The Directorate of Defense Trade Controls issued a Federal Register notice, printed today, that lifted the 1997 statutory debarment of AdComm, Inc. AdComm became debarred after it purchased the assets of a debarred party, Electrodyne, which had been debarred based on its conviction for violations of the Arms Export Control Act. Debarred parties cannot be involved in any transactions involving the export of defense articles or defense services.

As some may remember, Electrodyne had several contracts with NASA and the U.S. Air Force to build components to be used in communications, radar and weapons systems. Electrodyne then contracted with companies in Russia and Ukraine to build the components, thus disclosing, without a license and in contravention of the Arms Export Control Act, technical data controlled by the International Traffic in Arms Regulations (“ITAR”).

In 1996, Electrodyne pleaded guilty to these charges, but that was hardly the end of the matter. The docket sheet shows two appeals by Electrodyne of the sentences imposed by the District Court and it was not until the third sentencing, in 2001, that the matter became final. In the first appeal, the Third Circuit vacated the sentence by the district court and remanded for further proceedings. And although the second appeal only concerned the sentence imposed by the district court in its second go-round on sentencing, the Third Circuit reversed the judgment of the district court. This reversal, it might be argued, effectively eliminated the basis for the statutory debarment of Electrodyne, although it might also be argued that this was sloppy language and that the court didn’t intend to reverse the conviction but just to vacate the second sentence.

In all events, a statutory debarment remains in place, even after a reversal of the conviction, unless the debarred party petitions DDTC to lift the debarment on that basis, something AdComm, by that time standing in Electrodyne’s shoes, didn’t appear to have done. More interestingly, the debarment order contained the standard language that the period of debarment was normally three years after conviction and that after that period the debarred party could petition DDTC to lift the debarment. It’s curious, then, that this debarment was in place for almost twelve years. Certainly Adcomm, as merely a third-party successor to Electrodyne that hadn’t been involved in the wrongdoing at issue, would have had a good basis to go into DDTC after three years, i.e. in 2000, to lift the debarment.

ABOVE:French Rafale M Fighter Jet

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An article that appeared today on the website of the German-based Defence Professionals group reported on an address given last week by French Defense Minister Hervé Morin. Mr. Morin optimistically predicted that France would surpass Britain this year as Europe’s largest weapons exporter and added that French weapons exports in 2010 could reach $9 billion.

This part of Morin’s address, as reported, particularly caught my attention:

In his statement, Morin also pointed out that defence acquisitions are a political issue that have to be supported by a country’s politicians. “A country’s purchasing decisions depend on the quality of the product and the product’s price, but it is also a political act. There has to be both: industrial and political. If one is missing, our position is weakened,” he said.

In this context, the French government has undertaken a reform of export procedures with the result being that export license applications now can be processed in less than 40 days, compared previously with 80 days and created a high-level arms sale task force with the aim to help the defence industry to better trade their products.

(Emphasis added.)

While skeptics and Francophobes might suspect that this reduction in license processing times might simply reflect a decision to process licenses less carefully, I think that would be unfair. But whatever your position on how the reduction was accomplished, everyone can certainly agree that more streamlined procedures in processing U.S. export licenses for defense articles could be a significant benefit for the U.S. defense industry.

Luxembourg-based Qioptiq S.A.R.L. agreed in mid-December to a $25 million fine in connection with its unlicensed exports of military-grade night vision items and technology without required licenses from the Directorate of Defense Trade Controls. Most of the unlicensed exports were undertaken by a company acquired by Qioptiq and occurred prior to the acquisition. Of the $25 million, $10 million was suspended — $5 million in consideration of expenses already incurred by Qioptiq in its investigation of the illegal exports and $5 million to be used to defray the costs of the compliance initiatives mandated by the consent agreement.

A review of the charging letter that DDTC proposed as a basis for the consent agreement reveals two things of particular interest. First, successor liability at DDTC is alive, well, and thriving. Second, emails sent by Qioptiq’s predecessor in interest provide an object lesson about what companies shouldn’t say about export compliance. Clearly DDTC’s desire to impose a significant penalty seems motivated by these emails.

The DDTC has long said that it considers an acquiring company to be strictly liable for export violations committed by the acquired company. Many people, myself included, have questioned the wisdom of such a policy inasmuch as it could deter companies with a demonstrated record in export compliance from acquiring, and cleaning up, bad export citizens. The DDTC’s charging letter, however, casts most of these issues aside, asserting that these might be mitigating factors, but not enough to “mitigate away” the violations:

Given the significant national security interests involved as well as the systemic and longstanding nature of the violations, the Department has decided to charge the Respondent with one hundred sixty-three (163) violations at this time. Had the Department not taken into consideration as significant mitigating factors the Respondent’s Voluntary Disclosures, the fact that the violations were committed prior to the Qioptiq Group acquisition of the violating business units and the remedial measures implemented, the Department could have charged the Respondent with additional violations, and could have pursued more severe penalties.

DDTC’s hard line approach here seems to have been motivated by its discovery of emails sent by the acquired company that one might charitably call extreme indifference to export compliance. DDTC singled out the following instances of the acquired company’s cavalier attitudes towards compliance

Of course, these are merely allegations by DDTC. But, if true, they would certainly raise serious questions about a company’s commitment to export compliance.

Regular readers of this blog know that an occasional feature is highlighting press releases by companies that have received their registration number from the Directorate of Defense Trade Controls (“DDTC”) and that can’t resist engaging in, shall we say, a little creative elaboration on the significance of registration. Hey, we’ve spent all that money on the registration fee, we ought to get something from it, right?

The latest installment in this feature comes from EPE Corporation, which issued this press release:

EPE Corporation, an EMS provider, announced that they have received their official International Traffic in Arms Regulations (ITAR) registration from the US Department of State, Bureau of Political-Military Affairs. … Companies receiving this certification demonstrate that they have knowledge and understanding to fully comply with the AECE and ITAR as well as having corporate procedures and controls in place to ensure compliance.

Has DDTC started administering a test for potential registrants? When is the next one being held?

But wait, there’s more:

To EPE, ITAR registration represents our ongoing commitment to supporting the continued success of our homeland security and defense customers by providing the most secure environment possible.

Why stop there? Why not go the whole nine yards and claim that registration permits the company to give a free pony to each of its customers?

All kidding aside, registration is required for all manufacturers and exporters of defense articles, but obtaining that registration does not represent any endorsement by DDTC that the registrant meets any standard other than the ability to fill out a short form and send it in with the required fees. At most, registration proves that the registrant was aware of the registration requirement. I suppose one might say that this elevates the registrant a little bit above those companies that aren’t even aware of that requirement, but it’s a far cry from demonstrating that the company has “corporate procedures and controls in place to ensure compliance.”