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Strategies for Managing and Mitigating Global

Trade Compliance Risk2014 CEI, 16 September 2014, 4:15-5:15pm

KENDRA COOK, OWNER / DIRECTOR OF COMPLIANCE, C2 INTERNATIONAL, LLCAND

GWEN HASSAN, MANAGING ATTORNEY – REGULATORY COMPLIANCE, CNH INDUSTRIAL AMERICA LLC

Overview

Speaker Backgrounds / Introductions

Primary Risk Areas and Associated Regulations Sanctions Programs

Anti-Boycott Regulations

Imports

Exports of Technology (Non-Military and Military)

Export Control Reform

Embargoes

Anti-Corruption Regulations

Training

Recordkeeping

Consequences for Violations

Recent Enforcement Examples

Putting it All Together

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Introduction / Backgrounds

Kendra Cook Currently NOAA’s Lead Systems Engineer on COSMIC-2 satellite program; Senior

Systems Engineer on NASA CPOD CubeSat program BS, Aerospace Engineering; MS, Astronautical Engineering; MS, Computer Engineering 11 years working for the U.S. Government (U.S. Air Force, U.S. Navy, NGA, NOAA) on

satellite, UAV, and missile system programs in various engineering and Program Management roles Spent 2 years as Director of Corporate Compliance for a 600+ employee defense contractor

Lived in Taiwan for 2 years as the U.S. Government’s liaison to the Taiwanese Government on a joint satellite program

Certified Program Management Professional (PMP) Certified U.S. Export Compliance Officer (CUSECO)Certified Compliance and Ethics Professional (CCEP)

Introduction / Backgrounds

Gwen Hassan Currently Managing Attorney for Regulatory and Compliance matters for CNH

Industrial $32B company with over 70,000 employees worldwide and operations in over 180

countries Third largest capital goods manufacturer in the world (agricultural and construction

equipment, military vehicles, buses and engines).

Based in Chicago at Company’s North American Headquarters Responsible for providing counsel on all global trade and anti-corruption matters

as well as data privacy, immigration and environmental issues 17 years of in-house practice Certified Compliance and Ethics Professional (CCEP)

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Sanctions Programs

Many governments and regions of the world have enacted trade sanctions and embargos against other countries/regimes U.S. has two types

ITAR Section 126.1 Military Embargos (No military imports or exports to or from Belarus, Cuba, Eritrea, Iran, North Korea, Syria, Venezuela, Burma, China, and the Republic of the Sudan)

U.S. Department of Treasury, Office of Foreign Asset Controls (“OFAC”) trade sanction programs (most recently enacting sanctions against certain individuals and companies in Russia in response to President’s Executive Order requiring same)

United Nations Security Council also maintains other embargos in which the U.S. participates

Other international organizations, banks and regions have their own sanctions programs For example, Russian sanctions against U.S. and EU food products, EU sanctions against

Russia, World Bank sanctions

Sanctions

Key Compliance Risks “Know Your Customer/Supplier”

Who is the end-customer?

Where will your product be put into actual use?

Where are your purchased parts and supplies coming from?

Compliance Tips:

1. Screen all of your transactions for involvement of sanctioned countries and parties.

2. Obtain end-use certificates for all sales and prohibit re-export to sanctioned parties/locations.

3. Include trade compliance language in all purchase agreements.

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Sanctions

Risk Area: The “50% Rule” August 13, 2014 OFAC issued new guidance on how to handle entities owned 50% or more by

one or more sanctioned party Example: I Love Chocolate Company NOT on any sanction list

30% owned by Gladys

40% owned by Chuck

30% owned by Eric

Eric and Chuck on the sanctioned parties list

I Love Chocolate is now considered to be “sanctioned” even though not on a list

Compliance Tip: Conduct due diligence on all companies operating in sanctioned countries to ensure no ownership “ties” to sanctioned parties

Sanctions

Risk Area: Non-U.S. Affiliate Companies and Facilitation Risk

Example: Your French incorporated affiliate (under common ownership) wants to sell a product into Cuba.

Is this allowed?

Facilitation Risk: No U.S. person can “facilitate” a transaction with a blocked party or country Are there U.S. persons working in or managing your French affiliate?

Does a U.S. person oversee or approve transactions of the French affiliate at a corporate headquarters?

Compliance Tip: Regularly monitor U.S. employees of your company working in other countries and for other affiliates to ensure they are not at risk for a facilitation problem.

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Recent Enforcement Example -Sanctions

BNP Paribas Case $9B fine in the U.S. for facilitating transactions by their customers with sanctioned parties

Alleged to have removed language from documents that would have identified the transactions as involving sanctioned countries or parties

Allegedly there was upper level management knowledge of this practice

Anti-Boycott Regulations

The Arab League has had a boycott of Israel and Israeli-origin products for many years

U.S. law makes it illegal for a U.S. person or company to comply with this boycott

Example: Arab customer asks you to please replace a component on your product so it is no longer

sourced from Israel

Arab customer uses letter of credit that prohibits involvement of Israeli persons

Compliance Tip: Check the anti-boycott regulations carefully, there are numerous exceptions to these rules (i.e. war risk exception)

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Imports

Key Risk Areas: Tariff Classifications

Valuation Assists

C-TPAT

Country of Origin

TPAs/APAs and duty impact

Free Trade Zones

Audit

Importer Security Filing

Imports

All products imported into the United States must be classified using the Harmonized Tariff Code System (Often referred to as the HTS Code)

Different codes are subject to different duties depending on their country of origin (COO) 8701 Tractors (other than tractors of heading 8709):

8701.90 Other: 8701.90.10 Suitable for agricultural use

Duty is calculated using the value of the goods being imported

Compliance Tip: Have an outside expert/broker/law firm audit your customs classifications on a regular cadence. Include country of origin marking requirements as part of your purchasing contracts and audit for same.

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Imports

Valuation

Most common method: Transaction Value (price actually paid)

Important valuation risk area – AssistsIs your business adequately “capturing” the additional value that comes from assists? Materials, components, parts incorporated into import

Merchandise consumed in producing the import

Tools, dies, molds etc…, used in producing the import

Engineering, design, development work performed outside of the United States

Compliance Tip: Conduct an audit of your assists and valuation methods to ensure these are being handled correctly. Incorporate regular “self-audit” as part of your compliance program.

Imports

Transactions Between Related Parties:

U.S. Customs and Border Protection (“CBP”) Bulletin & Decisions Vol. 46, No. 23 on Transfer Pricing Policies as they relate to valuation for Customs purposes A Transfer Pricing Agreement (“TPA”) or Advanced Pricing Agreement (“APA”) between related companies can now be considered to be an “objective formula” for customs valuation purposes if:

1. A written TPA is in place prior to import 2. TPA is also used for tax purposes 3. TPA specifies how prices will be set and adjusted for all products covered by the TPA 4. Company provides accounting details to support any claimed adjustments 5. Transfer price must be an arm’s length price (must have documentation of same)

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Imports

BEWARE of other countries’ customs and tax regulations. The Customs and Tax authorities of other countries may not consider a TPA/APA to be an objective measure and may not accept it as the basis for proper valuation

There may be negative duty or tax impact in another country

Compliance Tip: Ensure you consult with customs experts before implementing any TPA or APA involving another country

Imports

Mill Certs

A Mill Test Certificate is required for imports of iron or steel classifiable in chapter 72, HTS, or in headings 7301, HTS, to 7307, HTS.

Importers are required to provide a statement of the internal chemistry of the metal that is being imported. Generally provided by the foundry that manufacturers the steel. Port of Pembina auditing for and requiring Mill Certs.

Compliance Tip: Include mill cert requirements in all purchasing contracts for iron or steel goods and train your purchasing group on what a mill cert is and why they are needed.

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Recent Enforcement Examples -Imports

Otterbox Case Whistleblower came forward to the government Alleged Otterbox purposely failing to properly include “assists” in the value of their imported products Resulted in artificially low import value and lower duty payments Settled for $4.3M dollars Whistleblower receives $830,000 for reporting this case to the government

Compliance Tips: 1. Encourage whistleblowers to report violations/suspected violations internally. 2. Train your managers on how to handle whistleblower employees internally.3. Implement a zero tolerance policy on retaliation so employees feel they can report issues internally.

Exports

EVERY item or commodity exported from the U.S. is subject to some form of export control. Associated software, services and technology are also controlled at the same level

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Exports

What is considered an “export”? The movement of an item The sending of information The delivery of a service The disclosure of information Outside of the United States or within the United States to a person who is not a U.S.

Citizen or Permanent Resident

“Deemed Export” Example: A U.S. citizen employee in New York travels to Chicago and shares technical drawings for a product with another company employee who is a citizen of India working here on an H-1B VISA The U.S. employee has just “exported” technical data to India

Compliance Tip: Review all potential new hires in advance for U.S. citizenship/green card status to determine whether a license or agreement will be needed for them to have access to technical information

Non-Military Exports

Exports of items or information that is not considered “military” technology are controlled by the Department of Commerce, Bureau of Industry and Security (BIS) responsible for administering the Export Administration Regulations (EAR)

EAR controls are delineated into 5 product groups (ECCNs): Systems, Equipment, Assemblies and Components

Test, Inspection and Production Equipment

Materials

Software

Technology

Depends on ultimate destination, end use, and end user.

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Non-Military Exports

Commerce Control List (CCL) Categories within the Export Administration Regulations (“EAR”) provide the associated Export Control Classification Number (“ECCN”): Nuclear Materials, Facilities, and Equipment (and misc. items) Materials, Chemicals, Microorganisms, and Toxins Materials Processing Electronics Computers Telecommunications Information Security Sensors and Lasers Navigation and Avionics Marine Propulsion Systems, Space Vehicles, and Related Equipment

Exports

Using the ECCN for the item in question, you then need to check the Country Chart for the level of export control for the destination country

Example: 9A990 Diesel engines and tractors and “specially designed” “parts” and “components” therefor, n.e.s. (see List of Items Controlled) Reason for Control: AT

Control(s) Country Chart (See Supp. No. 1 to part 738). AT applies to entire entry except 9A990.a

If the ECCN of the product you wish to export is controlled for the destination it’s going to, you will need an export licenseCompliance Tip: Audit your products to check for proper ECCN numbers and require vendors of “purchased parts” to supply the correct ECCN for you

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Military Technology Exports

Exports of military technology are controlled by the Department of State (DoS), Directorate of Defense Trade Controls (DDTC), with responsibility for administering the International Traffic in Arms Regulations (ITAR)

The ITAR controls: Defense Articles

Defense Services

Technical Data

Regardless of ultimate destination, end use, or end user.

What’s Considered an Export?

Disclosing (including oral or visual disclosure) or transferring technical data to a foreign person, whether in the U.S. or abroad; or

Performing a defense service on behalf of, or for the benefit of, a foreign person, whether in the U.S. or abroad; or

Sending or taking a defense article out of the U.S. in any manner, except by mere travel outside of the U.S. by a person whose personal knowledge includes technical data; or

Transferring registration, control or ownership to a foreign person of any aircraft, vessel or satellite covered by the USML, whether in the U.S. or abroad; or

Disclosing (including oral or visual disclosure) or transferring in the U.S. any defense article to an embassy, any agency or subdivision of a foreign gov’t (e.g. diplomatic missions).

Visual and oral disclosure, or the application of personal knowledge or technical experience can be considered an export!

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Ensure You Are Exporting Legally

Export License

Agreement Technical Assistance Agreement (TAA)

Manufacturing License Agreement (MLA)

Distribution Agreement (DA)

Exemption / Exception (a.k.a. waiver)

Compliance Tip: Have an expert, broker or law firm audit your exports for compliance with export laws and regulations

Military Technology Exports

Defense Articles are specifically designed, developed, configured, adapted, or modified for a military application, and Do not have predominant civil applications, and

Do not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications

Defense Services include: The furnishing of assistance (including training) to foreign persons, whether in the United

States or abroad The furnishing to foreign persons of any technical data Military training of foreign units and forces

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Military Technology Exports

Technical Data controlled under the ITAR is defined as information which is required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles

Examples from the ITAR

Blueprints Drawings Photographs Plans Instructions Documentation Classified information relating to defense

articles or defense services Software directly related to defense articles Information covered by an invention

secrecy order

Design Methodology

Engineering methods or design philosophy (i.e., the “why” or rationale and lessons learned) Test Requirements Interface Control Drawings Build-to-Print Specifications Program Technical Documents Failure Analysis Factors that establish Operational Requirements Maintenance/Repair Manuals Top-Level and Detailed Design Information Component Life Predictions

Software and its Documentation

Design or details of the software or software source code

Engineering Analysis

Analytical methods and tools (e.g., mock-ups, computer models and simulations, and test facilities) used to design or evaluate performance against the operational requirements

Manufacturing Know-How

Information that provides detailed manufacturing processes and techniques needed to translate a detailed design into a qualified, finished article, such as:

Discoveries Formulas Materials Inventions Processes Approaches

Concepts Techniques Devices Apparatus Machines

Military Technology Exports

Firearms, Close Assault Weapons, Combat Shotguns

Guns and Armament

Ammunition/Ordnance

Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs and Mines

Explosives and Energetic Materials, Propellants, incendiary Agents and Their Constituents

Vessels of War and Special Naval Equipment

Tanks and Military Vehicles

Aircraft and Associated Equipment

Military Training Equipment and Training

Protective Personnel Equipment and Shelters

Fire Control, Range Finder, Optical and Guidance and Control Equipment

Auxiliary Military Equipment

Toxicological Agents, Including Chemical Agents, Biological Agents, and Associated Equipment

Spacecraft Systems and Associated Equipment

Nuclear Weapons, Design and Testing Related Items

Classified Articles, Technical Data, and Defense Services Not Otherwise Enumerated

Directed Energy Weapons

Submersible Vessels, Oceanographic and Associated Equipment

Miscellaneous Articles

U.S. Munitions List (USML) Categories within the ITAR:

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Recordkeeping

Records must be maintained for ALL exports for a period of 5 years from the expiration of the license or other approval (to include exports using an exemption), or from the date of the transaction (whichever is later).

The records to be maintained include, but are not limited to: Licenses, agreements, exceptions/exemptions

All correspondence with the State Department or Department of Commerce

Emails and typed or hand-written notes indicating the types and frequency of exports/transfers

Contracts

A database of all technical data that was exported should be maintained, that includes: Name of exporter, date of export

Document control number and document title

Method of export

Recipient of information

Export authorization

Copy of the document/briefing/etc.

Consequences for Violations

Entity (Your Company)

Criminal*: Fines up to $1M or 5x the value of

the export (whichever is greater)

Debarment

Civil: Fines up to $500K

Debarment

Loss of right to contract with the Government

Loss of contracts, award fees, and stockholders

*Generally the outcome of a violation that is committed intentionally, with knowledge, or willfully

EACH PENALTY IS PER OFFENSE

Individual (You)

Criminal*: Fines up to $1M or 5x the value of

the export (whichever is greater)

Debarment

10 years in prison

Civil: Fines up to $500K

Debarment

Loss of right to contract with the Government

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Recent Enforcement Examples -Exports

2012 – United Technologies Corporation and its subsidiary Pratt & Whitney Canada Corporation and other subsidiaries Charged with 576 violations of the ITAR in connection with the unauthorized export and transfer of defense

articles and technical data, and unauthorized provision of defense services to various countries, including proscribed destinations

Fined $55M and assessed $20M to implement significant additional remedial compliance actions

“Had the Department not taken into consideration Respondent’s voluntary disclosures and remedial compliance measures as significant mitigating factors, the Department would have charged Respondent with many additional violations and imposed a more severe penalty.”

2011 – BAE Systems, plc (UK) and its subsidiaries (other than BAE Systems, Inc. and its subsidiaries) Charged with 2,591 violations of the ITAR in connection with the unauthorized brokering of US defense articles

and services, and the failure to maintain records involving ITAR-controlled transactions

Fined $79M and required to implement significant additional remedial compliance actions

Export Control Reform (ECR)

In August 2009, President Obama directed a review of the U.S. export control system with the goal of strengthening national security and the competitiveness of key U.S. manufacturing and technology sectors by focusing on current threats and adapting to the changing economic and technological landscape.

The goal is to move to: Single Control List

Single Primary Enforcement Coordination Agency

Single IT System

Single Licensing Agency

DoS has already begun transferring less sensitive technology to DOC’s EAR and re-writing the ITAR to become more “positively controlled” New “600 series” ECCNs were created on the CCL for items previously ITAR-controlled

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Export Control Reform (ECR)

Implementation Status:

Anti-Corruption Regulations

Most countries now have Anti-Corruption Laws and Regulations in place U.S. Law: The Foreign Corrupt Practices Act (“FCPA”)

UK Law: The UK Bribery Act

New Brazilian Law: Law to Combat Corruption

India: Lokpal Bill

United Nations: Convention Against Corruption

Some differences between regions and countries

All prohibit bribery of government officials, most prohibit “private” bribery as well

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Anti-Corruption

Global Trade creates many opportunities for corruption Be aware of the potential for corruption with:

Customs brokers/agents/officials

Freight Forwarders

Logistics/transportation providers

Compliance Tips: 1. Perform due diligence on third party providers throughout your trade flows 2. Require anti-corruption certification and indemnification in all agreements with annual renewals3. Train your third parties as to what you expect4. Keep careful records of all of the above!

Recent Enforcement Examples –Anti-Corruption

Glaxo Smith Kline case Employees of China operations of Glaxo Smith Kline allegedly using a travel agency to funnel bribes to

government officials

GSK corporate office hires local investigators to see what they can find out

Local investigators jailed by China officials without trial

Local GSK Manager jailed

New allegations related to bribery of government employed doctors in Syria

Compliance Tip: Conduct anti-corruption training everywhere in the local language and document it carefully. See the Morgan Stanley case for a great example of how to do this.

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Recent Enforcement Examples –Anti-Corruption

Siemens case (2008) $1.9 Billion dollars in fines and disgorgement of profit

$800M to U.S. government

$800M to German government

$300M to Greek government

KBR/Halliburton (2009) $579M in fines and disgorgement

Total S.A. (2013) $398M in fines and disgorgement

Alcoa (2014) $384M in fines and disgorgement

Training

Annual training for ALL employees is recommended

Agenda should include topics such as: What is considered an export or import, how to accomplish legally

What products does your company sell that are controlled

Corporate policies/procedures for trade compliance

WHO TO CONTACT WITH QUESTIONS

Process for disclosing violations or potential violations

Consequences for not following laws/regulations

Examples of non-compliance / penalties

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Putting it All Together

Do your due diligence and keep careful records of having done so!

Document, document, document!

Train your employees on corporate policies/procedures

Maintain records

If you have questions, ask! There are people who can help!

EAR Decision Tree

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ITAR Decision Tree

Resources

Dept. of State: www.pmddtc.state.gov

Dept. of Commerce: www.bis.doc.gov

www.export.gov

http://www.fcpablog.com/

http://www.fcpaprofessor.com/

http://www.cbp.gov/xp/cgov/newsroom/news_releases/national/

http://www.grcustomslaw.com/