International Law Advisory - Deemed Export Risks for Contractors Via Bid Solicitations and Internal Collaboration

Many defense contractors work with items that are subject to the International Traffic in Arms Regulations (ITAR) administered by the Department of State.  In addition to restricting the physical shipment of certain military-related commodities abroad, the ITAR also restrict the flow of certain technical data to foreign nationals in the U.S., as well as its transmission abroad.  Moreover, the ITAR restrict the provision of “defense services” to foreign persons, a term that includes services based on publicly-available information and data.  Unlike the Export Administration Regulations ( EAR) administered by the Department of Commerce,  ITAR restrictions generally apply to all countries, including Canada, regardless of the category of item controlled, although typically the sharing of commodities and technology with Canada is less restricted than it is with other countries.

Recently, General Motors and General Dynamics (in its capacity as successor in interest to certain portions of GM’s defense business) settled an ITAR matter with the Department of State for $20 million.  Numerous additional compliance measures were mandated as part of the settlement -- including, with respect to GM, the appointment of a Special Compliance Official from outside the corporation.  Essentially all of the alleged violations at issue related to improper sharing of technical data.

The application of the ITAR restrictions to the real-world business environment is illustrated by the draft charging letter and consent decree involved in this case. Both documents criticize GM for keeping many presumably unclassified but nonetheless ITAR controlled engineering drawings on a central computer server that was freely accessible, apparently without regarding to export control considerations, to employees throughout the U.S. and abroad.  Moreover, the settlement documents also point to the fact that the GM frequently sent out preliminary engineering drawings -- without proper regard to export controls -- to vendors as part of its procurement bidding process.  Finally, a significant portion of the alleged violations at issue related to otherwise appropriate transmission of data to Canada, but which became illegal because the  persons having access to the data were dual nationals of Canada and of countries to which ITAR-covered exports are proscribed in all instances (e.g., China, Iran and Syria).  Though the Government criticized GM’s handling of this last issue in particular, the point regarding Canadian dual nationality is not intuitively obvious, as American dual citizens or permanent resident aliens are not subject to such deemed export rules under the ITAR.

In the past few years, there have been a number of multi-million dollar ITAR settlements. Almost invariably, however, these matters have involved shipments of commodities, or sharing of technical data, with “controversial” foreign governments or quasi-governmental entities (e.g., certain programs in China).  The GM/GD settlement, however, is particularly significant in that it shows the extent to which enforcement authorities are willing to impose heavy penalties on defense contractors who “leave the window open” when it comes to accessing controlled technical data in collaborative defense programs.  Indeed, the fact that so many of the alleged violations involved Canada, which enjoys a preferred export control status with the United States, shows the extent to which contractors need to have in place vigorous compliance programs to prevent and detect these types of potential infractions.

In terms of immediate lessons learned, one can make the following observations:

• Companies clearly need to be careful when providing foreign nationals access to ITAR-controlled data.  But beyond the fundamental export control implications of such access, companies need to be wary of the “dual nationality” risks of any such access, since the ITAR impose restrictions (and therefore penalties) on the basis of the most restrictive country of citizenship.
• Companies need to recognize that all steps in a supply chain or procurement process are potentially subject to export control disciplines.  While some ITAR exemptions may be applicable (e.g. 22 CFR § 125.4(b)(7), technical data being returned by a US person to the original source of import), US companies need to be cognizant of licensing requirements when providing technical data to foreign persons at any step in the procurement process, even if the technical data will be returned to the US company or the data pertains to a subcomponent or preliminary phase of the larger procurement.

If you have questions about how ITAR controls apply in the supply chain function, methods for managing controlled technical data with foreign national employees, or compliance controls that can be integrated into your subcontracting/purchasing work processes, please contact Andrew Irwin at (202) 429-8177 or Edward Krauland at (202) 429-8083.