Is it getting hot in here? Or is it just summer approaching? If you’re feeling a little “toasty,” we’re here to say that you aren’t imagining things. The agency responsible for the Export Administration Regulations (EAR) just turned up the heat on exporters.
Earlier this month, the Bureau of Industry and Security (BIS) released updated guidance on its voluntary disclosure process. The new policy may have U.S. companies finding themselves in need of some A/C. (Or at least an Instachill Wearable Neck Fan.) Those of you who follow export enforcement activities know this is an ever-changing landscape. The actions are more coordinated and focused than ever before. The fines and penalties continue to increase. Last year, BIS initiated a “dual-track system” to handle disclosures – prioritizing serious violations and fast-tracking those involving minor or technical infractions.
Now, the agency has rolled out new guidance focused on two areas of enforcement. This policy was announced on April 18 in an internal memo by Assistant Secretary for Export Enforcement Matthew Axelrod.
Why not disclosing may now cause … aggravation
The first topic addressed in the memo centers around companies who uncover “significant possible violations of the EAR” and who decide to not voluntarily disclose these potential infractions. In the past, BIS gave significant weight to companies who submit disclosures and cooperate fully with investigations. (This policy continues and is unchanged.) What’s changed is how BIS treats those companies who uncover problems and choose not to disclose them.
Going forward, Axelrod explained, these scenarios will be considered an “aggravating factor” in determining financial penalties. In other words, if a company uncovers “significant” violations – or potential violations – and chooses not to notify BIS, then subsequently comes under investigation, that company’s decision to not voluntarily disclose will be viewed as reason to consider a “sharply increased” penalty.
When someone chooses to file a VSD, they get concrete benefits; when someone affirmatively chooses not to file a VSD, however, we want them to know that they risk incurring concrete costs.
The mitigating (or aggravating) factor can be huge when determining a penalty. For example, companies who voluntarily disclose a non-egregious violation can expect a base penalty amount that is half (50 percent) of the value of the transaction and capped at a maximum of $125,000. In some cases, Axelrod noted, full suspension of the penalty may be possible. Under this new guidance, by choosing to not voluntarily disclose an egregious violation, companies run the risk of these penalty calculations swinging in the other direction. Although no exact numbers were given, BIS described the additional penalty as “sharply increased.”
Tell (on) your friends. Your neighbors. Your competitors.
The second area of focus is centered on reporting the conduct of others. BIS is making significant changes to encourage and incentivize people to report suspected violations. This applies to individuals, companies and universities. The agency has introduced its Confidential Enforcement Lead/Tip Form to help with these efforts.
They’re also incentivizing this reporting. Under the new policy, if a company becomes aware of another’s conduct that may violate the EAR, reports this to BIS, and that tip results in an enforcement action – then BIS will consider it a “mitigating factor” if a future action is ever brought against the disclosing party. (Even for unrelated conduct!) Similar guidance is being followed for sanctions violations reporting by the Financial Crimes Enforcement Network (FinCEN).
“We need everyone’s assistance in bringing potential EAR violations to our attention,” Axelrod said. “Moreover, we don’t want parties to suffer in silence when they’re forgoing sales because of our controls while their competitors continue to book revenue.”
One interesting thing to note about these policy changes: BIS is not focused on trying to increase the number of minor or non-egregious VSDs it receives. In fact, the agency hopes these types of disclosures do not increase. What they are trying to achieve is greater reporting and disclosures of the most egregious EAR violations – the ones that focus on national security and the protection of U.S. technology.
You can read the full text of the policy memo here.
Tom Reynolds is the Vice President of Operations for Export Solutions, a consultancy firm which specializes in helping companies with import/export compliance.