The Proper Use of Prior Disclosures on Export Violations

Transcription

1 August 8 th, 2016 Adrienne Braumiller Braumiller Law Group PLLC Lawrence W. Hanson The Law Office of Lawrence W. Hanson, P.C. The Proper Use of Prior Disclosures on Export Violations Should You Disclose? How Should You Disclose? What Should You Disclose? When Should You Disclose? To Whom Should You Disclose?

2 Context of Potential Disclosures Prospect of civil and criminal liability Reduced but not eliminated Key difference from Prior Disclosure of import violations Reduce or eliminate time spent on investigation Reduce risk of uncertainty Don t think this is wrong but if it is.... Required not by law but by internal corporate governance

3 What is an Error or Violation? A violation of a law or regulation It can be intentional or negligent The error or violation can affect revenue, export controls, embargoes and sanctions, export declarations or any export or import requirement Examples: Failure to file an Electronic Export Information (EEI - export declaration) Failure to obtain an export license Not indicating an export license, or exemption on an EEI Exporting to an embargoed country without approval Hiring a foreign national without a license for access to technical data

4 Finding Out About Errors and Violations Export related violations are discovered in a variety of ways: 1. Internal or third party audits and investigations 2. Internal ethics hot lines and whistle-blowers 3. Disgruntled or laid off employees 4. Monitoring export transactions 5. Competitors ratting on companies 6. US Government data mining 7. US Government investigations The first 4 are candidates for voluntary self-disclosures; the last 3 are not

5 Voluntary or Not? Disclosure BEFORE learning of investigation Valid Disclosure Disclosure after under investigation Admissions to be used against you in a court of law

6 Voluntary or Not? The most important issue in whether an error or violation is eligible for US Government voluntary self-disclosure procedures is whether it is truly voluntary If the error or violation is under review or investigation by any government agency it is not voluntary and will be handled under the agency s penalty procedures The party disclosing must state that the matter is not under investigation by the US Government that the government agencies have no knowledge of the error or violation Note that the Directorate of Defense Controls has a directed disclosure procedure for certain ITAR violations (more to follow)

7 Deciding to Disclose Deciding to disclose needs management buy-in and support no maverick disclosures Entity disclosure vs officer or employee disclosure Be sure to lay out to management the facts, recommendations and consequences of disclosing and not disclosing In most cases management must sign off on the voluntary disclosure Most agencies permit a party to make an initial disclosure and perfect it later usually within 90 days - when all the facts are known In 2013 BIS imposed a 180 day limit on perfecting a disclosure

8 Reasons For Not Disclosing Reason could be that the company in good faith does not believe an error or violation took place Recommendation is to have evidence to support this the report of an audit or investigation or a classification determination or General Correspondence response If an error or violation in fact took place and the company chose not to disclose they are rolling the dice It is possible the US Government will never learn of the error or violation and the company will get away with it If the US Government learns of the error or violation and that the company chose not to disclose the consequences will be dire

9 Who Can File a Disclosure? The exporter can file its own voluntary self-disclosures Other parties can also file on behalf of the exporter: Outside attorneys Freight forwarders Customs brokers The exporter will need to provide outside parties with all the facts and documents and also a written authorization A customs broker will also need a power of attorney if it could be interpreted as customs business

10 Who Do You Disclose To? The error violation is disclosed to the agency responsible for enforcing the law or regulation: ITAR violations - the Directorate of Defense Trade Controls EAR violations the Office of Export Enforcement EEI violations the Bureau of Census Embargoes and sanctions violations the Office of Foreign Assets Controls In many cases a disclosure is filed with more than one agency: Example: An exporter does not obtain and use a license to export ITAR-controlled articles. This also means the EEI indicated the wrong export authority. A disclosure is filed with both DDTC and Census

11 Due Diligence in Disclosing Investigate whether an error or violation has occurred and, if so, the extent of the error or violation Single incident or systemic? Absence of controls vs failure of controls Need to go back 5 years Gather supporting documents where available Evaluate necessary corrective actions Design necessary corrective actions Outline necessary corrective actions Implement necessary corrective actions If possible, demonstrate efficacy of necessary corrective actions

12 The Protection of the Attorney Client Privilege Best practice is to put under privilege through legal counsel Control of information to the government Waiver of privilege for what is disclosed, not necessarily investigation Outside counsel vs inside counsel

13 USG Agency VSD Procedures Most agencies have similar procedures for filing voluntary self-disclosures: Where and when disclosures are filed Determination of whether they are truly voluntary Require full explanation of the errors or violations and the circumstances surrounding them Inclusion of mitigating factors Inclusion of proposed corrective actions to prevent recurrence Agency regulatory or policy guidelines for amount of penalty Differences between agencies are in how the matter is handled internally and the amount of fine or penalty to be assessed

14 Voluntary Self Disclosures - DDTC The Directorate of Defense Trade Controls (DDTC) encourages voluntary self disclosures Regulations on how to file a VSD with DDTC are at Part of the ITAR A VSD is considered a mitigating factor in determining the amount of administrative penalties if any to be assessed Factors include whether violation was intentional or inadvertent, familiarity with law and regulations, prior violations, whether one-time or systemic and corrective actions to be taken A regular exporter that does not periodically file VSDs is suspect does it have a good compliance program?

15 Voluntary Self Disclosures - BIS The Bureau of Industry & Security (BIS) and its partner the Office of Export Enforcement (OEE) encourage VSDs VSDs are actually submitted to OEE, which decides on type of action to be taken from no action to criminal prosecution Regulations on how to file a VSD with OEE are in Part of the EAR Considered an excellent indicator of a party s intent to comply with the regulations A VSD also provides OEE with information on other possible violations OEE reviews VSDs to determine: (1) did the violations occur and (2) the appropriate corrective actions to be taken

16 Voluntary Self Disclosures - BIS BIS published a new enforcement policy on June 22, 2016, titled Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases Maximum penalty for non-egregious VSDs is 50% of transaction value not to exceed $125K Policy removes maximum 75% mitigation allowing for dismissal of all penalties If egregious, mitigation for VSD is 50% of maximum penalty BIS states that it will respond to most non-egregious VSDs with a warning letter BIS also published Aggravating Factors, General Factors, Mitigating Factors and Other Factors for deciding amounts for all penalty cases including VSDs

17 Voluntary Self Disclosures - BIS Aggravating Factors: Willfulness and recklessness Awareness of conduct Harm to regulatory objectives General Factors: Individual characteristics (size of company, experience, prior violations) Compliance program (internal controls, corrective actions) Mitigating Factors: Remedial response(investigating cause, taking corrective actions) Extraordinary cooperation with BIS and OEE License likely to be approved

18 Voluntary Self Disclosures - BIS Other Factors: Related violations (one error causing other violations) Multiple unrelated violations (a single case or VSD involving several separate export related violations) Other enforcement actions (other enforcement actions arising from the same or similar conduct) Future compliance/deterrence effect (whether case will result in future compliance by company) Final note: OEE can still pursue an enforcement action despite a VSD however the purpose is stated as not punitive but for raising awareness, increasing compliance and deterring future violations

19 Voluntary Self Disclosures - OFAC OFAC encourages voluntary self disclosures of embargoes and sanctions A self disclosure is considered a mitigating factor in civil penalty proceedings OFAC does not have an amnesty program where parties are excused from violations whether disclosed or not OFAC does review the totality of the circumstances of any violation including any self-disclosures, cooperation and the quality of a company s compliance program in determining penalties to be assessed

20 Voluntary Self Disclosures - Census Census encourages voluntary self disclosures of non-filing or errors on EEIs Census VSD requirements are in Part of the Foreign Trade Regulations (15 CFR 30.74) Requirements are nearly identical to other agencies: Facts, circumstances, regulations violated, corrective actions, mitigating factors Census has a sample VSD letter on its website A VSD filed for violation of the ITAR or EAR may also require a VSD to be filed with Census if it means that EEIs were filed with errors or not filed at all

21 Outcomes US Government Agency Responses The US Government agency typically has no required timeline for response Most respond reasonably quickly Outcomes: No response no news is good news Warning letter don t do it again Penalty depend on guidelines and severity of case Audit or investigation to verify completeness of disclosure and whether other violations occurred Requirement and verification of corrective actions Placed on a US Government blacklist (i.e., Table of Denial Orders) for egregious cases

22 Special Case Directed Disclosures The Directorate of Defense Trade Controls may require a Directed Disclosure if they learn of ITAR violations This is not voluntary! Exporter must investigate matter and respond to DDTC with findings DDTC will set deadline for when disclosure is required DDTC response could range from dismissal of matter to full assessment of penalties or sanctions

23 A Recent Case to Learn From Microwave Equipment Corporation (MEC) provided ITAR controlled technical data to a Chinese foreign national employee in 2009 and 2010 The deemed exports were not disclosed until 2012 when the president of MEC pleaded guilty to an unrelated export violation Suspicion is that president of company was blocking the disclosure DDTC assessed MEC a fine of $100,000 based in large part on its delay in filing the VSD

24 Takeaways Voluntary self disclosures are encouraged by US Government agencies Lack of disclosures could indicate inadequate internal controls A complete and accurate self-disclosure will get the best possible treatment by the agencies Make sure it is truly voluntary, filed timely and that you have disclosed everything for a 5-year period Include mitigating factors and realistic corrective actions Don t be reluctant to file disclosures!

25 Thank You! Adrienne Braumiller Braumiller Law Group PLLC 5520 Spring Valley Rd. Suite 200 Dallas, TX (214) Lawrence W. Hanson The Law Office of Lawrence W. Hanson, P.C Post Oak Blvd, Suite 1225 Houston, TX (713)