Export Control Violations Just Got a Lot More Expensive

By George W. Thompson

Increased Penalties

Politicians keep saying “America Needs a Raise”, but this probably is not what they have in mind. The State and Commerce Departments have announced inflation adjustments to their civil monetary penalties, including for violations of the International Traffic in Arms Regulations and the Export Administration Regulations. The maximum penalties for violating either set of regulations will increase measurably, with that for most ITAR matters to more than double.

Here’s the background. By statute, federal regulatory agencies must adjust the amount of their maximum authorized penalties for inflation on a quadrennial basis, subject to a 10 percent limit. A 2015 amendment changed the standard, to require a one-time “catch-up” adjustment so that current penalties more accurately reflect the past rate of inflation. Future adjustments must be made on an annual basis.

To Infinity and Beyond

Commerce and State have duly calculated the required increases by applying an inflation multiplier to the current penalties; their Federal Register notices are respectively available here and here.

For ITAR violations, State noted that the maximum penalty under the section 38(e) of the Arms Export Control Act was set at $500,000 per violation in 1985. The inflation multiplier from then to now is 2.18802, so the per-violation maximum penalty is $1,094,010 as of the August 1, 2016 effective date. Section 38(e), which applies to unauthorized exports of defense articles, is the basis for most ITAR penalties. Penalties for violations of AECA section 39A(c) (prohibition on incentive payments) will jump from $500,000 to $795,445, and for section 40(k) (prohibition on transactions with countries supporting acts of international terrorism) from $500,000 to $946,805.

The Directorate of Defense Trade Controls provided further guidance in a Web Notice (available here) DDTC confirmed that the new amount would apply to penalties assessed after the effective date, regardless of when the violation occurred. Thus, exporters and other parties with pending ITAR cases should be mindful that their potential exposure is now much higher than before.

Penalties under the Chemical Weapons Convention Act increased as well, from $25,000 to $36,256 for inspection-related violations and $5,000 to $7,251 for record-keeping violations.

State’s changes will be effective on August 1, 2016.

Ouch Indeed

Commerce took a different approach than State, announcing its increases as an interim final rule effective on July 7, 2016, and inviting public comments by that date. Penalties imposed by BIS and the Census Bureau are increased as follows:

(b) Bureau of Industry and Security.

(1) 15 U.S.C. 5408(b)(1), Fastener Quality Act (1990), violation, maximum from $32,500 to $44,539.

(2) 22 U.S.C. 6761(a)(1)(A), Chemical Weapons Convention Implementation Act (1998), violation, maximum from $25,000 to $36,256.

(3) 22 U.S.C. 6761(a)(l)(B), Chemical Weapons Convention Implementation Act (1998), violation, maximum from $5,000 to $7,251.

(4) 50 U.S.C. 1705(b), International Emergency Economic Powers Act (2007), violation, maximum $284,582.

(5) 22 U.S.C. 8142(a), United States Additional Protocol Implementation Act (2006), violation, maximum from $27,500 to $29,464.

(c) Census Bureau. (1) 13 U.S.C. 304, Collection of Foreign Trade Statistics (2002), each day’s delinquency of a violation; total of not to exceed maximum violation, from $1,000 to $1,312; maximum per violation, from $10,000 to $13,118.

(2) 13 U.S.C. 305(b), Collection of Foreign Trade Statistics (2002), violation, maximum from $10,000 to $13,118.

Commerce also announced increased penalties for violations relating to foreign-trade zones. Additionally, Commerce, State and other federal agencies are increasing their penalties for false claims, so government contractors will be affected by these changes too.

Exporters and other parties subject to these statutes now face significantly greater liability for violations, a point they should take into account in crafting their compliance programs. It doesn’t take a cynic to expect that the export control agencies will use the prospect of higher penalties to negotiate less favorable (to exporters) violation settlements. If compliance was an imperative before, it is doubly so now.


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