As many of you are aware, with some minor exceptions, the United States bifurcates export controls responsibility between the Department of State, which administers the International Traffic in Arms Regulations (the “ITAR”), and the Department of Commerce, which administers the Export Administration Regulations (the “EAR”). Under the Arms Export Control Act and the ITAR, the State Department has jurisdiction over munitions list items and technologies. Under the EAR, the Bureau of Industry and Security (“BIS”) at the Commerce Department has jurisdiction over commercial and dual use items and technologies. When it comes to violations and enforcement of those violations, the traditional wisdom had been that BIS’s Office of Export Enforcement (“OEE”) metes out many more, but arguably smaller, punishments than the State Department’s Office of Defense Trade Controls Compliance (“DTCC”), which has the reputation of entering into less than five enforcement settlements a year.
It is fair to say that BIS appears to have been far more active in working with the FBI, Homeland Security, ATF and various U.S. Attorneys’ offices and has become incredibly active from an enforcement standpoint. In 2023, for example, BIS imposed the largest standalone administrative penalty in its history ($300 million) against a technology company, imposed a $2.77 million penalty on a 3D printing company for illegally exporting blueprints for aerospace and military electronics to China, issued denial orders and suspensions of export privileges against numerous companies and individuals, and worked with U.S. Attorneys’ offices to file a significant number of criminal export cases, including cases that involve China, Russia, and Iran, and many others. Compounding this, it seems to many companies that it is easier than ever to misstep in the export world, especially considering new and evolving requirements in the EAR intended to respond to activities of countries considered hostile to the U.S. and its allies and emerging technologies that often seem to be ahead of the regulators.
Some of you may recall President Ronald Reagan’s famous quote from an August 12, 1986 speech where he said, “[T]he nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” In a January 16, 2024 memorandum issued by BIS’ Assistant Secretary for Export Enforcement, Matthew S. Axelrod, BIS channeled a bit of the Gipper, stating that BIS has made certain changes to its voluntary self-disclosure (“VSD”) process to “enhance the efficiency and effectiveness of our VSD program, while also making it easier for parties to make disclosures.” Mr. Axelrod’s memorandum explains that “[b]y improving upon [its] programmatic processes,” BIS “can help” companies and universities “learn how to promptly correct minor [export] missteps and move forward with compliant behavior.” So, should industry and academia fear BIS’s overture, or embrace it?
VSDs are indeed voluntary. There is no obligation in the EAR to report an export violation. However, there are complications that can arise when an exporter becomes aware of a violation and chooses not to disclose it to BIS. One major complication with not disclosing an apparent violation — however minor it may be — is that General Prohibition 10 in the EAR very clearly makes it illegal to proceed with a transaction with knowledge that a violation has occurred or is about to occur. 15 C.F.R. § 736.2(b)(10). This provision explains that, “You may not sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service, in whole or in part, any item subject to the EAR and exported, reexported, or transferred (in-country) or to be exported, reexported, or transferred (in-country) with knowledge that a violation … has occurred, is about to occur, or is intended to occur in connection with the item.” Id. Some of you may also recall Winston Churchill’s famous quote, “It is a mistake to look too far ahead. Only one link of the chain of destiny can be handled at a time.” With all due respect to the British Bulldog, it occurs too often that an exporter who does not voluntarily disclose a minor violation ends up with a terrible dilemma on its hands as a result of General Prohibition 10, because the exporter failed to think far enough down the line to realize that some necessary future action would or could be related to the transaction tainted by the violation and, therefore, result in a violation of General Prohibition 10.
Whether to avoid a frequently inevitable General Prohibition 10 problem or for a number of other reasons, many companies routinely submit VSDs on even the most seemingly-minor issues. Enter BIS’s updates to its VSD process. Arguably the most noteworthy policy update is the relaxation of what is required for a VSD that involves “only minor or technical infractions.” In another section of the memorandum, Mr. Axelrod explains that a violation is not “significant” and is, therefore, eligible for the relaxed submission if it is “the result of a good-faith misinterpretation or the checking of a wrong box on a form.” For these types of VSDs, BIS now agrees that the exporter does not have to provide supporting documents that have long been mandated by 15 C.F.R. § 764.5(c)(4), such as licensing documents, shipping documents, and other documents such as letters, facsimiles, internal memoranda, purchase orders, invoices, letters of credit, and brochures. Coupled with streamlined documentation requirements, BIS accepts an “abbreviated narrative account,” supplanting the traditional detailed explanation that most parties filing a VSD have provided. And, the exporter need not review its conduct looking back five years, which is the traditional “lookback” period that BIS expects with a VSD submission.
The trick here is that these streamlined requirements apply only when there are no “aggravating factors” associated with the VSD, and it is up to the exporter to make that determination. Aggravating factors are identified in the EAR and include willfulness (i.e., the violation resulted from a decision to take action with the knowledge that it would lead to the violation), recklessness or gross negligence (i.e., failing to exercise a minimal degree of caution or care), concealment (i.e., hiding or purposely obfuscating the conduct to mislead a regulator), pattern of conduct (i.e., a violation resulting from a pattern or practice as opposed to an isolated event), prior notice (i.e., the exporter should reasonably have been on notice that the conduct constituted a violation), and involvement of company management. 15 C.F.R. Part 766, Supp. No. 1 § III(A). Mr. Axelrod’s memorandum makes it clear that, “[i]f OEE suspects the presence of aggravating factors that are not disclosed, the OEE Director will request a full narrative account.” And this is exactly one way an exporter that makes an abbreviated submission may run into trouble, and rue the day it neglected to recall President Reagan’s cautionary quote.
VSDs are serious business. The EAR requires that VSDs are to be certified. 15 CFR § 764.5(c)(5). The certification must state “that all of the representations made in connection with the voluntary self-disclosure are true and correct to the best of that person’s knowledge and belief.” Id. And, the EAR reminds those who submit a VSD that “Section 764.2(g) of this part, relating to false or misleading representations, applies in connection with the disclosure of information under this section.” Id., citing 15 C.F.R. § 764.2(g), which provides that no person may make any false or misleading representation, statement, or certification, or falsify or conceal any material fact, either directly to BIS or an official of any other United States agency, or indirectly through any other person in connection with the preparation or submission of any report filed with BIS. Exporters should be cautious in availing themselves of BIS’s new abbreviated VSD program. This program should not be considered an invitation to conceal information from BIS in order to speed the processing and close out of a VSD. Any decision to use the new process should involve a detailed review to ensure that there are indeed no aggravating factors involved in the potential violation.
