Incentives, Penalties, and Enforcers: BIS’s Final Rule Signals Focus on Corporate Compliance Enhancements

On September 12, 2024, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) issued a final rule revising the Export Administration Regulations (EAR) to increase incentives for voluntary self-disclosures (VSDs) and update BIS penalty guidelines (the Final Rule).  This Final Rule enshrines BIS enforcement guidance that has been issued since early 2022.  To support implementation of the Final Rule, BIS also announced the appointment of its first-ever Chief of Corporate Enforcement, Raj Parekh.

These changes complement other enforcement efforts to incentivize VSDs, such as the US Department of Justice’s (DOJ) January 2023 policy providing companies that submit a VSD, fully cooperate, and remediate in a timely and appropriate manner a presumption of declination of prosecution.  This also follows DOJ’s October 2023 policy providing a safe harbor for certain VSDs made in connection with mergers and acquisitions.  The Final Rule should be read in tandem with the DOJ National Security Division’s latest enforcement policy that in certain circumstances provides companies that submit a VSD related to export controls or sanctions with a presumption of a non-prosecution agreement and no fine, even for potentially criminal conduct.

The Final Rule, which came into effect on September 16, 2024, includes several relevant regulatory updates for companies, including a streamlined VSD process for minor violations and reiterates the warning that BIS will treat a decision not to disclose a significant violation as an aggravating factor in an enforcement action by BIS’s Office of Export Enforcement (OEE).  Additionally, the Final Rule gives BIS increased flexibility to determine penalty amounts and revises the base penalty calculation.  Together with the appointment of the Chief of Corporate Enforcement, these changes signal BIS’s increased focus on encouraging companies to disclose apparent violations and implement compliance program enhancements. 

Companies may wish to consider the updated incentives, penalties, and enforcement resources when implementing export control compliance programs and also in weighing how to approach possible violations of US export controls.

BIS Increases Incentives for VSDs

The Final Rule implements several key changes announced by BIS in a series of earlier memoranda—changes that BIS notes have coincided with a nearly 30% increase in significant VSDs and a nearly 20% increase in industry tips resulting in actionable leads in the year after their announcement. 

     1. “Dual-track” VSD submissions: The Final Rule provides a “dual-track” process for submitting VSDs.  Minor or technical violations may be disclosed through an abbreviated narrative that includes the discloser’s contact information and a general description of the apparent violations.  BIS states that OEE will generally resolve VSDs concerning minor or technical violations within 60 days, either by issuing a warning letter or informing the submitter that BIS intends to take no action.  For more serious violations, the Final Rule states that BIS will assign an OEE agent and an Office of Chief Counsel enforcement attorney to oversee the matter.

     2. Non-disclosure as an aggravating factor: The Final Rule adds non-disclosure as an additional aggravating factor.  Under the Final Rule, OEE will consider “a deliberate decision not to disclose . . . a significant apparent violation” as an aggravating factor because such non-disclosure “may compound the harm to U.S. national security or foreign policy interests.”

     3. Returning unlawfully exported items (General Prohibition 10 Waiver): The Final Rule authorizes any party in possession of or with an interest in an item that is the subject of a VSD—not just a party submitting a VSD—to return unlawfully exported items to the United States, after the party submits a notification to OEE.  (The OEE notification requirement takes the place of having to obtain authorization from OEE to return such unlawfully exported items.) 

Revisions to BIS’s Penalty Guidelines 

The Final Rule includes several updates to BIS’s penalty guidelines, including providing OEE with more flexibility on base penalty calculations and the ability to impose non-monetary penalties in appropriate cases.  The Rule also outlines a mechanism for parties to receive mitigation credit based on prior disclosures against third parties that led to enforcement actions.

     1. Revised penalty caps for non-egregious cases: Previously, BIS’s guidelines capped penalties for non-egregious cases that are disclosed through a VSD at $125,000 per violation and non-egregious cases not initiated by a VSD at $250,000.  To increase deterrence in high value transactions, the Final Rule raises the cap in the base penalty matrix to one-half of the transaction value for non-egregious cases submitted through a VSD and to the full transaction value for non-egregious cases not initiated by a VSD. The updated base penalty matrix (at 15 CFR Appendix Supplement No. 1 to Part 766) provides the following caps:

     2. Non-monetary resolutions: The Final Rule also describes non-monetary resolutions with respect to cases that involve only non-egregious conduct that did not result in national security harm but that rise above the level of cases warranting a warning letter.  The Final Rule states that such non-monetary agreements will require remediation through the imposition of a suspended denial order with certain conditions, such as training and compliance requirements, as appropriate, to mitigate harm from past violations and prevent future ones.

     3. Expanded aggravating factors for enforcement: The Final Rule amends the EAR’s enforcement guidance to add “enabling of human rights abuses” as an aggravating factor.  BIS also expanded the types (and timeframes) of prior corporate criminal enforcements OEE will consider.  Under the Final Rule, OEE may consider any prior convictions and guilty pleas, as well as other resolutions like deferred prosecution or non-prosecution agreements, not just those that are export-related.

     4. Mitigation for disclosure of violations by other parties: Under the updated enforcement guidance in the Final Rule, OEE may provide mitigation credit in a future enforcement action where the respondent has previously disclosed information about the conduct of others that led to an enforcement action by OEE against the other party.  BIS policy provides that the respondent may receive such cooperation credit for a previous third-party disclosure, even for unrelated conduct. 

BIS Appoints its First Chief of Corporate Enforcement 

To supplement the Final Rule’s changes to the VSD process and BIS Penalty Guidelines, BIS appointed Raj Parekh as its first-ever Chief of Corporate Enforcement.  Mr. Parekh will work on corporate investigations with BIS agents, the Department of Commerce’s Office of Chief Counsel for Industry and Security, and the Department of Justice.  

Key Takeaways for Companies

The Final Rule and appointment of a Chief of Corporate Enforcement signal BIS’s increased focus on corporate investigations and enforcements. Companies might consider the following takeaways:

• Voluntary self-disclosures: 
  • Streamlined submission for minor violations: For apparent minor violations, companies may now consider that BIS has a “dual-track” streamlined process for submitting a VSD.
  • Incentives to encourage VSD submissions: When disclosing an apparent significant violation, take note of the Final Rule’s incentives and updated penalty guidelines.  This includes that BIS may treat as an aggravating factor a company’s decision not to voluntarily self-disclosure a violation. On the other hand, by submitting a VSD, companies may gain credit for disclosing a potential violation and cooperating with BIS and avoid losing that credit to a third-party submitter.
  • Consider updated enforcement guideline factors:  Companies might consider incorporating the updated enforcement guideline factors, to the extent they are relevant, when drafting a VSD or negotiating a settlement.
• Compliance function enhancements: Companies may wish to review their internal compliance policies and procedures and, as appropriate, enhance their existing programs with respect to export control compliance to better safeguard against potential missteps and prompt detection of potential issues.

Conclusion

The Final Rule updates the incentives for companies considering submitting a VSD to BIS.  Notably, the dual-track for minor violations and BIS’s treatment of a company’s non-disclosure of a significant violation to be an aggravating factor in an enforcement action—coupled with the hiring of BIS’s first-ever Chief of Corporate Enforcement—signal BIS’s interest in attracting more voluntary self-disclosures of apparent violations by companies. The greater flexibility in imposing penalties, including penalties with larger dollar amounts, also indicates BIS’s interest in more significant corporate resolutions to deter non-compliance.

[1] The Final Rule provides that the OEE Director will determine whether conduct is considered “egregious” for purposes of the base penalty calculation.