How did five of the most prominent freight forwarders shipping goods subject to the International Traffic in Arms Regulations (ITAR), suddenly become ineligible as carriers for ITAR exporters? The answer begins with a Sherman Antitrust action by the U.S. Department of Justice and ends, for the moment, with a major gap in logistics, supply chain, and transport for companies manufacturing, trading, or exporting ITAR-controlled products.
In September 2010, six international freight forwarders pleaded guilty to allegations of conspiring to fix prices and fees for international air cargo shipments to the United States. The plea agreements, however, were not completely finalized until December 2011. By that time, President Obama had signed the Consolidated Appropriations Act of 2012. That Act contained a provision that debarred companies with felony criminal violations under any federal law within the preceding two years from receiving funds from the U.S. government, including the Department of Defense. Companies so debarred are placed on the U.S. Government’s Excluded Party List System (EPLS).
On February 16, 2012, as a result of the guilty pleas, a number of freight forwarding companies were placed on the EPLS. Two of those have since successfully challenged their debarment and have been removed from the EPLS. The remaining debarred freight forwarding companies are:
- BAX Global Inc.
- Kuhne and Nagel International AG
- Panalpina Inc.
- Panalpina Welttransport AG
- Schenker AG
Under §127.1(c)(2) of the ITAR, a party may not use, forward, transport, or otherwise participate in a transaction with a party listed as debarred or proposed for debarment on the EPLS where that transaction involves a defense article. In short, companies may not ship ITAR-controlled articles using debarred freight forwarders.
At the time the debarment was announced, rumors swirled (and blog articles proliferated) regarding the ITAR implications of adding these freight forwarders to the EPLS. Manufacturers and exporters of ITAR goods came to understand the implications of the debarment and could foresee potentially devastating shocks to their global supply chains and shipping logistics.
The DDTC, to its credit, quickly issued guidance on the situation on February 27, 2012. That guidance clarified certain essential points including:
- The entities listed on the EPLS are ineligible to participate in transactions involving ITAR-controlled articles in accordance with §127.1(c)(2);
- ITAR authorizations approved by DDTC prior to February 24, 2012 are not affected;
- Authorization requests received by DDTC prior to February 18, 2012 will be reviewed in the normal course;
- Authorization requests involving one of the listed parties received by DDTC on or after February 18, 2012 and pending with DDTC on February 24, 2012, will be Returned Without Action (RWA) unless a Transaction Exception (TE) request is submitted; and
- Future authorization requests involving any of the listed parties must include a TE request or they will be RWA.
Each TE request is required to include an explanation of why the ineligible party should be included in the ITAR authorization as well as why a TE for the ineligible party is in the interest of U.S. foreign policy or national security. DDTC will consider TE requests on a case-by-case basis to review the reasons for including an ineligible party. The requirement to submit TE requests in order to use a listed shipper could significantly increase administrative costs for applicants as well as raise the risk that they will not receive requested DDTC authorizations.
Because incidents outside the narrow realm of ITAR-controlled manufacture and export can have a profound impact on companies doing business in that area, companies must be sure that their ITAR screenings are adequately comprehensive. The Bureau of Industry and Security maintains a Consolidated Restricted Party List (CRPL), against which many companies screen transaction partners for ITAR-controlled activity. There are, however, parties listed on the EPLS that are not included on the CRPL.
An EPLS screening should be part of any due diligence performed by exporters and other parties involved in ITAR transactions. Companies working in the ITAR-controlled sector should take steps to ensure that their compliance functions, including their automated compliance screening software, include a check of the EPLS for parties engaged in ITAR-controlled transactions. If a company finds the name of a transaction partner listed on the EPLS, the company should consider the match a “red flag” and resolve the listed party’s ITAR eligibility before proceeding with the transaction.