ITC Audits & Investigations

Tahlia Townsend

December 11, 2015

2

© 2

015

Wig

gin

and

Dan

a LL

P

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)

© 2

015

Wig

gin

and

Dan

a LL

P

3

• 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

© 2

015

Wig

gin

and

Dan

a LL

P

4

© 2

015

Wig

gin

and

Dan

a LL

P

5

6

© 2

015

Wig

gin

and

Dan

a LL

P

Sentencing Guidelines

7

© 2

015

Wig

gin

and

Dan

a LL

P

Sentencing Guidelines

© 2

015

Wig

gin

and

Dan

a LL

P

Audits

© 2

015

Wig

gin

and

Dan

a LL

P

9

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

© 2

015

Wig

gin

and

Dan

a LL

P

10

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

© 2

015

Wig

gin

and

Dan

a LL

P

11

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

© 2

015

Wig

gin

and

Dan

a LL

P

Internal Investigations

© 2

015

Wig

gin

and

Dan

a LL

P

13

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?

© 2

015

Wig

gin

and

Dan

a LL

P

14

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

© 2

015

Wig

gin

and

Dan

a LL

P

15

Who should perform the investigation? How should it be scoped? Should we disclose?

Considerations

© 2

015

Wig

gin

and

Dan

a LL

P

16

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

© 2

015

Wig

gin

and

Dan

a LL

P

17

© 2

015

Wig

gin

and

Dan

a LL

P

18

© 2

015

Wig

gin

and

Dan

a LL

P

19

© 2

015

Wig

gin

and

Dan

a LL

P

20

Timely Accurate Complete Convincingly corrected

Cardinal Rules

© 2

015

Wig

gin

and

Dan

a LL

P

21

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

© 2

015

Wig

gin

and

Dan

a LL

P

22

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

© 2

015

Wig

gin

and

Dan

a LL

P

23

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

© 2

015

Wig

gin

and

Dan

a LL

P

24

• 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

© 2

015

Wig

gin

and

Dan

a LL

P

25

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

© 2

015

Wig

gin

and

Dan

a LL

P

26

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 …

© 2

015

Wig

gin

and

Dan

a LL

P

27

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

© 2

015

Wig

gin

and

Dan

a LL

P

Government Investigations

© 2

015

Wig

gin

and

Dan

a LL

P

29

Hold notice Deadline Scope Protection of privileged information Record of production Internal investigation

Responding to a Subpoena

© 2

015

Wig

gin

and

Dan

a LL

P

30

Answering the 8 AM Knock

Prior training is critical for effective response

© 2

015

Wig

gin

and

Dan

a LL

P

31

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?

© 2

015

Wig

gin

and

Dan

a LL

P

32

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

© 2

015

Wig

gin

and

Dan

a LL

P

33

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

© 2

015

Wig

gin

and

Dan

a LL

P

34

• 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 …

35

© 2

015

Wig

gin

and

Dan

a LL

P

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, ttownsend@wiggin.com, 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