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

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.

The saga over conflicts between the Department of State and the Department of Commerce regarding which agency has jurisdiction over exports of aircraft parts continues with the latest Final Rule issued by the Commerce’s Bureau of Industry and Security. The new rule amends section 770.2(i) of the Export Administration Regulations (”EAR”), which had otherwise been known as “Interpretation 9″ and which purported to describe, among other things, which aircraft parts and components were subject to regulation by the State Department and which were subject to regulation by the Commerce Department. The jurisdictional issue is concerned in particular with aircraft parts that can be used on both civil and military aircraft.

The new rule is prefaced with a detailed discussion of the Note that the State Department’s Directorate of Defense Trade Controls (”DDTC”) added in August of 2008 to Category VIII(h) of the United States Munitions List (”USML”) in which it tried to clarify this jurisdictional conundrum. The touchstone for the Note was section 17(c) of the Export Administration Act which provided that “standard equipment certified by the Federal Aviation Administration (FAA), in civil aircraft and is an integral part of such aircraft, and which is to be exported to a country other than a controlled country, shall be subject to export controls exclusively under” the Export Administration Act.

Under the Note, which is not necessarily consistent with section 17(c), DDTC states that parts that are “exclusively” designed for civil aircraft are covered by the EAR. Parts designed for military aircraft would be covered by the USML. Parts that can be used on both civilian and military aircraft are subject to the EAR if they meet the standards of 17(c). In the case of aircraft parts that are designated Significant Military Equipment but could be used on both civil and military aircraft, an exporter would be required to file a commodity jurisdiction request before availing itself of the benefits of section 17(c).

The new rule adopted by BIS attempts to bring Interpretation 9 and the Note to Category VIII(h) of the USML into harmony. The prior version of Interpretation 9 asserted jurisdiction over:

Parts, accessories and components (including propellers), designed exclusively for aircraft and engines described in paragraphs (i)(1), (i)(2), (i)(3) and (i)(4) of this section.

The aircraft described in those referenced sections are civil aircraft.

The new version of Interpretation 9 asserts jurisdiction over the following aircraft parts:

Any aircraft tires as well as any components, parts, accessories, attachments and associated equipment that are not specifically designed or modified for aircraft on the Munitions List and all components and parts not on the Munitions List by virtue of the criteria set forth in the note to Category VIII(h) of 22 CFR part 121.

Clearly the intent is to broaden EAR jurisdiction from parts “exclusively” designed for civil aircraft to parts “not specifically designed” for military aircraft, a subtle but important difference that brings Interpretation 9 into line with the Note to Category VIII(h) of the USML. But what’s up with the new reference to tires?

The language of Interpretation 9 could be read to commit all tires to EAR jurisdiction or only tires “not specifically designed” for military aircraft. There doesn’t seem any reason for the regulation to call out tires and then exclude tires “specifically designed” for military aircraft. The regulation could accomplish the same thing by excluding from the EAR all parts “specifically designed” for military aircraft. But one also has to wonder why tires were singled out for special treatment.

UPDATE: As Tom deButts pointed out in a comment left on another post, USML Category VIII(h) specifically excludes tires and propellers used with reciprocating engines even if they are specifically designed for military aircraft and can’t be used on civilian aircraft, something I should have noticed. The revised Interpretation 9 appears to reflect that although I still maintain it could have been more carefully worded.

Regular readers of this blog know that an occasional feature is highlighting press releases by companies that have received their registration number from the Directorate of Defense Trade Controls (”DDTC”) and that can’t resist engaging in, shall we say, a little creative elaboration on the significance of registration. Hey, we’ve spent all that money on the registration fee, we ought to get something from it, right?

The latest installment in this feature comes from EPE Corporation, which issued this press release:

EPE Corporation, an EMS provider, announced that they have received their official International Traffic in Arms Regulations (ITAR) registration from the US Department of State, Bureau of Political-Military Affairs. … Companies receiving this certification demonstrate that they have knowledge and understanding to fully comply with the AECE and ITAR as well as having corporate procedures and controls in place to ensure compliance.

Has DDTC started administering a test for potential registrants? When is the next one being held?

But wait, there’s more:

To EPE, ITAR registration represents our ongoing commitment to supporting the continued success of our homeland security and defense customers by providing the most secure environment possible.

Why stop there? Why not go the whole nine yards and claim that registration permits the company to give a free pony to each of its customers?

All kidding aside, registration is required for all manufacturers and exporters of defense articles, but obtaining that registration does not represent any endorsement by DDTC that the registrant meets any standard other than the ability to fill out a short form and send it in with the required fees. At most, registration proves that the registrant was aware of the registration requirement. I suppose one might say that this elevates the registrant a little bit above those companies that aren’t even aware of that requirement, but it’s a far cry from demonstrating that the company has “corporate procedures and controls in place to ensure compliance.”

An article in today’s Washington Post provides some interesting insights into the April 2007 conviction of Pennsylvania-based Electro-Glass Products for violations of the Arms Export Control Act arising from the company’s unlicensed exports of 23,000 solder-glass preforms to India. The preforms are allegedly components of military night vision goggles.

As a result of the 2007 conviction, Electro-Glass was debarred from exporting by the Directorate of Defense Trade Controls (”DDTC”). Electro-Glass has now prevailed upon Representative John Murtha to write a letter to DDTC seeking to have the agency set aside the debarment. According to the article, Murtha wrote the letter as a favor to a constituent — the company is located in Murtha’s congressional district.

More interesting than this congressional intervention is the defense proffered by Electro-Glass for its unlicensed exports:

“We want to stay legal, we want to stay aboveboard. It was an accident what happened in the first place,” [James K.] Schmidt [Electro-Glass's President] said in a telephone interview.

Schmidt said he called the FBI and “they told me that India was a democracy and they should not be denied.” The company later consulted U.S. customs officials and got the impression that it should not stop the shipments, he said.

But officials from both the FBI and U.S. Customs and Border Protection have denied that they gave approval.

Although I don’t doubt that the FBI may have said something like that to Schmidt, you have to wonder why Schmidt was using the Bureau as the company’s export compliance department. Moreover, given that it wouldn’t be clear to either the FBI or Customs that “solder glass preforms” were components of military night vision, it’s hard to see that the okay from either agency, even if given, would be much of a defense.

Admittedly it is self-serving for me to say so, but this case just illustrates why inexperienced companies ought to call an export lawyer before exporting any item that could conceivably have a military use. But don’t be too hard on me for this little bit of self-promotion: it’s the middle of August, everybody is on vacation, and probably only three people will read this post.

A magistrate hearing pretrial motions in the criminal export case against Doli Syarief Pulungan wondered in a recently issued Report and Recommendation¹ whether there might be a secret version of the USML which lists actual items rather than categories of items. Of course it’s impossible for me to say whether or not there is a “secret” list of that sort with any certainty, since if I knew about it, it wouldn’t be so secret. I don’t think such a list exists, however, but I do think its useful to see what caused the magistrate to wonder about such a list.

As we reported in an earlier post, Pulungan is charged with conspiring to export 100 Leupold Mark 4 CQ/T Rifle Scopes to Indonesia without a license. One of Pulungan’s pretrial motions was for a bill of particulars describing “the specifications to which the subject riflescopes were manufactured that make them defense articles on the Munitions List.” According to the magistrate’s report:

The government’s initial response is that its expert will testify at trial that Leupold Mark 4 CQ/T Riflescopes are on the Munitions List. Pulungan rejoins with an obvious observation: the list itself does not specify any brand or model of riflescope, nor does it list the specifications that would make the scopes defense articles; so what relevant testimony could this ostensible expert possibly provide? Pulungan wants a breakout of the implied syllogism: a riflescope that possesses characteristics x, y and z is deemed to be manufactured to military specifications; a Leupold Mark 4 CQ/T Riflescope possesses characteristics x, y and z; therefore, a Leupold Mark 4 CQ/T Riflescope is manufactured to military specifications. What, asks Pulungan, are x, y and z?

Of course the answer to that question is hardly a deep, dark secret. Leupold’s web site reveals that the scope was designed for the M16. Rather than saying this, however, the prosecution tried to be cute, and that’s where the trouble begins. The magistrate continues:

The government responds that it doesn’t work this way. There is no x, y or z factor that lands a riflescope on the Munitions List in Category I(f). The only logical way to interpret the government’s response is that there is another list, prepared by the DDTC, which determines whether any particular item is a defense article included on the Munitions List as part of ITAR.

The magistrate goes on to note that the government in its pleading says that an item “is designated as a ‘defense article’ on the United States Munitions List” or “defined by the ITAR as a ‘defense article’ covered by Category I(f)”:

If I am interpreting Count 1’s passive-voice declaration and the government’s explanation correctly, then some person or committee within the DDTC has declared that the Leupold Mark 4 CQ/T Riflescope is a “defense article” because it fits within Category I(f) of the Munitions list. But this doesn’t answer Pulungan’s actual complaint: how did it get there? Where, precisely, might a potential exporter actually find this ITAR designation of the Leupold Mark 4 CQ/T Riflescope? What is the foundational basis for the testimony of the government’s trial witness from the DDTC? Does the DDTC have some other real list by make and model? Is there a memo specific to the Leupold scope’s I(f) designation? If so, where is it and why hasn’t it been provided to Pulungan as pretrial discovery?

Following this logic to its end, the Magistrate ordered the prosecution to provide the who, how and why of the designation:

[T]he government promptly must explain in detail who designated the Leupold Mark 4 CQ/T Riflescope a “defense article,” how they did it (the procedural mechanisms) and why they did it (the actual and specific reasons for the designation).

To which we can anticipate the government will respond: nobody designated the Mark 4, there was no procedure that designated it, and no specific reasons were given. The scope is a USML item because it was manufactured to be used on the M16.

You can easily see how the government’s loose language got it into this silly predicament. Items aren’t on the USML; just categories are on the USML and items are either in a USML category or not. The Mark 4 scope isn’t designated on the USML. “Riflescopes manufactured to military specifications” are designated category I(f) on the USML and the Mark 4 either is or isn’t a “riflescope manufactured to military specifications.”

And the issue before the court is not the designation of milspec rifle scopes as category I(f), a designation which is not reviewable under section 38(h) of the Arms Export Control Act, 22 U.S.C. § 2778(h), but simply whether the Mark 4 is or is not a “riflescope manufactured to military specifications.”

It is only a semantic distinction to note that the category not the scope itself is on the USML, but failing to observe that distinction clearly resulted in the magistrate issuing an order that he might not have otherwise issued.

¹ Westlaw subscription required.

Yesterday the Directorate of Defense Trade Controls (”DDTC”) announced new documentation requirements for export licenses. Failure to meet this requirement can result in an export license being returned without action although DDTC says that for an “interim” period of unspecified length it will decide on a case-by-case basis whether to return applications not in compliance with these documentary requirements.

• Purchase orders and invoices support the license application must be with a foreign party not with its U.S. subsidiary. DDTC bases this requirement on the notion that the U.S. subsidiary is a “U.S. person” although why that should prevent the U.S. subsidiary from issuing purchase orders on behalf of its parent is not clear, particularly where the exporter may prefer to have an agreement with a U.S. party rather than a foreign one.
• The purchase order or similar document must “have an issue date within one year from the date of application submission.” Since documents that are more than one-year-old are still legally binding, this seems, at best, an arbitrary requirement. DDTC gives no reason for this requirement.
• If the invoice lists the price in a foreign currency, the exchange rate and U.S. dollar conversion for each line item must be annotated on the document. Again, since the license application must provide those figures in dollar amounts, there is no reason why this must be hand-annotated on the documentation. Even so, this shouldn’t pose a huge compliance burden on applicants.
• The purchase order, invoice, or similar documentation must indicate the ultimate end user of the item.

Defense News published yesterday an interview with Frank Ruggiero, Deputy Assistant Secretary (DAS) for Defense Trade and Regional Security in the Bureau of Political-Military Affairs. Mr. Ruggiero oversees all defense exports from the United States, including Direct Commercial Sales and Foreign Military Sales. And he had several interesting things to say.

First, he reported that pursuant to National Security Presidential Directive No. 56, the Directorate of Defense Trade Controls has significantly streamlined processing times:

In summer 2007, we had nearly 700 licenses that were over 60 days. As of April 16, that’s down to 67. An average license takes about 18 days to process, a 50 percent reduction from last summer. We’ve also dropped backlog by 50 percent.

Second, Ruggiero suggested that licensing policy might be used to retaliate against foreign defense firms that produce defense articles free of U.S.-origin goods in order to trade with China and other countries that are subject to arms embargoes or strict licensing policies:

Q. Your office can veto the export of foreign-made items that use controlled U.S. parts or technologies, which has led some firms, such as France’s Thales and Italy’s Alenia, to develop satellites free of American components for sale to China. Is that a concern?

A. We are monitoring the circumstances and analyzing what International Traffic in Arms Regulations (ITAR) items we may have authorized to such companies to make sure those items are in fact not being incorporated into ITAR-free products. We would certainly factor into any future licensing determination the activity of a foreign company in terms of licensing ITAR-free items to countries that may raise potential national security risks to the United States.

That’s one way to expand the scope of U.S. export laws, I suppose.

Robert Bigelow is a Las Vegas hotel billionaire who owns Bigelow Aerospace and wants to put a Budget Suites of America motel somewhere in space near you. Such facilities are apparently called privately-owned orbital facilities or POOFs. Seriously.

Of course, the folks at Bigelow think that their dreams of space tourism may be negatively impacted by the anti-POOF forces over at the Directorate of Defense Trade Controls (”DDTC”). Those grinches take the view that most space-qualified stuff is on the USML and needs an export license, which, of course, is a major annoyance for someone who wants to build hotels (and other commercial facilities) in the sky.¹ So, according to an editorial by Bigelow’s general counsel in the print edition of Space News, Bigelow is going to file a commodity jurisdiction (”CJ”) request to transfer the company’s “space habitat” (or POOF) technology from the United States Munitions List to the Commerce Control List (”CCL”).

Anyone who has filed a CJ request is probably giggling more over the idea that Bigelow’s CJ request will be addressed by DDTC anytime soon than they are over the acronym POOF. Similarly, the idea that DDTC will move space technology, even for space hotels, over to the CCL will provoke similar snorts. And, of course, once DDTC says no to Bigelow’s request, that will be the end of the story since such decisions are shielded from judicial review under section 2778(h) of the Arms Export Control Act.

But you can’t blame Bigelow for dreaming, can you?

[Thanks to Res Communis and Hobbyspace for info on the Space News editorial]

¹Under section 120.17(a)(6) a space launch of a payload is not itself an export of the payload. However, Bigelow appears to be hoping to launch its components from outside the United States, and thus would be required to export them prior to launch.

The Directorate of Defense Trade Controls (”DDTC”) has revamped its web site and says it hopes “the new format enhances your experience at this Web site.” It also hopes that all visitors to the new site only use Microsoft’s Internet Explorer because the new site is broken if viewed in Firefox. Firefox, currently used by almost 40% of people browsing the Internet, is Internet Explorer’s chief competitor and is available as a free download.

Here’s what you see at the new DDTC site if you’re using IE6:

And here’s what a Firefox user will see:

Notice that in Firefox the blue menu on the left covers up the beginning of each line of text on the right, making the page unreadable, hardly the “enhanced experience” that DDTC was hoping for. It is somewhat disheartening when an agency that is in charge of guarding critical technology stumbles when it comes to something as simple as cross-browser compatibility.

Canadian Foreign Minister
Maxime Bernier

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An article in today’s Toronto-based Globe and Mail uses the occasion of the recent visit of Canadian Foreign Minister Maxime Bernier to Washington to see his U.S. counterpart, Secretary of State Condoleezza Rice, as an opportunity to comment on disagreements between the two countries on defense trade and export controls. As reported previously on this blog, a major bone of contention between the U.S. and Canada is over Canada’s legal prohibition against nationality-based discrimination and the U.S. refusal to permit transfer of defense technology to Canadians who are dual-nationals of countries subject to U.S. arms embargo, such as China and Syria.

According to the article:

[Canadian] officials have said recently that a solution is not imminent, although they insist they want a deal. And Public Works Minister Michael Fortier, who met U.S. procurement officials in Washington last week and is now the designated point man in negotiations with Washington, won’t discuss the status of the file. Nor did he meet anyone at the State Department, which administers the contentious U.S. export controls.

The article posits two reasons that an agreement over this issue with Canada languishes while the United States has entered into agreements with the United Kingdom and Australia which would ease transfer of technical data to individuals and entities in those countries. First, the article quotes a Virginia-based “trade consultant” who said that

Canada doesn’t have a deal yet because it’s resisting concessions made by the British and the Australians. She pointed out that both those countries agreed to aggressively prosecute violators of the technology-sharing deals, most notably by applying domestic Official Secrets laws.

The second reason cited by the article is this:

Unlike the Aussies and the Brits, Canada buys relatively little of what U.S. military suppliers produce.

I’m not entirely convinced that these are reasons that the U.S. and Canada can’t see eye to eye over the dual national issue. The U.S.-U.K. Defense Trade Cooperation Treaty leaves open the criteria for determining what companies will be within the approved “community” of companies eligible for transfers with export licenses. It would not be surprising if those criteria require agreements by such companies not to transfer defense technologies to dual-nationals of countries subject to an arms embargo. If that’s the case, Canada can’t expect different treatment of dual nationals even if it increases its defense spending in the U.S. or agrees to cover re-exports of non-classified technical data under Canadian laws relating to official secrets or classified data.