The Trade Compliance Update
By: Jennifer S. Huber and Adam Munitz
November 3, 2016
Welcome to the Trade Compliance Update- a weekly FH+H publication that discusses recent trade compliance matters and the manner in which international businesses can learn from such matters and reduce their legal and regulatory risk profiles.
On October 5th, the U.S. State Department entered into a Consent Agreement with Marc Turi (“Turi”) and Turi Defense Group, Inc. (“TDG”), after alleging that Turi and TDG violated Section 127.1 of the International Traffic in Arms Regulations (“ITAR”) by engaging in the unauthorized brokering of defense articles and submitting a proposal to a proscribed party without the requisite prior approval. The facts outlined in the Proposed Charging Letter are relatively straightforward, but the case as a whole provides a number of interesting takeaways for those that are presently brokering, or are considering brokering, defense articles or defense services.
According to the Proposed Charging Letter, in early 2011 Turi and TDG requested prior approval from the Directorate of Defense Trade Controls (“DDTC”) at the U.S. Department of State to broker the sale $195 million worth of Eastern European arms and ammunition to the Libyan Transitional National Council (the “TNC”). DDTC rejected this request. Soon afterwards, Turi and TDG requested, and received, prior approval from DDTC to broker the sale of $267 million worth of Eastern European arms and ammunition to the Government of Qatar. However, according to the Proposed Charging Letter, Turi and TDG immediately began working with the original equipment manufacturer and others to divert the arms and ammunition that were authorized for Qatar to the TNC. Furthermore, in June, 2011, Turi and TDG sent to Egypt a “Confirmation Letter” for execution by the Prime Minister of the TNC, Mr. Mahmoud Jibril, under which Mr. Jibril would confirm the intended end use of various arms and ammunition that were practically identical to those referenced in the Qatar brokering license. Ultimately, these arms and ammunition were not successfully delivered to Libya, for reasons unspecified in the Proposed Charging Letter.
The Office of Defense Trade Controls Compliance (“DTCC”) alleged that, “by acting to facilitate the transfer of foreign-origin defense articles to Libya without obtaining the required license or written approval from [DDTC][,]” Turi and TDG violated Section 127.1(a)(6) of the ITAR, which stipulates that “it is unlawful…[t]o engage in the business of brokering activities for which registration, a license, or written approval is required by this subchapter without first registering or obtaining the required license or written approval from [DDTC].” DTCC also alleged that Turi and TDG violated Section 127.1(d) of the ITAR on the basis that the Confirmation Letter sent by Turi and TDG to Mr. Jibril constituted a “proposal” to a proscribed country under the ITAR, for which Turi and TDG did not secure prior approval.
Under the terms of the Consent Agreement, Turi and TDG are prohibited “from participating in activities subject to the ITAR” for a period of four years, and are liable for a suspended penalty of $200,000, which will be waived if, when the Consent Agreement expires, Turi and TDG have not breached the Agreement. Notably, neither Turi nor TDG were debarred by the U.S. State Department.
1. The definition “brokering activities” is very broad. Arms brokering is a high-risk endeavor, in part because the regulatory threshold is so low and undefined. One need look no farther than the definition of the term “brokering activities” under ITAR Section 129.2(b) to understand that this is the case: “Brokering activities means any action on behalf of another to facilitate the manufacture, export, permanent transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin.” The non-exclusive list of examples of brokering activities that follows this definition only serves to demonstrate the sheer breadth of the term:
a. Financing, insuring, transporting, or freight forwarding defense articles and defense services; or
b. Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.
As a result of the manner in which this essential term is defined, arms brokers frequently find themselves engaging in brokering activities before they even realize they are doing so. In Turi’s case, the precise nature of his activities is unclear, but the Proposed Charging Letter does make clear that he and TDG “communicated with an Eastern European manufacturer of defense articles, logistics providers, and others in furtherance of diverting to Libya the approved [Qatar] transaction[,]” and subsequently “communicated with persons in Qatar, the United Arab Emirates, and Libya regarding the Libyan weapons deal.”
2. Prior approval is required for proposals to proscribed countries. Manufacturers, exporters, and brokers often make the mistake of assuming that the mere provision of a proposal to a foreign person, where the proposal is devoid of any controlled technical data, is categorically harmless. However, this is not the case, and the extent to which manufacturers, exporters, and brokers can provide proposals to foreign persons without prior approval depends on the nationality of the foreign person and, more specifically, whether he/she is a national of a proscribed country under ITAR Section 126.1. This restriction is outlined in ITAR Section 126.1(e), which stipulates that,
[n]o sale, export, transfer, reexport, or retransfer of, and no proposal or presentation to sell, export, transfer, reexport, or retransfer any defense articles or defense services subject to this subchapter may be made to any country referred to in this section (including the embassies or consulates of such a country, or to any person acting on its behalf, whether in the United States or abroad, without first obtaining a license or written approval of the Directorate of Defense Trade Controls. (Emphasis Added).
Essential here is that the terms “proposal” and “presentation” are broadly defined under the ITAR, and in order to qualify as such a communication must simply be made “in sufficient detail that it would permit an intended purchaser to decide to acquire the article in question or to enter into an agreement…” Note to ITAR Section 126.1(e). As an example, the ITAR stipulates that “communicating information on the equipment’s performance characteristics, price, and probable availability for delivery would be a proposal or presentation requiring a license or other approval.” Id. Thus, in this particular instance, the Confirmation Letter that Turi and TDG sent to Egypt qualified as a proposal, and given that the recipient was a representative of Libya, which remains a proscribed country under Section 126.1, its provision required the prior approval of DDTC.
3. Intent matters, but the U.S. government doesn’t want your policy guidance. In assessing the various factors that mitigated Turi and TDG’s violations of the ITAR, DTCC took into the consideration that Turi and TDG “conveyed to the Department their belief that they had the authority to engage in brokering activities.” That DTCC did so is indicative of the fact that, with respect to these types of matters, the U.S. government does weigh the intent of the parties, and exporters, manufacturers, and brokers engaging in voluntary and directed disclosures should make a point of emphasizing in their submissions to the government that their alleged violations were inadvertent (if in fact that is the case).
That said, exporters, manufacturers, and brokers under governmental scrutiny frequently make the mistake of instead emphasizing that their alleged violations are justifiable on the basis that they are in furtherance of U.S. foreign policy. Indeed, in this case Turi and TDG could have argued that arms exports to the TNC were in the best interest of the U.S. and were consistent with its strategic national security objectives. The U.S. government, however, does not care for such arguments, and its officials are quick to indicate that regulations such as the ITAR are what enshrine, and implement, U.S. policy. Accordingly, exporters, manufacturers, and brokers in a position similar to that of Turi and TDG should resist the temptation to set forth policy-based justifications, and should instead focus on demonstrating that their alleged violations lacked any degree of willfulness or intent.
4. Damages are not required, but their absence helps. When enforcing the ITAR, DTCC is not required to demonstrate that unlawful exports have occurred. Rather, it is sufficient for DTCC to prove that a manufacturer, exporter, or broker has violated the procedural requirements of ITAR, or acted with the intent to do so. Indeed, in this instance DTCC alleged that Turi and TDG violated the ITAR despite the fact that they never actually brokered the sale of defense articles to the TNC. Regardless, DTCC will consider the absence of an actual transfer as a mitigating factor, and it did just that when examining the culpability of Turi and TDG, noting that “the proposal and brokering activities for the transfer of defense articles to Libya did not result in an actual transfer.” Thus, while exporters, manufacturers, and brokers should be conscious of acts and omissions that violate the ITAR whether or not such acts or omissions resulted in unlawful exports, and should not avoid or delay submitting voluntary disclosures that outline such acts or omissions, they should still ensure that their disclosures note, if applicable, that actual exports did not occur.
5. Fully cooperate and disclose, disclose, disclose! As noted in the Proposed Charging Letter, Turi and TDG were credited with having fully cooperated with DTCC during its investigation, and, presumably, the fines imposed by the U.S. government were adjusted accordingly. Exporters, manufacturers, and brokers would be wise to take a similarly cooperative posture during inquiries by DTCC. Turi and TDG did not, however, disclose their violative activities to DTCC, which was, instead made “aware of these unauthorized activities through information provided by the Department of Justice.” Thus, it is quite possible that Turi and TDG could have received even more leniency, and perhaps even have had their export privileges reinstated in less than four years. Exporters, manufacturers, and brokers should take note of this, and should endeavor to proactively make DTCC aware of violations themselves while they still have an opportunity to set the tone for the subsequent inquiry. Otherwise, DTCC may well uncover the violations itself, or with the aid of another U.S. agency, by which point it will have already formed its own opinions and assumed a skeptical investigative posture.
Jennifer S. Huber and Adam Munitz are attorneys in FH+H, PLLC’s International Trade & Transactions Practice. Focusing primarily on the defense, security, and intelligence sectors, Jennifer and Adam help businesses translate their domestic successes into overseas growth, and assist foreign entities with sensitive investments in, and acquisitions of, U.S. businesses. Additional information regarding their capabilities and previous representations can be found here.