The U.S. Department of Commerce's Bureau of Industry and Security (BIS) just issued a significant rule change that reshapes the landscape of export control enforcement.
Published on September 16, 2024, the rule amends the Export Administration Regulations (EAR) by revising the procedures for voluntary self-disclosure (VSD) and reshaping penalty guidelines for administrative enforcement cases. The new rule codifies a series of memoranda that BIS published in the past two years and designed to strengthen its administrative enforcement program. I covered the previous memoranda in previous articles that can be accessed by clicking here and here. For international companies engaged in exporting goods, technology, or software subject to the EAR, it's critical to understand these changes.
Key Changes in the Final Rule
- Non-Disclosure Now an Aggravating Factor
- One of the most consequential changes is that, going forward, BIS will consider a company's deliberate decision not to disclose a significant apparent violation as an aggravating factor when determining administrative sanctions.
- If a firm uncovers a significant violation but chooses not to file a VSD, BIS may impose harsher penalties, including larger fines and stricter administrative actions.
- Introduction of a Dual-Track VSD Process BIS
has established a dual-track process for handling VSDs:
- Minor or Technical Violations: Companies can submit an abbreviated narrative report for minor infractions that lack aggravating factors. Examples include minor filing errors or inadvertent record-keeping issues. These disclosures can be bundled and submitted quarterly, streamlining the process.
- Significant Violations: For violations involving aggravating factors (e.g., willful misconduct, harm to national security), a full narrative report is required. Companies must conduct a thorough internal review and submit detailed information within 180 days of initial notification to BIS.
- Revised Penalty Calculations Linked to Transaction
Value BIS has overhauled its penalty guidelines to align
penalties more closely with the transaction value and seriousness
of the offense:
- Removal of Caps for Non-Egregious Cases: Previous caps on penalties for non-egregious cases have been eliminated. Penalties are now directly tied to the transaction value, ensuring that fines are proportionate to the potential harm or benefit derived from the violation.
- Adjustment of Mitigating and Aggravating Factors: Specific percentage reductions for mitigating factors have been removed. Instead, BIS will assess all relevant factors collectively to determine the appropriate penalty, providing flexibility to impose penalties that reflect the nuances of each case.
Under the new rule, companies can no longer opt for silence without potentially increasing their liability. In fact, the choice to withhold disclosure of significant violations could potentially lead to more severe consequences than the violation itself.
At the same time, the new process incentivizes companies to promptly report minor issues with less administrative burden while ensuring significant violations receive appropriate scrutiny.
BIS's revised penalty schedule means that companies must be more diligent than ever in their compliance efforts, especially for significant deals. Under the new rules, high-value transactions now carry higher potential penalties if violations occur.
Accordingly, we recommend five steps for companies subject to the EAR:
- Enhance Your Export Compliance Programs
- Regularly evaluate your export activities to identify areas of potential non-compliance, focusing on transactions involving controlled goods or technologies.
- Revise internal policies to reflect the new BIS regulations, ensuring procedures for identifying and reporting violations are clearly outlined.
- Conduct regular training sessions for employees, emphasizing the importance of compliance and the potential consequences of non-disclosure.
- Promptly Report Violations This is critical.
Both minor and significant violations must be reported to BIS in a
timely fashion.
- Utilize the simplified VSD process for minor infractions. Submitting abbreviated reports quarterly can help address issues without significant administrative burden.
- If a significant violation is discovered, initiate the full VSD process immediately. Timely disclosure can be a mitigating factor and may reduce potential penalties.
- Monitor Transaction Values
- For high-value transactions, implement enhanced due diligence to ensure compliance with the EAR. This includes verifying end-users, destinations, and the classification of items.
- Maintain thorough records of all export transactions. Accurate documentation can support compliance efforts and facilitate disclosures if necessary.
- Seek Legal Expertise
- Engage legal counsel experienced in export controls to navigate complex situations and interpret how the new regulations apply to your operations.
- Consider third-party audits to assess the effectiveness of your compliance program and identify any gaps.
- Foster a Culture of Compliance
- Senior management should demonstrate a commitment to compliance, setting the tone for the entire organization.
- Establish clear channels for employees to report potential violations internally without fear of retaliation.
The BIS's final rule represents a significant shift in export control enforcement, emphasizing both the importance of voluntary compliance and the consequences of non-disclosure. While the agency has simplified reporting for minor violations, it will impose stricter penalties for non-disclosure of serious violations, penalties that are now linked to the value of the transaction involved in the violation.
International companies must adapt to this new regulatory environment by strengthening compliance programs, fostering transparency, and engaging proactively with regulatory authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.