What happened?
On 18 April 2023, Matthew Axelrod, Assistant Secretary for Export Enforcement at the US Department of Commerce’s Bureau of Industry and Security (“BIS”), released a memorandum (Memorandum) addressing the Office of Export Enforcement’s (“OEE’s”) policy regarding voluntary self-disclosures (VSDs) and enforcement actions. The Memorandum clarifies potential benefits for parties that self-disclose or report potential violations, as well as potential negative implications for entities that choose not to self-disclose. The Commerce Department hopes that incentives for disclosures will lead parties to report potential significant violations of the Export Administration Regulations (EAR). BIS has issued the Memorandum as a clarification of policy, but BIS has not proposed amendments to the EAR.
Existing guidelines
EAR § 764.5 provides that VSDs are encouraged when there is a belief that you may have violated the “EAR, or any order, license or authorization issued thereunder,” and such VSDs are considered “a mitigating factor in determining what administrative sanctions, if any, will be sought by” OEE.
BIS settlement guidelines (Settlement Guidelines) describe how OEE makes penalty determinations in the settlement of civil administrative enforcement actions and includes “apparent wilfulness or recklessness” in its evaluation of the conduct. The Settlement Guidelines state that the failure to voluntarily self-disclose possible violations is not considered “concealment”, which is an indicator of wilful or reckless violation of the law. In contrast, there are clear benefits to submitting VSDs, including reduced monetary penalties and potentially no penalty at all. For example, for voluntary self-disclosures, the base penalty for non-egregious violations is one-half the transaction value, capped at $125,000 and the base penalty for egregious violations is capped at “an amount up to one-half of the statutory maximum penalty applicable to the violation.” Further mitigation my be applied depending on the facts of the transactions at issue and whether the company is cooperative with BIS.
To encourage reporting, in June 2022, BIS implemented a dual-track system to handle VSDs. The vast majority of VSDs involve “minor or technical infractions,” and for those, BIS uses a fast-track system of resolving by issuing a “warning letter or no-action letter within 60 days of a final VSD submission.” For VSDs involving more serious violations, a field agent and an Office of Chief Counsel attorney is assigned. For the most serious cases, an additional attorney is assigned “from the Department of Justice’s Counterintelligence and Export Control Section.”
Clarifying policy
BIS’s April 2023 memorandum seeks to incentivize submissions of VSDs when “significant possible violations of the EAR” are uncovered. However, in an effort to deter increasing the number of VSDs involving minor or technical violations, the memorandum states that parties may submit one submission, instead of multiple individual VSDs, to streamline the process.
As discussed above, BIS treats VSDs as a mitigating factor in determining what, if any, administrative penalty is appropriate for a violation of the EAR. Affirmatively choosing to not file a VSD after discovering a possible violation was not historically treated as an aggravating factor. Going forward, where a significant possible violation is uncovered and the party actively chooses to not submit a VSD, BIS will consider this as an aggravating factor where parties will “risk incurring concrete costs.” Specifically, BIS says that parties making disclosures will “benefit greatly by getting a sharply reduced penalty,” and parties who choose not to make disclosures will “risk a sharply increased” penalty.
BIS is taking the position that this is a clarification to the enforcement policy, and there is no indication from BIS that the EAR will be revised to make this change clear prior to its use in settlement negotiations. Supplement No. 1 to Part 766 of the EAR states that the OEE will determine whether a case is egregious based on analysis of aggravating factors: wilful or reckless violation of the law, awareness of the conduct at issue; harm to regulatory program objectives, and individual characteristics. These factors do not specifically mention a failure to file a VSD, but it could support the awareness of the conduct at issue factor. However, because the question of egregiousness lies in an evaluation of the underlying conduct, which is distinct from knowledge of a potential violation and choice not to file a disclosure, a case would likely not be found egregious based solely on a failure to file a VSD.
To date, other export control or sanctions agencies, such as the U.S. Treasury Department’s Office of Foreign Assets Control, have not indicated an intention to implement BIS’s approach to failure to file voluntary self-disclosures.
To level the playing field, BIS also encourages parties to use BIS’s confidential reporting form to report potential violations of the EAR by other parties. Reporting potential violations by other parties will be seen as “exceptional cooperation” by the reporting party and will be considered as a mitigating factor for any future enforcement action that is brought up against the reporting party, even for unrelated conduct. If the reported violation involves potential sanctions violations, monetary rewards may also be available through the Financial Crimes Enforcement Network (FinCEN).
Next steps
Parties should ensure they have a robust export compliance program that includes an escalation process in the event of the discovery of a suspected violation. For assistance in establishing or evaluating your self-disclosure procedures or with trade controls compliance generally, please reach out to any of the listed Hogan Lovells contacts.
Authored by Beth Peters, Ajay Kuntamukkala, Andrea Fraser-Reid, and Cassady Cohick.
