Redmond-based Analytical Methods, Inc., entered into a consent agreement, released earlier this week, with the Directorate of Defense Trade Controls (“DDTC”) in connection with unlicensed provision of defense services to foreign persons and unlicensed exports of software adapted for military purposes. Pursuant to the consent agreement, the company agreed to pay $500,000 in civil penalties, $400,000 of which was suspended provided that this amount is applied to past and future compliance measures. Significantly, this penalty was imposed even though Analytical Methods voluntarily disclosed the export violations.

The company’s problems started with some confusion on its part as to whether its software, which consists of various programs and modules designed to model the conditions present while flying through air or travelling through water, was controlled by the International Traffic in Arms Regulations (“ITAR”). According to the charging letter, counsel for the company initially filed a voluntary disclosure with the DDTC in 2003 indicating that he was investigating whether an export of one of it’s software modules to an “embargoed entity” in the People’s Republic of China was a violation of the ITAR. Subsequently counsel sent a second letter to DDTC stating that he had determined that the software module that was exported was not ITAR-controlled and that the PRC entity that received the module was not on any prohibited end-user list.

The company then filed a commodity jurisdiction request with respect to that module, which the DDTC determined was, indeed, ITAR-controlled:

Respondent failed to notify the Department immediately after this CJ determination that it had exported ITAR controlled MGAERO-FPI software to the PRC. Instead in March of 2004 the Respondent notified the Department that it had ceased manufacturing and exporting the ITAR controlled MGAERO-FPI software and would not re-register with the Department.

And that right there explains, at least in my view, why this voluntary disclosure led to a significant fine. In this instance, the DDTC obviously was annoyed by what appears to have been a disingenuous response by the company to the CJ determination, something made even more disingenuous because it involved an item that the company had previously told DDTC had been exported to the PRC but was not ITAR-controlled. Subsequent voluntary disclosures of these exports won’t be viewed as favorably when they come on the heels of prior attempts by a company to conceal the exports from DDTC.

Two things about the charging documents, however, are of more cause for concern. First, the DDTC appears to be continuing to expand its efforts to require export licenses for public domain material. In the charging letter, DDTC states:

Section 124.1(a) of the ITAR provides that approval from DDTC is required prior to providing a section 120.9(a) defense service, whether or not the information relied upon in providing the defense service is in the public domain or otherwise exempt from license requirements.

The problem here is that section 120.9(a)(2) defines the provision of technical data as a defense service. These two sections read together with DDTC’s gloss on 124.1(a) in the above-quoted section, means that a “disclosure” of public domain information can be seen as a defense service (and not just as an export of technical data) that would require that a Technical Assistance Agreement (“TAA”) be approved by DDTC prior to the disclosure of the public domain material.

Second, language in the charging documents continue to obscure the boundaries of what is and isn’t a defense service. Although all the software modules involved in the specific charges brought by DDTC were modified for military use and were thus defense articles, DDTC throws into the Consent Agreement this language:

[S]oftware designated as dual-use can be used to provide an ITAR regulated defense service. …

Does this mean that a vendor that provides non-ITAR software, say a CAD program, to a foreign defense contractor, and then trains that contractor on using the software, that this might be a defense service if the contractor uses the software to design a military article? The boundaries here have never been clear and the cited language from the DDTC makes them less clear.

ABOVE:INS Shivalik under construction

---

PLEASE SEE IMPORTANT UPDATE AT THE END OF THIS POST.

The INS Shivalik, the first in the Shivalik class of stealth frigates being built by the Indian Navy, was scheduled for commissioning in April or May of this year. But the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) has thrown a wrench into the works, so to speak, and that commissioning may be delayed for some time.

The INS Shivalik utilizes two GE LM-2500 gas turbine engines which have already been fitted on the frigate. However, additional work needs to be performed by GE to render the engines operational. According to a report in today’s edition of India’s Business Standard, the DDTC has told GE to stop all work on the engines until the incoming administration could review its military ties with a number of nations, including India. Because this was a direct commercial sale between GE and India, a DSP-5 and a Technical Assistance Agreement (“TAA”) would already have been in place and DDTC would have therefore told GE that it was temporarily suspending the DSP-5 and the TAA.

GE told the Indian Navy that this review could take upwards of five months. This has prompted the Indian Navy to commence a search for other companies outside the U.S., such as Fiat Avio, to complete the work on the engines, according to an article in today’s Times of India. Because that might void the warranty, India is also exploring whether a foreign G.E. subsidiary could complete the work. According to the Business Standard, GE is not averse to that possibility as long as no U.S. citizens are involved in the work.

The State Department, for its part, is neither confirming nor denying that it has instructed temporary suspension of the work on the INS Shivalik according to inquiries made by the Business Standard:

The US State Department has also ignored a request for information. A spokesperson of the US Embassy in New Delhi has sidestepped the question, replying by email that, “The State Department has not instructed GE in the conduct of this direct commercial sale. Aspects of this sale were subject to export licensing, which is conducted through the State Department.” When asked to comment specifically on blanket orders from the State Department to GE regarding commercial defence dealings with India, the US Embassy did not respond.

The Obama administration’s review of its military relationship with India will no doubt be complicated by the failure of India and the U.S. to agree to the terms of a global End Use Monitoring Agreement which would permit the U.S. to monitor the deployment of defense articles exported from the United States to India. Instead, the U.S. and India have been signing individual end-use agreements for each military sale. The Indian government claims that U.S. monitoring requests are intrusive and are a violation of the country’s sovereignty, an argument that India would seem to have waived when it decided to outsource supply of military equipment from the United States.

(For those who may be wondering why I haven’t said anything yet about the DDTC’s consent decree with Analytic Methods, Inc., I plan on posting something on that tomorrow.)

UPDATE: Upon further investigation by me, I have discovered that the Indian press accounts of the situation involving the GE engines being installed in the INS Shivalik were inaccurate and that the DDTC did not stop GE’s operationalization of the engines in order to conduct a review of U.S. policy regarding defense exports to India. Apparently the engines were not modified for military use and were therefore not listed on the United States Munitions List. Accordingly, export of the engines to India did not require a license from DDTC. However, since installation of the engines on a military frigate could be construed as a “defense service,” GE delayed work on the engines pending DDTC approval of a Technical Assistance Agreement (“TAA”) allowing that work. That TAA has now been granted.

The UK’s Export Control Office (“ECO”) has just released a video on export control that has the tenor and excitement of certain videos they used to show us in high school health class on those touchy subjects of serious concern, and you all know which ones I mean. I think they even hired the same narrator and just told him to say al-you-men-i-um instead of allume-i-num.

Slam down a double espresso and then click play to watch:

For those in the U.K. that the video doesn’t put to sleep, it might scare them into not ever exporting anything again. It doesn’t clearly delineate what can and can’t be exported and then promises jail time for mistakes, solemnly intoning the old canard that “ignorance of the law is no excuse.” (Well, actually it is, at least in the United States. A criminal prosecution for export violations requires that the defendant have at least some knowledge that the export was illegal or improper.)

My absolutely favorite part comes near the end where the soporific narrator intones:

What the ECO does, and the licensing process, is, of course, more complicated than a short video like this can ever hope to explain.

Translation: this video was produced in order to spend some extra funds that were lying around the agency but that’s not something we could admit, at least until the very end of the video where there was a very good chance that you had already decided to watch something much more interesting, like, you know, the one of that dachshund with the machine that throws tennis balls for him.

If you weren’t able to make it through the ECO video, but are still dying to know what was in it, the ECO helpfully provides a transcript here.

Regular readers will know that we have a particular fascination with Business Wire press releases where companies announce that they have “achieved” registration under the International Traffic in Arms Regulations (“ITAR”). These press releases are amusing because anyone who can figure out how to fill out and mail in the registration form with the requisite fee will be registered and will obtain a registration number.

Boasting about ITAR registration is not too different from a company claiming that it “achieved” an employer identification number from the I.R.S, thereby demonstrating the company’s extensive knowledge of corporate tax laws and its commitment to tax compliance. And by the time the PR firms for these new ITAR registrants have finished with the Business Wire press release, some of these companies wind up claiming that the ITAR registration demonstrates the company’s intimate knowledge of even the most obscure provisions of the ITAR, its passage of a grueling three-day exam on all aspects of export law, its successful completion of a three-month compliance audit by the Directorate of Defense Trade Controls (“DDTC”) and its ability to leap tall buildings in a single bound.

The latest in this series is this press release from South Dakota based Electronic Systems, Inc., (“ESI”) which, I must say, sets a new benchmark in misunderstanding the DDTC registration process.

Electronic Systems, Inc. today announced 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. The ITAR Registration means that the company is uniquely positioned to fully support defense related projects in the United States. Companies that are based in the United States but owned by foreign companies or non-Americans make them ineligible for ITAR compliance.

You know, I was almost willing to go along with the company’s claim that ITAR registration demonstrated that it had knowledge of the ITAR. At least I was until I got to that last sentence about foreign ownership precluding ITAR registration. Apparently section 122.2(b)(2) of the ITAR, which specifically contemplates registration by foreign-controlled companies, wasn’t covered on that grueling exam that ESI had to take before “achieving” registration.

The Office of Foreign Assets Control (“OFAC”) released today its monthly report on civil penalties, and it was indeed a short list with one short entry. And since there’s only one entry it, not surprisingly, involved the “terrorist” island just to our south.

According to the report, French cheese giant Lactalis’s New York subsidiary agreed to pay $20,950.38 to settle allegations that, between February 2004 and March 2007, the subsidiary made six unlicensed wire transfer payments in which Cuba or Cuban nationals had an interest. Lactalis is responsible for Président products, including the heavily marketed Camembert it produces under that brand name, as well as Sorrento, Rondelé, Société Roquefort and other famous cheese brands. Lactalis did not voluntarily disclose the matter to OFAC.

Of course, OFAC, consistent with its less-is-more approach to penalty transparency, doesn’t provide any further information on the situation leading to the agreed fine, but a coincidence relating to the dates of the wire transfers can allow some speculation that a blog, as opposed to a real newspaper, can get away with. A report in the Cuban press in February 2004 — the date of the first wire transfer — indicated that Lactalis made a presentation to the Cubans in the Melia Hotel in Havana indicating the company’s intention to amplify its presence on the Cuban market.

Lactalis’s subsidiary in New York is its only subsidiary in the Americas, and so my guess is that it made wire transfers in connection with the presentation in Havana, probably a transfer to reimburse the French-based employees that made the presentation. The remaining wire transfers may also have been to reimburse non-U.S. employees for expenses that they were incurring in Cuba while marketing Lactalis’s products. Chances are the wires referenced Cuba (even though they were not destined to Cuba) which is how they got picked up by the banks involved and reported to OFAC.

This is, of course, just my guess. Any other ideas welcomed in the comments.