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[No items of interest noted today.]
- Ex/Im Items Scheduled for Publication in Future Federal Register Editions
- Commerce/BIS: (No new postings.)
- DHS/CBP Updates ACE Information Posted on CBP.gov
- Justice: “Ukrainian National Arrested In Connection With Scheme To Illegally Export Rifle Scopes And Thermal Imaging Equipment”
- State/DDTC: (No new postings.)
- EU Amends Restrictive Measures Concerning Somalia and Democratic Republic of the Congo
- South China Morning Post: “ZTE to Pay Record US$1.2 Billion Fine for Violating Iran, North Korea Sanctions”
- ST&R Trade Report: “Trade Community Seeking Further Modernization of CBP Revenue Collections”
- WorldECR New Issue Out, March 2017
- G. Husisian: “Private Equity and the New Trump Administration: Your Top Ten Questions Answered” (Part II of IV)
- R.C. Thomsen II, A.D. Paytas & M.M. Shomali: “ZTE Pleads Guilty to Criminal Charges and Settles Civil Charges with BIS and OFAC”
- R.C. Burns: “Did Undercover Agent Give Legal Lecture to Defendant on Export Law or Not?”
- Bartlett’s Unfamiliar Quotations
- Are Your Copies of Regulations Up to Date? Latest Changes: ATF (15 Jan 2016), Customs (27 Jan 2017), DOD/NISPOM (18 May 2016), EAR (24 Feb 2017), FACR/OFAC (10 Feb 2017), FTR (15 May 2015), HTSUS (10 Feb 2017), ITAR (11 Jan 2017)
EX/IM ITEMS FROM TODAY’S FEDERAL REGISTER
[No items of interest noted today.]
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OTHER GOVERNMENT SOURCES
|1. Ex/Im Items Scheduled for Publication in Future Federal Register Editions |
(Source: Federal Register)
[No items of interest noted today.]
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| | 3. DHS/CBP Updates ACE Information Posted on CBP.gov
U.S. Customs and Border Protection (CBP) has updated two Automated Commercial Environment (ACE) CBP and Trade Automated Interface Requirements (CATAIR) Chapters and an ACE document posted on CBP.gov. The updated ACE information includes:
* Drawback CATAIR Chapter – Available in CERT now, PROD date is TBD
– Please review the table of changes.
* PGA Message Set CATAIR Chapter – Available in CERT on March 16, 2017 and in PROD on March 23, 2017
– Updated text in the Description field to indicate this data element is NOT mandatory if intended use code 980.000 is provided.
– Updated Note 1 to clarify the PG records that the qualifier codes are associated with. Only specific additional information qualifier codes are valid based on the designated parent record it appears immediately after.
– For CIT, removed reference to CPSC. While this code could be available to any PGA, at the moment no agency is using it. The rule to enforce the PG60 qualifier code designated parent will be put into CERT on March 16 and in PROD on March 23, 2017.
To download a copy of the updated ACE documentation, please visit the “ACE Automated Broker Interface (ABI) CATAIR” and the “ACE Technical Documentation” pages of CBP.gov/ACE.
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| | 4 . Justice: “Ukrainian National Arrested In Connection With Scheme To Illegally Export Rifle Scopes And Thermal Imaging Equipment” (Source: Justice) [Excerpts.]
Queens Man Sought to Export Controlled Rifle Scopes and Thermal Imaging Equipment Designed for Military Use
Yesterday, Volodymyr Nedoviz, a lawful permanent resident of the United States and citizen of Ukraine, was arrested on federal charges of illegally exporting controlled military technology from the United States to end-users in Ukraine. Federal agents also executed a search warrant at a Philadelphia, Pennsylvania location that was used in connection with Nedoviz’s illegal scheme. …
The complaint alleges that the defendant conspired with others located in both Ukraine and the United States to purchase export-controlled, military-grade equipment from sellers in the United States and to export that equipment to Ukraine without the required licenses. The devices obtained by the defendant and his co-conspirators included some of the most highly powerful and technologically sophisticated night vision rifle scopes and thermal imaging equipment available, including, among others, an Armasight Zeus-Pro 640 2-16×50 (60Hz) Thermal Imaging weapons sight, a FLIR Thermosight R-Series, Model RS64 60 mm 640×480 (30Hz) Rifle Scope, and a ATN X-Sight II 5-20x Smart Rifle Scope. In many cases, the devices purchased by the defendant and his co-conspirators retail for almost $9,000, and they are specifically marketed to military and law enforcement consumers.
As part of the conspiracy, in order to induce U.S.-based manufacturers and suppliers to sell them the export-controlled devices and to evade applicable controls, the defendant and his co-conspirators falsely purported to be United States citizens and concealed the fact they were exporters. The defendant and his co-conspirators also recruited, trained, and paid other U.S.-based individuals to export the controlled devices to Ukraine via various freight forwarding companies. Among other things, the defendant and his co-conspirators instructed the U.S.-based individuals to falsely describe the nature and value of the equipment they were attempting to export. In addition, to conceal their identities, as well as the true destination of the rifle scopes and thermal imaging equipment, the defendant and his co-conspirators instructed that the items be shipped using false names and addresses.
The export of military-grade rifle scopes and thermal imaging equipment requires a license from either the United States Department of State or the United States Department of Commerce. Both the Department of State and the Department of Commerce have placed restrictions on the export of items that they have determined could make a significant contribution to the military potential and weapons proliferation of other nations and that could be detrimental to the foreign policy and national security of the United States. …
“Nedoviz, a Ukrainian national, falsely pretended to be a citizen of the United States in order to purchase highly sensitive military grade equipment, that would later be illegally exported to Ukraine” said Melendez, Special Agent in Charge, Melendez of HSI New York. “These items including rifle scopes and thermal imaging equipment have strict export controls in order to make sure that our soldiers overseas never have to encounter them on the battlefield. It is a mission we at HSI take very seriously.” …
If convicted of the charges, the defendant faces up to 20 years in prison and a $1 million fine. …
Queens, New York
E.D.N.Y. Docket No. 17-M-208
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| | 5. State/DDTC: (No new postings.)
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| | 6. EU Amends Restrictive Measures Concerning Somalia and Democratic Republic of the Congo
– Council Implementing Regulation (EU) 2017/395 of 7 March 2017 implementing Article 13 of Regulation (EU) No 356/2010 imposing certain specific restrictive measures directed against certain natural or legal persons, entities or bodies, in view of the situation in Somalia – Council Implementing Regulation (EU) 2017/396 of 7 March 2017 implementing Article 9(5) of Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo
– Council Implementing Decision (CFSP) 2017/398 of 7 March 2017 implementing Decision 2010/231/CFSP concerning restrictive measures against Somalia – Council Implementing Decision (CFSP) 2017/399 of 7 March 2017 implementing Decision 2010/788/CFSP concerning restrictive measures against the Democratic Republic of the Congo
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| | 7 . South China Morning Post: “ZTE to Pay Record US$1.2 Billion Fine for Violating Iran, North Korea Sanctions”
ZTE Corp, China’s largest listed telecommunications equipment supplier, has agreed to pay the United States government a record fine to settle a five-year probe of its trade sanctions violations, in a move to lift the ban on US exports of chips and components for its products.
Shares of the Shenzhen-based company jumped as much as 8.9 per cent to HK$13.28 in Hong Kong, their biggest intraday advance in 19 months, before closing up 6.07 per cent to HK$12.94. Trading of its shares in Shenzhen was halted for the announcement of the settlement.
ZTE agreed to pay a total of US$1.2 billion in penalties to the US government to settle its violation of long-standing trade sanctions on Iran and North Korea. It also agreed to activate audit and compliance requirements to prevent and detect future violations.
In addition, the company agreed to a seven-year suspended denial of export privileges, which could be quickly activated if any aspect of this deal is not met, according to an announcement by US Secretary of Commerce Wilbur Ross.
“ZTE acknowledges the mistakes it made, takes responsibility for them and remains committed to positive change in the company,” Zhao Xianming, the chairman and president of ZTE, said in a statement late on Tuesday. “We have learned many lessons from this experience and will continue on our path of becoming a model for export compliance and management excellence.”
As part of the resolution, ZTE agreed to combined criminal and civil penalties worth US$892.4 million and an additional penalty of US$300 million to the Bureau of Industry and Security (BIS), which is under the Commerce Department, that will be suspended during that seven-year probationary period.
The civil penalty is the largest ever imposed by the bureau and, if the criminal plea is approved by a federal judge, the combined US$1.2 billion in penalties from the Commerce Department, the Department of Justice and the Department of Treasury would be the largest fine and forfeiture ever levied by the US government in an export control case, according to Ross.
“We are putting the world on notice: the games are over,” Ross said. “Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences.”
The US government last year banned Qualcomm and Micron Technology from selling their chips and components to ZTE, in a punitive measure for the Chinese company’s violation of US sanctions.
“While a company may on occasion breach a trade sanction unknowingly, ZTE’s penalty reflects the fact that it knew that it was breaching sanctions and tried to cover up that breach,” said Paul Haswell, a partner at international law firm Pinsent Masons.
Under the settlement, ZTE has admitted to the allegations made by the BIS in its charging letter against the Chinese company.
The US government has stated that between January 2010 and April 2016, ZTE conspired to evade the long-standing and widely known embargo against Iran to obtain contracts with and related sales from Iranian entities to supply, build, operate and service large-scale telecommunications networks in Iran made out of equipment and software from the US.
As a result of the conspiracy, the US government said ZTE was able to obtain hundreds of millions of dollars in contracts with and sales from those Iranian entities.
ZTE also pursued other actions involving 283 shipments of controlled items to North Korea with knowledge that such shipments violated the US Export Administration Regulations (EAR), it said. The shipped items included routers, microprocessors and servers, all restricted products under the trade sanctions against North Korea.
The US government also said ZTE engaged in evasive conduct designed to prevent detection of its violations.
The official investigation of ZTE went on for five years from 2012, when allegations of illegal conduct first surfaced in media reports.
On March 7 last year, the Department of Commerce sanctioned ZTE by adding it to the so-called Entity List, which created a license requirement to export, re-export or transfer to ZTE any items subject to the EAR.
Last month, ZTE was granted its fifth consecutive reprieve from those export restrictions by the US government.
The BIS said it will recommend that ZTE be removed from the Entity list, conditioned on court approval of the Department of Justice agreement, the entry of ZTE’s plea and the issuance of bureau’s settlement order.
“The agreements we reached will enable us to move forward in a stronger position than ever before,” Zhao said. “We are grateful to all of our customers, partners, employees and stakeholders who have stood by us throughout this difficult time.”
ZTE had named veteran executive Zhao as its new chairman and president in a sweeping senior management revamp in April, which was geared to help repair the company’s damaged reputation with the US government.
In November, ZTE appointed former EY and KPMG consultant Michael Bell to the company’s newly created position of chief export compliance officer.
“We are creating a global team of experienced compliance professionals, and our compliance trainings have been strengthened and reinforced at every level of the company,” Bell said. “We are constantly reviewing and improving policies and procedures to keep up with an ever-changing regulatory landscape and working to reinforce the strategic business advantage a strong compliance programme has in the marketplace.”
On February 14, Zhao announced in a regulatory filing in Hong Kong that ZTE expected to incur penalties as part of a settlement being negotiated with the US government.
That development may have been expected by the market already, as ZTE’s shares finished up to HK$12.84 in trading that day. Its shares on Tuesday, however, were down 1.61 per cent to close at HK$12.20.
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The Commercial Customs Operations Advisory Committee approved March 1 more than a dozen recommendations on how U.S. Customs and Border Protection can continue to develop and improve its revenue modernization initiative. CBP officials said the COAC recommendations are consistent with their efforts and objectives.
CBP’s multi-year, phased revenue modernization initiative seeks to simplify and provide modern tools for the collection of duties, taxes, and fees; reduce the number of payments submitted via cash and checks at ports of entry; and improve documentation, training, and procedures. CBP believes the benefits of this initiative will include lowering transaction costs and administrative burdens that delay cargo and traveler movements; improving the agency’s ability to provide filers with an accurate, consolidated view of their financial transactions; and gaining access to real-time, reliable financial and operational data that will better inform decision-making and aid compliance with existing and emerging reporting requirements.
CBP has been working with COAC’s Trade Modernization Subcommittee to identify and collect from the trade and travel communities information on how to further improve its revenue collection processes and systems. As part of that effort, the subcommittee drafted, and COAC recently approved, the following recommendations.
– consolidate port-specific daily and monthly formal entry statements to one monthly statement, inclusive of all statements from all ports of entry nationwide
– any form of payment currently processed manually (e.g., duties, taxes and fees, single entries, reconciliation (NAFTA or value), post-entry adjustments via 28s, 29s, and post-summary corrections, liquidated damages, rate advances, and supplemental duty payments at liquidation) and/or voluntary tenders should be automated and available via ACE ABI, ACE AMS, the ACE portal and Pay.gov
– update CBP regulations to accept electronic payments
– allow individuals or companies who hold customs broker licenses to make payments through ACE for all brokerage-related fees
– create the ability for brokers for express consignment operators to pay duties, taxes, and fees electronically for daily consolidated informal entry filings
– require all truck carriers to submit an e-manifest through ACE prior to crossing
– enable the ACE application to allow for the set-up of a deposit account to be linked to an e-manifest so pre-payments may be automatically debited from the account based on the e-manifest
– leverage radio frequency identification technology, including on FAST cards, to collect single entry payments
– give truck carriers the ability to view a detailed history of their DTOPS-related transactions through the ACE portal, including all transactions associated with payments based on e-manifest
– create a smart phone app to provide a more efficient way of pre-paying fees
– allow shipment manifests, which contain a breakdown of cargo by entry type and payment, to be used to bill express consignment couriers for their express consignment fees or allow couriers to pay those fees using a pre-paid account in the ACE portal
– consider providing an incentive for ship agents and/or carriers to move toward e-payments (e.g., allowing the ship agent/payer 48 hours following vessel arrival to make payment if done via one of the approved e-payment methods)
– change the regulations to allow a more flexible method of overtime assessment that would meet both CBP and trade requirements
– create the ability to automate fees associated with partner government agency processing services (e.g., Fish and Wildlife Service overtime clearance fees and Department of Agriculture annual permits)
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(1) Good practice: Blowing the whistle
(2) Russia to punish sanctions-compliant banks
(3) Between Trump and Tehran – the dilemma for European business
(4) Close, but no cigar? Trump, Cuba and the way forward …
(5) U.S. sanctions and their impact on arbitration
(6) No violation is too small and no connection too attenuated to escape U.S. OFAC scrutiny
(7) Acts and omissions: trying to follow Canada’s strict sanctions legislation
(8) Implementing sanctions and penalties in the Latin American context
[Editor’s Note: To subscribe to WorldECR, the journal of export controls and sanctions, please visit http://worldecr.com/.]
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| | 10 . G. Husisian: “Private Equity and the New Trump Administration: Your Top Ten Questions Answered” (Part II of IV)
* Author: Gregory Husisian, Esq., Foley & Lardner LLP, firstname.lastname@example.org, 202-945-6149.
[Editor’s note: This client alert is the sixth of a series of Foley & Lardner LLP Alerts being prepared to help companies navigate the uncertain international trade and regulatory environment. Due to space limitations, this alert is divided into four parts. Part I was posted in the Daily Bugle of Tuesday, 7 March. Part III and IV will be posted in the Daily Bugle of Thursday, 9 March and Friday, 10 March, respectively.]
(4) “What regulatory areas are of most concern for PE firms?”
The following areas merit special scrutiny by PE firms in the administration of both their portfolio investments and their own operations:
– Antitrust. Under the Obama administration, antitrust enforcement was regarded as being more aggressive, including the willingness of regulators to challenge transactions that fell below the filing thresholds of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. It is difficult to handicap whether this scrutiny will change. While Republican administrations are viewed as more relaxed in the antitrust area, this generally has meant a more lenient approach to merger activities, not a lessening of the enforcement of such antitrust issues as collusion and price fixing. When campaigning, President Trump stated that if he were president he would seek to block the $85 billion AT&T/Time Warner merger, which potentially could signal a mindset of preventing concentrations of market power. President Trump also has personal experience in antitrust cases, including as a plaintiff in a federal antitrust suit against the National Football League, as a defendant in a NJ state court suit alleging he attempted to monopolize and suppress competition in the Atlantic City casino gambling market, and his payment of a $750,000 civil penalty to resolve claims he violated the Hart-Scott-Rodino Act’s reporting and waiting period requirements when acquiring stock in two gaming companies. It is unclear how these experiences will shape President Trump’s view of antitrust law.
Because the administration’s stance could impact the acquisition and exit strategies for PE companies that own companies in concentrated industries, monitoring early antitrust activity will be important. Discerning the views of new appointees to the Federal Trade Commission and the head of the DOJ’s Antitrust Division will be important to divining how the administration is likely to proceed. Regardless of how the new administration treats antitrust on the monopolization side, it is likely that antitrust enforcement will continue to be strong, especially for activities that subvert the competitive market, such as collusion and price fixing. The same is likely to be true with regard to the enforcement of fair competition laws abroad, which are in many countries enforced as rigorously as or even more so than U.S. antitrust law. As a result, ensuring antitrust and fair competition compliance at portfolio companies will continue to be an important risk-management requirement.
– Cybersecurity. President Trump stated during the first presidential debate that the U.S. government needed to get “very, very tough on cyber and cyberwarfare,” and called for the creation of a joint public-private team of experts to analyze U.S. government cybersecurity protections. With the intelligence agencies agreeing that China, Russia, and North Korea have engaged in hacking designed to steal confidential data from the U.S. government and U.S. companies, and with private intrusions being even more common, it is highly likely that regulatory agencies such as the SEC and subject-matter agencies overseeing particular industries will be implementing regulations and other measures designed to ensure that regulated companies are putting in place measures to combat electronic intrusion into company networks and confidential data sources. Expectations will be particularly high for companies that maintain classified or controlled information, for government contractors, for firms with security clearances or that maintain classified data, or for companies that deal with export-controlled technical data. Firms that deal with highly confidential personal data, such as healthcare and financial firms, also will be under heightened scrutiny. Any firm in this category should operate under heightened compliance expectations to ensure they are not victims of hacking or cyberattacks. (The subject of cybersecurity will be covered in a future “top ten questions” alert.) PE firms need to have a firm handle on the vulnerability of their firms to such attacks and have strong compliance measures designed to fight off such electronic intrusions.
– FCPA. FCPA risks existed long before the Och-Ziff enforcement action highlighted above. With many PE firms now regulated under the federal securities laws, they remain liable for the bookkeeping and internal control requirements of the FCPA, which require accuracy in books and records and an effective internal control environment sufficient to give the company control over and insight into the disbursement and use of assets. Further, the ways in which many PE firms operate increase the risk of direct application of the law to their operations. For example, many PE firms seek investments from sovereign wealth funds. Due to the operation of the FCPA’s rules, which consider all employees of sovereign wealth funds to be “government officials,” the payment of bribes to secure sovereign wealth fund investments are potentially criminal acts. Liability also is enhanced by the frequent use by PE firms of consultants in foreign countries, including investment placement agents and marketers. FCPA liability attaches to dealings by these third parties where the PE fund either knew, or had reason to know, that the arrangement would result in the payment of a bribe. Even where such knowledge cannot be shown, the U.S. government
Even if liability is attached at the portfolio company level, keeping the penalty “away” from the PE firm itself can be a pyrrhic victory, as the economic hit of a portfolio penalty will still be felt on the PE firm balance sheet – a key concern, given that annual penalties under the FCPA generally exceed $1 billion annually. For this reason, the FCPA is a priority not only in terms of compliance, but also as a due diligence item during acquisitions. (The FCPA will be covered in detail in a future “top ten questions” alert.)
– Economic Sanctions/Export Controls. Over the last few years, the economic sanctions programs overseen by OFAC, alongside the coordinating export control regimes, have become a key enforcement priority of the U.S. government. Penalties in the OFAC area can exceed $1 billion annually. Further complicating compliance in this area is that the regulations rapidly change, reflecting the foreign policy issues that arise daily. Compliance is no longer accomplished just by screening new customers against OFAC lists of Specially Designated Nationals. A multi-faceted compliance program, based upon a current risk assessment, is an essential risk-management tool for portfolio companies operating internationally, export controls and sanctions and being an important due diligence item. (Export controls and economic sanctions will be covered in detail in a future “top ten questions” alert.)
– Privacy. During the Obama administration, the Federal Trade Commission (FTC) took the lead on bringing actions against companies that used personal data in ways that exceeded how they had agreed to use such information. Although some critics believed these actions were based on an overly broad reading of the “unfair practices” and “likelihood of consumer harm” provisions in Section 5 of the FTC Act, the protection of consumer data has become a bipartisan issue. Some business interests may press the new administration and Republican congress to weaken privacy restrictions to allow greater data mining of data, including through reversal of the USA Freedom Act of 2015 (which amended the USA PATRIOT ACT to create additional data privacy protections). It is likely, however, that concerns that such amendments would jeopardize the EU-U.S. Privacy Shield agreement, which allows companies to send data from the EU to the U.S. in compliance with EU law. Fears of cutting off the ability to share information with the EU likely would forestall such action.
It therefore is unlikely that there will be any scaling back of the regulatory expectations of protection of confidential data. Indeed, it is more likely that other regulatory agencies will look to enhance privacy protections. This makes privacy compliance measures important at PE portfolio firms that deal with confidential data, such as at financial and healthcare firms.
– Whistleblower Issues. The Dodd-Frank Act provides that the provision of information to the SEC that results in monetary sanctions of $1 million or more for violations of the federal securities laws or regulations thereunder makes the whistleblower eligible for an award of 10-30 percent of the amount recovered. The information cannot already be known to the SEC or derived from public sources and must be based on the whistleblower’s independent knowledge or independent analysis. Although the rules also allow the whistleblower a 120-day window to provide the same information to the company, the whistleblower still has a strong incentive to report to the SEC because the SEC rules protect the whistleblower from company retaliation.
The SEC rules apply to any entity subject to federal securities laws, thus including PE firms with more than $150 million under management. Whistleblower issues (including at companies not covered by the SEC rules) are especially onerous for PE firms for the following reasons:
* Where SEC requirements apply, the whistleblower laws apply to any violation of the federal securities laws, allowing for reporting of issues regarding both the PE firm and at any of the PE firm’s portfolio companies.
* Whistleblowers can be employees of either the PE firm or the portfolio company, thus increasing the number of persons who can report compliance lapses.
* Unlike for most private or publicly traded companies, where whistleblowers generally know only about compliance lapses in their own areas of responsibility, office, or division, PE firms often have employees who may know about issues across the full range of portfolio companies. This gives employees the potential to become whistleblowers across multiple companies at the same time.
* Since many PE firms do not directly manage their portfolio companies, they may not have sufficient insight into the effectiveness of compliance at their holdings, making it more difficult to detect compliance lapses that can lead to whistleblowing opportunities.
* PE firms often purchase companies where it is expected that better management and more efficient operations will increase profitability, making for a profitable exit strategy. To the extent that these activities lead to job losses, they create conditions that foster whistleblower activities from disgruntled or terminated employees.
While there are serious discussions in Washington regarding the potential repeal of the Dodd-Frank law, in whole or in part, we expect that the whistleblower provisions will survive, due to their demonstrated utility. This may be either through preservation of the statutory authority for the whistleblower program or through an exercise in SEC rulemaking. Regardless, even if the program were to disappear, we believe this should not impact the level of resources devoted to compliance or the type of compliance measures maintained by PE firms, including at their portfolio companies. The size of potential penalties alone dictates that companies mitigate risk through effective compliance measures.
(5) “What are some of the risk factors that PE firms should be looking at when acquiring portfolio companies?”
Regardless of the context (export controls, OFAC sanctions, FCPA, and so forth), government regulators believe change of control does not eliminate liability for violations. As the FCPA Guide states: “[s]uccessor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.” [FN/7] Further, an acquiring entity is responsible for any ongoing or new violations, from the very first moment of ownership.
The prospect of inherited liability makes due diligence at the acquisition stage more important than ever. The speed at which deals are completed, however, as well as the difficulties in getting full information from target companies, can complicate fact finding. Time and advance thought to the due diligence strategy always are important to combat these realities. If issues are identified early in the process, protections in the form of tailored representations and warranties, escrow funds, prior disclosures to agencies, agreements that the cost of investigations will be borne by the seller, or even a diminished sales price can all be used to protect against known risks. In some cases, the problems may be large enough to merit abandoning the deal. But none of these risk-mitigating strategies can be used for risks not uncovered through appropriate due diligence.
Some of the key issues that should be evaluated in any acquisition include the following:
– International Regulatory Risk. As noted above, such international regulatory risks as international antitrust, export controls, OFAC sanctions, AML, and anticorruption concerns arise where targets are multinational companies that operate, export, or sell abroad. For any acquisition with an international risk profile, careful inquiry should be made into these key areas, which are all enforcement priorities for the U.S. government.
– Operations in Countries of Concern. Due diligence should not be done in a one-size-fits-all fashion. Instead, it should be tailored to the overall risk profile and particular risks of a given transaction. One of the key determinants is the countries where the target operates and sells. Countries that rank high on the Transparency International Perceived Corruption Index also tend to have a general lack of respect for the rule of law, and to present a heightened risk profile for such things as export controls and OFAC sanctions (diversion risk), AML, and other regulatory concerns. Heightened due diligence generally is appropriate when the target has significant ties to such countries as China, India, Russia, much of Latin America, the Middle East, and Africa, as well as countries in Europe with a reputation for diminished respect for the rule of law (Italy, Greece, and so forth).
– Controlled Goods. Companies that manufacture, broker, sell, or export goods that are subject to controls under the ITAR (USML goods or goods that are specially modified to meet military specifications) or the EAR (goods with an ECCN) present special compliance concerns, as well as heightened opportunities to commit legal violations of the strict export control regulations. Inquiry should always be made as to the presence of controlled goods or technical data at the target, with a tailored follow-up inquiry should initial results be positive.
– International Trade Risk. PE firms often own portfolio companies that operate internationally. If president Trump follows through on his claims that he will aggressively pursue an “American First” trade strategy, U.S. companies, including U.S. PE funds, may need to move their focus to U.S. investment opportunities. PE funds that possess portfolio investments abroad, or that are seeking such investments, will need to carefully factor in international trade risk, especially if they are looking at investments that draw some of their value from operations in or trade with foreign countries that are under a trade spotlight (China, Mexico, developing markets like India, the Philippines, Vietnam, and to some extent other countries where there is a trade deficit like Germany, Korea, and Japan). Relevant inquiries include whether the target imports goods that are subject to antidumping or countervailing duty orders, whether the company is heavily reliant on imports from China, Mexico, or other countries viewed as being a subject of potential trade actions, and the company’s general susceptibility to international supply chain disruptions. (These issues are covered in detail in separate Foley client alerts, available here. [FN/8])
– Supply Chain Risk. President Trump has vigorously and often stated his view that international trade as currently constituted allows certain countries to take excessive advantage of the liberal U.S. free trade posture. With President Trump asserting that his administration will crack down on countries that maintain a significant trade surplus with the United States – whether through the imposition of increased tariffs, a border tax, safeguard actions, or antidumping and countervailing duty orders – it is appropriate for acquiring companies to closely examine whether target companies import a large amount of goods or significant components, particularly if they are goods that are commonly subject to antidumping and countervailing duty actions (steel, many chemicals, and so forth). Further, the potential amendment of or withdrawal from NAFTA could have a huge impact on companies that rely on Mexican sourcing as part of an integrated supply chain. Although not commonly a due diligence topic, acquiring PE firms should carefully determine whether sourcing depends on the operation of free trade agreements like NAFTA and determine the susceptibility of the target to supply chain disruption if President Trump’s international trade campaign announcements are in fact implemented. (Risk scenarios regarding NAFTA are explored in detail here. [FN/9])
– National Security Risk. As outlined in an earlier client alert regarding national security reviews and the CFIUS review process, there are reasons to expect that the new administration will emphasize national and economic security issues. Acquiring firms should carefully evaluate whether sales to foreign companies merit a CFIUS review due to the sale of sensitive technology, product lines, technical data, or other sensitive interests to a foreign company. Further information is found in Foley’s “top ten questions” CFIUS client alert. [FN/10]
[FN/7] U.S. Dep’t of Justice and U.S. Sec. & Exch. Comm’n, “A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012), available here. [FN/8] See Gregory Husisian and Robert Huey, “International Trade Litigation and the Trump Administration: Your Top Ten Questions Answered,” available here. [FN/9] See Gregory Husisian and Robert Huey, “NAFTA and the Trump Administration: Your Top Ten Questions Answered,” available here. [FN/10] See Gregory Husisian, “CFIUS Reviews and the Trump Administration, Your Top Ten Questions Answered,” available here.
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11 . R.C. Thomsen II, A.D. Paytas & M.M. Shomali: “ZTE Pleads Guilty to Criminal Charges and Settles Civil Charges with BIS and OFAC”
* Authors: Roszel C. Thomsen, Esq., Roz@t-b.com; Antoinette D. Paytas, Esq., Toni@t-b.com; and Maher M. Shomali, Esq., email@example.com. All of Thomsen & Burke, LLP.
Earlier today, ZTE Corporation and the Departments of Justice, Commerce and Treasury announced a global settlement of charges that ZTE violated the International Emergency Economic Powers Act (IEEPA), the Export Administration Regulations (EAR) and the Office of Foreign Assets Control (OFAC) Regulations.
In total, ZTE has agreed to pay the U.S. Government $892,360,064 and agreed to a significant conduct remedy, in the various plea and settlement agreements described below.
CRIMINAL VIOLATIONS OF IEEPA
ZTE agreed (contingent on the court’s approval) to plead guilty to three criminal charges, including:
(1) Conspiracy to unlawfully export, re-export and transship U.S.-origin servers, switches, routers and other components of a cellular network infrastructure to Iran;
(2) Obstruction of justice by hiding data regarding its sales to Iran, causing its defense counsel to unwittingly provide false information to the Department of Justice, and deleting all communications related to its cover-up; and
(3) Making a materially false statement that it was complying with the laws and regulations of the United States.
The criminal penalties include a fine in the amount of $286,992,532, which represents the largest criminal fine in the history of IEEPA prosecutions, and a criminal forfeiture in the amount of $143,496,266, as well as a conduct remedy discussed below. Because a conduct remedy in a case involving the violation of IEEPA, EAR and OFAC regulations is unusual, a summary of the conduct remedy and its implications is included, below the discussion of ZTE’s settlement agreements with the Departments of Commerce and Treasury.
SETTLEMENT OF CHARGES WITH COMMERCE DEPARTMENT
ZTE also agreed to settle charges with the Commerce Department’s Bureau of Industry and Security (“BIS”) of 380 violations of the EAR, including (1) Conspiracy (2) Acting with Knowledge of a violation in Connection with Unlicensed Shipments of Telecommunications Items to North Korea via China and (3) Evasion. As part of the settlement:
(1) ZTE agreed to pay a penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period to deter future violations. This is the largest civil penalty ever imposed by BIS.
(2) ZTE agreed to active audit and compliance requirements designed to prevent and detect future violations.
(3) ZTE agreed to a seven-year suspended denial of export privileges, which could be activated by BIS if any aspect of this deal is not met.
(4) BIS will recommend that ZTE be removed from the Entity List.
SETTLEMENT OF CHARGES WITH TREASURY DEPARTMENT
OFAC administers a comprehensive embargo on Iran as set forth in the Iranian Transactions and Sanctions Regulations (“ITSR”; 31 CFR part 560), including prohibitions on the indirect supply of goods from the United States to Iran, the re-exportation of U.S.-origin goods with knowledge that those items are intended for Iran, and any activity designed to evade or cause a violation of the ITSR. OFAC identified at least 251 ZTE transactions that violated these prohibitions.
ZTE ultimately settled with OFAC for $100,871,266, which was 95% of the maximum statutory civil penalty. As a condition to settlement, ZTE agrees that it has terminated all conduct leading to the apparent violations and will maintain internal policies and procedures that are designed to minimize the risk of future occurrences. Should ZTE willfully violate this condition, the settlement can become null and void, subjecting ZTE to additional OFAC enforcement activity.
Key takeaways for U.S. companies include the need to identify red flags when a customer refuses to disclose the ultimate destination of goods and when a customer involves an unknown intermediary without an adequate explanation.
The conduct remedy imposed on ZTE includes some of the elements addressed in the recently updated BIS Export Compliance Guidelines – The Elements of an Effective Compliance Program and elements that are above and beyond the guidelines. In addition, ZTE’s press release regarding the Settlement includes additional compliance elements that the company implemented in its effort to implement an improved export compliance program. The standard elements of a compliance program that are addressed in the conduct remedy are:
(1) Issuance of a statement of corporate policy of export control compliance from the chief executive officers of ZTE Corporation and ZTE Kangxun to ensure compliance with the EAR which will be distributed no less than annually to all relevant employees of ZTE Corporation and ZTE Kangxun and their subsidiaries and affiliates.
(2) Implementation of a training program on applicable export control requirements to be provided to (a) its leadership, management, and employees and (b) the leadership, management and employees of its affiliates, subsidiaries, and other entities worldwide over which it has ownership or control.
(3) Record retention as required by the EAR.
The elements that are above and beyond the BIS guidelines are:
– Submission of six annual audit reports regarding export compliance.
– Hiring an initial independent compliance monitor that is approved by the U.S. government for a three-year term. The duties of the monitor include preparing the initial three annual audit reports.
– Hiring an independent compliance auditor, also approved by the U.S. government, for an additional three years to prepare the remaining three annual audit reports.
– The audit reports must include a certification to BIS, executed under penalty of perjury, from the chief executive officer and chief legal officer of ZTE that to the best of their knowledge, after reasonable inquiry, ZTE and its subsidiaries and affiliates are in compliance with the terms of the Agreement including the compliance program obligations.
– An affirmative duty to report potentially unlawful transactions to the U.S. government during the probationary period.
– A requirement to meet at least annually with BIS to discuss any suggestions, comments or proposals for improvement ZTE may wish to discuss with BIS.
– A requirement to provide copies of training materials, the training schedule and training locations to BIS on a quarterly basis until January 1, 2020.
In its press release, ZTE noted that it has:
– Appointed a new Chairman and Chief Executive Officer and made major changes to the senior management team, all of whom have a mandate of leading a new ZTE with a best-in-class export compliance program.
– Created a Chief Executive Officer-led Compliance Committee with the authority and remit to significantly change the company’s policies and procedures, and provide greater oversight of support for the compliance initiatives.
– Hired a new Chief Export Compliance Officer with responsibility for overseeing the continued development and improvement of the global export compliance program.
– Created a separate compliance department with increased headcount to build the compliance program with full independence.
– Issued a new Export Control Compliance Manual created in conjunction with the review of BIS to provide more detailed guidance to the employees. ZTE also now requires an annual Compliance Commitment Agreement from all employees.
– Implemented a software automation tool which screens shipments from ZTE Corporation and certain subsidiaries for export control obligations. The system is used to determine which items are subject to the Export Administration Regulations (EAR), provides embargo and restricted party screening on the transactions, and places shipments on hold that require detailed classification analysis, application of license exceptions, or application of licenses when necessary.
The penalties assessed by Justice, Commerce and Treasury are significant. Cumulatively, they comprise the largest global settlement involving violations of IEEPA, the EAR and OFAC regulations in history.
Nevertheless, these announcements most likely are not the end of the ZTE saga. In its plea agreement with the Justice Department, ZTE specifically agreed to cooperate with the Justice Department regarding any criminal investigation it may undertake with respect to the activities of third parties. In its settlement agreement with the Commerce Department, that agency merely agreed to recommend removal of ZTE from the Entity List. Removal of ZTE from the Entity List will require the agreement of other agencies (including State and Defense, which are not parties to the global settlement) and publication of a new rule in the Federal Register.
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12 . R.C. Burns: “Did Undercover Agent Give Legal Lecture to Defendant on Export Law or Not?”
(Source: Export Law Blog . Reprinted by permission.)
* Author: R. Clifton Burns, Esq., Bryan Cave LLP, Wash DC, Clif.Burns@bryancave.com , 202-508-6067)
Several law enforcement officials have said to me that what often makes their jobs so easy is that many criminals are several forks short of a kitchen utensil drawer. With that in mind, we bring you the story of Kolar Rahman Anees Ur Rahman, who, if the criminal complaint is to be believed, was pretty stupid. But maybe not. You decide.
Mr. Rahman is an Indian national living in the UAE who just received five years probation in connection with a scheme to ship sniper rifles to Belarus. After an associate of Rahman’s contacted a gun manufacturer in the United States with a request to buy guns for Belarus, a federal undercover agent got in contact with Rahman in the UAE to continue the purchase negotiations. The undercover (or UCA in fedspeak) lured Rahman to Chicago, which was Rahman’s second mistake, the first of course having been trying to ship rifles from the US to Belarus in the first place.
Now what follows as described in the criminal complaint is astonishing, if true:
The UCA reminded RAHMAN that all of the .308 Caliber sniper rifles are export controlled in the U.S. by ITAR and could not be exported to certain countries without a license. The UCA reminded RAHMAN, due to the policy of denial in place by the U.S. government against Belarus, that it was not possible to obtain the required export licenses needed to legally export the .308 Caliber sniper rifles. The UCA explained that in order to export the firearms, they would need to make misrepresentations on the paperwork as to where the rifles would be shipped. RAHMAN informed the UCA he understood and still wanted to continue with their business transaction. The UCA informed RAHMAN he wanted to make sure RAHMAN understood the risks and that they would both go to jail if they were caught illegally exporting the rifles and ammunition. RAHMAN informed the UCA he understood the risk and that he desired to complete their business transaction as planned.
Seriously? This lengthy lecture on the law didn’t set off alarm bells, warning signals, blaring sirens, flashing lights and abject fear in Rahman? What real criminal ever gives a lengthy lecture to his associates about criminal law before embarking on the planned conduct? “Hey, Rufus, ya know robbing banks is illegal, right? And if we carry guns the penalty is increased to 30 to life? If we do this, we can both go to jail for at least thirty years or more. You know that, right? Speak up. I can’t hear ya. Okay, so you are absolutely, positively certain without any equivocation that you still want to rob this bank and you’re doing so of your own free will even though you might wind up in jail for a very long time? Don’t nod, Rufus, I need to hear you say yes.”
The UCA, if he in fact said all this, was making sure he could establish the necessary criminal intent for an export violation. This is critical where an Indian national living in the UAE might not know the ins and outs of U.S. export laws or about the U.S. arms embargo on Belarus. (I bet even a bunch of Americans don’t know about the Belarus embargo.) But you have to wonder why Rahman when (and if) he got this five-minute spiel on U.S. law didn’t run out the door of the hotel room in Chicago and hop on the next flight back to the UAE.
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|EDITOR’S NOTES |
| | 14 . Are Your Copies of Regulations Up to Date? (Source: Editor)
The official versions of the following regulations are published annually in the U.S. Code of Federal Regulations (C.F.R.), but are updated as amended in the Federal Register. Changes to applicable regulations are listed below.
– Last Amendment: 15 Jan 2016: 81 FR 2657-2723: Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity With Respect To Making or Transferring a Firearm.
– Last Amendment: 27 Jan 2017: 82 FR 8589-8590: Delay of Effective Date for Importations of Certain Vehicles and Engines Subject to Federal Antipollution Emission Standards; and 82 FR 8590: Delay of Effective Date for Toxic Substance Control Act Chemical Substance Import Certification Process Revisions.
* DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM): DoD 5220.22-M
– Last Amendment: 18 May 2016: Change 2: Implement an insider threat program; reporting requirements for Cleared Defense Contractors; alignment with Federal standards for classified information systems; incorporated and canceled Supp. 1 to the NISPOM (Summary here.)
– Last Amendment: 24 Feb 2017: 82 FR 11505-11506: Temporary General License: Extension of Validity
– Last Amendment: 10 Feb 2017: 82 FR 10434-10440: Inflation Adjustment of Civil Monetary Penalties.
– Last Amendment: 15 May 2015; 80 FR 27853-27854: Foreign Trade Regulations (FTR): Reinstatement of Exemptions Related to Temporary Exports, Carnets, and Shipments Under a Temporary Import Bond – HTS codes that are not valid for AES are available here
– The latest edition (9 Mar 2016) of Bartlett’s Annotated FTR (“BAFTR”), by James E. Bartlett III, is available for downloading in Word format. The BAFTR contains all FTR amendments, FTR Letters and Notices, a large Index, and footnotes containing case annotations, practice tips, and Census/AES guidance. Subscribers receive revised copies every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance website. BITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR.
– HTS codes for AES are available here . – HTS codes that are not valid for AES are available here
– Latest Amendment: 11 Jan 2017: 82 FR 3168-3170: 2017 Civil Monetary Penalties Inflationary Adjustment
– The only available fully updated copy (latest edition 8 Mar 2017) of the ITAR is Bartlett’s Annotated ITAR (“BITAR”), by James E. Bartlett III. The BITAR contains all ITAR amendments to date, plus a large Index, over 750 footnotes containing case annotations, practice tips, DDTC guidance, and explanations of errors in the official ITAR text. Subscribers receive updated copies of the BITAR in Word by email, usually revised within 24 hours after every ITAR amendment. The BITAR is available by annual subscription from the Full Circle Compliance website. BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please contact us to receive your discount code.
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|* The Ex/Im Daily Update is a publication of FCC Advisory B.V., edited by James E. Bartlett III and Alexander Bosch, and emailed every business day to approximately 8,000 readers of changes to defense and high-tech trade laws and regulations. We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOJ/ATF, DoD/DSS, DoD/DTSA, State/DDTC, Treasury/OFAC, White House, and similar websites of Australia, Canada, U.K., and other countries and international organizations. Due to space limitations, we do not post Arms Sales notifications, Denied Party listings, or Customs AD/CVD items. |
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