Complying with the ITAR: A Case Study (WS933)

http://spie.org/x1139.xml?course_id=E0913260

27 January, 2010 in San Francisco – 1:30-5:30pm

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SHINING A LIGHT ON U.S. EXPORT CONTROLS

Webinar Presented on behalf of SPIE

November 12, 2009

Kerry T. Scarlott, Esq.Posternak Blankstein & Lund LLP

kscarlott@pbl.com617.973.6272

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PRESENTATION TOPICS

• Overview of the Principal U.S. Export Controls Laws and Regulations

• What is an Export? – Check your logic at the door

• Determining which Control Regime Applies– Why you need to know

• Overview of EAR / ITAR• Enforcement – Lessons Learned• Best Practices

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PRINCIPAL EXPORT CONTROL LAWS AND REGS

• Export Administration Regulations– Governs export of commercial and “dual use” commodities, software, and

technology on Commerce Control List (“CCL”)– Administered by Bureau of Industry and Security, Dept. of Commerce

(“BIS”)• Arms Export Control Act and ITAR

– Governs export of defense articles, services and technical data on United States Munitions List (USML)

– Administered by Directorate of Defense Trade Controls, Dept. of State (“DDTC”)

• Office of Foreign Asset Control (OFAC), Dept. of Treasury– OFAC regs bar transactions (incl. exports) involving embargoed countries

or designated individuals and entities (“SDN list”)– Apply to exports under both ITAR and EAR

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WHAT IS AN “EXPORT”?

• Any oral, written, electronic or visual disclosure, or any shipment, transfer or transmission outside the United States to anyone, including a U.S. citizen, of any commodity, technology or software– Except mere travel by a person with knowledge of technical data

• Any oral , written, electronic or visual disclosure, transfer ortransmission to any person or entity of a commodity, technology or software with an intent to transfer it to a non-U.S. entity or individual, wherever located (including within the U.S.)

• Any transfer of these items or information to a foreign embassy• Additional specific acts are covered under the ITAR (e.g., performing

a defense service for a foreign person, whether in the U.S. or abroad)

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DON’T THINK YOU ARE “EXPORTING?” THINK AGAIN . . .

• Deemed Exports (a.k.a. “exports in the hallway”)• Release of technology or source code to a “foreign person” / “foreign national” within

the U.S. is considered an export to that person’s home country• Deemed export rule covers virtually any means of communication to a foreign person

– Face to face– Telephone– E-mail– Fax– Sharing of computer files– Visual inspections– Site tours

• Also includes re-exports (e.g., communications to a foreign national abroad of U.S. origin technology legally exported from the U.S. in the first place)

• Applies to foreign customers, employees, interns, contractors, visitors

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OVERVIEW OF THE EAR

• Licensing is product and circumstance specific• Self Determine / Obtain CCATS

– ECCN in categories 0 through 9 and EAR99– Common Misconception: HTC = ECCN

• A license is required if the product is classified under an ECCNon the CCL and an “x” is present in the relevant column in the Country Chart

• EAR99 � “License Not to Care”

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OVERVIEW OF THE EAR (cont’d)

• General Prohibitions Always Apply (even if EAR99)– Embargo – Shipping to or via a listed person or entity– Shipping via a restricted country – Prohibited end-use

• chemical / biological / nuclear / missile

– Export with knowledge that a violation will or may occur (beware red flags)

Denied Persons ListUnverified ListEntity List

REPRESENTATIVE CCL CATEGORIES APPLICABLE TO OPTICS / PHOTONICS

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• Cat. 0 - Nuclear and Miscellaneous (e.g., certain firearm sighting devices, etc.)

• Cat. 1 - Materials (e.g., stealth technology and materials, certain coatings, etc.)

• Cat. 3 - Electronics (e.g., optical integrated circuits, etc.)

• Cat. 6 - Sensors and Lasers (e.g., imaging devices, image intensification tubes, optical detectors and sensors, photocathodes, focal plane arrays, lasers, etc.)

• Cat. 7 - Navigation and Avionics (e.g., accelerometers, gyros)

CCL categories are broken down into subcategories as follows:

A - Systems, Equipment and Components

B - Test, Inspection and Production Equipment

C - Materials

D - Software

E - Technology

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OVERVIEW OF THE ITAR

• The ITAR governs exports of:– Articles listed on the USML (including parts, components, attachments,

and accessories specifically designed, developed, configured, adapted or modified for military application or for use in or with listed article)

– Technical data related to listed articles– Defense services

• Also governs temporary imports of defense articles (permanent imports governed by ATF regulations

• Unlike under the EAR, a license or DDTC approval is almost always required

• Registration requirements (including brokers)• Beware embargoes / policy to deny

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REPRESENTATIVE USML CATEGORIES APPLICABLE TO OPTICS / PHOTONICS

• Cat. I - Firearms (e.g., certain firearm sighting devices, etc.)• Cat. X - Protective Personnel Equipment and Shelters (e.g., goggles, glasses

or visors designed to protect against certain lasers or thermal flashes, etc.)• Cat. XI - Military Electronics (e.g., imaging radar systems, etc.)• Cat. XII - Fire Control, Range Finder, Optical and Guidance and Control

Equipment (e.g., aiming devices, infrared focal plan array detectors, image intensification tubes, sensors, accelerometers, gyroscopes, etc.)

* Includes specifically designed parts, components, etc., of covered articles.

** Related technical data and defense services are covered.

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ITAR CONTROLLED “TECHNICAL DATA”

• Information required for the design, development, production, maintenance, repair or modification of defense articles

• Classified information related to defense articles and services

• Tangible articles (e.g., models, mock-ups) that convey controlled technical data

• Information subject to an invention secrecy order• Software directly related to defense articles• Note “public domain” exception

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ITAR CONTROLLED “DEFENSE SERVICES”

• Providing Foreign Persons, whether in the U.S. or abroad, with:– Assistance (incl. training) in the design, development, repair,

maintenance, modification or use of defense articles– Technical data controlled under ITAR

• ITAR applies to service even if all technical data used to perform service is in public domain or otherwise exempt from ITAR requirements– Line can be fuzzy (public domain ���� best way to do something)

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TYPES OF ITAR EXPORTLICENSES

• Permanent Export License (DSP-5)– Used for most hardware exports subject to ITAR

• Temporary Export License (DSP-73)– Item must be returned within 4 years / no transfer of title

• Technical Assistance Agreement (“TAA”)– Used for ongoing exchange of technical information or provision of

defense service / Deemed exports– Assembly OK, but not production rights or manufacturing know-how

• Manufacturing Licensing Agreement (“MLA”)– Used to authorize manufacture of defense articles outside the U.S. or with

foreign persons (machiladoras)– Production rights and manufacturing know-how (compare TAA)

• Others (e.g. Distribution Agreements)• DDTC license application response times are long – Plan Ahead

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ITAR LICENSING EXEMPTIONS

• Limited in number and scope– e.g., Canadian Exemption

• Beware technical requirements– e.g., notations on shipping documents, understandings with foreign

parties, record-keeping

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ARMS EMBARGOES, ETC. UNDER THE ITAR

• A variety of countries are subject to special restrictions:– Embargoed countries: Burma, China, Haiti, Liberia, Somalia, Sudan and

Venezuela– Policy to deny: Afghanistan, Belarus, Congo, Cuba, Iran, Iraq, Libya, North Korea,

Rwanda, Syria and Vietnam (note exceptions and case-by-case review)– Designated terrorist states: Cuba, Iran, Libya, North Korea, Sudan and Syria– United Nations Security Council embargoes

• Exemptions do not apply• Includes prohibitions on making “proposals” without prior approval• Duty to report (“Whistleblower”)

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RECORD-KEEPING (EAR & ITAR)

• 5 year rule• Records concerning:

– manufacture, acquisition and disposition of defense articles

– license applications and licenses– tech development contracts– sales contracts– transfer and shipping documents

(incl. SED / AES)– material correspondence– political contributions, fees or

commissions

• Originals or certain electronic files

APPLICATION OF U.S. LAWABROAD

• Applicable to U.S. persons wherever located• Applicable to U.S. origin products (de minimus rule

only under EAR)• Reexports• Services• Foreign subsidiaries

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CONSEQUENCES OF NON-COMPLIANCE

• Enforcement activity, including coordination of Federal agencies, has ramped up considerably since 9/11

• Penalty authority has increased exponentially since 9/11– Individual criminal and civil liability for unauthorized exports and for

misrepresentations• Fines up to $250,000 per violation of ITAR/EAR (higher in certain

circumstances) ($11k � $50k � $250k)• Fines up to $10,000 per violation of AES rules

– Seizure and forfeiture of attempted illegal exports– Corporate death sentences

• Export license suspension and debarment• Federal contract suspension and debarment

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IGNORANCE IS NO EXCUSE

• U.S. export controls are based upon strict liability --violations do not require specific intent

• U.S. businesses, individuals, owners, managers, and employees may be penalized for violating laws theydid not know they were violating or believed they were complying with fully

• Successors can be held liable whether or not they knew about predecessor’s missteps and despite any deal arrangements

ENFORCEMENT ACTIONS –LEARNING THE HARD WAY

• Enforcement activity has ramped up considerably in recent years

• New focus on sub tier suppliers• Establishment of Federal joint task forces• Illustrative enforcement actions

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HOW DOES THE GOVERNMENT FIND OUT ABOUT NON-COMPLIANCE?

• Disgruntled current or former employees or contractors

• Competitors• Distributors• SED / AES review program• Visa application review

program• Inspection of shipments• Post-shipment verifications• Voluntary disclosure

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BEST PRACTICES TIPS

• Know your customer / know yourself – all involved parties

• Determine regulatory jurisdiction• Determine CCL classification (if EAR) or USML

category (if ITAR)• Prepare written compliance plan / procedures

– Corporate Commitment and Policy (maximize export sales while ensuring compliance)

– Segregate EAR / ITAR– Detailed procedures, with checks and safeguards– Training / Awareness– Internal Monitoring / Audits

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BEST PRACTICES TIPS (cont’d)

• Use TAAs / MLAs as appropriate (if ITAR)• Review and update contract terms• Cooperation between contractor and DoD, etc. in

connection with contracts involving the U.S. Government

• Cooperation / communication between primes and sub-primes

• Use exemptions when appropriate

• Utilize voluntary disclosure mechanism

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“Don’t curse the darkness –light a candle.”

-- Attributed to Confucius, among others

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NEED HELP?

Kerry T. Scarlott, Esq.Posternak Blankstein & Lund LLP

Prudential Building800 Boylston StreetBoston, MA 02199

T 617.973.6272C 617.823.9069F 617.722.4912

kscarlott@pbl.com

Engaging in the ITAR discussion

• Beyond Fortress America – 2009 Report from the National Academies. (exec. summary)

• Need for “sensible decisions by technically oriented people” on committees– DoD tech. working groups, DoC tech. advisory com– Bureau of Industry & Security TAC

• American Competitiveness Initiative – Gov. to review policy that hinders growth

• H.R. 2410 – transfer satellite controls from DoStateback to DoCommerce. In committee…