By Joseph J. Dyer
Seyfarth Shaw LLP
“That’s a lot of money in anybody’s book.” You can say that again. In March, the Department of Justice announced that ITT Corporation agreed to plead guilty to exporting defense related technical data without required licenses, and to misrepresenting its knowledge of such exports in reports to the State Department in violation of United States export control laws, and to pay a $100 million fine.1 The fine was the largest ever imposed for violation of export control laws – by good measure. The second largest fine to date was $32 million imposed on Hughes Electronics in 2003.2
The ITT case is instructive of several matters – perhaps most significant is the importance of promptly and accurately reporting violations. Exports from the United States are regulated, for the most part, by the International Traffic In Arms Regulations (“ITAR”) and the Export Administration Regulations (“EAR”). The ITAR regulates the export of defense related items.3 The EAR regulates the export of non-defense related items.4 The Department of State administers the ITAR.5 The Department of Commerce administers the EAR.6
The ITAR scheme is simple. With very limited exceptions, one is required to obtain State Department authorization before exporting any defense item.7 Regulating a wider range of items, the EAR scheme is more complex. Whether one is required to obtain Commerce Department authorization before exporting a non-defense items depends on the nature of the item and the country of destination.8 The more sophisticated the item, the less accommodating the country of destination is to United States interests – the more likely it is that authorization is required.
The heart of both sets of regulations is, of course, their prohibition on unauthorized exports. Significant penalties can be imposed on their account.9 In line with that, both Departments, along with related Federal agencies, maintain rigorous enforcement of the laws. At the same time, the Departments’ interests lie more in encouraging compliance than in collecting fines. And this is where the ITT case is particularly instructive.
Perforce, both Departments rely heavily on voluntary compliance and voluntary reporting of violations. Both strongly encourage companies voluntarily to disclose violations. And both consider voluntary disclosure to be a mitigating factor in determining what penalty, if any, to impose on the violator. 10 Federal Sentencing Guidelines provide the same.11
Relying as they do on voluntary compliance, the Departments can take a particularly dim view of companies deliberately masking violations. ITT agreed to plead guilty to exporting night vision technology without authorization to, among other countries, the People’s Republic of China. ITT agreed also to plead guilty to “knowingly and willful omitting material facts from required reports that were necessary to make the statements in the reports not misleading.”12 The statement of facts accompanying the agreement elaborated on the matter. ITT, in voluntarily reporting violations stated that it had “recently discovered” the reported violations, and that it had “[u]pon realizing that it had a compliance issue … [taken] corrective action.”13 In fact, ITT had not “recently discovered” the violations. It had been aware of violations for some years. Nor had ITT taken action to correct its defective compliance “upon realizing” the violations. It had, again, delayed years before taking corrective action.14
Export of night vision technology to China is serious (by contrast, however, Hughes Electronics was fined only $32 million for exporting arguably more sensitive, satellite technology, to the People’s Republic of China).15 One suspects, then, that the government was more concerned that ITT knowingly and willfully misrepresented its disclosure and corrective action than it was about the unauthorized export itself. Relying on voluntary compliance, it is understandable that the government would be especially concerned with persons deliberately misrepresenting their compliance. It appears that this was a prime factor in the Department of Justice demanding such a significant fine.
So, what lessons does the ITT case hold? First, one should be scrupulously accurate in reporting export violations. One should be careful, both in what one says and in what one does not say, to accurately report the violation and the response thereto. One should avoid general characterizations in favor of specific facts. Had ITT, for example, stated the date(s) on which it discovered the violations instead of stating generally that the discoveries were “recent,” it could have avoided, at least, part of the misrepresentation to which it pled guilty.
Second, one should thoroughly investigate violations before finally reporting them (both the ITAR and EAR encourage persons to report violations “immediately” on learning of them, and to follow-up with a final report of the violation after investigating it).16 Unless one thoroughly investigates the violations it is difficult to accurately represent the facts surrounding the violations and the corrective actions that one should take in response thereto (the Departments recognize that the final report, having the benefit of the investigation, may report different facts from those initially reported).
Third, one should act promptly after discovering a possible violation. The longer one delays, the less likely it is that one can thoroughly investigate and accurately report the violations. As time passes, evidence stales. At the least, delay will make the task of investigating and accurately reporting the violation more difficult. And, of course, the longer one delays, the less credible is one’s commitment to compliance.
The good news is that the Departments are more interested in encouraging compliance than in collecting fines. Most voluntary disclosures are resolved – where the violation is thoroughly investigated and accurately reported – with the imposition of no penalties beyond the implementation of corrective action to attempt to avoid future violations. Companies maintaining reasonable compliance procedures and promptly and accurately reporting violations can, therefore, expect to avoid any significant penalties. Companies that don’t should start setting aside reserves for the significant fines that are to come.17
1 Press Release U.S. Department of Justice, ITT Corporation to pay $100 million penalty and plead guilty to illegally exporting secret military data overseas (March 27, 2007). www.usdoj.gov/opa/pr/2007/March/07_nsd_192.html.
2 Renae Merle, Hughes, Boeing Settle with U.S., Washington Post, March 6, 2003, at E1. www.washingtonpost.com/wp-dyn/content/article/2007/03/27/AR2007032702105.html.
3 22 C.F.R. §120.5.
4 15 C.F.R. §§730.3 and 730.4.
5 22 C.F.R. §120.1(a).
6 15 C.F.R. §730.1.
7 22 C.F.R. §§123.1(a), 125.2(a) and 125.3(a).
8 15 C.F.R. Part 738.
9 See 22 C.F.R. §127.3; 15 C.F.R. §764.3.
10 22 C.F.R. §127.12(a); 15 C.F.R. §764.5(a).
11 Federal Sentencing Commission, Guidelines Manual, §5K2.26 (Nov. 2006).
12 United States v. ITT Corporation, No. 07-22 (W.D. Va. 2007), Information at 2.
13 Id. at Deferred Prosecution Agreement, Statement of Facts, Appendix A at 4.
14 supra note 12, at 2.
15 Renae Merle, Hughes, Boeing Settle with U.S., Washington Post, March 6, 2003, at E1. www.washingtonpost.com/wp-dyn/content/article/2007/03/27/AR2007032702105.html.
16 22 C.F.R. §127.12(c)(1). The EAR uses the phrase “as soon as possible.” 15 C.F.R. §765.4(c)(1).
17 Export compliance programs is address in “Export Control Compliance Programs – An Ounce Of Prevention,” Maryland State Bar Association, Business Law section Newsletter (Vol. 6, No. 1, Winter 2002).