On April 18, 2023, Matthew Axelrod, Assistant Secretary for Export Enforcement at the Department of Commerce's Bureau of Industry and Security (BIS), issued a memorandum outlining two important changes to BIS's settlement guidelines when significant potential violations of the Export Administration Regulations (EAR) are identified. Specifically, BIS announced that (1) the deliberate non-disclosure of a significant potential violation will now be treated as an aggravating factor in civil enforcement cases, and (2) whistleblowing of significant potential violations by another party that ultimately results in a BIS enforcement action will be considered a mitigating factor in any future enforcement action involving the whistleblower, even for unrelated conduct. The policy changes are intended to incentivize the submission of disclosures to BIS when industry or academia uncovers significant EAR violations (i.e., those reflecting possible national security harm, as opposed to minor, technical violations).
BIS's new policy of treating non-disclosure of significant potential violations of the EAR as an aggravating factor marks a potential sea change in the voluntary self-disclosure (VSD) risk calculus for exporters and reexporters. By reorienting the purpose of the VSD to serve as both carrot and stick, BIS has now interjected more complexity into the voluntary disclosure decision making process. Companies that may have been inclined, previously, to remediate significant potential violations but not disclose may now face a more difficult choice. While it may take years for the civil penalty data to demonstrate the concrete costs of non-disclosure of significant potential violations of the EAR, consideration of that factor is likely to weigh heavily in any future BIS VSD decisions.
These policy changes are the latest initiative by the Biden Administration to incentivize corporate investment in export compliance by targeting companies involved in significant EAR violations. For instance, in a June 2022 memorandum designed to strengthen BIS's administrative enforcement of U.S. export controls, BIS announced, among other major changes, that it would fast-track VSDs involving minor or technical infractions while focusing BIS's finite (but growing) resources on investigating EAR violations that reflect serious national security harm. (For a detailed discussion of the June 2022 memorandum, please see our July 6, 2022 blog post.) More recently, on March 2, 2023, Deputy Attorney General Lisa Monaco revealed plans to add 25 prosecutors to the Department of Justice's National Security Division (NSD) and the first-ever chief counsel for corporate enforcement to prosecute export control violations. The toughening of BIS's administrative enforcement policy, as well as the expansion of the NSD's resources to target criminal violations of export controls, reflect the government's increasing expectations that exporters and reexporters will devote more substantial resources to compliance.
Changes to BIS's Administrative Enforcement Policy
The two changes announced in Assistant Secretary Axelrod's memorandum may materially impact corporations' and academic institutions' risk calculus when it comes to disclosing potential EAR violations.
Under BIS's existing settlement guidelines, a VSD that is timely, comprehensive, and involves full cooperation substantially reduces the applicable civil penalty under the base penalty matrix. If a party voluntarily discloses a non-egregious violation, the base penalty amount would be reduced to one-half of the transaction value and capped at a maximum base penalty amount of $125,000 per violation. Even for an egregious violation involving a VSD, the base penalty amount is reduced to as much as one-half of the statutory maximum penalty applicable to the violation, which is currently the greater of $353,534 per violation or twice the value of the transaction. BIS will then apply any other applicable mitigating or aggravating factors, which are described in the settlement guidelines, to adjust the base penalty amount to reflect the seriousness of the alleged violations.
Effective immediately, when a party fails to file a VSD after uncovering a significant potential EAR violation, BIS will consider such non-disclosure an aggravating factor under the existing settlement guidelines. Under this policy, BIS considers the existence, nature, and adequacy of a respondent's export compliance program at the time of the apparent violation as a "General Factor," stating that the Office of Export Enforcement (OEE) will "consider whether a Respondent's export compliance program uncovered a problem, thereby preventing further violations, and whether the Respondent has taken steps to address compliance concerns raised by the violation, to include the submission of a VSD and steps to prevent reoccurrence of the violation that are reasonably calculated to be effective." In the past, BIS had only applied this "General Factor", as a mitigating factor (i.e., to adjust the base penalty amount downward when a VSD was submitted). Going forward, BIS will also consistently apply this factor as an aggravating factor (i.e., to adjust the base penalty amount upward).
Moreover, when a company or academic institution discloses a significant EAR violation by another party directly to OEE or through BIS's confidential reporting form, and if that tip results in enforcement action, then BIS will consider that disclosure to be a mitigating factor for the whistleblower in any future enforcement action, even for unrelated conduct. BIS also notes that when whistleblowers disclose potential export control violations that also constitute potential sanctions violations to the Department of Justice (DOJ) or Financial Crimes Enforcement Network (FinCEN), the whistleblower may be entitled to a monetary reward.
Conclusion
The recent changes to BIS's administrative enforcement policies reflect the U.S. government's ongoing effort to find novel ways to enhance the use of export controls to protect U.S. national security. These changes portend more aggressive administrative enforcement in cases of deliberate non-disclosure of significant EAR violations. Nevertheless, parties that uncover potential violations of U.S. export controls should continue to carefully weigh the potential upsides and risks of disclosure or non-disclosure to the U.S. government, especially while the concrete costs and benefits of BIS's clarified VSD policy are quantified with more precision over time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
