Honeywell Settlement Highlights Compliance Risks in Defense Supply Chain, China, Law Firms Say

The State Department’s recent $13 million penalty against Honeywell International highlighted the importance of company employees closely following internal compliance procedures and treading carefully when dealing with China, law firms said. It also showed that the State Department is committed to targeting weaker compliance programs but will impose lenient penalties if violations are self-disclosed, the firms said. Honeywell signed a settlement agreement with the agency earlier this month after it illegally sent drawings of export-controlled parts for military-related items to potential customers in several countries, including China (see 2105040018).

The settlement showed that it is “imperative” that companies follow through with remedial measures after submitting a voluntary disclosure to the U.S. government, Torres Law said in a May 12 alert. They should also ensure their employees are complying with those measures to avoid repeat violations. Although Honeywell disclosed its violations to the State Department and said it took “corrective actions” to fix its compliance issues, the company submitted another disclosure soon after discovering its employees weren’t adhering to its new compliance procedures.

Companies should also “apply the same level of export compliance measures” to their quoting process as they normally would for actual exports of finished products, the firm said, referring to Honeywell's failure to stop illegal transfers of technical drawings to foreign suppliers as part of a process to request quotes. Companies should also classify and safeguard technical data even if it isn’t being exported, Torres Law said, because the company's violations “did not involve the export of hardware.” The firm also said “domestic manufacturers of defense articles could encounter similar violations if they fail to properly classify” data controlled under the International Traffic in Arms Regulations.

Companies should also “pay special attention” to transactions with China, even if they involve subsidiaries, affiliates or “non-related parties,” the firm added. “Failure to audit these Chinese companies and vet their Chinese suppliers can easily lead to violations that [the Directorate of Defense Trade Controls] takes more seriously because they involve a proscribed destination.”

The State Department’s “leniency” against Honeywell was the “most significant takeaway” from the settlement, Robison & Cole said May 11. The firm said Honeywell could have been subject to a maximum $37.4 million penalty but was able to minimize the fine by cooperating closely with State Department follow-up inquiries and through “prompt self-policing.” Robinson & Cole also pointed to the fact that the agency decided not to issue a debarment against Honeywell because the company self-disclosed the violations. The settlement “suggests that the Biden Administration may place significant value on corporate candor and cooperation,” the firm said.

The settlement agreement also showed that the State Department “remains vigilant in enforcing export compliance” in an effort to protect U.S. national security, including compliance surrounding transfers of technical data, Shipman & Goodwin said May 12. It also emphasized the importance of aerospace and defense companies maintaining a “tailored export compliance program,” the firm said, and “obtaining proper authorizations before” exporting controlled items.