Notable Penalty Cases

Exporters involved in transactions that require exporting goods controlled by U.S. regulations like the Arms Export Control Act (AECA), and the International Traffic in Arms Regulations (ITAR) are aware, if not all too familiar with the penalties and repercussions of noncompliance.  However, over the last two months notable civil and criminal penalties were handed down by regulatory agencies charged with enforcing these regulations and it bears reiterating what can happen to exporters who violate these regulations.  Exporters in violation of U.S. export-control regulations face severe penalties, but as the cases below will demonstrate, voluntary disclosures can mitigate the possibility that the exporter will lose their exporting privileges.

In early August, Aeroflex Incorporated (Aeroflex) entered into a Consent Agreement with the U.S. Department of State (State Department), which included an $8 million civil penalty, bringing the State Department’s extensive compliance review to a close.  The State Department reviewed hundreds of alleged civil violations of the AECA and ITAR.  The majority of the alleged violations included exports and re-exports of ITAR-controlled electronics, microelectronics, and associated technical data.

According to the State Department, Aeroflex’s alleged violations stemmed from inadequate corporate oversight and a systemic and corporate-wide failure to properly determine export control jurisdiction over commodities, which led to numerous violations during the period of 1999-2009.  Aeroflex business units disclosed hundreds of ITAR violations, with a large percentage of unauthorized exports resulting from the failure to properly establish jurisdiction over defense articles and technical data.

Under Aeroflex’s Consent Agreement, the company agreed to pay a civil penalty of $8 million. However, the State Department agreed to suspend half of the penalty so long as the suspended amount is directed towards corrective measures and compliance costs.  Aeroflex also agreed to bring in an Internal Special Compliance Official to oversee the implementation of the Consent Agreement.  The Special Compliance Official will ensure Aeroflex is compliant with export-control regulations moving forward, and will oversee Aeroflex’s enactment of compliance procedures and training.  The official will also supervise the company’s two compliance audits, which are required under the Agreement.

In August, the State Department also entered into a Consent Agreement with Meggitt-USA, Inc. (Meggitt) under which Meggitt agreed to pay a civil penalty of $25 million to resolve an investigation into alleged violations of the AECA and ITAR.[1]  Under the terms of the 30-month Consent Agreement with the State Department, Meggit agreed to pay a civil penalty of $25 million, with three million to be paid to the State Department and the remainder suspended on the condition that the State Department approves expenditures for remedial compliance costs.  Meggitt voluntarily disclosed its ITAR violations, many of which were the result of a post-acquisition review by Meggitt.

Similar to Aeroflex, Meggitt agreed to have an Internal Special Compliance Official oversee the execution of the consent agreement, which will require the company to implement additional compliance measures such as enhanced procedures, internal audits, a review of jurisdictional commodity determinations, and report on system upgrades and improvements throughout its subsidiaries.

Most notably, the State Department highlighted that both Meggitt and Aeroflex voluntarily disclosed nearly all of their ITAR violations, cooperated with the State Department review, and acknowledged the serious nature of their ITAR violations.  The State Department cited these circumstances as the reason debarment, thereby revoking Meggitt and Aeroflex’s export privileges, was not appropriate.  Both Aeroflex and Meggitt also took significant steps to implement remedial measures including the restructuring of their compliance organization and revising the company-wide ITAR compliance program, which also factored into the State Department’s decision not to revoke both companies’ export privileges.

The lesson to be learned from these cases is clear – voluntary disclosures and taking a proactive approach to corrective measures can go a long way to mitigating penalties and preventing the State Department from revoking an exporter’s privileges.  According to the State Department, voluntarily disclosing violations of the ITAR and implementing remedial measures factor into the State Department’s decision whether or not to place an exporter on the debarred list.  Also notable is the suspension of $22 million of Meggitt’s penalty, which sends a clear message that the State Department wants violators to devote resources to ensuring that violations will not reoccur.

While the State Department only imposed civil penalties on Meggitt and Aeroflex, criminal penalties are also available for ITAR violations, which can include imprisonment and criminal fines, in addition to losing exporting privileges.  Adrian Jesus Reyna will be serving a sentence of 60 months in prison and paying a $1,000 criminal fine after he was convicted of violating AECA.[2]  According to the Department of Commerce, Reyna intentionally and knowingly conspired with persons to willfully export to Mexico several AK-47-type rifles and magazines without a license.

Perhaps more importantly for companies who rely heavily on export transactions, Reyna is now on the U.S. Department of State Debarred List.  Under the EAR, the Director of the Office of Exporter Services may deny the export privileges of any person who has been convicted of a violation of the Export Administration Act, the EAR, the International Emergency Economic Powers Act or any order, license or authorization issued under these acts.  The denial of export privileges may last for a period up to 10 years from the date of the conviction.[3]  Under the EAR, the denial of export privileges bars the subject from participating in any transaction involving the export of a controlled commodity or service.  In Reyna’s case, the Director of Office of Exporter Services imposed the maximum debarment period of 10 years.

In order to avoid criminal penalties such as imprisonment and criminal fines, businesses that rely heavily on exporting goods or services should invest in an export management compliance program to internally investigate possible export violations.  As the consent agreements of both Meggitt and Aeroflex demonstrate, voluntarily disclosing ITAR violations to the State Department is one mitigating factor that will weigh favorably against the State Department placing a violator on the debarred list.  Building a robust export management compliance program will also decrease the number of violations and reduce overall penalties.  An export management compliance program and internal monitoring will also prevent exporters from intentionally violating export laws, which can result in criminal penalties.

By:  Kate Purdom, Associate Attorney


[1] AECA 22 U.S.C. § 2778; ITAR 22 C.F.R. parts 120-130

[2] 22 U.S.C. § 2778

[3] 15 CFR §766.25(a)