Legally Armed: May 2018

By Johanna Reeves, Esq.

ATF Compliance Inspections of DOD Contractors*

On October 20, 2017, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) posted on its website a document titled, “Department of Defense Contractor Inspections: ATF Inspection Process.” This document (the “Contractor Inspection Guidelines”) describes a procedure for ATF field divisions to conduct warrantless compliance inspections of contractors who are licensed under federal law to engage in the business of manufacturing, importing or dealing in firearms or explosives. It is important that Department of Defense (DOD) contractors who are federal firearms or explosives licensees carefully review this process with legal counsel and consider the potential consequences. The full document is available on ATF’s website at: https://www.atf.gov/firearms/docs/guide/department-defense-contractor-inspections-atf-inspection-process-firearms/download (last visited February 5, 2018).

I. ATF’s Authority to Inspect Federal Firearms and Explosives Licensees

It is important we review the Contractor Inspection Guidelines in the context of ATF’s authority to conduct warrantless inspections. ATF implements the inspection programs for federal firearms licensees (“FFLs”) and federal explosives licensees (“FELs”) through Industry Operations, which is the regulatory enforcement section under the Office of Field Operations. The Deputy Assistant Director (DAD) of Industry Operations at ATF headquarters is responsible for directing and coordinating both the FEL and FFL compliance inspection programs. The DAD of Industry Operations reports to the Assistant Director for Field Operations. The FFL and FEL compliance inspections are conducted by Industry Operations Investigators (IOIs) at the respective ATF field division. IOIs do not have legal authority to arrest individuals, they do not carry firearms nor do they conduct criminal or undercover investigations.

A. ATF Warrantless Inspections of Federal Firearms Licensees

In Small Arms Review, Vol. 19, No. 10, p. 16 (Dec. 2015), “Legally Armed” examined ATF’s inspection authority under the Gun Control Act of 1968 (GCA), 18 U.S.C. §923(g)(1)(A). For review, the following are the critical points of ATF’s statutory ability to conduct warrantless inspections of FFLs:

1. Congress authorizes ATF to inspect federally licensed manufacturers, importers, dealers and collectors of firearms without reasonable cause or warrant in limited circumstances:

• In the course of a reasonable inquiry during the course of a criminal investigation of a person or persons other than the licensee;
• When the inspection may be required for determining the disposition of one or more particular firearm in the course of a bona fide criminal investigation; or
• For ensuring compliance with the GCA recordkeeping requirements, either (a) at any time with respect to records relating to a firearm involved in a criminal investigation that is traced to the licensee, or (b) not more than once during any 12-month period (also known as the annual compliance inspection).

2. The scope of an ATF warrantless inspection is not unlimited. Under the Firearms Owners’ Protection Act (FOPA), 100 Stat. 449 (May 19, 1986), warrantless compliance inspections of FFLs must be limited to the following:

• Business hours: The GCA requires compliance inspections be conducted during the licensee’s business hours. Although not defined in the statute, “business hours” is generally interpreted as the hours of operation indicated on the Form 7 Application for Federal Firearms License.
• Inspection at Place of Business: ATF may conduct warrantless compliance inspections only at the business premises identified on the Form 7 license application as well as places of storage. If a licensed premises is only a part of a larger building, ATF may inspect only the licensed part. If a licensee conducts business temporarily at a gun show or other similar event in the same state, ATF may inspect the records and firearms inventory located at the gun show or other temporary location.
• Inspection of Required Records and Inventory: ATF’s authority to conduct warrantless inspections under the GCA is limited to examining records required by ATF’s regulations and firearms and ammunition stored at the licensed premises or a separate storage facility. The required records include:
• Record of acquisitions and dispositions;
• Form 4473 Firearms Transaction Record;
• Form 6 Application and Permit for Importation of Firearms, Ammunition and Defense Articles;
• Form 6A Release and Receipt of Imported Firearms, Ammunition and Implements of War;
• ATF Form 3310.11 Federal Firearms Licensee Firearms Inventory Theft/Loss Report;
• ATF Form 3310.4 Report of Multiple Handgun Sale;
• ATF Form 5300.11 Annual Firearms Manufacturing and Exportation Report;
• ATF Form 3310.6 Interstate Firearms Shipment Theft/Loss Report; and
• Marking variances.

3. If the licensee is a Special (Occupational) Taxpayer, ATF will also inspect records required under the National Firearms Act (NFA), including registration and transfer forms and Special Tax Registration and Returns. Like the GCA, the NFA grants ATF the authority to enter a licensed premises and places of storage during business hours to examine records required to be kept under the NFA. However, NFA compliance inspections are not subject to the same frequency limitations as GCA inspections, and ATF is authorized to conduct warrantless NFA inspections as often as necessary. That said, such compliance inspections are limited to those records required under ATF regulations in 27 C.F.R. Pt. 479.

For more information on the limitations on ATF’s compliance inspections under the GCA, please refer to the Legally Armed article “Compliance Inspections Under the Gun Control Act–Know ATF’s Limitations and Boundaries” that appeared in Small Arms Review, Vol. 19, No. 10 at p. 16 (Dec. 2015).

B. ATF Warrantless Inspections of Federal Firearms Licensees

Under the Safe Explosives Act (SEA), Title XI, Subtitle C of Pub. L. 107-296, the Homeland Security Act of 2002 (Nov. 5, 2002), ATF is required to inspect without a warrant every FEL explosives storage magazine at least once every three (3) years, which ATF generally schedules up to 12 months prior to a license or permit expiration date. These compliance inspections include verification of SEA-required storage and all other aspects of a full inspection.

SEA inspections are not limited to one annual compliance inspection, as is the case under the GCA, but the SEA compliance inspection will cover magazines (construction, maintenance and compliance with Tables of Distances) and review of the inventory and comparison to records required under ATF’s regulations at 27 C.F.R. Pt. 555 (explosives).

II. ATF’s Defense Contractor Inspection Process

ATF presented the October 18, 2017, Contractor Inspection Guidelines as a “discussion of ATF’s compliance inspection process… intended to help Federal firearms or explosives licensees who are DOD contractors prepare for and participate in an ATF compliance inspection, and it should help minimize any intrusion and on-site complications during such inspections.” The guidelines are broken into five parts ranging from the pre-inspection preparation stage to the closing conference with ATF and outline the documents and information ATF IOIs should have access to during a warrantless compliance inspection.

A. Relationship of the ATF Inspection of DOD Contractors to DCMA

Many of the documents and information points ATF seeks to review during an inspection (listed below) are directly related to DOD contracts and performance thereunder, activities that fall under the purview of the Defense Contract Management Agency (DCMA). DCMA is a component of DOD authorized to work directly with DOD suppliers to help ensure that DOD, Federal and allied government supplies and services are delivered on time, at projected cost and meet all performance requirements. Among other responsibilities, DCMA “monitors DOD contractors’ performance and management systems to ensure that cost, product performance and delivery schedules are in compliance with the terms and conditions of the DOD contracts a company is fulfilling.”

ATF has indicated that it does not anticipate conducting joint inspections with DCMA, as certain areas subject to DCMA inspection may not be subject to ATF inspection.

B. The Major Inspection Team

For large volume manufacturers, ATF has advised that the inspection team likely will be the Major Inspection Team (MIT). ATF launched the MIT program in 2016 with the goal of yielding faster inspections of large-volume manufacturers, importers and dealers with less disruption to the industry member. For inspections of DOD contractors, the MITs will be made up of inspectors with 10 or more years of experience.

C. Pre-Inspection

ATF has indicated that its policy is to give a standard 30-day advance notice for compliance inspections of DOD contractors. The agency has explained that it recognizes the importance of negotiating the start date of the inspection with the industry member to allow for knowledgeable contractor personnel to be on-site and available to participate in the inspection activities.

According to the Contractor Inspection Guidelines, licensees should provide the following documents to the IOI for review during the pre-inspection period:

1. Licensee business operations, including products and current licenses and permits;
2. Copies of U.S. Government contracts (both primary and secondary contractor information);
3. Any issued variances;
4. Any other documents relating to the licensee’s operations;
5. Name and contact information of the DCMA point of contact (quality assurance representative or administrative contracting officer), if any;
6. DOD security protocols and procedures, including requirements for safety training and access to the facility.

According to ATF, the information gathered during the pre-inspection stage will enable the IOIs to determine the scope of the inspection. ATF has noted it will likely consult with DCMA as well as examine the requested documents to aid in determining what items should be included in the inspection and what items fall outside the inspection, such as Government Furnished Equipment (GFE) or items of classified status. In addition, ATF will refer to any related government contract to validate any variances, exceptions and recordkeeping.

D. Opening Conference

During the opening conference, the IOIs will come to the licensee’s business during business hours, or at an agreed upon time, and will review the following:

1. Corporate structure and list of responsible persons and employee possessors;
2. All Federal Firearms Licenses (FFL) and Explosive licenses/permits (FEL), Special (Occupational) Tax stamps (SOT) and any other licenses or permits;
3. Terms of the DOD contract the licensee services;
4. Any variances held;
5. Specifics on business operations including: (1) information on U.S. Government sales; (2) direct commercial sales (including to foreign governments); (3) manufacturing and/or importing activities; (4) subcontractors; and (5) shipping procedures;
6. Facility tour, including location of records and storage facilities;
7. Plat plan and table of distances (if FEL);
8. Other supplemental records, including: (i) DOD magazine information; (ii) DODIC numbers; (iii) safety data cards; (iv) State Department Directorate of Defense Trade Controls registration information; (v) purchase orders; (vi) shipping documents; (vii) bills of lading; (viii) invoice shipping documents; (ix) DD250 – Material Inspection and Receiving Reports; (x) documentation that Certified Statements of Use were provided to suppliers; and (xi) “other records.”

E. Records/Inventory/Storage Review

This portion of the Contractor Inspection Guidelines is broken into firearms and explosives and outlines the types of records and information the IOI will review for each.

For Firearms:

1. Acquisition and Disposition records;
2. The annual NFA exemption letter, if manufacturing for the U.S. Government;
3. Physical inventory inspection, part of which will distinguish between DOD exempt products/storage and commercial products;
4. Documentation to confirm items exempt under Title 27, CFR Parts 478.141 and 555.141;
5. Applicable variances for residual completed munitions that are not part of U.S. Government contracts and are not marked, registered or stored properly;
6. Importer Forms 6 and 6A;
7. NFA Forms 2, 3, 5, and 9.

For non-exempt explosives:

1. Acquisition and Disposition records;
2. Physical inventory inspection;
3. Inspection of explosive storage magazines and process buildings;
4. Verification of commercial markings and markings pertaining to a DOD contract;
5. Applicable variances for residual completed munitions that are not part of U.S. Government contracts and are not marked, registered or stored properly.

For inspections that include off-site storage of firearms, ATF has explained its policy is to inspect the licensed premises and the storage facility at the same time. If the off-site storage is located in a different state, then the ATF field divisions will coordinate to facilitate a concurrent review of records and inventory.

For FEL inspections, whether ATF will be able to coordinate inspection of off-site storage will depend on the staffing capabilities of the field division. In 2017, the number of IOIs throughout the entire country was approximately 790, but ATF expects to add more in 2018.

III. Do ATF’s Contractor Inspection Guidelines Exceed Its Warrantless Inspection Authority?

ATF does not have the authority during a warrantless compliance inspection to review records not required under its regulations in 27 C.F.R. Pt. 478, 479 or 555. A review of the Contractor Inspection Guidelines reveals that ATF includes documents and information that are well outside the scope of any of its regulations. However, ATF has explained that these types of inspections are voluntary and, as noted above, the reasons for ATF’s examination of certain records and information not required under its regulations may be for understanding the scope of the underlying government contract(s) and verifying any variances, claimed registration exemptions and the ability to distinguish between inventory made for the government from inventory manufactured for commercial sale. It is up to the contractor to work with corporate counsel to determine the best course of action if asked by ATF to produce additional documentation.

IV. Best Practices for a Contractor Inspection

Manufacturers should be able to readily distinguish between government product and civilian product on-site and in inventory, including product that has been “delivered on-site” to government customers. Contractors should segregate government-owned or government-furnished inventory, clearly mark such product and not record such inventory in the company’s bound book. During the inspection, ATF will seek confirmation of legal possession of inventory identified as government-owned or GFE and may request review of shipping documents to confirm that inventory has been delivered to the government, even though it is still on-site. Having a clear process for identifying and distinguishing product will be a key factor in having a smooth inspection.

All records that ATF is entitled to inspect should be kept in a designated area to allow convenient and ready inspection by IOIs. Records not subject to a warrantless ATF inspection should be kept in a separate location that is accessible only to authorized personnel. Inspections can have significant consequences, and any demands by an IOI to inspect records that are not within ATF’s warrantless inspection authority should be brought immediately to the attention of corporate counsel to determine the appropriate next steps. In determining whether to comply with requests from ATF for documents that are not within the scope of ATF’s inspection authority during a warrantless compliance inspection, licensees and SOTs should consult with qualified legal counsel.

ATF compliance inspections can have consequences. When IOIs discover violations during an FFL or FEL inspection, they can issue a Report of Violations, which describes each violation and the required corrective action by the FFL or FEL. More serious violations, such as lost firearms, inventory discrepancies, failure to record acquisitions or dispositions, require the IOIs to recommend an administrative action. Administrative actions range from warning letters, warning conferences, temporary suspension and revocations or denials of license renewals. If an IOI finds suspected criminal violations, he or she may refer the case to the criminal enforcement section.

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.

ABOUT THE AUTHOR

Johanna Reeves is the founding partner of the Washington, D.C. law firm Reeves & Dola, LLP (www.reevesdola.com). For 15 years she has dedicated her law 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 also has served as Executive Director for the F.A.I.R. (FireArms Import/Export Roundtable) Trade Group (http://fairtradegroup.org). In 2016, Johanna was appointed by the U.S. Department of State, Bureau of Political-Military Affairs to serve on the 2016-18 Defense Trade Advisory Group (DTAG). Johanna can be reached at 202-683-4200 or at jreeves@reevesdola.com.