ITAR FOR DEFENSE EXECUTIVES - 2016

WHAT YOU NEED TO KNOW TO RUN YOUR BUSINESS

February 9, 2016

Thomas McVey

Williams Mullen

Washington, DC

(202) 293-8118

tmcvey@williamsmullen.com

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Thomas B. McVey

Williams Mullen

Thomas McVey practices in the area of the federal regulation of

international business transactions. He advises clients on the

Export Administration Regulations, the International Traffic In

Arms Regulations, Sanctions Programs administered by the

Office of Foreign Assets Control, the Foreign Corrupt Practices

Act, anti-boycott laws and CFIUS.

This Webinar contains general, condensed summaries of legal matters, statutes and

opinions for information purposes. It is not meant to be and should not be construed as

legal advice. Participants with particular needs on specific issues should consult with their

counsel.

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ITAR Compliance Is Important

• Avoid liability for the company and employees

• Avoid debarment from government programs

• Your company is more desirable to prime contractors

• Your company is more desirable to purchasers if you are

selling your company

• Builds strong reputation in defense community

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DFARS §225.79 and 252.225-7048

• Government contractors required to comply with

ITAR/EAR

• Must “flow down” this requirement to subcontractors

• Covers ITAR registration, licensing of defense articles,

defense services, technical data and other requirements

• Important for second– and third-tier suppliers

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U.S. Export Control Laws

• ITAR - International Traffic In Arms

Regulations

• Export Administration Regulations

• U.S. Sanctions Laws

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International Traffic In Arms

Regulations (ITAR)

• Enabling statute: Arms Export Control Act

• Regulations - International Traffic In Arms Regulations (“ITAR”)

(22 C.F.R. Chapter 1, Subchapter M, parts 120-130)

• Department of State – Directorate of Defense Trade Controls

• List of Controlled Products - U.S. Munitions List

• Controls Military Items – Broad scope encompassing many items originally developed for military use

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Defense Articles - U.S. Munitions List (USML)

• Category 1: Firearms, weapons

• Category 2: Guns and armaments

• Category 3: Ammunition, ordinance

• Category 4: Launch vehicles, missiles, rockets

• Category 5: Explosives, incendiary agents

• Category 6: Naval vessels

• Category 7: Military vehicles

• Category 8: Aircraft and equipment

• Category 9: Military training services, equipment

• Category 10: Protective personnel equipment and shelters

• Category 11: Military electronics

• Category 12: Optical and guidance control equipment

• Category 13: Auxiliary equipment (cameras,

encryption, camouflage)

• Category 14: Toxicological, chemical,

biological agents, protective equipment

• Category 15: Space systems and

equipment

• Category 16: Nuclear weapons, technology

• Category 17: Classified technical data and

services

• Category 18: Directed energy weapons

• Category 19: Gas turbine engines/

equipment

• Category 20: Oceanographic equipment

• Category 21: Other items designed or

adapted for military use

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ITAR Also Controls

Technical Data and Software

Technical Data:

Information which is

required for the design,

development, production,

manufacture, assembly,

operation, repair, testing,

maintenance or

modification of defense

articles, and other items.

( see 22 CFR §120.10)

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Technical Data and Software (Cont’d)

Blueprints

Training Manuals Data

Models

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Methods For Exporting Technical Data

and Software

•Send or take it abroad (e.g., send

disk in the mail)

•Go abroad and talk about it

•Electronic transmissions, e-mail,

phone call, fax to foreign party

•Take it in your laptop or iPhone in

an overseas trip

•Foreign national comes to U.S.

and has access to it

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Defense Services

• Furnishing of assistance to

foreign persons related to

Defense Articles;

examples:

– Consulting

– Engineering

– Technical Services

– Military training

– Other services

– Furnishing technical data

• Requires Technical

Assistance Agreement

(TAA)

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Examples of USML Items

• Command, control and

communications systems

• Certain drone aircraft

• Navigation systems for military

vessels

• Certain electronic equipment used

in military applications

• Military training services and

equipment

• Underwater sound equipment

• Flight control products, software

and technologies

• Developmental equipment funded

by DOD

• Certain satellites and ground

control equipment, including parts,

technologies and software

• Anti-gravity and pressure suits,

atmosphere diving suits

• Body armor (certain types)

• Naval vessels and related

equipment, parts and software

• Protective personnel equipment

• Certain ground sensor systems

• Antennas for military systems

• Military radar systems and

equipment

• Certain optical equipment

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Category XI - Electronics

• Many types of electronic equipment used in military applications are

listed in Category XI

• Electronic systems, equipment and software specially designed for

intelligence purposes that collect, survey, monitor, exploit, analyze

electromagnetic spectrum

• Specified command, control, communications, computers,

intelligence, surveillance and reconnaissance (C4IS4) equipment

• Electronic sensor systems and equipment specified in XI(a)(9)

• Radar equipment specified in XI(a)(3)

• Printed circuit boards and multichip modules specially designed for

articles in Category XI

• “Developmental electronic equipment or systems” funded by the DOD

• Many parts, components, accessories, attachments and equipment

specially designed to be used in items in Category XI

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Category VIII – Aircraft and Related Articles

• Category VIII lists many types of military aircraft, subsystems and related

parts and components

• Armed UAV’s and unarmed military UAV’s

• Military intelligence, surveillance and reconnaissance aircraft

• Aircraft that contain any ITAR-controlled mission systems

• Mission computers, vehicle management computers and integrated core

processors specially designed for items in Category VIII

• Inertial navigation systems and related equipment specially designed for

articles in Category VIII or ECCN 9A610

• UAV flight control systems

• Thermal batteries, thermonic generators specially designed for articles in

Category VIII or ECC 9A610

• Specified radar altimeters

• Many parts, components, accessories, attachments and equipment specially

designed for articles in this Category

• Gas turbine engines and many parts and components are covered in USML

Category XIX

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Intelligence and Security

• Many contracts involving intelligence and security

activities are ITAR-controlled

• Covers equipment and services

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Items on USML ― Parts and Components

• Many parts, components,

accessories, attachments,

equipment and software

specially designed for a

USML item are also on

USML

• Certain parts and

components have been

transferred to the Commerce

Control List under the Export

Administration Regulations

pursuant to Export Control

Reform

• Major issue for second- and

third-tier suppliers and

subcontractors

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Services on the USML

• Intelligence and security

services often covered

under ITAR

• Military advice to foreign

persons is covered under

ITAR (§120.9)

• Military training for foreign

persons (§120.9)

• Training in use of USML

items (subject to certain

exemptions)

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Government Sponsored Research Funding

• SBIR, DOD university research funding and other defense

research funding

• Resulting products, technical data, software and services are often

on U.S. Munitions List

• Many “developmental products” funded by Department of Defense

are on the USML

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USML Category XVII: Classified Information

• Classified Information is on

the USML

• Category XVII: “Classified

Technical Data and

Services”

• Major issue for government

contracts firms

• Another “Catch-All” category

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Commodity Jurisdiction Requests

• Procedure for DDTC to

determine if item is on U.S.

Munitions List

• Binding, written response

• Can also be used to

request removal of item

from USML

• Form DS - 4076

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Requirements If Item Is On USML

• Physical articles:

– Cannot export unless

obtain export license (e.g.

DSP-5)

• Technical Data and

Software:

– Cannot send or take out

of U.S. without export

license

– Cannot transfer to foreign

party in U.S. without

export license

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Requirements If Item Is On USML (cont.)

• Services:

– Cannot perform defense

services for foreign

persons overseas or in

the United States without

license (TAA)

• Imports:

– Items on USML and U.S.

Munitions Import List

subject to import

restrictions

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Other Requirements - Registration

• Parties that manufacture or export items on the USML

or perform defense services are required to register

with DDTC

• This is even if the company does not export any

products

DDTC Registrations

0

2000

4000

6000

8000

10000

12000

Exporters Manufacturers Total

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Recordkeeping Requirements

• Mandatory requirement

to maintain records of

ITAR - related activities

for 5 year period

• Covers paper, electronic

and other media

• Retention period can be

extended in certain

instances

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Brokering Registration and Licensing

• Parties that facilitate export or import of ITAR items

are subject to ITAR Brokering Regulations (22

CFR Part 129).

• Registration, licensing, reporting and other

requirements

• If U.S. company appoints a marketing agent to

market USML products/services overseas – broker

registration requirement.

• Requirement to file annual reports

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Reports for Sales Commissions and

Political Contributions

• Parties required to file reports with DDTC related to sales

commissions, fees and political contributions paid in

connection with sale of USML items and services

• See 22 C.F.R. Part 130

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Denied Party Screening

• Prohibited Party Lists:

• DDTC Debarred Party List (DDTC)

• Nonproliferation Sanctions List (DDTC)

• Specially Designated Nationals List (OFAC)

• Denied Persons List (BIS)

• Unverified List (BIS)

• Entity List (BIS)

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Companies Most Likely Subject To ITAR

Regulation

• Defense industry firms

• Government contractors

• Aerospace, avionics

• Electronics

• Maritime

• Navigation

• Unmanned aerial vehicles (UAV)

• Satellite

• Communications

• High performance materials

• Government sponsored research

• Manufacturers of parts, components, software for above

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Penalties for Violations

• Criminal Sanctions – up to 20 years imprisonment

• Fines: Up to $1,000,000 per violation

• Press release

• Debarment

• For criminal cases Justice Department can

prosecute:

– Company

– Officers and Directors

– Employees in their individual capacities

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Recent Export Compliance Cases • Timothy Gormley; 42 months imprisonment; export of microwave

amplifiers without license

• LeAnne Lemeister (empowered official and export compliance

officer), DDTC Administrative Debarment; 21 violations regarding

improper use of export control documents

• Meggitt-USA, Inc; $25,000,000 civil penalties; various ITAR

violations

• Aeroflex Inc; $8,000,000 civil penalties; various ITAR violations

• Raytheon Company; $8,000,000 civil penalties; various ITAR

violations

• Peter Gromacki; 3 months imprisonment; export of high-grade

carbon fiber to China

• Ming Suan Zhang, 57 months imprisonment; high-grade carbon

fiber to China

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SENTENCING OF COMPANY FOR EFFORTS TO TRADE WITH IRAN

Raleigh, North Carolina - United States Attorney George E.B. Holding announced today that on Monday July 28, 2008, Allied Telesis

Labs, Inc. (ATL), was sentenced in United States District Court in Elizabeth City to a $500,000 criminal fine and was placed on probation

for two years for violating United States law regarding conducting business with Iran.

ATL was successfully engaged in the design of telecommunication equipment and systems including high capacity Multiservice Access

Platforms (iMAPs) and related items capable of routing a large volume of messages/information/data. ATL’s guilty plea acknowledged

that the corporation conspired with another to trade with the Islamic Republic of Iran in violation of the law. Specifically, ATL and its

related corporate entities conspired to land and execute a $95,000,000 contract with the Iranian Information Technology Company

(IRITCO) to rebuild and upgrade the telecommunications systems of approximately 20 Iranian cities, including Tehran. The iMAPS

developed here in the Triangle were to be a central component of this system. Preparation for the execution of the contract went as far as

the manufacture of approximately $2 million worth of iMAPS at ATKK facilities in Singapore. The contract negotiations eventually

collapsed, the telecommunications system was not installed and the iMAPs were sold elsewhere at a loss.

Mr. Holding noted the importance of the case: “Every American is aware of the sensitive nature of the United States’ relationship

with Iran. That relationship is a central focus of our foreign policy and the work of our Government. The International Emergency

Economic Powers Act allows the President to regulate the conduct of business internationally under certain circumstances, a step

which was taken with regard to Iran. When the President imposes these types of authorized restrictions, it is incumbent on all

citizens, including our corporate citizens, to adhere to those regulations and to follow the strict letter of the law. Only then can we

be confident that our country speaks with one voice in our relationships with our international friends and foes. The plea of guilty

and the sentence in this case should act as a reminder to our business community of the seriousness with which the Department of

Justice takes this issue.”

The case was investigated by the United States Department of Commerce. Assistant United States Attorney John Bowler

represented the United States in federal court.

For Immediate Release: July 31, 2008

Contact - BIS Public Affairs 202-482-2721

U.S. Department of Justice

United States Attorney's Office

District of Columbia

(202) 514-2007

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Compliance Strategy

• Classification – review all of your company’s products

to see if they are listed on: – U.S. Munitions List

– Commerce Control List

– End Use Based Controls (15 CFR Part 744)

• Application – Apply as required for: – DDTC export licenses (DSP-5, etc.)

– BIS export licenses

– TAA’s, MLA’s

– Warehouse Distribution Agreements

– Re-export authority

• Compliance Program – internal company compliance

procedures

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Export Compliance Program

• Designated company official in charge of compliance

• Classification of company’s products, software, technical data and

services

• Written policies and procedures for dealing with ITAR and EAR

issues

• Procedure for foreign nationals

• Training

• Recordkeeping

• Prohibited list checking and OFAC sanctions review

• Procedure for dealing with suspected violations

• Auditing

• Updating program

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Export Compliance Audits

• Annual internal review of your company’s compliance activities

• Compliance Processes

• License filings

• TAA administration

• Screening of transactions for prohibited parties

• Recordkeeping requirements

• Other

• Can be conducted by outside party or company employee

• Report results to senior management

• You discover compliance problems before government does

• Should be organized so that results are subject to attorney-

client privilege

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Export Administration Regulations

• Enabling Statute: Export Administration Act

(expired), International Emergency Economic Powers

Act

• Regulations: Export Administration Regulations

(EAR)

• Department of Commerce – Bureau of Industry and

Security

• List of Controlled Products – Commerce Control List

• Controls “Dual-Use” Items and 600 Series Military

Items

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Commerce Control List – Examples of

Products Covered

- encryption - computers, networking

- aerospace devices

- lasers - high performance

- chemicals materials

- power generation - telecom equipment

- police equipment - high strength fibers

- electronics - nuclear industry products

- sensors - high performance pumps,

- electronics generators, processing

- machine tools equipment

- fingerprint/biometrics - others

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Commerce Control List

Computers Telecom

Lasers Machine Tools

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Requirements for all exports

(even if product is not on CCL):

• Know Your Customer Requirements – 15 CFR Part

732, Supplement No. 3

• Denied persons list – 15 CFR Part 764

• Recordkeeping requirements – 15 CFR Part 762

• Shipment documentation – 15 CFR Part 758

• Prohibited End-Use Controls – 15 CFR Part 744

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Export Control Reform Initiative

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Commerce Control List 600 Series

• Items will still require export licenses for all destinations except

Canada

• May be eligible for Strategic Trade Authorization exception (to

government end-users only)

• Will be subject to de minimis rules for incorporating U.S. parts and

components into foreign made items

• Reduced controls on services

• “Specially designed” – effort to remove routine components (bolts,

washers, screws, etc.) from controls

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Example of Broad Provisions of 600 Series

– Military Electronics:

ECCN 3A611.a: Electronic equipment, end items, and systems

“specially designed” for a military application that are not

enumerated in a USML category or another 600 Series ECCN.

ECCN 3A611.x. Parts, components, accessories and attachments

that are “specially designed” for a commodity controlled by this entry

or for an article controlled by USML Category XI, and not

enumerated or described in any USML category or another 600

Series ECCN or in paragraph .y of this entry.

Note to 3A611.a: ECCN 3A611.a includes any radar, telecommunications, acoustic or

computer equipment, end items, or systems “specially designed” for a military application

that are not enumerated or otherwise described in any USML category or controlled by a

“600 series” ECCN.

Summary only – see 15 C.F.R. Part 774 for exact language

*/

*/

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Examples of Broad Provisions of 600 Series

• Computers – ECCN 4A611/3A611: Computers and parts, components,

accessories and attachments specially designed for a military application that

are not listed on the USML

• Telecom Equipment – ECCN 5A611/3A611: Telecommunications equipment

and parts, components, accessories and attachments specially designed for

military application that are not listed on the USML

• Navigation/Avionics Equipment – ECCN 7A611/3A611: Navigation and

avionics equipment and parts, components, accessories and attachments

specially designed for a military application that are not listed on the USML

• Acoustic Systems and Radar – ECCN 6A611/3A611: Acoustic systems and

radar, and parts, components, accessories and attachments specially

designed for a military application that are not listed on the USML

Summary only – see 15 C.F.R. Part 774 for exact language */

*/

*/

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“Specially Designed”: § 120.41 Summary

Is a part, component, accessory, attachment, or software for use in or with a

defense article.

I. Catch: (a) (1)

As a result of development, has properties peculiarly responsible for achieving

or exceeding the controlled performance levels, characteristics, or functions

described in the relevant USML paragraph; or

Is subject to the EAR pursuant to a commodity jurisdiction determination;

Is a fastener (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets,

pins), washer, spacer, insulator, grommet, bushing, spring, wire, or solder;

Dual use in production - Has the same function, performance capabilities,

‘‘equivalent’’ form and fit as a commodity used in a commodity that is or was

in production and is not on the USML;

Dual use design intent - Developed with knowledge that it would be for use in

both articles on the USML and also commodities not on the USML; or

General purpose - Was or is being developed as a general purpose

commodity or software, i.e., with no knowledge for use in a particular

commodity or type of commodity.

II. Release: (b) (1)

(a) (2)

(b) (2)

(b) (3)

(b) (4)

(a) (5)

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U.S. Sanctions Programs

• Office of Foreign Assets Control (Department of the

Treasury)

• Prohibition against dealing with targeted list of countries

• Prohibition against dealing with targeted list of entities

and parties

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Sanctions Programs - Summary OFAC Country Programs

• Balkans

• Belarus

• Burma

• Burundi

• Central African Republic

• Cote D’Ivoire (Ivory Coast)

• Cuba

• Dem. Republic of the Congo

• Iran

• Iraq

• Lebanon

• Liberia (Taylor Regime)

• Libya

• Magnitsky Sanctions

• North Korea

• Somalia

• Sudan and South Sudan

• Syria

• Ukraine/Russia/Crimea Sanctions

• Venezuela

• Yemen

• Zimbabwe

OFAC Non-Country-Specific

Programs

•Counter-terrorism Sanctions Program

•Cyber-related Sanctions Program

•Non-Proliferation Sanctions Program

•Narcotics Trafficking Sanctions Program

•Diamond Trading Sanctions Program

•Persons Undermining the Sovereignty of

Lebanon or Its Democratic Processes and

Institutions

•Transitional Criminal Organizations

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U.S. Sanctions Programs – SDN’s

• Prohibition against dealing with Specially Designated

Nationals anywhere in the world

– 3,000 Parties

– 15 CFR Chapter 5, App. A-C

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Consolidated Screening List

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Summary – Key Steps

• Classification and Jurisdiction

– Determine if products/technologies are subject to

ITAR and EAR

– Commodity Jurisdiction Request for confirmation

• Application

– If items are controlled, apply for licenses and other

authorizations

• Compliance Program

– Internal company policies and procedures to comply

with legal requirements.

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Pre-Recorded Webinar: ITAR For Defense Executives

Export Control Newsletter:

Contact Tom McVey: tmcvey@williamsmullen.com

Thomas B. McVey 1666 K Street, NW

Suite 1200 Washington, DC 20006

202.293.8118 tmcvey@williamsmullen.com

www.williamsmullen.com

30246877