Archive for the ‘ITAR’ Category

Court of Appeals Judges Question Justice Department on ITAR Prior Restraint Against Speech at Libraries, the Internet, and other Public Forums

Tuesday, July 12th, 2016 by Danielle McClellan

2016/07/12

By: Matthew A. Goldstein, Esq., matthew@goldsteinpllc.com, 202-550-0040

Originally filed in the U.S. Federal District Court for the Western District of Texas in Austin under Case No. 1:15-cv-00372, the case of Defense Distributed and the Second Amendment Foundation against the U.S. Department of State and other government defendants seeks to prevent application of the International Traffic in Arms Regulations [FN/1] (“ITAR”) as a prior restraint against public speech.

Following the District Court’s denial of the plaintiffs’ request for a preliminary injunction against the State Department, the plaintiff’s appealed to the United States Court of Appeals for the Fifth Circuit.

At last week’s oral argument before the Court of Appeals, a panel of judges questioned the Justice Department on the scope of the State Department’s prior restraint.  The Justice Department’s responses were inconsistent with prior State Department positions in the case and contrary to the State Department’s June 13, 2015 notice of proposed rulemaking that announced the government’s sudden application of the ITAR as a prior restraint on public speech. [FN/2]

 

Has the State Department Previously Enforced the Prior Restraint?

Considering how the regulations have been in effect for 60 years, the Court asked the Justice Department to provide examples of when the State Department previously regulated prepublication of information about guns.  The Justice Department responded that it did not know of any examples, “but there certainly aren’t a lot…” [FN/3]

 

The Justice Department’s representation that “there certainly aren’t a lot” of examples is unclear, but seems to assume there is at least one.  Yet, the State Department has not cited a single case of enforcement in its briefs filed with the court.

The Justice Department claim there “aren’t not a lot” of examples also conflicts with a Justice Department representation to the court that followed its original response, where it concedes the State Department has not previously regulated information about handguns. [FN/4]

 

Is Exposing Technical Data to a Foreign Person Controlled?

The Justice Department told the Court that exposing technical data to a foreign is not the relevant standard. [FN/5]  However, the State Department’s June 3, 2016 proposed rule discussing the prior restraint states: “‘technical data’ may not be made available to the public without authorization.” [FN/6]

 

Does the Prior Restraint Apply to Scientific Information?

The Justice Department told the court that it did not think that anybody could read the prior restraint to apply to scientific exchanges. [FN/7]  However, the ITAR U.S. Munitions List (“USML”) designates a vast amount of scientific information as technical data and the State Department’s rule does not provide any across-the-board exclusion from the prior restraint for exchanges of scientific information.

There is a limited exclusion for information that arises or results from “fundamental research,” but the State Department takes a very narrow interpretation of the scope of this exclusion-to the point that it does not exist in reality. This is because the fundamental research exclusion, codified at 120.11(a)(8), is nested within the ITAR definition of public domain at 120.11(a) [FN/8]-and is therefore under the shadow of the State Department’s prepublication approval requirement.  Here, the State Department warns universities: “The only part of fundamental research that is not controlled by the ITAR is the published information that meets the definition of public domain.” [FN/9]

 

Does the Prior Restraint Apply to Information on Guns?

The Justice Department told the court the ITAR does not prohibit the dissemination of information about guns for a number of reasons and claimed that a lot of that information is already in the public domain. [FN/10]

Of course, the ITAR definition of “technical data” includes information on any article listed on the ITAR USML, not just guns.  But it most definitely controls “information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification” of guns listed on the USML. [FN/11]

Moreover, the State Department’s June 3, 2015 proposed rule prevents reliance on the public domain exclusion for the vast majority of information on the Internet, public libraries, and other public forums where it states:

“‘Technical data’ and software that is made publicly available without proper authorization remains ‘technical data’ or software and therefore remains subject to the ITAR.” [FN/12]

Considering how the State Department has not publicly enforced its prepublication approval requirement against anyone other than Defense Distributed, most, if not all, persons who previously posted technical data to the Internet, at libraries, and other public forums had no reason to know that the State Department required prior U.S. government authorization for public speech.  As a result, the vast majority of publicly available technical data on guns is not “already in the public domain” because the publishers did not obtain U.S. government authorization before publication.

 

Does the Prior Restraint Criminalize Placing Books at Libraries?

The Court asked the Justice Department whether the State Department restricts placing books at public libraries. [FN/13]  The Justice Department did not clearly answer “yes” or “no.”  Instead, it argued that the State Department has not faced the issue and that upholding the State Department’s prior restraint in the present case would not impact the issue. [FN/14]

However, the State Department’s June 3, 2015 proposed rule claims that prior government authorization is required for any transmission of technical data into the public domain, regardless of the means of transmission.  As announced by the Stated Department in its proposed rule:

Prior to making available ”technical data” or software subject to the ITAR, the U.S. government must approve the release through one of the following: (1) The Department; (2) the Department of Defense’s Office of Security Review; (3) a relevant U.S. government contracting authority with authority to allow the ”technical data” or software to be made available to the public, if one exists; or (4) another U.S. government official with authority to allow the ”technical data” or software to be made available to the public. [FN/15]

There is no carve-out for technical data in books placed at public libraries.  To the contrary, the proposed rule states the ITAR prior restraint applies to a release of technical data by publishing in a book as much as publishing on the Internet:

The requirements of paragraph (b) are not new. Rather, they are a more explicit statement of the ITAR’s requirement that one must seek and receive a license or other authorization from the Department or other cognizant U.S. government authority to release ITAR controlled ”technical data,” as defined in § 120.10. A release of ”technical data” may occur by disseminating ”technical data” at a public conference or trade show, publishing ”technical data” in a book or journal article, or posting ”technical data” to the Internet. [FN/16]

Accordingly, if the Court of Appeals rules in favor of the State Department, the Court will indeed be upholding a broad prior restraint on the placing of books at public libraries, as well as releases of technical data at public conferences, and any other public forum.

Moreover, same as the exclusion for fundamental research discussed above, because the exclusion for information that is available at “libraries open to the public”, as codified at 120.11(a)(4), is nested within the ITAR definition of public domain at 120.11(a) [FN/17]-it is subsumed within the State Department’s prepublication approval requirement-as are the other public forums nested below 120.11(a) (i.e., through sales at newsstands and bookstores, subscriptions, second class mailing privileges, etc.)-which are all subject to the State Department’s prior restraint.

 

Does the ITAR Restrict Republications of Information?

The Justice Department told the court that republication of technical data that was made available without government authorization is a violation under the State Department’s proposed rule if made with “knowledge that it was put out originally in violation of the regulations…” [FN/18]  But the Justice Department did not explain what it means by “knowledge”-a legal term of art that can include actual knowledge of a fact or constructive knowledge of a fact.

Are suspicious circumstances enough for prosecution?

Is it sufficient that a speaker knows or should know the facts indicate technical data or software was made publicly available without an authorization?

What, if any, actions constitute sufficient due diligence to guard against imputation of such knowledge?

These questions are particularly relevant considering how the government has not publicly enforced the prior restraint, which means the public is on constructive notice that the vast majority of all technical data in the public domain was placed there without U.S. government authorization.

For instance, under the proposed rule, it is unclear whether a person can be held liable for reposting technical data if they do not actually know whether the original poster of technical data had permission from the government, but circumstances exist indicating a lack of such approval (i.e., no indication that government approval was obtained, technology of a nature that the government is unlikely to approve, etc.).

The republication requirement will also violate the First Amendment under the Supreme Court’s holding in Bartnicki v. Vopper Williams, 532 U.S. 514 (2001). In Bartnicki the Supreme Court addressed the question: “Where the publisher has lawfully obtained information from a source who obtained it unlawfully, may the government punish the ensuing publication based on the defect in a chain?” [FN/19]

 

The Supreme Court concluded that, under the statutory language at issue in the case, a person speaking on matters of public concern could not be prohibited from publishing the contents of an electronic communication, even where he or she knows or has reason to know that the information was obtained through an illegal interception. The Supreme Court noted:

“It would be quite remarkable to hold that speech by a law-abiding possessor of information can be suppressed in order to deter conduct by a non-law-abiding third party.” [FN/20]

Equally important to note, the Supreme Court has held that government bans on the republication of information does not meaningfully advance any legitimate government interest. [FN/21]

 

What Happens Next?

As explained in the plaintiffs’ briefings to the Court, the State Department’s prior restraint is unconstitutional under the First Amendment and for a variety of other reasons.  However, much more than protection of the First Amendment and other fundamental rights are at stake in the upcoming Court of Appeals decision.

 

A Dangerous Precedent

A decision in favor of the State Department will establish a dangerous precedent wherein the government is allowed to maintain a list of topics that citizens cannot discuss publicly without a license from some unnamed government official (or contractors working for the State Department).

Although the case concerns information about guns and other topics listed on the USML, future lists can include virtually any topic that some unnamed government official or contractor decides to “designate” or otherwise place on a list-unless the prospective speaker has the time and money to hire a team of attorneys, file a lawsuit, and eventually wins in court.

 

Adversely Impact Innovation

The ITAR controls many developmental electronics, aeronautics, and other technologies. [FN/22]  It even controls emerging technologies not yet enumerated on the USML. [FN/23]  Although it is important to protect these technologies, the development of advanced and innovative technologies through open research and development is the key to U.S. National Security.  The State Department’s proposed prepublication approval requirement will defeat this important government interest by creating increased caution and restraint in the scientific community that will inhibit the free exchange of information necessary to innovation.

 

Chilling Effect on Speech

The prior restraint’s impact will be far-reaching because a prepublication review requirement will necessarily subject a wide range of technical information to review. Most persons publishing information in books, newspapers, magazines, journals, and on the Internet are not generally knowledgeable about export controls. Because of this, they are unlikely to recognize the proper scope of ITAR controls and will likely refrain from participating on exchanges for fear of inadvertently violating the regulations.

 

Changes Contrary to Stated ECR Goals

The prior restraint is contrary to the stated goal of the President’s Export Control Reform (“ECR”).  The primary ECR goal is a system where “higher walls are placed around fewer, more critical items” that focuses agency resources on license reviews of critical technologies that matter. The proposed prepublication approval requirement is contrary to this stated goal because it will require the devotion of significant agency resources to reviews of unclassified, non-proprietary information, which does not generally describe the state of art technology or implicate military critical technologies.

 

Ineffective and Waste of Taxpayer Dollars

Considering the annual volume of academic and professional publications and the sheer volume of daily publications on the Internet that may contain technical data, the costs of adding more staff with the technical expertise required to administer the proposed prepublication review requirement will no doubt exceed existing DDTC capacities.  In the meantime, further lawsuits by newspapers, magazines, academic journals, and other would-be publishers will further burden agency resources and waste taxpayer dollars.

—————

[FN/1] 22 C.F.R. Part 120 et seq.

[FN/2] See 80 Fed. Reg. 31,525 (June 13, 2015).

[FN/3] June 6, 2016 Hearing Record (hereinafter “06/06/16 H.R.”) at 23:32-25:40.

[FN/4] 06/06/16 H.R. at 24:21-25:17.

[FN/5] 06/16/16 H.R. at 30:48-31:26 (Justice Department stating, inter alia, that “exposed to a foreigner is not the standard”).

[FN/6] 80 Fed. Reg. at 31,528.

[FN/7] 06/06/16 H.R. at 28:09-28:47; See also 24:11-25:40.

[FN/8]  22 C.F.R. § 120.11   Public domain.

(a) Public domain means information which is published and which is generally accessible or available to the public:

(1) Through sales at newsstands and bookstores;

(2) Through subscriptions which are available without restriction to any individual who desires to obtain or purchase the published information;

(3) Through second class mailing privileges granted by the U.S. Government;

(4) At libraries open to the public or from which the public can obtain documents;

(5) Through patents available at any patent office;

(6) Through unlimited distribution at a conference, meeting, seminar, trade show or exhibition, generally accessible to the public, in the United States;

(7) Through public release (i.e., unlimited distribution) in any form (e.g., not necessarily in published form) after approval by the cognizant U.S. government department or agency (see also §125.4(b)(13) of this subchapter);

(8) Through fundamental research in science and engineering at accredited institutions of higher learning in the U.S. where the resulting information is ordinarily published and shared broadly in the scientific community. Fundamental research is defined to mean basic and applied research in science and engineering where the resulting information is ordinarily published and shared broadly within the scientific community, as distinguished from research the results of which are restricted for proprietary reasons or specific U.S. Government access and dissemination controls…

[FN/9] (emphasis in original) See here.

The State Department also advised that the fundamental research exclusion does not apply to the provision of information to foreign parties during the performance of research involving technical data or a defense article because the provision of such information constitutes a defense service that requires DDTC authorization under ITAR sections 120.9(1) and 124.1(a). Under this DDTC interpretation of the exclusion, the provision of information to foreign parties in the course of research, regardless of if in the public domain or otherwise falling under any other ITAR exclusion, requires DDTC authorization if the research involves ITAR-controlled technical data or a defense article.

[FN/10] 06/06/16 H.R. at 18:51-19:47; 21:45-22:39.

[FN/11] 22 C.F.R. § 120.10.

[FN/12] 80 Fed. Reg. 31,528 (June 3, 3015) (“‘Technical data’ and software that is made publicly available without proper authorization remains ‘technical data’ or software and therefore remains subject to the ITAR.”).

[FN/13] 06/06/16 H.R. at 25:39-27:13.

[FN/14] 06/06/16 H.R. at 26:27-27:13.

[FN/15] 80 Fed. Reg. at 31,528.

[FN/16] Id.

[FN/17] 22 C.F.R. § 120.11 (“(a) Public domain means information which is published and which is generally accessible or available to the public… (4) At libraries open to the public or from which the public can obtain documents…”)

[FN/18] 06/06/16 H.R. at 31:26-33:00.

[FN/19] Id. at 528.

[FN/20] Bartnicki at 529-530.

[FN/21] Florida Star v. B.J.F., 491 U.S. 524, 535 (1989) (“punishing the press for its dissemination of information which is already publicly available is relatively unlikely to advance the interests in the service of which the State seeks to act.”).

[FN/22] See e.g., USML at 22 C.F.R. § 121.1 paragraphs VI(c), VIII(f), X(f), XI(a)(7), and XX(a)(8).

[FN/23] See e.g., USML Category XXI-Articles, Technical Data, and Defense Services Not Otherwise Enumerated

*(a) Any article not enumerated on the U.S. Munitions List may be included in this category until such time as the appropriate U.S. Munitions List category is amended. The decision on whether any article may be included in this category, and the designation of the defense article as not Significant Military Equipment (see §120.7 of this subchapter), shall be made by the Director, Office of Defense Trade Controls Policy.

(b) Technical data (see §120.10 of this subchapter) and defense services (see §120.9 of this subchapter) directly related to the defense articles covered in paragraph (a) of this category.

It Never Pays to Use Your Church to Cover Your Export Violations

Thursday, May 5th, 2016 by Danielle McClellan

2016/05/05

By: Danielle McClellan

What does a system analyst for a defense contractor, a church volunteer and an owner of 3 US companies all have in common?  They all involve one woman, who will now spend 57 months in prison, encompassed each, and all at the same time. Hannah Robert, of North Burnswick, New Jersey recently plead guilty to conspiring to violate the Arms Export Act by exporting military technical drawings to India without government approval.

The story begins with Robert being an employee for a defense contractor where she worked as a system analyst and had access to thousands of export controlled drawings that were used for bids on US Department of Defense (DoD) contracts (Robert held this position until November 2012). In June 2010, she became the founder, owner and president of One Source USA LLC where she contracted with the DoD to supply defense hardware items and spare parts. In September 2012, Robert opened another defense company, Caldwell Components, Inc. as well as Once Source India (located in India), with a resident of India (identified on as R.P. in court documents) that manufactured defense hardware items and spare parts.

Between June 2010 and December 2012 Robert illegally exported defense technical drawings for parts used in the torpedo systems for nuclear submarines, military attack helicopters and F-15 fighter aircraft to R.P. in India. Robert and her India counterpart also sold defense hardware items to foreign customers including the United Arab Emirates Ministry of Defence. Hannah Robert volunteered at a church in Camden County, New Jersey, as a web administrator. This allowed her access to the church’s website where she uploaded the defense technical data. She provided her login and password to the church’s website to R.P. so that he/she could download the files. This process went on for two years and was the way in which Robert and R.P. were able to pass the technical information amongst themselves.

Hannah Robert was also faced with the issue of providing US DoD with faulty wing pins for the F-15 fighter aircraft. Robert provided false and misleading material certificates and inspection reports for the parts. The documents also failed to list that the actual manufacturer of the pins was located in India, not One Source USA’s New Jersey location which was listed on all of her DoD bids. The failed wing pins grounded approximately 47 F-15 fighter aircraft and cost DoD over $150,000 to inspect and repair the pins. Robert must pay $181,000 to the DoD to cover the repair costs as well as forfeiting more than $77,000 that she earned from the contracts.

The case was investigated by the special agents of the Defense Criminal Investigative Service’s Northeast Field Office and the special agents of the Department of Homeland Security’s Counter Proliferation Investigations.

More Information: https://www.justice.gov/usao-nj/pr/former-owner-defense-contracting-businesses-sentenced-57-months-prison-illegally

BIS & DDTC Release Another Set of Proposed Rules on Military Aircraft

Tuesday, March 29th, 2016 by Danielle McClellan

2016/03/29

By: Danielle McClellan

BIS and Department of State simultaneously released proposed rules based on a review of Categories VII and XIX as well as ECCNs 9A610, 9A619, 9C610, 9C619, and 9E619.

BIS Revisions would be as follows:

Changes to ECCN 9A610

  • This proposed rule would remove text currently in the “Control(s)” table that excludes paragraphs .t, .u, .v and .w from national security controls. Although the text of those paragraphs is taken from the Missile Technology Control Regime Annex, the commodities that they control are unmanned aerial vehicle parts, components or associated equipment that also are subject to category ML10 on the Munitions List of the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. The addition of the national security controls would not increase the number of destinations to which a license is required for the commodities controlled by these paragraphs as those paragraphs already have missile technology and regional stability controls. …

Changes to ECCN 9A619

  • This rule would make three additions to the “Related Controls” paragraph. The first would state explicitly the historical practice of controlling 501-D22 gas turbine engines in ECCN 9A991.d, which is the classification that has been used for many years. The second would add a reference to USML Category XIX(f) to alert readers that some aircraft parts and components are enumerated in that paragraph. Finally, a note would be added reminding readers that the commodities enumerated in paragraph .y are subject to the controls in that paragraph rather than the broader controls elsewhere in this ECCN. …

Changes to ECCN 9C610

  • ECCN 9C610 would be revised by adding references to USML Category VIII in both the heading and in paragraph .a, to make clear that materials specially designed for commodities enumerated or otherwise described in that category are controlled in ECCN 9C610.

Changes to ECCN 9C619

  • ECCN 9C619 would be revised by adding references to USML Category XIX in both the heading and in paragraph .a, to make clear that materials specially designed for commodities enumerated or otherwise described in that category are controlled in ECCN 9C619.

Change to ECCN 9E619

  • The related controls paragraph in ECCN 9E619 would be amended by removing the sentence that reads “Technology described in ECCN 9E003 is controlled by that ECCN.” Although true, the placement of the sentence in a 600 series ECCN could mislead readers into thinking that the order of review does not apply in this instance.

Comments must be received by BIS by March 25, 2016. You may submit comments by any of the following methods:

  • Federal eRulemaking Portal: http://www.regulations.gov. Search for this rule using its regulations.gov docket number: BIS-2016-0009.
  • By email directly to publiccomments@bis.doc.gov. Include RIN 0694-AG76 in the subject line.
  • By mail or delivery to Regulatory Policy Division, Bureau of Industry and Security, U.S. Department of Commerce, Room 2099B, 14th Street and Pennsylvania Avenue NW., Washington, DC 20230. Refer to RIN 0694-AG76.
  • FOR FURTHER INFORMATION CONTACT: Thomas DeFee or Jeffrey Leitz in the Office of Strategic Industries and Economic Security, Munitions Control Division by telephone at (202) 482-4506 or by email at Thomas.DeFee@bis.doc.gov or Jeffrey.Leitz@bis.doc.gov.

Department of State Revisions would be as follows:

Revision of Category VIII

This proposed rule revises USML Category VIII, covering aircraft and related articles, to describe more precisely the articles warranting control on the USML.

  • Paragraph (a) is revised to clarify that the controls for all paragraphs are applicable “whether manned, unmanned, remotely piloted, or optionally piloted,” by modifying paragraph (a)(5) to clarify the features meriting USML control, and by deleting paragraph (a)(6) and placing it into reserve, because the relevant control would be subsumed by paragraph (a)(5).
  • Paragraphs (a)(7) and (a)(8) are modified to clarify the features meriting USML control.
  • Paragraphs (a)(11) and (a)(13) are deleted and placed into reserve.
  • Paragraph (a)(14) is modified to exclude L-100 aircraft manufactured prior to 2013 from the scope of control.
  • The Note to paragraph (a) is revised to incorporate technical corrections.
  • Paragraph (d) is modified to delete the “ship-based” control parameter and to clarify the intent and scope of the control.
  • Notes 1 and 3 to paragraph (f) are modified to incorporate clarifying language. …

Revision of Category XIX

This proposed rule revises USML Category XIX, covering gas turbine engines and associated equipment, to describe more precisely the articles warranting control on the USML.

  • Paragraph (a) is modified to clarify the scope of controlled engines and to incorporate technical corrections.
  • Paragraph (b) is revised to provide additional technical parameters to clarify the scope of controlled engines. With respect to paragraph (b)(1), public comment is requested on whether any commercial models exceed the capability described in this paragraph. In any public comment submitted in reply to this request, please provide specific examples of the commercial models at issue.
  • Paragraph (c) is modified to incorporate conforming changes and to make clear that the paragraph applies only to gas turbine engines, while paragraph (d) is modified to update the list of subject engines.
  • The Note to paragraph (e) is modified to incorporate a conforming change.

The Department of State will accept comments on this proposed rule until March 25, 2016. Interested parties may submit comments within 45 days of the date of publication by one of the following methods:

  • Email: DDTCPublicComments@state.gov with the subject line, “ITAR Amendment–Categories VIII and XIX.”
  • Internet: At www.regulations.gov, search for this notice by using this rule’s RIN (1400-AD89).
  • Comments received after that date will be considered if feasible, but consideration cannot be assured. Those submitting comments should not include any personally identifying information they do not wish to be made public or information for which a claim of confidentiality is asserted, because those comments and/or transmittal emails will be made available for public inspection and copying after the close of the comment period via the Directorate of Defense Trade Controls Web site at www.pmddtc.state.gov. Parties who wish to comment anonymously may do so by submitting their comments via www.regulations.gov, leaving the fields that would identify the commenter blank and including no identifying information in the comment itself. Comments submitted via www.regulations.gov are immediately available for public inspection.
  • FOR FURTHER INFORMATION CONTACT: Mr. C. Edward Peartree, Director, Office of Defense Trade Controls Policy, Department of State, telephone (202) 663-2792; email DDTCPublicComments@state.gov. ATTN: ITAR Amendment–USML Categories VIII and XIX.

Compliance Professionals: The Federal Government is Coming for You!

Thursday, October 1st, 2015 by Danielle McClellan

2015/10/01

By: Stephen Wagner

In my article on Personal Liability for Export Violations, originally published in February 2015, I warned that a federal appellate court had recently decided in United States v. Trek Leather, Inc., 767 F.3d at 1288, 96-99 (Fed. Cir. 2014) (en banc), that corporate officers may be held personally liable for civil penalties in cases in which import laws were violated.  I speculated that export enforcement agencies may use the ruling in Trek Leather to increase their assessments of civil penalties against the principals of export companies.

That speculation just turned into a virtual certainty.

In a move that will have far-reaching effect on exporters – as well as importers and any company whose activities are regulated by the federal government – the U.S. Department of Justice (DoJ) issued a memorandum dated September 9, 2015, on Individual Accountability for Corporate Wrongdoing.

The new guidelines prioritize the Justice Department’s focus on individual responsibility in cases involving both civil and criminal corporate wrongdoing, and set forth six steps that will strengthen the DoJ’s “pursuit of individual corporate wrongdoing”:

  1. In order to qualify for any [consideration for cooperation under the DoJ’s Principles of Federal Prosecution of Business Organizations], corporations must provide to the Department all relevant facts relating to the individuals responsible for misconduct.
  2. Criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
  3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
  4. Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.
  5. Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any [decision not to bring civil claims or criminal charges against the individuals who committed the misconduct] in such cases.
  6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

(Emphasis added.)

What does all of this mean for executives and employees working in export compliance?

It is important to understand that whenever a U.S. government enforcement agency such as the Office of Export Enforcement (OEE) in the Bureau of Industry and Security or Homeland Security Investigations (HSI) (on behalf of the Directorate of Defense Trade Controls) initiates an investigation, it follows DoJ guidelines with an eye toward bringing civil and/or criminal charges against the violators.  While individuals have always been subject to charges for criminal violations of export laws, rarely before have individual executives or compliance professionals in an export company faced civil charges and monetary penalties for export violations.

And then came Trek Leather, which put individuals on notice that they could be held personally liable for export violations and made to pay civil penalties in such cases.  (Over $570,000 for the president of Trek Leather.)  Now, these DoJ guidelines make clear that compliance professionals at all levels will be in the crosshairs when federal enforcement officials investigate a potential violation.

In fact, the DoJ memo makes it a prosecutorial requirement that formal consideration of potential charges against individuals be part of any process of resolving claims against the company in general.  Moreover, in the event that an investigation concludes with criminal or civil charges against a corporation and the investigators do not want to press charges (criminal or civil) “against the individuals who committed the misconduct,” such a decision must be approved in writing by the United States Attorney (the senior lawyer in every judicial district) or an Assistant Attorney General.  This high standard will make it incredibly difficult for charges to be brought against an exporter without charges being brought against the individual who is responsible for the violation.

These new Justice Department guidelines also create a two-way incentive for companies to offer up to investigators the individuals responsible for violations and for individuals to spill everything on their superiors who also knew of the behavior.  As seen in the first of the “six steps” above, companies cannot obtain leniency under federal charging (and sentencing) guidelines unless they provide “all relevant facts” regarding the individuals involved.  Turning to the individuals, the DoJ comments as follows:

“by focusing our investigation on individuals, we can increase the likelihood that individuals with knowledge of the corporate misconduct will cooperate with the investigation and provide information against individuals higher up the corporate hierarchy.”

(Emphasis added.)

This language clearly implies that – going forward – the initial focus of federal investigators will be not only presidents and chief compliance officers of the company, but also those employees who are responsible for day-in day-out export compliance matters and who, most likely, actually committed the violation.

As I and my colleague, Andrew Ittleman, discussed in our March 2015 webinar on personal liability for export violations, there are steps that companies and compliance professionals should take to help mitigate the risk of personal liability for civil penalties.  These steps include reviewing and updating company policies, indemnifications, insurance, and governance documents (e.g., bylaws or operating agreements) so as to address the new risks to individual employees presented by these DoJ guidelines.  However, as the new DoJ guidelines make clear (and as we discussed in the webinar), the best overall protection for compliance professionals is still to have a robust export compliance program and to faithfully execute that program every day.

I’ll Have A Cat. VIII, Hold the Wing Folding Systems with Extra Cheese, to Go

Friday, September 11th, 2015 by Danielle McClellan

2015/09/11

By: John Black

Despite the fact Export Control Reform has given us quite a bit of big ITAR changes over the past two years, the biggest ITAR news of all is the opening of the ITAR BISTRO in Orlando, Florida.  Certainly nothing known to man could do more to excite the salivary glands of hardcore export compliance nerds than knowing there actually is an Itar Bistro.  The bistro’s Orlando, Florida location could cause us all to jump to the conclusion that Disney World has added an export control themed section.  But alas, Disney has not yet accepted my long standing proposal to open an export compliance wing in its vast theme park.  Imagine the wild and twisting rollercoaster ride through the pitch black cave listening to the scream rock song “It’s a Specially Designed World after All.”

While my dreams of an export control theme park remain far from being fulfilled, we all can lick our chops in hopes that the ITAR BISTRO is the first in a string of many new establishments specially designed to appeal the export control experts worldwide.

Please, please, please, when you visit the ITAR BISTRO please send me picture of you at the bistro, preferably a picture of the head chef autographing your pocket ITAR.

For more information go to http://itarbistro.com/

DDTC Looking for Comments Regarding Amendments to Parts 120, 122, 124, 125 & 126

Tuesday, July 14th, 2015 by Danielle McClellan

2015/07/14

By: Danielle McClellan

The Department of State wants to clarify requirements for the licensing and registration of US person providing defense services while in the employ of foreign persons. They also want to clarify when these same persons may be covered under existing DDT C authorizations previously issued to their employers and affiliates, and when they are instead obligated to apply for their own license or agreement prior to engaging in the provisions of the defense service.

Comments regarding the following proposed rules will be accepted until July 27, 2015

FOR FURTHER INFORMATION CONTACT: Mr. C. Edward Peartree, Director, Office of Defense Trade Controls Policy, Department of State, telephone (202) 663-1282; email DDTCResponseTeam@state.gov. ATTN: Regulatory Change, U.S. Persons Employed by Foreign Persons.

The Department of State’s full plan can be accessed here.

For the reasons set forth above, Title 22, Chapter I, Subchapter M, parts 120, 122, 124, 125 and 126 are proposed to be amended as follows:

PART 120–PURPOSE AND DEFINITIONS

1. The authority citation for part 120 continues to read as follows:     . . . .

2. Section 120.39 is amended by revising paragraph (a)(2) to read as follows:

Sec.  120.39  Regular employee.

(a) * * *

(2) An individual in a long term (i.e., 1 year or longer) contractual relationship with the company where the individual:

(i) Works at the company’s facilities;

(ii) Works under the company’s direction and control;

(iii) Works full time and exclusively for the company;

(iv) Executes nondisclosure certifications for the company; and

(v) Where the staffing agency that has seconded the individual (if applicable) has no role in the work the individual performs (other than providing that individual for that work) and does not have access to any controlled technology (other than where specifically authorized by a license).

3. Section 120.40 is amended by removing the Note and adding Note 1 and Note 2 to read as follows:

Sec.  120.40  Affiliate.

Note 1 to Sec.  120.40: For purposes of this section, “control” means having the authority or ability to establish or direct the policies or operations of the firm with respect to compliance with this subchapter. Control is rebuttably presumed to exist where there is ownership of 25 percent or more of the outstanding voting securities if no other person controls an equal or larger percentage.

Note 2 to Sec.  120.40: A registrant may establish a control relationship with another entity via written agreement such that the entity then becomes an affiliate in accordance with section. The registrant may include such an affiliate on its registration, in accordance with this subchapter and subject to DDTC’s disallowance. If an affiliate listed on a registration ceases to meet the requirements of this section, the registrant must immediately remove the affiliate from its registration and notify DDTC pursuant to Sec.  122.4(a) of this subchapter.

4. Section 120.43 is added to read as follows:

Sec.  120.43  Natural person.

Natural person means an individual human being, as distinguished from a corporation, business association, partnership, society, trust, or any other entity, organization or group.

PART 122–REGISTRATION OF MANUFACTURERS AND EXPORTERS

5. The authority citation for part 122 continues to read as follows:…

6. Section 122.1 is amended by revising paragraph (a) and adding a note to paragraph (a) to read as follows:

Sec.  122.1  Registration requirements.

(a) Any person who engages in the United States in the business of manufacturing, exporting, or temporarily importing defense articles or furnishing defense services; and any U.S. person who engages in the business of furnishing defense services wherever located, is required to register with the Directorate of Defense Trade Controls under Sec. 122.2. For the purpose of this subchapter, engaging in such a business requires only one occasion of manufacturing or exporting or temporarily importing a defense article or furnishing a defense service. A manufacturer who does not engage in exporting must nevertheless register. (See part 129 of this subchapter for requirements for registration of persons who engage in brokering activities.)

Note to paragraph (a): Any natural person directly employed by a DDTC-registered person, or by a person listed on the registration as a subsidiary or affiliate of a DDTC-registered U.S. person, is deemed to be registered.

Sec.  122.2  [Amended]

7. Section 122.2(a) is amended by adding a comma between the words “registrant” and “or” in the third sentence.

8. Section 122.4 is amended by revising paragraph (a)(2)(v) to read as follows:

Sec.  122.4  Notification of changes in information furnished by registrants.

(a) * * *

(2) * * *

(v) The establishment, acquisition, or divestment of a U.S. or foreign subsidiary or other affiliate who is engaged in manufacturing defense articles, exporting defense articles or defense services, or the inability of an affiliate listed on the registration to continue meeting the requirements in Sec.  120.40 of this subchapter;

or

PART 124–AGREEMENTS, OFF-SHORE PROCUREMENT, AND OTHER DEFENSE SERVICES

9. The authority citation for part 124 continues to read as follows:  . . . .

10. Section 124.1 is amended as follows:

a. Add two sentences at the end of paragraph (a).

b. Revise paragraph (b).

The addition and revision read as follows: Sec.  124.1  Manufacturing license agreements and technical assistance agreements.

(a) * * * The provision of defense services by a natural U.S. person may be authorized on a Form DSP-5. Natural U.S. persons employed as regular employees of a foreign subsidiary or affiliate listed on the registration of a U.S. person may receive authorization to provide defense services via an agreement between the registered U.S. person and the foreign subsidiary or affiliate, provided the registered U.S. person accepts responsibility for, and demonstrates ability to ensure, the natural U.S. person’s compliance with the provisions of this subchapter.

(b) Classified Articles. Copies of approved agreements involving the release of classified defense articles will be forwarded by the applicant to the Defense Security Service of the Department of Defense.

11. Section 124.17 is added to read as follows:

Sec.  124.17  Exemption for natural U.S. persons employed by foreign persons.

(a) A natural U.S. person employed by a foreign person may furnish defense services to and on behalf of the foreign person employer without a license if all of the following conditions are met:

(1) The employer is located within a NATO or EU country, Australia, Japan, New Zealand, and/or Switzerland, and the defense services are provided only in these countries;

(2) The end user(s) of the associated defense article(s) are located within NATO, EU, Australia, Japan, New Zealand, and/or Switzerland;

(3) No U.S.-origin defense articles, to include technical data, are transferred from the U.S. persons to the employer without separate authorization;

(4) No classified, SME, or MT technical data is transferred (even if separately authorized) in connection with the furnishing of defense services; and

(5) The U.S. person furnishing the defense services maintains records of such activities and complies with registration requirements in accordance with part 122 of this subchapter.

(b) [Reserved]

PART 125–LICENSES FOR THE EXPORT OF TECHNICAL DATA AND CLASSIFIED DEFENSE ARTICLES

12. The authority citation for part 125 continues to read as follows:  . . . .

Sec.  125.4  [Amended]

 

13. Section 125.4 is amended by removing and reserving paragraphs (b)(2) and (b)(12).

PART 126–GENERAL POLICIES AND PROVISIONS

14. The authority citation for part 126 continues to read as follows:  . . . .

15. Section 126.6 is amended by revising paragraph (c) introductory text and adding paragraph (c)(7) to read as follows:

Sec.  126.6  Foreign-owned military aircraft and naval vessels, and the Foreign Military Sales program.

(c) Foreign Military Sales Program. A license from the Directorate of Defense Trade Controls is not required if the classified or unclassified defense article or defense service to be transferred was sold, leased, or loaned by the Department of Defense to a foreign country or international organization under the Foreign Military Sales (FMS) Program of the Arms Export Control Act pursuant to a Letter of Offer and Acceptance (LOA) authorizing such transfer (permanent or temporary), which meets the criteria stated below:

(7) Natural U.S. persons employed by foreign persons may provide defense services to and on behalf of their employers without a license if all of the following conditions are met:

(i) The defense services are provided in support of an active FMS contract and are identified in an executed LOA;

(ii) No U.S.-origin defense articles are transferred from the U.S. person to the employer, without separate authorization;

(iii) The provision of defense services is not to a country identified in Sec.  126.1;

(iv) No classified or SME technical data is disclosed (even if separately authorized) in connection with the furnishing of defense services; and

(v) The U.S. person furnishing the defense services maintains records of such activities and complies with registration requirements in accordance with part 122 of this subchapter.

2 Regulations…1 Destination Control Statement

Tuesday, July 14th, 2015 by Danielle McClellan

2015/07/14

By: Danielle McClellan

On May 22, 2015 the Directorate of Defense Trade Controls and the Bureau of Industry and Security proposed rules that would change the EAR destination control statement to read the same as the ITAR destination control statement. Many exporters have shipments that contain both EAR and ITAR goods which creates issues when deciding which statement should be included…or if both statements should be included. The goal of this proposed  rule is to make exporter’s lives a bit easier…something we don’t see very often—but then again this is only a proposed rule.

To a certain extent, BIS already fixed the dual DCS problem for shipments containing both EAR and ITAR items.  BIS previously revised 758.6(a) of the EAR to state that using the ITAR DCS constitutes compliance with the EAR DCS requirement for shipments containing both EAR and ITAR items.  The proposed rules, if implemented, would go beyond this BIS quick fix for mixed shipments to a single DCS for all exports.

The Department of State Federal Register notice can be accessed online here.

The BIS Federal Register notice can be accessed online here.

Proposed Revisions to EAR & ITAR Definitions

Tuesday, July 14th, 2015 by Danielle McClellan

2015/07/14

By: Danielle McClellan

The Directorate of Defense Trade Controls (DDTC) and the Bureau of Industry and Security (BIS) are seeking comments regarding their respective proposed rules to revise the following terms based on the claim that they are seeking clarity in the rules and consistency between the two export regulations.   In fact, the proposals, if ever implemented, would significantly change the rules.  In addition, the proposals would return the ITAR “public domain” to it pre-December 1984 approach requiring prior government authorization before ITAR technical data could be put in the public domain.  While it is not clear whether DDTC will be able to return public domain to its pre-1984 approach, if it were able to do so it would make it dramatically different from the EAR publicly available, despite US Government claims that it is seeking to harmonize ITAR public domain and EAR publicly available.

ITAR Definitions to be updated:

  • Defense article
  • Defense service
  • Technical data
  • Public domain
  • Export
  • Reexport or retransfer

ITAR Definitions to be created:

  • Required
  • Technical data that arises during, or results from, fundamental research
  • Release
  • Retransfer
  • Activities that are not exports, reexports, or retransfers

EAR Definitions to be updated:

  • Technology
  • Required
  • Peculiarly responsible
  • Proscribed person
  • Published
  • Results of fundamental research
  • Export
  • Reexport
  • Release
  • Transfer
  • Transfer (in-country)

In addition to these definition updates and new definitions to be created, DDTC is also proposing to creating new sections which will detail the scope of licenses, unauthorized releases of information, and the “release” of secured information as well as revising the sections on “exports” and “technical data” via foreign communications infrastructure.

The comment period ends for both the State Department and BIS proposed changes on August 3, 2015.

BIS Comments:

Comments may be submitted to the Federal rulemaking portal (http://www.regulations.gov). The regulations.gov ID for this proposed rule is: [BIS-2015-0019]. Comments may also be submitted via email to publiccomments@bis.doc.gov or on paper to Regulatory Policy Division, Bureau of Industry and Security, Room 2099B, U.S. Department of Commerce, Washington, DC 20230. Please refer to RIN 0694-AG32 in all comments and in the subject line of email comments. All comments (including any personally identifying information) will be made available for public inspection and copying.

DDTC Comments:

Email: DDTCPublicComments@state.gov with the subject line, “ITAR Amendment–Revisions to Definitions; Data Transmission and Storage.”

Internet: At www.regulations.gov, search for this notice by using this rule’s RIN (1400-AD70). Comments received after that date may be considered, but consideration cannot be assured. Those submitting comments should not include any personally identifying information they do not desire to be made public or information for which a claim of confidentiality is asserted because those comments and/or transmittal emails will be made available for public inspection and copying after the close of the comment period via the Directorate of Defense Trade Controls Web site at www.pmddtc.state.gov. Parties who wish to comment anonymously may do so by submitting their comments via www.regulations.gov, leaving the fields that would identify the commenter blank and including no identifying information in the comment itself. Comments submitted via www.regulations.gov are immediately available for public inspection.

To assist in the creation of public comments, DDTC has created a chart of the proposed regulatory text side-by-side from the ITAR rule and Export Administration Regulations rule (80 FR 31505) from the Bureau of Industry and Security. Click here to read. In addition, it has posted a Fact sheet on Revisions to Definitions Proposed Rule.

“ITAR Control of Public Speech”

Tuesday, July 14th, 2015 by Danielle McClellan

2015/07/14

By:  Matthew A. Goldstein, Esq., matthew@goldsteinpllc.com, 202-550-0040

(Source: Defense Trade Law Blog. Reprinted by permission.)

The State Department released a Federal Register notice yesterday proposing to amend definitions for “public domain,” “fundamental research,” “defense services,” and “technical data” under the International Traffic in Arms Regulations (“ITAR”). [FN/1] Among other things, the notice explicitly confirms that the State Department imposes a prepublication approval requirement on public speech under the ITAR.

The State Department requirement operates as a prior restraint on free speech that applies to all would-be publishers of ITAR technical data. It applies to print and electronic news media outlets, movie and television entertainment industries, public libraries, publishing houses, trade show venues, and conference organizers. It also applies to persons who post information to blogs, electronic bulletin boards, company websites, and other online public forums.

Notice of the prepublication approval requirement comes as a surprise to many trade compliance professionals who reasonably believed any such requirement was removed in 1984 when the State Department deleted a former footnote thought by some to impose a general prepublication approval requirement. [FN/2] Indeed, the Federal Register notice removing the former footnote even cited First Amendment concerns. [FN/3]

The controversial nature of public speech under the ITAR is nothing new. Since 1978, the Justice Department repeatedly warned the State Department, the White House, and even Congress, that subjecting public speech to ITAR control raises serious constitutional concerns under the First Amendment. [FN/4] Federal courts directly addressing the issue agreed and have had little difficulty holding that the ITAR is unconstitutional as applied to public speech.

In Bernstein v. U.S. Dep’t of State, 945 F. Supp. 1279 (N.D. Cal. 1996), a federal district court held the State Department’s application of the ITAR to public speech involving cryptographic computer code was unconstitutional under the First Amendment. When the government shifted control over the computer code at issue from the State Department to the Commerce Department, the plaintiff challenged relevant Export Administration Regulations (“EAR”) controls and the federal court struck down control of public speech under the EAR as well. See Bernstein v. U.S. Dep’t of State, 974 F. Supp. 1288 (N.D. Cal. 1997). This decision was later upheld by the Ninth Circuit Court of Appeals. See Bernstein v. United States Dep’t of Justice, 176 F.3d 1132 (9th Cir. 1999).

There is only one publicly known case of the State Department seeking to enforce the prepublication approval requirement following the Bernstein line of cases. This recent case, which involves an online publisher named Defense Distributed, has resulted in a lawsuit against the State Department and its employees for civil rights violations. [FN/5]

The State Department’s imposition of the prepublication approval requirement is also contrary to the results of a study performed by an Federal Advisory Committee Act industry working group, which found that imposing a prepublication approval requirement through export controls would serve little purpose, be ineffective, and adversely impact research and development in the United States. [FN/6]

The working group also observed that technology of likely concern to national security is normally restricted by the business community as proprietary information and/or classified by the government; that there are already many laws protecting technical information of concern from theft or other unauthorized use; and that the impact of publications on national security is minor compared to the burdens imposed on government and industry by a prepublication approval requirement.

The State Department will accept public comments to the proposed rule until August 3, 2015. However, considering the Department’s refusal to heed the Justice Department’s warnings, it is unlikely to change its decision to impose the prepublication approval requirement. Still, absent a court order enjoining the State Department from imposing the requirement or Congressional intervention, the public comment process may offer the last line of defense against State Department censorship of the Internet and other public forums.

————-

[FN/1] See 80 Fed. Reg. 31525, 31528 (June 3, 2015) (“Paragraph (b) of the revised definition explicitly sets forth the Department’s requirement of authorization to release information into the ”public domain.” Prior to making available ”technical data” or software subject to the ITAR, the U.S. government must approve the release through one of the following: (1) The Department; (2) the Department of Defense’s Office of Security Review; (3) a relevant U.S. government contracting authority with authority to allow the ”technical data” or software to be made available to the public, if one exists; or (4) another U.S. government official with authority to allow the ”technical data” or software to be made available to the public.”).

[FN/2] See former Footnote 3 to Section 125.11 (1980). Copy available from author at matthew@goldsteinpllc.com

[FN/3] See 49 Fed. Reg. 47,682, 47,683 (December 6, 1984) (“Concerns were expressed, for example, on licensing requirements as they relate to the First Amendment to the Constitution. The revision seeks to reflect these concerns . . .”).

[FN/4] See 1997 Report on the Availability of Bombmaking Information,” U.S. Department of Justice Report to Congress, http://cryptome.org/abi.htm; “Revised Proposed International Traffic in Arms Regulations (ITAR),” U.S. Department of Justice Opinion Memorandum, July 5, 1984. https://app.box.com/s/utb41cwfhorh55463ufw; “Constitutionality of Proposed Revisions of the Export Administration Regulations,” U.S. Department of Justice Opinion Memorandum, July 28, 1981. http://www.justice.gov/olc/opiniondocs/op-olc-v005-p0230.pdf; “Constitutionality of the Proposed Revisions of the International Traffic in Arms Regulations,” U.S. Department of Justice Opinion Memorandum, July 1, 1981. https://app.box.com/s/x1urxgds1km6tw34qh5v; “Constitutionality Under the First Amendment of ITAR Restrictions on Public Cryptography,” U.S. Department of Justice Opinion Memorandum, May 11, 1978. https://app.box.com/s/r0xidb6z9m6x4uze5uqi

[FN/5] See Defense Distributed v. U.S. Department of State et al., Case No. 1:15-cv-00372 (W.D. Texas, May 6, 2015), copies of pleadings available at www.goldsteinpllc.com; the author is co-counsel for Plaintiff in this action.

[FN/6] See “Feasibility of Controls on Publication of PGUTI,” Department of Commerce Materials Technical Advisory Committee, September 5, 2014. Copy available here.

Free, Updated Searchable ITAR and CCL Available Now!

Tuesday, June 2nd, 2015 by Danielle McClellan

2015/06/02

By: Jill Kincaid

ECTI strives to provide useful tools and resources for trade compliance professionals in addition to our live training seminars, webinars and e-Seminars.   For that reason, ECTI has created a searchable ITAR and a searchable CCL.  You might think DDTC and BIS already offer these—in which case you would be wrong.

ECTI’s newest tool is a FREE Searchable ITAR document.  The ITAR document includes all of Parts 120-130 in one single pdf file which is updated and current with all ITAR  changes on a monthly basis.  The document is downloadable in searchable PDF format with bookmarks so it is easy to find what you are looking for—in one convenient file!

Similarly, for some time now ECTI has been offering a CCL tool that includes all of CCL categories 0 – 9 in a single pdf file which is updated and current with all CCL changes on a monthly basis.    Both of these tools are FREE and available for download at any time on our website!

Searchable ITAR

Searchable CCL