export controls for government contractors

Export Controls for Government Contractors

October 22, 2019

Johny Chaklader, Esq.

Practice Lead, Export Controls & International Trade Director, Industry Specialty Services Group – Government Contracts

OverviewRegulatory Framework

Export of Defense Articles, Defense

Services, and Technical Data

Arms Export Control Act / Export Control Reform Act

International Traffic in Arms Regulations

(ITAR)

U.S. State Dept. Directorate of Defense Trade

Controls (DDTC)

Export of Dual Use Commodities and

Technical Data

Export Administration Act

Export Administration

Regulations (EAR)

U.S. Department of Commerce, Bureau

of Industry and Security (BIS)

For purposes of U.S. export control laws, the term “export” covers a broad range of activities that include the export of products, services or information.

In general, an export occurs when there is any transfer to any non-U.S. person, either within or outside of the U.S., of controlled commodities, technology, or software, by physical, electronic, oral, or visual means.

What is an “export?”

Examples:

Physical Movement

• Sending a part by U.S. mail or a with a freight forwarder (such as Federal Express)

• Carrying an item in carry-on luggage out of the country


Examples:

Transferring Technical Data or Disclosing Technology (“Deemed Export”):

Disclosing controlled technology (including oral or visual disclosure) or transferring controlled technical data, to a non-U.S. person, whether in the United States or abroad.

Any exchange of information (e.g. telephone conversations, technical proposals, fax communications, e-mails and other electronic communications, the sharing of computer databases, briefings, or training sessions.)


Examples:

Providing a Defense Service (§ 120.9)

– Furnishing of assistance (including training) to foreign persons, whether in the United States or abroad in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles;

– Furnishing to foreign persons of any technical data controlled under this subchapter (see §120.10), whether in the United States or abroad; or

– Military training of foreign units and forces, formal or informal instruction of foreign persons in the United States or abroad


22 CFR 120.3

• Specifically designed, developed, configured, adapted or modified for a military application [on USML]

• Does not have a predominant civil application

• Does not have performance equivalent (defined by form fit or function) to those articles used in civil applications

Intended end use (civil or military) after export is not relevant in determining whether item is subject to ITAR controls*

What is a “defense article?”

Term “defense articles” includes (22 CFR 120.6) “technical data” stored or recorded in an physical form, including:

• Models

• Mock-ups

• Other items that reveal technical data directly relating to items on USML

Excludes basic marketing information on functions, purpose, or general systems descriptions

What is a “defense article?”

Technical data (22 CFR 120.10) is

Information required for the:

• Design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles.

• Includes information in the form of blueprints, drawings, photographs, plans, instructions or documentation.

• Software includes but is not limited to the system functional design, logic flow, algorithms, application programs, operating systems and support software for design, implementation, test, operation, diagnosis and repair.

See 22 CFR 121.8(f)

What is “technical data?”

S/he has a non-U.S. passport

Exception: Green Card = Treated as US citizen

NO Green Card = Treated as a foreign person regardless of visa status (H1B visa, business visa, student visa, no visa)

What is a “foreign national?”

ITAR United States Munitions List (USML)22 C.F.R. § 121.1

EAR Commerce Control List (CCL)Supp. No. 1 to Part 774

Is the “export” controlled?


Classification

1. Firearms, Close Assault Weapons and Combat Shotguns 2. Guns and Armament 3. Ammunition/Ordnance 4. Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs,

and Mines 5. Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their

Constituents 6. Surface Vessels of War and Special Naval Equipment 7. Ground Vehicles 8. Aircraft and Related Articles 9. Military Training Equipment and Training 10. Personal Protective Equipment 11. Military Electronics 12. Fire Control, Range Finder, Optical and Guidance and Control Equipment 13. Materials and Miscellaneous Articles 14. Toxicological Agents, Including Chemical Agents, Biological Agents, and Associated

Equipment 15. Spacecraft and Related Articles 16. Nuclear Weapons Related Articles 17. Classified Articles, Technical Data, and Defense Services Not Otherwise

Enumerated 18. Directed Energy Weapons 19. Gas Turbine Engines and Associated Equipment 20. Submersible Vessels and Related Articles 21. Articles, Technical Data, and Defense Services Not Otherwise Enumerated


Classification

If an assembly contains a part or component that is controlled under the ITAR, the whole assembly takes the ITAR character.

If an item is on the USML, parts and components that are specially designed for that item are likely also subject to ITAR.

In some cases, if the end item is on USML, parts and components may be listed on CCL and regulated under the EAR.

DSP-5- permanent export of unclassified defense articles and related

unclassified technical data. - also used for authorization for employment of a foreign national

in the US when those employees will have access to ITAR controlled technical data.

DSP-61- temporary import of unclassified defense articles into the United

States. - e.g. U.S. goods sold to a foreign owner being returned to the

United States for overhaul, repair, or an upgrade, would require this license if not exempt under 22CFR 123.4(a).

- Foreign manufactured defense articles for trade shows and demonstrations would also require this license type.

DSP-73- for the temporary export of unclassified defense articles subject

to ITAR. - Can be used for specific end users and public trade shows. - if demonstrations or marketing information will exceed public

domain information, a DSP-5 will also be required. - Technical data is not authorized under a DSP-73

ITAR Authorizations

DSP-85- for permanent export, temporary export or temporary import of

classified defense articles and related classified technical data.

Manufacturing License Agreement (MLA) - allows for the manufacturing of U.S. defense articles by a foreign person abroad.

Technical Assist Agreement (TAA)- an agreement for the performance of defense services or

disclosure of technical data. - Unlike a DSP-5, discussions regarding the technical data may be

held. - required for training of foreign military forces in use of defense

articles. - manufacturing "know how" is not permitted - authorization to manufacture U.S. defense articles by a foreign

person is not granted.

Distribution Agreement- agreement to establish a warehouse or distribution point abroad for

defense articles exported from the U.S. - distribution must be in an approved sales territory.

ITAR Authorizations

EAR Commerce Control List (CCL)Supp. No. 1 to Part 774

Classification

0 Nuclear & Miscellaneous1 Materials, Chemicals, Microorganisms and Toxins2 Materials Processing3 Electronics4 Computers5.1 Telecommunications5.2 Information Security6 Sensors and Lasers7 Navigation and Avionics8 Marine9 Aerospace and Propulsion

If an assembly contains a part or component that is controlled under the EAR, the whole assembly does not necessarily take on the EAR character.

EAR Commerce Control List (CCL) ECCN

Export Control Classification Number

Classification

EAR Commerce Control List (CCL) ECCNCommerce Country Chart (Supp. 1 to Part 738)

Reasons for Control

Applications

Office of Foreign Assets Control (OFAC)• U.S. Department of the Treasury

• Administers country-specific economic and trade sanctions that often include restrictions on most or all transactions with and exports to targeted countries and persons.

• Generally, sanctions restrict or attempt to limit commercial engagement with targets by both US persons and non-US persons in furtherance of a foreign policy objective.

• U.S. entities and their foreign subsidiaries/affiliates may be required to obtain authorizations from the U.S. government before they engage in certain commercial transactions with targeted parties.

• Supplier / Third Party Vetting for Specially Designated Nationals (SDN) List, Iran, Russia, Venezuela, etc.

ITAR• civil = up to $1,000,000 per violation• criminal = up to $1,000,000 and/or 20

years of imprisonment

EAR• civil = up to greater of $300,000 or 2x

transaction value per violation• criminal = up to $1,000,000 and/or 20

years of imprisonment.

OFAC (vary by program)• civil = generally, up to $250,000 per

violation, • criminal = generally, up to $10,000,000

and/or 30 years of imprisonment.

Penalties

Recent ITAR Enforcement Actions

Recent EAR Enforcement Actions

Recent OFAC Enforcement Actions

$3,504,533.00

$772,442,861.00

$200,735,996.00

$91,650,055.00

$1,139,158,727.00

$137,075,560.00

$1,209,298,807.00

$599,705,997.00

$21,609,315.00

$119,527,845.00 $71,510,561.00

$1,278,349,451.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Government contractors often:• Did not realize that their activities required an

authorization, • Lacked adequate training on export and sanctions

requirements, and/or • Failed to appoint compliance personnel with adequate

knowledge or institutional decision-making authority to implement effective controls.

• Often they did not have compliance policies and procedures in place and did not periodically stress test their compliance programs.

• Companies that interfaced with third party vendors, suppliers or partners failed to have consistent compliance measures to govern inter-party liability.

• In some cases, the excessive delay in submitting voluntary disclosures from the date of discovery also served as a penalizing factor.

Trends

• Be proactive and not reactive. • Have a well-documented and standardized approach to

deciding whether and to what extent the requirements apply to your activities.

• Companies engaged in international activities must pay special attention to foreign supply chain integrity and third party due diligence.

• Have systematic methods to perform due diligence on employees and third parties that support the company’s domestic and international operations.

• Periodically examine business processes and identify which among them potentially interface with requirements arising under the ITAR, EAR, and OFAC programs.

• These periodic reviews should be done in concert with a review of existing contracts. Know which of your contracts include FAR and DFARS clauses that explicitly or implicitly reference U.S. export controls and sanctions requirements, and what types of commercial notice or liability provisions are triggered thereby. These requirements must be monitored.

Strategies

• Have in place policies and procedures that account for specific business activities and the requirements of the ITAR, EAR and OFAC programs.

• The policies and procedures should demonstrate a clear commitment to compliance from top management.

• A compliance official who has the knowledge and power to implement decisions must be appointed as an Empowered Official (EO).

• The EO must have cross-functional visibility and must be supported by management in carrying out their role.

• Periodic stress tests are needed to verify whether compliance protocols are working as intended, and to identify instances where improvements are necessary.

• A company must put in place measures that are specifically responsive to the compliance issues identified.

Compliance Strategies

Compliance Strategies• Process enhancements must be communicated to all

affected personnel. • Periodic training for employees, contractors, and a well-

documented record of attendance at such training is critical.

• If compliance gaps are identified, the company must decide whether to disclose.

• Disclosing potential non-compliance must be done with care and in close coordination with the company’s legal team.

• A defense services provider must be forthright and cannot mislead the government.

• The company must have supporting evidence for any facts it discloses.

• Often, the endeavor to correct a misstatement can be more problematic than the misstatement itself. Words matter and timing is key.

Thank You!

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