LEGAL NEWS FROM THE NATION’S CAPITAL JOHANNA REEVES, ESQ.
Looking ahead to 2020, I thought it appropriate to review the recent civil enforcement actions coming out of the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) related to violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).1 Sometimes seeing what another has done wrong can help one avoid the same mistakes and costly penalties. A “teachable moment” as they say.
Pursuant to the AECA, the U.S. Department of State is authorized to impose civil penalties for violations. These penalties, usually handed down through a Consent Agreement, can include fines as well as pre-scribed enhanced compliance measures. But schadenfreude notwithstanding, many people don’t read through the published Consent Agreements. This is unfortunate, as Consent Agreements are wonderful learning tools that provide valuable insight into what the U.S. Department of State considers important compliance features in the context of real life examples of compliance failures. In short, Consent Agreements put the regulations into perspective.
The Three Elements of a Consent Agreement
Three specific documents make up what is often collectively referred to as the Consent Agreement: (1) the proposed Charging Letter; (2) the Consent Agreement; and (3) the Order. As likely can be inferred by the name, the proposed Charging Letter outlines the alleged violations of the ITAR that State proposes to charge the subject company or person, including the number and nature of each violation, the presence of mitigating factors, including whether any compliance measures were in place at the time of the violation(s), and whether any aggravating factors were present. After DDTC notifies the subject company or person of its intent to initiate administrative proceedings against it for the violations identified in the proposed Charging Letter, DDTC works with the company to shape the Consent Agreement and the terms of any civil monetary penalty to be imposed.
DDTC tailors each Consent Agreement to the underlying export violations of the particular case and outlines the measures required to enhance compliance programs for the case at hand. Depending on the industry member’s cooperation in coming to a resolution and the level of compliance measures already in place, DDTC may prescribe a Special Compliance Officer (SCO) or Internal Special Compliance Officer (ISCO), comprehensive audits, or institution of a “cradle-to-grave” export tracking system, and may also institute a policy of denial, or administrative debarment.
The Order is the document signed by the Assistant Secretary of State for Political-Mil-itary Affairs and formally outlines the monetary penalties and compliance measures required under the Consent Agreement. The Order also makes sure to put the company on notice that the Consent Agreement terms flow down to any assignees and successors, and in the event of reorganization, all affected entities or units. The Order requires that the Charging Letter, Consent Agreement and the Order itself are made available to the public.
Recent Consent Agreements
DDTC does not issue Consent Agreements very often. Indeed, in the past 5 years DDTC has issued only nine Consent Agreements, listed in the chart.
The most recent Consent Agreements are instructive in several key areas of compliance, including the importance of paying
attention to the terms and provisos of each license, having an effective Empowered Official in place and watching out for unauthorized activity with the so-called “126.1” countries. Their importance warrants a closer look at each case.
FLIR Systems, Inc. (April 24, 2018)
As described in this Consent Agreement, FLIR Systems, Inc., allegedly violated the ITAR in connection with unauthorized exports of defense articles, including technical data; unauthorized provision of defense services; violating the terms of provisos or other limitations of license authorizations; and failing to maintain specific records involving ITAR-controlled transactions. FLIR’s violations included misuse of exemptions, inaccurate or incomplete shipping documents, failure to return items prior to the expiration of temporary export authorization, destruction or retransfer of defense articles without authorization and failure to obtain proper license endorsements for certain defense articles. DDTC also alleged that theft or loss of defense articles occurred at international trade shows because of inadequate safeguards.
FLIR was further charged with unauthorized retransfer of ITAR-controlled technical data and provision of defense services to dual-national employees from over 15 countries, including Iran, Iraq, Lebanon and Cuba to which the United States restricts exports of defense articles and defense services pursuant to 22 CFR §126.1. Additionally, FLIR allegedly failed to properly report payments of political contributions, fees and commissions as required by 22 CFR Part 130, for both licenses and agreements that were submitted.
As part of the Consent Agreement, FLIR was required to establish policies and procedures, conduct an internal compliance review and audit, provide training and appoint a Designated Official which had to be approved by DDTC and who will serve for a 3-year term. The Designated Official will monitor FLIR’s compliance program, including its effort to update and implement compliance policies
and procedures; oversee the implementation of all compliance measures required by the Consent Agreement; and provide status reports to DDTC with respect to FLIR’s compliance with the Consent Agreement.
On top of it all, FLIR was slapped with a $30 million civil penalty, half of which was suspended so long as DDTC determines the sum was applied to remedial compliance measures resulting from the Consent Agreement.
Darling Industries, Inc.(February 26, 2019)
In its Consent Agreement, Darling Indus-tries, Inc. (Darling) settled allegations that it violated the ITAR in connection with unauthorized exports of defense articles, including technical data; unauthorized provision of defense services; and failure to appoint a qualified Empowered Official. In this situation, DDTC described Darling’s activities as “systematic, reoccurring violations” of the ITAR.
The root of the violations in this instance stemmed from having no documented export compliance program and delegating the responsibility for export compliance to staff who had not been provided export compliance training. Further, Darling failed to appoint an Empowered Official who met the definition in 22 CFR §120.25.
Specifically, the individual was not in a position of authority for policy or management, nor did he/she properly understand the regulations.
In the Consent Agreement, Darling is also required to appoint a Designated Official to oversee its implementation of the remedial measures required by the settlement and be the main point of contact between Darling and DDTC in much the same way the Designated Official acts in the FLIR settlement. However, the Designated Official’s term in Darling is 18 months.
It is important to note that DDTC required Darling to conduct a jurisdictional review of all items it manufactures (100%) under the supervision of the Designated Official. The results of this review are to be submitted to DDTC to confirm compliance with this requirement. In addition, Darling is required to conduct an internal audit to be conducted by an outside auditor approved by DDTC.
The civil penalty assessed in this case was $400,000, with half of the penalty suspended on the condition that the amount is applied to compliance measures.
“Having a lackadaisical approach to compliance is a recipe for disaster.”
L3Harris Technologies, Inc. (September 19, 2019)
L3Harris Technologies, Inc. (L3Harris), settled allegations for activities conducted by Harris Corporation (Harris) prior to its recent merger with L3. The allegations are that Harris violated the ITAR in connection with unauthorized exports of defense articles, including technical data in the form of software; provision of a false Part 130 statement on a Techni-cal Assistance Agreement; violation of export license provisos; violation of terms or conditions of multiple licenses and agreements; and various violations caused by systemic administrative issues.
This Consent Agreement arose out of a directed disclosure resulting from concerns the Defense Technology Security Administration (DTSA) brought to DDTC’s attention, as well as a series of voluntary disclosures that flowed from the resulting review. Because DDTC first learned of the subject violations from DTSA and not Harris, DDTC did not give any mitigating weight to the subsequent disclosures Harris submitted related to the DTSA referral. DDTC did, however, allow subsequent disclosures not related to the DTSA referral to be a mitigating factor in its penalty considerations.
As part of the settlement, L3Harris is required to appoint a DDTC-approved Designated Official to oversee its implementation of the remedial measures outlined in the Con-sent Agreement for a period of 2 years. The Designated Official will monitor the company’s compliance program, including its effort to update and implement compliance policies and procedures; oversee the implementation of all compliance measures required by the Consent Agreement; and provide status reports to DDTC with respect to L3Harris’ compliance with the Consent Agreement. In particular, L3Harris is required to implement strengthened compliance policies, procedures and training focused on its business operations to ensure its employees are familiar with their responsibilities under the ITAR. L3Harris must conduct a jurisdictional review of all hardware manufactured by ITAR-regulated operating divisions, as well as conduct two compliance audits, the first to be conducted by an outside consultant approved by DDTC.
The civil penalty assessed in this case was $13 million, with half of the penalty being suspended so long as L3Harris uses that sum for compliance measures.
A major red flag for DDTC is repeated, system compliance violations of the ITAR. Having a lackadaisical approach to compliance is a recipe for disaster. As evidenced by the remedial measures implemented in each case discussed above, it is vitally important that company personnel responsible for export compliance have the necessary training and management support to implement export control policies and procedures within the company. Further, each item, from hardware to software, must be properly classified. And, don’t forget regular audits—I’ve said it before and will say it again, what you don’t know can hurt you. Being able to test and confirm your compliance program on a regular basis is essential to staying out of DDTC’s sights. Consent Agreements aren’t cheap from a monetary or implementation perspective, so better to learn from those before you.
DDTC posts its current and past Con-sent Agreements dating back to 1978 on its website (pmddtc.state.gov/ddtc_public). “DDTC Compliance Actions” is visible under the “ITAR Compliance” tab.
The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.
|L3Harris Technologies, Inc.
|Unauthorized exports of defense articles,
including technical data; providing false Part 130 statement;
violation of export license provisos and license
terms/conditions; violations caused by systemic administrative issues.
|Darling Industries, Inc.
|Unauthorized exports of defense articles, including technical data;
unauthorized provision of defense services; failure to appoint
a qualified Empowered Official.
|FLIR Systems, Inc.
|Unauthorized exports of defense articles, including technical data
(including retransfer of technical data and provision of defense services to dual
nationals of 126.1 countries); unauthorized provision of defense services;
violation of provisos or other limitations of license authorizations;
failure to maintain specific records involving ITAR-controlled transactions.
|Bright Lights USA, Inc.
|Unauthorized exports of defense articles, including technical
data to a proscribed destination.
|Microwave Engineering Corp.
|Unauthorized export of technical data to foreign person
employee from a proscribed destination.
|Rocky Mountain Instrument Co.
|Oversight agreement for RMI’s revised compliance program.
DDTC modified RMI’s statutory debarment
(resulting from a 2010 AECA criminal conviction)
to allow indirect participation in ITAR transactions.
|Marc Turi and Turi Defense Group, Inc.
|Unauthorized brokering and proposal to a pro-scribed destination.
|Unauthorized export, re-export and retransfer of defense articles.
|Esterline Technologies Corp.
|Unauthorized exports and temporary imports of defense articles,
including technical data; unau-thorized provision of defense services;
violation of terms and conditions of licenses or approvals granted;
violation of ITAR rules and regulations.
ABOUT THE AUTHOR
Johanna Reeves is the founding partner of the law firm Reeves & Dola, LLP in Washington, DC (reevesdola.com). For more than 15 years she has dedicated her practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna has served as Executive Director for the Firearms and Ammunition Import/Export Roundtable (F.A.I.R.) Trade Group (http://fairtra-degroup.org). She has also served as a member of the Defense Trade Advisory Group (DTAG) since 2016. Johanna can be reached at firstname.lastname@example.org or 202-715-9941.
- At the time of this writing, the Trump administration has not yet implemented final rules to transition most firearms and ammunition away from the export controls of the U.S. Department of State over to the controls of the Department of Commerce. For more information on the proposed export control reforms for firearms and ammunition, see Small Arms Review, Legally Armed, Vol. 22, Nos. 8 and 9 (Oct. and Nov. 2018) and Vol. 23 No. 9 (Nov. 2019).
|This article first appeared in Small Arms Review V24N1 (Jan 2020)