On December 18, 2024, the U.S. Senate Permanent Subcommittee on Investigations (PSI) released a majority staff report that assesses the challenges facing the U.S. Department of Commerce Bureau of Industry and Security's (BIS) export controls enforcement efforts. While the report is titled, "The U.S. Technology Fueling Russia's War in Ukraine: Examining the Bureau of Industry and Security's Enforcement of Semiconductor Export Controls" (the Report), its findings may have broad implications for both BIS and exporters that must comply with U.S. export controls. As we explain below, the Report reflects PSI's view that export controls enforcement has been "inadequate" and hints at what Congress and BIS may do to ramp up enforcement going forward. 

Background

Led by Senators Richard Blumenthal (D-CT) and Ron Johnson (R-WI) during the 118th Congress, PSI conducts in-depth, long-term investigations into a broad range of critical issues. Investigations undertaken by PSI involve bipartisan engagement and its findings are generally viewed as being rooted in a serious, fact-based inquiry. That PSI's minority members did not challenge or oppose any aspect of the Report suggests a broad consensus among Democrats and Republicans regarding U.S. export controls enforcement. As such, the Report's findings and recommendations are likely to continue to shape Capitol Hill's approach to export controls enforcement efforts, notwithstanding the transfer of power in the Senate and White House. 

The Report follows an inquiry launched by PSI in 2023, which ultimately lasted well over a year, focusing on the continued appearance of U.S.-manufactured semiconductors in Russian weapons even after the U.S. government imposed new U.S. export controls on Russia. The Report acknowledges that export controls have "emerged as a defining tool of national security" and have been used "to both hamper U.S. adversaries' present military production," particularly in the case of Russia, and "to create a strategic technology barrier" aimed at preventing countries like China from "gaining a military advantage in the future." 

Findings and Recommendations

While the Report repeatedly underscores the importance of export controls to national security, its findings provide a grim assessment of BIS's efficacy in enforcing export controls, concluding that the "enforcement of export controls is a shadow of what it should be, and inadequate at every level." In summary, the Report notes the following as key factors exemplifying and/or contributing to BIS's ineffectiveness: 

1. Inadequate resources for BIS operations. The Report notes that "BIS's workload and responsibilities tied to national security have drastically increased since 2010, but its funding has remained mostly stagnant." This, according to PSI, translates to, among other things, insufficient international end-use checks necessary to detect the diversion of semiconductors and other controlled items to destinations like Russia and China. 
2. "Woefully outdated" information technology (IT) systems. The Report notes that BIS's IT systems have not changed or been updated since they were created in 2006, leading to processes that are "cumbersome," "counterintuitive," and which prevent BIS personnel from effectively conducting investigations and managing the review of BIS license applications. 
3. Failure to mandate that semiconductor companies include specific components in their compliance programs. The Report discusses BIS's approach, which emphasizes promoting voluntary cooperation through communicating BIS's desired outcomes, offering best practices guidance, and allowing companies to develop their own compliance programs. However, according to PSI, BIS's "preference for voluntary cooperation is leading to inadequate export controls in the semiconductor industry."
4. Failure to charge "knowing" violations based on a "high probability theory." Under the Export Administration Regulations' (EAR) broad definition of "knowledge," BIS can impose significant penalties where a person alleged to have violated export controls exhibited "an awareness of a high probability of [the] existence or future occurrence" of a violation (the so-called "high probability theory"). This could arise, for example, when a semiconductor company conducts no due diligence even after a transaction presents red flags for diversion, proceeds with the transaction anyway, and diversion occurs. Even though BIS has reminded companies of its broad definition of "knowledge," the Report notes that BIS has never brought an enforcement action against a company under the high probability theory. Notably, the high probability language closely tracks the language of the Foreign Corrupt Practices Act (FCPA), which has been wielded aggressively to impose major penalties on corporate actors for decades.
5. Failure to impose larger fines necessary "to incentivize robust, proactive corporate compliance with export controls." The Report highlights assurances to PSI by BIS officials, including comments by Assistant Secretary for Export Enforcement Matthew S. Axelrod, that significant penalties for export violations "were needed, are in process, and would be forthcoming." The Report also notes comments by Deputy Attorney General Lisa Monaco in 2023 describing export controls as "the new FCPA." Still, the Report points out that nearly a year following Axelrod's comments to PSI, no such fines have been announced. 

Takeaways

• PSI believes the intensity and aggressiveness of BIS's enforcement efforts have a long way to go to meet the national security needs of the day, even as the agency continues to issue new regulations imposing additional export controls related to advanced semiconductors, artificial intelligence (AI), connected vehicles, and biotechnology-related items. Given the bipartisan nature of PSI, the Report will be likely used to try to spur Congress to allocate additional resources to BIS in the ongoing appropriations process, the deadline of which has been pushed to March 14, 2025. Notably, BIS's requests for more funding in the 2024 budget were rejected by key members of the House of Representatives, who argued that BIS first needed to increase export controls restrictions before Congress would provide additional funding. 
• While we wait and see if BIS receives more resources, companies dealing with sensitive destinations and items, particularly companies dealing in advanced semiconductors, should assess whether their current compliance policies and procedures address recent developments in export controls, are appropriately tailored to their risk profiles, and incorporate BIS's latest best practices. Furthermore, companies should ensure deficiencies that are identified are promptly remedied. Recent announcements by BIS, such as the appointment of its first-ever Chief of Corporate Enforcement Raj Parekh (a former acting U.S. attorney who previously worked in the Department of Justice's (DOJ) National Security Division, which handles criminal prosecutions of export controls violations), along with regulatory adjustments threatening companies who fail to disclose significant violations with harsher penalties, indicate that even with limited resources, BIS remains focused on sharpening its existing enforcement tools.
• To the extent that BIS adopts PSI's recommendations (either voluntarily or pursuant to subsequent legislation), exporters could face an enforcement environment where: 
  • Dealing in certain types of sensitive technology, including advanced semiconductors, will face significantly higher penalties if they disregard BIS best practices.
  • The investigation and enforcement for "knowing" violations under the high probability theory will increase, placing further emphasis on the need for procedures that can adequately detect and address diversion and other compliance red flags.
  • The penalties imposed on companies by BIS in connection with export controls violations may dwarf those imposed in previous matters.

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Sandeep A. Prasanna, sprasanna@milchev.com, 202-626-5856 

Annie Cho, acho@milchev.com, 202-626-1570

Peter Kentz, pkentz@milchev.com, 202-626-5891

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