Regulatory intelligence for US exporters

DDTC's Keysight Settlement Highlights Trends Toward Aggressive Enforcement, Penalty Mitigation

The State Department's Directorate of Defense Trade Controls recent settlement with Keysight Technologies shows the agency is growing more aggressive with certain compliance requirements and violations involving software and technical data, Miller & Chevalier said Aug. 18. At the same time, DDTC continues to reward cooperation and other mitigating factors with significant penalty reductions as it tries to incentivize companies to voluntarily disclose violations and work with the agency during its investigation.

The firm said exporters of goods controlled under the International Traffic in Arms Regulations can gain a range of helpful insights from DDTC’s $6.6 million fine against Keysight, which illegally exported technical data and software to more than 15 countries, including China (see 2108090043). But companies should also specifically review the settlement, which shows DDTC is “getting more aggressive” with a particular consent agreement requirement that forces companies to review and verify the jurisdiction and classification status of all hardware and software relating to their ITAR-regulated activities.

DDTC included that condition in four settlement agreements within the past three years, Miller & Chevalier said. But while other companies had “more time” to complete that review, Keysight must complete it within one year, the firm said. “That is one of the most rigorous and time-consuming consent agreement requirements to satisfy,” the firm said. The review can also lead to the discovery of other misclassifications and potential ITAR violations, the firm said.

It also noted that several of DDTC’s recent consent agreements have focused on software and technical data -- including a $13 million fine against Honeywell International in May (see 2105040018) -- which demonstrates the agency’s “aggressive enforcement in this complex area.” Software and technical data items “remain [some of] the more difficult areas to perform jurisdiction and classification analysis,” Miller & Chevalier said.

Further complicating Keysight’s classification analysis was its confusion about whether the goods should have been subject to the ITAR. The company appealed a DDTC commodity jurisdiction determination over the items but failed, which “can be detrimental in some situations,” the firm said. “Seeking reversal of the government's prior determination is often a last resort situation, and it needs to be approached differently from the original submission.”

The firm also said there are “numerous difficult issues that arise when there is a jurisdiction and classification dispute regarding an item that has already been developed and has a significant history of international sales,” which was the case with Keysight. “Should a company in such a situation treat the item as ITAR-controlled out of an abundance of caution? Should the company find a middle ground by limiting sales to only certain countries?” Miller & Chevalier said. “These are important considerations, and they need to be carefully examined based on the facts and circumstances.”

The consent agreement continued a “long trend” by DDTC of crediting mitigating factors into final penalty amounts and significantly reducing fines. Although it was “noticeably unclear” from DDTC’s order whether Keysight filed a voluntary disclosure or was directed by DDTC to file a disclosure, the company was credited for cooperating with DDTC’s investigation. Miller & Chevalier said Keysight’s maximum potential fine for its 22 alleged ITAR violations was more than $28 million, yet the company was fined only about 15% of that. “DDTC continues to afford exceptional benefits to companies who cooperate with the government's investigation,” the firm said.

The case highlighted “how it is crucial for companies to ensure the appropriate export jurisdiction and classification of their items,” which may sometimes involve continuous reviews of company development and production changes as well as regulatory revisions, the firm said. Companies should have adequate “expertise” to perform those reviews and those reviews need to be well documented in case any violations are discovered.