On 26 February 2019 Darling Industries, Inc entered into a $400,000, 18-month consent agreement with the Department of State, Directorate of Defence Trade Controls (DDTC) to settle six alleged violations of the International Traffic in Arms Regulations (ITAR).
The key issue was Darling's ITAR empowered official, who was neither empowered nor an expert. Through this consent agreement, the DDTC is sending a message to the industry – an empowered official must have both:
- sufficient familiarity with the ITAR to determine the legality of a transaction; and
- sufficient authority to stop a transaction.
Each year, the DDTC enters into a handful of consent agreements with companies for violations of the ITAR when it determines harm to national security or significant gaps in compliance programmes. Lesser violations are addressed through a process which typically includes:
- disclosing documented evidence of a complete investigation of the violations;
- identifying the root causes; and
- proving that appropriate corrective actions have been implemented to prevent subsequent violations.
The DDTC can request independent audits to verify that compliance issues have been addressed before closing a company's (voluntary or directed) disclosure of ITAR violations. When the DDTC chooses to enter into a consent agreement, it highlights areas of concern that it expects companies to address within their compliance programmes.
In the case of Darling's consent agreement with the DDTC, the violations at issue were not of particular national security concern because the unauthorised exports had been made to US allies, such as Canada and the United Kingdom. Conversely, the DDTC took issue with:
- Darling's lack of a documented export compliance programme;
- the lack of a qualified empowered official; and
- the lack of initiative to address unauthorised exports and compliance programme deficiencies for nearly two years after a third-party auditor had identified the issues.
The third-party auditor Darling engaged identified not only unauthorised exports and compliance programme deficiencies, but also found:
- no formal jurisdiction and classification process; and
- no additional personnel trained in ITAR compliance.
The audit described "decades of systematic, reoccurring violations" but Darling did not file a voluntary disclosure until 22 months after the audit. The report found additional issues of concern, but the DDTC chose not to charge Darling with those violations as a result of mitigation, including:
- submitting a voluntary self-disclosure;
- entering into a tolling agreement; and
- self-initiating compliance programme improvements.
The failure to appoint a qualified empowered official is a new issue to be highlighted by the DDTC. The charging letter indicated that Darling had appointed an empowered official who was not qualified under the ITAR (22 CFR § 120.25) because the individual had no authority regarding policy or management within the organisation and did not understand the provisions and requirements of the export regulations. The DDTC stated that "[t]he Empowered Official prepared, signed, and submitted license application that reflected a deficient understanding of the licensing process and the regulations". Section 120.25 of the ITAR stipulates that an empowered official must have the:
independent authority to (i) inquire into any aspect of a proposed export, temporary import, or brokering activity by the applicant; (ii) verify the legality of the transaction and the accuracy of the information to be submitted; and (iii) refuse to sign any license application or other request for approval without prejudice or other adverse recourse.
To execute these duties, an empowered official must have:
- enough familiarity with the ITAR to determine the legality of a transaction; and
- enough authority within the company to stop the transaction if there is an issue of export compliance.
The takeaways from this consent agreement are particularly relevant for smaller and mid-sized entities that may not be dedicating adequate resources towards hiring, training and retaining qualified export compliance personnel and maintaining a robust ITAR compliance programme. Even if it is necessary to use existing personnel to serve in export compliance roles, companies must ensure that these employees receive sufficient training on the ITAR and export compliance requirements.
Second, the person selected to serve as an empowered official must meet the requirements for this role as set out in the ITAR, including having authority over policy or management within the company and, most importantly, the ability to hold, question and ultimately stop a transaction with the full support of management if the they have export compliance concerns.
Finally, violations must be disclosed in a timely manner after discovery. While Darling made efforts to assess its compliance programme by engaging an outside auditor, it disclosed the report's findings of violations long after the audit – a primary factor for the DDTC in entering the consent agreement.
For further information on this topic please contact Kay C Georgi, Regan K Alberda or De'Siree N Reeves at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). Alternatively, please contact Marwa M Hassoun at Arent Fox LLP's Los Angeles office by telephone (+1 213 629 7400) or email (email@example.com). The Arent Fox LLP website can be accessed at www.arentfox.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.