For companies involved in the U.S. defense industry, maintaining compliance with the federal International Traffic in Arms Regulations (ITAR) is essential. It is essential for both managing companies’ regulatory risk and protecting national security, and noncompliance can expose companies (and potentially their owners and executives) to substantial penalties. Along with administrative and civil monetary penalties, this can include loss of defense contract eligibility in some cases.
What does it take to effectively manage ITAR compliance? Effectively managing compliance starts with developing and implementing a custom-tailored ITAR compliance program. As the Directorate of Defense Trade Controls (DDTC) at the U.S. Department of State explains:
“The Office of Defense Trade Controls Compliance strongly advises parties engaged in defense trade to establish and maintain an ITAR/export compliance program. . . . In designing a compliance program[,] you need to understand how your business works to determine your risk areas. Possessing defense articles or technical data raises your risk of an inadvertent violation. Many companies that don’t engage in manufacturing, exporting, or brokering, still maintain compliance programs to reduce the risk of such violations.”
The Directorate of Defense Trade Controls has also published an extensive set of International Traffic in Arms Regulations (ITAR) Compliance Program Guidelines (the “ITAR Compliance Guidelines”), and it notes that, in general, a “good” ITAR compliance program will generally be: (i) clearly documented; (ii) tailored to the business’s specific risks and needs; (iii) regularly reviewed and updated; and, (iv) “fully supported by management.” Crucially, however, while the ITAR Compliance Guidelines are a good place to start, companies cannot rely on this guidance exclusively.
Rather, developing and implementing an effective ITAR compliance program requires a comprehensive and custom-tailored approach that takes into account all pertinent statutory and regulatory requirements. The Directorate of Defense Trade Controls makes clear, stating that the ITAR Compliance Guidelines are intended as an “introduction” to ITAR compliance, and that, “[t]o the extent there is any discrepancy between these guidelines and either the [Arms Export Control Act (AECA)] or the ITAR, the AECA and ITAR will prevail.”
“Effectively managing ITAR compliance is both extremely complicated and extremely important. Documenting ITAR compliance is extremely important as well. To mitigate their risk of noncompliance (and the consequences that can come with it), companies must take an informed, practical, and good-faith approach based on their specific risks and needs.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
With all of this in mind, how can (and should) manufacturers, exporters, brokers, and other companies involved in the U.S. defense industry effectively address their ITAR compliance obligations? Here are seven keys to a successful ITAR compliance program:
Key #1: Management Commitment to ITAR Compliance
These seven keys to a successful ITAR compliance program are based on the “Elements” in the Directorate of Defense Trade Controls’ ITAR Compliance Guidelines. While the ITAR Compliance Guidelines contain eight Elements, we have combined two of these Elements (documentation and recordkeeping) into one.
The first of the ITAR Compliance Guidelines’ Elements is “Management Commitment.” The DDTC takes the position that, “[m]anagement commitment is one of the most important factors in creating a deep-rooted culture of ITAR compliance . . . [and] is essential for fostering a proactive compliance posture.”
The DDTC advises that companies should take several steps to demonstrate a sufficient managerial commitment to effectively managing ITAR compliance. These steps include:
- Creating and maintaining a written ITAR compliance program
- Devoting sufficient resources (including both funding and personnel) to facilitate effective ITAR compliance management
- Creating and maintaining an Export Compliance Management Commitment Statement
Regarding the creation of an Export Compliance Management Commitment Statement, the DDTC advises that this statement should, among other things:
- “Affirm that no export shall be made under any circumstances that violates or potentially violates the ITAR.”
- “Communicate the importance of routine export compliance monitoring and auditing.”
- “Stress the importance of and/or the requirement to report known or suspected violations to the organization’s export compliance department . . . .”
This guidance—to take a top-down approach to compliance—is consistent with guidance from other federal authorities in other areas of federal compliance as well. When facing a federal audit or investigation, being able to use on-hand documentation to demonstrate management’s commitment to compliance can help set the stage for a favorable outcome. Conversely, inability to demonstrate a top-down commitment to compliance can raise red flags that expand both the scope and the risks of the inquiry.
Key #2: Registration, Classification, and Authorizations
Manufacturers, exporters, brokers, and temporary importers are all subject to registration requirements under the ITAR. Registration requirements apply to other companies in certain “unique circumstances” as well. Registering—and maintaining registration on an ongoing basis—is a fundamental component of ITAR compliance.
Another fundamental component of ITAR compliance is proper classification of the defense items that a company manufactures, exports, imports, or brokers. Likewise, companies that are subject to the ITAR may need to obtain licenses, agreements, authorizations, and other forms of approval in order to conduct business. In many cases, classification and authorization management go hand-in-hand, as the nature of a particular defense item (as well as its intended destination) can directly influence what authorizations are required.
Key #3: ITAR Compliance Documentation and Recordkeeping
The Directorate of Defense Trade Controls recommends that all companies that are subject to the ITAR maintain compliance documentation in the form of an ITAR Compliance Manual (which the DDTC refers to as an “ICM”). As explained in Element 8 of the ITAR Compliance Guidelines, “[t]he primary objective of the ICM is to provide all employees with a written, authoritative source that sets forth the organization’s policies and procedures for ITAR compliance and that defines clear and consistent responsibilities and expectations for employees with respect to ITAR compliance.”
The ITAR Compliance Guidelines state that an ITAR Compliance Manual should be “well organized” and “easy to understand,” and then they go on to include several broad substantive recommendations. To address their specific compliance obligations, companies will need to conduct a thorough ITAR compliance needs assessment with the help of experienced outside counsel.
Along with developing a written ITAR Compliance Manual, companies also need to take adequate steps to document their compliance efforts on an ongoing basis. After stating that companies need to, “maintain records regarding the manufacture, acquisition, and disposition of defense articles, including technical data; the provision of defense services; brokering activities; and information on political contributions, fees, and commissions,” the ITAR Compliance Manual goes on to list several specific forms of documentation that companies should be prepared to provide in the event of an external audit or investigation.
Key #4: Detecting, Reporting, and Disclosing ITAR Compliance Violations
Companies’ ITAR compliance programs should include protocols for detecting, reporting, and disclosing both actual and potential ITAR violations as required under the regulations. This is among the more active aspects of managing ITAR compliance. Recordkeeping is crucial here as well, as the government’s auditors or investigators will expect to be able to see that companies have taken the steps necessary to meet their reporting and disclosure obligations.
Key #5: Internal Training on ITAR Compliance
The ITAR Compliance Guidelines highlight the importance of internal training for effectively managing compliance—including both preventing violations and addressing violations when necessary. According to the DDTC, companies’ ITAR training programs should:
- “[Be] tailored to address their specific compliance risks.”
- “[B]e . . . dynamic, up-to-date, and adequately resourced.”
- “[C]learly identify the job-specific export control responsibilities for all employees.”
- “[A]llot sufficient time for employees to complete their training.”
- “[O]ffer training on a recurring basis, at a minimum annually.”
Given the need for companies’ ITAR training programs to address not only their specific risks but also specific roles within their organizations, a custom-tailored approach is key here as well. Experienced ITAR compliance counsel should be able to assist with developing training programs that are adequate for both managing and demonstrating compliance.
Key #6: Internal Risk Assessments Related to ITAR Compliance
The DDTC describes internal risk assessments as “essential tools” for effective ITAR compliance management. Here too, a custom-tailored approach is essential, and companies will want to work with their outside counsel to conduct both regularly scheduled and ad hoc risk assessments as necessary. Not only does working with outside counsel provide the opportunity to ensure a comprehensive and compliant approach, but it also generally ensures that any information uncovered during internal risks assessments will be subject to the attorney-client privilege.
Key #7: Internal Auditing and Compliance Monitoring Related to ITAR Compliance
Internal auditing and compliance monitoring are essential tools for effectively managing ITAR compliance as well. They present similar considerations to conducting internal risk assessments; and, by using these tools to identify potential regulatory risks proactively, companies can both enhance the efficacy of their compliance programs and reduce their likelihood of facing substantial enforcement-related costs.
While these are all key aspects of a successful ITAR compliance program, as discussed above, a custom-tailored approach is essential. As also discussed above, while the ITAR Compliance Guidelines are intended as a useful resource for companies involved in the U.S. defense industry, they are not a substitute for reviewing all pertinent federal statutes and regulations. Ultimately, to effectively manage ITAR compliance, companies must have clear policies that they can systematically implement, audit, and enforce—and they must actually implement, audit, and enforce compliance on an ongoing basis.
