- First State Department Enforcement Action of 2005: In the Matter of: The DirecTV Group Inc. and Hughes Network Systems, Inc.
- March 8, 2005
- Law Firm: Patton Boggs LLP - McLean Office
On January 26, 2005, the Department of State signed a Consent Agreement with The DirecTV Group and its wholly-owned subsidiary, Hughes Network Systems, Inc. The agreement and related compliance annexes are unique for a number of reasons, each of which continues to provide insight into the elements the Department considers important when pursuing export enforcement actions. Of particular note is that since 1998, this case appears to be the first time the Department has found a company in violation of a previously signed consent agreement and imposed penalties related to that violation. This brief summarizes some of the more salient points of this recent action.
The DirecTV Group and Hughes Network Systems were previously owned by the Hughes Electronics Corporation, that was owned by General Motors Corporation. In 2002, General Motors sold Hughes Electronics' Corporation's subsidiary, Hughes Space and Communications to The Boeing Company. At the time of the sale and afterwards, Hughes and Boeing were in negotiations with the Department of State over alleged export violations related to transfers of technical data and defense services to various Chinese entities. In March 2003, Hughes and Boeing signed a consent agreement with State that required a number of compliance measures, including the appointment of an objective, independent Special Compliance Official with specifically enumerated authorities and the payment of substantial penalties. A portion of those penalties was suspended to be used for implementing comprehensive compliance measures.
At the time of the discussions with State and ultimate settlement between Hughes, Boeing and the Department, the most recent draft charging letter alleges that Hughes Network Systems and DTV were conducting unauthorized exports of technical data and defense services to various proscribed countries, specifically China and India. The Department states that upon discovery of the potential violations, the company began an internal investigation, but did not immediately notify the Special Compliance Official of the discovery or the investigation. The company appears to have substantially completed its investigation, and then notified the SCO of the investigation and results. On May 6th, 2004, DTV and HNS met with their SCO and on May 10, 2004, the company submitted an initial notification to the Department outlining possible violations. One month later, the company submitted its voluntary disclosure on June 9, 2004.
On May 14, 2004, the Department of State imposed a policy of denial on all applications for export licenses or other approvals, whether directly or indirectly for, HNS, based on violations of the terms of the 2003 Consent Agreement. The Department decided that DirecTV and HNS violated the terms of the consent agreement signed in 2003 that required that the SCO be "kept actively engaged in overseeing all activities related to compliance" with ITAR, AECA and the consent agreement. (Emphasis added) The policy remains in effect through May 2005, although the company has been able to use its exemption authorizations.
After consideration of the companies' voluntary disclosure, and the expenditure of millions of dollars of legal fees by HNS and DirecTV, the two parties entered into a consent agreement on January 4, 2005. The consent agreement, order and draft charging letter are notable for a number of reasons and consistent with past settlements in other areas.
- The draft charging letter alleged violations over a 10 year period.
- The enforcement action arose from a voluntary disclosure submitted by the companies.
- The Department invoked the terms of the existing Hughes/Boeing consent agreement and alleged that the companies violated the terms of that agreement.
- The Department required Hughes to pay $1.5 million of the $2 million suspended compliance cost fine under the terms of the first consent agreement.
- The Department actually suspended the US companies' ability to obtain new export licenses for a one (1) year period.
- The Department debarred HNS' Chinese subsidiary for a 3-year period.
- The Department required HNS and DirecTV to remove their existing SCO and retain a new one.
The agreement is also notable for what it did not do. The Department did not:
- suspend or debar DirecTV or HNS from all licensing authorizations;
- impose an excessive fine for the apparent number of violations;
- choose the new SCO for the company;
- appear to have requested that the Department of Commerce suspend HNS' or DirecTV's EAR export privileges or that HSN'/DirecTV's ability to contract with the government be affected; or
- affect the ability of the law firms who provided the questioned legal advice to practice before the Department.
The Department has signaled through this settlement its interest in enforcing the terms of existing settlement agreements. Companies whose agreements remain in force should ensure that any compliance with those agreements is well-grounded in supportable legal interpretation and if assertive, reviewed with the Department, within the appropriate context.
CONSISTENCY WITH PAST SETTLEMENT AGREEMENTS
Although notable in the manner mentioned above, much about this settlement is consistent with past agreements and the Department's approach to enforcement:
- A fine was imposed;
- An SCO was required;
- The US company was not debarred or otherwise suspended;
- An audit is required;
- No part 128 action occurred; and
- The Department issued a draft charging letter on the basis of a voluntary disclosure submitted by the company.
The notable factors discussed above and the consistent terms of this agreement with past enforcement actions highlight the need for:
- competent legal advice when interpreting existing consent agreements and more so when negotiating the terms of agreements with the Department;
- strong skills when conducting an investigation on behalf of a company to determine the true nature of violations; and
- knowledgeable personnel to deal with the Department to ensure a high degree of credibility when addressing violations.
As the first case settled in 2005, the DirecTV/HNS matter continues to demonstrate the State Department's resolve to enforce the AECA and the ITAR. The case also highlights, however, the lack of resources within the Department to pursue cases that are not brought to them in a voluntary disclosure context. Hughes and HNS were subject to review by the Departments of Justice and State on matters which led to the 2003 settlement. The question remains, had DirecTV and HNS not voluntarily disclosed the matter, would the Department have discovered it through U.S. Government channels?