Luxembourg Company Agrees to $25 Million Fine for Illegal Exports
Posted by Clif Burns at 8:07 pm on January 5, 2009
Luxembourg-based Qioptiq S.A.R.L. agreed in mid-December to a $25 million fine in connection with its unlicensed exports of military-grade night vision items and technology without required licenses from the Directorate of Defense Trade Controls. Most of the unlicensed exports were undertaken by a company acquired by Qioptiq and occurred prior to the acquisition. Of the $25 million, $10 million was suspended — $5 million in consideration of expenses already incurred by Qioptiq in its investigation of the illegal exports and $5 million to be used to defray the costs of the compliance initiatives mandated by the consent agreement.
A review of the charging letter that DDTC proposed as a basis for the consent agreement reveals two things of particular interest. First, successor liability at DDTC is alive, well, and thriving. Second, emails sent by Qioptiq’s predecessor in interest provide an object lesson about what companies shouldn’t say about export compliance. Clearly DDTC’s desire to impose a significant penalty seems motivated by these emails.
The DDTC has long said that it considers an acquiring company to be strictly liable for export violations committed by the acquired company. Many people, myself included, have questioned the wisdom of such a policy inasmuch as it could deter companies with a demonstrated record in export compliance from acquiring, and cleaning up, bad export citizens. The DDTC’s charging letter, however, casts most of these issues aside, asserting that these might be mitigating factors, but not enough to “mitigate away” the violations:
Given the significant national security interests involved as well as the systemic and longstanding nature of the violations, the Department has decided to charge the Respondent with one hundred sixty-three (163) violations at this time. Had the Department not taken into consideration as significant mitigating factors the Respondent’s Voluntary Disclosures, the fact that the violations were committed prior to the Qioptiq Group acquisition of the violating business units and the remedial measures implemented, the Department could have charged the Respondent with additional violations, and could have pursued more severe penalties.
DDTC’s hard line approach here seems to have been motivated by its discovery of emails sent by the acquired company that one might charitably call extreme indifference to export compliance. DDTC singled out the following instances of the acquired company’s cavalier attitudes towards compliance
- An internal training program of the acquired company “advised its employees that one factor to consider when deciding whether to make (and implicitly for deciding not to make) a disclosure to the Department is the risk of discovery of the violation by a U.S. company or U.S. authorities
- An email from a corporate export compliance officer of the acquired company questioned the need for seeking export advice noting “By experience when you call for a US advisor on export control, he will play by the book and drive you to implement a strict (and so a costly) procedure. If you hire a US advisor you will not finish with the only voluntary disclosure we are having in mind today, but he will push you to clean up all the past!”
- An engineer concerned about illegal exports contacted the U.S. office of the acquired company and was directed to talk to outside counsel, which he did. The U.S. office decided not to file a voluntary disclosure and advised the engineer that “no further action was necessary.” According to the company’s outside counsel further requests for ITAR guidance by this engineer went unanswered because the acquired company would not authorize the outside counsel to advise the engineer on other ITAR issues.
Of course, these are merely allegations by DDTC. But, if true, they would certainly raise serious questions about a company’s commitment to export compliance.
You would think that by now the M&A bar would have learned that a proper due diligence requires examination of the target’s trade compliance record. Wall Street lawyers just still don’t get it.
Another interesting aspect is the attention given to the conduct of non-US persons. The majority of the charges cited retransfers and reexports of derivative ITAR-controlled technology from non-US companies to third countries, as opposed to exports directly from US companies to non-US destinations or nationals.
I can’t think of a DDTC consent agreement in recent years in which the charges focused so overwhelmingly on the culpability of non-US recipients of technology exported from the US. (The GM/GD episode comes closest, I suppose.) I think it’s reasonable to construe the Qioptiq agreement as a strong reminder from DDTC to all the foreign end-users out there that the ITAR follow the exports.
This case might do for destination control statements and TAAs/MLAs what the QRS-11 case did for jurisdictional decision-making.
Mike: Qioptiq knew about the problems because the first of the voluntary disclosures was filed by the acquired company prior to the merger, perhaps at Qioptiq’s insistence. Still, the smart thing would have been to await the outcome of the VD. Or maybe Qioptiq thought it was getting a good enough price that it was willing to take the risk. And, of course, there may be an indemnification agreement.
Pat: I had the same impression about the large amount of the narrative that was based on the conduct of overseas affiliates of the U.S. person. Another reason for U.S. companies to keep an eye on their overseas affiliates, if possible, and subsidiaries. Still, it seems DDTC has wandered into some interesting questions of jurisdiction.
I think the fact that the foreign companies facing retransfer/reexport allegations were affiliates of a US company probably put teeth in the assertion of jurisdiction by DDTC to bring Qioptiq (and the acquired companies) to the table with their checkbook. But in reading the charges in the proposed charging letter, I get the distinct impression that DDTC is also asserting jurisdiction over the ITAR-controlled technology, as well as overseas hardware and data that were derived from it. In other words, my sense is that the assertion of jurisdiction via affiliation made this expensive settlement more likely to happen as a practical matter, but DDTC is at least implicitly also taking the position–as it has in public statements, and as the ITAR state–that jurisdiction to prescribe and enforce follows the technical data.
So even foreign recipients of ITAR-controlled items who aren’t affiliated with US companies might want to look at this consent agreement for some lessons learned. BIS hasn’t been shy about going after unaffiliated foreign companies for unlawful reexports of US-origin stuff; DDTC could decide to dedicate more resources to similar enforcement actions. To be sure, enforcement against unaffiliated foreign companies can involve some unique challenges (overseas location of assets, personnel, evidence, etc.). But DDTC has plenty of leverage over noncompliant foreign companies that make money in reliance on US exports of defense articles and services–it can cut those exports off.
Both BIS and DDTC have taken the position that they have jurisdiction over re-exports of U.S. origin items, even though this is a dubious position under international law. The DOJ used this theory to indict a Dutch company and its principal for reexports of aircraft parts to Iran. DOJ hasn’t sought extradition, undoubtedly because the Dutch company and its principal had no contact with the U.S. other than the U.S.-origin parts.
It appears Qioptiq is the beneficiary of an indemnification arrangement. One report now states that “[a]s part of the divestiture agreements, the Seller retained full responsibility for the consequences of all pre-acquisition export matters.” The full story–which I think is likely a Qioptiq press release–is at http://www.vision-systems.com/display_article/349485/19/none/none/COMPN/Qioptiq-enters-into-consent-agreement-with-US-Department-of-Stat.