The Raytheon Company recently entered into a consent agreement with the Directorate of Defense Trade Controls (DDTC) of the Department of State settling allegations that it violated the Arms Export Control Act and the International Traffic in Arms Regulations (ITAR) by failing to properly manage license agreements and temporary export and import licenses.
In the consent agreement, published on the DDTC website, Raytheon agreed to pay $8 million in civil penalties and take actions to greatly improve its management of licenses and agreements under the ITAR. Many companies involved in the trade of defense articles and technical data focus on obtaining DDTC-approved license agreements (such as Technical Assistance Agreements and Manufacturing License Agreements) and temporary export and import licenses (DSP-73 and DSP-61 licenses) to carry out international transactions. The Raytheon case illustrates that obtaining agreements and licenses is only half of what is needed to maintain compliance. The other half, which led to the consent agreement in this instance, is less glamorous and frequently overlooked but just as important.
First, we should mention that although Raytheon was the subject of the consent agreement, the issues that caused this action apply to many other companies.
So, an aerospace company drafts and submits license agreements and accompanying temporary licenses to carry out proposed international transactions. The agreements and licenses are approved by DDTC. The company has the agreements executed, provisos implemented, and sends an executed copy to DDTC. The licenses are then deposited with its freight forwarder or customs broker. Is the work done? The Raytheon case illustrates that it has only started.
Let’s look at agreements. Most license agreements under the ITAR are valid for 10 years. A lot can happen in that time period, such as:
- The scope of work can change;
- The value of the agreement may be exceeded;
- The parties to the agreement may be sold, acquired, change their names or be dissolved; and
- The international transaction that brought about the agreement may be completed or terminated.
Any one of these developments can affect an agreement and cause it to be amended, re-baselined or terminated. There are also many maintenance and record-keeping tasks associated with a license agreement. All technical transfers must be recorded. The value of technical data and hardware exported in furtherance of the agreement must be recorded and monitored. There are annual reports associated with Manufacturing License Agreements and Distribution License Agreements that must be filed with DDTC.
Administering a license agreement is not unlike administering a major procurement or contract. There are tasks that must be constantly performed and things to monitor. Miss a step and you can be in serious trouble. Temporary export and import licenses present another set of tasks and things to monitor. The applicant maintains the original license (although many companies have their freight forwarder or customs broker retain the original). The licenses are for a specific quantity and value and valid for no more than four years.
As with license agreements, there are number of things associated with temporary licenses that need to be constantly checked as part of license administration:
- The license balances need to be monitored to ensure they are not exceeded.
- The expiration date must be tracked to ensure that it is not exceeded.
- The licensed articles of each shipment must be described on the license and cannot exceed the available quantities and values on the license.
- For every export on a DSP-61 there must be a previous import of the same article.
- For every import on a DSP-73 there must be a previous export of the same article.
- The export freight forwarder must be shown on the license or attachment. If not, the license must be amended.
- The original license must be presented to U.S. Customs & Border Protection at the time of every export and import.
- The applicant or their agent needs to ensure that U.S. Customs & Border Protection recorded the shipment on the back of the license and that it was done correctly.
- If the license was not presented at the time of each export and import and signed off by U.S. Customs & Border Protection, the applicant may need to file a voluntary disclosure to remedy the problem.
- The parties to the transaction must be shown on the license. If not, the license must be amended or replaced.
- If any of the parties to the license changes its name, the license will need to be amended or replaced.
- If the license will be replaced because it will expire or be used up, the applicant will need to start that process at least three months prior to expiration.
- When the license expires or is used up, the original must be returned to DDTC.
- Finally, the exact location of the original license must be known at all times. If the license is lost, the applicant will need to apply for a replacement as soon as possible.
If any of these things go wrong, it can result in delayed exports and imports and potential seizures and disclosures. Many major companies have dozens of temporary licenses; thus temporary license administration becomes a major task, and a real minefield of compliance issues. In many companies the person who obtained the original license or agreement is not the same person who is responsible for administering the license or agreement. That handoff needs to be clear and well-managed to avoid the difficulties that Raytheon experienced.
So, here’s to the unsung heroes of ITAR compliance, the people who administer the agreements and licenses. Their attention to detail will keep things working smoothly and keep your company out of trouble.
By: Bruce H. Leeds