International Trade and Trade Finance Compliance Programs: Perspectives from a Former U.S. Prosecutor

Transcription

1 International Trade and Trade Finance Compliance Programs: Perspectives from a Former U.S. Prosecutor Jonathan C. Poling Baker & McKenzie LLP International Trade, Compliance & Customs Washington, D.C jonathan.poling@ Speaker Jonathan C. Poling Speaker Washington, DC Jonathan C. Poling is a partner in Baker & McKenzie s International Trade, Compliance and Customs Practice Group with significant experience handling complex export control and traderelated civil and criminal matters involving a wide array of industries. He represents clients nationally and internationally in a variety of matters, including white collar criminal cases, administrative enforcement matters, trade-related due diligence, integration issues in mergers and acquisitions; internal investigations, audits, export control and sanctions cases, and addressing corporate compliance issues. Mr. Poling s practice also covers anti-money laundering and fraud investigations involving international trade and trade finance, including investigations involving potential violations of the International Emergency Economic Powers Act, the Trading with the Enemy Act and the Arms Export Control Act. Mr. Poling is a former prosecutor with the US Department of Justice National Security Division, Counterespionage Section. In 2009, Mr. Poling was awarded the Assistant Attorney General for National Security Division s Special Commendation Award and in 2010 he was awarded the US Department of Commerce, Office of Export Enforcement Award for Excellence. Mr. Poling handled substantial and high profile investigations and prosecutions of non-us companies and financial institutions for trade violations, including United States v. Balli Aviation (illegal export of aircraft and largest fine by the US Department of Commerce); United States v. ING Bank; and United States v. Ulrich Davis (violations of a temporary denial order and one of first cases involving a freight forwarder employee). 2 1

2 Emerging Enforcement Trends in Trade & Trade Finance Cases I skate to where the puck is going to be, not where it has been. --Wayne Gretzky What are we seeing? Enhanced international cooperation on enforcement matters. Development of strategic trade laws in new countries (Malaysia, Dubai, Philippines, Mongolia, etc.). Granting extraditions for export violations (Singapore, Hong Kong, Germany, Czech Republic). Focusing on current and former employees in addition to corporate responsibility. Increasing fines and cases based not only on substantive export violations, but on the quality and timeliness of the company s internal investigation. Approaching the cases as fraud investigations (undervaluing, misrepresenting, concealing, intentionally avoiding due diligence on customers, etc.) 2

3 Other Trends Broadening of investigations to include new industries and new aspects of business. Oil services, defense contractors, aircraft manufacturers, but also now insurance companies, financial institutions and IT companies. Export investigations do not just focus on what was exported via air waybill, but what is being exported by the click of a mouse (e.g. software, design, technical specifications, instructions). Enhanced coordination and leveraging of intelligence in export enforcement matters through the President s establishment of the Export Enforcement Coordination Center (E2C2). No criminal cases involving re-exports, and most cases continuing to focus on China and Iran, and Syria. Use temporary denial orders (TDOs) and administrative subpoenas during criminal investigations. Examining a Compliance Program During an Export Enforcement Investigation Igor: Could be worse. Dr. Frankenstein: How? Igor: Could be raining. - Young Frankenstein 3

4 The Worst Time to Examine a Compliance Program The worst time to examine a compliance program is during an investigation. Ideally, companies should be conducting independent risk assessments and audits of the program before an investigation occurs. During an investigation, the compliance program will be examined closely: By investigators at the beginning of the investigation and By prosecutors at the end of the investigation. At the beginning of an investigation... Why is the compliance program an important focus for investigators? A good starting source for evidence of knowledge regarding what employees understood to be legal or illegal. [D]efendant knew the export was in violation of the law, we are hard pressed to say it matters what the basis of that knowledge was. United States v. Tsai, 954 F.2d 155, 162 (3d Cir. 1992)(emphasis added). On two occasions, [Defendant s] bank refused to complete questionable transactions.... [Defendant] conducted his business practices in stealth, using code words to reference money transfers. Sometimes he described his clandestine transactions in terms of the sale of newspapers; other times he surreptitiously referred to the sale of tea. This activity clearly confirms that [defendant] knew his activities ran afoul of the law. United States v. Homa Int l Trading Corp., 387 F.3d 144, 147 (2d Cir. 2004). 4

5 And at the end of an investigation... When determining corporate liability at the end of an investigation, federal prosecutors are obligated under the Principles of Federal Prosecution of Business Organizations to consider, among other factors, the existence and effectiveness of the company s pre-existing compliance program. U.S. Court s views on the existence of compliance programs: United States v. Potter, 463 F.3d 9 (1st Cir. 2006), a corporation cannot avoid liability by adopting abstract rules" that forbid its agents from engaging in illegal acts, because "[e]ven a specific directive to an agent or employee or honest efforts to police such rules do not automatically free the company for the wrongful acts of agents. United States v. Hilton Hotels Corp., 467 F.2d 1000, 1007 (9th Cir. 1972) (noting that a corporation could not gain exculpation by issuing general instructions without undertaking to enforce those instructions by means commensurate with the obvious risks ) What does the Government consider? United States Attorney s Manual Comment to Section on Corporate Compliance Programs states, among other things: The DOJ recognizes no compliance program can ever prevent all criminal activity by a corporation s employees. The critical factors in evaluating a compliance program include whether the program is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or tacitly encouraging or pressing employees to engage in misconduct to achieve business objectives. No formulaic requirements, but prosecutors ask themselves several questions. 5

6 Seven Common Deficiencies with Export Control Compliance Programs The rule: anytime you have a chance of getting something right, there's a 90% probability you'll get it wrong. --Andy Rooney Number #1: Outdated Compliance Programs If a compliance program was created, often the program was outdated and not revised to reflect significant changes in the company s business. How has the company changed? Mergers Acquisitions Discontinuation of businesses Changes in reporting lines New products New offices in new countries 6

7 Number #2: Unempowered Compliance Officers The compliance officers were simply not empowered to proactively examine transactions and enforce compliance across departments. Has management sent a consistent message within the company about the importance of compliance to business? Are resources annually budgeted for compliance? Is the compliance function separate and distinct from the internal investigation function? Who in General Counsel s Office handles FCPA? Who handles export matters? Are they the same people? Why? Why not? 7

8 Number #3: Untrained Compliance Officers In export control matters, some compliance questions may be technical and require a science or engineering background whereas other compliance questions may be legal and require an understanding of complex regulations. What training is (or is not) being provided to compliance officers? Export Control Conferences Classes or Courses on Compliance or Export Controls Membership in Best Practices Groups on Export Controls Getting into the how business is conducted and examining real situations. Number #4: Unimaginative Compliance Programs Is your company s compliance program a cookie cutter approach? Basic: Does it even mention your company s name? Better: Does it include your company s terms of art so that it would be understood by employees? Creative: Is the program purely punitive in nature? What about rewarding employees for turning down business? Is the compliance program modeled off of best practices available? Are they abstract rules and general instructions? 8

9 Number #5: Failure to Record Compliance Successes There will come a time when a program is scrutinized and by then it will be too late to create this record. How can one gauge the adequacy of a pre-existing compliance program without basic data? When compliance works effectively, the details of successes must be memorialized and preserved. While cost will be an issue, this need not require much more than an that memorializes the salient transaction details, dates, parties involved and action taken. United States v. Rudolf Cheung (D.D.C. 2012) Rudolf L. Cheung, 57, a resident of Massachusetts, pled guilty to conspiracy to violate the Arms Export Control Act in connection with the unlawful export of 55 military antennae from the United States to Singapore and Hong Kong. In June 2006, a company in Singapore sent an inquiry to the firm that employs Cheung seeking a quotation for two types of antennae that were defense articles. After receiving the query, the export compliance officer at Cheung s firm advised the firm in Singapore that neither antenna could be exported unless they filled out a U.S. government form attesting that the goods would not be transferred. The Singapore company refused, and the order was stopped. After learning that the export compliance officer at his company had blocked the export, Cheung admitted that he discussed with an individual outside his company (co-conspirator C) a plan to bypass the export controls at his company and arrange for the antennae to be exported to Singapore through co-conspirator C. Under the plan, co-conspirator C, who operated his own company in Massachusetts, would purchase these goods from Cheung s company and then export them on his own to the firm in Singapore, with Cheung s knowledge. 9

10 Number #6: Unresolved Compliance Conflicts International companies that operate in many countries have compliance officers examining cross-border transactions and appropriately identifying issues within each geographic region. Case Example: A significant compliance issue involving the United States, Malaysia and Taiwan is detected by the compliance officer assigned to cover the United States. When the issue is raised with colleagues in Malaysia and Taiwan, the non-u.s. compliance officers do not see an issue. Who resolves this question? Does it get resolved? How quickly is the question resolved? Functional and Geographic Reporting Lines? What falls through the cracks? 10

11 Number #7: The Really Important Department In the aftermath of some investigations of companies that had robust compliance programs, the program was applied inconsistently across departments. In certain instances, one department, unit or group was known for being too important or too busy for compliance. Do you have an example of this within your company? Is this unit frequently excepted from training requirements? Are they given abbreviated compliance training? 11

12 If there was a # 8... The Leaky Faucet Investigation Drip, drip, drip of facts from a compliance program. Companies that do not handle properly the internal investigations have gotten themselves in trouble for conduct relating to the investigation. Are the reports being filed with the Government giving investigators the feeling that there is a constant drip of new and significant facts? Word to the Wise: The Government is charging violations that arise well after the export for what they have construed as willfully sloppy, untimely or inadequate disclosures--- even where the company was following advice of counsel. 12

13 United States v. Pratt & Whitney Canada, et al. (D.Conn 2012) On June 28, 2012, Pratt & Whitney Canada (PWC), a Canadian subsidiary of United Technologies Corporation (UTC), pleaded guilty in the United States District Court for the District of Connecticut for violating the Arms Export Control Act; the Justice Department agreed to defer other charges against PWC, UTC, and another UTC subsidiary, Hamilton Sundstrand Corporation (HSC). Multiple voluntary self-disclosures with numerous false statements. The Justice Department also charged the companies for the untimeliness of the disclosures under the Arms Export Control Act for violating Section 126.1(a) and (e) of the International Traffic in Arms Regulations, in what was the first time that a criminal charge for this type of violation has been brought. Count Three of the Justice Department s information charges PWC and HSC with willfully violating Section 126.1(e), which states in relevant part: Any person who knows or has reason to know of such a final or actual sale, export, transfer, reexport, or retransfer of such articles, services, or data [to China or any country referred to in Section 126] must immediately inform the Directorate of Defense Trade Controls. (emphasis added) Export Control Compliance Program Best Practices 13

14 Best Practices in Compliance Programs Leadership Risk Assessment Standards & Control Training Oversight (Monitoring, Audit & Response) Contact Information: Jonathan C. Poling Speaker Washington, DC Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, DC United States T F jonathan.poling@ 28 14

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