(This article was originally published on August 24th, 2009 and was contributed to Corporate Compliance Insights by Wendy Wysong, a partner at Clifford Chance US LLP in the White Collar & Regulatory group.)
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Export Control Violations
Best Practices for Conducting Effective Global Investigations
Introduction
Cross-border internal investigations of U.S. export controls violations pose unique challenges for in-house counsel and compliance officials. The U.S. government’s heightened focus on export control enforcement in recent years, combined with the five-fold increase in potential fines, has spurred U.S. companies to include export controls in their internal compliance programs.
Moreover, non-U.S. multinationals have also begun to understand more fully the various compliance obligations that they have in this area. Both U.S. and non-U.S. companies recognize that a critically important element of an effective compliance program is a process by which potential export violations are self-identified and internally investigated. Not surprisingly, as this awareness has increased, so too has the identification of potential violations and the need for multi-jurisdictional investigations.
The extraterritorial nature of export controls poses difficult legal issues. To what extent do the U.S. export controls address the actions of non-U.S. companies and, for U.S. companies, their overseas affiliates and distributors? What steps need to be taken if a potential violation is identified and how does local law affect those steps?
There are also unique factual issues in this context, such as determining intent and knowledge when countries have laws that conflict with U.S. regulations, when interpretation and translation issues arise, and when access to witnesses is limited. Finally, what can and should be done with the results of the internal investigation? Is disclosure to the U.S. government necessary, appropriate, or possible? And is there a chance of foreign legal action which must be taken into account when conducting the investigation of violations of U.S. law?
Overview of U.S. Export Controls
U.S. export controls are administered primarily under three regulatory regimes: the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”).
Put most simply, OFAC imposes a wide range of controls on exports to designated countries, entities, and individuals, including virtual embargoes on Cuba, Iran, Sudan and Syria. Compliance-minded companies utilize screening programs for customers, vendors, and agents to prevent dealing with “Specially Designated Nationals.”
BIS has overlapping regulatory and enforcement jurisdiction over these embargoed destinations, as well as North Korea, under the Export Administration Regulations (“EAR”). Additionally, pursuant to the EAR, BIS regulates exports of “dual use” items (i.e., items with both a commercial and military purpose).
Finally, pursuant to the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”), DDTC regulates the export of “defense articles and services.”
These agencies regulate exports from the United States but also “re-exports” of U.S.-origin products from abroad, including non-U.S. products containing 10% or more U.S.-origin content. This extraterritorial jurisdiction is derived from the origin of goods, not just the nationality of the transaction parties. Thus, non-U.S. as well as U.S. persons have compliance obligations with respect to U.S.-origin goods and technology.
Penalties for violations of U.S. export controls can be severe. Civil penalties for violations of OFAC’s regulations and the EAR were recently increased from $50,000 per violation to the greater of $250,000 or twice the value of the transaction underlying the violation. Criminal penalties for violations of these laws can be as high as $1 million and 20 years imprisonment.
For violations of AECA, maximum civil penalties for corporations are $500,000 per violation and criminal penalties can be as high as $1 million and 10 years in jail. Collateral consequences can include denial of export privileges, debarment from U.S. and foreign government contracts, as well as negative international publicity and disruption of business relationships.
Initial Steps Once A Potential Export Violation Has Been Identified
Given the seriousness of the consequences, identification of potential export violations is crucial. Compliance officers may notice irregularities in transaction documentation as a result of a routine audit or a proactive compliance safeguard. Potential violations may be identified through employee tips or hotlines implemented in accordance with internal company compliance programs. As long as knowledge of the potential violation is within the company (e.g., it has not been disclosed to a U.S. regulatory/enforcement authority by a whistleblower), the company is in control as to how it handles a potential violation.
Preliminary Evaluation: A preliminary evaluation of the facts through documentary review, as well as an analysis of the applicable export control regulations, should be undertaken as a first step to determine whether there is a reasonable likelihood that a violation has occurred that would necessitate the time and expense of a global investigation.
Knowledge of the investigation should be controlled, but balanced against this is the need to immediately ensure that the potential violative conduct is stopped and that any relevant evidence is preserved. Notices involving the conduct and preservation of documents must be carefully drafted so that the existence and nature of the investigation is not inadvertently disclosed.
An important decision that should be made at this point is who should conduct this preliminary investigation: the compliance group; the legal department; regular outside counsel; or, special export control specialists (U.S. or non-U.S.).
Independence and objective analysis is paramount. Moreover, a reporting and decision-making process should be defined. If the preliminary investigation determines that a violation has likely occurred, the next steps should involve counsel in order to preserve the attorney client privilege. In a global investigation, it is important to note that some countries do not recognize the privilege with regard to in-house counsel such that interviews conducted by the corporate legal department in those jurisdictions may be subject to disclosure.
Investigative Plan: Once the preliminary evaluation confirms that a violation most likely occurred, a written investigative plan should be developed under the guidance of or by counsel. The plan should address the scope of the investigation, the subject issue, review period, and geographic range. If the investigation does not encompass all jurisdictions and transactions, but is risk-based or sampling is used, the rationale and methodology must be described. The plan should detail what steps have been taken to preserve documents, to stop on-going violative conduct, and whether remediation has been undertaken such as removal of persons who may be involved in the conduct, severance of questionable business relationships, and retrieval of illegal exports. A budget, timeline, and sufficient resources should also be included in the plan.
Government Disclosure: The plan will not only determine the scope of the investigation, it will document the company’s response to the potential violation. Such documentation is particularly important if the violation is later discovered by government agents or if a decision is made to voluntarily disclose the violation to the government.
Disclosure may be advisable to obtain credit, either by avoiding a penalty altogether or obtaining some mitigation of the penalty imposed. The disclosure decision must be made sooner rather than later, as export control agencies require disclosure very soon after discovery of the violation. Companies must consider the risk of high penalties and other sanctions that could be incurred if a disclosure is not filed immediately and is subsequently identified by the U.S. regulatory/enforcement agencies.
These agencies encourage companies to voluntarily disclose evidence of potential violations, and there are significant advantages to doing so (e.g., penalty mitigation, control and timely resolution of the investigation). Because of overlapping jurisdiction, disclosure to multiple agencies may be necessary, including foreign government agencies, such as bank regulatory authorities in the United States and abroad.
If a decision to disclose has been made, companies should begin to prepare to make an initial voluntary disclosure based on the preliminary investigation. The initial voluntary disclosure allows companies to request additional time to conduct a more thorough internal investigation and perfect the final voluntary disclosure. The agency will provide guidance as to what it expects to be included in the investigative plan.
Conduct of the Investigation
An effective global investigation requires great attention to detail, mindfulness of resource issues, and recognition of local law restrictions on documents and access to witnesses. The complexities of conducting an internal investigation are multiplied when the investigation involves conduct by a non-U.S. company for potential violations of U.S. law.
Document Collection and Review: Coordinating global document collection may require the assistance of local counsel in each jurisdiction to ensure that local law issues, language barriers, and cultural sensitivities are taken into account and managed. There may be data protection laws in place, particularly in European Union countries, that will not allow the documents to be brought into the U.S. without government permission or individual consent. Again, each country may have different laws and interpretations that will require individual resolution before documents are collected, transported, and/or analyzed.
Arrangements may have to be made to review documents only in overseas locations or through the assistance of third-party companies that have “safe harbor” approval. Documents may require redaction of any information that could disclose personal data such as names, positions, locations, and responsibilities. This applies to Human Resource files, organizational charts, email, and electronic documents — the mainstays of any document review.
Violations of local privacy, data protection, or other laws may lead to private rights of actions by individual employees or civil enforcement actions by data protection authorities. A company must be aware of the laws and consider assuming the risks of violating those laws before it allows open access to its files overseas to the investigators.
In analyzing the documents, keyword search terms must be carefully developed to take into account both English and foreign language versions of the same word, as well as rough approximations of terms of art or legal concepts. Forensic assistance, including scanning of original documents overseas, may be challenging as equipment and skilled personnel often need to be brought into the country.
Witness Interviews: On-site visits and interviews are crucial to understanding the conduct of a company or responsible employee in the context of the foreign jurisdiction and are required for a credible presentation to the U.S. government.
Careful planning of overseas witness interviews is critical as visas and permits may be necessary, time may be restricted, logistical arrangements may be challenging, and there is no obligation for non-U.S. citizens, particularly non-employee third-party witnesses, to make themselves available. Local laws may govern how the interviews are conducted, who is present, and what documents can be shown to a witness. It may be impossible to interview witnesses on-site due to local security concerns. Off-site interviews, including foreign travel arrangements, passports, and interpreters for the witnesses may be necessary.
Ideally, interviews should not be undertaken unless all documents relevant to a particular witness have been obtained, analyzed, and translated as there may be only one opportunity to conduct the interview. It is important to ensure that foreign employees understand the importance of the investigation and that global management supports the investigation. Language and cultural differences must be considered. In particular, in this context it is important to document that Upjohn warnings as to attorney-client confidentiality and representation were given and understood. It is also important to keep in mind that local employment law may allow remedial action by employees who perceive retaliation and may restrict what remedial steps can be recommended by the investigators.
Conclusion
Global investigations of U.S. export controls can be conducted effectively, but only if the multi-jurisdictional challenges are recognized and addressed. Counsel experienced in conducting global internal investigations and with expertise in export controls can ensure that the investigation is efficient and thorough to allow the company to address the violations and move forward.
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About the Author
Wendy L. Wysong is a partner at Clifford Chance US LLP in the White Collar & Regulatory group. Her concentration is compliance and enforcement under the Export Administration Act, Export Administration Regulations, Arms Export Control Act, International Traffic in Arms Regulations, and International Emergency Economic Powers Act.
Ms. Wysong can be contacted at 202.912.5030 or via email at wendy.wysong[at]cliffordchance[dot]com.
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