by Brent Carlson and Michael Huneke

The 118th U.S. Congress has taken an active and bipartisan interest in U.S. sanctions and export controls. With reports that U.S. executives have been asked to testify before the U.S. House Select Committee on the Chinese Communist Party[1] and recent hearings before a U.S. Senate subcommittee previewing further questions for both companies and regulators,[2] U.S. companies whose products might require a license for export to China or that might be found in Russian or Iranian weapons should prepare for congressional scrutiny—and congressional pressure on the U.S. Executive Branch departments to deliver enforcement results.

Companies should accordingly evaluate whether their compliance programs would survive congressional scrutiny—a type of scrutiny that does not carry the same constraints that U.S. regulatory or court proceedings might. Like many aspects of the current enforcement environment, here too prior experience with U.S. Foreign Corrupt Practices Act (“FCPA”) enforcement provides valuable lessons.

We offer below some observations and practical guidance for congressional hearings.

Follow the (Taxpayer) Money

The Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) and Science Act was signed by the President on August 9, 2022. Among up to $280 billion authorized by the law[3] was $39 billion in subsidies for chip manufacturing on U.S. soil, a 25% investment tax credit for capital expenses, and $13.2 billion for semiconductor research and training.[4]

Beneficiaries of such funding or incentives should expect increased congressional scrutiny of their compliance with U.S. sanctions and export controls.

During the 1970s, in the hearings that led to the FCPA, Congress focused on bribes paid by a U.S. company that had received taxpayer support. The Office of the Special Prosecutor empowered to investigate the Watergate burglary prosecuted several U.S. companies and executives for making illegal campaign contributions.[5] The Office referred information to the U.S. Securities & Exchange Commission (“SEC”), which discovered that “slush funds” used to make such contributions were also used to make payments to foreign officials for overseas business.[6]

Companies’ payments to foreign officials attracted congressional and media attention. In 1975, Northrop Corporation—which had pleaded guilty in 1974 to making illegal campaign contributions—defended its agent payments on the grounds that Northrop was following the “Lockheed model” of paying agents to secure foreign sales.[7] Lockheed was vulnerable to congressional scrutiny because, in 1971, it received a federal guarantee of up to $250 million in loans to stay in business. The U.S. Senate held hearings titled “Lockheed Bribery”[8] and then-Senator Joseph Biden criticized Lockheed’s chairman for providing “phony” justifications for $202 million in agent payments.[9]

Lockheed was far from alone in its conduct—more than four hundred publicly traded companies disclosed overseas bribe payments.[10] Nor were foreign bribe payments clearly illegal under U.S. law when Lockheed made them (a parallel, perhaps, to today’s perceived export controls loopholes and the risks of using them[11]). Yet the taxpayer guarantees (and a competitor’s finger-pointing) focused scrutiny on Lockheed’s conduct.

Beneficiaries of CHIPS and Science Act funding or incentives should gird themselves for similar scrutiny regarding their compliance with U.S. sanctions and export controls.

Congress Does Not Cede U.S. Foreign Policy to the Executive Branch

U.S. companies should not expect the U.S. Congress to toe any foreign policy lines set by the Executive Branch.

Again, the history of the FCPA provides a compelling reminder. In response to the SEC’s effort to enforce in court its subpoena of Lockheed, then-Secretary of State Henry Kissinger filed a Suggestion of Interest arguing that the public disclosure of Lockheed’s payments to officials of friendly governments could have “grave consequences for significant foreign relations interests of the United States.”[12] Although the court agreed, Congress did not consider itself restrained by the court’s holding. Congress publicly disclosed payments to officials of several friendly governments, leading to the resignation and criminal conviction of a Japanese prime minister, destabilization of the Dutch monarchy, and substantial election gains for Italy’s Communist Party.[13]

The recent February 22-23, 2024 visit to Taiwan by a bipartisan delegation of the U.S. House Select Committee on the Chinese Communist Party is but the most recent reminder of the ability and willingness of members of Congress to engage in foreign policy.[14]

From the Front Lines to the Front Pages

From the Red to the Black Sea, there are live-fire conflicts targeting and killing U.S. friends and U.S. military personnel. Recovered ordnance is deconstructed and its contents—and those contents’ manufacturers—catalogued. Russia and Iran, by dragging U.S. companies into the front lines, are accordingly also dragging them onto the front pages of U.S. news.[15]

Companies whose products—even ubiquitous, consumer electronics—are found on the battlefield should anticipate congressional scrutiny. Congress is a political forum and the difficulties of tracking such components or the fact that their export might not even be restricted (unless sanctions or certain catch-all provisions apply) does not prohibit members of Congress from inquiring as to how the products arrived on the battlefield.

Practical Steps for Companies, In-House Legal and Compliance Teams, and Boards of Directors

1) Ensure that executives’ public statements about sanctions and export controls compliance are vetted by compliance counsel, not just Investor Relations

There is often a tension between what Investor Relations wants to say to assuage investors’ concerns and what compliance counsel would be comfortable saying. Regarding U.S. sanctions’ and export controls’ impact on a company’s business, compliance counsel should review and be comfortable with statements made on earnings calls or otherwise. Such statements are low-hanging fruit should Congress seize upon them as evidence of conduct inconsistent with U.S. national security objectives, fairly or not.

2) Perceived loopholes lead not only to liability but also political danger

As we have warned, continuing to profit from perceived loopholes in sanctions and export controls carries the risk of legal liability,[16] particularly when enforcement transitions from a predominantly strict-liability, administrative regime to a white collar crime regime.[17] Profiting from perceived loopholes also risks congressional ire similar to Lockheed’s agent payments mentioned above. Congress has already expressed its frustration[18] over reports[19] of companies shifting sales to Inspur subsidiaries after the parent entity was added to the Entity List. If companies have indeed continued such sales under a belief that the subsidiaries are somehow not simply reexporting the products to the parent (or to end-customers at the parent’s direction), they should be prepared to defend that belief under scrutiny by Congress and the media.

3) Ensure the effectiveness of controls to meet license thresholds

Volkswagen infamously trained its diesel engines to detect emissions-testing circumstances and to downgrade performance artificially to frustrate those controls. Volkswagen ultimately agreed to spend up to $14.7 billion to resolve the allegations and remedy the harm,[20] and an executive was sentenced to seven years in prison for his role.[21] Companies exporting downgraded products should ensure that the products are truly downgraded and cannot be re-engineered by otherwise-prohibited end-users, particularly when depending on software to reduce the performance of hardware.

Footnotes

[Title Quote] Hannah Arendt, Men in Dark Times (1970) (“Even in the darkest of times we have the right to expect some illumination, and that such illumination may well come less from theories and concepts than from the uncertain, flickering, and often weak light that some men and women, in their lives and their works, will kindle under almost all circumstances . . . .”) (quoted in the epigraph of Ian Johnson’s book Sparks (2023)).

[1] See Demetri Sevastopulo, US House China Panel Calls Intel, Nvidia and Micron Heads to Testify, Financial Times (Jan. 12, 2024); Mackenzie Hawkins, US House China Panel Seeks Nvidia, Intel, Micron Testimony (1), Bloomberg News (Jan. 12, 2024).

[2] U.S. Senate, Committee on Homeland Security & Government Affairs, Permanent Subcommittee on Investigations, Hearings on “The U.S. Technology Fueling Russia’s War in Ukraine” (Feb. 27, 2024).

[3] Ryan Tracy & Natalie Andrews, Senate Approves $280 Billion Bill to Boost U.S. Chip Making, Technology, Wall St. J. (July 27, 2022).

[4] The White House, FACT SHEET:  CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China (Aug. 9, 2022).

[5] See The Final Report of the S. Select Comm. on Presidential Campaign Activities, S. Rep. No. 93-981, at 445–46 (1974).

[6] Report of the Securities & Exchange Comm’n on Questionable and Illegal Corporate Payments and Practices, submitted to the Comm. on Banking, Housing & Urban Affairs, 94th Cong., 2d Sess. at 3, 37 (Comm. Print. May 12, 1976).

[7] Multinational Corps. and U.S. Foreign Policy: Hearings Before the Subcomm. on Multinational Corps. of the S. Comm. on Foreign Relations (Part 12), 94th Cong., 1st Sess. 131 (statement of Howard P. Willens, counsel to Northrop Chairman Richard W. Millar) (referring to the questionable practice as the “Lockheed model”), 129–30 (quoting a report from Ernst & Ernst) (1975).

[8] See Lockheed Bribery: Hearings Before the S. Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 1 (1975) (statement of Senator William Proxmire).

[9] Multinational Corps. and U.S. Foreign Policy: Hearings Before the Subcomm. on Multinational Corps. of the S. Comm. on Foreign Relations (Part 12), 94th Cong., 1st Sess. 381–83 (1975).

[10] See H.R. Rep. No. 95-640, at 4 (1977).

[11] See Brent Carlson, When Loopholes Create Liability Pitfalls: A Fresh Look at Export Controls, NYU Program on Corporate Compliance & Enforcement (“PCCE”) Blog (Aug. 25, 2023).

[12] Letter from Sec’y of State Henry A. Kissinger to Attorney General Edward H. Levi (Nov. 28, 1975) (providing date of SEC subpoena), reprinted at Abuses of Corp. Power: Hearings Before the Subcomm. on Priorities and Econ. in Government of the Joint Econ. Comm., 94th Cong., 1st & 2d Sess. 164–65 (1976).

[13] Multinational Corps. and U.S. Foreign Policy: Hearings Before the Subcomm. on Multinational Corps. of the S. Comm. on Foreign Relations (Part 14), 94th Cong., 1st Sess. (1976); see S. Hearing 99-766 to Amend and Clarify the Foreign Corrupt Practices Act of 1977: Joint Hearing Before the Subcomm. on Int’l Finance and Monetary Policy and the Subcomm. on Securities of the S. Comm. on Banking, Housing, and Urban Affairs, 99th Cong., 1st Sess. 20–21 (1986) (statement of Senator William Proxmire).

[14] See Press Release, “Taiwan and America United Against CCP Aggression”: Gallagher Leads Historic U.S. Delegation to Taiwan Following Presidential Elections (Feb. 22, 2024).

[15] See, e.g., Alberto Nardelli, Most of Russia’s War Chips Are Made by US and European Companies, Bloomberg (Jan. 25, 2024); Benoit Faucon & Warren P. Strobel, Iranian Military Technology and Advisers Aid Houthi Attacks in Red Sea, Officials Say, Wall St. J. (Jan. 24, 2024); Natasha Bertand, CNN Exclusive: A single Iranian attack drone found to contain parts from more than a dozen US companies (Jan. 4, 2023); Yermak-McFaul International Working Group on Russian Sanctions & Kyiv School of Economics, Challenges of Export Controls Enforcement (Jan. 11, 2024).

[16] See Brent Carlson, When Loopholes Create Liability Pitfalls: A Fresh Look at Export Controls, NYU Program on Corporate Compliance & Enforcement (“PCCE”) Blog (Aug. 25, 2023).

[17] Brent Carlson & Michael Huneke, How Not to Stand Out Like a Sore Thumb (Part 1): A Fresh Look at the “Willful” Intent Standard for Criminal Liability in Export Controls and Sanctions Corporate Enforcement, NYU PCCE Blog (Feb. 13, 2024); Brent Carlson & Michael Huneke, How Not to Stand Out Like a Sore Thumb (Part 2): A Fresh Look at the “High Probability” Definition of Knowledge Applied to Export Controls and Sanctions Enforcement, NYU PCC Blog (Feb. 21, 2014).

[18] US House of Representatives Select Committee on the Chinese Communist Party, Letter on Inspur [to the US Department of Commerce], (March 24, 2023).

[19] Jenny Leonard and Ian King, US Races to Close Loophole in Ban on China Tech Firm Inspur, Bloomberg News (Mar. 9, 2023).

[20] U.S. Department of Justice (“DOJ”), Volkswagen to Spend Up to $14.7 Billion to Settle Allegations of Cheating Emissions Tests and Deceiving Customers on 2.0 Liter Diesel Vehicles (June 28, 2016).

[21] DOJ, Volkswagen Senior Manager Sentenced to 84 Months in Prison for Role in Conspiracy to Cheat U.S. Emissions Tests (Dec. 6, 2017).

Brent Carlson is a Director at the Berkeley Research Group, LLC. Michael Huneke is a Partner in the Anti-Corruption & Internal Investigations and Sanctions, Export Controls, and Anti-Money Laundering practice groups at Hughes Hubbard & Reed LLP. The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

The views, opinions and positions expressed within all posts are those of the author(s) alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of the New York University School of Law. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this site and will not be liable any errors, omissions or representations. The copyright of this content belongs to the author(s) and any liability with regards to infringement of intellectual property rights remains with the author(s).