New York Company Settles AECA and ITAR Violations for $8M after Making Voluntary Self-Disclosures: The Cost of Failing to Properly Determine Export Control Jurisdiction
A Long Island, New York company, Aeroflex, Inc., has entered into an $8 million settlement with the U.S. Department of State for an estimated 158 alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).
According to the nearly 18-page long Proposed Charging Letter, the Department considered the series of voluntary disclosures submitted by the company and its remedial compliance measures as “significant mitigating factors” in deciding the charges to pursue. The Department, however, found that there were significant national security interests involved and systemic and longstanding violations, including improper product classifications, and decided to charge the company with an estimated 158 violations for unauthorized exports based on information contained in the voluntary disclosures.
The Department found that the “violations were caused by inadequate corporate oversight and demonstrate systemic and corporate-wide failure to properly determine export control jurisdiction over commodities,” leading to “the unauthorized exports and re-exports of ITAR-controlled electronics, microelectronics, and associated technical data; and caused unauthorized exports of ITAR-controlled microelectronics by domestic purchasers.”
The 158 alleged violations included: 32 unauthorized exports of ITAR-controlled microelectronics and electronics, including to NATO and other allied countries; 96 unauthorized exports of ITAR-controlled microelectronics to China; causing 18 unauthorized exports of defense articles when the company and its subsidiaries “sold ITAR-controlled radiation tolerant multipurpose transceivers to domestic buyers who exported the transceivers without Department authorization,” due to Aeroflex’s incorrect jurisdiction determination; causing 7 unauthorized exports of defense articles to China by exporting “ITAR-controlled microelectronics to foreign entities who then re-exported these defense articles to the People’s Republic of China without Department authorization,” again due to making incorrect jurisdiction determinations; causing an unauthorized export of defense articles when it sold ITAR-controlled integrated circuits to the UAE for end-use on satellite projects in India, knowing the items would be re-exported without Department authorization; and misused the ITAR Canadian exemption 4 times when it exported radiation hardened microelectronics to Canada without Department authorization.
Despite the company-wide failures noted in the Proposed Charging Letter, Aeroflex and its subsidiaries apparently did make some efforts at export controls compliance – they were just badly misguided. The company apparently relied primarily on “commodity classification guidance from the Department of Commerce in reviewing the export control status of its microelectronics and electronics,” but failed to understand that Commerce can only properly classify items and technology that are subject to the Export Administration Regulations (EAR).
In other words, Aeroflex often skipped over the critical first-step in the export control analysis which is to determine jurisdiction over the commodities, technology, and software involved – whether jurisdiction lies with the Department of State or the Department of Commerce. Only after this determination is made, can classification be determined. The Proposed Charging Letter noted that while “companies may self-classify an article or service, it is to their advantage to seek a [Commodity Jurisdiction] CJ determination where a company has doubts” about whether an article or service is covered by the U.S. Munitions List and, therefore, falls under the jurisdiction of the Department of State.
Making the proper jurisdiction determination is highlighted not only by this settlement, but by Export Control Reform (ECR), which, in a little more than 60 days, will cause a shift in jurisdiction from the Department of State to the Department of Commerce for certain aircraft parts and components and gas turbine engines. Companies should be well into their reviews of how ECR will impact their exports. And as the Aeroflex settlement shows, incomplete or incorrect analyses of jurisdiction can lead to costly violations. Companies should not assume that jurisdiction will shift for their items and technologies under ECR. Whether affected by ECR or not, companies should use this settlement as a reminder to review jurisdiction regularly or to perform that in-depth analysis for the first time before “systemic and longstanding violations” occur. There really are no short-cuts to be taken with export controls.