Big changes are afoot at the U.S. Department of Commerce Bureau of Industry and Security that, on the one hand, would significantly raise the stakes for companies that run afoul of export control regulations but, on the other hand, bring greater transparency to the enforcement process.
The Bureau of Industry and Security (BIS) in late December published a proposed rule amending its enforcement guidelines on charging and penalty determinations in administrative enforcement actions under the Export Administration Regulations (EAR). According to BIS, the intent is to make administrative penalty determinations more predictable, transparent, and aligned with the enforcement procedures used by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).
The most significant development that raises the stakes for compliance officers is the new penalty amounts. “The guidelines generally provide for significantly higher civil penalties for egregious cases than BIS has historically imposed,” David Mills, Assistant Secretary of Commerce for Export Enforcement, noted during remarks at the BIS’ annual conference in November.
Mills further stressed the importance of industry collaboration. “You are our eyes and ears; you are the ones receiving the suspicious inquiries; you are the ones whose reputation is most damaged when your items get diverted; you are the ones spending hard-earned profits on compliance programs,” he said.
Both BIS and OFAC make penalty determinations under the International Emergency Economic Powers Act (IEEPA), which imposes civil monetary penalties of up to $250,000 or twice the value of the transaction, whichever is greater. Similar to OFAC’s economic sanctions enforcement guidelines, BIS’ civil monetary penalty assessments under the proposed rule would introduce a base penalty amount, which would then be adjusted upward or downward based on certain mitigating and aggravating factors and whether a case is “egregious” or “non-egregious.”
Aggravating factors include:
Willfulness, recklessness, and concealment
Awareness of the conduct at issue
Harm to regulatory program objectives, taking into account end use, end users, and the sensitivity of the items involved in the transaction
Individual characteristics of the parties involved, including an evaluation of the respondent’s commercial sophistication, exporting experience, volume and value of transactions, and regulatory history
Under the proposed rule, BIS would also consider whether the company had an effective risk-based compliance program in place at the time of the apparent violation. A robust compliance program “ensures that all employees understand the EAR and know that senior management is committed to compliance with the regulatory regime,” Mills remarked. Other key components are “knowing your customers, asking for end-use certificates, and effectively screening them against government lists,” he said.
Questions that U.S. exporters need to consider include:
Are you devoting adequate resources to export control compliance?
Are you screening all transactions against government lists to ensure you’re not doing business with designated entities or individuals?
Are you conducting training regularly, ensuring that employees understand export control laws and can apply that knowledge to their day-to-day job responsibilities?
How often do you refresh that training?
If a transaction raises a red flag, do you have an escalation process?
Compliance officers also should take advantage of the educational materials that the U.S. government provides. At Raytheon, for example, compliance and in-house legal counsel regularly monitor press releases from BIS and the Directorate of Defense Trade Controls for developments or enforcement actions affecting Raytheon’s business or its suppliers, said Benjamin Turkel, trade compliance counsel at Raytheon.
“The guidelines generally provide for significantly higher civil penalties for egregious cases than BIS has historically imposed.”
David Mills, Assistant Secretary of Commerce for Export Enforcement
Any changes to policies and procedures are communicated to company personnel through internal e-mail, news bulletins, and announcements, Turkel explained during a webinar sponsored by law firm Skadden. To effectively allocate resources to export control compliance, Turkel recommended conducting risk-based assessments and audits, and identifying business units that engage in higher levels of export-controlled activities and risks.
BIS also would consider whether the case resulted from a voluntary self-disclosure, which would cut base penalties by half of the transaction value (capped at $125,000 per violation) in non-egregious cases. In egregious cases, self-disclosures would reduce the penalty to one-half of the statutory maximum penalty.
Whereas BIS historically has given a lot of credit to companies that voluntary self-disclose apparent export control violation, the proposed regulations would allow companies to actually quantify the impact of making such a decision, using a base table calculation. “If people can make that calculation and see the exact dollar value of the risk that they’re taking, that helps them be able to make that decision a little easier,” says Laura Fraedrich, a partner at law firm Jones Day.
The decision of whether to self-disclose, however, must be decided on a case-by-case basis. “Being able to identify a problem, investigate, or review that issue adequately, and then having a process to disclose to the U.S. government, should that make sense, certainly will help a great deal with mitigation,” says Ajay Kuntamukkala, former senior adviser to the Undersecretary of Commerce for BIS and now a partner with law firm Hogan Lovells.
BASE PENALTY MATRIX
The chart below describes BIS’ formula for how it would make charging and penalty determinations in administrative enforcement actions under the Export Administration Regulations.
Source: BIS Proposed Rule
U.S. issuers should keep in mind, however, that they are required in some cases to file disclosures for potential sanctions violations under the Securities Exchange Act, such as those mandated by the Iran Threat Reduction and Syria Human Rights Act. If you have to disclose potential violations to the SEC, you might as well disclose it to other government agencies, says Judith lee, a partner and co-chair of Gibson Dunn’s international trade practice group.
The proposed regulations come at a time when BIS civil penalties have skyrocketed in the last two fiscal years. In 2014 and 2015, BIS obtained a total of $75.6 million in civil penalties—nearly quadruple the $21.3 million in total civil penalties BIS obtained over the previous three fiscal years, according to penalty figures posted on its website.
Criminal fines have also spiked dramatically, with BIS obtaining $294.2 million in total criminal fines over the past two fiscal years—$156.4 million in 2015, and $137.8 million in 2014. This is nearly a 400 percent increase from the $7.5 million in total criminal fines obtained in the two fiscal years prior.
“BIS is putting a lot more emphasis on dealings with embargoed countries and terrorism-supporting states, which, in turn, has resulted in higher penalties,” says Richard Burke, a partner with law firm White & Case. In these types of egregious cases, “enforcement tends to be a lot more aggressive,” he says.
In one landmark case, Shlumberger Oilfield Holdings, a wholly owned subsidiary of oilfield services giant Schlumberger, entered into a guilty plea in March 2015 and agreed to pay over $232.7 million, including forfeiture of $77.5 million and an additional $155 million criminal fine—the largest to date in a sanctions case for violations of the IEEPA, in which the BIS Office of Export Enforcement was the sole investigative agency.
According to court documents, from 2004 to 2010, Drilling & Measurements (D&M), a U.S.-based Schlumberger business segment, provided oilfield services to Schlumberger customers in Iran and Sudan through non-U.S. subsidiaries of Schlumberger Oilfield.
At its core, Shlumberger’s export control compliance fell short because, according to the Justice Department, the company “failed to train its employees adequately to ensure that all U.S. persons, including non-U.S. citizens who resided in the United States while employed at D&M, complied with Schlumberger’s sanctions policies and compliance procedures.”
The broader message to all global companies with a U.S. presence is that “even if you don’t directly ship goods from the United States to sanctioned countries, you violate our laws when you facilitate trade with those countries from a U.S.-based office building,” warned Ronald Machen, former U.S. Attorney of the District of Columbia, in announcing the settlement.
Compliance officers of U.S. exporters should refer to the proposed penalty guidelines to better anticipate what approach BIS is likely to take to resolve export control violations moving forward. Furthermore, given that BIS intends to take a page from the OFAC playbook, OFAC enforcement decisions may offer further guidance on what to anticipate from BIS down the road.
The main lesson from BIS is that having in place a robust compliance program, self-disclosing potential violations, and taking remedial steps to prevent future violations will continue to be of paramount importance in reaching a favorable resolution in an export control case.
Comments on the proposed rule are due Feb. 26.