Yesterday the Bureau of Industry and Security (“BIS”) published in the Federal Register an Advance Notice of Proposed Rulemaking. In the Notice, BIS proposed to fill in Country Group C of Supplement 1 to Part 740. Under the BIS proposal, the countries in Group C would be called “Destinations of Diversion Concern.”

BIS says in the Notice that licensing policy would “likely change” for exports going to countries listed in the new Group C. I think BIS is just being a little coy with the “likely” business — you can pretty much bet that licensing policy will certainly change. Why else bother with the list?

The Notice lists the factors that will be considered before a country is admitted to the new club:

• Transit and transshipment volume;

• Inadequate export/reexport controls;

• Demonstrated inability to control diversion activities in this destination;

• Government not directly involved in diversion activities; and

• Government unwilling or unable to cooperate with the U.S. in interdiction efforts.

So, who do we think is going to be on the list? BIS won’t say in this “Advance Notice.” But we think that BIS has at least one country in mind and that this “Advance” Notice is a shot across the bow aimed at the UAE. It’s only been several months since Assistant Secretary Padilla of BIS and Undersecretary Abdulla Bin Ahmed Al-Saleh of the UAE engaged in a war of words over diversion of shipments from the UAE to Iran and other places of concern.

Any other ideas? Leave them in the comments where I suspect that they just might be seen by BIS.

Magnetic Shield Corporation, the company that made the magnetic shield vault in which the Watergate tapes are stored, filed a voluntary disclosure with the Bureau of Industry and Security (“BIS”), something it probably now regrets. According to a Charging Letter just posted on the BIS site, Magnetic Shield exported magnetic shielding in 2001 to the Indira Gandhi Centre for Atomic Research, which is on BIS’s Entity List, without the required license. The company also forgot to fill out item 27 on the Shipper’s Export Declaration for the 2001 export. Exporters are required to put the license number, license exception or NLR (“No License Required”) in Item 27. Finally, it appears that the company attempted to export magnetic shielding to the Indira Gandhi Centre in a separate transaction in 2004.

According to the Settlement Agreement entered into with respect to these transactions, Magnetic Shielding voluntarily disclosed “certain” of these transactions. The Settlement Agreement doesn’t disclose which of the transactions were voluntarily disclosed, but it’s reasonable to suppose that the completed transaction in 2001 was the subject of the voluntary disclosure after the attempted export in 2004 led to a BIS inquiry.

Magnetic Shield agreed to pay $19,000 in settlement of the BIS charges. Considering that Magnetic had a maximum liability of $33,000 for one export violation in 2001, one technical SED violation relating to the 2001 export, and one attempted export in 2004, BIS didn’t really do Magnetic Shield much of a favor here for the voluntary disclosure. The issue here is why BIS charged the SED violation other than to increase the ultimate penalty. There is no allegation that the failure to fill out Item 27 was anything other than a simple clerical error. The only reason to charge the failure to fill out Item 27 in the SED appears to have been to justify collecting a higher fine for the voluntary disclosure.

(Note: post and comments updated to reflect that two transactions rather than one were involved.)

BIS just posted additional information on voluntary self disclosures on its website, including a slightly edited version of Wendy Wysong’s article (paid subscription required) from the December issue of The Export Practitioner entitled “BIS Data Show Benefits of Voluntary Disclosures.” The website also just posted descriptions of voluntary self-disclosures and their outcomes for 2004, 2005, and 2006.

This is more fallout from the brouhaha that this blog started when it criticized the outcome in the EP MedSystems case and suggested that because of that case, a company should think long and hard before filing a voluntary self-disclosure with BIS. The posted article argues that VSDs often result in a 50 percent reduction of the maximum allowable penalty. As I’ve said before, this approach by BIS is somewhat disingenuous given BIS’s well-known ploy of trying to turn single exports into multiple violations. In all events, I am reviewing these new materials and will post my analysis of them later.

In the meantime, I did notice one interesting thing in the VSD article that I had not focused on previously:

Of course, disclosure of violations to BIS and BIS’s action on VSDs are not the only steps needed to fully address noncompliance issues. Disclosing parties must also continue internal improvement of their compliance efforts, programs, and processes. Corrective actions to address the underlying causes of noncompliance and to ensure that violations do not recur are a critical part of companies’ overall export compliance programs. In order to avoid a denial order
in cases involving knowledge, BIS looks particularly closely at the possibility of recurrence. Factors considered include the continued employment of culpable employees, the actual implementation of the export compliance program set forth on paper, and senior management commitment to future compliance.

Yikes. This is, to my knowledge, the first time that an export agency has publicly suggested that a company filing a voluntary disclosure needs to fire the employees involved. Even the Thompson Memorandum, which discusses considerations in charging a criminal offense, says that the prosecutor should consider what the company has done to “discipline or terminate [the] wrongdoers.” Here BIS is suggesting that employees involved in a civil violation should simply and automatically be terminated, without even any consideration of other disciplinary measures that might be more appropriate to the circumstances.

The sucking sound you are now hearing is the sound of hundreds of export compliance officers looking for new jobs.