As a result of the recent economic downturn, every company must take a hard look at its bottom line and make difficult decisions. Companies that are considering scaling back their export controls compliance efforts, however, are moving in the wrong direction. They are making an ill-advised decision that is unlikely to achieve the goal of reducing unnecessary costs. Indeed, given current enforcement trends, companies that do not strive to maintain effective export controls compliance programs are jeopardizing their business operations, as well as their good reputations.
The Compliance Challenge
Even in a good economy, export controls compliance can be a tough sell within the company. There are reasons for that - but when they are closely examined, their flaws become apparent.
Generally, when companies invest money in their operations, they want to see such benefits as increased productivity, new product and distribution lines, and new customers. In short, they want positive, measurable results.
Compliance is not a profit-center or a revenue-generating portion of the company. Thus, companies sometimes resist devoting money and other resources to compliance because they do not view it as providing a return on investment.
There is plenty of evidence, however, that effective export controls compliance programs provide measurable and significant benefits. Indeed, at every stage - even when companies are in the less-than-enviable position of being in direct contact with the export enforcement authorities - having an effective compliance program provides tangible benefits that every company needs. Compliance also protects the United States and its economy, upon which the well-being of the company ultimately depends.
Effective Compliance Programs
The operative word in the phrase "effective compliance program" is "effective." Merely having a compliance program is not enough.
How does one determine if a compliance program is effective? In short, to be effective, a compliance program must be well designed and well implemented. It cannot be static; rather, it must be a living, dynamic program. As the circumstances within a company change, such as its business model, the company's compliance program must also adapt. The program must also adapt to external changes, including those in the marketplace.
BIS's Approach ToEffective Compliance Programs
As the Assistant Secretary of Commerce for Export Enforcement at the Bureau of Industry and Security (BIS), I developed and announced the Nine Principles that BIS uses in its administrative cases to assess whether compliance programs are effective. The Nine Principles are as follows:
1. Whether the company has performed a meaningful risk analysis, which includes consideration of the types of goods being exported and the destination of those goods.
2. The existence of a written compliance program that is communicated to others.
3. Whether appropriate senior company officials are responsible for overseeing the export compliance program.
4. Whether adequate training is provided to employees, so they understand what is required of them to remain in compliance.
5. Whether the company adequately screens its customers and transactions.
6. Whether the company meets record-keeping requirements.
7. The existence of an internal system for reporting export violations, including making voluntary self-disclosures.
8. The existence of internal/external reviews or audits to help determine whether company procedures and compliance programs need to be revised.
9. Whether remedial activity has been taken in response to export violations.
BIS also has developed Core Elements of an Effective Export Management and Compliance Program (EMCP). More about the EMCP, as well as the Nine Principles, can be found at BIS's website, www.bis.doc.gov.
The Benefits Of Compliance
When we examine how these principles operate in the business world, we readily see that effective compliance programs provide significant and measurable benefits to companies that far exceed the investment required to establish and maintain them.
Protecting Your Brand Through Prevention
First, effective compliance programs are the best way to prevent violations from occurring. By preventing violations, effective compliance programs also protect your business reputation - which, is priceless.
Your company spends a great deal of time, effort and resources to develop its brand. It does so to differentiate itself from its competitors. Your company wants consumers to know that it has integrity, can be relied upon, and is the best in its field.
These efforts are undermined when your company is named in press releases and other public documents by law enforcement authorities as the target of an export controls criminal prosecution or administrative action. In bygone days, such negative publicity might have lasted for only a day - and perhaps only in the local newspaper. But, the Internet allows such bad publicity to be broadly disseminated much more easily - and it continues to live online at the websites of the various government agencies and elsewhere for years. One such government publication is BIS's Don't Let This Happen to You booklet. It is a compilation of BIS's significant export enforcement and antiboycott cases. It is updated annually and is posted on BIS's website. BIS also distributes hard copies of it across the country throughout the year.
Avoiding Enforcement Actions
Prevention also saves the company the considerable effort and expense of defending against enforcement actions - including a potential criminal prosecution. Having to make such expenditures over the course of an investigation that may last several years does not add to a company's bottom line. The same is true regarding having to pay the criminal fines and administrative penalties that result. The company's money is far better invested in profit-making efforts - especially in today's economy. Effective compliance programs help you do that.
Your company also derives significant benefits if its compliance program detects violations before the enforcement authorities do so. That will enable your company to make a voluntary self-disclosure (VSD) to the government, which resolves many such cases by only issuing a Warning Letter. If the government does issue a penalty, however, it grants significant mitigation for a valid VSD. For example, BIS mitigates its administrative penalties for a valid VSD by 50 percent, without more. Moreover, BIS mitigates its penalties up to a 25 percent for the existence of an effective compliance program. So, having an effective compliance program that allows you to make a VSD will mitigate your penalty by 75 percent, without more - and BIS will also grant additional mitigation for other circumstances in the case.
On the criminal side, the Department of Justice's (DOJ) National Security Division (NSD) has recently publicly stated on several occasions that companies that submit valid VSDs in export enforcement cases are likely to avoid criminal prosecution. Reducing the company's potential exposure from a criminal prosecution to a potential administrative case is of immense value.
So, the "return on investment" that effective compliance programs provide is measurable, and significant. Taking advantage of that is more critical than ever, given current enforcement trends.
Today's Export Enforcement Trends
The export enforcement landscape has recently undergone significant changes. Export violations are now squarely being treated as national security cases. As a result, there now are much greater consequences for violating the export control laws, including the following:
In late 2007, Congress enacted the International Emergency Economic Powers Enhancement Act, which retroactively raised the administrative penalties for these violations to $250,000, or twice the value of the transaction. The increase in the amount of the penalty, as well as its retroactivity, were dramatic changes from the $11,000 per violation penalties that were in effect merely two years earlier.
Greater Law Enforcement Cooperation In Export Controls Investigations
A variety of federal law enforcement agencies investigate export controls violations. The sole responsibility of the Special Agents at Bureau of Industry and Security's (BIS) Office of Export Enforcement (OEE) at the U.S. Department of Commerce is to investigate export violations involving dual-use goods - those that have legitimate business uses but can also be used in weapons. Such goods and technology are controlled under the Export Administration Regulations (EAR). OEE's special agents express their mission as "Keeping the most sensitive goods out of the most dangerous hands." Their priorities are countering terrorism and terrorists; countering weapons of mass destruction (WMD) proliferation, and also countering the diversion of dual-use goods to unauthorized military end uses. Among the most sensitive dual-use goods and technologies are those controlled under the EAR for national security, nuclear, missile technology and chemical-biological weapons reasons. A broad array of goods and technologies fall within those categories. They include certain electronic components, valves and pumps as well as biological toxins and chemicals. Among the most important cases resulting from OEE's investigations are those involving illicit trade with Iran and other state sponsors of terror, unlawful diversions of dual-use goods to military uses by China, as well as prohibited trade with various countries of concern, including Pakistan. OEE also devotes its resources to other cases to ensure the fundamental integrity of our dual-use export controls system. Both criminal prosecutions as well as civil administrative cases can result from OEE's investigations.
In addition to OEE, other federal law enforcement agencies also investigate export violations as a part of their duties, including the Federal Bureau of Investigation (FBI) and the Department of Homeland Security's (DHS) Immigration and Customs Enforcement (ICE). All of these agencies now cooperate more closely as a result of the Department of Justice's Export Enforcement Initiative.
More Criminal Prosecutions
In late 2007, the DOJ's newly established National Security Division launched its nationwide Export Enforcement Initiative. Under the Initiative, DOJ has taken several significant steps to underscore that export controls cases are national security matters. Among those steps are training more federal prosecutors across the country to handle export controls prosecutions and appointing a National Coordinator for Export Controls Enforcement. DOJ has also established numerous Counterproliferation Task Forces around the country, comprised of federal prosecutors as well as special agents from the various law enforcement agencies. A significant nationwide increase in export controls criminal cases has resulted.
Effective compliance programs help companies avoid the adverse consequences of enforcement actions by providing answers to the fundamental questions that lie at the heart of our export controls system. Those questions include:
• To whom am I exporting?
• To what locations are my goods or technology going? and also
• For what purposes will the goods or technology that I am exporting be used?
Companies that answer these questions before they export will avoid placing sensitive U.S-origin goods and technology into the hands of those who would harm us and our allies. They will also protect the company's business interests as well as our national security and economy.
Companies that establish, maintain and enhance effective export controls compliance programs will enjoy significant and measurable benefits that will outweigh the investment. Those benefits will also help companies weather today's stormy economy and position them well for the better times ahead.
Darryl W. Jackson is a Partner in Kelley Drye & Warren's Washington, DC office and former Assistant Secretary of Commerce for Export Enforcement, Bureau of Industry and Security, U.S. Department of Commerce.