Some figures in the Bureau of Industry and Security’s (BIS) latest Annual Report to Congress point towards BIS increasingly turning its focus towards enforcement, even as the government has began unveiling export control reform (ECR) with the principal purpose of reducing regulatory burdens on exporters. In addition, BIS’s recent enforcement history and statements before Congress indicate that ECR will not result in a reduction in investigations, audits, or penalties, but in fact will result in amplified enforcement measures from the agency, staying true to ECR’s signature phrase, “higher walls around fewer items.” While many exporters are scrambling to update their product classifications from the United States Munitions List (USML) to controls under the Export Administration Regulations (EAR), and Commerce Control List (CCL) in hopes of obtaining some of the more generous licensing provisions granted under the EAR, exporters should not be fooled into thinking that BIS is more lenient, forgiving, or any less zealous than the Directorate of Defense Trade Controls (DDTC). ECR has generated new rules along with new risks, and exporters should have close familiarity with both.
What BIS’s Statistics Demonstrate
In BIS’s Annual Report to Congress for Fiscal Year 2013, certain figures strongly suggest that BIS is drastically stepping up its enforcement measures and broadening the use of the various enforcement tools it has at its disposal. First, the number of convictions resulting from BIS investigations was 100% higher in 2013 than it was in 2012. In 2013, 52 individuals and businesses were convicted for export violations as opposed to 27 in 2012. Second, convictions in 2013 resulted in a total of 881 months of imprisonment, compared to the 187 months of imprisonment handed down in 2012. This means that a person convicted of an EAR violation in 2013 was given a prison sentence around 10 months longer on average than a person convicted of a violation in 2012. Third, in 2013 exporters forfeited more than $18 million in goods or assets due to EAR violations. This represents over a 350% increase in forfeitures since 2012, when exporters forfeited $5 million in goods or assets.
BIS also utilized its administrative authority more actively in 2013 than it had in 2012, completing 71 administrative export and anti-boycott actions against individuals and businesses, compared to 42 in 2012. Additionally, BIS stepped up its preventative enforcement measures, completing 1,033 end-use checks in 50 countries, resulting in 40 more end-use checks than were conducted in 2012.
Changes that will Increase BIS’s Ability to Enforce
Corresponding with BIS’s enforcement statistics, they have indicated on several occasions their intention to intensify their focus on enforcement in light of ECR. In fact, BIS has suggested that ECR will enhance their ability to enforce export control laws. For example, in a hearing before the Committee on Foreign Affairs, the agency pointed out that one result of ECR will be that “prosecutors will have greater confidence in bringing forward cases based upon the clearer rules.” BIS’s increased focus on enforcement is reinforced by the additional $8.291 million requested for the agency in the President’s FY 2014 budget for “additional resources to augment BIS enforcement capabilities.”
While BIS has confidence that clearer rules will result in more convictions, they are also increasing their enforcement manpower and improving coordination with other agencies. In April of 2013, Assistant Secretary of Commerce, Kevin Wolf, stated that BIS had hired 22 licensing and compliance officers dedicated to processing and monitoring munitions transactions subject to the new “600 series.” The agency is also expanding their global investigative reach as the President’s FY 2014 budget requests three additional Export Control Officers (ECOs) to be added to the seven ECOs already responsible for conducting on-site end-use checks around the world.
This increased manpower will be supported by relatively recent changes that have enhanced coordination between BIS and other agencies. As a result of Executive Order 13558, the Export Enforcement Coordination Center, also called E2C2, was formed, which combined the resources of eight departments and the intelligence community under one roof. E2C2 will coordinate the sharing of enforcement information across various government agencies to ensure investigations are conducted more efficiently. Furthermore, in 2012 the Administration established the Information Triage Unit (ITU), which is hosted and administered by BIS. The stated purpose of this unit is to assemble, analyze, and disseminate information from all sources to give agencies more visibility into parties involved in a given transaction.
While coordination with other agencies should improve BIS’s ability to investigate violations, the agency has been granted some significant administrative enforcement measures and has stated in this regard:
“[BIS] can bring to bear unique administrative authorities – such as civil penalties, temporary and long-term denial orders, and Entity List and Unverified List designations – that can be more powerful than criminal sanctions by taking away a company’s ability to export or a foreign company’s ability to obtain U.S.-origin items. We have seen time after time that our Entity List drives front companies out of business and legitimate businesses to change their behavior to become responsible stewards of international trade.”
These administrative enforcement measures are fortified by a BIS rule that came into effect on January 21, 2014, which clamped down on transactions with parties listed on the Unverified List (UVL). The UVL is maintained by BIS and documents individuals or businesses in foreign countries who were parties to past export transactions where BIS was unable to verify the existence or authenticity of the end-user or other party to the transaction when conducting pre-license checks or post shipment verifications. BIS regularly adds and removes parties from the UVL. As of January 21, 2014, exporters are required to file an Automated Export Systems (AES) record for all exports to which a person listed on the UVL is a party regardless of the value or destination of the shipment. Furthermore, no license exception will be available for transactions involving UVLs. Finally, in those transactions not normally requiring a license or license exception, anyone exporting, re-exporting, or transferring an item to a UVL will be required to obtain a statement from the UVL certifying the end use, end user, and country of ultimate destination of the items being exported, re-exported, or transferred, and the UVL must consent to end-use checks by the U.S. government. These changes to the EAR will not only increase the need for exporters to be wary when conducting a transaction, they also demonstrate BIS’s shift towards enhancing their own enforcement mechanisms.
Possibly creating more risks for exporters of EAR controlled goods, recent statements made by Assistant Secretary, David W. Mills, indicate that BIS is considering updating their Enforcement Penalty Guidelines for administrative cases to align with OFAC’s guidelines. Under BIS’s current enforcement guidelines, BIS has assessed administrative penalties against only 3% to 6% of exporters who have disclosed violations through a voluntary self-disclosure. Under OFAC’s guidelines apparent violations disclosed through a voluntary self-disclosure result in a proposed penalty of one-half of the transaction value, which is capped at $125,000 per violation, subject to certain exceptions. If BIS adopts the OFAC guidelines, it may lead to more frequent and higher penalties being issued by BIS even in cases of voluntary self-disclosures.
Finally, BIS will be paying special attention to those seeking to take advantage of recent changes under ECR. At an advisory committee meeting in Washington, D.C., Mr. Mills told industry leaders that BIS is going to direct their enforcement resources towards policing exports of items transitioned from the USML to the CCL. He further explained that BIS will work with the U.S. Census Bureau in monitoring the AES in an effort to discover potential violations. Significantly, BIS will likely penalize exporters with violations more severely than DDTC, even in cases where companies self-disclose, as DDTC has typically been more progressive in its treatment of voluntary self-disclosures, and has informally stated that it expects companies to submit disclosures as part of a healthy compliance program. BIS, on the other hand, has been a bit tougher in terms of potential for monetary penalties and has taken the position that submission of multiple disclosures reveals a systemic problem. Mr. Mills also stated that as the munitions items shift from State to Commerce, BIS will consult with DDTC about the past histories of its registrants and related compliance issues, and will take that information into account in making license determinations and taking enforcement actions.
BIS Enforcement in Action
BIS’s increased commitment to enforcement is supported by the fact that BIS recently issued, by far, their largest penalty levied against a company for violations of the EAR. On November 26, 2013, BIS announced that Texas company Weatherford International Ltd. and four of its subsidiaries agreed to pay a $50 million civil penalty following allegations that Weatherford exported oil and gas equipment to Iran, Syria, and Cuba in violation of the EAR. Furthermore, the agency alleged that Weatherford had exported items controlled for nuclear non proliferation reasons to Venezuela and Mexico. In addition to the $50 million penalty issued by BIS, Weatherford was required to pay an additional $50 million to the U.S. Government as a result of an agreement with the U.S. Justice Department, thus bringing the total amount of penalties paid by Weatherford to $100 Million. Significantly, the large penalty in Weatherford coincides with ECR and BIS’s indications that enforcement is a current priority.
What this Means for Exporters
Although ECR is working to reduce some of the regulatory burdens that exporters face, the reduction in controls on certain exports is being accompanied by a corresponding emphasis on enforcement. This should not be a surprise for many exporters as BIS has always indicated that it is their intention to “erect higher walls” around the items that continue to be controlled. As a result, they are enhancing their enforcement capabilities by creating new regulations or leveraging the authorities they already have. The new restrictions on transactions with parties on the UVL will create additional regulatory burdens for exporters while increasing their liability. Furthermore, the consideration of penalty guidelines that establish minimum penalties in the case of voluntary disclosures means that exporters will need to be ever more vigilant toward preempting violations. Finally, BIS is not shy about leveraging their enforcement powers. Recent statements by BIS indicate their growing concern with enforcement, which is supported by the fact that BIS recently levied their largest fine ever. Companies must understand the higher enforcement risks they will face as a result of ECR and prepare accordingly. At a minimum, companies should develop and fully implement export compliance procedures and provide export training to key employees.