The State Department's Directorate of Defense Trade Controls ("DDTC") published its third consent agreement of the year on August 28, 2023. This consent agreement is part of an administrative settlement with Island Pyrochemical Industries Corporation ("IPI")1 involving three alleged violations of the Arms Export Control Act ("AECA") and the International Traffic in Arms Regulations ("ITAR"). Specifically, IPI engaged in unauthorized brokering activities related to the transfer of ammonium perchlorate ("APC")2 from an entity from China, a proscribed country under §126.1 of the ITAR, to a Brazilian company. In addition, IPI misrepresented the roles of the Chinese and Brazilian entities and falsely stated that it was the manufacturer of APC on DSP-5 license applications.
Notably, IPI did not voluntarily disclose these alleged violations. Instead, the violations were reported pursuant to a Directed Disclosure issued by DDTC. The proposed charging letter states that the following were considered as aggravating factors in the case: the lack of voluntary disclosure, the fact that certain violations involved false statements, misrepresentations, omissions of material facts, and a state-owned corporation of the PRC, the fact that licenses would not have been approved, and the company's disregard for export compliance rules. DDTC considered IPI's cooperation during the Department's investigation (including entering into a tolling agreement), and implementation of certain remedial measures as mitigating factors.
As part of the consent agreement, the company must pay an aggregate civil penalty of $850,000. IPI must also conduct an internal review of ITAR compliance resources and ensure sufficient resources are dedicated to compliance within 90 days. The bullet points below highlight some of the additional actions IPI has been directed to take.
- IPI must appoint a Special Compliance Officer ("SCO") to monitor the company's ITAR compliance program. The SCO must direct special attention to certain areas of the program including policies and procedures related to preventing, detecting, and reporting violations, screening and control of persons who are not authorized to access ITAR controlled items, ensuring the physical security of facilities, and maintaining appropriate records.
- The SCO must oversee specific areas including IPI's corporate oversight of ITAR compliance and enhancing incorporation of ITAR compliance into IPI's management business plans at the senior executive level.
- Implement certain compliance training procedures to ensure all employees with work related to controlled items are familiar with the AECA and ITAR. Supervisors and senior managers must also be knowledgeable about the policies and principles of the AECA and ITAR. In addition, IPI must maintain records of compliance training including the names of trained employees, trainer names, and the level and area of training received.
- Implement an automated export compliance system to track export requests, improve IPI's ability to monitor export activity, and identify technical data and technical assistance to be disclosed to foreign employees. The system will also include a procedure for notifying users of ITAR requirements for electronic transmissions of ITAR controlled technical data.
- Review classifications of hardware and/or software related to IPI's ITAR-regulated operating divisions. IPI must also review classifications of items prior to their export, re-export, or transfer.
Importantly, the directed actions listed above are helpful measures any company can take to ensure compliance with U.S. export controls. Maintaining adequate export compliance programs, facilitating compliance training for employees, and ensuring there is proper corporate oversight of export compliance programs can help save a company from becoming the next subject of an enforcement action by DDTC.
Footnotes
1. Island Pyrochemical Industries Corporation is a manufacturer and supplier of specialty chemicals and related materials. The company, headquartered in Mineola, New York, is a small, privately held, corporation with less than 100 employees.
2. Ammonium Perchlorate is an explosive and energetic materials oxidizer primarily used as a rocket propellant. APC is controlled under Category V(d)(2) of the United States Ammunitions List (“USML”).
Originally published 09 February, 2023
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