Update on Export Regulatory Changes
Submitted By: Bob Imbriani
The BIS (Bureau of Industry and Security) and the DDTC (Directorate of Defense Trade Controls) have been continuing to update and align the EAR (Export Administration Regulations) and the ITAR (International Traffic in Arms Regulations) as part of the ECR (Export Control Reform) Imitative. The following is a recap of some BIS/EAR changes in penalties and an upcoming change in the rules regarding Destination Control Statements.
New BIS Guidance for Penalties under the Export Administration Regulations (EAR)
The Bureau of Industry and Security (BIS) on June 22, 2016 released a final rule (81 FR 40499) titled Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases. The rule revises BIS policy for assessing penalties for violating the Export Administration Regulations (EAR). The rule formalizes the significant credit given for submitting a voluntary self-disclosure (VSD), and it updates the list of mitigating and aggravating factors that will be taken into account in assessing penalties. The new rule became effective on July 22, 2016 and will not apply to then pending matters still in settlement phase. Here are some of the highlights:
Orientation with Office of Foreign Asset Control (OFAC) Penalty Provisions
Under the rule, BIS amended its guidance to make civil penalty determinations more predictable to regulate entities and the public, and also align its penalty assessment provisions with those put forth by the Treasury Department’s OFAC.
Voluntary Self-Disclosure (VSD)
Significantly, base penalty amounts will be reduced by half if the case is based on a VSD. The reduction would be taken “up front” and the final penalty determination made in accordance with aggravating and mitigating factors. BIS is emphasizing the practical importance of VSDs; in fact, BIS states that over the past several years, on average only 3 percent of VSDs submitted have resulted in a civil monetary penalty.
Base Penalty in Egregious vs. Non-Egregious Cases
The new rule and guidance offers more straightforward methods for determining the base penalties for egregious and non-egregious cases. While the statutory maximum penalty remains $250,000.00, the rule describes how, among other things, the 50% VSD credit will apply in different cases.
Aggravating & Mitigating Factors
Under the rule, once the base penalty is set, the actual penalties are determined up or down by taking into account various aggravating and mitigating factors. Aggravating factors include traditional matters, such as the willfulness or recklessness of the violation, attempts at obfuscation of one’s conduct, management awareness of the conduct, etc.
Mitigating factors include whether the respondent immediately stopped the conduct upon discovery of the violation, whether corrective actions were taken, cooperation with BIS, etc. One interesting new mitigating factor is whether the target had previously made voluntary efforts to provide information to BIS to support enforcement of U.S. export control regulations.
Keep in mind, in addition to monetary penalties, BIS may impose non-monetary sanctions or actions including a warning letter, export license suspension, export privilege denial, training/audit requirements, etc.
Early Resolution Economic Incentives
The BIS policy to generally assess lower penalties in cases that are settled quickly is retained in the rule. Simple economics drives this policy. According to BIS, “[i]t…is … recognized that the additional resources the government must expend to take a case to trial also can justify a penalty greater than the amount the agency may have accepted prior to litigation.”
Destination Control Statement Changes
The Bureau of Industry and Security and the State Department have issued final rules that, effective Nov. 15, 2016, will harmonize the destination control statements required under the Export Administration Regulations and the International Traffic in Arms Regulations. Both rules reflect the agreement of BIS and State with public commenters that the proposed rules did not go far enough and additional harmonization was needed. The rules also incorporate certain clarifications and refinements to clarify and alleviate perceived concerns, in particular for exporters of non-600 series and non-9×515 items under the EAR.
Destination Control Statements
The EAR requires exporters to include a DCS on certain export control documents that accompany a shipment for most exports. The ITAR include the same type of requirement but specific to the ITAR context and with slightly different text. In both cases the purpose of the DCS is to alert parties outside the United States that receive the item that the item is subject to the EAR/ITAR, that the item was exported in accordance with the EAR/ITAR and that diversion contrary to U.S. law is prohibited.
Because the transfer of formerly ITAR-controlled defense article parts and components to the EAR under the Export Control Reform Initiative has increased the incidence of exporters shipping articles subject to both the ITAR and the EAR in the same shipment, there has been confusion among exporters as to which DCS to include on such mixed shipments or whether to include both. BIS states that adopting a new harmonized DCS will simplify export clearance requirements for exporters because they will not have to decide which DCS to include, especially for mixed shipments containing both ITAR and EAR items. Harmonization is also “one important step” to prepare both regulators and the regulated public for the eventual creation of a single export control list and single licensing agency.
Under these rules the DCS will only be required with the commercial invoice and will no longer have to be included on the air waybill, bill of lading or other export control documents. In addition, the DCS is only required for items exported in tangible form. However, when a commercial invoice does exist for intangible exports, BIS recommends as a good compliance practice to include a DCS or other export control-related information that may be relevant.
The new wording will be similar to the following:
‘These items are controlled by the U.S. Government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations’’ and (Export Control Classification).”
Additional information on these changes can be found in the Federal Register / Vol. 81, No. 159 / Wednesday, August 17, 2016 / Rules and Regulations. Team will be updating our system and procedures to comply with these DCS regulations.