Companies Should Generally Disclose More Serious Violations, Lawyers Say

Companies should generally lean toward disclosing serious violations to the government -- especially those that involve national security issues -- even if there’s almost no chance the violation will be discovered, lawyers said last week.

Wendy Wysong, a Steptoe lawyer and former senior export enforcement official with the Bureau of Industry and Security, said she has never heard of a possible violation that had “zero risk of discovery” by the government. “We've all seen wrongdoing discovered in the strangest ways,” she said during a webinar hosted by the law firm.

In some cases, Wysong said, companies may have no choice but to disclose, especially if they need to undo the export of a sensitive item that was illegally sent to a U.S. adversary. If the shipment affects national security, “you need to get that stuff back,” said Wysong, deputy assistant secretary for export enforcement at BIS from 2004 to 2007. “If it's going to require help from the U.S. government to get the stuff back, you need to disclose.”

But she also said disclosure isn’t “automatic” in every scenario. BIS has made several changes and updates to its administrative enforcement policies in recent years to convince more companies to submit voluntary disclosures while increasing penalties on businesses that don’t self-report (see 2304180071 and 2401170059).

A decision about whether to disclose “needs to be weighed carefully,” Wysong said. She said companies also should decide whether they're OK with government-led “forced remediation” -- which may require some businesses to report to a government-approved compliance monitor -- as opposed to the “benefits of being able to do this in a way that you want to do it that's good for your company.”

Iris Bennett, a Steptoe lawyer who works on Foreign Corrupt Practices Act issues, also said more serious potential violations “cut in favor of disclosure, in general.” She said that’s the case “even where it seems like the risk of detection is very low” or “nonexistent.”

Sometimes that’s because disclosures are driven by company executives who oversee the compliance team or broader business operations, she said. For example, if the board of a company believes the issue is serious enough that “management cannot deal with it effectively because it's too widespread or it goes too high up,” Bennett said, “the board may essentially insist on, ‘You all have to make a disclosure.’”

Outside auditors might also insist on a disclosure, she said, especially if they decline to sign off on a financial statement because they believe the issue is too “significant.”

“So even if there's no risk of detection, if it's a very serious issue, unfortunately, that's probably going to weigh in favor of disclosure,” Bennett said.

Zoe Osborne, a London-based Steptoe lawyer, said she “violently” agreed with Wysong and Bennett. “It's a risk appetite” decision, she said. “The only thing I would say is, if you're going to not report, you've got to be OK with the authorities finding out that you took that decision down the line and the consequences of that.”

She also said there are “probably a wider set of circumstances” in the U.K. and in Europe where companies are legally required to report a violation. In the U.K., for example, a company is required to report certain information to the country’s Financial Conduct Authority that the authority “would reasonably expect to know” about the firm, Osborne said.

Wysong added that U.S. companies must also think carefully about where to send their voluntary disclosures, which can be a complicated decision. Some agencies offer disclosure incentives only to companies that disclose violations directly to that agency.

“You need to consider all of these agencies that are involved in export controls and sanctions and figure out which agencies are going to have an interest and which agencies might think that they have an interest,” Wysong said.

She cited a recent case where a company illegally exported sensitive technology and “carefully” crafted a disclosure to DOJ, hoping the admission and cooperation would allow it to avoid an export suspension. But the company didn’t involve the State Department, Wysong said, which suspended the company’s export privileges.

“Each one of these agencies has a specific interest,” she said. “You have to make sure that you follow their particular regulations in making the disclosure, and you have to make sure that you've got the timing correct.”