ITAR compliance is a mission-critical task for defense suppliers

Story

May 25, 2012

Producing embedded electronics for military applications requires that defense suppliers meet stringent environmental and performance standards on the design side so that the technology does not fail in the field. Compliance with U.S. export control regulations such as the International Traffic in Arms Regulations (ITAR) also is essential because failure to comply could lead to multimillion-dollar fines that could shut down their business completely.

ITAR and export compliance regulations have been around for decades, but the past decade has seen record fines and increased enforcement of export controls by the U.S. government. Contributing to this are companies that have little experience with export compliance looking to break into the steady military market to stem losses in more volatile commercial markets.

Also many experienced companies think they know the difference between a component that needs an ITAR license and one that does not or is classified as dual-use. “Dual-use has been used as a shorthand for describing items subject to the Export Administration Regulations (EAR),” says Kay Georgi, an export compliance attorney and Partner at Arent Fox LLP in Washington, D.C. Commerce in its proposed rule published July 15, 2011 “gave this definition: ‘A dual-use item has commercial applications and also has military applications or proliferation concerns.’”

Enhanced export compliance enforcement makes it tough for U.S. companies to do business abroad in the global economy and also frustrates foreign companies looking to sell to the U.S. or to resell systems that have components of U.S. origin. The Obama Administration is working on overall compliance reform across multiple agencies, but these reforms still have to be approved by Congress.

Export compliance reform

“The Administration continues to make great progress towards developing a single control list,” Georgi says. “To date, they have published proposed rules on: military aircraft; gas turbine engines; military vehicles; military vessels of war; submersibles; spacecraft through Report DoD 1248 from Departments of State and Commerce; and explosives and energetic materials, propellants, incendiary agents, and their constituents.”

“These proposed rules would move many U.S. Munitions List (USML) controlled items to the Commerce Control List under special 600 Series Export Control Classification Numbers (ECCNs) that will continue to require licenses to most destinations, although some items may benefit from license exception Strategic Trade Authority (STA) for end use by the governments of some countries,” Georgi says. “The proposed rules are still to be sent to Congress, and of course, they still do not combine the Commerce Control List (CCL) and the USML into a single list. Indeed, some would say the addition of the 600 Series to the CCL effectively creates two lists within the CCL, but still these are substantial steps towards export control reform. A U.S. government official recently went on the record stating that the Administration hopes to send the necessary reports for a number of the USML categories to Congress as soon as August 2012. It remains to be seen if this ambitious schedule can be kept, as a number of proposed regulations need to be sent out for notice and comment first, but it indicates that the Administration continues to press forward briskly even in an election year.”

Space export control policy reform: Section 1248 Report

The aforementioned Section 1248 Report is an effort by State and DoD officials working with the space industry to revamp space export control policy. Congress requested the report in Section 1248 of the National Defense Authorization Act for Fiscal Year 2010 (Public Law 111-84), according to a DoD release.

“In the DoD 1248 report, the Departments of State and Defense concluded that certain satellites and parts and components did not warrant continued control on the USML,” Georgi says. “More specifically: ‘Communications satellites (COMSATs) that do not contain classified components; remote sensing satellites with performance parameters below certain thresholds; and systems, subsystems, parts, and components associated with these satellites and with performance parameters below thresholds specified for items remaining on the USML.’”

“The current environment, which has rad-hard ICs covered under the ITAR, is destroying the satellite industrial base and is hurting the second- and third-tier suppliers,” says Chuck Tabbert, Vice President at Ultra Communications in Vista, CA, and a member of the President’s Export Council Subcommittee on Export Administration (PECSEA). “If the recommendations of the 1248 Report are implemented, it could mean that radiation-hardened ICs will move to the Department of Commerce with a special export commodity control number, which by utilizing the new STA exception could allow us to ship to 36 nations without having a license required.”

The Departments of State and Defense concluded that certain other satellites and parts and components did warrant continued USML control, such as satellites performing purely military or intelligence missions; remote sensing satellites with high-performance parameters; systems, subsystems, parts, and components unique to the aforementioned satellite types and not common to dual-use satellites; and services supporting foreign launch operations for USML- and CCL-designated satellites, Georgi says. To view the entire report, visit www.defense.gov/home/features/2011/0111_nsss/docs/1248_Report_Space_Export_Control.pdf.

Tabbert says the reform will enable “friendly countries to sell to other friendly countries without getting U.S. permission first. They would be able to sell to European satellite manufacturers of COMSATs like Thales and EADS Astrium, which support Inmarsat, Eutelsat, etc. Another implication is that it will strengthen relationships with foreign partners. The government is still concerned about working with China in the space area, and the 1248 did not recommend a change to that practice.”

The report essentially says that if even one U.S.-origin connector is on a European-made satellite exported to China, it would require a license and be denied, Georgi says. “A license would still be required under the ITAR for a U.S. person to provide any assistance to a foreign person for a spacecraft to be launched from outside the U.S., even if that spacecraft may be exported under License Exception STA. Launch services and launch failure analysis for the CCL satellites and parts also remain subject to the ITAR,” Georgi continues. “Since those selling spacecraft would normally need to provide some support for their launch, this effectively means that an ITAR license [presumably a Technical Assistance Agreement (TAA)] would still be needed to sell a U.S. CCL satellite to a non-U.S. or U.S. customer for launch outside the U.S.”

Enforcement trends

“We are beginning to see the fruit of the export enforcement portion of the export control reform initiative in the creation of three cross-agency enforcement units,” Georgi says. “How these coordination units will change the enforcement landscape remains to be seen, but I anticipate they will ensure a greater degree of coordination of efforts between the many agencies enforcing the export control laws.”

One key coordination unit is the Export Enforcement Coordination Center (E2C2), which is housed at Immigration & Customs Enforcement and is a clearinghouse for coordinating enforcement activities among the Departments of Homeland Security, Commerce, Energy, Treasury, State, Justice, and the Director of National Intelligence, she says. A second unit is the Information Triage Unit (ITU) in Bureau of Industry and Security that operates as a forum for assembling and disseminating information and intelligence gathered by agencies across the government so that individual export licensing agencies will have a consistent data set, Georgi continues. The third unit is the Office of the National Counterintelligence Executive (ONCIX), which coordinates export control issues involving the intelligence community.

“On the criminal side, I believe we are seeing greater crossover between export control cases and other cases, specifically in the areas of [the] Foreign Corrupt Practices Act (U.S. v. BAE Systems in 2010 and U.S. v. Shu Quan-Sheng in 2009) for ITAR Part 130 violations, the False Claims Act, and perhaps more than any other, the Economic Espionage Act (EEA),” Georgi continues. “While the EEA/export control prosecutions have largely targeted individuals, these have definitely been on the rise. In some cases, EEA prosecutions involve trade secrets that are not export controlled so there is not a perfect overlap between the two.” For more on ITAR penalties, see the Editor’s Perspective column on page 8.

A tough area for the government to enforce export violations is in cyberspace. Many small companies do not have the IT infrastructure to prevent access by unauthorized entities or persons, so “sophisticated intrusion attempts are on the increase, and some companies may choose to not report the attempt or actual intrusion, believing they may lose present or future business or create bad press,” says Dean Young, Celestica Aerospace Technologies Corp. Security Manager in Austin, TX. Cloud services also risk that controlled data will inadvertently be released to unknown entities or countries without proper authorizations. “We may never know the true extent of data loss in the U.S. involving controlled data and technology.”

Avoiding mistakes

Companies and individuals can avoid the attention of export compliance enforcement officials by avoiding some common mistakes. Many of the large prime contractors have strong compliance programs in place, yet individuals at those companies still slip up when it comes to the ITAR. (For steps to setting up a compliance program see Sidebar 1.)

 

Sidebar 1: Export compliance attorney Kay Georgi shares 15 tips for ITAR export compliance.

(Click graphic to zoom)

 

“Typical mistakes these individuals make include not paying enough attention to export compliance, as they are so busy with running the business they don’t devote the time necessary to analyze the export control issues associated with a particular transaction,” Georgi says. Another is that when an issue arises, they fail to consult legal counsel in-house or outside for assistance. “This is particularly an issue with respect to government inquiries, but it is also true in the case of ‘Oops, I think we may have made a mistake.’” A third error is when they assume “they know the export compliance rules and [proceed] without appropriate guidance. If the experts need to check and double-check their advice, the employee who has sat in on an hour of training should not be making the decisions. They need to troubleshoot and take it to the responsible company (empowered) official or legal department.”

Smaller companies and ones new to the defense market are also prone to easily avoidable ITAR compliance slip-ups. Georgi lists 10 of them:

1) Not realizing their work is subject to ITAR or EAR controls in the first place;

2) Not realizing that even if they do not export, they have to register as manufacturers if they manufacture defense articles in the U.S.;

3) Not knowing which of their projects are ITAR, either because they don’t ask the right questions or they don’t have the size or knowledge to obtain the necessary information from their (usually much larger) customers with ITAR projects;

4) Not realizing that even if they don’t export end product outside the U.S., they can be exporting ITAR-controlled technical data when they procure build-to-spec or build-to-print parts from foreign suppliers or even U.S. suppliers with foreign suppliers;

5) Not realizing that even if they don’t export end product outside the U.S., they can be exporting ITAR-controlled technical data when they employ foreign nationals on their ITAR projects;

6) Not devoting enough or the right resources to ITAR and EAR compliance;

7) Too much reliance on a single export compliance official or a fraction of an employee (too-many-hats issue) and not enough training to that person;

8) Not providing all the information needed for a complete and accurate license application;

9) Not following all the provisos/conditions and the regulations in general in exporting pursuant to a license; and

10) Not handling export compliance issues properly, causing them to become larger export compliance issues.