BIS Proposes New Export Enforcement Guidelines Drawing on OFAC’s Approach
OFAC's Guidelines - premised upon the statutory criteria set forth in IEEPA, the statutory authority pursuant to which both agencies now administer and enforce their respective regulations - uses the transaction value to determine the baseline for assessing a civil penalty. The OFAC Guidelines also provide greater transparency and predictability for the exporting community, an important objective of ECR [Export Control Reform].
Determining the Base Penalty Amount
The proposed BIS Guidelines largely mirror OFAC’s Economic Sanctions Enforcement Guidelines (“OFAC Guidelines”), which have been in force since November 9, 2009.
Like the OFAC Guidelines, the proposed BIS Guidelines would as a first step categorize an enforcement case as “egregious” or “non-egregious.” A different base penalty amount would apply depending on this characterization and whether the case resulted from a valid voluntary self-disclosure. Egregious cases would be those deemed to constitute the “most serious violations” following an analysis of all applicable enforcement factors (discussed below). In making this determination, BIS would accord particular weight to considerations of willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, and harm to the regulatory program objectives (Factors A-C), in light of the individual characteristics of the parties involved.
If BIS intends to impose an administrative penalty, BIS would next make a determination as to how many violations of the EAR had occurred. As noted below, BIS has some discretion and for many commonly recurring fact patterns it may be difficult to predict how many violations BIS will find to have occurred.
Next, BIS would set the “base penalty amount” for each violation based on one of three values -- the applicable statutory maximum ($250,000), the “transaction value,” or the “applicable schedule amount.”
As with the OFAC Guidelines, the concept most critical to the base penalty amount besides “egregiousness” is “transaction value,” a concept that is not precisely defined. The BIS Guidelines provide that transaction value “means the U.S. dollar value of a subject transaction, as demonstrated by commercial invoices, bills of lading, signed Customs declarations, or similar documents. Where the transaction value is not otherwise ascertainable, BIS may consider the market value of the items that were the subject of the transaction and/or the economic benefit derived by the Respondent from the transaction, in determining transaction value. In situations involving a lease of U.S.-origin items, the transaction value will generally be the value of the lease. For purposes of these Guidelines, ‘transaction value’ will not necessarily have the same meaning, nor be applied in the same manner, as that term is used for import valuation purposes at 19 CFR 152.103.” This begs the critical questions: what is the “subject transaction,” and how is it to be valued in a given case?
Again mirroring the OFAC Guidelines, the BIS Guidelines would define the “applicable schedule amount” by reference to a table that lists several different amounts, and provides a range of transaction values corresponding to each of these applicable schedule amounts. For example, the applicable schedule amount is $1,000 if the transaction value is less than $1,000, it is $10,000 if the transaction value is at least $1,000 and less than $10,000, and so on. The maximum applicable schedule amount is $250,000 if the transaction value is $170,000 or more. This approach would assign a great deal of weight to transaction value.
Based on our experience with the similar OFAC approach to penalty calculations, this can become a point of contention in settlement negotiations.
After the base penalty amount has been determined, BIS would then consider numerousfactors to adjust the base penalty amount for each violation downward or upward, up to the statutory cap ($250,000 per violation under the International Emergency Economic Powers Act, which is the current statutory authority for the EAR). Many of the factors are the same as under the current BIS penalty guidelines, and there is some degree of overlap among the factors themselves. The proposed rule organizes the factors into four categories – aggravating factors, general factors (which can either increase or decrease penalty), mitigating factors, and other factors that may be considered on a case-by-case basis.
1. Aggravating Factors
A. Willful or Reckless Violation of Law. This factor involves an evaluation by BIS of the willfulness, recklessness/gross negligence, concealment, pattern of conduct, prior notice, and management involvement for the company involved in the enforcement action. The degree to which these actions are present would determine the degree of aggravation factored into any administrative penalty calculation.
B. Awareness of Conduct at Issue. This factor would consider actual knowledge, reason to know, and management involvement. According to the Guidelines, “Generally, the greater a Respondent's actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the BIS enforcement response will be. In the case of a corporation, awareness will focus on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers.”
C. Harm to Regulatory Program Objectives. This factor would take into account U.S. national security and foreign policy implications with reference to the destination involved, the end-use and end-user, and the sensitivity and control level of the item(s) involved in the transaction, as well as the licensing policy. These three aggravating factors would be particularly important in determining the egregiousness of a violation.
2. General Factors
D. Individual Characteristics. This factor would evaluate the Respondent’s commercial sophistication, exporting experience, regulatory history (prior enforcement actions), related illegal conduct and criminal convictions, among other issues. Interestingly with regard to regulatory history, the BIS Guidelines note that “[w]hen an acquiring firm takes reasonable steps to uncover, correct, and voluntarily disclose or cause the voluntary self-disclosure to [the BIS Office of Export Enforcement] of conduct that gave rise to violations by an acquired business before the acquisition, BIS typically will not take such violations into account in applying these Factors in settling other violations by the acquiring firm.” For purposes of calculating the base penalty amount, first offenses could result in a reduction of that amount by up to 25%. Generally, an apparent violation would be considered a “first violation” if the Respondent has not been convicted of an export-related criminal violation or been subject to a BIS final order in five years, or a warning letter in three years.
E. Compliance Program. This would involve a determination of whether the Respondent had an effective risk-based BIS compliance program in place at the time of the apparent violation, including an assessment of the extent to which it complied with BIS’s Export Management System (EMS) Guidelines. “In this context, BIS will also consider whether a Respondent’s export compliance program uncovered a problem…and whether the Respondent has taken steps to address compliance concerns raised by the violation.” These general factors may be considered either aggravating or mitigating depending on the circumstances.
3. Mitigating Factors
F. Remedial Response. This factor would consider whether the Respondent took appropriate corrective actions in response to the apparent violation.
G. Exceptional Cooperation with OEE. This factor could result in a 25% to 40% reduction of the base penalty amount. It is noteworthy that to gain mitigation credit under this factor, the level of cooperation is expected to go beyond what would be considered minimally necessary to address a violation and take corrective measures.
H. License Was Likely To Be Approved. Transactions that would likely have received a license had one been sought also may result in a reduction of up to 25% of the base penalty amount. Although mitigating factors could be combined for a greater reduction in penalty, BIS indicates that mitigation generally would not exceed 75% of the base penalty. Although no longer an express mitigating factor in its own right, voluntary self-disclosure would continue to weigh heavily in the base penalty amount, with a deduction of 50% of the transaction value in non-egregious cases or the applicable schedule amount in egregious cases.
4. Other Relevant Factors Considered on a Case-by-Case Basis
I. Related Violations. If a single export transaction might give rise to multiple violations, (e.g., one unlicensed export resulting in multiple violations of the EAR and the Foreign Trade Regulations), BIS has discretion to charge one or more violations. For example, a single export could give rise to one or more violations of the EAR, and BIS has expressly retained the discretion to consider each separate incorrect statement made in an Automated Export System (“AES”) filing as a separate violation. In many commonly recurring fact patterns, it could be difficult to predict how many violations BIS might find to have occurred.
J. Multiple Unrelated Violations. Under the proposed BIS Guidelines, BIS would be more likely to seek a denial of export privileges and/or a greater monetary penalty in cases of multiple unrelated violations where the pattern of violations might indicate serious compliance problems and a resulting greater risk of future violations. In deciding whether such heightened penalties / denial order are warranted BIS also may consider whether a Respondent has taken effective steps to address compliance concerns.
K. Other Enforcement Action. Enforcement action taken by federal, state, or local agencies in response to the apparent violation or similar apparent violations could be considered, particularly with regard to global settlements or criminal convictions and/or plea agreements. BIS retains discretion as to whether such related enforcement actions will result in increased or decreased penalty levels and collateral sanctions.
L. Future Compliance/Deterrence Effect. This Factor would address the impact that the administrative action may have with regard to promoting future compliance and deterring such conduct by other similar parties, particularly in the same industry sector. In other words, BIS would consider what message the case would send to the regulated industry.
M. Other Factors That BIS Deems Relevant. According to BIS, this factor would “serve as a ‘catch-all’ category to retain flexibility to consider factors not already specifically addressed in the proposed BIS Guidelines, whether proposed by the Respondent or BIS.” The proposed BIS Guidelines articulate this as more of a proportionality principle and state that: “On a case-by-case basis, in determining the appropriate enforcement response and/or the amount of any civil monetary penalty, BIS will consider the totality of the circumstances to ensure that its enforcement response is proportionate to the nature of the violation.” According to BIS, “Consideration of these Factors would not dictate a particular outcome in any particular case, but rather is intended to identify those Factors most relevant to BIS’s decision and to guide the agency’s exercise of its discretion.
The proposed BIS Guidelines would provide sufficient flexibility to allow for the consideration of the Factors most relevant to a particular case. Penalties for settlements reached after the initiation of an enforcement proceeding and litigation through the filing of a charging letter will usually be higher than those described by these Guidelines.”
A Few Thoughts on the Proposed BIS Guidelines
While a more transparent and predictable approach by BIS certainly is welcome, the proposed BIS Guidelines largely seem to formalize what has been BIS policy and practice for the past several years rather than pave new ground. Moreover, based on experience with the similar approach OFAC has had for over six years, in the relatively small percentage of cases that result in administrative penalties, there are a number of ways in which the seemingly mechanical penalty calculations can yield unpredictable results, for better or worse. Three examples illustrate this point.
First, most penalty calculations start with transaction value, a difficult concept to pin down, all the more so with the open-ended definition BIS has proposed. It would be preferable for BIS to start with the transaction value (or half of that for VSD cases) but use a more precise definition of that term.
Second, many cases will involve several mitigating factors, with cumulative reductions in any otherwise applicable penalty. Mathematically it is unclear how these add up. If there is 25% mitigation of a base penalty of $100 because a license would likely have been approved, plus 40% mitigation for cooperation, is the proposed penalty reduced to $35 (a 65% reduction) or $45 (a 25% reduction from $100 to $75, and then a 40% reduction from $75 to $45)? In addition, what is the cumulative mitigating effect of all the other factors without specified percentages of reduction?
Third, while BIS indicates that cumulative penalty mitigation will not exceed 75%, in our experience many OFAC administrative penalty cases, other than simple ones involving few violations, appear to involve a higher cumulative mitigation. In many cases, OFAC often appears to apply an additional discretionary mitigation after taking into account any mechanical penalty reductions such as for cooperation.
Thus, an OFAC administrative penalty may be reduced much more than 75% from the base penalty. It may be more realistic, and more favorable for exporters, if BIS would expressly reserve the discretion to do the same. Indeed, a review of BIS enforcement actions suggests that mitigation of greater than 25% is not uncommon, although the role of transaction value in those determinations is less clear.
In sum, any increased predictability in enforcement outcomes as a result of the proposed BIS Guidelines is balanced with enforcement flexibility, and the proposed BIS Guidelines arguably provide the appearance of greater objectivity to enforcement and penalty decisions that are and will remain a largely subjective exercise. That said, the goal is laudable and BIS’s efforts should be appreciated.
Deadline and Importance of Public Comments
Public comments on the proposed BIS Guidelines are due on February 26, 2016. Given the importance of this proposed changes we expect that bar associations and trade associations will and should take the lead in drafting the comments to BIS.