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400,000 Reasons to Remain Vigilant About ITAR Compliance

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Jean G. Schtokal
Foster Swift Business & Tax Law News
March 11, 2019

In the latest reminder of the importance of complying with the International Traffic In Arms Regulations (ITAR), an Arizona company recently reached a $400,000 settlement with the U.S. government after self-reporting an ITAR violation. The settlement agreement, which is reflected in the first consent agreement related to an ITAR violation posted by the U.S. Department of State, Directorate of Defense Trade Controls (DDTC) in 2019, identified a number of violations that resulted in the fine.

An ITAR Overview

ITAR controls the export and import of defense-related articles and services on the United States Munitions List. It applies to manufacturers, exporters, and brokers of defense articles, defense services, or related technical data. ITAR, which is part of a larger regulatory framework,  is in place to protect national security and prevent sensitive information and technology from falling into the wrong hands. ITAR can apply even if a company is not engaged in any exporting activities—merely performing certain activities in the U.S. can trigger ITAR registration obligations.

The stakes of noncompliance are high. Violations can result in criminal penalties of up to 20 years imprisonment, as well as significant fines, denial of export privileges, mandatory increases in staffing, independent monitors and regular external audits. To avoid these consequences, it’s important for businesses that are part of the defense industry—even tangentially—to establish and maintain an ITAR/export compliance program that is documented in writing, tailored to the business’ unique set of circumstances, frequently reviewed, and endorsed and supported by management.

As Darling Industries, Inc., the Arizona company that was party to the recent ITAR consent agreement, learned the hard way, failure to maintain strict control and oversight over ITAR compliance can cost you.

The Consent Agreement

Darling Industries primarily manufactures defense articles and also has a non-defense aerospace business that manufactures and sells industrial products. The company manufactures for the domestic market and also exports overseas.

The ITAR violations at issue came to light as a result of a self-initiated compliance program review that started in 2014. It was determined that over a period of decades, Darling Industries made numerous unauthorized exports for which the company failed to obtain or attempt to obtain the proper licenses and there was no documented export compliance program or method to determine the export jurisdiction of the products it sold. In addition, export control compliance was left to staff that was not trained, and the company relied on personal knowledge or customer information to determine whether the items they manufactured and/or exported were ITAR-controlled and required prior governmental approval for export. Finally, the company relied on foreign customers for advice on license requirements.

Some of the issues that impacted the outcome of the matter included the fact that the company had little internal oversight over its export controlled activities, including:

  • Failure to have a classification system for export controlled articles and technology
  • Failure to obtain the necessary U.S. government licenses and approvals before exporting
  • Lack of qualified personnel and misclassification of items for export
  • Lack of ITAR compliance training
  • No documented export compliance program
  • No qualified Empowered Official, as required under the ITAR for all ITAR-registered entities
  • Failure to comply with the terms and conditions of authorizations and the ITAR when it did receive U.S. government licenses or approvals

The Consent Agreement lasts 18 months and requires the president of the company to act as an internal special compliance officer to oversee ITAR compliance, to supervise and verify export classification of all items it manufacturers, and to perform a compliance audit conducted by an outside counsel or consultant with ITAR expertise that DDTC has to approve. The audit plan and report have to be approved by DDTC, and a corrective actions report has to be submitted. Of the $400,000 fine, $100,000 was due immediately, another $100,000 will be due within 18 months, and the other half of the fine was suspended on the condition that the money be used for remedial compliance measures approved by DDTC. 

You can learn more about these violations and their resolution by reviewing the related Charging Letter, Settlement Agreement, and Order.

Conclusion

ITAR is a complex regulatory framework and, as you might imagine due to the national security concerns that it is meant to address, the penalties for ITAR violations can be severe. Legal liability and business risk can result when companies don’t understand if, how and/or when ITAR applies to their business. Working with experienced legal counsel to identify risks and to design an effective compliance program is a sound strategy to understand and fulfill your obligations under ITAR.

ITAR compliance will be the topic of a full day program sponsored by the Michigan Economic Development Corporation that Foster Swift will be presenting on May 9, 2019 in Traverse City, Michigan. Registration can be found at https://MEDC.cvent.com/export2019.