Companies in the defense industry increasingly are being asked by their customers whether they are “ITAR Compliant” and if they can document this. Many small and mid-sized contractors and suppliers do not know how to respond to these requests, and how to respond can have important consequences for these companies.
By way of background, the International Traffic In Arms Regulations (ITAR) are the State Department regulations that apply to the manufacture and transfer of defense products, defense services and technical data. There is a major concern within the U.S. Government that, while large prime contractors have strong ITAR compliance, many mid-sized and small companies in the defense supply chain do not, and that this gap creates significant national security risks for the U.S.
These issues apply both to companies with direct contracts on defense projects as well as independent upstream suppliers of parts, components, services and software that are ultimately used in the defense sector.
The agencies have taken a number of steps to address this risk including: (i) adopting specialized clauses in DOD contracts mandating that contractors comply with ITAR requirements and flow this requirement down to their subcontractors (see for example DFARS §225.79 and 252.225.7048); and (ii) initiating ITAR enforcement cases targeted specifically at small/mid-sized companies. (See for example our article: “Recent ITAR Case Sends Important Message to Small/Midsized Government Contractors”). These steps are intended to force ITAR compliance throughout the entire defense supply chain.
Many prime contractors are now worried that if their subcontractors commit ITAR violations, the prime contractor can have liability. As a result, prime contractors are establishing requirements that their subcontractors become ITAR-compliant, and requiring the subcontractors to impose similar requirements on the subcontractors’ suppliers and subcontractors. The prime contractor will often ask for documentation from the subcontractors providing evidence that they have done this.
Failure to be “ITAR Compliant” can create significant problems for small and mid-sized contractors, including loss or termination of their contracts, potential civil and criminal liability for ITAR violations, and reputational damage, especially in the eyes of prime contractors and other downstream customers.
ITAR sets forth a number of requirements that apply to companies in the defense sector, including:
A more detailed discussion of ITAR requirements applicable to government contracts firms is available in our Whitepaper: “ITAR For Government Contractors.”
Penalties for ITAR violations include financial fines of up to $1,000,000 per violation and up to twenty years imprisonment. If you discover that you have a violation there are steps you can take to deal properly with these and minimize your liability – for additional information see our articles: “Dealing with Violations In Export Transactions”, “Seven Steps To Protect Your Company From Export Violations,” and “Voluntary Self-Disclosures – An Important Tool For Dealing With Export Violations.”
The Commerce Department also administers a companion set of regulations entitled the Export Administration Regulations (which apply to commercial products and certain limited defense products) which must be read in conjunction with ITAR.
ITAR requirements can apply even if your company does not engage in any international activities and even if your only customer is the U.S. Department of Defense.
What should mid-sized companies do to deal with these requirements? There is no formal process or certification for a company to become “ITAR Compliant” or “ITAR Certified.” However, there are a number of important steps that small/mid-sized contractors can take to come into compliance with the law and address these requests from prime contractors:
Other steps that you can take to protect your company include:
Once you have taken these steps, you can advise your prime contractors of the actions you have taken to come into compliance with ITAR. In addition, you will be ready to respond to future inquiries from prime contractors regarding your company’s ITAR readiness for new contracts. This will provide your company a competitive advantage over other subcontractors in competing for new business and help in reducing your legal liability on an ongoing basis.
Please note:
This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at www.williamsmullen.com or contact Thomas B. McVey, 202.293.8118 or tmcvey@williamsmullen.com.