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Pisa-Relli ITAR Civil Enforcement (November 2011)


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Pisa-Relli ITAR Civil Enforcement (November 2011)

  1. 1. ITAR Civil Enforcement A Pound of Cure and Then Some…. John Pisa-Relli Legal Director - Trade Compliance Thales USA, Inc. November 2011
  2. 3. Quis Custodiet Ipsos Custodes Who Watches the Watchers? Despite arguable availability of administrative hearings, for all intents and purposes no due process exists DDTC’s willingness to use its denial and suspension powers as leverage is an almost irresistible force DDTC enforcement staff enjoys considerable autonomy and wide latitude to pursue cases And its decisions are largely immune from judicial review because of national security implications
  3. 4. A Target Rich Environment How Are Violations Uncovered? Customs seizures Intelligence reports Referrals from other agencies DDTC watchlist Criminal cases Coordinated USG investigations Disclosures (voluntary/directed) “ Blue Lantern” end use checks License/registration discrepancies Whistleblowers Disgruntled employees DDTC Company Visit Program Competitors M&A due diligence SEC filings Media investigations
  4. 5. Enforcement Priorities How Are Cases Selected? Significant violations that impact U.S. national security and foreign policy interests, especially involving “crown jewel” technologies and proscribed countries Companies that challenge DDTC ’s regulatory authority Recurring themes include tech data transfers and defense services , but DDTC often uses individual cases to single out specific or novel issues And each case seems to embody one or more “morals” apparently calculated to send a message to industry
  5. 6. Spare the Rod and Spoil the Child Hallmarks of DDTC Enforcement Aggressive penalty calculation Directed remediation almost always imposed Successor and predecessor liability Stern, uncompromising posture toward industry Little latitude to negotiate more than “terms of surrender”
  6. 7. Directed Remediation A Bitter Pill to Swallow Appointment of external or internal compliance monitor Establishment of electronic tech data tracking system Strengthen policies and procedures and conduct training Conduct internal and external audits Establish or reaffirm legal department and senior management oversight Establish or reaffirm compliance “hotline” or other reporting channels
  7. 8. 2 2 5 2 2 5 1 4 2 3 01 02 03 04 05 06 07 08 09 10 ITAR Civil Cases over the Last Ten Years
  8. 9. Odds of being targeted for enforcement arguably low The Numbers Game Is It Worth the Gamble? But the stakes are high Is it worth gambling with a company’s reputation and ability to do business?
  9. 10. To Disclose or Not to Disclose Weighing Risks and Benefits
  10. 11. DDTC expects disclosures to demonstrate compliance Companies without track record for disclosure arouse suspicion Few cases actually trigger penalties Can lead to “snowball effect” Proven mitigating effect Protects national security interests by keeping DDTC alert Risk of discovery greater than you might think Gives DDTC a “ready-made” case Often impairs relationships with implicated business partners No guarantees you’ll just get a “slap on the wrist” Aggravating factor if violations independently discovered
  11. 12. 2011 Enforcement Trends <ul><li>One case so far (BAE), but it broke all records! </li></ul><ul><ul><li>Unfortunately, it provides little meaningful guidance (as we will discuss) </li></ul></ul><ul><li>Anecdotal information that DDTC is pursuing more unpublished cases </li></ul><ul><ul><li>Emphasis apparently on audits and corrective actions tailored to specific company issues </li></ul></ul><ul><ul><li>But lack of public information leaves us guessing </li></ul></ul><ul><li>Unclear how ongoing U.S. export reform initiative plays into ITAR enforcement </li></ul>
  12. 13. 2010 Enforcement Trends <ul><li>Quoth Lisa Aguirre, DDTC enforcement chief, at a July 2010 event </li></ul><ul><ul><li>“ [I]f there has been a voluntary submission of information and the company is generally working with 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 to impose monetary penalties….” </li></ul></ul><ul><ul><li>“ [W]orking with our office, volunteering information, being honest and open, and just generally trying to fix the issues, will go an extremely long way.” </li></ul></ul><ul><li>Emphasis on directed remediation over penalties? </li></ul><ul><li>Big penalties ostensibly reserved for nondisclosure and lack of cooperation </li></ul>
  13. 14. 2010 Enforcement Trends (cont.) <ul><li>Did Ms. Aguirre’s remarks herald a “kinder, gentler” DDTC, especially in light of 2011 BAE case? </li></ul><ul><li>Of the three published 2010 cases, one against the former Blackwater (now Xe Services) involved a $42 million civil penalty and extensive directed remediation </li></ul><ul><li>But another against former Blackwater entities acquired by another company (AAR) actually involved no civil penalty (only directed remediation) </li></ul><ul><li>And the third case (Interturbine) ($1 million) involved an employee misrepresenting the classification of an item but DDTC noted cooperation by the company </li></ul>
  14. 15. 2009 Enforcement Trends <ul><li>Two relatively modest cases settled against small companies </li></ul><ul><li>Ostensibly to remind industry that it’s not just the big U.S. primes at risk of being selected for enforcement </li></ul><ul><li>Cases settled against backdrop of political and agency transition </li></ul>
  15. 16. 2008 Enforcement Trends <ul><li>Four cases, three of which were against U.S. prime contractors </li></ul><ul><ul><li>Boeing (fifth time to the woodshed!) </li></ul></ul><ul><ul><li>Lockheed (third time in 8 years) </li></ul></ul><ul><ul><li>Northrop Grumman (first time) </li></ul></ul><ul><ul><li>Qioptiq (foreign company that acquired former Thales optics businesses) </li></ul></ul><ul><li>Multimillion dollar penalties in every case </li></ul><ul><li>Directed remediation in every case </li></ul>
  16. 17. BAE Systems plc (2011) <ul><li>Nutshell </li></ul><ul><ul><li>Largest ITAR civil penalty and most violations ever </li></ul></ul><ul><ul><li>Brokering and related violations related to worldwide sales of aircraft and naval frigates </li></ul></ul><ul><ul><li>Stemmed from wide-ranging transatlantic criminal fraud and corruption settlement (UK SFO and US DOJ) </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Brokering </li></ul></ul><ul><ul><li>Part 130 </li></ul></ul><ul><ul><li>Recordkeeping </li></ul></ul>
  17. 18. BAE Systems plc (2011) <ul><li>Penalties </li></ul><ul><ul><li>$79 million for 2,591 violations (both record-breaking) </li></ul></ul><ul><ul><ul><li>In addition to $450 million to settle UK/US criminal charges focused on fraud and corruption </li></ul></ul></ul><ul><ul><li>Debarment (lifted upon settlement) but three affiliates placed under denial policy </li></ul></ul><ul><ul><li>Extensive directed remediation </li></ul></ul><ul><ul><li>BAE U.S. affiliates deemed not liable and shielded from consequences </li></ul></ul><ul><ul><li>But pre-settlement denial policy created havoc for BAE operations worldwide </li></ul></ul>
  18. 19. BAE Systems plc (2011) <ul><li>Moral(s) </li></ul><ul><ul><li>Alleged misdeeds can trigger devastating collateral consequences </li></ul></ul><ul><ul><ul><li>Guilty plea for single criminal ITAR violation related to unreported commissions in fraud case snowballed into record-breaking ITAR civil penalty case </li></ul></ul></ul><ul><ul><li>Lack of coordination costly </li></ul></ul><ul><ul><ul><li>BAE UK seemingly overlooked implications of criminal case and failed to coordinate resolution with DDTC </li></ul></ul></ul><ul><ul><li>Lack of cooperation costly </li></ul></ul><ul><ul><ul><li>Failure to produce records led to DDTC estimating violations </li></ul></ul></ul>
  19. 20. BAE Systems plc (2011) <ul><li>Moral(s) (cont.) </li></ul><ul><ul><li>Bad facts make worse law </li></ul></ul><ul><ul><ul><li>DDTC suggested that buying for one’s own account can trigger brokering violations! </li></ul></ul></ul><ul><ul><ul><li>And paying one’s broker is brokering! </li></ul></ul></ul><ul><ul><ul><li>As is not verifying third party brokering compliance! </li></ul></ul></ul><ul><ul><ul><li>And any ITAR-content in foreign end item can trigger brokering jurisdiction! </li></ul></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul>
  20. 21. Qioptiq (2008) <ul><li>Nutshell </li></ul><ul><ul><li>Night vision technology to China, Iran, Cyprus, etc. </li></ul></ul><ul><ul><li>ITT spin-off </li></ul></ul><ul><ul><li>Voluntary disclosure and cooperation noted </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Proscribed countries </li></ul></ul><ul><ul><li>Sensitive technology </li></ul></ul><ul><ul><li>Classified tech data and defense services </li></ul></ul><ul><ul><li>M&A due diligence and successor liability </li></ul></ul>
  21. 22. Qioptiq (2008) <ul><li>Penalties </li></ul><ul><ul><li>$25 million for 163 violations (no debarment) </li></ul></ul><ul><ul><li>Directed remediation </li></ul></ul><ul><li>Moral(s) </li></ul><ul><ul><li>Everyone is accountable </li></ul></ul><ul><ul><ul><li>Buyer paid penalty and assumed compliance obligations but seller indemnified </li></ul></ul></ul><ul><ul><li>Perception of cavalier attitude unhelpful </li></ul></ul><ul><ul><ul><li>Predecessor rebuked harshly in settlement documents and portrayed as inattentive to ITAR compliance </li></ul></ul></ul>
  22. 23. ITT Corporation (2007) <ul><li>Nutshell </li></ul><ul><ul><li>Second largest overall U.S. export control case ever </li></ul></ul><ul><ul><li>Night vision technology to China, Singapore, and UK </li></ul></ul><ul><ul><li>Material omissions in prior disclosure </li></ul></ul><ul><ul><li>Exceeding scope of TAA </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Proscribed country </li></ul></ul><ul><ul><li>Sensitive technology </li></ul></ul><ul><ul><li>Classified tech data and defense services </li></ul></ul>
  23. 24. ITT Corporation (2007) <ul><li>Penalties </li></ul><ul><ul><li>Staggering $128 million penalty comprising a blend of criminal and civil sanctions, with $50 million earmarked for mandatory R&D for USG </li></ul></ul><ul><ul><li>Extensive directed remediation with no credit given for prior efforts </li></ul></ul><ul><ul><li>Debarment (now lifted) </li></ul></ul><ul><li>Moral(s) </li></ul><ul><ul><li>Perceived lack of cooperation is devastating </li></ul></ul><ul><ul><ul><li>Cooperation essentially means total submission </li></ul></ul></ul>
  24. 25. Lockheed Martin Sippican (2006) <ul><li>Nutshell </li></ul><ul><ul><li>Violated TAA provisos </li></ul></ul><ul><ul><li>Tech data transfers after TAA lapsed </li></ul></ul><ul><ul><li>Transfers to unauthorized recipients </li></ul></ul><ul><ul><li>Unauthorized classified data transfers </li></ul></ul><ul><ul><li>Failed to identify prior violations when seeking TAA </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>TAA compliance </li></ul></ul><ul><ul><li>Classified tech data and defense services </li></ul></ul>
  25. 26. Lockheed Martin Sippican (2006) <ul><li>Penalties </li></ul><ul><ul><li>$3 million for 6 violations (no debarment) </li></ul></ul><ul><ul><li>Directed remediation but no credit given toward program improvements </li></ul></ul><ul><ul><li>Successor liability </li></ul></ul><ul><li>Moral(s) </li></ul><ul><ul><li>Even when TAA involves close ally (in this case Royal Australian Navy), strict compliance not an option </li></ul></ul><ul><ul><li>U.S. Navy contract requirements do not supersede ITAR or sway DDTC </li></ul></ul>
  26. 27. Boeing (2006) <ul><li>Nutshell </li></ul><ul><ul><li>Transferred ITAR-controlled QRS-11 sensors used in commercial aircraft to China and other destinations </li></ul></ul><ul><ul><li>Disregarded DDTC instructions and interpretations regarding QRS-11’s ITAR classification </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Unwritten ITAR “see-through” rule </li></ul></ul><ul><ul><li>Proscribed country </li></ul></ul><ul><ul><li>Primacy of DDTC’s authority (“because I said so!”) </li></ul></ul>
  27. 28. Boeing (2006) <ul><li>Penalties </li></ul><ul><ul><li>$15 million for 86 violations (no debarment) </li></ul></ul><ul><ul><li>Directed remediation but no credit given for program improvements because of recidivism </li></ul></ul><ul><li>Morals </li></ul><ul><ul><li>You can’t fight city hall </li></ul></ul><ul><ul><li>Hell hath no fury like a regulatory agency scorned </li></ul></ul><ul><ul><li>ITAR trumps even most compelling business considerations (such as grounding commercial aircraft) </li></ul></ul>
  28. 29. Goodrich/L-3 (2006) <ul><li>Nutshell </li></ul><ul><ul><li>Material omission in Commodity Jurisdiction request concerning QRS-11 </li></ul></ul><ul><ul><li>Unauthorized exports of same </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Unwritten ITAR “see-through” rule </li></ul></ul><ul><ul><li>Integrity of submissions to DDTC </li></ul></ul><ul><ul><ul><li>Outside attorneys cited by name in charging documents for “aiding and abetting” violations </li></ul></ul></ul>
  29. 30. Goodrich/L-3 (2006) <ul><li>Penalties </li></ul><ul><ul><li>$7 million for 26 violations (no debarment) </li></ul></ul><ul><ul><li>Directed remediation, with $3.75 million credit </li></ul></ul><ul><ul><li>Successor liability </li></ul></ul><ul><li>Moral(s) </li></ul><ul><ul><li>Don’t play games with submissions </li></ul></ul><ul><ul><ul><li>Tell the truth, the whole truth, and nothing but the truth </li></ul></ul></ul><ul><ul><li>Don’t push the envelope when giving legal advice </li></ul></ul><ul><ul><ul><li>You may find yourself named in a charging letter </li></ul></ul></ul>
  30. 31. DirecTV/Hughes Network (2005) <ul><li>Nutshell </li></ul><ul><ul><li>Satellite technology transfers, including to China and India </li></ul></ul><ul><li>Focal Points </li></ul><ul><ul><li>Sensitive technology </li></ul></ul><ul><ul><li>Technical data transfers </li></ul></ul><ul><ul><li>Proscribed Countries </li></ul></ul>
  31. 32. DirecTV/Hughes Network (2005) <ul><li>Penalties </li></ul><ul><ul><li>$5 million for 56 violations </li></ul></ul><ul><ul><li>Directed remediation, with $1 million credit </li></ul></ul><ul><ul><li>Successor liability </li></ul></ul><ul><ul><li>Hughes China debarred </li></ul></ul><ul><ul><li>Forced to appear on a “lessons learned” panel at a public conference </li></ul></ul><ul><li>Moral </li></ul><ul><ul><li>Punishment may include public pillorying </li></ul></ul>
  32. 33. Parting Thoughts What to Make of All This Fire and Brimstone? <ul><li>“ Turn square corners” </li></ul><ul><ul><li>There’s simply no substitute for acting with integrity, transparency, and competency </li></ul></ul><ul><li>Cooperate at all costs </li></ul><ul><ul><li>Trustworthiness is paramount </li></ul></ul><ul><ul><li>Need to maintain positive ongoing relationship with regulators usually outweighs other considerations </li></ul></ul><ul><li>When mistakes are made consider voluntary disclosure </li></ul><ul><ul><li>Demonstrate bona fides while controlling the message </li></ul></ul><ul><li>Better to invest in effective compliance on your own terms </li></ul><ul><ul><li>Than to have DDTC dictate what to do and how much to spend </li></ul></ul><ul><li>Study DDTC consent decrees </li></ul><ul><ul><li>DDTC’s expectations are spelled out </li></ul></ul>