BIS Enhances Its Voluntary Self-Disclosure Process and Related Enforcement Guidance

Background

Amid an increasing enforcement environment among U.S. federal agencies, BIS issued the Rule, effective September 16, 2024, to integrate certain policy changes in connection with, among other things, VSDs and penalties. BIS's Office of Export Enforcement ("OEE") previewed these changes through multiple memoranda issued since 2022 (which we wrote about here).

VSDs allow companies to inform BIS of EAR violations (the disclosure of which is not mandatory). While resolving a disclosure can be costly and time-consuming, companies typically enjoy reduced penalties as a result of having made a voluntary disclosure. As discussed below, companies stand to benefit now more than ever from submitting VSDs; at the same time, failure to disclose might prove more costly than before.

As a preliminary matter, the Rule introduces a dual-track system that bifurcates BIS's review depending on the nature of the underlying apparent violation(s). VSDs historically involved full narrative reports, requiring significant time and effort to prepare, regardless of the number, nature, and severity (from a national security perspective) of the violations. The Rule establishes a new track for companies to submit VSDs involving minor or technical violations and that have no aggravating factors. On this track, companies can submit an abbreviated narrative report. Companies also may make combined submissions regarding multiple, unrelated minor or technical violations if the violations occurred close together in time. In return, BIS may resolve the VSD within 60 days by informing the submitter that no action will be taken, or by providing a warning letter. However, if BIS suspects that an aggravating factor may be present, BIS may request a full narrative. The other track remains in place for "significant violations" - including situations in which one or more aggravating factors are present - and will still require a full narrative report (including a five-year lookback period).

Changes for VSDs and Enforcement

In addition to the new dual-track system described above, we highlight below larger changes arising from the Rule, which can be expected to incentivize companies to file VSDs.

1. Deliberate failure to disclose will be an aggravating factor

The stakes have increased for not disclosing "significant apparent violations," as BIS will now consider the deliberate failure to disclose a significant violation as an aggravating factor. If a company chooses to not disclose a significant apparent violation, it not only misses out on mitigation credit, but it also likely faces an increased penalty. From BIS's perspective, the deliberate decision to not file increases the potential threat to U.S. national security and/or foreign policy interests, thereby impeding the U.S. government's ability to take the necessary steps to prevent potential harm to U.S. national security. Notably, the apparent violations must be significant, which will depend on the facts surrounding apparent violations.

2. BIS has more discretion to impose penalties, making penalties uncertain

The Rule not only endows OEE with more discretion over penalty calculations in multiple ways, but also it introduces ambiguity to the calculation process. The Rule has removed base penalty caps that existed for non-egregious cases so that OEE can impose a penalty that it views as commensurate with the case, depending on transaction values, the nature and severity of the violations and other factors. The Rule also allows for non-monetary resolutions; BIS has clarified that OEE prefers to impose non-monetary penalties to resolve non-egregious cases that have minimal aggravating factors and do not harm U.S. national security but in which the conduct warrants more than a warning letter.

With respect to egregious violations involving a VSD, the base penalty amount will be capped at one-half of the statutory maximum (currently $364,992 or twice the full transaction value, whichever is greater). For egregious violations not involving VSDs, the base penalty amount is capped at the statutory maximum.

BIS previously allowed violators in certain circumstances to apply a portion of a suspended or deferred penalty to expenses associated with enhancing their compliance program. The Rule removed BIS's authorization to do this; BIS now takes the view that companies are responsible for making "appropriate investments in their compliance program to identify and prevent potential violations" and they shouldn't expect "credit for the cost of making such investments."

3. BIS has strengthened its enforcement capabilities with its first-ever Chief of Corporate Enforcement

In anticipation of increased enforcement, BIS appointed Raj Parekh to be its first ever Chief of Corporate Enforcement. Mr. Parekh is a former Acting U.S. Attorney for the Eastern District of Virginia and a veteran of the U.S. Department of Justice's National Security Division. He will "serve as the primary interface between BIS's special agents, the U.S. Department of Commerce's Office of Chief Counsel for Industry and Security, and the U.S. Department of Justice to advance significant corporate investigations."

4. BIS made changes to the "General Prohibition Ten" waiver process that should make it easier to correct violative activity

The Rule revises the EAR's process regarding "General Prohibition Ten" (in Section 764.2(e) of the EAR) by allowing any person, not just VSD submitters, to request authorization to engage in activities that would otherwise be prohibited in connection with the improperly exported items. Moreover, after a "notification" is made to OEE, companies do not need further authorization to arrange for the return to the United States of items associated with export violations. These changes will no doubt be welcomed by the exporting community.

Conclusion

To the extent it synthesizes and formally integrates recent BIS policy changes into regulation, the Rule is likely a welcome addition. To the extent it (deliberately) adds discretion and ambiguity to the penalty-assessment process, the Rule may be relatively less welcome. As ever, companies must ensure their compliance programs are effective enough to detect and prevent export control (and other) violations. When export control violations occur nonetheless, companies must carefully assess whether, when, and how to disclose them to BIS. As BIS is enhancing its enforcement capabilities, a failure to file a VSD could be costly, with respect to both financial and reputational considerations.

We will continue to monitor for updates as BIS's new dual-track system and enhanced enforcement capabilities are implemented. Dechert is available to advise on compliance measures with respect to export controls and to assist with investigating potential violations and, as appropriate, disclosing them to BIS.

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