BIS Could Soon Make More Use of High-Probability Knowledge Standard, Advisers Say
The Bureau of Industry and Security’s latest export control enforcement action against a semiconductor firm shows the agency may be preparing to target companies that flout its high probability standard, a trade lawyer and industry consultant said.
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Companies can be held liable for export violations under the Export Administration Regulations if BIS can show that the company had reason to know -- including the awareness of a high probability -- that an EAR violation had occurred, was occurring or was about to occur. The agency’s recent $4.25 million penalty against Alpha and Omega Semiconductor (see 2507020033) stated that the company knew or had reason to know that it was violating the EAR.
Michael Huneke, a lawyer with Hughes Hubbard, noted that that penalty was "not an enforcement action" based on the high probability theory. But the agency still included that language in the order, he said, which could mean BIS was "previewing" that its next enforcement action may rely heavily on the high probability threshold. He also noted that a Senate report from December called out BIS for never having brought "significant penalties against companies for violating export controls even when companies knew there was a high probability that the transaction breached or could lead to a breach of the law" (see 2412190033).
In the Alpha and Omega penalty, BIS is “emphasizing the full definition of knowledge, and in doing so, really setting up what’s going to come next,” Huneke said during a recent episode of his Red Flags Rising podcast, which he co-hosts with Brent Carlson of consulting firm BRG.
Huneke said BIS is "signaling to trade compliance teams -- who are looking for reasons why cases like this might demonstrate the value in investing now on the front end of compliance -- that the next case is going to maybe be on that high-probability threshold, that it’s going to go there."
Huneke added that the high probability-standard “isn’t scientific,” and companies should be prepared to defend their due diligence if BIS is gearing up to invoke it in future penalties.
“In these cases, you have the government telling you, here’s where we’re going with this," he said. "And that’s relevant to assessing -- and frankly, perhaps, reassessing -- compliance and enforcing risk going forward.”
Carlson agreed. “That seems like a signal, a clear signal, of more to come.”
Carlson also said companies should still be preparing for major penalties even though the pace of enforcement has slowed slightly since the Biden administration left office. Since January, BIS has levied two stand-alone monetary penalties: one against Alpha and Omega, and another against Unicat Catalyst Technologies, for illegally exporting catalysts designated as EAR99 (see 2506230055).
“It's always the most quiet before the storm,” Carlson said. "There seems to be a lot that’s going on in the backfield.”
He also noted that both Commerce Secretary Howard Lutnick and BIS Undersecretary Jeffrey Kessler said they want to significantly increase fines.
“I don’t think penalties are going to stay in these low ranges for a lot of folks any longer," he said.