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

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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.