Libya Sanctions Cause Confusion The Wall Street Journal, March 31, 2011 Justice Department, SEC cracking

down on U.S. companies engaging in bribery abroad The Washington Post, March 24, 2011 U.S. business community asks for leeway on Libya sanctions The Cable, March 3, 2011 FCPA Fines Made Up Half of All DOJ Criminal Division Penalties in Fiscal 2010 The Wall Street Journal, January 24, 2011
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U.S. Export Controls and Economic Sanctions

*with special thanks for contributions by Steve McNabb, Gozie Onyema and Kim Walker
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Overview of U.S. Trade Controls

Export Controls Economic Sanctions and Embargoes Anti-boycott Controls

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Dual Use Export Controls

Main regulator: U.S. Commerce Department, Bureau of Industry & Security (BIS) Regulations: Export Administration Regulations (EAR) Product Destination Controls: products listed on Commerce Control List (CCL) according to Export Control Classification Number (ECCN) End Use/End User Controls Penalties: Under the International Emergency Economic Powers Act (IEEPA) Civil fines (up to the greater of $250,000 or twice the value of the transaction) Criminal fines (up to $1 million) or if an individual, imprisonment (up to 20 years), or both
Possibly greater fines if imposed under the Alternative Fines Act, which (among other things) allows fines to be imposed up to twice the pecuniary gain or loss of the transaction

Seizure and forfeiture of goods Loss of export privileges Possible reputational damage
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Dual Use Controls (contd)

What is covered?
Dual Use Items generally, U.S.-origin items not specifically designed or modified for military use (even if the item is frequently used by the military, e.g., a water bottle)
EXAMPLE 1: U.S.-origin bicycle helmet not specifically designed/modified for a military use. [Dual use item] EXAMPLE 2: U.S.-origin bicycle helmet specially configured to be compatible with military communication hardware. [ITAR item]
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Dual Use Controls (contd)

General Prohibitions (exceptions may apply): Export and reexport of controlled items to listed countries Reexport and export from abroad of foreignmade items incorporating more than a de minimis amount of controlled U.S. content
25% U.S.-origin content by value for most destinations 10% U.S.-origin content by value for sanctioned countries (e.g., Iran, Syria)

Reexport and export from abroad of the foreign-produced direct product of U.S. technology and software to listed destinations
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Dual Use Controls (contd)

Common License Exceptions: Temporary imports, exports, and re-exports (TMP) Technology and Software-Unrestricted (TSU) Baggage (BAG)

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Key Concept: Deemed Exports

Release of technology to a foreign national is deemed to be an export to the country or countries of the foreign national Foreign national:
Any person who is not a U.S. citizen or permanent resident A valid work or student visa does not change status

Technology can include technical data, documentation, manufacturing know-how Release includes transmission of information to a foreign national anywhere, including in the United States
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Arms Export Controls

Main regulator: U.S. State Department, Directorate of Defense Trade Controls (DDTC) Regulations: International Traffic in Arms Regulations (ITAR) Penalties: Civil fines (up to $500,000) Criminal fines (up to $1 million) or if an individual, imprisonment (up to 10 years), or both
Possibly greater fines if imposed under the Alternative Fines Act

Loss of export privileges Possible reputational damage

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Arms Export Controls (contd)

What is covered? Exports of all U.S.-origin defense articles (items listed on U.S. Munitions List) A defense article is defined as any item that has been specifically designed or modified for a military use Includes controls on transfers of technical data related to defense articles to non-U.S. persons, whether that data is transferred orally, visually, electronically, or through any other means
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Arms Export Controls (contd)

With very few exceptions, licenses or other authorizations are required for exports to all destinations of defense articles Exports of defense articles are prohibited to:
Embargoed destinations (including Belarus, China, Cote dIvoire, Venezuela, and about 20 more), State Department Debarred Parties, and Prohibited parties under U.S. law

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Economic Sanctions and Embargoes

Main Regulator: U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) Types of Programs: May be comprehensive (e.g., Cuba, Iran, Sudan) or selective (e.g., Burma, Syria, Zimbabwe) Embargoes on Trade and Services Asset Freezes Entry Restrictions

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Sanctions and Embargoes (contd)

Apply to U.S. persons:
U.S. citizens, wherever located U.S. companies Any person in the United States, regardless of nationality

May also cover:

Non-U.S. persons directing or involved in prohibited conduct by U.S. persons Also for Cuba embargo: Covers all entities owned or controlled by certain U.S. persons
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Sanctions and Embargoes (contd)

Penalties: IEEPA sanctions programs: Civil fines (up to the greater of $250,000 or twice the value of the transaction) Criminal fines (up to $1 million) or if an individual, imprisonment (up to 20 years) or both
Possibly greater fines if imposed under the Alternative Fines Act

Trading With the Enemy Act (TWEA) sanctions programs (e.g., Treasurys Cuban Assets Control Regulations): Civil fines (up to $65,000) Criminal fines (up to $1 million) (if an organization) or if an individual, criminal fines (up to $100,000) or imprisonment (up to 10 years), or both
Possibly greater fines if imposed under the Alternative Fines Act

Seizure and forfeiture of goods Possible reputational damage

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Key Concept: Specially Designated National

Specially Designated Nationals (SDNs) (e.g., terrorists, drug cartels, certain vessels) Unlawful for U.S. persons to conduct any transaction with an SDN Names change regularly and SDN List is updated regularly May be based in non-sanctioned countries, such as: Canada Mexico UK United States
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Key Concept: Export of Services

Many economic sanctions programs prohibit U.S. persons from directly or indirectly exporting services to sanctioned parties, including sanctioned individuals, entities, and countries
Example: A U.S. person cannot repair the computer of an SDN because such conduct would constitute the provision of a service to the SDN

Sanctions also prohibit a U.S. person facilitating any transaction that a U.S. party could not conduct
Example: A U.S. person cannot refer Iran business to a nonU.S. competitor because that U.S. person could not itself conduct such business as a general matter.
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Key Concept: Export of Services (contd)

Prohibition on export of service covers U.S. persons, wherever located
Example: U.S. citizen in Kosovo cannot facilitate a prohibited transaction simply because they are outside the United States.

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Anti-Boycott Controls
Main Regulators: Departments of Commerce and Treasury Regulations: Export Administration Regulations (Commerce) Internal Revenue Code (Treasury)

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Anti-Boycott Controls (contd)

Evasion: any action to avoid U.S. anti-boycott laws and regulations Very fact-specific Current Treasury Department boycott countries: Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Republic of Yemen Boycott requests also may be received from Bahrain, Bangladesh, Indonesia, Iraq, Malaysia, Oman, or others Reporting: Boycott requests generally have to be reported to Commerce and or Treasury

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Restricted Parties Screening

5 Principal U.S. Government Lists of Restricted Parties:

Specially Designated Nationals List:

http:www.treas.gov/offices/enforcement/ofac/sdn

Denied Persons List: http://www.bis.doc.gov/dpl/default.shtm Unverified List: Entity List: http://www.bis.doc.gov/entities/default.htm Debarred Persons List:
http://www.pmddtc.state.gov/compliance/debar.html

http://www.bis.doc.gov/enforcement/unverifiedlist/unverified_parties.html

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FCPA
Anti-bribery provisions apply to
All U.S. companies, citizens, or residents, whether or not they act within or outside of the United States Any non-U.S. company listed on the U.S. stock exchanges Any non-U.S. company or individual who executes any part of a bribery scheme within the United States, and All officers, directors, employees, or agents of the above

U.S. parent companies may also be liable for the acts of non-U.S. subsidiaries where the parent authorized, directed, or controlled the activity in question

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FCPA (cont.)
Accounting provisions apply to
Issuers, which are companies with securities registered in the United States or that file periodic reports with the SEC Foreign subsidiaries of issuers are not bound directly by these provisions, but a parent company must generally in good faith use its influence to cause its subsidiary to devise and maintain efficient accounting controls

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FCPA (cont.)
Facilitating payments exception
Made to secure routine governmental action Must be small, reasonable, and welldocumented Most local laws prohibit them Examples include
Obtaining copies of or speeding the processing of permits, licenses, official documents Expediting the processing of governmental papers (e.g., visas) Providing police protection Delivering mail Providing utilities (phones, power, water)
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FCPA (cont.)

Two limited affirmative defenses

Payment is lawful under foreign countrys written laws Payment is a reasonable and bona fide expenditure to demonstrate or promote a product or execute a contract

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FCPA (cont.)
Criminal PenaltiesAnti-Bribery Provisions
Up to a $2 million fine per violation for companies Up to 5 years in jail and up to $250,000 fine for individuals

Criminal PenaltiesAccounting and Internal Controls Provisions

Up to a $25 million fine per violation for companies Up to 20 years in jail and up to a $5 million fine for individuals

Fines for both companies and individuals may be even higher than the ones included in the FCPA statute (up to 2x the benefit sought or received) under a federal alternative fine provision
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FCPA (cont.)
Civil Penalties
FCPA statute permits both the DOJ and SEC to impose a basic $10,000 per violation civil fine upon individuals and companies The SEC may also impose additional civil penalties ranging between $5,000 to $100,000 upon individuals and $50,000 to $500,000 upon companies
These additional penalties, and the SEC basic FCPA civil fine, are adjusted for inflation Alternatively, the SEC may impose a civil penalty equal to the gross pecuniary gain to an individual or company

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Other Potentially Relevant Laws

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Other Potentially Relevant Laws (cont.)

Dodd-Frank ActWhistleblower Provisions
Permit awards of between 10 and 30% of monetary sanctions the SEC imposes upon a company > $1 million to those who assist the SEC with information about a securities violation (including FCPA violations)
This information must be independently gained (i.e., not from an internal investigation, audit, annual report, court filing, or news article)

Create a private right of action for whistleblowers who are discharged, threatened, suspended, harassed, or discriminated against for reporting securities violations

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Other Potentially Relevant Laws (cont.)

Travel Act (18 U.S.C. 1952)
Prohibits domestic or international travel or use of facilities to commit, attempt to commit, or help commit certain crimes (either state or federal)
Facilities is defined to include the mails, the wires, emails, advertising, telephones, etc.

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Other Potentially Relevant Laws (cont.)

Wire & Mail Fraud (18 U.S.C. 1341-43)

Prohibits use of the U.S. wires/mails in connection with any scheme to deprive anyone of a thing of value (i.e., submitting inflated bids/false invoices)
May also apply to non-U.S. companies and individuals

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Other Potentially Relevant Laws (cont.)

Bribery of U.S. government officials

Federal law prohibits directly or indirectly providing anything of value to U.S. government officials in exchange for an official act (this includes procurement fraud)

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Other Potentially Relevant Laws (cont.)

Many states have anti-bribery laws

Many of these laws apply to bribery of both public officials and private persons
e.g., Texas Penal Code 36.02 (public officials) and 32.43 (commercial bribery)

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Recent Enforcement Trends

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Recent Enforcement Trends (cont.)

Top enforcement priority and increased resources
Significant growth in both the number of FCPA reported enforcement actions and the size of the penalties imposed Dedicated Department of Justice (DOJ) and Securities and Exchange Commission (SEC) FCPA teams

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Recent Enforcement Trends (cont.)

Increased use of industry-wide investigations and growth in the number of industries under scrutiny Industries recently under review include
Oil & gas Medical devices & pharmaceuticals Cosmetics Law enforcement & military products Financial services
Sovereign wealth funds

Insurance Construction & engineering Tobacco Computer & information technology

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Recent Enforcement Trends (cont.)

More proactive enforcement techniques Traditional law enforcement techniques Both the DOJ and SEC are seeking increasingly large penalties
Nearly $2 billion in fines and penalties were levied against companies for FCPA-related offenses in 2010 Also in 2010, several individuals were sentenced to prison terms ranging from 6 months to over 7 years

Both agencies are also clearly focused on prosecuting individuals

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Recent Enforcement Trends (cont.)

DOJ and SEC are increasingly utilizing expansive theories of liability, including aiding and abetting, agency, and conspiracy theories Anti-corruption enforcement is heating up all over the world
International enforcement agencies have increased the number of anti-corruption related investigations and prosecutions Cooperation is increasingly routine New anti-corruption legislation is being enacted U.S. style approaches to investigations and resolutions are being adopted by other nations enforcers
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Practice Notes: How are companies complying?

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Policies Regarding Business Courtesies

Anti-corruption compliance policies requiring that business courtesies (i.e., gifts, entertainment, and travel-related expenses) be pre-approved by an appropriate supervisor or the companys compliance officer Expenditures cannot be lavish or frequent and must be compliant with local laws Focus on transparency to avoid any appearance of corrupt intent
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Facilitating Payments
Effective anti-corruption policies generally prohibit or place strict limits on facilitating payments, including
Pre-approval procedures Procedures to ensure such payments are accurately recorded on the companys books and records

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Third Parties
The FCPA and other anti-corruption laws prohibit direct and indirect corrupt payments Including robust anti-corruption provisions in all contract agreements with third parties is one way of mitigating potential anticorruption risks presented by those relationships
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Joint Ventures
Joint venture partners, and the joint venture itself, can raise substantial compliance issues As with third parties, keys to joint venture compliance involve careful due diligence and the incorporation of robust anti-corruption provisions into the joint venture agreement

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Mergers & Acquisitions

Anti-corruption liability has often arisen in connection with mergers and acquisitions Requires robust due diligence

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