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Issue Spotting International Trade Issues in Supply and Acquisition Agreements
December 10, 2015
Presented by: Nancy Noonan, David Salkeld & Marwa Hassoun
Arent Fox LLP www.arentfox.com
Washington, DC | New York, NY | Los Angeles, CA | San Francisco, CA
Why are We Here? • Does your company:
– use inputs produced outside of the US
– sell finished products outside of the US
– own any company that either uses or sells products outside the US?
If so, you likely have to screen global supply arrangements at an early stage for export, customs, sanctions issues, as well as antidumping and countervailing duties. In this program, our panel of experts will outline how to spot issues in these agreements to identify and mitigate high risk areas in international transactions.
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Agenda • Introduction • Imports • Exports • Anti-Corruption • Conflict Minerals • General Review
Guidance
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International Trade Issues • What Laws and Regulations are We Discussing?
– The U.S. government enforces laws and regulations that promote the national security, foreign policy, and economic interests of the United States, including those related to exports, imports, trade sanctions, requests to comply with certain boycotts, and bribery.
• Consequences are serious: civil and criminal penalties may be imposed for violations of these laws and regulations.
• Focus on – US imports – US exports – Bribery – Emerging Corporate Social Responsibility Issues
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Who regulates Imports? • Primary Regulator: U.S. Customs and Border
Protection (CBP), part of the Department of Homeland Security
• 40 different federal agencies with CBP as “border cop.”
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US Import Issues – Customs/Imports
When a shipment reaches the United States, the party responsible for clearing the goods through customs is the “importer of record.” See 19 U.S.C. § 1484.
Importer of record will obtain and maintain a customs bond and will file entry documents for the goods at the port of entry.
Imported goods are not legally cleared until after the shipment has arrived within the port of entry, release of the merchandise has been authorized by U.S. Customs and Border Protection (“CBP” or “Customs”), and estimated duties have been paid.
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US Import Issues – Key Risks Examples of key risks: (1) analyzing the risk of civil and criminal liability
that could be imposed if the goods have been entered into the United States;
(2) determining whether reasonable care has been used when importing;
(3) performing due diligence reviews on key import compliance areas, such as classification, valuation, country of origin, recordkeeping
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Reasonable Care • Importer must make entry using “reasonable
care” 19 U.S.C. 1484. • Definition -- “that degree of care which a person
of ordinary prudence would exercise in the same or similar circumstances”
• Standard by which US importers are measured in terms of compliance
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US Import Risk – Growing Risk AD/CVD
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• If the good is subject to antidumping/countervailing duties, ensure cash deposits are being made at the appropriate rate. Review
• Monitor liquidation of entries subject to AD/CVD duties for liquidation at the appropriate time and rate. Monitor
• If seller claims the good is excluded from the AD/CVD order, perform due diligence on that claim—heightened scrutiny of AD/CVD evasion or circumvention is resulting in False Claims Act liability as well as penalty actions by CBP.
Diligence
US Imports – Review Items • Records for Import Compliance
– Manuals, checklists, or other guidance – Training materials – A list of countries from which the target or its affiliates
have imported goods within the past five years. – Tariff classification database – Communications with CBP, including CF 28, CF 29,
Informed Compliance Notices, Liquidated Damages Notices and Penalties Assessed.
– Request ACE (entry) data, if available – list of an entity’s imports; otherwise request ITRAC (entry) data from CBP
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US Imports – Review items – cont’d • Customs Valuation/accounting records related to
import issues • Royalties related to imported goods • Discounts/rebates • Accounts for materials supplied to vendors
overseas – molds, tools, dies, materials (assists) • Freight payments • Customs bond information
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US Imports - Takeaways
Supply Agreement
• Incoterms can be important for risk of loss – Cost, Insurance, Freight (CIF) or Delivered Duty Paid (DDP) Terms
Acquisition Agreement
• Buyers should include provisions to cover potential liability through funds held in escrow, indemnification, excess indemnification payable clauses
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Defense and Dual-Use Controls Ø Department of State
§ Directorate of Defense Trade Controls (“DDTC”), International Traffic in Arms Regulations (“ITAR”)
Ø Department of Commerce § Bureau of Industry and Security (“BIS”),
Export Administration Regulations (“EAR”) § Census Bureau, Federal Trade Regulations (“FTR”)
Embargoes and Sanctions Ø Department of Treasury
§ Office of Foreign Assets Control (“OFAC”), Foreign Assets Control Regulations
Miscellaneous Ø Drug Enforcement Agency Ø Nuclear Regulatory Commission
Exports
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ITA
R
• DDTC • United States Munitions List
(USML) • U.S. origin • Exports and temporary
imports of hardware, technical data, and defense services for military applications
• Brokering
EA
R
• BIS • Commerce Control List (CCL) • U.S. origin or exported from
the U.S. or Non-U.S. items containing more than “de minimis” U.S. content or, in certain cases, derived from U.S. technology
• Exports of commodities, software, technology that are commercial or dual-use (both military and commercial application) AND items that have moved off the USML as part of Export Control Reform
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– Department of Treasury – Office of Foreign Assets Control – Prohibitions on countries, designated persons, certain activities.
• What countries are sanctioned?
§ Cuba
§ Syria
§ Iran
§ North Korea
§ Crimea
§ Sudan
§ Balkans § Belarus § Central African Republic § Cote d’Ivoire § Democratic Republic of Congo § Iraq § Lebanon § Liberia
§ Libya § Myanmar § Russia § Somalia § South Sudan § Venezuela § Yemen § Zimbabwe
Sanctions
Export/Sanctions Restrictions
• Specific hardware, software, and technology, including military and dual use (commercial) items
• Services • Foreign-made items incorporating U.S.
components or technology
Exports, reexports, or retransfers
• Selling to or doing business with sanctioned countries
• Doing business with specific parties, such as terrorists, drug traffickers, or individuals subject to economic sanctions
Sanctions
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Export/Sanctions Diligence
Jurisdiction and classification
Adequate licenses and use of
exceptions and exemptions
Actual shipments done properly
Restricted and denied party
screening
Exports, reexports, or transfers were to
prohibited destinations,
persons, or end uses
Directed or voluntary disclosures
Recordkeeping Policies and procedures
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US Export Control Review
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Provide a list of countries to which the target or its affiliates have exported any goods, services, software, or technology within five years.
Provide a description of the jurisdiction and classification process employed by the target for its goods, services, software, or technology, and provide a copy of any classification database.
Determine if target employs any individuals in the United States who are not “U.S. Persons” (i.e., citizens or permanent residents of the United States)? To what types of technology or technical data do such persons have access?
Provide copies of all Department of State and Commerce licenses obtained by the target or its affiliates and that were valid at any point during the last five years.
Sanctions Review
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Does the target or its affiliates conduct any activities, directly or indirectly, with Cuba, Iran, North Korea, Sudan, or Syria? Describe the activities.
Provide copies of all OFAC licenses obtained by the target or its affiliates and that were valid at any point during the last five years.
Does the target or its affiliates screen the end use and end users for international transactions against U.S. government prohibited lists such as the Specially Designated Nationals (SDNs) and Blocked Persons List? How?
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• Successor liability for past violations
• Liability for future
violations
Audit
Contractual provisions
Diligence
Indemnification
Export/Sanctions Risk Areas
Anti-Corruption – FCPA Basics • United States and many other countries have anti-
bribery and anti-corruption laws that make bribery of foreign officials illegal.
• Foreign Corrupt Practices Act (FCPA) prohibits the payment of bribes to foreign officials in order to obtain or retain business.
• Prohibition applies to U.S. citizens, U.S. companies, foreign subsidiaries of U.S. companies, and in some cases, third party agents, distributors and others acting on behalf of a U.S. person or company.
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Anti-corruption – Transaction Basics • Transaction documents should include:
– Due diligence and audit rights; – The right to terminate the deal based on potential
FCPA violations; – Post-closing transaction tasks; – A closing condition that the purchaser shall have
completed FCPA due diligence to its satisfaction; – Provisions governing any possible joint
investigation and the disclosure of potential FCPA liabilities to the government.
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Anti-corruption – Representations and Warranties
Amount of the potential penalty – what is the likely level of culpability?
Existence of mitigating factors
Is it likely that a prior disclosure will be accepted as valid?
Has the company received notice that a Focused Assessment is to be conducted?
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Conflict Minerals • Tantalum, Tin, Tungsten, and Gold - found in a wide variety of
products from electronics and jet engines to tools and jewelry.
• U.S. Securities and Exchange Commission (“SEC”) requires reporting issuers whose products contain conflict minerals to conduct due diligence and report on the source and chain of custody of those minerals, and a description of the due diligence.
• Monitor targets use/purchases of conflict minerals -– in their products and what they are doing to determine the source and chain of custody of those minerals.
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CSR Issues - Review
Supply agreement/ purchases
• Companies required to comply with conflict minerals rule will want to be aware of supplier’s efforts to conduct due diligence into source and chain of custody of conflict minerals in purchased products to meet their own reporting obligations.
Acquisition
• Determining level of due diligence by target is important not only in terms of future compliance obligations, but
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Target may have other customers that are required to file reports and who will increasingly demand such due diligence or find other suppliers.
CSR - Review
Acquisition - also important to determine whether target is required to comply with conflict mineral rule, and, if so, if it is in compliance.
A lack of compliance can trigger not only legal and cost risks, but reputational ones as well.
Representations and warranties should be required in the transaction documents regarding conflict minerals, as well as indemnification provisions to cover potential liability.
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General Review Guidance
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Provide copies of all export, import, trade sanctions, anti-boycott, and anti-corruption compliance processes, procedures, or manuals.
Has the target or its affiliates filed a disclosure with or been investigated or penalized by the government relating to a potential violation of any export, import, trade sanctions, or anti-corruption law or regulation?
If so, provide a copy of all correspondence to or from the government.
Does the target or its affiliates provide training to employees regarding export, import, economic sanctions, or anti-corruption laws and regulations? If so, provide copies of training materials during the past five years.
Additional Resources • The U.S. DOJ and SEC Resource Guide to the U.S. Foreign
Corrupt Practices Act: http://www.justice.gov/criminal-fraud/fcpa-guidance
• SEC Fact Sheet on Disclosing the Use of Conflict Minerals: http://www.sec.gov/News/Article/Detail/Article/1365171562058
• OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas: http://www.oecd.org/corporate/mne/mining.htm
• U.S. International Trade Commission, Harmonized Tariff Schedule of the United States: http://www.usitc.gov/tata/hts/bychapter/index.htm
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Additional Resources • U.S. International Trade Administration:
http://www.ita.doc.gov/ • U.S. Customs and Border Protection – Trade Issue:
http://www.cbp.gov/trade/trade-community • Office of Foreign Assets Control, U.S. Department of
Treasury: http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx
• Bureau of Industry and Security, U.S. Department of Commerce: http://www.bis.doc.gov/
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Questions?
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