Corporate Liability Reconsidered

on Tuesday, 01 December 2015. Posted in Export Control Reform, ITAR

by Frank Record


With new rules in place at the Justice Department to focus on individuals in investigations of corporate misconduct, the administration is responding to long-standing criticism that those responsible for the great Recession were treated too leniently.


How will the new rules on corporate responsibility affect your company and non-

profit organization?


While it remains to be seen how these new rules will affect the actions of U.S. attorneys and other enforcement officials across the country, corporate officers,  including those responsible for export compliance,  are now officially on notice that their actions will receive greater scrutiny.

The new rules are largely based on a September 9 memorandum  on “Individual Accountability for Corporate Wrongdoing” issued to all United States Attorneys by Deputy Attorney General Sally Yates.


The six key steps outlined in the memo include: (1) corporations must provide all relevant facts relating to the individuals responsible for the misconduct; (2) criminal and civil corporate investigations should focus on individuals from their inception; (3) criminal and civil attorneys should be in regular communication with one another; (4) the Department will not release culpable individuals from criminal or civil liability absent extraordinary circumstances or approved departmental policy; (5) Department attorneys should not resolve matters with a corporation without a clear plan to provide a resolution to related individual cases; and (6) civil attorneys should focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond the individual’s ability to pay.


BIS Under Secretary for Industry and Security Eric Hirschhorn cautioned that corporate officers will face fines, imprisonment and denial of export privileges when export control violations result from deliberate acts. In speeches delivered before the annual BIS Update conferences, he noted that “BIS has typically imposed penalties on companies involved in export violations. Now when a violation is the deliberate action of an individual, we consider seeking penalties against that individual”.


Enforcement actions have, in fact, been taken against such officers in the past including the conviction of Mozaffar Kazaee in October of this year, the issuance of charging letters against the Chairman and the Vice President of a South Carolina company, and the arraignment in mid-November of Ahmad Faras Diri on charges of illegally exporting lab equipment to Syria.

How should companies and corporate officers meet these new challenges?  By ensuring that export compliance fundamentals are in place in the classification of products, the training of employees, the implementation of screening, record-keeping and assessment and audit procedures, and the adoption of an Internal Compliance Program, ICP.


In regard to the latter, there are compliance templates and Risk Matrices available from many sources, including on the websites for Department of Homeland Security, U.S. Immigration and Customs Enforcement /Homeland Security Investigations,


Commerce Department’s Bureau of Industry and Security, BIS,

State’s  Directorate for Defense Trade Controls, DDTC,

and Treasury’s Office of Foreign Assets Control, OFAC,

But the consolidation of ICP requirements is still ongoing and many of these resources do not fully reflect policy changes from the Justice Department.


Companies and non-profit organizations need to review the Justice Department’s September memo, changes made to the U.S. attorney’s manual as well as the recent enforcement cases and to revise accordingly their compliance program and any related code of conduct for corporate officers.


Our consultants at the Trade Compliance Group are experts in the design and implementation of ICPs. We offer practical advice to those who manage these compliance programs on a day-to-day basis as well as to upper management, whom the U.S. Government insists bear ultimate non-delegable responsibility. 


Phone: 202 621 5491

E-Mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

Proposed Changes to ITAR Definitions and Defense Services: A UK Perspective

on Monday, 27 July 2015. Posted in Export Control Reform, ITAR

US and Cuba flags


Preliminary thoughts on 80 FR 31505, setting out revisions to a number of ITAR definitions. 

by Michael Bell



There are several proposals which I think are welcome. First, the exemption for encrypted tech data is helpful, not only for US exporters but also for foreign companies storing data on, and downloading it from, U.S. servers. Unfortunately, it may be difficult for foreign companies to comply with U.S. cryptographic requirements because their own governments have different regulatory mandates.

Second, the attempt to narrow the definition of tech data could also be helpful, albeit distinguishing that data which is 'peculiarly responsible' for achieving the controlled performance levels may be trickier in practice than in theory.

That said, I do have reservations about the DDTC's attempt to impose a pre-publication approval requirement before technical data is placed in the public domain (new 120.11(b). It would appear that this is an attempt to create an ex post defensive position in the lawsuit brought by Defense Distributed against the DDTC for trying to prevent them from placing files on line which would enable a 3D printer to produce a primitive plastic gun. This issue looks as if it will be fought out in the US courts over a questionable doctrine under which a government is entitled to prevent publication of material, even if it is neither security classified nor government owned.

My main concerns remain with defense services. The DDTC have taken some account of views expressed, including by EGAD, on the previous draft, but not enough.

In 120.9(a)(1), the criterion that the provider of the service must have knowledge of the relevant US-origin technical data, seems eccentric and illogical. One can easily envisage cases where exactly the same activity might be treated as a defense service or not, depending not on the activity but on who does it. (An example might be someone in a management or an export control role in a submarine manufacturing business).


One assumes that DDTC are taking this line in order to defend their position in Hughes satellite type cases (where DDTC charged Hughes with providing defense services without exporting technical data), but it does not make a lot of sense. It may also be more difficult than DDTC claim to believe, to establish the facts of whether an individual has had access to the relevant technical data. It would be preferable if the DDTC finally bit the bullet, and made the export of technical data a criterion for the provision of a defense service.

I also remain unhappy about (a)(2), and the DDTC's attempt to assert jurisdiction over the integration of non-USML items into foreign defense articles. Why, for example, do they not use the same criterion ( ie knowledge of the relevant US technical data) as in (a)(1)?
In their commentary, DDTC appear to be arguing that the AECA does not mandate a distinction between US and non-US defense articles. This is a very precarious argument for several reasons:

  1. It conflates designation with regulation. The AECA designates 'defense articles' as subjects for controls, but regulates 'exports' (and imports). It follows as a matter of logic that the defense articles in question must be in (or entering) the U.S.

   2. This point is supported by the AECA requirement for 'persons' engaged in the manufacture  of  'defense  articles' to register (see (b)(1)(A)(i)).Even the DDTC would not assert that the registration requirement extends to foreign persons engaged in manufacturing foreign defense articles.

   3. Finally, the AECA itself distinguishes between 'defense articles' and 'foreign defense articles'. See (b)(1)(A)(i) and (ii) (I):
         'As prescribed in regulations issued under this section, every person ...who  engages in the business of manufacturing, exporting, or importing any defense articles or defense services designated by the President under subsection (a)(1) shall register...
        ' As prescribed in regulations issued under this section, every person... who engages in the business of brokering activities with respect to the manufacture, export, import, or transfer of any defense article or defense service designated by the President under subsection (a)(1), or in the business of brokering activities with respect to the manufacture, export, import, or transfer of any foreign defense article or defense service , shall register...'

It follows that the only circumstances under which the AECA extends jurisdiction to US persons involved in foreign defense articles or foreign  defense services is when the US person is engaged in brokering. This does not apply here.

The reason why this is important to foreign companies is not so much because of the need to license such activities, which is a nuisance but scarcely a deal breaker, but because of the implications of the 'derived data' rule (ITAR 124.8(5)), which would mean that any defense service provided under this head would render the resulting foreign defense article perpetually subject to ITAR retransfer conditions, notwithstanding the absence of any USML content. Furthermore, since one can easily envisage 'integration' being required for the increasing volume of 600 series items, as well as minor items like microchips, there is also the danger that this requirement will effectively negate the de minimis rule for CCL content.

It would be preferable if the DDTC accepted that integration of non-ITAR items into foreign defense articles not requiring the export of USML technical data was outside their jurisdiction. As a fallback, however, it has been suggested to me by an authoritative source that the derived data rule applies only to technical data and defense services supplied under agreements, and not under licenses, eg DSP-5s (because 124.8(5) applies only to agreements, while the DSP-5 guidelines refer to the control of integrated technical data but not of derived technical data). If this interpretation were confirmed by DDTC, then a possible way forward might be to press for defense services supplied for the purposes of integration to be approved under licenses rather than agreements, thus mitigating the worst effects of this rule.

There is one final point. The FRN separates 'retransfers' from 'reexports' (new 120.51) and defines them as follows:

     'Except as set forth in § 120.52 of this subchapter, a retransfer is a change in end use or end user of a defense article within the same foreign country.' 

Unlike the present definition, there is no reference to 'destinations'. It would appear then that the requirement for prior authorization of retransfers in country to other than different  end users, eg to other partners or subcontractors, has been dropped. This outcome would be very helpful since it would reduce the need for a great deal of tedious and unproductive compliance activity. It seems unlikely, however, that DDTC really intended this in which case there is a need for clarification.


As a member of the Export Group for Aerospace and Defense (EGAD), Michael plays a leading role in advising UK industry on ITAR and export control reform. His comments below, including on DDTC's asserted jurisdiction over the integration of non-USML items into foreign defense articles, should be of interest to companies on both sides of the Atlantic. 

Sanctions Watch - Cuba Part II

on Monday, 20 April 2015. Posted in Export Control Reform

US and Cuba flags


Industry Outlook: Biotech, Agriculture and Transportation

by Frank Record

(Read Sanctions Watch - Cuba Part I)


The New York trade delegation led by Governor Andrew Cuomo generated its share of publicity here and in Cuba, prompting critics to label it a ‘publicity stunt’ and its supporters to point to the groundwork it laid in establishing ties to the Cuban private sector.  Before leaving Havana, several delegation members signed two agreements with Cuban partner companies and a research institute.


The Roswell Park Cancer Institute of Buffalo, New York signed an agreement with Cuba’s Center for Molecular Immunology with a clinical trial to be held in the U.S. According to the Roswell Chief Executive Officer, Candace Johnson, “The agreement establishes a collaboration between our two institutions to develop a cancer vaccine in lung cancer”.


The New York City-based Infor Global Solutions Inc reached an agreement with Cuban partners to resell its software on the island nation. According to CEO Charles Phillips, “We were surprised and impressed with the level of technology and expertise they have in healthcare technology”.


Based on these agreements and the fact that Cuba has its own biotech industry and produces a number of vaccines, the health sector is expected to get high priority in future U.S.-Cuban exchanges. Successor state-led delegations might, for example, come from mid-Atlantic  states, like Maryland with its BioMaryland Center and outreach to life science research and development in the U.S. and overseas.


Other delegations from the south and mid-west would very likely include agriculture and farm equipment exporters as well as airlines and transportation-related companies seeking to establish air and sea links with the island nation.


Establishing significant commercial links will, however, not be a quick or easy process requiring not only the lifting of the Cuban terrorist designation and the restoration of diplomatic relations but also an end to the Congressionally-imposed embargo.


Americans wanting to see Cuba first-hand, either by boat or private plane, should be aware that government licenses are most likely required for ‘sojourns’ to Cuba.


Click the following images for additional information provided by the Treasury and Commerce Departments:



Frank Record is the Executive Partner at the MK Trade Compliance Group. With more than 25 years of experience in the legislative and executive branches, he has substantial high-level experience in a wide range of trade and security issues.  Read More about Frank

Phone: 202 621 5491

E-Mail: This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it.


Sanctions Watch - Cuba

on Monday, 20 April 2015. Posted in Export Control Reform

US and Cuba flags


Fact Finding Mission or Something More?

by Frank Record


Governor Cuomo arrives in Cuba today as head of a New York trade delegation between Washington and Havana. While his spokesman said he will ‘stick to business matters’ focusing on travel, education, agriculture, health care and financial services, other commentators expect him to address broader topics including ways to encourage Cuba’s development and private sector.


Whatever the outcome, the state-sponsored trip is likely to be the first of many designed to open up a market closed to American businesses for more than 50 years.  President Obama’s announcement last week to take Cuba off the list of states that sponsor terrorism should be the key impetus in restoring relations between Havana and Washington, but the trade embargo and the decision to end it remains in the hands of the Republican-controlled Congress.


The President eased the sanctions on Cuba, allowing freer travel for Americans, more remittances to Cubans, liberalized rules on the export of telecommunication equipment and services to the island nation, and the use of credit cards by American tourists.

Historically significant, symbolically important, the opening to Cuba has captured the attention of all Americans, but it has yet to move the needle on U. S.-Cuban trade and investment.  


Since their unveiling in January,  the Commerce Department has approved only a handful of newly created license exceptions for Cuba. With U. S. banks thus far steering clear of Cuba and with no export credits or any other financing forthcoming from the U.S. government, the impetus for the re-integration of Cuba into the global economy will most likely not come from  the U.S.,  but from Cuba’s creditors in Europe and Asia with debt consolidation and forgiveness and export credits.


Non-American companies are the likely beneficiaries in the short term of the U.S. opening to Cuba and its removal from the list of terrorist nations, as well as the gradual economic reforms introduced by President Raul Castro in 2010. American agricultural exporters have actually been losing ground to foreign competitors over the past six years with food shipments down from $700 million to $265 million last year.


Unless and until Congress repeals the embargo on Cuba, American companies will face numerous obstacles in getting back into the domestic market. Additional and broader license authority is needed from the Department of Commerce’s Bureau of Industry and Security  and Treasury’s Office for Foreign Assets Control to facilitate trade and lay the groundwork for ship traffic across the Florida Straits.


New License Exception Support for the Cuban People (SCP) authorizes the license-free export and reexport to Cuba of the following items: building materials, equipment and tools for use by the private sector to renovate privately owned businesses and residences; tools and equipment for private sector agricultural activity; and tools and equipment and supplies for private sector entrepreneurs. Eligible items must be designated EAR99 or controlled on the Commerce Control List solely for anti-terrorism (AT) reasons.


License exception have been broadened  to authorize the commercial sale of consumer communication devices and the shipment of consolidated gift parcels. Commerce has also instituted a policy encouraging license applications for items and services for environmental protection for air quality, coastlines and waters around Cuba.


With the thaw in relations and the arrival of the American trade delegation in Havana, attention is beginning to shift from the U.S.-imposed embargo to the Cuban government’s own internal ‘embargo’ on the Cuban private sector and the development of a more market-based economy. Will Cuba follow the example of China, or Russia or seek its own development path?


Read Sanction Watch - Cuba Part II

Frank Record is the Executive Partner at the MK Trade Compliance Group. With more than 25 years of experience in the legislative and executive branches, he has substantial high-level experience in a wide range of trade and security issues.  Read More about Frank

Phone: 202 621 5491

E-Mail: This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it.


Encryption Export Controls

on Friday, 24 October 2014. Posted in Export Control Reform

The recent Wind River settlement for $750,000.00, which was imposed for the export of 55 encryption items valued at $2.9 million and made without proper authorization and to restricted parties, should alert all developers, manufacturers, and brokers of encryption products to review their processes and procedures for managing their exports.

It should be noted that the settlement was the result of a voluntary self-disclosure. According to the Assistant Secretary of Commerce for Enforcement, David W. Mills, “Because the violations were voluntarily disclosed, the company received significant mitigation,” and the proposed charging letter would indicate that the penalty could have been as high as $13.750 million. Assistant Secretary Mills cautioned that “This penalty should serve as a reminder to companies of their responsibility to know their customers and, when using license exceptions, to ensure their customers are eligible recipients.”

Processes and procedures need to be reviewed periodically for any changes to business models, for any new employees, and for compliance system process breakdown. Particular attention needs to be paid to the encryption controls found in Sections 742.15 and 740.17, some of the most complex in the Export Administration regulations. Their proper implementation will protect the interests of U.S. exporters and many, if not all, of their foreign trading partners.

Under the guidance of Craig Ridgley - Managing Partner for MK TCG and one of the country’s top global encryption controls experts - MK TCG can effectively and efficiently assess your export compliance program. MK TCG can also review your export classifications to ensure they are consistent with recent changes in encryption controls, and can perform comprehensive or random sample audits (whichever is appropriate) of your encryption exports to determine if process breakdown has already occurred. In the unfortunate event you find that your company has violated U.S. export controls, MK TCG can help you with the tasks necessary to prepare and submit a voluntary self-disclosure.

For more information please call 202 621 5484

Export Control Reform has reached Category XI: Good News and Bad News

on Tuesday, 29 July 2014. Posted in Export Control Reform


Export Control Reform has reached Category XI:

Good News and Bad News


by Francis Sutschek

Senior Consultant


The good news. For those of us, like myself, who have lived our professional life in the USML, welcome to the Commerce Department’ BIS and the world of ECCNs. Any of your products that were Category XI and are in use on current US war-fighter equipment like the Joint Strike Fighter, Bradley Fighting Vehicles, or US Navy ships of the line, are most likely still Category XI. Prior Category XI products for equipment no longer used by US forces, but still in use by other countries either friendly to us or at least not seen as hostile to us, may have transitioned to BIS / EAR control from DDTC / ITAR control. So what do we do? We suggest you read the ITAR parts 120.2, 120.3, 120.4, 120.6, 120.9 and 120.10 and see if your product still fits. The key words are found in 120.3 (b), determining whether your product give our side an edge. If not, even if still in use by US forces, it may no longer be ITAR-controlled.

If you are unsure, but leaning toward EAR control request a CJ from DDTC   Do include a proposed ECCN for your product, but do not include a potential USML Category. In your CJ submittal, include a white paper explaining why you feel your product, which may provide the user with an essential capability, does not give our forces a military advantage. In the paper do explain why the function of your product is essential, Include history of the product with civil equivalent examples if any, and stress the general availability of the basic technology and functionality your product provides. I suggest you do not have your marketing people write this paper as they will tend to make it sound like the answer to someone’s dreams, while you are trying to sell DDTC on the fact that this is everyday capability that you just provide with good value to the end user.

An example would be military aviation radio Communications and Navigation (Com-Nav) equipment. Military aviation Com-Nav operates in the UHF Radio Frequency (RF) band. There is also Civil aviation Com-Nav which operates in the VHF RF band. The reason is at the end of WW II, it was clear to all that he RF spectrum needed to be managed as demand for its use was growing with all the technology developed during the war, so military aviation was allocate a block of UHF frequencies and civil aviation a block of VHF frequencies. A purely arbitrary decision, but if you are building a radio for a military aircraft it will be UHF. Also at the end of WW II the need to control air traffic was recognized, so agencies such as US FAA developed the “Airways Air Route Structure” which defined overland flight paths from one ground radio aid to navigation to another. Civil aviation developed VOR in the VHF frequencies for that purpose in the 1940s and the military developed TACAN in the UHF frequencies for the same function in the 1950s so they could comply with FAA requirements. The technical functional requirements for both are in the public domain and there is no military significance for either system. If a functional equivalent is available to all from a foreign source also specify that including the source.

Now the bad news. The three agencies most involved here, DDTC, BIS, and DTSA, have been given no additional resources to effect this change. Category XI is by nature highly technical, so technical review is a big and time consuming item. DDTC by its own admission has no technical expertise and relies on DTSA. DTSA as part of DoD is farming some of the workload out to other Pentagon agencies. The DoD people doing many of the reviews will be military officers with engineering degrees, but who have not been working as engineers for several years, they have been flying aircraft, driving tanks, or running ships. They understand the math and physics, but do not know what is leading edge vs what you can buy at Radio Shack.   Put an extraordinary workload on top of that and you are at risk to have your product over controlled. That is an item that should transition to EAR control may not make the jump from ITAR, or if it does, it will fall into the new 600 series of ECCNs which are item regarded as still significant to national security, when in fact they should be seen as normal commercial goods available world- wide. This is the significance of a well written, clear, brief and to the point white paper. I suggest you include a technical point of contact with people skills for any questions the reviewer may have.


Tips for Export Compliance Awareness Education & Training

on Friday, 30 May 2014.

Tips for Export Compliance Awareness Education & Training


by Martin Kalin

Founder & Partner





While not everyone needs to be an export compliance expert, employees and stakeholders at all levels across the organization certainly need to be aware of this important issue, as they are the front line in detecting suspicious transactions, preventing inadvertent or unauthorized exports.


Export compliance awareness education & training at an appropriate level of detail should be mandatory for everyone in your organization and is part of any world class export compliance program.  Voluntary education & training is this area is not recommended.  All third-party stakeholders (vendors, resellers, distributors, etc.) with access to the organization’s proprietary information and products including technology, technical data and defense services should receive export compliance awareness education & training – initially and on a recurring basis.  


Education & training should be mandatory before an employee is given the ability to export items, related information, assistance or have access to any export controlled material.  Ideally, education & training should commence within a week of employment, and annually thereafter.  The same should apply to suppliers, third-party distributors and other players in the organization's globally integrated supply chain.  Due diligence to ensure everyone who needs export compliance education & training and related issues is essential.


All employees and staff should be required to acknowledge in writing they have read and understand the organization’s Export Control Plan, as well as rudimentary rules and regulations specific responsibilities (or especially one’s general role inside the organization).  Everyone should also be well versed in the organization’s code of conduct and reporting channels when violations are known or suspected.   


All staff and third parties should be exposed to export compliance awareness education & training at least once per year and should be provided with periodic reminders by a variety of means including emails, letters, posters….  Again, documentation and record retention are important.


Management should strongly support and (as/where appropriate) attend export compliance awareness sessions.  The senior staff including the Chief Executive Officer, Chairman, President, Vice Presidents, Directors or other high level individuals should clearly and concisely communicate the importance of export compliance with the letter and spirit of the law throughout the organization.  




Awareness Program Guidelines


  • General awareness education & training videos and presentations ideally should be short and be followed by a short test to confirm/prove/validate learning.  Issuing a certificate to those that participated in the session and passed the test is optional, but strongly recommended.  Taking attendance and maintaining a complete record of what was presented are essential.


  • A “Common Level” of export compliance education & training should be identified.  A basic awareness program does not replace additional more-focused and specific education & training for those individuals that require more in-depth expertise.  This “Common Level” of export compliance awareness includes: background on laws, regulations, relevant agencies and legal responsibilities; export compliance requirements; access & business controls; knowledge of the organization’s export specific policies, processes and procedures, applicable information on the disciplinary and disclosure actions; recordkeeping and who to contact for further compliance advice.  


  • Education & training should include the impact & importance of export compliance to the person as an individual (i.e. potential of adverse actions, criminal prosecution and other negative consequences), as well as to the organization.  The “Common Level” should be determined based on a thorough needs and risk assessment that includes consideration of regulatory requirements and the unique nature of the organization.


  • Diverse external education & training experts should be leveraged and best practices, and benchmarks should be used for guidance in program developing.  Where possible, multiple delivery options should be used to suit different learning modes.  Where practical, all materials should be made accessible to staff with disabilities.  Where this is not possible, alternative methods must be provided.


Delivery & Administration


Information technology (IT) should be used in an optimized manner to automate education & training, as well as, to provide the necessary tools.  Records of attendance should always be retained and kept in personnel files or in an easily accessed compliance-tracking tool/database.  Qualitative & quantitative metrics should be used to obtain feedback and measure program results and effectiveness.

Where possible, multiple points of contact along with compliance personnel (e.g. senior management, Contracts, Engineering, IT, Legal, Logistics/Shipping, Operations, Procurement, Sales/Marketing, Human Resources, Security…) should also be used to reinforce learning and stress the critical importance of the program.





The effects and necessity of implementing an Export Compliance Awareness Program should never be underestimated.  In today's global, competitive, demanding and dynamic marketplace of exporting and its ever-changing rules and regulations, an organization must be diligent in this arena in order to advance its mission and comply with the letter and spirit of the law.  Likewise, export compliance education & training is not a one-time event.  To be truly effective, it has to be a comprehensive, ongoing and a well documented effort that quickly reflects changes.


Export Control Reform Category VII: Changes affecting the Aircraft and Aviation industry

on Monday, 06 January 2014. Posted in Export Control Reform, ITAR, Aerospace

Suppliers and distributors to the aerospace/defense industry should be aware that the government has made significant changes to the export control regulations affecting the aviation industry. Failure to implement the new regulations can lead to fines and the potential loss of exporting privileges.


At the center of the Export Control Reform Initiative, ECRI, is the movement of many aircraft parts that do not support either military fighter or bomber aircraft from Category VIII on the United States Munitions List to the new 600 series, in this case 9A610, Export Control Classification Numbers on the Commerce Control List. For many companies, this will drastically affect what types of export licenses will be used, or whether the company qualifies for a  license exception in lieu of an export license. The ECRI  specifies that aerospace/defense companies review their United States Munitions List/Commerce Control List product classifications and re-classify their products to comply with the new laws. 


The MK Trade Compliance Group can provide your company and your employees with export compliance awareness training and product line classification review so that they can remain up to date with these regulatory changes, determining which products stay on the State Department's US Munitions List and which transition over to the Commerce Control List. We can assist you in the re-classification of your product lines and the sorting of your parts and components data base so that your company is in full compliance with the new Commerce and State Department regulations.


As pointed out by Assistant Secretary of Commerce for Export Administration, Kevin Wolf, "once you have endured the short-term pain of reviewing your compliance program, you should be able to reap the long-term benefits of a simpler system requiring fewer validated licenses." In many cases, your company may qualify for the use of license exception STA (Strategic Trade Authorization) instead of applying for a Commerce license. The results can be favorable but it requires a re-classification process.   


Let us help you minimize the pain and maximize the benefits. See the links below to our site and to some yardsticks you can use to measure your compliance program. Have questions or need assistance? Give us a call or email and we'll 

be happy to help.

The New Brokering Rule FAQ (ITAR Part 129)

on Monday, 25 November 2013. Posted in ITAR

By Michael JV Bell C.B.

The aim of the brokering rule set out in ITAR part 129 is to define and identify brokers and to regulate their activities. A revision of the rule has just come into effect.

My previous blog discussed the debate over the extraterritorial reach of the Arms Export Control Act brokering amendment. This one focuses on the nuts and bolts of the new rule.

What is a Broker?

 A Broker is any person who engages in the business of brokering activities, in the following categories:

(1) Any U.S. person wherever located;
(2) Any foreign person located in the United States; or
(3) Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person.

(As elsewhere in the ITAR, ‘person’ means both an individual and a corporate entity. ‘Controlled’ is defined in the rule.)

As noted in the earlier blog, the new rule does not apply to foreign persons outside the US when their activities involve US-origin defence articles or services. This is a change from previous Department of State interpretation of the ‘otherwise subject to US jurisdiction’ language in the previous rule.


What are Brokering Activities?
Brokering Activities are defined as any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin. Such action includes, but is not limited to:

- Financing, insuring, transporting, or freight forwarding defense articles and defense services; or
- Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.

This definition applies even

- When there is no agent or intermediary relationship as normally understood, or payment made (this is a widening of the definition in the previous rule); and
- When there is only one action taken.

There are a number of important exclusions from the definition of brokering including:

- Activities performed by an affiliate on behalf of another affiliate;
- Activities by regular employees on behalf of their employer (except US persons involving embargoed countries listed in ITAR 126.1);
- Administrative services, such as translation services or organising trade shows;
- The provision of legal or consultancy advice.


Who must register?
Anyone listed above who engages in a brokering activity and is not exempted as
- A foreign government or international organisation, or
- A person exclusively in the business of financing, insuring, transporting, customs brokering or freight forwarding.

Registration fee is $2250. Material changes must be reported within 5 days. US registrants may include subsidiaries and affiliates on their registration forms.


What transactions require prior approval?
Certain brokering activities require prior State Department approval, ie those involving:

- More sensitive US-origin defence articles, such as fully automatic firearms, platforms such as vessels, tanks, aircraft and UAVs, but also night-vision, inertial platform sensor or guidance systems, and chemical agents and precursors;
- Same categories of foreign defence articles if inside NATO-plus;
- All foreign defence articles/ services if outside NATO-plus.

This is a change from the previous rule which focussed on whether items were Significant Military Equipment (SME) and based on value. The rule sets out in detail the information required for prior approval. Applications involving embargoed countries listed in ITAR 126.1 or denied parties will be refused.


What transactions require prior notification?
None. This feature of the previous rule was felt to be confusing, and to add little value.

Annual Reports?
An annual report of brokering activity is required of all registered brokers (including nil returns). The report must cover quantity, type, US dollar value, and purchaser(s) and recipient(s), all individuals involved, payments received, licence numbers for approved activities and any exemptions utilised. Records should be retained for at least five years after the last controlled activity.

To sum up
The new rule is much clearer on who is, and who is not, covered, and on what is required of those who are. Additional helpful guidance is provided by FAQs on the DDTC website.
The narrowing of the rule’s scope by excluding foreign persons, other than those owned or controlled by US persons, plus the exemption of regular employees and of affiliates acting on behalf of other affiliates, will result in a considerable reduction in coverage. The DDTC forecasts a significant fall in the number of broker registrations, by 1300, plus another 300 incorporated into the registrations of US companies. There may be further reductions as a result of transfers of defence articles from the USML to the CCL ‘600 series’ as a result of Export Control Reform.
On the other hand, for those who are covered, the definition of brokering activity is both broader and vaguer than before. As noted above, the new definition does not retain the sense of acting an agent or intermediary, or the requirement for a fee or commission; it can also be triggered by just one transaction. Uncertainty will remain in many cases as to whether certain activities constitute brokering.

Thus the definition may apply to activities on behalf of other entities such as:
- Providing logistic support by arranging for the procurement and shipping of defence articles from the OEM to the customer, or arranging support contracts with third parties;
- Managing the movement of sub-systems between contractors on international defence programmes.
- Promotion of exports by the foreign subsidiaries of US companies, even when there is no US content; this could particularly affect companies offering packages of equipment to foreign customers.
- Contracting out defence acquisition, as is currently under consideration by the UK MOD. The sole remaining bidder is a consortium led by Bechtel, a US company. It is difficult to see how Bechtel could avoid the obligations of Part 129, including those for prior authorisation, when procuring equipment on the MOD’s behalf.

For this reason, companies which may be affected should consider taking expert advice from those familiar with developing ‘case law’ on the subject. Furthermore, para 129.9 of the new rule permits ‘any person desiring guidance on whether an activity constitutes a brokering activity within the scope of this part 129 may request in writing guidance from the DDTC’. The information to be provided is set out in detail. ‘The guidance will constitute an official determination by the Department of State’. It will often be prudent to take advantage of this offer.


Extraterritoriality and The New Brokering Rule (ITAR Part 129)

on Thursday, 31 October 2013. Posted in ITAR

By Michael JV Bell C.B.

October 25th, 2013 marked the entry into force of a revised ITAR brokering rule, published in ‘interim final’ form as a Federal Register Notice in August. The brokering amendment of the Arms Export Control Act was passed in 1996 and the resulting regulation, embodied in ITAR Part 129, appeared the following year. It was as long ago as 2003 that the Department of State informed the Congress that they were reviewing the rule in the light of experience. Ten years and four attempts later, a new rule is finally with us.

The debate over revision of the brokering rule over the last decade can in part be seen as, and gains much of its interest from, a war of attrition between the Directorate of Defence Trade Controls and expert legal opinion over the extraterritorial intent of the AECA brokering amendment, extraterritoriality (XT) being defined in this context as the assertion of jurisdiction over foreign persons outside the United States.

Following passage of the AECA amendment, ITAR Part 129.2(b) stated that the regulation applied (but was not limited) to activities by US persons located inside or outside of the USA or by ‘foreign persons subject to US jurisdiction’. Similarly, Part 129.3(a) placed a requirement to register on any US person, wherever located, and any foreign person located in the United States ‘or otherwise subject to the jurisdiction of the United States’.

The DDTC issued no guidance on the interpretation of ‘otherwise subject to US jurisdiction’, or indeed on any other aspect of Part 129. Contemporary commentators opined that the language should be interpreted in terms of foreign brokers ‘having a sufficient nexus with the US based on the activities in question’, or ‘employed by US companies or having an unrelated business in the US’. With the passage of time, however, it became clear that the DDTC asserted jurisdiction over foreign brokers outside the US even if their only connection with the US was with involvement in brokering US origin defence articles or defence services.

In 2009, a new draft regulation was put to the Defense Trade Advisory Group (DTAG) which replaced the language of ‘otherwise subject to US jurisdiction’ with the more specific statement that ‘brokering activities include any such activities by…any foreign person located outside the US who engages in brokering activities involving a US-origin defense article or defense service’. The same language was included in draft text published as a Federal Register Notice in December 2011. DDTC had also imposed, in May 2011, a Consent Agreement on BAE Systems plc, a foreign person outside the United States, for 2588 alleged violations of the ITAR brokering regulations involving US origin defence articles and defence services.

Meanwhile, however, informed legal opinion was coming down increasingly heavily against an expansive XT interpretation of the amendment. In the case of US v Yakou, in 2005, Sabri Yakou was charged with offences in connection with brokering patrol boats for Saddam Hussein. The Court, reflecting Supreme Court rulings on extraterritoriality, confirmed that ‘the Congress was concerned with both United States brokers of arms and foreign brokers of arms located in the United States, but not with foreign brokers located outside the United States’. The case, however, ultimately turned on whether Yakou’s ‘green card’ was still valid, and thus whether he was a ‘US person’. The DDTC saved something from the wreckage by successfully appealing that the interpretation of ‘otherwise subject to US jurisdiction’ was not at issue, and chose not to modify their overall stance on the application of this language.

Subsequently, in an unsolicited input of February 2008 to the Department of State’s legal adviser by the American Bar Association (ABA), and in a commentary on the December 2011 FRN from the Section of International Law (SIL) of the ABA, the argument was put that application of standard principles of statutory construction, as confirmed by the US Supreme Court, did not permit an XT interpretation of the AECA brokering amendment.

Under such principles, ‘Congress legislates with a presumption against extraterritoriality. Federal laws apply only within the territorial jurisdiction of the United States unless Congress provides “affirmative evidence” to the contrary. This intention must be “clearly expressed”’. The brokering amendment failed that test.

The December 2011 FRN marked the high noon of the DDTC’s expansive interpretation of brokering. Comments were numerous, forceful, and almost unanimously critical. Foreign governments were also upset. As a result, the DDTC did not proceed with the draft. Instead, after a decent interval, the DDTC adopted a fresh approach, circulated for comment to the DTAG in November 2011. This approach set out a new definition of a broker as ‘any person described below who engages in the business of brokering activities:

1) Any US person wherever located;
2) Any foreign person located in the United States;
3) Any foreign person located outside the United States where the foreign person is owned or controlled by a US person;
4) Any person located outside the United States involving the temporary import into the United States of any defense article or service.’

Thus the DDTC had finally dropped its efforts to extend jurisdiction over foreign persons outside the US involved with US-origin defence articles or services. This was generally welcomed. There was, however, some concern over (4) above from foreign companies, who were unable to see how the US national interest was served by a control over brokering temporary imports, and feared that the provision was an attempt to extend extraterritorial jurisdiction by stealth. After representations, this sub-paragraph was dropped and does not appear in the ‘interim final’ text published in August.

This lengthy saga prompts two questions. First, why did the DDTC persist with their view of the reach of the legislation for so long when the writing was so clearly on the wall after the Yakou judgment? The answer must be speculative but DDTC officials commented at the time that they believed the Yakou decision to be wrong in law. Furthermore, the power to exercise oversight over not only foreign agents of US companies, but also foreign agents of foreign companies, or even the foreign companies themselves, as illustrated by the BAE Systems case, must have been attractive to the Department of State. DDTC does not appear to have the intention of revisiting decisions made under this interpretation. This suggests that the new rule is seen as a change of policy rather than a correction or clarification of the AECA brokering amendment.

Secondly, is this the end of the story? Not quite. The ‘interim final’ status of the latest version permits further amendment. Inclusion of foreign persons owned or controlled by US persons, is also objectionable under international law, as the ABA has already pointed out. While DDTC has yet to publish the comments on the ‘interim final’ text, it may be assumed that there will be proposals to remove or modify this provision.

Brave New World of Export Controls

on Monday, 07 October 2013. Posted in Export Control Reform

By Dr. Paul Freedenberg

In the summer of 2009, at the urging of Secretary of Defense Robert Gates, President Obama announced a plan for a complete reform of our nation’s export control process.  Gates, who had experienced the export control system first-hand as President of Texas A & M University, articulated the President’s concerns when he argued that the system was “overly complicated, contains too many redundancies, and in trying to protect too much, diminishes our ability to focus” on the truly important.  The President told the national security bureaucracy that he wanted the system simplified and consolidated, both for the sake of good government and because our companies were needlessly losing sales and market share to foreign competitors as potential customers avoided buying from US in order to escape the bureaucratic delays and needless restrictions they encountered when they purchased US high tech products and weapons systems.  Even combat cooperation with close allies was delayed by needless licensing requirements built into a rigid compliance system.

 As a consequence of the President’s mandate, over the past four years licensing officials at the State, Commerce and Defense Departments have been diligently at work reforming both the lists of licensed items and the manner in which they are licensed.  This is a Herculean task.  It involves reconciling export control definitions, regulations, and policies that govern the export of tens of thousands of items worth hundreds of billions of dollars.  At its conclusion, it is expected that fully 90 percent items governed by the State Department Munitions List (“ML”) will be transferred to Commerce Department jurisdiction or decontrolled.  They will have moved from the more restrictive and less flexible State Department ML to the simpler and more flexible Commerce Control List.  Those items inherently military and needing tighter controls will have been more precisely defined on a less ambiguous, positively defined ML.  The object is to have the ML contain only the “crown jewels” of U.S. national security technology.

Within that “Export Control Reform initiative” (“ECR”), the Commerce Department’s Export Administration Regulations have been clarified and the need for an individual validated license in order to export to America’s allies and friends who accept international restrictions on high technology exports has been greatly reduced.  In keeping with the good government, reform theme, many enforcement functions have been consolidated and export licensing has been made available on-line in almost all cases.

Probably the most attractive licensing reform of the ECR initiative is the creation of new Commerce license exception known as the Strategic Trade Authorization (“STA”) which allows export without a validated license to 36 countries that are either U.S. allies or who have agreed to adhere to the various regimes created to prevent proliferation – the Australia Group, the Nuclear Suppliers Group, and the Missile Technology Control Regime.  The jury is still out with regard to how widely this new STA license exception will be utilized, because it creates additional compliance burdens on the exporter and it requires significant new paperwork and commitment to compliance from the end-user.  These new burdens may very well prompt many exporters to pass on the new license exception and stay with the validated licensing process that they know rather than embark into the unknown world of requirements inherent in the new STA, with which they have no experience and in which they are obligated to make new demands on their customers.  But despite its restrictions and its paperwork burden, it should be attractive to a number of companies who previously operated under the State Department’s tight restrictions.

Interestingly, the STA is not available to China or Russia, the two countries with high license volumes and the most difficult licensing challenges, where the promise of licensing relief would be most attractive to exporters, particularly large exporters with large numbers of licenses. Balanced against the merits of the STA license exception’s enhancement of an exporter's licensing obligations and reduction of the paperwork burden of the licensing process is the fact that the new license exception eliminates the requirement for exporter to submit his decision to the U.S. Government and await its decision regarding the approval of the proposed export.  The item is exported according to strict guidelines and with strict compliance requirements, but it does not require prior U.S. Government approval.  Understandably, it is highly unlikely that the Congress would look favorably on this special expedited treatment for the two countries in question.  Congress has been clear in its desire that the U.S. Government should not just set the rules but make the decision with regard to the licensing process, particularly when it involves countries where U.S. security or proliferation concerns are manifest, such as China or Russia.  Hence, the STA provides licensing relief to three dozen countries, but it avoids the controversy that would come from providing that licensing relief for countries where exporters might find it most welcome. 

Despite the desire to reduce the number of individual validated licenses with devices such as the STA, it is clear that the Obama Administration will be careful to confine those license reductions to the lower risk categories and countries, likely to raise the fewest eyebrows among Members of Congress.

U.S.-based multinational corporations have expressed support for this massive undertaking and have participated through public fora and the detailed written comments that they have submitted.  But their praise has been muted. They understand the great cost and effort involved in transforming their export compliance systems to conform to the new requirements.  Assistant Secretary of Commerce for Export Administration, Kevin Wolf has addressed this concern when he said recently that while ECR will mean short term pain, as companies are forced to revise their compliance programs, there is likely to be long term gain, as companies reap the benefit of a simplified system with fewer validated licenses with which to contend. 

Some exporters have expressed concern, wondering if the risks and rewards will balance in the long run.  Multinational companies in particular are concerned that the ECR, which has taken the better part of four years and is still not completed, has diverted the Obama Administration from the equally important task of simplifying and expediting the licensing process for sales to China and other difficult destinations, which has been completely ignored as all resources have been diverted to the West-West trade orientation of the ECR.  They are also concerned that other important reforms have been put off into the indefinite future as the time-consuming task of revising and combining the export control lists is completed.  Such tasks as reforming encryption controls, creating an effective way to authorize inter-company exchange of data on a worldwide basis, and increasing the utility of the UK and Australia arms treaties have been deferred as work continues on the fundamental rewrite of the regulations.

There is a lot riding on this four-year long undertaking.  2014 will be the acid test of the ECR initiative.  Beginning on October 15, when the first of the new regulations go into effect, everyone planning to export high technology will be forced to switch to the new regulations, create new compliance programs, and re-categorize almost all of the their inventories.  We shall see whether the ECR lives up to the Administration’s promises of actually enhancing national security while providing export control efficiency and simplicity, and whether the Obama Administration can point to the new licensing system as an accomplishment that is worth all the work that has been put into it.

Export Control Reform and Military Aircraft/Parts: Time to Re-Classify

on Tuesday, 27 August 2013. Posted in Export Control Reform


So you’re a supplier of parts and accessories for military aircraft. Are you aware of the sweeping changes that Export Control Reform initiative has on Category VIII of the United States Munitions List? Do you know that your agency jurisdiction and product classification are likely to change with an October deadline fast approaching? Perhaps you haven’t begun reviewing the ECR and how it will impact the agency that has jurisdiction over your products including either the Directorate of Defense Trade Controls (DDTC) or the Bureau of Industry and Security (BIS). But now is the time to move as the October 15 implementation deadline approaches with a mass migration of aircraft and related parts from the Munitions List to the Commerce Control List.

Currently, USML Category VIII covers all types of military aircraft including but not limited to fighters, bombers, transporters, cargo planes, attack helicopters and more. The new change creates a “positive list” of aircraft primarily limited to fighters and bombers. Specifically, the new USML Category VIII(h) covers:

Parts, components, accessories, attachments, and equipment specially designed for the following U.S.-origin aircraft: the B–1B, B–2, F–15SE, F/A–18 E/F/G, F–22, F–35 and future variants thereof; or the F–117 or U.S. Government technology demonstrators. Parts, components, accessories, attachments, and equipment of the F–15SE and F/A–18 E/F/G that are common to earlier models of these aircraft, unless listed in paragraph (h) of this category, are subject to the EAR.

If your company’s products support military aircraft other than those enumerated above, agency jurisdiction moves to the BIS and you’re now subject to the EAR/CCL, not the ITAR/USML. The ECCN will fall under the new “600” series category, more specifically somewhere in 9A610. For all but 36 countries, an export license from the BIS is required, not the DDTC, or if the destination is one of the 36 on the newly revised A:5 country group (mostly NATO countries) then license exception STA (Strategic Trade Authorization) is available after a one time classification ruling from BIS (CCATS) is obtained. In all, the ECR has greatly pared down Category VIII of the USML and moved jurisdiction and classification from the State Department to the Commerce Department. For licensing purposes, this is a game changer, as export licenses will come from the BIS and depending on the destination, a new license exception may be available.

So what needs to be done to prepare for 10-15-13? The answer is straightforward: Re-classify. It’s essential that companies supplying parts for military aircraft review their product lines, re-determine agency jurisdiction and re-classify accordingly. This will help you avoid costly fines and penalties from potential violations of either the EAR or ITAR. More specifically, the following steps should be taken:

  1. Assemble a full database of your military aircraft parts and specifically identify which military aircraft each part supports,
  2. Sort your database by aircraft type (i.e. B-1B, F/A-18, C-5, V-22 etc),
  3. Using the “positive list” above, indicate the appropriate agency jurisdiction and and USML/CCL classification for each part,
  4. All parts identified as ITAR controlled should be classified under USML Category VIII (most likely, VIII(h)),
  5. All parts identified as EAR controlled should be classified under 9A610(a) – (y) as appropriate.

Here’s a special note for step 5. ECCN 9A610(a) – (w) and (y) covers very specific types of aircraft parts, so it’s essential to perform an additional sort of your database by part type. Then it becomes easier to classify which sub-part of 9A610 is appropriate for your items. The catch all ECCN for parts not specifically enumerated in  9A610(a) – (w) and (y) is 9A610.x.

There’s one last thing. You should match each part to any countries designated in the A:5 group for eligibility under license exception STA. Once you’ve finalized this list, it’s time to submit a CCAT’s ruling request to the BIS for approval to use license exception STA. When you receive the approved one-time classification ruling, you’re good to go with STA to the A:5 countries. Naturally, any new items to your product line should be reviewed and classified in the same manner described above.

Note that over the past few months Commerce and State officials have been encouraging companies to submit Category VIII related license applications where they will be reviewed in the order received with final authorizations issued on October 15.  Need a hand in the application process, in updating your compliance and information technology programs, in the proper classification of your parts inventory under the new guidelines? Give us a call. We’ll be glad to assist.

David G. Ross
Senior Advisor, MKTCG

AEROSPACE -- -- Dealing with Regulatory Complexity

on Monday, 27 May 2013. Posted in Aerospace

Aerospace companies have been under particular regulatory uncertainty and pressure in the past few years.


Historically, Aerospace companies have experienced regulatory uncertainty and licensing delays stemminfrom an overly complex export control system. A number of companies have also faced demands for "ITAR-free" products where U.S. made parts and components are designed out in the design plan. 

Small and Medium-sized Enterprises, SMEs were often the victim of this effort to avoid the reach of U.S. munitions controls, but the ongoing Export Control Reform initiative should make them the beneficiaries of the decontrol or the transfer of thousands of parts and components frothe State Department's Munitions List to the Commerce Department's Commerce Control List.  SMEs frequently don't have fully developed compliance programs, including the in-house compliance expertise of the larger companies and as a result they have sometimes held bacfrom aggressively pursuing export opportunities.

At MK TCG we have experienced consultants who can help your company make the transition ta new regulatory framework with the background and expertise required to train your the internal compliance program, classify your products. and make commodity jurisdiction and CCATS requests. Whether you are a supplier to or a sub of  one of the defense primes or an Unmanned Air Systems provider. we can assist your company in complying with the latest provisions of the regulatory changes.

Did you know that parts that are not "Specially Designed" but rather common to military and civilian aircraft and not found on the USML would be subject to the Export Administration Regulations? Did you know that parts and componcnts  may be exported or reexported in License Exception STA (Strategic Trade Authorization), but certain software and technology related to their "Development"' or "Production" may not be?

ITAR Categories VIII (military aircraft) and XIX (turbine engines) have already had regulations published with dramatic changes announced that would shift many items from State Department to Commerce Department control. Aerospace companies, among others, face penalties ranginfrom warnings and small fines to actual denial of export privileges and/or the prohibition against selling to the U.S. Government and they will face increasing pressure to 'put more significant resources into the effort to stay current with the new rules and regulations.

ECRI is Bringing Change for the Aerospace and Defense Industries

on Friday, 16 August 2013. Posted in ECRI, ITAR


For aerospace and defense companies the ITAR-centric world is about to change in mid-October. Uncomfortable with change no matter how well intentioned, many of these defense companies had hoped that the Export Control Reform Initiative - ECRI -- wouldn't start in their own backyard.   But that wish was not fulfilled.  For example, there was the migration of many ITAR US Munitions List (USML) Category VIII items to either the EAR Commerce Control List (CCL) or USML Category XIX. The formerly reserved USML Category XIX will cover military turbine engines and the EAR Commerce Control List (CCL) was broadened to include a new "600 Series", including a new series 9X600 for aircraft and 7X600 for avionics.

To better identify what is ITAR-controlled, Category VIII will be more clearly defined and more limited: those items not identified in USML category VIII will be moved on October 16 to the Department of Commerce, Commerce Control List (CCL).

As a Senior Advisor to the MK Trade Compliance Group (MK TCG), my colleagues and I have the expertise to help your enterprise through this confusing and daunting transition period by creating an ECRl­ compliant process for your enterprise, to keep your export/import operations running smoothly.  To this goal we would execute an in-depth audit both to ITAR and EAR compliance and a technical assessment to determine which of your exported products would remain subject to ITAR and which would transition to the EAR.  MK TCG consultants can work with you to get all of your products classified correctly, determine what items may need to be re-categorized under the EAR, and what, if any actions need to be taken regarding items transitioning to the EAR. 

The State and Commerce Departments and other relevant government agencies have established a two­-year transition period, but there should be no time lost in training your workforce and reviewing your export control and compliance procedures and manuals.

In the EAR world, administered by the Bureau of Industry and Security, you are expected to classify your product on the CCL and determine the extent of your licensing requirements. Once you learn the EAR terminology and process, you will find that it is user-friendlier than the ITAR, but we have the expertise to assist you along the way.

We also have an extensive working relationship with the government agencies involved in the regulation of aircraft and aircraft-related products, including the Federal Aviation Administration, other national airworthiness agencies, and the International Civil Aviation Organization as well.

Frank Sutschek
Senior Advisor MKTCG

Minimizing Exposure, Liability and Risk

on Tuesday, 28 May 2013.

Protecting Yourself and Your Organization

This is a real-world sanitized example for education, training and discussion. The following real-world case study was authored by John Priecko


The Situation

You are the junior Empowered Official (EO) at a defense contractor's major production facility in the Southeast United States registered with the Directorate of Defense Trade Controls. Your Business Unit (BU) manufactures and exports Significant Military Equipment with a national security interest under both the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR). You joined the company a year ago and are still trying to get things in order in a compliance culture set in its ways. Your immediate super- visor and other more senior EO is Director of International Business. His boss is the Vice President (VP) of Contracts who reports to the BU President/General Manager (PGM). The VP of Contacts is also dotted line to the Corporate Headquarters (CH) lawyer assigned to your BU.

Several years before you were hired, CH started a comprehensive trade compliance program. Due to the unique sensitivity of your BU products & services and concerns about unresolved compliance issues, headquarters has scheduled a comprehensive audit of your BU to be overseen by a contracted, independent, savvy and unbiased outside consultant who has a team of two other knowledgeable professionals (one from your CH; another from one of the other BUs).

For the next two years your BU PGM, comes up with reasons to delay the audit. The senior EO, VP of Contracts and assigned BU lawyer at CH all support the PGM. When the audit finally does take place some serious long-term violations of the EAR & ITAR are identified. The audit team through the Corporate General Counsel (CGC) requests more detailed information on the transactions. The PGM encourages you to not respond and essentially drags his feet not allowing you to provide the requested details. As this is playing out, a team of enforcement agents arrive unannounced at your BU with a subpoena seizing records, computers and other documents.

As the investigation progresses, the CGC advises you that CH has waived the Attorney Client Privilege, put you on administrative leave and recommends you retain your own counsel.

 In Review 

  1. What are the Red Flags in this situation indicating there are trade compliance, management, regulatory and other problems that need to be dealt with in a timely manner?

  2. What are the positive indications in this situation?

  3. Are there any important trade compliance best practices missing in this case study?

  4. If you are the junior EO, what do you do now, what are your options and what might you expect based on what has taken place?

  5. What could have been done to get this on the right track before it got out-of-hand?