Pisa-Relli ITAR Civil Enforcement (November 2011)

ITAR Civil EnforcementA Pound of Cure and Then Some….

John Pisa-RelliLegal Director - Trade Compliance

Thales USA, Inc.

November 2011

Quis Custodiet Ipsos CustodesWho Watches the Watchers?

Despite arguable availability of administrative hearings, Despite arguable availability of administrative hearings, for all intents and purposes for all intents and purposes no due processno due process exists exists

DDTC’s willingness to use its DDTC’s willingness to use its denialdenial and and suspensionsuspension powers as powers as leverageleverage is an almost irresistible force is an almost irresistible force

DDTC enforcement staff enjoys considerable DDTC enforcement staff enjoys considerable autonomyautonomy and and wide wide latitudelatitude to pursue cases to pursue cases

And its decisions are largely And its decisions are largely immune from judicial immune from judicial reviewreview because of national security implications because of national security implications

A Target Rich EnvironmentHow Are Violations Uncovered?

Customs seizuresCustoms seizures

Intelligence reportsIntelligence reports

Referrals from other agenciesReferrals from other agencies

DDTC watchlistDDTC watchlist

Criminal casesCriminal cases

Coordinated USG investigationsCoordinated USG investigations

Disclosures (voluntary/directed)

“Blue Lantern” end use checks

License/registration discrepanciesLicense/registration discrepancies

WhistleblowersWhistleblowers

Disgruntled employeesDisgruntled employees

DDTC Company Visit ProgramDDTC Company Visit Program

CompetitorsCompetitors

M&A due diligenceM&A due diligence

SEC filingsSEC filingsMedia investigationsMedia investigations

Enforcement PrioritiesHow Are Cases Selected?

Significant violations that impact U.S. national security Significant violations that impact U.S. national security and foreign policy interests, especially involving and foreign policy interests, especially involving “crown “crown jewel” technologiesjewel” technologies and and proscribed countriesproscribed countries

Companies that Companies that challenge DDTCchallenge DDTC’s regulatory authority’s regulatory authority

Recurring themes include Recurring themes include tech data transferstech data transfers and and defense defense servicesservices, but DDTC often uses individual cases to single , but DDTC often uses individual cases to single out out specificspecific or or novelnovel issuesissues

And each case seems to embody one or more “morals” And each case seems to embody one or more “morals” apparently calculated to apparently calculated to send a message to industrysend a message to industry

Spare the Rod and Spoil the ChildHallmarks of DDTC Enforcement

Aggressive penalty calculationAggressive penalty calculation

Directed remediation almost always imposedDirected remediation almost always imposed

Successor and predecessor liabilitySuccessor and predecessor liability

Stern, uncompromising posture toward industryStern, uncompromising posture toward industry

Little latitude to negotiate more than “terms of surrender”Little latitude to negotiate more than “terms of surrender”

Directed RemediationA Bitter Pill to Swallow

Appointment of external or internal compliance monitorAppointment of external or internal compliance monitor

Establishment of electronic tech data tracking systemEstablishment of electronic tech data tracking system

Strengthen policies and procedures and conduct trainingStrengthen policies and procedures and conduct training

Conduct internal and external auditsConduct internal and external audits

Establish or reaffirm legal department and senior Establish or reaffirm legal department and senior management oversight management oversight

Establish or reaffirm compliance “hotline” or other Establish or reaffirm compliance “hotline” or other reporting channels reporting channels

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ITAR Civil Cases over the Last Ten Years

Odds of being targeted for enforcement arguably lowOdds of being targeted for enforcement arguably low

The Numbers GameIs It Worth the Gamble?

But the stakes are highBut the stakes are high

Is it worth gambling with a company’s reputation and ability Is it worth gambling with a company’s reputation and ability to do business?to do business?

To Disclose or Not to DiscloseWeighing Risks and Benefits

DDTC expects disclosures to DDTC expects disclosures to demonstrate compliancedemonstrate compliance

Companies without track record for Companies without track record for disclosure arouse suspiciondisclosure arouse suspicion

Few cases actually trigger penaltiesFew cases actually trigger penalties Can lead to “snowball effect”Can lead to “snowball effect”

Proven mitigating effectProven mitigating effect

Protects national security interests Protects national security interests by keeping DDTC alertby keeping DDTC alert

Risk of discovery greater Risk of discovery greater than you might thinkthan you might think

Gives DDTC a “ready-made” case Gives DDTC a “ready-made” case

Often impairs relationships with Often impairs relationships with implicated business partners implicated business partners

No guarantees you’ll just get No guarantees you’ll just get a “slap on the wrist” a “slap on the wrist”

Aggravating factor if violations Aggravating factor if violations independently discoveredindependently discovered

2011 Enforcement Trends2011 Enforcement Trends

• One case so far (BAE), but it broke all records!One case so far (BAE), but it broke all records!

• Unfortunately, it provides little meaningful guidance (as Unfortunately, it provides little meaningful guidance (as we will discuss)we will discuss)

• Anecdotal information that DDTC is pursuing more Anecdotal information that DDTC is pursuing more unpublished casesunpublished cases

• Emphasis apparently on audits and corrective actions Emphasis apparently on audits and corrective actions tailored to specific company issuestailored to specific company issues

• But lack of public information leaves us guessingBut lack of public information leaves us guessing

• Unclear how ongoing U.S. export reform initiative Unclear how ongoing U.S. export reform initiative plays into ITAR enforcementplays into ITAR enforcement


• Quoth Lisa Aguirre, DDTC enforcement chief, at a Quoth Lisa Aguirre, DDTC enforcement chief, at a July 2010 eventJuly 2010 event

• ““[I]f there has been a voluntary submission of [I]f there has been a voluntary submission of information and the company is generally working with information and the company is generally working with our office, it is extremely unlikely—I can’t say it can’t our office, it is extremely unlikely—I can’t say it can’t happen—but I say it is unlikely and it is not our practice happen—but I say it is unlikely and it is not our practice to impose monetary penalties….”to impose monetary penalties….”

• ““[W]orking with our office, volunteering information, [W]orking with our office, volunteering information, being honest and open, and just generally trying to fix being honest and open, and just generally trying to fix the issues, will go an extremely long way.”the issues, will go an extremely long way.”

• Emphasis on directed remediation over penalties?Emphasis on directed remediation over penalties?

• Big penalties ostensibly reserved for nondisclosure Big penalties ostensibly reserved for nondisclosure and lack of cooperationand lack of cooperation

2010 Enforcement Trends (cont.)2010 Enforcement Trends (cont.)

• Did Ms. Aguirre’s remarks herald a “kinder, gentler” Did Ms. Aguirre’s remarks herald a “kinder, gentler” DDTC, especially in light of 2011 BAE case? DDTC, especially in light of 2011 BAE case?

• Of the three published 2010 cases, one against the Of the three published 2010 cases, one against the former Blackwater (now Xe Services) involved a $42 former Blackwater (now Xe Services) involved a $42 million civil penalty and extensive directed million civil penalty and extensive directed remediationremediation

• But another against former Blackwater entities But another against former Blackwater entities acquired by another company (AAR) actually acquired by another company (AAR) actually involved no civil penalty (only directed remediation)involved no civil penalty (only directed remediation)

• And the third case (Interturbine) ($1 million) involved And the third case (Interturbine) ($1 million) involved an employee misrepresenting the classification of an an employee misrepresenting the classification of an item but DDTC noted cooperation by the companyitem but DDTC noted cooperation by the company


• Two relatively modest cases settled against small Two relatively modest cases settled against small companiescompanies

• Ostensibly to remind industry that it’s not just the big Ostensibly to remind industry that it’s not just the big U.S. primes at risk of being selected for enforcementU.S. primes at risk of being selected for enforcement

• Cases settled against backdrop of political and Cases settled against backdrop of political and agency transitionagency transition


• Four cases, three of which were against U.S. prime Four cases, three of which were against U.S. prime contractorscontractors

• Boeing (fifth time to the woodshed!)Boeing (fifth time to the woodshed!)

• Lockheed (third time in 8 years)Lockheed (third time in 8 years)

• Northrop Grumman (first time)Northrop Grumman (first time)

• Qioptiq (foreign company that acquired former Thales Qioptiq (foreign company that acquired former Thales optics businesses)optics businesses)

• Multimillion dollar penalties in every caseMultimillion dollar penalties in every case

• Directed remediation in every caseDirected remediation in every case

BAE Systems plc (2011)BAE Systems plc (2011)

NutshellNutshell

• Largest ITAR civil penalty and most violations everLargest ITAR civil penalty and most violations ever

• Brokering and related violations related to worldwide Brokering and related violations related to worldwide sales of aircraft and naval frigatessales of aircraft and naval frigates

• Stemmed from wide-ranging transatlantic criminal fraud Stemmed from wide-ranging transatlantic criminal fraud and corruption settlement (UK SFO and US DOJ) and corruption settlement (UK SFO and US DOJ)

Focal PointsFocal Points

• BrokeringBrokering

• Part 130Part 130

• RecordkeepingRecordkeeping


PenaltiesPenalties

• $79 million for 2,591 violations (both record-breaking)$79 million for 2,591 violations (both record-breaking)

• In addition to $450 million to settle UK/US criminal In addition to $450 million to settle UK/US criminal charges focused on fraud and corruption charges focused on fraud and corruption

• Debarment (lifted upon settlement) but three affiliates Debarment (lifted upon settlement) but three affiliates placed under denial policyplaced under denial policy

• Extensive directed remediationExtensive directed remediation

• BAE U.S. affiliates deemed not liable and shielded from BAE U.S. affiliates deemed not liable and shielded from consequencesconsequences

• But pre-settlement denial policy created havoc for BAE But pre-settlement denial policy created havoc for BAE operations worldwideoperations worldwide


Moral(s)Moral(s)

• Alleged misdeeds can trigger devastating collateral consequences

• Guilty plea for single criminal ITAR violation related to unreported commissions in fraud case snowballed into record-breaking ITAR civil penalty case

• Lack of coordination costly

• BAE UK seemingly overlooked implications of criminal case and failed to coordinate resolution with DDTC

• Lack of cooperation costly

• Failure to produce records led to DDTC estimating violations


Moral(s) (cont.)Moral(s) (cont.)

• Bad facts make worse law

• DDTC suggested that buying for one’s own account can trigger brokering violations!

• And paying one’s broker is brokering!

• As is not verifying third party brokering compliance!

• And any ITAR-content in foreign end item can trigger brokering jurisdiction!

• But in public comments at 2011 compliance seminar, DDTC official suggested that elements of settlement are peculiar to BAE and should not be given precedential weight

Qioptiq (2008)Qioptiq (2008)

NutshellNutshell

• Night vision technology to China, Iran, Cyprus, etc.Night vision technology to China, Iran, Cyprus, etc.

• ITT spin-off ITT spin-off

• Voluntary disclosure and cooperation notedVoluntary disclosure and cooperation noted


• Proscribed countriesProscribed countries

• Sensitive technologySensitive technology

• Classified tech data and defense servicesClassified tech data and defense services

• M&A due diligence and successor liabilityM&A due diligence and successor liability

Qioptiq (2008)Qioptiq (2008)

PenaltiesPenalties

• $25 million for 163 violations (no debarment)$25 million for 163 violations (no debarment)

• Directed remediationDirected remediation

Moral(s)Moral(s)

• Everyone is accountable

• Buyer paid penalty and assumed compliance obligations but seller indemnified

• Perception of cavalier attitude unhelpful

• Predecessor rebuked harshly in settlement documents and portrayed as inattentive to ITAR compliance

ITT Corporation (2007)ITT Corporation (2007)

NutshellNutshell

• Second largest overall U.S. export control case everSecond largest overall U.S. export control case ever

• Night vision technology to China, Singapore, and UKNight vision technology to China, Singapore, and UK

• Material omissions in prior disclosureMaterial omissions in prior disclosure

• Exceeding scope of TAAExceeding scope of TAA


• Proscribed countryProscribed country



ITT Corporation (2007)ITT Corporation (2007)

PenaltiesPenalties

• Staggering $128 million penalty comprising a blend of Staggering $128 million penalty comprising a blend of criminal and civil sanctions, with $50 million earmarked criminal and civil sanctions, with $50 million earmarked for mandatory R&D for USGfor mandatory R&D for USG

• Extensive directed remediation with no credit given for Extensive directed remediation with no credit given for prior effortsprior efforts

• Debarment (now lifted)Debarment (now lifted)

Moral(s)Moral(s)

• Perceived lack of cooperation is devastating

• Cooperation essentially means total submission

Lockheed Martin Sippican (2006)Lockheed Martin Sippican (2006)

NutshellNutshell

• Violated TAA provisosViolated TAA provisos

• Tech data transfers after TAA lapsedTech data transfers after TAA lapsed

• Transfers to unauthorized recipientsTransfers to unauthorized recipients

• Unauthorized classified data transfersUnauthorized classified data transfers

• Failed to identify prior violations when seeking TAAFailed to identify prior violations when seeking TAA


• TAA complianceTAA compliance


Lockheed Martin Sippican (2006)Lockheed Martin Sippican (2006)

PenaltiesPenalties


• Directed remediation but no credit given toward Directed remediation but no credit given toward program improvementsprogram improvements

• Successor liabilitySuccessor liability

Moral(s)Moral(s)

• Even when TAA involves close ally (in this case Royal Even when TAA involves close ally (in this case Royal Australian Navy), strict compliance not an optionAustralian Navy), strict compliance not an option

• U.S. Navy contract requirements do not supersede U.S. Navy contract requirements do not supersede ITAR or sway DDTCITAR or sway DDTC

Boeing (2006)Boeing (2006)

NutshellNutshell

• Transferred ITAR-controlled QRS-11 sensors used in Transferred ITAR-controlled QRS-11 sensors used in commercial aircraft to China and other destinationscommercial aircraft to China and other destinations

• Disregarded DDTC instructions and interpretations Disregarded DDTC instructions and interpretations regarding QRS-11’s ITAR classificationregarding QRS-11’s ITAR classification


• Unwritten ITAR “see-through” ruleUnwritten ITAR “see-through” rule

• Proscribed countryProscribed country

• Primacy of DDTC’s authority (“because I said so!”)Primacy of DDTC’s authority (“because I said so!”)

Boeing (2006)Boeing (2006)

PenaltiesPenalties


• Directed remediation but no credit given for program Directed remediation but no credit given for program improvements because of recidivismimprovements because of recidivism

MoralsMorals

• You can’t fight city hallYou can’t fight city hall

• Hell hath no fury like a regulatory agency scornedHell hath no fury like a regulatory agency scorned

• ITAR trumps even most compelling business ITAR trumps even most compelling business considerations (such as grounding commercial aircraft)considerations (such as grounding commercial aircraft)

Goodrich/L-3 (2006)Goodrich/L-3 (2006)

NutshellNutshell

• Material omission in Commodity Jurisdiction request Material omission in Commodity Jurisdiction request concerning QRS-11concerning QRS-11

• Unauthorized exports of sameUnauthorized exports of same


• Unwritten ITAR “see-through” ruleUnwritten ITAR “see-through” rule

• Integrity of submissions to DDTCIntegrity of submissions to DDTC

• Outside attorneys cited by name in charging documents Outside attorneys cited by name in charging documents for “aiding and abetting” violationsfor “aiding and abetting” violations

Goodrich/L-3 (2006)Goodrich/L-3 (2006)

PenaltiesPenalties


• Directed remediation, with $3.75 million credit Directed remediation, with $3.75 million credit


Moral(s)Moral(s)

• Don’t play games with submissionsDon’t play games with submissions

• Tell the truth, the whole truth, and nothing but the truthTell the truth, the whole truth, and nothing but the truth

• Don’t push the envelope when giving legal adviceDon’t push the envelope when giving legal advice

• You may find yourself named in a charging letterYou may find yourself named in a charging letter

DirecTV/Hughes Network (2005)DirecTV/Hughes Network (2005)

NutshellNutshell

• Satellite technology transfers, including to China and Satellite technology transfers, including to China and IndiaIndia



• Technical data transfersTechnical data transfers

• Proscribed CountriesProscribed Countries

DirecTV/Hughes Network (2005)DirecTV/Hughes Network (2005)

PenaltiesPenalties

• $5 million for 56 violations$5 million for 56 violations

• Directed remediation, with $1 million creditDirected remediation, with $1 million credit


• Hughes China debarredHughes China debarred

• Forced to appear on a “lessons learned” panel at a Forced to appear on a “lessons learned” panel at a public conferencepublic conference

MoralMoral

• Punishment may include public pilloryingPunishment may include public pillorying

Parting ThoughtsWhat to Make of All This Fire and Brimstone?

““Turn square corners”Turn square corners”• There’s simply no substitute for acting with integrity, There’s simply no substitute for acting with integrity,

transparency, and competencytransparency, and competency

Cooperate at all costsCooperate at all costs• Trustworthiness is paramountTrustworthiness is paramount• Need to maintain positive ongoing relationship with Need to maintain positive ongoing relationship with

regulators usually outweighs other considerationsregulators usually outweighs other considerations

When mistakes are made consider voluntary disclosureWhen mistakes are made consider voluntary disclosure • Demonstrate bona fides while controlling the messageDemonstrate bona fides while controlling the message

Better to invest in effective compliance on your own termsBetter to invest in effective compliance on your own terms • Than to have DDTC dictate what to do and how much to spendThan to have DDTC dictate what to do and how much to spend

Study DDTC consent decreesStudy DDTC consent decrees • DDTC’s expectations are spelled outDDTC’s expectations are spelled out

Pisa-Relli ITAR Civil Enforcement (November 2011)

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Transcript of Pisa-Relli ITAR Civil Enforcement (November 2011)