Export Compliance Program: A Risk Based Approach and Disclosure Considerations

Presented by: Kevin Doane, Senior Counsel Compliance, Dresser-Rand Law Department

Mary Menz, Vice President, Corporate Trade Compliance, Harris Corporation Beverly Demma, U.S. Trade Compliance Manager, Melles Groit-Optical Systems Group

Jessica Blum, Compliance Specialist, Directorate of Defense Trade Controls Compliance, U.S. Department of State

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Pillars of Export Control Program

2 Management Support, Policies, Procedures

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Export Control

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What is A “Restricted Party”? – Party that creates some sort of restriction for US

transactions

Could be a “denied party”

Could be a lesser restriction

– Restricted party lists are fluid and 100,000’s names long

Terrorists

Terrorist financers

Narco-traffickers

Certain international political figures 3

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Restricted Parties

– US Companies are obligated to adhere to limitations and prohibitions

“Strict liability” standard for failures

– Must develop a screening process – “KYC”

Search engine vs. “search person”

Automatic vs. manual

Frequency of rescreening

Don’t’ forget about suppliers….Employees… External sales…

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Restricted Party Screening, Manual

– Screening performed through Kewill web-based portal

– Screening performed at Customer and Supplier set up

Locations responsible for screening

Local Export Compliance Manager reviews results

– Periodic rescreening

TCD responsible for rescreening

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Restricted Countries State Sponsors of

Terrorism

– No US business with US

designated State Sponsors of

Terrorism

Cuba

Iran

Syria

Sudan

Other Restricted Countries

– Business may be possible with restrictions

North Korea

Others – Depends on Risks

o Myanmar?

o Russia?

o Belarus?

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Restricted Goods - Export Restrictions

– Determine What Control Regimes Apply

International Traffic in Arms Regulation (ITAR)

o “Specially Designed” for military application

Nuclear Regulatory Commission (NRC)

Export Administration Regulations (EAR)

o Commerce Control List

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Restricted Goods - Export Restrictions

– Step 1: Evaluate the products for export control

– Step 2: Implement process to identify those items that are controlled

– Step 3: Review control restrictions prior to export

– Step 4: Obtain export license if necessary

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Recordkeeping – Export Control Documents

– EAR Parts 762 / 772

– Minimum Period – 5 years from export (or re-export)

– What is an Export Control Document?

Extensive list – almost anything related to an export transaction

– Paper vs. Electronic – 762.5

– Do you have a good organization scheme??

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| 10 | Harris Proprietary Information harris.com

Mary Menz

GRE Conference

| 11 •| •Harris Proprietary Information

Compliance Program Audit

Registered exporters of defense controlled articles are expected to review and improve their Trade Compliance program on a regular basis. This can be achieved in a number of ways. Self audits Compliance department staff will review specific activities against manuals and documented processes and procedures to determine if there are inconsistencies or deviations from the required practices. A schedule should be developed which requires the assessment of critical compliance areas on a regular basis. Document the activity and outcome. Internal Audit Department performs a targeted audit of trade practices and controls. External audits A consultant with subject matter expertise is selected to assess the trade compliance program and the organization’s ability to meet program requirements. Partners are asked to review documentation or activity to confirm compliance requirements are being followed.

| 12 •| •Harris Proprietary Information

What to do when inconsistencies, deviations or in the worst case, violations are discovered from these audits? • Analyze and investigate the deviation and determine if it is an anomaly or systemic

problem. • If it is a systemic problem a remedial action plan has to be developed and implemented

to resolve the issue. • Update manuals, procedures or processes to reflect the remedial action plan. • Develop targeted training for the departments/individuals affected.

• Document all activity.

• Confirm any changes to processes have been implemented!

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How to handle violations

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A Look Inside DTCC &

The Voluntary Disclosure Process

Jessica Blum Compliance Specialist

Defense Trade Controls Compliance

DTCC Organization

ICE Liaison

FBI Liaison

Senior Advisor Daniel Buzby

Compliance, Registration, and Enforcement Division

Daniel Cook

Director

Sue Gainor

Team 1 • Policies and

procedures • SOPs • Senior liaison w/

law enforcement • Training, security,

facilities

Team 2 • Company visit

program • Mergers and

acquisitions • CFIUS (PM lead) • Section 3 reports

Team 3 • Disclosures,

denials, debarments, reinstatements, policy exceptions

• Civil enforcement actions

• Support to law enforcement on criminal matters

Team 4 • Disclosures,

denials, debarments, reinstatements, policy exceptions

• Civil enforcement actions

• Support to law enforcement on criminal matters

Team 5 • Registration of

manufacturers, exporters & brokers

• Registration fee collection

• Response Team coordination

Functionally Organized by Task (Matrix Approach)

35 staff evenly divided betw civil service & contractor

Our Work: Brokering, Registration, MAD

• 12,454 Registrants (down from 13,394) – 11,401 manufacturer/exporter – 1,053 broker (81% US, 19% Foreign)

• Mergers, Acquisitions, & Divestitures

– Reviewed 323 M&A-related transactions in FY 2014 – Reviewed 85 foreign MADs in FY2014

• 50 transactions were also reviewed under CFIUS process • CFIUS Participation

– About 35-40% of CFIUS cases involve ITAR equities

Our Work: Civil Enforcement/Compliance

• Voluntary and directed disclosures – Processed ~1,400 disclosures in FY 2014 – Vast majority of disclosures are voluntary – Disclosures decreased after years of steady increases

• Civil enforcement actions: charging letters, consent

agreement, agreement monitoring, debarment – Two consent agreements concluded in 2014 – Monitoring 9 active consent agreements – Two debarments: U.S. person and foreign person

• Denials, reinstatements, policy exceptions

Our Work: Other Important Stuff

• Section 3 violations and investigations • Advisory opinions • Congressional inquiries

• Law Enforcement Support

– Trial-Certs: 23 in 2014, up from 12 in 2013 – Pre-Trial Certs: 239 in 2014, up from 162 in 2013 – FBI and HSI liaisons

• Speaking Engagements & Industry Outreach

– Approximately 105 events annually

Company Visit Program

Purpose: • Learn how companies establish a defense trade compliance

program • Understand how compliance programs are implemented and

companies comply with the AECA and ITAR • Gather info to determine whether the Department is properly

exercising its regulatory authorities and responsibilities • Use the gathered info to adjust or revise regulations and practices • Learn about and disseminate industry best practices and provide

feedback for compliance programs

Company Visit Program

Process: • Referral or select companies

– Company can request visit – Company may be selected for visit

• Company and team selection • Visit preparation • Site visit • Out-briefing with company senior management • Evaluation and outreach

Voluntary Disclosures

Disclosure Trends by FY

0

500

1000

1500

2000

2500

2006 2007 2008 2009 2010 2011 2012 2013 2014

DirectedVoluntary806

1107 1153 1312

1482 1493

456

2027

1318

back

The Black Hole?

back

Mail room

Delivered to applicable DTCC

POCs

New case?

Compliance Specialist

review & case no. assigned

Team Lead triage (new)

Case worked by DTCC DTSA staffing

DTCL/ DTCP

coordination Letter to industry

Yes

No

Staff case? Yes

No

No

Yes

Internal VD Process

Acknowledgement letter to industry

Close case

Add’l info

Req’d?

Review response

from industry

Process continues

Add’l info

Req’d?

Assessing Disclosures

• Harm to U.S. foreign policy or national security

• Adherence to law, regulations, and DDTC’s licensing and compliance policies

• Severity of violations – Minor or substantive – Procedural or judgmental – Isolated incident or repeated violation – Number of locations, programs, and business units affected

Assessing Disclosures cont.

• Destinations (126.1 countries) and other persons involved

• Whether transaction would have been authorized • Company’s approach and commitment to compliance

– Unclear or incomplete disclosure – Nature of investigation; root causes identified – Remedial measures implemented – Improved company compliance program

Voluntary Disclosures Preparation and Submission

• ITAR § 127.12(c) identifies info to include in disclosure • Who, what, when, where, how, why – provide specifics • Describe corrective actions taken – be thorough and explicit;

explain how corrective actions resolve the violation and prevent future violations

• Provide all relevant documentation and attachments – License history and copies of approvals – Descriptive literature on hardware – Technical data documents or details on defense service – CV/resume of any foreign persons involved – Provide on disc if documentation is voluminous

• Confirm senior officer informed 27

Voluntary Disclosures Suggestions

• Initial notification immediately after a violation is discovered, then a thorough review

• DTCC will issue a disclosure case number

– Provided in a 60-day notification letter – Wait for the case number before submitting related licenses –

DO NOT cite anything other than a correct case number on a license application

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Voluntary Disclosures More Suggestions

• Identify any past related disclosures

• Acknowledge underlying error/violation – enhances credibility

• Review all export-related transactions and policies – discover and disclose any other violations

• Implement remedial actions promised and verify effectiveness through audits

• Provide a matrix or timeline for multiple or complex violations

Voluntary Disclosures More Suggestions

• Submit one original and one copy; more copies will be requested if needed

• Submit only once – no faxes, emails, phone calls • Provide point of contact – name, title, phone/fax, e-mail, and

mailing address • Submit on company letterhead

– Outside counsel may submit the disclosure with a cover letter but requires certification from the Empowered Official

• Keep DTCC apprised of status and ask for extensions in advance

DTCC Procedures

• Process times vary greatly – Complexity – Related pending cases – Company history – DTSA staffing (SME, 126.1 countries) – DTCP and DTCL coordination – Sheer volume of cases office is reviewing and evaluating

• Adjudication types

– Closed or closed with action – Directed audit requested – Penalty

Voluntary Disclosures Disposition Determination Factors

• Remedial training provided

• Policies and procedures reviewed, implemented, and/or enhanced

• Violator cautioned or disciplined

• System implemented to report repeat violation

• Degree of cooperation with Department during review

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Voluntary Disclosures Disclosure Results

• Majority of disclosure cases closed without further action

• When warranted, most common DTCC actions include:

– Request additional information – Review company compliance manual – Recommend additional compliance measures – Recommend audit of compliance program – Recommend commodity jurisdiction (CJ) submission – Disclosure resolved under a consent agreement

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Directed Disclosures

• Directed disclosure not defined in the ITAR

• DTCC requests information from a company or person based on information we have received

• Information sources: – Calls, emails, DTSA, Licensing, voluntary disclosures

• 59 directed disclosures in FY 2014

• General Questions – DDTC Response Team • Phone number: (202) 663-1282 • E-mail: DDTCResponseTeam@state.gov

• Extensive FAQs on the website

http://pmddtc.state.gov/faqs/

Questions and Guidance

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