The Department of Justice’s National Security Division released earlier this month a new guidance document that aims to provide greater transparency about what is required from companies seeking credit for voluntarily self-disclosing potential criminal conduct involving export controls and sanctions violations, fully cooperating with investigations, and remediating. This guidance could present challenges to affected companies and could ultimately result in a drop in the number of self-disclosures, which is precisely the opposite effect sought by DOJ.
The NSD characterizes this guidance as part of a broader approach to prevent and combat the unlawful export of commodities, technologies, and services and to block trade and transactions with sanctioned countries and designated individuals and entities. The NSD states that pursuing willful export controls and sanctions violations by corporate entities and their employees is a particular priority and that it is committed to using all of its tools to deter such criminal misconduct. If successful, the NSD states, this guidance will serve to further deter violations, encourage companies to implement strong compliance programs to prevent and detect violations, and increase the government’s ability to prosecute individual wrongdoers whose conduct might otherwise have gone undiscovered or been impossible to prove.
However, there are several problematic elements of the guidance. For the first time it directs companies to disclose violations not only to the appropriate regulatory agency (i.e., the Directorate of Defense Trade Controls, the Bureau of Industry and Security, or the Office of Foreign Assets Control) but to DOJ as well if they believe the violations were willful. Making this determination could create a more defensive environment within companies and result in employees being more reluctant to share information during the course of internal investigations. This requirement could also signal a more adversarial relationship between DOJ and the regulatory agencies, which have previously held responsibility for determining whether there was criminal intent associated with a violation and referring such cases to DOJ.
Further, DOJ does not administer U.S. export controls and sanctions regulations and therefore does not have the same experience with related violations as the regulatory agencies. It can thus take several months to educate DOJ on basic export control rules in a criminal case, leading to a longer and more expensive review process, a more confrontational relationship between DOJ and the company under investigation, and confusion on the appropriate resolution. These problems could be magnified if the new guidance results in in a greater number of VSDs submitted to DOJ, as seems likely.
Benefits. The guidance states that when a company voluntarily self-discloses criminal violations of export controls and sanctions, fully cooperates, and appropriately remediates in accordance with the specified standards it may be eligible for a significantly reduced penalty; e.g., a non-prosecution agreement, a reduced period of supervised compliance, a reduced fine and forfeiture, and no requirement for a monitor. The ultimate resolution will depend on an evaluation of the totality of the circumstances in a particular case, including the presence of one or more aggravating circumstances. When a company does not voluntarily self-disclose but cooperates fully and appropriately remediates the practices at issue after learning of violations from the government’s investigation it still may be eligible to receive some credit; e.g., a deferred prosecution agreement, a reduced fine and forfeiture, and an outside auditor as opposed to a monitor. A company that does not voluntarily disclose will rarely qualify for an NPA.
VSDs. The guidance states that business entities should continue to submit VSDs to DDTC, BIS, or OFAC, as appropriate. However, DOJ now wants VSDs to also be submitted to its Counterintelligence and Export Control Section when a business becomes aware that a violation may have been willful (i.e., may have been done with the knowledge that it is illegal). For those inclined to submit a VSD to DDTC, BIS, or OFAC, this low standard will likely result in a higher number of VSDs submitted to DOJ as well, even where there is no criminal conduct.
While companies will remain free not to voluntarily self-disclose, cooperate, or remediate, under this guidance the following actions are required for a self-disclosure to DOJ to be deemed voluntary: (1) the company discloses the conduct prior to an imminent threat of disclosure or government investigation; (2) the company discloses the conduct to CES and the appropriate regulatory agency within a reasonably prompt time after becoming aware of the offense, with the burden on the company to demonstrate timeliness; and (3) the company discloses all relevant facts known to it, including about the individuals involved in any export control or sanctions violation.
For publicly held companies, the Securities and Exchange Commission regulations on disclosures to DOJ may require public notification similar to that required for Foreign Corrupt Practices Act disclosures.
Full Cooperation. The guidance directs prosecutors to assess the scope, quantity, quality, and timing of cooperation based on the circumstances of each case when determining how much credit to give a company. The guidance sets forth a number of actions required for a determination of full cooperation, including timely disclosure of all relevant facts, proactive (rather than reactive) cooperation, timely updates on the company’s internal investigation, and the provision of all facts relevant to potential criminal conduct by all third-party companies and individuals. The guidance notes that not all companies will satisfy all components but that credit commensurate with the level of cooperation should generally be given.
Timely and Appropriate Remediation. Noting that a company cannot fail to cooperate and then expect to receive credit for remediation, the guidance sets forth several items that will generally be required for a company to receive credit for timely and appropriate remediation. These include implementation of an effective compliance program, appropriate discipline of employees, and any additional steps that demonstrate recognition of the seriousness of the criminal conduct, acceptance of responsibility for it, and implementation of measures to prevent recurrences.
Aggravating Circumstances. The guidance lists the following examples of circumstances that, if present to a substantial degree, could result in a more stringent resolution for a company that has engaged in criminal export controls and sanctions violations: exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country; exports of items known to be used in the construction of weapons of mass destruction; exports to a terrorist organization; exports of military items to a hostile foreign power; repeated violations, including similar administrative or criminal violations in the past; knowing involvement of upper management in the criminal conduct; and significant profits from the criminal conduct, including disproportionate profits or margins, whether intended or realized.