In the international arms trade world, doing business as a defense contractor, broker, or even a supply chain service provider is like walking a tightrope. Just one misstep and you’ll find yourself in steep monetary fines, loss of business, or in the worst case scenario, imprisonment. Unfortunately, International Traffic in Arms Regulations (ITAR) violations are all too real for entities that end up with a breach of the provisions of the regulation. Take, for instance, the ITAR brokering violation case in 2022.
A Chinese US businessman was fined with imprisonment for violating the Brokering Regulation under ITAR Part 129. The offender operated as a broker for exporting defense-related items on the US Munitions List (USML) without registering as a broker with the State Department or obtaining a valid license - a condition under the ITAR Brokering Regulation for entities engaged in brokering activities.
In our previous blog, ITAR Compliance & ITAR Compliance Checklist, we’ve discussed the ITAR challenges, the primary responsibilities of the controllers, and best practices in great detail. This blog will focus on the various types of ITAR violations and the fatal consequences for businesses dealing in defense-related military goods and services.
Who Should Comply - An Overview
Our previous blog, ITAR Compliance, extensively discussed the entities that must follow ITAR regulations. To summarize, ITAR applies to entities that deal in defense-related military goods, services, and documentation. For instance, ITAR applies to defense item manufacturers, exporters, brokers, distributors, contractors, third-party suppliers, and even defense-related hardware or software providers.
As a basic yet important rule, the entity must be a US person, which according to 22 CFR § 120.62, is someone:
“who is a lawful permanent resident as defined by 8 U.S.C. 1101(a)(20), or who is a protected individual as defined by 8 U.S.C. 1324b(a)(3). It also means any corporation, business association, partnership, society, trust, or any other entity, organization, or group that is incorporated to do business in the United States. It also includes any governmental (Federal, state, or local) entity. It does not include any foreign person as defined in § 120.63.”
The United States Munitions List (USML) catalogs all 21 categories of military items, services, and documents that are subject to ITAR. If a defense-related item isn’t listed in the USML, then it is highly likely that it is subject to Export Administration Regulation (EAR).
5 Common Types of ITAR Violations
ITAR is a comprehensive regulation on the trade, export, or import of military gear, items, weapons, or related technical data. However, no matter the strictness of the regulation, violations are bound to happen in one way or another. You could be in steep fines and penalties if you are not careful or knowledgeable of ITAR violations. Let’s take a look at some of the common types of violations under ITAR.
1. Accidental Violations
It is imperative that entities dealing in military-grade products and services properly train their employees regarding ITAR compliance obligations. In fact, organizations must ensure that their operations and processes are aligned with the regulatory guidelines. But no matter how careful one could be, accidental violations are bound to happen.
Suppose that an appliance manufacturer deals in producing appliances for both domestic and military purposes and asks one of its engineers to create a domestic product. However, due to some misunderstandings or technical mishaps, the engineer integrates military-related data into the domestic product. Ultimately, the manufacturer exports the finished product outside the US.
Unbeknownst to them, this export of a product with defense-related technical data is a breach of ITAR. Even though the violation is accidental, it carries serious consequences.
2. Willful Failure to Comply
An Accidental breach can happen to anyone for several reasons, such as lack of due diligence or supervision, etc. However, in some cases, some businesses knowingly do not adhere to the regulations due to many reasons. For instance, an exporter might want to ditch the red tape or the demanding registration and licensing processes. Some businesses do not want to spend on adequate security measures. And in rare cases, the perpetrator may have a malicious intention to cause harm to the country.
Regardless of the reasons, willful failure to comply has dire consequences, as seen in the Chinese US businessman case we discussed earlier.
3. Failure to Register Or Obtain License
The manufacturing, brokering, exporting, temporary importing, and even distribution of military-related items, products, or services is prohibited without proper registration and prior approval or licensing. The business must first register with the Department of State, Directorate of Defense Trade Controls (DDTC) and get approvals for processing and export before transferring the product or its technical data to any foreign country.
4. Omission of Facts in Documents
Some companies intentionally omit factual information to get around ITAR compliance. This omission of facts can have dire consequences, which may lead to incarceration. Suppose that a manufacturer receives a bulk manufacturing order of military equipment from another company. However, the other company is in a country or region where the US bans the export, import, or distribution of their military-related items. To get around this problem, the manufacturer shows in its report that the customer resides in a country that is not subject to the US embargo. Such omission of facts is detrimental to the manufacturer and the US.
5. Hire Foreign Employees
There are many reasons why hiring foreign employees in companies that deal with military-related items can affect ITAR compliance. For starters, 22 CFR § 120.62 clearly indicates that the person or entity must be a US person to access, export, or import ITAR data. For ITAR compliance, an entity must have a robust compliance program, including employee background checks, training, etc.
Dreadful Consequences of ITAR Violations
It is important to note that non-compliance with the ITAR may have serious consequences for individuals and entities that deal with defense-related goods and services.
Civil Penalties
Entities and individuals alike that violate any provision of ITAR are subject to civil fines and penalties. These fines may range up to 1.2 million dollars in violation.
Criminal Penalties
Similarly, some violations are more harmful than others. Hence, any individual found to be involved in such violations may experience harsher penalties, such as a fine of up to 1 million dollars or imprisonment for up to 20 years or both.
Loss of Export License
Monetary loss isn’t the only thing one should consider while committing violations of the provisions of ITAR. Organizations that violate any provision of ITAR may lose their export license. The export license is the second important requirement after registration if a company wishes to export defense-related items outside the country. If a company loses its license, it can face detrimental consequences, such as loss of revenue or business altogether.
Declining Customer Trust
Violations or regulatory breaches can have a detrimental effect on the reputation of the business. It is critical to understand that customers trust a company if the company has a reputable standing in the market. However, if you are a known violator, you lose customer trust and some serious clients.
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ITAR compliance is necessary for every organization that manufactures or distributes military articles or data. The world’s renowned enterprises leverage Securiti’s DataAI Command Platform to gain comprehensive visibility of all their sensitive data and establish controls across security, privacy, governance, and compliance. A unified framework enables businesses to eliminate the cost and complexities of cloud data management and protection.
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