Mitigating Trade Compliance Risks in Mergers & Acquisitions · of U.S. origin goods. Foreign...

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Mitigating Trade Compliance Risks

in Mergers & Acquisitions

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Adrienne Braumiller www.braumillerlaw.com


Agenda   Part I: The Risk Environment

• U.S. Export and Anti-Corruption Regulations

• Extraterritorial Reach of Export and Anti-Corruption Laws

• Export Control Reform Risks

• The Overlap of ITAR and FCPA Risks

• Successor Liability Risks

  Part II: Mitigating Risks

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Part I: The Risk Environment

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Export Control and Anti-Corruption Agencies

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CUSTOMS AND BORDER PROTECTION

“Policemen” to Enforce Regulations

19 CFR

“DUAL USE” ITEMS

Bureau of Industry & Security

Export Administration Regulations

(EAR) 15 CFR

OTHER AGENCIES

OFAC, Census Bureau

DEFENSE ITEMS

Directorate of Defense Trade Controls

International Traffic in Arms Regulations

(ITAR) 22 CFR

Foreign Corrupt Practices Act

DOJ Anti-Bribery Provisions

SEC Books and

Recordkeeping Provisions


Export Administration Regulations   The Export Administration Regulations (EAR) are

administered by the Bureau of Industry & Security (BIS), US Department of Commerce

  The EAR regulates exports and reexports of dual-use articles, technology, and software

  Items subject to the EAR are listed on the Commerce Control List (CCL)

  Whether an export requires a license for export depends on numerous facts, including the item itself, the ultimate destination, and the end-user

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Export Administration Regulations   EAR also contains the antiboycott regulations   Regulations that discourage/prohibit U.S. companies

from furthering or supporting unsanctioned foreign boycotts

•  Primarily the Arab League boycott of Israel   Boycott requests are typically reportable to BIS,

sometimes prohibited, and can subject U.S. companies to penalties

  Examples: •  Agreements to refuse to do business with/in Israel

• Letters of credit containing prohibited boycott terms

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  The International Traffic in Arms Regulations (ITAR) controls export and temporary import of defense articles and related technical data

  The ITAR is administered by the Directorate of Defense Trade Controls (DDTC), Department of State

  Items subject to the ITAR are listed on the US Munitions List (USML)

  The ITAR is interpreted broadly and enforced strictly

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  Similar to the EAR, the ITAR controls the export of goods, technical data, and software

  Any person in the U.S. that deals in or with defense articles or defense services must register with DDTC

  Registered companies must appoint Empowered Officials

•  EOs have personal liability   Almost every export subject to the ITAR requires a

license   The USML contains listings for products ranging from:

•  Firearms, Vessels of War, Special Naval Equipment, Military Electronics, Aircraft

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Office of Foreign Assets Controls   Office of Foreign Assets Controls, U.S. Department of

Treasury   OFAC administers and enforces economic and trade

sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and others

  Two types of sanctions:

•  List-based: Sanctions targeting specific entities or persons

•  Country-based: General Sanctions against a country and its nationals (Cuba, Iran, Syria)

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Census Bureau Foreign Trade Division

  Administers the Foreign Trade Regulations (FTR)   Requires the filing of Electronic Export Information

(EEI) in the Automated Export System (AES) for most exports of items from the U.S.

  FTR contain specific filing requirements for certain exports subject to the ITAR, EAR, and OFAC sanctions programs

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False Claims Act

  The False Claims Act (“FCA”) is the government’s primary litigation tool for combating fraud

  The FCA empowers both the U.S. Attorney General and private persons to institute civil actions to enforce the Act against anyone that commits fraud by submitting false or fraudulent claims to the federal government. 31 U.S.C. § 3730.

• Allows Relator (i.e., whistleblower) to stand in the Government’s shoes to commence litigation o  Incentive: A Percentage of the Recovery (15-30%)

  Government can recover treble damages plus $5,500 to $11,000 per violation

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False Claims Act

Triggers   The FCA imposes liability on any person who “knowingly makes, or causes to be made or used, a false record or statement to conceal, avoid, or decrease, an obligation to pay or transmit money or property to the Government."

  The FCA also imposes liability on any person acting

with "reckless disregard.”

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Foreign Corrupt Practices Act   FCPA’s anti-bribery provisions prohibit payments to

foreign government officials for the purpose of obtaining or retaining business

  Applies to all U.S. persons, certain foreign issuers of security, and foreign firms/persons who cause an act in furtherance of a corrupt payment to take place in the U.S.

  FCPA’s account provisions require publicly traded companies to (1) keep accurate books and records, and (2) maintain an adequate system of internal accounting controls

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Export Control Reform   August 2010, details of Export Control Reform (ECR)

announced   Goal of reforming and streamlining U.S. export controls   August 16, 2013: First set of rules implementing ECR

were published

•  Changed the jurisdiction of items from numerous USML categories to the CCL

  New final rules will continue to be published on a rolling basis

  Regulatory uncertainty, lack of precedent, opportunities for violations

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Extraterritorial Reach

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EAR OFAC FCPA

Foreign reexports of U.S. origin goods. Foreign-produced goods exceeding de minimis U.S. content. Boycott requests received by controlled in fact subsidiaries, branches, affiliates.

Subject to U.S. Law Jurisdiction

Census

ITAR

Foreign entities engaged in routed exports (FPPI assumes responsibility for license requirements and filing of EE!).

Applies to any foreign entities dealing in defense articles or services controlled on the USML.

Actions by a foreign subsidiary may implicate U.S. parent under both the books and records and anti-bribery provisions.

Applies to U.S. persons and foreign subsidiaries “owned or controlled” by U.S. persons. “Facilitation,” FSE Act, and other provisions may also implicate foreign subsidiaries and U.S. parents.


Successor Liability: Buying Violations

  Common application of successor liability doctrine in customs and export laws, even though successor liability not codified in laws of either.

  Concepts of merger/acquisition, and de facto merger and substantial continuation accepted in both areas.

  Especially since 9/11, many public pronouncements from customs and export officials of various agencies that successor companies will be held liable for violations of predecessor.

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Successor Liability: Buying Violations

  In import law, purchaser can be held liable for both duties and penalties.

  Adjudicator in export law can assign liability to purchaser for any civil penalties.

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Overlap: FCPA and ITAR Risks   Trend toward convergence of export and anti-corruption

violation cases   Companies using brokers or paying fees/commissions

to 3rd parties typically at higher corruption risk. •  Those companies also dealing in ITAR items at higher risk for

violation of ITAR’s brokering and fees/commissions/political

contribution provisions   Anti-corruption risks in transactions also often involve

violations of OFAC sanctions programs and transactions subject to the EAR

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Penalties for Export Violations

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Census -  Civil: Up to $10,000 per violation -  Criminal: Up to $10,000 and 5 years imprisonment

ITAR -  Civil: $500,000 per violation -  Criminal: $1 million per violation, 10 years imprisonment per violation -  Loss of goods, denial of export privileges

EAR -  Civil: $250,000 per violation (or twice the value of the transaction) -  Criminal: $1 million per violation, 20 years imprisonment -  Loss of goods, denial of export privileges

OFAC -  For IEEPA programs, up to $250,000 per violation (or twice the value of transaction) in civil penalties, $1 million in criminal penalties and 20 years imprisonment

-  For TWEA programs, up to $65,000 per violation in civil penalties, $1 million in criminal fines for corporations, and $250,000 in criminal fines for individuals

FCPA -  Criminal: For anti-bribery, $2 million/corporations and $250,000 and 5 years imprisonment/individuals. For accounting provisions, $25 million/corporations and $5 million and 20 years imprisonment/individuals.

-  Civil: For anti-bribery, $16,000 per violation for corporations and individuals. For accounting provisions, up to the amount of the pecuniary gain, or a specified dollar limitation.


Penalties for Import Violations   Fraud: Civil penalties in an amount not to exceed the

domestic value of the merchandise.   Gross negligence: Civil penalty in an amount not to

exceed: •  The lesser of:

o  The domestic value of the merchandise, or o  Four times the lawful duties, taxes, and fees of which the U.S. is or

may be deprived, or

•  If the violation did not affect assessment of duties, 40% of the

dutiable value of the merchandise.

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Penalties for Import Violations   Negligence: Civil penalty in an amount not to exceed:

•  The lesser of: o  The domestic value of the merchandise, or o  Two times the lawful duties, taxes and fees of which the U.S. is or

may be deprived, or

•  If the violation did not affect assessment of duties, 20% of the dutiable value of the merchandise.

  Recordkeeping (failure to produce): •  For willful conduct, lesser of $100,000 per release or 75% of appraised value of goods.

•  For negligence, lesser of $10,000 per release or 40% of the value of appraised goods.

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Part II: Mitigating the Risks

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Management Commitment   Top-down support is critical for compliance   Informs employees at all levels of the importance of

compliance   Necessary for “buy in” and allocation of appropriate

resources/personnel   Government agencies want to see management

involvement in compliance

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Training   Employees can’t comply unless they understand

the rules   Training should be tiered and tailored to specific

groups   Education should be ongoing and routinely updated   Training can be a mitigating factor in the event of a

violation

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Classifications   Compliance is dependent on correct product

classifications •  Jurisdiction, licensing, and potential exceptions all depend on the classification

  Even inadvertent incorrect classifications are not a defense to violations

  Can be technically complex   Consider Commodity Jurisdictions (CJ) and

Commodity Classification Automated Tracking System (CCATS) requests

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Export Licenses   Licenses can take time to obtain, and can be denied –

do not assume your license will be approved   Compliance doesn’t end upon receipt of a license

•  All terms, conditions, and provisos must be complied with

• Conditions may not affect your transaction, or may be so

restrictive as to essentially halt your transaction

• Exporters should have a tool to track license usage

  Certain ITAR licenses (Technical Assistance Agreements and Manufacturing Licensing Agreements) can be difficult to track

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Compliance Programs   Companies should have written and

documented export compliance and anti-corruption programs, policies, and procedures   The lack of such a program is considered an

aggravating factors by most U.S. agencies   Compliance programs should be tailored to a

company’s operations •  Begin with a risk assessment to identify focus areas

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Illegal Diversion   Large risks for the diversion of U.S. items to

unauthorized end-uses, end-users, and destinations   Certain factors increase the risk

•  Product type •  Known diversion/transshipment point

  Compliance programs should address diversion risks specific to a company’s operation •  Product in high demand in sanctioned nations? •  Customer in a known diversion destination?

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Foreign Subsidiaries, Affiliates, Partners

  ITAR, EAR, OFAC sanctions, and FCPA all apply differently to foreign interests   Can be difficult to maintain visibility into foreign

operations   Compliance and audit procedures should

specifically address foreign operations

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Questions?

Braumiller Law Group, PLLC

5200 Spring Valley Road, Suite 200 Dallas, TX 75254

(214) 348-9306 www.braumillerlaw.com

[email protected]

Mitigating Trade Compliance Risks in Mergers & Acquisitions · of U.S. origin goods. Foreign...

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