Articles in Category: ITAR

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, https://www.ice.gov/

Justice/FBI,  https://www.fbi.gov/about-us/nsb

Commerce Department’s Bureau of Industry and Security, BIS, https://www.bis.doc.gov/

State’s  Directorate for Defense Trade Controls, DDTC, https://www.pmddtc.state.gov/

and Treasury’s Office of Foreign Assets Control, OFAC, https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx

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. 

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.

ECRI is Bringing Change for the Aerospace and Defense Industries

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

Fighter-Jet

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

U.S. Department of State - Settlement Summary

on Tuesday, 28 May 2013. Posted in ITAR

United Technologies Corporation

The attached is a summary of the U.S. State Department Resolution of the United Technologies Corporation Arms Export Control Enforcement Case. John Priecko authored the summary of the State Departments settlement with UTC. The summary provides details on the five-hundred and seventy-six (576) alleged violations of the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR) for unauthorized export and transfer of defense articles, to include technical data (TD), and unauthorized provision of defense services to various countries, including proscribed destinations.

Download Summary