On June 22, 2016, the Department of Commerce, Bureau of Industry and Security (BIS), finalized a new enforcement policy for administrative (i.e., non-criminal) matters called the Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases (Guidance). The Guidance, which is effective immediately, lays out the factors that BIS and its Office of Export Enforcement (OEE) will consider when evaluating whether to pursue enforcement actions, along with the appropriate penalties, for violations of the Export Administration Regulations (EAR). It replaces the current version at Supplement No. 1 to Part 766 of the EAR. The final Guidance makes some noteworthy changes as compared with the December 2015 proposed rule (2015 Proposed Rule).
The Guidance is limited in scope. It does not apply to criminal matters, but only deals with BIS’s authority to issue civil penalties, denial of export privileges and other licensing restrictions. Nor does the Guidance apply to violations of the anti-boycott regulations of the EAR, or to pending matters for which, as of June 22, 2016, there were ongoing settlement negotiations and a charging letter had not yet been filed. It is also important to be aware that the Guidance applies to settlements. If a company decides to litigate against BIS, the agency may take stricter positions, within the limits of its authority. It is also important to be aware that the core regulations underlying BIS’s enforcement authorities have not changed: those are found in Parts 764 and 766 of the EAR.
The Guidance revamps the policy framework for BIS enforcement and aligns it with the November 2009 guidelines from the Treasury Department’s Office of Foreign Asset Control (OFAC), on which we have previously advised. It makes sense for BIS to use a similar enforcement framework as OFAC, since they cooperate on many matters and share the same primary authorizing statute.
With the new Guidance, BIS seeks to make its charging decisions and civil penalty determinations more predictable and transparent, and to account more clearly for the higher penalties set forth in the International Emergency Economic Powers Enhancement Act of 2007. But even with this more transparent framework, BIS will continue to have wide discretion in making enforcement decisions, and the Guidance does not establish certainty as to the agency's charging decisions or the penalties to be levied in any specific set of circumstances. In considering the tradeoff between predictability for industry and flexibility for its own decision-making, BIS generally favored the latter.
Among the noteworthy substantive changes set forth in the Guidance is a policy of providing a one-half reduction in the penalty amount in “non-egregious” cases resulting from a Voluntary Self-Disclosure (VSD). In “egregious” cases, the extent of VSD mitigation credit is less certain (“up to” 50%). Since BIS retains discretion to determine whether a case is “egregious,” companies at the end of the day will not always be able to know whether they can benefit from the clear 50% mitigation rule. However, there no doubt will be many instances in which a company can reasonably ascertain into which category a set of infractions will fall, and the likely level of disclosure credit available. Overall, one of the most significant changes with the issuance of the Guidance is the new and more structured framework for making charging and penalty determinations. This may not have a major practical impact on enforcement results going forward, as opposed to the past; but it does provide more clarity on BIS’s enforcement policy and aligns it more closely with OFAC’s.
Voluntary Self-Disclosure Mitigation
The Guidance is clear about how much credit BIS will grant in non-egregious cases when the matter comes to their attention from a VSD: the base penalty “shall be one-half of the transaction value, capped at a maximum” of $125,000 per violation.
For egregious cases, the 2015 Proposed Rule set out a similar automatic 50% penalty reduction for VSDs. The final Guidance changed that approach and instead adopted a flexible policy like the one that existed before. Under the final Guidance, the base penalty amount “shall be an amount up to one-half of the statutory maximum” in a VSD case. According to BIS, this rule “would simply formalize the long-standing practice of OEE to accord up to 50% mitigation to VSDs by assigning them ‘great weight’ as a mitigating factor.” BIS goes on to say that “in most instances OEE’s practice has been to assign 50% mitigation for the submission and completion of VSDs that meet the requirements of § 764.5 . . . .” Therefore, enforcement targets can continue to expect a reasonably high chance of obtaining the full 50% mitigation for a VSD, but there is no guarantee of this. BIS says that the 2015 Proposed Rule would have “remove[d] the discretion to assign anything less than” 50% mitigation for a VSD. The formula in the final Guidance (“up to” a 50% reduction) leaves BIS wider latitude to weigh other mitigating and aggravating factors.
On a positive note, the final Guidance, “in recognition of the importance” of VSDs, removes the 75% limit on mitigation that the 2015 Proposed Rule had set out, but only for non-egregious cases based on a VSD. In such cases, the “mitigating factors may be combined for a greater reduction in penalty, but mitigation will generally not exceed 75 percent of the base penalty, except in the case of VSDs, where full suspension is possible with conditions in certain non-egregious cases.”
Seeking to alleviate fears about the risk of submitting a VSD, BIS states that only 3% of VSDs on average have resulted in a civil monetary penalty over the past several years. When compared with the potentially significant penalty reduction that is being offered, BIS hopes that this transparency will tip the balance more clearly in favor of submitting VSDs. BIS does not expect that rate to change significantly – in other words, the Guidance should not lead to more penalties in VSD situations. BIS says that it will respond to most VSDs with a warning letter, including when there are less serious aggravating factors, consistent with the practice of the State Department’s Directorate of Defense Trade Controls (DDTC).
Egregiousness and Enforcement Factors
Beyond the threshold issue of whether a case results from a VSD, BIS will set the base penalty amount according to whether the violation was “egregious” or “non-egregious,” which is a discretionary decision at the end of the day, but one based primarily on the following three “aggravating” factors:
- Aggravating Factor A (Willfulness or recklessness): This would include an attempt to conceal the offense, any past pattern of similar conduct, and whether management knew or should have known about the conduct. BIS added a note to make clear that failure to submit a VSD does not constitute concealment.
- Aggravating Factor B (Awareness of conduct): This is very similar to Factor A, and includes actual knowledge or reason to know, as well as culpable disregard of the relevant facts by senior management.
- Aggravating Factor C (Harm to regulatory objectives): This factor takes into account the impact of the violation on US national security and foreign policy.
These factors will largely guide BIS’s determination of whether a case is “egregious,” which in turn sets the applicable VSD rule. BIS will set penalty amounts based on the degree of egregiousness, so it is not a binary decision. These factors are merely guidelines underlying a discretionary decision by BIS.
In addition to these three aggravating factors, the Guidance lists two “general” factors, which can be either aggravating or mitigating, along with three “mitigating” factors and five “other” factors:
- General Factor D (Individual characteristics): This includes considerations such as whether the respondent is an individual or a company, its size, its experience and sophistication with respect to export practices, the relative volume and value of the transactions in the context of respondent’s business, respondent’s regulatory history (“generally” going back five years, and excluding anti-boycott matters), any other related illegal conduct (e.g., money laundering, drug or firearm smuggling, etc.), and respondent’s prior “export-related” criminal convictions. Notably, the Guidance makes clear that the prior conduct of respondent’s principals may be imputed to respondent.
- General Factor E (Compliance program): This includes whether the respondent’s compliance measures led to the discovery of the problem, whether the respondent took reasonably effective steps to correct it and prevent similar problems in the future, and whether the respondent submitted a VSD. BIS looks to its Export Management System Guidelines to evaluate this factor.
- Mitigating Factor F (Remedial response): This includes terminating the violative conduct, thoroughly investigating, keeping senior management informed, and implementing preventative measures for the future.
- Mitigating Factor G (Exceptional cooperation): BIS will grant between 25% and 40% mitigation based on this factor in a non-VSD case; in VSD cases exceptional cooperation can yield additional mitigation beyond what the VSD would provide. BIS expects companies to provide information about other possible violations involving the same conduct and, in certain cases, to agree to a statute of limitations tolling agreement. (The Guidance states that a refusal to enter into a tolling agreement will not be considered an aggravating factor, but the difference between the absence of a mitigating factor and the presence of an aggravating factor may not be meaningful.) It is also noteworthy that BIS credits cooperation in investigations of third parties, in recognition of the reality “that tips and leads from industry are valuable to enforcement; however, the companies that provide them receive little or no benefit for doing so.” This policy was not included in the 2015 Proposed Rule.
- Mitigating Factor H (License likely to be approved): Expanding upon this factor in the 2015 Proposed Rule, the final Guidance also considers whether a license exception would have applied, but, for example, was used improperly. This can lead to up to 25% mitigation.
- Other Factor I (Related violations): Acknowledging that one error, such as a misclassification, can have a domino effect and cause multiple violations, BIS stated that, while it reserves the right to charge separate violations in such circumstances, it “generally” does not do so and will typically just charge the most serious offense in the settlement context. The Guidance states the standard as “whether the violations stemmed from the same underlying error or omission, and whether they resulted in distinguished or separate harm.” BIS says that it “generally will consider inadvertent, compounded clerical errors as related and not separate infractions.”
- Other Factor J (Multiple unrelated violations): Multiple unrelated violations can lead to a greater monetary penalty or even a denial of export privileges, as BIS may consider it to be evidence of a systemic compliance failure. On the other hand, BIS will grant up to 25% mitigation if the respondent has not been convicted of an “export-related” criminal violation or been subject to a BIS final order in the preceding five years. When a prior enforcement action involved conduct of a substantially different nature, BIS may still grant first offense mitigation. Importantly, BIS stated explicitly that it will “typically” not take prior violations into account when a firm acquires another and “takes reasonable steps to uncover, correct, and voluntarily disclose” prior violations.
- Other Factor K (Other enforcement actions): BIS may take into account the nature and resolution of any other enforcement actions, including at the state and local levels, arising out of the same or similar conduct.
- Other Factor L (Future compliance/deterrence effect): Whether the case resolution will promote future compliance by the respondent and others.
- Other Factor M (Other factors): This catch-all allows BIS to take into account any other facts that it deems relevant.
The last key consideration in setting penalty amounts is the value of the transaction. The Guidance says that BIS will first look to the documents, such as an invoice or AES filings. If the value is not “otherwise ascertainable,” for example if BIS believes the documents may be inaccurate, they will consider the “market value . . . and/or the economic benefit derived by the respondent.” These more subjective standards may be used, for example, with emerging technology, intra-company or related-party transactions, or portions of a wider transaction (e.g., repairs or replacements).
The Guidance states a new policy on suspended penalties, which was also included in the 2015 Proposed Rule. It will allow respondents in some cases to use funds in the amount of their civil penalty to implement mandated compliance steps rather than paying it to the government. DDTC has used suspended penalties like this in the past, but this would be new for BIS, which generally has only suspended penalties due to inability to pay.
In its discussion of the comments, BIS rejected concerns about coercing parties to settle. Commenters noted that the agency can include additional charges and higher penalties if settlement talks fail and litigation ensues. BIS essentially took the position that this is normal prosecutorial practice designed to encourage early settlement. It makes clear that BIS may settle cases after the issuance of an actual charging letter, but that a settlement at such a later stage is likely to be less favorable.
BIS confirmed in this rule that “600 series” items, defense-related items that transitioned from the US Munitions List (USML) to the Commerce Control List (CCL) as part of Export Control Reform (ECR), will be subject to more stringent enforcement scrutiny than other items: “the ‘higher fences’ principle of ECR, referring to the more focused and concentrated enforcement efforts around the more significant military items that remain on the USML also applies to enforcement of items transferred to the CCL. Because of the more flexible licensing authority of the EAR that serves to facilitate trade (e.g., License Exception STA), it is also paramount that the diversion risk with respect to such items of lesser military significance be monitored closely and that the deterrent effect of a strong enforcement response to violations be maintained.” This is not surprising, but, given the different approach to enforcement that BIS takes as compared with DDTC, companies accustomed to dealing only with DDTC may be concerned that BIS will take a particularly tough approach to enforcement for 600 series items.
The Guidance provides more transparency and predictability to BIS charging and penalty decisions in administrative matters, but those decisions will remain within the discretion of the agency. In addition, closer alignment with OFAC should simplify resolution discussions in which both agencies are involved, as is often the case. One question BIS did not address in this rule is how it will react to any move by the Department of Justice (DoJ) to start seeking VSDs in cases involving willful conduct. In particular, it remains unclear how BIS will handle a VSD submitted only to BIS that may contain a willful element, and under what circumstances BIS may refer the case to DoJ.
It does not appear likely that the Guidance will bring about any major changes in BIS enforcement practices, although it does provide a clearer framework that may, with time, lead to more predictability in outcomes.