Non-Disclosure of Export Controls Violation May Now Constitute an “Aggravating” Factor
On April 18, 2023, Matthew S. Axelrod, Assistant Secretary for Export Enforcement at the U.S. Department of Commerce, Bureau of Industry and Security (BIS), released a memorandum which signals a significant shift in BIS’s stance on voluntary self-disclosures (VSD), or lack thereof. The memo clarifies that a company’s failure to voluntarily disclose after learning of a possible violation of the Export Administration Regulations (EAR) will be considered an “aggravating factor” in BIS enforcement actions and explains that this policy will apply where the Department of Commerce has determined “there is a deliberate nondisclosure for significant possible violations.” The memo further explains that BIS is focused on VSDs of “significant” violations—“the types of violations that reflect potential national security harm”—and the new policy is not intended to increase the number of “minor or technical VSDs.”
This announcement signals a major shift in BIS’s enforcement policy, which previously did not consider failure to voluntarily disclose an aggravating factor. Under the existing enforcement guidelines, BIS “strongly encourages” submission of VSDs for potential EAR violations and considers VSD as a mitigating factor in enforcement actions without specifically providing that failure to disclose would constitute an aggravating factor.15 C.F.R. § 764.5.Rather, the existing guidelines merely state that “[f]ailure to report potential violations may result in the unwarranted issuance of licenses or exports without the required licenses to the detriment of the interests of the United States.” 15 C.F.R. § 764.4(b). In addition, while the list of aggravating factors in BIS’s “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases” identifies “concealment” as an aggravating factor, it specifically notes that “[f]ailure to voluntarily disclose an apparent violation to OEE does not constitute concealment.”
That said, existing guidelines do note that the existence, nature, and adequacy of a respondent’s export compliance program at the time of the apparent violation is a “General Factor,” stating: “OEE will also 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.”Axelrod’s memo states that BIS will now rely on this General Factor and consistently apply it as an “aggravating factor” going forward where a “significant” possible EAR violation is discovered through a company’s compliance program but not disclosed to BIS.
Companies that uncover actual or potential violations of EAR should take into account this new policy in their assessment of whether to disclose any such violations. What is more, in addition to the shift in its policy on non-disclosure of potential violations by the company itself, the memo also encourages individuals, companies, and universities to disclose the conduct of others (including industry competitors), noting that this cooperation will be considered as a mitigating factor in any related or unrelated future enforcement action against the disclosing party.
For questions about BIS’s new policy or its impacts, contact the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations or Export Control & Sanctions practice groups.
*Junghyun Baek contributed to this blog. Mr. Baek is a graduate of Harvard Law School and is employed at Arnold & Porter’s Foreign Legal Consultant Office as a Law Clerk.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.