What Keeps You Up at Night: Mitigating Trade Compliance and Corruption Risks

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What Keeps You Up at Night:

Mitigating Trade Compliance and Corruption

Risks

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Adrienne Braumiller, Olga Torres 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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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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International Traffic in Arms Regulations

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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International Traffic in Arms Regulations

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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Foreign Corrupt Practices ActFCPA’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 ReformAugust 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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EAROFAC 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, oro 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 ViolationsNegligence: Civil penalty in an amount not to exceed:

• The lesser of:o The domestic value of the merchandise, oro 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 CommitmentTop-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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TrainingEmployees 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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ClassificationsCompliance 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 LicensesLicenses 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 DiversionLarge 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 200Dallas, TX 75254

(214) 348-9306www.braumillerlaw.com

[email protected]@braumillerlaw.com

What Keeps You Up at Night: Mitigating Trade Compliance and Corruption Risks

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