BIS Codifies VSD Policies, Removes Caps on Non-Egregious Base Export Penalties

The changes, effective Sept. 16, are “important steps in institutionalizing” the host of enforcement updates spearheaded by Matthew Axelrod, the BIS assistant secretary for export enforcement, since 2022, he said in a news release. “The stakes of ensuring that we have the proper tools to deter export violations and -- when that deterrence fails -- to hold violators accountable could not be higher,” he said.

Since joining BIS, Axelrod has overseen the Office of Export Enforcement as it launched an effort to convince more companies to submit voluntary disclosures while increasing penalties on businesses that don’t self-report (see 2304180071 and 2401170059). Some industry lawyers and advisers said the changes have been mostly positive, while others have said companies should wait until BIS develops a record of implementing the policies instead of rushing to judgment (see 2402130013).

In the 12 months after BIS introduced some of those voluntary disclosure policy changes, the agency said it has seen a 30% increase in more serious disclosures and a 20% uptick in industry tips about others committing violations compared with the previous 12 months. Those tips have led to “actionable leads,” BIS said.

“We take that as evidence our policies are working,” Axelrod said during a Sept. 12 event in Washington hosted by the Center for Strategic and International Studies. “We want these to be institutionalized, to be part of the fabric of our federal regulations.”

By codifying the changes, "BIS can ensure that the directives are legally binding and consistent with the legislative intent,” the agency said in the final rule, “thereby enhancing their effectiveness and enforceability while adhering to the statutory requirements.”

The rule will translate a range of existing BIS administrative enforcement policies into the Export Administration Regulations, including one that says OEE will “generally resolve” more minor disclosures within 60 days; language allowing exporters to “bundle” multiple disclosures into one submission and include only an “abbreviated narrative” describing the possible violations; and a provision that formalizes the agency’s ability to hand out “non-monetary resolutions,” including in cases in which BIS wants to require a party only to improve its compliance program.

Other changes will make “clear” that a “deliberate decision” not to self-report a significant violation will be considered an aggravating factor and could lead to higher penalties, and a clarification that any person may ask BIS for permission to return an illegally exported item to the U.S. -- not just the party submitting the disclosure.

The rule also revises the agency’s penalty guidelines to change how OEE calculates base penalties in administrative cases, and how it applies “factors” to the base penalty to determine the final penalty amount. BIS said this will allow its civil penalties to “more appropriately reflect the seriousness of the offense by linking that determination directly to transaction value and other circumstances pertaining to a violation.”

The agency said it’s making the penalty changes because it has seen certain cases where base penalties are “disproportionately low” compared with the value of the transaction and are “insufficient to serve as a deterrent or incentive for companies to invest properly in export compliance.”

Current regulations call for civil penalties to be one-half of the transaction value -- capped at a maximum base penalty of $125,000 per violation -- for a self-reported, non-egregious violation, no matter the value of the transaction.

"Even if the transaction was a billion dollars, the maximum base penalty that we start with before we add in aggravating and mitigating factors was capped at $250,000" for violations that aren't self-reported, Axelrod said during the CSIS event. "That just doesn't make sense to us."

The new rule removes this cap and the EAR’s definition of “applicable schedule amount,” which listed a “base penalty matrix” that outlined the various base penalty levels for different transaction values.

In “non-egregious” self-reported cases, the base penalty amount will now be capped at “one-half of the transaction value.” In a non-egregious case that wasn’t self-reported, the base penalty amount will be capped at the full transaction value, BIS said.

These new caps for non-egregious cases will allow penalties to be calculated based on “transactional value instead of progressive brackets that round up,” BIS said. “The penalty cap is removed to recognize that certain transactions are of such high value, that any potential penalty under the cap would not serve as an effective deterrent.”

This change “will make administrative penalties more straightforward and in line with the overall value of the transaction at issue,” the agency said. BIS said it will continue to take mitigating factors into account and apply an “appropriate” reduction to the base penalty if warranted.

The agency is also removing all the “specific ranges” for penalty reductions that had previously been outlined in its penalty guidelines. These ranges “led parties to incorrect assumptions about the range of reduction to which they were entitled,” BIS said.

For example: Even though the guidelines offered a base penalty reduction amount of up to 25% for first-time violators, BIS noted that a company’s first offense might occur together with aggravating or mitigating factors that could lead to a smaller or larger reduction in the penalty.

BIS said it’s “impossible to associate potential ranges for reductions or increases with all mitigating and aggravating factors that would appropriately capture every potential combination of facts and circumstances associated with a violation.”

The rule makes “clear” that OEE has “discretion” to adjust civil penalties up or down, leading to penalties that may be higher or lower than the base penalty amount.

Another notable change removes language that had allowed companies to apply a portion of an export fine toward improving their compliance program. This “reflects BIS’s view that companies should independently make appropriate investments in their compliance program sufficient to identify and prevent potential violations, and generally should not expect to receive credit for the cost of making such investments against administrative penalties for past misconduct,” BIS said.

"We don't think you should be sentenced to do compliance. That's something you need to invest in on the front end," Axelrod said. "And we don't want companies feeling that they're disadvantaged because they spent money on compliance out of their pocket and other people got sentenced to it."