Voluntary No More

In taking steps to take the “voluntary” out of voluntary disclosure, Assistant Secretary of US Export Enforcement Matthew Axelrod issued another memorandum on April 18, 2023, following on his June 2022 enforcement memorandum, that further changes the voluntary disclosure dynamic to threaten exporters who choose not to file “voluntary” disclosures of “significant” export violations.

Read the memorandum here and the June 2022 memorandum here.

• What is a “significant” violation? Well, not minor technical violations that were referred to, but not defined in, either this latest memo or the June 2022 memo, but violations that “reflect potential national security harm.” The recent unexpected expansion of the Export Administration Regulations (EAR) in October 2022 to cover a broad sweep of semiconductor and advanced computing end uses in China, which the memorandum subtly alludes to in its first paragraph, hints that this Bureau of Industry and Security (BIS) may take an expansive view of what violations “reflect potential national security harm.”  

• What happens if you choose not to submit a “voluntary” disclosure of a “significant” violation? If it “comes to the attention” of the US Office of Export Enforcement (OEE), the decision not to disclose will be considered “an aggravating factor” under OEE’s enforcement guidelines. In other words, OEE can “sharply” increase the size of the penalty.

The Snitch Mailbox

Why should it “come to the attention” of OEE? Because OEE is promising that if you snitch on your competitors – see special snitch mailbox – and if you later have your own export control violations, OEE will consider that assistance as a mitigating factor. In other words, OEE can decrease the size of the penalty for entities sending OEE enforcement tips. This is actually a good thing, as law-abiding companies that have been frustrated by competitors’ apparent violations have to date shared tips with OEE often with few apparent results. Perhaps this new reporting will also create a tracking mechanism at OEE for such tips and lead to greater enforcement.

There May Also Be $$$$ for You

OEE closes by pointing out that if the export control violation involves a potential sanctions violation, there may be a reward, as the Financial Crimes Enforcement Network (FinCEN) has a whistleblower program. Maybe something for OEE to ask Congress for in its holiday stocking?

What Does That Mean for Companies and Universities Deciding Whether to Make a Disclosure?

One could argue that these changes are not that big of a deal. In fact, there has always been a risk associated with not filing a voluntary disclosure should it come to OEE’s attention, particularly where the companies and universities have simply swept the violations under the carpet and done nothing to mitigate or prevent future violations. But until now, unless there was some reason why disclosure was in fact required to avoid something like a material omission on a license application or a General Prohibition 10 violation, a company or university could choose not to disclose, provided they took action to investigate, identify root causes, mitigate any ill effects of the violation to the extent possible, and put in place training, procedures, and technology solutions to ensure a violation does not recur. In other words, if a company or university took a violation seriously and worked hard to fix things (and documented all of the above and followed through on mitigation steps), they would not be disadvantaged if they chose not to make a disclosure.

OEE is now saying, don’t try to fix things on your own: OEE will be the judge of any “significant” export violation. If it’s significant, and you don’t disclose, you can be disadvantaged by non-disclosure being an “aggravating factor,” even if you take prompt actions to fix the problem you disclose. In short, the OEE memo does in fact place a thumb on the scales favoring “voluntary” disclosure.