Insights

In a move that highlights the U.S. government’s ongoing fight against evasion of sanctions and export control laws, the Departments of the Treasury, Commerce, and Justice yesterday published yet another Tri-Seal Compliance Note directed specifically at foreign persons, describing the applicability of these international trade and finance laws to foreign-based persons (the “March 6 Compliance Note”). Since Russia’s invasion of Ukraine in February 2022 and the significant increase of sanctions and export controls targeting Russia, these Departments have published Tri-Seal Compliance Notes on “Third-Party Intermediaries Used to Evade Russia-Related Sanctions” and “Export Controls and Voluntary Self-Disclosure of Potential Violations.”

Ensuring compliance with U.S. export controls, import regulations, and economic sanctions is common practice for companies that engage in international trade. These companies often have internal compliance policies and due diligence practices that help to monitor compliance for everyday operations. In addition, companies undergoing structural, or ownership changes often must conduct trade-related due diligence to assess compliance risks associated with a relevant target company. 

On December 28, 2023, a federal court sentenced New Hampshire charity NuDay (a/k/a NuDay Syria) to five years of probation – the maximum sentence for an organizational defendant – for three counts of Failure to File Export Information.

In its third memorandum in the past two years,¹ BIS recently announced further updates to its Voluntary Self-Disclosure (VSD) process related to administrative violations. My last article covered BIS’s April 18, 2023 memorandum, which discussed incentives for companies to disclose violations after uncovering “significant violations” or risk higher penalties because a failure to disclose will be treated as an aggravating factor.

The State Department’s Directorate of Defense Trade Controls (“DDTC”) published its third consent agreement of the year on August 28, 2023. This consent agreement is part of an administrative settlement with Island Pyrochemical Industries Corporation (“IPI”)1 involving three alleged violations of the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”). Specifically, IPI engaged in unauthorized brokering activities related to the transfer of ammonium perchlorate (“APC”)2 from an entity from China, a proscribed country under §126.1 of the ITAR, to a Brazilian company. In addition, IPI misrepresented the roles of the Chinese and Brazilian entities and falsely stated that it was the manufacturer of APC on DSP-5 license applications.  

On July 26, 2023, the Department of Justice (“DOJ”), the Department of Commerce’s Bureau of Industry and Security (“BIS”), and the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published their second Tri-Seal Compliance Note of the year. The first compliance note was issued on March 2 and focused on the importance of proactive trade compliance by companies and efforts to combat evasion of Russia-related sanctions and export controls. This time, the three departments have provided guidance pertaining to the other side of the compliance coin – what a company should do when it discovers it has been involved in potential violations of U.S. sanctions or export controls.  

On April 20, 2023, VTA Telecom Corporation (“VTA”) entered into an administrative consent agreement with the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) to resolve six alleged violations of the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”) for unauthorized exports of defense articles and technical data to Vietnam.

In a memorandum published by the Bureau of Industry and Security on April 18, 2023, the Office of Export Enforcement (OEE) announced that it wants to incentivize voluntary self-disclosures (VSDs) after a party uncovers “significant” possible violations of the Export Administration Regulations (EAR), the types of violations that reflect national security harm.

In its announcement today, OEE spelled out the types of benefits that industry or academia gets when deciding to file a VSD, which often include a substantial reduction in potential monetary liability. Today’s announcement comes after OEE’s announcement last year, shifting administrative enforcement policies that impacted the VSD process.

To more effectively counter transnational corruption and economic sanctions evasion, recent changes to the U.S. anti-money laundering (“AML”) whistleblower regime expand and reinforce whistleblower protections and rewards in the Bank Secrecy Act of 1970, as amended (“BSA”).¹ These changes to the BSA/AML whistleblower framework have significant implications, not only for “financial institutions” (as defined in the BSA) already subject to regulation under the BSA, but for all individuals and entities seeking to comply with U.S. economic sanctions administered by the U.S. Department of the Treasury (“Treasury”) Office of Foreign Assets Control (“OFAC”).

On January 17, 2023, Assistant Attorney General (AAG) for the U.S. Department of Justice (DOJ) Criminal Division Kenneth Polite announced the “first significant changes” to the Criminal Division’s Corporate Enforcement Policy (CEP) since 2017. AAG Polite’s remarks come roughly four months after Deputy Attorney General (DAG) Lisa Monaco’s speech, calling for all DOJ components to reexamine their voluntary self-disclosure (VSD) policies and “to clarify the benefits of promptly coming forward to self-report, so that chief compliance officers, general counsels, and others can make the case in the boardroom that voluntary self-disclosure is a good business decision.” According to AAG Polite, the Criminal Division “took the DAG’s call as an opportunity to reassess and strengthen” its existing policies. The revised CEP, which “applies to all corporate criminal matters” handled by the Criminal Division, offers companies “new, significant, and concrete incentives to self-disclose misconduct,” and even where companies do not self-disclose, incentivizes “companies to go far above and beyond the bare minimum when they cooperate” with DOJ investigations.

Companies often must decide whether to conduct internal investigations after receiving information that could indicate ongoing violations of export control or economic sanction laws and regulations. It is important that they take adequate steps to preserve attorney-client privilege, immediately stop ongoing violations, and ensure resources and personnel are assigned to the investigative team. Deciding whether to conduct an investigation will ultimately depend on a variety of factors, and there are a number of decisions to be made at the outset of the investigation as outlined below.

On September 19, 2019, the U.S. Directorate of Defense Trade Controls (“DDTC”) entered into a consent agreement with L3Harris Technologies, Inc. (“L3Harris”) for alleged violations of the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”). 

In the United States, when violations of the export rules are discovered, exporters have the option to prepare and submit Voluntary Self-Disclosures to the U.S. export agencies in exchange for reduced penalties. These VSDs are formal statements containing a description of the violation and a promise to remedy the conduct that led to it.

Unfortunately, companies do not always follow through with the full implementation of the promised corrective measures, in some cases discontinuing the remedial process measures altogether. 

The export control regulations are difficult enough to understand in their own right. But for companies that are also involved in defense contracting, whether as prime contractors or subcontractors, the export control regulations occasionally intersect with additional requirements of the Defense Federal Acquisition Regulations Supplement (“DFARS”), making compliance much more difficult.

On October 10, 2018, the U.S Department of the Treasury issued temporary regulations to conduct pilot programs to implement provisions of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which became effective August 13, 2018, and amended section 721 of the Defense Production Act of 1950 specifically to protect American technology companies and intellectual property. As Torres Law previously discussed in several articles, the Committee on Foreign Investment in the United States (“CFIUS”) reviews foreign investment in U.S. companies for national security considerations, and FIRRMA has significantly expanded CFIUS jurisdiction.

The Committee on Foreign Investment in the United States (“CFIUS”) is an interagency body which has the authority to assess the national security implications of transactions that could result in control of U.S. businesses by a foreign person. The CFIUS is chaired by the U.S. Secretary of Treasury and includes representatives from 16 U.S. departments and agencies. Over the last thirty years, the CFIUS has advised the president concerning foreign investment, particularly with respect to transactions that, for one reason or another, the CFIUS believes the president should review in the interest of national security. Under the CFIUS’s guidance, U.S. presidents have only blocked a total of five transactions, two of which have happened in the last six months under President Trump. This article provides a brief summary regarding recent cases and proposed legislation that will impact foreign investment in the United States.

In 2009, the U.S. Customs and Border Protection (“CBP”) published guidelines that govern the enforcement and mitigation of civil penalties for companies and other entities that fail to comply with the Foreign Trade Regulations (“FTR”) in 15 C.F.R. § 30.[1]. While Section 30 includes a list of violations that trigger civil penalties, it also lists mitigating factors for violations.

Perhaps the information came from a colleague or a customer or an anonymous tip left on your company’s “tip line.”  Or it could have been a comment made during a presentation at a professional meeting.  Something caught your attention and triggered the realization that you may have a U.S. export controls violation.  Whether or not you have experienced that sinking feeling, prudent compliance requires that you be prepared to take appropriate action at the first sign of trouble.  

It is easy to think of the various U.S. government agencies with trade control responsibilities as operating entirely separate from one another. Often, that can be the case. Industry professionals have learned through the process of Export Control Reform that many trade procedures are not at all synchronized amongst the respective agencies. A final rule published by the Department of State this year serves as a reminder that, in many ways, certain functions of the various trade agencies are inextricably linked, and these agencies rely on one another to perform certain tasks.