Best Practices Every Business Should Know in the International Trade Arena Trade Sanctions Compliance Programs in the US, EU and Canada Tuesday, March 13, 2012
Speakers 2
Moderator/Speakers Terrie Gleason practices extensively in the area of international trade. She routinely advises clients on a wide range of customs/import regulatory issues involved in the global movement of goods. Ms. Gleason is listed in the 2010 edition of The Legal Media Guide to the World's Leading Women in Business Law. She is Co-Chair of Baker & McKenzie's Global Customs Practice, with Edmundo Elias of Guadalajara, Mexico. Terrie Gleason Moderator Washington, DC Steven Hill Steven F. Hill is a member of the Firm's Outbound Trade Practice. He has over 10 years of experience in a broad array of international trade regulation compliance and enforcement matters, particularly US export controls and sanctions laws and anti-corruption laws including the Foreign Corrupt Practices Act (FCPA). Steven Hill Speaker Washington, DC Brian Cacic primarily focuses on customs law issues as well as export control regulations compliance. He obtained his LL.B. from the University of Western Ontario, and holds a Master of Science in Mathematics and a bachelor s degree in Mathematics and Computer Science. Mr. Cacic was also the recipient of the 2004 Governor General of Canada s Gold Medal in recognition of his achievements in his graduate studies. Mr. Cacic is a member of the Canadian and Ontario bar associations and the Canadian Association of Importers and Exporters, among others. Brian Cacic Speaker Toronto 3
Speakers Lise Test Speaker Washington, DC Lise Test Lise Test, an associate in the Firm s International Trade Group in Washington, DC, practices in the area of international trade regulation and compliance with emphasis on US export control laws, trade sanctions, anti-boycott laws and the Foreign Corrupt Practices Act. Prior to joining Baker & McKenzie, Ms. Test served as a lawyer at the Danish Ministry of Defence where she focused on international public law and Danish torts, administrative law and military criminal law. In addition to her practice, Ms. Test also taught international humanitarian law and contract law at the Danish Royal Naval Academy. James Robinson Speaker London James Robinson specialises in EU and UK competition and trade law. The trade element of his practice is focussed on export control and sanctions matters. James advises clients across a number of industry sectors such as energy and energy services, ITC and manufacturing/engineering. He works on a broad range of outbound trade matters, including audits, the submission of rating enquiries, applications for multidestination open licences and the preparation of detailed voluntary disclosures. James also advises clients on the outbound trade issues arising from cross-border mergers and acquisitions and the application of UN and EU sanctions regimes to international transactions. James has particular expertise in advising ITC clients on encryption controls. 4
Agenda 5
Agenda Overview of US, EU, and Canadian sanctions Enforcement trends in the US, EU, and Canada Basic elements of a sanctions compliance program Blocking Orders: Canada and EU M&A compliance issues Review Q&A 6
Sanctions Overview 7
United States 8
Basic Concepts Under US Trade Sanctions Apply to US Persons US companies and their foreign branches US citizens and permanent resident aliens ( Green Card holders ), wherever located or employed Any person while in the United States Does not include separately incorporated subsidiaries of US companies, with the exception of US trade sanctions against Cuba 9
US Trade Sanctions: Basic Prohibitions Targets: countries Specially Designated Nationals (SDNs) Prohibits nearly all forms of US Person involvement that directly or indirectly involves a sanctioned country or person facilitation of transactions by non-us Persons that are prohibited as to US Persons Note US jurisdiction over US dollar transactions that enter the US financial system (e.g., dollar clearing) 10
US Trade Sanctions: Examples of Facilitation Examples of US Person facilitation Supply of product/services to third countries with knowledge or reason to know items are destined for a sanctioned country US management approvals/directions for sanctioned country dealings Financing, bank guarantees, warranties Referral of orders to non-us Persons Negotiation/review of commercial terms/contracts Strategizing business Certain forms of IT infrastructure support and IT access/services Other support (technical, legal, credit review etc.) 11
US Trade Sanctions Embargo or Extensive Sanctions Cuba Iran Sudan Syria Significant Sanctions Burma (Myanmar) North Korea List-Based Sanctions Regimes: Western Balkans region, Belarus, Cote d Ivoire, DR Congo, Iraq, Liberia, Lebanon, Somalia, Zimbabwe, Libya Terrorists Narcotics Traffickers WMD Proliferators Transnational Criminal Orgs. 12
European Union 13
EU Sanctions Policy EU follows so-called smart sanctions policy Mostly follows UN multilateral regime Some unilateral regimes, either in whole (e.g., Burma and Zimbabwe) or in part (e.g., Iran) EU sanctions regulations directly applicable in all 27 EU Member States Licensing, penalties and enforcement left to Member States Sanctions apply independently of export controls 14
Whom Do EU Sanctions Apply To? Any entity incorporated in an EU Member State and its EU and non-eu branches Any entity incorporated outside the EU, but only in respect of any business conducted in the EU Any directors, officers, employees, agents etc. located in the EU (irrespective of nationality) Any directors, officers, employees, agents etc. that are nationals of EU Member States (even if located outside the EU) 15
Typical EU Sanctions Controls Arms embargo Additional product controls Controls on certain services Controls on transfer of funds Designated party controls Current hot spots are Iran and Syria 16
Designated Person Controls Freeze funds and economic resources belonging to, owned, held or controlled by DPs Prohibitions on making funds or economic resources available, directly or indirectly, to or for the benefit of DPs Concepts of funds and economic resources broadly defined Knowledge defence if did not know, and had no reasonable cause to suspect Breach of contractual obligation will not give rise to liability if based on good faith implementation of sanctions Reporting obligations (additional requirements for FSAregulated companies) 17
Designated Party Programmes Chart Country U.N. E.U. U.S. Belarus Burma / Myanmar DR Congo Cuba Egypt Eritrea Republic of Guinea Iran Iraq Ivory Coast Lebanon Liberia Libya North Korea Somalia Sudan Syria Tunisia Zimbabwe Balkans and ICT of Yugoslavia Al-Qaida/Taliban and Terrorists 18
EU Embargos/Trade Sanctions Chart Country Arms Embargo Additio nal restrictions Armenia X Azerbaijan X Belarus X Internal repression Burma (Myanmar) X I nternal repression and timber and mining equipment DR Congo X Eritrea X Republic of Guinea X I nternal repression Iran X Nuclear, dual - use, inter nal repression and oil/gas items and insurance services Iraq X Cultural property Ivory Coast X I nternal repression Lebanon X Liberia X Libya X Internal repression North Korea X Nuclear related items and luxury goods Somalia X Sudan X Syria X Oil/gas items, telecoms and information security, power sector, insurance services and internal repression Zimbabwe X Equipment for internal repression 19
Canada 20
Categories of Sanctions Controls Arms and related materials embargo Additional product controls (in addition to the general export controls) Services and transactions Designated persons (i.e., restricted parties) 21
Legislative Framework United Nations Act Sanctions imposed pursuant to Canada s commitments as a UN member Special Economic Measures Act Trade and economic sanctions imposed pursuant to international commitments, or where the Government of Canada is of the opinion that a grave breach of international peace and security has occurred that has resulted or is likely to result in a serious international crisis Area Control List All goods and technology destined for countries of concern named on the list require an export permit from DFAIT 22
Legislative Framework Canada prohibits conducting business and financial transactions with individuals or groups associated with terrorism, or who are or are associated with foreign corrupt officials 1. Regulations Establishing a List of Entities (Criminal Code) 2. Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism (UN Act) 3. United Nations Al-Qaida and Taliban Regulations (UN Act) 4. Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations (Freezing Assets of Corrupt Foreign Officials Act) The Office of the Superintendent of Financial Institutions (Canada) publishes on its website the names of individuals and entities listed under the laws noted in 1 3 above. The individuals named under the Freezing Assets of Corrupt Foreign Officials (Tunisia and Egypt) Regulations can be found in the schedule to those regulations 23
Legislative Framework Country Implementing Legislation Belarus Burma (Myanmar) Côte d Ivoire Democratic People s Republic of Korea Democratic Republic of the Congo Eritrea Iran Iraq Lebanon Liberia Libya Sierra Leone Somalia Sudan Syria Zimbabwe List of sanctions current as at March 10, 2011 Area Control List (EIPA) Area Control List (EIPA) Special Economic Measures (Burma) Regulations (SEMA) United Nations Côte d Ivoire Regulations (UN Act) Area Control List (EIPA) Regulations Implementing the United Nations Resolutions on the Democratic People s Republic of Korea (UN Act) Special Economic Measures (DPRK) Regulations (SEMA) United Nations Democratic Republic of the Congo Regulations (UN Act) Regulations Implementing the United Nations Resolution on Eritrea (UN Act) Regulations Implementing the United Nations Resolutions on Iran (UN Act) Special Economic Measures (Iran) Regulations (SEMA) United Nations Iraq Regulations (UN Act) Regulations Implementing the United Nations Resolution on Lebanon (UN Act) Regulations Implementing the United Nations Resolutions on Liberia (UN Act) Regulations Implementing the United Nations Resolutions on Libya (UN Act) United Nations Sierra Leone Regulations (UN Act) Regulations Implementing the United Nations Resolutions on Somalia (UN Act) United Nations Sudan Regulations (UN Act) Special Economic Measures (Syria) Regulations (SEMA) Special Economic Measures (Zimbabwe) Regulations (SEMA) EIPA (Export and Import Permits Act); UN Act (United Nations Act); SEMA (Special Economic Measures Act) 24
Whom do Canadian sanctions apply to? Persons (i.e., individuals and entities) in Canada However, under the UN Act and the SEMA, sanctions apply to Canadians outside Canada Canadian means a person who is a citizen within the meaning of the Citizenship Act or a body corporate incorporated or continued by or under the laws of Canada or of a province 25
Common Issues Canadians outside Canada Screening of designated persons Broad language used in the sanctions Obtaining comfort on proposed activities 26
Broad Language E.g., Special Economic Measures (Iran) Regulations (SEMA): 3. It is prohibited for any person in Canada and any Canadian outside Canada to (a) deal in any property, wherever situated, held by or on behalf of a designated person (b) enter into or facilitate, directly or indirectly, any transaction related to a dealing referred to in paragraph (a) (c) provide any financial or other related service, including insurance or reinsurance, in respect of a dealing referred to in paragraph (a) (d) make any goods, wherever situated, available to a designated person, or (e) provide any financial or financial-related service to or for the benefit of a designated person 27
Obtaining Comfort on Proposed Activities The Minister of Foreign Affairs (DFAIT) has the authority to issue a permit to carry out a specified activity or transaction that is restricted or prohibited under the SEMA or UN Act sanctions What if the activity is not restricted or prohibited but some level of comfort is required? Government authorities seem unable to assist beyond simply confirming what may already be evident Exporters must conduct their own due diligence and satisfy themselves that the proposed activities do not contravene the sanctions 28
Enforcement Trends 29
The Consequences of Getting it Wrong Significant financial penalties Potential imprisonment Denial of export privileges / revocation of licences Impact on trading partners Reputational harm Legal costs Regulator difficulties going forward 30
Enforcement Trends Higher penalties Increased government-to-government cooperation Focus on sanctioned countries Inter-agency cooperation Increased scrutiny of exports by customs Designated person offences can indicate other violations Expectations of compliance programs 31
Sanctions Compliance Program Elements 32
Corporate Commitment & Awareness Awareness Knowledge of trade sanctions and how they apply to operations Understanding of where various trade sanctions programs may overlap or differ, e.g.: US sanctions on Cuba versus Iran US sanctions on Burma versus Canadian sanctions on Burma This process must be dynamic: Changes in laws and regulations (especially restricted parties) Changes in products and technologies Changes in delivery and supply chain Establishment of operations overseas Problems acquired through mergers and acquisitions 33
Corporate Commitment & Awareness (cont.) Commitment Tone at the top clear statement from senior management of commitment to compliance with applicable laws and regulations Allocation of resources must be sufficient and in accord with level of compliance risk presented by operations Senior management must understand the importance of compliance (not just another non-revenue producing administrative activity) Bring compliance in-house don t rely on freight forwarders and brokers 34
Basic Compliance Questions to Ask What What is the item (goo/software/technology) you are exporting? US items may be prohibited for reexport depending upon the export control classification and destination Where What are the intermediary and end destinations of the shipment? Who Who are the parties you are dealing with at all levels of the transaction? Why Why is the product being ordered (i.e., what is the intended end use?) 35
Watch List/Restricted Party Screening Written procedures for screening of relevant transaction Procedures should be tailored for business operations US versus EU sales Sales of US origin goods Sales to specific regions May be best to centralize screening to avoid any gaps Use of screening software program ideal if integrated into order entry system Procedures should include authority to halt transaction processing until potential matches can be confirmed Documentation of process once complete 36
Watch List/Restricted Party Screening Parties to screen include: Customers Suppliers and subcontractors Ship-to parties, ultimate and intermediate consignees Brokers and freight forwarders Banks or other financial institutions Intermediaries and service providers Pay-to and pay-from parties End users, if known Employees and visitors to facilities JV partners and M&A counterparties Other transaction parties as appropriate 37
Watch List/Restricted Party Screening When to conduct screening will depend upon nature and risk of business Entry of new customers into customer database Acceptance of new orders in order entry system New vendors Screening prior to shipment of goods Placement of new acquisition orders Hiring of new employees Periodic re-screening of lists 38
Diversions and Transshipments Compliance program screen intermediary and end destinations BIS Guidance on Best Practices to Guard Against Unlawful Diversion (http://www.bis.doc.gov/complianceandenforcement/bestpractices.htm) Are red flags present? Use freight forwarders observing compliance best practices Know the nature of your end customer (an end user or reseller?) Take appropriate steps to confirm end user/destination when shipping to or through a transshipment hub For dual-use goods, communicate product classification to end user or consignee In routed export transactions, freight forwarders should inquire when FPPI and USPPI provide different delivery information 39
Diversions and Transshipments Be on the lookout for red flags including: Delivery to freight forwarder Consignee is not the customer or ultimate end user Customer lacks appropriate technical or business background Delivery dates are vague, or deliveries directed to a remote location Abnormal quantities Abnormal payment terms Shipment to destinations with diversion risk (e.g., UAE, Hong Kong, Singapore, Kenya) Shipping route/intermediate country concerns (e.g., transshipment through Iran) 40
Blocking Orders: Canada and EU 41
Blocking Orders Canada EU Foreign Extraterritorial Measures Act Foreign Extraterritorial Measures (United States) Order, 1992 ( FEMA Order ) Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom 42
Blocking Orders The essence of these blocking orders are to protect trade and commerce between Canada/EU and Cuba from the effects of the extra-territorial application of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act ( Helms-Burton ) and the Cuban Asset Control Regulations (CACR) In addition, these blocking orders impose obligations on certain persons to notify government authorities of situations wherein their interests with respect to trade and commerce with Cuba are being affected by the extraterritorial application of Helms-Burton and the CACR Impose fines and/or criminal charges if contravened 43
Whom do the blocking orders apply to? Canada EU Canadian corporations, including directors, officers, managers or employees in a position of authority of a Canadian corporation US corporations registered to do business in Canada, such as US corporations with branch operations in Canada Generally subject if there is a clear link between the persons covered by the blocking order and the European Union, either through nationality, residency, physical presence or incorporation 44
Canadian Blocking Order Attorney General must be notified of any directive, instruction, intimation of policy or other communication relating to an extraterritorial measure of the United States in respect of any trade or commerce between Canada and Cuba Prohibited from complying with any extraterritorial measure of the United States or with any notifiable communication Statutory penalties For corporations, fines ranging from CAD $150,000 to $1.5m 45
EU Blocking Sanctions Obligation of non-compliance; European Commission may authorise compliance Obligation to notify European Commission of direct and indirect effects of targeted laws on economic and financial interests Claw back of damages caused by application of targeted laws Penalties and enforcement left to Member States 46
Potential solutions to Catch 22 situation? Genuine commercial reason not to deal US parent has full responsibility for Cuba US parent or EU subsidiary relies on non-listed US laws (EAR?) US parent in management role at some point, and points to its need to comply with US law: HQ just can t do the necessary step 47
Resolving Conflicts It s not always easy E.g., in Canada, if compliance with extraterritorial measure or communication is one of a number of reasons for not engaging in the transaction caught With respect to M&A, the business with Cuba may be of significant value to the company Assets may be very difficult or costly to divest (e.g., after-sales support contracts) Arguments can be made regarding the application of the law to the circumstances, but these remain untested in the courts 48
M&A Issues 49
M&A Issues Due diligence on target? Now or later, will have to do it Preference is to conduct diligence before signing or at least closing Advantages to pre-closing diligence Avoid committing violations through the acquisition itself Acquisition of blocked property and performance of blocked contracts (e.g., Cuban contracts) No grace period under US sanctions laws Acquisition of contracts reflecting agreement to participate in prohibited international boycott 50
M&A Issues Pre-closing diligence advantages (cont.) Avoid acquisition of ongoing violations committed by the target Current operations of target becoming a violation under new US management structure (e.g., target sales to Iran) Could result in meaningful penalty discount, if voluntary disclosure is made with corrective action (effective compliance measures) Could uncover information that is dramatic enough to warrant a purchase price adjustment or a walkaway 51
M&A Considerations for Diligence Successor liability concerns? When? Pre-signing is optimal Post-signing, pre-closing should include specific provisions on access Post-closing diligence to be avoided Exit or walkaway rights in the event of bad results Purchase price adjustment rights Reps/warranties and indemnification language Closing schedules 52
Review 53
Contact Information: Teresa A. Gleason Moderator Washington, DC Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, DC 20006 United States T + 1 202 452 7030 F + 1 202 416 6960 teresa.gleason@bakermckenzie.com Brian Cacic Speaker Toronto Baker & McKenzie LLP 181 Bay Street, Suite 2100 Toronto, Ontario M5J 2T3 Canada T + 1 416 865 2327 F + 1 416 863 6275 brian.cacic@bakermckenzie.com Steven Hill Speaker Washington, DC Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, DC 20006 United States T + 1 202 835 6121 F + 1 202 416 7115 steve.hill@bakermckenzie.com James Robinson Speaker London Baker & McKenzie LLP 100 New Bridge Street London EC4V 6JA T + 44 20 7919 1631 F + 44 20 7919 1999 james.robinson@bakermckenzie.com Lise Test Speaker Washington, DC Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, DC 20006 United States T + 1 202 835 6131 F + 1 202 416 7075 lise.test@bakermckenzie.com 54
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