On January 21, 2022, the US Directorate of Defense Trade Controls (“DDTC”) entered into a consent agreement with Torrey Pines Logic, Inc. (“TPL”) and its founder and president, Dr. Leonid Volfson, for alleged violations of the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”).one TPL, an electro-optics and communications equipment company, allegedly committed violations that involved the attempted unauthorized export and unauthorized export of defense articles, including to proscribed destinations; involvement in ITAR-regulated activities while ineligible; and failure to maintain export transaction records.
Under the terms of the consent agreement, TPL is required to pay a penalty of $840,000, half of which is to go toward remedial compliance measures. TPL is also debarred from exporting ITAR defense articles during the three-year term of the consent agreement. Additionally, TPL is subject to additional compliance measures, including the appointment of a Special Compliance Officer (“SCO”), on-site reviews by DDTC, and a mandatory classification review, under the supervision of the SCO, of TPL’s products and technical data .
The proposed charging letter against TPL includes a summary of the alleged conduct leading to the consent agreement.2Dr. Volfson is accused of attempting to export in his carry-on luggage two thermal imaging systems, controlled under US Munitions List (“USML”) Category XII, on a commercial flight bound for Singapore, via Tokyo, Japan. Dr. Volfson was stopped by US Customs and Border Protection (“CBP”) at the Seattle airport and was unable to provide an authorization to export the thermal imaging systems. CBP therefore seized the defense articles.
Separately, the proposed charging letter describes unauthorized exports of Category XII defense articles to Bulgaria, Canada, Estonia, Germany, Russia, Spain, Switzerland, Lebanon, and China. Notably, Lebanon and China are proscribed destinations under 22 CFR § 126.1.
The TPL consent agreement provides (at least) five valuable takeaways for all defense manufacturers and exporters:
- Do Not Skip the CJ Process for Potentially ITAR-Controlled Items
TPL’s thermal imaging systems have both military and civilian applications. In January 2015, TPL’s sister company requested a Department of Commerce Bureau of Industry and Security (“BIS”) commodity classification for a particular family of small form-factor thermal imagers, the T10 family. Pursuant to this classification request, BIS classified the T10-M model under Export Control Classification Number (“ECCN”) 0A987. Subsequently, TPL exported various T10 units to Germany, Switzerland, the Netherlands, France, Malaysia, Canada, Hong Kong, and Austria without authorization.
However, in April 2015, after TPL applied for a license to export T10-M units to Switzerland, BIS did not grant the license request because the units were potentially ITAR-controlled. BIS then encouraged TPL to request a commodity jurisdiction (“CJ”) from DDTC to confirm whether the T10 units were subject to ITAR controls. TPL submitted a CJ request in April 2015. In August 2016, DDTC determined that the T10 family of products was subject to the ITAR and controlled under USML Category XII(c), which is also a Significant Military Equipment (“SME”) subcategory.
The Export Administration Regulations (“EAR”), which are administered by BIS, explicitly state that “those who request commodity classifications . . . should have determined that the items at issue are not subject to the exclusive export control jurisdiction of one of the other US Government agencies listed in § 734.3(b) of the EAR,”3 which includes DDTC. Therefore, exporters should confirm the item for which they seek a BIS commodity classification is not controlled under the ITAR. Any complete jurisdiction and classification “order of review” analysis for a dual-use product requires a review of the USML prior to a review for EAR controls.
Do Not Export Potential Defense Articles Without Authorization While a CJ Determination Is Pending
In the proposed charging letter, DDTC describes TPL’s continued export of multiple T10 products without authorization while its CJ request was pending. Because DDTC later determined that the items are ITAR-controlled, these exports were in violation of the ITAR. This charge reinforces the emphasis DDTC is now placing on the export of potentially controlled defense articles after the submission of a CJ request.
A similar ITAR violation was described in DDTC’s consent agreement with Keysight Technologies, Inc. (“Keysight”), which immediately preceded TPL’s consent agreement.4In that case, DDTC alerted Keysight of misclassification concerns over Keysight’s software, which can be used with equipment to simulate electronic warfare threat scenarios for testing radar equipment. DDTC recommended that Keysight submit a CJ to determine jurisdiction. Keysight continued to export the software as EAR99 to China, Russia, Japan, Israel, and Canada while a CJ request was pending with DDTC. DDTC eventually determined that the software was properly classified under USML Category XI(d), so prior exports under EAR99 constituted ITAR violations. Under its consent agreement, Keysight received a penalty of $6.6 million.
In official guidance, DDTC provides that exporters may continue to export items subject to a CJ request, but DDTC “strongly encourages” the exporter to treat the subject item as ITAR controlled and obtain any required licensing approvals prior to export.5
Take Recordkeeping Requirements Seriously
The charging letter also describes the insufficient manner in which TPL maintained its export records. Specifically, TPL failed to record exports of technical data, keep an export log, and obtain export records from its freight forwarders. Additionally, even when records were available, they were at times not complete enough to determine product details. For example, TPL’s auditor explained that TPL “uses serial numbers yet is not able to tie its own serial numbers to product details (ieTPL cannot determine whether S/N 50605037 is a T10-M or other variant of the T10).”
Per 22 CFR § 122.5, companies registered with DDTC must keep retrievable, legible, and readable records associated with the “manufacture, acquisition, and disposition” of defense articles and technical data. DDTC-registered companies sometimes treat the recordkeeping provisions of the export control regulations as an afterthought, but the TPL case demonstrates that recordkeeping violations are penalized the same as other ITAR violations.
Manufacturing Defense Articles without Registering with DDTC Is an ITAR Violation
Companies familiar with the ITAR likely understand that, despite the ITAR being “export regulations,” DDTC also regulates the manufacture of defense articles. However, some defense manufacturing companies, especially those with little or no export experience, are not familiar with the requirement to register with DDTC when only engaged in manufacturing defense articles. By specifically calling out as an ITAR violation TPL’s manufacture of defense articles when not registered, DDTC makes clear that such conduct is regulated by the agency and may lead to enforcement and penalties.
The requirement to register with DDTC is described at 22 CFR § 122.1 and provides that the requirement applies to any person that “engages in the United States in the business of manufacturing or exporting or temporarily importing defense articles, or furnishing defense services.” To prevent any doubt, the ITAR further provides, “A manufacturer who does not engage in exporting must nevertheless register.” The ITAR strictly defines “engaging in such business” as requiring “only one occasion” of manufacturing defense articles. Therefore, a company that manufactures an ITAR-controlled defense article under a single purchase order for a sale to a domestic customer would technically be required to register with DDTC.
The Value of Completely Disclosure ITAR Violations in a Voluntary Disclosure
During the period covered by the proposed charging letter, TPL submitted two voluntary disclosures identifying ITAR violations to DDTC, which counted as a mitigating factor in the penalty determination. However, TPL did not disclose other violations to DDTC, leading to the agency’s independent identification of the violations. DDTC considered TPL’s failure to disclose the additional violations an aggravating factor during the settlement process.
When submitting a voluntary disclosure to DDTC, the best practice is to conduct a five-year review of all exports and related activity. Although this process can be expensive and arduous, such an undertaking will lead to a more complete voluntary disclosure. The more complete the voluntary disclosure, the less likely DDTC is to identify additional violations. Whenever submitting a voluntary disclosure, the goal should be to receive mitigation for the disclosure and avoid aggravating factors for failure to disclose.
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Like any export enforcement action, the TPL consent agreement provides numerous lessons to the export community for improving compliance. DDTC maintains an archive of past consent agreements on its website, and we recommend companies involved in defense manufacturing and export review past cases, both as cautionary tales and for ideas to improve compliance.
1.See In the Matter of: Leonid Boris Volfson and Torrey Pines Logic, Inc.Consent Agreement, United States Department of State Bureau of Political-Military Affairs (January 21, 2022), available at https://www.pmddtc.state.gov/sys_attachment.do?sysparm_referring_url=tear_off&view=true&sys_id=9a8529c31b5dcd90c6c3866ae54bcb32.
2.See In the Matter of: Leonid Boris Volfson and Torrey Pines Logic, Inc.Proposed Charging Letter, United States Department of State Bureau of Political-Military Affairs,
available at https://www.pmddtc.state.gov/sys_attachment.do?sysparm_referring_url=tear_off&view=true&sys_id=5285a9c31b5dcd90c6c3866ae54bcb1c (last visited May 27, 2022).
3. 15 CFR § 748.3.
4.See In the Matter of: Keysight Technologies, Inc.Consent Agreement, United States Department of State Bureau of Political-Military Affairs (Aug. 3, 2021), available at https://www.pmddtc.state.gov/sys_attachment.do?sysparm_referring_url=tear_off&view=true&sys_id=98ebc0e51b35b0d0c6c3866ae54bcb80.
5. Instructions for Preparing and Submitting a DS-4076: Commodity Jurisdiction (CJ) Determination Request Form, Department of State, Directorate of Defense Trade Controls, 1 (Oct. 23, 2019),
available at https://www.pmddtc.state.gov/sys_attachment.do?sys_id=3174759edbb140505c3070808c961995.
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