"BIS Outlines Nine Minimum Requirements for 'Great Weight' Civil Penalty Mitigation for Effective Compliance Programs"

(Source: Dewey & LeBoeuf LLP Client Alert, April 30, 2008)

At a recent Export Control Forum in Newport Beach, California, Assistant Secretary of Commerce for Export Enforcement, Darryl Jackson, gave the keynote address on export control compliance, especially as it relates to the mitigation of administrative penalties. The address was particularly timely, given the drastic increases in penalties for export control violations under the recently passed IEEPA Enforcement Act.

Before passage of the IEEPA Enhancement Act, the maximum civil penalties for export control violations were $50,000 per violation. Under the new law, those penalties were increased to $250,000, or twice the value of the violative transaction, whichever is greater. See Client Alert, Penalties for Violations of U.S. Embargo/Sanction Programs and Export Controls Drastically Increased; Export Enforcement On the Rise, Oct. 17, 2007. It was unclear initially how BIS would choose to implement the higher penalty regime; thus, Assistant Secretary Jackson's remarks provide some much needed and valuable insight for the trade community.

"Effective Compliance" = "Great Weight" Mitigation = 25 Percent Reduction in Penalties

According to Assistant Secretary Jackson, BIS is now giving "Great Weight" mitigation - equal to a reduction of 25 percent - in administrative penalty cases, where the exporter can demonstrate that it has an "effective compliance program". While noting that there is no "one size fits all" solution to export compliance, Assistant Secretary Jackson did identify nine indispensable components that will be a feature of all "effective" export compliance programs meeting the threshold for great weight mitigation. These nine components, described below, must appear in the design of the compliance program, and must also actually be implemented to be considered by BIS. Moreover, the burden is on the exporter to clearly demonstrate that its compliance program is "effective".

(1) Meaningful Risk Analysis: The first component of an effective compliance program is performance of a "meaningful risk analysis". A meaningful risk analysis considers, for example, the types of merchandise exported, the particular export destinations, and the likelihood of diversion. A meaningful risk analysis is not just a one-time thing, however. Rather, according to Assistant Secretary Jackson, exporters should revisit this step periodically, and make any necessary changes to their compliance program, in light of changing conditions.

(2) Formal Written Compliance Program: Once the meaningful risk analysis is performed, the written compliance program should be tailored to it. Formal written compliance procedures and directives are "the fundamental baseline" of any compliance program. The written compliance program should be developed, implemented and made available to all relevant personnel. Without this component, common goals cannot be adequately established or communicated.

(3) Oversight by Senior Officials: Responsibility for oversight of export control matters should be tasked to a senior official. The appropriate official must have the authority, expertise and resources to provide effective oversight. An isolated, lower-level manager or staff person will very likely lack the ability, or the accountability, to deal adequately with export control issues.

(4) Employee Training: In addition to having a written export compliance program, and making it available to all relevant personnel, exporters must properly train those personnel so they will know what is required of them for the company to be in compliance. Training, like a meaningful risk analysis, cannot be a "one-time" event. Training must occur on an ongoing basis and must be well documented for accountability purposes.

(5) Customer/Transaction Screening: Effective compliance programs must also include screening procedures for all export transactions and customers. Screening against the various lists maintained by export control agencies should be an automatic step taken in every single transaction and for every single customer.

(6) Recordkeeping: Requirements All exporters must have effective recordkeeping controls in place. Effective recordkeeping procedures will provide for compliance with all the recordkeeping requirements of the Export Administration Regulations, as well as for maintaining the kinds of documentation commonly expected in the exporter's particular line of business, so that the details of all transactions can be verified.

(7) System for Reporting Violations: Effective compliance programs will also include an established process by which employees raise concerns over possible export control violations. These issues must be escalated to the appropriate authority within the company so that they may be properly investigated, and so that any necessary remedial actions, including the filing of voluntary disclosures, may be taken. This is also a critical step for protecting a company's bottom line, as BIS routinely mitigates administrative penalties by 50 percent when violations have been voluntarily disclosed.

(8) Periodic Reviews and Audits: Performing periodic internal audits is necessary for every compliance program to verify that it is effectively minimizing risk.This process should entail not only reviewing the details of past transactions, but also making modifications to compliance procedures in light of the results of the audit.

(9) Remedial Actions: Finally, all effective export compliance programs will provide for appropriate disciplinary action to be taken in the event of violations. Non-compliance with established procedures, or with export control laws or regulations, must not be merely "swept under the rug".

Assistant Secretary Jackson's remarks provide a welcome glimpse at how BIS will approach final penalty determinations under the new penalty regime, and were about as clear a directive to the trade community as it is likely to receive from an export enforcement agency.The nine components he identified are, effectively, a recipe for exporters to try to ensure that they will be granted civil penalty mitigation of, at least, 25 percent. Moreover, and as mentioned above, a voluntary disclosure will typically reduce the final penalty amount by an additional 50 percent.

All exporters should carefully review their export compliance efforts to ensure that they incorporate all of the nine components outlined by Assistant Secretary Jackson. Especially considering that maximum penalties may now be a multiple of the value of the merchandise, exporters neglecting their compliance obligations do so at their own peril. Finally, Assistant Secretary Jackson also indicated that the Department of Justice is devoting more resources than ever to export enforcement activities, "so you should expect to see an increase in criminal prosecutions. Thus, compliance is more important than ever."