Turning Yourself In: Export Enforcement Trends

Often reporting export violations can mitigate penalties.

With the evolution of the global marketplace, almost every company is, these days, an exporter. A number of federal agencies regulate exports including the State Department, the Commerce Department, the Treasury Department, the Nuclear Regulatory Commission, the Food and Drug Administration and the Department of Energy to name just the six most important. Given this regulatory maze, every company should be accept that sooner or later it may discover that it has run afoul of the export regulations of one of these agencies.

Upon discovering such a violation, the first question a company must confront is what in years past would have been unthinkable -- should the company turn itself in? Lawyers and agencies call that "making a voluntary self disclosure" to the agency, which sounds less threatening even if fundamentally it's still just turning yourself in. The voluntary self disclosure (or VSD to the acronymically inclined) offers the inducement of potential mitigation of the penalties that the agency will impose. Of course on the minus side the outcome of a voluntary self disclosure might be criminal penalties, including jail time, although this rarely in fact results from a voluntary disclosure.

The Case Of EP MedSystems

The recent settlement agreement entered into by EP MedSystems with the Bureau of Industry and Security ("BIS"), the export enforcement arm of the Commerce Department, illustrates some of the perils and pitfalls of voluntary disclosures. EP MedSystems made six exports of heart monitor equipment valued at $510,590 to Iran without the required licenses. These shipments were made through the company's subsidiaries and/or distributors in Germany, the Netherlands and the United Kingdom.

Under the Trade Sanctions Reform Act of 2000, medical equipment, such as the heart monitor equipment shipped by EP MedSystems, can be exported to Iran provided an export license is obtained. Such licenses are routinely granted, so the export violations here would normally be considered purely technical and would, if voluntarily disclosed, normally result only in a minimal fine.

In this case, however, EP MedSystems agreed to a substantial fine -- $244,000 or almost half the value of the exports. The reason? BIS nitpicked the voluntary disclosures and claimed that certain statements in the voluntary disclosures were not true. The preliminary disclosure said that it was made "immediately" upon discovery of the violations; BIS didn't think that a delay of five months was "immediately." The voluntary disclosure said that the company first learned of the exports in October 2003 but BIS pointed to one email it found relating to the exports dated May 2003. Finally, the final disclosure said that a European employee responsible for shipping some of the equipment to Iran was unfamiliar with U.S. export laws; BIS thought that he was familiar with U.S. export laws.

So what can we learn from EP MedSystems about voluntary disclosures? Four things, I think.

1. Carefully consider whether filing a VSD is advisable.

In the EP MedSystems case, the disclosure got the company in more trouble than the exports themselves. Violations that are unlikely to be discovered by the agency may not warrant the risk of disclosure. Of course, companies subject to Sarbanes-Oxley may be forced to disclose the rule violations to shareholders and have no realistic choice but to file with the agency as well. Other companies may well see the violations discovered and disclosed during due diligence for a merger or acquisition.

2. If a VSD is filed, take care to make sure it is completely accurate.

This is mostly a problem for preliminary disclosures where the company does not yet know all the relevant facts. Thus, the preliminary disclosure should say as little as possible beyond the bare facts of the export violation, i.e., the Company shipped X without a license to Country Y on Z date. Don't try to sugar-coat the preliminary disclosure by saying such things as the employee involved didn't know it was illegal or this was the first and only such export. The subsequent investigation may show these assertions to be false.

3. Realize that an effective voluntary disclosure requires more than simple disclosure.

BIS has posted on its website an article on voluntary disclosures which was, in large part, a response to intense criticism directed at the agency over the EP MedSystems case. In that article, BIS said:

Of course, disclosure of violations to BIS and BIS's action on VSDs are not the only steps needed to fully address noncompliance issues. Disclosing parties must also continue internal improvement of their compliance efforts, programs, and processes.

This means that the company must implement effective compliance programs or revise existing programs to make future such violations unlikely. The disclosure must demonstrate that senior management is committed to implementing the compliance program.

More ominously, the BIS article suggested that the agency would look at whether the culpable employees remained in the employment of the disclosing company. This goes beyond the Thompson Memorandum used by federal prosecutors to determine whether to charge companies for criminal violations and which requires prosecutors to consider whether the employees who committed the criminal violations were "disciplined or terminated."

4. Plug up leaky spots in overseas operations.

EP MedSystems and other recent enforcement cases suggest that a large number of export violations occur because overseas sales staff may not realize that U.S. export rules still apply to U.S. goods shipped from those foreign offices. A company can significantly reduce its risk of ever having to file a voluntary disclosure by properly educating its overseas staff that U.S. export laws will continue to apply to re-exports from that foreign location.

Robert Clifton Burns is a partner with Powell Goldstein LLP in Washington, DC, and an Adjunct Professor of Law at the Georgetown University Law Center. He also writes and edits ExportLawBlog and can be reached at (202) 624-3949 or [email protected].

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