On July 26, 2023, the U.S. Department of Commerce, Bureau of Industry and Security (BIS), the U.S. Department of the Treasury Office of Foreign Asset Control (OFAC) and the U.S. Department of Justice (DOJ) released joint compliance guidance discussing the Voluntary Self-Disclosure (VSD) policies of the respective agencies.[1] The purpose of the guidance is to highlight recent updates to the VSD policies; emphasize the importance of compliance with sanctions, export controls and other laws related to national security; and discuss the benefits of voluntarily self-disclosing potential violations to the agencies. Interestingly, the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), which administers arms export controls, did not participate in the joint guidance, although it also maintains a VSD policy. The guidance also references the Anti-Money Laundering and Sanctions Whistleblower Program, operated by the Treasury’s Financial Crimes Enforcement Network (FinCEN), which notably applies to its sister agency OFAC as well.
This new government guidance emphasizes the benefit for companies to voluntarily self-disclose any potential violations. Tougher enforcement policies for nondisclosed cases and new policies that reward informants for disclosing violations create strong incentives for companies to address any potential violations quickly and effectively.
DOJ
On March 1, 2023, the DOJ’s National Security Division (NSD), which enforces criminal violations of export control and sanctions laws, updated its VSD policy.[2] The updated policy provides that NSD will generally not seek a criminal conviction through a guilty plea against a company that (1) voluntarily self-discloses potential criminal (i.e., willful) violations, (2) fully cooperates with the NSD and (3) remediates the violations in a timely and appropriate manner, absent aggravating factors.[3] Additionally, NSD may resolve criminal violations with such a company through a nonprosecution agreement (or declination, depending on the violation) without imposing a monetary fine on the company. However, the company will not be permitted to keep any proceeds unlawfully gained from the conduct but rather must disgorge those gains in connection with a resolution.[4]
How NSD learns of the potential violation is important in determining whether a company receives the full benefit of its VSD policy. To obtain the full benefit of NSD’s VSD policy, the company must disclose the conduct directly to NSD not long after becoming aware of the potential criminal misconduct.[5] Disclosures made only to civil regulatory agencies will not qualify under NSD’s VSD policy.[6] Other agencies, such as BIS, OFAC and DDTC, may also refer VSD cases to the DOJ, but DOJ will not give a company credit for a voluntary self-disclosure under its VSD policy following such a referral.[7]
BIS
In June 2022, BIS’s Office of Export Enforcement (OEE) implemented a new dual-track system to handle VSDs.[8] As part of this system, VSDs involving minor or technical infractions are fast-tracked, with the aim of issuing a warning or no action letter within 60 days of the final submission.[9] BIS’ goal in fast-tracking minor infractions is to better focus its resources on VSDs where more serious violations may have occurred.[10]
Further, in April 2023, BIS issued a memorandum that provided an overview on how BIS applies its existing enforcement guidelines on VSDs and disclosing conduct by third parties.[11] Parties that submit VSDs that are “timely, comprehensive, and involves full cooperation” are eligible for substantial reduction of the applicable civil penalties, including the possibility of a fully suspended penalty in certain instances.[12] Alternatively, the deliberate decision not to disclose significant possible violations of the EAR can be considered an aggravating factor against that party, which may result in enhanced penalties in any resulting non-voluntary enforcement action by BIS.[13] Lastly, a party that discovers potential EAR violations by a third party (such as a competitor or a transaction counterparty) and submits a tip to BIS that leads to an enforcement action will receive favorable consideration under BIS’ penalty guidelines for future enforcement actions, even if unrelated to the conduct initially presented to BIS.[14]
OFAC
Under OFAC’s enforcement guidelines, a proper VSD submission can be a mitigating factor when OFAC is determining the appropriate enforcement action.[15] For matters where a civil monetary penalty is deemed appropriate, a proper VSD may result in up to a 50% reduction in the base amount of any proposed civil penalty.[16] A proper VSD to OFAC “must include, or be followed within a reasonable period of time by, a report of sufficient detail to afford a complete understanding of an apparent violation’s circumstances.”[17] After submitting the report, the party is expected to continue responding to follow-up inquiries by OFAC related to the potential violation.[18]
DDTC
While it did not participate in the joint guidance on VSDs, DDTC also has a VSD program and strongly encourages individuals to disclose any potential violations of export control provisions, regulations, orders, licenses or other authorization under the Arms Export Control Act.[19] A voluntary disclosure to DDTC may be considered as a mitigating factor in determining if any administrative penalties are imposed.[20] The process and the incentives, for submission of a VSD are similar to those for BIS and OFAC.
FinCEN
In 2021, FinCEN implemented its whistleblower program pursuant to the Anti-Money Laundering Act of 2020 (AMLA), and further enhanced by the Anti-Money Laundering Whistleblower Improvement Act, enacted as part of the Consolidated Appropriations Act, 2023, P.L. 117-328. FinCEN’s program is designed to incentivize individuals to provide the government with information regarding violations of U.S. trade and economic sanctions administered by FinCEN’s sister agency OFAC, as well as violations of the Bank Secrecy Act anti-money laundering and suspicious activity rules administered by FinCEN.[21] Individuals are eligible for rewards between 10% to 30% of the monetary penalties collected if their information leads to a successful enforcement action. Whistleblowers may also receive awards if the information they provide leads to the successful enforcement of a related action.
CONCLUSION
With persistent global tensions, the role of the digital economy to conduct transactions and process payments, and national security concerns around the weaponization of new and emerging technologies, technology companies are on the front line of trade compliance enforcement.
Companies with ties to the U.S. economy should expect to see increasing outreach and interest from U.S. trade control regulators, as well as stronger and more frequent penalties for export control and sanctions violations. An appropriate response to government outreach, a private whistleblower or internal discovery of a potential violation can vary depending on the facts and circumstances of the situation. Companies that become aware of potential violations will benefit from consultation with counsel on the proper response, including an assessment of risks and strategies, an internal review of the conduct at issue, remediation and possible disclosure to the relevant authorities.
*Trade and national security senior paralegal Kurt Vinson also contributed to the preparation of this alert.Footnotes:
[1] Department of Commerce, Department of the Treasury, and Department of Justice, “Tri-Seal Compliance Note: Voluntary Self Disclosure of Potential Violations” (July 26, 2023), available at https://ofac.treasury.gov/media/932036/download?inline
[2] Department of Justice, “NSD Enforcement Policy for Business Organizations” (March 1, 2023), available at https://www.justice.gov/media/1285121/dl?inline= ; see also JM 9-28.900 Voluntary Self-Disclosures, available at https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.900
[3] NSD Enforcement Policy for Business Organizations, at 2
[4] Id.
[5] Tri-Seal Compliance Note, at 2
[6] NSD Enforcement Policy for Business Organizations, at Footnote 7
[7] See e.g. §764.5(b)(4), “…. Voluntary self-disclosure does not prevent transactions from being referred to the Department of Justice for criminal prosecution. In such a case, [BIS] would notify the Department of Justice of the voluntary self-disclosure, but consideration of that factor is within the discretion of the Department of Justice.” See also Appendix A to 31 CFR Part 501 II. F, “Criminal Referral. In appropriate circumstances, OFAC may refer the matter to appropriate law enforcement agencies for criminal investigation and/or prosecution….”; see also 22 CFR Part 127(b)(3), “The violation(s) in question,… may merit penalties, administrative actions, sanctions, or referrals to the Department of Justice to consider criminal prosecution.”
[8] Memorandum from Matthew Axelrod, Assistant Secretary for Export Enforcement to All Export Enforcement Employees Re Further Strengthening Our Administrative Enforcement Program (June 30, 2022), available at https://www.bis.doc.gov/index.php/documents/enforcement/3062-administrative-enforcement-memo/file
[9] Id. at 3
[10] Id.
[11] Memorandum from Matthew Axelrod, Assistant Secretary for Export Enforcement to All Export Enforcement Employees Re Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others (April 18, 2023), available at https://www.bis.doc.gov/index.php/documents/enforcement/3262-vsd-policy-memo-04-18-2023/file
[12] Id. at 2
[13] Id.
[14] Id. at 3
[15] Appendix A to 31 CFR Part 501; see also Office of Foreign Asset Control, Frequently Asked Questions (FAQs) 13, available at https://ofac.treasury.gov/faqs/13
[16] See Tri-Seal Compliance Note, at 5; see also OFAC FAQs 13
[17] Appendix A to 31 CFR Part 501, I.I “Voluntary self-Disclosure”
[18] Id.
[19] 22 CFR Part 127.12(a); see also Directorate of Defense Trade Controls, Violations and Disclosures FAQs, available at https://www.pmddtc.state.gov/ddtc_public/ddtc_public?id=ddtc_public_portal_faq_cat&topic=7e14bd571b373050c6c3866ae54bcb89&subtopic=840871971b773050c6c3866ae54bcbd4#840871971b773050c6c3866ae54bcbd4
[20] 22 CFR Part 127.12(a)
[21]
Financial Crimes Enforcement Network, The Anti-Money Laundering Act of 2020, available at https://www.fincen.gov/anti-money-laundering-act-2020