International Law Advisory - State Department Amends Voluntary Disclosure Procedures for ITAR Infractions

The US Department of State, Directorate of Defense Trade Controls (“DDTC”), effective today, has amended certain voluntary disclosure provisions and procedures in Part 127 of the International Traffic in Arms Regulations (“ITAR”).  DDTC maintains and encourages a voluntary disclosure program for industry to report violations of the ITAR, thereby resulting in mitigation of enforcement action relating to the disclosed infractions.  The final promulgated rule, at 72 Fed. Reg. 70777-70779, stipulates that failure to submit a full and timely disclosure may result in a decision by DDTC not to consider the initial notification of a voluntary disclosure as a mitigating factor in determining the appropriate disposition of the violation.

More specifically, the regulatory changes are as follows:

• DDTC has now established a 60-calendar day deadline, triggered by an initial notification of an infraction, to submit a final, complete voluntary disclosure report.  Failure to meet this deadline will lead DDTC to deem the initial notification as not a voluntary disclosure.
• An empowered official or senior officer of the disclosing party can request an extension to file the full report, but DDTC may require a certification in writing that the final and complete voluntary disclosure will be submitted by a certain date. 
• A request for extension must explain why the 60-day deadline cannot be met, and specifically what information required for a voluntary disclosure report needs to be collected during the extension. 
• Complete identification information must be provided in the report about all persons known or suspected to be involved in the activities giving rise to the violation, such as name(s), mailing, shipping, and e-mail address(es), telephone and fax numbers, and any other known identifying information. 
• Any corrective actions and compliance initiatives implemented and described in the report must be directly in response to the violation(s) discussed in the voluntary disclosure, and designed to deter that particular violation from occurring again. 
• A senior officer of the party may be required by DDTC to certify (to the best knowledge or belief of that person) that all representations are accurate and truthful where the violation is a major violation, reveals a systemic pattern of violations, or reflects the absence of an effective export compliance program.

DDTC’s stated goal in making these clarifications and changes is to ensure timely submissions of voluntary disclosures.  An unstated policy rationale is that DDTC likely is concerned that parties submit an initial notification letter, but then take a long period of time to file the full report, which may be interpreted as failing to prioritize internal investigations, full reports, or corrective action.  DDTC may also be concerned that the details in full disclosures are somewhat stale if there is a long delay in filing a full report.

Based on these regulatory changes to this rule, companies may consider the following options and risks.

First, if it is imperative to make an initial disclosure, such as a need to seek authorization to continue activity that is the subject of the disclosure, the nature of the infraction is such that national security or other U.S. interests require immediate notification to DDTC or other agencies of the U.S. Government, or there is a concern with being disqualified from the voluntary disclosure program absent an initial notification, then once the notification letter is submitted, sufficient resources (in-house or external) must be allocated to investigate, correct, mitigate, and report the circumstances to DDTC in an expeditious manner.  It is possible that an extension period can be negotiated with DDTC, and one might consider noting in the initial notification letter the likely need for an extension if it is obvious one will be needed.  But failure to file a full report in a timely fashion could cause the initial letter not to be viewed as a factor of mitigation.  Furthermore, if the letter indicates a pattern of violations or a substantial problem, DDTC may decide that senior management must certify the final and complete voluntary disclosure when submitted, which can add review time to the final disclosure effort.

Second, if one discovers a violation and the circumstances warrant a lengthy investigation (e.g., complex issue; many parties must be interviewed or are located abroad; significant and effective corrective actions must be implemented), one may need to decide to not file an initial notification letter until the matter is far enough advanced that the full disclosure report deadline can be met.  This course, nevertheless, could engender a risk of losing voluntary disclosure credit.

Third, 22 C.F.R. Part 127(c)(1) states that parties “should” submit an initial notification letter, so arguably, it is not mandatory (but recommended by DDTC) that such a letter be filed.  Thus, the option appears to remain to simply disclose voluntarily the matter in full once the investigation is complete.  Of course, if no initial notification letter is submitted, or one waits to file the report until the investigation is complete and finalized, there could be risks associated with the infraction being independently brought to the attention of the U.S. Government, or risks to important interests of the government due to an absence of a notification.

Other observations and questions about the notice include whether DDTC will grant extensions that are required not as a result of further fact investigation, but as a result of close internal review of the facts, internal legal assessments, consideration of corrective measures, or logistical constraints in completing the preparation of the report and submission.  In addition, the notice does not indicate if the new 60-day deadline or procedures will be applied to existing notifications, but one would believe the most reasonable approach would be to make these changes prospective only.

If you have any questions about these changes and their implications, please contact Edward Krauland at 202.429.8083 or Jack Hayes at 202.429.6491.