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Due to the post-Sept. 11, 2001, focus on national security, enforcement of U.S. export control laws is on the rise. Recognizing the threat that illegal exports pose, the U.S. government no longer views violations of export controls and economic sanctions as merely technical, regulatory or administrative offenses, and enforcement is no longer the province of only a few prosecutors. The government’s message is clear: Companies violating export laws will be prosecuted. Indeed, ITT Corp., once seemingly immune from enforcement as the U.S. Department of Defense’s leading supplier of night-vision equipment, recently paid $100 million in criminal and civil penalties for sending classified night-vision technology abroad. See U.S. v. ITT Corp., Information and Plea Agreement (W.D. Va. March 27, 2007). Also, a leading international bank was fined $80 million for inadequate oversight of a subsidiary that used “special procedures” to avoid U.S. financial restrictions against transactions with Iran and Libya. Further, five InfoCom executives were sentenced to between five and seven years in prison for sending computer equipment to state sponsors of terrorism. As never before, the U.S. government views export controls as critical tools in its arsenal of counterterrorism and counterproliferation weapons. Accordingly, severe consequences may result from their violation. Understanding the risk and implementing effective compliance programs are a company’s first steps toward avoiding violations. Further, when problems are discovered, they should be treated as serious, and companies must commit resources to limit economic and public relations damage. Rigorous internal investigation, informed assessment of the risk and potential liability, and skilled handling of government inquiries from the outset can limit adverse consequences. As the Justice Department recently realigned its counterterrorism and counterproliferation resources to more effectively address the risk posed by illegal exports, a corresponding commitment of corporate resources is needed for companies to avoid being targeted by illegal proliferation networks and government agents investigating such networks. In 2005, approximately 140 countries and 35 known and suspected terrorist organizations targeted U.S. companies for intelligence collection involving sensitive military and dual-use (i.e., suitable for both military and nonmilitary use) technologies (see statement by Michelle Van Cleave, National Counterintelligence Executive, Office of the Director of National Intelligence). Surprisingly, most people targeting U.S. companies take a direct approach to acquiring protected U.S. technologies, often sending mass “requests for information” in hopes of finding someone willing to ignore export-licensing requirements. Others exploit ongoing relationships, solicit marketing services, take advantage of foreign visits and target conventions and the Internet (Annual Report to Congress on Foreign Economic Collection and Industrial Espionage � 2005, Office of the National Counterintelligence Executive), at 7-10. Whatever the approach, nations targeting U.S. companies understand that obtaining U.S. military and dual-use technology is in their national interest, as it undermines the United States’ technological leadership and military dominance by assembling a “body of technological work for domestic industries to exploit.” Technology Collection Trends, supra, at 19. Export controls are administered under three regimes by the Commerce, State and Treasury departments, respectively. Most exports fall under the controls administered by the Commerce Department’s Bureau of Industry and Security (BIS). These controls are contained in the Export Administration Regulations, and generally apply to dual-use goods, although many nondual-use goods are also regulated by BIS and other agencies. See 15 C.F.R. 730-774. In addition, acts that are “deemed to be exports” (e.g., providing software to foreign nationals temporarily in the United States) are also regulated by BIS. Despite its broad reach, the Export Administration Act (EAA) � the Export Administration Regulations’ conventional statutory basis � is nonpermanent legislation that has lapsed on several occasions. See 50 U.S.C. app. 2401-2420. Most recently, the EAA lapsed in August 2001, but was continued by presidential order under the International Emergency Economic Powers Act (IEEPA). See 50 U.S.C. 1701-1706; Exec. Order No. 13222, Aug. 17, 2001, 66 Fed. Reg. 44025 (Aug. 22, 2001) (extended by notice, Aug. 3, 2006, 71 Fed. Reg. 44551 (Aug. 7, 2006)). The State Department’s Directorate of Defense Trade Controls regulates the export of “defense articles” and “defense services.” See “Public Service Plan,”, Directorate of Defense Trade Controls. The Directorate of Defense Trade Controls are found in the International Traffic in Arms Regulations, promulgated under the Arms Export Control Act. 22 U.S.C. 2778-2994. The Treasury Department’s Office of Foreign Assets Control (OFAC) controls exports to countries that have been targeted for economic sanctions and embargoes. Generally, OFAC regulations are issued under authority delegated by the president under the IEEPA, and are found in 31 C.F.R. part 500, et seq. U.S. membership in multilateral control arrangements, such as the Nuclear Suppliers Group, the Australia Group, the Missile Technology Control Regime and the Wassenaar Arrangement, further enhances domestic controls. A new era of enforcement Enforcement of export laws has become a top priority. In 2004, the FBI added its resources to export control enforcement. See 28 C.F.R. 0.85(d), 69 Fed. Reg. 65542. Indeed, BIS, the FBI and other agencies often join forces to investigate violations. Moreover, this year the Justice Department created the National Security Division and announced that its top counterintelligence and counterespionage priority is to pursue violations involving export controls and technology transfers. See Chitra Ragavan, “Justice Department to Focus on Technology Transfer,”. U.S. News & World Report, Feb. 20, 2007. This allowed the National Security Division to combine terrorism, espionage, national security and intelligence experts with investigative tools provided under the Foreign Intelligence and Surveillance Act (which permits, among other things, no-notice searches and wiretaps). See 50 U.S.C. 1801-1811, 1821-29, 1841-46, 1861-62. With increased resources, the number of administrative and criminal cases in this area has exploded. See Wendy Wysong, deputy assistant secretary for export enforcement, BIS, “The Dangerous World of Illegal Exports,” ABA-CLE Publication on White Collar Crime 2007, at R-1 (April 2007) (noting that criminal convictions have quadrupled over the past five years, and that BIS has significantly increased enforcement activities). As noted, in a recent case investigated by the State and Justice departments, ITT, one of the U.S. military’s largest suppliers of sophisticated defense systems, pleaded guilty to felony charges and paid a $100 million penalty for transferring night-vision technology to foreign companies, including companies in the People’s Republic of China. The investigation revealed that ITT knowingly sent technical information to prohibited foreign facilities, and provided false and misleading information to the State Department to conceal years of violations relating to night-vision goggles. In announcing ITT’s guilty plea, the Justice Department warned, “[w]e hope [this] will send a clear message that any corporation who unlawfully sends classified or export-controlled material overseas will be prosecuted and punished.” ITT press release, at 1. Similarly, the Department of Homeland Security cautioned: “Export violations that compromise our technology pose a potentially deadly threat to our military and our nation . . . Today’s case illustrates that corporations engaging in these illegal and reprehensible business practices will pay a heavy price.” Id. Civil penalties are also on the rise. Last year, the civil fine applicable to illegal dual-use export charges was increased from a maximum of $11,000 per violation under the IEEPA to a maximum of $50,000 per violation pursuant to a statutory amendment set forth in the USA Patriot Improvement and Reauthorization Act. See 50 U.S.C. 1705; Amdt. 502 to H.R. 3199. Because BIS charges every violation relating to a particular transaction, a single shipment can result in multiples of the “per violation” penalty amount. Moreover, pending legislation would raise the maximum civil penalty to $250,000 per violation, and raise criminal penalties to up to $1 million and up to 20 years imprisonment for individuals. See S. 1612, 110th Cong. (2007). Other proposed legislation would raise civil penalties to $500,000 per violation, and raise criminal penalties for corporations to the greater of $5 million or 10 times the value of the items exported. See “Fact Sheet: The Export Enforcement Act of 2007″. There are also collateral consequences to consider. For example, convictions under the Arms Export Control Act could result in collateral denial orders of dual-use export privileges and debarment from government contracts. Convictions for embargo violations may trigger civil investigations by BIS or OFAC. Because settlement with one agency does not end a company’s potential liability, all possible collateral consequences must be analyzed in choosing a course of action. An ounce of prevention Given the national security interests involved, and increased focus on and penalties for export control violations, it is critical for companies to implement and maintain meaningful compliance programs. Employees must be trained to recognize, handle and report “red flags” to senior management. At a minimum, effective compliance programs should include senior-level participation, training, internal compliance reviews and mechanisms for reporting suspicious transactions. Moreover, prior to entering into transactions, companies should look for indicators of potential violations, including a buyer’s unwillingness to offer information about the item’s end-use or willingness to pay cash when financing is the norm; incompatibility of the goods with the buyer’s business or the destination country’s technical level; and use of vague delivery dates, abnormal shipping routes and isolated destinations. See “Red Flag Indicators,” BIS. Although, absent red flags, BIS imposes no affirmative duty to inquire beyond customers’ representations, companies should consider the disastrous public relations consequences should their products be discovered in the hands of terrorists. See “Know Your Customer Guidance,” BIS. Further, companies should not intentionally avoid receiving information, as doing so may be an aggravating factor justifying imprisonment and hefty fines. See id.; 50 U.S.C. app. 2410(b); 50 U.S.C. 1705(b). Companies also must monitor for new regulations to avoid unintentional violations. For example, last year BIS labeled certain United Arab Emirates entities as companies that were diverting U.S. goods to Iran, and issued an order requiring a license to ship to those entities. See 71 Fed. Reg. 32272 (June 5, 2006). BIS will sanction U.S. companies that ship to those entities without a license, even if they were unaware of the requirement. Interagency and international cooperation, and increasing effectiveness of investigative techniques, have raised the likelihood that violating companies will be exposed. Moreover, according to Wysong, the “best cases have resulted from inside information from a disgruntled, conscientious, or patriotic employee,” or from “trade competitors who lost a contract” to the violating company. See Wendy Wysong, “Voluntary Self-Disclosure at BIS,” at 6. In short, ignoring violations is a dangerous game. When problematic conduct is detected, companies should promptly commence comprehensive internal investigations, and consider engaging experienced counsel. Because self-disclosure conserves investigative and prosecutorial resources, BIS and other agencies encourage companies to self-report violations. See e.g., “Voluntary Self-Disclosure at BIS,” at 1. BIS, for example, gives “great weight” to self-disclosures when determining what administrative sanction, if any, is warranted. See EAR, 15 C.F.R. 764.5 (2005). Indeed, when companies meet the requirements for voluntary self-disclosure, BIS will often begin the penalty calculation at 50% of the maximum fine (before considering other mitigating factors), and will publicly recognize the self-disclosure. The government has made it eminently plain: Export controls are front and center in the war against terrorism. Companies are on notice: Be proactive, have meaningful compliance and investigate and report problems . . . or else. Mark A. Kirsch, the chairman of Clifford Chance’s U.S. litigation and dispute-resolution practice, based in the firm’s New York office, has significant experience defending complex criminal and civil cases. Jason A. D’Angelo, also in the New York office, is counsel to the firm.

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