As we previously described on February 22, 2010, BAE Systems plc (“BAES”) of the United Kingdom entered into anagreement with the US Department of Justice (“DoJ”) to plead guilty to one count of conspiracy to make false statements to the US Government. BAES entered the guilty plea on March 1, 2010 in the US District Court of the District of Columbia and was sentenced to pay a $400 million criminal fine. In combination with other conduct, BAES allegedly violated the Arms Export Control Act (“AECA”), 22 U.S.C. § 2779, and the International Traffic in Arms Regulations (“ITAR”), 22 C.F.R. Part 130, administered by the US Department of State, Directorate of Defense Trade Controls (“DDTC”). This case raises important ITAR compliance issues. The relevant facts from the criminal information are as follows.
- Beginning in 1993, BAES allegedly failed to identify commissions paid to third parties for assistance in soliciting, promoting, or securing the sale of defense articles to foreign armed forces, in contravention of the AECA and ITAR.
- BAES allegedly made, or caused others to make, false, inaccurate, or incomplete statements in arms export license applications to DDTC.
- Such statements allegedly were made in connection with payments by BAES of more than £19,000,000 to a third party, and there was a “high probability” that part of the payments would be used in a foreign government procurement tender process to favor BAES. The payments were not publicly disclosed, and BAES reportedly did not subject the disbursements to internal corporate scrutiny.
- The payments were related to leases of Gripen fighter jets from the Government of Sweden to the armed forces of the Czech Republic in 2001 and Hungary in 2003. Since these jets contained ITAR-controlled defense articles, Sweden was required to apply for and obtain an authorization from DDTC to transfer the aircraft to the Czech Republic and Hungary. However, the fees and commissions were not disclosed to DDTC in the applications made for the licenses because BAES did not inform the applicant of the existence of the payments.
- The criminal information indicates that BAES, as a foreign entity, caused license applicants to make false license applications and also made false statements by failing to inform the applicant or DDTC of fees and commissions paid.
- Also, beginning in the mid-1980s, BAES allegedly provided benefits to a foreign government official and made payments to intermediaries in connection with the sale of Tornado aircraft and support services through the U.K. Ministry of Defense to the Kingdom of Saudi Arabia. In so doing, BAES allegedly failed to comply with representations made to the US Department of Defense in 2000 and 2002 regarding the company’s worldwide anti-corruption program.
By way of background, the AECA and ITAR require that each license application or transmittal letter for a Technical Assistance Agreement or Manufacturing License Agreement valued at $500,000 or more for the export of defense articles or defense services contain a certification that the “applicant” and its “vendors” are in compliance with ITAR obligations regarding payments of political contributions, fees, and commissions. The AECA and ITAR only cover such payments made, or offered or agreed to be made, to solicit, promote, or otherwise secure the conclusion of a sale to or for the use of the armed forces of a foreign country or international organization. A concise summary of Part 130 is provided below.
- 22 C.F.R. § 130.2 defines applicant as any person who applies to DDTC for any required license or approval. Generally speaking, to apply for a license or approval, a person must first be registered with DDTC as a manufacturer, exporter, or broker of defense articles or defense services, although non-US persons who are ineligible to register with DDTC can seek re-export or re-transfer authorizations for items on the US Munitions List.
- 22 C.F.R. § 130.8 defines vendor to include any person who, directly or indirectly, furnishes to an applicant defense articles or services to be delivered or incorporated in defense articles or services to be delivered, as well as distributors or manufacturers of defense articles that are end-items or major components as defined by 22 C.F.R. § 121.8.
- Fees and commissions are defined broadly under 22 C.F.R. § 130.5 to include loans, gifts, donations, or other payments of $1,000 or more made, or offered or agreed to be made, directly or indirectly, in cash or in kind, and whether or not pursuant to a written agreement. Subject to a few exceptions, a fee or commission can include payments to virtually any person, regardless of nationality, made by applicants or vendors, or persons acting on the behalf of applicants or vendors.
- Political contributions under 22 C.F.R. § 130.6 are also similarly defined in a broad fashion, and cover essentially any payment, or any offer or agreement to pay, valued at $1,000 or more made, directly or indirectly, to a foreign political agent or group or a foreign government official or employee.
- Under 22 C.F.R. § 130.9, applicants must inform DDTC whether the applicant or its vendors have paid, or offered or agreed to pay, political contributions aggregating $5,000 or more, and/or fees and commissions aggregating $100,000 or more for any sale. If these thresholds are exceeded, 22 C.F.R. § 130.10 sets forth the specific information that must be provided to DDTC by the applicant. If an applicant certifies to DDTC that these thresholds have not been reached, but then subsequently learns that the applicant itself or its vendors have made payments or offers or agreements to pay exceeding the thresholds, the applicant has 30 days to provide the information specified in 22 C.F.R. § 130.10 to DDTC.
- 22 C.F.R. § 130.12 specifies the “full disclosure” of information that a vendor must provide to an applicant, placing an obligation on: (1) applicants to obtain information from vendors regarding political contributions, fees, or commissions paid in connection with a regulated sale, and (2) vendors to respond in a timely manner – within 20 days – to an applicant’s request for information required under 22 C.F.R. §§ 130.9-10. If the vendor does not wish to provide such information to an applicant because commercial interests may be at risk, a vendor can provide an abbreviated statement to the applicant with a certification that the requested information has been reported directly to DDTC.
In this case, it seems DoJ took the position, at least in part, that BAES was not the applicant, but rather a vendor. Although BAES’ US affiliates were not charged with wrongdoing, Part 130 places an affirmative obligation on the applicant to identify whether and what amount of fees, commissions, or political contributions are being made by vendors in connection with a sale of defense articles or defense services.
In making license or agreement submissions, applicants may believe that neither it nor its vendors have paid, or offered or agreed to pay, political contributions, fees, or commission over specified thresholds in respect of any sale for which a license approval is being requested. Before making such certifications, however, an applicant should be mindful of the need to implement compliance mechanisms and to obtain relevant information for determining whether it – and particularly its vendor(s) – have made or will make applicable fees, commissions, or political contributions for a sale of defense articles or services.
Additionally, Part 130 compliance measures may coincide with compliance policies in place to protect the company against risks under US and foreign anti-bribery laws. Indeed, the BAES settlement provides a reminder of how potential non-compliance with anti-bribery requirements can raise parallel ITAR penalty and/or debarment risks. And while not featured in the BAES settlement, use of intermediaries and payments for such services also must comport with the Part 129 brokering regulations of the ITAR, which are currently in flux.
If required, applicants should consider developing effective procedures for timely reporting specific Part 130 information to DDTC as proscribed, either upon filing the license application or upon learning that certain reporting thresholds have been exceeded during the course of a license’s validity period. The Criminal Information states that applicants and vendors have an obligation to correct any false statements or omissions on previous arms export license applications, i.e., under 22 C.F.R. §§127.1-2. Therefore, a system should be implemented to monitor whether Part 130 reporting thresholds have been exceeded, and to ensure that any previous statements made to DDTC regarding Part 130 are correct or whether they need to be changed. Depending on the organization, these ITAR requirements may require coordination across various corporate functions, which present compliance challenges to manage.