Navigating Troubled Waters: Dealing with Export Compliance Violations and Voluntary Disclosures

From Widgets to Weapons: Mastering the Spectrum of Export Controls - Series - Part 21 / 21 

In the complex world of international trade, even the most diligent organizations can find themselves facing potential export compliance violations. How a company responds to these situations can significantly impact the consequences and shape its relationship with regulatory authorities. This article explores the critical aspects of identifying violations, making voluntary disclosures, and implementing mitigation strategies across different jurisdictions.

Identifying Potential Violations

Detecting potential export compliance violations is like being a vigilant lighthouse keeper, constantly scanning the horizon for signs of trouble. Here are key strategies for identifying possible infractions:

1. Regular Internal Audits

   - Conduct thorough reviews of export transactions, focusing on high-risk areas

   - Use data analytics to spot anomalies or patterns indicative of non-compliance

2. Employee Reporting Mechanisms

   - Establish clear channels for employees to report suspected violations

   - Foster a culture that encourages and protects whistleblowers

3. Customer and Transaction Screening

   - Implement robust screening processes for customers, end-users, and transactions

   - Regularly update screening lists and tools to catch recent additions

4. Post-Shipment Verifications

   - Conduct follow-ups on significant exports to ensure compliance with end-use requirements

   - Monitor for any unexpected diversions or unauthorized re-exports

5. Monitoring Regulatory Changes

   - Stay informed about evolving export control regulations

   - Assess the impact of new rules on past and current transactions

6. Supply Chain Due Diligence

   - Regularly audit suppliers and partners for compliance with export regulations

   - Monitor for any changes in ownership or control that might affect compliance status

7. Technology Controls Assessment

   - Regularly review access controls for export-controlled technical data

   - Monitor for any unauthorized access or transmission of controlled information

Voluntary Disclosure Processes in Different Jurisdictions

While voluntary disclosure processes are well-established in some jurisdictions, it's important to note that not all regulatory frameworks have formal, codified procedures for such disclosures.

United States: Formalized Voluntary Disclosure Processes

The United States has well-defined voluntary disclosure procedures across its export control regimes:

1. Bureau of Industry and Security (BIS) - EAR Violations

   Legal Basis: Section 764.5 of the Export Administration Regulations (15 CFR §764.5)

   Key Points:

   - Encourages voluntary self-disclosure of violations

   - Outlines a two-step process: initial notification and full narrative

   - Specifies that voluntary disclosure is considered a mitigating factor in determining penalties

2. Directorate of Defense Trade Controls (DDTC) - ITAR Violations

   Legal Basis: Section 127.12 of the International Traffic in Arms Regulations (22 CFR §127.12)

   Key Points:

   - Provides guidelines for voluntary disclosures

   - Emphasizes the importance of thorough and timely disclosure

   - Indicates that voluntary disclosure may be considered a mitigating factor in determining penalties

3. Office of Foreign Assets Control (OFAC) - Sanctions Violations

   Legal Basis: OFAC's Enforcement Guidelines (31 CFR Part 501, Appendix A)

   Key Points:

   - Encourages voluntary self-disclosure of violations

   - Specifies that voluntary self-disclosure is a mitigating factor in civil penalty determinations

European Union: Lack of Unified Voluntary Disclosure Process

Contrary to the U.S. system, the European Union does not have a harmonized, formal voluntary disclosure process for export control violations.

1. EU Dual-Use Regulation

   Legal Reference: Regulation (EU) 2021/821

   Key Points:

   - The regulation does not specify a formal voluntary disclosure process

   - Article 27 mentions that member states shall take appropriate measures to ensure proper enforcement, but does not detail specific procedures for voluntary disclosures

   - Handling of violations is left to individual member states

2. EU Common Position on Arms Exports

   Legal Reference: Council Common Position 2008/944/CFSP

   Key Points:

   - Does not include provisions for a voluntary disclosure process

   - Focuses on criteria for assessing export license applications rather than enforcement mechanisms

Given the lack of a unified EU approach, practices regarding voluntary disclosures may vary significantly among member states. Some countries may have national procedures, while others may not have formalized processes at all.

Best Practices in the Absence of Formal Procedures

When operating in jurisdictions without formal voluntary disclosure processes:

1. Consult with local legal experts familiar with export control practices.

2. Consider the general principles of cooperation with authorities and transparency.

3. Document thoroughly any voluntary disclosures made, even in the absence of formal procedures.

4. Be prepared for varied responses from different national authorities.

5. Consider the potential cross-border implications of disclosures.

In this complex global landscape, companies must approach potential violations with caution, understanding that the processes and outcomes of voluntary disclosures can vary significantly depending on the jurisdiction involved.

Consequences of Non-Compliance and Mitigation Strategies

The consequences of export control violations can be severe, ranging from financial penalties to criminal charges. However, effective mitigation strategies can significantly reduce these impacts.

1. Financial Penalties: Fines can range from thousands to millions of dollars, depending on the violation. In the U.S., penalties can reach $300,000 per violation or twice the value of the transaction.

2. Loss of Export Privileges: Temporary or permanent denial of export rights. Placement on restricted party lists.

3. Criminal Charges: Individuals may face imprisonment for willful violations. Corporate officers can be held personally liable.

4. Reputational Damage: Loss of customer trust and business opportunities. Negative impact on stock prices for public companies.

5. Increased Regulatory Scrutiny: More frequent audits and inspections. Stricter licensing requirements

Case Study: The Fokker Services B.V. Case (2010-2014)

Fokker Services B.V., a Dutch aerospace services provider, made headlines with its voluntary disclosure to U.S. authorities, demonstrating both the benefits and complexities of the process.

Background:

According to court documents, Fokker Services used a number of schemes to evade U.S. sanctions and export laws while continuing its business with customers located in U.S.-sanctioned countries and specifically designed to continue the company’s profit earnings in the sanctioned countries’ markets.  Internally, Fokker Services described these as “work-arounds.” Some examples of the work-arounds used by Fokker Services and its employees include the following: deliberately withholding aircraft tail numbers to U.S.-based repair shops, providing false tail numbers to U.S. and U.K. companies and repair shops, and stating that the parts submitted for repair by U.S.-repair shops were to be used as “stock” parts.  Fokker Services engaged in this conduct as an intentional effort to conceal the company’s affiliation with customers located in U.S. sanctioned countries. On one occasion, Fokker Services provided a U.S. aerospace company with a work order that falsely represented that the aircraft part belonged to an airplane owned by a Portuguese airline when, in reality, the part actually belonged to an Iran Air aircraft.  The U.S. aerospace company fixed the part and returned it to Fokker Services, who then shipped the part to Iran.

Other work-arounds were designed by Fokker Services to further the company’s efforts of continuing to engage in transactions in violation of U.S. export laws while also avoiding detection of U.S. authorities, for example, the company constructed and constantly updated a chart it called “the black list” that tracked which U.S. companies were more vigilant about export controls, and directed its business to those U.S. companies that were not on “the black list.”  The company also deleted references to Iran in materials sent to its U.S. subsidiaries and U.S. repair shops.  It changed an internal database that tracked parts to delete fields related to ultimate end-user information, and directed employees to hide activities and documents related to Iranian transactions when inspectors from the U.S. Federal Aviation Administration audited Fokker Services’ Dutch warehouse.

According to court documents, this conduct occurred in various business units within Fokker Services and certain policies and practices in furtherance of Fokker Services’ criminal conduct were carried out with the knowledge and approval of the company’s senior corporate managers, as well as with the knowledge of the company’s Legal and Export Compliance departments.

Voluntary Disclosure Process:

In 2010, Fokker Services voluntarily disclosed the potential violations to the U.S. Department of Commerce's Bureau of Industry and Security (BIS), the Department of the Treasury's Office of Foreign Assets Control (OFAC), and the Department of Justice (DOJ).. The company conducted an internal investigation and cooperated extensively with U.S. authorities over several years.

Outcome:

In 2014, Fokker Services reached a global settlement with BIS, OFAC, and DOJ. The company agreed to pay a combined $21 million in civil and criminal penalties. The settlement included a deferred prosecution agreement with the DOJ.

Consequences and Mitigating Factors:

1. Penalty Mitigation: The voluntary disclosure was explicitly recognized as a significant mitigating factor. Authorities noted that the penalties could have been substantially higher without the voluntary disclosure and cooperation.

2. Avoided Criminal Conviction: Through the deferred prosecution agreement, Fokker Services avoided a criminal conviction, which could have had more severe long-term consequences.

3. Enhanced Compliance Measures: As part of the settlement, Fokker Services agreed to implement enhanced compliance measures and submit to external audits.

4. Reputational Impact: While the case did impact the company's reputation, the voluntary nature of the disclosure was seen as a positive step in demonstrating corporate responsibility.

Key Takeaways:

1. Proactive Approach: The case underscores the importance of proactively identifying and disclosing potential violations.

2. Cooperation Matters: Fokker's extensive cooperation with authorities was crucial in reaching a settlement.

3. Substantial Penalties Still Possible: Even with voluntary disclosure, significant penalties may still be imposed, especially for serious or prolonged violations.

4. Multi-Agency Involvement: The case involved multiple U.S. agencies, highlighting the complex nature of export control enforcement.

5. Long-Term Proces: The four-year period between initial disclosure and final settlement demonstrates that these processes can be lengthy and resource-intensive.

This case serves as a powerful example of how voluntary disclosure can influence the outcome of export control violations. While Fokker Services faced substantial penalties, the voluntary nature of their disclosure likely prevented even more severe consequences and demonstrated the company's commitment to compliance moving forward.

Mitigation Strategies

1. Prompt and Full Disclosure: Voluntarily disclose violations as soon as they're discovered. Provide complete and accurate information to authorities.

2. Cooperation with Authorities: Fully cooperate with any investigations or inquiries. Demonstrate willingness to resolve issues and improve compliance.

3. Comprehensive Corrective Action: Implement robust corrective measures to prevent future violations. Enhance compliance programs and internal controls.

4. Employee Training and Awareness: Intensify training efforts, especially in areas related to the violation. Foster a strong culture of compliance throughout the organization

5. Engagement of External Expertise: Seek guidance from legal counsel experienced in export control matters. Consider hiring compliance consultants to strengthen your program.

6. Transparent Communication: Keep stakeholders informed about the situation and remediation efforts. Demonstrate commitment to ethical business practices

7. Compliance Program Overhaul: Conduct a thorough review and enhancement of your entire compliance program. Implement advanced technology solutions for better monitoring and control.

8. Regular Audits and Assessments: Increase the frequency and depth of internal audits. Consider external audits to provide an objective assessment.

Conclusion

Dealing with export compliance violations is a challenging but crucial aspect of international trade. By implementing robust identification mechanisms, understanding the nuances of voluntary disclosure across jurisdictions, and employing effective mitigation strategies, companies can navigate these troubled waters successfully. Remember, the goal is not just to resolve current issues but to emerge with a stronger, more resilient compliance program that safeguards your organization's future in the global marketplace..

Patrick Goergen, Founder & CEO, RespectUs

The Export Control Expert & Explainer

9 October 2024