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It all begins with a fresh look.
 

In increasingly challenging and uncertain times, the first step in arriving at effective solutions begins with a fresh look at the issues.

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The "Fresh Looks" series of articles posted on NYU Law School's Program on Corporate Compliance and Enforcement blog provides innovative insights into each stage of the key critical areas for today's fast-changing landscape of export controls. 

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In each article, co-author Michael Huneke and I conclude with practical and actionable steps for legal & compliance teams, c-suite leadership, and boards of directors.

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Scroll down for the original article that launched it all: "When Loopholes Create Liability Pitfalls: A Fresh Look at Export Controls."

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How to audit export controls compliance programs, and those of your distributors, more effectively and less costly?

Carlson and Huneke explain the pitfalls of relying on traditional (often self-reported) inputs in conducting audits of companies’ or their distributors’ export control compliance programs. Although there is substantial political pressure from the U.S. Congress to conduct such audits across as many counterparties and as frequently as possible, trying to do such audits rapidly and at scale runs the risk of having to rely on inputs of limited value or veracity, creating costly potential liability landmines in the process. Instead, following recent U.S. cross-agency guidance emphasizing the “high probability” standard, U.S. companies should assess their greatest risks of export controls violations and direct their finite audit—and compliance—resources on those priority areas. Doing otherwise not only wastes time and money with increasingly material enterprise risk, but also will fail to bring to bear the right focus and critical thinking necessary to have a fighting chance of detecting and preventing the sophisticated diversion schemes that adversarial foreign powers support. The world has changed, and compliance tactics need to change with it.

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If my company can’t avoid a BIS administrative subpoena, how should we respond?

Huneke and Carlson conclude Part 1’s discussion of practical tips for avoiding administrative subpoenas, then conclude Part 2 with a discussion of how best to respond to a BIS administrative subpoena if one can’t be avoided.

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How do I anticipate and hopefully avoid BIS administrative subpoenas?

Huneke and Carlson explain why administrative subpoenas are likely the next step in the Bureau of Industry & Security’s enforcement “playbook,” discuss how to recognize and anticipate the circumstances in which they might arise, and begin their discussion of how best to avoid them entirely—continued in Part 2.

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How can I help my company avoid the pitfalls of legacy responses to distributor or reseller export controls diversion risks?

Huneke and Carlson follow Part 1’s focus on letters of assurance and their limitations with a look at other legacy responses. They explain why ignoring “red flag” letters or similar warnings, responding only selectively to such outreach, continuing to rely on traditional Know-Your-Customer (“KYC”) screening tools alone, and accepting representations at face value from new counterparties for the same items all present compliance and enforcement risks. They then explain why designing and implementing a methodology based on the “high probability” standard emphasized by BIS to conduct enhanced screening before proceeding with transactions otherwise appearing to present a high probability of diversion risk—per BIS guidance published on July 10, 2024—is the best way to protect the company and its management, directors, and employees.

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How do I identify—and then mitigate—the greatest diversion risks posed by our distributors and resellers, and is a letter of assurance enough?

Huneke and Carlson explore the necessity of seeking letters of assurance from distributors and resellers, such letters’ limitations, and how to leverage the “high probability” standard emphasized by the July 10, 2024, BIS enforcement guidance to help identify and mitigate the greatest diversion risks in U.S. manufacturing or design companies’ sales channels.

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What will drive BIS enforcement going forward, and how should I prepare my company?

Huneke and Carlson provide updates regarding BIS officials’ statements about export control enforcement, their comparison of emerging export control enforcement to past FCPA enforcement, and identify five core principles to guide the creation of risk-mitigation framework in the new enforcement environment driven by the “high probability” standard found in both the FCPA and the Export Administration Regulations.

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My company received a list from BIS. What does it mean?

Huneke and Carlson explain the significance of the so-called “red flag” letters sent by BIS to more than 20 American companies, both in terms of due diligence on the listed third parties and potential exposure under the “high probability” standard.

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How to improve pre- and post-resolution monitoring?

Huneke and Carlson explain why traditional monitoring might not achieve national security objectives, be too costly, and take too long. They propose an alternative framework for companies under investigation to consider pre-resolution or to negotiate for post-resolution with U.S. agencies.

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How to respond to U.S. congressional inquiries?

Huneke and Carlson provide observations and practical guidance for companies expecting to go before Congress. This was a timely subject given the Feb. 27 hearing in the U.S. Senate where senators called data of sales by four U.S. manufacturers to Kazakhstan and other diversion points “troubling" and previewing further hearings.

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What is the “high probability” standard under the EAR?

Huneke and Carlson delve into the “high probability" definition of knowledge in the U.S. Export Administration Regulations, which is also the same standard that applies to indirect payments under the U.S. Foreign Corrupt Practices Act (FCPA). This standard has in many ways been a key driver of FCPA enforcement for the past two decades but has not (yet) been applied by the Departments of Commerce or Justice in the context of export controls evasion.

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What is the “willfulness” standard for criminal liability?

Huneke and Carlson explored how the “willfulness" trigger for criminal liability works in practice, and provided practical tips for manufacturers and exporters seeking to ensure their compliance programs are calibrated to the risk of criminal enforcement.

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How can boards of directors manage their risk?

Huneke and Carlson examine the increasing liability risk for boards of directors given heightened geopolitical tensions and a renewed focus on U.S. national security. Huneke and Carlson discuss how the Delaware Chancery Court summarized directors' duty of oversight in the McDonald's shareholder litigation, and how the duty of oversight could apply to sanctions- and export controls-evasion—both in terms of compliance programs and responding to alleged or reported evasion.

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How do DOJ corporate enforcement policies apply?

Huneke and Carlson examine the U.S. Department of Justice (DOJ)'s corporate enforcement tools to increase the cost of non-compliance. These tools include the DOJ's new policies requiring companies to claw back or withhold executive compensation, requiring CEOs and chief compliance officers to make pre-release compliance certifications, and expanding the grounds for appointing independent compliance monitors.

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What are the penalties, and how might those evolve?

Huneke and Carlson discuss how export control penalties have historically fallen behind FCPA penalties and how that might change given new U.S. national security priorities.

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How to respond to allegations or reports of evasion?

Huneke and Carlson discuss how the U.S. Navy SEAL's and aikido martial arts masters' principle of “Slow is Smooth, Smooth is Fast" helps to respond to allegations of sanctions or export controls evasion.

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How to identify and assess my risks?

Huneke and Carlson explain that sanctions and export controls risk must be assessed in an updated and more effective manner that reflects the current heightened economic sanctions and export controls enforcement environment.

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What loopholes actually expose my company to liability?

Carlson launches the “Fresh Look” series with a cautionary tale of how (mis)perceived loopholes or technicalities may instead expose companies and individuals to liability.

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