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State Department's Back-To-Back Multi-Million Dollar Settlements Emphasize Liabilities for Improper Export Jurisdiction Determinations

September 17, 2013

The U.S. Department of State concluded two separate, but notably analogous, administrative settlements within a span of two weeks:  first with Aeroflex Incorporated on August 9, 2013 and second with Meggitt-USA, Inc. on August 23, 2013.

In both instances, the State Department noted that the settlements were “reached after an extensive compliance review” conducted by the Office of Defense Trade Controls Compliance (“DTCC”) involving “hundreds” of potential violations of the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”) over a period of many years.  Both respondents entered into multi-year consent agreements wherein each is accountable for engaging an Internal Special Compliance Official to oversee implementation of the consent agreement.  In addition to imposing significant civil penalties, $8 million against Aeroflex and $25 million against Meggitt-USA, the companies are required under the terms of the agreements to conduct multiple internal audits and implement extensive compliance measures, including enhanced policies, procedures and export compliance training.

The substantive nuances in each case, however, serve as cautionary tales for companies in possession of ITAR-controlled technical data, services, or articles.  In the case of Aeroflex, the State Department found “inadequate corporate oversight” and a “systemic and corporate-wide failure to properly determine export control jurisdiction over commodities.”  Although Aeroflex sought and received commodity classifications for certain products from the U.S. Department of Commerce, the State Department emphasized that “the [Directorate of Defense Trade Controls] commodity jurisdiction (“CJ”) procedure of ITAR § 120.4 is the only U.S. government method of determining whether an article or service is covered by the USML.”  Aeroflex’s reliance on export classification determinations from the Commerce Department, and its failure to obtain commodity jurisdiction determinations from the State Department, led to many of the ITAR violations.

For Meggitt-USA, many of the disclosed ITAR violations were the result of an internal review conducted following the acquisition of a number of companies.  The State Department found Meggitt-USA liable for the ITAR violations of its subsidiaries, despite the fact that the majority of violations occurred prior to Meggitt-USA’s acquisition of the companies.  The State Department concluded that the disclosed ITAR violations stemmed from a misunderstanding of ITAR requirements, the improper classification of the subsidiaries’ products and services, and the failure to properly administer certain export licenses and agreements.

In what seems to be a trend in the expansion of potential export liability, the State Department determined in both cases that the failure to determine the proper export jurisdiction of products, which were subsequently re-exported by third parties, resulted in ITAR violations attributable to the initial seller.  For example, Aeroflex’s failure to determine the proper export jurisdiction of its products resulted in an inability to notify domestic and foreign purchasers that the items purchased were subject to ITAR control.    As a result, the State Department found that Aeroflex violated section 127.1(a)(4) of the ITAR when the purchasers subsequently exported the ITAR-controlled products without proper authorization. Similarly, because a Meggitt-USA subsidiary failed to determine the proper jurisdiction of its products, it was unable to notify a foreign purchaser that the products were ITAR-controlled.  Accordingly, the State Department found that the Meggitt-USA subsidiary could have been charged with violating the ITAR when the purchaser improperly re-exported and retransferred the products without authorization.    

The State Department credited the fact that each company disclosed “nearly all of the ITAR violations…voluntarily,” acknowledged their “serious nature,” “cooperated with Department reviews,” and “implemented or has planned extensive remedial measures” for the finding that “an administrative debarment” was not warranted in either case.  In addition, the State Department agreed to suspend significant portions of the civil monetary penalties ($4 million suspended for Aeroflex and $22 million suspended for Meggitt-USA) subject to State Department approval of expenditures for “self-initiated, pre-Consent Agreement remedial compliance measures” and “Consent Agreement-authorized remedial compliance costs.”

The settlements serve as critical reminders of two necessary practices:  (1) implementing and maintaining corporate-wide compliance programs, including controls to correctly determine export jurisdiction of products and services, and (2) conducting thorough export-related due diligence in advance of any corporate acquisition.  All companies subject to regulation under the AECA or ITAR should periodically review their compliance programs and have sufficient controls in place to identify, investigate, and report, when necessary, any potential export violations.  

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