Trade Compliance Flash: DOJ/BIS/OFAC Tri-Seal Compliance Note Highlights Key Requirements and Benefits of Voluntary Self-Disclosure
On July 26, 2023, the Department of Commerce (DOC), Department of the Treasury (Treasury), and Department of Justice (DOJ) issued a Tri-Seal Compliance Note (the Note) summarizing each agency's approach to the submission of voluntary self-disclosures (VSDs) of potential violations of statutes and regulations related to U.S. sanctions, export controls, and other national security laws. The Note also highlights recent updates to these policies that in many cases could have significant implications for persons considering submitting a VSD. Highlights of the Note are provided below, along with an assessment of key takeaways for companies.
DOJ, DOC's Bureau of Industry and Security (BIS), and Treasury's Office of Foreign Assets Control (OFAC) each maintain policies governing the submission of VSDs by persons who believe they may have violated applicable laws and regulations. Submission of a VSD may result in mitigation credit, which in some cases can be significant. DOJ, BIS, and OFAC, like other U.S. government agencies, provide this mitigation credit to encourage individuals and entities to voluntarily submit information to agencies tasked with supporting U.S. national security and foreign policy objectives. However, as the policies themselves make clear, disclosure remains voluntary at all times: Companies need not disclose but doing so provides a promise of leniency that they should assess when making an informed decision on whether or not to disclose.
Department of Justice
On March 1, 2023, DOJ's National Security Division (NSD), which typically investigates violations of export controls and sanctions laws, issued a revised Enforcement Policy for Business Organizations, which included NSD's approach to VSD submissions. While the guidance provided in the Note is consistent with NSD's Enforcement Policy, the Note highlights key components of DOJ's treatment of VSDs.
As a matter of procedure, the Note reiterates that a qualifying VSD must be submitted to NSD itself; a submission to another agency such as OFAC or BIS, even one involving the conduct at issue, would not meet the requirements. In some cases, particularly ones where criminal intent is not clear at the time of the regulatory disclosure, this separate disclosure can create confusion about if and when to disclose to NSD. Many trade regulations provide for strict liability in the civil context, meaning that disclosures are often made without consideration or information about intent. Because criminal trade-related cases within the scope of NSD's jurisdiction almost uniformly require a finding of willfulness, there will be many situations where a regulatory disclosure is made, but there is not yet any grounds for a disclosure to NSD. As a result of this separate disclosure requirement, companies submitting regulatory disclosures without evidence of intent must remain attentive to the question of whether a violation involves willfulness. As soon as evidence of intent is discovered, a separate disclosure to NSD should be considered, as the failure to file one could result in loss of voluntary disclosure credit in the criminal case, where leniency can be the most valuable.
The Note also emphasizes that in cases where a company submits a VSD, the presumption will be that the company will not be required to plead guilty, will receive a non-prosecution agreement (NPA), and will not pay a fine, provided that the following conditions are met:
- The VSD describing potential criminal violations is submitted to NSD within a reasonably prompt time after becoming aware of the potential violation.
- The company fully cooperates. The NSD notes that "cooperation" includes, among other things, the "timely preservation and collection of relevant documents and information," "deconfliction of witness interviews and other investigative steps that a company intends to take as part of its own internal investigation," and "timely identification of opportunities for further investigation by NSD."
- The company timely and appropriately remediates any violations. Here, NSD reiterates that remediation means implementation of an "effective and sufficiently resourced compliance and ethics program" and appropriate disciplinary measures for employees who participated in, or had oversight over, the conduct at issue.
- No aggravating factors are present. This would include, among other things, "egregious or pervasive criminal misconduct within the company, concealment or involvement by upper management." Notably, even if aggravating factors are present, NSD maintains the discretion to offer an NPA.
That said, even when preferential treatment under the VSD policy is applied, submitting companies will be required to forfeit any unlawful gain generated by the disclosed criminal conduct.
Bureau of Industry and Security
While BIS's formal VSD policy is codified at section 764.5 of the Export Administration Regulations (EAR) and settlement guidelines contained in Supplement No. 1 to Part 766 (the Guidelines), recent guidance outlined in the Note, provides additional context and nuance.
In particular, the Note reiterates key points included in the memorandum issued by BIS on April 18, 2023, detailing BIS's intention to introduce novel interpretations and applications of the settlement guidelines.
- While the Guidelines indicate that the failure to file a VSD will not be considered concealment (an aggravating factor), BIS announced that it intends to characterize a "deliberate non-disclosure of a significant possible violation of the EAR" as an aggravating factor under the guidelines. This is designed to further encourage companies and individuals to make voluntary disclosures, by increasing the relative leniency that will be provided in the VSD context.
- BIS will offer credit to any company that discloses a potential violation of the EAR by a third-party that leads to an enforcement action against the third-party. Disclosing entities will, in effect, "bank" this credit – it will apply even if the violative conduct is unrelated to the disclosing entity or if the disclosing entity faces an unrelated, unanticipated enforcement action in the future. Once again, this is another policy designed to further encourage voluntary disclosures.
The Note also highlights BIS's dual-track system for handling VSDs, which was debuted in June 2022. Under this system, VSDs involving "minor or technical" violations will be dealt with by the Office of Export Enforcement (OEE) through the issuance of a warning or no-action letter within 60 days of submission. For disclosures describing more serious conduct, OEE will conduct a more thorough investigation, while taking the voluntary nature of the disclosure into account regarding any future enforcement action or penalty.
Office of Foreign Assets Control
In contrast to NSD's and BIS's revised and/or reinterpreted enforcement policies, OFAC's Economic Sanctions Enforcement Guidelines have remained largely consistent since their release in 2009, including with respect to VSDs. To qualify for VSD credit (which can result in a 50 percent reduction in the base penalty amount), a disclosure "must occur prior to, or simultaneous with, the discovery by OFAC or another government agency of the apparent violation or a substantially similar violation." Unlike NSD, OFAC will determine on a case-by-case basis whether submission of a VSD to another agency will apply to an OFAC enforcement action. Other scenarios where a VSD would not qualify include where a third-party discloses the conduct prior to the submission of the VSD, the disclosure includes "false or misleading information," the disclosure was not self-initiated, or the disclosure is materially incomplete.
- Submission of a qualifying VSD may provide increased mitigation for any enforcement action initiated by NSD, BIS, or OFAC, and the agencies seem inclined to increase the relevant leniency to encourage additional voluntary disclosures.
- The decision whether to disclose remains a voluntary one and should be made with an eye toward the requirements and expectations of each of these agencies to maximize a VSD's benefit.
- VSDs describing potentially criminal violations of sanctions and export control laws and regulations must be submitted to NSD in order to receive credit. Thus, even where disclosure has been made to BIS and OFAC in the absence of any evidence of intent, a separate disclosure should be considered as soon as the resulting investigation reveals evidence of criminal intent.
- Their respective regulations and historic practices suggest that OFAC and BIS may, but are not required to, treat a disclosure to another agency as a VSD, though best practices suggest submitting concurrent VSDs to all potentially involved regulators.
- Unlike NSD and OFAC, BIS says it will consider the decision not to submit a VSD as an aggravating factor under its enforcement guidelines. It is unclear whether and how this new requirement will be enforced, as disclosure expressly remains "voluntary," and the punishment of non-disclosure seems inconsistent with the disclosure decision remaining a "voluntary" one.
- BIS's new policy of rewarding companies for reporting potential violations by third parties (by allowing companies to "bank" credit with OEE that can be applied to future enforcement actions) raises incentives for companies to ensure compliance with U.S. export controls and to not sit quietly if they believe their competitors or others are violating U.S. export controls.
For more information, please contact Miller & Chevalier's Economic Sanctions & Export Controls group:
*Former Miller & Chevalier attorney
The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.
This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.