International Business

Please summarized and turn it into a slideshow.

•BLUF: (Bottom Line Up Front)
•Facts of the case/reference legal authority
•Issue
•Rule (what law was broken)
•Analysis

Case attached, also attached an example on how the slideshow should loo like 

PROPOSED CHARGING LETTER

Mr. Charles D. Gill

Senior Vice President & General Counsel

United Technologies Corporation

One Financial Plaza

Hartford, CT 06101

Re: Potential Violations of the Arms Export Control Act and the

International Traffic in Arms Regulations by United Technologies

Corporation.

Dear Mr. Gill:

The Department of State (“Department”) charges United Technologies

Corporation (“UTC” or “Respondent”) with violations of the Arms Export Control

Act (“AECA”) (22 U.S.C. §§ 2778-2780) and the International Traffic in Arms

Regulations (“ITAR”) (22 C.F.R. Parts 120-130) in connection with the

unauthorized export and transfer of defense articles, to include technical data, and

the unauthorized provision of defense services to various countries, including

proscribed destinations. A total of five hundred and seventy six (576) charges are

alleged at this time.

The essential facts constituting the alleged violations are described herein.

The Department reserves the right to amend this proposed charging letter,

including through a revision to incorporate additional charges stemming from the

same misconduct of the Respondent in these matters. Please be advised that this

proposed charging letter, pursuant to 22 C.F.R. § 128.3, provides notice of our

intent to impose debarment or civil penalties or both in accordance with 22 C.F.R.

§127.7 and 127.10. Some of the conduct underlying the alleged violations has

been the subject of criminal investigation by U.S. federal law enforcement

authorities.

– 2 –

The Department considered Respondent’s voluntary disclosures and

remedial compliance measures as significant mitigating factors when determining

the charges to pursue in this matter. However, given the harm to national security

and the systemic, longstanding and repeated nature of certain violations the

Department has decided to charge Respondent with five hundred and seventy six

(576) violations at this time. The Department estimated the number of certain

types of violations, due in part to the summary nature of several key voluntary

disclosures by the Respondent. Had the Department not taken into consideration

Respondent’s voluntary disclosures and remedial compliance measures as

significant mitigating factors, the Department would have charged Respondent

with many additional violations and imposed a more severe penalty.

JURISDICTION

Respondent is a corporation organized under the laws of the State of

Delaware.

Respondent is a U.S. person within the meaning of the AECA and the ITAR,

and is subject to the jurisdiction of the United States.

During the period covered by the violations set forth herein, Respondent was

engaged in the manufacture and export of defense articles and defense services,

and was registered as a manufacturer and exporter with the Department of State,

Directorate of Defense Trade Controls (“DDTC”) in accordance with Section 38 of

the AECA and section 122.1 of the ITAR.

Hamilton Sundstrand Corporation (“HSC”), Sikorsky Aircraft Corporation

(“Sikorsky”), Derco Aerospace, Inc. (“Derco”), Kidde Technologies, Inc. (“KTI”)

and Pratt & Whitney Rocketdyne (“Rocketdyne”) are U.S. subsidiaries of

Respondent; Pratt & Whitney U.S. (“P&W U.S.”) is an unincorporated division of

Respondent; and Pratt & Whitney Canada (“P&W Canada”) is a Canadian

subsidiary of Respondent.

The defense articles and defense services associated with the violations set

forth herein are designated as controlled under various categories of the U.S.

Munitions List (“USML”), §121.1 of the ITAR. Some of the relevant defense

articles are further defined as significant military equipment (“SME”), requiring a

DSP-83 (Nontransfer and Use Certificate) for re-transfers and re-exports.

– 3 –

BACKGROUND

Respondent’s Canadian subsidiary, P&W Canada, manufactures aircraft

engines predominately for the civil aircraft market. P&W Canada has modified

several of its civil engines using U.S. origin, ITAR-controlled defense articles and

technical data. P&W Canada exports these engines for military end-users and end-

uses. These modified engines are ITAR-controlled.
1

Respondent’s U.S. subsidiary, HSC, designs and manufactures aerospace

systems for civil and military aircraft. HSC’s products include auxiliary power

units, environmental controls, electronic engine controls (“EECs”), and EEC

software for both the civil and military markets.

Respondent’s P&W U.S. division designs, manufactures, and services civil

and military aircraft engines and industrial gas turbines.

Respondent’s U.S. subsidiary, Sikorsky, designs, manufactures and services

civil and military helicopters and fixed-wing aircraft.

Respondent’s U.S. subsidiary, Derco, provides aircraft spares, services, and

solutions.

Respondent’s U.S. subsidiary, KTI, designs, manufactures and services

commercial and military fire protection systems.

Respondent’s U.S. subsidiary, Rocketdyne, develops rocket engines,

including for the U.S. space program.

VIOLATIONS

The ITAR violations included in this proposed charging letter are derived

from a number of voluntary disclosures, out of many, provided over a period of six

years by several subsidiaries of Respondent. Several key disclosures only

summarized hundreds of violations, precluding complete review without additional

information. The violations fall into three broad categories: 1) unauthorized

1
Some examples of P&W Canada’s ITAR-controlled engines are the JT15D-5C, PT6A-62, PT6A-68, 68B, and

68C.

– 4 –

exports and re-exports, resulting from the failure to properly establish jurisdiction

over defense articles and technical data; 2) unauthorized exports, resulting from the

failure to exercise internal controls over technical data; and 3) failure to properly

manage Department-authorized agreements. Respondent’s subsidiaries repeatedly

discovered and disclosed violations to the Department, in some cases finding that

reported remedial measures failed to prevent or detect additional similar violations.

In other cases, Respondent’s self-initiated internal compliance reviews identified

additional violations of the same nature, prompting further disclosures and

assurances of remediation.

Also included in this proposed charging letter are two charges based on

violations that do not fall into the three categories referenced above, but which

reveal past problems with Respondent’s internal processes for evaluating and

addressing ITAR violations. On behalf of its operating unit KTI, HSC disclosed to

the Department in April 2012 that two ITAR-controlled aircraft parts were

exported in June 2011 from KTI to Singapore and then re-exported by the recipient

in Singapore to commercial airline customers in the People’s Republic of

China

(“PRC”) and Republic of Korea, before being recovered several months later. The

unauthorized exports occurred after a KTI employee selected the wrong items from

a storage bin containing commingled and similar looking commercial and ITAR-

controlled parts (though labeled accordingly), and then two additional KTI

employees failed to properly verify the shipment.

In its disclosure, HSC noted that a previous unauthorized export from KTI of

ITAR-controlled parts (involving the same KTI employee, the same root causes,

and the same recipient in Singapore) occurred in May 2009. The earlier violation

was not previously disclosed to the Department because Respondent granted an

internal request by HSC for a “waiver” from Respondent’s mandatory compliance

disclosure policy. Respondent’s procedures required that a waiver request include

the results of a comprehensive investigation to determine the facts and

circumstances of the discovered violation, root cause(s), and appropriate corrective

actions. HSC sought a waiver for the May 2009 violation at the end of 2010,

effectively precluding the option for Respondent to deny the request and submit a

timely voluntary disclosure in accordance with §127.12 of the ITAR. Furthermore,

HSC represented to Respondent that KTI had implemented extensive corrective

measures after the May 2009 violation, including segregation of ITAR-controlled

and commercial parts in separate and clearly marked bins. Despite these

representations, KTI failed to implement fully those corrective measures. Without

the opportunity for Department review and oversight which would have followed a

voluntary disclosure, Respondent and HSC relied primarily on KTI’s

– 5 –

representations and did not verify independently KTI’s implementation of the

claimed remedial measures. Similar ITAR violations occurred at KTI in June 2011

and subsequently. Respondent has since acknowledged a need to strengthen

tracking and validation of corrective actions, agreed to review corrective actions

associated with past waiver decisions, and eliminated the waiver option from its

compliance program.

Although UTC operating units and subsidiaries continue to carry out

multiple, wide-ranging compliance reviews, the results of which have yet to be

reported, the Department determined that a proposed charging letter and

administrative settlement was necessary at this time. The violations demonstrate a

systemic, corporate-wide failure to maintain effective ITAR controls and require

immediate, comprehensive, effective remedial action across Respondent’s many

operating units and subsidiaries.

I. Failures by Respondent and Subsidiaries to Properly Establish Jurisdiction on

Defense Articles and Technical Data, Resulting in Unauthorized Exports and

Re-exports

Modified Electronic Engine Control Software to the People’s Republic of China

In March of 2000, the China Aviation Industry Corporation II (China AVIC

II) of the People’s Republic of China (PRC), and its subunits, the China Helicopter

Research and Development Institute and Changhe Aircraft Industries Group Co.,

Ltd. (Changhe), entered into discussions with P&W Canada to develop and sell

PT6C-67C
2
engines for certain Chinese helicopters. According to Respondent’s

disclosure, the discussions involved both civil and military variants of a Z-10

helicopter referred to as the Chinese Medium Helicopter (Z-10 CMH).

The Chinese entities specified the civil version of the Z-10 CMH as a 6 ton

helicopter with a 12-14 passenger cabin capability. However, an internal P&W

Canada document dated August 29, 2000, referred to discussions with the above

Chinese entities on the use of the PT6C-67C engine for the Chinese Z-10 military

attack helicopter. Another internal document dated November 13, 2000, referred

to the sudden appearance of the civil variant of the Z-10 helicopter and speculation

2
Respondent stated that the PT6C-67C engine contains no ITAR technology or hardware.

– 6 –

by P&W Canada that the civil program may have been put together to aid in the

approval of export licenses for the PT6C-67C.
3

In January of 2001, P&W Canada, China AVIC II and Changhe entered into

a contract for P&W Canada to develop ten (10) PT6C-67C engines for use in the

civil variant of the Chinese Z-10 helicopter. In November of 2001, P&W Canada

exported two (2) of the PT6C-67C engines to the PRC under Canadian export

authorization. Then, between December of 2001 and February of 2002, P&W

Canada exported the remaining eight (8) PT6C-67C engines to the PRC.

Between March of 2001 and July of 2002, HSC exported from the U.S. to

P&W Canada ten (10) electronic engine controls (“EECs”) manufactured by HSC.

P&W Canada then exported to the PRC these ten (10) EECs, as well as two (2)

additional EECs from its own inventory. The export and re-export of these EECs

did not require ITAR authorization. Also during this time period, P&W Canada

issued a purchase order to HSC for HSC to modify the basic EEC software for use

on the Chinese Z-10 CMH engines.

Each PT6C-67C engine required an EEC with an associated operating

software program. The basic EEC software was modified during the aircraft

development phase to fine-tune the engine’s performance for the Z-10 helicopter

into which the engine was installed.

When such modifications were made for a

military application, the EEC software became ITAR-controlled.

Between January 2002 and March 2003, HSC exported to P&W Canada

various modified test versions of the EEC software for the Chinese Z-10

helicopter.

HSC exported without authorization this modified EEC software

electronically to Canada on eleven (11) occasions, and then P&W Canada without

authorization re-exported it to the PRC on six (6) occasions.

During this period,

P&W Canada staff travelled to the PRC to participate in engine installation and

software modification tests. At the time, they only performed tests on a generic

PT01 ground test rig.

In March of 2003, however, P&W Canada employees travelled to the PRC

and observed two P&W Canada PT6C-67C engines mounted on a military attack

helicopter prototype test rig referred to as the PT02. This PT02 military prototype

was configured as a stepped, two seat/tandem attack helicopter.

The nature of the

3
Canadian export law required authorization to export PT6C-67C engines to the PRC.

– 7 –

test rig and its use indicated that the P&W Canada PT6C-67C engines, the EECs

and modified EEC software were for use in a Chinese military attack helicopter.

In April of 2003, P&W Canada notified the Canadian Government that the

first test flight of the Chinese helicopters powered by P&W Canada engines would

be the Chinese Z-10 military helicopter.

In August and October 2003, HSC electronically exported without

authorization to P&W Canada a development version of the modified EEC

software. P&W Canada without authorization electronically re-exported the

modified EEC software to the PRC.

In December of 2003, P&W Canada attended a flight test conducted by

Changhe in the PRC of the Z-10 helicopter, specifically the PT03 prototype. The

PT03, like the PT02, was also a stepped, two seat/tandem attack helicopter with

black paint and attack helicopter indicia.

In early January of 2004, P&W Canada and HSC discussed the existence of

the attack helicopter configuration and the resulting export control issues, and HSC

consequently ceased work on the program. In June of 2004, P&W Canada

prepared briefing material for UTC senior executive management, referencing the

two-seat military helicopter configuration of the Z-10 helicopter.

Despite

Respondent’s knowledge of the military application, between November 2004 and

June 2005, P&W Canada made four (4) additional unauthorized re-exports to the

PRC of the modified EEC software.

In February 2006, P&W Canada applied for Canadian government

authorization to export one hundred twenty (120) PT6C-67C engines to the PRC.

In its application, P&W Canada noted that one hundred and ten (110) of these

engines were to be used for the military versions of the Z-10 helicopter.

Though

the Canadian government originally approved this authorization,

it was

subsequently suspended as part of the Canadian government’s export control

review of the program.

In a letter dated July 17, 2006, Respondent disclosed to the Department the

unauthorized exports to the PRC of the modified EEC software for use with the

PT6C-67C engines on the military versions of the Z-10 helicopter. These exports

directly supported the development of Chinese military attack helicopters and

caused harm to U.S. national security. Export of the modified EEC software,

– 8 –

however, did not impart specific military engine or aircraft development

technology.

Respondent’s July 2006 disclosure to the Department came two and a half

years after P&W Canada and HSC discussed their awareness of the attack

helicopter configuration and the resulting export control issues, leading HSC to

stop work on the project. The disclosure was preceded by investor inquiries and

publicity regarding Respondent’s involvement with a PRC attack helicopter. The

disclosure did not reference the early awareness of the primacy of the attack

helicopter version and suspicions regarding the authenticity of the civil version,

shared among certain P&W Canada personnel. In 2010, Respondent also

acknowledged to the Department that its July 2006 disclosure and subsequent

submissions mischaracterized several key corrective measures.

Other USML Modified Engines

After making its July 17, 2006, disclosure and encouraged by a subsequent

meeting with the Department, Respondent undertook a review of P&W Canada

engines and HSC products to determine whether proper ITAR controls were in

place for U.S. defense articles and defense services. As a result of this review,

Respondent detected additional violations involving misclassification of ITAR-

controlled items, and then disclosed them to the Department. The violations

included unauthorized exports and re-exports to Brazil, Bulgaria, Canada,

Colombia, Germany, Greece, Indonesia, Ireland, Italy, Mexico, Saudi Arabia,

Singapore, South Korea, Spain, Switzerland, and Turkey of EECs, EEC software

and other items associated with several P&W Canada engine types.

Deficient Remediation

In January of 2008, after HSC did not properly label ITAR-controlled, build-

to-print technical data related to gas turbine engine minor components for the F-35

Joint Strike Fighter (JSF), an HSC subcontractor without authorization exported

this technical data to the PRC.

This violation was initially reported to the

Department in February of 2008.

Upon discovering the violation, HSC initiated a

complete review of all its supply-chain parts sourced to the PRC where ITAR-

controlled technical data may have been exported without authorization.

In June of 2008, HSC reported that it had exported without authorization

ITAR-controlled, build-to-print technical data for parts incorporated into auxiliary

power units, environmental control units and engines to the PRC. More than a

– 9 –

year later, HSC reported that the review failed to detect a misclassified C-295 part

that had been sourced to a PRC supplier. In the interim, technical data related to

the part was provided to additional PRC companies.

More generally, after initially disclosing EEC-related violations involving

Spain in 2006, HSC committed to undertake a complete review of all items in its

automated compliance system, to verify correct classification and coding. HSC

planned to complete the review by the end of 2006. Five years later, HSC reported

in a different disclosure that it had incorrectly identified 261 items as not ITAR-

controlled, and exported these items and related technical data without

authorization on 812 occasions, including 58 unauthorized exports of defense

articles to Switzerland, United Kingdom, Italy, Australia, Denmark, Brazil, France,

Germany, United Arab Emirates, South Korea, Japan, Hong Kong, Honduras,

Turkey, and Singapore.

Derco Test Stands

In October 2005, Derco contracted to develop, assemble and provide an F-16

Avionics Intermediate Maintenance Test Stand for the Venezuelan Defense

Ministry/Air Force (“VAF”). On August 17, 2006, the Department issued an arms

embargo of all ITAR-controlled items to Venezuela. A Derco employee designed

the test stand using non-ITAR components, and Derco neglected to separately

classify the test stand itself. The Derco employee assembled and programmed the

test stand in Milwaukee, Wisconsin, for inspection by the VAF in October 2006,

and provided training there on its use to the VAF in December 2006.

Derco exported the test stand components to Venezuela between October

and December 2006. The Derco employee assembled the test stand on-site in

Venezuela in December 2006 and January 2007, provided troubleshooting advice

to the VAF in November 2007, and repaired the test stand in Venezuela in

February 2008, with approval of Derco compliance personnel. Derco became

aware of potential ITAR violations involving the test stand in May 2010, but did

not report them to the Department until August 2011.

In 2010, Derco also disclosed similar unauthorized exports in 2007 of two

hydraulic actuator test stands and related services for F-16s of the Belgian Air

Force. The stands were incorrectly classified as not subject to the ITAR.

– 10 –

II. Failures by Respondent and Subsidiaries to Exercise Internal Controls over

Technical Data, Resulting in Unauthorized Exports

In 2000, P&W U.S. began outsourcing to contract engineers from Infotech

Enterprises Ltd. (Infotech), India, certain engineering tasks involving P&W civil

gas turbine aero engines. Foreign person contract engineers co-located at P&W

U.S. facilities were provided with access to electronic data and hard copy

documents related to the engines. In 2008, a review of the technology control

plans and work space for the foreign person contract engineers at P&W U.S.

facilities revealed that fifty-one (51) ITAR-controlled technical data documents

had been accessed without authorization by the Indian engineers, including data

designated as significant military equipment (SME). P&W U.S. also without

authorization provided access to programming tools that incorporated data on

military aircraft engines including the F135 for the F-35 Joint Strike Fighter (JSF).

P&W U.S. disclosed these violations to the Department in 2008 and 2009,

while continuing its investigation.

In addition, P&W U.S.’s Engineering

Department initiated a full review of its export compliance policies and procedures

related to outsourcing in general. In subsequent disclosures, P&W U.S. informed

the Department that between 2003 and 2009, 419 foreign persons affiliated with

approximately 50 different entities had unauthorized access to a software file

containing technical data for the F119 engine. P&W U.S. also disclosed that

between 2007 and 2010, a manual containing technical data related to several

military engines was posted on an Internet-based portal, was downloaded and

viewed without authorization by employees of Infotech and another foreign

vendor, and was accessible by foreign persons employed by P&W U.S., third party

vendors and customers.

In 2010 and 2011, P&W U.S. made additional voluntary disclosures to the

Department regarding potential violations associated with unauthorized access by

foreign persons to P&W U.S. intranet systems. Most of these potential violations

could not be confirmed because P&W U.S. had no means to capture forensic

evidence on data access.

The potential violations included at least 700 documents

containing technical data that were variously accessible by foreign person

employees, contractors and third party vendors.

The potential number of foreign

persons exceeded 260,000 individuals from 90 countries, including countries

proscribed pursuant to § 126.1 of the ITAR. Some of the data was SME and dealt

with sensitive and advanced defense technology, access to which by foreign

persons would have caused significant harm to U.S. national security. After

– 11 –

consultation with the Department of Defense, the Department was unable to assess

the level of actual harm given the lack of forensic evidence.

P&W U.S. undertook several comprehensive compliance reviews related to

the above violations, and implemented extensive remedial measures. Nevertheless,

P&W U.S. continued to discover similar violations. In several instances, actual

and potential violations were not remedied sufficiently upon discovery, resulting in

additional violations.

Also, P&W U.S. repeatedly disclosed violations to the

Department years after discovering them, attributable in part to the need for

extensive investigations.

Similarly and in 2011, P&W Canada voluntarily disclosed to the Department

potential violations by unauthorized foreign persons with access to 97 ITAR-

controlled technical data drawings on an intranet system. While these violations

were identified in 2006, P&W Canada did not address the matter until 2010.

Also in 2011, HSC disclosed that an HSC contract engineer traveled to the

People’s Republic of China (PRC) on business with an HSC-issued laptop

containing ITAR-controlled technical data. The contract engineer left the laptop at

a Shanghai airport upon departure in December 2009, and then failed to retrieve it.

The laptop contained technical data related to the auxiliary power units for the C5,

A400M, and JAS39 platforms. No export control review by HSC preceded the

export of technical data to the PRC, so Department authorization for the export

was neither requested nor granted. HSC was unaware of the export and loss until

April 2010, and then did not disclose the incident to the Department until

September 2011. The laptop was apparently in the custody of Shanghai airport

security for 6 months before it was retrieved by the company. Weaknesses in HSC

procedures and computer forensic investigation have precluded a definitive

determination as to whether the laptop was accessed during that time.

III. Failure by Respondent and Subsidiaries to Properly Manage Department-

Authorized Agreements

Pratt & Whitney, U.S.

In 2006, acting on a referral from the Department of Defense, the Office of

Defense Trade Controls Compliance determined that P&W U.S. substantially

exceeded the scope of a technical assistance agreement (TAA). P&W U.S.

obtained the TAA to provide technical data and defense services to the Ministry of

– 12 –

Defense, Gas Turbine Research Establishment (GTRE), India. This agreement was

limited to the evaluation and assessment of the GTX-35 Kaveri Gas Turbine

Engine (also known as K-9+ and K-10).

In 2005 and 2006, P&W U.S. violated

several provisos and exceeded the scope of the TAA by engaging in a technical

relationship equivalent to providing unauthorized training to GTRE on U.S. turbine

engine design, development and production.

The Department requested and P&W

U.S. promised to develop and implement remedial measures to ensure compliance

with P&W U.S. agreements.

Despite such assurances to the Department, P&W U.S. continued to violate

the provisions of its TAAs and manufacturing license agreements (MLAs).

Through 2009, P&W U.S. and its Israeli affiliates exceeded the scope of several

agreements related to F100 engine production, including the unauthorized

manufacture of engine forgings, the unauthorized provision of defense services,

and unauthorized re-transfers of technical data and defense services to

sublicensees. During that time period, P&W U.S. also exceeded the scope of two

other MLAs when on eight (8) separate occasions it exported technical data and

defense services related to lifing analysis of the F117-PW-100 military engine to

Germany and gearbox component analysis of the F117-PW-100 and F100-PW-

220/229 military engines to Italy. P&W U.S. disclosed these violations to the

Department in 2009.

And in 2010, P&W U.S. disclosed that over the preceding

decade it exceeded the authorized value of three MLAs by a combined total of

more than $35,000,000.

P&W U.S. accompanied each successive disclosure with a compliance

review and corrective actions. In 2010 and 2011, P&W U.S. reviewed 193 of its

agreements in an extensive effort to ascertain ITAR compliance. This undertaking

was part of an enterprise-wide review of all agreements held by UTC aerospace

entities, launched in May 2010 in response to the extensive violations uncovered at

Hamilton Sundstrand (discussed below). P&W U.S. found that 89 agreements had

been violated in the following ways: transfers outside of scope, ITAR Part 130

reporting violations, dollar value overages, and unauthorized access to technical

data by foreign persons, including foreign licensees and information technology

(IT) subcontractors and unauthorized employees.

Given the nature and extent of

these violations and lack of proper record-keeping, P&W U.S. could only provide a

summary disclosure, precluding complete review by the Department.

In

conjunction with this analysis, P&W U.S. reported substantial new commitment to

and investment in export compliance.

P&W U.S. continues its compliance

reviews.

– 13 –

Hamilton Sundstrand Corporation

In May 2007, Hamilton Sundstrand Corporation (HSC) commenced a

review of all of its agreements to identify any undiscovered compliance issues and

ensure continued compliance with the ITAR. The review was to be completed by

the end of 2007. Also that year, HSC instituted an “Agreement Control Plan” and

launched a comprehensive company ITAR training program.

HSC reported these

measures and undertakings to the Department while disclosing violations of a TAA

involving the US101 Presidential Helicopter (now designated VH-71A).

Despite these remedial and preventive compliance measures, nearly two

years later in 2009 and again in 2010, HSC submitted to the Department multiple

disclosures associated with various violations of technical assistance and

manufacturing license agreements and a warehouse & distribution agreement.

These violations included unauthorized access by foreign persons to defense

articles, including technical data associated with component parts for a host of

aircraft, submarine and ground vehicle systems.

The violations involved foreign

person employees, subcontractors, foreign manufacturers and contracted IT staff.

Other violations involved continued manufacturing after agreement expiration,

exceeding authorized dollar values, failure to file timely sales reports, Part 130

violations and incorrect export control jurisdiction of items.

In all, hundreds of violations were identified in more than 200 agreements.

These violations were largely summarized by HSC for the reasons noted above

regarding P&W U.S., precluding complete review by the Department. For

example, HSC acknowledged its inability to supply the Department with all

technical data re-transferred under the color of the reviewed agreements, and

offered to submit representative samples instead.

HSC acknowledged that it failed to manage its agreements properly and to

keep adequate records of its ITAR-controlled activities.

HSC attributed these

failures to a lack of clear compliance processes and adequate IT systems, due in

turn to inadequate resources for compliance.

Until recently, for instance, HSC’s

agreement management was “trifurcated,” with a licensing manager responsible for

drafting agreements, compliance officials responsible for transmittal letters and

providing general support, and designees in the business units nominally

responsible for managing agreement compliance.

As a result, HSC’s export compliance program could not keep up with the

increased demands caused by organic growth, increased export activity, and

– 14 –

decentralized business processes.

For example, HSC had been shipping all

hardware sold to Japan via Sumitomo Corporation of America (“SCOA”), for

forwarding to licensees pursuant to SCOA’s own DSP-5 permanent hardware

export licenses. HSC did not track which of its agreements covered each shipment,

and overlapping HSC and SCOA export authorizations made this impossible to

determine subsequently.

Early remedial compliance measures were not effective in preventing further

violations. However, HSC has recently increased its export compliance staff and is

implementing a variety of remedial and preventive compliance measures, including

a revised “Agreement Control Plan.”

Other UTC Subsidiaries

Other UTC subsidiaries have also demonstrated inadequate oversight of their

agreements. During the past decade, Pratt &Whitney Rocketdyne has submitted a

series of disclosures regarding similar recurring violations of a TAA with Russia’s

NPO Energomash related to the RD-180 rocket engine. Some of the violations

took place while remedial measures related to prior violations were being

implemented. And in 2010, Sikorsky Aircraft Corporation disclosed violations of

six (6) TAAs and MLAs with Canadian, French and German companies, related to

a variety of military aircraft. In 2011, Sikorsky Aircraft Corporation reviewed 159

of its agreements, and found that 70 agreements had been violated in the following

ways: unauthorized access to defense articles and technical data by foreign

persons, including foreign licensees and information technology (IT)

subcontractors and unauthorized employees; activities by unauthorized parties and

under expired or unexecuted agreements; and various recordkeeping violations.

RELEVANT ITAR REQUIREMENTS

Part 121 of the ITAR identifies the items that are defense articles, technical

data, and defense services pursuant to Section 38 of the AECA.

Section 123.1(a) of the ITAR provides that any person who intends to export

or to import temporarily a defense article must obtain the approval of the DDTC

prior to the export or temporary import, unless the export or temporary import

qualifies for an exemption under the provisions of this subchapter.

– 15 –

Section 123.1(c)(5) of the ITAR provides that a DSP-83 (Nontransfer and

Use Certificate) is required for the permanent export of significant military

equipment.

Section 123.22(b) of the ITAR provides that any export of a defense article

controlled by the ITAR requires the applicant/exporter, or an agent acting on the

filer’s behalf, to file export information with the U.S. Customs and Border

Protection.

Section 124.1(c) of the ITAR requires that changes to the scope of approved

agreements (including modifications, upgrades, or extensions) must be submitted

for approval, and that the amendments may not enter into force until approved by

DDTC.

Section 126.1(a) of the ITAR provides that it is the policy of the United

States to deny, among other things, licenses and other approvals, destined for or

originating in certain countries, including the People’s Republic of

China (PRC).

Section 126.1(e) of the ITAR provides that anyone that knows or has reason

to know of a proposed or actual sale, or transfer, of a defense article, defense

service or technical data to a proscribed country, such as the PRC, must

immediately inform DDTC.

Section 127.1(a)(1) of the ITAR provides that it is unlawful to export or

attempt to export from the United States, or to re-export or re-transfer or attempt to

re-export or re-transfer from one foreign destination to another foreign destination

of any defense article or technical data or to furnish any defense service for which

a license or written approval is required by the ITAR without first obtaining the

required license or written approval from DDTC.

Section 127.1(a)(4) of the ITAR provides that it is unlawful to violate any

terms or conditions of licenses or approvals granted by DDTC.

Section 127.2(a) of the ITAR provides that it is unlawful to use any export

or temporary import control document containing a false statement or

misrepresenting or omitting a material fact for the purpose of exporting any

defense article or technical data or the furnishing of any defense service for which

a license or approval is required by the ITAR.

– 16 –

CHARGES

Charges 1-13 Unauthorized Exports to Canada of EEC Software

Respondent violated Section 127.1(a)(1) of the ITAR when HSC exported to

P&W Canada thirteen (13) times EEC software specifically modified for use in the

military Z-10 attack helicopter without the appropriate authorizations from the

Department.

Charges 14-24 Unauthorized Re-transfer of Modified EEC Software to the

People’s Republic of China (PRC)

Respondent violated Section 127.1(a)(1) of the ITAR when P&W Canada on

eleven (11) occasions re-exported to the PRC EEC software specifically modified

for use in the military Z-10 attack helicopter without appropriate authorizations

from the Department.

Charge 25 Failure to File Export Information

Respondent violated Section 123.22(b) of the ITAR when HSC exported a

defense article to Canada and failed to file required export information with U.S.

Customs and Border Protection.

Charge 26 Failure to Immediately Notify of Sale/Transfer to Proscribed Country

Respondent violated Section 126.1(e) of the ITAR when Respondent knew

of the sale, or transfer, of a defense article to a proscribed country in 2004 and

failed to immediately notify DDTC.

Charges 27-84 Unauthorized Exports of Defense Articles due to Incorrect

Jurisdiction Self-Determinations

Respondent violated Section 127.1(a)(1) of the ITAR when fifty-eight (58)

times HSC exported defense articles that it incorrectly determined to be not subject

to the ITAR to Switzerland, United Kingdom, Italy, Australia, Denmark, Brazil,

France, Germany, United Arab Emirates, South Korea, Japan, Hong Kong,

Honduras, Turkey, and Singapore without the appropriate authorizations from the

Department.

Charge 85 Unauthorized Export to Venezuela of Test Stand

– 17 –

Respondent violated Section 127.1(a)(1) of the ITAR when Derco exported

to Venezuelan Defense Ministry/Air Force an F-16 Avionics Intermediate

Maintenance Test Stand without the appropriate authorization from the

Department.

Charges 86-136 Unauthorized Exports of Technical Data and Automation Tools

Respondent violated Section 127.1(a)(1) of the ITAR when fifty-one (51)

times P&W U.S. exported without authorization technical data and automation

tools to an Indian company and its contracted engineer employees.

Charge 137 Unauthorized Export of Technical Data to the People’s Republic of

China

Respondent violated Section 127.1(a)(1) of the ITAR when HSC exported

without authorization a laptop containing technical data related to the auxiliary

power units for the C5, A400M, and JAS39 platforms to the People’s Republic of

China (PRC).

Charges 138-574 Failure to Comply with the Terms and Administrative

Requirements of Agreements

Respondent violated Sections 127.1(a)(4), 127.2, and 124.1(c) of the ITAR

four hundred and thirty seven (437) times when it failed to abide by the substantive

and administrative terms and conditions associated with DDTC-approved TAAs,

MLAs and WDAs.

Charges 575-576 Unauthorized Exports of Defense Articles to Singapore

Respondent violated Section 127.1(a)(1) of the ITAR two (2) times when

KTI exported defense articles to Singapore in May 2009 and in June 2011 without

the appropriate authorization from the Department.

The Department considered the Respondent’s voluntary disclosures and

remedial compliance measures as significant mitigating factors, and would

otherwise have charged the Respondent with many additional violations and

imposed a more severe penalty. The Department estimated the number of certain

types of violations, due to the summary nature of several key voluntary disclosures

by the Respondent.

– 18 –

ADMINISTRATIVE PROCEEDINGS

Pursuant to Part 128 of the ITAR, administrative proceedings are instituted

by means of a charging letter against Respondent for the purpose of obtaining an

Order imposing civil administrative sanctions. The Order issued may include an

appropriate period of debarment, which shall generally be for a period of three

years, but in any event will continue until an application for reinstatement is

submitted and approved. Civil penalties, not to exceed $500,000 per violation,

may be imposed as well in accordance with Section 38(e) of the AECA and

Section 127.10 of the ITAR.

A Respondent has certain rights in such proceedings as described in Part 128

of the ITAR. Currently, this is a proposed charging letter. However, in the event

that you are served with a charging letter, you are advised of the following matters:

You are required to answer the charging letter within 30 days after service. If you

fail to answer the charging letter, your failure to answer will be taken as an

admission of the truth of the charges. You are entitled to an oral hearing, if a

written demand for one is filed with the answer, or within seven (7) days after

service of the answer. You may, if so desired, be represented by counsel of your

choosing.

Additionally, in the event that you are served with a charging letter, your

answer, written demand for oral hearing (if any) and supporting evidence required

by Section 128.5(b) of the ITAR, shall be in duplicate and mailed to the

administrative law judge designated by the Department to hear this case. These

documents should be mailed to the administrative law judge at the following

address: USCG, Office of Administrative Law Judges G-CJ, 2100 Second Street,

SW Room 6302, Washington, D.C. 20593. A copy shall be simultaneously mailed

to the Managing Director, Directorate of Defense Trade Controls, Bureau of

Political-Military Affairs, U.S. Department of State, PM/DDTC, SA-1, 12
th

Floor,

Washington, D.C. 20522-0112. If you do not demand an oral hearing, you must

transmit within seven (7) days after the service of your answer, the original or

photocopies of all correspondence, papers, records, affidavits, and other

documentary or written evidence having any bearing upon or connection with the

matters in issue.

Please be advised also that charging letters may be amended from time to

time, upon reasonable notice. Furthermore, pursuant to Section 128.11 of the

– 19 –

ITAR, cases may be settled through consent agreements, including after service of

a proposed charging letter.

Be advised that the U.S. Government is free to pursue civil, administrative,

and/or criminal enforcement for violations of the AECA and the ITAR. The

Department of State’s decision to pursue one type of enforcement action does not

preclude it, or any other department or agency, from pursing another type of

enforcement action.

Sincerely,

Lisa V. Aguirre

Director

Office of Defense Trade Controls

Compliance

KRAKEN EXCHANGE
LAWSUIT

Trevor, Woojin & Marbel

TABLE OF
CONTENT

01.

02.

BOTTOM LINE UP FRONT

FACTS OF THE CASE / LEGAL AUTHORITY

What’s the case about?

03.

ISSUE

04. RULE

What exactly happened – which legal authority?

What law has been broken?

BLUF

05.

ANALYSIS

Outcome of the case

TERMINOLOGY01.

02.

OFAC – OFFICE OF FOREIGN
ASSETS COUNCIL

AGGREVATING VS MITIGATING FACTOR

Financial intelligence and enforcement agency of the US Treasury Department. It
administers and enforces economic and trade sanctions in support of US national
security and foreign policy objectives

03. IP BLOCKING

04. GEOLOCATON

Any facts that increase the level of severity of any criminal activity.
Any fact or circumstance that lesses the severity or culpability of a criminal
act

05. BLOCKCHAIN
Distributed database that maintains a continuously growing list of ordered
records, called blocks

Process of identifying the geographical location of a person or device by
means of digital information processed by the internet

Configuration of a network service that blocks request from hosts with
certain IP addresses.

BOTTOM LINE

San Francisco based Virtual
Crypto Currency Exchange
company

daily trading volume is
around $333 million
9 million users worldwide
(2023)

Sued by OFAC – breaching its
regulations regarding trading
with citizens from Iran which is
forbidden.

FACTS &
ISSUE

Kraken Case

01.

FACTS

ISSUE

Maintained anti-laundering and
sanctions compliance program.
IP address information @
onboarding
826 transactions from Iran –> $
1,680,577
OFAC – Office of Foreign Assets
Control

Kraken engaged in 826
apparent violations of

the Iranian Transaction
and Sanctions

Regulations
$ 1,680,577 from Iran

“IRANIAN TRANSACTIONS AND
SANCTIONS REGULATIONS

31 C.F.R. §560.204

31 CFR § 560.204

826 violations of the Iranian
Transactions and Sanctions
Regulations
560.204 prohibits unauthorized
export and re-export, sale or
supply, directly or indirectly from
the United States or by an US
person, wherever located, of any
goods, technology or services to
Iran or the Government of Iran.

SETTLEMENT OF
$362,158.70

MAXIMUM CIVIL MONETARY PENALTY APPLICABLE IN THIS MATTER IS
$272,228,96.

ACCORDINGLY, UNDER OFAC’S ECONOMIC SANCTIONS ENFORCEMENT
GUIDELINES THE BASE CIVIL MONETARY PENALTY
APPLICABLE THE SUM OF ONE-HALF OF THE TRANSACTION VALUE FOR EACH
APPARENT VIOLATION, WHICH IS $840,288.55.

ANALYSIS

Aggravating Factors
Kraken failed to exercise due caution or care for its sanctions compliance
obligations when, knowing it had customers worldwide, it applied its
geolocation controls only at the time of onboarding and not with respect to
subsequent transactional activity, despite having reason to know based on
available IP address information that transactions appear to have been
conducted from Iran.

Mitigating Factors
voluntarily self-disclosed and cooperated with OFAC
never received a penalty in 5 years.
undertook significant measures
sanctions compliance program

BIBLIOGRAPHY

https://en.wikipedia.org/wiki/Office_of_Foreign_Assets_Control

https://www.investopedia.com/tech/what-
kraken/#:~:text=Kraken%20is%20a%20cryptocurrency%20exchange,euros%2C%20and

%20the%20Japanese%20yen.

https://www.usesignhouse.com/blog/kraken-stats
(PDF Provided)