The second half of 2013 saw the continued expansion of FCPA enforcement by the DOJ and the SEC. The decrease in the scope of protections afforded to whistleblowers will lead to an increase in the number of FCPA potential violations reported to the U.S. government. The increase in compliance violations reported to the government will likely lead to an increase in export violation prosecutions. I say this because once an FCPA investigation begins the facts often show weak compliance in other areas such as export control compliance. And, the penalties are getting crazy. For example, Avon recently submitted a revised filing estimating that the FCPA-related fines levied against it would amount to $132 million. I am speechless about this. Avon isn’t selling missile detection systems. Cosmetics is obviously a more competitive business than I realized.
Additionally, it isn’t just the United States government you have to worry about. If you do any business in the U.K, the U.K. Bribery Act also applies to you with its strict liability provisions. The U.K. Act, has only one mitigating factor and it’s a robust compliance program meeting the Act’s requirements. Starting on February 24, the United Kingdom will have the option of using deferred prosecution agreements (or DPAs) to enforce the UK Bribery Act 2010. DPAs, already in use in the United States, seek to incentivize corporations under investigation by offering a negotiated resolution in return for cooperation with the investigation. They also provide a form of supervision of the remedial measures undertaken by a corporation after a violation occurs: if a company fails to implement the changes it agreed to, the government can revisit the “deferred” criminal case against it. And then there is the “imbedded probation agent” that the government assigns to a corporation which is like having an IRS agent camping out in your internal audit department.
So what is the point? Don’t limit your focus to your anticorruption program. An audit of an exporter arising out of a potential FCPA violation may unearth unrelated inconsistencies that lead to additional headaches. To avoid this slippery slope in the event of an unforeseen FCPA investigation, you must have an up to date export compliance manual and licensing records sufficient to survive a thorough audit of all of the company’s practices, not just those related to bribery. Can you easily put your hands on your training attendance sheets, your list of product classifications and your anti-boycott procedures? If not, consider some spring cleaning and reorganization.
As State and Commerce continue to rollout the President’s Export Control Reform Initiative in stages, there is an increased likelihood that inadvertent errors will occur as employees scramble to familiarize themselves with changing regulations during this period of transition. By ensuring that your company implements and maintains up-to-date anticorruption and export compliance programs, you are insuring yourself against the possibility of a minor inadvertent error leading your company down a slippery, costly, and potentially embarrassing slope.
Have a great weekend,
President Obama’s February 19 Executive Order outlines an initiative aimed at reducing supply chain barriers by simplifying filing processes and eliminating duplicative requirements in order to allow companies to concentrate on managing their businesses.
The Order includes two intimately related elements:
- The creation of a “single window,” dubbed the International Trade Data System (ITDS), where companies can submit required import and export documentation to the various agencies that play a part in regulating the transfer of goods across U.S. borders.
- Establishment of a Border Interagency Executive Council to continually develop and reassess policies and procedures aimed at further coordinating the agencies involved in trade regulation in order to facilitate the transition to the ITDS.
The goal is to have the ITDS up and running by the end of 2016. Although it is too soon to make any substantive changes to your company’s procedures you can best prepare your company by learning about the changes and preparing for the transition. Keep in mind that more significant changes are on the horizon. Just like the elements of the President’s Export Control Reform Initiative that began rolling out in stages this past October, the ITDS roll out will create a relatively uncertain time of transition during which the danger of inadvertent compliance errors caused by new and unfamiliar procedures will be heightened.
Consequently, you should plan to allocate additional time and resources in 2016 to ensure that the reforms do not catch you off guard and lead to costly penalties imposed by the government for noncompliance. And when the dust settles, the “single window” approach has the potential to greatly improve the ease with which companies satisfy their compliance obligations.
Have a great day!
Are you proactively planning your expansion or are you reacting to a business opportunity? If you are reacting to a business opportunity, here is what I suggest you do. Start with doing diligence on your buyer/potential agent or distributor. To me this means:
- Screening the party against the government lists for parties with whom you can’t do business;
- Provide the party with an anti-corruption questionnaire and certification; and
- Ensure the company can pay you! One cost effective way to do this is using the U.S. Commercial Service’s International Company Profile. This is a great services. The only concern is you must let the company know you are doing the investigation because company executives will be interviewed. You will get a report that includes:
- A detailed credit report on your prospective foreign partner;
- A listing of the company’s key officers and senior management;
- Banking and other financial information about the company;
- Market information, including sales and profit figures, and potential liabilities;
- An opinion as to the reliability of the overseas partner; and
- An opinion on the relative strength of that company’s industry sector in your target market.
The cost is lowered to $350 for new exporters using the service for the first time. The regular price ranges from $600-$900 depending on the size of the foreign company and takes about 20 business days to complete.
Then you are ready for a draft contract or more diligence on the party if the first round of vetting resulted in significant red flags.
Good luck, and feel free contact me if you need assistance navigating the process.
We usually don’t post enforcement summaries. However, I wanted to insure everyone was aware that the United States government is really going after non-U.S. entities. Please see below. Note it is the Commerce Department not OFAC at Treasury Department.
The U.S. Commerce Department’s Bureau of Industry and Security (BIS) recently issued a temporary denial order revoking the export privileges of a British Virgin Islands-based company, Evans Meridians Ltd., because it was involved in a plan to ship two GE commercial aircraft engines to Iran without first obtaining the proper licenses. Illinois-based Adaero International Trade LLC shipped the engines to 3K Aviation in Turkey and 3K was planning on reexporting the engines to Pouya Air in Iran. In early January, BIS revoked the export privileges of these three companies and has now decided to take action against Evans Meridian because it was listed as a purchaser on documents related to the transaction and acted as owner of the engines at one point. The government also noted that following BIS’s initial action against the three companies, Evans Meridian made a payment to 3K despite the fact that the denial order against 3K was in force. The engines currently remain in 3K’s possession in Turkey so there is still a risk that further attempts will be made to get the items to Iran.
These companies (so-called denied companies) are now disallowed from playing any role in exporting controlled items, cannot apply for export licenses, cannot negotiate sales or shipments involving controlled items, and cannot benefit in any way from any transaction involving controlled items. Third parties are also barred from helping or working with these denied companies on transactions involving controlled items.
Have a great weekend!
Here’s a word of caution when dealing with commercial agents based in the EU: the European Court of Justice (the “ECJ”) has recently ruled that EU Member States can implement mandatory commercial agency rules that will trump any choice of law clauses contained in particular agreements between parties, including arbitration clauses. The ruling stemmed from a case involving a Belgian commercial agent who entered into a commercial agency agreement in order to operate the principal’s container liner shipping service. A disagreement arose when the agent accused the principal of unlawfully terminating the agreement months before the date provided for in the contract. Although the parties’ agency agreement contained an arbitration clause that referred all disputes to the Bulgarian Chamber of Commerce and stipulated that Bulgarian law applies, the Belgian agent brought a claim against the principal in a Belgian court for compensation pursuant to Belgium’s Law on Commercial Agency Agreements. The law provided that “any activity of a commercial agent whose principal place of business is in Belgium shall be governed by Belgian law and shall be subject to the jurisdiction of the Belgian courts.”
Thus, the question was whether the Belgian law granting jurisdiction over the matter to the courts of Belgium and sanctioning the use of Belgian law trumps the choice of law clause in the parties’ agency agreement calling for arbitration of any dispute between the parties in Bulgaria under Bulgarian law. The ECJ concluded that given the fact that a Member State’s mandatory national laws do not permit the Member State to deviate from such mandatory requirements in order to comply with EU law, a finding that Belgium’s Law on Commercial Agency Agreements imposed “mandatory” obligations on the Member State and the contracting parties would render the arbitration clause in the agreement unenforceable.
What does this mean for you?
- Simply pasting in a standard form arbitration clause may not be providing you with the protection you think it is. The case illustrates the fact that your agent’s home country may have statutes that override terms in your agreement. Thus, you want to perform more due diligence on potential local agents prior to entering into contracts. You should go beyond merely understanding where the particular branch or office you are contracting with is doing business and find out if the agent is doing business in other countries with laws that could affect your agreement.
- Also it is now even more important to have a basic understanding of what affect the agent’s local law will have on your agreement terms if a dispute should arise. You can then better assess the risk associated with the agreement and either account for that risk in the agreement or attempt to structure the business relationship in a different way in order to avoid exposure to that particular risk altogether.
Thanks, Stay warm!
Take a look at my recent article entitled “Doing Business Abroad: The ‘Must Haves’ of Your Corporate Compliance Program” located here. The article highlights key elements of a successful international corporate compliance program including a corporate policy, employee training, anti-corruption procedures, and the all-important tone at the top. Let me know if you have any follow up questions!
Having described the most common shortcomings of an insufficient trade compliance program in a previous post, I’d now like to share five positive pointers that can be used to help ensure effective implementation of your company’s trade compliance program. Remember, a company-wide commitment and a similarly broad allocation of resources is necessary to implement a trade compliance program successfully, so picking and choosing which procedures to implement and which to ignore is not a viable option. Taking that route will result in a trade compliance program in name only, and won’t afford any real protection to your company. Instead, make sure to keep the following key elements in mind:
- It isn’t enough to just train. Charles E. Duross, Deputy Chief of the U.S. Department of Justice’s FCPA unit recently said, “Training is insufficient.” I would say training alone isn’t enough. To be compliant, companies actually must commit to a new way. Just like in sports and music, knowledge is a requirement, but you must practice. Compliance must be proactive to prevent violations. No longer is “hope for the best and change after a problem is discovered” an acceptable risk profile.
- Embrace technology. Anyone I know personally will be laughing. I repel technology. However, new project management formats are being developed to help compliance groups manage and follow legal obligations. The IT system must be set up so that busy professionals can’t hit “dismiss” and overlook a compliance obligation.
- Resources will have to be dedicated to the compliance effort. It isn’t an afterthought. Trade compliance must have a seat at the table along with other serious risks.
- Senior management must stay engaged throughout the year. A lot can be done by mirroring corporate wellness programs and safety matters. “Compliance Minutes” and discussion groups are real possibilities. Everyone in the company has a role to play, and when each employee feels empowered, the company will benefit.
- Accountability. There is no way around this if you really want to improve compliance. Hold people accountable. Period. It works. (And the government likes it.)
Have a great week,
Happy New Year!
Thanks for a great 2013. We will continue posting in 2014. There is a lot happening that is affecting global business.
To kick off the new year, our first post is regarding internal training of management and employees.
If a CEO instructs management to ensure the company is protected, management might decides to train internally, update the company’s manual, and possibly send a few employees to additional training. However, taking such action does not necessarily result in an improved compliance program because although internal training requires real understanding of the new regulatory environment, most companies lack internal officers who have the time or the motivation to appreciate the nuances of the export changes. There are several reasons why this approach may not translate into real protection for your company:
- Logistics, sales, business development and product development all play a role in the process, and no one person really understands all the procedures that go into internal compliance. Therefore, internal compliance officers need good, in-depth training that is specifically tailored to their business, is up-to-date and takes existing procedures into account. That usually means one-on-one training.
- In-house lawyers usually have an understanding of the big picture and the importance of training and compliance, but do not have the time to delve into the details. They either need a bucket of money to rely on external consultants or to hire compliance experts.
- If no funding is allocated to improve the compliance process and documentation, increase due diligence by internal investigations, hire more people, pay for advanced export training or bring in a trainer, it is unlikely your company will make any real compliance improvements.
- If every senior manager doesn’t treat trade compliance as a real risk area, then those on the front lines, like the receptionist and the facilities manager, won’t either. (The facilities manager has to know that technology controlled by the Commerce Department can’t be visible to the evening cleaning crew or it could be a deemed export. The receptionist has to know that the overnight package going to China must be treated differently than the designs going to St. Louis.)
Have a great day,
Recently, I was fortunate enough to work with Assistant Secretary Kevin Wolf on a webinar on October 23. We based the webinar on questions our team encountered when trying to apply the new regulatory changes to our client’s businesses. This has been a big issue for us as we have been designing an export chart that includes all of the State, Commerce and OFAC requirements for any business when exporting. As we worked with companies using the chart we would get tangled up in the new requirements. So we came up with a series of questions that Assistant Secretary Wolf answered on our webinar. We thought if we had these questions so would other exporters.
You can view the webinar here.
Have a great day,
As you may know, the United States’ export control regime controls items, services, and information through regulations enforced by the State, Commerce, and Treasury Departments. Since all three departments promulgate their own set of definitions and rules, trying to determine which set of regulations and definitions to apply to your particular export can get confusing – especially when similar words are used by different departments to describe similar (but legally distinct) classes of exports.
Today I want to shed some light on a distinction that confuses many of my clients, at least initially: the difference between “Technical Data” and “Technology.”
Since the government has not quite caught up with the rapid evolution of cloud technology and information security products, properly classifying information for export can get complicated. What you need to know is that the information the government regulates is called controlled information. Controlled information is referred to as “Technical Data” (capital T, capital D) under State Department regulations (International Traffic in Arms Regulations) and “Technology” (Capital T) under Commerce Department regulations (Export Administration Regulations).
- If you have an item controlled by the State Department, look at the Technical Data definition. It is defined as information used in the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of Defense Articles, classified information and software relating to Defense Articles, or information covered by a specific invention secrecy order issued by the government. Information is not considered Technical Data if it is in the public domain, consists of general scientific, mathematical, or engineering principles commonly taught in schools, colleges, and universities, or basic marketing information describing the general function or purpose of Defense Articles.
- If you have an item controlled by the Commerce Department, look at the Technology definition. It is defined as specific information necessary for the development, production, or use of an item. Development is related to all stages prior to serial production while production includes all stages ranging from manufacture to quality assurance. In order to be controlled because it is necessary for the use of an item, information must satisfy a narrower standard. The information must be used to operate, install, maintain, repair, overhaul, and refurbish the item. Information is not considered Technology if it is (or will be) published, a result of fundamental research, educational, included in certain patent applications, or under the exclusive jurisdiction of another U.S. government agency,
As with any system, to get an accurate result you have to make sure to employ the proper standard for the particular analysis you are doing. Remember: in order to determine if the State Department controls information see if it falls under the Technological Data definition, and in order to determine if the Commerce Department controls the information see if it falls under the Technology definition.
Have a great day,