The U.S. Department of Justice (DOJ), Department of Commerce's Bureau of Industry and Security (BIS) and Department of the Treasury's Office of Foreign Assets Control (OFAC) on July 26, 2023, issued a Tri-Seal Compliance Note (Compliance Note) outlining agency policy memoranda and existing regulations on voluntary self-disclosures (VSDs) of violations of sanctions, export controls and other national security laws. Collectively, the three agencies highlight the importance of voluntary self-disclosures as a way of identifying threats to national security.

Background

The Compliance Note appears to be part of the coordinated and sustained effort by the agencies to prevent controlled technology and goods from being diverted to Russia, China and Iran.

A prior Tri-Seal Compliance Note issued in March 2023 focused on identifying red flags of diversion (e.g., the use of third-party intermediaries or transshipment points). In May 2023, the Treasury Department's Financial Crimes Enforcement Network (FINCEN) and BIS issued a joint alert identifying specific classes of goods/technology that Russia is seeking to acquire through deceptive means. In May 2023, BIS expanded the types of industrial items controlled for export to Russia to include many that are not normally controlled for export to most countries. (See Holland & Knight's previous alert, "United States Imposes Expanded Sanctions and Export Controls on Russia," May 24, 2023.)

Similarly, through the Compliance Note, the three agencies are encouraging voluntary self-disclosures as a way of helping the U.S. government identify intermediaries and other bad actors working with or for Russian, Iranian and other sanctioned countries' interests.

Recent Policy Updates

NSD

DOJ's National Security Division (NSD), which is tasked with prosecuting criminal violations of sanctions and export control laws, encourages VSDs by emphasizing its policy toward companies that voluntarily self-disclose, cooperate, and timely and appropriately remedy any noncompliance. For such companies, generally, the NSD will not seek a guilty plea or impose any fines, and the company will receive a non-prosecution agreement. Notably, the NSD's policy applies to other corporate criminal matters handled by the NSD, including violations of the Foreign Agents Registrations Act and Committee on Foreign Investments in the United States (CFIUS) regulations.

BIS

BIS, the agency that administers the Export Administration Regulations (EAR), emphasized its recent policy updates. In June 2022, BIS established a dual-track system to streamline the process of handling VSDs. Minor and technical infractions will be resolved on a "fast-track basis," with the issuance of a warning or no-action letter within 60 days of final submission. In addition, on April 18, 2023, the Assistant Secretary of Export Enforcement issued a memorandum on BIS' VSD policy clarifying the risk calculus on VSDs: Deliberate nondisclosure of an EAR violation will be considered an aggravating factor under BIS guidelines. Furthermore, if an entity submits a tip to BIS reporting a company's potential violation of the EAR, BIS will offer the possibility of mitigating credit to the whistleblowing entity if the tip leads to an enforcement action.

OFAC

OFAC encourages voluntary disclosures of potential sanctions violations by emphasizing penalty mitigation. In cases where a civil monetary penalty is warranted, a qualifying VSD can result in a 50 percent reduction in the base amount of a proposed civil penalty. The Compliance Note outlines situations where a disclosure will not qualify as a VSD, including cases where a disclosure contains false or misleading information, is materially incomplete, is not "self-initiated" or is a result of a suggestion made by another agency or official.

Key Takeaways

• Adequate Diligence of Transactions Is Critical. Companies that trade internationally in certain products face a difficult risk environment with sanctioned countries using increasingly sophisticated methods to evade sanctions, whether through false documentation, spoofing Automatic Identification System (AIS) or use of intermediaries.
• The Calculus on Whether to Voluntarily Disclose to the U.S. Government, and to Whom, Is Changing. The benefits of making a voluntary self-disclosure are more consistent. For example, all DOJ departments were required to revise and publish written policies for voluntary disclosures with regard to mitigation of penalties and other benefits, with the hope that having clearer and more predictable treatment would encourage more voluntary disclosures. For example, the NSD issued its policy in March 2023. There are potentially substantial whistleblower rewards available for certain criminal conduct, such as international export violations.
• Failure to Make a Disclosure Could Constitute an "Aggravating Factor." Though it has created a dual-track process that will allow minor or technical violations to be resolved quickly with warnings or no-action letters, BIS cautioned that nondisclosure of significant possible violations, once discovered, would be an aggravating factor. For example, where the company's compliance team identifies a potential serious violation, but management chooses not to voluntarily disclose, would be considered an aggravating factor.
• A Disclosure to One Agency Does Not Count as a Disclosure to the Other Agencies. In the Compliance Note, DOJ emphasized that making a disclosure to one agency does not constitute a voluntary disclosure to DOJ, and vice versa. Hence, companies should carefully consider and evaluate to which agencies to make a disclosure. For example, if there is evidence of intentional violations of sanctions laws, then a company should consider disclosing to both OFAC and DOJ.
• Time Is of the Essence. If the U.S. government discovers a potential violation from another party's disclosure or due to a whistleblower, the company will lose the benefits of a voluntary disclosure. Hence, making an initial disclosure quickly has significant advantages.
• U.S. Enforcement Agencies Construe Their Jurisdiction Broadly. Non-U.S. companies may face enforcement risk, and U.S. enforcement agencies have imposed penalties and export or other restrictions on non-U.S. companies for export and sanctions violations. Hence, particularly where transactions involve goods subject to U.S. export controls or funds flowing through the U.S. banking system, non-U.S. companies should evaluate the benefits of making a VSD.
• When a Potential Violation Is Suspected, Engage Experienced Outside Trade Counsel. When a potential violation comes to attention of management, its investigation and resolution should be given top high priority, and experienced outside counsel should be consulted. Whether to report a potential violation, through a voluntary disclosure or otherwise, and who to make such disclosure to, is driven by the particular facts and circumstances, including the company's and officer's duties under securities or other laws.

Conclusion

The issuance of the Tri-Seal Compliance Note encourages self-disclosure by emphasizing the benefits of VSDs. Private companies play a significant role in preventing sensitive technologies and goods from being used by U.S. adversaries and sanctioned individuals, entities and jurisdictions from abusing the U.S. financial system. Therefore, cooperation with the U.S. government is key to protecting national security. Notably, the BIS update that incentivizes companies to whistleblow on other entities makes nondisclosure of potential violations riskier. In light of this information, companies engaging in global business should carefully assess their internal compliance programs and supply chains to ensure that they are not violating any U.S. sanctions or export control laws and to consult with experienced trade counsel whenever a violation is suspected.