The Department of Commerce’s Bureau of Industry and Security (BIS) released the final version of its Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases (Guidance). The Guidance sets forth BIS policy for assessing penalties for violating the Export Administration Regulations (EAR). Notably, the new Guidance formalizes the significant credit given for submitting a voluntary self-disclosure (VSD), and it updates the list of mitigating and aggravating factors that will be taken into account in assessing penalties. The new Guidance, which becomes effective on July 22, 2016, will not apply to matters pending on that date for which there are ongoing settlement negotiations and a charging letter has not been filed.
Following are a few of the new Guidance’s significant features.
Alignment with OFAC’s Penalty Provisions
BIS amended the Guidance to make civil penalty determinations more predictable and transparent to the public. Another stated purpose is to align its penalty assessment provisions set forth in the Guidance with those promulgated by the Treasury Department’s Office of Foreign Assets Control (OFAC). BIS observed that both agencies implement their respective programs under the same statute – the International Emergency Economic Powers Act. Since both agencies coordinate with each other on investigations and implement the same statute, BIS wanted to bring its regulations in line with OFAC’s provisions.
One of the significant changes to the Guidance is the weight given to VSDs: base penalty amounts will be reduced by half if the case is based on a VSD. The 50 percent reduction would be taken “up front” and the final penalty determined in accordance with aggravating and mitigating factors. According to BIS, the final Guidance simply formalizes the long-standing practice of according “great weight” mitigation to VSDs. The Guidance also removes the discretion to assign anything less than 50 percent, thus enhancing the importance of VSDs.
In making these changes, BIS reiterated its long-placed emphasis on the significance of VSDs. It underscored the fact that, over the past several years, on average only 3 percent of VSDs submitted have resulted in a civil monetary penalty. BIS does not expect this rate to change significantly as a result of revisions to the Guidance.
Base Penalties: Egregious vs. Non-Egregious Cases
The new Guidance sets more explicit formulae for determining the base penalties for egregious and non-egregious cases – in particular, how the 50 percent VSD reduction is applied:
- In a non-egregious case involving a VSD, the base penalty amount will be half the transaction value, but no greater than half the statutory maximum of $250,000 – i.e., the base penalty per violation is capped at $125,000.
- For a non-egregious case not involving a VSD, the base penalty amount will be the “applicable schedule amount” – i.e., taken from a penalty schedule included in the Guidance – but is capped at $250,000.
- For an egregious case that results from a VSD, the base penalty amount will be set in a range of up to half the statutory maximum – i.e., up to $125,000.
- For an egregious case not resulting from a VSD, the base penalty will be set in a range up to $250,000 – that is, up to the statutory maximum.
According to BIS, these clarifications in the Guidance will provide the flexibility it requires to obtain reasonable results in settlement negotiations.
Aggravating & Mitigating Factors
Under both the current and new Guidance, once the base penalty is set, the actual penalty is determined by taking into account various aggravating and mitigating factors.
Aggravating factors include:
- the apparent willfulness or recklessness in violating or attempting to violate the law;
- whether there was a deliberate effort to hide or purposely obfuscate one’s conduct;
- whether the apparent violation constituted or resulted from a pattern or practice of conduct;
- whether the party had prior notice that the conduct constituted a violation;
- whether management was aware of the conduct; and
- whether the violations resulted in harm to regulatory program objectives, including the impact on national security.
BIS noted that it generally does not charge multiple violations on a single export and would not consider the existence of multiple violations as an aggravating factor in and of itself.
Mitigating factors include:
- whether the respondent immediately stopped the conduct upon discovery of the violation;
- whether corrective actions were taken in response to the violation;
- exceptional cooperation with BIS;
- whether an export license application would have been approved had one been sought; and
- whether the respondent entered into a statute of limitations tolling agreement.
One new mitigating factor is whether the respondent previously made substantial voluntary efforts to provide information, such as tips, to support enforcement of U.S. export control regulations.
BIS will consider any applicable aggravating or mitigating factors when determining whether to assess a monetary penalty and, if so, the appropriate penalty amount. In addition to monetary penalties, possible non-monetary actions include a “no action” letter, a warning letter, referral to the Justice Department for criminal prosecution, export license suspension, export privilege denial, training or audit requirements.
Early Resolution Incentives
The new Guidance retains BIS policy generally to assess lower penalties in cases settled quickly. Cases settled after litigation is initiated will usually result in higher, more onerous penalties than cases settled prior to the start of enforcement proceedings.
This practice, according to BIS, is not meant to coerce a party into settling a matter even if there is a valid defense, but is the most efficient means for reaching resolution. BIS added that it is a common government practice for an agency, in an effort to reach settlement before trial, to propose a subset or sampling of charges, reserving the ability to bring a fuller set of charges should litigation prove necessary. According to BIS, “[i]t also is commonly recognized that the additional resources the government must expend to take a case to trial also can justify a penalty greater than the amount the agency may have accepted prior to litigation.”