[co-author: Elizabeth Philipp]
Voluntary self-disclosure is a valuable remediation measure for companies who identify their own potential violations of U.S. sanctions, export controls, and other national security laws. On July 26, 2023, the United States Department of Justice (DOJ), the U.S. Department of Commerce's Bureau of Industry and Security (BIS), and the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a Tri-Seal Compliance Note: Voluntary Self-Disclosure of Potential Violations that highlighted the benefits of coming forward quickly and disclosing thoroughly. The benefits extend beyond the self-disclosure context. The Note also describes the incentives of providing tips regarding third-party wrongdoing—from mitigating fines to receiving a monetary reward for whistleblowing to the U.S. government. Each agency's priorities and guidance as set forth in the Note are summarized below.
DOJ National Security Division (NSD)
The NSD outlines its current self-disclosure policy, which was updated earlier this year. In the event of potentially criminal violations, self-disclosure, full cooperation, and appropriate remediation, and absent aggravating factors, the NSD generally will not seek a guilty plea, and there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine. The presumption in favor of a non-prosecution agreement will not apply, however, where there are aggravating factors—including egregious or pervasive criminal, concealment or involvement by upper management, repeated administrative and/or criminal violations, the exports of particularly sensitive items or to end users of heightened concern, and a significant profit to the company from the misconduct. To avail itself of NSD's policy, a company must self-disclose to NSD—disclosure only to its partner regulatory agencies, OFAC or BIS, is insufficient—and follow NSD guidelines for the disclosure and associated steps. DOJ first announced the policy of a presumption of non-prosecution in 2019. The 2019 policy replaced a less favorable policy set out three years prior, which accorded lesser incentives to companies, including eligibility for a reduced penalty and the possibility of a non-prosecution agreement.
Bureau of Industry and Security
BIS strongly encourages self-disclosure of potential violations of the Export Administration Regulations (EAR). BIS may reward disclosures that are timely, comprehensive, and involve full cooperation with a substantial reduction of the applicable civil penalty under the BIS settlement guidelines. For violations disclosed via a voluntary self-disclosure (VSD), BIS regulations mandate a civil penalty of one-half of the transaction value (capped at $125,000 per violation) in the case of a non-egregious violation. For an egregious violation disclosed via VSD, the regulations require a base penalty amount up to one-half of the statutory maximum penalty applicable to the violation. The Tri-Seal Note highlights the dual-track system to handle VSDs introduced last year. Under the dual-track system, VSDs involving minor or technical infractions are resolved on a fast-track basis, with the issuance of a warning or no-action letter within 60 days of final submission. Potentially more serious violations are reviewed by OEE in detail. This is intended to allow companies who submit more minor VSDs to receive a quicker turnaround.
Further, the Note highlights the April 2023 BIS memorandum clarifying BIS policy on VSDs, including that deliberate non-disclosure of a significant possible violation will be considered an aggravating factor, and tips on potential EAR violations by another party that result in an enforcement action will be treated as mitigating factors in current or future enforcement actions against the disclosing entity, even if unrelated.
Office of Foreign Assets Control
OFAC considers VSDs to be a mitigating factor when determining appropriate enforcement action in response to violations of sanctions regulations. Qualifying VSDs must occur prior to, or simultaneously with, the U.S. government's discovery of a violation or a substantially similar apparent violation. Conforming disclosures may result in a 50 percent reduction in a proposed civil penalty. OFAC reviews the "totality of circumstances" when evaluating VSDs, but the Note highlights certain scenarios where disclosures will not qualify for VSD treatment, notably when a third party (e.g., a bank) is required to and does notify OFAC of the apparent violation because the transaction was blocked or rejected by that third party—regardless of when OFAC receives such notice or whether the subject person was aware of the third party's disclosure. This is notable because many companies with inadvertent violations of sanction regulations often discover them when they are notified by their banking institution of the potential issue, and banks virtually always file a blocked or rejected report on such transactions.
Financial Crimes Enforcement Network (FinCEN)
Finally, the Note included information from Treasury's FinCEN regarding the monetary benefits of providing tips through its Anti-Money Laundering and Sanctions Whistleblower Program. The Program is designed to incentivize disclosure of violations of U.S. trade and economic sanctions, as well as violations of the Bank Secrecy Act. Disclosures about third parties that lead to successful enforcement may qualify the whistleblower for an award equal to 10 to 30 percent of the money collected in an enforcement action. FinCEN might also pay awards on "related actions" – enforcement taken under authority of another governmental agency. Such disclosures may be made anonymously.
The July 26 Tri-Seal Compliance Note is the second publication from the collective. On March 2, 2023, the DOJ, BIS, and OFAC issued a Tri-Seal Compliance Note Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls. Venable's alert describing the earlier publication is available here.
