1. Opportunity Mixed With Compliance Risk Matt Koehl matt.koehl@sdklaw.com 202 583 1118 1

2. Shook Doran Koehl LLP  Sources of Country of Origin (COO) Requirements  Trade Agreements Act (TAA) – Overview of Rules and Key Concepts  TAA Eligible Countries  “Substantial Transformation” Test  Completing TAA Certificate  Challenges to TAA Certifications  Common Problems, Practical Tips and Compliance Strategies 2

3. Shook Doran Koehl LLP  Domestic preference laws for government procurement Buy American Act (BAA) Berry Amendment  International “free trade” agreements guaranteeing non- discriminatory treatment in government procurement  Implementing regulations for domestic preference and international free trade agreements 3

4. Shook Doran Koehl LLP  Complex interaction between domestic preference laws and international free trade agreements  Extremely confusing even for government contract specialists Many “exceptions to exceptions”  Significant penalties for non-compliance  Increased visibility and compliance enforcement 4

5. Shook Doran Koehl LLP  Absolute prohibition vs. “pricing preference” like BAA  TAA restricts contractors from supplying any “end products” from non TAA-eligible (“designated”) countries  Unavailability determination theoretically possible but extremely rare in real world Contractor requests are routinely denied by GSA contracting officers  Applies to services but not enforced 5

6. Shook Doran Koehl LLP  Implements international trade agreements guaranteeing equal treatment in government procurement  Applies generally to procurements of supplies with estimated value in excess of $194,000 (TAA Threshold)  BAA waived for TAA-covered procurements BAA waived for all "commercial item” Information Technology. FAR 25.103(e)  The TAA Threshold for construction contracts is much higher > $7.4million 6

7. Shook Doran Koehl LLP  TAA is, by its terms, applicable to services  TAA COO for services = country where contractor is “established.” FAR 25.402(a)(2)  U.S. Trade Representative affirms that TAA applies to services outsourced to non-TAA countries  Possible future TAA enforcement relative to services 7

8. Shook Doran Koehl LLP  Even above the “threshold” TAA does not apply to: Small business set-asides  Including MAS contract set-aside SINs  Not including set-aside MAS contract RFQs involving SINs that are not set-aside SINs Arms, ammunitions or war materials Purchases indispensable for national security  E.g., Project BioShield Sole-source acquisitions 8

9. Shook Doran Koehl LLP  The “Estimated Value” of a procurement is based upon estimated total value, including options  “Estimated Value” using all CLINs or CLIN-by-CLIN or Order-by-Order Basis (NASA SEWP)  Almost all GSA MAS contract Special Item Numbers (SINs) are covered by TAA, regardless of order size GSA considered possibility of applying TAA on a delivery order value basis 9

10. Shook Doran Koehl LLP  United States – “US-Made End products” “Assembled in the US from foreign and domestic components”  Does not = “Made in America” Federal Trade Commission “All or virtually all” domestic http://www.ftc.gov/bcp/edu/pubs/business/adv/bu s03.shtm http://www.ftc.gov/bcp/edu/pubs/business/adv/bu s03.shtm 10

11. Shook Doran Koehl LLP  In addition to US-Made End Products, TAA allows “Designated Country” End Products  “Designated Countries” listed in FAR 25.003 WTO GPA countries: Aruba, Austria, Belgium, Bulgaria, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea (Republic of), Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. 11

12. Shook Doran Koehl LLP  Free Trade Agreement Countries: Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Morocco, Nicaragua, Oman, Peru and Singapore  Caribbean Basin Countries:  Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, or Trinidad and Tobago 12

13. Shook Doran Koehl LLP  Least Developed Countries: Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, East Timor, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Laos, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Yemen and Zambia 13

14. Shook Doran Koehl LLP  Taiwan accedes to the WTO GPA on July 15, 2009  Not effective for government contracting until an interim FAR rule is published adding Taiwan to the Designated Country list  The interim FAR rule for Taiwan is under review at the FAR Secretariat  Interim rule should be published in a Federal Acquisition Circular (FAC) “within the next 30 days or so” 14

15. Shook Doran Koehl LLP  All “end products” supplied under TAA-covered contracts must be from TAA-eligible countries  Country of origin under TAA is the country in which the end product was last “substantially transformed”  July 2008 - Customs and Border Patrol proposed rule to replace “substantial transformation” test with tariff shift test Not currently effective, status uncertain 15

16. Shook Doran Koehl LLP  Component COO is not determinative Electronic equipment built entirely of Chinese components in the US might comply  Product “bundling” strategy (w/in a CLIN) to establish TAA end product compliance Example: is the computer system the “end product” or are the desktop unit, keyboard, mouse and monitor all separate end products? Strategy not tested 16

17. Shook Doran Koehl LLP  “Substantial Transformation” Test Manufacturing process must change components’ “essential use” through “complex and meaningful” manufacturing process Absent “substantial transformation” each component retains original COO Simple assembly does not = “substantial transformation”  Higher standard than BAA “manufacturing” 17

18. Shook Doran Koehl LLP  US Customs and Border Patrol has statutory authority to issue advisory opinions and final determinations on product country of origin  Formal and informal rulings on “substantial transformation” for specific end products and manufacturing processes Searchable database http://rulings.customs.gov/http://rulings.customs.gov/  Government contracts tribunals give “exceptional weight” to Customs Rulings but make independent determinations 18

19. Shook Doran Koehl LLP  Example: “Mere assembly” of components of cut fabric for a laptop carrying case, entailing simple combining operations, trimming and joining together by sewing, does not involve sufficient skill or complexity to effect a substantial transformation (Attachment 1)  Example: Partially assembled but non-functional laptop computer is “substantially transformed” through addition of memory, hard-drive, keyboard, and software download (Attachment 2)  Fact patterns and results sometimes difficult to reconcile 19

20. Shook Doran Koehl LLP  TAA Certificate FAR 52.225-6 FAR 52.212-3(g)(4) Attachment 3  Completing Certificate is the easy part  Difficult task is TAA compliance throughout entire 5-year contract term 20

21. Shook Doran Koehl LLP  Pre-award (Bid Protests) Wyse Technology, Inc., B-29745, January 24, 2006 Award overturned by GAO where awardee declined to execute TAA certification  Post-award (False Certification, Product Substitution Investigations) 21

22. Shook Doran Koehl LLP  “False” COO certifications may = civil false claims  Civil false claims = treble damages, up to $11,000 per invoice penalty potential  Investigations of MAS “office products” contractors for TAA violations led to multi-million dollar fines  June 26, 2009. MAS furniture contractor pays $400k to settle allegations of supplying Malaysian furniture (Attachment 4)  Numerous additional TAA investigations currently underway for MAS 70 IT contractors 22

23. Shook Doran Koehl LLP  Much production has moved to non-TAA countries with cheaper labor (e.g., China, India, Vietnam, Thailand, Malaysia)  Many problem countries for TAA compliance have discriminatory government procurement practices, making GPA entry unlikely  Often difficult to find compliant end products Hardware Medical products IT hardware Software Paper products 23

24. Shook Doran Koehl LLP  MAS reseller buys from distribution without obtaining manufacturer TAA certification  MAS reseller lacks good process for obtaining updated manufacturer product country of origin data  Manufacturer product development function changes point of production without notice to MAS Contract administrator 24

25. Shook Doran Koehl LLP  Inventory control issues  SKU management issues  Failure to archive country of origin information 25

26. Shook Doran Koehl LLP  Review all government solicitations and contract clauses and certifications contained therein to clearly understand TAA requirements  Seek clarification re: regulatory inconsistencies: BAA clause in a TAA-covered procurement  Consider including clarifying language w/ certificates or proposal: E.g., “this is how we defined end product”  Consider obtaining a Customs ruling or advisory opinion with regard to a product’s TAA COO 26

27. Shook Doran Koehl LLP  Supply chain staff must maintain a system capable of tracking and archiving COO information for each SKU/ end product (TAA)  Supply chain staff must provide advance notice to contract management staff of changes to production point for products supplied to the government  Resellers should obtain TAA certification and indemnity from their manufacturer suppliers 27

28. Shook Doran Koehl LLP  Seek CO clarification if the solicitation does not identify which line items are subject to the TAA  The substantial transformation test is applied on a line- item basis, such that each end product/line-item must be substantially transformed in a TAA-eligible country  Focus on the process; the value and COO of the end product’s components is not determinative  Remember: unless a postaward waiver is granted, you must deliver TAA-compliant items on all contract orders 28