BIS Promulgates Enforcement and Voluntary Self-Disclosure Policies of Critical Importance for All Exporters and Reexporters

On September 16, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) promulgated a Final Rule to amend immediately its enforcement and voluntary self-disclosure (VSD) policies set forth in the Export Administration Regulations (EAR). These amendments principally formalize through regulatory rules certain BIS Office of Export Enforcement (OEE) policy memoranda issued in 2022, 2023, and 2024 under the Biden Administration. Those prior policy pronouncements now have the force and effect of law.

Additionally, the Final Rule builds upon those policy positions by updating the BIS Penalty Guidelines in revised Supplement No. 1 to Part 766 of the EAR to change how the base penalty in civil enforcement cases will be calculated. BIS cites two primary reasons for the change. First, BIS asserts that the prior version produced a base penalty that was disproportionately low compared to the transaction value (for non-egregious cases) and, thus, was insufficient to deter violations and incentivize companies to promote appropriate export compliance. Second, BIS is removing from the Penalty Guidelines specific percentage ranges for civil penalty reductions associated with certain mitigating factors. BIS contends that the inclusion of specific percentage ranges in the prior version of the Penalty Guidelines led to confusion about the range of penalty reduction to which parties were entitled. Now, the Penalty Guidelines clarify that a civil monetary penalty will be adjusted up or down based upon all applicable factors, both aggravating and mitigating, in a particular case and at the discretion of OEE.

Notably, the Final Rule establishes the following, which exporters, reexporters, and retransferors of items subject to the EAR should recognize and take into account now.

• Non-disclosure is an aggravating factor: Section 764.5(a) of the EAR now states explicitly that a “deliberate decision” not to submit a VSD for an apparent “significant” violation of the EAR is an aggravating factor. This would be the case where a “firm” (as defined in § 772.1) uncovers such a violation, but then “chooses” not to submit a VSD to OEE. Where a failure to submit a VSD is ascertained by BIS, a firm not only foregoes potential mitigation credit that would have been afforded, but such omission also changes how:
  • the base penalty will be calculated; and
  • OEE will assess the firm’s commitment to compliance and other potential national security or foreign policy concerns.
• Dual Track process: The EAR now officially have a dual track VSD process in §§ 764.5(c) and (d). The first, the so-called “fast track” system for VSDs announced earlier this year, applies to minor or technical violations, which can be handled with an abbreviated report that can be “bundled” into a quarterly report and which OEE will attempt to resolve in 60 days. The second track is the standard VSD process that previously existed in the EAR, which will be reserved for conduct involving a significant violation or relating to one or more of the aggravating factors now set forth in the BIS Penalty Guidelines. This includes an initial notification and a full narrative final report. As announced previously, OEE does have discretion to determine that a fast track VSD is more serious and should be investigated further. Such VSDs will be resolved by one of five possible enforcement action outcomes:
  • informing the disclosing party that OEE plans to take no further action;
  • issuing a warning letter;
  • issuing a proposed charging letter pursuant to § 766.18 of the EAR and attempt to settle;
  • if a settlement is not reached, issuing a proposed charging letter pursuant to § 766.3 of the EAR; or
  • referring the matter to the US Department of Justice (DOJ) for criminal prosecution.
• OES Requests: Any person, not just the party that submitted a VSD, may now notify OEE that a violation has occurred and seek authorization from the BIS Office of Exporter Services (OES), such as by submitting a request to remove restrictions under General Prohibition Ten. BIS states that this change now allows any person “in possession of or with an interest in the item” to submit a VSD and obtain the necessary written authorization (i.e., a specific approval or permission to utilize an applicable license exception of the EAR). This would apply for reexport or transfers outside the United States. The information set forth in § 764.5(g) should be submitted to OES for processing such requests. However, BIS has now indicated that the return to the United States of any unlawfully exported item only requires notification to OEE and not permission from OES.
• Updates to BIS Penalty Guidelines: The Final Rule updates the statutory authorities for penalties – the maximum civil penalty per violation under the Export Control Reform Act is currently $364,992 based on the Civil Penalties Inflation Adjustment Act, or twice the value of the transaction that is the basis for the violation, whichever is greater – but no “applicable schedule amount” will be published going forward. In other words, the maximum penalty will not be capped at various “bands” or “tiers” of transaction value. Removal of this limitation means OEE has discretion to impose a more substantial penalty for a significant violation, even if the transaction value is lower. In addition, BIS makes the following key changes:
  • If there is a non-monetary resolution because the conduct is not egregious and does not result in US national security harm, but OEE determines that the circumstances warrant more than a warning letter or no-action letter, then OEE may impose a suspended denial order with conditions. For example, it appears that OEE could impose a requirement to undertake compliance training or process improvements, in order to mitigate the harm from the violations and better assure that they do not occur in the future, in exchange for the non-monetary resolution.
  • A respondent should no longer expect to receive credit for the cost of making compliance improvements against the value of past violations because BIS now asserts that firms should independently make investments in their compliance program sufficient to identify and prevent potential violations.
  • Enabling of human rights abuses is now explicitly enumerated in Aggravating Factor C when OEE assesses the potential impact of an apparent violation on US foreign policy objectives. If such a circumstance arises, OEE may consider the conduct to be significant. Additionally, as discussed above, failure to disclose a significant violation is now an explicit part of Aggravating Factor D and also may be considered under the General Factors regarding commitment to adequate or sufficient export compliance. However, BIS makes clear that such conduct or omission is not “concealment” as set forth in Aggravating Factor A.
  • BIS removed language in (new) Factor E that limited the review of prior history to five years before the date of the violation, as well as excluded antiboycott violations from consideration. Thus, it appears that OEE may consider previous penalties, warning letters, or administrative actions (including settlements), whether for export violations or antiboycott infractions under the EAR, dating back beyond five years as part of the respondent’s “enforcement history.” Furthermore, BIS may also consider whether a respondent entered into any resolution with DOJ, such as a Deferred Prosecution Agreement or Non-prosecution Agreement, not just a criminal conviction or guilty plea.
  • New illustrative examples in Factor G set forth the type of conduct that may constitute exceptional conduct for cooperation. This explicitly includes making a VSD regarding the conduct of “others” that led to an enforcement action of OEE. In other words, BIS has introduced a regulatory incentive for firms to disclose the wrongful conduct of other persons.
• Changes to Egregiousness Determination: Now, the Director of OEE will make determinations concerning whether a case is deemed egregious for purposes of the base penalty calculation. According to BIS, the Assistant Secretary of Commerce for Export Enforcement need not provide concurrence any longer, which is unnecessary because this official’s signature authority on final orders implementing settlement agreements is already required.
• Statutory Maximum Penalty: BIS has added paragraph (IV)(B)(2)(a)(v) to the BIS Penalty Guidelines, which describes the applicable statutory maximum civil penalty per violation, to be adjusted annually.

If you have questions, comments, or concerns about any of these important regulatory changes to BIS enforcement policy, please contact Steptoe’s Export Controls practice group.