While a great deal of attention has been paid to the promised fruits of the US export reform initiative, export compliance practitioners are all too aware that some of the more significant changes of late are in the area of enforcement. Better coordination among the agencies, more criminal cases, and higher penalties (imposed retroactively, no less) have all been enforcement trends for the past several years. It is no secret that penalties for export controls and sanctions violations are on the rise – across all the primary government enforcement agencies, including the US Department of Justice, Customs and Border Protection (CBP), the US Department of Commerce, Bureau of Industry and Security (BIS), and others – with a growing list of cases resulting in multimillion dollar settlements and increasingly expensive collateral consequences.

Though perhaps less obvious than its levying significant monetary penalties, a review of recent published civil settlement agreements indicates that the BIS has adopted several new civil enforcement measures against parties settling export enforcement cases. These mechanisms include: mandatory audit and reporting requirements; mandatory export compliance training; and pursuing separate civil enforcement actions against individual company employees alleged to have violated the US Export Administration Regulations, in addition to the possibility of a criminal referral.

The trend toward imposing measures designed to improve an exporter’s compliance going forward generally represents a positive step toward reaching the US government’s ultimate goal of decreasing export violations and protecting national security and nonproliferation interests. The emerging BIS audit requirement in current form, however, does raise a number of issues worthy of debate.

Other US government agencies, most notably the Department of State, Directorate of Defense Trade Controls (DDTC), have used mandatory internal audits as a tool in addressing export violations for a number of years. Yet those audits typically have been imposed without the addition of monetary civil penalties, provided the audit findings did not reveal ongoing compliance concerns or a pattern of repeated violations. Conversely, BIS seems to have imposed these measures without a concomitant decrease in civil penalties. Will the audit requirement evolve into just an additional form of penalty, or will the costs associated with the audit factor into a reduced monetary penalty? 

What’s more, these audit requirements mandate reporting of “potential violations”, including the provision of relevant shipment documents, which exceeds the scope of the typical audit requirements imposed by DDTC. In other words, the exporter is essentially placed on civil probation and afforded the privilege of paying for it, ostensibly without being able to avail itself of the benefits of a voluntary self-disclosure. What is the effect of the audit provision on voluntary disclosure, and what should it be? In addition, should the audit be tailored to key areas of weakness identified in connection with a company’s alleged prior violations, as the audit requirements imposed in the past by DDTC? 

In addition, these equitable remedies are fashioned on a case-by-case basis in a context where BIS is in a position to assert disproportionate leverage over the settling party. The use of these types of remedial measures would benefit from published regulations or formal agency policy to ensure fairness, consistency, and ideally an opportunity for public notice and comment. One need look no further than the example of Foreign Corrupt Practices Act deferred prosecution agreements for a cautionary tale of the perils of law-making through settlement agreements. Will BIS update its civil penalty guidelines to address these new settlement practices?

While this trend raises many questions, at least one question can be answered clearly: “What does this mean for my company as an exporter?” It is yet another reason to get your compliance house in order now because, if ever you are the target of an export enforcement action, you almost surely will have to – on the government’s terms rather than your own.

This piece is an excerpt from a longer article we published in the December 2011 issue of the World Export Controls Review. To read the full article, click on the link in the “Doanloads” section to the right.

Should you have any questions regarding this Alert, please contact members of Arent Fox’s International Trade Group, or the Arent Fox attorney who handles your matters.