What’s in a $10 Million Compliance Mandate

What’s in a $10 Million Compliance Mandate?

When the U.S. Department of State, Bureau of Political Military Affairs asks whether you agree to the terms of the proposed “Consent Agreement,” including that 50% of the penalty will be reinvested back into your company in the form of a compliance program, the answer appears to be “yes”…  Including when that means spending $10 million in a compliance program out of a $20 million fine.

It can be expensive to violate the Arms Export Control Act (“AECA”) and its implementing regulations known as the International Traffic in Arms Regulations (“ITAR”).  At issue in a 2014 settlement were defense articles, technical data, and defense services.  The solution involved implementation of “effective” export control oversight, infrastructure, policies, and procedures for all AECA and ITAR-regulated activities.

For this company, the path to compliance included the appointment – with the approval of the Office of Defense Trade Controls Compliance (“DTCC”) – of an outside, qualified individual to serve as a Special Compliance Officer for at least two of three mandated oversight years, with a successor Internal Special Compliance Officer to take over the position.  The SCO/ISCO would be responsible for three, principal areas:  (1) policy and procedure; (2) specific duties; and, (3) reporting.  Each of these areas was detailed.  For example, “policies and procedures for ensuring that exports of classified defense articles and classified technical data are in full compliance with Section 125.3 of the ITAR”.

Also within the Consent Agreement was the direction for the company to set up a hotline for reporting.  This theme resonated through each of the three responsibility areas and warranted a separate provision. 

Also of interest to this Consent Agreement is an article titled “Defense Articles and Defense Services,” which required the company to acknowledge four specific points:

  1. the definition in ITAR of “defense services” is clear and sets out binding responsibilities and requirements;
  2. the DTCC has jurisdiction over furnishing defense services to foreign persons even if the information is in the public domain;
  3. the law and regulations governing defense services and proposals to foreign persons are clear and specific and capable of civil enforcement; and,
  4. the company is required as a matter of law and regulation to come into compliance 

The compliance investigation began with a voluntary disclosure by the company that included “unauthorized transfers of technical data and manufacturing know-how to foreign person employees.”  It ended with 282 charges/violations.

 It is so crucial for companies to take a proactive approach to compliance when exporting in the firearms industry.  There are several reasons that it benefits the company to have a robust Compliance Program:

  1. It impacts the company’s financial success and the reputation
  2. It creates an infrastructure to protect, organize, and oversee the company’s research and technology
  3. There are national security and foreign policy implications

For more information contact the DDTC Response Team at DDTCResponseTeam@state.gov or Orchid Advisors at www.orchidadvisors.com