BIS Announces Key Updates To Voluntary Self-Disclosure Process - Export Controls & Trade & Investment Sanctions

Key Points

On January 16, 2024, Matthew Axelrod, Assistant Secretary for Export Enforcement at the U.S. Department of Commerce's BIS announced key updates to BIS's VSD process. The updates are also now reflected on BIS's webpage for voluntary self-disclosures. Assistant Secretary Axelrod emphasized the importance of export controls to America's national security and BIS's focus on partnering with industry and academia to detect and report potential violations.
The updates to BIS's VSD process apply primarily to "minor or technical" violations – i.e., those that are not accompanied by aggravating factors. Companies and universities may now submit an abbreviated narrative account for such violations, without conducting a five-year lookback, focusing only on the most immediate violation. Disclosing parties may additionally "bundle" such violations and submit a single narrative account to BIS on a quarterly basis.
Companies and universities should exercise caution in evaluating whether the violation they seek to disclose via BIS's new streamlined process is indeed minor or technical in nature and should not presume that merely because a violation is among the types BIS has identified as potentially qualifying for that process (e.g., incorrect use of one license exception where other license exceptions were available) that the violation lacks aggravating factors.
If BIS suspects that a party has mischaracterized a disclosure as minor or technical, the disclosing party risks foregoing the disclosure credit and possibly facing an enforcement action.
With respect to significant violations, Assistant Secretary Axelrod emphasized that BIS anticipates high dollar enforcement actions soon. The "relaxing" of requirements with respect to disclosures of minor or technical violations is intended to free up BIS's limited resources to focus on significant violations. At the same time, BIS continues to strongly encourage the submission of VSDs, especially where aggravating factors are present, which can reduce the applicable maximum penalties by 50%.

Updates to BIS's VSD Process

Abbreviated Narratives for Minor/Technical Violations

Parties disclosing violations for which no aggravating factors are present may now submit an abbreviated narrative account focusing only on the most immediate violation. The aggravating factors considered by the Bureau of Industry & Security (BIS), which are identified in Section III of the EAR's Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases, include the following: willfulness; recklessness/gross negligence; concealment; pattern of conduct; prior notice; management involvement; awareness of conduct at issue; actual knowledge; reason to know; management involvement; harm to regulatory program objectives; implications for U.S. national security; and implications for U.S. foreign policy.

BIS's website provides the following examples of minor or technical violations: "immaterial [Electronic Export Information (EEI)] filing errors, inadvertent recordkeeping violations resulting from failed file retrieval or retention mechanisms (e.g., physical damage caused by flood or fire and/or electronic corruption due to malware, virus or outage), and incorrect use of one license exception where other license exceptions were available." However, it appears that any one of these "minor or technical violations" would constitute a significant violation that does not fall within the policy if it is accompanied by an aggravating factor.

Under the new policy, an abbreviated narrative account should include a brief description of the nature of the violations as outlined in Section 764.5(c)(3) of the Export Administration Regulations (EAR). However, parties submitting an abbreviated narrative account need not submit all the accompanying documentation outlined in Section 764.5(c)(4) of the EAR or necessarily conduct a full five-year lookback as recommended in Section 764.5(c)(3), unless specifically requested by the Office of Export Enforcement (OEE). However, where OEE suspects the presence of undisclosed aggravating factors, the OEE Director may request a full narrative account, including a five-year lookback, with accompanying documentation.

All parties submitting Voluntary Self-Disclosures (VSDs) involving aggravating factors should continue to conduct a thorough review of all export-related transactions where possible violations are suspected, and such reviews should cover a period of up to five years prior to the date of the initial notification, consistent with Section 764.5(c)(3) of the EAR.

Quarterly Submissions for Minor/Technical Violations

BIS now allows parties to "bundle" minor or technical violations as a single VSD submission—even if those violations arise out of different conduct—on a quarterly basis using the abbreviated narrative account process identified above.

Email Submissions for VSDs

BIS is strongly encouraging applicants to submit their VSDs via email here, including submissions of initial notifications, extension requests and narrative accounts of disclosure. These submissions may now be electronically signed. The memorandum explains that this manner of submission makes monitoring and tracking easier and facilitates a quicker response from BIS. BIS will continue to accept paper submissions for VSDs but encourages disclosing parties to provide an email address on any hard-copy submission to expedite follow-up and action from BIS.

Expedited Processing of Requests for Permission to Engage with Unlawfully Exported Items

BIS has implemented a process through which parties may request permission from BIS to engage in activities that would otherwise be prohibited by Section 764.2(e) of the EAR (i.e., General Prohibition 10), which broadly prohibits nearly all activities (e.g., ordering, storing, using, selling, disposing of, financing or otherwise servicing) with respect to an item known to have been exported, reexported or transferred (in-country) in violation of the EAR.

Companies and universities may submit these requests pursuant to 764.5(f) of the EAR to BIS's Office of Exporter Services and provide a courtesy copy to OEE via email for expedited review. Any party with knowledge of a violation—not just the party submitting a VSD—may notify the OEE Director that a violation has occurred and request permission from the Office of Exporter Services to engage in otherwise prohibited activities with respect to an item. OEE will consider such disclosures to have fulfilled the requirements of Section 764.5(f) even when the request does not disclose a violation by the submitter but only seeks permission to engage in otherwise prohibited activities.

For parties seeking to return an unlawfully exported item back to the United States from abroad, OEE's presumptive recommendation will be for BIS to authorize such reexports, regardless of who is seeking such permission.

Recommendations and Enforcement Outlook

Companies and universities considering submitting streamlined VSDs should first carefully examine whether the violation is indeed minor or technical in nature and whether an internal investigation without a five-year lookback is sufficient to identify aggravating factors and mitigate the root cause of the violation. For disclosing parties to receive full disclosure credit for a VSD—which can include a non-prosecution agreement in cases involving "willful" criminal conduct or a 50% reduction of the base penalty amount for civil or criminal penalties—the disclosure must be truthful, accurate and complete. Thus, if BIS believes that a party has mischaracterized a disclosure as "minor" or "technical," that may affect whether the party receives full disclosure credit.

Moreover, all disclosures—whether minor, technical or otherwise—are subject to penalties for false statement regulations outlined in Section 764.2(g) of the EAR, as well as 18 U.S.C. § 1001, which criminalizes the knowing and willful inclusion or omission of materially false, fictitious or fraudulent statements in a document submitted to the U.S. Government. Criminal charges and arrests were made as recently as 2019 for the submission of a VSD containing multiple false statements and are highlighted in BIS's "Don't Let This Happen To You" public outreach materials.

Further, there is still likely a middle ground of disclosures between minor/technical violations and significant violations. Companies should continue to review, investigate and disclose such violations in consultation with counsel.

During his same announcement of the new streamlined VSD procedures, Assistant Secretary Axelrod emphasized that BIS remains squarely focused on pursuing enforcement actions targeting significant violations and that export control penalties are on the rise. BIS is clear that it expects companies and universities to rigorously evaluate their compliance risks with respect to export controls.

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