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 Christina.cugle@ngc.com
Thad McBride
Sheppard Mullin
Mark Jensen