Reggy p gulatory Compliance Challenges for International ......• Many sanctions programs are list-based – OFAC maintains list of “Specially Designated Nationals and Blocked Persons”

Regulatory Compliance Challenges for g y p gInternational Businesses

Presented by:

Barbara D. Linney, Blank Rome LLP

Shawn M. Wright, Blank Rome LLP

Edward J. Hoffman Agility DGS Holdings IncEdward J. Hoffman, Agility DGS Holdings, Inc.

@BlankRomeLLP #EmergingIssues7

7th Annual Emerging Issues for In-House Counsel 11/2011

© Blank Rome LLP 2011 All Rights Reserved

Several U.S. Government Departments R l t I t ti l B iRegulate International Business




Primary Regulators

• U.S. Department of the TreasuryCh i C itt F i I t t i th

• U.S. Department of CommerceM b f CFIUS– Chairs Committee on Foreign Investment in the

United States (“CFIUS”)• foreign investment review

– Office of Foreign Assets Control (“OFAC”)• trade embargoes and economic sanctions

– Member of CFIUS– Bureau of Industry and Security (“BIS”)

• controls exports of “dual use” and “commercial” items

• U S Department of Justice (“DOJ”)trade embargoes and economic sanctions• U.S. Department of Defense

– Member of CFIUS– Defense Security Service (“DSS”)

• reviews foreign ownership, control or

U.S. Department of Justice ( DOJ )– Member of CFIUS– Bureau of Alcohol, Tobacco, Firearms and

Explosives (“BATFE”)• regulates permanent imports of defense

ti lg p,

influence (“FOCI”) of cleared contractors• U.S. Department of State

– Member of CFIUS– Directorate of Defense Trade Controls (“DDTC”)

articles• monitors change of ownership of

registered importers– Criminal Division

• enforces antibribery provisions of Foreign • controls permanent exports and temporary

imports of defense articles, technology and services

• monitors change of ownership of registered exporters

enforces antibribery provisions of Foreign Corrupt Practices Act (“FCPA”)

• U.S. Securities & Exchange Commission (“SEC”)

– enforces FCPA books and records and internal t l i i


– Bureau of Economic, Energy & Business Affairs• administers various sanctions programs

control provisions



Primary Areas of Regulationy g

• Export Controlsp• Economic Sanctions• FCPA (anti-corruption)( p )• Government Contracts/Defense Security• CIFUS (foreign investment review)CIFUS (foreign investment review)




Export Controlsp

• An export is…– a privilege, not a right– sending or taking anything out of the United States

d li f d f ti l t f i t i th U it d St t– delivery of a defense article to a foreign government in the United States– releasing controlled technology or technical data to foreign persons

• even in the United States - sometimes referred to as a “deemed export”p– providing technical assistance or defense services to foreign persons in the

United States or abroadT t i d i i t d b t t i• Two separate regimes administered by two separate agencies:

– BIS administers Export Administration Regulations (“EAR”)– DDTC administers International Traffic in Arms Regulations (“ITAR”)


DDTC administers International Traffic in Arms Regulations ( ITAR )



Regulation of Commercial Exportsg p• A BIS export license may be required for commercial or “dual use” items controlled

under the EAR for national security foreign policy (including anti-terrorism) under the EAR for national security, foreign policy (including anti terrorism), nonproliferation, short supply or other reasons

• Items and technology “subject to the EAR” include all items in the United States, all items of U.S. origin wherever located, and items containing more than de minimis levels

f U S i i t d d ith U S i i l t i t t h lof U.S. origin components or produced with U.S. origin plant, equipment or technology• Commerce Control List (“CCL”) includes ten (10) categories of controlled items

(including technology) listed by export classification number (“ECCN”) and reason for control control

• The Country Chart at Supplement No. 1 to Part 738 of the EAR shows controls to which exports to various countries may be subject based upon reasons for control

• Many items do not require a license for export to most countries but controls exist and Many items do not require a license for export to most countries but controls exist and due diligence should be exercised prior to all export

– certain prohibitions apply even if no export license is required based upon the nature of the item and the destination




Regulation of Military Exports

• Licenses are required for export of most defense articles, services and technical data listed on the ITAR’s U S Munitions List (“USML”) (21 technical data listed on the ITAR s U.S. Munitions List ( USML ) (21 categories of controlled items)

– many categories are not “arms” per se (e.g., military electronics and communications t t ti tsystems, protective gear, etc.

• Specifically designed or modified components remain controlled as export reform is proceeding slowlyreform is proceeding slowly

• Registration requirements apply to manufacturers of defense articles even if they do not export

• ITAR registration and licensing requirements also apply to brokering




Economic Sanctions• OFAC administers numerous U.S. trade embargoes and economic

sanctionssanctions– activities of “U.S. Persons” (U.S. citizens, residents and businesses and

persons in the United States) are restrictedCuba embargo also applies to controlled subsidiaries of U S businesses– Cuba embargo also applies to controlled subsidiaries of U.S. businesses

• Many sanctions programs are list-based– OFAC maintains list of “Specially Designated Nationals and Blocked

Persons” (SDN List)Persons” (SDN List)– entities owned or controlled by SDNs are also off limits

• Countries subject to additional sanctions include Burma, Cuba, Iran, S d d S iSudan and Syria

– each program is different• Some sanctions programs (e.g., Iran Sanctions Act) are


p g ( g , )administered by U.S. Department of State



FCPA Anti-Bribery Provisiony• FCPA fulfills U.S. obligations under OECD Convention on Combatting Bribery of

Foreign Public Officials in International Business TransactionsForeign Public Officials in International Business Transactions• Prohibits the paying or offering to pay “anything of value” whether directly or

indirectly:– to a foreign official (including employees of state owned enterprises and international g ( g p y p

organizations), political party, or candidate for foreign political office, or to any person while “knowing” that all or part of the thing of value will be paid or offered to a foreign official, political party, or candidate;

– “corruptly” for the purpose of influencing the official in some official act or decision;co up y o e pu pose o ue c g e o c a so e o c a ac o dec s o ;– in order to obtain or retain business or to secure any improper advantage

• In certain cases use of U.S mails or other means or instrumentalities of interstate commerce must be proven (e.g., telephone calls, facsimile, wire t f i t t t i t ti l t l)transfers, or interstate or international travel)

• Two affirmative defenses:– lawful under written laws of the foreign country

demonstrating a product or performing a contractual obligation


– demonstrating a product or performing a contractual obligation



Who Is Subject To The FCPA Anti-Bribery P i i ?Provision?• U.S. businesses (“domestic concerns”)• “Issuers” – i.e., companies (including foreign companies) who

have issued securities in the United States or file reports with the SECthe SEC

– issuers are also subject to the FCPA’s books and records and accounting controls requirements (administered by the SEC)

• Any officer, director, employee, agent, shareholder of a domestic concern or issuer or anyone acting on their behalf

S• Foreign companies within the United States• Foreign subsidiaries of domestic concerns and their U.S.

citizen/resident employees


citizen/resident employees



FCPA Treatment of Facilitating Paymentsg y

• The FCPA permits small facilitating payments to a foreign p g p y gofficial in order “to expedite or secure the performance of a routine governmental action by a government official” (i.e.,

di ti t )non-discretionary acts)• This exception is very narrow:

– the payment may only be given to encourage an action to which the company is legally entitled (not an illegal or improper action)

– the payment must be properly recorded to reflect the amount the payment must be properly recorded to reflect the amount, purpose and recipient of the payment




Facilitating Payments - Examplesg y p

• Obtaining permits, licenses, or other official documents to g pqualify a person to do business in a foreign country

• Processing governmental papers, such as visas and work orders

• Providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across countryP idi h i d l l di d • Providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration


commodities from deterioration• Actions of a similar nature



FCPA and U.K. Bribery Act Comparisony pIs it an offense? FCPA U.K. Bribery ActBribery of Foreign Yes YesBribery of Foreign Officials

Yes Yes

Private Sector Bribery No YesFacilitation Payments No YesFailure to keep accurate records/

Yes No/

internal controlsLiability for acts of third parties

Yes Yesthird partiesCompliance Program Required?

Yes, for mitigation under USSG

Yes, for adequate procedures defense


NOTE: USSG = U.S. Sentencing Guidelines



Government Contracts• Global footprint of U.S. Government operations means that government contractors are

increasingly involved in international business (“OCONUS”)increasingly involved in international business ( OCONUS )• Federal government contractors must comply with applicable provisions of the Federal

Acquisition Regulation (“FAR”) and, for DOD contracts, Defense Federal Acquisition Regulation Supplement (“DFARS”)

– FAR & DFARS generally apply irrespective of whether operations are CONUS or OCONUS & may require that clause to be flowed down to local suppliers

– absent a SOFA (Status of Forces Agreement), contractors must comply with local laws as well, which may be in conflict with the FAR/DFARSwhich may be in conflict with the FAR/DFARS

– foreign owned contractors not exempt– significant penalties for false certifications (e.g., False Claims Act; suspension or debarment from

eligibility for government contracts; fines and penalties; qui tam suits, etc. )• Contractors requiring access to classified information must comply with the NISPOM

(“National Industrial Security Program Operating Manual”)– compliance is overseen by DSS


– additional requirements apply when contractor is subject to FOCI (foreign ownership, control or influence)



DSS FOCI Process

• When a contractor with a security clearance is in negotiation for a sale to a foreign interest, notification must be submitted to DSS

• DSS will consider whether• DSS will consider whether– foreign interests can affect the company’s management in a way that

might result in unauthorized disclosure of classified/controlled information

– foreign influence can adversely affect the performance of the company’s defense contractscompany s defense contracts

• Mitigation measures will be required if FOCI exists (e.g., Board resolutions, Security Control, Special Security or Proxy A )


Agreements, etc.)



What Indications of FOCI Does DSS C id ?Consider?• Contracts with foreignersg

– e.g., foreign or foreign-owned customers or suppliers• Indebtedness to foreigners

– U.S. subsidiaries of foreign banks are considered “foreign” for these purposes

F i i • Foreigners in management– including dual citizens or green-card holders

F i hi h ll 5%• Foreign ownership share as small as 5%




CFIUS

• Established in 1975• Inter-agency committee authorized to review “covered

transactions” to evaluate potential threat to national security posed by proposed transactionposed by proposed transaction

– “covered transactions” are transactions that could result in the control of a U.S. business by a foreign person

• Initial Review (30 days), Full Investigation (45 days), Presidential Consideration (15 days)

• President authorized to block an acquisition upon determination that the transaction presents a threat to the U.S. national security that cannot be addressed by other measures


national security that cannot be addressed by other measures



CFIUS Notification • Voluntary Notification • Key considerations:

– security/facility clearances– export-controlled information– U.S. government contracts– foreign government purchaser– critical infrastructure (e.g., cyber systems, products or services; ( g , y y , p ;

telecommunications and/or internet products or services; natural resources)– opportunity for surveillance/sabotage– acquirer’s prior dealings with governments/entities unfriendly to the United

St tStates– post-acquisition plans for the acquired business

• Mitigation measures may be required


g y



Bringing It All Togetherg g g

• Contractual Negotiationsg• Mergers & Acquisitions• Subpoenas & Investigationsp g• Finding the Right Approach to Compliance for your Company

– Syrian Sanctions – A Case Studyy y




Contractual Negotiationsg

• Due diligence in selection of agents, distributors, g grepresentatives and joint venture partners

• Attention during bid process to need for– security clearances– export authorizations for foreign national employees– OFAC licenses

• Representations, warranties, & certifications– address compliance with FCPA, export controls, economic sanctions,

etc.– confirm that certifications will be accurate


confirm that certifications will be accurate



Mergers & Acquisitionsg q

• “Deemed export” issue may trigger need for export license to p y gg pallow foreign persons to participate in due diligence

• Due diligence phase must encompass review of target’s compliance with export controls, economic sanctions, FCPA, government contracts & defense security regulations

– successor liability for export control violations (even in asset sales)– no successor liability for criminal conduct but significant risk of

conduct continuing post-closingconduct continuing post closing• Compliance with applicable notification requirements should be

condition to closing


condition to closing



M&A Notification Requirementsq

• Pre-closing– CFIUS notification is “voluntary” but critical if the target business

involves classified or export controlled technology or manufacturing or is otherwise critical to national securityy

– DSS requires notice of negotiations for sales to a foreign or foreign-owned entity or other indications of FOCI60 day advance notice to DDTC of intended sale of registered – 60-day advance notice to DDTC of intended sale of registered exporter/manufacturer to a foreign person

– 30-day advance notice to BATFE of any change in ownership or control

• new registrations, licenses and/or permits may be required depending upon structure of transaction


p g p



M&A Notification Requirementsq

• Post-closingg– update DDTC registration; transfer licenses to surviving registration– BATFE– DSS– government contract notices and novations




Subpoenas & Investigationsp g

• FCPA enforcement trends include move towards charging g gofficers, directors and employees as well as companies

• OFAC Administrative Subpoenas• Voluntary Disclosures

– DOJ– DDTC, BIS, OFAC




Finding the Right Approach to Compliance for Your Company • “Just say no”y

– minimizes risk of violations but may leave legitimate business opportunities on the table

• Case-by-case analysis– may have high cost/benefit ratio

P d d• Processes and procedures– “decision-tree” approach

d t i i t t t hi h li d/ l l i– determine appropriate stage at which compliance and/or legal sign-off should be required




Case Study – Syrian Sanctionsy y

• Sanctions against Syria prohibit U.S. persons from– engaging in transactions with Government of Syria and various

“Specially Designated Nationals and Blocked Persons” (“SDNs”) (unless licensed by OFAC)( y )

– exporting to Syria (except for “EAR99” food and medicine and certain licensed exports of items such as medical devices)importing Syrian origin petroleum or petroleum products– importing Syrian-origin petroleum or petroleum products

– provide services to Syria• Several exemptions and general licenses may apply, such asSeveral exemptions and general licenses may apply, such as

– performance of U.N. contracts– contracts with Syrian diplomatic missions to the United States and

th U it d N ti


the United Nations



Documents

Reggy p gulatory Compliance Challenges for International ......• Many sanctions programs are list-based – OFAC maintains list of “Specially Designated Nationals and Blocked Persons”