What do you do when you get news that makes you a little nervous? Most of us try to shy away from things we don’t want to be true. Unfortunately, just because we don’t want to deal with them doesn’t make them any less true!
Sometimes, our office gets calls from users who were surprised to discover that names they screened in our export compliance module came back as a match for restricted parties. Their question: What should I do now?!
Obviously, you don’t want to ignore bad news—in this case, that means ignoring a match for a potential export compliance violation. So what should exporters do when they encounter potential export violations? Follow these tips.
Potential Export Violations You May Face
Sometimes it’s helpful to lay out the possible scenarios as to what could have gone wrong. Here are some missteps we’ve seen that you should keep an eye out for:
- You encounter a violation that may have occurred before you worked at a company.
- You find out your distributor has been making payments to government officials in a foreign country, which is a violation of the Foreign Corrupt Practices Act (FCPA).
- You shipped an item that needed an export license, but you didn’t get one.
- The person who had your job before you didn’t follow protocol for export compliance.
- You misclassified your product(s).
- If you purchased or merged with another company, you may be surprised that the other company has violated export regulations. You take on a company, you take on their problems. (Ideally, part of the premerger due diligence involves looking for potential export compliance violations.)
This is just a small glimpse of what might go wrong—there are a ton of other possible situations. You can read about real violations, penalties and backstories in the Bureau of Industry and Security (BIS) publication: Don't Let This Happen to You!
Pay attention when I say this: Just because you are a small exporter does not mean you can ignore export control violations. No matter the size of your company, you are liable and responsible for your export compliance.
Responding to Export Violations
When a company has reason to know a potential violation may be occurring and decides not to take action, the government can take the position that it committed a violation with 'knowledge,' which could lead to criminal charges and higher penalties. For this reason, it is very important that as soon as companies discover a potential violation they immediately stop the activity leading to the violation. —Holland & Knight
To appropriately respond to export violations, you need a system in place to address them. That plan should include the following elements:
Report the Violations
You have a legal obligation to report export violations. Self-reporting is a mitigating factor for export compliance violations; in some cases, self-reporting may eliminate or significantly reduce the fines and penalties you face.
Identify Who and How the Violations Will Be Reported
You don't know who will be the person to discover the export violation. It could be you. It could be your boss. It could be almost anyone at your company. (For heaven's sake, you don't want it to be a competitor!) You don’t want employees reporting violations to BIS or any other government agency willy-nilly.
You need a process in place so if someone finds a violation—or a suspected violation—they can report it. And they should know that the company will treat this suspected violation seriously and will follow through appropriately.
In order for that to work properly, this process should be known throughout your organization. That's another reason why your company needs an Export Compliance Program (ECP), and it should be shared with everyone at your company.
Have a Written ECP in Place
For the most part, exporters don’t plan on doing something wrong in the eyes of the law. However, mistakes do happen and the consequences may be devastating. A properly implemented ECP will help alleviate that risk.
- A comprehensive ECP reduces the chance of violating export regulations.
- An ECP gives you a clear plan of how to audit your company's procedures and processes yourself, so you can identify and address any potential violations before they surface.
- A well-written ECP can substantially reduce penalties if your company violates export regulations, as long as you can document that you regularly follow the written ECP procedures. BIS considers due diligence a strong mitigating factor when determining penalties.
Get Your Legal Department or Attorney Involved
If you have a legal department or attorney, get them involved in the process.
The best compliance programs are tailored to the company and its business. They don’t need to be complicated; they need to work.”—Directorate of Defense Trade Controls (DDTC)
Finally, you have to choose whether you’re going to self-disclose the violations. It’s a business decision if you decide you don’t want to report, but you have to be aware of the potential fallout. I rarely recommend going this route, but it is an option.
How to Self-Report
According to the National Customs Broker and Forwarders Association of America (NCBFAA), export violations should be disclosed to the agency responsible for enforcing the law or regulation:
- International Traffic in Arms Regulations violations—the DDTC
- Export Administration Regulations violations—the Office of Export Enforcement
- Electronic Export Information violations—the Census Bureau
- Embargoes and sanctions violations—the Office of Foreign Assets Control
BIS encourages self reporting via the submission of Voluntary Self Disclosures (VSDs) by parties who believe they may have violated the EAR. VSDs are an excellent indicator of a party’s intent to comply with U.S. export control requirements and may provide BIS with important information on other ongoing violations.
BIS carefully reviews VSDs received from disclosing parties to determine if violations of the EAR have occurred and to determine the appropriate corrective action if necessary. Additional information regarding VSDs is found in Part 764.5 of the EAR, or the enforcement section of the BIS website.
You may also submit a VSD to:
Director, Office of Export Enforcement
1401 Constitution Ave.
Washington, DC 20230
Tel: (202) 482-5036
Why You Should Self-Disclose
In Export Compliance Self-Disclosure: When, How & Why You Should Do It, we discuss more about the BIS review process of VSDs. According to the BIS website, “Voluntary self-disclosure is a mitigating factor in determining what administrative sanctions, if any, will be sought by the Office of Export Enforcement (OEE).”
When you self-disclose, your issue is more likely to be resolved by means other than the issuance of an administrative penalty because you’re demonstrating to the enforcement agency that you’re doing your best to stay compliant.
Just how much can self-disclosure help your case? According to BIS, "During fiscal year 2017, [the Office of Export Enforcement] opened approximately 385 VSD cases and closed approximately 420 VSD cases. Around 80% of these VSD cases were closed with the issuance of a warning letter, while around 18% were closed with 'no action' or 'no violation.'"
Furthermore, if the BIS determines a penalty is appropriate for the resolution of a VSD, it gives self-disclosures "great weight" in assessing and mitigating the penalty; when appropriate, fines and other administrative penalties may be significantly reduced. Find out more about administrative penalties in Supplement No. 1 of Section 766 of the EAR.
Exporters should strive for 100% compliance with export rules. Although you may not achieve it, as long as you have compliance processes in place and follow them diligently, if you do make a mistake, it will make regulatory agencies less inclined to pursue onerous penalties.
What might you be subject to if you don’t disclose?
Generally speaking, the penalties for export violations under the U.S. export regulations are very high. The penalties could be up to $1 million per violation, up to 20 years of imprisonment, statutory debarment and denial of export privileges.
Remember as a child, when your parents told you, “It’s going to be worse if I find out myself than if you tell me right now?” The same holds true for exporting. By taking the responsibility to voluntarily self-disclose when you encounter export violations—even if you are in violation of them—you are in a better position to receive fewer penalties and lower fines.
Ultimately, compliance is up to everyone in your organization. That’s why you need a policy (including an ECP) in place; it should be shared with everyone and be part of your regular training and compliance reviews. And if you feel like you’re doing it alone, then you need to do everything you can to get your senior management involved today.
This article was first published in October 2017 and has been updated to include current information, links and formatting.