United States: BIS Revises Penalty And Settlement Guidance

On June 22, 2016, the Bureau of Industry and Security ("BIS") revised its guidance regarding administrative enforcement cases for violations of the Export Administration Regulations ("EAR"), other than those related to restrictive trade practices and boycotts. The rule, effective July 22, 2016, rewrites Supplement 1 to Part 766 of the EAR and sets forth factors the Office of Export Enforcement ("OEE") will consider when determining penalties in the settlement of administrative enforcement cases and when deciding whether to pursue charges or settle claims of EAR violations. The new guidelines are based on those used by the U.S. Office of Foreign Assets Control ("OFAC") in the enforcement of U.S. trade and financial sanctions and embargoes and are intended to increase predictability and transparency for civil penalty determinations.

The EAR may be enforced both criminally and civilly. Maximum criminal penalties are 20 years in jail, a $1 million fine, or both. Maximum civil penalties are the greater of $250,000 or twice the value of the transaction, per violation. BIS can also deny export privileges and exclude persons from practicing before the agency.

Civil Penalties

BIS' starting point in calculating the civil penalty it wishes to assess will be to determine a base penalty amount. The first step in that process will be assessing whether the suspected violations are egregious or not egregious. BIS will make such a determination based on a variety of factors, as described below.

In non-egregious cases resulting from a voluntary self-disclosure ("VSD"), the base penalty is one-half of the transaction value, capped at the statutory maximum penalty ($125,000). In non-egregious cases resulting from anything other than a VSD, the base penalty is taken from a schedule, capped at a maximum amount of $250,000. Schedule amounts are incremental (beginning from $1,000) and are based on the transaction value.

The base penalty amount for an egregious case resulting from a VSD is up to one-half of the statutory maximum penalty ($125,000). The base penalty amount for an egregious case resulting from anything other than a VSD is up to the statutory maximum penalty ($250,000).

In addition to the reductions set forth above for VSDs, in cases involving exceptional cooperation with OEE where no VSD was filed, the base penalty amount generally will be reduced between 25 and 40 percent. Exceptional cooperation in cases involving VSDs may also be considered as a further mitigating factor. In cases involving a respondent's first violation, the base penalty amount generally will be reduced by up to 25 percent. An apparent violation generally will be considered a ''first violation'' if the respondent has not been convicted of an export-related criminal violation or been subject to a BIS final order in the five years preceding the date of the transaction giving rise to the apparent violation. Multiple violations arising out of the same act do not necessarily constitute egregiousness. BIS has assured the public that it will continue to consider inadvertent, compounded clerical errors as related and not separate violations.

Transaction Value

The transaction value used for penalty calculation purposes is based on the value of the subject transaction. The value listed on export transaction documents (e.g., Automated Export System filings, commercial invoices, and bills of lading) may be the appropriate transaction value, but BIS is also free to consider the market value of the items in the transaction or the economic benefit derived by the respondent. Thus, transaction value is not necessarily determined in the same way that transaction value is determined for customs import purposes.

Aggravating, Mitigating, and General Factors

Base penalty amounts can be adjusted either upward or downward based on the existence of aggravating, mitigating, and general factors. They are divided into several categories. Substantial weight is given to factors A, B, C, and D, and particular emphasis is afforded to factors A, B, and C.

A. Willful or reckless violation of law

B. Respondent's awareness of conduct at issue giving rise to the apparent violation

C. Actual or potential harm to regulatory program objectives

D. Individual characteristics of a respondent

E. Existence, nature, and adequacy of respondent's risk-based compliance program

F. Respondent's remedial response to apparent violations

G. Nature and extent of respondent's cooperation with BIS

H. Likelihood that license would be approved or availability of license exception

I. Existence of related violations

J. Multiple unrelated violations

K. Other enforcement action

L. Impact on promoting future compliance

M. Other relevant factors

Where the analysis of these factors reflects that a particularly serious violation of the law has occurred, the case will be considered egregious. So these factors are really used twice—once to determine whether the case is egregious, and again to determine the adjustment to the base penalty amount. The two determinations, while related, are separate and distinct.

The guidance also identifies which individual characteristics should be considered in determining appropriate penalty amounts. Those are (i) the respondent's commercial sophistication, (ii) the size and sophistication of its operations, (iii) the volume and value of the apparent violations relative to all transactions, (iv) its regulatory history, (v) any other illegal conduct in connection with the export, and (vi) prior criminal convictions. Notably missing from this list are past violations of an acquired entity when an acquirer has taken reasonable action to discover, correct, and disclose violations.

BIS has also sought to benefit those companies that have previously provided information of value to the government in other instances. Mitigating Factor G asks whether the respondent has previously made substantial voluntary efforts to provide information (such as providing tips that led to enforcement actions against other parties) to federal law enforcement authorities in support of the enforcement of U.S. export control laws.

Determinations and Responses

BIS has several options in responding to apparent violations. It may issue a "no action" letter, issue a warning letter, institute an administrative enforcement case, issue a civil monetary penalty, make a criminal referral, or take other administrative sanctions or actions. A "no action" letter is just that—BIS will take no action when there is insufficient evidence to conclude that a violation has taken place. Historically, most cases resulting from VSDs result in the issuance of a warning letter with a finding that an apparent violation may have taken place. When it appears that a violation has occurred, but pursuing a civil penalty is inappropriate under the circumstances, BIS will issue a warning letter.

"No action" letters and warning letters constitute final disposition of the matter, but do not constitute final agency action with respect to an EAR violation. This means that BIS may reopen an investigation or inquiry based on the discovery of new, relevant information.

In addition to the imposition of a civil monetary penalty or a criminal referral, BIS may take other administrative actions. These may include training or audit requirements and license revision, suspension, or revocation. In addition, any person acting as an attorney, accountant, consultant, freight forwarder, or in any other representative capacity may be excluded from practicing before BIS.

Conclusion

BIS addressed several concerns within the industry in response to its proposed guidance, but it left some issues open. BIS previously considered some factors that are not included in this guidance—for instance, the timing of settlement. The guidance increases consistency with OFAC, but does not adopt OFAC's separate approach to recordkeeping and reporting obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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