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Voluntary Disclosures, Remedial Measures Yield Mitigated Penalty for Unauthorized Exports

Friday, September 15, 2017
Sandler, Travis & Rosenberg Trade Report

The State Department’s Directorate of Defense Trade Controls has imposed a $400,000 civil penalty against a U.S. company to settle charges in connection with unauthorized exports of defense articles and technical data to foreign persons. However, DDTC is not imposing an administrative debarment against the company or requiring additional compliance measures or enhanced oversight.

According to DDTC, the company has been registered as a manufacturer and exporter with DDTC since 1992 and its business primarily consists of manufacturing military spare parts for both public- and private-sector customers. Many of these parts transitioned off the U.S. Munitions List beginning in October 2013 as a result of the Export Control Reform Initiative.

DDTC states that the company created redacted versions of technical drawings for products it outsourced but did not seek or obtain licenses or other authorizations from DDTC for exports of the redacted technical data to the vendors. The company attributed this failure to a good faith misunderstanding of the requirements in the International Traffic in Arms Regulations.

The company also (a) misclassified parts of an anti-missile system as controlled under the Export Administration Regulations and exported them without a license or shipped them against a valid DDTC authorization issued pre-ECR and (b) misclassified parts of other systems controlled under the USML and exported them without DDTC authorization to non-prohibited destinations. An internal review determined that these errors were caused by confusion between parts and components for vehicles, which were largely moved off the USML as part of the ECR, and parts and components for systems mounted on the vehicles, particularly weapon systems that remain on the USML.

DDTC states that it considered a number of mitigating factors when determining whether to propose charges. These include the company’s submission of two voluntary disclosures, cooperation with the DDTC’s review, and provision of information suggesting that the violations were not willful. The company also made significant improvements in its export compliance program that reduce the likelihood of future violations, including conducting internal and independent audits, conducting staff training on the ITAR (including more extensive training for personnel directly involved in export compliance), creating a fully documented compliance program (with formal procedures, checklists, and a compliance manual), and significantly increasing staff resources devoted to day-to-day compliance (including retaining an outside consultant to provide expert advice where needed).

DDTC also considered countervailing factors such as the central role of an individual with a prior conviction under the Arms Export Control Act, significant ITAR training and compliance program deficiencies that directly contributed to the violations, and the unauthorized export of technical data to a proscribed destination.

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