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

1. What Keeps You Up at Night: Mitigating Trade Compliance and Corruption Risks • Adrienne Braumiller, Olga Torres www.braumillerlaw.com

2. 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

3. Part I: The Risk Environment

4. CUSTOMS AND BORDER PROTECTION “Policemen” to Enforce Regulations 19 CFR Export Control and Anti-Corruption Agencies DEFENSE ITEMS Directorate of Defense Trade Controls International Traffic in Arms Regulations (ITAR) 22 CFR DOJ Anti-Bribery Provisions SEC Books and Recordkeeping Provisions “DUAL USE” ITEMS Bureau of Industry & Security Export Administration Regulations (EAR) 15 CFR OTHERAGENCIES OFAC, Census Bureau Foreign Corrupt Practices Act

5. 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

6. 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

7. 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

8. 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

9. 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)

10. 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

11. 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

12. 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

13. Extraterritorial Reach Subject to U.S. Law Jurisdiction EAR Census ITAR 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. 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. 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. Actions by a foreign subsidiary may implicate U.S. parent under both the books and records and anti-bribery provisions.

14. 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.

15. 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.

16. 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

17. Penalties for Export Violations

18. 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: • The domestic value of the merchandise, or • 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.

19. Penalties for Import Violations • Negligence: Civil penalty in an amount not to exceed: • The lesser of: • The domestic value of the merchandise, or • 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.

20. Part II: Mitigating the Risks

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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?

27. 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

28. Questions? Braumiller Law Group, PLLC 5200 Spring Valley Road, Suite 200 Dallas, TX 75254 (214) 348-9306 www.braumillerlaw.com Adrienne@braumillerlaw.com Olga@braumillerlaw.com