VSD Handbook
From time to time, companies may discover that they’ve violated export, economic sanctions, anti-corruption, or customs laws and must decide whether to self-disclose to the U.S. government agency that enforces the regulation in question. When considering a voluntary disclosure, companies must weigh all facts and circumstances leading to the potential violation, as well as the advantages and disadvantages associated with disclosure.
This Voluntary Self-Disclosure Handbook was created to provide a concise summary of the voluntary disclosure procedures administered by various U.S. government agencies. It is not meant to be a comprehensive review of the pros and cons of filing a VSD or conducting an internal corporate investigation.
Torres Trade Law is a nationally recognized boutique international trade and national security law firm. Torres Trade Law assists clients with the import and export of goods, technology, and services. The firm has extensive experience with the various regimes and agencies governing trade such as the Directorate of Defense Trade Controls, the Bureau of Industry and Security, the Office of Foreign Assets Control, the U.S. Customs and Border Protection and others. Our group provides clients with full support for all trade law issues, including U.S. export control and sanctions laws, industrial security, the Foreign Corrupt Practices Act, anti-boycott laws, and customs law.
1. What is a Voluntary Self-Disclosure?
In general, a voluntary self-disclosure or “VSD” is a type of submission in which a company reports violations or suspected violations of U.S. trade laws to relevant regulatory agencies. Depending on the regulatory agency, a VSD may be referred to as a Prior Disclosure by Customs and Border Protection (CBP), a Voluntary Disclosure by the Directorate of Defense Trade Controls (DDTC), or a Voluntary Self-Disclosure by the Bureau of Industry and Security (BIS) and the Office of Foreign Assets Control (OFAC). Various Department of Justice (DOJ) components also accept VSDs of conduct related to international trade violations. The Committee on Foreign Investment in the United States (CFIUS) also “strongly encourages” self-disclosures of violations of the CFIUS regulations related to foreign investment.
VSDs typically include a description of the legal violations that have occurred, an explanation of how the violations occurred, and the corrective actions subsequently taken by the disclosing company. Companies file VSDs to obtain potential mitigation of penalties and reduce the likelihood of enforcement actions by regulatory agencies. For more information on voluntary self-disclosures see our VSD Handbook.
2. What are the benefits of submitting a VSD?
A key benefit of submitting a VSD is the potential for reduced penalties assessed against a disclosing party for its misconduct. For example, OFAC’s enforcement guidelines state that penalties for a non-egregious violation disclosed voluntarily will be capped at one-half of the transaction value and penalties for an egregious violation will be reduced to one-half the statutory maximum. Minor or technical violations voluntarily disclosed to BIS will generally result in a warning or no-action letter and voluntary self-disclosure of significant violations will result in a 50% reduction in the statutory penalty. VSDs made to the DOJ may be eligible for declinations of prosecution, non-prosecution agreements, and reductions of up to 50% in penalty amounts, depending on the DOJ component. In addition to potential penalty reductions, companies that submit a VSD to a regulatory agency may also benefit from a reduced likelihood of an enforcement action, development of rapport with relevant agencies, and mitigation of reputational harm that may come as a result of publicized misconduct.
3. What are the risks of not submitting a VSD?
The BIS considers it an aggravating factor for a company not to submit a VSD. Specifically, the Export Administration Regulations (EAR) at 15 C.F.R. § 764.5(a) provides that “voluntary self-disclosure is a mitigating factor, and a firm's deliberate decision not to disclose significant apparent violations is an aggravating factor in determining what administrative sanctions, if any, will be sought by [BIS].”
Even if other agencies do not consider the failure to submit a VSD an aggravating factor, a company that does not submit a VSD and becomes subject to a government enforcement action will be denied the significant mitigation benefits that come with the voluntary disclosure of potential violations. The decision to submit a VSD should not be taken lightly, and a company that has discovered potential violations should contact experienced legal counsel to discuss the risks and benefits of submission. Torres Trade Law has significant experience helping clients navigate the decision of whether or not to disclose potential violations to government agencies. For more information, see the VSD Handbook and Should I File a Customs Prior Disclosure?
4. What are potential unmitigated penalties for international trade violations?
A party that violates U.S. export controls can become the subject of an administrative enforcement action by BIS, DDTC, or other relevant government agencies. Violations of the EAR can lead to civil monetary penalties of up to $374,474 per violation, or twice the value of a subject transaction, whichever is greater. Violations of the International Traffic in Arms Regulations (ITAR) can lead to civil monetary penalties of up to $1,271,078 or twice the amount of a subject transaction, whichever is greater. Willful (i.e., criminal) violations of U.S. export controls may also be prosecuted by the DOJ and result in fines of up to $1,000,000 per violation and a prison sentence of up to 20 years.
For most sanctions programs, a violation can lead to the assessment of a civil monetary penalty of up to $377,700. Criminal violations can generally lead to a fine of up to $1,000,000 and a prison sentence of up to 20 years.
Penalties for administrative customs violations depend on the level of culpability of the importer and can range from two times the loss of duties to the domestic value of the merchandise. For more information regarding customs violations, see our article Import Violations: What You Need to Know about 19 USC 1592.
5. Who do I submit a VSD to?
Violations of the EAR may be disclosed to the BIS. Violations of the ITAR may be disclosed to the DDTC. VSDs may also be submitted to OFAC for sanctions-related violations, as well as the U.S. Census Bureau for violations of the U.S. Foreign Trade Regulations (e.g., Electronic Export Information (EEI) errors). Companies may file VSDs with multiple agencies simultaneously depending on the nature of the underlying violations and implicated laws. Companies may also choose to file a VSD with the DOJ to disclose potential violations of federal statutes such as the False Claims Act or other criminal misconduct.
6. When can I submit a VSD?
A VSD must be self-initiated and voluntary, typically meaning that it is initiated without a pre-existing duty to disclose and before the government has initiated an investigation into the potential violation. Many agencies, including BIS, DDTC, OFAC, and Census, allow for the submission of an initial notification of disclosure prior to the submission of a final, fully detailed disclosure. Filing an initial notification “locks in” the voluntary nature of a disclosure while the company’s internal investigation is still ongoing. This approach is useful if the company discovers a violation but needs time to collect records, interview employees, and obtain details on the nature and extent of the violation. Certain agencies and DOJ components have specific time windows in which a final VSD must be submitted after submission of an initial notification. Thus, it is important for disclosing parties to consult agency regulations, published guidance, and legal counsel to ensure that disclosure deadlines are complied with.
7. What happens if another agency discovers the violation before I file?
Typically, if a government agency learns of a violation and initiate an investigation prior to a company submitting a VSD, the disclosure may no longer be considered “voluntary.” As such, companies may choose to file parallel disclosures with multiple agencies simultaneously when misconduct involves violations of multiple different trade laws (e.g., economic sanctions violations in addition to export control violations). Submitting parallel VSDs can help disclosing parties avoid losing potential mitigation credit if the matter is referred to or transferred from one regulatory agency to another.
8. How do I protect privilege during a VSD?
The company should structure the internal investigation under attorney direction and issue Upjohn warnings to employees. These are warnings from corporate counsel to employees that counsel does not represent the specific individual, but rather the company as a whole. This helps preserve attorney-client privilege over communications and work product as well as avoid hazards for the individuals involved in the investigation. Be mindful, however, that submitting a VSD may waive privilege over facts disclosed to the government.
9. Can information provided in a VSD be used as evidence against the disclosing party in a later enforcement action or prosecution?
Yes. In general, a VSD is an admission of a violation and may be shared across government agencies, including with the DOJ. Submission of a VSD also creates “knowledge” of the disclosed misconduct meaning that continuation of the misconduct or similar violations in the future may be viewed as “willful” and subject to increased penalties. Companies should carefully frame the disclosure with legal counsel to mitigate risks.
10. Do I have to tender owed duties or fees with a disclosure?
Companies submitting a Prior Disclosure with CBP must tender the full amount of owed duties at the time of the disclosure submission in order to receive mitigation credit. For disclosures to other agencies such as BIS, OFAC, or DDTC, no upfront payment is required; penalties may be assessed later.
11. How do I know if I have a potential violation that may require a VSD?
An important part of any trade compliance program is conducting risk assessments to discover potential vulnerabilities. Additionally, a trade compliance program should also include the performance of regular audits of import or export functions to discover potential compliance shortfalls. If an audit uncovers irregularities or potential violations, a further investigation may be required to determine risk exposure. Torres Trade Law has extensive experience in conducting internal investigations and preparing and implementing international trade compliance plans for both small companies and multinational corporations.