Agreements executed under the International Traffic in Arms Regulations ("ITAR") serve as a licensing tool for the transfer of defense articles, technical data, manufacturing know-how, and defense services between a U.S. party and a foreign party. Fulfilling the requirements of those agreements is a critical part of ITAR compliance, as demonstrated by the recent L3Harris Technologies, Inc. ("L3Harris" or "the Company") consent agreement with the U.S. Department of State ("State"), Directorate of Defense Trade Controls ("DDTC").
The ITAR authorizes three types of license agreements: 1) the Technical Assistance Agreement ("TAA"); 2) the Manufacturing License Agreement ("MLA"); and 3) the Warehouse and Distribution Agreement ("WDA"); collectively referred to as "ITAR Agreements."1
Companies in the defense sector are familiar with the submission and approval process of ITAR Agreements imposed by the DDTC, Office of Defense Trade Controls Licensing ("DDTC/DTCL"). But most companies are not as familiar or often neglect the compliance requirements applicable to ITAR Agreements. Whether a company has a small or large volume of ITAR Agreements, managing them can be a difficult task.
The compliance requirements of ITAR Agreements are extensive and complex. Even with the State/DDTC Agreement Guidelines, there are certain ITAR provisions and procedures in the DDTC Agreement Guidelines that industry often overlooks. This article provides details of the "often forgotten" compliance requirements for ITAR Agreements.
Why is Compliance with ITAR Agreements So Important?
The ITAR prescribes certain requirements for ITAR Agreements, and DDTC/DTCL usually includes provisos in the approved ITAR Agreements that also need to be followed. It is imperative that companies have robust and effective export compliance procedures for the maintenance of ITAR Agreements because the failure to abide by the relevant ITAR provisions or provisos can result in ITAR violations. Consequently, companies may be subject to DDTC enforcement actions or criminal or civil penalties. The penalties assessed under the ITAR for export violations are significant (up to $1,000,000 per violation).
Importantly, in the fall of 2019 DDTC entered into a Consent Agreement with L3Harris for alleged violations of the Arms Export Control Act ("AECA") and the ITAR. One of the 131 alleged ITAR violations included in the Proposed Charging Letter was, "Violation of the Terms or Conditions of Licenses and Agreements."2 Specifically, the Company violated the terms and conditions of the TAAs and MLAs, by failing to file: 1) initial export reports;3 2) signed, concluded agreements;4 3) annual status notifications;5 4) a written statement accompanying concluded agreements;6 and 5) annual sales reports;7 in addition to failing to notify DDTC of agreements not concluded.8
Ultimately, L3Harris faced a $13 million civil penalty for the ITAR violations, and the L3Harris Consent Agreement made it clear that DDTC will not hesitate to enforce the compliance requirements for ITAR Agreements.
Compliance Procedures after ITAR Agreement Approval
Once an ITAR Agreement approval is issued, there are several compliance tasks to be completed, including: implement provisos, execute agreements, file notifications and reports with DDTC/DTCL, maintain balances, file amendments, and maintain records.
Most of these compliance requirements are the responsibility of the U.S. applicant, and it is recommended that companies establish written ITAR Agreement procedures to fulfill the required compliance tasks and that they implement the written procedures for each approved ITAR Agreement.
DDTC/DTCL Notifications
Overall, there are specific notifications that need to be submitted to DDTC/DTCL or other government agencies for every ITAR Agreement that has been approved, including:
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An executed agreement and executed agreement cover letter,
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An executed DSP-83 (if applicable),
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A copy of the executed agreement submitted to the Regional Defense Security Service (DSS) Office (if applicable),
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Initial notification of technical data/defense service export, and
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A termination of agreement notice.
There are multiple required DDTC/DTCL Notifications, and a majority are commonly omitted by industry. As further discussed below, L3Harris failed to comply with many of the required DDTC/DTCL Notifications.
Depositing Executed Agreements and Notification Letters
One of the first compliance procedures after an ITAR Agreement is approved is to have all parties sign the agreement. As a reminder, ITAR Agreements must be executed to be in effect, meaning they require the signature of an officer or employee of each party who has the authority to sign contracts.
After the agreement has been fully executed by all the parties, an executed copy of the ITAR Agreement must be electronically filed with DDTC/DTCL within 30 days after it enters into force.9 Note that this is one of the required ITAR Agreement notifications that L3Harris failed to complete. Specifically, L3Harris failed to "file signed TAA and MLA agreements with DDTC."10
The executed copy must be accompanied by a cover letter that includes the applicant registration code, agreement number, and other relevant information. Additionally, for submission of executed MLAs, the cover letter must also include a copy of the license approval and an original and one additional copy of the cover letter that contains the information required under § 124.4(b)(1)-(4) (e.g., identity of foreign countries and parties involved, defense article descriptions and estimated value, third-party transfer restrictions, and other production quantities and disposition). As noted in the Proposed Charging Letter, L3Harris violated this requirement when it failed to "file a written statement accompanying concluded MLA agreements."11
Annual Status Updates (Non-Executed Agreements)
Often, an approved ITAR Agreement is not immediately signed by all the parties. When that happens, the U.S. applicant is usually not aware of their failure to comply with the § 124.4(a) annual status update requirement for non-executed agreements.
When the ITAR Agreement is not executed within one year of approval, the applicant must submit an annual written report to DDTC/DTCL summarizing the status of the agreement (the "Annual Status Report"). The Annual Status Report must be electronically uploaded to the respective license approval (e.g., DSP-5 approval) of the ITAR Agreement. Note that the applicant must continue to submit the Annual Status Report until one of the following requirements is satisfied: 1) the agreement is signed by all the parties (§ 124.4(a)); or 2) a decision is made not to conclude the agreement (§ 124.5).
L3Harris did not meet this often-overlooked Annual Status Report requirement and failed to "fileannual status notifications with DDTC."12
Decision Not to Conclude (DNTC)
Furthermore, pursuant to ITAR § 124.5, if the decision is made that an ITAR Agreement will not be concluded, the applicant must notify DDTC/DTCL within 60 days of that decision via a formal notification letter. The notification letter should include the applicant registration code and ITAR Agreement number and must be electronically uploaded to the respective license approval of the ITAR Agreement. Like L3Harris, most companies are often in violation of the § 124.5 requirement and fail to file the DNTC notice with DDTC.13
Initial Notification of Technical Data/Defense Services Export
ITAR § 123.22(b)(3)(ii) requires that prior to the initial export of technical data or defense services, the applicant notify DDTC/DTCL that exports have begun via a notification letter that must be uploaded to the approved DSP-5 vehicle of either the base agreement or the first amendment under which the transfer of technical data or defense services occurred.14
The Initial Notification of Exports is probably one of the most, if not the most, disregarded compliance requirement involving ITAR Agreements. Companies submit this notification after exports have commenced or fail to submit it entirely because this requirement can easily be overlooked when engineers and other company personnel are not adequately trained in ITAR Agreement compliance requirements. As seen in the L3Harris enforcement case, DDTC will not hesitate to enforce the § 123.22 requirements (per the Proposed Charging Letter, L3Harris failed to file initial exports information15).
Annual Sales Reports for MLAs/WDAs
Pursuant to § 124.9(a)(5) and § 124.14(c)(6), the applicant of an MLA/WDA is required to submit an annual report of sales or other transfers pursuant to the agreement of the licensed articles, by quantity, type, U.S. dollar value, and purchaser or recipient to DDTC/DTCL. When an MLA/WDA is not active in a particular year, a report of "No Sales" is required. As previously discussed, L3Harris failed to file the annual sales reports as required by the ITAR.16
Termination Notice
When ITAR Agreements are set to expire after the 10-year validity period it is very easy for companies to forget one of the last compliance requirements and fail to complete the termination notice.
When the decision has been made to terminate the ITAR Agreement, the U.S. applicant must notify DDTC/DTCL in writing not fewer than 30 days prior to the expiration date of the agreement. The termination letter should be uploaded to the approved license of the base agreement and must include the applicant DDTC registration code and agreement number. The termination notice for an MLA and a WDA must be accompanied by a final sales report summary and a final activity summary, respectively.
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Although most companies – from small businesses to subsidiaries of large parent companies to global corporations – fail to meet ITAR Agreements compliance requirements, the L3Harris Consent Agreement serves as a great reminder that ITAR Agreements compliance should never be taken lightly.
Footnotes
1 All"ITARAgreements"and"agreement"referencesincludetheoriginal/baseagreementsandamendments.
2 ProposedChargingLetter,AllegedViolationsoftheArmsExportControlActandtheInternationalTrafficinArmsRegulationsbyL3HarrisTechnologies,Inc.,UnitedStatesDepartmentofStateBureauofPolitical-MilitaryAffairs(2019)[hereinafter L3HarrisProposedChargingLetter].
3 22C.F.R.§123.22(2020).
4 22C.F.R.§124.4(a)(2020).
5 Id.
6 22C.F.R.§124.4(b)(2020).
7 22C.F.R.§124.9(a)(5)(2020).
8 22C.F.R.§124.5(2020).
9 22C.F.R.§124.4(a).
10 SeeL3HarrisProposedChargingLetterat8,10.
11 Id.
12 Id.
13 Id.
14 Inthefuture,thisnotificationwillbemadeelectronicallyviaFormDS-4071.Theelectronicnotificationsystemhasyettobeimplemented,however,socurrentlythenotificationtoDDTC/DTCLmustbeinwriting.
15 SeeL3HarrisProposedChargingLetterat8,10.
16 Id.
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