L-3 Communications Corp. Agrees to Pay $1.5 million in Fines for Its Subsidiary’s Past Violations of the ITAR Reporting Requirements

November 10, 2006

L-3 Communications Corporation (L-3), a Delaware company engaged in the business of manufacturing and exporting defense articles and providing defense services, has agreed to pay in fines and remedial compliance measures a civil penalty in the amount of $1.5 million in complete settlement of civil charges for its subsidiary’s past, pre-acquisition violations of certain reporting requirements under the International Traffic in Arms Regulations (ITAR). Before becoming L-3’s wholly-owned subsidiary, Titan Corporation (Titan) violated Section 39 of the Arms Export Control Act, and sections 127.1(d), 127.2, 130.9 and 130.10 of the ITAR, by failing to report in applications for exports of defense articles payments of commissions exceeding $100,000 in respect of sales for which licenses were sought and by making false statements in those applications that there were no reportable commissions. Following the acquisition, Titan became covered by L-3’s registration with the Directorate of Defense Trade Controls (DDTC) pursuant to Part 122 of the ITAR. L-3 was held responsible for the described past violations of Titan as successor. L-3 agreed to pay in fines and remedial compliance measures a civil penalty in the amount of $1.5 million, including $1 million to be paid within ten days of the order, and $500,000 to be applied to the costs of remedial compliance measures during the three-year term of the consent agreement. 

L-3 also agreed to implement several compliance measures during the three-year term of the agreement, focusing primarily on Titan and operations related to Titan. In particular, L-3 agreed 1) to institute strengthened overall export compliance policies, procedures and training, addressing fees and commissions, brokering requirements, use of exemptions under the ITAR, and other requirements, and to provide the Director, DTCC, with the updated procedures and training materials; 2) to hire an independent consultant, with the concurrence of the Director, DTCC, to help improve its Part 130 compliance procedures; 3) to submit its revised Part 130 policies and procedures to the Director, DTCC, for review and comments; 4) to hire an outside audit firm to audit L-3’s Part 130 compliance policies and procedures, and compliance with the order; 5) and to arrange and facilitate on-site audits by the Department of State, with minimum advance notice, of its business units covered by L-3’s registration under ITAR during the three-year term of the consent agreement. 

The Department of State determined that debarment was not an appropriate penalty against L-3 in view of its willingness to co-operate, acknowledgement of the seriousness of the violations alleged against L-3, its efforts to strengthen its compliance with part 130 Regulations with respect to Titan, and its undertaking of extensive remedial measures described in the consent agreement. The Department also agreed to discontinue denying applications for licenses involving Titan effective upon payment of the civil penalty under the consent agreement. 

The charges that led to the consent agreement arose from Titan’s three applications for exports of defensive articles. Titan failed to report payments of commissions or other fees in connection with the applications in excess of $100,000, and made false statements in the license applications that it did not make such commission payments. In two of these applications, the paid commissions significantly exceeded the $100,000 reporting threshold, but in one of the applications the paid commission exceeded the threshold only by $9,000. Having no de minimis exception, 22 C.F.R. § 130.9-130.10 require each applicant for export of defensive articles to disclose commission payments in excess of $100,000 at the time of application, and also to provide such information within thirty days after learning that such payments were made. Titan failed to comply with both of these requirements.

L-3 appears to have avoided debarment under the ITAR only as a result of the extensive and intrusive remedial measures imposed under the consent agreement. It may also have been relevant that Titan was ineligible under the ITAR since March 1, 2005, by reason of its conviction for violations of the Foreign Corrupt Practices Act. This along with the $1.5 million penalty imposed on L-3 serve to place companies that are engaged in acquisitions on notice that thorough and critical due diligence on export and FCPA issues is essential when reviewing potential acquisitions. As this example demonstrates, the penalties for violations of the ITAR can be severe and costly even for an acquiring company that itself did nothing illegal.  

Gibson, Dunn & Crutcher’s International Trade Regulation and Compliance Practice Group is
available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn attorney with whom you work or Judith A. Lee (202-887-3591, [email protected]) or Jim Slear (202-955-8578, [email protected]) in the firm’s Washington, D.C. office.

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.