U.S. Departments of Justice, Commerce, and the Treasury Publish Tri-Seal Compliance Note Regarding Voluntary Self-Disclosure Policies

On July 26, 2023, the U.S. Departments of Justice (DOJ), Commerce, and the Treasury published a joint, or “tri-seal,” compliance note, setting forth each department’s respective voluntary self-disclosure (VSD) policies that apply to potential violations of U.S. sanctions, export controls, and other national security laws. The compliance note underscores that U.S. companies, particularly those engaged in international trade and finance, play a “critical role in identifying threats from malicious actors and helping to protect our national security.”

The compliance note emphasizes that disclosure to only one agency may not constitute disclosure to the entire U.S. government,¹ and that the failure to disclose may be viewed by certain agencies as an aggravating factor.

The compliance note serves as an important reminder of the requirements and benefits associated with VSD, particularly as criminal enforcement of national security laws ramps up. The note also highlights strong incentives for whistleblowers and tipsters. This Advisory captures the guidance offered in the joint compliance note and offers key takeaways for U.S. entities who may discover possible violations of national security laws.

DOJ’s Voluntary Self-Disclosure Policies

DOJ National Security Division’s (NSD’s) VSD policy, which was recently updated on March 1, 2023,² covers reporting of possible criminal violations of export control and sanctions laws. To receive credit under the policy, the following conditions must be met:

• Promptness: Reporting parties must disclose possible violations to NSD (not regulators) “within a reasonably prompt time,” absent any legal obligation to disclose, and prior to an imminent threat of disclosure or government investigation.
• “Full” Cooperation: Reporting parties must share all relevant, non-privileged facts; timely preserve and collect relevant documents and information; deconflict witness interviews and perform other investigative steps; and timely identify opportunities for further investigation by NSD.
• Remediation: Reporting parties must implement appropriate disciplinary measures, such as compensation clawbacks, for employees involved in any criminal conduct.
• Compliance: NSD will evaluate whether the reporting party has implemented robust and effective compliance and ethics programs.

Should a reporting party satisfy these requirements, NSD offers steep discounts on penalties associated with uncovered criminal violations, including offering a safe harbor from criminal prosecution with a presumption in favor of non-prosecution agreements (NPAs). Such a presumption will not apply, however, if aggravating factors are present, such as pervasive criminal conduct or involvement of upper management.

Notably, NSD’s updated policy applies beyond export controls and sanctions violations to other criminal statutes within NSD’s purview, including violations of the Foreign Agents Registration Act (FARA), laws prohibiting material support to terrorists (as in the LaFarge case), and criminal violations related to the Committee on Foreign Investment in the United States (CFIUS), and other national security proceedings.

NSD also announced its creation of the Chief Counsel for Corporate Enforcement, including its addition of 25 new prosecutors to help investigate and prosecute criminal sanctions evasion, export control violations, and similar economic crimes.

Commerce Department’s Voluntary Self-Disclosure Policies

BIS similarly encourages companies to voluntarily self-disclose possible violations of the Export Administration Regulations (EAR),³ offering reductions in civil penalties for entities that make timely and comprehensive disclosures. BIS’s guidance differs in certain respects from NSD’s policy. Most importantly, BIS treats reporting of “possible EAR violations” differently than reporting of “significant possible EAR violations.”

In June 2022, the Commerce Department’s Office of Export Enforcement (OEE) implemented a dual-track system to handle VSDs within the Commerce Department. Possible violations that are minor or technical in nature are resolved on a “fast-track” basis, meaning that BIS will issue a resolution within 60 days of the VSD. On the other hand, possible violations that are more serious in nature will require a more thorough evaluation, including consideration of whether the reporting company will receive credit for its VSD.

Subsequently, in April 2023, BIS published a memorandum on its VSD policy (VSD Memo), clarifying its dual-track system and explaining how BIS will evaluate VSDs. In the VSD Memo, BIS explained that it is not focused on increasing the number of minor or technical VSDs it receives, but rather that it is focused on increasing those VSDs that implicate potential national security harm. To that end, BIS’s VSD Memo sought to clarify the risk calculus for individuals and companies considering whether to disclose significant possible EAR violations. BIS explained that it will consider a deliberate, non-disclosure of a significant possible EAR violation an aggravating factor under BIS penalty guidelines. Thus, a decision not to self-report to BIS risks not only losing the discounts that may be available for VSDs, but it also risks drawing even more aggressive penalties due to the failure to disclose.

BIS also explained that, if an entity learns of a possible EAR violation by another party and submits a tip to OEE, OEE will consider that a mitigating factor under the penalty guidelines if the tip leads to an enforcement action and if the disclosing entity faces an enforcement action (even if unrelated) in the future.

BIS settlement guidelines offer specific civil penalty reductions for qualifying VSDs. If an entity voluntarily discloses a violation, and that violation is “non-egregious,” the base penalty amount is one-half of the transaction value, with a maximum base penalty cap. Even in “egregious” cases, the base penalty amount is reduced up to one-half of the statutory maximum penalty applicable to the violation. Both the compliance note and the VSD Memo emphasize the importance of robust compliance programs and thorough internal investigations to combat and identify possible EAR violations.

Treasury Department’s Voluntary Self-Disclosure Policies

OFAC, too, has a long-established VSD policy. OFAC considers qualifying VSDs to be a mitigating factor when determining whether to pursue an enforcement action and ultimately, whether to assess penalties. A qualifying VSD can result in up to a 50% reduction in the base proposed civil penalty. A VSD will not qualify for credit where: a third party is required to and does notify OFAC of the possible violation because the transaction was blocked or rejected; the disclosure includes false or misleading information; the disclosure is not self-initiated; and/or the disclosure is materially incomplete.

Beyond these standard reductions for VSDs, the factors that OFAC considers in evaluating its enforcement response to a potential violation are set forth in its Enforcement Guidelines, appearing at Appendix A to 31 C.F.R. Part 501. OFAC generally considers the totality of the circumstances when determining any further penalty for an entity that has voluntarily self-disclosed a possible violation. Specifically, OFAC will consider the circumstances and severity of the violation, the adequacy of the reporting entity’s compliance program, and the remedial steps taken by the entity following the violation. Any qualifying VSD must be made to OFAC prior to OFAC’s (or another government agency’s) discovery of the possible violation.

FinCEN Whistleblower Program

Finally, the compliance note reminds U.S. companies that monetary rewards for whistleblowers of sanctions and export control violations are available under certain circumstances through the Financial Crimes Enforcement Network’s (FinCEN’s) whistleblower program. FinCEN’s whistleblower program incentivizes individuals, both in the United States and abroad, to report potential violations of anti-money laundering and U.S. sanctions laws to FinCEN or DOJ. Pursuant to the FinCEN program, individuals who provide information ultimately leading to a successful enforcement action are eligible to collect between 10% to 30% of the monetary awards from the enforcement action.

The inclusion of sanctions violations under the program’s umbrella is a relatively new development — the whistleblower program was expanded under the Anti-Money Laundering Whistleblower Improvement Act (the Improvement Act), passed by Congress as part of the Consolidated Appropriations Act of 2023, to include awards for reporting possible sanctions violations. The Improvement Act encourages industry participants who are confronted with potential sanctions violations to consider self-disclosure to OFAC. Again, any individuals who provide information resulting in a successful enforcement action could be eligible for significant awards; and, as discussed above, could be eligible for penalty reductions from OFAC should there be an enforcement action against the reporting party, subject to OFAC’s VSD requirements.

For additional information on BSA/AML reform, including FinCEN’s efforts under the Improvement Act, please visit Arnold & Porter’s BSA/AML Reform Resource Center, where we track the legal developments and rulemaking resulting from the Anti-Money Laundering Act (AMLA) — including financial regulatory whistleblower programs — and provide our insights on the impact on the financial services industry.

Conclusion

The joint compliance note represents the U.S. government’s efforts to leverage U.S. businesses to detect and report national security threats. The message is clear: the U.S. government encourages companies to report violations and, in exchange, offers substantial credit to those that do. The co-habitation of DOJ NSD in the regulatory space raises the stakes for corporate compliance and ethics programs. If violations are uncovered during the course of internal monitoring, it is important to seek counsel regarding if, when, to which agencies, and how to voluntarily self-disclose.

We will continue to monitor guidance regarding VSDs and emerging enforcement activities. Please contact any author of this Advisory for more information.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.