Trade Compliance Flash: Notable Observations from the Latest ITAR Consent Agreement
On May 31, 2023, the U.S. Department of State's Directorate of Defense Trade Controls (DDTC) announced that it entered into a consent agreement with VTA Telecom Corporation (VTA). VTA is a U.S.-based subsidiary of a Vietnam telecommunications company with separate media reports indicating that its Vietnamese parent company is connected to Vietnam's Ministry of Defense. DDTC alleges that VTA violated the International Traffic in Arms Regulations (ITAR) by making six unauthorized exports or attempted unauthorized exports of defense articles to Vietnam that are controlled on the U.S. Munitions List (USML). This is the second announced DDTC consent agreement in 2023.
The consent agreement resolves the six alleged violations of the ITAR that took place between June 2015 and July 2016 detailed in the proposed charging letter. These alleged violations include the unauthorized export and the attempted unauthorized export of defense articles to Vietnam, which at time of export was a proscribed country under the ITAR, meaning that it was under a licensing policy of denial. DDTC further alleges that VTA executives were aware that the items were subject to the ITAR and required agency approval prior to export.
The proposed charging letter notes that these violations involved several types of defense articles, including Category XII(a) electro-optical imaging video trackers, Category IV(d)(7) hobby rocket motors, Category IV(h)(20) propellant kits for the rocket motors, Category IV(h)(11) explosive bolts, and Category XIX(c) gas turbine engines. Some of the items are designated as Significant Military Equipment (SME), meaning that pursuant to ITAR section 120.36, the item warrants special export controls given its substantial military utility or capability.
The proposed charging letter also alleges that VTA misrepresented shipping documents to conceal the nature of the items as defense articles and the potential military end-use.
DDTC further describes how the violations stem from a disclosure VTA submitted after the company became aware of a federal law enforcement investigation into alleged criminal export control violations, leading to a search of VTA's California office and arrests of a former vice president and account manager. In response, VTA engaged outside counsel and conducted an internal investigation of the company's activities, which led it to it filing a disclosure with DDTC regarding the alleged ITAR violations.
VTA's internal investigation also led to the submission of a disclosure to the U.S. Department of Commerce's Bureau of Industry and Security (BIS) concerning potential violations of the Export Administration Regulations (EAR). Although not noted in DDTC's enforcement action, in 2021, VTA and BIS settled the alleged EAR violations. The BIS consent agreement imposed a $1,869,372 fine (with $200,000 suspended if no further violations occur during a two-year probation), required spending $25,000 on export control compliance within one year, and required hiring an international director of trade compliance for two years.
The six alleged violations led to DDTC bringing two types of charges. Five of the charges involve the unauthorized exports and attempted unauthorized exports of defense articles to Vietnam. The last charge alleges a single violation of the ITAR arising from VTA knowingly providing false statements on required export control documentation. Although DDTC notes that VTA was not registered as an exporter of defense articles — as required by the ITAR — it did not bring any charges for the failure to register.
Aggravating Factors and Imposed Penalty
DDTC identified several aggravating factors for bringing this enforcement action. First, it notes that Vietnam was a proscribed country under the ITAR at the time of the exports and attempted exports. Second, it took issue with VTA not voluntarily disclosing the violations earlier, as it apparently disclosed the violations only after the company learned of the related federal criminal charges involving its former vice president. Third, it believed that the circumstances demonstrated how VTA's former personnel disregarded the ITAR and that senior management participated in or were aware of the company's disregard of the ITAR.
Those aggravating factors outweighed several mitigating factors that DDTC considered, such as VTA's cooperation with its investigation, entrance into three agreements to toll the statute of limitations, and efforts to remediate its previous conduct and the violations.
The consent agreement, which acknowledges that the company neither admits nor denies the allegations, places VTA under a three-year administrative debarment pursuant to ITAR section 127.7(a), prohibiting VTA from participating directly or indirectly in any ITAR-controlled activities. An administrative debarment may be imposed when there is a sufficiently established basis for a violation and "such a violation is of such a character as to provide a reasonable basis for the [DDTC] to believe that the violator cannot be relied upon to comply with the statute or these rules or regulations in the future." Here, DDTC took the position that it had such a reasonable basis and VTA agreed to be placed under administrative debarment, even though DDTC acknowledged as a mitigating factor that VTA took steps to remediate the prior issues. DDTC published a Federal Register notice to make the public aware that VTA is under administrative debarment.
Notable Observations: Enforcement and Penalty Trends
Disclosures and Cooperation. Even in enforcement actions where egregious circumstances are alleged, DDTC continues to afford benefits to companies who submit voluntary disclosures or who otherwise cooperate with its investigation. Although DDTC apparently did not award credit for VTA's disclosure, it did credit VTA's cooperation with DDTC's investigation. Here, the six alleged violations could have resulted in a maximum fine of $7,200,000. While placing VTA under administrative debarment for ITAR purposes is an extraordinary penalty, it could have been coupled with a sizable fine. By comparison, BIS' enforcement action against VTA in 2021 for similar violations under the EAR imposed a $1,869,372 fine and required further remediation, such as by hiring an international trade compliance director.
No Country Policy Change Consideration. DDTC repeatedly emphasizes in the proposed charging letter that the exports or attempted exports by VTA involved Vietnam, a proscribed country under the ITAR at the time, meaning that Vietnam was under a licensing policy of denial for defense articles and defense services. As DDTC notes, the State Department lifted the ban on lethal sales to Vietnam in May 2016, while some of VTA's conduct was still taking place. The ITAR itself, however, was not specifically revised to remove Vietnam as a proscribed country until September 2016, after the conduct in question. Nevertheless, DDTC did not seem to apply any leniency due to Vietnam's ITAR status change.
For any questions you may have about the potential impact of these developments on your business, contact a member of the Miller & Chevalier team to discuss further.
This alert has been republished in WorldECR.
*Former Miller & Chevalier attorney
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