California Dreamin’ – The Logic Behind ITAR Compliance

In a late January 2022 enforcement action against two export law malefactors, the Directorate of Defense Trade Control (DDTC) has once again demonstrated the cost of ITAR compliance is less than the cost of non-compliance. Not only is the ITAR compliance cost less than the fines that can be, and here, were imposed for non-compliance, but the potentially more devasting remedies of debarment and administrative controls can lead to those costs being open-ended and persisting for years.

By imposing a fine of $840,000 on a San Diego, California-based electro-optics and communications company, Torrey Pines Logic, Inc., and its CEO/owner, Leonid Boris Volfson, the DDTC showed its willingness to impose ITAR violation fines in amounts as large as almost a third of the company’s annual revenues.

The DDTC’s harsh remedial posture, in this case,* certainly was influenced by the presence of some fairly egregious facts. Included among these were the following findings of wrongdoing:

1. bringing controlled goods in the CEO’s luggage when traveling to Singapore,
2. conducting exports to various countries, including Lebanon and PRC, both proscribed destinations, without licenses while a commodity classification was pending and/or after having asked and then received a classification that could invoke the ITAR,
3. failing to disclose previous exports of an item when applying with the DDTC for a license to export it, and
4. exporting ITAR-controlled devices while barred from any ITAR activities due to having been suspended by the US Navy from government contracting (See 22 C.F.R. § 120.1(c)(2)).

Torrey Pines Logic’s listed transgressions of the ITAR went beyond those listed above. The DDTC also found and discussed in the proposed charging letter and the consent decree that “[t]he Company is not keeping any records of technical data exports.”** Indeed, it appears that Torrey Pines Logic had no records showing that its exports of technical data, which had assuredly occurred, did in fact occur. This violation itself was deemed so significant by the DDTC that it formed the basis of one of the five charges proposed by the DDTC in its charging letter.

In addition to the steep fine imposed in this case, the DDTC also showed it is willing to impose substantial indirect financial penalties that go even further than monetary fines. In this case, the DDTC did so by prohibiting ITAR-controlled exports by Torrey Pines Logic, all of which products appear ITAR-controlled, and its owner for a minimum period of three years. The export suspension could last longer if all corrective actions mandated by the DDTC have not been completed.

Further, and as an added demonstration of the lack of trust by the DDTC in the company, the DDTC required in the consent decree that Torrey Pines Logic hire a Special Compliance Officer (SCO) for three years. This SCO shall report directly report to the CEO, or the CEO’s designee if the latter reporting is permitted by the DDTC. The SCO shall oversee ITAR compliance at the Company, in consultation with the DDTC.

Finally, over the next three years, Torrey Pines Logic and its CEO shall have an outside consultant approved by the DDTC to audit their ITAR compliance. If this audit demonstrates a need, another audit can be imposed by the DDTC to determine whether recommended corrective actions have been accomplished.

What Can You Do?

So, the message of these consent decrees and agreements, and those in the past, remains the same:

• Know and Continue to Know the ITAR.
• Comply with the Letter and the Spirit of the ITAR.
• Have Controls in Place.
• Don’t Seek Shortcuts.
• Keep Accurate and Trust-worthy Records.
• Accept that the Cost of Compliance, while not insignificant, is much less than the direct and indirect Cost of Noncompliance.

*Of course, the consequences to Torrey Pines Logic and its officer could have been even greater. Just ask Jorge Orencel, owner of Maryland-based Sumtech, who on Tuesday, February 22, 2022, was sentenced to six months incarceration followed by one year supervised release for attempting to circumvent export laws requiring a license for shipping high-tech equipment to Hong Kong. See the Press Release by the US Attorney for the District of Maryland on this case.

**See C.F.R. § 122.5 – “A person who is required to register must maintain records concerning . . . technical data; [and] the provision of defense services…. All records subject to this section must be maintained for a period of five years from the expiration of the license… .”