Every trade compliance department has gaps. Usually unintentional, these gaps can cause inadvertent violations of U.S. Government federal regulations such as the International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), Foreign Trade Regulations (FTR), or Office of Foreign Assets Control (OFAC) Regulations, among others. A healthy trade compliance department is aware of the potential for gaps in compliance and conducts regular audits and assessments to both quantify and qualify its unique compliance risk. Regular “health checks” help spot accidental lapses or gaps in compliance that could result in a violation that needs to be disclosed to the relevant federal agency.1
Yet, risks not often discussed are the unwritten costs of submitting a disclosure. Not only is there a chance of a monetary cost, upwards of $1,197,728 per violation, but the potential of a civil penalty or criminal investigation can also ding a company’s reputation, damage its future business opportunities, and land the conspirators in prison up to ten (10) years. That said, the risks of not disclosing the violation immediately on discovery are even greater. Federal regulators and agencies communicate with one another, and a disclosure, investigation, or violation to one agency opens the door to scrutiny by other agencies that are players in the same game.2 It is common to file multiple disclosures to multiple agencies simultaneously to mitigate the blow-back from other agencies that could learn through word of mouth of the initial disclosure.
Although the penalties and risks are very real, more often than not voluntary disclosers that are prepared correctly and did not result in a company seriously jeopardizing national security will be closed with no further action on the side of the government, so long as the company adheres to the corrective actions and plans to correct the mistakes in the VSD.3 The greater risk comes to companies that either do not disclose, or do not follow through on their proposed corrective actions.4
The risks of not disclosing a violation outweigh the potential risk of submitting the disclosure in the first place. Primarily, the company risks losing opportunity to take advantage of the “voluntary” nature of the disclosure. If investigated later on, or if a greater violation occurs, the company may be directed by the agency to submit a disclosure. Submitting a directed disclosure removes the mitigating factor of the disclosure being voluntary and creates a greater risk of fines and penalties for the company. In 2021, the consent agreements for Keysight Technologies, Inc. and Honeywell International, Inc. ranged from $6.6 million to $13 million with additional government oversight and third-party monitoring for at least three (3) years.5
To further mitigate the risk a company faces after a VSD, the company MUST fully and completely follow, implement, and enact the proposed corrective actions. Over the past 5 years, it has become clear that the federal agencies want to a VSD as a clean slate with compliance at the forefront moving forward.6 Major consent agreements have often come from companies that submitted a VSD, did not follow-through with the corrective actions, and subsequently had to disclose again.
It is always in a company’s best interest to submit a disclosure to all relevant agencies as soon as it discovers a violation of any federal export regulation. Post-submission, so long as the company did not put national security at risk, intentionally or unintentionally, and follow-through with the proposed corrective actions and prevent further violations of the same nature, the company can have a clean slate. The DTS “clean slate approach” has proven to put companies in not only a better position with USG, but also fill and fix any preexisting gaps in export compliance. This proactive approach saves the company potentially millions of dollars, criminal liability, prison time, and their reputation to the government regulators and the public. The potential costs of disclosing significantly outweigh the very real costs of not disclosing.
[1] See, generally, https://home.treasury.gov; https://www.census.gov/en.html; https://www.pmddtc.state.gov/ddtc_public; and https://www.bis.doc.gov for more information on when and why to file a Disclosure. [2] See, e.g., https://www.jdsupra.com/legalnews/voluntary-self-disclosures-vsds-your-14728/. [3] See, e.g., the DDTC Consent Agreements: https://www.pmddtc.state.gov/ddtc_public?id=ddtc_kb_article_page&sys_id=384b968adb3cd30044f9ff621f961941, highlighting the reasons companies have been subject to a Consent Agreement as a penalty, see the OFAC Settlement Agreements: https://home.treasury.gov/policy-issues/financial-sanctions/civil-penalties-and-enforcement-information with the enforcement outcomes of OFAC disclosures; see also, the benefits of submitting a Customs and Border Patrol Disclosure: https://www.census.gov/newsroom/blogs/global-reach/2010/06/voluntary-selfdisclosures-vsd.html. [4] Id.
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