By: John Black

Who would have thought that a company right here in my peaceful Shenandoah Valley of Virginia would set the export fine record with a $100 million penalty? (And, no, ITT is not and was not a client of mine). ITT agreed to plead guilty to criminal charges of illegally exporting controlled night vision technology and omitting material facts in statements to the government. The penalties stemmed from ITT’s outsourcing of components for their leading edge night-vision goggles. According to government and published reports, ITT exported technical data without the required licenses to the UK and Singapore. ITT was aware of violations in the mid 1990’s and voluntarily disclosed some limited infractions but omitted large amounts of material information and provided false information to hide the full scope of the problem. It seems like in the course of looking into UK violations it was discovered that there were even more significant violations involving Singapore.

There are many lessons that export compliance professionals can learn, from this story.

Based on public sources, it appears that ITT illegally transferred technical data to Singapore to source parts for the night vision goggles. The firm in Singapore employed Chinese nationals, thus, this violation involves “an illegal transfer to the PRC” because of US rules that say the release of technical data to a foreign national is an export to the home country of the national. Another important aspect of the case is that ITT alledgedly released technical data to a Singaporean national at its facility Roanoke, VA.

When a full scale investigation was begun, ITT tried to hinder it by “running out the clock” on the statute of limitations for several years, a strategy most experts in this field would consider to be nothing short of short-sighted, if not simply stupid, and certainly a strategy that deserves credit for racking up a significant portion of the record setting fine. It was only after the government informed them that they were prepared to seek an indictment in 2005 that ITT began to cooperate with the investigation. Government sources claim that documents show that officials at ITT saw export regulations as an obstacle to making money and tried to circumvent them accordingly.

So, ITT agrees to pay $100 million. If ITT spends $50 million in research and development of night vision technology, it can reduce the fine down to a measly $50 million. Seems like a good deal-part of your fine you must use to develop new technology? Well, don’t ever catch yourself being positive in this field-the government will own all the rights to the new technology ITT develops. The government will be able to share that new technology with whomever it wants, including ITT’s competitors who are bidding against ITT to selling night vision to the US Government, a move that could potentially create an alternative source of the advanced technology upon which the US military could rain its huge contracts for purchasing new equipment.

Also, ITT gets debarred. The debarment applies only to ITT’s Roanoke, VA company. The debarment notice says that the State Department may grant exceptions to the debarment as it sees fit. Debarment means that ITT Roanoke may not be involved in transactions under ITAR exemptions without specific State Department authorization and that all license and agreement applications involving ITT Roanoke will require that State grant an exception to the debarment.

And, of course, ITT must implement the standard full suite of corrective measures to enhance its compliance policies and procedures, including hiring an independent third party Special Compliance Officer to monitor ITT’s export activities and report them to the government. ITT also is open to spot check audits and increased government scrutiny across the board.

Lessons for Export Compliance People:

  1. If your lawyers are dumb enough to think they can fight the government and win, or even stall the government until the statute of limitations expires on potential violations, fire them. If you have a large and sensitive violation, try this strategy: Resistance is futile, try to negotiate the best deal you can while you cooperate with the government and absorb the costs of your loss.
  2. A transfer of technology to a company in Singapore who employs Chinese nationals will be characterized as an illegal export to China in press releases, which will make your company look bad.
  3. Here is a case to use to mention when somebody in your company wants to know the risk of violations that involve the release of ITAR technical data to foreign nationals in the United States.
  4. See above comments about strategy on dealing with government investigations of ITAR violations.
  5. Indictment or conviction for violations of US export controls rules makes a company ineligible (e.g., debarred) under the ITAR
  6. ITT Roanoke Debarrment: If you are not ITT, you need to remember about the prohibitions against using exemptions for transactions that involve ineligible parties such as ITT Roanoke. Realize that you may have a difficult time getting the State Dept. to approve a license or agreement that involves ITT. Add ITT Roanoke to the list of export denied parties against which you screen your transactions (the debarment applies only to transactions involving ITAR items and does not effect ITT’s involvement in transactions involving only EAR items). My advice: If you need to do business with ITT Roanoke (or any other ITT facility in the short term), you should contact the export compliance or legal people in ITT and discuss with them the status of their debarment at the time and whatever special arrangements they have worked out with State. You probably want to contact State also to discuss the same.
  7. Use this case to remind your purchasing department that US export controls have a direct impact on their overseas purchasing and procurement activities.
  8. Generally use this case to scare, err, motivate your company to comply.

More Background

The severity of the penalty reflects the seriousness of the technology that may have been compromised. The ability to operate around the clock with night-vision technology is one major advantage that US forces have on the battlefield. John Brownlee, Prosecuting US Attorney, (and law school classmate of BSA’s Maarten Sengers) said:

“The superior quality of our night vision technology gives the United States Armed Forces an enormous advantage on the battlefield. Sending sensitive information on these advancements overseas without the necessary licenses puts that advantage in jeopardy. We hope the agreement reached with ITT will send a clear message that any corporation who unlawfully sends classified or export-controlled material overseas will be prosecuted and punished. In addition, the remedial action plan that is part of this agreement is designed to bring ITT Corporation back into full compliance, which will benefit both the corporation and the United States.”

ITT maintains that the “tube technology” – the heart of the night vision goggles – was never compromised and remains secure.

This case has brought the spotlight on US manufacturers and the practice of outsourcing to pare costs. Many companies transfer technology related to outsourcing of components, mistakenly not looking at the components as defense articles. This case should be a serious warning to them.