The Department of State, through the Research & Analysis Division (RAD), Office of Defense Trade Controls Compliance (DTCC), Bureau of Political-Military Affairs (PM) operates an end-use monitoring program called Blue Lantern. The Blue Lantern program monitors the end-use of defense articles, defense services, and brokering activities to ensure that “the recipient is complying with the requirements imposed by the U.S. government with respect to use, transfers, and security of defense articles and defense services,” and that “such articles and services are being used for the purposes for which they are provided.” The Blue Lantern program involves “pre-license, post-license, or post-shipment inquiries or checks” to verify the legitimacy of transactions and all parties to those transactions.
On an annual basis, the department releases the results of the Blue Lantern reviews for the most recent fiscal year. While many exporters may never be the subject of a Blue Lantern review, the annual program results can serve as a reminder of the importance of risk identification and strong export compliance programs for all exporters.
In FY 2012, the department initiated 820 Blue Lantern inquiries in 103 countries ranging from Saudi Arabia to Tanzania. The reviews are not initiated randomly. Instead, inquiries are initiated based on the “potential risk of diversion or misuse.” Of the 706 inquiries closed for FY 2012, 144 were deemed “unfavorable,” generally meaning the findings of fact were not consistent with the facts presented to DDTC in connection with the request for an export license or other authorization.
The causes of unfavorable findings range from the inability to confirm the order or receipt of goods by the end-user, the involvement of a foreign party in a transaction that was not listed on an application or license, indications of unauthorized diversions, retransfers, or re-exports, unauthorized stockpiling, and the lack of secure storage facilities. For FY 2012, the most common cause of an unfavorable result was “derogatory information/foreign party deemed unreliable,” which can include information ranging from criminal records to concerns related to a company’s bona fides. This was also the primary cause of unfavorable results in FY 2011.
Unfavorable findings can lead to several results, such as the denial of a license application or revocation of a license, or referral to the Enforcement Division (END). In FY 2012, the unfavorable inquiries resulted in the denial of 13 license applications or other authorization requests, the return without action of 20 such requests, five revocations of existing authorizations, and nine directed disclosures. In addition, nine referrals to law enforcement assisted in six criminal investigations, one re-opening of an investigation, and one Project Shield America outreach to an exporter.
The number of Blue Lantern inquiries initiated in the last several years has steadily increased. In 2010 and 2011, the department initiated 536 and 783 Blue Lantern inquiries, respectively. A review of the geographic areas and industries in which the department has initiated reviews can also shed light on areas and industries the department considers high risk, meaning exporters involved in those areas may find their transactions subject to additional scrutiny. For example, in FY 2012 the most unfavorable findings occurred in South Central Asia and in Europe, followed by the Americas. The Department noted that Europe typically has the lowest unfavorable finding rate, but was elevated in the FY 2012 results due to 30 checks or inquiries on a single entity. In South Central and East Asia, the highest number of unfavorable findings involved aircraft parts; several unfavorable findings in East Asia also involved military electronics. Most unfavorable results in the Americas, by contrast, involved firearms, ammunition, and armor.
The FY 2011 Blue Lantern showed the Near East to have the highest number of unfavorable results, although the department again noted that the number was higher for that region due to multiple checks on a single entity in which the department could not confirm bona fides or identified unauthorized brokering. East Asia and the Americas also saw high numbers of unfavorable findings. Similar to the FY 2012 results, most unfavorable findings in East and South Central Asia involved aircraft parts, while most unfavorable findings in the Americas involved firearms, ammunition, and armor.
As in FY 2012, the primary cause of unfavorable findings in FY 2011 was derogatory information/foreign party deemed unreliable. The department also noted an increase in the number of unfavorable findings resulting from the involvement of unauthorized parties in the transactions. The department further noted in its findings that in many instances, the inclusion of an authorized party in a transaction stemmed from “company-level administrative oversights and insufficient knowledge of ITAR requirements on the part of U.S. and foreign parties,” rather than an intentional effort to hide the involvement of a particular party.
Exporters can use many of the same risk indicators the department uses to initiate Blue Lantern reviews to identify risk in their own export operations. As the U.S. government continues to increase enforcement efforts, exporters should ensure their compliance programs are in order, not only to prevent violations from occurring within their company, but to prevent the company from participating in a transaction with an entity with improper motives.
In 2007, a British businessman named Christopher Tappin was indicted for attempting to illegally export batteries for the Hawk Air Defense Missile. The batteries are controlled under Category IV(h) of the United States Munitions List (USML). Tappin was extradited from the United Kingdom in February of 2012 for prosecution in the U.S. Tappin used false shipping documentation and business associates in Cyprus and Oregon to arrange for the transfer of the batteries to the U.K. without an export license via specially designated freight forwarders. In January, he was sentenced to 33 months in prison for aiding and abetting the illegal export of batteries for the Hawk Air Defense Missile to Iran.
In January, Timothy Gormley was sentenced to 42 months in prison for violations of the International Emergency Economic Powers Act (IEEPA) in connection with the unlicensed export of microwave amplifiers to multiple foreign countries. The Department of Justice’s press release stated that Gormley’s employer, Amplifier Research, submitted a Voluntary Self-Disclosure (VSD) to the Department of Commerce (DOC) in 2011 when it learned of Gormley’s violations. Gormley pleaded guilty in 2012 to numerous violations, including altering invoices and shipping documents to conceal the classification of products, listing false license numbers on export paperwork, and lying to other employees about the status of export licenses. The DOJ press release revealed that Gormley had caused at least 50 unlicensed exports of the amplifiers, which have applications in military systems such as radar jamming and weapons guidance systems.
Whether the threat of export violations presents itself internally or externally for your company, both risks are magnified in the absence of an effective export compliance program and risk identification procedures. Exporters should review their export compliance programs on an ongoing basis to ensure they are as up-to-date and effective as possible.