© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. What Keeps You Up at Night: Mitigating Trade Compliance and Corruption Risks 1 Adrienne Braumiller

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Agenda Part I: The Risk Environment U.S. Export and Anti-Corruption Regulations Extraterritorial Reach of Export and Anti-Corruption Laws Export Control Reform Risks The Overlap of ITAR and FCPA Risks Successor Liability Risks Part II: Mitigating Risks 2

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Part I: The Risk Environment 3

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Export Control and Anti-Corruption Agencies 4 CUSTOMS AND BORDER PROTECTION “Policemen” to Enforce Regulations 19 CFR “DUAL USE” ITEMS Bureau of Industry & Security Export Administration Regulations (EAR) 15 CFR O THER A GENCIES OFAC, Census Bureau D EFENSE I TEMS Directorate of Defense Trade Controls International Traffic in Arms Regulations (ITAR) 22 CFR Foreign Corrupt Practices Act DOJ Anti-Bribery Provisions SEC Books and Recordkeeping Provisions

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Export Administration Regulations The Export Administration Regulations (EAR) are administered by the Bureau of Industry & Security (BIS), US Department of Commerce The EAR regulates exports and reexports of dual-use articles, technology, and software Items subject to the EAR are listed on the Commerce Control List (CCL) Whether an export requires a license for export depends on numerous facts, including the item itself, the ultimate destination, and the end-user 5

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Export Administration Regulations EAR also contains the antiboycott regulations Regulations that discourage/prohibit U.S. companies from furthering or supporting unsanctioned foreign boycotts Primarily the Arab League boycott of Israel Boycott requests are typically reportable to BIS, sometimes prohibited, and can subject U.S. companies to penalties Examples: Agreements to refuse to do business with/in Israel Letters of credit containing prohibited boycott terms 6

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. International Traffic in Arms Regulations The International Traffic in Arms Regulations (ITAR) controls export and temporary import of defense articles and related technical data The ITAR is administered by the Directorate of Defense Trade Controls (DDTC), Department of State Items subject to the ITAR are listed on the US Munitions List (USML) The ITAR is interpreted broadly and enforced strictly 7

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. International Traffic in Arms Regulations Similar to the EAR, the ITAR controls the export of goods, technical data, and software Any person in the U.S. that deals in or with defense articles or defense services must register with DDTC Registered companies must appoint Empowered Officials EOs have personal liability Almost every export subject to the ITAR requires a license The USML contains listings for products ranging from: Firearms, Vessels of War, Special Naval Equipment, Military Electronics, Aircraft 8

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Office of Foreign Assets Controls Office of Foreign Assets Controls, U.S. Department of Treasury OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and others Two types of sanctions: List-based: Sanctions targeting specific entities or persons Country-based: General Sanctions against a country and its nationals (Cuba, Iran, Syria) 9

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Census Bureau Foreign Trade Division Administers the Foreign Trade Regulations (FTR) Requires the filing of Electronic Export Information (EEI) in the Automated Export System (AES) for most exports of items from the U.S. FTR contain specific filing requirements for certain exports subject to the ITAR, EAR, and OFAC sanctions programs 10

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Foreign Corrupt Practices Act FCPA’s anti-bribery provisions prohibit payments to foreign government officials for the purpose of obtaining or retaining business Applies to all U.S. persons, certain foreign issuers of security, and foreign firms/persons who cause an act in furtherance of a corrupt payment to take place in the U.S. FCPA’s account provisions require publicly traded companies to (1) keep accurate books and records, and (2) maintain an adequate system of internal accounting controls 11

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Export Control Reform August 2010, details of Export Control Reform (ECR) announced Goal of reforming and streamlining U.S. export controls August 16, 2013: First set of rules implementing ECR were published Changed the jurisdiction of items from numerous USML categories to the CCL New final rules will continue to be published on a rolling basis Regulatory uncertainty, lack of precedent, opportunities for violations 12

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Extraterritorial Reach 13 EAR OFAC FCPA Foreign reexports of U.S. origin goods. Foreign-produced goods exceeding de minimis U.S. content. Boycott requests received by controlled in fact subsidiaries, branches, affiliates. Foreign reexports of U.S. origin goods. Foreign-produced goods exceeding de minimis U.S. content. Boycott requests received by controlled in fact subsidiaries, branches, affiliates. Subject to U.S. Law Jurisdiction Census ITAR Foreign entities engaged in routed exports (FPPI assumes responsibility for license requirements and filing of EE!). Applies to any foreign entities dealing in defense articles or services controlled on the USML. Actions by a foreign subsidiary may implicate U.S. parent under both the books and records and anti- bribery provisions. Applies to U.S. persons and foreign subsidiaries “owned or controlled” by U.S. persons. “Facilitation,” FSE Act, and other provisions may also implicate foreign subsidiaries and U.S. parents. Applies to U.S. persons and foreign subsidiaries “owned or controlled” by U.S. persons. “Facilitation,” FSE Act, and other provisions may also implicate foreign subsidiaries and U.S. parents.

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Successor Liability: Buying Violations Common application of successor liability doctrine in customs and export laws, even though successor liability not codified in laws of either. Concepts of merger/acquisition, and de facto merger and substantial continuation accepted in both areas. Especially since 9/11, many public pronouncements from customs and export officials of various agencies that successor companies will be held liable for violations of predecessor. 14

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Successor Liability: Buying Violations In import law, purchaser can be held liable for both duties and penalties. Adjudicator in export law can assign liability to purchaser for any civil penalties. 15

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Overlap: FCPA and ITAR Risks Trend toward convergence of export and anti-corruption violation cases Companies using brokers or paying fees/commissions to 3 rd parties typically at higher corruption risk. Those companies also dealing in ITAR items at higher risk for violation of ITAR’s brokering and fees/commissions/political contribution provisions Anti-corruption risks in transactions also often involve violations of OFAC sanctions programs and transactions subject to the EAR 16

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Penalties for Export Violations 17 Census -Civil: Up to $10,000 per violation -Criminal: Up to $10,000 and 5 years imprisonment ITAR -Civil: $500,000 per violation -Criminal: $1 million per violation, 10 years imprisonment per violation -Loss of goods, denial of export privileges EAR -Civil: $250,000 per violation (or twice the value of the transaction) -Criminal: $1 million per violation, 20 years imprisonment -Loss of goods, denial of export privileges OFAC -For IEEPA programs, up to $250,000 per violation (or twice the value of transaction) in civil penalties, $1 million in criminal penalties and 20 years imprisonment -For TWEA programs, up to $65,000 per violation in civil penalties, $1 million in criminal fines for corporations, and $250,000 in criminal fines for individuals FCPA -Criminal: For anti-bribery, $2 million/corporations and $250,000 and 5 years imprisonment/individuals. For accounting provisions, $25 million/corporations and $5 million and 20 years imprisonment/individuals. -Civil: For anti-bribery, $16,000 per violation for corporations and individuals. For accounting provisions, up to the amount of the pecuniary gain, or a specified dollar limitation.

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Penalties for Import Violations Fraud: Civil penalties in an amount not to exceed the domestic value of the merchandise. Gross negligence: Civil penalty in an amount not to exceed: The lesser of: o The domestic value of the merchandise, or o Four times the lawful duties, taxes, and fees of which the U.S. is or may be deprived, or If the violation did not affect assessment of duties, 40% of the dutiable value of the merchandise. 18

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Penalties for Import Violations Negligence: Civil penalty in an amount not to exceed: The lesser of: o The domestic value of the merchandise, or o Two times the lawful duties, taxes and fees of which the U.S. is or may be deprived, or If the violation did not affect assessment of duties, 20% of the dutiable value of the merchandise. Recordkeeping (failure to produce): For willful conduct, lesser of $100,000 per release or 75% of appraised value of goods. For negligence, lesser of $10,000 per release or 40% of the value of appraised goods. 19

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Part II: Mitigating the Risks 20

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Management Commitment Top-down support is critical for compliance Informs employees at all levels of the importance of compliance Necessary for “buy in” and allocation of appropriate resources/personnel Government agencies want to see management involvement in compliance 21

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Training Employees can’t comply unless they understand the rules Training should be tiered and tailored to specific groups Education should be ongoing and routinely updated Training can be a mitigating factor in the event of a violation 22

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Classifications Compliance is dependent on correct product classifications Jurisdiction, licensing, and potential exceptions all depend on the classification Even inadvertent incorrect classifications are not a defense to violations Can be technically complex Consider Commodity Jurisdictions (CJ) and Commodity Classification Automated Tracking System (CCATS) requests 23

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Export Licenses Licenses can take time to obtain, and can be denied – do not assume your license will be approved Compliance doesn’t end upon receipt of a license All terms, conditions, and provisos must be complied with Conditions may not affect your transaction, or may be so restrictive as to essentially halt your transaction Exporters should have a tool to track license usage Certain ITAR licenses (Technical Assistance Agreements and Manufacturing Licensing Agreements) can be difficult to track 24

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Compliance Programs Companies should have written and documented export compliance and anti- corruption programs, policies, and procedures The lack of such a program is considered an aggravating factors by most U.S. agencies Compliance programs should be tailored to a company’s operations Begin with a risk assessment to identify focus areas 25

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Illegal Diversion Large risks for the diversion of U.S. items to unauthorized end-uses, end-users, and destinations Certain factors increase the risk Product type Known diversion/transshipment point Compliance programs should address diversion risks specific to a company’s operation Product in high demand in sanctioned nations? Customer in a known diversion destination? 26

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Foreign Subsidiaries, Affiliates, Partners ITAR, EAR, OFAC sanctions, and FCPA all apply differently to foreign interests Can be difficult to maintain visibility into foreign operations Compliance and audit procedures should specifically address foreign operations 27

© 2013 Braumiller Law Group, PLLC Any copying or distribution is prohibited. Questions? Braumiller Law Group, PLLC 5200 Spring Valley Road, Suite 200 Dallas, TX (214)