Complying with ITAR Requirements Amid Increased Enforcement - - PowerPoint PPT Presentation

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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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
• rganized 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

19

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

22

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

24

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

26

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