Chemicals Supplier Settles With DDTC After Alleged ITAR Brokering Violations

The State Department fined a U.S.-based specialty chemicals supplier $850,000 for allegedly violating defense export regulations and failing to voluntarily disclose those violations, the agency announced in an order and settlement agreement this week. The Directorate of Defense Trade Controls said Island Pyrochemical Industries Corp. illegally acted as a broker between Brazilian and Chinese companies for shipments of chemicals used in explosives and made false statements on a license application to DDTC.

The agency said Island Pyrochemical “seriously” violated the International Traffic in Arms Regulations and was aware of the ITAR’s brokering license requirements but still went ahead with the brokering services. The “unauthorized brokering activities demonstrated a disregard for its export compliance responsibilities,” the agency said in a proposed charging letter.

DDTC said the violations began in 2015 when Island Pyrochemical tried to arrange shipments of ammonium perchlorate (APC), a chemical used in explosives and rockets, from Chinese companies to Brazil-based Avibras Industria Aeroespacial SA (Avibras), which was looking to manufacture rockets for Saudi Arabia’s government. Island Pyrochemical sourced the chemical from China-based APC manufacturer Dalian Gaojia Chemical Co. (Dalian) and Chinese APC exporter Aerospace Long-March International Co. (ALIT), a subsidiary of China Aerospace Science and Technology Corporation, which now has various research institutes listed on the Commerce Department’s Entity List.

Island Pyrochemical soon after began “brokering activities” between the companies, including through “various means of communication, engagement, and facilitation,” without a required DDTC license, the agency said. The company agreed to help broker 140 metric tons of APC to Avibras as part of a contract signed in May 2015, DDTC said, including by helping to communicate amendments to the contract and aiding with shipping logistics, production inspections and supervision of vessel loadings.

The agency said Island Pyrochemical submitted a license application to DDTC for the brokering services in June of that year, but the company falsely listed itself as the manufacturer of the APC and ALIT as an “intermediate party.” DDTC returned the license in August, seeking “additional clarification on the roles” of ALIT and Avibras, and Island Pyrochemical submitted another application with no mention of ALIT. The company later told DDTC that it had a “longstanding (but flawed) practice of listing itself as the manufacturer on form DSP-5 as a ‘placeholder’ when” the company was “considering multiple sources for a given product.”

DDTC said the alleged ITAR violations were severe, adding it sent a brokering registration letter to Island Pyrochemical in March 2015 that told the company to be “aware of compliance with brokering requirements.” The agency gave the company “notice in writing that no person(s) may engage in the business of brokering activities with respect to the manufacture, export, import, or transfer of any U.S. or foreign defense article without first obtaining a license from the Department.”

As part of the settlement, Island Pyrochemical will have to pay $425,000 directly to the State Department in incremental amounts over the next three years. The agency said it will waive the second half of the $850,000 penalty as long as the company applies that amount to “remedial compliance costs” outlined in the settlement, which includes hiring a DDTC-approved special compliance officer for three years.

That designated officer will monitor Island Pyrochemical compliance with the ITAR, including its policies and procedures for preventing and detecting future violations, classifying export-controlled items and services, applying for and maintaining export license applications, strengthening the “physical security” of facilities where ITAR-controlled activities occur and maintaining “adequate” compliance staffing levels. The officer will also oversee how the chemical supplier spends the “expenditures” in its “remedial compliance measures account,” help the firm incorporate ITAR compliance into business plans at the “senior executive level,” and evaluate and report on the company’s compliance resources and procedures, including by providing regular status reports on its compliance efforts.

Island Pyrochemical also agreed to introduce a “comprehensive” automated export compliance system, which will track the company’s “decision process from the initiation to conclusion” of an export. The company must provide DDTC status reports about the system every six months. Other provisions in the settlement agreement require Island Pyrochemical to review past export control jurisdiction decisions and complete at least one audit.

Island Pyrochemical didn’t respond to a request for comment.