Thomas McVey of Williams Mullen
Failure to understand and comply with these requirements presents significant legal risk for government contracts firms of all sizes.
ITAR stands for International Traffic In Arms Regulations and are part of the U.S. export control laws. The ITARs provide a number of requirements for U.S. firms that sell products and services to military customers. While many provisions of the ITAR apply to exports, certain provisions apply even if a company does not conduct any export activities or only exports to U.S. government customers overseas. Since violations can result in significant criminal liability for the company, including imprisonment for the company’s owners and employees, it is imperative for government contract firms to have a clear understanding of this important area of the law.
U.S. Munitions List
The cornerstone of the ITAR is a list of products called the U.S. Munitions List (“USML”). If a company’s product or service is on the list, the company is subject to the ITAR requirements. Every company should check the USML to determine if its products or services are set forth on the USML.
Special Application For Government Contractors
One of the categories on the USML is Category XXI, a broad catch-all which provides, in effect: any other product, service or technology that was developed or modified for a military use. Category XXI causes great heartburn for government contract firms since developing almost any product or service for a U.S. military customer can result in the products or service being on the USML. Also developing products using U.S. defense research funding — such as SBIR grants or DOD grants for research projects — can often place products and technologies on the USML. Hence it is very common for companies that provide products, services or technologies to federal defense agencies to be swept into ITAR’s reach.
Obligations Under ITAR
If a company’s products or services are on the USML, it is subject to a number of ITAR requirements including:
Registration — The company must register with the U.S. State Department even if it does not export any of its products.
Export Licenses — If the company exports any of its products, it is required to obtain an export license.
Services — If a company performs services on the USML for foreign persons, it is required to obtain export authorization for the performance of these services called a Technical Assistance Agreement (“TAA”). This includes providing training services, technical services, logistics services, design services, warranty repairs, etc.
Transfer of Technical Data to Foreign Nationals
The USML covers a wide array of technical data. If a company transfers technical data listed on the USML overseas it must obtain an export license. In addition, companies are prohibited from disclosing technical data set forth on the USML to foreign nationals in the U.S. without an export license. This is even if the foreign national is an employee of your company.
Exports To U.S. Government Customers
These rules apply even if the company is exporting products, performing services or disclosing technologies to DOD customers overseas. If there is an export, the company may be required to obtain an export license, TAA or otherwise comply with the ITAR requirements.
Sanctions
As referenced above, violations under the ITAR can result in criminal and civil penalties, including imprisonment of company owners, officers and employees, disbarment and significant fines, among other penalties.
Compliance Strategy
As a first step, it is imperative that companies review the USML to determine if they are covered under the ITAR. If they are, most companies adopt an ITAR compliance program to establish written policies and procedures for their employees to comply with the ITAR requirements. In addition, if a company is found to have an ITAR violation in the future, the State Department will often reduce penalties for companies which have adopted compliance programs.
Voluntary Disclosure
If a company has inadvertently violated ITAR requirements, there is a procedure available for companies to voluntarily disclosure previous violations to the State Department which often result in no penalties being assessed against the company. In many cases this procedure provides an opportunity to “wipe the slate clean” of past violations if companies commit to compliance in future operations. This procedure, called “voluntary disclosures,” can be extremely valuable for small government contractors in organizing their export compliance activities.
Operations Under ITAR
If a company determines that it is regulated under ITAR, it is still permitted to conduct most business activities to operate in the international markets. It can still export its products and perform services overseas; it must simply obtain the appropriate export licenses or TAAs and comply with other ITAR requirements. Life still goes on – it simply must incorporate the ITAR procedures into its business model. Many defense contractors conduct robust international businesses within the parameters of the ITAR.
The author is an attorney who advises companies on strategies for organizing for and complying with ITAR. For a free subscription to the Williams Mullen export control newsletter, please contact the author at tmcvey@williamsmullen.com or 202.293.8118.
