On December 28, 2015, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a proposed rule that would amend BIS’s Guidance on Charging and Penalty Determinations (Enforcement Guidelines) found in Supplement No. 1 to part 766 of the Export Administration Regulations (EAR). The proposed rule seeks to make administrative penalty determinations more predictable and aligned with the approach taken by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). In particular, the proposed rule sets forth factors BIS will consider when setting penalties in settlements of administrative enforcement cases and when deciding whether to pursue charges or settle alleged violations of the EAR. BIS is accepting comments until February 26, 2016.
The two major changes under the proposed rule are: (1) the introduction of a base penalty amount that reflects whether a case is considered egregious or non-egregious and whether a case resulted from a voluntary self-disclosure, and (2) reorganization and expansion of the factors that BIS will use to adjust the base penalty amount, including clarification of aggravating and mitigating factors.
Determination of the Base Penalty Amount
Much like OFAC’s Economic Sanctions Enforcement Guidelines, BIS’s civil monetary penalty assessments under the proposed regulation would be based on: (1) whether the case is “egregious” or “non-egregious,” and (2) whether the case resulted from a voluntary self-disclosure (VSD). While currently the submission of a voluntary self-disclosure is a mitigating factor entitled to “great weight,” under the new rule submission of a voluntary self-disclosure that satisfied all of the requirements of § 764.5 would reduce the amount of the base penalty as set forth in the chart below.
To determine whether an alleged violation is egregious or non-egregious, substantial weight will be given to the alleged violations involve willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, and harm to the regulatory program objectives, while taking into account the individual characteristics of the parties involved. BIS anticipates that most cases of apparent violations of the EAR will fall into the non-egregious category.
Second, the base penalty assessment will turn on the submission of a complete and timely voluntary self-disclosure (VSD). In egregious cases, a VSD will reduce the base penalty to one-half of the applicable statutory maximum; in non-egregious cases, a VSD will reduce the base penalty to one-half of the transaction value (capped at US$125,000). This calculation is intended to encourage parties to notify BIS of apparent violations, which serves BIS’s objectives of raising awareness, increasing compliance, and deterring future violations of the EAR.
Taken together, the base penalty would be calculated according to the following matrix:
BASE PENTALTY MATRIX
Click here to view the table.
Adjustment Based on Mitigating, Aggravating, or General Factors
Once the base penalty is determined, the factors set forth in the proposed rule would be consulted to determine whether the penalty amount should be adjusted downward or upward (subject to the statutory maximum). With regard to mitigating factors, the base penalty may be adjusted downwards in situations where the respondent is exceptionally cooperative (25-40% reduction); whether the respondent took corrective actions in response to the apparent violations, including stopping the apparent violation; and whether the transaction would likely have received a license had one been sought (up to 25% reduction). First offenses may also result in a reduction of up to 25%. Aggravating factors include willful or reckless violation of the law, awareness of the conduct at issue, and harm to the regulatory program. BIS will also review certain general factors, which could be mitigating or aggravating depending on the facts, such as the individual characteristics of the respondent and the nature of the respondent’s existing compliance program. Mitigating factors may be combined, but the total reduction would generally not exceed 75% of the base penalty.
BIS also proposes, in appropriate cases in the context of settlement negotiations, that it may suspend or defer payment of a civil penalty, taking into account whether the respondent has demonstrated a limited ability to pay, whether the matter is part of a global settlement with other U.S. government agencies, or whether the respondent will apply a portion or all of the funds suspended or deferred for purposes of improving its internal compliance program.
BIS will continue to have the discretion to issue warning letters in cases involving inadvertent violations or minor or isolated compliance deficiencies, absent the presence of the aggravating factors discussed above.
Special thanks to Mary Van Houten for her contribution to this update.