The Department of Commerce’s Bureau of Industry and Security (BIS) has announced policy changes designed to strengthen its administrative enforcement of U.S. export controls. In a memorandum released on June 30, Matthew Axelrod, Assistant Secretary for Export Enforcement at BIS, outlined four new policy changes including (1) significantly higher penalties for egregious violations, (2) elimination of no admit/no deny settlements, (3) offering non-monetary settlement agreements in cases where the violations “do not reflect serious national security harm” but are more serious than cases that receive warnings or no-action letters, and (4) implementation of a dual-track processing system for Voluntary Self Disclosures (VSDs) involving minor or technical infractions and those involving potentially more serious violations. These changes have the potential to significantly increase export enforcement risks for U.S. and non-U.S. companies, and suggest it is time for exporters and reexporters to conduct internal audits, assessments, and monitoring for potential compliance gaps. It may be necessary for some exporters to consider tailoring and enhancing internal export compliance programs, processes, and resources to avoid costly penalties, investigations, business disruptions, and brand damage.
These policy changes by BIS follow a final rule, effective June 2, making charging letters public when filed with an Administrative Law Judge, rather than only after a matter is resolved, often years later. BIS’s stated rationale for this regulatory change is to enhance transparency and educate the exporting community to enable them to use such information in real time to develop their compliance programs. According to a BIS press release, pre-charging letters will not be made public, allowing the agency to have conversations and negotiations with alleged violators about a resolution prior to a charging letter being issued publicly.
Some practical consequences that bear on internal compliance programs – if you happen to be the unfortunate target of a BIS enforcement action, your alleged violations will now be published earlier in the enforcement process. This pre-resolution publication could lead to questions or concern from customers, suppliers, financial service providers, and shareholders, among others, before you have an opportunity to address the scope and tenor of the charges. And, even for U.S. and non-U.S. companies not accused of violations, the changes reflect BIS’s enhanced expectations that exporters and reexporters will devote more substantial efforts to compliance.
New Policy Changes to BIS’s Administrative Enforcement
Assistant Secretary Axelrod’s memorandum outlines four new policy changes to BIS’s civil enforcement approach, all of which could materially impact companies’ export control compliance efforts. These changes are intended to increase transparency in BIS’s administrative enforcement actions, encourage companies to proactively invest in export compliance programs, and deter violations of U.S. export controls.
First, BIS plans to use all of its existing regulatory and statutory authorities to ensure that the most serious administrative violations trigger commensurately serious penalties. By aggressively and uniformly applying the existing BIS settlement guidelines, BIS intends to ensure that all appropriate cases are properly deemed “egregious,” which opens the door to significantly larger penalties. BIS also will seek to apply the existing aggravating penalty factors more uniformly to escalate penalty amounts where appropriate. By imposing stiff penalties for serious administrative violations, BIS aims to (1) reach resolutions that adequately reflect the national security harm caused by serious violations; (2) disincentivize those considering circumventing U.S. export controls; and (3) incentivize exporters and reexporters to invest in strong compliance programs. This approach may also cause some companies considering a voluntary self-disclosure to carefully consider whether the underlying activity could be considered “egregious,” and to weigh the risks and benefits of submitting a disclosure in such circumstances.
Second, BIS is eliminating its use of no admit/no deny settlements. More specifically, the agency will require that persons that settle before an administrative hearing publicly admit to the allegations contained in the Proposed Charging Letter in order to avoid stiffer civil monetary and other penalties. By requiring companies to admit to the allegations contained in Proposed Charging Letters in order to qualify for reduced penalties, BIS intends to send a strong deterrent message to similarly-situated companies.
However, an admission of wrongdoing could encourage collateral lawsuits, impact certifications required in other areas of regulation, business and finance, affect stock value or bond ratings, result in a breach of financial covenants or representations to lenders, and damage one’s brand, among other collateral consequences. Thus, if BIS undertakes such an enforcement approach, companies that are charged and who believe they have not violated the law may elect to undertake more formal adjudicatory enforcement proceedings set forth in Part 766 of the Export Administration Regulations (“EAR”).
Third, for those violations that “have not resulted in serious national security harm, but rise above the level of cases warranting a warning letter or no-action letter,” BIS will offer non-monetary settlement agreements that require remediation through the imposition of a suspended denial order with certain conditions, such as training and compliance requirements, as appropriate. Consistent with BIS’s elimination of no admit/no deny settlements, non-monetary settlement agreements will be contingent on the alleged violator’s willingness to accept responsibility, to admit to their conduct, and to commit to enhanced compliance measures.
Fourth, BIS is changing how it processes VSDs and will now use a dual-track processing system. For VSDs that involve minor or technical infractions, BIS plans to resolve them on a “fast-track” by issuing a warning letter or no-action letter within 60 days of a final VSD submission. For those VSDs that indicate potentially more serious violations, BIS will assign both a field agent and an attorney from BIS’s Office of Chief Counsel. For the most serious cases, an attorney from the Department of Justice’s Counterintelligence and Export Control Section will be assigned. By fast-tracking minor or technical violations while assigning specific personnel to investigate and obtain further information concerning potentially more serious VSDs, BIS aims to focus its finite resources on the most significant VSDs, while also allowing companies that submit more minor disclosures to receive a quicker turnaround.
BIS is also considering similar changes to the administrative enforcement of antiboycott violations. In particular, BIS is considering revising the EAR to recategorize the relative seriousness of the various antiboycott violations to better comport with current boycott-related activity and with the Office of Antiboycott Compliance’s priorities and practices. Similar to changes for U.S. export cases, BIS is also considering increasing monetary penalties and eliminating no admit/no deny settlements in order to incentivize compliance and strengthen deterrence. BIS expects to provide more information on these potential changes in the coming weeks.
These changes to BIS’s administrative enforcement policies reflect an ongoing effort by the U.S. government to use export controls to protect U.S. national security and portend the potential for more aggressive administrative enforcement by BIS. As these changes go into effect, they will increase corporate risks posed by non-compliance with U.S. export controls.