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The post-World War II period saw rapid development in the nuclear arms race and conventional military capabilities. Countries recognized the danger of the ease with which such technology and items were available. Suspecting the danger of these items falling into the hands of non-state actors, countries enacted national legislation to control the export of Dual-use materials and technology to regulate such access.

Considering the nature of the items and the possible repercussions, compliances under the export control regimes are quite stringent. In case the same is not undertaken, the implications can be serious. However, there remain certain relaxations for an exporter. One of them is in the form of Voluntary Self-Disclosure (“VSD”). In this article, the authors will focus on the concept of VSD under various jurisdictions, including India, and why businesses must favorably pursue VSD in case of violation of applicable legal provisions.

Overview of export control laws in India.

In India, Dual-use items are goods, including software and technologies, which have potential civilian/industrial applications as well as use in weapons of mass destruction.[2] Export control on any Dual-use item is exercised to prevent the proliferation of weapons of mass destruction that constitute or has the potential to constitute, a threat to international peace and security.

India has regulated the exports of Dual-use items, and nuclear-related items, including software and technology by acceding to Wassenaar Arrangement (WA) as its 42nd Participating State on 8th December 2017. Apart from the WA, India is also a member of the Nuclear Suppliers Group (NSG), the Australia Group (AG), and the Missile Technology Control Regime (MTCR).

In line with the WA, India enacted its list of Dual-use items known as the “special chemicals, organisms, material, equipment and technology” (“SCOMET”)[3]. The SCOMET list appears in Appendix 3 to Schedule 2 of ITC (HS) which was notified in terms of Sections 5 and 14A of the Foreign Trade (Development and Regulation) Act, 1992 (“FTDR Act”) and is updated regularly. The listed items are either (i) prohibited or (ii) permitted for export under an authorization unless specifically exempted[4].

Violation of the export control laws usually entails serious implications for the exporters. Graded penalties are prescribed for such violations, ranging from pecuniary fines[5] up to life imprisonment in exceptional cases[6]. Furthermore, the exporter, inter-alia, runs the risk of having its Import-Export Code and authorizations suspended or canceled,[7] and goods may be confiscated.[8]

Apart from the above, even the Customs authorities under the Customs Act, 1962 can make a case for improper exportation and consequently confiscate the goods and impose penalties.[9] Consequently, there can be significant negative consequences for both individual businesses and the overall economic growth of a nation.

Need for Voluntary Self-Disclosure

Effective compliance is the first line of enforcement and the same can be achieved only through the support and cooperation of businesses. The stakeholder must have a proper compliance system in place to identify, prevent, and mitigate export control violations. An important part of a robust export compliance system is to ensure that a proper process is in place for making VSD. Even the WA, recommends VSDs of violations in its model of best practices for the effective enforcement of export controls.[10]

As the phrase itself suggests, in cases of violations, businesses can come clean before the relevant authorities in cases of suspected violations of the export control regime. However, considering the implications of contraventions of applicable legal provisions, many times businesses shy away from making disclosures fearing serious consequences.  By doing so, the entities face substantial risk- because if the contravention does come to the attention of the concerned authorities, the decision not to disclose will be considered as an aggravating factor.

Voluntary-Self Disclosure in India and other jurisdictions

Before the Foreign Trade Policy, 2023 was notified, the Indian export control regime did not contain any explicit provision on VSD. The Inter-Ministerial Working Group (“IMWG”)[11] is/was responsible for considering applications for SCOMET items (listed)/unlisted items[12]. Accordingly, the IMWG could consider a case of VSD on merit and may make recommendations on further action to be taken by DGFT after considering the facts of the case.

A nation's business environment thrives when its regulatory framework supports both growth and compliance. Second chances, mitigating penalties, and VSDs by businesses are key elements in fostering such an environment, ultimately leading to improved business activity. Keeping these elements in mind, coupled with ambitions of improving the ease of doing business in India, the Central Government introduced the provision for VSDs[13]. As per the introduced paragraph 10.11 of FTP, any exporter who fails to comply with the export control provisions of the FTDR Act, Customs Act, or any SCOMET regulation or conditions of a SCOMET authorization issued by DGFT, can submit a VSD request along with the supporting documents immediately after an export violation is discovered.

Strict actions are taken in cases of violation of SCOMET law and policy other than in cases where an entity undertakes VSD. The Government intends to incentivize VSD submissions.

However, paragraph 10.11 does not exhaustively provide the manner of making disclosures and under what circumstances disclosures can be made. The provision does not elucidate implications/consequences post VSD and in what scenarios penal, monetary, or administrative consequences could be mitigated. While the provision states that detailed procedures/guidelines will be notified by the DGFT separately, the same is awaited.

In the meantime, cues can be taken from the provisions in other jurisdictions for better implementation of the VSD benefits.

For instance, the United Kingdom’s (“UK”) law on Export Control and the policy on VSD, prescribes a broad framework on the manner of making a VSD.[14]

Similarly, the Export Control Regime in the United States (“US”) comprehensively covers, inter-alia, the general policy on VSD, limitations, and information to be provided including detailed mechanism of disclosure along with timelines, supporting documentation, and treatment of unlawfully exported items after VSD.[15] Depending on the facts and circumstances and other relevant factors of a case, the US regulatory authority undertakes the course of action. [16]

Businesses in India with proper guidance, can refer to the manner of making VSD under UK/US jurisdictions, till proper procedure is notified by the DGFT.

While reference to other regimes for VSD can be a blueprint, it is emphasized that making Indian law clearer and more precise is crucial for improving the ease of doing business.

Voluntary Self-Disclosures: Softening the Blow.

VSD works in favor of businesses, as it can eventually lead to softening the blow of harsh penalties/imprisonments. Regulatory authorities across jurisdictions are proactively encouraging businesses to disclose their violations. There are various instances, where the authorities have welcomed voluntary disclosures and mitigated the possible penalties imposed on businesses.[17]

Additionally, the authorities are well aware that exports of Dual-use items, especially intangible technologies, can be difficult to trace. Thereby, taking businesses into confidence, such that they approach the authorities in case of suspected violations, helps the authorities in effective enforcement of the export control laws and heightens transparency and co-operation.

The current Indian economy is aligned with the ambitions of “Make in India”/ “Aatman Nirbhar Bharat” for promoting indigenous manufacturing and businesses. Such schemes aim to make India a global supplier but for doing so, various incentives are required to be provided by the Government to promote the “ease of doing business in India”. Statutory recognition to VSD is one such welcome tool. In conclusion, it can be said that VSD is not a sign of weakness; but rather underpins’ a business’s commitment to be a responsible corporation.