Select Advanced Export Issues Faced Each Day in the Life of an … · Select Advanced Export Issues Faced Each Day in the Life of an Overworked Export Compliance Professional 2014

Select Advanced Export Issues Faced Each Day in the Life of an Overworked Export Compliance Professional 2014 Upstate New York Trade Conference & Expo Rochester, New York June 19, 2014

Law Offices of Jon P. Yormick Co. LPA

An International Law Practice Attorney Advertising

Disclaimer

• The information provided is believed to be accurate as of the date of the presentation, but is subject to change without notice

• This presentation is designed for informational purposes only and is not intended to be, nor should it be deemed, specific legal advice. If such advice is required, please consult with qualified legal counsel

Selected Export Issues

• Deemed Export Rule

• FCPA/Antibribery

• Economic Sanctions

• Antiboycott Regulations

• Incorporating Export Compliance in T&C and Commercial Agreements

Deemed Export Rule

Assumptions • Jurisdictional analysis performed – ITAR v. EAR

• I-129 Part 6 Certification

• Export Control Classification Number (ECCN)* examples:

– 3E001 (“Technology” for the “development” or “production” of hard disk drive manufacturing)

– 9E991 (Technology for the development or production of aircraft parts)

– 9E980 (Technology for the development or production of monitoring equipment, e.g., electronic bracelets)

*Commerce Control List – 15 CFR Supp. 1 to Part 774

Why Talk about Deemed Export Rule?

BIS FY13 Report to Congress:

• “BIS continued increasing its regulatory compliance education programs in the critical area of deemed exports.”

• “…BIS continued to focus on the enforcement aspects of expanded outreach and deemed export compliance involving individuals and companies … BIS’s Office of Export Enforcement conducted more than 843 enforcement outreach visits [and] initiated 92 leads and cases involving allegations of deemed export licensing violations.

-Assistant Secretary for Export Enforcement, David W. Mills

Upstate Deemed Export Scenarios

• IT staffing company compliance

• Italian aerospace engineer on H1-B

• German optics engineer on L-1

• Indian optics engineer on H1-B

• Thin film technology PowerPoint presentation

I-129 Part 6 Certification

• Box 1: A license is not required from Commerce or State to release such technology or technical data to the foreign person; or

• Box 2: A license is required from either Commerce or State for the release and petitioner will prevent access to controlled technology or technical data by beneficiary until and unless the petitioner has received required license or other authorization…

Is a Deemed Export License Required?

• Q: Send an email with export controlled information to our [citizenship of choice] colleague in Albany?

• Q: If so, we can just let her download it from the server without a license, right?

• Is a License Exception available? STA?

• Caveats: - Follow documentation requirements

- Not available for China or Russia

Where to Find Guidance – www.bis.gov

• Policy Guidance Tab: Deemed Exports

– Deemed Exports FAQs http://1.usa.gov/1hsOlQm

– Guidelines for Preparing Export License Applications Involving Foreign Nationals http://1.usa.gov/Rm3egX

What to Keep in Mind: Points from USG Officials at 2013 BIS Update

• Deemed exports is the fastest growing area of export controls

• Licensing trigger: private sourcing of research • No need to correct/update Part 6 certification – get a

license • Time to license: 30-45 days • Who gets deemed export licenses? Chinese – 74%,

Iranians, Indians, Russians, Vietnamese • Currently no routine information sharing

Points from USG Officials at 2013 BIS Update

• Ongoing training – HR must understand export controls during hiring process

• Targets: USML to CCL aka 600 Series

• I-129 Part 6 is “hugely useful” to show knowledge and intent – Do not sign unless check was actually performed – Resist timing pressures

This is What $115,000 in Violations Looks Like

• February 19, 2014 – Intevac, Inc. (Santa Clara) – VSD

– Charge 1: Releasing National Security-Controlled Technology to Russian National Employee – development and production of hard disk drives

• “Release” – technology on server; provided employee with login and password to access server; view, print, download, create attachments

– Charges 2-4: Acting with Knowledge – 3 more releases while deemed export license application was pending with BIS

– Charge 5: Exported NS Controlled Technology to China without license – “export took the form of a transmission that occurred when a Chinese national employee working at the Chinese subsidiary used a login identification code and password … to access server” located in Santa Clara

To Disclose or not to Disclose… Keynote Speech of David W. Mills, BIS, Assistant Secretary for Export Enforcement, West Coast Forum, February 25, 2014: “… on January 17, 2014, BIS reached a settlement with Amplifier Research for a $500,000 penalty. However, BIS suspended the civil penalty in its entirety because of the VSD filed by Amplifier Research in 2011 detailing the actions of Gormley and its substantial cooperation in the course of this investigation….By filing the VSD, Amplifier Research avoided criminal charges (against the company itself), and the suspended fine will be waived at the end of the penalty period provided all commitments are met.”

Foreign Corrupt Practices Act/Antibribery Laws

Foreign Corrupt Practices Act • …”consequences of public corruption can be even more

severe in developing countries.”

• “In today’s global economy, the negative effects of corruption inevitably flow back to the United States.”

– Economic crises that destabilize the global financial system

– Opens borders for terrorists to cross

– Raises prices of goods

– Costs American jobs because U.S. companies cannot compete effectively

Deputy Attorney General James M. Cole, Foreign Corrupt Practices Act Conference, Nov. 19, 2013

Foreign Corrupt Practices Act

• Key parts of FCPA

– Antibribery

– Accounting (Book and records)

make/keep books accurately and reflect transactions

maintain adequate internal accounting controls

Antibribery • Prohibits “corruptly offering, paying, promising to

pay, or authorizing the payment of any money or anything of value , directly or indirectly, to a foreign government official for the purposes of obtaining or retaining business for, or directing business to, any person.”

Information, United States v. Weatherford International Ltd., Court Docket Number: 13-CR-733, Nov. 26, 2013

Small Business Case Study: United States v. BizJet International Sales and Support, Inc., Docket No: 12-CR-061-CVE, N.D. Okla.

BizJet International

• MRO provider

• Customer list:

– Mexican Federal Police

– Mexican President’s Fleet

– Mexican State of Sinaloa (Governor’s Fleet)

– Panama Aviation Authority

BizJet International

• Paid bribes to officers and other decision-makers – “commissions”

– “incentives”

– “referral fees”

• Board knowledge and approval

• Benefit - $7M+

• 200-999 employees – about 320

BizJet International

• Internal audit

• Voluntary disclosure

• Cooperation

• Termination

• Enhanced compliance

Result: DPA + 4 former employees criminally charged

Penalty: $11.8M

Enhanced compliance – review/report

Mandatory successor liability

FCPA Guidance • Nov. 2012 - A Resource Guide to the U.S. Foreign Corrupt Practices Act

http://www.justice.gov/criminal/fraud/fcpa/guide.pdf

• Opinion Releases Index http://www.justice.gov/criminal/fraud/fcpa/index/

– Audit rights

– Charitable contributions

– Gifts, Travel & Entertainment

– JVs, M&A

– Reasonable, bona fide expenditures

– Third-party agents

DPA – Corporate Compliance Program

• “… has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operation…”

UK Bribery Act 2010 (#UKBriberyAct)

• April 8, 2010 – received Royal Assent

• Delayed effective date - July 1, 2011 • New high water mark

• …the UK Bribery Act “finally bring[s] UK rules on

corrupt payments into line with other OECD countries.”

UK Bribery Act 2010

• Key features: – Commercial bribery – Prohibits facilitation payments – Adequate procedures defense – UK nexus – “close connection”

UK Bribery Act 2010 • Active/passive approach • Section 1 – offering, promising, paying bribes • Section 2 – agreeing, requesting, receiving

bribes • Section 6 – bribery of foreign public officials • Section 7 – corporate liability failing to

prevent bribery • Section 12 – extraterritorial jurisdiction

UK Bribery Act 2010 – Section 7

• Strict liability offence

• Extends to acts of “associated persons” – anyone performing for or on behalf of company

• Defense: “adequate procedures” adopted – Proportionate to risk, scale and complexities of

activities

UK Bribery Act Guidance • Ministry of Justice - UK Bribery Act 2010 Guidance, March

2011, http://www.justice.gov.uk/guidance/docs/bribery-act-2010-guidance.pdf

• 6 principles (and 11 Case Studies) 1. Proportionate procedures 2. Top-level commitment 3. Risk Assessment 4. Due diligence 5. Communication (including training) 6. Monitoring and review

UK Bribery Act Guidance • Acknowledges how SMEs will comply v. multinationals • Case studies designed to illustrate SME compliance

Case Study 5 – Principle 3 (Assessing risks) “A small specialist manufacturer is seeking to expand its business in one of several emerging markets . . . and is unsure how to go about assessing the risks of entering a new market. The small manufacturer could consider any or a combination of the following:”

Quick Start Guide, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181764/bribery-act-2010-quick-start-guide.pdf

Corruption of Foreign Public Officials Act (#CFPOA) • June 19, 2013 – amendments received Royal Assent

– Intended to close significant loopholes, create new offences

Highlights:

• Extraterritorial jurisdiction – Canadian citizens, residents, corporations, firms, societies

– Replaced “real and substantial connection” requirement – significant activities occurring in Canada

– Q: Non-resident importers? Branch offices? Independent contractors ?

Corruption of Foreign Public Officials Act

Highlights

• Facilitation payments – grace period

• Books and records – criminal only

• For-profit requirement – removed

• Double jeopardy – cross-border prosecutions

– But: FCPA does not have reciprocal provision

Corruption of Foreign Public Officials Act

• First trial – Ontario Superior Court of Justice, Aug. 15, 2013

– Nazir Karigar – offering bribes (conspiracy)

– USD 450,000 cash/stock to Air India officials and Indian Minister of Civil Aviation

– RFP - facial recognition software/hardware contract

– Agent for Canadian tech company – 30% revenue stream

– Initial USD 200,000 paid from U.S. parent – to ensure bid was technically qualified

– Unsuccessful bid

Economic Sanctions

SDN List • Specially Designated Nationals List – 30 May update

http://www.treasury.gov/ofac/downloads/t11sdn.pdf

• Individuals and companies owned/controlled by or acting for/on behalf of targeted countries

• Individuals, groups, and entities, (terrorists and narco- traffickers)

• Assets are blocked and U.S. persons are generally prohibited from dealing with SDNs

NEW: Foreign Sanctions Evaders List (FSE List) • Released – 6 February 2014 (no updates) • Legal authority - Executive Order (E.O.) 13608,

“Prohibiting Certain Transactions With and Suspending Entry Into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria.”

• “Evaders” - foreign persons who have facilitated deceptive transactions for or on behalf of persons subject to U.S. sanctions

Foreign Sanctions Evaders List (FSE List)

• Prohibits: Transactions by U.S. persons or within the U.S. involving FSEs

• FSEs by Country – Cyprus, Georgia, Liechtenstein, Turkey, Ukraine, UAE, Undetermined

• June 9 – Can search as part of upgraded Sanctions Party with SDN List

Sanctions List Search

OFAC Licensing

• General v. Specific License – authorization to engage in transactions otherwise prohibited

• General License (GL) - authorizes performance of certain types of transactions

• Limitations on performance activities

• Documentation/recordkeeping

• OFAC License Application Page – case-by-case http://www.treasury.gov/resource-center/sanctions/Pages/licensing.aspx

– Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) – agricultural commodities, medicine, or medical devices

– Cuba travel

– Blocked funds release – U.S. financial institution

– “Catchall” (including guidance) - Transactional

Specific Licenses

License Checklist Highlights

• Copies of documents relating to transaction – technical specs, CCATS from Commerce, purchase orders, invoices, bills of lading, payment, passport or other government issued-ID

• Identify any and all Specially Designated Nationals associated with the transaction

• Identify all sanctions programs involved • Describe proposed transaction and why believe prohibited

– Is a G.L. available? – Money flow

• Any prior license numbers • Is everything in English?

Specific License Conditions

• Licensee shall provide and make records and reports

available for inspection, upon request

• License is a privilege – non-transferrable; limited to specific facts and circumstances of transaction described in application; can be revoked or modified at any time

• Maintenance, replace/repair, installation, training? Is it “incidental and necessary” to transaction?

Sanctions Update Highlights:

Burma, Iran, Ukraine

Burma

• 1 April – updated FAQs

http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/ques_index.aspx#burma

• State Dept. “Reporting Requirements on Responsible Investment in Burma”

• $500,000+ “in any period”

• 180 days after hitting threshold; July 1

• FAQs: 280 – 283

Iran

• JPOA Guidance - http://www.treasury.gov/resource-center/sanctions/Programs/Documents/jpoa_guidance.pdf

• FAQs on JPOA - http://www.treasury.gov/resource-center/sanctions/Programs/Documents/jpoa_faqs.pdf

JPOA FAQ

2. Q: How does the JPOA impact U.S. sanctions on Iran?

A: Except for the limited, temporary, and reversible relief provided pursuant to the JPOA, all U.S. sanctions with respect to Iran, including financial sanctions, sanctions pertaining to the purchase of Iranian crude oil, and sanctions on investment in Iran’s energy and petrochemical sectors, remain in effect with respect to U.S. and non-U.S. persons.

Iran

But we have a Canadian subsidiary…

Query: Is there a legally viable

“Canadian strategy” for Iran?

Iran – A Canadian Strategy?

• Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) – extends sanctions to non-US subs

• May 2013 – amendments to Canada Special Economic Measures (Iran) Regulations. Persons in Canada and Canadians outside of Canada:

-prohibited from exporting, selling, supplying, or shipping goods … to Iran or to a person for the purposes of carrying on business in or operated from Iran

Ukraine-Related Sanctions

• March 6 – First Executive Order issued (E.O. 13660) – blocked property

• March 17 - New Executive Order (E.O. 13661) – expanded E.O. 13660; SDN Designations

- by extension entities majority owned or controlled

• March 20 – E.O. 13662 and additional SDN designations, including Bank Rossiya

• April 11 – Additional SDN designations, including Chernomoreneftegaz (Simferopol, Crimea only)

Ukraine-Related Sanctions

Related actions: • BIS has suspended action on export/reexport license

applications “until further notice” • BIS added Chernomoreneftegaz to Entity List – - subsidiary of Naftogaz

- covers EAR99 (NLR) items - Presumption of Denial

• DDTC suspended review and issuance of export licenses and agreements “until further notice”

OFAC Penalty Settlement – 6 March 2014 Ubiquiti Networks, Inc.

• $504,225 - Iranian Transactions and Sanctions Regulations (the “ITSR”).

• From 2008 - 2010, Ubiquiti appears to have violated ITSR by engaging in transactions related to the exportation, reexportation, sale or supply, directly or indirectly, of goods for broadband wireless connectivity to Iran, and facilitating the reexportation, sale or supply of such goods to Iran

- entered exclusive distributorship agreement with UAE company to distribute products in Iran, then sold and exported broadband wireless equipment to distributor then reexported to Iran

• Dec. 2009 – Feb. 2011, Ubiquiti appears to have violated the ITSR by engaging in 13 exports of broadband wireless equipment to Greek distributor, with knowledge or reason to know that the goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran

Ubiquiti Networks, Inc. Penalty Settlement

• Not a voluntarily disclosure - base penalty: $560,250 • Factors considered:

– demonstrated reckless disregard for U.S. sanction requirements;

– on notice that the conduct at issue constituted a violation of U.S. law;

– members of senior management knew or had reason to know that products were reexported to Iran;

– conduct resulted in the provision of goods related to broadband wireless connectivity, worth nearly $600,000 to entities located in Iran;

Ubiquiti Networks, Inc. Penalty Settlement

– had no OFAC compliance program in place at the time of the apparent violations;

– has no prior sanctions history, including not being the subject of a penalty notice or Finding of Violation;

– cooperated with OFAC during its investigation of the apparent violations;

– took remedial action in response to the apparent violations.

• Is it a potential violation?

– General license

– Specific license

– Applicable law/regulations at time

• Voluntary Self-Disclosure – credit on base penalty

– 50% of transaction value (non-egregious)

– $125,000 cap/violation ($32,500/TWEA)

Economic Sanctions Non-Compliance

Antiboycott Regulations

Antiboycott Regulations

• Antiboycott regulations (per OAC): “…prohibit U.S. companies from furthering or supporting the boycott of Israel sponsored by the Arab League, and certain other countries, including complying with certain requests for information designed to verify compliance with the boycott.”

15 CFR 760

Covered Parties

• Regulations apply to:

– “U.S. persons” – home or abroad

– “controlled in fact” affiliates of domestic concerns

• Ability to control operations, set policies of affiliate

Q: Foreign commercial agents? JVs?

Duties Under Antiboycott Regulations

• Not further or support an unsanctioned foreign boycott; and

• Report requests to comply with or support an unsanctioned foreign boycott

• Single transaction – Form BIS15-612P • Multiple transactions – Form BIS15-6051P 75

requests during a particular period

Reporting Antiboycott Requests

Antiboycott Requests

• Delete all products, manufactured in Israel as they are banned in Bahrain

• All Produce of Israel are Banned

• Shipping company or agent was to issue a certificate that the ship was permitted to enter Muscat or Sultan Qaboos

• Confirming certain parts sold to a UAE party were not made in Israel

• Sales orders from the UAE and Malaysia - requested U.S. company cancel portions of order because parts originated from Israel; requested substitute parts; requested confirmation parts were not made in Israel; otherwise made clear that Israeli-origin products were prohibited

OAC Assistance is Available

• FY 2013 – over 1,000 requests to BIS for compliance guidance

• OAC works for U.S. companies to remove boycott terms from tenders, RFPs, etc.

– Saudi Arabia, UAE, Iraq

http://www.bis.doc.gov/index.php/enforcement/oac

Incorporating Export Compliance in T&C and Commercial Agreements • Use clear and specific language – incorporate

local law references where possible • Use mandatory language – shall, must,

required • Obtain acknowledgments, representations,

warrants, covenants • Blame the USG and then the lawyers • FCPA/Antibribery Acknowledgment

Food for thought ….

• Do your company’s T&C and commercial agreements: – have a prohibition on export, disclosure, re-export of goods and technology and

create an affirmative duty on the customer or business partner to comply with U.S. and applicable foreign export controls laws, regulations, orders, decrees, etc., including obtaining licenses?

– create a duty of cooperation to ensure export compliance, and address sharing of compliance and export licensing costs?

– incorporate the minimal DCS from the regulations or incorporate an affirmative duty that your business partner and customer do not export, re-export, re-sell, trans-ship, or divert your company’s goods or technology to named embargoed or sanctioned countries and parties and an affirmative duty to notify your company of any intended, attempted, or completed prohibited transaction?

More food for thought ….

• Do your company’s commercial agreements:

– incorporate key definitions under the FCPA, UKBA, etc. e.g., “government official,” “foreign public official,” and summarize/highlight key provisions of the applicable laws so business partners are familiar with these provisions?

– refer to the OECD Anti-Bribery Convention, the United Nations Convention Against Corruption, and national laws of the territory in which the business partner is located and is within its sales territory?

• T&C and commercial agreements can be a shield – further evidence of compliance

Thank you

Jon P. Yormick Attorney and Counsellor at Law

Law Offices of Jon P. Yormick Co. LPA

Email: [email protected] Toll Free: +1.866.967.6425 (Canada & U.S.)

Mobile: +1.216.269.5138 Skype: jon.yormick

Twitter: @yormicklaw

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