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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
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
Thaddeus R. McBride
Sheppard Mullin Richter & Hampton
43
Thank You