Comments on: Luxembourg Company Agrees to $25 Million Fine for Illegal Exports

By: Pat Briscoe

Pat Briscoe — Wed, 07 Jan 2009 15:06:24 +0000

It appears Qioptiq is the beneficiary of an indemnification arrangement. One report now states that “[a]s part of the divestiture agreements, the Seller retained full responsibility for the consequences of all pre-acquisition export matters.” The full story–which I think is likely a Qioptiq press release–is at http://www.vision-systems.com/display_article/349485/19/none/none/COMPN/Qioptiq-enters-into-consent-agreement-with-US-Department-of-Stat.

By: Clif Burns

Clif Burns — Tue, 06 Jan 2009 15:35:16 +0000

Both BIS and DDTC have taken the position that they have jurisdiction over re-exports of U.S. origin items, even though this is a dubious position under international law. The DOJ used this theory to indict a Dutch company and its principal for reexports of aircraft parts to Iran. DOJ hasn’t sought extradition, undoubtedly because the Dutch company and its principal had no contact with the U.S. other than the U.S.-origin parts.

By: Pat Briscoe

Pat Briscoe — Tue, 06 Jan 2009 15:26:33 +0000

I think the fact that the foreign companies facing retransfer/reexport allegations were affiliates of a US company probably put teeth in the assertion of jurisdiction by DDTC to bring Qioptiq (and the acquired companies) to the table with their checkbook. But in reading the charges in the proposed charging letter, I get the distinct impression that DDTC is also asserting jurisdiction over the ITAR-controlled technology, as well as overseas hardware and data that were derived from it. In other words, my sense is that the assertion of jurisdiction via affiliation made this expensive settlement more likely to happen as a practical matter, but DDTC is at least implicitly also taking the position–as it has in public statements, and as the ITAR state–that jurisdiction to prescribe and enforce follows the technical data.

So even foreign recipients of ITAR-controlled items who aren’t affiliated with US companies might want to look at this consent agreement for some lessons learned. BIS hasn’t been shy about going after unaffiliated foreign companies for unlawful reexports of US-origin stuff; DDTC could decide to dedicate more resources to similar enforcement actions. To be sure, enforcement against unaffiliated foreign companies can involve some unique challenges (overseas location of assets, personnel, evidence, etc.). But DDTC has plenty of leverage over noncompliant foreign companies that make money in reliance on US exports of defense articles and services–it can cut those exports off.

By: Clif Burns

Clif Burns — Tue, 06 Jan 2009 14:16:17 +0000

Mike: Qioptiq knew about the problems because the first of the voluntary disclosures was filed by the acquired company prior to the merger, perhaps at Qioptiq’s insistence. Still, the smart thing would have been to await the outcome of the VD. Or maybe Qioptiq thought it was getting a good enough price that it was willing to take the risk. And, of course, there may be an indemnification agreement.

Pat: I had the same impression about the large amount of the narrative that was based on the conduct of overseas affiliates of the U.S. person. Another reason for U.S. companies to keep an eye on their overseas affiliates, if possible, and subsidiaries. Still, it seems DDTC has wandered into some interesting questions of jurisdiction.

By: Pat Briscoe

Pat Briscoe — Tue, 06 Jan 2009 12:42:53 +0000

Another interesting aspect is the attention given to the conduct of non-US persons. The majority of the charges cited retransfers and reexports of derivative ITAR-controlled technology from non-US companies to third countries, as opposed to exports directly from US companies to non-US destinations or nationals.

I can’t think of a DDTC consent agreement in recent years in which the charges focused so overwhelmingly on the culpability of non-US recipients of technology exported from the US. (The GM/GD episode comes closest, I suppose.) I think it’s reasonable to construe the Qioptiq agreement as a strong reminder from DDTC to all the foreign end-users out there that the ITAR follow the exports.

This case might do for destination control statements and TAAs/MLAs what the QRS-11 case did for jurisdictional decision-making.

By: Mike Deal

Mike Deal — Tue, 06 Jan 2009 11:28:46 +0000

You would think that by now the M&A bar would have learned that a proper due diligence requires examination of the target’s trade compliance record. Wall Street lawyers just still don’t get it.