BIS Enforcement Changes Could Mean More Risk for Industry, Law Firms Say
The Bureau of Industry and Security's recent shift in enforcement policies and strategy could “significantly” increase risks for companies, law firms said, especially those based in the U.S. The changes could cause businesses to invest more in compliance, they said, and could lead to a more aggressive BIS enforcement posture.
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The changes, outlined by BIS last month, will raise penalties for more serious violations, eliminate the agency’s use of no-admit, no-deny settlements and revise how the agency processes voluntary disclosures (see 2206300069). BIS also will begin offering settlement agreements that don’t include fines, and already has begun a new policy of publishing charging letters before cases are resolved (see 2205160062 and 2206030012).
The changes could lead some exporters to bolster their compliance programs to avoid “costly penalties, investigations, business disruptions, and brand damage,” Steptoe & Johnson said July 6. "These changes have the potential to significantly increase export enforcement risks for U.S. and non-U.S. companies, and suggest it is time for exporters and reexporters to conduct internal audits, assessments, and monitoring for potential compliance gaps."
The firm said companies should be particularly mindful of the new policy surrounding charging letters, which are now being published earlier in the enforcement process. This could lead to “questions or concern” from customers, suppliers, service providers and shareholders “before you have an opportunity to address the scope and tenor of the charges,” Steptoe said. A former BIS agent said the change could lead companies to more frequently choose to voluntarily disclose a potential violation, which usually leads only to a warning letter and avoids the publicity of a charging letter (see 2205230018).
BIS also said it will look to more strongly penalize egregious violations, which “opens the door to significantly larger penalties,” Steptoe said. “This approach may also cause some companies considering a voluntary self-disclosure to carefully consider whether the underlying activity could be considered ‘egregious,’” the firm said, “and to weigh the risks and benefits of submitting a disclosure in such circumstances.”
Under the agency’s decision to stop using no-admit, no-deny settlements, companies must admit to some level of guilt before agreeing to the reduced penalties that come with a settlement. The change is meant to send a “strong deterrent message to similarly-situated companies,” the firm said, but could have a range of negative consequences on the business.
Admissions of wrongdoing could “encourage collateral lawsuits, impact certifications required in other areas of regulation, business and finance, affect stock value or bond ratings, result in a breach of financial covenants or representations to lenders, and damage one’s brand, among other collateral consequences,” Steptoe said. “Thus, if BIS undertakes such an enforcement approach, companies that are charged and who believe they have not violated the law may elect to undertake more formal adjudicatory enforcement proceedings set forth” under the EAR.
The changes to BIS enforcement policies, combined with some of the agency’s latest enforcement actions, may signal that BIS is looking to devote more attention to U.S.-based companies, said Idea Intellectual, a firm of intellectual property lawyers. The firm pointed to the temporary denial order (TDO) issued last month against three U.S. companies for illegally exporting technical drawings and blueprints to China (see 2206080068).
BIS’s “shifting focus” on U.S.-based companies “should be understood as an indication that export operations are equally scrutinized for all, and as a result everyone should be wary of any potential export control violations, including U.S. entities,” the firm said July 6.
Although Quicksilver Manufacturing, one of the companies named in the TDO, had a compliance program, the penalty showed that merely having a program wasn’t enough to mitigate penalties. “The programme must be proactively upheld and referred to in order to avoid any actual violations of the law,” Idea Intellectual said. “As seen from the recent case, severe penalties may still attach, despite that the violating company was apparently well-aware of export control risks, and had strategized ways to try and prevent breaches.”
The firm also said companies should “especially be mindful” of violations of BIS’s deemed export control rules, which could also lead to a denial order. Those violations could occur even in the “early stages” of a company’s operations, Idea Intellectual said, including if the company allows certain foreign employees to review export-controlled designs or “undergo a visual inspection of the items.”
“Because of this, deemed exports could present problems where companies unintentionally commit violations, which may subsequently attract harsh consequences such as being subjected to TDOs,” the firm said, “which are issued to ‘prevent an imminent violation’ of U.S. export control laws.”