Compliance

Thailand

While the U.S. has no formal Thai sanctions program (and we love their food and beautiful vacation spots), U.S. businesses may want to take a few extra precautions when dealing with the Thai government these days.  Nalinee Taveesin, formerly Thailand’s trade representative and currently a “Cabinet Member in Thailand’s Prime Minister’s office” is now one of The Office of Foreign Assets Control (OFAC)’s Specially Designated Nationals (SDN).   For those of you that are unfamiliar with blocked parties, OFAC’s SDN list is a list of parties (governments, individuals, businesses, and entities) whose assets are blocked and U.S. persons are generally prohibited from doing business with such listed parties.  Ms. Taveesin was added to the SDN list under the Zimbabwe sanctions for an alleged connection to Robert Mugabe.

For U.S. businesses the real questions are:

What does this mean for U.S. persons?

How does OFAC treat such a listing of a private individual who holds a public office?

Does this mean you can’t do business with her in her official capacity?

According to OFAC as of today, such a listing doesn’t prohibit U.S. persons from dealing with the Thai government.  However, what is clear is that U.S. individuals and businesses should be aware of Ms. Taveesin’s listing and consult OFAC before considering any transactions that might involve or be connected to her. As always, OFAC must evaluate the particular extent of contact with the named SDN in your transaction/business dealings.  A phone conversation is not prohibited but financial dealings would be a no-no.

Burma

In other news, the U.S.’s relationship with Burma (also known as Myanmar), whose U.S. sanctions include a prohibition on import of Burmese products, export and reexport of financial services, and  new investment in Burma,  seems to be moving in a positive direction.  Political reforms in Burma, including the first elections in 20 years and the release of political prisoners, seem to be making real headway in Burmese/U.S. relations.  Hillary Clinton’s December 2011 visit marked the first visit by a U.S. Secretary of State to Burma in over fifty years.  On January 16th and 22nd respectively Senator Mitch McConnell and Senator John McCain (this was his second visit within a year) also visited the country.   This month the U.S. also announced that it will once again be exchanging ambassadors with Burma for the first time in two decades.

While none of these actions ensures a change or scaling back of sanctions against Burma, the U.S. seems to be considering its next moves.  Some Congressmen have been speaking positively on the issue but no one seems to have a decisive plan just yet.  While the U.S. watches and waits to see if Burmese progress continues, the bottom line is this: keep an eye on Burma – we could be seeing big changes soon.

Your sales person says she just got an order from France, Canada or the UAE.  Can you ship your product tomorrow? How do you decide? How do you know if you are right? What paperwork do you keep?

Here is a simplified version of the steps you must take (and document!) to ensure you are not violating U.S. laws. To do this you need a compliance program and training so that you understand and consistently apply these steps.  Obviously, there are all kinds of exceptions and qualifications. The good news is that once you classify your products  you don’t have to do it again unless you change the design (or if they are moved from the U.S. Munitions List (USML) to the Commerce Control List (CCL)).

STEPS TO EXPORT

  1. Ensure the buyer is not on any of the government lists of denied or restricted persons.  There are more than 50 lists of government restricted persons that should be checked before exporting. Online services are available to assist you with this process.
  2. Consider what you are selling.  Is the item designed, modified, adapted or configured for a military use? If so the State Department’s International Traffic in Arms Regulations, called the ITAR, will control the export and you probably need to be registered and need a license to export unless an exception applies.   If the ITAR regulations do not control, then you need to look at the Commerce Department ‘s Export Administration Regulations, called the EAR. This process of determining where and how your product is categorized is called classification.  Once you’ve classified your item under the EAR, then you need to determine if you need a license to export to your potential buyer.  To do that you need to look at the CCL and the Commerce Country Chart and determine if a license is required or a license exception exists for your classification number.  One short cut is to contact the manufacturer (if you did not manufacture the item) and see if it has already classified the product. Some companies have this information on line and you simply check the requirements for export to the country in question.
  3. Check the end use of the product for each sale.  The U.S. government restricts certain end-uses based on objectives such as nuclear non-proliferation.
  4. Check the embargoed country and sanctions regulations of the Office of Foreign Assets Control (OFAC).  Do you know which countries a U.S. company can’t ship to? Some countries have full embargoes while other sanctions only limit certain aspects of trade.
  5. Consider if there are any red flags telling you that you need to do more due diligence on the buyer or transaction.  Do you know the buyer?  Is he in the line of business that would use the product? Is he in a transshipment country? Do you know the  end-user?  Does it makes sense that they will need this product in their line of business?  Are there any strange payment requests?
  6. Keep documentation to support your decisions as part of your export compliance program.  This is a must!

Exporting can really help your business grow but you must have some procedures in place to protect the company and its officers from civil and criminal violations.  Even large companies with extensive compliance programs can make mistakes. For example, FedEx recently agreed to pay the Bureau of Industry and Security (BIS) at the Department of Commerce $370,000 in connection with six charges from between 2004 and 2006. See the order and settlement agreement on the BIS website.

As the year is winding down, I thought we should discuss a new compliance issue that has emerged over the past year that’s important for you and your human resources (HR) manager. I am talking about the U.S. Citizenship and Immigration Services (USCIS) I-129 Petition for a Nonimmigrant Worker form. Find the USCIS I-129 form here. Employers petitioning for an alien to temporarily come to the U.S. in order to work or to receive training must complete this form. Usually, a company’s HR department will complete the form. In February 2011, a new section was added to the form (“Part 6”). It is mandatory for those employers applying for H-1B, H-1B1 Chili/Singapore, L-1, and O-1A visas. And, here is the scary compliance twist: the HR manager has to certify that he/she has read and complied with the deemed export rules of the Departments of Commerce and State.

Your first question might be, what is a deemed export? Don’t worry – you’re not alone. That’s the same question a lot of immigration attorneys had when Part 6 was first announced. This small addition to what was solely an immigration form created a whirlwind of questions. What are companies signing? What are the penalties if they are mistaken? Who is liable? What if the employees work for a third party? What if I have foreign workers but I didn’t hire them?

What is a deemed export? To explain this we’re going to have to get a little technical. Both the Department of Commerce and the Department of State’s export regulations include lists of technology and technical data that are controlled and cannot be exported without a license. Likewise, even if the items are not physically exported out of the country, sharing controlled items with foreigners located in the U.S. is considered a “deemed export.” The rule is, if a license is required to export the item to a foreign country then a license is also required to release the item to a national of that country – even when they are in the U.S. Releases can happen in many ways – some that you would probably never even think about, like telephone conversations; leaving blueprints, specs, or drawings out in the open; giving tours and trainings; and sending emails and faxes.

Ok, so how does all this relate back to Part 6 of the I-129 form? Well, first of all, Part 6 requires HR managers to sign that they have read the export regulations. Second, HR managers must indicate whether or not the foreign person will have access to items requiring a license and, if so, acknowledge that the manager will restrict the foreigner’s access until a license is received. Obviously, this requires HR managers to know what technology and data are controlled, which projects involve the technology/data, and which foreign workers might have access to such controlled items. This can require a lot of communication and a really well designed compliance program to ensure that all bases are covered.

TAKE AWAY: Amend your compliance program to include I-129 compliance. As usual, I say nothing beats a checklist or two to protect the company and yourself. Document your “check the box” decision and classify your technology. If you do that once and you don’t have new products – you will be set.

Hi all. I hope everyone had a great Thanksgiving.  While we all start the mad dash to year end, I want to follow up on a recent Wall Street Journal article published on November 28, 2011, by Joe Polazzolo: “Critics Target Bribery Law.”  Mr. Palazzolo wrote an interesting article about the FCPA, the current state of its enforcement and companies’ abilities to be compliant.  He  highlights the U.S. Chamber of Commerce’s $700,000 investment to lobby for clarification of the anti-bribery law to provide more guidance to businesses (and Boards of Directors) to arguably increase compliance while protecting US companies’ abilities to compete. The Chamber is a noble, forward-thinking and proactive organization.   In my opinion, the Chamber has some of the most experienced trade professionals fighting for international U.S. business growth.  SO when the Chamber spends money to hire outside lobbyists for any effort, we should take notice.

The FCPA has come a long way. In the late 1980s I wrote my first FCPA article for the Japanese paper Nihon Keizai Shimbun.  Back then, the definitions of the law’s provisions were so vague that it was barely enforceable and the Justice Department’s enforcement statistics were weak at best.  The law was amended and that helped the government prosecute and define what actions would be violations.  Yes, there are lots of unclear nuances in every element of the law itself and the fact that prosecutions end in settlements means they don’t provide case law for legal research.  However, we have come far with compliance and getting the focus on global anti-corruption efforts.  Thirty-eight countries are parties to the Organization for Economic Cooperation and Development (OECD) Convention on Preventing Bribery of Foreign Public Officials in International Business Transactions, and 154 countries are parties to the United Nations Convention against Corruption.  Both treaties require governments to criminalize (and to enforce their laws against) bribery.

The FCPA is a hot topic everywhere (including at the WSJ).  Businesses are taking notice and taking the necessary steps to understand, train employees, document overseas actions and conduct mergers and acquisitions due diligence reviews.  My point is that the law is finally effective and producing results.  Yes, guidance from the Justice Department will undoubtedly be forthcoming.  As more companies focus on compliance (as more senior executives face penalties) the natural evolution will be more information to help clarify obligations.  What is really needed is transparency.  Look at export compliance voluntary disclosures at OFAC and the Commerce Department for examples.  Aggravating and mitigating circumstances are part of the process and there are formulas for determining the “value” of a disclosure.

I believe the Justice Department will get there—hopefully sooner than later.  Maybe some of the proceeds from the penalties can go to developing further transparency of the process and the Chamber won’t have to allocate its resources to get some attention!  It is a major accomplishment that this discussion is a priority for such influential organizations like the Chamber of Commerce. To obtain the reduction we are now seeing in global corruption, we needed the entire process to play out and it took high-profile U.S. cases to get us there. The global playing field is becoming more level for U.S. companies as other nations are participating in anti-bribery efforts.

I am using this blog to offer practical advice to companies trying to do business globally and to address common problems I see in my import-export practice.  An issue that keeps popping up that makes me crazy is the misinformation out there regarding the export compliance process.  What do you do first?   As I have said it used to be that only the boutique law firms on the coasts had export practices.  Now it seems that many firms have such practices as it is a natural outgrowth of the services firms provide to their business clients.  Business is going overseas so corporate lawyers must follow the business.

However what I can’t stand is when companies get the wrong information because the lawyer either doesn’t really know the substance or doesn’t know how to explain the process.  I was recently at a big corporate conference for in-house lawyers. I was appalled (really) at the export compliance seminar because the material was confusing to the audience and made the export process seem more confusing than it needs to be.

For example, when a company has a product,  technology or software that it wants to export,  what are the first couple questions that you ask?

1.       Is it publically available?  If so, it is not even subject to the Export Administration Regulations.

2.       Is it regulated by another agency?  For example, is it specifically designed developed, configured, adapted or modified for military use?  If so, you must immediately stop what you are doing and go to the State Department International Traffic in Arms Regulations (ITAR).

What do you not do?  You do not classify the product under the export administration regulations.  It is a waste of your time. You do not look at the Commerce licensing requirements or the exceptions nor do you even think about filing for a commodity classification with Commerce.  If you have a product specifically designed developed, configured, adapted or modified for military use you are subject to ITAR.  Do not pass go.  Do not collect $200 at Commerce.  This means even if you have a filter that goes into an air conditioner so you think it has a civilian use but it was designed for a military product in 1963—it is ITAR unless and until you are told that it is not. 

This strategy also applies to other regulatory regimes such as the Office of Foreign Assets Control (OFAC).  If there are sanctions against exporting to your destination country, then it doesn’t matter what your classification at Commerce is.  You simply cannot export.  This is apparently very confusing to companies that do not have a good checklist or export tree diagram.  For example, many lawyers teach and talk about Commerce classification without clarifying that you must first consider if your product, technology or software is subject to the “exclusive” jurisdiction of another agency, like the Department of Energy or Patent and Trademark Office.  If so, that preempts the review.

Make sense?  I hope so and I hope this is helpful.  Export compliance is all about the process.

Have a good day.

A crucial and often ignored element of an export compliance program is buy-in from senior management.

Top Executives must:

  1. Literally set a tone at the top of management that exemplifies the importance of export compliance to each executive and the company as a whole. You can do this with a policy statement, posters in the shipping room, and on the company’s intranet site to draw attention to the issue and highlight the compliance program. Treat it like safety issues and ethical obligations.  Non-negotiable.
  2. Discuss export compliance with your Board of Directors, receptionists, sales force, and shipping/logistics departments, in other words – everyone in the company.  Management’s subjective intent establishes the tone of compliance.  It also will become a serious mitigating factor with the U.S. government and can reduce any penalties if a violation does occur.
  3. Be examples of what is expected – follow export compliance procedures and discuss with others in the company to ensure that the written procedures fit into existing processes and are usable.
  4. Ensure that all procedures and policies reflect the tone at the top and management’s commitment.  Use Board minutes and formal letters to employees to show this commitment.
  5. Create a dialogue within all departments and at all levels of the company so you are not blindsided by lack of knowledge. Discuss how red flags arise in your business and how they are addressed within the different levels of your company.
  6. Learn the civil and criminal penalties for company violations that could result in individual jail time if you ignore export compliance obligations.
  7. Finally, be visible and actually engaged in export compliance training.  Stimulate serious practical discussions that involve your company’s ongoing sales procedures.  Train everyone.

So what is a good program for a small company or any company that doesn’t want to spend a lot of money on compliance? The key is a compliance program that outlines the company’s policy as well as various internal procedures to implement the policy and having a solid set of documents to evidence the compliance activities at all levels of the company.

A good compliance policy should include a statement of the prohibition that it seeks to enforce and should state that it is every employee’s responsibility to be vigilant in identifying and reporting potential violations. Clearly identifying the name of the compliance officer is another must. Short questionnaires and certifications protect the company and ensure that new employees, agents, partners, distributors, and other third parties understand the policy. They also identify any red flags related to those parties. Indemnification language and appropriate dispute resolution provisions in third party contracts will give force to such certifications and representations.

Internal forms and standard form contracts offer opportunities to include compliance verification mechanisms in existing procedures and to regularly remind employees of compliance obligations.  For example, a form that a business development manager completes to report the engagement of a new agent abroad can include answers to questions intended to elicit red flags for bribery.  A form contract for the sale of software can require the buyer to agree that it is not in violation of and will not violate any U.S. export controls laws.