John Watson Law Group LLC

International Traffic in Arms Regulations (ITAR)

CFIUS

FOCI

While not technically a common issue and not a concern for all but a few companies, this office has knowledge of and personal experience with the ITAR.  Its name can be misleading, because it covers far more than guns, which its name might imply.  It is an extremely technical area of business compliance for those affected companies and individuals.  The penalties for each violation can be staggering, up to $1 million and 10 years in prison per violation.  The ITAR can be found at 22 C.F.R. 120-130.

Here is an oversimplified summary.  The export of goods from the U.S. is controlled by the Commerce Department for most goods, but the State Department for certain goods and services.  The ITAR contains what is called the U.S. Munitions List.  This describes the items and services that are covered under the ITAR.  It covers, for example, certain guns, ammunition, explosives, chemicals, radar, communications, submarine technology, missile technology, weapons sighting and ranging systems, night vision technology, etc.

Certain services are also covered, such as some types of military training.  Brokers involved in facilitating the export of covered items are also covered.

Those involved in the manufacture, sale, import and export of covered items must register with the Directorate of Defense Trade Controls under the State Department.  A registration is required before one can apply for an export license, so the registration should be accomplished before the potential sale, else there will be an unnecessary delay. 

If a company is uncertain whether an item is covered, it can file a Commodity Jurisdiction Request.  This will enable Commerce and/or State to make a classification of the item(s) in question.  While 60 days is the targeted time for a response to a CJ request, the average time in 2007 was just over 100 days.

One of the biggest caveats is understanding the broad definition of an export.  For example, if you have a covered item and you disclose technical information, as defined in the ITAR, about the item to a foreign person, even in your own office in the U.S., an export has occurred.  Even a posting of such information on your website can be an export.  If you have a foreign affiliate, or even a foreign parent company, you may have to limit their access to certain parts of your facility and technical information as to some items. 

I was previously a part owner in a Georgia company involved with developing long range night vision systems.  The company was sold to a Canadian entity.  We tested a component that came under the ITAR.  The operator's manual had ITAR warnings stamped on its cover and inside.  We had to be careful not to let the Canadian principal even hold that manual, much less allow him to read it.  To have done otherwise could have constituted an export.

 When we sold the company to the Canadian entity, we had to get prior approval from the Committee on Foreign Investment in the United States (“CFIUS”).  If a company involved in matters that MAY affect national security is sold to a foreign owned or foreign controlled entity, the President must approve the sale.  The President delegates this approval process to the CFIUS, which is headed by the Treasury Department.  Its investigations are confidential.

This is absolutely an area that demands close compliance and a thorough knowledge and an in depth understanding of the pitfalls of the ITAR.  Penalties for violations can be stiff: up to $1 million and/or ten years per violation.  In addition, violators can be debarred rom further government contracts.

Another area of caution emanates from what is called the Foreign Ownership Control and Influence laws, or FOCI.  This, too, is an extremely complex area.  For example, if a company has as little as 5% foreign ownership, it can be deemed to be foreign influenced.  If FOCI comes into play, such a company may be prevented from getting sensitive US government contracts.  There are specials ways to be excepted under FOCI, such as a Special Security Agreement, whereby the company sets up a separate government approved American board of directors to exclusively oversee all such contracts.

These regulations were promulgated to protect the national security of this country, and enforcement is understandably strict.  Extreme caution is urged.

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