The main US export controls regulator continues to take steps to demonstrate its focus on enforcement.
Specifically, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a final rule (the “Rule”) on September 16, 2024, effective immediately, to amend the provisions in its regulations focused on the voluntary self-disclosure (“VSD”) process. Many of the changes in the Rule reflect guidance previously issued by BIS in individual memoranda (available here), which are now formalized in the regulations. Most notably, BIS updated its guidance on charging and penalty determinations in VSD-initiated administrative enforcement cases. The updated guidance provides the agency with greater discretion to determine the amount of fines that may be imposed in individual cases.
In its press release (here), BIS also announced the appointment of Raj Parekh, an experienced prosecutor, as the first ever Chief of Corporate Enforcement. These changes and the appointment of the Chief of Corporate Enforcement reflect BIS’s heightened focus on enforcement of export control laws and regulations and are consistent with efforts at the Department of Justice (“DOJ”) and other enforcement agencies to strengthen their enforcement authority while simultaneously promoting voluntary self-disclosure programs to encourage the private sector to share information about violations (see, e.g., here and our previous blog post on the DOJ’s revisions to the DOJ’s National Security Division’s self-disclosure policy here).
Brief summaries of the changes to BIS’s VSD process are provided below:
- Changes to Penalty Guidelines to Remove Schedule Amounts and Caps and Change How Factors Are Considered
Penalties assessed for non-egregious violations disclosed to BIS via a VSD have historically been limited by penalty caps on the maximum amount that could be assessed for a violation, as was set out in BIS’s “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases” at Supplement No. 1 to 15 C.F.R. Part 766 (the “BIS Penalty Guidelines”). BIS has now removed the caps as well as predetermined reductions for certain mitigating factors to “make administrative penalties more straightforward and in line with the overall value of the transaction at issue.” These changes were limited to the penalty guidelines in Supplement No. 1, which apply to all violations of the EAR except anti-boycott violations, which are addressed in the “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases Involving Antiboycott Matters, at Supplement No. 2 to Part 766.) BIS did not make parallel changes to Supplement No. 2.
BIS explained that it had identified scenarios where the administrative caps resulted in artificially low penalties compared to the transaction value, reducing the deterrent effect of the penalties, while specific percentage reductions in the guidelines led to incorrect assumptions about the penalties that would apply for specific violations. BIS explained that it removed these caps and specific percentage reductions to allow it to more appropriately align penalties imposed with the seriousness of the violations. Without the penalty caps, the maximum penalty is now simply the maximum penalty established under the Export Control Reform Act, i.e., currently the greater of $364,992 per violation or twice the value of the transaction, adjusted annually for inflation.
The Rule also amended the BIS Penalty Guidelines to formalize the policy that a party’s decision to not file a VSD upon discovering “significant” violations of the EAR will be considered an aggravating factor. Prior to 2023, the decision to not file a VSD was not a factor recognized in the BIS Penalty Guidelines. However, in a 2023 policy memorandum (here) BIS announced that a decision not to file a VSD to disclose “significant” violations of the EAR would be considered an aggravating factor. The policy change (described in more detail on our blog here) was intended to enhance the mitigating effect of VSDs and to further encourage the trade community to disclose violations when discovered. The Rule codifies this 2023 policy change in the BIS Penalty Guidelines.
In addition, BIS is eliminating the practice of applying a portion of a suspended or deferred penalty to compliance program enhancements. This is based on BIS’s view that companies should not expect to receive credit for the cost of investments in compliance programs, and that the quantity and type of investments necessary to mitigate the risk of future violations should be determined independently by companies.
BIS also formalized the policy it adopted in 2022 on the use of non-monetary penalty resolutions to EAR violations (here) for cases involving non-egregious conduct that did not result in serious harm to US national security but which were serious enough not to warrant a no-action or warning letter. Non-monetary penalties can include requiring a company to improve their compliance program or other measures where BIS determines that monetary penalties are not appropriate or would be too low to effectively deter future violations.
Finally, BIS has changed its approach to considering past history of non-compliance as a factor in its decisions on whether to impose penalties against a company. Previously, in its penalty determinations, BIS only considered whether the company had violations during the preceding five-year period. BIS has removed this five-year limitation. It has also expressly included non-compliance with the anti-boycott regulations in the EAR within the scope of these considerations. Furthermore, BIS will consider not just any prior convictions or guilty pleas but also other types of resolution with the DOJ or other prosecutorial authorities related to criminal violations, such as Deferred Prosecution or Non-Prosecution Agreements.
- Formalizing a Dual-Track VSD Process for Serious and “Minor or Technical” Export Control Violations First Announced in January 2024
BIS formalized its dual-track process for VSDs to provide for a “fast track” process for “minor or technical” violations of the EAR under Section 764.5. This policy change was previously announced in a 2024 policy memorandum (our previous blog post about the policy change is here). The Rule describes “minor or technical” violations to involve infractions where no aggravating factors are present based on BIS’s Penalty Guidelines. The “fast track” process allows companies to submit abbreviated narrative accounts of the violations and to bundle multiple “minor or technical” violations into a consolidated VSD if the violations occurred in the preceding quarter. BIS normally intends to resolve VSDs of “minor or technical” violations within 60 days by informing the disclosing party that no action will be taken or issuing a warning letter.
The normal VSD process at EAR Section 764.5 for “significant” violations (meaning violations where one or more aggravating factors are present) will continue to apply. Where a party is unsure of whether a violation is considered “minor or technical” or “significant,” BIS instructs that the process for filing a VSD of “significant” violations should be followed.
- Allowing Third-Parties to Seek Authorization to Engage in Activities Involving Unlawfully Exported Items (i.e., GP 10 Authorizations)
BIS has formalized its policy originally announced in a 2024 policy memorandum (here) to introduce flexibility into its process for so-called General Prohibition 10 authorizations to allow third parties to obtain such authorizations. These authorizations, which are issued under EAR Section 764.2(e), effectively remove the taint from items subject to the EAR that have previously been involved in EAR violations. Without such an authorization, parties are prohibited from exporting, selling, or engaging in certain other activities with respect to the item. While this taint can spread to third parties that did not themselves engage in the violative conduct, previously, the process only formally allowed the violating party to request an authorization. Now, the process has been updated to allow third parties in possession of or with an interest in such an item to notify BIS’s Office of Export Enforcement (“OEE”) that a violation has occurred and to request permission to engage in activities that would otherwise be prohibited under General Prohibition 10 and EAR Section 764.2(e).
BIS clarified that no advance OEE authorization is required for a company to return goods to the United States that had been unlawfully exported by a third party, provided that the third party has disclosed the related EAR violations in a VSD and the party in possession of the goods notifies the Director of OEE about the return. In the case of authorizations for re-exports or transfers of previously unlawfully exported articles, a request may be submitted with a copy of the VSD or notification filed disclosing the EAR violation, and a company may obtain permission to use a license exception or No License Required (“NLR”) designation so long as the re-export or transfer would qualify for the license exception or NLR designation.
