As part of the USA PATRIOT Improvement and Reauthorization Act signed by the President on March 9, 2006, lawmakers added a small piece of legislation entitled the Combating Terrorism Financing Act of 2005 (Title IV) ("the Act"). One of the primary purposes of this Act is to raise the maximum amount for civil penalties under the International Emergency Economic Powers Act from $10,000 per violation (adjusted to $11,000 per violation under the Federal Civil Penalties Adjustment Act of 1990) to $50,000 per violation, resulting in a potential sea change in the export enforcement environment.
The position of the Department of Commerce, Bureau of Industry and Security ("BIS"), as explicitly stated in the Export Administration Regulations ("EAR"), is that a "voluntary self-disclosure" of export violations constitutes a "mitigating factor" in determining what administrative sanctions, if any, will be sought by BIS. In comparing different mitigating and aggravating factors in an enforcement context, the EAR further states that a voluntary disclosure should be given great weight relative to other mitigating factors, especially in situations where no concurrent BIS investigation would have been likely to discover the violation at some future point.
What does "great weight" mean in dollars and cents? A survey of all voluntary disclosure enforcement actions resulting in civil penalties from 2001 to the current time reveals an average of only $4,345 per violation—or less than 40 percent of the prior statutory maximum. Unfortunately, this good news to exporters is frequently negated by the BIS practice of "parsing" the number export violations. This "parsing" consists of tacking on all related violations to each single export transaction, resulting in exporters being fined multiple times for the same conduct. To use the example provided in the EAR, if an exporter misclassifies an item on the Commerce Control List ("CCL"), that exporter may, as a result of that misclassification, export the item without the required export license. However, as a result of the same error, that exporter would have also submitted a Shipper’s Export Declaration ("SED") that both misstates the applicable Export Control Classification Number ("ECCN") and erroneously identifies the export as qualifying for the designation "NLR" (no license required). According to BIS enforcement policy, BIS may exercise its discretion to count the single export transaction as three separate but related export violations: one violation for the unauthorized export and two violations for the two false statements on the SED. In this manner, BIS has been able to effectively increase the maximum "per violation" penalty without an actual adjustment in the statutory maximum, all while maintaining its policy of treating a voluntary self-disclosure as a "great weight" mitigating factor. Following this line of analysis, the effective average per violation penalty for voluntary disclosure enforcement actions, leaving out all parsed violations, increases to $8,398—more than 75 percent of the statutory maximum.
As a general disclaimer, it is important to recognize that BIS conducts enforcement settlements on a case-by-case basis, and that the enforcement examples used in these calculations vary widely in the underlying facts and eventual outcomes. In fact, the majority of enforcement cases either did not include any parsed violations or only included a handful of parsed violations in situations where there were only one or two actual export transactions at issue. The number of cases where the bulk of the total violations were because of parsing is a small, but still relevant, minority. What remains to be seen is whether BIS will maintain its practice of parsing violations now that it has a broader spectrum of enforcement penalties to pursue, or whether it will abandon this practice in favor of the more transparent one-to-one pairing of export transactions to export violations. Because this change will only apply to export violations occurring after March 9, 2006, the effective date of this change, it is up to current exporters to determine whether they want to be a test case for these new penalties, or whether they would rather invest this money in compliance measures.
This article is presented for informational purposes only and is not intended to constitute legal advice.
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