Complying with ITAR Requirements Amid Increased Enforcement Identifying Risks, Implementing an Effective Compliance Strategy, and Avoiding Inadvertent Violations

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WEDNESDAY, FEBRUARY 5, 2014

Presenting a live 90-minute webinar with interactive Q&A

Thaddeus R. McBride, Partner, Sheppard Mullin Richter & Hampton, Washington, D.C.

Hilary L. Hageman, Vice President & Deputy General Counsel, CACI International, Arlington, Va.

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FOR LIVE EVENT ONLY

Complying With ITAR

Requirements Amid Increased

Enforcement

Strafford Publications Webinar

February 5, 2014

Agenda

Importance of compliance

Overview of ITAR controls

Compliance best practices

Questions

5 5

Importance of Compliance

Maintain export privileges

Avoid penalties

Protect national security

Safeguard corporate reputation

6

Defense Exports

International Traffic in Arms Regulations (ITAR)

U.S. Department of State, Directorate of Defense

Trade Controls (DDTC)

Controls based on destination of item

All exporters / manufacturers must register

7 7

Coverage

Defense articles

– Any item specially / specifically designed or modified for a military purpose or space application

– Includes physical items and related technical data

Defense services

– Providing assistance to a foreign person in the U.S. or abroad in design, repair, use, etc. of a “defense article”

– Includes providing controlled technical data to a foreign person

8 8

No de minimis threshold

Any item containing any U.S.-origin ITAR

component is likely subject to ITAR

ITAR applies even if other country’s laws do too

• Example: Military aircraft engine manufactured in Japan includes an ITAR component

• Engine likely subject to both ITAR and Japanese controls

9 9

Technical Data

Information required for

– Design, development, production, operation,

maintenance, modification, etc. of defense articles.

– Includes information in many forms, including:

• Blueprints

• Drawings

• Photographs

• Plans

• Instructions

• Documentation

10

Technical Data Exports

Emailing design drawings to colleague in design

center in Bangalore

Delivering presentation containing controlled

technical data to audience of foreign persons

Discussing repair of a U.S.-origin defense article with your non-U.S. engineering manager

If disclosure occurs in the United States, it is treated like an export to person’s home country

11

Foreign Persons

Any non-U.S. person

– Not a U.S. citizen

– Not a LPR

– Not a protected individual under INA

– Not a U.S. government entity

12

Foreign Persons (cont’d)

Non-U.S. governments

International organizations

Corporations or organizations not incorporated or

organized to do business in U.S.

– May include U.S. person acting on behalf of non-U.S.

corporation (Arms Export Control Act, 22 USC 2778)

Any non-U.S. person wherever located

13

Embargoes

Approximately 30 countries currently subject to

U.S. arms embargo

Presumed denial for any export with company or

individual from embargoed country

Includes China and other trading partners

– Example: Chinese national researcher in Shenzen or

Chinese national graduate student interning in your lab

for summer

14

Export Control Reform (ECR)

Background

ECR initiative designed to

– Maintain ITAR controls on sensitive items

– Move less sensitive defense articles to EAR controls

Remember: The “R” in ECR is for “Reform” not

“Release”

16

600 Series

600 series of Export Control Classification

Numbers (ECCNs) created in Commerce Control

List (CCL)

– CCL forms part of Export Administration Regulations

(EAR)

– EAR administered by U.S. Commerce Department,

Bureau of Industry & Security (BIS)

– Very significant differences between ITAR and EAR

regimes

17

600 Series (cont’d)

600 series items still subject to controls for

– National Security

– Regional Stability

– Anti-Terrorism

– United Nations Embargo

This means that a license will usually be needed

to export such items

18

600 Series (cont’d)

New 600 series items are not eligible for any

de minimis threshold for U.S. arms-embargoed

destinations, including China

For all other countries, the EAR 25% de minimis

rule applies to 600 Series items

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Classification

Review revised USML to see whether item is

affirmatively listed

If not, review CCL category applicable to item

If not, review new 600 series in CCL category

20

Classification (cont’d)

600 Series items have a new appended letter:

– “.a” – “.w” for former ITAR items now specifically

enumerated in the EAR

– “.x” category for former ITAR items not specifically

enumerated in the EAR

– “.y” category for items not specifically enumerated,

but expressly removed, from the controls of the “.x”

category

21

Classification Example

You manufacture a tire for military aircraft

– Was USML Category VIII(h), “catch-all” of aircraft parts

Review that Category to see if the tire is

specifically listed

– Now VIII(h) is an express list, not including tires

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Example (cont’d)

So now refer to the 600 Series for aircraft

– ECCNs 9A610.a - 9A610.w list parts formerly in

Category VII(h). Tires are not listed

– ECCN 9A610.x is the catch-all for the 600 series

– ECCN 9A610.y contains a list of lesser-controlled items

• Aircraft tires are not listed as a 9A610.y item

– Military aircraft tires are now 9A610.x

23

USML Revisions

Revisions to 6 USML categories in effect:

– Cat VI: Vessels of War and Special Naval Equipment

– Cat VII: Tanks and Military Vehicles

– Cat VIII: Aircraft and Associated Equipment

– Cat XIII: Auxiliary Military Equipment

– Cat XIX: Gas Turbine Engines and Associated

Equipment

– Cat XX: Submersible Vessels, Oceanographic and

Military Equipment

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Compliance Best Practices

Value of Export Compliance Program

Reduces risk of civil and criminal liability

– Compliance programs count

– Charges take “adequate compliance systems” into

account

Culture of compliance viewed favorably in

government reviews

Mitigates reputational risks

Improves business prospects

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Best Practices - Culture

Culture of compliance and tone at top

– Senior management support is essential

– Ensures that compliance messages are adapted to

corporate culture

– Explains the importance of compliance to each

employee

– Emphasizes that there will be accountability for non-

compliance

27

Best Practices - Resources

Dedicate appropriate resources to compliance

– Policies, procedures, manuals, and other written

compliance guidance

• Legally accurate and complete

• Tailored to company and culture

• Updated regularly

• User friendly / practical

28

Best Practices - Infrastructure

Adequate and effective compliance infrastructure

– Dedicated compliance personnel

• Manage program

• Promote awareness

• Address routine questions

• Update senior management / Board regularly

– Maintain detailed records

• Required under the regulations

• Document transparent and consistent processes to

demonstrate commitment to compliance

29

Best Practices - Awareness

Training

– Legally accurate and complete

– Mandatory

– At hire and regularly thereafter

– Recorded

– Make user friendly

30

Awareness (cont’d)

Make awareness efforts count

– Tailored to company’s business

– Relevant to audience

– Keep it interesting with different formats

• newsletters, posters, internet banners, websites, posts,

blogs

Your best chance to reach personnel directly

31

Best Practices - Monitoring

Monitoring, auditing, evaluation

– Regular due diligence on transaction partners

– Periodic review of company’s processes

– Defensible system of reviewing potential issues

32

Best Practices - Accountability

Accountability and enforcement

– Equip personnel to spot “red flags”

– Expect them to report issues that arise

– Address and remediate any problems

– NO RETALIATION IN CASE OF GOOD FAITH

REPORT OF VIOLATION

33

Best Practices – Due Diligence

Why is diligence so important, e.g., how can it

be my / my company’s fault?

– ITAR §127.1(b) states the following:

“Any person who is granted a license or other approval under this

subchapter is responsible for the acts of employees, agents

and all authorized persons to whom possession of the

licensed defense article or technical data has been entrusted

regarding the operation, use, possession, transportation and

handling of such defense article or technical data.”

34

Due Diligence (cont’d)

Risks associated with third parties

– Diversion / re-export or re-transfers

– Bribes paid by or through a third party

– Unauthorized exports to foreign persons

Any of these can lead to violation by third

party AND you or your company

35

Due Diligence (cont’d)

Third Parties include:

– Sales Agents/Brokers/Advisors

– Distributors

– Freight Forwarders

– I.T. service providers

– Suppliers

• Domestic

• International

– Contract employee or temporary labor providers

– Customers (end-user)

– Translators

36

Due Diligence (cont’d)

Denied Party Screenings

Third party checklists and certification forms

– Domestic and foreign suppliers

– Freight Forwarders

Maintain an approved supplier list / database

with updated certifications

Ensure third parties are authorized by DDTC as

needed

37

Due Diligence (cont’d)

Request a copy of suppliers’ product

classification or CJs

Require end use certifications

Comprehensive Ts & Cs and Non-Disclosure

Agreements (NDAs)

38

Due Diligence (cont’d)

Audits of third parties: Due diligence should not

be completed solely at beginning of the process – Contract employee or temporary labor providers

– Freight forwarders

– Foreign subsidiaries

– Foreign customers

Due diligence should be done on all parties, in

various degrees depending on risk level

Maintain complete records of diligence activity

39

Best Practices - Audit

Objective assessments - completed by person(s)

not responsible for generating company revenue

Structure and define the audit scope

• Determine if the audit will focus on a specific program,

business area, business location or a hybrid model

• No surprises: schedule with audit criteria provided in

advance through checklist(s) and questionnaires

• Timely, detailed report with specific responsibility

assigned for corrective actions

40

Why We Comply

Raytheon (April 2013)

$8M settlement for ITAR violations

– Inaccurate tracking, valuation and documentation of

controlled hardware exports

– Manufacture of controlled hardware by foreign partners

in excess of the approved amounts

Create a great export compliance system

Follow your great export compliance system

41

Questions?

CONTACT INFORMATION

Hilary L. Hageman

CACI International

hhageman@caci.com

Thaddeus R. McBride

Sheppard Mullin Richter & Hampton

tmcbride@sheppardmullin.com

43

Thank You