U.S. export controls are a key topic of many compliance programs, and if they are a part of yours, recent guidance suggests some important changes may need to be made.
On April 18, 2023, the Office of Export Enforcement (or the OEE, which sits within the Department of Commerce and its Bureau of Industry and Security (BIS)) issued a memorandum clarifying its policy regarding voluntary self-disclosures (VSDs) and disclosures concerning others. The OEE memorandum announced increased incentivization of submission of VSDs regarding significant possible violations of the export administration regulations (EAR), with a clear focus driving change around what it considers significant violations (e.g., those that reflect potential national security harm).
Under existing BIS settlement guidelines, a VSD that was timely, comprehensive, and involved full cooperation would substantially reduce the applicable civil penalty and could further entitle the filer to additional mitigation, up to a fully suspended penalty. The reduction in penalties is rooted in the notion that when an entity’s export compliance program uncovers and reports a problem, it hopefully prevents further violations, and is thus a mitigating factor.
Now, through the new guidance, the OEE is clear that the same logic will be applied in reverse, i.e., when a significant violation is uncovered and not reported, it is an aggravating factor and may worsen penalties. And while the application of this new, aggravating factor is limited to “significant” violations, so far, that term remains undefined.
The OEE memorandum also addresses and encourages disclosures concerning others. Specifically, one of the mitigating factors in the guidelines is “exceptional cooperation with OEE,” which the memorandum indicates includes previous substantial voluntary efforts to provide information (e.g., tips that led to enforcement actions against other parties) in support of enforcement of U.S. export control regulations.
According to the memorandum, tips resulting in enforcement actions will be considered a mitigating factor if a future enforcement action is ever brought against the disclosing party. Moreover, when the conduct disclosed includes a potential sanctions violation, monetary rewards may be available through the Financial Crimes Enforcement Network (FinCEN) whistleblower program.
The joint efforts of administrative agencies and law enforcement agencies are likely to result in increased outreach to industry, additional information gathering and sharing between agencies, and an increased risk to companies with inadequate sanctions and export control compliance procedures.
What does this mean for you?
Be prepared for additional government outreach. While you shouldn’t assume that every outreach from the government is indicative that you are a target of an investigation, you should also not assume that all outreach is merely friendly in nature. Use caution with respect to what you share in all communications with the government, and engage your legal counsel early to advise you on how to appropriately respond to questions.
Incorporate into your policies an analysis of the significance of a potential violation. The guidelines and OEE memo do not provide examples of what constitutes a “significant” violation beyond being one that reflects potential national security harm. For example, violations related to items that are controlled for reasons related to national security under the EAR or to countries that are subject to sanctions or high-level controls (e.g., Russia, Iran, and currently China) are more likely to constitute a “significant” violation as compared to a violation dealing with Canada or a registration error. Accordingly, your compliance policy should likely include an assessment of the national security impact of your
potential violation when considering whether to file a VSD. The consideration of whether to file a VSD should also include an evaluation of the potential consequences of not filing a VSD, given the OEE’s commitment to considering failure to disclose an aggravating factor.
Document your review, including any conclusions on significance. The investigation and considerations that lead to a decision not to disclose should be clearly and carefully documented to enable you to defend against allegations from the BIS that your decision not to disclose should be an aggravating factor or a whistleblower claim. Given the increased cooperation of multiple agencies, you must also assume that any information will be shared with other agencies.