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Trade Controls Due Diligence: When, Where, and How to Review Business Partners and Transactions Momentum Webinar June 26, 2014.

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Presentation on theme: "Trade Controls Due Diligence: When, Where, and How to Review Business Partners and Transactions Momentum Webinar June 26, 2014."— Presentation transcript:

1 Trade Controls Due Diligence: When, Where, and How to Review Business Partners and Transactions
Momentum Webinar June 26, 2014

2 Agenda Regulatory Overview Why / When Diligence is Warranted
Specific Diligence Steps Questions

3 Regulatory Overview

4 Importance of Compliance
Corporate and Individual Penalties Reputational Damage Business Risk

5 Military and Security Exports
What Exports of items or technical data designed or modified for military use Who Department of State, Directorate of Defense Trade Controls (DDTC) How International Traffic in Arms Regulations (ITAR)

6 ITAR – KEY POINTS Registration Requirement
Nearly all ITAR exports, including exports of technical data, require a license Embargoes – No ITAR exports to certain countries or nationalities

7 Dual Use / Commercial Exports
What Exports of most U.S.-origin items and related technology, now including some military items Who Bureau of Industry and Security (BIS) How Export Administration Regulations (EAR)

8 End-user, end-use, and destination
EAR – KEY POINTS EAR99 End-user, end-use, and destination Deemed exports

9 Sanctions – The Basics Comprehensive Selective Programmatic
What Comprehensive Selective Programmatic Who Office of Foreign Assets Control (OFAC) How Specific sanctions regulations codified in 31 C.F.R. Chapter V

10 Sanctions – KEY POINTS Jurisdiction over U.S. persons + SDNs
50% Ownership by SDNs Exports of Services / Facilitation

11 Foreign Corrupt Practices Act
What Prohibits offering or paying bribe to a foreign official to corruptly obtain a business advantage Who DOJ and SEC How Anti-Bribery Provisions Books and Records Provisions Internal Controls Provisions REASONS for CONTROL

12 FCPA – KEY POINTS Government-Owned Entities
Third Parties: Agents, Distributors, and Partners Willful Blindness

13 Why and When Diligence is Warranted

14 The “Knowledge” Standard

15 Knowledge – the Law No 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 customer New representative Joint venture Acquiring a new company

17 What Information Do You Need?
Type of organization Controlled goods/technologies involved Territories involved Commitment to compliance Compliance program Registration Use of agents Government touch points Subject to past enforcement action? Look Out For RED FLAGS Use 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 Flags Distributor 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 representative Customer wants to make payment from bank outside country in which customer is based Proposed agent in country deemed to be corrupt would interact regularly with government officials

19 Diligence Keys and Discussion

20 Diligence Keys Conduct risk assessment to target review
Diligence should be conducted based on risk level Extent of diligence based on risk too – extensive diligence not needed in every situation Develop appropriate tools Follow consistent process Document 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 consider What 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 consider How 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 consider Who directs the accountants? What are they looking for? What is their responsibility with respect to potential red flags? How do you manage costs?

25 Diligence Tools and Process

26 Due Diligence Process Get to know transaction partners
Check references, pose follow-up questions Public records search Additional steps if needed: Background check Interview partner representatives Audit partner’s books Require them to attend training

27 Questionnaires/Surveys
Low cost Usually internally managed Example questions: Evidence of DDTC registration Names of principals Contact information Facility locations / offshore operations Officers / directors who are or were government officials Whether company maintains compliance policies / has provided training Questionnaires 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 restrictions Delineate responsibilities of each party Other provisions depending on facts, e.g., Immediate termination right if compliance breach Audit right Right to review / pre-approve all subcontractors

29 Recording Diligence Maintain file of all records obtained / prepared in relation to diligence review Details of screening Notes of reference checks Compliance department approvals Completed questionnaires Other notes and records Questionnaires 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 engines Government registration search tools Government restricted party tools SAM Company registrations & licenses Some jursidictions offer free searches Internet search is fast and free. It should be a bare minimum in due diligence for new counterparties.

31 Restricted Party Screening Tools
Moderate cost Multiple vendors Better than free tools Fuzzy logic Consolidated search: OFAC, DDTC, BIS, DFAIT, OSFI, RCMP, UN, EU, etc. Can be integrated with ERP systems Restricted 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).

32 Questions?

33 Thank you! Christina Cugle Northrop Grumman
Thad McBride Sheppard Mullin Mark Jensen

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