COMMERCE RAISES ENFORCEMENT AND COMPLIANCE PROFILE

On April 18, 2023, the U.S. Department of Commerce (“Commerce”)’s Assistant Secretary for Export Enforcement issued a Memorandum titled “Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others” (“Memorandum”). The Memorandum made clear that Commerce will consider a failure to file a voluntary self-disclosure (VSD) as an “aggravating factor” in any penalties imposed for violations of the Export Administration Regulations (EAR). The Memorandum focuses on two types of disclosures: (1) VSDs about parties’ own possible violations of the EAR and (2) disclosures about possible violations of the EAR by others.

The Memorandum seeks to incentivize the submission of VSDs by businesses and universities that uncover “significant possible violations of the EAR,” particularly the types of violations that could impact national security, and individuals, companies and universities to provide information about others who may be violating the EAR. The Memorandum underscores Commerce’s commitment to promoting a strong culture of compliance, by warning against the risk of failing to self-disclose of significant possible violations and the benefit that could accrue by disclosing on the conduct of others.

One day later, on April 19, 2023, Commerce’s Bureau of Industry and Security (BIS) announced the largest standalone penalty in its history when it assessed a $300 million penalty against Seagate Technology LLC and Seagate Singapore International Headquarters Pte. Ltd. (collectively, “Seagate”), for selling sensitive goods and technologies to a listed entity subject to the foreign direct product (FDP) rule. BIS noted that Seagate was aware that its competitors had ceased similar shipments in response to the imposition of restrictions and factored that knowledge into the penalty assessment.

These recent actions demonstrate BIS’s increasing enforcement profile and capabilities and make clear to companies that export sensitive goods and technologies that they should prioritize compliance with the EAR.

Voluntary Self-Disclosures

The Memorandum expands the risks associated with failing to make a VSD if a company discovers a violation of the EAR. Under the existing Commerce settlement guidelines, Commerce considers whether a violator’s export compliance program uncovered the violation and whether steps were taken to address compliance concerns, including the submission of a VSD to Commerce. The Memorandum explains that whether a company filed a VSD is a “General Factor” and can thus be either mitigating, and lead to a potential reduction in liability, or aggravating, and lead to potential greater penalties.

Although Commerce has historically only considered the submission of a VSD to be a mitigating factor, the Memorandum makes clear that going forward, Commerce will also consistently consider the decision not to disclose as an “aggravating factor” under the existing guidelines. As such, failure to file a VSD can lead to the imposition of higher penalties for violations of the EAR.

Further, the Memorandum reiterates that a timely and comprehensive VSD, in which the company fully cooperates with Commerce, entitles the reporting entity to a “steep and concrete reduction in potential monetary liability,” via:

• If a company or university voluntarily discloses a violation (and the violation is considered non-egregious), the base penalty amount is one-half of the transaction value and capped at a maximum base penalty amount of $125,000 per violation;
• In some non-egregious cases, full suspension of the penalty may even be possible;
• In egregious cases, the base penalty amount is reduced up to one-half of the statutory maximum penalty applicable to the violation; and
• The filing of a VSD is also a factor for consideration in weighing the impact of a party’s compliance program at the time of the violation, as well as its remedial response, on the final administrative penalty.

Disclosures About the Conduct of Others

The Memorandum continues by reinforcing Commerce’s incentive to “aggressively investigate and, as appropriate, take action” against those that are alleged to be violating the EAR. To further this goal, the Memorandum seeks to incentivize individuals, companies, and universities to report on others who are violating the EAR by highlighting the benefits that taking such action can accrue. Commerce specifically discusses the following three benefits:

• First, if the conduct disclosed also includes a potential sanctions violation, monetary rewards may be available via the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) or the Department of Justice (DOJ) whistleblower programs, so long as the information leads to successful enforcement action. FinCEN can also pay awards to those whose original information leads to successful enforcement of “related actions,” meaning that FinCEN could even pay awards on Export Control Reform Act penalties, so long as either FinCEN or DOJ took qualifying action based on the same original information.
• Second, when a company becomes aware that some other company’s conduct may have violated the EAR, discloses such conduct, and that tip results in enforcement action, that will be considered as a mitigating factor if a future enforcement action, even for unrelated conduct, is ever brought against the disclosing party.
• Third, parties that follow U.S. export-control guidelines and forgo sales accordingly should not suffer while their competitors continue to book revenue by evading U.S. export-control laws.

Record Setting Enforcement Penalty

Just one day after announcing its new policy, BIS announced a settlement that resulted in the largest standalone civil penalty—$300 million—in an enforcement proceeding. Specifically, BIS found that for over a year, Seagate shipped over a billion dollars’ worth of hard disk drives (HDDs) without BIS authorization to an entity listed company subject to the FDP. Seagate did so even though its only two competitors promptly and publicly ceased HDD sales to the restricted entity. Seagate even entered into a “key strategic supplier” agreement with the restricted entity, all while its only two competitors had publicly declined to export HDDs to the restricted entity.

Assistant Secretary for Export Enforcement Matthew Axelrod described the settlement as “a clarion call about the need for companies to comply rigorously with BIS export rules, as our enforcement team works to ensure both our national security and a level playing field.” This penalty makes clear that BIS will consider companies’ awareness of external factors, including decisions made by competitors to cease shipments of similar products in response to new export restrictions, when assessing penalties.

Key Takeaways

The Memorandum and the $300 million civil penalty highlight Commerce’s continued and increasing focus on investigating and strictly enforcing U.S. export controls. As the geopolitical landscape continues to evolve, we expect to see additional resources deployed toward enforcement and additional scrutiny applied to companies’ compliance policies, procedures and culture when assessing violations and setting penalties.

In light of this enhanced compliance environment, companies that export U.S. products or services subject to the EAR should review, and if necessary, enhance their compliance programs to align with U.S. export-control laws, regulations, and BIS enforcement policies. Further, companies should ensure proper channels of communication exist within the business so that if a party’s export compliance program uncovers a significant possible violation of the EAR, the proper people within the company are informed and can timely submit a VSD to Commerce.

Companies can also expect underwriters, joint venture partners, and acquirers to focus heavily on export compliance in connection with loans, investments, and mergers.

Additionally, given the increased scrutiny of possible export violations, enforcement actions, and the recent imposition of record-breaking penalties, companies and individuals who have knowledge of another’s export control violations should consider whether to report, as it could be viewed as a mitigating factor if a future enforcement action is ever brought against the reporting company.