By Tom Reynolds, Export Solutions

Earlier this month, Esterline Technologies Corporation agreed to pay a $20 million civil penalty for alleged violations of the International Traffic in Arms Regulations (ITAR). According to the State Department’s charging letter, these violations span a number of years, and cover various subsidiaries and departments within the company. Although the charges against the company are broad, here are some of the key “takeaways” from this case.

  • Unauthorized Deemed Exports: On several occasions, one of Esterline’s U.S. subsidiaries (Kirkhill-TA Co. or “KTA”) allegedly transferred ITAR-controlled technical data and manufacturing know-how to foreign person employees without the appropriate authorization from DDTC. KTA mistakenly classified this data and knowledge as subject to the EAR. After discovering the problem and voluntarily disclosing to State, KTA implemented new policies and procedures to ensure compliance. However, apparently this new program was not sufficient to correct the problems, because three years later, KTA disclosed unauthorized exports of ITAR-controlled data to foreign person employees from El Salvador, Honduras, India, Mexico and the U.K.
  • Exports Before Approval: Merely submitting a license application to DDTC does not grant the applicant approval to export. In 2008, another Esterline subsidiary (Korry Electronics Company), submitted a Manufacturing License Agreement (MLA) to authorize the foreign manufacture of optical filters used in night vision imaging systems. However, DDTC alleges that Korry began exporting technical data for these filters before the agreement was executed.
  • Exceeding Scope of Approvals: In several instances, DDTC charged Korry with exporting items that were not included in the scope of the company’s approved agreements. This included parts and hardware not covered by certain agreements, as well as technical data from other USML categories not covered by the scope of its agreements.
  • Poor Recordkeeping. Throughout the charging letter, DDTC cites Esterline’s failure to maintain adequate records related to its exports of defense items. So, it’s no surprise that a portion of the company’s consent agreement includes new policies and procedures for tracking and recordkeeping.
  • Part 130 Compliance. On at least one occasion in 2002, Esterline’s Mason Electric Company (“Mason”) subsidiary, allegedly failed to report fees and commissions paid to one of its Brazil sales agents, as required in ITAR § 130.9.
  • Registration Accuracy. After acquiring a company called Memtron, Esterline continued to submit its annual DDTC registration from 2007 until 2010 without including Memtron on its registration renewal paperwork. In the grand scheme of ITAR compliance, this is a relatively minor issue, however, it did result in one additional charge that otherwise would not have occurred.
Cases like these serve as a reminder and provide helpful guidance for corporate counsel, empowered officials and export compliance officers. If your company is serious about avoiding an ITAR penalty, it would do well to learn from other’s mistakes. As the case of Esterline illustrates, having a compliance program is one thing … but having a compliance program that works is what really matters.

Tom Reynolds is the President of Export Solutions, a consultancy firm which specializes in helping companies with import/export compliance.