On June 22, 2016, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published a final rule (“Final Rule”) revising its guidance regarding penalties in administrative enforcement cases under the Export Administration Regulations (“EAR”). The Final Rule will go into effect 30 days after its publication, or on July 22, 2016. Specifically, the Final Rule amends the Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases (“BIS Guidelines”), found in Supplement No. 1 of Part 766 of the EAR, to make BIS’s civil penalty determinations more predictable, transparent, and consistent with the Economic Sanctions Enforcement Guidelines implemented by the Treasury Department’s Office of Foreign Assets Control (“OFAC”), Appendix A to 31 C.F.R. Part 501 (“OFAC Guidelines”).
In the Final Rule, BIS emphasized that it does not believe the new BIS Guidelines will meaningfully affect the percentage of voluntary self-disclosures that result in civil monetary penalties, which is currently at about 3%. It is not clear whether the new BIS Guidelines will result in higher civil monetary penalties in cases where they are imposed, particularly those involving violations that were not voluntarily self-disclosed, or in other significant changes to the enforcement practices of the Office of Export Enforcement (“OEE”) (the organizational unit of BIS responsible for enforcement). Nonetheless, the BIS Guidelines may have following implications for companies subject to enforcement actions under the EAR:
- Alignment with OFAC Guidelines: The new BIS Guidelines will make OEE’s penalty determinations more aligned with those of OFAC, particularly with respect to sanctions enforcement cases where both BIS and OFAC may exercise jurisdiction. Since expiration of the Export Administration Act of 1979 (P.L. 76-72) (“EAA”) in 1994, BIS has operated pursuant to the authority of the International Emergency Economic Powers Act (“IEEPA”), which is the same statutory authority underlying most of OFAC’s sanctions programs. Maximum penalties under IEEPA are the same for both EAR and OFAC violations: 20 years imprisonment and/or $1 million per violation for criminal penalties and $250,000 (as adjusted for inflation) or twice the transaction value (whichever is greater) for administrative monetary penalties. (See our related blog post on the enhanced penalty amounts under IEEPA that go into effect on August 1, 2016.)
- Expanded Range of Enforcement Responses: Whereas the prior guidelines provided only three possible responses to violations (i.e., a warning letter, an enforcement action, or a criminal referral) and three types of administrative sanctions (i.e., civil monetary penalties, denial orders, or exclusion from practice), the BIS Guidelines now set forth a range of possible responses that include all of these actions and the following additional enforcement options:
- Issuance of a “No Action” letter in cases where OEE has insufficient information to determine whether a violation occurred, determines a violation did not occur, or believes the conduct does not warrant an administrative response;
- Suspension, revision, or revocation of licenses or the availability of license exceptions;
- Requirements for training, audits, or other compliance measures; and
- Suspension or deferral of civil monetary penalties during a probationary period, in which the company may be required to allocate an equivalent amount to required training, audit or compliance activities. While OEE has allowed for suspension or deferral of civil monetary penalties, this was previously done primarily on the basis of financial need.
- Enhanced Predictability of Monetary Civil Penalties: For cases where a monetary civil penalty is deemed appropriate, the BIS Guidelines set out a two-part calculation by which the penalty amount would be determined:
(1) First, a base penalty amount would be determined, based on (a) whether the matter is deemed to be “egregious” or “non-egregious” and (b) whether the matter is disclosed through a voluntary self-disclosure (in which case, at least a 50% penalty reduction will apply) or through some other source. The base penalty calculations can be summarized as follows (subject to adjustment for inflation, as noted above):
- In a non-egregious, voluntarily self-disclosed case, the base penalty amount will be one-half of the transaction value (capped at $125,000 per violation);
- In a non-egregious, non-voluntarily self-disclosed case, the base penalty amount will be the “applicable schedule amount,” as defined in the BIS Guidelines (capped at $250,000 per violation);
- In an egregious, voluntarily self-disclosed case, the base penalty amount will be up to one-half the statutory maximum (the greater of $125,000 or the transaction value); and
- In an egregious, non-voluntarily self-disclosed case, the base penalty amount will be up to the statutory maximum (the greater of $250,000 or twice the transaction value).
These base penalty amounts match those set out in the OFAC Guidelines, except that, in egregious cases, BIS has the discretion to adjust the base penalty downward from the statutory maximum or one-half the statutory maximum, whereas comparable language in the OFAC Guidelines does not provide this flexibility to OFAC.
(2) Next, BIS would then adjust the base penalty amount downward or upward (up to the statutory maximum) on a case-by-case basis, based on the presence of aggravating, general, and mitigating factors. The new BIS Guidelines now provide examples of conduct under each factor and some specific penalty reduction percentages in an attempt to provide clarity for how each factor is applied to a given case. For example, a first offense will generally result in a 25% reduction, while exceptional cooperation will generally result in a 25-40% reduction; maximum mitigation for any case other than a non-egregious, voluntarily self-disclosed case will generally not exceed 75% of the base penalty.
- Continuing Importance of Voluntary Self-Disclosures: The Final Rule makes clear that the BIS Guidelines are intended to emphasize and incentivize voluntary self-disclosures. According to the Final Rule, the BIS Guidelines formalize OEE’s longstanding practice of giving up to 50% in penalty reductions for such disclosures.
- Increased Pressure to Settle Before Charges are Filed: The BIS Guidelines also provide that penalties will likely be higher in cases that settle after the commencement of litigation. In practice, this means companies may be under greater pressure to settle before litigation.
The new BIS Guidelines will not apply to pending enforcement matters where, as of July 22, 2016, settlement negotiations are ongoing and no charging letters have been filed. In addition, the new BIS Guidelines will not apply to violations of Commerce’s anti-boycott rules, 15 C.F.R. Part 760, which will continue to be subject to the enforcement guidelines in Supplement No. 2 of Part 766 of the EAR.