The U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a press release August 14, 2009, announcing the settlement of charges against North Carolinabased RF Micro Devices, Inc. (RFMD) for $190,000. The penalties related to allegations that the company had exported spread spectrum modems to the People’s Republic of China without the appropriate export authorizations in 2002 and 2003. Spread spectrum modems are classified in Category 5A001 of the Commerce Control List, and are controlled for National Security reasons. RFMD, which designs and produces high-performance semiconductor components, voluntarily disclosed the violations.

The allegations involved several of the standard allegations seen in these cases including exporting product without the appropriate authorization; exporting product with knowledge that a violation has occurred, is about to occur, or is intended to occur; and making false or misleading statements in connection with the submission of Shipper’s Export Declarations. There were 14 alleged instances of unauthorized exports and 13 alleged instances of false or misleading statements. At the maximum penalty levels, even those in place at the time of the allegations, the allegations could have resulted in penalties of more than $2 million.

More interesting is the fact that BIS also included an allegation against an individual – a manager at the company – for making a false or misleading statement in the course of the BIS investigation. The manager, whose responsibilities at the time of the violations included export compliance, has agreed to pay a civil penalty in the amount of $15,000.

The press release issued by BIS states that in 2004 Carol Wilkins told a BIS investigator that an outside export control consultant had advised that RFMD’s products were not subject to export licensing requirements to any country into which the company was marketing them. In fact, Wilkins was advised – repeatedly – that the products in question “may have been classified under the Commerce Control List and that these products may have required an export license.”

Although the details contained in the BIS press release are fairly limited, there appear to be some lessons to be learned – or reiterated – from this case. First, without having an appropriate export classification program in place, it is impossible to be properly in compliance with the Export Administration Regulations (or the International Traffic in Arms Regulations). Of course, the type of program will depend largely on the business in which your company engages, but a company in the semiconductor industry should have known that its products might have specific export classifications and should have had an appropriate classification and license determination procedure in place.

Second, as we all should have learned as children: getting caught and then lying about it is far worse than getting caught and owning up to your mistake. Penalties against individuals are unusual and are generally limited to circumstances in which principals of a company are alleged to have intentionally and knowingly exported product without a license. Although the press release indicates that Wilkins herself was told repeatedly that the product might require a license, the personal allegations against her do not appear to be based on her failure to follow that advice. Instead, the stated reason for the individual penalty was her false and misleading statement to investigators.

Third, export compliance managers – always concerned about personal liability – are certainly likely to take this case to heart. Companies should do the same. Your export compliance manager should be in a position to take the steps necessary to protect the company from itself. When export compliance responsibilities interfere with sales targets or shipping deadlines, or other similar conflicts exist, an export compliance manager should not be in a position of having to choose between violating the law or forgoing a raise, bonus or promotion. While the role of the manager in the RFMD case or what led her to make the choices she did are unknown, she clearly had some motivation to make the wrong choice. The lower the incentive to put sales and profits over compliance, the better a compliance program will perform.

Fourth, the profit that you will make on an illegal transaction is highly unlikely to outweigh the penalties that you will pay if you get caught. In this case, the final settlement amount with BIS comes out to just over $13,500 per modem exported. Of course, this does not take into account the internal resources and legal fees the company dedicated to its internal investigation, the preparation of a voluntary disclosure and settlement negotiations with BIS, the compliance improvements and other costs that we know RFMD incurred as a result of the investigation or the fees paid to the outside export consultant who apparently gave accurate advice in the first place.

In conclusion, given the fivefold increase in potential per-violation penalties since the violations in question occurred,1 the government’s current stance toward the issuance of penalties and the motivation on the part of agencies to increase revenues, exporters should take this penalty case to heart when reviewing the structure and operation of their export compliance programs.