Key Aspects of Successful Voluntary Disclosures
By John Herzo, Senior Associate
The goal of any Voluntary Disclosure (“VD”) submitted to the Department of State (“DOS”) or Voluntary Self-Disclosure (“VSD”) submitted to the Department of Commerce (“DOC”) (collectively referred to as, “disclosure”) is to report and assure the DOS or DOC that the violations will not occur again. You also want DOS or DOC to close the disclosure without taking any civil or criminal action against your company or otherwise levying a fine based on the facts addressed in the disclosure. Key elements of the voluntary disclosure process are described below.
Investigation: Management Support For The Disclosure And The Investigation Process
Management support signals the importance of the matter for company employees and will allow for all aspects of the potential non-compliance to be fully investigated. Management support of the process should give authority to the investigation team to fully investigate all aspects of the transaction in question and related matters deemed appropriate by the investigation team and to convey to the persons involved that the goal of the investigation is to determine what went wrong, why it went wrong and how to assure it won’t happen again. It is not intended to place blame for the violation. Management support should provide the persons involved in the transaction with the encouragement to fully cooperate with the investigation and not sweep important facts under the rug.
- Thorough Interview Of Each Person Involved In The Transaction In Question (And Related Matters)
Each person involved in the transaction, including employees of other entities involved, if applicable, should be interviewed. The lead personnel in each department involved in the potential matter of non-compliance should also be interviewed including personnel in business development, shipping/receiving, engineering and IT. Questions regarding the specific facts of the matter should be asked. To determine if the matter is part of a systemic issue or if there are related issues, questions regarding similar types of transactions should be asked.
- Thorough Audit Of The Documentation Related To The Transaction In Question
Although the interview process is a key aspect of the investigation, people’s memories and interpretation of the events may be incorrect and will be subjective. However the documentation associated with the event will be objective. The document review portion of the audit should focus on documentation related to the transaction in question such as: license/agreement approvals; shipping documents/records; technical data such as: technical proposals; drawings; schematics; operation and maintenance manuals; internal and external emails; faxes; phone logs; visitor forms; travel forms; classification information; citizenship documentation. To determine if the transaction is part of a systemic issue or if there are related issues, documentation related to similar types of transactions should be reviewed.
It should be noted that when documentation is not clear regarding what happened or why in a given transaction, the documentation review will need to be augmented with interviews of more personnel to attempt to corroborate or contradict information learned from those who were responsible.
- Goal Of The Investigation
The goal of the investigation is to gather information necessary to determine if a matter of non-compliance has occurred. This information will be used to draft a complete disclosure for submission to the DOS or DOC, if the facts indicate a disclosable violation occurred.
The results of the investigation should be reviewed with your company’s Empowered Official, internal legal staff, and outside consultants or counsel to determine if a violation has occurred. The Empowered Official should discuss the result of the investigation with senior management and a decision following company policy should be made regarding the filing of a disclosure.
The key aspects of a successful disclosure are:
- Identification Of The Matter(s) Of Non-Compliance
The disclosure will identify the matter(s) of non-compliance. In addition to laying out the facts in the disclosure letter, we recommend the utilization of matrices to convey the key aspects of the matter(s) of non-compliance to the U.S. Government reviewers. For disclosures related to the export/import of hardware the matrix should identify the following: date of export/import; description of the hardware; quantity; U.S. $ value; intermediate consignee; consignee; end user; end use; country of ultimate destination; license/agreement # or exemption/exception citation; AWB or BOL #. For disclosures related to the export of technical data/technology and/or defense services the matrix should identify the following: date of export; description of non-compliance; list of technical data/technology provided; description of defense service provided; list all foreign parties by name, address and role; and country of ultimate destination.
- Identification Of How And Why The Matter(s) Of Non-Compliance Occurred
After you have identified the matter(s) of non-compliance, the disclosure will need to identify how and why the matters of non-compliance occurred. This information will come from the interviews and audit of the documentation related to the transaction in question. This section should be tailored to transition smoothly to the following section, where “mitigating factors” are explained.
- Mitigating Factors
Mitigating factors are arguably the most important part of any disclosure. The ITAR and EAR both address the manner how mitigating circumstances factor into avoiding civil and criminal action and to reduce potential fines. Key mitigating factors include: no willful intent to violate the regulations; no harm to U.S. national security and/or U.S. foreign policy objectives; export was made to a U.S. ally; belief, based on prior approvals, that had your company requested authorization for the export in question such authorization would have been granted; foreign availability of similar products. To be included in the disclosure, mitigating factors must be specific to the subject matter(s) of non-compliance.
- Corrective Actions
When there are insufficient mitigating factors involved, the corrective action section of a disclosure becomes the most important section of the disclosure. By explaining the corrective actions taken or being taken, the company is letting the government know what actions your company has and/or will take to help ensure that the disclosed matter(s) of non-compliance will not occur again. The corrective actions included in your disclosure should be specific to the subject matter(s) of non-compliance. Key corrective actions include: taking immediate steps to stop actions so that the matter(s) of non-compliance do not continue (e.g., holding a shipment until the correct license is obtained or removing a foreign person employee from a program until the correct license is obtained), providing training to strengthen and establish a cross-check on export transactions (hardware and technical data) to ensure review of transactions against requirements of licenses and regulations. The U.S. government reviewers will want to know that your company has a documented export compliance program and assigned trained individuals within your company responsible for export compliance. Therefore, the disclosure should address any changes your company has or will make to its export compliance manual and internal processes or procedures to ensure similar matter(s) of non-compliance will not occur and what training personnel involved in the matter of non-compliance or trade compliance has or will receive.
All corrective actions should be specifically focused on the matter of non-compliance that your company is able to undertake within the time frame stated in the disclosure. For instance, if a corrective action is to update your company’s export compliance manual within 30 days of the submission of the disclosure, that should be an achievable action.
An essential aspect of any successful disclosure is one’s compliance with all stated corrective actions. Failure to comply with stated corrective actions will be a severe issue if the same type(s) of matter(s) of non-compliance occur again. As a result, many enforcement actions by DOS and DOC in recent years have been brought because company’s fail to follow through on promised corrective actions. Follow-on auditing is recommended to verify implementation of corrective actions.
- Supporting Documentation
Copies of relevant documentation reviewed during the document review portion of the investigation should be included with the disclosure submission such as: license/agreement approvals; shipping documents/records; technical data such as: technical proposals; drawings; schematics; operation and maintenance manuals; emails; faxes; phone logs; visitor forms; travel forms; classification information; citizenship documentation.
Any documentation related to a stated corrective action should also be included. For instance if a stated corrective action is that your company updated its export compliance manual specific to the violation, a copy of the updated export compliance manual should be submitted with the disclosure. If a stated corrective action is that the persons involved in the subject matter(s) of non-compliance received refresher export compliance training, copies of the refresher export compliance training slides with sign-in sheet should also be included.
 It should be noted that the investigation of potential matters of non-compliance should involve all three of the major regulations that pertain to exporting hardware and/or technical information from the United States: (1) the International Traffic in Arms Regulations (“ITAR”); (2) the Export Administration Regulations (“EAR”); and (3) the Federal Trade Regulations (“FTR”). While this article concentrates on the requirements for disclosures submitted to DOS and DOC for prospective non-compliance with the ITAR and the EAR respectively, it should be noted that exporters need to also assess whether export shipments described in VDs or VSDs need to be addressed in disclosures to the U.S. Census Bureau, who administers the FTR.`