Many exporters are at least vaguely familiar with the “company visits” or “outreach visits” conducted by the export control agencies, but most have very little idea what these visits actually entail, how a company is selected for a visit, or the potential consequences of such a visit. Exporters, freight forwarders, non-exporting manufacturers of defense articles, and companies that share controlled technology with foreign persons, resulting in “deemed exports” should thoroughly prepare for these visits if they are ever “lucky enough” to be selected.
This article will constitute the first part of a two-part series and will introduce the reader to the types of visits conducted by the two major export control agencies: the Department of Commerce’s Bureau of Industry and Security (“BIS”) and the Department of State’s Directorate of Defense Trade Controls (“DDTC”). Additionally, this article will discuss some of the potential outcomes and consequences of these visits. In the forthcoming second part of the article, we will summarize our recommendations to prepare for and make the best of such a visit.
DDTC Company Visit Program
The DDTC administers the International Traffic in Arms Regulations (“ITAR”) and maintains the U.S. Munitions List (“USML”) of controlled defense articles. Generally, the DDTC regulates exports of defense items, develops and enforces defense trade export control laws and regulations, and maintains registration requirements for manufacturers, exporters, and brokers of defense articles and defense services. DDTC also operates a Company Visit Program (“CVP”), which consists of visits by DDTC officials to entities registered with the DDTC, as well as other entities involved in ITAR-related activities.
In its current form, DDTC’s CVP supports two types of visits: CVP-Outreach, called “CVP-O” and CVP-Compliance (“CVP-C”). CVP-O is referred to by DDTC as an extension of DDTC’s outreach activities. According to DDTC, CVP-O visits are intended to be learning exercises for both the selected company and DDTC. During a CVP-O visit, a company has the opportunity to discuss the compliance challenges it faces with actual DDTC personnel. For their part, the DDTC team has the opportunity to see first-hand how members of industry are adapting to changes to the ITAR and other compliance changes. The CVP-O team can also provide suggestions for best practices and answer any questions the visited company may have. DDTC claims that CVP-O site visits are unrelated to any specific compliance matters and has stated that CVP-O visits are more educational in nature and are not conducted to evaluate compliance failures or violations.
DDTC also engages in CVP-C visits, which are conducted by the Office of Defense Trade Controls Compliance (“DTCC”) to verify company compliance. For example, if a company has entered into a consent agreement after the discovery of ITAR violations, the company should expect a CVP-C visit in the future. CVP-C visits may also occur in the context of the adjudication of a voluntary self-disclosure (“VSD”), directed disclosure, or other compliance matter. CVP-C visits will include a more in-depth look at a company’s compliance program and procedures.
Typically, DDTC aims to conduct between two and four CVP visits (of either type) per quarter. From May 2015 to April 2016, DDTC conducted fifteen CVP visits, and six of those were CVP-C visits pursuant to consent agreement monitoring. Six of the fifteen CVP visits were conducted in foreign countries. DDTC addresses how a company is selected for a CVP visit, but specific details are sparse. According to its website, DDTC “selects companies based on its CVP goals” and considers multiple factors when selecting a company. These factors include “proximity to other activities DDTC is participating in, registration status, volume of licensed activity, experience conducting ITAR activities, nature of business, type and sensitivity of technology, geographic location, monitoring of an existing consent agreement, and value to ongoing work within DDTC.”
BIS Outreach Visits
BIS administers the Export Administration Regulations (“EAR”) and its Commerce Control List of sensitive “dual-use” goods and technology. Like DDTC, BIS also conducts on-site “outreach” visits. Unlike the ITAR, though, the EAR has no requirement for exporting or manufacturing entities to register with BIS. Thus, unlike DDTC-registered companies which by virtue of their registration are within the pool of companies that should be prepared for a CVP visit, the lack of an EAR registration requirement means that companies subject to BIS’ jurisdiction may not be explicitly aware of their potential to be selected for a visit from BIS.
BIS conducts two different types of visits, but whereas both types of DDTC visits are administered within the same CVP framework, the two types of BIS visits are conducted by two completely separate divisions within BIS. The first, and far more common, type of visit is an “outreach visit” conducted by BIS’ Office of Export Enforcement (“OEE”). Technically speaking, the OEE creates a distinction between situations where a company requests OEE to come, called a “visit,” and where OEE arrives uninvited, called an “inquiry.” For simplicity’s sake, we’ll refer to all situations where OEE comes to a company as an “outreach visit.”
OEE outreach visits are conducted by OEE officers, the “guns and badges” branch of BIS, through the division’s Outreach Program. OEE has informed the public that companies that could be selected for visits include, but are not limited to, manufacturers, exporters, and freight forwarders. It is not entirely clear how OEE selects companies for outreach visits. However, exporters that have recently submitted an export license application without having previously applied for any licenses in the past have been targeted for outreach visits. In fiscal year 2016, OEE conducted more than 743 outreach visits to individuals and companies within the export community.
BIS’ Office of Exporter Services Export Management and Compliance Division (“EMCD”) has also begun to conduct company visits over the past couple of years. These visits are much less frequent than OEE outreach visits; only 40 on-site EMCD visits were conducted during fiscal year 2016. EMCD selects entities for a company visit based on filing errors found within the Automated Export System (“AES”). BIS explains that EMCD meets with these entities “to better understand the specific reasons that errors occurred, determine what export compliance procedures they [have] in place, and offer export counseling assistance.”
Consequences of Visits
Typically, the only consequence of receiving a company visit from either DDTC or BIS is becoming more familiar with the agencies’ expectations for compliance. However, in some cases there certainly can be negative consequences. One area of concern is that it is unclear how either agency handles violations discovered during a visit. Per the DDTC website, if the DDTC visit team discovers a violation during their visit, DDTC will instruct the company to review the issue and submit a disclosure, if necessary. Importantly, DDTC does not specify whether the disclosure would be a VSD or a directed disclosure. The distinction is important because the submission of a VSD is considered a mitigating factor in the levying of any potential penalties, while a directed disclosure does not provide for any mitigation. BIS has provided no official guidance as to how it handles the discovery of violations during visits.
Additionally, in some cases BIS has imputed “knowledge” on a violating company based on evidence that the company participated in outreach visits in the past. For example, the charging documents in a recent $27 million settlement with an exporter detail several instances where BIS and other government agencies conducted outreach visits with the charged party. These visits were explicitly referenced to establish “knowledge” i.e., the exporter knew of its compliance obligations and violated the regulations anyway. Knowledge of the illegality of actions is an important piece of building an administrative case against an exporter, as well as providing an important component for recommending a case to the Department of Justice for criminal prosecution.
It is clear that, although potentially helpful and informative, visits by the export control agencies may not, and often are not, entirely positive experiences. With critical factors at stake like the mitigation of penalties or referral to the Department of Justice, visits from DDTC or BIS should be treated with the respect they deserve. The forthcoming second part of this article will discuss how to best prepare for a visit from one of the above referenced export control agencies and provide recommendations for navigating a visit with optimum results.