The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.
A few days ago, your company filed a voluntary disclosure with the Directorate of Defense Trade Controls stating that you violated the ITAR in an export transaction. Your in-house counsel told you that you had to file quickly and that you were legally obligated to disclose your violation voluntarily. You really didn’t have time to do anything other than gather all of the documents related to the transaction and send those papers to the government along with a summary of what happened and what you had done to fix the problem.
Last night, you told this story to a friend who is a criminal defense lawyer. She shocked you by asking why you would EVER voluntarily “confess to a crime.” Your legal department told you that you would escape serious legal liability by making the voluntary disclosure to the DDTC. But now you are not so sure.
Did your company do the right thing, or did you just make a serious mistake?
The question of whether or not a company should make a disclosure to the government in any regulatory matter – including exports, imports, food and drug, anti-money laundering – should never be evaluated in normative, ethical constructs of doing the “right” or the “wrong” thing. Instead, a company should carefully consider all of the business and legal implications of disclosure and then decide. If your company did that here, then the decision would always be the “right thing,” regardless of whether you ended up making the disclosure or not.
In your particular case, however, it doesn’t sound like your company carefully evaluated all of the angles before dashing off a letter to Washington.
Federal regulations provide for the voluntary disclosure of compliance violations by exporters, and making such disclosures can be very beneficial in enforcement matters. The Office of Export Enforcement, Bureau of Industry and Security notes that a voluntary disclosure will be given “great weight” as a mitigating factor in administrative sanction decisions. The Office of Foreign Assets Control (OFAC) states that voluntary self-disclosure will result in a capping of maximum penalties at 50% of their normal level. (31 C.F.R. § 501, App. A.) U.S. Customs and Border Protection offers similar, strong mitigation of administrative penalties for voluntary disclosures in matters involving Automated Export System (AES) violations under the Census regulations (15 C.F.R. § 30.74, CBP Dec. 08-50 (“Extraordinary Mitigating Factor”)).
But these benefits of voluntary disclosures are not automatically accorded by all export enforcement agencies. DDTC regulations state, “the Department may consider a voluntary disclosure as a mitigating factor in determining the administrative penalties, if any, that should be imposed” (22 C.F.R. § 127.12(a) (emphasis added)). Therefore, it is possible that no mitigation of administrative penalties may occur upon the filing of a voluntary disclosure under the ITAR.
The fundamental truth is that a voluntary disclosure is an admission that your company has violated export control laws. A company must be aware, therefore, of the ramifications of a voluntary disclosure:
- It will result in an investigation of the company and its export activities.
- It most likely will result in sanctions which can range from a warning letter up to significant fines and even jail time.
- If a disclosure (or the subsequent investigation) reveals other violations (e.g., of tax laws or securities laws), those matters will be referred to other enforcement agencies.
- If a disclosure reveals the clear intent of a company to violate export laws and/or egregiously violative activities, the case most likely will be referred to the Justice Department for criminal prosecution (in addition to administrative sanctions).
While the voluntary disclosure can significantly mitigate sanctions and even convince an agency to proceed administratively instead of criminally in some circumstances, every effect on the company must still be considered before making the disclosure.
What Should Companies Consider?
Given the significant risks and benefits involved in voluntary disclosures, what should companies consider when evaluating whether to make such a disclosure? There are myriad factors and many are particular to the company, its compliance history and the particular facts of the violation(s); however, the following are some important elements that must be considered by every exporter:
- Is Disclosure Required? Under some circumstances, voluntary disclosure is not just a good idea, but is required by law. For example, under 22 C.F.R. §126.1(e) (ITAR), “Any person who knows or has reason to know of such a final or actual sale, export, transfer, reexport or retransfer of such articles, services or data [to certain listed, embargoed countries] must immediately inform the Directorate of Defense Trade Controls” (Emphasis added). In fact, the ITAR regulation’s general policy statement would seem almost to compel voluntary disclosure: “Failure to report a violation may result in circumstances detrimental to U.S. national security and foreign policy interests, and will be an adverse factor in determining the appropriate disposition of such violations” (22 C.F.R. § 127.12(a) (emphasis added)).
- Will the Government find out about the violation anyway? A company must ask itself whether, absent disclosure, the Government will likely find the violation on its own. If your company has aggressive competitors or disgruntled employees who may learn of the violation and contact enforcement officials, the odds of discovery increase. Similarly, if the violation involved a recurring transaction or an item that may be returned for repair or replacement, the Government is more likely to find out about the violation eventually. If the chance for discovery is higher, you might as well disclose the violation(s) to take advantage of potential mitigation of sanctions. Voluntary disclosure can also avoid an inference of a company’s intent to violate export control laws (in a potential criminal investigation) when the violation was, in fact, an accident or unintended.
- Is this an isolated or recurring issue? Does it involve potentially criminal activity? Before making a disclosure of an export violation, a company needs to know all of the facts surrounding the issue. Since the Government will launch a complete investigation upon receiving the voluntary disclosure, your company needs to thoroughly investigate the transaction(s) and audit its export compliance program to determine if there is a systemic problem, or if criminal activity is present. Factors such as these could significantly increase penalties and even result in prison sentences for company employees; all things you will want to know before making the disclosure.
- What are the effects of disclosure on other aspects of my business? Voluntary disclosures can result in public pronouncements (charging letters, consent agreements) that can adversely affect a company’s goodwill (and revenues). Moreover, disclosures of export violations may implicate potential issues in import transactions, tax returns, accounting records, shareholder and Securities and Exchange Commission (SEC) disclosures. Making a voluntary disclosure without a complete understanding of the nature of the violation(s) and the ripple effects on your business is playing Russian roulette with your company’s future.
The fact of the matter is that voluntary disclosure is a double-edged sword. It can be a powerful way for an exporter to “clean the slate” of its violations and greatly mitigate penalties. It can also launch a Government investigation (of a matter the Government may never have found on its own) and serve as your signed confession to a federal crime. However, for these reasons, even if your company has an in-house attorney, you may want to consult with an unbiased outside counsel before deciding whether to make a prior disclosure.