Monthly Archives: January 2016

BIS Proposal Mirrors OFAC Penalty Guidelines: How Will This Impact Your Compliance Program?

On December 28, 2015, the Commerce Department’s Bureau of Industry and Security (BIS) published a Proposed Rule (80 FR 80710) that—if adopted—would revise the agency’s guidance concerning the settlement of civil (a.k.a. administrative) enforcement cases for export violations under the EAR.

The proposed changes would not apply to penalties imposed in civil cases involving Restrictive Trade Practices and Boycotts (Part 760 of the EAR), for which the current enforcement guidance in Supplement No. 2 of Part 766 would still apply; nor would they apply to penalties in criminal cases, which BIS refers to the Department of Justice for prosecution.

BIS will accept comments on this Proposed Rule until February 26.

What is BIS’s reason for revising the current guidelines?

The preamble to the proposal states that this revision is intended “to make administrative penalties more predictable to the public.” A second reason given is perhaps the most important one: to bring the Commerce Department’s enforcement policies into line with the penalty guidelines followed by the Treasury Department’s Office of Foreign Assets Control (OFAC).

In 2009, OFAC put into place a revised set of Economic Enforcement Guidelines for the Treasury Department’s sanctions programs. Since then, “the OFAC Guidelines” have provided a helpful framework of factors used by OFAC to determine whether or not to impose monetary penalties, and if so, how much. What BIS is now proposing is essentially a rewrite of its current “Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases” (found in Supplement No. 1 to 15 CFR Part 766) to make it substantially similar to those OFAC guidelines.

Greater transparency to the exporting community, harmonization of licensing policies and definitions among the regulatory agencies, and better coordination of enforcement actions are certainly laudable goals. They were important objectives of Phases I and II the U.S. Government’s Export Control Reform Initiative (ECR) when it was launched in 2010.

What will change if these guidelines are implemented?

Perhaps the most significant change is that the Proposed Rule would amend the factors BIS will consider when deciding whether to pursue administrative charges or settle allegations of EAR violations and when setting penalties in civil enforcement case settlements; it also explains how penalties would be calculated. The current BIS guidelines only list the factors to be taken into account in determining appropriate enforcement. The revised guidelines now under consideration—patterned after OFAC’s Guidelines—would use the transaction value to determine a baseline for assessing a civil penalty, applying a systematic calculation method set out in the Proposed Rule.

Under the proposed guidelines, BIS would first decide whether an enforcement case should be categorized as egregious or non­egregious. (Some of the factors that would enter into their decision are explained in the proposal.) They would also look at whether or not the apparent violations had been voluntarily disclosed by the exporter. These two factors, taken together with the transaction value (defined as the total U.S. dollar value of the transaction) and the maximum applicable penalty for each violation, as fixed by law, would be used to calculate a “base amount” for assessing penalties in the case. (The formulas to be employed in that calculation are explained in detail in the proposal.) Next, the agency would ascertain how many apparent violations of the EAR had occurred.

Finally, the presence of certain aggravating factors (e.g., indications of willfulness or recklessness, extent of harm done to the goals of the regulatory program) and/or mitigating factors (e.g., evidence that effective remedial measures were promptly taken, exceptional cooperation with OEE, likelihood that a license would have been approved if applied for) and/or general factors (e.g., an operational corporate compliance program conforming to the BIS guidelines for exporters)—these would all be considered and weighed to decide whether the penalty should be adjusted downward, or upward (capped by the statutory maximum), and by how much.

The maximum legal penalties for violations of the EAR would not be affected by the Proposed Rule. The Export Administration Act (EAA) of 1979— the legal basis for U.S. export controls on dual use items—actually lapsed in 2001 and has never been reauthorized by Congress. At present BIS derives its statutory authority to administer and enforce the EAR from the International Emergency Economic Powers Act (IEEPA), the same statutory authority by which OFAC implements most of its economic sanctions programs. Under the terms of the IEEPA, the maximum applicable penalty for civil violations can be as high as $250,000 for each violation, or twice the value of the transaction, whichever is greater. (If you are thinking that’s a very steep fine, you’re entirely right. Consider, however, the penalties associated with criminal violations under the IEEPA: a fine of up to $1 million or 20 years in prison. Or both. For each violation.)

Is this proposed change likely to result in higher penalties than we’re seeing now?

That’s a good question, but it’s hard to answer with any certainty. It will largely depend on BIS. Under the Proposed Rule, the penalty amounts would still be determined by the agency on a case-by-case basis, and the revised guidelines allow considerable enforcement discretion. Very considerable discretion.

BIS says it wants to retain sufficient administrative flexibility under the revised guidelines to allow proportionality in its enforcement actions. Instead of being tightly bound to mechanical penalty calculations, the agency will consider the totality of the circumstances in each case and tailor its response to the seriousness of the violation. Be that as it may, the trade-off for greater flexibility in regulations is always less certainty and predictability. That’s one reason why it isn’t entirely clear how the proposed guidelines would affect the size of civil penalties imposed.

One thing is quite clear: the Proposed Rule provides for significantly higher civil penalties in “egregious” cases. BIS assures exporters that it expects the vast majority of apparent violations investigated by its Office of Export Enforcement (OEE) to fall into the “non-egregious” category. Judging by the record of OFAC, which has been following a similar enforcement approach over the last six years, that does seem very likely. But it isn’t as reassuring as it might be. Here’s why: in addition to determining the penalty amount for each violation, BIS expressly retains the administrative discretion to determine how many violations have occurred in an enforcement case. If you’re thinking that this is simply a matter of knowing how to count, think again. Even under the current guidelines, OEE has been known to “pile on” violations in certain cases. What that means is something like this: if the identical incorrect information (say, a wrong EECN, description, or monetary value) has been entered in multiple fields of the AES filing, it may be counted—at OEE’s discretion—either as a single export violation or as multiple separate violations, and be charged accordingly. In this way, even “non-egregious” violations can result in unexpectedly large penalties.

And there are other reasons why it’s hard to predict the impact of the revised guidelines on the size of penalties: the definitions of some key regulatory terms in this Proposed Rule are less than precise. Take the term “transaction value,” for example. Under the Proposed Rule, this value is to be the starting point for most penalty calculations. That means it is critically important that we know precisely how BIS will determine the “transaction value” in a given enforcement case. Regrettably, the definition of this term provided in the Rule raises more questions than it answers:

Transaction value means the U.S. dollar value of a subject transaction, as demonstrated by commercial invoices, bills of lading, signed Customs declarations, or similar documents. Where the transaction value is not otherwise ascertainable, BIS may consider the market value of the items that were the subject of the transaction and/or the economic benefit derived by the Respondent from the transaction, in determining transaction value. In situations involving a lease of U.S.-origin items, the transaction value will generally be the value of the lease. For purposes of these Guidelines, ‘‘transaction value’’ will not necessarily have the same meaning, nor be applied in the same manner, as that term is used for import valuation purposes at 19 CFR 152.103.

What do you think of that definition? Clear . . . or cloudy? Egregious or non-egregious? Once these guidelines have been finalized and implemented, BIS will presumably provide answers to some of the questions exporters will surely be asking about this: What transaction is the “subject transaction”? How will the referenced documents be used in determining its value? What happens when the documents contain inconsistent information? In what circumstances is the transaction value considered to be “not otherwise ascertainable”? How will “market value” and “economic benefit” be evaluated? Which of these two values will be prioritized? Once we know how BIS understands this and other key terms in the revised guidelines, we’ll be in a better position to assess the impact of the changes on penalty amounts.

Should we expect to see more enforcement actions by BIS if this rule is implemented?

Yes, you can definitely expect to see more enforcement actions by BIS, but probably not as a result of these revised guidelines—at least, not directly.

BIS says it does not expect the adoption of this Proposed Rule to increase the number of cases which are charged administratively—and which therefore result in monetary penalties, rather than being closed with a warning letter. We have no reason to doubt that statement. Nevertheless, BIS’s statistics show without a doubt that it has been drastically ramping up its enforcement of the EAR over the past several years. The agency has significantly increased its manpower, enhanced its enforcement tools, and broadened the scope of its investigations. Its pursuit of export violations—both civil and criminal—has intensified each year. There is every reason to believe that trend will continue.

Insofar as clearer rules, more explicit guidance, and greater alignment with other agencies (such as OFAC) will allow more cases to be brought forward, and either settled or charged, we expect the implementation of this Proposed Rule to facilitate the current trend.

Will Voluntary Self-Disclosures still be a mitigating factor under this Proposed Rule?

Technically, no. Voluntary Self-Disclosures are no longer stated to be “mitigating factors” per se.

But actually, yes. And that’s a very definite yes. Under this Proposed Rule, which closely follows the OFAC Guidelines, whether or not the exporter has submitted a VSD is the second most significant component in establishing the base penalty amount. So, this new proposal is entirely in keeping with BIS’s longstanding policy of strongly encouraging voluntary notifications of violations. Export violations that were completely disclosed in timely VSD would be afforded more significant deductions in the base penalty amount than would have been afforded if BIS had discovered the violation independently.

According to BIS, only three percent of VSDs submitted over the past several years have resulted in a civil penalty. In most cases, BIS says, VSDs result in the issuance of warning letters.

BIS’s enforcement statistics, as well as the penalty calculation formulas in the Proposed Rule, indicate that an exporter would be wise to voluntarily self-report as soon as possible whenever a potential violation is discovered. Of course, whether or not a VSD is warranted by your company’s specific circumstances is a matter you should discuss with your corporate legal counsel. Generally speaking, however, submitting a full voluntary self-disclosure, including an account of corrective measures immediately taken to guard against future violations, is likely to limit potential penalties.

One caveat though: BIS does not look favorably on exporters who submit untruthful or misleading VSDs, or attempt to conceal some of the facts.

Would the implementation of this Proposed Rule be good news or bad news for U.S. exporters?

On the whole, probably good news.

Good News #1: Despite the uncertainty and unpredictability we noted above, due to BIS’s broad discretionary power in enforcing the EAR, the new guidelines should aid exporters—at least, to some extent—in estimating the range of likely penalties, especially for export violations that involve both the EAR and OFAC sanctions programs.

Good News #2: The trade-off for uncertainty and unpredictability, as we also noted above, is enforcement flexibility. In settlement negotiations, we would expect the flexibility and discretionary powers retained by BIS under this Proposed Rule to work in an exporter’s favor. In appropriate cases, BIS has the authority to suspend or defer payment of a civil penalty, taking into account whether the Respondent has demonstrated a limited ability to pay, whether the matter is part of a global settlement with other U.S. Government agencies, and/or whether the Respondent has agreed to apply a portion or all of the funds suspended or deferred for purposes of improving the company’s internal compliance program. Should your company ever be the Respondent, we’re certain you’ll see that as good news!

Good News #3: Even now, while the new guidelines are not yet in place, the Proposed Rule is already very helpful to exporters, as an indication of the approach to settlement and penalty determinations that BIS is likely to take in the years ahead.

What else should I take away from this?

One more thing: in case this wasn’t already abundantly clear to you, the Proposed Rule makes it even clearer: creating, maintaining, and prioritizing a comprehensive corporate compliance program that incorporates all the key elements identified in the BIS Compliance Guidelinesincluding written guidelines that tell your company’s employees exactly what is expected of them and provide a framework for senior management to engage intelligently with all compliance issues—is a critical requirement for every U.S. exporter, and is certain to become even more critical in the months and years ahead.

(None of the information is intended to be authoritative official or professional legal advice. Consult your own legal counsel or compliance specialists before taking actions based upon this blog or other unofficial sources.)