Contractors Must Take Ownership of Export Control Compliance
By Kara M. Bombach and William M. Jack
A recent change to the Defense Federal Acquisition Regulation Supplement (DFARS) provides an important reminder that all Defense Department contractors and subcontractors must implement effective export controls compliance programs to meet government contracting requirements.
Even without a DFARS clause mandating this obligation, contractors for decades have borne the burden of export control law compliance.
The new DFARS clause (DFARS 252.204-7008), Export-Controlled Items (April 2010), requires a single export controls clause in all DoD solicitations and contracts, thereby eliminating what was a two-clause approach, under which the department opted between one of two clauses depending on whether the contractor was projected to generate or require access to export-controlled items during contract performance.
The new clause requires compliance, among other things, with “all applicable” export laws and consultation with proper U.S. government export authorities for any export compliance questions. The “proper authorities” include the Department of State, the Directorate of Defense Trade Controls for questions on defense articles and defense services under the International Traffic in Arms Regulations (ITAR), and the Department of Commerce, Bureau of Industry and Security for questions on commercial or dual-use items under the Export Administration Regulations.
Prime contractors must include the clause in all subcontracts — including a flow-down requirement — so the DFARS clause and all relevant export control laws cover lower tiered subcontractors and suppliers as well.
The single-clause approach has garnered both criticism and praise from the contractor community. Praise comes from Defense Department contractors who appreciate the one-clause approach as it aptly reminds contractors of existing obligations to comply with export control laws, while respecting limits of department input on export control law applicability.
Specifically, it eliminates potential ambiguities in the enforcement and interpretation of export control laws by clarifying Defense is not an arbiter. Defense Department research and development contractors, in contrast, are concerned that a single clause fails to surface department expectations as to whether the contract would generate or require access to export-controlled items during contract performance.
Some contractors would prefer that Defense specify applicable export laws, especially if the government is furnishing technical data, or requiring contractor research that might exceed the scope of “basic” or “fundamental” research as defined in the ITAR.
The DFARS clause is silent as to Defense’s views on applicable export control laws, rendering it crucial that contractors properly self-classify items, technology and services on each department procurement. This classification analysis is key to an effective export compliance program. Contractors unsure about classification or jurisdictional issues, formally or informally, should seek guidance from the Directorate of Defense Trade Controls on ITAR-related questions and from Bureau of Industry and Security on Export Administration Regulations-related questions.
While the Defense Department will not advise contractors on their specific export control obligations, in order to evaluate potentially applicable export control laws, contractors should ask contracting officers to provide information about specific end-users, end-uses and applications related to work to be performed under a given contract.
Along these lines, the single DFARS clause restates an ITAR requirement that any manufacturer or exporter of defense articles or services be registered with State. Contractors not yet registered under the ITAR must determine whether they should be. This requires the contractor to evaluate whether it will be dealing with defense articles or services, including any items specifically designed, developed, modified or adapted for military applications. Not all goods and services provided to Defense meet the ITAR definition of “defense articles” or “defense services,” so input on the precise end-uses is a must.
Tackling export compliance head on and taking ownership of the process is imperative for purposes of supporting U.S. national security, minimizing exposure to stiff civil and criminal penalties, and maintaining eligibility to serve on important defense programs.
Violations of U.S. export control laws may lead to civil and criminal penalties of up to $1 million — or twice the value of a transaction and imprisonment — administrative penalties and suspension or debarment from U.S. government contracting. Contractors, whether private industry, research institutions or universities, cannot rely on the Defense Department to explain legal obligations related to export compliance. Nor can contractors assume export control laws do not cover their activities, or rely on questionable interpretations of possible licensing exemptions or exceptions. Kara M. Bombach (email@example.com) is a shareholder in the export controls practice group of the international law firm of Greenberg Traurig, LLP in the firm’s Washington, D.C., office. William M. Jack (firstname.lastname@example.org), a senior associate in the firm’s government contracts practice, is also based in Washington, D.C. The views expressed are solely those of the authors.