Trade Alert: Justice, Commerce, And Treasury Departments Issue A Tri-Seal Compliance Note On Voluntary Self-Disclosures

On July 26, 2023, the Department of Justice ("DOJ"), the Department of Commerce's Bureau of Industry and Security ("BIS"), and the Department of the Treasury's Office of Foreign Assets Control ("OFAC") published their second Tri-Seal Compliance Note of the year. The first compliance note was issued on March 2 and focused on the importance of proactive trade compliance by companies and efforts to combat evasion of Russia-related sanctions and export controls. This time, the three departments have provided guidance pertaining to the other side of the compliance coin - what a company should do when it discovers it has been involved in potential violations of U.S. sanctions or export controls.

More specifically, the Compliance Note emphasizes that companies that discover potential violations of U.S. sanctions or export controls should "promptly disclose" these violations to the government by submitting a Voluntary Self-Disclosure ("VSD"). The Compliance Note describes the VSD policies of the DOJ, BIS, and OFAC.

First, the Compliance Note provides that the NSD has issued an updated VSD policy as of March 1st that incentivizes companies to disclose potential criminal violations of U.S. sanctions and export control laws. Notably, a company that voluntarily discloses potential criminal violations, fully cooperates, and implements remedial measures in a timely manner can qualify for a non-prosecution agreement and may not even have to pay a fine. However, when aggravating factors are present, such as facts demonstrating "pervasive criminal misconduct within the company" or an attempt to conceal violations by upper management, the NSD will have the discretion to instead seek a deferred prosecution agreement or guilty plea from the disclosing party. In addition, the principles of NSD's updated policy also apply to other matters handled by the NSD, including cases involving violations of Foreign Agents Registration Act and violations related to the Committee on Foreign Investment in the United States ("CFIUS").

The BIS Office of Export Enforcement ("OEE") implemented a "dual-track system" for VSDs in June 2022, creating a "fast-track" for VSDs involving minor or technical violations of the Export Administration Regulations ("EAR"). In addition, on April 18, 2023, Assistant Secretary for Export Enforcement, Matthew Axelrod, issued a memorandum on BIS's VSD policy. As discussed in our previous article, this memorandum clarified that a deliberate non-disclosure of a serious violation of the EAR will be considered as an aggravating factor by BIS when assessing penalties. Furthermore, the memorandum stated that, where an entity submits a tip to OEE regarding another entity's violation, OEE will consider such whistleblowing a mitigating factor in any future enforcement action against the whistleblowing entity if the tip leads to an enforcement action by BIS.

OFAC handles and encourages companies to submit VSDs of sanctions violations in a similar manner to the NSD and BIS. OFAC will consider the submission of a VSD a mitigating factor when assessing what type of enforcement action should be taken in a case. In some cases, a VSD can result in as much as a 50% reduction in the base amount of a proposed monetary penalty. The Compliance Note also lists situations where a disclosure will not qualify as a VSD, including situations where a disclosure is not "self-initiated" or is a result of a suggestion made by another agency or official. In addition, VSDs cannot be materially incomplete or contain false or misleading information.

The issuance of this Compliance Note and the recent updates to VSD policies are reflective of the fact that private companies play a significant role in effectuating U.S. trade policy and combatting evasion of U.S. sanctions and export controls. The BIS updates in particular make non-disclosure of potential violations even more risky as third parties are now incentivized to blow the whistle on other companies engaged in violations. The end of the Compliance note also highlights the Financial Crimes Enforcement Network's ("FinCEN") new whistleblower program that can provide monetary awards to individuals that report sanctions violations to FinCEN or the DOJ (see our article on this topic here). These increases in whistleblower-related incentives should prompt companies to seriously consider submitting VSDs to the relevant agencies when potential violations are discovered. As the VSD policies described above show, the submission of a VSD will in most cases lower the risk of a company being subject to significant enforcement actions and harsh penalties.

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You can find more information on VSDs in our VSD Handbook