ITAR BOOTCAMP

A Hands-On Workshop June 12, 2008

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Topics for Today

1. Overview of Export Controls & ITAR Terminology

2. Classification of Items Under the ITAR

3. ITAR License Exemptions

4. ITAR Licensing

5. Deemed Exports and Technology Security

6. ITAR Enforcement & Voluntary Disclosures

7. ITAR Compliance Program Elements & Best Practices

1. Overview of Export Controls & ITAR Terminology

Holland & Knight LLPTel: 202-828-1870E-mail: jonathan.epstein@hklaw.com

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Goals for this Training

By the end of this training, you should have:

• Basic Understanding of the U.S. export regulatory environment for defense goods and services

• Understanding of when and how items become “military” items subject to the International Traffic in Arms Regulations

• Basic Understanding of ITAR exporting processes

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International Activities

• Export controls are only one element of international business

• Foreign Corrupt Practices Act

• Anti-Boycott restrictions

• Foreign country import requirements:

– Standards (CE marking)

– Duties

• Intellectual Property protections

• Government Contracting issues

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Relevant Agencies and Regulations

• Department of Commerce

– Bureau of Industry and Security (BIS)

• Department of State

– Directorate of Defense Trade Controls (DDTC)

• Department of Defense

– Defense Technology Security Administration

• Department of the Treasury

– Office of Foreign Assets Control

• Department of Homeland Security

– Customs and Border Protection

• Department of Justice

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Tight Restrictions on Defense Exports

• Separate licensing regime administered by State Department under International Traffic in Arms Regulations (ITAR)

• Covers most equipment/technology designed specifically for military use + satellite technology

– U.S. Munitions List

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Differences in Dealing with DDTC Versus BIS

• Generally all exports require licenses regardless of destination

• Licensing process has historically been slow

• Extensive export clearance and record-keeping requirements

• Considerably less access to licensing officers and information than with BIS

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Commercial “Dual-Use” Exports

• Administered by Commerce Department

• Covers all commercial products from tires to supercomputers and the related “technology”

• Complex classification system, but at end of the day:

– Most items can be shipped to most most countries without a license

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U.S. Embargoes

• Administered by the Department of Treasury Office of Foreign Assets Control (OFAC)

• Administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals

• Bars virtually all transactions (direct or indirect) with certain embargoed countries including:

– Cuba

– Iran

– (Syria)

– Sudan

– (North Korea)

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Anti-Boycott Regulations

• U.S. business cannot participate directly or indirectly in Arab League boycott of Israel

• What to Look for (typically in contract/bid documents):

– Terms requiring TRC to refuse to do business with Israel or black listed companies

– Request for information on race, religion, national origin of officers or employees

– Negative certificate of origin

• Mandatory reporting requirements, even if TRC doesn’t enter into contract or changes terms

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Foreign Corrupt Practices Act

• Prohibits U.S. business and persons from directly or indirectly bribing foreign officials to obtain business from the country

– Justice Department very aggressive in investigating violations, high penalties

– Arises in contracting with foreign governments, governmental entities

– Watch out of for extraordinary commissions paid to middleman, broker in country

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Restricted End-Users/End-Uses

• ITAR prohibitions

• U.S. embargo prohibitions

– Cuba, Iran, Syria, Sudan, (North Korea)

• Various Government Lists

– Specially Designated Nationals (SDN) List

– Denied Persons List (DPL)

• Restricted End-Uses

– China military end-use rule

– Weapons of mass destruction

– Nuclear end-uses

– Missile development

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International Traffic in Arms Regulations 22 C.F.R. Parts 120-130

• ITAR Part 120 - Purpose and Definitions

• ITAR Part 121 - The United States Munitions List

• ITAR Part 122 - Registration of Manufacturers and Exporters

• ITAR Part 123 - Licenses for the Export of Defense Articles

• ITAR Part 124 - Agreements, Off-Shore Procurement and Other Defense Services

• ITAR Part 125 - Licenses for the Export of Technical Data and Classified Defense Articles

• ITAR Part 126 - General Policies and Provisions

• ITAR Part 127 - Violations and Penalties

• ITAR Part 128 - Administrative Procedures

• ITAR Part 129 - Registration and Licensing of Brokers

• ITAR Part 130 - Political Contributions, Fees and Commissions

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Defense Articles

• Any item (or technical data) designated on the U.S. Munitions List of the ITAR including technical data recorded or stored in any physical form, models, mock-ups or other items that reveal technical data directly relating to items designated on the U.S. Munitions List

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Technical Data• Information required for the design, development,

production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles under the ITAR or the EAR with respect to dual-use technologies.

• Technical data may take the form of a blueprint, plan, diagram, model, formula, table, engineering design, or specifications, as well as manuals or instructions written or recorded on other media or devices, such as disk, tape, or read-only memories.

• Also includes classified information related to defense articles or defense services and “software related to defense articles.”

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Defense Service

•The furnishing of assistance (including training or technical data) to a foreign person, whether in the United States or abroad related to a defense article or furnishing to foreign persons of any technical data controlled under the ITAR.

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Confusion in Definitions

• Some danger in ambiguous definitions

• Defense article includes technical data

• Defense service includes the provision of technical data

• Common sense generally prevails, but. . .

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An Export Is:• Exports from U.S. Territory

– Actual shipment or transmission of goods from the U.S. to a foreign country

– Transferring title or ownership to a foreign person (inside/outside the U.S.)

• Extra-territorial Transfers

– Re-export from one country to another

– Retransfers within a country

– Disclosure to a foreign person from a third country

• Export of Intangibles

– Disclosing technical data to a foreign person in the U.S. or abroad

– Performing a defense service for a foreign person in the U.S. or abroad

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U.S. Person and Foreign Person

A U.S. Person (Access To Unclassified):

– Is a U.S. citizen

– Holds lawful permanent resident status (green card)

– Is a “protected person” or “refugee” under the U.S. Asylum Program

A Foreign Person Is:

– A person who holds a student or work visa

– A U.S. Person representing a foreign government or company

– An employee of a company overseas facility

– A foreign government and its offices (i.e., embassies)

– An entity not organized to do business in the U.S.

No License Required

License Required

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#1 Transfers of Technology or Technical Data

Disclosing or transferring (by any means) export-controlled technical data (including software) to a foreign person, whether in the U.S. or abroad:

– Visits

– Telephone conversations

– Internet transfers (email)

– Web site postings

– Vendors and customers

– Includes employees in U.S. or international locations, consultants, long term visitors and contract employees

– Conferences, symposia, marketing meetings

– Faxes

– Proposals containing technical data related to defense articles

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Registration ITAR Part 122

• Any entity that manufactures or exports defense articles, or exports defense services or technical data

• Empowered officials must be designated in writing

• Registration process straight-forward

• Cannot apply for license unless you are registered

• Many defense contractors require their subcontractors to be registered

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Brokering – ITAR Section 129

• Anyone who facilitates the manufacture, export or import of defense articles “regardless of origin”

– Original purpose to prevent brokering of foreign made small arms by U.S. persons

– Covers financers, sales agents, both domestic and foreign

– Freight forwarders are excluded

– Separate registration and licensing requirements

• Generally if broker is registered and is identified in a licensed transaction, no separate authorization required

2. Classification of Items Under the ITAR

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What Is ITAR-Controlled?

• Unlike CCL, the US Munitions List is not inclusive

• Generally any item specifically designed for a military purpose

– Down to the smallest part

– Bare print circuit board

• “Look through” analysis – If any component is ITAR-controlled then the equipment is ITAR-controlled

• Also covers:

– Commercial satellites

– Some chemical precursors

– Energetic materials

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Classification Under the ITAR

• Classification will determine eligibility for certain license exemptions

• Classification will determine supporting documentation requirements

– DSP-83

• Classification will help determine if congressional notification is warranted for the export

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The United States Munitions List (USML)• I - Firearms

• II – Guns and Armament

• III – Ammunition/Ordnance

• IV - Launch Vehicles, etc.

• V - Explosives, Propellants, Incendiary Agents and Their Constituents

• VI - Vessels of War and Special Naval Equipment

• VII - Tanks and Military Vehicles

• VIII - Aircraft and Associated Equipment

• IX - Military Training Equipment

• X - Protective Personnel Equipment

• XI - Military Electronics

• XII - Fire Control, Range Finder, Optical and Guidance and Control Equipment

• XIII - Auxiliary Military Equipment

• XIV - Toxicological Agents and Equipment and Radiological Equipment

• XV - Spacecraft Systems and Associated Equipment

• XVI - Nuclear Weapons Design and Related Equipment

• XVII - Classified Articles, Technical Data and Defense Services Not Otherwise Enumerated

• XVIII – Directed Energy Weapons

• XIX - Reserved

• XX - Submersible Vessels, Oceanographic and Associated Equipment

• XXI - Miscellaneous Articles

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Category VI—Vessels of War and Special Naval Equipment.

*(a) Warships, amphibious warfare vessels, landing craft, mine warfare vessels, patrol vessels and any vessels specifically designed or modified for military purposes. (See §121.15.)

(b) Patrol craft without armor, armament or mounting surfaces for weapon systems more significant than .50 caliber machine guns or equivalent and auxiliary vessels. (See §121.15.)

*(c) Turrets and gun mounts, arresting gear, special weapons systems, protective systems, submarine storage batteries, catapults, mine sweeping equipment (including mine countermeasures equipment deployed by aircraft) and other significant naval systems specifically designed or modified for combatant vessels.

(d) Harbor entrance detection devices (magnetic, pressure, and acoustic) and controls therefor.

*(e) Naval nuclear propulsion plants, their land prototypes, and special facilities for their construction, support, and maintenance. This includes any machinery, device, component, or equipment specifically developed, designed or modified for use in such plants or facilities. (See §123.20)

(f) All specifically designed or modified components, parts, accessories, attachments, and associated equipment for the articles in paragraphs (a) through (e) of this category.

A. (g) Technical data (as defined in §120.10) and defense services (as defined in §120.9) directly related to the defense articles enumerated in paragraphs (a) through (f) of this category. (See §125.4 for exemptions.) Technical data directly related to the manufacture or production of any defense articles enumerated elsewhere in this category that are designated as Significant Military Equipment (SME) shall itself be designated SME.

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When Is a Warship no Longer Subject to the ITAR?

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Other Specific Sections Provide Additional Guidance

• Missile Technology 121.1

• Aircraft and related articles 121.2

• Chemical agents 121.7

• Military explosives and propellants 121.12

USML USUALLY CROSS REFERENCES ANNEXES WHERE APPLICABLE

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Section 121.8 Definitions

• End-item

– assembled and ready to use

• Component

– Only useful in connection with an end-item

– Component – item which is useful only when used in conjunction with an end-item

• Major component - required for function of end-item

• Minor component – assembled element of a major component

– Accessory/attachment are not necessary for function of end-item

• Rifle scope

• Firmware considered part of end unit

• Software if installed is part of defense article/if separate it is generally considered technical data

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Tactical Generator

• Category XIII Auxiliary Military Equipment

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Reading the USML

• Generally each Category has subcategory for:

– One or more categories of end-item

– Components, parts, and accessories specifically designed for that end-item

– Technical data and defense services

• Items with a “*” are Significant Military Equipment (SME)

– This may trigger congressional notification

– Restrict exemptions

– Dictate end-use certification

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Factors to Consider in Determining if a Product is controlled Under the ITAR

• Is it Specially designed for a military application

– No real consideration of civil equivalent or sophistication of item

• 1940s Swordfish torpedo bomber

• Standard coax cable with standard fittings made to order

• What is the Origin of the Product?

– Was the specific product originally designed for military or civil use?

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Additional Factors

• What is the predominant use? Who do you sell this particular product to?

• Does the Product have particular military characteristics?

– Tempest

– Radiation hardening

– MILSPEC standards

• Whether the item has a performance equivalent in terms of form, fit, and function similar to articles designed for civil use

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What do Third-Parties Say?

• How does OEM/prime contractor classify this?

• Does the Government Contract impose restrictions?

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Was It developed with DoD funding, or Under a Government Contract?Efficient, Low Emission Generator

Navy SBIR 2008.2 - Topic N08-105 MARCOR - Mr. Paul Lambert - sbir.admin@usmc.mil Opens: May 19, 2008 - Closes: June 18, 2008 N08-105 TITLE: Efficient, Low Emission Generator

TECHNOLOGY AREAS: Ground/Sea Vehicles

ACQUISITION PROGRAM: PM Expeditionary Power ACAT III. The technology within this topic is restricted under the International Traffic in Arms Regulation (ITAR), which controls the export and import of defense-related material and services. Offerors must disclose any proposed use of foreign nationals, their country of origin, and what tasks each would accomplish in the statement of work in accordance with section 3.5.b.(7) of the solicitation.

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Help in Classification

• DDTC Response Team

– (202) 663-1282

– DDTCResponseTeam@state.gov

– Response team is helpful on straight forward questions but woefully understaffed

• Very difficult to get licensing officer to respond to questions

• No “body” of interpretations

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Commodity Jurisdiction Determination

• Procedures available to submit request to determine if EAR or ITAR-controlled

• Lengthy process

• DDTC takes broad view of their jurisdiction

– Current fight with Commerce over demilitarized aircraft on civil registries

• Sometimes CJ is only option

• Must make full submission, as partial or misleading submission can have negative consequences

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How Do You Classify This?

• WWII Vintage DUK converted to carry tourists

– Cat VI(a) covers landing craft and amphibious warfare craft

• 121.15(a)(b)(2) deals with demilitarized amphibious warfare craft

-Cat VII(f) covers “amphibious vehicles”

• 121.4 if built on auto chassis and specially designed to meet military requirements

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Aviation Bomb Loader

• Cat VIII(h) . . . Ground support equipment specifically designed or modified for [military aircraft]

• Cat IV(c) . . . Apparatus for handling [bombs, missiles, rockets, torpedoes . . .]

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ITAR Jurisdiction Goes Beyond Military Equipment• Cat XV controls

– Commercial satellite and some related ground equipment

• Some space qualified parts

• Certain toxicological equipment and toxins

• Certain personal protection equipment

• Certain chemical agents

– Explosive/jet fuel

– Chemical warfare

• Chemicals and biologics need to check CCL and USML

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Panel Discussion and Q&A

3. ITAR License Exemptions

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ITAR License Exemptions

• Exemption permit the export or import without a specific license to accompany a particular shipment

• Many license exemptions

• Most are limited very limited

• Often have specific record-keeping/reporting requirements

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Most Useful Exemptions

• Canadian Exemption

• Special NATO countries + Australia, Japan, and Sweden exemption

• Foreign Military Sales (FMS)

• Exporting under TAA/MLA

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List of Exemptions

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More Exemptions

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Canadian Exemption

• Potentially useful tool for certain types of collaboration, but limited in scope:

• Excluded Categories:

– All classified defense articles, technical data, or services

– All defense articles, technical data, or services excluded by 126.6(b)(5)-21) including missile systems, firearms, nuclear systems and aircraft (not aircraft parts)

– Any export requiring Congressional Notification

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Canadian Exemption

• End-Use Limitations

– Defense articles must be for end-use by the Canadian Government or for return to U.S. (after processing in Canada)

– Technical data and defense services must be used for a Canadian or U.S. government program

- Ex: Canadian subcontractor making component for U.S. prime contractor on DoD Contract

• Limitation on Technical Data/Defense Services

– Limited to build-to-print, build-to-design, basic research, and maintenance

– Design review, engineering analysis excluded

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Canadian Exemption

• Canadian contractor must be registered with the Canadian Controlled Goods Directorate

http://www.cgd.gc.ca/cgdweb/text/index_e.htm

• Certificate of Agreement by Canadian Contractor to language in 126.5(c)

• Special record-keeping and export clearance requirements

• Semi-annual reports by U.S. exporter

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Canadian Exemption

• Canadian exemption most useful when:

– Established relationship with Canadian company

– Parent/subsidiary in Canada

– Canadian entity is providing goods on built-to-print basis:

• Bare circuit boards

• Even then return of defective boards/repairs, etc., may cause issues

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Special NATO+ Exemptions

• NATO countries + Australia, Japan, and Sweden

• NATO exception for preparing bids on U.S. DoD procurements

• NATO exception for maintenance, repair, overhaul of U.S. origin defense exports

• Impact is limited:

– Limited to “build-to-print” “build-to-design” and “basic research”

– Excludes design methodology, engineering analysis, and manufacturing know how

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Foreign Military Sales (FMS) Exemption

• FMS program is where U.S. Government acts as party to sale to foreign military, and U.S. exporter contracts with DoD entity, not foreign entity

• Exports of defense articles, technical data, and defense serves generally exempt if meet all requirements:

– Must be specifically identified within the scope of the FMS letter of offer and acceptance and implementing contracts/subcontracts, that is currently in effect

– DSP-94 Form accompanies shipment

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Exporting Under TAA/MLA

• Broad exemption in ITAR § 124.3 to export “Unclassified” technical data as authorized under an overarching TAA/MLA agreement

– Must be within scope of agreement

– Must file initial notice (Electronic DS-4071 once available on D-Trade)

– Comply with recordkeeping requirements

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Australia/UK Treaties

• When implemented will provide “Canadian exemption” type exemption

– Limited to specific items

– Limited to items for ultimate end-use by either the U.S. or treaty partner

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Using License Exceptions Correctly

• Improper use is source of violations

• Develop specific protocol for commonly used exceptions, don’t rely on general knowledge

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Panel Discussion and Q&A

4. ITAR LICENSING

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Registration is a Precondition to Licensing

• You must be registered before you can export under a license or under an exemption

– Different from EAR

– Factor in time for registration – it can take from 1 day to 1 year

– M# for manufacturer / exporter

– K# for broker

• For the export of unclassified defense articles, you must also register with D-Trade – allow at least a week

– DSP-5

– DSP-61

– DSP-73

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ITAR Licensing

• Identify Licensing Requirements

– Work with Export Control Officer

– Know the controls on your products or technology

• Always assume that export approval is required

• If licenses are needed – allow processing time

– at least 60 days

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DDTC Processing Times

• 7-14 days for non-staffed applications

– Repeat exports

• 4-6 weeks for staffed applications

• Add another 45-60 days if:

– Congressional notification

– Sensitive nature of product (e.g., UAV, EW, classified)

– If U.S. company has pending voluntary disclosure

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ITAR Licensing – Processing Time

• National Security Presidential Directive-56, Defense Trade Reform – January 22, 2008

• Department of State directed to complete the review and adjudication of license applications within 60 days of receipt, except in cases where national security exceptions apply

• 73 Fed. Reg. 20357 (April 15, 2008) – exceptions:

– Congressional Notification required (sale of major defense equipment, manufacture abroad of SME)

– Required Government Assurances not received (e.g., Missile Technology Control Regime)

– End-use checks not completed

– DoD overriding national security exception

– Waiver of Restrictions required (e.g., a sanctions waiver)

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License Review Process

State Department

Office of Defense Trade Controls Licensing (USML)

Defense Department Defense Technology Security

Administration

Commerce DepartmentBureau of Industry and Security

(CCL)

Defense Agencies Joint Staff & Military Services

APPLICANT

OtherGovernment

Agencies

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ITAR License ReviewPossible Issues/Delays

– New or inexperienced licensing officers

– Other priorities - special projects - Operation Iraqi Freedom (OIF)

– Foreign policy and national security issues

– Staffing to outside agencies

– Inaccurate or incomplete submission

– Incomplete end-user or end-use information

PLAN AHEAD !!!

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ITAR Types of Licenses

• Export/Import Licenses– Export and/or Temporary Import licenses are issued by the

Department of State for the export or temporary import of “defense articles.” Common ITAR license types include:

• DSP-5 – Application for permanent export license for unclassified defense articles/technical data

- Most common

• DSP-73 – Application for temporary export license for unclassified defense articles

• DSP-61 – Application for temporary import license (and subsequent re-export) of unclassified defense articles

• DSP-85 –Application for permanent or temporary export of classified defense articles or technical data

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Complex Licensing Arrangements - Part 124

• Technical Assistance Agreement (TAA)

– Provision of defense services/technical data to a foreign person

• Manufacturing License Agreement (MLA)

– For U.S. company to provide defense services/technical data for a foreign company to manufacture defense articles

• Offshore Procurement Agreement

– Where U.S. company provides build-to-print specifications to foreign manufacturer to produce articles for use in the U.S.

• Warehouse/Distribution Agreement

– Agreement for warehousing/distributing U.S. defense articles overseas

• Special Comprehensive Export Authorizations for NATO+ Countries

– JSF – not aware of any use since

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Other Licenses/Forms

• General correspondence – not well defined used for reexports and other approvals

– May get better when this goes electronic

• Brokering Requests

• DSP-94 Notification of export pursuant to FMS exception

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DSP-5: Permanent Export of Unclassified Defense Articles and Technical Data

• May only be filed electronically through D-Trade

• Can be used to cover multiple shipments of multiple products

– Valid for a maximum of 4 years; decremented with each shipment

– Use “up to X” units – doesn’t have to match commercial deal exactly but should be equal or greater than

• Application Package consists of:

– Electronic application

– Supporting documentation – invoice, description of the product, letter of explanation – PDF format recommended

– End-Use certificate – DSP83 Non-Transfer and Use Certificate

– If in furtherance of a TAA / MLA – attach a complete set

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Tips on Avoiding “Returned without Action”

• Follow guidelines

• Be sure to list all intermediate consignees, freight forwarders, etc.

• Letter of Explanation

• List “Precedents”: previous approvals of the same or similar items; to the same country

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Technical Assistance Agreements (TAA)

• For the export of defense services and technical data

• Most common form of a “complex” license

• Although it looks like a “contract” between the parties, it is really a license application

– do not include business terms

• Typically Used:

– Joint development projects

– Technical assistance

– Anytime there will be technical interaction between engineers

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Resources for Drafting TAA

• ITAR Section 124

• 48-page Guidelines with sample formats

• http://www.pmddtc.state.gov/docs/agbook.pdf

• ITAR Section 124

• 48-page Guidelines with sample formats

• http://www.pmddtc.state.gov/docs/agbook.pdf

• Check for updates to the Guidelines on DDTC website – not always incorporated

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TAA Application• Letter of Transmittal

– Provides certain affirmations by the U.S. party

– Details of nature of transaction such as value, types of services, technical data to be provided, etc.

– Follows specific format

• Draft TAA

– Follows specific format

– Submitted in “draft” (e.g., unsigned)

• Technical Annex

– Statement of work, description of technical data, etc.

• Other Supporting Documentation

– DSP-83 (if SME involved)

– Certification Letter

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Wrap in All Relevant Parties

U.S. Prime Contractor

Foreign employees of U.S. PrimeU.S. Subcontractor

Foreign Prime Contractor

Foreign Subcontractor

Third country nationals/dual citizens

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Strategic Issues in TAAs

• U.S. Prime often doesn’t include U.S. subcontractor

– U.S. sub can’t interface directly with foreign persons

– Worse – U.S. Sub may assume it is authorized when it is not

– U.S. sub identified as a “domestic licensee” – can’t export

• Business people don’t account for TAA processing delays

– Potential limitations in TAA

• Foreign entities and U.S. subs not involved in TAA drafting

– U.S. prime may be unaware of all foreign subs, or third-party nationals

– Key consultant who is a Canadian citizen

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Strategic Issues for TAAs

• Export staff that drafts TAA not coordinated

– With the contract requirements

– The specific type of technical data involved

• Advance planning for delays or denials

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Drafting Tips

• Include all types of transfers, in the relevant countries (e.g., face-to-face, telephonic, correspondence)

• Include description and value of any defense articles that will be exported under the agreement

– Note: Although ITAR allow for exemption, you will need a DSP-5 to cover the specific defense article exports

• Provide a detailed work description and the type of technical information to be transferred

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TAA Authorizations

• Processing times can be several months (although a TAA is covered by the Presidential Directive)

• Provisos

– Some generic

– Some may limit transfers that undermine the purpose of the agreement

– Create ambiguity

• You can negotiate provisos

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Sample TAA Transmittal Letter

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T

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Other Provisos

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Post-Approval Requirements

• Check the license (TAA, DSP-5, etc.)

• Check the license attachments

• Review the provisos in the approval lettero Comply with the provisos

o If problems, submit proviso change letter immediately

o If clarification is needed, request it immediately

o Comply with the provisos (yes, this is redundant)

• Keep records

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Proposals Requiring Advance Approval/Notice

• Involves Technical Data

• Meets certain thresholds

• Marketing relating to SME

• Advertising

• Reports in publications of general circulation

• Preliminary discussions

• No controlled Technical Data (technical data must be authorized separately)

• Distinguish from marketing TAAs

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Prior Approvals

• Detailed Marketing Presentations/Proposal Relating to SME

– Detailed marketing pitch

– Communicates info about price, performance characteristics, availability for delivery, etc.

– Sufficient to permit the proposed purchaser to enter into an agreement to purchase

– Advance notice/approval would not generally apply if:

• Sales under $14 million

• Sales to NATO, Australia, New Zealand, Japan armed services

• Non-military sales (e.g., sale for police, civil applications)

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Reporting of Commissions/Political Contributions

• If export is valued at more than $500,000 and for use by a foreign armed force must report:

– Political contributions of $5,000 or more

– Commissions of $100,000 or more if used to help secure the sale

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D-TRADE

• DDTC is moving to fill electronic licensing

• Currently following applications must be made through D-Trade:

– DSP-5

– DSP-61

– DSP-71

• Slowly moving other forms to D-Trade

• Must register for D-Trade

• Lots of Information on D-Trade at:

– http://www.pmddtc.state.gov/sl_dtrade.htm

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Select Type of Application from Drop Down Menu

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Application Form with Drop Down Menus

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Example of Drop Down Menus

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Types of Attachments

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Menu for Adding Documents

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Panel Discussion and Q&A

5. Deemed Exports and Technology Security

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Deemed Exports

• What is a deemed export?

• “Hot” enforcement issue

• BIS and DDTC have differing interpretation and procedures

• Deemed Export Advisory Committee looking at issue:

– IG Report in 2004 led to proposal for BIS to screen on “place of birth”

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Who Is a Foreign Person

A U.S. Person (Access To Unclassified):

– Is a U.S. citizen

– Holds lawful permanent resident status (green card)

– Is a “protected person” or “refugee” under the U.S. Asylum Program

A Foreign Person Is:

– A person who holds a student or work visa

– A U.S. Person representing a foreign government or company

– An employee of a company overseas facility

– A foreign government and its offices (i.e. embassies)

– An entity not organized to do business in U.S.

No License Required

License Required

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What Is the Nationality of Dual Nationals

• BIS

– Latest country of permanent residence

– Indian foreign national who recently obtained UK citizenship (UK)

– BIS warns to be conscious of nationality

• DDTC

– Dual citizen must consider both countries

– In theory must consider place of birth/nationality

– Doesn’t apply to U.S. citizens/permanent residents

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What Is Licensable Disclosure?

• DDTC– Virtually any access to technical data, defense services

– Access to defense articles?

• BIS– Breaks down “Technology” into “use,” “production,” and

“design”

– Many technologies are releasable to all but persons from embargoed countries

– The EAR defines “use” technology as specific information necessary for the “operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing” of a product

• Both Exclude Fundamental Research

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Licensing Through BIS

• BIS detailed application guidelines at

• http://www.bis.doc.gov/DeemedExports/foreignationals.pdf

• Very detailed disclosure required:

– On technology

– On the companies technology control plan

– On person

• Education

• Employment history

• Military service

• License conditions

– Limitations

– Submission of TCP

107

Licensing Through BIS

• Recent Stats

– Processing time about 40 days

– 86% approved

– 14% RWO

– 4 denied

– Foreign nationals

• 60% Chinese

• 13% Indian

• 9% Iranian

108

Licensing Through DDTC

• Generally two-stage process

• DSP-5 Authorization for employment and access to “technical data” in specified areas

• TAA to receive defense services

• Guidance online http://www.pmddtc.state.gov/docs/foreign_national_employment.doc

109

Restrictions on Information

• In addition to ITAR/EAR (export controlled information)

• DoD classified materials restricted to cleared U.S. citizens

• Government materials may be “NOFORN”

– DHS Sensitive Security Information

• Government contract may restrict who can work on project

110

Sample Restriction from Government Contract• Equipment and technical data generated or delivered under

this contract are controlled by the International Traffic in Arms Regulation (ITAR) . . . . An export license is required before . . . granting access to foreign persons to any equipment and technical data generated or delivered during performance . . . . The Contractor shall . . . obtain written approval of the Contracting Officer prior to assigning or granting access to . . . foreign persons or their representatives. The notification shall include the name and country of origin of the foreign person . . ., and whether the foreign person is cleared to have access to technical data (DoD 5220.22-M, National Industrial Security Program Operating Manual (NISPOM)).

111

Anti-Discrimination Laws

• Generally you can’t refuse to hire someone because of national origin or citizenship status (as long as they are lawfully in the U.S.)

• Need to coordinate closely with Human Resources

• Title VII of Civil Rights Act

– Prohibits discrimination based on race, creed, color, and national origin

• Immigration Reform and Control Act of 1986 (IRCA)

– Fills gap to add “alienage” (e.g., individual’s current citizenship status)

112

Government Contractor Exception

• Narrow exception under IRCA where discrimination is allowed:

[D]iscrimination because of citizenship status which is otherwise required in order to comply with law, regulation, or executive order, or required by Federal, State, or local government contract, or which the attorney general determines to be essential for an employer to do business with an agency or department of the Federal, State, or local Government.

8 U.S.C. § 1324(2)(C).

113

What Can/Can’t You Ask?

• Coordinate with Human Resources

• If U.S. citizenship/permanent resident status is required for a job – then it is a legitimate question

– Probably a legitimate reason for denying employment, although license may be available

• Back-checking of records regarding residency should be done by Human Resources

114

Technology Control Plan (TCP)

• TCP should be tailored to type of technology

– Classified

– ITAR

– EAR

• May have different procedures for different facilities

• TCP deals with both physical and IT security

115

Elements of a TCP

• General Access policy

– Specific controls for foreign subsidiaries/affiliates

– Foreign employee/visitor briefing (if necessary)

– Non-disclosure agreement

• Facility Security

– ID check and nationality screening at front desk

– Badging and escorts

– Computer access

– Access controls to certain spaces

116

TCP

• IP Security

– Segregating and securing access to controlled technology

– Need to know basis

– Who are your IT Staff?

– Special requirements for classified data

117

Panel Discussion and Q&A

6. ITAR Enforcement & Voluntary Disclosures

119

Enforcement Issues

• ITAR Enforcement Environment

• Voluntary disclosures Under ITAR

• What to do when the government comes knocking?

120

Violations and Voluntary Disclosures

• Company should have internal procedures for reporting suspected violations

• Any investigation should be done by or under the auspices of legal department/outside counsel to protect findings

121

Current Enforcement Environment

• Increasing criminalization of ITAR export violations

– Steven Pelak – DOJ Coordinator for Export Enforcement

– 150 FBI Agents trained on export controls

• Strict Enforcement

– Even technical violations can result in substantial penalties

• Strict Liability Standard for Civil Enforcement

122

What Constitutes a Violation?

• ITAR § 127.1

– Exporting a defense article, technical data without approval

– Exceed provisos or limited in licenses or agreements

– Exporting on expired license

– Misuse of exemptions

– Failing to record use of exemptions

123

How Does the U.S. Government Learn of Potential Violations?

• Flagged at border by Customs (going in or out)

• AES – now a powerful enforcement tool

• Disgruntled former employee

• Competitors who seek advantage or to “level playing field”

• Your company is mentioned in a Voluntary Disclosure by another entity

124

How Does an ITAR Enforcement Case Proceed?

• Letter, phone call or visit from DDTC or seizure of items

• Rarely starts with a charging letter

• Strong incentive for companies to make disclosure and settle as virtually no other options:

– Administrative appeal process not used

– Absent criminal prosecution, no real judicial remedy

– Government appears to have penalized companies who didn’t cooperate, both in terms of civil penalties and potential criminal referral

125

State Cases Typically Settled

126

Elements of Settlement

• Civil Penalties ranging from under $100,000 to multi-million dollars depending on a number of factors

• ITAR Civil Penalties up to $500,000 per violation

- OFAC/BISAs of Oct. 16, 2006, Max penalty raised from $50,000 to $250,000 per violation – may apply retroactively

• Some portion may be suspended if used for internal compliance, auditing, hiring additional personnel, etc.

• Hiring of Special Compliance Official (“SCO”)

• Debarment or denial of exports for a certain period

127

Criminal Sanctions

• Increase criminal investigation of suspected export violations

• Intent requirement

• Corporations and individuals may be penalized

• Criminal fines

– $1,000,000

• Imprisonment up to 20 years or statutory debarment

128

Voluntary Disclosures

• If your company makes a voluntary disclosure it is in good company

• DDTC expects that companies that regularly export will have violations, and the absence of any voluntary disclosures for a major defense contractor may in and of itself raise suspicion

129

Why do Companies Make Voluntary Disclosures to DDTC?

• Can be single most important mitigating factor in violations

• For public company violation may be “material” for SEC purposes

• Since past violations stay with companies after they are sold, often see voluntary disclosures following M&A due diligence

130

Voluntary Disclosures

• Depending on a number of factors, may result in a warning letter or minimal penalty

– Transaction would have been licensed if applied for properly

– Export didn’t involve highly sensitive technology

– Involved export to “friendly” country

– Company had or is implementing compliance measures

– Did management endorse disclosure

– Did the company cooperate in investigation

131

Voluntary Disclosure to DDTC

• Initial notification followed by full disclosure within sixty days after internal investigation

• VD must be in writing include:

– Description of violation and regulations violated

– Circumstances, why, when, how

– Products involved

– Corrective action taken

– Include relevant documentation

• Applications, licenses, shipping documents, etc.

132

Differences Between BIS/DDTC Voluntary Disclosures

• Both have enormous discretion on penalties

• Historically DDTC penalties higher, but BIS has narrowed gap

• Historically, BIS issued warning letters for very high percentage of VDs, but this may be changing

• DDTC will typically ask for the company to conduct an audit of past exports and report

BOTH EXPECT YOU TO BE CANDID

– Company which stated it took immediate action, but in fact had kept shipping for some time after initial discovery

133

What to Do When the Government Comes Knocking?• Increasingly we see the government showing up with little or

no announcement

– Who:

• BIS special agents

• Customs special agents

• FAA agents (HAZMAT)

• FBI

• Why are they coming?

– Compliance visit

– Search warrant

– Civil investigation

134

General Guidelines

• As soon as you are aware of a visit:

– Notify your general counsel’s office

– Notify the senior person at that facility

• If they are serving a search warrant, ask for a copy and the supporting affidavit and get it to legal

• Check IDs – they may not be entitled to access (e.g., if classified areas)

– Get card or write down names of each visitor

135

General Guidelines

• Do NOT sign a “consent to search” for or similar document without consulting with legal

• Pledge to cooperate and be polite and respectful

• Be sure officials are escorted at all times

• You can ask the purpose of the visit and whether CDI or specific employees are the target of an investigation

136

Regulatory Officials

• Generally, federal agencies have a right to inspect export or other records

• Reason for visit:

– May have specific information about a possible violation by CDI (disgruntled former employee)

– May be investigating a customer of CDI

– May be “awareness” visit

• FBI visiting manufacturer of sensitive technology to make them aware of threat

• Many universities visited

137

If No Search Warrant

• If they ask to review documents, ask them to put the request in writing so you can be sure to provide everything

– Ask for reasonable time to provide (e.g., days)

– If they insist, put them in designated room and bring docs to them

– They can inspect originals, but in general if they want a document make them a copy

– WITHOUT A WARRANT THEY DON’T HAVE THE RIGHT TO SEIZE ANYTHING

• Questioning of employees

– Cooperate, but only answer factual questions you can answer in full

– If situation becomes adversarial you have absolute right not to answer

138

Regulatory Subpoena

• Used extensively by some agencies

• Generally gives you “x” number of days to respond

• Fax it immediately to legal

• Customs/FAA Notices

139

140

Officials with a Search Warrant

• This means there is a criminal investigation

• Cooperate to the extent of the warrant

• Don’t volunteer information or make admissions

• Review warrant to make sure it covers your facility and is actually signed by a judge

• Try to delay until you can speak with counsel (probably won’t be successful)

141

Search Warrant

• Discuss the scope of warrant – They don’t have right to records or premises outside scope of warrant

• Do not, without a lawyer present, allow them to interview employees

• If they want to remove records/computers, etc., ask for a chance to make copies or at least an inventory of what was seized

142

Post Visit

• Do not destroy records, or erase emails, etc., even if regular practice, without consulting with legal

143

Panel Discussion and Q&A

7. ITAR Compliance Program Elements & Best Practices

145

Overview

• Why create a tailored program?

• What are the major elements?

– Best practices

– How comprehensive should your program be?

• How do you implement it?

– (And sell it to management)

146

Benefits of a Tailored ECP

• Streamline export processing

– Cut costs of an export transaction

– Push export clearance to lowest level possible

• Clarify & standardize procedures

– Both export procedures and control procedures

• export shipping procedures

• foreign visitors

• Why “out of the box” programs don’t work

147

Further Benefits – Risk Reduction/Mitigation

• Reduce risk of violations

• Receiving heavy emphasis from DDTC & BIS

• Major mitigating factor if there are violations

– Federal Sentencing Guidelines (this protects you)

– State & Commerce view as key factor in penalties

• Improving program -- often condition to DDTC settlements

148

De-Facto Requirement for Public Company

• Sarbanes-Oxley

– Internal controls mandatory to ensure financial accuracy and accountability

– Internal controls must ensure, among other things, that:

• All business transactions conform with applicable laws

– Annual internal control report required by Section 404

– Section 302/306 require certain executives (CEO/CFO) to certify as to the effectiveness of internal controls

– Required to disclose “material changes” in financial condition in reports

149

What Are the Major Elements of the ECP?

• Management Commitment

• Defining the scope – meaningful risk analysis

• The ECP manual

– This must be tailored for your company

• Training

• Internal auditing

• Recordkeeping

• System for Reporting Violations

• Remedial / Disciplinary Actions

150

Major Elements – Management Commitment

• Communicating management’s emphasis of compliance

– Policy statement

• Active management involvement

– Compliance committee

– Reviewing audits

– Export Compliance Officer – ensure direct channel of communication to management / legal counsel

• Provide adequate resources

– Staffing

– IT support

– Training funding

151

Major Elements - How Comprehensive?

• What regimes apply? ITAR, or EAR, or both?

– OFAC always applies

• Export Compliance also overlaps:

– Industrial security

– Anti-boycott laws

– Foreign Corrupt Practices Act (FCPA)

– New anti-money laundering regulations

• including mandatory anti-money laundering programs by financial institutions

152

Elements of the ECP Manual

• Policy Directive from CEO / President

• Export Controls Overview

• Policies and Procedures

– Roles and responsibilities of management, export compliance personnel, HR, IT, security staff

– Training – tailored to employee’s responsibilities

– Recordkeeping

– Internal audit procedures

– Detection and reporting (whistleblower provisions)

– Clear disciplinary procedures

• Appendices

– Decision trees; charts; checklists; questionnaires; key contacts

153

Tailored Procedures – Avoiding Pitfalls

• Give tools to lowest level and avoid:

– Generic references to regulations

– Overly complex procedures

– Requiring information not readily at hand

• Multi-layered review of routine transactions

– Avoid front office review where possible

• No error-proof system

– Due diligence better than overly burdensome procedures that are ignored

154

Develop Flow Charts & Step-by-Step Procedures

• Vetting transaction:

– Is the purchaser barred?

– Is a license needed to export this product to this purchaser?

– Anything suspicious about the transaction? (red flags)

• For companies with high-volume product sales

– Detailed matrix of product ECCN classification

• For license required transactions

– Clear guidance on who applies, how process flows

• Export clearance procedures

155

Sample Export Control Flowchart

InformationUSML technical dataCCL listed technology / software

Tangibles / defense servicesUSML / CCL listed articlesUSML defense services

Information / informational

materials

Equipment, technology,

software

NOnot subject to ITAR / EAREAR99

YESIS THE ITEM OR TECHNOLOGY

LISTED ON USML OR CCL? (if uncertain contact Export Compliance Officer)

Is it going to an embargoed country / barred individual?

NO YES

Apply for a license or do not export

No restrictions on export

OK to:Disclose to foreign nationals

Is it:in the public domain / publicly availableeducational informationresult of fundamental research

NOYES

Is there an exemption or exception available?

* cannot use exemption / exception if export to

embargoed countries or barred individuals

YES NO

Document use of exemption or exception and export

Apply for a license or do not export

156

Other Elements of ECP Manual

• Post-license ongoing compliance

– Particularly an issue with large contracts under TAA

• Handling deemed exports (always a problem area)

– Procedures for foreign national employees

– Procedures for plant visits by foreign nationals

– E-mails and other lines of communication (a training issue)

• Sample forms

• Procedures for reporting suspected violations

• Contact information for assistance

157

Training

• Develop module based training program

• Tailor training to needs:

– Export compliance personnel (train the trainers) – industry sponsored events; outside counsel

– Senior management – overview; regular briefings

– Employees that work with controlled information and articles

• engineers

• sales

• production

• shipping/logistics

158

Audit Function

Baseline audit

• Periodic audits

– Use “independent” auditors

– Update ECP manual – keeping it current

– Procedures for evaluating a process

• identify process problems that need fixing

• recordkeeping deficiencies

• training deficiencies

• Export Compliance Council review

159

Implementing an ECP

• The nuts & bolts

• Overcoming internal hurdles

160

Implementation - Conduct a Baseline Audit

• Who should conduct the audit?

– Outside counsel / consultant

– “Independent” corporate employees

• Find current procedures in various divisions

• Find where “that’s the way it’s always been done” will be an issue

• Identify relevant personnel

161

The Decision to Automate Functions

• Cost-benefit analysis depending on size of company / type of exports

• For large defense contractor a de-facto requirement

• For high-volume exporter - can streamline process

• Intranet-based manual best way to stay current

162

Where to Get Help?

• Written Resources

– Nunn-Wolfowitz Task Report: Industry “Best Practices” Regarding Export Compliance Program (2000)

• Hughes Electronics Corp. sponsored blue ribbon task force

• Detailed report contains numerous “best practices”

• Follows closely the Sentencing Guidelines and BIS EMS Guidelines

- DDTC GUIDELINES - General Guidance

– BIS - EMS GUIDANCE MODULES

163

Gaining Management Support• Streamlined procedures prevent delays

– Knocks decision-making to lowest level possible

• Programs are de-facto requirement

– BIS recent release: “Formal written compliance procedures and directives are “the fundamental baseline” of any compliance program.”

• Cost-benefit analysis

– Preventive costs pale when compared to violation & “repair” costs:

• civil/criminal penalties

• major contracts delayed/products seized

• risk of suspension of export privileges

• costly DDTC settlement conditions regarding ECPs

• Sell changes as “improvements” to existing structure

– Help overcome defense of former systems

164

Panel Discussion and Q&A

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