The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) continues to send a strong and clear message to the exporting community – it wants businesses and universities to voluntarily disclose any significant possible violations of the Export Administration Regulations (EAR).
On 18 April 2023, the Department of Commerce’s Assistant Secretary for Export Enforcement Matt Axelrod issued a policy memorandum highlighting that the BIS Office of Export Enforcement (OEE) now will consider the deliberate non-disclosure of a significant possible export control violation to be an aggravating factor that may trigger “sharply increased” penalties.
While submitting a voluntary self-disclosure (VSD) has long been considered by OEE to be a mitigating factor likely to reduce the amount of a penalty, failing to do so would typically not have increased the base penalties. Notably, Assistant Secretary Axelrod’s memorandum also explains that a business’s prior record of disclosing export control violations of third parties could mitigate penalties for its own violations in future enforcement actions. These measures continue the evolution of several BIS policy initiatives announced in the Summer of 2022 designed to enhance the effectiveness and efficiency of the VSD submission and BIS resolution processes under the EAR.
Voluntary self-disclosures and "significant" possible violations
When a business finds that it might have violated the EAR, it has the option to submit a VSD. Historically, submission of a VSD could dramatically reduce the base penalties imposed for an export control violation. In other words, submission of a VSD was a mitigating factor. But failure to submit the VSD would generally not have affected the base penalty amount.
However, under the updated BIS policy memorandum guidance, a company’s deliberate decision to not submit a VSD for a “significant” possible violation of the EAR will now be considered as an aggravating factor for increasing the base penalty amount. “Significant” violations are characterised in the memorandum as the “types of violations that reflect potential national security harm.” While the BIS settlement guidelines do not expressly provide that a failure to voluntarily disclose an apparent violation should be considered as an aggravating factor, they do allow “the existence, nature and adequacy of a Respondent’s export compliance program” to be considered either as a mitigating or aggravating general factor. Because OEE may consider whether a company’s export compliance program uncovered a violation and whether corrective action was taken to prevent reoccurrence of the violation (including via submission of a VSD), moving forward OEE will now treat the non-disclosure of an uncovered significant violation as an aggravating factor in its ultimate penalty determination.
Businesses and the exporting community will need to consider this new BIS policy when weighing whether to submit a VSD. Though submission has always had potential benefits, the updated policy guidance greatly increases the risks and potential repercussions associated with failing to timely and accurately file a VSD when a significant possible violation is uncovered.
Disclosures about third-party conduct
The BIS policy memorandum also seeks to incentivise individuals, companies, and universities to confidentially report third-party violations of the EAR. For example, the memorandum highlights that protecting sensitive U.S. technologies is a “shared endeavour,” and that when a company’s competitors violate the EAR, BIS does not want parties to “suffer in silence” while their competitors engage in violative conduct to generate and enhance revenue. Companies are therefore incentivised to report such conduct in order to re-level the playing field.
Further, Assistant Secretary Axelrod’s latest guidance provides an additional settlement guidelines incentive associated with third-party reporting. When a business finds that another company’s conduct might have violated the EAR and reports such conduct to OEE, then if that report ultimately results in an enforcement action, OEE will factor that third-party report in any future action against the disclosing business and treat that report as a mitigating factor in its own penalty assessment (even where the disclosing business’ conduct is unrelated). OEE considers these types of third-party reporting efforts as constituting “exceptional cooperation with OEE,” which the BIS settlement guidelines list as a mitigating factor.
Finally, the memorandum also reminds businesses that if a third-party report results in enforcement actions by either the Department of Treasury or Department of Justice for sanctions violations, the Financial Crimes Enforcement Network (“FinCEN”) is authorised to issue monetary awards to the reporting business under its whistleblower program.
Success of the ‘dual-track’ system for VSDs
The policy memorandum also reports the success of the recently implemented “dual-track” system for handling VSDs. While the number of VSDs filed by industry has not changed, those that involve “minor or technical infractions” have been resolved by BIS more quickly with an issuance of a warning or no-action letter within 60 days of submission.
If your business finds that it might have violated the EAR - or if you find or suspect that another company might have committed a significant violation of the EAR - consider these heightened incentives for voluntarily disclosing the relevant facts to BIS and OEE. As highlighted at the forefront of this policy memorandum, technology protection is a core national security priority for BIS.
This alert was prepared by members of WBD’s International Trade and National Security Team, which has grown to five lawyers and two global trade advisors in the US and four lawyers in the UK, who focus their practice primarily on international trade and related areas. Please contact any member of our team for help in evaluating your options.
This article is part of Womble Bond Dickinson’s Growing Global series. For more insights, click here to visit our Growing Global hub.