Disclosing Export Violations Won't Give You a Free Pass

by Kay C. Georgi, Peter R. Zeidenberg, and  Mary Carter Andrues (*This article was originally published in Law360.)

The US Department of Justice recently announced that Fokker Services BV (FSBV), a Dutch aerospace services provider, agreed to forfeit $10.5 million to the United States for conspiring to violate the International Emergency Economic Powers Act by exporting aircraft parts, technologies and services to customers in Iran, Sudan and Burma. The company was charged in a criminal information filed in federal court in the District of Columbia with knowingly and willfully conspiring to violate the IEEPA, in violation of 18 U.S.C. Sec. 371.

The plea is part of a deferred prosecution agreement, in which the company acknowledged it conspired to violate the IEEPA, agreed to continue cooperating with the government, and also agreed to forfeit the $10.5 million to the government. In exchange for these concessions, the government agreed, provided FSBV did not commit any future violations of law, to dismiss the case in 18 months.

In addition to the criminal penalties, the company also agreed to an additional $10.5 million civil penalty to settle US Department of the Treasury, Office of Foreign Assets Control, and US Department of Commerce Bureau of Industry and Security charges relating to the same conduct.¹

The criminal prosecution of FSBV, as opposed to a purely civil settlement, and substantial fines, seemed surprisingly harsh to some, given that the company’s conduct came to the government’s attention by way of voluntary disclosures to BIS and OFAC. The government has long promised, and companies have come to expect, more lenient treatment if they disclose violations voluntarily.

But a closer look at the facts at hand explains why OFAC and BIS made a criminal referral of the voluntary disclosures to the DOJ, and why the DOJ decided to proceed with a deferred prosecution agreement.

FSBV admitted significant facts that led to the plea agreement. The company admitted that it used a variety of schemes — termed by the company as “workarounds” — to deliberately evade US sanctions and export laws while continuing its business with customers located in US-sanctioned countries. The company admitted that it:

• Advised employees to choose only US repair shops that did not request end-user statements or other indicia related to where the parts were ultimately going;

• Instructed employees how to repackage parts to remove indications that the part had come from a customer identified in a US-sanctioned country;

• Withheld tail numbers or provided false tail numbers to US and UK companies, as a means to conceal the customers’ locations in US-sanctioned countries;

• Constructed and constantly updated a chart it called “the black list” that tracked which US companies were most vigilant about export controls, and directed its business to those businesses that were not on the this list;

• Deleted references to Iran in materials sent to the company’s US subsidiaries, US repair shops and elsewhere;

• Changed the internal company database that tracked parts to delete fields related to ultimate end user information; and

• Directed its employees to hide activities and documents related to Iranian transactions when US Federal Aviation Administration inspectors audited the company’s Dutch warehouse.

According to the agreed upon statement of facts, the company undertook conduct to ensure that it could continue its transactions with customers located in US-sanctioned countries despite the company’s awareness that the transactions were in violation of US export laws.

Given the nature of the conduct and the fact that it involved 1,153 shipments from 2005 to 2010 for, according to OFAC’s calculations, a base penalty amount of $145 million (after a 50 percent reduction for the voluntary disclosure), it is not surprising that the government insisted on a DPA, rather than merely a civil settlement. There is little doubt that had this conduct been uncovered by the government rather than brought to its attention by way of a voluntary disclosure, the penalties could have been harsher, possibly involving a guilty plea by the company and possibly its executives. Such a guilty plea could have put FSBV out of business.

In addition, absent the voluntary disclosures, civil penalties could have been substantially higher. OFAC determined that the case did qualify as a voluntary disclosure but that the violations constituted egregious conduct, findings which mean that OFAC’s base penalty of $145 million was one half of the statutory maximum civil fines (the higher of $250,000 per violation or twice the value of the transaction) — or, in total, $290 million in maximum civil fines for OFAC violations. To this amount, OFAC applied the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines (31 CFR Part 501 app A) noting that:

• FSBV engaged in willful and reckless violations causing significant harm to the objectives of OFAC’s Iran and Sudan sanctions programs given the volume and value of the transactions;

• FSBV is a sophisticated and experienced aerospace services provider;

• FSBV had no formal OFAC compliance program in place for most of the five-year period when the violations took place;

• FSBV did not institute sufficient controls to completely stop the conduct at issue upon discovering the alleged violations;

• But that FSBV had no OFAC sanctions history in the five years preceding the date of the earliest of the alleged violations;

• FSBV has adopted new and more efficient internal controls since launching the internal investigation; and

• FSBV provided substantial cooperation during the investigation including by conducting an external internal investigation, producing voluminous records, and agreeing to toll the statute of limitations.

Based on its application of these factors, OFAC calculated a potential civil liability of $50,822,208 in its pre-penalty notice to FSBV. As noted above, the total actual fine amounted to $21 million, $10.5 million of which was designated to OFAC and BIS civil settlements.

The takeaway for observers trying to determine whether a voluntary disclosure is their best option should be that while a voluntary disclosure may lead to somewhat more lenient treatment, there will be no “free pass.” If a company has engaged in willful misconduct, then it should expect to feel real pain at the hands of the government, regardless of whether the conduct was disclosed voluntarily.

This leads us to offer some practical pointers for companies.

First, in cases involving potentially significant export control or economic sanctions violations, such as violations involving US embargoed countries, or violations involving highly sensitive items or technology to US arms-embargoed countries, it is critical to do an adequate investigation prior to filing an initial notification of voluntary disclosure to determine: (1) if violations have, in fact, occurred; (2) whether a disclosure is mandated by law; and (3) the seriousness of the case and, in particular, the degree to which the conduct was willful and/or approved by upper company management.

Filing an initial notification before ascertaining these key points is highly risky — the equivalent to crossing the Rubicon when you do not know what is on the other side.

If violations have occurred and disclosure is mandated by law, the company should immediately file initial notifications and proceed with both an investigation and corrective measures.

If violations have occurred but disclosure is not mandated by law, the company should take immediate actions to put in place policies and procedures — rolled out by top-level management — to ensure that the violations do not continue or recur. Robust compliance programs, including employee training and hotlines established to address employees’ concerns about the company’s compliance with government regulations, are the best defense to an export controls investigation. Rigorous compliance programs not only help to prevent violations, but they also increase a company’s ability to mitigate exposure.

The company should also consider whether to file a voluntary disclosure, keeping in mind that particularly in cases of willful violations of export controls and sanctions laws, voluntary disclosures are no guarantee that the company and individuals will not be subject criminal prosecution and very substantial fines. In addition, the U.S. government does not afford voluntary disclosure mitigation where it learned of a substantially similar violation from other sources before the voluntary disclosure was filed, although it may still award the company “cooperation points.” This calls into question at least some of the benefits of filing a voluntary disclosure in, for example, cases where there have been press reports of the alleged misconduct.

Whether or not a disclosure is filed, it is key for the company to follow through on its export compliance program to ensure that the misconduct is halted in full, hold individual employees responsible for misconduct and ensure they are suitably punished and invest substantial resources to get its export compliance program functioning at a very high level. If the US government later investigates the company, the company will then be able to explain the steps it has taken to make sure the violations were halted and fully remediated.

In its investigation, FSBV’s outside counsel reviewed 584,046 documents, interviewed 51 current FSBV employees and four former FSBV employees, collected data on 20,614 transactions possibly related to transactions involving US sanctioned countries, and reviewed data associated with 200,000 parts. As a Dutch company, it is noteworthy that FSBV provided unredacted documents after having assisted in expediting the DC US Attorney’s Office’s mutual legal assistance treaty request made to Dutch authorities, provided English transactions to Dutch documents (since the majority of documents were in Dutch), and facilitated interviews by US investigators and prosecutors of 12 FSBV employees and former employees and paid for their U.S. legal counsel.

In short, the resources devoted by the company to investigating the violations and cooperating with the US government is reminiscent of the resources companies have devoted to the investigation of a Foreign Corrupt Practices Act violations and the resulting penalties, while smaller than most of the larger FCPA fines, are still substantial. Moreover, it should be noted that, according to the statement of facts, FSBV ceased dealing with any Iranian military customers in March 2008. Thus, the violations for the final three of the five years when violations occurred involved the supply of civil aircraft parts to commercial airline companies — thereby presumably ensuring the safety of civil aviation, which is actually a grounds for BIS and OFAC currently to issue licenses, including licenses to Iran Air, notwithstanding the Iranian sanctions (see 15 CFR Part 746.7(b) and here). In other words, at least some of these exports would likely have been subject to a favorable US licensing policy today.

Whether or not to disclose past misconduct to the government is one of the most difficult and significant decisions a company will confront. On the one hand, if a company can remediate without disclosing, it will avoid what will often be a painful and expensive encounter with government authorities. On the other hand, not disclosing and having the government discover the misconduct on its own could result in a criminal prosecution that could put the company out of business and, potentially, its executives in prison. Disclosing voluntarily helps to reduce the likelihood of either of these dire consequences, but — and this must not be overlooked — there are no guarantees. Ultimately, the decision of whether to disclose will depend on the specific facts of the case. There are no cookie-cutter approaches that will always yield the correct decision.

It is always easy to second-guess, particularly when one does not have all the facts. In this case, for example, consider whether FSBV would have been better off if rather than making a voluntary disclosure, it had invested the very substantial resources it put into investigating itself into immediately remediating its past misconduct, punishing and firing corporate management, and implementing world-class export and economic sanctions compliance?