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Justin A. Chiarodo and Anthony Rapa ●
We wrote earlier this year about the growing web of regulation and enforcement attention around export controls. In another key development in this area, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) issued a memo to all of its export enforcement employees on April 18,2023, both reemphasizing the importance of corporate export control compliance, and clarifying its enforcement policies in two key areas. These two developments—one a stick and one a carrot—are designed to promote more (and more significant) disclosures to BIS with respect to violations of the Export Administration Regulations (“EAR”).
The first item in the memo addresses what happens when a company discovers, but does not report, a “significant possible violation” of the EAR. This marks a major policy change. Going forward, the deliberate non-disclosure of such “significant” possible violations of the EAR will be treated as an aggravating factor when BIS considers penalties. The memo explains that “significant” violations are those that “reflect potential national security harm” as compared to more technical violations. This policy emphasizes the BIS settlement guidelines that focus on the adequacy of a company’s export control program. BIS cautions companies that they face sharply increased risks if they do not make a voluntary disclosure after discovering a “significant” suspected violation.
The second item makes clear that BIS effectively provides for future compliance credit to companies that report third parties for suspected export control violations that result in an enforcement action. This policy clarification is grounded in the “exceptional cooperation” mitigating factor in the BIS enforcement guidelines. This is a significant incentive: a tip leading to an enforcement action against a third party will be considered a mitigating factor in any future enforcement action against the disclosing party—even for unrelated conduct.
These developments are the latest in a strong focus on export controls by the Biden Administration, highlighted by a recent $300 million enforcement action against a hard disk drive manufacturer for alleged export control violations arising from exports to Huawei of items subject to the EAR. The enforcement appears to be one of the first under the complex foreign direct product rule. Overall, this initiative is consistent with the Biden Administration’s broader approach to what it calls the “competition for what comes next,” including anticipated restrictions on U.S. investment in China, a focus on reshoring and “friend shoring” of critical technologies, and a focus on technology supply chain rules.