U.S. Commerce Department Continues Revising Export Controls Enforcement and Voluntary Disclosure Policies

U.S. Commerce Department Continues Revising Export Controls Enforcement and Voluntary Disclosure Policies

September 17, 2024, Covington Alert

As part of the U.S. Commerce Department's ongoing overhaul of its export controls enforcement program and voluntary self-disclosure ("VSD") policies, on September 12, 2024, the Department's Bureau of Industry and Security ("BIS") announced a final rule (the "Rule") revising the administrative and enforcement provisions of the Export Administration Regulations ("EAR") to codify policy changes previously announced in various public memoranda, increase presumptive penalties by removing caps on the dollar-value starting point from which BIS calculates penalties for certain less serious violations of the EAR, provide BIS more flexibility in assessing penalties, and provide guidance on the Department's "General Prohibition Ten" process for authorizing activities relating to items that have been involved in violations of the EAR. The Rule is effective as of yesterday, September 16, 2024.

In addition, BIS announced that it had appointed its first-ever Chief of Corporate Enforcement, a former U.S. Department of Justice ("DOJ") prosecutor whose appointment underscores BIS's continued focus on bringing larger and more impactful enforcement cases against companies.

VSD Policies

Through the Rule, BIS is formally incorporating into the EAR certain policy changes that were previously announced in a series of public memoranda, and that were aimed at encouraging parties to submit VSDs. With these changes, BIS noted that "the regulations contain all relevant policies and procedures for submitting VSDs."

The previously announced policy changes that have now been incorporated into the EAR include:

• A "fast track" disclosure process for minor or technical violations that allows disclosing parties to submit shorter and less-detailed narrative accounts of the violations being disclosed, as well as guidance on the information required in those accounts;
• The option for BIS to impose non-monetary penalties in cases that are not egregious and have not resulted in national security harm, but rise above conduct warranting merely a (typically non-public) warning letter; and
• The addition of a party's deliberate decision not to disclose significant violations of the EAR as an aggravating factor when assessing whether a violation is egregious and setting an appropriate penalty.

In remarks at the Center for Strategic & International Studies on the day the Rule was announced, BIS Assistant Secretary for Export Enforcement Matthew Axelrod noted that, after announcing these policy changes, BIS saw a nearly 30 percent increase in disclosures of significant violations and a 20 percent increase in industry tips that led to actionable leads for agents in the field.

Penalty Guidelines

BIS has also revised the EAR's penalty guidelines to tie penalty amounts more closely to transaction values and provide BIS more flexibility when assessing aggravating and mitigating factors. Specifically, BIS eliminated previous dollar-amount caps for base penalties in non-egregious cases. Base penalties are dollar values that BIS sets as presumptive penalties, then increases or decreases based on aggravating and mitigating factors in each case. Base penalties thus serve as the starting point for penalty calculations. 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 new Rule removes those caps, setting the base penalty for non-egregious violations at up to half the transaction value (if voluntarily disclosed) and up to the transaction value (if not voluntarily disclosed). BIS lays out these base penalty principles in a matrix, which has changed as follows:

Previous Base Penalty Matrix

	Egregious Case?
Voluntary Self-Disclosure?	No	Yes
Yes	One-Half of the Transaction Value (capped at $125,000 per violation)	Up to One-Half of the Applicable Statutory Maximum
No	Applicable Schedule Amount (capped at $250,000 per violation)	Up to the Applicable Statutory Maximum

Revised Base Penalty Matrix

	Egregious Case?
Voluntary Self-Disclosure?	No	Yes
Yes	Up to One-Half of the Transaction Value	Up to One-Half of the Applicable Statutory Maximum
No	Up to the Transaction Value	Up to the Applicable Statutory Maximum

Of course, neither the base penalty amount nor the ultimate penalty amount can exceed the applicable statutory maximum. The statutory maximum authorized under the Export Control Reform Act of 2018 is currently the greater of $364,992 or twice the value of the transaction.

In parallel, BIS has removed references to the percentage decrease amounts that previously generally applied to certain mitigating factors, in order to provide BIS more flexibility in its assessment of the impact that all factors may have on the appropriate penalty amount. BIS also clarified that appropriate penalty amounts could be higher or lower than the applicable base penalty, depending on the impact of all relevant factors, and in all cases will not exceed the statutory maximum.

In addition, BIS has also newly revised one existing aggravating factor and two general sub-factors used to assess penalty amounts. The Harm to Regulatory Program Objectives aggravating factor has been revised to include the enabling of human rights abuses as a specific consideration in assessing the impact of an apparent violation on U.S. foreign policy objectives. Separately, the Regulatory History and Criminal Conviction general sub-factors have been revised to allow BIS to consider, respectively: (1) antiboycott matters and regulatory compliance history prior to the five years preceding the date of the transaction giving rise to the violation as part of a respondent's regulatory history; and (2) as part of the respondent's criminal history, resolutions with the Justice Department other than a criminal conviction, including deferred prosecution agreements and non-prosecution agreements.

Finally, BIS removed language from the penalty guidelines regarding the practice of suspending or deferring a portion of a civil penalty if the suspended amount is applied to compliance program enhancements. BIS explained that "companies should independently make appropriate investments in their compliance program sufficient to 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."

These changes, which will likely enable BIS to impose larger financial penalties on companies accused of export controls violations, form part of a longer-term effort by BIS to obtain more costly and demanding resolutions to enforcement cases.

Earlier this year, in a policy memorandum, BIS announced a policy change to allow any person, not limited to parties submitting VSDs, to notify the Director of the Office of Export Enforcement ("OEE") of an export violation and seek authorization from the Office of Exporter Services ("OES") to engage in activities with respect to items involved in the violation. This change was significant, because most activities with respect to such items are prohibited under the EAR's General Prohibition Ten and EAR Section 764.2(e), and submitting a VSD was previously a prerequisite to applying for a waiver of that prohibition. The Rule codifies that relatively new policy into the EAR, allowing parties that have not been involved in an export violation but that are in possession of, or otherwise have an interest in, an item subject to General Prohibition Ten to seek a waiver to engage in further activities with respect to the item. Additionally, the Rule revises the EAR to clarify that items subject to a violation may be returned to the United States upon notification to OEE and do not require further authorization for the return to the United States or future activities that comply with applicable EAR provisions after the initial return to the United States. BIS expects this change will reduce the administrative burden on industry and BIS by reducing the number and scope of waiver filings companies must submit and BIS must process.

BIS also announced the appointment of Raj Parekh, a former Acting United States Attorney for the United States Attorney's Office for the Eastern District of Virginia, as BIS's first-ever Chief of Corporate Enforcement. In announcing the appointment, Assistant Secretary Matthew Axelrod described it as an important step in institutionalizing the efforts BIS has undertaken over the past three years to strengthen its administrative enforcement program.

This appointment advances BIS's longer-term project to bring former prosecutors to BIS and the Department of Commerce's Office of Chief Counsel for Industry and Security. It also parallels the appointment of Ian C. Richardson as the DOJ National Security Division's first Chief Counsel for Corporate Enforcement in September 2023. The two appointments reflect BIS and DOJ's continued interest in pursuing significant cases against companies.

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We are closely monitoring developments concerning U.S. export controls and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington's International Trade Controls team-which includes lawyers in the firm's offices in the United States, London, and Frankfurt-regularly advises clients across business sectors, and would be well-placed to provide support in connection with these new and proposed export controls developments, or to assist with comments on these proposed rules. Covington's market-leading Trade Controls practice works seamlessly with our preeminent White Collar group, roster of former high-level U.S. government officials, and seasoned teams on the ground in China and around the globe to advise clients on their most sensitive and complex trade controls enforcement matters. Our trade controls lawyers also work regularly with Covington's Global Public Policy team-consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia-many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls and White Collar practices.

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