On 2 October 2016, the U.S. Department of Justice (DOJ) issued guidance (the Guidance)1 that sets forth a new policy encouraging companies (other than financial institutions)2 to file voluntary self-disclosures (VSDs) with DOJ for possible criminal violations of U.S. export controls and sanctions laws in exchange for potential leniency. The Guidance continues implementation of DOJ’s broader policy of leveraging corporate cooperation to gain increased prosecution of individual officers and employees, as set forth in the September 2015 Yates Memo.3 This is a departure from traditional VSD practice in the export control and sanctions arena, where VSDs have traditionally been handled solely with the relevant administrative agencies. Previously, upon receipt of a VSD, those agencies would have investigated potential civil violations and referred potential criminal violations to DOJ. Companies facing a VSD now will have to quickly determine whether to file VSDs with both the relevant administrative agency and DOJ in order to gain full credit for cooperation.
Background: Export Controls and Sanctions Laws Enforcement
- The U.S. State Department's Directorate of Defense Trade Controls (DDTC) administers and enforces the International Traffic in Arms Regulations (ITAR), which govern the export and temporary import of defense articles and defense services, among other things. The U.S. Commerce Department's Bureau of Industry Security (BIS) administers and enforces the Export Administration Regulations, which are the principal embodiment of U.S. export controls for dual-use items. The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) administers and enforces U.S. sanctions regulations.
- Civil fines for regulations administered by DDTC, BIS and OFAC may be imposed on a strict liability basis and can exceed USD1 million per violation. Criminal penalties may result in fines of up to USD1 million and/or up to 20 years' imprisonment.
- DDTC, BIS and OFAC each provide VSD programs that can result in significant reductions in the penalties imposed for violations of the civil penalty provisions of these regulations, including a decision to take no action. However, DOJ can, in coordination with DDTC, BIS or OFAC, bring criminal actions against companies and individuals who commit "willful" violations of U.S. export controls and sanctions laws. The new policy outlined in the Guidance potentially brings DOJ in at the outset and multiplies the complexities companies facing potential violations must confront.
Possible Credit Available to Companies For Filing a VSD With DOJ
The Guidance states that when a company submits a VSD, fully cooperates, and implements appropriate remediation, the company may be eligible for a significantly reduced penalty, to include the possibility of a non-prosecution agreement (NPA), a reduced period of supervised compliance, a reduced fine and forfeiture, and no requirement for a monitor. It also, however, makes clear that there are no bright-line standards and that cooperation credit will be on a case-by-case basis, considering the totality of the circumstances, including what resources are available to the company – a small, unsophisticated company may not receive the same treatment as a multinational corporation. DOJ will consider the following in determining whether and what cooperation credit will be given:
- Qualification as a VSD: A qualifying VSD must be made "prior to an imminent threat of disclosure or government investigation" and "within a reasonably prompt time after becoming aware of the offense." The burden is on the company to demonstrate timeliness. The Guidance further states that the company must disclose all relevant facts known to it, including all relevant facts about the individuals involved in any export control or sanctions violation.
- Full Cooperation: Eleven requirements for full cooperation credit are listed, including: identification and description of the conduct of any individuals involved; preservation and production of all relevant documents and information, including materials overseas (to the extent permitted by applicable non-U.S. blocking statutes); proactive, detailed disclosure of internal investigation findings, including attribution of facts to specific sources; and facilitation of government interviews of U.S. and non-U.S. employees and third parties. Passively responding to the DOJ's investigation, even if done in a timely manner, would not be deemed as "full cooperation"; proactive assistance with the investigation and commitment to timely resolution is required.
- Timely and Appropriate Remediation: A company must implement appropriate remediation measures to ensure the misconduct has ceased and will not reoccur. DOJ will assess remediation efforts only after some cooperation has been established; companies cannot refuse to cooperate during the investigation and expect credit only via remediation alone. Remediation includes the implementation of an effective compliance program, "appropriate discipline" of employees who run afoul of that compliance program and connecting employee compensation to the achievement of meaningful compliance goals.
- Potential Aggravating Circumstances: The Guidance includes a non-exhaustive list of aggravating circumstances related to national security concerns that could result in a more stringent penalties or resolution regardless of the level of cooperation or remediation a company demonstrates: export of nuclear technology to a proliferator country, export of items involved in weapons of mass destruction, exports to a terrorist organization or military items to a hostile foreign power, repeated violations, involvement of senior management, and significant or disproportionate profits from the illegal activity.
- Although the Guidance states that it does not alter the traditional disclosure process, in light of the Guidance, companies will need to consider whether or not to file a concurrent disclosure with the DOJ at the onset of an internal investigation when they submit an initial disclosure with the relevant agencies. In practice, this could be a substantial burden because it is often a challenge, if not an impossibility, to discern whether a violation may have been “willful" at the onset of an internal investigation. Companies that identify potential violations of export controls or sanctions laws should make certain to consider both criminal and regulatory enforcement procedures prior to initiating a voluntary disclosure.
- One can also expect that more disclosures will be filed with DOJ going forward based on this Guidance. This would mean that DOJ will have greater insight into the possible violations committed by companies at an early stage of a government review which could potentially lead to an increased number of criminal enforcement cases.
- Finally, companies must be aware of the heightened emphasis on individual accountability as well as proactive and involved cooperation during government investigations related to export controls and sanctions law matters.