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1 Office of Defense Trade Controls Compliance ITAR Compliance Overview 2014 National SBIR/STTR Conference June 17 – 18, 2014 • Organization DTCC Responsibilities & Trends Compliance Program Voluntary Disclosures

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Page 1: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

1

Office of Defense Trade Controls Compliance

ITAR Compliance Overview

2014 National SBIR/STTR Conference June 17 – 18, 2014

• Organization

• DTCC Responsibilities & Trends

• Compliance Program

• Voluntary Disclosures

Page 2: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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DTCC Organization

Sue Gainor, Director

Daniel Buzby, Deputy Director

Enforcement Division

Glenn Smith, Chief

• Voluntary/directed disclosures

• Denials, policy exceptions and

reinstatements

• Civil enforcement actions

(charging letters, consent

agreements, debarments)

• Support to law enforcement for

criminal matters

Personnel:

14 total (7 FTE, 7 contractor)

Compliance & Registration

Division

Dan Cook, Chief

• Registration of manufacturers,

exporters & brokers

• Company Mergers &

Acquisitions

• Company Visit Program

• Input on CFIUS

Personnel:

14 total (5 FTE, 9 contractor)

Research & Analysis Division

Judd Stitziel, Chief

• Blue Lantern end-use

monitoring program

• Watch List screening &

maintenance

• Intelligence liaison & research

• AECA Section 3 reports to

Congress

• PM lead on CFIUS

Personnel:

7 total (6 FTE, 1 contractor)

ICE Liaison

FBI Liaison

Compliance and Registration

Page 3: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Compliance and Registration Division Responsibilities

• Registration of manufacturers, exporters, & brokers • Company mergers & acquisitions and divestitures • Company Visit Program • Input on CFIUS

(Committee on Foreign Investment in the U.S.)

Registration Trends (FY13)

• Total registrants: Approximately 13,000

manufacturers/exporters and brokers

• Approximately 250 mergers & acquisition cases

• Approximately 50 advisories regarding registration requirements and brokering activity

Page 4: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Who Must Register And Why

Manufacturer / Exporter • Any person who engages in the U.S. in the business of manufacturing or

exporting defense articles or furnishing defense services • USG agencies acting in an official capacity are exempt

• Required by AECA Section 38 & ITAR Part 122 Broker

• Any person described below who engages in brokering activities:

1. Any U.S. person wherever located; 2. Any foreign person located in the U.S. or; 3. Any foreign person located outside the U.S., if owned or controlled

by U.S. person

• USG agencies, foreign governments and international organizations acting in official capacity are exempt

• Required by AECA Section 38 & ITAR Part 129

Consolidated Registration and Fee

• Consolidation of U.S. person manufacturer/exporter/broker registration and elimination of separate broker fee

• Consolidation to be triggered by expiration of manufacturer/exporter registration not broker registration expiration

• Consolidations will require an updated broker report § 129.10

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Registration Requirements (ITAR Parts 122 & 129)

• U.S. manufacturers/exporters and service providers receive “M” code

• U.S. and foreign brokers receive “K” code

• Step 1 – submit electronic payment - exact payment instructions available at www.pmddtc.state.gov/registration

• Step 2 – complete Statement of Registration (DS-2032) form, include

authorization to do business in the U.S. and submit electronically via the Electronic Form Submission (EFS)

• Maintain registration and notify of changes – Most material changes provided within 5 days of effective date – Material changes of intended sale, or transfer to a foreign person of

ownership or control of the registrant or any entity thereof 60 day advanced notice

• Annual Broker Report, including no activity, due with registration renewal, if

not renewing, within 30 days after expiration of registration

• Guidance and forms available at: www.pmddtc.state.gov/registration

Registration Validity Term & Fees

• Registration valid for 1 year

• Three-Tier Fee Structure

• Excluded from calculation:

CJs, reports, GCs or licenses

denied, revoked, or returned

without action (RWA)

• Registrants informed annually

of renewal fee and calculation

details

Tier I = $2,250 No final action on any license

First year of registrants

Tier II = $2,750

10 or fewer licenses with final action

Tier III = the lessor of: $2,750 + $250 for each license >10 with final action

Or 3% of total dollar value of applications but not <$2,750)

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Registration Renewal Helpful Hints

• Send to DTCC 60 days in advance of expiration

• Cite existing registration number on Statement of Registration (DS-2032)

• Include copy of renewal fee letter with submission

• Same basic requirements as new registrants

• Keep registration information current

• Lapsed registration: unable to obtain authorizations or invoke exemptions

§ 122.4 Material Changes

5 Day Material Changes:

• Eligibility status

• Change in information contained in the Statement of Registration (DS-

2032) such as: registrant name, address, legal organizational

structure, ownership or control, the establishment, acquisition, or

divestment of a U.S. or foreign subsidiary engaged in the manufacture

or export of defense articles or services

• Change in board of directors, senior officers, partners, or owners

60 Day Notifications:

• Any intended sale or transfer to a foreign person of ownership or

control of the registrant or any entity thereof

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How to Obtain Registration Guidance

• DDTC website: www.pmddtc.state.gov

• General Questions - 202-663-1282 and [email protected]

[email protected]

• Advisory opinion § 126.9 may be requested from DDTC regarding export or registration

Research and Analysis Division

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Research and Analysis Division Responsibilities

• ‘Blue Lantern’ end-use monitoring program

• Watch List screening & maintenance

• Intelligence liaison & research projects

• AECA Section 3 reports to Congress

• Compliance Report

• PM lead on CFIUS

Blue Lantern

End-use Monitoring Program

• End-use monitoring program required by Section 40A of the Arms Export Control Act (AECA), formalized 1996

• Verifies end-users, consignees, and end-uses of U.S. exports of defense articles and services

• Performed in cooperation with host governments worldwide by U.S. Embassy personnel

Monitor transfer of sensitive hardware technology, and services Build confidence between USG and defense trade partners Educate foreign governments and companies about U.S. export controls Impede "gray arms" trade

Improved International

Security

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0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010 2011 2012 2013

543 552

723 783

820

919

Blue Lantern Trends

Reasons for “Unfavorable” Blue Lantern Responses

• Derogatory info / unreliable recipient of USML

• Unable to confirm order / receipt of goods

• Unauthorized foreign party involved in transaction

• Refusal to cooperate

• Diversion / retransfer / re-export

• Unauthorized stockpiling

• Lack of secure storage facilities

• Inability to confirm existence of foreign party

Page 10: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Red Flags and Due Diligence

• Vague or unintelligible end-use statement

• Reluctance/evasiveness to provide end-use explanation and/or documentation

• Unfamiliar customer, lack of available information

• Unfamiliarity with hardware/technology and its use

• Hardware inconsistent with stated end-use

• Private/non-government end-user

• Chain-of-custody unclear

• Unusual routing

• End-user appears to be a reseller or integrator

If something about the transaction doesn’t make sense, ask questions.

Due Diligence Continued

• Obtain Complete End-User/Use Certification

End-User, End-Use (include platform, i.e., aircraft type)

Intermediate Consignees: Customer, Customer’s customer (when applicable), Freight Forwarder, Maintenance and Repair Providers, Any company that will take possession of the item

• Ask for Additional Supporting Documentation

Non-Transfer and Use Certificate (DSP-83), Contract, Purchase Order, End-Use Statement on Government Letterhead

• Request Contact Information

Specific name and all available contact information for end-user and intermediate consignees

• Conduct Basic Research on Foreign Parties

Visit website and learn about their line of business

Page 11: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Summary

• Ensure all parties are identified, end-use is clear and logical, and that all available supporting documentation is provided

• Conduct basic due diligence on unfamiliar parties

• Information discovered during the course of a Blue Lantern may result in a Directed Disclosure

• Perform thorough due diligence up front and avoid violations

Enforcement Division

Page 12: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Enforcement Division Responsibilities

• Voluntary/directed disclosures

• Denials, policy exceptions and reinstatements

• Administration of civil enforcement actions

• Charging letters & consent agreements and monitoring Debarments

• Support to the law enforcement community for criminal enforcement

Disclosure Trends

0

500

1000

1500

2000

2500

2006 2007 2008 2009 2010 2011 2012 2013

Directed806

1107 1153 1318 1312

1454

580

2027

Page 13: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Factors for Disclosure Trends

• Increased number of license approvals

• Growth in defense exports & business activity

• Increased industry awareness and training

• Industry audits – voluntary

• Mergers & acquisitions – due diligence by companies

• More USG outreach and inter-agency cooperation

• “Project Shield America” (DHS/ICE)

• “Domain Program” (FBI)

• Quicker response by DDTC on less serious violations

• DDTC’s analysis of registration & subsequent actions

Compliance Program

ITAR

Compliance

Manual

Page 14: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Compliance Program

Why Bother?

• Affects foreign policy & national security

• Impacts your reputation & your bottom line

• Provides organizational structure and oversight

• Becomes expensive if you don’t – fines & penalties!

Penalties for Violations of the AECA and ITAR Include:

Civil Violations

• $500,000 for each violation • Extra compliance measures • Debarment

Criminal Violations

• $1 million for each violation • 20 years imprisonment • Debarment

Compliance Program Key Factors

Senior Officer’s Commitment to Compliance:

• Sets the company tone and overall message on export controls

• Has general knowledge of export controls and their importance

• Creates organizational structure and provides resources

• Designates empowered official

• Serves as final appeal authority for internal dispute resolution

• Signs registration documentation (ITAR §§122.2 and 129.3)

• May certify voluntary disclosures (ITAR § 127.12(e))

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Compliance Program Key Factors Cont.

Role of the Empowered Official (ITAR §120.25)

• Designated by senior management for supervision of export control responsibility

• Directly employed by applicant or a subsidiary

• Legally empowered in writing to sign license applications

• Understands export control statutes and regulations

• Understands criminal and civil liability and administrative penalties for violation of AECA/ITAR

• Has independent authority to:

Inquire into any aspect of proposed export/temporary import

Verify legality of transaction and accuracy of information

Refuse to sign any license application without prejudice or adverse recourse

14. License / Agreement Maintenance 15. Shipping & Receiving Processes 16. ITAR Training 17. Internal Monitoring & Audits 18. Disclosures 19. Violations & Penalties 20. Brokering

1. Organizational Structure 2. Compliance Resources 3. Product Classification 4. Contracts / Marketing Screening 5. License Preparation &

Implementation 6. Exemption Implementation 7. Non-U.S. Person Employment 8. Physical Security of the ITAR Facility 9. Computer Network Security

10. Foreign Travel 11. Foreign Visitors 12. Record Keeping 13. Reporting

Compliance Program Elements

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Voluntary Disclosures

Voluntary Disclosures (ITAR § 127.12):

• “The Department strongly encourages the disclosure of information to the Directorate of Defense Trade Controls by persons…that believe they may have violated any export control provision of the Arms Export Control Act, or any regulation, order, license or other authorization…”

• “Voluntary self-disclosure may be considered a mitigating factor in determining… penalties.”

• Failure to report will be a factor in determining penalties.

Voluntary Disclosures Discovery of Violations

Violations are discovered when:

• Updating registration

• Initiating export/import activity

• During training

• Preparing a new license submission

• Internal or external auditing

• Merging with or acquiring another company

Page 17: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Voluntary Disclosures Preparation & Submission

• Information to provide detailed in ITAR §127.12(c)

• Summary – who, what, when, where, how, why…

• Corrective actions taken – be thorough and explicit

• Provide all relevant documentation and attachments (on CD if

voluminous)

– license history and copies of approvals

– descriptive literature on hardware

– technical data documents or details on defense service

– CV/resume on foreign persons

• Confirmation senior officer has been informed

Voluntary Disclosures Specific Details

• What was the general nature of the violation – unauthorized export/re-export, terms/conditions of license approval, loss/theft, recordkeeping, etc.

• What item was involved – hardware, technical data, defense service, USML category & sub-category

• When did it occur – beginning, duration, end, discovery and reporting

• Who was involved – name, citizenship, title, function, employer, all parties to the export, person who authorized the transaction, person responsible for export compliance

• Where did it occur – U.S. or overseas, city, state, country

• Why did it occur – root cause, were prevailing policies/procedures adequate, any previous violation and previous mitigation measures

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Voluntary Disclosures Measures to Prevent Recurrence

• Violation continues or has ended

• Severity of violation

• Number of locations, programs and business units

• Root causes identified and addressed

• Remedial training provided

• Policies & procedures reviewed and reconsidered

• Violator cautioned or disciplined

• System implemented to report repeat violation

Voluntary Disclosures Suggestions

• Submit on company letterhead

– Outside counsel may submit the voluntary disclosure with a cover letter

• One original and one copy, more will be requested if required

• Provide a matrix or timeline for multiple or complex violations

• In-depth analysis of violation demonstrates your knowledge

• Provide point of contact – name, title, phone/fax, and e-mail

• Do not send via fax or email

• Consider a summary at beginning that identifies: violation & ITAR section(s),

commodity, USML category & subcategory, date of violation, foreign party(ies) and any related license(s)

Page 19: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Voluntary Disclosures More Suggestions

• Initial notification immediately after a violation is discovered, then a

thorough review

• Review thoroughly but swiftly – ensure enough resources

• Acknowledge underlying error/violation – enhance credibility

• Review all export-related transactions and policies – discover and disclose

any other violations

• Keep END apprised, ask for extensions in advance

• Implement remedial actions promised to END, verify effectiveness

Enforcement Division Lifecycle of a Voluntary Disclosure

Company

DOD

Case Closed!

Submission More info

needed

Homework

Requested

Case worked by DTCC

Full

Staffing to

DTSA

Streamline

Received

Processed

Reviewed

by END

Chief

Case

Created/

Assigned

Minor

Violation

Case

Closed

Page 20: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Voluntary Disclosures What USG is Reviewing

• Harm to U.S. foreign policy or national security • Adherence to law, regulations, and DDTC’s licensing and

compliance policies • Severity of violation

– minor or substantive, procedural or judgmental, once or repeated, unique or systemic

• Company’s approach & commitment to compliance

– Nature of investigation – Implementation of remedial measures – Improvement of company’s compliance program

Most Common Violations

• Misclassification of hardware or technical data; ineffective or no procedures to properly classify commodities

• Failure to properly implement & manage licenses or agreements

• Failure to complying with provisos, exceeding value, etc.

• Relying on a Commodity Classification Automated Tracking System (CCATS) decisions from BIS as a jurisdiction determination in lieu of a CJ determination from DDTC

• Posting technical data on a computer server without proper protection from unauthorized foreign employee access

• Misunderstanding or misuse of ITAR exemptions

Page 21: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Voluntary Disclosures Disclosure Results

Most common compliance action by DTCC:

• Request additional information and identify additional violations

• Review company compliance manual

• Recommend additional compliance measures

• Recommend audit of compliance program

• Recommend submission of CJ request

• Disclosure resolved under a consent agreement

Voluntary Disclosures Beneficial Results

• Greater appreciation & understanding of defense trade controls

• Senior management attention & support for compliance

• Enhanced compliance program

• Designated, full-time export control official & other resources

• Improved ability to identify & prevent violations

Page 22: Office of Defense Trade Controls Compliance ITAR ... · PDF fileOffice of Defense Trade Controls Compliance ITAR Compliance Overview ... •DTCC Responsibilities & Trends •Compliance

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Summary

• Company commitment

• Management’s support toward ITAR compliance

• Sufficient human, financial and capital resources

• Compliance manual & implementation

• U.S. & foreign party screening data

• Education and training

Leads, Tips, Questions

Glenn E. Smith

Chief, Enforcement Division

202-632-2799

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General Questions

• Response Team Telephone Number:

202-663-1282

• Response Team E-mail:

[email protected]