Key Takeaways:
- The DOJ, BIS, and OFAC release Tri-Seal Compliance Note, providing consolidated guidance concerning voluntary self-disclosures of possible U.S. sanction and export control violations.
- The DOJ's updated guidance establishes that, absent aggravating factors, when a company voluntarily self-discloses suspected criminal violations, cooperates fully, and properly rectifies the violation in a timely manner, the DOJ will not seek a guilty plea, in general, and there will be a presumption in favor of a non-prosecution agreement with no fine.
On July 26, 2023, the U.S. Department of Justice's ("DOJ") National Security Division ("NSD"), the U.S. Department of Commerce's Bureau of Industry and Security ("BIS"), and the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") released a Tri-Seal Compliance Note ("Note") concerning the voluntary self-disclosure of potential violations of U.S. sanctions and export controls. The Note, which is further detailed below, outlines voluntary self-disclosure ("VSD") policies that apply to U.S. export controls, sanctions, and other national security laws and underscores recent updates that the DOJ, BIS, and OFAC have made to their respective VSD policies. The Note also summarizes a whistleblower program instituted by the Financial Crimes Enforcement Network ("FinCEN"), which provides monetary rewards for reporting violations, in certain situations. As addressed below, the guidance provided in the Note builds upon actions taken earlier in 2023, by OFAC and BIS (in particular), which have been addressed in a previous client alert, in connection with their VSD policies.
While the Note is largely a summary of existing VSD policies, it does include a noteworthy enforcement policy update from NSD as discussed further below.
DOJ VSD Guidance
As identified in the Note, the DOJ is concerned with two main threats: (1) the unlawful export of sensitive commodities, technologies, and services [which] pose[] a serious threat to the national security of the United States"; and (2) U.S. individuals and companies or organizations transacting with sanctioned individuals and entities. To address these issues, NSD issued a revised VSD policy in early March 2023, which provided incentives for companies to come forward through VSDs, as a way to reduce, and possibly eliminate, criminal liability when they notice or identify potential criminal violations of U.S. sanctions and export control laws.
Consistent with this policy, in the Note, NSD confirms for the first time that "where a company voluntarily self-discloses potentially criminal violations, fully cooperates, and timely and appropriately remediates the violations, NSD generally will not seek a guilty plea, and there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine." But, even when companies enter into a non-prosecution agreement, they cannot keep any funds gained from the underlying misconduct. Further, the non-prosecution agreement presumption is inapplicable if aggravating factors are present—such as a substantial company profit stemming from the misconduct or involvement by high-ranking organization members—in which case NSD may opt for a different resolution (e.g., a guilty plea).
NSD's policy is only applicable to those companies who disclose a potential violation to NSD "within a reasonably prompt time after becoming aware" of the possible infraction; if the company does not have a legal obligation to disclose; and if disclosed "prior to an imminent threat of disclosure or government investigation." If the disclosure is only made to other agencies such as BIS and OFAC, it is not covered by NSD's policy. The disclosing entity must share "all relevant non-privileged facts known at the time" and fully cooperate with NSD when making the disclosure. This includes, inter alia, collecting and preserving relevant documents and information, facilitating "concurrent authentication of records under Federal Rule of Evidence 902 and/or 803", and identifying potential avenues of investigation for NSD, in a timely manner.
To benefit from NSD's policy, the disclosing party "must timely and appropriately remediate any violations." Notably, in conducting its analysis, NSD considers whether the party "implemented an effective and sufficiently resourced compliance and ethics program." NSD will also be checking if disciplinary measures were enacted by the party, such as compensation clawbacks, with respect to employees who were directly involved in, or were supervising areas in the company connected to, the criminal acts.
BIS VSD Guidance
BIS' VSD policy, which is focused on export control violations, can be found in Section 764.5 and Supplement No. 1 to Part 766 of the Export Administration Regulations ("EAR").
As explained in the Note, about a year ago, BIS' Office of Export Enforcement ("OEE") enacted a dual-track process to evaluate VSDs. First, "VSDs involving minor or technical infractions are now resolved on a fast-track basis, with the issuance of a warning or no-action letter within 60 days of final submission." Second, VSDs that give rise to potentially more serious infractions will require OEE to conduct a more thorough analysis in deciding whether to pursue enforcement. But, in conducting this analysis, OEE will adhere to the principle that self-disclosing entities merit substantial credit towards any potential penalty.
As analyzed extensively in our prior alert, in mid-April 2023, the Assistant Secretary for Export Enforcement, Matthew Axelrod, issued a memorandum concerning the BIS VSD policy, as well as BIS' policy regarding disclosures related to third parties. This guidance makes clear that BIS will consider a failure to disclose a substantial possible violation of the EAR as an aggravating factor. The memorandum also asserted that, when a party identifies a potential violation of the EAR by another entity and provides a tip to OEE, BIS will consider this "a mitigating factor under the penalty guidelines if the information leads to an enforcement action and if the disclosing entity faces an enforcement action (even if unrelated) in the future."
Importantly, the memorandum clarifies that companies should not attempt to avoid conducting an internal investigation to determine whether a VSD is necessary because it could ultimately be used against them. Specifically, as one of the factors under the settlement guidelines (Section III.E to Supplement No. 1 to Part 766 of the EAR), BIS will evaluate whether a company has a compliance program and, if so, whether or how that program self-identifies and resolves compliance gaps.
OFAC VSD Guidance
Like BIS and the DOJ, OFAC also encourages VSDs. In its Enforcement Guidelines (Appendix A to 31 CFR Part 501), OFAC describes VSDs as a mitigating factor in determining how to enforce its regulations in any given case. Likewise, where a civil monetary penalty is at issue, a VSD meeting the necessary requirements can lead to a 50 percent reduction to the base amount of a potential civil penalty. In evaluating the actions at issue in a VSD, OFAC uses a totality of the circumstances approach. This includes, for example, looking to the relevant party's compliance program (or lack thereof) and its effectiveness, as well as identifying whether the party has taken corrective action to address the possible violation.
For a VSD to qualify for the benefits mentioned above, the VSD must take place before, or at the same time as, OFAC's—or another government agency's—discovery of the possible violation (or a similar one). OFAC will decide, on a case-by-case basis, whether a VSD submitted to another agency is considered a VSD to OFAC.
Moreover, the Note reiterates that disclosures to OFAC will not count as VSDs in specific circumstances, including when:
- A third party is required to and does notify OFAC of the apparent violation because the transaction was blocked or rejected by that third party (regardless of when OFAC receives such notice or whether the subject person was aware of the third party's disclosure).
- The disclosure includes false or misleading information.
- The disclosure is not self-initiated (including when the disclosure results from a suggestion or order of a federal or state agency or official; or, when the subject person is an entity, the disclosure is made by an individual in a subject person entity without the authorization of the entity's senior management. In addition, responding to an administrative subpoena or other inquiry from, or filing a license application with, OFAC is not a VSD.).
- The disclosure (when considered alongside supplemental information) is materially incomplete.
Additionally, OFAC mandates that VSDs contain—or, in a timely manner, be followed up by—a detailed report that enables OFAC to obtain a complete understanding of the circumstances surrounding the potential violation(s). And those who disclose violations must be responsive to OFAC's follow-up questions.
FinCEN Whistleblower Program
The Note also highlights that those who report violations stemming from U.S. trade and economic sanctions or those related to the Bank Secrecy Act can receive a monetary award through FinCEN's whistleblower program.
FinCEN may also reward whistleblowers who provided information that enables the enforcement of a "related action." This means FinCen may compensate individuals who disclose such information with respect to enforcement actions that proceed under, for instance, the Export Control Reform Act.
Lastly, while those who disclose are allowed to remain anonymous, they must be represented by legal counsel when they choose to do so.
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.
