2013 was a significant year in export enforcement cases in both the high-profile nature of certain enforcement actions as well as the significant penalties levied over the course of the year. Companies involved in all aspects of exporting, as well as exporters from all industries, are well served by a review of notable enforcement actions over the past year and the lessons to be learned from those cases. Many of the cases discussed below demonstrate the risk of non-compliance with export control regulations, and also serve as a valuable reminder that export compliance programs that merely exist on paper, without practical implementation, are not adequate.
Several export enforcement cases from the past year demonstrate that freight forwarders continue to be at a high risk of export violations and penalties. In March of 2013, EGL, Inc. agreed to pay $139,650 in connection with alleged violations of the Cuban Assets Control Regulations (CACR) and Iranian Transactions and Sanctions Regulations (ITSR). EGL’s foreign affiliates engaged in 280 transactions providing freight forwarding services for shipments to and from Cuba, and 10 shipments of oil rig supplies to an oil rig affiliated with the National Iranian Oil Company. Also in March, Vantec World Transport (USA), Inc. settled two charges of alleged violations of the Export Administration Regulations (EAR). Vantec arranged for the export of antennae, cables, and an atmospheric testing device from the U.S. to the Pakistan Space and Upper Atmosphere Research Commission (SUPARCO), an entity on BIS’s Entity List. Vantec was assessed a $40,000 civil penalty.
In March, Aeroships International, Inc. settled a charge with BIS of a violation of the EAR. Aeroships arranged for the export of a 125 kilowatt generator from the U.S. to Prime International in Pakistan, an entity on BIS’s Entity List. In April of 2008, Aeroships received an outreach visit from BIS during which BIS discussed the need to screen all parties in an export transaction against BIS’s Entity and Denied Persons Lists; Aeroships arranged for the export to Prime International in July of 2008, subsequent to BIS’s outreach visit. The terms of Aeroships’s settlement agreement with BIS required Aeroships to complete an export control compliance training course or program. More critically, Aeroships is prohibited from participating in any transaction involving EAR-controlled export transactions for a period of four years (suspended during a four-year probationary period).
In September of 2013, Total Cargo Logistics, Inc. (TCL) settled a charge of an alleged violation of the EAR. TCL facilitated the export of EAR99 PVC cement and primer cleaners, valued at $57,000, to Syria without the required license. Specifically, TCL prepared and filed the Automated Export System (AES) records and arranged for the transport of the items to Syria. BIS assessed a $27,000 penalty against TCL for the alleged violation.
International Traffic in Arms Regulations
2013 also saw significant export enforcement cases involving violations of the International Traffic in Arms Regulations (ITAR). In early 2013, the Raytheon Company was charged with 125 alleged violations of the ITAR in connection with the company’s agreements and temporary import and export authorizations. In the Proposed Charging Letter, the Directorate of Defense Trade Controls (DDTC) broadly categorized the violations as (1) the failure to properly manage Department-authorized agreements (such a Technical Assistance Agreements and Manufacturing License Agreements) and (2) the failure to properly manage temporary import and export authorizations. Overall, Raytheon was charged with 110 instances of failing to comply with the terms of agreements, and 15 instances of failing to comply with the terms of temporary import and export authorizations. In addressing the high number of violations charged, DDTC noted that while the company had submitted multiple Voluntary Disclosures over a number of years, DDTC determined that there was a “corporate-wide weakness in administering Part 124 agreements and Part 122 temporary import and export authorizations and in investigating and correcting errors.”
DDTC noted that prior to 2006 the department closed certain compliance cases related to violations of ITAR-controlled agreements without penalties, relying in part of the remedial measures reported by the company. However, in 2006, DDTC requested an external audit of all agreements managed by Raytheon’s Space and Airborne Systems (SAS) business unit; the audit revealed over 100 instances of administrative non-compliance with the ITAR from the 184 agreements reviewed. Around the same time, Raytheon conducted an internal audit of all agreements managed by the rest of the company’s business units, which resulted in a report of almost 300 violations from 170 managed throughout the company’s business units. In response to the findings of the internal and external audits, the company again reported corrective measures intended to prevent similar violations. DDTC did not pursue administrative action at that time.
At the end of 2009, Raytheon reported that all recommendations from the external audit of SAS had been implemented, yet the company reported an additional 50 violations of the ITAR in 2009 and 2010. In connection with those violations, DDTC noted that many of the instances of non-compliance appeared to result from the failure of personnel to follow written procedures, which indicated insufficient training to DDTC. In September of 2010, DDTC and Raytheon met to discuss DDTC’s ongoing concerns and recommendations for further improvement of the company’s compliance program and measures, which the company agreed to implement. However, in the Proposed Charging Letter, DDTC stated that since the 2010 meeting, the company has submitted more than 30 additional disclosures identifying violations of 50 agreements.
Overall, the types of violations included, for example, the manufacture of hardware by foreign signatories “greatly in excess of the approved amounts” (some of which resulted in DDTC’s inability to properly notify Congress per §124.11 of the ITAR), the failure to timely submit required documents and necessary amendments, the failure to file required annual sales reports, and inaccurate tracking, valuation, and documentation of temporary exports and imports.
Ultimately, DDTC assessed an $8 million penalty against the company. In addition, under the terms of the Consent Agreement, Raytheon is required to appoint an external Special Compliance Officer (SCO) to be approved by DDTC, promote and publicize the company’s employee reporting mechanisms for reporting violations, institute strengthened and uniform corporate export compliance procedures within 12 months of the date of the Consent Agreement, conduct a classification review of all hardware, defense services, and technical data exported by the company in the past five years, have two audits conducted by outside consultants, and provide semi-annual status reports to DDTC pertaining to the company’s ITAR compliance program enhancements and resource levels, as well as their effect on ensuring ITAR compliance.
In July of 2013, DDTC published a Proposed Charging Letter to Aeroflex, Inc. in connection with 158 alleged violations of the ITAR. In prominent language, DDTC noted that it considered Aeroflex’s Voluntary Disclosures and remedial measures to be mitigating factors, but charged the company with the violations given the “significant national security interests, as well as the systemic and longstanding nature of the violations based on improper product classifications.” DDTC also noted that the department would have charged Aeroflex with additional violations had the department not considered the company’s voluntary disclosures and remedial measures as mitigating factors.
This case involved five Aeroflex subsidiaries and equipment ranging from integrated circuits, radiation hardened and tolerant microelectronics, microwave assemblies, to avionics and communication test equipment. In the Proposed Charging Letter, DDTC stated that the violations were caused by “inadequate corporate oversight” and “corporate-wide failure to properly determine export control jurisdiction over commodities.” DDTC further noted that Aeroflex’s failure to properly establish jurisdiction over defense articles not only resulted in unauthorized exports of ITAR-controlled items, but caused domestic purchasers to export ITAR-controlled items without the proper authorization.
Aeroflex developed a specialized process for radiation hardening of certain integrated circuits. According to DDTC, Aeroflex relied primarily on classification guidance from the Department of Commerce (DOC), when the proper classification should have come from DDTC as the electronics met some of the radiation hardness criteria pursuant to the United States Munitions List (USML). More specifically, an Aeroflex subsidiary submitted a request for an Advisory Opinion to DDTC in 2005 regarding the jurisdiction of a microelectronic circuit. DDTC returned the request without action and recommended that Aeroflex obtain a Commodity Jurisdiction (CJ), which the company subsequently submitted. DDTC’s final CJ, issued in January of 2006, determined that the circuit was controlled under USML Category XV(e) as it was specifically designed for satellites controlled under Category XV(a). In the Proposed Charging Letter, DDTC noted that in its final CJ the department rebutted Aeroflex’s argument that the circuits were properly controlled by the DOC because the items did not meet all five criteria under USML Category XV(d), explaining that the argument was irrelevant in determining jurisdiction if an item was designed or modified for use in space.
According to DDTC, Aeroflex did not use the rational in the January 2006 CJ for future self-classifications or jurisdictional analyses, instead applying the CJ narrowly to that particular product line. Over the next three years, the company did not obtain additional CJs from DDTC or classify its radiation tolerant microelectronics on the USML, but instead relied on commodity classifications from the DOC. After receiving two commodity classifications from DOC between 2006 and 2007 indicating that certain electronics may have been ITAR-controlled, Aeroflex tested and subsequently determined that certain components met or exceeded some ITAR-specific radiation hardness levels, and submitted a CJ request to DDTC in April of 2007, which resulted in DDTC’s determination that the items were controlled on USML Category XV(e).
The company also submitted a voluntary disclosure in April of 2007 revealing incorrect jurisdictional determinations for radiation tolerant microelectronics for over a decade. In its disclosure, Aeroflex reported that the company had exported approximately 5,500 radiation tolerant items on 51 occasions, including 652 radiation tolerant multipurpose transceivers to the People’s Republic of China. The company also indicated it caused 18 unauthorized exports via the sale of 1,600 transceivers to domestic purchasers who subsequently exported those items without authorization from DDTC.
In August of 2008, DDTC reaffirmed its original jurisdictional determination for the items in question, which resulted in Aeroflex’s provision of internal and external training to the company’s employees, and a review of the company’s product lines for other items potentially controlled by the ITAR. That review revealed that between 2003 and 2008, the company had exported over 37,000 ITAR-controlled radiation tolerant microelectronics without the proper authorization to numerous countries, including over 14,500 of those items to the PRC (more than half of which were exported after Aeroflex received DDTC’s original CJ determination in 2006). DDTC noted that those exports caused harm to U.S. national security because they directly supported Chinese satellites and military aircraft.
DDTC stated that between 2004 and 2006, the company exported 196 ITAR-controlled radiation hardened microelectronics to Canada without the proper authorization. At the time of those exports, Aeroflex had properly self-classified the items on USML Category XV(d) and was obtaining licenses for the export of those items to numerous countries, but thought that exports of defense articles to Canada intended for end-use by Canadian or American citizens should have been considered “No License Required” (NLR) under the EAR. In another example, the company exported 50 ITAR-controlled integrated circuits to the United Arab Emirates for use in satellite projects in India. Aeroflex had submitted a CJ for those items, but exported the circuits while the CJ was still under review.
The violations described above are just a small number of the overall violations identified by DDTC in its Proposed Charging Letter. Ultimately, DDTC assessed an $8 million penalty against the company, in addition to numerous Consent Agreement-ordered corrective and remedial measures. Under the terms of Consent Agreement, Aeroflex was required to appoint a Special Compliance Officer, approved by DDTC, within 60 days from the date of the Consent Agreement. Aeroflex was also ordered to implement an employee reporting program for reporting ITAR violations, institute strengthened compliance policies and procedures within 12 months, conduct a classification review for all hardware, defense services, and technical data exported in the past five years, have two audits conducted by outside consultants, and agree to arrange and facilitate on-site reviews by DDTC within minimal advance notice.
In August of 2013, Meggit-USA, Inc. was fined $25 million by DDTC in connection with 67 alleged violations of the ITAR ranging from the unauthorized export of defense articles to the failure to maintain records involving ITAR-controlled transactions. In the Proposed Charging Letter, DDTC noted that it considered several mitigating factors, including Meggit’s voluntary disclosures and the fact that the majority of the alleged violations occurred prior to Meggit’s acquisition of certain subsidiaries involved in the violations. However, DDTC also considered various aggravating factors, such as the subsidiaries’ “unfamiliarity with and apparent disregard of ITAR compliance” and that one of the disclosures involved was a directed disclosure.
DDTC generally categorized the violations as (1) unauthorized exports, re-exports, and retransfers of defense articles resulting from unfamiliarity with the ITAR, and/or improper classification of defense articles, and (2) failures related to the administration of licenses and agreements. Examples of the types of violations identified in the Proposed Charging Letter include:
- Meggit Avionics UK (MAVUK) was a foreign recipient of U.S. defense articles under numerous DDTC export licenses, including a Warehouse and Distribution Agreement (WDA). MAVUK retransferred or re-exported 268 standby flight instrumentation, air data, altitude, and heading reference systems to 13 countries without the required authorization.
- Endevco Corporation, relying on “inadequate or incorrect guidance from an advisor,” made incorrect jurisdictional determinations for some of its products, resulting in over 1,000 unauthorized shipments of accelerometers.
- As a result of “similar misjudgment by one of Endevco’s export consultants regarding jurisdiction,” Endevco shipped several ITAR-controlled manufacturing calibration systems without the proper authorization to Meggit Sensors & Controls Company, Ltd. in the PRC. Exporters should pay attention to DDTC’s footnote number 12 in the Proposed Charging Letter, which states that “Endevco consistently sought to obtain advice and guidance from individuals and advisors it believed to be competent in the area of export controls and compliance. Some of Endevco’s consultants provided incorrect guidance regarding export obligations, particularly with respect to reliance upon opinions of the Commerce Department concerning products subject to…the jurisdiction of the State Department under the ITAR. Endevco took action on the basis of that guidance and understands that it is responsible for those actions.”
In addition to the $25 million penalty, Meggit was required to appoint an Internal Special Compliance Officer, institute strengthened compliance policies and procedures, implement a comprehensive automated export compliance system, conduct a classification review of all items produced or offered for exports by Meggit’s ITAR-controlled subsidiaries, coordinate with the Internal Special Compliance Officer and an outside consultant on the audit activities described in the Consent Agreement, and agree to facilitate and arrange on-site reviews by DDTC with minimal advanced notice.
Finally, in November of 2013, DDTC issued a Debarment Order against LeAnne Lesmeister, a former employee of Honeywell International, Inc. The Proposed Charging Letter from July of this year charged Ms. Lesmeister with 21 alleged violations of the ITAR during her employment as a senior export compliance officer and Empowered Official (EO) for Honeywell. According to the charging letter, Ms. Lesmeister created and used export control documents containing false statements or omitting and misrepresenting material facts for the purpose of exporting, retransferring, or furnishing defense articles, technical data, or defense services, and caused the unauthorized export of technical data and provision of defense services. As a result, Ms. Lesmeister has been debarred from participating directly or indirectly in any activities subject to the ITAR for a period of three years. The Debarment Order further notes that Ms. Lesmeister’s privileges are not automatically reinstated at the end of the debarment period; instead, she will remain debarred until she has applied for and been granted reinstatement.
Office of Foreign Assets Controls
As of December 7, 2013, OFAC has assessed $103,920,853 in civil penalties during 2013 against numerous companies for violations of the various economic sanctions and other programs administered by the agency. A review of selected OFAC civil penalty cases from the past year highlights not only the risks of non-compliance with an OFAC-administered program, but the broad types of companies that are at risk of those violations as well.
In January, OFAC assessed a $191,700 civil penalty (base penalty amount of $426,000) against Ellman International, Inc. for apparent violations of the Iranian Transaction Regulations (ITR). Ellman sold and exported medical equipment to Iran, as well as engaged the services of a physician in Iran, in an apparent violation of the ITR. The violations occurred under Ellman’s prior ownership and management; OFAC noted that Ellman’s new owners and managers voluntarily disclosed the apparent violations to OFAC, but that OFAC determined the submission to not be voluntary because OFAC had previously been notified of a rejected transaction between Ellman and a customer located in Iran.
In February, OFAC assessed a $404,100 penalty (base penalty amount of $449,000) against American Optisurgical, Inc. (AOI) for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR). OFAC alleged that AOI violated the ITSR on 36 occasions when it exported, or attempted to export, unlicensed medical goods and services to Iran, or to a person in a third country with knowledge that the goods and services were ultimately intended for Iran. OFAC’s settlement considered the fact that the alleged violations were the result of willful or reckless conduct, and that AOI’s senior management was directly involved in the conduct as it was determined that AOI actively participated in concealing the ultimate destination of its exports to Iran.
In May, OFAC assessed a $348,000 penalty against American Steamship Owners Mutual Protection and Indemnity Association, Inc. for apparent violations of the Cuban Assets Control Regulations (CACR), Sudanese Sanctions Regulations (SSR), and ITR. The company processed three Protection and Indemnity (P&I) insurance claims involving Cuba, processed 18 P&I claims, issued six Letters of Undertaking/Guarantee (LOU), and issued one letter of indemnity as security for an LOU involving Sudan, and processed 21 P&I claims, one LOU, and issued five letters of indemnity as security for an LOU involving Iran. While the base penalty amount for the apparent violations was $1,729,000, OFAC considered the following mitigating factors in assessing the final penalty: the company’s conduct did not appear to be willful or reckless, the size of operations, financial condition, and other relevant factors related to the individual characteristics of the company, that the company had not received a penalty notice of Finding of Violation from OFAC in the five years preceding the date of the transaction, that the company cooperated with OFAC, and the transactions constituting the apparent violations may have been licensable at the time those transactions occurred.
In June, OFAC assessed a $2,949,030 penalty against Intesa Sanpaolo S.p.A. (Intesa) for apparent violations of the CACR, SSR, and ITR. Intesa did not voluntarily disclose the apparent violations. According to OFAC, Intesa maintained a customer relationship with Irasco S.r.l., an Italian company that is owned or controlled by the Government of Iran (GOI). Despite numerous indicators (Irasco’s ownership and line of business as an exporter of goods to Iran, its financial and commercial associations with Iranian state-owned financial institutions), Intesa did not identify Irasco as a GOI entity and processed transactions on behalf of Irasco that terminated in the U.S., or with U.S. persons. Intesa also processed 67 funds transfers involving Sudan, 53 wire transfers involving Cuba, and 31 wire transfers for Irasco. The total base penalty amount was $9,632,000. In determining the final penalty amount, OFAC granted “substantial mitigation” for the following factors: the apparent violations did not constitute a willful or reckless violation of the law, no company managers had actual knowledge or awareness of these matters within the meaning of OFAC’s guidelines, Intesa provided substantial cooperation to OFAC, the company took remedial action in response to the violations and developed a more robust compliance program, and that Intesa had not received a civil penalty or Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations.
In July, OFAC assessed an $84,240 penalty against Stanley Drilling Equipment & Supply, Inc. (Stanley Drilling) for violations of the ITR. This case should remind exporters that “knowledge” in an export violation context does not necessarily mean actual knowledge. Stanley Drilling attempted to export four shipments, and successfully exported two shipments, of goods from the U.S. to the United Arab Emirates, “with reason to know that the shipments were intended specifically for supply, transshipment, or re-exportation to an oil drilling rig located in Iranian waters.” Stanley Drilling did not voluntarily disclose the violations. In determining the final penalty amount, OFAC considered the following mitigating factors: four of the six shipments at issue were detained prior to leaving the U.S., Stanley Drilling is a small company, the company has no history of prior OFAC violations, and Stanley Drilling did not appear to have actual knowledge that the drilling rig was destined for or located in Iranian waters at the time of the transactions. However, OFAC also stated that “Stanley Drilling had reason to know these facts, because they were publicly and readily available before and at the time of the subject transactions.”
The cases above represent only a small sample of export enforcement actions finalized in 2013, but should remind exporters of the consequences of committing export violations. While each case involved unique facts and circumstances, several themes are apparent. First, exports and re-exports or retransfers to denied, debarred, or otherwise restricted parties continue to be a common cause of export violations. Whether such violations occur because of a failure to properly screen all parties to a transaction, or because of a failure to complete due diligence on the ultimate end-user, or intended end-use for an export, all companies should take the necessary precautions to ensure that no restricted parties are involved.
The proper jurisdictional analyses and classifications of goods, and technology and services under the various export control regulations also continues to be a significant cause of violations. For those companies already, or soon to be, impacted by the migration of items from the USML to the Commerce Control List, 2014 may prove to be an especially challenging year. It is critical that exporters involve the appropriate personnel in conducting classification analyses. For example: product developers and engineers should pay close attention to the language of the changing classification lists and associated definitions, and develop a reliable methodology for conducting and documenting classification analyses.
Furthermore, it is critical that exporters have a working export compliance program tailored to the company’s operations and unique areas of risk. However, simply having an export compliance program on paper does not assist in the prevention of export violations without sufficient training of employees and the actual implementation of the compliance program. For example, many companies rarely implement the sections of a compliance program outlining the company’s audit or review procedures. Failing to take the opportunity to review the effectiveness of your program, or identify potential violations, may result in ongoing and sustained violations, which can lead to significant penalties and other export enforcement consequences.
As the start of a new year approaches, exporters should think critically about the current status of their compliance programs, policies and procedures and identify areas of risk and apply corresponding corrective or strengthened compliance measures. Particularly as the Export Control Reform initiative continues to progress, exporters must ensure that their compliance programs are effective and up-to-date in order to protect the company as well as possible from potential violations.