Why Voluntary Self-Disclosure of National Security-Related Transgressions is Critical for Defense-Related Businesses
Regulatory compliance is critical for any business involved in the export of defense related commodities. Violations under the International Traffic in Arms Regulation (ITAR) or the Export Administration Regulations (EAR) can be met with harsh monetary penalties and fines as well as civil or criminal action depending on the cause and type of violation. Failing to follow these export control requirements can be the worst nightmare for any “C-Suite” executive.
As ominous as all of this sounds, there is little benefit to letting a suspected or known violation go unaddressed. The proper course of action should be to 1) determine with counsel if it appears a legal violation occurred, and 2) if so, voluntarily disclose it to the appropriate agency within the U.S. Government under the process known as “voluntary self-disclosure” or “VSD.”
Companies should proactively address suspected violations through processes including compliance checks, internal and external audits, or the appointment of an investigative authority within the company to identify the source and substance of a potential or actual violation. It is a challenging but necessary task because violations come in many forms including:
- Unauthorized export of hardware or technical data and defense services;
- Unauthorized retransfers;
- Electronic transmissions;
- Faulty application of an exemption;
- License lapse or expiration;
- Poor record keeping; and
- Many others.
The root causes of such violative activity include poor management, lack of understanding of the regulatory landscape, lack of due diligence in M&A activity, failure to provide adequate oversight of subcontractors and lapses in recordkeeping. To put it bluntly, there are more ways to trip up than a CEO can imagine.
Let’s review a few key aspects of reporting under the Export Administration Regulations (EAR) and compare with the International Traffic in Arms Regulations (ITAR):
Under EAR §764.5 the Bureau of Industry and Security (BIS) “[s]trongly encourages disclosure to the Office of Export Enforcement (OEE) if you believe that you may have violated EAR.” In a similar manner under ITAR §127.12(a) the Directorate of Defense Trade Controls (DDTC) “Strongly encourages disclosure of information to DDTC by persons that believe they may have violated the Arms Export Control Act (AECA)” Clearly, whether EAR or ITAR applies to the issue at hand, both regulations suggest that disclosure should be made.
However, EAR requirements are a tad more forgiving overall because under EAR, a VSD is automatically considered a mitigating factor in determining what administrative sanctions might be brought by OEE. In contrast, under ITAR the DDTC may consider voluntary disclosure as a mitigating factor in determining administrative penalties, if any, that should be imposed.
Additionally, under EAR §764.5(c)(3), “[f]ailure to make such disclosures will not be treated as a separate violation unless some other section of the EAR or other provision of law requires disclosure. Upon completion of the review, OEE should be furnished with a narrative account that sufficiently describes the suspected violations so that their nature and gravity can be assessed.”
In contrast, under ITAR §127.12(a) “[f]ailure to report a violation may result in circumstances detrimental to U.S. national security and foreign policy interests and will be an adverse factor in determining the appropriate disposition of such violations.
Clearly, given heightened national security concerns under ITAR, the failure to disclose a suspected or actual violation could be met with more punitive response on the part of the U.S. government.
Regardless of these distinctions, when thinking about the VSD process under both EAR and ITAR, I am reminded of the signs occasionally seen in airports, train stations, and other public spaces that state “If you see something, say something.” Sage advice.
Anecdotally, I am aware of a certain defense contractor that, sadly, violated both ITAR and EAR regulations. Fortunately, through its embrace of the VSD process, both the OEE and DDTC considered the disclosure a mitigating factor. The company took the hit, cleaned up its act (both violations were unintentional) and moved on – successfully.
I have pointed out differences between EAR and ITAR wherein the DDTC does not automatically consider a VSD as a mitigating factor to a violation. However, I would be remiss if I did not point out that the DDTC does indeed offer some hope in the form of several mitigating factors in its analysis. Under the ITAR § 127.12(b)(3) the Regulation identifies the following considerations:
- Whether the transaction would have been authorized, and under what conditions, had a proper license request been made;
- Why the violation occurred;
- The degree of cooperation with the ensuing investigation;
- Whether the person has instituted or improved an internal compliance program to reduce the likelihood of future violation; and
- Whether the person making the disclosure did so with the full knowledge and authorization of the person’s senior management.
The U.S. government has a vested interest in regulating, among other things, the export of U.S. goods, technology, software, and intellectual property. EAR and ITAR regulations serve an important role in keeping U.S. companies competitive in the crowded international supply chain. As painful as it might be to accept that your company may have violated regulations, it is imperative that all company personnel take the right course of action and, when necessary, commit to voluntary self-disclosure. To do otherwise is not just bad business practice, but it can also seriously undermine our national security interests. Companies should rely on knowledgeable legal counsel to determine if a disclosure is warranted, and to assist the company through a process that requires clear communication and firm action with the U.S. government.
Export control teams such as Procopio’s work with clients involving the challenges inherent in successful commodities exporting. Letting a potential violation linger or go unresolved is not a recipe for success. We are here to help.