A U.S. company and its Chinese subsidiary are now $3.75 million poorer thanks to export control violations. On December 21, 2010, PPG Paints Trading (Shanghai) Co., Ltd. (PPG Trading), a wholly-owned Chinese subsidiary of U.S.-based PPG Industries, Inc. ("PPG Industries"), pled guilty to four criminal counts of violating the International Emergency Economic Powers Acts ("IEEPA") and the Export Administration Regulations ("EAR"). As part of the plea, PPG Trading agreed to a criminal penalty of $2 million and five years corporate probation. Both PPG Trading, as well as PPG Industries, also settled civil charges for the same violations by agreeing to penalties of $750,000 and $1 million, respectively. As stated in a press release issued by the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") regarding this case, the combined $3.75 million penalty is one of the largest penalties ever imposed by that agency. Simply put, exporters cannot afford to ignore these settlements.
According to information filed in U.S. district court, on three separate occasions between 2006 and 2007, PPG Trading exported high-performance coatings to Pakistan via China for use by the Pakistan Atomic Energy Commission ("PAEC") in the construction of a nuclear power plant. PAEC is the organization responsible for Pakistan's nuclear program and, at the time of those exports, was also identified on BIS's Entity List. Consequently, PPG Trading's original efforts to obtain a license through its U.S.-based parent company, PPG Industries, for the export of the coatings to PAEC were denied by BIS. According to the information, PPG Trading then arranged for PPG Industries to export the coatings to PPG Trading in China by falsely stating that the coatings were for use in a nuclear power plant in China -- an export that normally would not require a license. Once the coatings arrived in China, PPG Trading allegedly transferred them to a third party distributor, which in turn allegedly reexported them from China to the PAEC in Pakistan.
In the criminal proceeding, PPG Trading pled guilty to one count of conspiracy to violate IEEPA and three counts of exporting, attempted exporting, and causing an export in violation of IEEPA, the EAR, and other relevant laws. BIS stated in its press release that the company's criminal penalty represents the maximum fine, thereby indicating that the agency imposed IEEPA's maximum per-violation criminal penalty of $1 million for each of the two types of counts. As part of the criminal settlement, PPG Trading also forfeited gross proceeds of $32,319 from the unlawful exports.
In the civil proceeding, the penalty amounts also indicate that BIS imposed a high per-violation civil penalty. (As of the date of this Alert, BIS had not yet publicly released its settlement agreements with PPG Industries and PPG Agreement.)
These settlements are significant in a number of respects. First, the penalties reflect the agency's trend towards stricter enforcement of U.S. export control laws. Consistent with the increase in BIS enforcement actions and the agency's public statements regarding enforcement, the case represents the "new normal" in which BIS will likely pursue criminal charges and maximum penalties in cases, such as this one, involving willfulness on the part of the exporter. The Administration's reform efforts have not in any way distracted BIS from continuing that trend.
Second, the settlements demonstrate the importance of compliance processes and procedures across all of a company's business units and subsidiaries. Although the exact contours of BIS's civil charges against the parent company, PPG Industries, were not known as of the date of this Alert, BIS most likely held PPG Industries liable for contributing in some way to the unlawful exports, failing to stop the exports and reexports, and/or failing to ensure that its subsidiary, even if foreign, complied with U.S. export control laws. Indeed, BIS stated in its press release, "[t]hese cases emphasize the critical role that U.S. companies play in monitoring the activities or their subsidiary dealing in U.S.-origin items…subject to the [EAR]."
Finally, the settlements demonstrate the perils of failing to disclose violations voluntarily. Although the manner in which the violations were discovered were not known as of the date of this Alert, the penalty amounts strongly suggest that neither PPG Industries nor PPG Trading voluntary disclosed the alleged violations. As also shown by the substantial penalties, the failure to do so directly affected the result.
Update: Based on BIS's settlement document with PPG Industries, the agency indeed held the company liable for exporting the coatings to PPG Trading, finding that the company "failed to detect and resolve certain red flags that indicated that PPG…Trading was supplying the items for use at the PAEC facility…." Those red flags were as follows: 1) the coatings were not certified by the Chinese government for use in a Chinese nuclear facility, 2) public sources indicated that the alleged end user had not yet undertaken operations that would require the coatings, and 3) advance purchase of the coatings was unlikely given their shelf life. More significantly, BIS also established culpability based on PPG Industries' failure to follow its own policy and procedure of shipping coatings directly to the end user.
BIS's settlement with PPG Industries offers an additional set of enforcement lessons. First, exporters must ensure that it addresses any apparent red flags, no matter how seemingly minor and even if they require affirmative action on the part of exporters. Failure to do so may serve as the factual basis for violations. Second, an exporter's failure to abide by its own policies and procedures can be used as the basis for violations. Finally, it is worth reminding ourselves that mere negligence, as exhibited through PPG Industries' alleged oversights, is sufficient to establish liability under EAR's strict liability scheme.
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