BIS Clarifies Approach to Export Enforcement Concerning Voluntary Self Disclosures and Reporting of Third Party Misconduct under Guise of “Policy Clarifications”
Alex Cotoia, Regulatory Manager at The Volkov Law Group, rejoins us for an important posting on policy clarifications issued by the BIS Office of Export Enforcement. Alex can be reached at [email protected].
On April 18, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) Office of Export Enforcement (“OEE”) released a set of “policy clarifications” in the context of a memorandum authored by the Assistant Secretary for Export Enforcement Matthew Axelrod (“Axelrod Memorandum”). The Axelrod Memorandum contains a number of useful compliance tips for both private industry at large and academic institutions (primarily colleges and universities) that play a critical role in preventing the export of the most sensitive emerging technologies to malign actors and foreign countries that have the potential to alter the current global balance of power. Foremost among the considerations mentioned in the Axelrod Memorandum is the need for organizations across economic sectors to utilize voluntary self-disclosures (“VSDs”) in connection with potential, more serious violations of the Export Administration Regulations (“EAR”) with greater frequency.
While modifications to BIS policy last year has made it easier for organizations to report more routine, suspected EAR violations with an abbreviated resolution process, the OEE has shifted its focus to more substantive violations that have the potential to undermine U.S. national security and foreign policy objectives. To that end, the Axelrod Memorandum encourages organizations who discover what appears to be a more serious violation to avail themselves of the VSD procedure. To underscore this point, the Axelrod Memorandum clarifies that “deliberate non-disclosure of significant possible violations” will cary a host of unpalatable repercussions for the concealing organization; just as current BIS policy calls for organizations that report in a “timely, comprehensive” manner are entitled to concrete benefits, including a substantial reduction in the applicable civil penalty, and even an outright suspension of the penalty in certain cases. Conversely, organizations that fail to make a VSD in connection with more serious violations face the very real possibility of BIS regarding the non-disclosure as an “aggravating factor” in connection with the resolution of the case in question. This clarification to existing BIS policy makes it pellucidly clear that OEE, under the leadership of Assistant Secretary Axelrod, intends to ramp up enforcement of existing export control regulations in relation to the most heavily controlled dual-use technologies.
The second consideration addressed the Axelrod Memorandum concerns third-party disclosures made concerning the conduct of other organizations and academic institutions. Under this framework, the Axelrod Memorandum emphasizes that organizations and institutions aware of potential violations of export controls by others—especially those of competitors who are less compliance-conscious and leveraging circumvention of export controls to their pecuniary advantage—are encouraged to utilize BIS’s confidential reporting form to apprise OEE of the circumstances surrounding the potential infraction. Accordingly, BIS will be utilizing, with greater frequency, that stipulation encompassed in current policy that rewards organizations that furnish OEE with substantial assistance that leads to a successful enforcement action. From a practical perspective, this means that the reporting organization makes itself eligible for credit associated with “exceptional cooperation with OEE,” in the context of any future enforcement action, even if unrelated to the misconduct initially reported. This serves as a major incentive for organizations aware of export control evasion and circumvention by others to make a disclosure concerning that conduct and fully cooperate with the federal government in the context of any subsequent investigation and administrative enforcement action.
In summation, while the Axelrod Memorandum fails to articulate anything new in terms of modifying existing BIS policy, it significantly clarifies BIS’s current enforcement approach respecting VSDs involving significant suspected violations of the EAR, and disclosures implicating third parties potentially involved in the same misconduct. The determination of OEE to adhere to these policies is manifest most clearly by the landmark enforcement action brought against Seagate Technology (“Seagate”) for flagrant, continuous violations of the EAR’s foreign direct product (“FDP”) rules in its dealings with Huawei a mere day after the policy clarifications were released. There, Axelrod demonstrated the zeal with which BIS intends to pursue organizations determined to undermine or circumvent U.S. trade controls by imposing a whopping $300 million civil penalty against Seagate.
As a result of the Axelrod Memorandum’s publication, organizations should revisit their export control compliance programs to ensure that the threshold required for a VSD is aligned with current expectations. Generally speaking, more liberal disclosure of even suspected minor infractions are encouraged, while reports involving more substantial export control violations should now be mandatory rather than discretionary. Organizations should also reiterate their commitment to abiding strictly by current export regulations to all third parties with whom they contract. A zero-tolerance policy for any export violation may be appropriate under certain circumstances involving higher-risk transactions that allows the contracting organization to terminate its relationship with a counterparty and make an appropriate report to BIS.