ITC Audits & Investigations
Tahlia Townsend
December 11, 2015
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Regulatory landscape
Office of Foreign Assets Control (OFAC) (Treasury Dep’t)
Country-specific sanctions; specially designated nationals
Directorate of Defense Trade Controls (DDTC) (State Dep’t)
International Traffic in Arms Regulations (ITAR)
Bureau of Industry and Security (BIS) (Commerce Dep’t)
Export Administration Regulations (EAR)
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• Genuine commitment at the top
• Proper oversight and independence
• Accurate, living policies and procedures
• Meaningful training
• Regular risk-based review, audit, and testing
• Meaningful mechanisms for internal reporting
• Prompt and thorough investigations
• Consequences for willful misconduct
• Convincing, completed & sustained corrective actions
Government expectations
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Sentencing Guidelines
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Sentencing Guidelines
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Audits
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Why audit?
• USG expectations
• Risk mgmt - if it isn’t audited, it isn’t done
• Culture and awareness Who should perform the audit?
• Business or legal?
• Internal or external? Scope & frequency
• Risk profile
• Manageability
• Prevention, detection, & cure
Preliminary considerations
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Volume of hardware exports Exports to known transshipment hubs (e.g., UAE, Turkey …) Exports to countries with high numbers of SDNs/Entity List
parties (e.g., China, Pakistan, Russia, Singapore …) Sensitivity of technology (e.g., aerospace, electronics, high-tech
materials, semi-conductors, nuclear-related machinery …) Volume of foreign suppliers External access to IT systems (supplier portals, etc.) Foreign subsidiaries/offices (conflicts between sanctions
regimes; awareness of re-export obligations) Volume of foreign employees Mergers and acquisitions (integration, culture, successor liability)
Factors Affecting Risk Level
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Perform under legal direction Think carefully about scope & frequency Have a written audit process & timetable
• Review BIS’ online EMCP Audit Module Self-Assessment Tool
Document carefully Act promptly on findings
• Assign owners and track completion (with proof!)
• Create mechanisms for accountability
• Watch out for recidivism
Tips for successful audits
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Internal Investigations
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Audit finding Employee report Third party report M&A due diligence Government inquiry, direction, subpoena, or search
• Data mining
• Competitor/whistleblower
• Border seizure
• Disclosure/other investigation
How do investigations start?
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Determine whether a violation occurred If so:
• Identify who, what, when, and where of violation
• Determine root cause
• Implement corrective actions
• Disclose in appropriate cases If no:
• Document conclusion of no violation
• Identify and address the causes of the near-miss Demonstrate commitment to compliance
Goals
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Who should perform the investigation? How should it be scoped? Should we disclose?
Considerations
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Mandatory when ITAR 126.1 implicated Mitigation of penalties
• 15 CFR 766, Supp. 1 – “great weight”
• 22 CFR 127.12 “may be considered”
• 31 CFR Part 501 “important factor”; 50% penalty reduction (Appx A)
Credit only given if submitted before USG learns elsewhere (IVD?)
Failure to disclose will be considered “an adverse factor” (ITAR); “deliberate concealment” is an aggravating factor (EAR)
Most disclosures result in a warning letter but no guarantee Resources, penalties & public relations risks must be
weighed
Whether and when to disclose
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Timely Accurate Complete Convincingly corrected
Cardinal Rules
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Before the trail goes cold
• Documents, witnesses, memories … Before the government learns from other sources
• Disclosure is mitigating only if the USG has not already started an investigation
Initial disclosure
• ITAR “immediately after a violation is discovered”
• EAR “[a]s soon as possible after violations are discovered” Final Report
• ITAR 60 days after IVD
• EAR 180 days after IVD
• OFAC “within a reasonable period of time” after IVD
Timeliness
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If you don’t know what broke or why, you can’t explain it and you can’t fix it
Certification is required for disclosures Misrepresentations are independent violations and
can make a bad situation much worse Gaps in disclosures will provoke supplemental
questions Credibility counts
Accuracy
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Don’t make assumptions, do second-guess Do involve subject matter experts (e.g., IT) Trust but verify
• Ocular proof!
• Interview memos
• Action owners Check it thrice
• How do I know? Who told me? Where’s the proof? If you disclose, be clear about any gaps/unknowns
Achieving Accuracy
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• Scopeo Time period?o Other business units/divisions? o Other products? o Other parties/places?
• Identification of partieso “All individuals and organizations, whether foreign or
domestic, involved in the activities giving rise to the violations”
o Citizenship & country of birth (ITAR) - foreign privacy laws?
• Robust root cause & convincing corrective actions
Completeness
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Engage the business on RCCA
• Accuracy
• Feasibility
• Ownership Plan for the long haul
• Error-proofing
• Audit Don’t promise what you can’t deliver Do assign action owners Do track to completion and obtain (and document) concrete proof
Winning on Corrective Actions
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PROBLEM: “You may not sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service, in whole or in part, any item subject to the EAR and exported or to be exported with knowledge that a violation of the Export Administration Regulations, the Export Administration Act or any order, license, License Exception, or other authorization issued thereunder has occurred, is about to occur, or is intended to occur in connection with the item.” 15 CFR 736.2(b)(10) (“GP10”)
SOLUTION: “[A]t the time that a voluntary self-disclosure is made, the person making the disclosure may request permission from BIS to engage in the activities described in §764.2(e) of this part that would otherwise be prohibited.” 15 CFR 764.5(f)
Corrective Actions & GP10 …
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Perform under legal direction; do education re privilege Have a well-defined process with milestones and
deadlines Engage management early to secure resources Be clear about scope in any VSD Document findings & conclusions even if not disclosing Don’t make assumptions and do demand proof of
material facts wherever possible Engage the business on corrective actions, assign
owners, and track to completion with proof Follow up with employee who reported a violation to let
them know it has been addressed
Tips for successful investigations
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Government Investigations
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Hold notice Deadline Scope Protection of privileged information Record of production Internal investigation
Responding to a Subpoena
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Answering the 8 AM Knock
Prior training is critical for effective response
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Clarify nature of investigation and scope of search Assert representation of corporation and employees; instruct
agents not to interview employees without counsel present Assist in advising employees of rights and dismissing non-
essential employees Monitor search Minimize business disruption (computers etc.) Alert agents to privileged, classified, otherwise sensitive
documents Liaise with case agent / agency lawyer Timely launch internal investigation
Why call counsel?
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TELL THE TRUTH Describe nature of investigation No obligation to assist in search, but may do so Government may ask to interview employees, at home or work Employees have the right to consult with attorney before
consenting to an interview, and have right to speak to investigator with counsel present, without counsel present, or to not to speak at all
Employees have the right to understand the questions asked and to fully explain their answers. Employees are not required to speculate or answer a question they do not understand.
The company has retained counsel; the company may also arrange for counsel for employees and will/will not advance fees/costs of counsel
Employees should not provide company documents to investigators without notifying company counsel
Employee Advice of Rights
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Don’t think it’s over! Conduct internal investigation
• Hold notice
• Document collection
• Witness interviews
• Voluntary disclosure
• Corrective actions Manage dialogue with DOJ
After the Search
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• Tone from top – visible management commitment• Easy internal reporting – no retaliation• Thorough investigation – robust response• Meaningful corrective actions• Regular audit• Records of compliance activities• Adequate resources• Meaningful, function-specific training• Clear marking of privileged, confidential, classified, export-
controlled, and other sensitive documents• Smoking gun prevention (email, memos, social media …)
An Ounce of Prevention …
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This presentation is a summary of legal principles. Nothing in this presentation constitutes legal advice, which can only be obtained as a result of a personal consultation with an attorney. The information published here is believed accurate at the time of publication, but is subject to change and does not purport to be a complete statement of all relevant issues.
Wiggin and Dana’s International Trade Compliance Team
Practice Contact: Tahlia Townsend, [email protected], 203 498 4339
Jim Glasser
Dave Hall
Tahlia Townsend
Joe Martini
Dave Ring
Claire Coleman
Dan Goren
Sean Koehler
Rebekeh Gulash
Danielle Ives
Matt Nettleton