International Law Advisory - ITT Corporation Pleads Guilty to Transferring Night Vision Equipment for Foreign Destinations

March 28, 2007

On March 27, 2007, the U.S. Attorney’s Office for the Western District of Virginia publicly announced ITT Corporation’s (“ITT”) agreement to plead guilty to two felony charges, pay a total of $100 million in criminal fines and forfeitures restitution, subject itself to independent monitoring at the cost of ITT, and publicly acknowledge that ITT illegally transferred classified and controlled night vision technology to the People’s Republic of China, Singapore, and the United Kingdom with specific intent to evade U.S. export control laws and the International Traffic in Arms Regulations (“ITAR”) for the company’s financial gain.

According to the U.S. Attorney, John Brownlie, the plea agreement represents the first conviction of a major U.S. defense contractor for violation of the Arms Export Control Act. Mr. Brownlie stated that upon recognizing the full scope of the problems, ITT’s recently appointed CEO, Steven Loranger, “saved ITT from permanent ruin” by ordering a complete internal investigation with new outside counsel and by directing employees to cooperate with the U.S. Government’s investigation upon recognizing the full scope of the problems.

Based on a review of the plea agreement, the case has many nuanced elements, but some possible lessons learned include the following:

the importance of internal compliance personnel to act decisively when instances of infractions are uncovered,
the need for accurate and complete information when making disclosures and license applications to the U.S. Government,
the continuing challenge of managing foreign national employees for purposes of compliance with “deemed” export and re-export requirements,
the care required to ensure compliance with ITAR and NISPOM requirements for the transfer abroad of controlled and classified information, and
the serious manner in which the U.S. Government will address what it perceives to be deliberate and/or deceptive misconduct.

The following is a summary description of some of the highlights of the case, as set forth in the plea agreement and accompanying factual allegation statement:

First, the U.S. Department of Justice (“DOJ”) found that ITT had failed to implement rigorous internal export compliance policies and practices, citing as an example, that an employee reportedly was directed by a manager in 1998 to knowingly violate the ITAR and export night vision equipment without a license from the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). When the employee reported this conduct to higher-level management within ITT, no internal investigation was launched nor was the manager sanctioned; rather, the manager was reportedly promoted to a position responsible for overseeing export compliance.
Second, throughout the 1990s, ITT exported night vision equipment on consignment to foreign customers for purposes of conducting evaluations and tests. ITT failed to keep track of this equipment and certain pieces were lost or misplaced. Upon learning of this problem, ITT submitted a voluntary disclosure to DDTC in May 2000. In October 2004, DDTC entered into a consent agreement with ITT in which the company was fined $8 million, but the matter was not referred for DOJ prosecution. The DOJ’s investigation later alleged that ITT and its outside counsel knew that these problems had existed since at least 1998 (and dated back as far as 1990), but made misleading statements about the timeliness of discovering the problems at issue, omitted material facts, and did not implement corrective actions as outlined in ITT’s earlier voluntary disclosure report.
Third, the DOJ found that ITT knowingly exceeded the scope of a build-to-print export authorization, and instead exported controlled drawings and specifications to “the Singaporean company,” as well as worked collaboratively with the Singaporean company to design and manufacture night vision optical assemblies, which were ITAR-controlled. These problems reportedly were not included in the voluntary disclosure report filed with DDTC in May 2000, even though ITT and its legal counsel at the time were reportedly aware of them.
Fourth, the DOJ concluded that in response to price pressures relating to a Light Interference Filter (“LIF”), which was classified “Secret,” certain ITT personnel allegedly transferred the classified LIF information using deliberately deceptive practices to foreign facilities that were not cleared to received the information, as well as to a proscribed destination, while knowing that the necessary export authorizations had not been obtained. In addition, after the Defense Security Service (“DSS”) had been informed of the transfer of classified information and had launched an investigation, an ITT manager reported compounded the problem by issuing purchase orders for the offshore manufacture of the LIF components and failing to secure the return of classified materials.
Fifth, ITT reportedly engaged in a number of deemed export violations concerning technical data for an Enhanced Night Vision Goggle (“ENVG”) system. For example, the DOJ charged that ITT brought a foreign national employee from a Singapore company to work collaboratively with engineers in ITT’s Roanoke, Virginia, facility for design of an ENVG prototype. Additionally, the Singapore company working with ITT employed two optical designers who were Chinese citizens to work on the ENVG system in Singapore, to whom controlled technical data were retransferred.

Along the same theory, the DOJ also charged that ITT had violated the export control laws by mandating that a U.S. citizen employee be hired by an affiliate of the Singaporean company located in Rochester, New York, who purportedly was used to transfer controlled technical data about the ENVG system to Singapore on behalf of ITT without DDTC authorization.
Finally, the DOJ devised a novel penalty whereby $50 million of the fine must be used by ITT to invest in research and development of advanced night vision technology at the direction and approval of the U.S. Army. Items developed by ITT for the next 5 years under this program will be accorded “Government Purpose Status” and can be shared by the U.S. Government with any competing defense contractor for future contracts. Apart from a $2 million criminal fine, $28 million were also subject to forfeiture, a $20 million fine is to be paid to DDTC, and a special, independent compliance officer is to be appointed.

Should you have any questions regarding this case and its impact, please contact Ed Krauland (ekrauland@steptoe.com; 202-429-8083) or Jack Hayes (jhayes@steptoe.com; 202-429-6491).