Personal Liability for Export Violations: Civil Penalties for Individuals May be Trekking Toward YouTuesday, January 27th, 2015
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.
You run a small tech company that customizes other manufacturers’ desktop and laptop computers for your customers. You can install special chipsets, encryption hardware and software, upgrade the fans and power units to make them “ruggedized” for field use-whatever your clients need. You are the sole owner of the company and, except for occasional part-time help, the only employee.
One of your customers is an American research scientist with whom you have been working for years. He is on a special project at a university in a former Soviet republic and his team liked what you had done for his computer so much, you upgraded multiple machines for them and sent them out. Today, Special Agents from the Office of Export Enforcement visited your office and told you that you may have violated export control laws, because these computers required some sort of license. From your own research after they left, you have learned that your company could be liable for hundreds of thousands of dollars in civil penalties. The Special Agents told you that they didn’t see any potentially criminal liability issues.
If your company got hit with those sorts of penalties, you would have to close it down. You’re wondering if there are any other risks that you need to consider.
Generally speaking, the owners (equity holders), directors and officers of corporations and limited liability companies do not face personal liability for their corporate actions. Under the Business Judgment Rule, there is a presumption against individual liability if decisions are made on an informed basis, in good faith and with the best interests of the corporation at heart.
However, personal liability can attach for company actions under multiple circumstances; for example, if company officials intentionally act in a criminal or fraudulent manner, breach their fiduciary duties to the company or if the company is found to be an “alter ego” of the individual. The “alter ego” doctrine is especially important for small or closely held companies. As an attorney, I recommend to my smaller, corporate clients that they strictly observe corporate formalities (have regular director and shareholder meetings, execute formal resolutions, have company bank accounts that are separate from their personal accounts, not commingle personal and company assets, etc.) as a means to avoid a court “piercing the corporate veil” and extending corporate liability to a company’s owner(s), director(s) and officers.
Until recently, I would have said taking such actions to ensure that a company is not considered to be the alter ego of its owners/operators would protect an exporter from individual civil liability in the event that a company has export violations. And then came Trek.
In United States v. Trek Leather, Inc., and Harish Shadadpuri, 781 F.Supp.2d 1306, (CT.Int’l Trade, 2011), a company had improperly imported merchandise into the United States. The U.S. government (U.S. Customs and Border Protection) brought legal action against both the company and its president, individually. The applicable customs law in Trek provides “no person by fraud, gross negligence, or negligence” may “enter, introduce or attempt to introduce any merchandise into the United States by means of” misrepresentations or omissions. 19 U.S.C. § 1592(a)(1)(A) (emphasis added). The court in the Trek case applied the laws of agency – which state that an agent who actually commits a civil wrong is generally liable for the act along with the principal, even though the agent was acting for the principal – to find that not only is the company (i.e., the principal) liable for the import violation, but the president (its agent) is personally liable as well. Further ruling that the company’s president, Harish Shadadpuri, was indeed a “person” within the meaning of the statute, and is therefore covered by the statute, the Court of International Trade found both the company and its president liable on a theory of gross negligence.
On appeal to the Federal Circuit, the court held that corporate officers may be held personally liable for civil penalties even without the government piercing the corporate veil or when the officers themselves do not act in a manner that violates the Customs statute. United States v. Trek Leather, Inc., 767 F.3d at 1288, 96-99 (Fed. Cir. 2014) (en banc).The Trek court found that to impose personal liability, the corporate officer or his or her agent must only take some action that “introduce[s]” goods into the United States.
So what does the Trek decision mean for exporters? It may mean that individuals who take actions which violate export control laws can face civil liability in the form of monetary penalties for their actions.
Just like the customs law at issue in Trek, the Export Administration Regulations (EAR) provides:
No person may engage in any conduct prohibited by or contrary to, or refrain from engaging in any conduct required by, the EAA, the EAR, or any order, license or authorization issued thereunder.
15 C.F.R. §764.2(a) (emphasis added). Similarly, under the ITAR regulations,
Any person who is granted a license or other approval or who acts pursuant to an exemption under this subchapter is responsible for the acts of employees, agents, and all authorized persons to whom possession of the defense article or technical data has been entrusted regarding the operation, use, possession, transportation, and handling of such defense article or technical data abroad.
22 C.F.R. §127.1(c). In the same manner that the court in Trek found that company’s president to be a “person” covered by the statute and, therefore, personally liable for civil penalties arising from import violations, BIS, DDTC or a court could impose civil penalties on individual persons for their company’s export violations as well.
While individuals have often been charged, convicted, fined, and imprisoned for criminal violations of export control laws, I can think of no instance in which an individual has been assessed civil penalties for export violations committed by his or her company. Trek may now open the door for such civil penalties. With federal budgets tightening and the ruling of Trek relieving the government of any obligation to pierce the corporate veil, enforcement agencies may use the ruling to increase their assessments of civil penalties against companies and their principals. On December 18, 2014, for example, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) filed a lawsuit seeking $1 Million in civil penalties against the former compliance officer of MoneyGram for violations of the Bank Secrecy Act. This is the first attempt by this enforcement agency to hold an individual personally responsible for the anti-money-laundering failures of his employer.
It is likely that smaller exporters, and especially closely-held companies, may have a higher risk, because day-to-day operations – including export matters – are usually vested in just a few people. The fewer the people involved in an export transaction at a company, the easier it may be for government investigators and enforcement officials to affix individual liability. However, export program managers, compliance personnel, and even the “front line” employees responsible for export operations at larger exporters may also be at risk.
The ruling in Trek highlights the importance of an exporter- large or small – having a strong compliance program, using robust compliance procedures and safeguards which are implemented and maintained on an on-going basis and relying on agents such as freight forwarders and attorneys with proven compliance experience. Each of these measures will help ensure that companies and their individual officers, directors and employees are remaining compliant with respect to export matters.
Trek may also highlight the need for individuals involved in a company’s export operations to seek certain protections from their employers. Such individuals may well demand proper insurance and indemnification from the company for their export activities. They may also need to review company governance documents (such as bylaws and board resolutions) to ensure that the company is adequately protecting them from possible risks.