Now we have the real regulations.  We have the ITAR exemption for the UK.  So now it is time to export away!

NOT!

Maybe your boss or your sales department heard the new exemption gets rid of ITAR issues for the UK.  Unfortunately, the ITAR exemption for the UK is not a free ticket to export.  Instead it is a complex exemption with multiple requirements, limitations, and burdens.

As I approach my 28^th year in export compliance I wonder if I have ever seen anything as complicated as this.  Certainly many exporters right now still prefer to get an export license over trying to use the new exemption.  I guess the first test of whether the exemption is for you, is to see whether you can even finish reading this article.

Before you use this new exemption in ITAR 126.17, you need to ask, answer and act on at least these questions:

• What are the eligible exports from the US to the UK?
• What are the eligible transfers within the UK?
• What are the eligible retransfers from the UK?
• What are the eligible defense articles and defense services?
• What are the eligible parties—The “UK Community”?
• What are the eligible end-uses?
• What are the mandatory marking and destination control statement requirements?
• What are the mandatory recordkeeping requirements?
• What are the mandatory EEI requirements?
• What compliance procedures should I put in place to make sure we use this properly?

Let’s get some background before we start. The general idea is that UK exemption authorizes movements of ITAR items within a trusted community, which consists of the “US Community” and the “UK Community,” as long as the item and the end-use are eligible.

The exemption has some special definitions that apply only for the exemption:

“Export” means the initial export from the US to the UK.

“Transfer” means the movement of an item inside of the UK Community or between a member of the US Community and the UK Community.

“US Community” is the US Government and US persons registered with DDTC and eligible to export under the ITAR.

“UK Community” is UK Government entities identified on the DDTC website and UK non-governmental entities identified on the DDTC website.  (Funny that DDTC will publish the names of eligible UK companies on its website but it will not publish the names of eligible US companies.)

“Intermediate Consignee” is an entity that receives defense articles, but does not have access to them, for the purpose of effecting movement to members of the approved Community.

Special Webpage:  The exemption and this article frequently refer to something being on the DDTC website.  That “Treaties” webpage is:  http://pmddtc.state.gov/treaties/index.html.  The Federal Register notice is http://www.pmddtc.state.gov/FR/2012/77FR16592.pdf.

Now let’s take a look at answering some of these questions

What are the eligible exports from the US to the UK?    ITAR 126.17(a)(3)

An export from an entity registered with DDTC to a member of the UK Community involving only intermediate consignees who are not ITAR ineligible.  The export must be for an eligible end-use as defined in 126.17(e) and (f).  The item must not be excluded from eligibility by 126.17(g) or the new Supplement No. 1 to Part 126.  If Congressional Notification is required, you have to satisfy the requirements of 126.17(o) before you export.

What are the eligible transfers within the UK?

You may only transfer items exported pursuant to 126.17(a)(3) or transitioned from an approved license or other approval according to the requirements of 126.17(i).  The transferor and transferee must be members of the UK Community.  The end use must be eligible per 126.17(e) and (f).  The item must not be excluded from eligibility by 126.17(g) or the new Supplement No. 1 to Part 126.  If Congressional Notification is required, you have to satisfy the requirements of 126.17(o) before you export.

What are the eligible retransfers from the UK?   126.17(h)

First, as you probably guessed the item and end use have to be eligible as discussed above for exports and transfers.  Also, the authorized retransfer does not apply to items excluded by 126.17(g) or Supplement No. 1 when they are embedded into a larger system that is eligible—for example, an electronically scanned array radar embedded in a ship or aircraft.   Here are the eligible retransfers/reexports:

Eligible items from a member of the US Community or the UK Community to UK Ministry of Defence (MOD) elements deployed outside of the UK and engaged in an authorized end use.

Eligible items from a member of the US Community or the UK Community to another member of the US Community or the UK Community operating in direct support of UK Ministry MOD elements deployed outside of the UK and engaged in an authorized end use.

Eligible items for delivery to the UK MOD for an authorized end use.  The UK MOD may use the items for official business inside or outside of the UK.  The items must remain under the effective control of the UK MOD and access may not be given to unauthorized third parties.

What are the eligible defense articles and defense services?  126.17(g)

ITAR 126.17(g) defines the items excluded from the exemption and says that the items in the new Supplement No. 1 to Part 126 are not eligible.  This new Supplement No. 1 is a lengthy document that identifies the items ineligible for the ITAR exemptions for Canada and the UK, and eventually Australia.

You really need to read the entire Supplement No. 1 before you decide whether your defense article or defense service is eligible.  Do not fail to read the Notes at the end of Supplement No. 1 because they often play a critical role in defining the scope of what is eligible.  Also, the way the supplement works is an item might appear to be eligible if you read only one area of the supplement, when in fact it may be made ineligible by another area in the supplement.  For example, you may open up the supplement and jump to the USML Category VIII and see that your marketing technical data related to complete aircraft in Category VII are eligible.  The problem with that approach is that at the very beginning of the supplement, long before you get to the Category VIII, there is an exclusion that says you may not use the exemption for technical data in every Category (I-XXI) if it is going to be used for marketing items that DDTC has not previously licensed for export.

In addition to saying the items in Supplement No. 1 are ineligible, paragraph 126.17(g) has these limitations on eligible items:

• You may export eligible items for marketing defense articles only if DDTC has previously approved the export of the eligible item.
• Defense articles specific to the existence of (e.g., reveals the existence of or details of) anti-tamper measures made at the direction of the US Government are ineligible.
• 126.17(g)(3) has special rules for classified items.
• 126.17(g)(4) has special rules for development systems that have not obtained Milestone B approved for the US Department of Defense.
• 126.17(g)(5) has special rules for certain items that are eligible but incorporate an item that is ineligible—for example, an electronically scanned array radar embedded in an eligible aircraft or ship.
• 127.17(g)(8) explains that items that are on the European Union Dual Use List are not eligible.  These items are actually in Supplement No. 1.  This just points out that if the EU (and the UK) does not apply their military export controls to something that the US controls with the ITAR, the US is going to exclude them from the exemption.

What are the eligible parties—The “Approved Community”?

At the beginning of this article we defined the US Community and the UK Community.  The exemption applies only when the parties involved are in the approved communities or an eligible intermediate consignee.

ITAR 126.17(k) defines when and which intermediaries may be involved in an eligible transaction.

Don’t forget the ITAR requires that a party is eligible at the time of shipment.  The ITAR warns you that some UK parties may be removed from the UK Approved Community.  That means you might not want to just check the list once for Company X and assume that Company X is always ok.

What are the authorized end-uses?   126.17(e) and (f)

126.17(e) talks about the types of end uses that will be eligible.  126.17(e) gives you an idea of the eligible end uses but for an actual end use to be eligible for your export or transfer, it has to be listed on the DDTC webpage, identified in a DDTC letter, or a DOD contract as required by 126.17(f).

126.17(e) says these end uses are the types that will be authorized

(1) United States and United Kingdom combined military or counter-terrorism operations;

(2) United States and United Kingdom cooperative security and defense research, development, production, and support programs;

(3) Mutually determined specific security and defense projects where the Government of the United Kingdom is the end-user; or

(4) U.S. Government end-use.

126.17(f) tells you how to determine if an end-use is eligible.  It says that only these end uses are eligible:

• Operations, programs and projects that can be publicly identified will be posted on the DDTC website.
• Operations, programs and projects that cannot be publicly identified will be confirmed in written correspondence from DDTC.
• US Government end-use will be identified specifically in a US Government control or solicitation as eligible under the Treaty.

So if your end use is described by 126.17(e) but does meet the 126.17(f) requirement that it be listed on the DDTC website, identified in a DDTC letter, or in a DOD contract, you may not use the exemption.

What are the mandatory marking and labeling requirements?  126.17(j)

When you use the exemption for exports or transitions, you have to mark the defense articles and services with a special marking.  The two primary markings are:

1)      [126.17(j)(1)(i)]  For exports of classified defense articles and defense services the standard marking or identification shall read: “//CLASSIFICATION LEVEL USML//REL GBR and USA Treaty Community//.” For example, for defense articles classified SECRET, the marking or identification shall be “//SECRET USML//REL GBR and USA Treaty Community//.”

2)      [126.17(j)(1)(ii)]   For exports of unclassified defense articles and defense services exported under or transitioned pursuant to this section shall be handled while in the UK as “Restricted USML” and the standard marking or identification shall read “//RESTRICTED USML //REL GBR and USA Treaty Community//.”

There is a third marking to be used in a special circumstance:

Where U.S.-origin defense articles are returned to a member of the United States Community,  any defense articles marked or identified pursuant to paragraph (j)(1)(ii) above as “//RESTRICTED USML //REL GBR and USA Treaty Community//” will be considered unclassified and the marking or identification shall be removed;

Different types of items have to be marked in these ways:

• For defense articles other than tech data, the items must be individually labeled with appropriate statement from above.  If you cannot label an individual item (e.g., a powder or propellant) then you must include with such items documents (e.g., contracts or invoices) that have the marking.

• Technical data must be individually labeled with appropriate statement from above.  If you cannot label an individual item (e.g., a powder or propellant) then you must include with such items documents (e.g., contracts or invoices) that have the marking or by a verbal notification of the marking.

• Defense services must be accompanied by documentation (contracts, invoices, shipping bills or bills of lading) clearly labeled with the marking.

In addition to the above marking, there is a special destination control statement required for exports:

“These U.S. Munitions List commodities are authorized by the U.S. Government under the U.S.-UK Defense Trade Cooperation Treaty for export only to United Kingdom for use in approved projects, programs or operations by members of the United Kingdom Community. They may not be retransferred or reexported or used outside of an approved project, program, or operation, either in their original form or after being incorporated into other end-items, without the prior written approval of the U.S. Department of State.”

What are the mandatory recordkeeping requirements?  126.17(l)

The exemption says that US exporters must keep records for their exports and transfers.  Interestingly, the paragraph 126.17(l) does not say that UK parties have to keep records.

US exporters who use the exemption must keep these records:

(i) Port of entry/exit;

(ii) Date of export/import;

(iii) Method of export/import;

(iv) Commodity code and description of the commodity, including technical data;

(v) Value of export;

(vi) Reference to this section and justification for export under the Treaty;

(vii) End-user/end-use;

(viii) Identification of all U.S. and foreign parties to the transaction;

(ix) How the export was marked;

(x) Security classification of the export;

(xi) All written correspondence with the U.S. Government on the export;

(xii) All information relating to political contributions, fees, or commissions furnished or obtained, offered, solicited, or agreed upon as outlined in paragraph (m) of this section;

(xiii) Purchase order or contract;

(xiv) Technical data actually exported;

(xv) The Internal Transaction Number for the Electronic Export Information filing in the Automated Export System;

(xvi) All shipping documentation (including, but not limited to the airway bill, bill of lading, packing list, delivery verification, and invoice); and

(xvii) Statement of Registration (Form DS-2032

What are the mandatory EEI requirements?  ITAR 126.17(l)

When you file your Electronic Export Information (EEI) for your US export “shipments” you must fill in the appropriate field in your EEI as follows:

• For exports in support of United States and United Kingdom combined military or counter-terrorism operations identify §126.17(e)(1) (the name or an appropriate description of the operation shall be placed in the appropriate field in the EEI, as well);
• For exports in support of United States and United Kingdom cooperative security and defense research, development, production, and support programs identify § 126.17(e)(2) (the name or an appropriate description of the program shall be placed in the appropriate field in the EEI, as well);
• For exports in support of mutually determined specific security and defense projects where the Government of the United Kingdom is the end-user identify 126.17(e)(3) (the name or an appropriate description of the project shall be placed in the appropriate field in the EEI, as well); or
• For exports that will have a U.S. Government end-use identify 126.17(e)(4) (the U.S. Government contract number or solicitation number (e.g., “U.S. Government contract number XXXXX”) shall be placed in the appropriate field in the EEI, as well). Such exports must meet the required export documentation and filing guidelines, including for defense services, of §§123.22(a), (b)(1), and (b)(2) of this subchapter.

What compliance procedures should I put in place to make sure we use this properly?

If you are still reading, you may have decided that you will just stick to the old fashioned DSP-5s, TAAs, and the like.  If you want to use the new exemption, you need to put in place compliance procedures to make sure you comply with the complex, complicated and lengthy requirements.   Before you put in place procedures or use the exemption, you need to spend time reading and studying the exemption.

• Procedures for determining if a specific export or transfer is eligible by assessing the items, parties, and end use.  You may want to check some or all of these things on a shipment-by-shipment basis.
• Procedures for doing the proper markings, destination control statement, EEI information.
• Procedures for recordkeeping.
• Procedures for other things such as Congressional Notification and reporting political contributions, fees and commissions.
• Procedures for training your export compliance people and everybody else who will be involved in your activities under the exemption.  You need to train your management too because implementing these procedures will require significant resources.  You may also want to train the other companies and entities that will be involved in your activities under the new exemption.

Honestly, I am just highlighting the tip of the iceberg on compliance procedures.  You most likely already do things that are similar to what you have to do under the exemption—for example, you already do EEI filing so you just have to modify the existing procedure to do EEI properly for the exemption.

These things may be similar to what you already do, but significantly different.  For example, you already screen for prohibited parties and at first glance you might think you could tweak that system to screen for approved parties.  The prohibited parties lists are published and you can do batch screening.  The UK Community list is not published.  You have to get the UK party’s ACID and enter it into the tool on the DDTC website to find out if it is valid.  It might be valid today and invalid tomorrow so you might have to check an ACID on a case-by-case basis.

(Note: It is an ACID, not an ACID number, because ACID number would be an Approved Community Identification Number number.)

Off the record, a couple of days ago I actually went to the tool and since I didn’t have an ACID, I made up a few using what I thought would be reasonable combinations of letters and numbers.  I got a couple replies that the ACID was invalid and then the tool told me if I entered another invalid ACID I would be in a heap of trouble.  Just now, as I was writing this article, I went back to the tool to try again and this time I got this message when the tool opened:  “Recursion too deep; the stack overflowed.”

Exactly.

Be careful using the new UK exemption. If you are not careful the next thing you know you will be up to your eyeballs in recursion with no hope of capping your stack.

One significant structural difference is that DDTC moved the list of defense articles and defense services excluded from the 126.5(b) export exemption from 126.5(b) to a new Supplement No.1, to Part 126 of the ITAR. It is important to always remember this supplement is a list of excluded items—it is not a list of eligible items.  This supplement shows the items excluded from the Canadian exemption and the UK exemption, and the soon to be implemented Australian exemption.

The critical thing about the new Supplement 1 is that you should always check all of the notes before you use the Canadian (or UK) exemption for exports to Canada.

For example, you may see in the supplement that Category VIII(b) says it excludes “…defense services for gas turbine engine hot sections.  See Note 8.”  And then you see that there is no exclusion in the supplement for defense services for Category VIII(h) military aircraft parts.  So, you might think that you can export away since there is nothing in the supplement that says, “See Note X” for defense services for Category VIII(h) parts.   Well, you would be wrong.  There are notes that impose significant limits on defense services (and technical data) related to Category VIII(h) parts.  For example, Note 12 excludes applied research, design methodology, engineering analysis, and manufacturing know-how.  Another important example is that Note 14 says if you export defense services under the exemption you have to get a certification from the Canadian company and set up a written arrangement with the Canadian company—these requirements were in the former 126.5(c).

It might have been more user friendly to put some or all of the Notes at the beginning of the supplement so people would be less likely to miss them.

Another related point is that you should always read the entire supplement because if the item or service is excluded in one part of the supplement but not in another, it is excluded.  For example, you may open up the supplement and jump to the USML Category IV exclusions and not see your defense service as being excluded in any of the exclusions that reference Category IV.  The problem with that approach is that at the very beginning of the supplement, long before you get to the Category IV exclusions, there are exclusions, for example, that apply to every USML Category (I-XXI) for items on the Missile Technology Control Regime Annex and for defense services related to excluded defense articles.

The good news is that exclusions in Supplement 1 do not apply to the Canadian temporary import exemption in 126.5(a).

For the most part, there is little substantive difference between the former Canadian exemptions and the new Canadian exemptions.  Nonetheless, as you go through the new structure, do not be surprised if you run into some questions.  My question is this:  Why is it that every time the supplement tells you to “See  Note X” it uses an underlined and italicized “See”?

To see the Federal Register notice for the Canada exemption changes go to this webpage:   http://www.pmddtc.state.gov/FR/2012/77FR16592.pdf.

DDTC made three key changes to upgrade Israel’s ITAR status.  The first is that DDTC added Israel to the list of NATO and other countries eligible to receive certain retransfers of US components incorporated into a foreign defense article under an exemption.  The second is that DDTC added Israel to the list of NATO plus other countries eligible for the faster 15-day time period and high dollar value threshold for Congressional Notification.  The third is that Israel was added to the NATO plus countries that have fewer requirements for prior approval or prior notification under the ITAR brokering rules in Part 129.

Many of the changes either clarified or harmonized the existing rules.  Some changes worthy of note:

123.9(b):  Formerly said you have to put the ITAR destination control statement on “the bill of lading and the invoice.”  Now it says you have to put the statement on “the bill of lading, airway bill, or other shipping documents.”

123.9(c):  Revised to change, increase, and clarify the requirements’ information and documentation to be submitted with an application for written retransfer authorization from DDTC

123.26:  Formerly specified recordkeeping requirements for exports of unclassified technical data.  Now it specifies the recordkeeping requirements for all exports under exemptions.  The records must include the following:

• A description of the defense article, including technical data, or defense service;
• Name and address of the end-user and other available contact information (e.g.,
• telephone number and electronic mail address);
• Name of the natural person responsible for the transaction;
• Stated end-use of the defense article or defense service;
• Date of the transaction;
• Electronic Export Information (EEI) Internal Transaction Number (ITN);
• Method of transmission.

I used bold face to highlight the things above that at least arguably are new, different, or worth thinking about.

But it is actually more important.  The Census Bureau Foreign announced that exporters may not enter EAR99 in the ECCN field of the Automated Export System when the filer selects license code C32—No License Required.

For EAR99 items when transaction is designated as “No License Required” the filer should use License Code C33, which is for EAR99 items designated as “No License Required” and items under ECCNs having a reason for control of Anti-Terrorism only.

The Bureau of Industry and Security (BIS) requires a 5-position ECCN from the Commerce Control List when License Code C32 is reported. The License Code C32 is for an item under the designation “No License Required” having an ECCN with a reason for control other than, or in addition to, Anti-Terrorism. The classification EAR99 does not meet this criteria and therefore cannot be reported under License Code C32.

A complete list of all License and License Exemption Type Codes and Reporting Guidelines can be found in Appendix F of the Automated Export System Trade Interface Requirements (AESTIR).

http://www.cbp.gov/xp/cgov/trade/automated/aes/tech_docs/aestir/june04_intro/appendices/

As illustrated by three recent export enforcement actions, when armed government enforcement agents come to your door with PowerPoint slides, pay close attention. On March 8, 2012, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) and the U.S. Attorney's Office for the District of Wyoming announced settlements of three related cases involving illegal exports to Syria. The cases involved an increasingly common enforcement tool, the U.S. government "outreach" visit.

According to government documents in the case, Powerline Components Industries, a Wyoming company, sold diesel engine parts designated as "EAR99" (i.e., items subject to the U.S. Export Administration Regulations (EAR) but not specifically described in any Export Control Classification Number) from the United States to Syria without export licenses. Under General Order No. 2 of May 14, 2004, export control licenses were required for the export of those items to Syria. In the course of the transaction, the company's freight forwarder refused to make the shipment. Moreover, the freight forwarder sent the company a copy of the U.S. Office of Foreign Assets Control (OFAC) web guidance on the Syria sanctions program. After learning of the Syrian sanctions, the company allegedly switched freight forwarders (to a forwarder recommended by the Syrian buyer) and shipped the goods to Syria via the United Arab Emirates.

In any export control enforcement case, the government must prove that the violator was aware of the rules at the time of the violation. In this case, right around the time of the export transactions, the company received an "outreach visit" from the U.S. Department of Homeland Security, Immigration and Customs Enforcement (ICE) under ICE's "Shield America" program. ICE agents carry a gun, a badge, and increasingly, PowerPoint presentations. Agents from ICE field offices around the country conduct visits informing exporters of the export rules and providing tips for compliance. Other agencies with export enforcement authority, including BIS and its enforcement arm, the Office of Export Enforcement, also conduct outreach visits.

If the visit to Powerline was like typical outreach actions, the ICE agents explained current export control regulations, including the Syrian embargo, in some detail, and probably left behind copies (or links to the online versions) of the regulations. When Powerline's export to Syria subsequently came to light, the ICE outreach visit (combined with the company's regular freight forwarder refusing the shipment) presumably provided the government plenty of proof that Powerline conducted the prohibited transaction with the requisite mens rea under the regulations.

To settle the resulting violations, Powerline agreed to pay a $60,000 civil penalty in exchange for a Deferred Prosecution Agreement with the U.S. Attorney's Office for the District of Wyoming. The penalty also includes an order denying Powerline a range of export privileges, but the denial order is suspended for a three year probationary period and will be waived if Powerline does not commit any violations during the probation period and otherwise complies with the Deferred Prosecution Agreement. The BIS order in the case may be found online here [http://efoia.bis.doc.gov/exportcontrolviolations/e2254.pdf] .

In a related case, the Illinois freight forwarder that conducted the prohibited export, R.I.M. Logistics, Ltd., agreed to pay $50,000 to settle charges that it violated 15 C.F.R. § 764.2(b), which prohibits causing, aiding, or abetting acts prohibited by the EAR. See here [http://efoia.bis.doc.gov/exportcontrolviolations/e2255.pdfj] . Specifically, R.I.M. was charged with being the freight forwarder on Powerline’s export and attempted export of the EAR99 diesel engine parts from the United States to Syria via the UAE. In settling the case, R.I.M. neither admitted nor denied the allegations.

In the other related case, Powerline’s sales manager agreed to pay $75,000 to settle charges that he negotiated and arranged the illegal Syrian exports. See here [http://efoia.bis.doc.gov/exportcontrolviolations/e2253.pdf] .

The principal lesson of these cases should have been obvious but often needs repeating: pay attention when your government says not to export your goods in violation of U.S. law.

The total transaction value for the three transactions settled with OFAC was $33,299, and the base penalty was $750,000. Essie, Sortino and OFAC agreed to a settlement in the amount of $450,000. The parties did not voluntarily disclose the violation but OFAC said the discounted settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, App. A:

- Essie and Sortino have no history of prior OFAC violations;

- Essie and Sortino have cooperated with the investigation by the U.S. Bureau of Immigration and Customs Enforcement, resulting in executed Non-Prosecution Agreements with the United States Attorney’s Office for the Southern District of New York related to Essie and Sortino’s violations of IEEPA, and pursuant to which they agreed to the civil forfeiture of $200,000 by the Department of Homeland Security.

OFAC has considered $200,000 of its total settlement amount satisfied by Essie and Sortino’s agreement with the United States Attorney’s Office for the Southern District of New York and by the $200,000 administrative forfeiture by the Department of Homeland Security.

For more information regarding OFAC regulations, please go to: http://www.treasury.gov/ofac.

Editor’s Note:  Do you remember the employee who didn’t care too much about compliance because he (or she) knew that only the company gets in trouble for export violations and that employees don’t have anything to worry about?  Apparently they need to talk to Tom McVey….

A resident of Massachusetts pleaded guilty on January 20, 2012 to violations of ITAR in connection with the export of 55 antennae from the United States. The case is illustrative for export professionals on a number of levels as described further below.

According to the Department of Justice release, Rudolf Cheung (“Defendant”) was the head of research and development at a private company that manufactures antennae. In this capacity, he designed a library of antennae over recent years, some of which are used in the US space program and others for military applications.

According to the release, during 2006 his company received a request for the export of certain antennae to Singapore and Hong Kong. The company’s export compliance officer advised the customer that, to make the export, the company would be required to comply with ITAR licensing requirements. The customer refused to comply, and the compliance officer cancelled the order. After learning that the company had blocked the order, Defendant entered into discussions with a person outside the company (“Co-Conspirator C” according to the Justice Department release) to export the antenna without the knowledge of the company. Under the plan, Co-Conspirator C approached the company to purchase the antennae in a domestic transaction, and then exported the antennae and sold them to the purchaser in Singapore and Hong Kong without the requisite export licenses. During this period, Defendant was aware that the antennae were being exported to Singapore and Hong Kong without the license in violation of ITAR.

The Defendant was arrested and charged with criminal ITAR violations in the U.S. District Court For the District of Columbia. He pleaded guilty and is currently awaiting sentencing. He faces a potential sentence of up to five years in prison, a $250,000 fine and a three-year term of supervised release. The purchaser in Singapore/Hong Kong is being charged separately and extradited to the United States for prosecution.

Since the US company had an export compliance officer and compliance program, and previously stopped the original attempted export, the US company was not prosecuted in the case.

The case is instructive for two reasons. First, this reconfirms what we already know – that federal officials will prosecute individuals (as well as companies) for criminal export violations. Second, a sound export compliance program can protect a company and its owners from export liability, even when one of its own employees is engaged in illegal activity. Even when an export violation occurs, a compliance program demonstrates the good faith efforts of the company to comply with the law and can save the company from liability. A link to the Department of Justice press release is at http://www.bis.doc.gov/news/2012/doj01202012.htm.

As a follow-up to our February 26, 2012 post on the proposed debarment of a number of freight forwarders and the impact on ITAR-related transactions, today Schenker AG and BAX Global Inc. were removed from the Excluded Party List System (EPLS).

The removal from the EPLS took place after the companies presented to the Department of the Air Force information to demonstrate the companies’ present responsibility to conduct business as a federal contractor. After consideration of that information the Air Force today determined that suspension or debarment of the companies was no longer necessary. As a result, the proposed and mandatory debarments have been terminated and both entities have been removed from the EPLS.

Because the Schenker AG entities are no longer considered to be “ineligible” parties under section 120.1(c) of the ITAR, there should be no further need for exporters to submit a “transaction exception” request to DDTC for pending or future ITAR authorizations involving any of the freight forwarders that were added to the EPLS on February 16, 2012:

- CEVA Logistics LLC (removed from EPLS on February 24, 2012)

- EGL Inc. (now owned by CEVA Logistics) (removed from EPLS on February 24, 2012)

- Kuehne and Nagel International AG (removed from EPLS in March 2012)

- Panalpina Welttransport (Holding) AG (removed from EPLS on March 16, 2012)

- Panalpina Inc. (removed from EPLS on March 16, 2012)

- Schenker AG (removed from EPLS on April 11, 2012)

- BAX Global Inc. (now part of DB Schenker) (removed from EPLS on April 11, 2012)

Since none of these freight forwarders are “ineligible” to participate in ITAR transactions, we urge DDTC to remove or update its February 27, 2012 Web Notice to reflect this new information.

The significant interest in this issue has heightened the awareness of the role that the EPLS and serves as an important reminder that exporters and other parties involved in ITAR-related transactions should screen all the parties involved in ITAR licenses and other authorizations, including freight forwarders, against the EPLS.

This action taken by the Air Force against these freight forwarders also highlights the impact of the debarment provisions contained in the Consolidated Appropriations Act of 2012 (Pub. L. 112-74) which require the debarment of companies receiving federal funds, including from the Department of Defense, that have been “convicted of a felony criminal violation under any Federal law within the preceding 24 months.” (See Division A, Section 8125 for the Department of Defense language.)

Alpine engaged in six exports of parts for use on a Hawk missile system, and in a separate violation, failed to obtain a DSP-83 Non-Transfer and Use Certificate for these exports. Alpine cited an existing export license on export control documents for the exports which did not, in fact, authorize the export of parts for the Hawk missile system. TS Trade engaged in one export of aircraft parts and associated equipment without authorization.

Under the terms of the agreements, Alpine agrees to a civil penalty of $30,000 and TS Trade Tech agrees to a civil penalty of $20,000. The civil penalties are to be suspended on the condition that they are to be used for pre- and post-Consent Agreement expenditures for remedial compliance measures. Any portion of the penalty that is not so used will be forfeited at the conclusion of the thirty-month term of the agreements. The companies will implement additional remedial compliance measures, provide additional training to staff and principals, and will undergo two external audits of their compliance programs.

The companies have acknowledged the seriousness of the ITAR violations and have cooperated with the Department, expressed regret for their actions and taken steps to improve their compliance with law and regulations. For these reasons, the Department has determined that an administrative debarment of the companies is not appropriate at this time.

As is normally the case, this isn’t a simple black and white issue.  For example,

• One company was on the list and is now off the list.
• You may use Schenkers US company but not Schenkers AG.
• You may use all existing approvals involving the debarred parties such as Schenkers AG, but you have to come up with special justification for new applications involving these parties.
• What are the export compliance implications and what are the government contracting implications?
• Are any of these parties really debarred anyway?  And what type(s) of debarment are we talking about?

A few days after this issue hit, DDTC issued guidance on its website.  DDTC then changed that guidance.  The most recent DDTC guidance is at http://www.pmddtc.state.gov/documents/webnotice_FreightForwarders-Update.pdf

I was preparing to write a long and detailed analysis of the situation and then I stumbled upon an excellent accurate, thorough, and practical piece written by Doug Jacobson.  Being the slacker, I mean executive decision maker, that I am, I asked Doug if I could use his article and he said yes.  It is immediately following this brief article.

As a practical matter, your objective at this point is to figure out what this means for your business activities and what policies and procedures you want to implement to address this situation.