was certainly an element of preventability involved with the overall transaction. Each export to a country known for having potentially dangerous weapons or proliferation concerns should be especially screened, or include some additional oversight. Perhaps the main reason this happened was how (in)expensive this product was, which may have led the administration to overlook it, since cheaper and/or smaller items are less likely to cause concern among unsuspecting workers. In retrospect, the best way to discourage future events akin to this one would be to mandate some kind of industry-wide training program, or encourage the company to develop their own documents and export control program, seeing as how the Toshiba iteration became a ‘gold standard’ for the industry and the results could easily be replicated in this situation. The fine was perfectly justified since it was indeed a simple error, and hence should not be excessively increased considering the intent and unlikeliness of repetition, but further steps outside of direct punishment can be taken.

    Uday11 June 2014
  • •I believe company should be having KYC policy strongly implement so that proper due diligence is performed while setting up any new customers or before engaging any new business and transaction.
    • Also when we are dealing with broker we should have arm’s length mechanism and contract or agreement in place to take the ownership of compliance. Distributors specially middlemen should understand importance of compliance and its replication
    • Companies need strong compliance procedure while screening any new customers. In case of any red flags need to highlight to Compliance 0r legal team so that proper due diligence can be done while setting up new customers
    • All cases are very good example of not performing proper due diligence and screening while doing business

    Umesh11 June 2014
  • I think the Canadian government took a good stand in making sure that in the future, companies avoid these kinds of shady transactions. While it is possible this company just didn’t know any better, the relatively small fine (but large for the value of the commodities) shows the willingness of the government to enforce the obviously necessary export restrictions currently in place. However, I think it should have been quite apparent to the company that this transaction was not ‘clean’, and perhaps a further investigation should have taken place.

    Michael T.12 June 2014
  • I am surprised and wary that the court documents would list the entire affair as simply a “mail room error”. I felt like the judge should have been more critical of the company so as to create an external mitigating force and reinforcer for company change and accountability considering the powerful effects trade export scandals can have on a company’s reputation. While it is accurate to assume the problem was the source of human error, the responsibility and culpability extends beyond the individual workers and into the roles that supervisors, internal compliance officers, the company heads, and liaisons and the officials themselves to and within the Canadian government. Glaring errors such as the redflags raised by the customer address/affiliation of Iran (e.g. a country under which numerous embargoes and trade control agreements and sanctions apply) and the suspicious and numerous amount of times in which the shipping/source address were changed should have be tagged, noted, and made aware of by superior officers. Also, employees and departments should have been aware of the identity and applications of all potential dual-use commodities they sell so as to become better aware of suspicious orders – even despite the fact that the order quantities pertaining to this case were rather low (and part of a bulk order to begin with). The Canadian government, as well as the company, can look at this affair as a learning opportunity and should follow in the footsteps of Toshiba Machine to reassess and improve their internal export control policies and how they cooperate within larger Canadian trade regulations.

    Chris Samson15 June 2014
  • I find it ironic that the package was intercepted by authorities because the receiving address was changed directly to Iran, whereas if it had gone to Dubai as previously intended and shipped from there to Iran, they probably would have gotten away with it. From the perpetrators point of view, it really was a “mail room mix up”.

    Cypress18 June 2014

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