4 Importance of Compliance Corporate and Individual PenaltiesReputational DamageBusiness Risk
5 Military and Security Exports WhatExports of items or technical data designed or modified for military useWhoDepartment of State, Directorate of Defense Trade Controls (DDTC)HowInternational Traffic in Arms Regulations (ITAR)
6 ITAR – KEY POINTS Registration Requirement Nearly all ITAR exports, including exports of technical data, require a licenseEmbargoes – No ITAR exports to certain countries or nationalities
7 Dual Use / Commercial Exports WhatExports of most U.S.-origin items and related technology, now including some military itemsWhoBureau of Industry and Security (BIS)HowExport Administration Regulations (EAR)
8 End-user, end-use, and destination EAR – KEY POINTSEAR99End-user, end-use, and destinationDeemed exports
9 Sanctions – The Basics Comprehensive Selective Programmatic WhatComprehensiveSelectiveProgrammaticWhoOffice of Foreign Assets Control (OFAC)HowSpecific sanctions regulations codified in 31 C.F.R. Chapter V
10 Sanctions – KEY POINTS Jurisdiction over U.S. persons + SDNs 50% Ownership by SDNsExports of Services / Facilitation
11 Foreign Corrupt Practices Act WhatProhibits offering or paying bribe to a foreign official to corruptly obtain a business advantageWhoDOJ and SECHowAnti-Bribery ProvisionsBooks and Records ProvisionsInternal Controls ProvisionsREASONS for CONTROL
12 FCPA – KEY POINTS Government-Owned Entities Third Parties: Agents, Distributors, and PartnersWillful Blindness
15 Knowledge – the LawNo person may knowingly or willfully cause, or aid, abet, counsel, demand, induce, procure, or permit the commission of, any act prohibited by, or the omission of any act required by, 22 U.S.C and 2779, or any regulation, license, approval, or order issued thereunder.ITAR section 127.1(e). See also EAR, FCPA, and OFAC Sanctions.
16 When Diligence is Warranted New customerNew representativeJoint ventureAcquiring a new company
17 What Information Do You Need? Type of organizationControlled goods/technologies involvedTerritories involvedCommitment to complianceCompliance programRegistrationUse of agentsGovernment touch pointsSubject to past enforcement action?Look Out For RED FLAGSUse risk assessment results to guide the type of information to gather about your counterparties. This may be more or less depending on the type of counterparty, the products or technologies involved, and the territories involved. Throughout the process, be on the lookout for red flags.
18 Examples of Red FlagsDistributor wants products that do not fit the identified market (e.g. space heaters for UAE)Opaque billing practices by representative (e.g. lump sum charges, unexplained “fees”)Sanctioned country individual is a employee of a non-sanctioned country representativeCustomer wants to make payment from bank outside country in which customer is basedProposed agent in country deemed to be corrupt would interact regularly with government officials
20 Diligence Keys Conduct risk assessment to target review Diligence should be conducted based on risk levelExtent of diligence based on risk too – extensive diligence not needed in every situationDevelop appropriate toolsFollow consistent processDocument steps taken / findings
21 Risk Assessment §4.G.7 K/E 2 §6 §8B2.1(c) Risk assessment is a best practice. It allows exporters to focus their most expensive internal controls on the most significant risks. Basing internal controls on a periodic risk assessment provides supporting evidence of an effective compliance program, which aids discussion with governments in the event that something does go wrong. The U.S. BIS Guideline is particularly extensive.K/E 2§6§8B2.1(c)
22 Due Diligence Scenario 1 You are the Chief Compliance Officer of a U.S. encryption software company. Your company is hiring a marketing agent in Russia because it is having trouble winning lucrative government contracts.Discussion / Issues to considerWhat are the risks?How do you prioritize them?Who leads the diligence effort?What steps do you take?How do you protect company post-diligence?
23 Due Diligence Scenario 2 You are the General Counsel of a publicly-listed U.S. company acquiring a small European company. Your CEO demands that diligence be completed in two weeks.Discussion / Issues to considerHow do you prioritize issues to review?What resources do you need?How much can you do post-acquisition?
24 Due Diligence Scenario 3 You are the lowest-ranking lawyer in the corporate department of a large multinational defense contractor. You are responsible for hiring a forensic accountant to assist in due diligence related to the potential acquisition of a Mexican company.Discussion / Issues to considerWho directs the accountants?What are they looking for?What is their responsibility with respect to potential red flags?How do you manage costs?
26 Due Diligence Process Get to know transaction partners Check references, pose follow-up questionsPublic records searchAdditional steps if needed:Background checkInterview partner representativesAudit partner’s booksRequire them to attend training
27 Questionnaires/Surveys Low costUsually internally managedExample questions:Evidence of DDTC registrationNames of principalsContact informationFacility locations / offshore operationsOfficers / directors who are or were government officialsWhether company maintains compliance policies / has provided trainingQuestionnaires or survey forms are a low-cost way to collect information about a counterparty.
28 Robust Contract Terms Use to implement the compliance approach End use / End user restrictionsDelineate responsibilities of each partyOther provisions depending on facts, e.g.,Immediate termination right if compliance breachAudit rightRight to review / pre-approve all subcontractors
29 Recording DiligenceMaintain file of all records obtained / prepared in relation to diligence reviewDetails of screeningNotes of reference checksCompliance department approvalsCompleted questionnairesOther notes and recordsQuestionnaires or survey forms are a low-cost way to collect information about a counterparty.
30 Free Tools Internet Search Engines Hint: the government knows about search enginesGovernment registration search toolsGovernment restricted party toolsSAMCompany registrations & licensesSome jursidictions offer free searchesInternet search is fast and free. It should be a bare minimum in due diligence for new counterparties.
31 Restricted Party Screening Tools Moderate costMultiple vendorsBetter than free toolsFuzzy logicConsolidated search: OFAC, DDTC, BIS, DFAIT, OSFI, RCMP, UN, EU, etc.Can be integrated with ERP systemsRestricted party screening software is affordable and considered an industry best practice. It should be used for all counterparties. Procedures should be developed to deal with false positives, place holds where appropriate, and identify counterparties with limitations (example: no defense business).