The Trade Compliance Update
By: Jennifer S. Huber and Adam Munitz
October 21, 2016
Welcome to the Trade Compliance Update- a weekly FH+H publication that discusses recent trade compliance matters and the manner in which international businesses can learn from such matters and reduce their legal and regulatory risk profiles.
On October 2nd, the National Security Division (“NSD”) of the U.S. Department of Justice (“DOJ”) issued formal guidance on voluntary disclosures, cooperation, and remediation in criminal export control and sanctions investigations involving business entities (the “Guidance”), and the steps entities must take if they are to receive any leniency in exchange for taking such measures. Since then, lawyers and compliance experts have been pouring over the contents of the Guidance, the full text of which can be found here. For those businesses that are focused on expanding their footprint overseas and are too busy to review the Guidance in its entirety, though, we have boiled its contents down to eight key takeaways.
1. The Guidance only applies to export control and sanctions violations. The scope of the Guidance is limited to export control and sanctions violations, and, as such, the Guidance does not apply to violations of such laws as the Foreign Corrupt Practices Act. However, the DOJ guidance issued on September 15, 2015 (the “Yates Memorandum”) and the DOJ’s November, 2015 revisions to the Principles of Federal Prosecution of Business Organizations outlined in the U.S. Attorneys’ Manual (the “November 15th Revisions”), both of which are implemented by the subject Guidance with respect to export controls and sanctions violations, are applicable to other legal and regulatory violations, and should be carefully reviewed by corporate counsel.
2. Yes, the DOJ is still highly focused on individual accountability. Both the Yates Memorandum and the November 15th Revisions focused on the culpability of individuals, and made clear that if business entities intend to receive leniency from the DOJ in exchange for the voluntary disclosure of violations, cooperation, and remediation, then they must fully disclose the wrongdoing of individuals involved in the corporate violations. As reflected in the below summaries, the Guidance is but the latest continuation of this campaign. Accordingly, international businesses should impress upon their officers and employees that, irrespective of their seniority or tenure, they are not beyond reproach and will be held accountable for their contributions to malfeasance. Doing so will not only deter misconduct, but will also discourage the feeling of invincibility and unaccountability that often leads to export control and sanctions violations in the first place.
3. Keep voluntarily disclosing to DDTC and BIS! The Guidance only applies to export control and sanctions violations that may have been willful (and are thus potentially criminal in nature). As such, international businesses should continue reporting their export control violations, whether willful or inadvertent in nature, to the Directorate of Defense Trade Controls at the U.S. Department of State, the Bureau of Industry and Security at the U.S. Department of Commerce, and the Office of Foreign Assets Control at the U.S. Department of the Treasury, as appropriate. Per the Guidance, though, businesses should report potential export control and sanctions violations, where they are likely willful, to the DOJ as well.
4. “Voluntary” means more than “voluntary.” Businesses frequently consider disclosures to be voluntary so long as they have not been directed to make such disclosures by the U.S. government. However, the Guidance makes clear that, if a business is to receive any leniency during a criminal investigation of export control or sanctions violations, then a disclosure must comply with the following requirements:
a. The business must disclose the conduct “prior to an imminent threat of disclosure or government investigation,” United States Sentencing Guidelines § 8C2.5(g)(1);
b. The business must disclose the misconduct to the Counterintelligence and Export Control Section (“CES”) of the NSD “and the appropriate regulatory agency ‘within a reasonably prompt time after becoming aware of the offense;’ id., with the burden on the [business] to demonstrate timeliness[,]” The Guidance at 5; and
c. The business must disclose “all relevant facts known to it, including all relevant facts about the individuals involved in any export control or sanctions violations.” Id.
With respect to the first requirement, businesses should note that the Guidance does stipulate that “[i]f a whistleblower has informed the government of export control or sanctions violations, but the company remains unware of this fact and discloses before the company becomes aware of the government’s investigation, the company will be considered to have made a voluntary self-disclosure.” Id.
5. Cooperation must be full and comprehensive. In issuing the Guidance, the DOJ broadcast to the international business community that it will set a high bar for cooperation, and that if international businesses hope to receive leniency during investigations of export control and sanctions violations then they must truly partner with the U.S. government during the pending investigation and demonstrate a maximum level of transparency and commitment. More specifically, in addition to complying with those requirements outlined in the U.S. Attorneys’ Manual, the Guidance stipulates that, as part of their cooperation, businesses must take the following actions:
a. As set forth in the [Yates Memorandum], disclosure on a timely basis of all facts relevant to the wrongdoing at issue, including all facts related to involvement in the criminal activity by the corporation’s officers, employees, or agents;
b. Proactive cooperation, rather than reactive; that is, the company must disclose facts that are relevant to the investigation, even when not specifically asked to do so, and must identify opportunities for the government to obtain relevant evidence not in the company’s possession and not otherwise known to the government;
c. Preservation, collection, and disclosure of relevant documents and information relating to their provenance;
d. Provision of timely updates on the company’s internal investigation, including but not limited to rolling disclosures of information;
e. Where requested, de-confliction of an internal investigation with the government investigation;
f. Provision of all facts relevant to potential criminal conduct by all third party companies (including their officers or employees) and third-party individuals;
g. Upon request, making available for interviews those company officers and employees who possess relevant information; this includes, where appropriate and possible, officers and employees located overseas as well as former officers and employees (subject to the individuals’ Fifth Amendment rights);
h. Disclosure of all relevant facts gathered during the company’s independent investigation, rather than a general narrative, including attribution of facts to specific sources where such attribution does not violate the attorney-client privilege;
i. Disclosure of overseas documents, the location in which such documents and records were found, and who found the documents (except where such disclosure is impossible due to foreign law, including but not limited to foreign data privacy laws);
j. Unless legally prohibited, facilitation of the third-party production of documents and witnesses from foreign jurisdictions; and
k. Where requested and appropriate, provision of translations of relevant documents in foreign languages. The Guidance at 5-6 (Emphasis added throughout).
Lest international businesses underestimate the importance of cooperation and make the mistake of compensating for lackluster cooperation with robust remediation, the Guidance emphasizes that cooperation is a prerequisite to the receipt of any remediation-based credit. That said, the Guidance does stipulate that less than total cooperation will not preclude leniency altogether, while warning that, under such circumstances, “the benefits generally will be markedly less than for full cooperation as discussed in this Guidance, depending on the extent to which the cooperation is lacking.” The Guidance at 7.
6. Don’t just remediate- overhaul. There is a tendency on the part of businesses to narrowly interpret the term “remediation,” and to focus, with precision, on the proximate cause of compliance violations. Identifying and remedying the root cause of an export control or sanctions violation is crucial; however, the DOJ is clearly looking for much more from businesses that are hoping for remediation credit, and generally requires the following remedial measures:
a. Implementation of an effective compliance program, the criteria for which will be periodically updated and which may vary based on the size and resources of the organization, but will include:
i. Establishment of a culture of compliance, including an awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated;
ii. Dedication of sufficient resources to the compliance function;
iii. Ensuring that compliance personnel have the qualifications and experience to understand and identify transactions that pose a potential risk;
iv. Institution of a compliance function that is independent;
v. Performing an effective risk assessment and tailoring the compliance program based on that assessment;
vi. Implementation of a technology control plan and required regular training of employees to ensure export-controlled materials are appropriately handled;
vii. Appropriate compensation and promotion of a company’s compliance personnel, compared to other employees;
viii. Auditing of the compliance program to ensure its effectiveness; and
ix. A reporting structure of compliance personnel within the company that facilitates the identification of compliance problems to senior company officials and maximizes timely remediation.
b. Appropriate discipline of employees, including those identified by the corporation as responsible for the criminal conduct, and a system that provides for the possibility of disciplining others with oversight of the responsible individuals and considers how compensation is affected by both disciplinary infractions and failure to supervise adequately; and
c. Any additional steps that demonstrate recognition of the seriousness of the corporation’s criminal conduct, acceptance of responsibility for it, and the implementation of measures to preclude a repetition of such misconduct, including measures to identify future risks. The Guidance at 7-8 (Emphasis added throughout).
7. There are material benefits to voluntary disclosing violations, fully cooperating, and engaging in robust remediation. Per the Guidance, if a company satisfies the foregoing requirements then it “may be eligible for a significantly reduced penalty, to include the possibility of a non-prosecution agreement (NPA), a reduced period of supervised compliance, a reduced fine and forfeiture, and no requirement for a monitor.” The Guidance at 8. Notably, however, these benefits will likely be diminished if a company cooperates with the DOJ and fully remediates, but failed at the outset to make a voluntary disclosure. Indeed, the Guidance makes clear that, under these circumstances, “the company still may be eligible to receive some credit, to include the possibility of a deferred prosecution agreement (DPA), a reduced fine and forfeiture, and an outside auditor as opposed to a monitor[,]” but “will rarely qualify for an NPA.” The Guidance at 9.
8. Aggravating circumstances can change the leniency calculus. As discussed above, the voluntary disclosure of export control and sanctions violations, full cooperation, and remediation can yield significant benefits to international businesses. There are, however, “aggravating circumstances” referenced in the Guidance that will make the DOJ less inclined to provide such benefits. Such aggravated circumstances are as follows:
a. Exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country;
b. Exports of items to be used in the construction of weapons of mass destruction;
c. Exports to a terrorist organization;
d. Exports of military items to a hostile foreign power;
e. Repeated violations, including similar administrative or criminal violations in the past;
f. Knowing involvement of upper management in the criminal conduct; and
g. Significant profits from the criminal conduct, including disproportionate profits or margins, whether intended or realized, compared to lawfully exported products and services. The Guidance at 8.
Jennifer S. Huber and Adam Munitz are attorneys in FH+H, PLLC’s International Trade & Transactions Practice. Focusing primarily on the defense, security, and intelligence sectors, Jennifer and Adam help businesses translate their domestic successes into overseas growth, and assist foreign entities with sensitive investments in, and acquisitions of, U.S. businesses. Additional information regarding their capabilities and previous representations can be found here.