Breakout Session Candace Miller, Director, International Trade Compliance, BAE Systems, Inc.

2. Negotiating the Minefields of Export Controls & Compliance Breakout Session Candace Miller, Director, International Trade Compliance, BAE Systems, Inc. Date: December 4, 2006 Time: 11:40 am – 12:40 pm NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

3. Consideration “It is interesting that today we are discussing the awarding of national security contracts and not just defense contracts …………. Contracts impacting national security can be, and are, awarded by agencies other than the Department of Defense. Like DoD, the other agencies are required, for the most part, to comply with the same acquisition laws and regulations, including the Federal Acquisition Regulation (FAR). The FAR, [like many other laws and regulations relative to contracting and exporting requirements, are a highly complex set of rules that the parties involve must follow] in the award of contracts to government contractors within the industrial sector.” R. Terry Marlow, Vice President Acquisition Policy Aerospace Industries Association Opening Comments During the International Symposium (Emerging Issues on National and National Security), March 21, 2006 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

4. Overview • Pertinent Export Control Laws and Regulations • Responsibilities • Knowing Your Parties and Technology • Knowing Your Exports & Re-Exports • Internal Risk Assessment • Elements of Successfully Incorporating Export Controls • Evaluating External Risk • Red Flags • Export Control Violations • Compliance & Violations • Case Summaries NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

5. Pertinent Export Control Laws & Regulations • Export Control primarily refers to: • Enforcement of export control laws of the U.S. Departments of State (DDTC), Commerce (BIS), Treasury (OFAC), ATF/E, and a host of USG agencies. • Focus on Defense and Dual-Use Articles • 22 USC 2778 – Arms Export Control Act (AECA) – DDTC; Major Regulation Provision implementing the Statue, International Traffic in Arms Regulation (ITAR) at 22 CFR 120-130. • 50 USC 1701-1706 – International Emergency Economic Powers Act (IEEPA) – BIS & OFAC; Major Regulation Provision implementing the Statue, The Export Administration Regulation (EAR) at 15 CFR Parts 730-774. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

6. Responsibilities • Comprehensive Approach to Controls From Cradle-to-Grave with Proviso to Ensure Compliance • The Acquisition Process should not exclusively consider the cost & benefits of the acquisition, but also the potential for unintentional negative consequences. • The U.S. Exporter is Strictly Liable ( Responsible) for the Acts of all Employees, Agents, and all Authorized Persons • Information Provided to the USG must be Complete and Accurate • Discrepancies and Incomplete Information May Delay an Export Authorization Request or lead to the Submission of Incomplete or False Information • Perception of Ignorance or Circumvention of Government Requirements Will Result in Treatment of Minor Infractions as Major Violation (Reputation Precede) • Companies with a Proven Track Record and Commitment Can Withstand Inevitable Anomalies in Export Compliance NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

7. Knowing Your Parties & Technology • Know all Parties Involved with the Technology & Services in the Contractual Agreement (e.g., all Sub-Contractors [Domestic & Foreign]) • Identify and Certify all Parties to a Defense (Controlled Article) Trade Transaction in an Authorization Request (e.g., Positive Verification of Exporter, End-User, Sales Rep, Brokers, Freight Forwarded, Foreign Entity, Ultimate Consignee, etc.) • Avoid Dealings with Unauthorized/Denied and/or Barred Persons • Know Specific Requirements Related to High Interest or Sensitive (Major Defense & National Security) Programs (e.g., Significant Military Equipment [SME]; Missile Technology Control Regime [MTCR]; Classified vs. Non-Classified; etc.) NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

8. Knowing Your Parties & Technology (Continued) • Fees and Commissions • Suppliers and Applicants must disclose actual or offered agent’s fees or political contributions (ITAR Part 130) to the Department of State, Directorate, Defense Trade Controls (DDTC). • Brokering • Registration and Licensing of Brokers (ITAR Part 129) –Any person representing others in negotiating or arranging contracts, purchases, sales or transfers of defense articles (services) in turn for a fee, commission, etc. • OFAC Requirements • Economic sanctions are imposed by the U.S. against other countries for foreign policy reasons. • They are the weapons of choice for the U.S. short of military action. • Most U.S. sanctions are unilateral. They are widely criticized around the world and by some in the U.S., but they are administered aggressively by the U.S. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

9. Knowing Your Parties & Technology (Continued) • Identify • Arms Export Control Act (AECA) Section 38 (2): “The President shall require that each applicant for a license to export an item on the USML identify in the application all consignees and freight forwarders involved in the proposed export…including end user and country of final destination.” • Certify • 22 CFR 126.13: (2) “To the best of the applicant’s knowledge, no party to the export….has been convicted of violating any U.S. criminal statues enumerated in 120.27 since the effective date of the AECA; or is ineligible to contract with, or to receive a license or other approval to import defense articles or defense services from, or to receive an export license or other approval from any agency of the USG.” NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

10. Knowing Your Exports & Re-Exports • Exports include: • The shipment of goods abroad, • The performance of services abroad, • The transmission and/or licensing of software, technical data and information to overseas destinations, • The posting of data, including software, technology and other information, on a computer network which is accessible from overseas, and • Permitting foreign nationals to have access to data, including software, technology and other information which is controlled under U.S. export laws, whether such access is provided in the U.S. or abroad, including by providing such persons access to U.S. data bases or computer systems. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

11. Knowing Your Exports & Re-Exports (Continued) • Re-Exports include: • The export of products from a foreign country if such products were manufactured in the United States; • The export of products from a foreign country if such products were manufactured abroad based on technology which originated in the United States; and • The export of products from a foreign country if such products utilize U.S.-origin components or raw materials which exceed the De Minimis Rules set forth in the EAR’s. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

12. Internal Risk Assessment • Examine any unique Agreements particular to your business environment (e.g., Special Security Agreements, Technical Assistance Agreements, Diversity of Products and Technology, etc.) • Recommend, at a minimum, completion of an annual risk assessment: • What the major export compliance risks for my sector? • Do I have contacts/programs involving international programs? • Do these programs involve FN visitor and/or employees? • Is the level of my sub-contractor work high-medium-low? • Have I kept up with regulatory/corporation changes? • Do I have a viable means to verify required certifications of all parties involved? • Is there an internal audit cycle and established means to document disclosures and initiate a corrective action plan? • Do I have an established/tailored export compliance training program for all employees involved with controlled articles and/or service? NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

13. Elements of Successfully Incorporating Export Controls • Incorporate Export Compliance measures within the performance-based measures of the contractual agreement (e.g., semi-annual party identification and certification; recovery measures associated with unintentional [minor or major] consequences • Establish clear procedures for inventory control to track controlled items through final delivery and notification procedures when breaches occur • Involves Strategic Thinking • Culture of Compliance (Communication/Detection/Prevention) - Senior Leadership Involvement • Embed/Integrate your Compliance Program in your Business Practice (Before/During/After) NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

14. Elements of Successfully Incorporating Export Controls (Continued) • Becoming Heir to a Contract with Shortcomings by way of Mergers, Acquisitions, Divestitures (MAD) (Contrary to Law vs. Contract Administration) – Be aware of MAD activities of Suppliers, Freight Forwards, etc. • Objective and timely inquiry when identifying problems and disclosures • Export Compliance involves same level of consideration in the acquisition process as Security, Legal, Facilities, Budgeting, Sales, etc. • Comprehensive understanding of company risk NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

15. Negotiating the Minefields of Export Controls & Compliance Breakout Session (Continued) Steven Arruda, Senior Manager & Alfred Furrs, Senior Specialist, International Trade Compliance, BAE Systems, Inc. Date: December 4, 2006 Time: 11:40 am – 12:40 pm NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

16. Evaluating External Risk • Changes in USG Agencies/Polices/Laws/Regulations Governing the Contractual Transaction • Presidential Executive Orders (Geo-Political Environment) • Changes in Other Countries’ Export Regulations • Current Events (e.g., Venezuela Embargo; Libya no-Embargo; etc.) • Increased USG focus on compliance and enforcement NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

17. Red Flags • Basic Warnings • End-Use: • Unfamiliar end-user • Reluctance or evasiveness by USG party or purchasing agent to provide information • Unusual Payment requirements • Scanty, unavailable, or derogatory background information • Incomplete/suspect supporting documentation • Unfamiliarity of end-user with the product or its use • End-user declines usual follow-on service, installation, warranty, spares, repairs, or overhaul contracts NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

18. Red Flags (Continued) • Commodity Indicators • Commodities/services appear excessive or inconsistent with end-user’s or consignee’s inventory needs • Commodities in demand by embargoed/sanctioned countries • Request for sensitive/Significant commodities • Country/Shipment Indicators • Unusual routing, trans-shipment through multiple countries/companies • Location of end-user or consignee in a Free Trade Zone (FTZ) • New/unfamiliar Intermediary • Vague or suspicious delivery dates., locations, (e.g., P.O. boxes), shipping instructions, packing requirements, etc. • Designation of freight forwarders as foreign consignees or foreign end-users • Foreign intermediate consignees (trading companies, freight forwards, export companies) with no apparent connect to end-user NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

19. Export Control Violations • Civil violations: up to $500K fine per violation on business unit (comes out of profit/no tax write-off). • Criminal violations: up to $1M per violation and suspension of export privileges on business unit and the corporation • Criminal penalties: for willful and conscious avoidance of knowledge of violations also include the threat for both the perpetrator and Senior Management of (a) prison terms and (b) loss of personal assets. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

20. Violations Export Control Violations NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

21. Case Summaries • Technology Transfer/Deemed Export/Criminal & Civil Penalties/Voluntary Disclosure/Cooperation • Silicon Valley Leader in Microwave Systems (25 Regulatory Export Violations) (96-00) • Failure to obtain the appropriate licensing approval to ship Detector log Video Amplifiers (DLVAs) to PRC. (dual use technology – NS controlled – radar, missile, & satellite communications) • Company Knowingly Submitted False Statements to BIS by Supplying false end-user information (“identity”). Company President “certified” applications. • Failure to Obtain Export authority under the “Deemed Export” Provisions of the EAR. Chinese Nationals Worked & Training on DLVA Technology NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

22. Case Summaries • Technology Transfer/Deemed Export/Criminal & Civil Penalties/Voluntary Disclosure/Cooperation (Continued) • First Criminal Conviction in a Technology Transfer (Deemed Export) Case (2004) • Mitigating Circumstances (Voluntary Self Disclosed and Cooperated with Export Enforcement Officials) – Not Necessarily Advantageous • Company agreed to $275K Civil Penalty; President $187K Civil Penalty. Both received 20-year Denial of Export Privileges • Company Plea Guilty to Violating EAR and Fined $339K. President also Plea Guilty and still awaiting sentencing. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

23. HOSSEIN VAEZI and ABBAS TAVAKOLIANdba:SEPAHAN PASH COMPANY NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

24. Case Summaries • Suspicious Inquiry • Hossein VAEZI, owner of a company located in Tehran, Iran emails a U.S. defense contractor, requesting a quotation for (100) M61A1 Inner Drums used on F-4s and F-14s • Defense contractor reports the suspicious activity to U.S. Immigration and Customs (ICE) • ICE Undercover Agents (UCAs), utilizing an undercover business, engage VAEZI via email NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

25. Case Summaries • Undercover Negotiations With VAEZI • VAEZI and his son-in-law, Abbas TAVAKOLIAN, meet with undercover ICE agents in Vienna, Austria and inspect a sample M61A1 inner drum • During undercover meetings both men demonstrate knowledge that the export of military parts from the U.S. would be illegal. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

26. Case Summaries • Overt Acts • Undercover ICE Agents complete the sale of one inner drum and other F-14, F-5 and F-4 aircraft parts • TAVAKOLIAN wire transferred $20,000 into an ICE undercover bank account as a deposit for the total $400,000 aircraft part order • TAVAKOLIAN and VAEZI are indicted for conspiracy to violate the Arms Export Control Act and Money Laundering NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

27. Case Summaries • UC MEETINGS IN SAIPAN • TAVAKOLIAN meets ICE undercover Agents in Saipan, Mariana Islands to accept delivery of the aircraft parts • TAVAKOLIAN inspects the parts, pays the ICE undercover Agents $103,000 cash and requested a “Secret Meeting” in an outdoor park to discuss the purchase of 3 complete airworthy F-14 Tomcat military aircraft. NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

28. Compliance & Violations • Strategic Damage • Threat to the Nation’s national Security and Combat Forces • Export violations will damage the reputation of your company with customers, partners, the U.S. Government, and the public • Developing a reputation for export violations will undermine a strategy of growth through acquisition • Mergers will not be approved if a company’s reputation is not beyond reproach NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

29. Compliance & Violations (Continued) • Personal and Career Damage • Willful violations typically result in civil and/or criminal penalties/fines. • Export violations create a perception of poor performance • Committing an export violation can harm employability NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities

30. Contacts Candace Miller, Director Steven Arruda, Senior Manager Alfred Furrs, Senior Specialist BAE International Trade Compliance BAE Systems, Inc. Rockville, Maryland (301) 838-6947 NCMA 25th Annual Government Contract Management Conference 21st Century Federal Contract Management: Challenges and Opportunities