ITAR FOR GOVERNMENT CONTRACTS FIRMS

February 21, 2012February 21, 2012

Thomas B. McVeyThomas B. McVeyWilliams MullenWilliams Mullen202.293.8118202.293.8118

tmcvey@williamsmullen.comtmcvey@williamsmullen.com

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Thomas B. McVeyWilliams Mullen

Thomas McVey practices in the area of the federal regulation of international business transactions. He advises clients on the Export Administration Regulations, the International Traffic In Arms Regulations, Sanctions Programs administered by the Office of Foreign Assets Control, the Foreign Corrupt Practices Act, anti-boycott laws and CFIUS.

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Export Control Reform Initiative

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U.S. Export Control Laws

• ITAR - International Traffic In Arms Regulations

• Export Administration Regulations

• U.S. Sanctions Laws

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International Traffic In ArmsRegulations (ITAR)

• Enabling statute: Arms Export Control Act

• Regulations - International Traffic In Arms Regulations (“ITAR”)

• Department of State – Directorate of Defense Trade Controls

• List of Controlled Products - U.S. Munitions List

• Controls Military Items (And Some “Dual-Use” Items) – Broad scope encompassing most items originally developed for military use

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U.S. Munitions List (USML)• Category 1: Firearms, weapons

• Category 2: Guns and armaments

• Category 3: Ammunition, ordinance

• Category 4: Launch vehicles, missiles, rockets

• Category 5: Explosives, incendiary agents

• Category 6: Naval vessels

• Category 7: Military vehicles

• Category 8: Aircraft and equipment

• Category 9: Military training services, equipment

• Category 10: Protective personnel equipment and shelters

• Category 11: Military electronics

• Category 12: Optical and guidance control equipment

• Category 13: Auxiliary equipment (cameras, encryption, camouflage)

• Category 14: Toxicological, chemical, biological agents, protective equipment

• Category 15: Space systems and equipment

• Category 16: Nuclear weapons, technology

• Category 17: Classified technical data and services

• Category 18: Directed energy weapons

• Category 19: Reserved

• Category 20: Oceanographic equipment

• Category 21: Other items designed or adapted for military use

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ITAR – Military Items

Military VehiclesArmaments

Naval Vessels Missiles

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Other USML Items…Military?

Training Chemicals

Electronics Satellites

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Technical Data And Software

Technical Data andSoftware Are Listed

On the USML:

– Technical drawings– Formulas– Manuals– Photographs– Source Code

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Methods for Exporting Technical Data and Software

- Send it abroad (e.g., send disk in the mail)

- Go abroad and talk about it- Electronic transmissions, e-mail- Phone call, fax- Computer network- Foreign national comes to U.S. and

has access to it

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Defense Services• Performing services related to

USML items for foreign persons is controlled –“Defensive Services”– Consulting– Engineering– Training– Technical Services– Other

• Requires Technical Assistance Agreement (TAA)

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ITAR Controls• Items subject to ITAR

Controls:

– Physical Items

– Software

– Technical Data

– Services

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USML Category 21: Catch-All• Category XXI – Miscellaneous Articles

(a) Any article not specifically enumerated in the other categories of the U.S. Munitions List which has substantial military applicability and which has been specifically designed, developed, configured, adapted, or modified for military purposes. The decision on whether any article may be included in this category shall be made by the Director, Office of Defense Trade Controls Policy.

(b) Technical data (as defined in §120.10 of this subchapter) and defense services (as defined in §120.9 of this subchapter) directly related to the defense articles enumerated in paragraph (a) of this category.

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Examples of USML Items• Electronic equipment which is

specifically designed, modified or configured for military application

• Drone aircraft• Navigation systems• Command, control and

communications systems including radios (transceivers) and identification equipment

• Military training services and equipment

• Underwater sound equipment• Flight control products, software

and technologies

• Satellites, launch vehicles and ground control equipment, including parts, technologies and software

• Classified products, technical data and software

• Anti-gravity and pressure suits, atmosphere diving suits

• Body armor• Naval vessels and related

equipment, parts, technologies and software

• Protective personnel equipment and shelters

• Auxiliary military equipment

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Electronic Equipment – Category XI(b)

• Electronic systems or equipment specifically designed, modified, or configured for intelligence, security, or military purposes for use in search, reconnaissance, collection, monitoring, direction-finding, display, analysis and production of information from the electromagnetic spectrum and electronic systems or equipment designed or modified to counteract electronic surveillance or monitoring.

• A system meeting this definition is controlled under this subchapter even in instances where any individual pieces of equipment constituting the system may be subject to the controls of another U.S. Government agency.

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USML Category 17: Classified Information

• Classified Information is on the USML

• Category 17: “Classified Technical Data and Services”

• Major issue for government contracts firms

• Another “Catch-All”category

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Criteria For Inclusion on USML• Was product originally designed or developed for military use?

• Was product developed to military specifications?

• Was product developed with special military characteristics (e.g. radiation – hardening, ballistic protection, hard points, thermal or infrared signature reduction capability, surveillance or intelligence gathering capabilities)?

• Was product modified for military purpose?• Relevant question: Was government funding used to develop

product for military application?

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Government Sponsored Research Funding

• SBIR, DOD university research funding and other defense research funding

• Resulting products, technical data, software and services are often on U.S. Munitions List

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Commodity Jurisdiction Requests

• Procedure for DDTC to determine if item is on U.S. Munitions List

• Binding, written response

• Can also be used for removal of item from USML if predominant civil application

• Proceed with caution

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Requirements If Item Is On USML

Major Requirements:

• Physical articles – cannot export unless obtain export license (e.g. DSP-5)

• Technical Data and Software– Cannot send or take out of U.S. without export license– Cannot transfer to foreign nationals in U.S. without

export license

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Requirements If Item Is On USML (cont.)• Services

– Cannot perform defense services for foreign nationals overseas without license (TAA)

– Cannot perform defense services for foreign nationals in the U.S. without license (TAA)

• Imports– Cannot import items on USML or U.S. Munitions Import

List without a license

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ITAR Submissions• Export License – DSP-5

• Technical Assistance Agreement (TAA)

• Manufacturing License Agreement (MLA)

• Warehouse And Distribution Agreements (WDA)

• Registration – Form DS-2032

• Other

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Ancillary Requirements - DDTC Registration

• Parties that manufacture or export items on the USML or perform defense services are required to register with DDTC

• This is even if the company does not export any products

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Recordkeeping Requirements• Mandatory requirement to maintain records of all

export transactions for 5 year period

• Covers paper, electronic and other media

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Brokering Registration and Licensing

• Parties that facilitate export or import of ITAR items are subject to ITAR Brokering Regulations (22 CFR Part 129).

• 22 CFR §129.2(a): Broker means any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee, commission, or other consideration.

• Registration, licensing, reporting and other requirements

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ITAR – Other Issues• Debarred Party List

• Significant Military Equipment (SME)

• Payment of sales commissions, political contributions

• Temporary exports

• Recordkeeping requirements

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Penalties For Violations

• Criminal Sanctions – up to 20 years imprisonment

• Fines: $1,000,000 per violation• Press release• Debarment• For criminal cases Justice Department can

prosecute– Company– Officers and Directors– Employees in their individual capacities

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Major Export Compliance Cases• BAE Systems - $400,000,000 criminal penalties;

$79,000,000 civil penalties

• ITT Corporation - $128,000,000 combined civil and criminal penalties for ITAR violations related to night-vision products and technology

• Analytical Methods, Inc. - $500,000

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SENTENCING OF COMPANY FOR EFFORTS TO TRADE WITH IRAN

Raleigh, North Carolina - United States Attorney George E.B. Holding announced today that on Monday July 28, 2008, Allied TelesisLabs, Inc. (ATL), was sentenced in United States District Court in Elizabeth City to a $500,000 criminal fine and was placed on probatiofor two years for violating United States law regarding conducting business with Iran.

ATL was successfully engaged in the design of telecommunication equipment and systems including high capacity Multiservice AccessPlatforms (iMAPs) and related items capable of routing a large volume of messages/information/data. ATL’s guilty plea acknowledgedthat the corporation conspired with another to trade with the Islamic Republic of Iran in violation of the law. Specifically, ATL and itsrelated corporate entities conspired to land and execute a $95,000,000 contract with the Iranian Information Technology Company(IRITCO) to rebuild and upgrade the telecommunications systems of approximately 20 Iranian cities, including Tehran. The iMAPSdeveloped here in the Triangle were to be a central component of this system. Preparation for the execution of the contract went as far asthe manufacture of approximately $2 million worth of iMAPS at ATKK facilities in Singapore. The contract negotiations eventuallycollapsed, the telecommunications system was not installed and the iMAPs were sold elsewhere at a loss.

Mr. Holding noted the importance of the case: “Every American is aware of the sensitive nature of the United States’ relationshipwith Iran. That relationship is a central focus of our foreign policy and the work of our Government. The International EmergencyEconomic Powers Act allows the President to regulate the conduct of business internationally under certain circumstances, a stepwhich was taken with regard to Iran. When the President imposes these types of authorized restrictions, it is incumbent on allcitizens, including our corporate citizens, to adhere to those regulations and to follow the strict letter of the law. Only then can webe confident that our country speaks with one voice in our relationships with our international friends and foes. The plea of guiltyand the sentence in this case should act as a reminder to our business community of the seriousness with which the Department ofJustice takes this issue.”

The case was investigated by the United States Department of Commerce. Assistant United States Attorney John Bowlerrepresented the United States in federal court.

For Immediate Release: July 31, 2008Contact - BIS Public Affairs 202-482-2721

U.S. Department of JusticeUnited States Attorney's OfficeDistrict of Columbia(202) 514-2007

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Enforcement - ITAR Anxiety

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Compliance Strategy• Classification – review all of your company’s products

to see if they are listed on:– U.S. Munitions List– Commerce Control List– End Use Based Controls (15 CFR Part 744)

• Application – Apply as required for:– DDTC export licenses (DSP-5, etc.)– BIS export licenses– TAA’s, MLA’s– Warehouse Distribution Agreements– Re-export authority

• Compliance Program – internal company compliance procedures

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Elements of Export Compliance Program

• Designated company official in charge of compliance• Classification of company’s products, software, technical

data and services• Written policies and procedures for dealing with ITAR and

EAR issues• Procedure for foreign nationals• Training• Recordkeeping• Prohibited list checking and OFAC sanctions review• Procedure for dealing with suspected violations• Auditing• Updating program

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Specific ITAR Compliance Components

• Must provide specifics of organizational structure – steps in the compliance process and reporting responsibilities

• Corporate commitment at the highest level of the organization• Identification, receipt and tracking of ITAR controlled items

and technical data• Procedures for re-exports and retransfers of articles, software

and technologies• Restricted or prohibited exports, re-exports and transfers• Recordkeeping• Internal auditing, supervision and reporting• Training• Procedures if violations are discovered

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Export Compliance ProgramsHigh Priority Recommendations

• Specifics – names of responsible persons, titles, organization charts, flow charts specific to your organization

• Evidence of compliance activities – training records, list search results, results of Red Flag due diligence, etc.

• Risk-based analysis – concentrate resources in areas of highest risk

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Mitigation Criteria Checklist

Criteria Relevant Evidence for Compliance Program Mitigation

1. Whether the Company has Performed a Meaningful Risk Analysis

Design

Implementation

2. The Existence of a Formal Written Compliance Program

Design

Implementation

3. Whether Appropriate Senior Organizational Officials Are Responsible for Overseeing the Export Compliance Program

Design

Implementation

4. Whether Adequate Training is Provided to Employees

Design

Implementation

5. Whether the Company Adequately Screens its Customers and Transactions

Design

Implementation

6. Whether the Company Meets Recordkeeping Requirements

Design

Implementation

7. The Existence and Operation of an Internal System for Reporting Export Violations

Design

Implementation

8. The Existence and Results of Internal/External Review or Audits

Design

Implementation

9. Whether Remedial Activity Has Been Taken in Response to Export Violations

Design

Implementation

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Compliance Programs - ITAR Under Control

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Export Administration Regulations

• Enabling Statute: Export Administration Act (expired), International Emergency Economic Powers Act

• Regulations: Export Administration Regulations (EAR)

• Department of Commerce – Bureau of Industry and Security

• List of Controlled Products – Commerce Control List

• Controls “Dual-Use” Items

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Commerce Control List – Examples of Products Covered

- encryption - computers, networking- aerospace devices - lasers - high performance- chemicals materials- power generation - telecom equipment- police equipment - high strength fibers- electronics - nuclear industry products- sensors - high performance pumps,- electronics generators, processing- machine tools equipment

- fingerprint/biometrics

- others

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Commerce Control List

Computers Telecom

Lasers Machine Tools

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Requirements for all exports (even if product is not on CCL):• Know Your Customer Requirements – 15 CFR

Part 732, Supplement No. 3

• Denied persons list – 15 CFR Part 764

• Recordkeeping requirements – 15 CFR Part 762

• Shipment documentation – 15 CFR Part 758

• Prohibited End-Use Controls – 15 CFR Part 744

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U.S. Sanctions Programs

• Office of Foreign Assets Control (Department of the Treasury)

• Prohibition against dealing with targeted list of countries

• Prohibition against dealing with targeted list of entities and parties

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Sanctions Programs - SummaryOFAC Country Programs

• Balkans• Belarus• Burma• Cote D’Ivoire (Ivory Coast)• Cuba• Dem. Republic of the Congo• Iran• Iraq• Liberia (Taylor Regime)• Lebanon• Libya• North Korea• Somalia• Sudan• Syria• Zimbabwe

OFAC Non-Country-Specific Programs

•Counter-terrorism Sanctions Program

•Non-Proliferation Sanctions Program

•Narcotics Trafficking Sanctions Program

•Diamond Trading Sanctions Program

•Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions

•Transitional Criminal Organizations

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U.S. Sanctions Programs – SDN’s

• Prohibition against dealing with Specially Designated Nationals anywhere in the world

– 3,000 Parties

– 15 CFR Chapter 5, App. A-C

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Consolidated Screening List

Thomas B. McVeyThomas B. McVey1666 K Street, NW1666 K Street, NWSuite 1200Suite 1200Washington, DC 20006Washington, DC 20006202.293.8118202.293.8118tmcvey@williamsmullen.comtmcvey@williamsmullen.comwww.williamsmullen.comwww.williamsmullen.com

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ITAR Newsletter:Contact Tom McVey: tmcvey@williamsmullen.com