TREASURY SERVICES You Too Must Be ITAR-Compliant This white paper highlights four key steps to avoid scrutiny from the U.S. State Department. Commercial firms importing or exporting defense articles and services are subject to onerous restrictions under the guise of protecting national security.
Executive Summary Compliance with the U.S. State Department-administered International Traffic in Arms Regulations (ITAR) remains one of the hottest trade-control issues. While traditional defense contractors are well aware of the broad scope of the ITAR and U.S. Government (USG)-enhanced efforts to control the export and import of defense articles and services, the majority of commercial firms are not aware of the pitfalls presented by the ITAR and do not have the policies, processes and procedures in place to avoid them. There has been an increased scrutiny on ITAR-controlled technology due to enhanced national security concerns and the terrorist threat in the post-9/11 environment. In recent years, an increasing number of violations and violators have been identified. Higher fines are being levied and USGmandated remedial compliance measures are getting more onerous. Additionally, the USG has increased its spending on ITAR enforcement, is hiring more agents and is trying to resolve cases more quickly. The bottom line for many commercial firms is the added responsibility of complying with a whole new (for them) set of trade-control regulations that may be a traumatic and unwelcome experience. What Is ITAR? The ITAR implements Section 28 of the Arms Export Control Act (22 U.S.C. 2778). Controls are in place to support U.S. national security and foreign policy. The U.S. Department of State DDTC administers the regulations by monitoring and controlling the export and temporary import of defense articles and defense services covered by the United States Munitions List. An authorization (exemption license or other approval) from the Director of Defense Trade Controls (DDTC) is always required for the export or reexport of defense articles and services. Except in extreme cases of national security, licenses will not be granted for proscribed countries and debarred parties. The ITAR covers any item specifically designed, developed, configured, adapted or modified in any way for a military application or has significant military or intelligence applicability that such control is deemed necessary. This includes end items and any component, part, material, test equipment, hardware or software unique to that item. It covers inherently military items such as firearms, explosives, military vessels & aircraft and related parts, military electronics (including communications or navigation equipment) and certain chemicals deemed to have significant military applicability. The ITAR also includes many items that would generally be thought of as civil in nature (e.g., technology relating to commercial satellite launch vehicles, "Noncompliance with the ITAR can stop your supply chain in its tracks and result in significant fines. The ITAR is complex, challenging, sometimes vague, not intuitive and very much subject to interpretation." Jim Wilson, Vice President, Trade Management Consulting. Page 2 of 6
developmental aircraft, certain quartz rate sensors used in navigation systems in civilian aircraft and specialized protective equipment (e.g., pressure suits, helmets, gas masks). The ITAR also covers technical data and software (technology) and defense services (including training and assistance) required for the design, development, production, manufacture, assembly, operation, repair, testing or modification of a defense article. This information is controlled under the ITAR even if a company does not consider the information its intellectual property. For example, a commercial electronics firm that modifies a design for military application cannot grant access by any foreign person to the design data (without the proper authorization). This restriction applies to any foreign person (e.g., employees, contractors, subsidiaries, consultants, interpreters). ITAR Applies to Many Commercial Firms There is a large chasm between the myth that the ITAR does not apply to commercial firms and the reality of modern ITAR enforcement and supply chain restrictions. What many firms are now learning is that products and technologies that they thought were of a purely commercial/industrial (i.e., nonmilitary) nature may be subject to control under the ITAR. The slightest change, no matter how small to a traditionally commercial item for a specific military application will shift jurisdiction for that item from the Commerce Department to the State Department. If you manufacture, export or broker defense articles or furnish defense services, you must register with the Directorate of Defense Trade Controls.. Furthermore, even if a firm is dealing in public domain information related to ITAR-controlled items, the simple act of sharing such information may require authorization as a Defense Service. Additionally, taking such public domain data and rearranging or reconfiguring it for a unique purpose with military application may take the newly configured data out of the public domain and subject it to the ITAR. Remember, the DDTC is the sole authority to make jurisdiction determinations. Dual-use commodities (the exact item with same part number used on both a commercial and military application) have historically been under the jurisdiction of the Department of Commerce Export Administration Regulations (EAR). Recent jurisdiction rulings from the DDTC indicate that some of the standards used in making jurisdiction determinations are becoming less clear. Recent Rulings and Violations In a May 23 Federal Register Notice, DDTC ruled that although the L-100 (a variant of the C-130) is a commercial aircraft controlled by the Commerce Department, parts that are common only to the C-130 and the L-100 are Page 3 of 6
controlled as defense articles under the ITAR. In addition, commercial carriers flying the L-100 have to get authorization from the DDTC to fly over ITAR-proscribed countries. A number of well-known U.S. companies have run afoul of the ITAR regulations. Export and Import practitioners must constantly pay attention to the lessons learned from companies fined or penalized for a wide range of violations dealing with manufacturing or exporting of defense-related articles. The most recent examples of settlements with the State Department that also include Directed Disclosures include the following: The Boeing Company paid $15 million in fines for 86 alleged unauthorized exports of the Quartz Rate Sensor (QRS)-11, a small, lightweight, fully self-contained Direct Current solid-state gyro device. Charges included unauthorized exports to proscribed countries even after Boeing was notified by the State Department; misrepresentation and omissions of facts, false statements; failure to file a Shippers Export Declaration and failure to report a prohibited export. A Special Compliance Official (SCO) outside the company was appointed to oversee the State Department-mandated remedial compliance measures (RCM). DirecTV paid $5 million in fines for 56 alleged unauthorized exports of technical data, defense services and defense articles to foreign employees from proscribed countries. GM/General Dynamics was charged with 248 violations, including alleged exports to proscribed countries, unauthorized access to U.S. technical data by foreign national and dual national employees, and unauthorized access to U.S. technical data by foreign suppliers and vendors. The ITAR-controlled technical data was contained in GM s electronic databases for light armored vehicles. Fine: $20 million and required remedial compliance measures. Goodrich Corporation and L-3 Communications Corporation agreed to pay $7 million in fines as a result of 26 alleged violations for omission of material facts on a QRS-11 Commodity Jurisdiction request and the unauthorized export of the QRS-11 to 25 countries. SCOs inside both corporations were appointed to oversee the State Department-mandated RCM. As a result of 96 alleged violations, ITT Industries agreed to pay $8 million in fines for the unauthorized exports of night vision products and the unauthorized export of space remote sensing technical data and defense services. The State Department s actions were the result of Voluntary and Directed Disclosures and related compliance cases pertaining to numerous violations at several ITT business units. ITAR-compliance is a challenge for most commercial firms just starting to do business with government entities or engaging in the trade of defense Page 4 of 6
articles and services. It s clear that failure to comply with ITAR presents a great risk and the possibility of a long list of negative consequences. So, what steps can commercial firms take to help ensure that they are not committing ITAR violations? Steps Commercial Firms Can Take What are some of the most important actions commercial firms can take to help ensure they do not inadvertently run afoul of the ITAR? Follow these tips: 1. Determine Jurisdiction. Always first determine the correct jurisdiction of your products and technology (Department of Commerce or Department of State), then ensure proper classification under the applicable regulation (EAR or ITAR). 2. DDTC Registration. Register with the DDTC if you are involved in the manufacture, export or brokering of defense articles or furnishing of defense services. 3. Compliance Program. Establish a comprehensive Trade Compliance Program integrated globally, vertically and horizontally into all areas of the organization that includes: a. Well-defined compliance structure with the Board of Director and top all the way down emphasis b. Clearly written policies, processes and procedures that are followed c. Screening against all the applicable USG denied and debarred entities lists d. General and more-focused education and training on an initial and recurring basis e. Periodic assessments/audits and ensuring timely crosstalk and communication of lessons learned throughout your entire organization f. Maintenance of required records and submission of required reports 4. Disclosure. Proactively find and disclose violations and take appropriate corrective action immediately after discovery. Page 5 of 6
JPMorgan Global Trade Services The Global Trade Services group at JPMorgan provides logistics and trade finance solutions designed to help customers enhance physical and financial supply chain operations, improve compliance with government trade regulations and optimize working capital. Logistics solutions include trade management consulting, outsourced operations management, technology, and trade education and compliance training. Global Trade Services is part of the Treasury Services business of JPMorgan, a top-ranked, full-service provider of innovative payment, collection, liquidity and investment management, commercial card and information solutions. With more than 50,000 clients and a presence in 39 countries, JPMorgan Treasury Services is the world s largest provider of treasury management services. JPMorgan has been recognized in the industry as Best Trade Bank, Best Trade Services Provider, and Most Innovative Trade Bank. Page 6 of 6