Legally Armed: V19N9

By Teresa G. Ficaretta, Esq. & Johanna Reeves, Esq.

Voluntary Disclosures to Federal Agencies – Proceed with Caution

Manufacturers, importers, dealers and exporters in firearms and ammunition operate their businesses in a highly regulated environment under oversight from a variety of federal, state and local government agencies. Even with the best intentions, a detailed compliance program, and highly trained personnel, mistakes can be made. When is it a good idea to bring those mistakes to the attention of regulators and seek forgiveness? This article provides an overview of Federal regulations governing voluntary disclosures to the U.S. Department of State and the Bureau of Alcohol, Tobacco, Firearms and Explosives, and discusses considerations businesses should weigh in deciding whether a voluntary disclosure should be made. We focus on these two agencies as they have significant authority over Federal Firearms Licensees who manufacture, import, deal and export in firearms and ammunition.1

I. Voluntary Disclosures to the Department of State Directorate of Defense Trade Controls

A. Regulatory Background

The U.S. Department of State has licensing authority over the export and temporary import of defense articles and defense services, pursuant to the Arms Export Control Act, 22 U.S.C. § 2778. The Directorate of Defense Trade Controls (DDTC) has authority to implement the regulations in 22 C.F.R. Parts 120-130, known as the International Traffic in Arms Regulations (ITAR). As stated in its regulations at Section 127.12, DDTC strongly encourages the disclosure of information by persons who believe they may have violated any export control provision of the Arms Export Control Act (AECA) or any regulation, order, license or other authorization issued under the statute. ITAR Section 127.12(a) indicates that DDTC may consider a voluntary disclosure of a potential violation as a mitigating factor in determining what administrative penalties, if any, to impose. The regulations further state that a failure to report a violation may be viewed as an adverse factor in determining the appropriate penalties to be imposed. This means that if DDTC discovers the violation on its own, from another government agency, or through a third party, the lack of a voluntary disclosure is an aggravating factor that may be considered when the agency determines whether a penalty should be imposed.

DDTC regulations in ITAR Section 127.12(c)(1) state that persons who want to make a voluntary disclosure should initially notify DDTC “immediately after a violation is discovered.” The ITAR clarifies that an initial notification need not include all information pertinent to the violation, as long as the disclosing party provides a full disclosure within 60 calendar days of the initial notification.

The content for voluntary disclosures is set forth in ITAR Section 127.12(c)(2):

• Description of the nature and extent of the violation;
• Circumstances surrounding the violation (why, when, where, and how the violation occurred);
• Identities and addresses of all persons known or suspected to be involved in activities giving rise to the violation (include mailing, shipping, and e-mail address; telephone numbers, fax numbers, and any other known identifying information);
• Department of State license numbers, exemption citations, or descriptions of any other applicable authorization;
• U.S. Munitions List category and subcategory, product description, quantity, and characteristics or technological capability of the hardware, technical data, or defense service involved;
• Description of corrective actions undertaken to address causes of violations and disciplinary action taken;
• Name and address of person of person making the disclosure and a point of contact, if different.

ITAR Section 127.12(d) provides that voluntary disclosures should be accompanied by copies of
substantiating documents.2

B. Recommendations for Voluntary Disclosures to DDTC

DDTC officials recommend parties who suspect a violation directly submit voluntary disclosures directly on company letterhead rather than having a third party consultant or outside counsel submit the disclosure. If outside counsel assists in preparing the disclosure, they may be identified in the closing paragraph and authorized to communicate with DDTC on the company’s behalf. DDTC also recommends the disclosure include a summary matrix or timeline if the violations are complex or numerous. Disclosing parties may also wish to include a summary at the beginning of the submission that identifies the potential violation and appropriate ITAR section, a description of the commodity and its USML category; the date of the violation; foreign parties involved, if any; and related license numbers.

Whatever the content of the voluntary disclosure to DDTC, the activity that resulted in the violation or alleged violation must stop immediately upon discovery. A company risks losing substantial or all credibility with DDTC if it continues to engage in the same conduct that is the subject of the disclosure. Moreover, follow-up questions from DDTC may include those about when the conduct relating to the violations stopped. If it did not stop within a reasonable time after discovery of the potential violations, DDTC may consider this an aggravating factor, and the company should be prepared to explain its delay in halting the conduct in the voluntary disclosure, and the explanation must be satisfactory to DDTC.

Usually within a few weeks after receiving a voluntary disclosure, DDTC will assign a case number (called a “VD” number) and send a letter to the disclosing entity advising its receipt of the disclosure. DDTC expects companies to hold off on applying for any export licenses or other authorizations relating to the disclosure until the VD number has been issued. The VD number should be cited on all license applications submitted during pendency of the disclosure. Applicants should not enter a fictitious VD number in a license application while a VD is pending. If extenuating circumstances require submission of a license application before receiving a VD case number, it is important the applicant consult with the Office of Defense Trade Compliance to coordinate submission of a license application.

It is important to implement remedial actions to address the reported violations. DDTC is much more likely to close a voluntary disclosure without action if it believes the company takes responsibility and has put controls in place to prevent future violations. If particular remedial actions are not identified at the time of the disclosure, it is important to evaluate what steps are necessary to prevent the violation from happening again. And remember, anything presented to DDTC as a remedial or mitigating factor must be supported with documentation. For example, revisions to corporate policies and procedures and compliance training.

C. DDTC’s Disposition of Voluntary Disclosures

1. Potential Penalties

DDTC may impose a variety of penalties for persons who violate the AECA or the ITAR. As stated in ITAR Section 127.3, violations are punishable by fines and/or imprisonment. Property involved in violations of the AECA is subject to seizure and forfeiture, and DDTC may administratively debar persons who violate the law and regulations pursuant to ITAR Section 127.7. Administrative debarment results in persons being prohibited from participating directly or indirectly in activities subject to the ITAR, including registration and licenses. Debarment is generally for a period of three years, and debarred persons must request and be approved for reinstatement before being allowed to lawfully participate in activities subject to the ITAR.

Under ITAR Section 127.10(a), the Assistant Secretary of State for Political-Military Affairs is authorized to
impose civil penalties in an amount that does not exceed the criminal penalties under the AECA. Section 127.10(b) provides that DDTC may require payment of a civil penalty or completion of any administrative action pursuant to Parts 127 or 128 of the ITAR prior to issuing, restore or continue the validity of any export license or other approval. DDTC utilizes this authority to enter into Consent Agreements to settle violations that may be the subject of voluntary disclosures. Consent Agreements do not require persons to admit to particular violations of the law and regulations and allow the person to settle and dispose of all potential civil charges, penalties, and sanctions outlined in a Proposed Charging Letter issued by DDTC. Consent Agreements generally require payment of a specified fine and may impose other conditions on companies, such as training, adoption of a compliance program and follow-up reporting to DDTC.

2. Factors Considered by State in Reviewing Voluntary Disclosures

In reviewing voluntary disclosures, DDTC considers a number of factors, including the following:

• Harm to U.S. foreign policy or national security;
• Adherence to law, regulations, and DDTC’s licensing and compliance policies;
• Severity of the violation, e.g., is it minor/procedural or substantive, one-time versus repeat;
• Company’s approach and commitment to compliance;
• Whether the violation continues or has ended;
• Whether the transaction would have been authorized if the company sought authorization;
• Number of locations, programs, and business units for the company;
• Whether the root causes of the violation have been identified and addressed;
• Whether remedial training has been provided to key personnel;
• Discipline for personnel involved in the violation;
• Systems put in place to prevent future violations;
• Degree of cooperation from the company reporting the violations.

DDTC officials have stated publicly on a number of occasions that less than one percent of voluntary disclosures result in penalties being imposed pursuant to a Consent Agreement. This does not mean, however, that all persons who make voluntary disclosures to DDTC come through the process unscathed. A significant number of disclosures result in a request for more information. If the company does not have the information or documentation requested, resources will be required to adequately respond to DDTC’s request. Disclosures may also result in DDTC recommending specific compliance measures that are costly to implement, such as requiring the company engage a third party to conduct a complete audit of its export controls. In addition, disclosures may result in future scrutiny from DDTC to ensure that the remedial measures promised by the company have been fully implemented. In a small number of cases involving knowing or willful violations of the law, information disclosed pursuant to a voluntary disclosure results in referral for criminal investigation and possible prosecution. These are all risks that should be considered by companies and their counsel before making a voluntary disclosure.

The primary benefit in making a voluntary disclosure to DDTC is the mitigating weight the agency may give to this information. This is a positive factor that should help the company, particularly if the violation is one that may be reported by a competitor or third party, or one that will be discovered by DDTC in the process of reviewing a license application.

However, when determining whether a voluntary disclosure is appropriate for a potential violation, we caution readers to carefully weigh the potential mitigating effect of a voluntary disclosure against potential penalties and continued oversight by DDTC. In addition, it is important to consider the limitations of voluntary disclosures set forth in ITAR Section 127.12(b). Of these limitations is the important fact that DDTC has sole discretion as to the mitigating weight of a disclosure, even one that is voluntary. Indeed, ITAR Section 127.12(b)(4) states the following:

The provisions of this section do not, nor should they be relied on to, create, confer, or grant any rights, benefits, privileges, or protection enforceable at law or in equity by any person in any civil, criminal, administrative, or other matter.

Companies who determine a voluntary disclosure is a prudent course of action must be prepared to continue to cooperate with DDTC after filing the disclosure. Follow-up questions must be answered within the prescribed timeframe, and if the response deadlines cannot be met, the company should request an extension. Failure to continue cooperating with DDTC after filing a voluntary disclosure could have serious consequences, including the detrimental effect of turning a voluntary disclosure into an aggravating factor.

II. Voluntary Disclosures to the Bureau of Alcohol, Tobacco, Firearms and Explosives

A. Regulatory Background

ATF has authority to administer and enforce the Gun Control Act of 1968 (GCA), 18 U.S.C. Chapter 44; the National Firearms Act (NFA), 26 U.S.C. Chapter 53; and the permanent import provisions of the AECA. Regulations implementing the three statutes are in 27 C.F.R. Part 478 (GCA regulations), 27 C.F.R. Part 479 (NFA regulations), and 27 C.F.R. Part 447 (AECA regulations).

Penalties for violating the GCA are primarily felonies, with a few exceptions for certain record keeping and other offenses. See 18 U.S.C. § 924(a)(1)-(7). The GCA provides for civil monetary penalties only for violations of 18 U.S.C. § 922(t)(5), a provision of the Brady Law.

Section 923(e) of the GCA allows ATF to revoke the license of any Federal Firearms Licensee who willfully violates the GCA or any implementing regulation. Firearms and ammunition involved in any willful violation of the GCA are also subject to seizure and forfeiture pursuant to 18 U.S.C. § 924(d)(1).

B. Disclosing Violations to ATF

None of the statutes or regulations ATF administers have provisions for voluntary disclosure of violations of the law. This means there is no mitigation that goes along with bringing potential violations to ATF’s attention. Even without this effect, however, it may be in a licensee’s best interest to bring the information to the government rather than sitting back and waiting for them to discover it. In the experience of the authors, ATF officials appreciate receiving such information from a licensee and are generally willing to work with the licensee to ensure future compliance. When licensees make voluntary disclosures they control the message and manner of delivery and choose to whom the information is provided. This is often preferable to having the violation discovered during an annual compliance inspection when ATF is in the driver’s seat.

The factors below should be considered in determining whether to disclose violations of the federal firearms laws to ATF:

1. Does ATF already know about the violation?

2. Is ATF likely to discover the violation in the course of an annual compliance inspection?

3. Is the violation or potential violation one that threatens national security or public safety, such as missing firearms or sales to felons, other prohibited persons, or underage persons?

4. Does the violation affect ATF’s ability to trace firearms, such as marking violations?

The down side to disclosing potential violations to ATF is that there may be a full field inspection of your business shortly after the disclosure is made. This is true whether the disclosure is made to Headquarters or field officials, so it is important to have inventory and records in order to avoid additional citations. ATF has limited resources for field inspections, and when a particular licensee is brought to the agency’s attention, they are likely to take that opportunity for a full compliance inspection. If ATF then finds numerous or significant violations during a compliance inspection, it may propose administrative revocation of the license. Another down side is a field referral for criminal investigation. If the violations are knowing or willful and ATF considers them to be serious, it may open an investigation.

Finally, do not forget asset forfeiture. ATF has the authority to administratively seize and forfeit any firearms or ammunition involved in a violation of law. This is a powerful administrative penalty that can be imposed and requires no involvement from the United States Attorneys Office.

IV. Conclusion

Companies who commit inadvertent violations of the law when conducting their businesses should carefully consider whether there is benefit in voluntarily disclosing the violations to any federal agency. For those agencies with regulations specifically providing for mitigation, the risk of sanctions may be worth it. Even without such regulations, there may be benefits in taking control and bringing the violations to the agency’s attention. This is particularly true if the violation is one that may come to the agency’s attention in another way. The decision whether to make a voluntary disclosure to any federal agency should be considered carefully in consultation with qualified legal counsel.

The information in this article is for informational purposes only and is not intended to be construed or used as legal advice.