According to the late Nobel Prize-winning Economist Milton Friedman, “Inflation is the one form of taxation that can be imposed without legislation.” So, regardless of the sector or the industry, there is a good chance the cost of doing business will increase over time. But thanks to the Federal Civil Penalties Inflation Adjustment Act of 2015, there is legislation in place requiring Federal Regulatory Agencies to adjust monetary fines to account for inflation. While the passage of this law should seem logical for most companies since the last increase occurred in 1985, any business involved in ITAR related practices must be extremely careful in this new environment because the penalties for non-compliance will massively increase effective August 1, 2016. The Directorate of Defense Trade Controls (DDTC) announced changes to the maximum levy an organization not doing business compliantly may receive in civil penalties. The most important issue under this new Congressional mandate is a one-time “catch-up” adjustment to account for inflation for each violation a firm makes.
In some instances, these changes might swell over double the current amount. For example, a violation of 22 U.S.C. 2778: Control of arms exports and imports, the potential fines will increase from $500,000 to $1.09 million. A good compliance program can alleviate some of these issues. But if the compliance level of the organization is suspect, the costs to the organization could be devastating. The mandate provides for retroactively charging the new penalty amounts against each violation despite when the actual violation transpired. For example, a company in 2014 would normally face violations which usually cost $500,000 per issue but now the amount would reflect the $1.09 million per violation if the DDTC charges the fine in August of 2016. Therefore, if this company had over 200 hundred alleged violations, it would owe more than the GDP of some countries.
The new figures for the fines may seem extreme, but there are benefits to this new legislation. Even though the DDTC has a requirement to increase its maximum Civil Monetary Penalties, the agency can choose the lowest levy amounts for penalties. However, it may not be advisable to trust the agency’s discretion because the lowest cost is $70,000, a far cry from the new $1.09 million penalties. It seems more justifiable to lower the penalty from the punishment of $500,000 than the new amount. After August, everyone can expect similar practices from other U.S. government regulatory agencies.
For more information about this new mandate or compliance related issues, please contact OCEANAIR Compliance at (781) 286-2700 or compliance@oceanair.net.
