• DDTC Enforcement Actions on the Rise -- Do You Have a Compliance Program In Place?
  • June 23, 2004 | Authors: Karen R. Harbaugh; Brooke S. Horiuchi; Ritchie T. Thomas
  • Law Firms: Squire, Sanders & Dempsey L.L.P. - Tysons Corner Office ; Squire, Sanders & Dempsey L.L.P. - Washington Office
  • Increased Enforcement
    The Directorate of Defense Trade Controls (DDTC) recently announced that it will increase the number of enforcement actions against companies subject to the International Traffic in Arms Regulations (ITAR). In particular, DDTC intends to increase the number of end use checks from 413 to 500. To this end, DDTC has increased the number of people assigned to its compliance office and the number of intended compliance visits to exporters.

    Additionally, the DDTC reorganized its compliance section by creating three divisions -- enforcement, compliance and registration, and research and analysis. The enforcement division is responsible for working with the Department of Justice in prosecuting criminal cases, handling administrative cases, and settling voluntary and directed disclosures. The compliance and registration division oversees voluntary disclosures, registration of exporters and conducting off-site visits to follow up on voluntary disclosures, inspect new exporters and target firms exporting ITAR items of particular concern to the Department of State (such as aircraft and missile parts). The research and analysis division manages the end-use monitoring program.

    Great Burdens Imposed on Exporters under ITAR
    The ITAR are strict and impose great burdens on an exporter. For example, not only must the exporter obtain a license to export defense articles or services, but the exporter must also register with and obtain permission from DDTC before engaging in any munitions manufacturing, exporting, importing, or brokering. All items listed on the United States Munitions List (USML) will require a license for export to most destinations with certain exceptions.

    Licenses are also required to provide defense services (i.e., training non-US military personnel), or to enter into technical assistance agreements or manufacturing license agreements relating to defense articles and services, even if no article or technical data are exported. A non-US importer of a "significant military item" on the USML must execute a Non-Transfer and Use Certificate as a precondition for a US license to export that article. ITAR exemptions from license requirements are less liberal than those found in the Export Administration Regulations (EAR). For example, there is no de minimis exception for US content in a non-US-made item.

    The ITAR also have extraterritorial application to the re-export or retransfer of a defense article from one country to another country, from one end user to another end user, or for a different end use. A re-export or retransfer is defined under the ITAR as the transfer of defense articles or defense services to an end use, end user, or destination not previously authorized by DDTC. When a defense article is shipped to a non-US end user under a license granted by DDTC, the written approval of DDTC must be obtained before reselling, transferring, transshipping or disposing of the article, either in its original form or after being incorporated into other end items, to another destination, end user or for a different end use. The non-US end user is put on notice of this requirement by a destination control statement that is included on the invoice and the bill of lading. Either the US person who made the original export, or the non-US recipient under the DDTC license, can request approval for the re-export or retransfer of the defense article. If the US person does not request such approval, the non-US recipient is still under obligation to request approval from DDTC prior to re-export or retransfer.

    Penalties for violations of the ITAR can be severe, including imprisonment, monetary fines and debarment from participating in the import or export of defense articles or services. However, given the serious national security concerns associated with violations of the ITAR and the Arms Export Control Act, the penalties for such violations tend to be much more severe than for violations of the EAR.

    Compliance Program
    One way to avoid a possible enforcement action by DDTC is to have a comprehensive export controls compliance program in place. This compliance program should consist of the following two elements:

    1. Statement of Corporate Policy issued by senior management which should include:
      • A statement that company policy is to comply with export control laws and regulations
      • An explanation of the basic purpose behind export control laws
      • A directive to employees to comply with export control laws and regulations
      • An outline of the potential penalties for failing to comply with export control laws, and
      • An identification of the employees responsible for export control compliance in the company.

    2. Export Compliance Manual, which should include:
      • A description of the company's defense articles and services that are on the United States Munitions List
      • An outline of the regular training program for employees involved in areas touched by export controls
      • The procedures for screening customers, consignees, end use, countries, purchase orders and sales against the export control lists, and how to deal with any red flags that arise
      • A description of an internal audit program
      • The reporting mechanism for employees who suspect export control violations may be occurring, and
      • The record-keeping requirements.

    Any compliance program should be individually tailored for your particular company.