Tuesday, February 10, 2009

Newcomers to defense biz will face ITAR headache

Posted by John McHale

Listening to a presentation today on dealing with International Traffic in Arms Regulations (ITAR) pitfalls for small defense companies, I started thinking this is only going to become more problematic as commercial companies, finding their own markets tanking, try to break into the defense business. The defense industry is one of the few bright spots in this economy and already designers of commercial technology are looking for ways to attract military system integrators to their products.

Today's speaker, Russell VanDegrift, senior consultant and director at MK technology, warned the audience at the Components for Military & Space Electronics conference in San Diego that if they even think their product may be used for military systems they need to clear it with the State Department.

Unfortunately, I think commercial developers are quite naïve on this issue and we might see a more than a few get hit with costly ITAR violations.

VanDegrift also said that any products that may be sold or seen by a foreign government then used for military may come under scrutiny as well -- especially if the other country is China.

I remember last year at our Military & Aerospace Electronics Forum during the ITAR panel discussion engineers and managers kept peppering the panelists with "what if" scenarios -- when in the middle of one exchange someone stood up and said "don't take any chances, just cover your rear end, you don't want to get that letter from the State Department."

Not much has changed since then. The ITAR headache remains for many defense suppliers -- seasoned or not. It is also the only topic our conference advisory board voted to repeat for our 2009 conference.

Watch your step.


  1. Very good cautions and insight! Export enforcement law and regulations are very complex. The problem in this area is further exacerbated by enforcement trends which only point to a large increase in civil and criminal actions for the next few years. For example, a task force was formed in the latter part of 2007 that has been educating Federal Prosecutors and Agents regarding making cases in this area. Prior to this, there were not many Prosecutors taking these cases and very few Agents focused on it, at least in DOJ. As this education spreads throughout the 59 US Attorney's offices and their myriad of corresponding investigative agencies with whom they work, we will see much more scrutiny and many more cases. Add to this that the penalties for violations in this area were significantly increased, to as much as $250,000 per violation in some instances, and the pain becomes unbearable for many small and large companies alike. Furthermore, recent changes to the FAR now require that companies self-report violations. If they do not, their problem is compounded. As a former Federal Agent, now forensic accountant, who proactively advises companies (as well as research facilities, universities, hospitals and others) about this and, in many cases, helps them conduct the investigations after the problems have been discovered, I would strongly advise any companies to obtain expert assistance and counsel as they consider moving into this area. It's not a cost that many companies like to pay, but the cost/risk ratio is too high to not contemplate such proactive work gravely.

    John Hanson, CPA, CFE
    Huron Consulting Group

  2. I completely agree. After seeing my own small business come under the scrutiny of the State Department simply because we were 'unaware' of the issues (seriously) I can attest to how disruptive this can be to business. Small companies need to take some simple steps to avoid the problem. Advice from experts should be sought BEFORE you begin exporting.

    John Perser