Illegal Exports of Technical Data

A Growing Focus by the Department of Justice

Written by Jonathan C. Poling & Kerry Contini

During the past two years, the U.S. Department of Justice (“DOJ”) has charged a growing number of defense contractors and defense contractor employees for, among other things, conduct involving the illegal export of technical data.  “Exports” often make people think distribution services and perhaps, conjure up the movement of international freight aboard cargo planes or ships.  But an “export” may also occur with the “click of a mouse” or the uploading of data onto a shared site.  The “export” in many of the defense contractor cases was not necessarily a weapon or military aircraft, but the “know how” to manufacture the weapon or operate the military aircraft.

The compliance challenges of monitoring and addressing the transfer of controlled technical data are daunting.  In practice, many companies appear unaware of the need and/or unprepared to address the regulatory challenges of controlling technical data in a world where employees view borders and nationalities with less relevance.  Yet, the U.S.—and other countries—administer export control regimes based on borders and nationalities.

In the export control context, these compliance challenges are further compounded by the rapid rollout and introduction of computer systems that foster more collaborative sharing of data, like cloud computing, and smaller and more easily transportable devices, such as smart phones and mobile applications.  Simply a) identifying what technical data is controlled and b) interfacing with IT system architects to establish protocols to control access to this technical data is still a new and unchartered frontier.  It’s frankly surprising that an export control violation may occur by simply carrying a laptop with controlled technical data on a business trip to China or by uploading controlled technical data from an office in Los Angeles onto a shared platform where non-U.S. citizens have access to it.

While companies are only beginning to address the compliance challenges of controlling technical data, the DOJ is increasing enforcement and targeting enforcement, at least for now, on those industries that work alongside the government in national security.

In the case of defense contractors, the alleged conduct has involved violations of the International Traffic in Arms Regulations (“ITAR”), which control the export of defense articles and services.  Under the ITAR it is generally prohibited to export technical data for defense articles without first obtaining authorization from the Directorate of Defense Trade Controls (“DDTC”) in the U.S. Department of State.

The penalties may be severe:  Civil penalties include fines of up to $500,000 for each violation, and criminal penalties include fines of up to $1 million and 20 years imprisonment.  In addition to the monetary penalties and potential for imprisonment, the State Department has the authority to debar a company from engaging in any future exports of defense articles or provision of defense services.  In the case of a defense contractor, the potential for a broad debarment could be life or death and may mean whether the company can continue to stay in business.

The DOJ has charged at least six defense contractors and three individuals in the past year alone involving with the unlicensed export of technical data controlled under the ITAR, and it is believed that others are under investigation for similar conduct. [1]  This past July, FBI Director Mueller spoke about export controls at a U.S. Department of Commerce conference and was clear that one of the FBI’s highest priorities is “preventing our adversaries from obtaining protected technology and information” and, therefore, it’s likely there will be more of these cases to follow.  Although it is difficult to extract specific trends from limited cases, some interesting patterns are emerging.

Law Enforcement’s Focus on Technical Data Being Exported to China

All of these cases involve exports of technical data to China.  In two of the cases against defense contractors, United States v. Staff Gasket Manufacturing Corporation and United States v. Swiss Technology, Inc. and in two of the cases against defense contractor employees United States v. Eric Helf and United States v. Sixing Liu, China appeared to be the only country of destination for the illegally exported technical data.  In other cases, China was among the destinations where technical data was illegally exported.

Prosecution of Individuals

Critics of the DOJ have charged, particularly in the fraud investigations, that the U.S. Government has treated individuals too leniently, electing not to prosecute individuals, but instead to resolve cases with deferred prosecution agreements against the company.  But in the export control area, the DOJ seemed inclined to encourage prosecutions of individuals.  In two defense contractor cases this past year, the DOJ charged high-level management with schemes to defraud the Department of Defense by, in part, illegally exporting technical data from the United States.[2]

Most recently, another individual, Sixing Liu, formerly an employee of L-3 Communications Holdings Inc., was criminally convicted for stealing and exporting thousands of electronic files detailing performance and design of guidance systems for missiles, rockets, target locators and unmanned aerial vehicles.  Liu delivered presentations about the technology at several Chinese universities, the Chinese Academy of Sciences, and at government conferences, apparently with the aim of securing future employment.

DOJ’s Inclusion of Facts Showing Corporate Profit as a Motive

Although the publicly available documents for these types of cases do not typically provide much detail on the motive behind the illegal conduct, in several cases, the DOJ has included facts and highlighted those facts in press releases where companies have had to admit that the desire to make profit was the motivation for violating U.S. export control laws.  In some cases the profit motive was manifested as an interest to gain access to lucrative markets, such as China, and in other cases, the motive was to increase cost margins as part of Department of Defense contracts.

In two of the cases,  it appeared the defense contractors had committed export violations of technical data to increase profits under terms of existing contracts with the U.S. Department of Defense and technical data was illegally exported to China in order to provide the Chinese manufacturers with the information needed to manufacture the products.

By engaging Chinese manufacturers to produce some of the products that the defense contractors were selling to the U.S. Department of Defense, those products could be manufactured at a much lower cost.  Separate and aside from the export violations, however, this conduct was also a violation of the contracts with the U.S. Department of Defense, which provided that the products would be manufactured in the United States.

There is a growing chorus of voices in the U.S. Government urging that enforcement efforts focus on the fact that a significant transfer of wealth is occurring in the illicit movement of technical “know how” from the United States to China.  Although this is frequently discussed in the context of “cyber espionage” or “economic espionage,” there is no question the DOJ is aggressively using U.S. export control laws to disrupt and deter this illicit transfer of knowledge and expertise.

Author’s Bio:

Jonathan C. Poling ([email protected]) is a Partner in Baker & McKenzie LLP’s Washington DC office in the International Trade, Compliance and Customs Practice Group. He is a former federal prosecutor with the U.S. Department of Justice’s National Security Division.  Kerry Contini ([email protected]) is an Associate in Baker & McKenzie LLP’s Washington DC office in the International Trade, Compliance and Customs Practice Group.