On July 26, 2023, the US Departments of Treasury, Commerce, and Justice published a Tri-Seal Compliance Note on the voluntary self-disclosure (“VSD”) of potential violations of US sanctions, export controls, and other national security laws (the “VSD Note”). This publication is the second Tri-Seal Compliance Note issued by the agencies and continues the enforcement focus on the sanctions and export control measures targeting Russia in particular and national security concerns more generally. The first Tri-Seal Compliance Note issued in March 2023 addressed the topic of Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls (our related Blog post can be found here).
The VSD Note summarizes the respective agency VSD policies that apply to these laws, as well as recent updates that have been made to certain of those policies. The VSD Note itself does not announce changes to these VSD policies. Indeed, while the VSD Note is issued collectively by all three agencies, it treats each VSD regime separately. It provides no guidance as to how the agencies might coordinate among themselves having received a VSD or treat cases that may be disclosed to more than one, or all, of these agencies. That coordination can be one of the most challenging aspects for any company considering making a VSD, in cases of this type.
One message emphasized in the VSD Note is that these departments strongly encourage companies to “promptly disclose and remediate” to earn the benefits of the VSD policies. In particular, the VSD Note indicates that:
- The Department of Commerce Bureau of Industry and Security (“BIS”)’s VSD policies for potential violations of US export controls laws have recently been updated. The VSD Note summarizes BIS’s new dual-track system to handle VSDs in which VSDs involving minor or technical infractions are resolved on a fast-track basis with a warning or no-action letter within 60 days of final submission and VSDs that indicate potentially more serious violations being subject to deeper review. As a reminder, the June 2022 guidance issued by BIS specifically stated that an attorney from the Department of Justice’s (“DOJ”) Counterintelligence and Export Control Section, which is part of the National Security Division (“NSD”) would be assigned to “the most serious cases” presented in a VSD. Such a referral would not be considered a VSD to NSD, which would need to be considered separately, as discussed below. Another recent change is that a company’s failure to disclose a significant possible violation of the EAR is now considered an aggravating factor under BIS penalty guidelines. Our prior blog post about BIS’s recent updates to its VSD policies can be reviewed here.
BIS’s VSD polices for potential violations of US export controls laws also more broadly continue to allow for substantial reductions in the applicable civil penalties for timely disclosure of VSDs, up to and including full suspension of monetary penalties. In the VSD Note, the BIS section warns companies against sidestepping a decision on whether to submit a VSD and “self-blinding and choosing not to do an internal investigation in the first place.”
- The Department of the Treasury Office of Foreign Assets Control (“OFAC”)’s VSD policies for potential violations of US sanctions laws have not been recently updated, and continue to incentivize the submission of VSDs by treating their submission as a mitigating factor when determining enforcement actions and allowing for up to a 50% reduction in base civil penalties. The VSD Note also includes a list of disclosures that will not qualify as a VSD, including disclosures that are not self-initiated and mandatory notifications made by third parties after they block transactions.
- The DOJ NSD’s VSD policies for potential criminal violations of US export controls and sanctions laws have recently been updated as part of the DOJ’s efforts this year to implement consistent VSD policies across the DOJ. Our prior client alert about these DOJ policy changes and their impact on national security cases can be reviewed here.
Consistent with the policy of the Justice Department as a whole, the NSD VSD policy indicates that, when a company submits a VSD describing potentially criminal violations, fully cooperates, and timely and appropriately remediates the violations, the NSD will generally not seek a guilty plea, and that there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine but will be required to disgorge the profits of the criminal conduct. The VSD Note mentions that VSDs submitted to BIS or OFAC that are not made at the same time to the NSD will not be credited as VSDs by the NSD. This can be a significant challenge for companies, because the triggers and consequences of criminal VSD to the DOJ can be very different than with BIS and OFAC acting as civil enforcement agencies. Because of the near strict liability regimes administered by BIS and OFAC, it can often be quickly determined whether there has been a likely violation of these regimes through prohibited exports or dealings with restricted parties or sanctioned territories (even if the extent of the issue requires further investigation). It can be much more complex and time consuming to determine whether those violations may have occurred with the necessary intent that would risk criminal prosecution and justify a VSD to the NSD. It will remain to be a challenge to determine whether to disclose conduct to DOJ at the same time as initial disclosure to BIS and/or OFAC before a full investigation has been completed and the full facts and relevant intent determined. This will be especially so in situations where a BIS VSD has been submitted and likely rises to the level of severity triggering the assignment of a DOJ attorney under BIS’ own VSD guidelines (and cutting-off the company’ route to later VSD with NSD).
The NSD VSD policy also indicates that the presumption in favor of a non-prosecution agreement does not apply when there are aggravating factors, which can include egregious or pervasive criminal misconduct within the company, concealment or involvement by upper management, repeated administrative and/or criminal violations of national security laws, the export of items that are particularly sensitive or to end users of heightened concern, and/or a significant profit to the company from the misconduct. If these aggravating factors are present, the NSD VSD policy indicates that the NSD retains discretion to prosecute the case. Again, until evidence of possible or actual criminal intent emerges in an internal investigation, it will be difficult to determine whether any of these additional aggravating factors may exist and for companies to fully weigh up the risks and potential benefits of making a VSD to DOJ.
In addition, the BIS Assistant Secretary for Export Enforcement Matthew Axelrod gave a speech on the same day the VSD Note was published, during which he drew attention to these VSD policy updates and described the various ways BIS has stepped up its enforcement efforts. He also noted that BIS recently signed an agreement with OFAC to formalize their coordination and partnership. The agreement has not been made public, but Assistant Secretary Axelrod indicated that it would lead to their respective enforcement teams working more closely together and to more coordinated enforcement actions from both agencies going forward.
Finally, the VSD Note also draws attention to the whistleblower program run by the Financial Crimes Enforcement Network (“FinCEN”), which is designed to incentivize individuals to provide information to the US Government about violations of US sanctions. Under that program, individuals who provide information to FinCEN or to the DOJ may be eligible for awards totaling between 10% to 30% of the monetary penalties collected in an enforcement action if the information they provide leads to a successful enforcement action.
All of this serves to demonstrate the high level of complexity for corporations in considering VSDs and seeking to resolve complex sanctions and export controls cases with multiple US enforcement agencies and ever more frequently also with their international counterparts, where formal and informal information-sharing is becoming more routine.