DDTC Penalty Underscores Importance of CJ Process, Disclosures, Law Firm Says
The State Department’s recent fine of a U.S. electro-optics equipment manufacturer (see 2202010058) highlighted a range of key takeaways for defense exporters, including the importance of the commodity jurisdiction process and recordkeeping, Torres Trade Law said in a June alert. The consent agreement also underscored the benefits of voluntarily disclosing violations, the firm said, which can significantly mitigate penalties.
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The Directorate of Defense Trade Controls fined Torrey Pines Logic $840,000 earlier this year after it illegally exported or tried to export defense items to several countries, including China and Lebanon (see 2202010058). Torrey Pines specifically exported thermal imaging systems to a range of countries while its commodity jurisdiction request with DDTC was still pending.
DDTC found during the commodity jurisdiction process that the items were controlled, and the exports were therefore illegal. The decision “reinforces the emphasis DDTC is now placing on the export of potentially controlled defense articles after the submission of a CJ request,” Torres Law said.
DDTC took similar action in a 2021 consent agreement with Keysight Technologies, Torres Law said, which illegally exported certain products despite submitting a commodity jurisdiction request a few weeks prior (see 2108090043). Although DDTC has said exporters may continue to export items if they are subject to a jurisdiction request, it “strongly encourages” the exporter to treat the items as if they were controlled under the International Traffic in Arms Regulations, the law firm said. That includes applying for any licenses that would normally be required.
Torres Law also said exporters should “confirm” they aren’t misclassifying their item under a different agency’s jurisdiction, such as the Commerce Department’s Bureau of Industry and Security. “Any complete jurisdiction and classification ‘order of review’ analysis for a dual-use product requires a review of the [U.S. Munitions List] prior to a review for [Export Administration Regulations] controls,” the firm said.
The Torrey Pines penalty also underscores the importance of taking ITAR recordkeeping requirements “seriously,” Torres Law said. In the penalty notice, DDTC specifically pointed to the company’s “insufficient” export records, the firm said, including its failure to record technical data exports, keep an export log or ask for export records from its freight forwarders.
“Even when records were available, they were at times not complete enough to determine product details,” the firm said. “DDTC-registered companies sometimes treat the recordkeeping provisions of the export control regulations as an afterthought, but the TPL case demonstrates that recordkeeping violations are penalized the same as other ITAR violations.”
Although Torrey Pines submitted two voluntary disclosures to DDTC, it failed to disclose others that the agency later found, Torres Law said, which DDTC considered an “aggravating factor” in its penalty calculation. The firm said companies should conduct a five-year review of all exports related to a voluntary disclosure to make sure they are catching all potential violations.
“Although this process can be expensive and arduous, such an undertaking will lead to a more complete voluntary disclosure,” Torres Law said, adding that the goal of all disclosures should be to mitigate any potential penalties. “The more complete the voluntary disclosure, the less likely DDTC is to identify additional violations.”
Exporters should expect to see more DDTC consent agreements soon. Mike Miller, the deputy assistant secretary for defense trade in the Bureau of Political-Military Affairs, said in April the agency is hoping to release several new agreements in the coming months (see 2204290032).