military defense

Every day, employees share sensitive information with external parties and don’t realize the risks of these routine actions. While this level of collaboration may not seem like a serious threat, the inadvertent or unintended export of technical data to the wrong person, such as someone in a foreign country or a non-US citizen, could result in serious consequences for both the employee and his/her employer.

The U.S. government’s International Traffic in Arms Regulations (ITAR) controls the export and import of defense-related articles, services and technical data. Under these regulations, all technical data must be stored in an environment physically and logistically accessible to U.S. persons only, subject of course to exports of technical data permitted under ITAR. Companies and individuals that fail to comply with these regulations face severe consequences that not only include paying a hefty fine, but often expand far beyond it.

There are a number of risks that companies and individuals face by failing to monitor the movement of their technical data in violation of ITAR. If the data were to fall into the wrong hands, the accidental or intentional leakage of sensitive information could result in:

  • Significant Accrual of Fines – In recent years, failure to comply with ITAR has resulted in fines ranging from $20,000 to $78 million. The amount penalized depends on the number and severity of the violations committed.
  • Denial of Export Privileges – Companies who fail to comply with ITAR are subject to the loss of export privileges. If this occurs, organizations are prohibited from participating directly or indirectly in the export of technical data and defense services. As a result, their ability to conduct business regularly will likely suffer.
  • Mandatory Increase in Staffing – Penalties may also include the need to hire a special compliance officer (SCO). The SCO’s role is to monitor the company’s progress in enhancing compliance programs and must be compensated out-of-pocket. The time required for a SCO to be with a company depends on the severity of company’s violation(s).
  • Regular External Audits – A company found in violation of ITAR may be required to submit to a series of comprehensive audits. These audits must occur at least once each year, and will examine ITAR policies and procedures, while identifying compliance gaps and risks within a company’s ITAR program.
  • Loss of, or Completely Damaged, Public Reputation – In addition to the monetary, logistical and privilege-specific penalties, a company that has violated ITAR will be forced to sign a consent agreement requiring them to enhance compliance programs. Companies will be placed on a list and the details of their agreement will be made available to the public. This may hurt the company image and current business relations, and deter potential clients from using their products or services.

In the past two years, five companies have been fined a total of $71 million for violating ITAR regulations. While awareness through employee training is the best way to prevent this from happening, there are a number of ways to avoid criminal and civil penalties associated with ITAR violations. It may seem simple, but companies which have constructed private dark clouds to monitor and handle ITAR data have found themselves restricted and limited, unable to operate at the speed today’s business demands. Previously, there was no exemption allowing encrypted data to be stored in the cloud. However, due to recent changes by the U.S. State Department, if certain regulations such as knowing who can see the data, along with tracking when and where it has been accessed, are met, third-party cloud-based collaboration solutions can be designated as compliant. In accordance with [ITAR] § 125.4(b)(9), these regulations include:

  • Information and materials related to items on the United States Munitions List (USML) may only be shared with “U.S. Persons” (unless authorized by the U.S. Department of State).
  • All U.S. providers in the USML supply chain must register obtain appropriate import/export licenses from the U.S. Department of State.
  • Unauthorized re-transfer or re-export of any articles is a major breach of the law – and is tightly regulated.
  • Scope of the regulation includes data/information that’s accessed by authorized U.S. persons when traveling outside the U.S. and is then shared with foreign nationals.

For many years, organizations in the defense industry have been faced with two prospects when collaborating: build expensive private clouds that lack the ease and flexibility needed to facilitate business at lightning-fast speeds, or risk using public cloud options that expose the organization to expensive and damaging ITAR violations. However, new changes to regulations have allowed for the creation of a new generation of secure, ITAR-certified third-party public cloud options. It will be important for the defense sector to cut through the marketing hype to separate which ones are truly ITAR compliant from those that simply make the claim. But once they do, violations can be proactively prevented while still fostering a collaborative environment, giving both company and employee a priceless peace of mind.

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William O'Brien

William O'Brien_headshot (1)William L. O’Brien is the chief operating officer of Brainloop and former speaker of the New Hampshire House of Representatives. He obtained his J.D. from Suffolk University Law School and later received a Master’s in Intellectual Property Law from the University of New Hampshire School of Law. He has held various executive positions in technology companies over the last 20 years, including in both general counsel and operational roles. He has been happily married to his wife, Roxanne, for 40 years. They have three grown children, and three grandchildren.

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