BIS Publishes Clarifying Memorandum On The Concrete Benefits And Costs Of VSDs And Blowing The Whistle On Others

On April 18, 2023, the Commerce Department’s Bureau of Industry and Security (“BIS”) released a memorandum entitled “Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others” (“the Memorandum”), which represents a dramatic shift in BIS’ current export enforcement policy. Going forward, as discussed in greater detail below, a company’s decision not to file a voluntary self-disclosure (“VSD”), in cases where significant export violations are discovered, will be considered an aggravating factor in a BIS enforcement action brought under the Export Administration Regulations (“EAR”). In addition, the Memorandum reflects BIS’s intent to incentivize companies to blow the whistle on export violations committed by third parties—tips provided to BIS will be considered a mitigating factor in any future enforcement action commenced against the tipster, and may also result in substantial financial rewards.

 
1. Voluntary Self-Disclosures (VSDs)

By way of background, the EAR, which is administered and enforced by BIS, control exports, reexports and in-country transfers of purely commercial and dual-use commodities, software and technologies, as well as certain munitions that are no longer controlled under the State Department’s International Traffic in Arms Regulations (“ITAR”).  Violations of the EAR can lead to severe civil penalties against corporations and individuals. Willful and intentional export violations can also result in criminal fines and up to 20 years’ imprisonment. However, companies that discover potential export violations may avail themselves of the EAR’s VSD mechanism in order to mitigate the severity of civil penalties that may be imposed. The BIS strongly encourages companies to file VSDs as they are mitigating factors that will be considered when assessing the administrative penalties that may be imposed for violations of the EAR. However, prior to the issuance of the Memorandum, VSDs were just that: VOLUNTARY. Given the new, so-called clarification on BIS’ disclosure policy, certain export violations must be disclosed in order to avoid the possibility of increased penalties.

The EAR’s voluntary self-disclosure provisions can be found in 15 C.F.R. Section 764.5.  When filing VSDs, companies must provide BIS with complete details of the violations before it (or any other U.S. Government agency) learns of them from any other sources and commences an investigation or inquiry. Companies considering a VSD should conduct a thorough internal review spanning the previous five-year period—any additional violations that occurred within that timeframe that are not discovered and that are omitted from the disclosure will not receive mitigation.

In June 2022, BIS announced a new “dual-track” system for the review and resolution of VSDs.  Specifically, VSDs are assigned by BIS to two categories: VSDs involving minor or technical violations; and, VSDs involving more serious violations.  Disclosures of minor or technical violations are put on a “fast-track” by BIS, with cases resolved through warning or no action letters issued within sixty (60) days. On the other hand, VSDs involving more serious violations are assigned to a BIS field agent, an Office of Chief Counsel Attorney and, for the most serious cases, an attorney from the DOJ’s Counterintelligence and Export Controls Section.

The Memorandum does not change BIS’ policy with respect to the dual-track system or the handling of VSDs involving minor, technical violations. Rather, the Memorandum seeks to incentivize the filing of VSDs where significant export violations are discovered.  Specifically—

• There will be “concrete benefits” for companies that choose to file VSDs for potential significant export violations (i.e., a substantial reduction in the amount of civil penalties that may be imposed and the possibility that the contemplated penalty may be suspended altogether).
• There will be “concrete costs” for companies that deliberately choose not to file VSDs for potential significant export violations—the failure to file a VSD will be considered an aggravating factor. The settlement guidelines provide that BIS considers as a General Factor in export enforcement actions whether a company’s compliance program uncovered the violation, and whether the company has taken steps to address the compliance concerns raised by the violation (e.g., the filing of a VSD). “General Factors” can either be mitigating or aggravating.  Going forward, BIS will “consistently apply this factor as an aggravating factor when a significant possible violation has been uncovered but no VSD has been filed.”

The Memorandum does not specifically define the term “potential significant export violation.”  However, it mentions that such violations are those that reflect potential harm to US national security.

 
2. Tips and Disclosures of Export Violations Committed by Others

The Memorandum also reflects BIS’ intent to incentivize whistleblowing with respect to potential export violations committed by third parties. Tips and disclosures of potential third party export and sanctions violations may be submitted to BIS through an online, confidential reporting form.  In return, the tipsters will receive “concrete benefits” for their efforts.  The existing settlement guidelines provide that “Exceptional Cooperation with OEE” is a mitigating factor that will be considered in an enforcement action where a party has—

…previously made substantial voluntary efforts to provide information (such as providing tips that led to enforcement actions against other parties) to federal law enforcement authorities in support of the enforcement of U.S. export control regulations.

Accordingly, if the tip results in an enforcement action against the third party, the Memorandum states that BIS will treat the tip as a mitigating factor (i.e., “Exceptional Cooperation”) in an enforcement action against the tipster, if one is ever commenced in the future.

Further, if the tip is related to a potential sanctions violation, the tipster may also reap a monetary reward as well.  Individuals who provide the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) or the Department of Justice with information about sanctions violations may receive substantial financial awards if the information they provide ultimately leads to a successful enforcement action. It remains to be seen whether companies will seek the “concrete benefits” of blowing the whistle on violations committed by third parties to the U.S. Government.

What is the key take-away from the Memorandum? Companies should carefully weigh all of the “concrete benefits” and “concrete costs” of filing VSDs where potential export violations are discovered—this is especially the case where the error may be considered a significant violation of the EAR.

Please contact Melissa Proctor (melissa@millerproctorlaw.com) should you have any questions about the Memorandum, implementing effective export and sanctions compliance programs, and/or other international trade issues.