The State Department’s Directorate of Defense Trade Controls, more commonly known as DDTC, is a regulator of the firearms and ammunition industry but DDTC does not conduct regular inspections of registrants like ATF. If you are a manufacturer, does that mean you will never be required to show governmental authorities that your business has implemented an effective ITAR compliance program?

No.

Various events you cannot fully control could lead to federal authorities showing up in your reception area at any time or serving you with a warrant or subpoena. Let’s look at what some of them are.

Your foreign customer is suspected of diverting product you sell.

A key tenet of exporting is that an exporter must “know his customer.” This is a good rule to follow for your own protection as well as for protecting U.S. national interests.

DDTC may not routinely inspect U.S. exporters of defense articles but they do check up on the recipients of those products through their “Blue Lantern” end user program. In the 2013 fiscal year, the most recent for which information is available, 19% of more than 1,000 completed Blue Lantern investigations uncovered facts that were inconsistent with export license applications. “Firearms, ammo and armor” is one of the categories of exports on which the Blue Lantern program focuses attention.

What does this mean to you? First, it underscores the importance of conducting thorough due diligence on your foreign business associates. Someone is keeping an eye on bad actors and if you do business with them it can lead right back to your doorstep. Second, it highlights the need, in several respects, for implementing an export compliance program for your business. An effective compliance program will help you spot red flags that are signs of trouble with a transaction even when the due diligence on your counterparty is clean and will help ensure that the right people in your company analyze them. You also want to be able to confidently demonstrate that you have an effective program in place when investigators show up as part of their investigation to determine what went wrong.

Your company’s product could be exported by others illegally.

Another risk that no manufacturer can fully control is the possibility that its products will cross the U.S. border somewhere down the distribution chain in one or more transactions that do not comply with the ITAR. When law enforcement catches a wrongdoer, an investigation ensues. If you are unlucky enough to be caught up in such a situation, especially one with a political spotlight on it, you certainly want to have all your ducks in a row. Effective export and ATF compliance programs are critical to your ability to pass muster.

Your supplier could engage in bad behavior

How much do you know about your suppliers of key components such as frames, receivers, barrels, etc.? You know, for sure, that their price and quality are good and that they deliver product to you when you need it. But have you conducted due diligence to confirm the reputation of the supplier and that it has adequate security, record-keeping and compliance systems? If your supplier loses product out the back door that finds its way to, say, Mexico, an investigation could ensue and the investigators could well come your way.

This is another instance in which an effective compliance program will do double-duty protecting your business. By confirming that your suppliers have good security, record-keeping and compliance systems, you encourage them to employ best practices and thereby lower your own risk. Secondarily, you are ready to demonstrate your own compliance if investigators come your way as they try to figure out how product made by your supplier ended up in the wrong hands.

Other potential problems

What else can go wrong that could cause the export compliance systems of your business to be investigated? Acquiring a company that has conducted business improperly or maintained poor records can contaminate your well-run business and result in a government inspection or request for records that you never anticipated. Entering into a joint venture or partnership with such a business carries the same risks.

What about a disgruntled former employee with no valid gripe who nevertheless seeks revenge by contacting federal authorities and instigating an export-related investigation of your company?

The point is – you are exposed to an ITAR compliance investigation even though DDTC has no regular program of inspections. In light of the potential for denial of export licenses, fines, debarment and reputational damage in the eyes of your customers and employees, doesn’t it make sense to be prepared?

Orchid Advisors helps clients implement best-practices export compliance programs through training, compliance policies and manuals, compliance program assessments and the incorporation of good export compliance practices into day-to-day business processes. Orchid Advisors is an endorsed compliance solutions provider of the NSSF.