BAE Systems Settles Civil Charges Of ITAR Violations For $79 Million

On May 16, 2011, BAE Systems plc (BAES UK), a multinational defense contractor headquartered in the United Kingdom, entered into a Consent Agreement (Agreement) with the US Department of State, Directorate of Defense Trade Controls (DDTC). BAES UK settled 2,591 alleged violations of the International Traffic in Arms Regulations (ITAR), 22 CFR Parts 120-130, as described in a Proposed Charging Letter. Pursuant to the Agreement and Order, BAES UK agreed to pay $79 million in civil penalties and undertake extensive remedial compliance measures for a period of four years. DDTC also issued a policy of denial for new license applications regarding three BAES UK non-US affiliates: BAE Systems CS&S International, Red Diamond Trading Ltd., and Poseidon Trading Investments Ltd. The Agreement does not allege ITAR violations against BAE Systems, Inc., which is the US subsidiary of BAES UK and one of the United States' largest domestic defense contractors.

This civil enforcement case, resulting in significant penalties and other remedial measures, is important for several reasons. First, it involves a non-US person's alleged violations of the brokering provisions in ITAR Part 129, which appears to be the first of its kind. Second, it is one of two proposed charging letter cases that involve any person's failure to submit mandatory reports of "fees or commissions" or "political contributions" as required under ITAR Part 130 —the other significant action being against L-3 Communications Corporation/L-3 Titan Corporation in 2006. Third, the civil settlement amount is the highest monetary penalty ever imposed by DDTC, nearly doubling the amount of the next largest civil penalty of $42 million imposed in 2010 against Xe Services LLC. Fourth, because this case stems from US Department of Justice (DOJ) and the UK Serious Fraud Office (SFO) criminal proceedings/resolutions last year, it demonstrates the increasing interplay between export controls and anti-corruption law. Finally, the consent agreement imposes an extensive set of compliance requirements as part of the settlement.

Background

The allegations follow a March 2, 2010 Plea Agreement between BAES UK and the DOJ for conspiracy to make false statements and to violate Section 2779 of the Arms Export Control Act (AECA) involving, in part, leases and sales of Gripen fighter jets from Sweden to the Czech Republic and Hungary. Under the Plea Agreement, BAES UK agreed to pay a $400 million criminal penalty and undertake substantial compliance improvements. (See our previous advisory on that settlement here). BAES UK also settled similar charges with the SFO for £30 million in February 2010.

Following the settlements, on March 10, 2010, DDTC requested information from BAES UK regarding its failure to disclose payments as required under ITAR Part 130 in connection with the leases and sales of the Gripen jets. DDTC asserted that BAES UK was "incapable or reluctant to provide further, meaningful detail on its payment of fees or commissions," partly as a result of UK law and advice from the UK government. Based on a visit in November 2010 to BAES UK's facilities in the United Kingdom, DDTC concluded that BAES UK "had a limited, but insufficient, ITAR compliance program before 2007."

As part of its enforcement decision, DDTC considered mitigating factors, such as changes in BAES UK's senior management and members of the board of directors, as well as remedial compliance measures implemented after 2007. However, DDTC concluded that those mitigating factors were outweighed by aggravating factors, including BAES UK's alleged: (1) failure to cooperate fully for a period of 14 months after DDTC initiated its directed review; (2) incomplete responses to DDTC's requests for information; and (3) failure to maintain or produce relevant records. DDTC reported that these circumstances contributed to an incomplete investigation and the "inability to assess fully the potential harm to US national security." In addition, DDTC apparently decided that a penalty was warranted given the frequency and type of...