Trade Controls Due Diligence: When, Where, and How to Review Business Partners and Transactions...

Trade Controls Due Diligence: When, Where, and How to Review Business Partners and Transactions

Momentum Webinar

June 26, 2014

Agenda2

Regulatory Overview

Why / When Diligence is Warranted

Specific Diligence Steps

Questions

Regulatory Overview

Importance of Compliance4

Corporate and Individual Penalties

Reputational Damage

Business Risk

Military and Security Exports5

•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)

ITAR – KEY POINTS6

Registration Requirement

Nearly all ITAR exports, including exports of technical data, require a license

Embargoes – No ITAR exports to certain countries or nationalities

Dual Use / Commercial Exports7

•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)

EAR – KEY POINTS8

EAR99

End-user, end-use, and destination

Deemed exports

Sanctions – The Basics 9

• What• Comprehensive• Selective• Programmatic

• Who • Office of Foreign Assets Control (OFAC)

• How • Specific sanctions regulations codified in 31 C.F.R. Chapter V

Sanctions – KEY POINTS10

Jurisdiction over U.S. persons +

SDNs

50% Ownership by SDNs

Exports of Services / Facilitation

Foreign Corrupt Practices Act11

• 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

FCPA – KEY POINTS12

Government-Owned Entities

Third Parties: Agents, Distributors, and Partners

Willful Blindness

Why and When Diligence is Warranted

The “Knowledge” Standard

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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. 2778 and 2779, or any regulation, license, approval, or order issued thereunder.

ITAR section 127.1(e). See also EAR, FCPA, and OFAC Sanctions.

When Diligence is Warranted

New customer

New representative

Joint venture

Acquiring a new company

What Information Do You Need?

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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

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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

Diligence Keys and Discussion

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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

§6

K/E 2

§4.G.7

§8B2.1(c)

Risk Assessment

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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?

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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?

Diligence Tools and Process

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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

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

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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

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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

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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

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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

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Questions?

Thank you!

Christina Cugle

Northrop Grumman

Christina.cugle@ngc.com

Thad McBride

Sheppard Mullin

tmcbride@smrh.com

Mark Jensen

Sheppard Mullin

mjensen@smrh.com