Our International Trade & Regulatory Group highlights changes to the voluntary self-disclosure process and penalty guidelines under the Export Administration Regulations by the Bureau of Industry and Security.
- The final rule makes nondisclosure an aggravating factor for determining sanctions
- The final rule adds a dual-track process for handling minor versus significant violations
- The final rule removes the caps on penalties imposed by the Office of Export Enforcement
On September 12, 2024, the Department of Commerce’s Bureau of Industry and Security (BIS) announced a final rule, effective on September 16, 2024, revising provisions of the Export Administration Regulations (EAR) related to the voluntary self-disclosure (VSD) process and penalty guidelines. The rule codifies the policy changes BIS had previously announced in a series of public memoranda since the beginning of 2022. The revisions afford BIS more flexibility and discretion in resolving matters and, potentially, assessing greater penalties.
In addition, BIS announced the appointment of Raj Parekh, a former prosecutor of the U.S. Department of Justice, as its first-ever chief of corporate enforcement. This appointment underscores BIS’s commitment to bring more impactful enforcement actions against companies.
VSD Process Changes
To “encourage industry and academia to submit VSDs and to provide for efficient resolution of cases involving less serious violations,” the rule incorporates the following significant changes to § 764.5 of the EAR (regarding VSDs):
- Adding Nondisclosure as an Aggravating Factor. The Office of Export Enforcement (OEE) will consider a deliberate decision by a firm not to disclose a significant apparent violation to be an aggravating factor when determining what administrative sanctions, if any, will be sought. A deliberate decision not to disclose occurs when a firm uncovers a significant apparent violation that it has committed but then chooses not to file a VSD.
- Adding a Dual-Track Process to Process VSDs Involving Minor or Technical Violations vs. Significant Violations. Parties may submit an abbreviated narrative for a VSD involving minor or technical violations. Parties may also bundle the submission of multiple minor or technical violations into one overarching submission if the violations occurred within the preceding quarter. BIS explains that the OEE will general resolve VSDs involving minor or technical violations within 60 days. Parties who are unsure whether their disclosure involves a minor or technical violation or a significant violation should follow the procedures for disclosing a significant violation.
- Adding/Revising Paragraphs Regarding Treatment of Unlawfully Exported Items. The rule revises and adds paragraphs explaining that (1) any person (not just the party submitting a VSD) may notify the OEE director that a violation has occurred and then request permission from the Office of Exporter Services to engage in activities described in § 764.2(e) that would otherwise be prohibited; (2) actions to return to the United States unlawfully exported items that were disclosed in a VSD only require notification to the OEE director; and (3) once the items are returned to the United States, no further authorization is required.
Penalty Guideline Changes
To “revise the BIS Penalty Guidelines to change how OEE calculates the base penalty in administrative cases, and how it applies various factors to the base penalty to determine the final penalty,” the rule incorporates the following significant changes to Supplement No. 1 to Part 766 of the EAR (regarding the BIS penalty guidelines):
- Removing from the Base Penalty Matrix the Penalty Caps for Non-Egregious Cases. Before the rule, base penalties for non-egregious violations were capped at $125,000 (if voluntarily disclosed) and $250,000 (if not voluntarily disclosed). The rule removes those caps and sets the base penalty for non-egregious violations at up to one-half of the transaction value (if voluntarily disclosed) and up to the transaction value (if not voluntarily disclosed). The rule removes the penalty caps so the OEE may “impose penalties with sufficient deterrent effect in situations where transaction values are high.” However, neither the base penalty amount nor the ultimate penalty amount can exceed the applicable statutory maximum, which is currently the greater of $364,992 or twice the value of the transaction that is the basis of the violation.
- Removing the Application of a Portion of Penalty Toward Compliance Enhancements. It is BIS’s view that companies should independently make appropriate investments in their compliance programs to sufficiently identify and prevent potential violations, and generally should not expect to receive credit for the cost of making such investments against administrative penalties for past misconduct.
- Adding Nonmonetary Penalties as a New Type of Penalty Response. OEE can issue nonmonetary penalties to resolve enforcement cases that involve non-egregious conduct and that have not resulted in serious national security harm but remain serious enough to warrant more than a warning letter or no-action letter. Such resolutions generally require remediation and may involve the imposition of a suspended denial order with certain conditions, such as training and compliance requirements.
- Amending Factors Affecting Administrative Sanctions. The rule (1) amends Aggravating Factor C to include human rights abuses as a specific consideration when BIS assesses the potential impact of an apparent violation on U.S. foreign policy objectives; (2) adds nondisclosure as an aggravating factor; (3) allows the OEE to consider antiboycott matters and regulatory compliance history before the five years preceding the date of the transaction giving rise to the violation as part of a respondent’s regulatory history; and (4) allows the OEE to consider a respondent’s criminal history and resolutions with the Department of Justice other than a criminal conviction, including deferred prosecution agreements and non-prosecution agreements.
Conclusion
The changes highlighted afford BIS more flexibility and discretion in resolving enforcement matters and, potentially, assessing greater penalties. Companies should make appropriate investments or adjustments to their compliance programs to account for these changes.
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