United States: BIS Announces "Significant Policy Changes" To Strengthen Enforcement Of US Export Controls

On June 30, 2022, Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod published a memorandum that outlines four “significant policy changes” that the Bureau of Industry and Security (“BIS”) of the US Department of Commerce is making to enhance its enforcement of US export controls (the “ Axelrod Memorandum”).

Some of the announced “policy changes” expressly aim to increase penalties (e.g., in “egregious” cases), and thereby to “creat[e] a strong disincentive” for those considering circumvention of US export controls.  Similarly, the elimination of “No Admit, No Deny” settlements (discussed below) is intended to incentivize others to “modify” their behavior to avoid similar violations. Other measures announced in the Axelrod Memorandum (e.g., the use of non-monetary settlements and the dual-track processing of voluntary self-disclosures) appear designed to enhance efficiency and promote the adoption adequate internal compliance measures.

Given the scope of the expansion of US export controls applicable to Russia and Belarus as a result of the war in Ukraine, among other recent developments, companies with potential exposure to US export controls would be well-served to assess how the announced policy changes may impact them.

The Axelrod Memorandum identifies four areas in which BIS will seek to strengthen its enforcement practices.  We summarize these below.

Imposition of “Significantly Higher Penalties”

BIS indicates that it will use “all” of its existing statutory and regulatory authorities in order to “ensure” that “serious penalties” are imposed for “the most serious administrative violations.”  The Axelrod Memorandum outlines the two ways in which BIS will pursue this goal:

• First, BIS will “aggressively and uniformly” apply the Supplement No. 1 to Part 766 – Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases (the “BIS Settlement Guidelines”). Specifically, the Memorandum suggests that if the criteria for an “egregious” violation are met, BIS will pursue the more significant penalties recommended under the Guidelines for such violations. The BIS Settlement Guidelines describe how the Office of Export Enforcement within BIS makes penalty determinations in the settlement of civil administrative enforcement cases under part 764 of the Export Administration Regulations (“EAR”). Since cases involving violations of the EAR are resolved through settlement with BIS far more often than at trial, BIS's approach to enforcement of the BIS Settlement Guidelines is significant for US export controls policy generally.
• Second, BIS will “ensure that the existing aggravating penalty factors are applied more uniformly to escalate penalty amounts where appropriate,” with the express goal of “imposing appropriately stiff penalties.” Notably, BIS suggests that it will aim to employ aggravating factors to increase penalties in the same way that mitigating factors are currently employed to reduce penalties. BIS identifies three policy reasons for this approach, e.: (i) ensuring that the ultimate settlement “adequately reflect[s] the national security harm caused by the violations”; (ii) “creating a strong disincentive for those considering circumvention” of US export controls; and (iii) rewarding companies that have implementing a “strong compliance program” by “maintaining a level playing field . . . .”

In summary, while BIS will be applying existing criteria under the BIS Settlement Guidelines, the Axelrod Memorandum suggests that BIS will be taking a harder line on enforcement where criteria for “egregious” violations or enhanced penalties are met.

Using Non-Monetary Resolutions for Less Serious Violations

BIS has historically taken different approaches to enforcement based on the perceived seriousness of the violations. Less serious violations of US export controls may have resulted in the issuance of a “warning letter” or “no-action letter,” which typically require no specific action by the target company.  The most serious violations (i.e., “egregious” cases) have resulted in prosecution or the assessment of significant civil penalties. Between the least and most serious cases, BIS has historically also pursued civil penalties for non-“egregious” violations that warrant more of an administrative response than a warning letter or no-action letter.

The Axelrod Memorandum notes that, going forward, BIS will instead offer non-monetary settlement agreements focusing on the adoption of adequate compliance measures in such non-egregious cases. BIS notes that instead of requiring monetary penalties, such agreements will “require remediation through the imposition of a suspended denial order with certain conditions, such as training and compliance requirements . . . .” Moreover, the target company will be required to “accept responsibility, to admit to their conduct, and to commit to enhanced compliance measures.”

As a practical matter, a number of companies may fall into the “middle” ground of having committed non-“egregious” violations of US export controls. The impact of BIS's decision to focus on non-monetary settlement may therefore be significant in scope. It also generally reinforces the importance of ensuring that companies with potential exposure to US export controls-related risk have appropriate polices and protocols in place.

Elimination of “No Admit, No Deny” Settlements

Many companies have historically settled allegations of violations of US export controls with BIS in so-called “No Admit, No Deny” settlements where the company, for example, agrees to pay a civil fine but does not admit to any wrongdoing. The Axelrod Memorandum states explicitly that BIS is “ending” its use of such settlement.

As a practical matter, the end of the use of such settlements could have potential implications outside of the US export controls context, e.g., companies should consider whether a formal admission of violations of US export controls may breach representations or warranties or have other implications under contracts and/or have implications for insurance coverage.

Dual-Track Processing of Voluntary Self-Disclosures

Voluntary self-disclosures (“VSDs”) refer to a company's self-reporting potential violations of US export controls to BIS. Companies make VSDs to obtain credit under the BIS Settlement Guidelines for cooperation and remediation, among other reasons, and to obtain a corresponding reduction in any civil penalties imposed. The Axelrod Memorandum indicates that going forward, BIS will perform a triage of VSDs to increase efficiency and focus its limited resources on the most serious cases: (i) those VSDs that involve “minor or technical infractions” will be resolved on a “fast track” within 60 days; (ii) in cases involving “potentially more serious violations,” BIS will assign a field agent and an attorney from the Office of Chief Counsel of BIS; (iii) for “the most serious cases,” BIS will do as noted in point (ii), and the US Department of Justice Counterintelligence and Export Control Section will assign an attorney as well.

In summary, the triage approach described above may result in a “quicker turnaround,” as indicated by BIS. However, it may also place correspondingly more emphasis on the importance of a company's analysis and the thoroughness of its internal review or investigation in support of a VSD.

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.