Penalties, debarment and the presumption of denial

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1. Three kinds of consequence

A violation of the export rules can lead to three separate consequences. There are criminal penalties imposed by a court, civil penalties imposed by the Department of State, and debarment, which shuts a person out of regulated trade altogether. A fourth rule, the presumption of denial, affects everyone with a relevant conviction or ineligibility, whether or not they were the subject of these proceedings. What counts as a violation is covered in what counts as an export violation.

2. Criminal penalties

Criminal liability turns on willfulness. Any person who willfully violates section 38 or section 39 of the Arms Export Control Act, a rule issued under them, or an undertaking required for defense service agreements, faces prosecution (22 CFR 127.3(a)). So does a person who willfully makes an untrue statement of a material fact, or omits one, in a registration, license application or required report (22 CFR 127.3(b)).

The regulation does not set the figures itself. On conviction the person is subject to a fine or imprisonment, or both, as prescribed by section 2778(c) of title 22 (22 CFR 127.3).

3. Civil penalties

The Assistant Secretary of State for Political-Military Affairs may impose civil penalties. For each violation of section 2778, the penalty may reach "an amount not to exceed the greater of $1,271,078 or the amount that is twice the value of the transaction that is the basis of the violation with respect to which the penalty is imposed" (22 CFR 127.10(a)(1)(i)). Separate maximums apply to violations of the ban on offset incentive payments and to one other statutory prohibition (22 CFR 127.10(a)(1)).

Civil and criminal exposure can run together. The civil penalty may be in addition to, or instead of, any other liability or penalty (22 CFR 127.10(a)(2)). The Directorate of Defense Trade Controls may also make payment of a civil penalty, or completion of any administrative action, a condition of issuing, restoring or keeping any license or approval (22 CFR 127.10(b)).

4. Administrative debarment

Debarment removes a person from the whole field rather than from one transaction. The Assistant Secretary may debar any person and prohibit it from participating directly or indirectly in any activity subject to the regulations. "Any such prohibition is referred to as an administrative debarment for purposes of this subchapter" (22 CFR 127.7(a)).

The grounds are specific. Administrative debarment rests on a violation of section 2778, or a rule under it, of such a character that the Directorate has a reasonable basis to believe the violator cannot be relied on to comply in the future. The violation must be established under the administrative procedures in part 128 (22 CFR 127.7(c)(2)).

The period is set case by case. "The Assistant Secretary of State for Political-Military Affairs shall determine the appropriate period of time for administrative debarment, which generally shall be for a period of three years" (22 CFR 127.7(a)). Reinstatement is not automatic: the debarred person must apply and be approved before resuming any regulated activity.

5. Statutory debarment

A conviction triggers a different route. It is the Department of State’s policy not to consider license applications or approval requests involving a person convicted of violating the Act, or of conspiracy to violate it, for three years after conviction. The person is also prohibited from participating in regulated activity (22 CFR 127.7(b)).

This form rests only on the outcome of a criminal case in a United States court, and the part 128 procedures do not apply. The person is notified in writing, and the names are published periodically in the Federal Register. Reinstatement again requires an application and approval (22 CFR 127.7(b)). A statutorily debarred person may appeal to the Under Secretary of State for Arms Control and International Security for reconsideration (22 CFR 127.7(d)).

6. Reaching related companies

A debarment can follow a debarred person into other companies. To prevent evasion, a debarment order may be made applicable to other persons. They are persons related to the debarred person by affiliation, ownership, control, position of responsibility or other commercial connection, then or during the term of the order (22 CFR 127.9). "Appropriate notice and opportunity to respond to the basis for the suspension will be given" (22 CFR 127.9).

7. The presumption of denial

Under section 38 of the Act, licenses and approvals may not be granted to persons convicted under the criminal statutes the regulations list. The same bar applies to persons ineligible to receive export licenses from any agency, subject to a narrow statutory exception. "This provision establishes a presumption of denial for licenses or other approvals involving such persons" (22 CFR 127.11(a)). It applies to all such convictions and ineligibilities since the Act took effect on 30 June 1976.

An exception is considered only in extraordinary circumstances surrounding the conviction or ineligibility. The applicant must also show that it has taken appropriate steps to mitigate law enforcement and other concerns and to deal with the causes (22 CFR 127.11(b)). The request is made by letter to the Deputy Assistant Secretary for Defense Trade Controls. If it has merit, the Assistant Secretary consults the Office of the Legal Adviser and the Department of the Treasury, and may seek the views of the Department of Justice. Persons under statutory debarment cannot use this route while it is in force (22 CFR 127.11(c)).

8. What this means for a supplier

The presumption of denial reaches a company that deals with a convicted or ineligible party, not only the party itself, because it applies to approvals involving such persons. Screening the people in a transaction is part of getting it licensed. Voluntary disclosure, which the regulations treat as a mitigating factor, is covered in the voluntary disclosure policy.

Key terms

Administrative debarment	A bar on regulated activity for a violation, generally three years, decided under part 128.
Statutory debarment	A three year bar following a criminal conviction under the Act, published in the Federal Register.
Presumption of denial	The rule that approvals involving convicted or ineligible persons are refused save in extraordinary cases.
Civil penalty	A penalty imposed by the Department of State, up to the greater of a set sum or twice the transaction value.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Screening every party in a transaction matters as much on the ground as it does in the licensing office. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.