By: Kay C. Georgi, Esq., firstname.lastname@example.org; +1 202 857 6293; Marwa M. Hassoun, Esq., email@example.com, +1 213 443 7645; and Regan K. Alberda, Esq., firstname.lastname@example.org, +1 202 775 5771, all of Arent Fox. (Source: Arent Fox, 27 Jun 2019.)
On February 26, 2019, Darling Industries, Inc. (Darling) entered into a $400,000, 18-month consent agreement with the Department of State, Directorate of Defense Trade Controls (DDTC) to settle six alleged violations of the International Traffic in Arms Regulations (ITAR).
The key issue was Darling’s ITAR Empowered Official (EO), who was neither empowered nor an expert. DDTC is sending a message to industry with this action: your EO must have both sufficient familiarity with the ITAR to determine the legality of a transaction and sufficient authority to stop a transaction.
Each year, DDTC enters into a handful of consent agreements with companies for violations of the ITAR, when it determines harm to national security and/or significant gaps in a compliance program. Lesser violations are addressed through a process which typically includes: (1) disclosing documented evidence of a complete investigation of the violations, (2) identifying the root causes, and (3) proving implementation of appropriate corrective actions to prevent subsequent violations. DDTC can request independent audits to verify compliance issues have been addressed before closing a company’s (voluntary or directed) disclosure of ITAR violations. When DDTC does choose to enter into a consent agreement, it highlights areas of concern that it expects companies to ensure are addressed within their own compliance programs.
In the case of Darling’s consent agreement with DDTC, the violations at issue were not of particular national security concern because the unauthorized exports were made to US allies, such as Canada and the United Kingdom. Conversely, DDTC took issue with (1) Darling’s lack of a documented export compliance program; (2) lack of a qualified EO; and (3) lack of initiative to address unauthorized exports and compliance program deficiencies for nearly two years after the issues were identified by a third party auditor.
The third party auditor Darling engaged identified not only unauthorized exports and compliance program deficiencies, but also found no formal jurisdiction and classification process and the absence of additional personnel trained in ITAR compliance. The audit described “decades of systematic, reoccurring violations,” but Darling did not file a voluntary disclosure until 22 months after the audit. The report found additional issues of concern, but DDTC chose not to charge Darling with those violations as a result of mitigation, including submitting a voluntary self-disclosure, entering into a tolling agreement, and self-initiating compliance program improvements.
The failure to appoint a qualified Empowered Official is a new issue to be highlighted by DDTC. The charging letter indicated that Darling appointed an EO that was not qualified under the ITAR (22 CFR § 120.25) because the individual was not in a position of having authority for policy or management within the organization and did not understand the provisions and requirements of the export regulations. DDTC stated that, “[t]he Empowered Official prepared, signed, and submitted license application that reflected a deficient understanding of the licensing process and the regulations.” Section 120.25 of the ITAR stipulates that an EO must have the “independent authority to (i) inquire into any aspect of a proposed export, temporary import, or brokering activity by the applicant; (ii) verify the legality of the transaction and the accuracy of the information to be submitted; and (iii) refuse to sign any license application or other request for approval without prejudice or other adverse recourse.” To execute these duties, an EO must have enough familiarity with the ITAR to determine the legality of a transaction and also have enough authority within the company to stop the transaction if there is an issue of export compliance.
The takeaways from this consent agreement are particularly impactful for smaller and mid-sized entities that may not be dedicating adequate resources towards hiring, training, and retaining qualified export compliance personnel and maintaining a robust ITAR compliance program. Even if it is necessary to utilize existing personnel to serve in export compliance roles, companies must ensure that these employees receive sufficient training on the ITAR and export compliance requirements. Secondly, the person selected to serve as an EO must meet the requirements for this role as set forth in the ITAR, including having authority for policy or management within the company, and most importantly the ability to hold, question, and ultimately stop a transaction with the full support of management if the EO has export compliance concerns. Finally, violations must be disclosed in a timely manner after discovery. While Darling made efforts to assess its compliance program by engaging an outside auditor, it disclosed the report’s findings of violations long after the audit, a primary factor for DDTC in entering the consent agreement.