Today, many defense companies have already expanded their client base worldwide by selling their military goods or services abroad. While this may be good business for the company, it may not be good for the national security of the United States.
All businesses dealing in exports or imports of defense articles and services of any nature must first always ensure that they are fully compliant within the rules and regulations of the United States Department of State, Directorate of Defense Trade Controls, the International Traffic in Arms, the United States Munitions List, the United States Code, and the Code of Federal Regulations.
Laws and Regulations of Defense Articles and Services
The statutory law of the United States, passed by Congress and signed by the President, is called the United States Code (USC). Within the USC are regulations of the executive branch called the Code of Federal Regulations (CFR). Within the CFR, is the International Traffic in Arms (ITAR, 22 CFR 120-130) and the United States Munitions List (USML).
The ITAR and USML go hand in hand and outline the regulations governing the export and import of defense articles and services. In addition, there is the Federal Register (FR), which is a publication of the U.S. government where proposed and final regulation updates and executive orders are published.
The Arms Export Control Act (22 U.S.C. 2778) provides that the President is authorized and shall designate articles and services deemed to be defense articles and defense services to promulgate regulations for the import and export of same in the furtherance of world peace, security, and foreign policy of the United States. The items designated constitute the USML.
Under 22 CFR 122.1(a), “Any person who engages in the United States in the business of either manufacturing or exporting defense articles or furnishing defense services is required to register with the Directorate of Defense Trade Controls (DDTC)[…] manufacturers who do not engage in exporting must nevertheless register.” In addition, any person who intends to permanently export a defense article must obtain the approval of the DDTC via a permanent license application called a DSP-5.
Directorate of Defense Trade Controls
The DDTC, a division within the Department of State (DOS), administers and oversees the ITAR and USML regulations. The DDTC assumes that every registrant has a compliance program effective enough to properly ensure all laws and regulations governing the products and services the applicant provides is adhered to.
Under these federal laws and statutes, a person, as described below, is required to register with the DDTC as a manufacturer and seller of the defense articles (whether or not they intend to export) and must submit a DSP-5 license application for approval before any goods or services can be sold or exported.
Violations for non-compliance can result in hefty fines and penalties in the millions, debarment from conducting export/import business and/or manufacturing defense articles, and imprisonment for any or all of your empowered officials and employees. Any one of these types of violations could render a company bankrupt.
The ITAR has specific purpose definitions. Some of them are as follows (for more detail, see 22 CFR Part 120):
§120.14 –“A person means a natural person as well as a corporation, business association, partnership, society, trust, or any other entity, organization or group, including governmental entities.”
§120.15 – “A U.S. person means a person (as defined above) who is a lawful permanent resident as defined by 8 USC 1101(a)(20) or who is a protected individual as defined by 8 USC 1324b(a)(3). It also means any corporation, business association, partnership, society, trust, or any other entity organization or group that is incorporated to do business in the United States.”
§120.16 – “Foreign person means any natural person who is not a lawful permanent resident as defined by 8 USC 1101(a)(20) or who is not a protected individual as defined by 8 USC 1324b(a)(3). It also means any foreign corporation, business association, partnership, trust, society or any other entity or group that is not incorporated or organized to do business in the United States, as well as international organizations, foreign governments and any agency or subdivision of foreign governments.”
§120.25 – “Empowered official means a U.S. person who is directly employed by the applicant or a subsidiary in a position having authority for policy or management within the applicant organization and is legally empowered in writing by the applicant to sign license applications or other requests for approval on behalf of the applicant and understands the export control statues and regulations including civil, criminal and administrative liabilities and penalties for violating the export laws.”
§120.17 – “Export means sending or taking a defense article out of the U.S. in any manner or transferring registration, control or ownership to a foreign person of any aircraft, vessel or satellite covered by the USML, whether in the U.S. or abroad; disclosing (including oral or visual) or transferring in the U.S. any defense article to an embassy, any agency or subdivision of a foreign government; […] or disclosing (oral or visual) or transferring tech data to a foreign person, whether in the U.S. or abroad; and performing a defense service on behalf of, or for the benefit of, a foreign person, whether in the U.S. or abroad.” In a nutshell, this definition means an export can take place orally, visually, or as a tangible or intangible item, regardless of the location of the foreign person or entity.
Definition of an Export
Exports can happen at any time and place and with or without tangible items. By merely discussing technical data regarding a military controlled item during a cocktail event with anyone (potential or current customer included), a U.S. export has just occurred. We call this a Deemed Export.
Deemed exports are the toughest to control as most people tend to think there has to be a physical item actually being shipped to a non-U.S. location and/or to a foreign person, but that is not the case.
In order for any company to continue doing business when their products or services are governed by the ITAR, DDTC assumes that each applicant (company) at a minimum does the following:
- Registers with the DDTC;
- Has a written Export Management Compliance Program (EMCP) in place or develops such immediately;
- Ensures the policy includes how to address and perform voluntary self disclosures (VSD) should the need arise;
- Policy identifies all Empowered Officials (EO) and provides initial and ongoing training to all compliance personnel, including EO’s;
- Allocates adequate resources and staff to the compliance department;
- Pre-screens all non-U.S. employees, customers, partners, subcontractors and end-users for export controls (e.g., Specially Designated Nationals, Denied Party List , Denied Persons List, etc);
- Compliance Policy is continually maintained and updated as necessary;
- Has a record-keeping system in place, both hard and soft copy;
- Has a Technology Control Plan (TCP) and/or a Technology Transfer Control Plan (TTCP) and internal controls to safeguard ITAR controlled data and equipment; and
- Abides by all the regulations of the ITAR, 22 USC 2778, and all other applicable regulatory statutes.
This is a mere sampling of the many expectations the DDTC places on defense contractors. It is nearly impossible for a company to operate properly without a fully staffed and trained compliance department. Unfortunately, most companies are willing to take the risk of not having a compliance staff in order to save money. That is, until they are caught with a violation.
Companies that choose to disobey the laws and regulations, circumvent them, or simply are uneducated, find themselves wishing they would have implemented a compliance program and hired the proper staff once they are paid a friendly visit from DDTC and are being fined.
Consider this: The cost of just one fine or penalty will pay for the cost of a fully trained and staffed compliance department on average, typically for three to five years. Hmm. Seems like a no-brainer, yet every day companies are being fined and penalized. Call it ignorance, arrogance, lack of funding, unskilled workers, or willful neglect. Whatever you want to call it, it’s a hefty price to pay and does not make good business sense to operate without a solid compliance program and trained staff.
Companies that take a proactive approach and implement the necessary measures to ensure they are compliant and are conducting business within the legal framework of the laws will be adequately poised to continue a successful international business and minimize most, if not all, risk exposures and gain a competitive advantage in the global marketplace.