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Aeroflex Penalized for ITAR Violations – What Happened and What You Can Learn

By Kerry T. Scarlott and Ian H. Moss
October 2013
Practice: Export Controls & Economic Sanctions
Offices: Boston, Washington DC
People: Ian H. Moss, Eby Pineda-Dorcena, Kerry T. Scarlott

On August 30, 2013, Aeroflex, Inc. (“Aeroflex”), a Plainville NY producer of microelectronic devices, entered into a consent agreement with the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) settling allegations of 158 violations of the International Traffic in Arms Regulations (“ITAR”) and the Arms Export Control Act (“AECA”).  According to an earlier July 25, 2013 charging letter, the DDTC claimed that systemic and corporate-wide failures to properly determine export control jurisdiction over commodities resulted in unauthorized exports and reexports of ITAR controlled microelectronics by Aeroflex, and caused unauthorized exports of ITAR controlled microelectronics by domestic purchasers. Aeroflex agreed to an $8M penalty (with $4M suspended), and committed to extensive remediation activities, including retraining regarding its compliance obligations and two external audits.

Following is a brief overview of the most significant alleged violations and what can be learned from them.

  • Aeroflex Self-Determined Export Control Jurisdiction Incorrectly. Aeroflex self-determined that certain of its radiation hardened microelectronics were subject to the more permissive Export Administration Regulations (“EAR”),1 as opposed to the ITAR.  In doing so, it failed to take into account that the microelectronics in question were parts or components “specially designed or modified” for spacecraft or satellites, and therefore ITAR controlled.
  • Incorrect jurisdiction determinations are the single most common ITAR compliance pitfall. The ITAR controls specifically identified items, such as military aircraft, military optics and satellites, as well as all components, parts, accessories, attachments, and associated equipment specifically designed, modified, configured, or adapted for use with such articles.  In performing a self-determination analysis relative to the control status over an item (ITAR vs. EAR), it is important to understand that any design element — even seemingly inconsequential ones such as a new connector pin configuration — which render the item specific to a military, space, or intelligence application, will likely trigger ITAR control. This can be a difficult concept to comprehend when a product may be, in all other respects, identical to other products used in purely commercial or dual use applications.
  • Aeroflex Relied on Commodity Classification Guidance Under the EAR  in Determining Jurisdiction. Aeroflex received classification guidance from the Department of Commerce that certain of its products were classified under the EAR’s catch-all “EAR99” designation (a low level classification that imparts few export controls).  It appears Aeroflex relied on this guidance as confirmation that the products were subject to the jurisdiction of the Department of Commerce (i.e., EAR), rather than the jurisdiction of the Department of State (i.e., ITAR).  However, as the DDTC noted in its enforcement action, a “Department of Commerce commodity classification is not a jurisdictional determination for purposes of the AECA . . ..  The DDTC commodity jurisdiction [“CJ”] procedure … is the only U.S. government method of determining [jurisdiction].”
  • This is a common error. A commodity classification determination  (commonly referred to as a Commodity Classification Automated Tracking System, or “CCATS”) issued by the Department of Commerce should never be relied upon to confirm jurisdiction.  Only the Department of State has the power and authority to determine jurisdiction.
  •  Aeroflex Received a Commodity Jurisdiction Determination But Did Not Extend the Rationale to its Other Products.  In its response to a 2006 commodity jurisdiction determination request from Aeroflex, DDTC rebutted Aeroflex’s claim that the products were subject to the EAR, noting that the component was specifically designed or modified for use in space and hence controlled under the ITAR.  In its charging letter, DDTC faulted Aeroflex for not disseminating this response to its subsidiaries.  It also faulted Aeroflex for not applying the CJ rationale to its other jurisdiction self-determinations.
  • Although not discussed in the charging letter, this raises the issue of CJ strategy. A CJ determination request submitted on a product known to have been designed or modified for a military, space or intelligence application will likely receive a response that the product is controlled.  The Department of State will often not include in its resulting determination an explanation of its “rationale” for making the determination – thus making it difficult if not impossible to extend the CJ determination to other products, including standard products that may be intended for a dual-use market.  A better approach is to attempt to establish a baseline of EAR control by submitting a CJ on one or more standard products that have purely commercial or dual use applications, and then submit one or more CJs for products that progressively get closer to the ITAR line.  By proceeding in this fashion, the company submitting the CJ requests will obtain a clearer picture of the factors that ultimately trigger ITAR control.
  •  Aeroflex Exported Products Without a License While a CJ was Pending.  The DDTC indicated in its charging letter that it viewed Aeroflex’s unlicensed exports of products that were the subject of a pending CJ as an aggravating factor. 
  • Aeroflex broke the unwritten rule that when a party is uncertain as to the export control status of a product (as is naturally the case when a CJ determination request has been prepared and is pending), it must default to ITAR control until a final determination is made.  The rationale behind the rule is that it is reckless to export a product subject to a pending CJ without obtaining an ITAR export license since the product could well be ITAR controlled.  It bears noting that applying for and obtaining ITAR export licenses while a CJ is pending does not jeopardize the CJ outcome. 
  •  Aeroflex Was Alleged to Have Caused Unauthorized Exports by Domestic Purchasers.  The ITAR makes it unlawful to “conspire to export, import, reexport, retransfer, furnish or cause to be exported … any defense article” without first obtaining a license when one is required.  The DDTC alleged that Aeroflex’s incorrect jurisdiction determination caused domestic purchasers to engage in unauthorized exports.
  • This marks a very expansive view of causation by the DDTC.  It signals to U.S. manufacturers and distributors that they are not insulated from liability simply because they only sell domestically.  The duty to accurately determine export control jurisdiction and classification applies even when domestic sales are at issue.  

Of little solace to Aeroflex, ongoing export control reform efforts (“ECR”) will result in certain items, including many components and parts that are specifically designed for military use, being moved from control under the ITAR to control under the EAR. The first of the new rules goes into effect on October 15, 2013. The ITAR’s broad catch all concepts will be replaced with specific positive control criteria.  If a part or component isn’t identified by the USML criteria then it will be subject to the EAR.  As USML categories are revised, the nebulous “specifically designed or modified,” which was at the heart of many of Aeroflex’s alleged violations, will fade from compliance lexicon.

Unfortunately, a new term—“specially designed”—will become all too familiar as a control criterion in both the ITAR and EAR as a result of ECR.  While jurisdictional determinations will undoubtedly become less subjective, determining whether an item is “specially designed” and hence controlled under the ITAR or the new, and equally stringent, licensing requirements of the CCL 600 series, will still require very careful analysis.

For additional information regarding U.S. export controls, or help with any export control compliance matter, including assistance unraveling the new “specially designed” term as it applies to your business, please contact any of the attorneys in Goulston & Storrs’ Export Controls and Economic Sanctions practice group:

Kerry T. Scarlott
617.574.3572
kscarlott@goulstonstorrs.com

Ian H. Moss
617.574.3515
imoss@goulstonstorrs.com

Eby Pineda-Dorcena
617.574.6573
epinedadorcena@goulstonstorrs.com

 


1In contrast to the ITAR, the EAR controls products (and related technology) designed for commercial or civilian applications, as well as products (and related technology) that have both commercial/civilian and military applications (i.e., dual use items) but that were not specifically designed, modified, adapted or configured in for a military application.

 

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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