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$8 Million Fine Could Signal Further Effort to Prevent Unlicensed Defense Exports

Monday, August 12, 2013
Sandler, Travis & Rosenberg Trade Report

The State Department announced Aug. 9 that a New York company will pay an $8 million civil penalty for hundreds of alleged defense export violations despite having filed a voluntary disclosure. But it’s a brief statement buried within the announcement that should get defense exporters’ attention.

State’s Office of Defense Trade Controls Compliance determined that the company demonstrated inadequate corporate oversight and a systemic and corporate-wide failure to properly determine export control jurisdiction over commodities, leading to violations largely consisting of unauthorized exports and reexports of electronics, microelectronics and associated technical data controlled under the International Traffic in Arms Regulations. On the other hand, the company voluntarily disclosed nearly all of the ITAR violations at issue, acknowledged their serious nature, cooperated with department reviews, and since 2008 has implemented or planned extensive remedial measures, including the restructuring of its compliance organization, the institution of a new testing protocol of its commodities, and a revised company-wide ITAR compliance program. For these reasons, State has determined that an administrative debarment of the company is not appropriate at this time.

State also points out that the company’s violations included “causing unauthorized exports of ITAR-controlled microelectronics by domestic purchasers.” Melissa Miller Proctor, head of Sandler, Travis & Rosenberg’s export practice, says this could be “a shot across the bow” aimed at getting defense contractors to consistently let their U.S. customers or subcontractors know that their products or information may be subject to ITAR licensing requirements.

“We generally recommend as a best practice that clients selling EAR/ITAR-controlled products place destination control statements on their invoices for all sales, whether domestic or international, to put their customers on notice that the items may trigger U.S. export licensing requirements,” Proctor states. “In view of this case, our recommendation may become a flat-out necessity or even a requirement for companies that sell domestically.”

Half of the penalty against the company will be suspended on the condition that State approves expenditures for self-initiated remedial compliance measures. The company will also be required to engage an internal special compliance official to oversee the consent agreement, conduct two audits of its compliance program and implement additional compliance measures, such as improved policies and procedures and additional training for staff and principals.

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