exporting from the united states: key legal considerations

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Exporting from the United States: Key Legal Considerations

Luis Alcalde, Esq. and David M. Wilson, Esq.

2014 Ohio Export Internship Program

@LMAlcalde | @DwilsonJDMBA

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International

Trade in a

Legal

Context

FCPA

Master Export

GuruAgents,

Distributors,

and Labor

Export Controls

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International Trade in a Legal ContextGoods, services, technology, contract rights, money and/or people are moving from one market or legal jurisdiction to another market or legal jurisdiction.

The cross border nature of the trade and exchange means that the law of two jurisdictions or markets/countries apply to the transaction as well as principles of international law.

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Imports Into a Market

The export of goods, services, technology, IP, people, money from USA is also . . .

The import of goods, services, technology, IP, people, money into the foreign market.

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Laws that Apply to International TradeThe specific laws of each nation, and this includes not just the national or federal laws but also the laws of political subdivisions within a nation such as states, provinces, cities, etc.

Public International Law which is the law that governs the relationship among countries and international entities - tax treaties, multi-country agreements such as Convention on International Sale of Goods.

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Laws that Apply to International TradePrivate international law which is the procedural law that governs or determines what laws will apply to a cross border matter or dispute.

Supra national laws which are the laws of regional agreements such as the European Union and trade blocks such as MERCOSUR (Brazil, Argentina, Chile, Uruguay, etc.).

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USA export laws re: goods, services, technology, IP

Export Controls, ITAR, OFAC

Foreign Market Import laws re: goods,

services, technology, IP, approval and registration of

products, services, technology

Export / Import Laws of US and Foreign Market

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USA Finance laws re: Transfer of Money to Foreign Country and financial reporting,

transfer pricing issues, taxes

Foreign Market Financial Control Laws re: foreign currency, foreign

investments, transfer pricing,

financial reporting, taxes, import duties

and fees

Financial Laws of US and Foreign Market

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Laws Affecting the Private Relationship of Parties

USA laws applicable to contracts, sale of

goods, services, technology, IP,

financing, resolving conflicts

International treaties on IP, Sale of Goods, Contracts, Resolving

Conflicts, Taxes

Foreign markets laws re contracts, sale of

goods, services, technology, IP, solving

conflicts

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International Trading or Transfers

The transfer/movement of goods, services, technology, money and/or people can be:

a physical transfer;

an electronic transfer;

a transfer of rights (such is IP rights in Trademarks, Patents, Copyrights, Trade Secrets).

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Buying Music with a Smart Phone

A physical device designed in US, made in China, sold in Brazil using US technology and IP.

User in Brazil orders music that is downloaded electronically from servers in Europe and includes a limited transfer of IP rights to the purchaser, which also leads to electronic payment authorizations from a local bank in Brazil, and payment anywhere in the world.

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Exporting & Importing

Sales Agents in foreign country

Employees in foreign country

Contract Manufacturing

Joint Venture

Foreign Subsidiary

Distributorship

Franchises

Licensing and other contractual arrangements

Principal Means of Cross Border Business

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Successful international business requires a global mindset.

The ability to develop and interpret criteria for personal and business performances that are independent from the assumptions of a single country, culture, or context, and to implement those criteria appropriately in different countries, cultures, and contexts.

Global Mindset

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Analysis of Opportunity Requires Risk Analysis

Market Risks (unexpected market changes, raw material prices, supply problems, new competitors)

Regulatory Risks (changes in regulatory scheme)

Socio-Political Risks (political/social instability/changes to government programs)

Due Diligence –Risk Analysis

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Analysis of Opportunity Requires Risk Analysis

Economic/Financial Risk (non-payment by third parties, changes in monetary exchange rates)

Operating Risks (inability to maintain high standards of efficiency and production, infrastructure problems, labor issues)

Management Risks (inability to comply with international ethical and compliance norms; poor fit with local culture)

Due Diligence –Risk Analysis

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Government & Political Environment

Judicial System

Transparency, fairness, IP protection, rule of law

Taxation system on imports, income, and sales

Ease of repatriation of funds and earnings

Ease of starting a business & types of structures

Ease of avoiding permanent establishment

Labor/Employment/Immigration Laws

Due Diligence on Foreign Market Structures & Culture

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FCPA

Foreign Corrupt Practices Act 1977 (FCPA) Two key provisions

Prevention of bribery of (foreign) governmental officials

Anything of value to a foreign official

Duty to keep accurate financial books and records and have adequate internal controls to accurately reflect the transactions of the business

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FCPAApplies to US companies, citizens, foreign subsidiary, officer, director,

employee, or agent of a US company or its foreign subsidiary, any

stockholder acting on behalf of the company, foreign companies with

US registered securities

Scope and operation of FCPA not restricted to USA territorial boundaries

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Foreign Corrupt Practices Act (1977)

US has pursued 3.5 formal foreign bribery enforcement actions for every one action pursued by ALL other countries

Companies settle, pay fines and forfeit profits

2011 – Johnson & Johnson $70M, JGC $219M

Recent – Wal-Mart, Morgan Stanley, Avon

US Justice Dept. continues to focus on individuals

Guilty employees go to jail, pay fines and must make restitution

Average jail term is two years in federal prison but range is very broad with one sentence up to 15 years

FCPA

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Best practices

Financial controls

Monitoring process, legitimate vendor transactions, employee advances, petty cash, training

Contract review

Analyze all current and future contracts to ensure scope of services does not violate FCPA

Outsourcing bribery

Compliance program & culture

UK Bribery Act, compliance defense – NOT under FCPA

Broad definition of bribery, includes commercial bribery

FCPA

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Export Controls

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Export Controls

Why is compliance important?

Who has to comply?

What is an export?

How do I comply?

What changes can I expect?

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Why Is Compliance Important?Criminal penalties

20 years imprisonment

$1 million per violation, or 5x the value of the exports for each violation

Civil penalties$1 million per violation

Administrative penaltiesThe greater of $500,000 per violation or twice the amount of the transaction that is the basis of the violation

Loss of export privileges (“Denial Orders”)

Risk to reputation

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Civil penalties

Administrative penalties


Risk to reputation

PPG

-20B+ Multinational Corporation

-Global manufacture of paints, coatings and chemicals

-Operates in over 70 countries

Sunrise Technologies

-Less than 5M in annual revenue

-Sells surplus electronics parts

-Less than 20 employees

-In business for 17 years

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Civil penalties



Risk to reputation

PPG

-Failed to detect and resolve certain red flags that it was

supplying items for use in a Pakistan Atomic Energy

Commission facility


-Shipped computer goods to Dubai, which were later sent to

Iran

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Civil penalties



Risk to reputation

PPG

-$3.75 million criminal + civil


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Civil penalties



Risk to reputation

PPG

-$3.75 million criminal + civil


-5 year prison sentence

-$1 million criminal fine + civil settlements

-Denied export privileges for 10 years

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Who has to comply?U.S. Person is defined as: A “Lawful Permanent Resident” (8 USC 1101 (a)(20))

U.S. Citizen or national

Legal immigrant with a “green card”

A “Protected Individual” under the INA (8 USC 1324(b)(3))

designated an asylee or refugee

a temporary resident under amnesty provisions

but does not include Protected Individuals who:

fail to apply for citizenship within 6 months of becoming eligible

have not been naturalized within 2 years after applying

Any entity incorporated to do business in the United States

“Foreign Person” means everyone else Includes foreign businesses not incorporated in the U.S.

EAR does not use the term “foreign person”, instead refers to “foreign national,”

exempting Protected Individuals (See EAR 734.2(b)(ii))

U.S. and

Foreign Persons

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What is an export?What is an Export? ITAR 120.17, EAR 734.2(b) An actual shipment or transmission of “items” subject to the EAR or ITAR

(commodity, technical data or software) out of the United States

Releasing (including oral or visual disclosure) “technical data” or software “source code” to a “foreign person,” in the United States (“deemed export”)

Performing technical assistance, training, or other “defense services” for, or on behalf of, a “foreign person,” (including foreign corporations) whether in the United States (“deemed export”) or abroad

Re-exporting from foreign countries U.S. origin goods or technical data, goods incorporating U.S. components, or goods manufactured from U.S. technology or re-exporting U.S.-origin “technical data” or software

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What is an export?

Export Examples

Shipping OUT of the USPhysical shipments or hand carried items

Release of technical data or software in a foreign country

Releasing Information IN the USRelease of technical data to a foreign national in the US

Release of source code to a foreign national in the US

Inspections of US equipment and facilities by a foreign national

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What is an export?

What is NOT defined as export controlled “technical data” or “software”? ITAR 120.10, EAR 772.1

Publicly available technical data and software

Published for sale, in libraries open to the public, or through patents available at any patent office

General scientific, mathematical, or engineering principles commonly taught in colleges and universities

Available through unlimited distribution at a conference, meeting, seminar, trade show, or exhibition – provided no previous government or industry restrictions on distribution applied

Arises during or results from fundamental research, where no restrictions on publication or access accepted

Non-technical contract or business documents

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What is an export?

NSDD-1899

No restrictions may be placed upon the conduct or reporting of Federally funded fundamental research in science, technology and engineering at colleges, universities and laboratories unless classified, except as provided in applicable U.S. statutes.

Fundamental research

Basic and applied research in science and engineering, the results of which ordinarily are published and shared broadly within the scientific community.

Distinguished from research which results in information which is restricted for proprietary reasons or pursuant to specific U.S. Government access and dissemination controls.

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What is an export?

Tools of the Trade

All tools of trade may accompany the individual departing from the US or may be shipped unaccompanied within one month before the individual’s departure from the US, or at any time after departure.

Usual and reasonable kinds and quantities of tools of trade (commodities and software) for use by the exporter or employees of the exporter in a lawful enterprise.

The tools of trade must remain under the effective control of the exporter or the exporter’s employee (retain physical possession of the item, locked in hotel safe, or guarded).

Encryption commodities and software may be pre-loaded on a laptop, handheld device or other computer or equipment.

*No tools of the trade in Cuba or Sudan*

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State DepartmentDirectorate of Defense Trade Controls (DDTC)

Arms Export Control Act

International Traffic in Arms Regulations ITAR

22 C.F.R. Parts 120-130

UML - U.S. Munitions List

Commerce DepartmentBureau of Industry and Security (BIS)

Export Administration Act

Export Administration Regulations (EAR)

15 C.F.R. Parts 700-799

CCL - Commerce Control List

Treasury DepartmentOffice of Foreign Assets Control (OFAC)

Trading with the Enemy Act, Int’l Emergency Economic Powers Act

Iraq Sanctions, Terrorism Regulations, and Others

31 C.F.R. Parts 500-599

List of Specially Designated Nationals & Blocked Persons

Economic and trade sanctions

How do I comply?

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U.S. Department of State (Directorate of Defense Trade Controls) - ITAR

Controls defense articles, defense services and related technical data, including most space-related articles.

How do I comply? State Department Guidance

Ongoing program to assist in monitoring defense trade activities & updated manual.

a) Draft and update manual clearly articulating company policy related to compliance with defense

trade laws and regulations.

b) Outline procedures related to licensing and compliance matters.

c) Identify empowered and responsible persons.

d) Specify duties of empowered and responsible persons.

e) Create procedures for record keeping and internal auditing.

Resources

a) Dtrade – Directorate of Defense Trade Controls, electronic system

b) Directorate of Defense Trade Controls acronym list may be found on the DDTC Website

c) Country policies and embargoes may be found on the DDTC Website

http://www.pmddtc.state.gov/documents/DDTC Acronyms 8-22-2011.pdf

http://www.pmddtc.state.gov/embargoed_countries/index.html

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U.S. Department of Commerce (Bureau of Industry and Security) - EAR

Controls “dual-use” items – goods and technology with both civilian and military/strategic uses.

How do I comply? Commerce Department

Guidance

Export Management and Compliance Program (ECMP)

a) Draft written export compliance standards for the Company.

b) Commit sufficient resources for the Program.

c) Ensure senior organizational officials are designated with the overall responsibility for the

Program.

d) Conduct continuous risk assessment of the Program.

e) Engage in ongoing systematic compliance training and awareness activities.

f) Screen employees, contractors, customers, products, transactions and implementation of

compliance safeguards throughout the export lifecycle.

g) Conduct internal and external monitoring and audits

Resources

a) Commercial Control List (CCL), Supplement No. 1 to Part 774 of the EAR is available on the

Government Printing Office

b) Commerce Country Chart, Supplement No. 1 to Part 738 of the EAR is available on the

Government Printing Office Website

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=59ee1d5eeb8f1d444ba88927fa1eaaff&rgn=div9&view=text&node=15:2.1.3.4.24.0.1.5.27&idno=15

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U.S. Department of the Treasury (Office of Foreign Assets Control)

Oversees U.S. trade embargoes and Enforces all three programs at U.S. borders through U.S. Customs Service.

How do I comply? Treasury Department Guidance

Maintain a rigorous risk-based compliance program

a) Questions to ask:

Who are your customers?What kinds of business do you do?

Shipping, wire transfers, bank, insurance

b) Resources

OFAC Starter KitSpecially Designated Nationals (SDNs) listIndustry specific information

Interdiction software OFAC “Regulations by Industry” brochure OFAC Exporter assistance Hotline 1-800-540-6322

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Step 1 - Classification of item.

Start by looking in the Commerce Control List, CCL under the category of electronics (Category 3) and product group which covers equipment (Product Group A). Then read through the list to find whether your item is included in the list. The ECCN for polygraphs is 3A981.

Step 2 - License requirements.

These list the reason that the item is controlled. Polygraphs are controlled for “CC”, or crime control.

How do I comply? Department of Commerce

example: Shipment of Polygraph

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How do I comply?

Step 3 – Destination Country.

Check whether a license is required for the country.

Department of Commerce


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Step 4 – Screening. Certain individuals and organizations are prohibited from

receiving U.S. exports.Entity List

BIS list of organizations identified as engaging in activities related to the proliferation of WMD.

Specially Designated Nationals and Blocked Persons List

OFAC list of individuals and organizations representing restricted countries or known to be involved in terrorism or narcotics trafficking.

Unverified List

BIS list of firms for which it was unable to complete an end-use check.

How do I comply? Department of Commerce


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Do NOT ship any item outside the U.S. without first checking the ITAR and EAR lists to determine if the item is controlled.

Secure all license approvals or verify license exceptions BEFORE shipment of controlled Item.

Consult an advisor before accepting Access Controls in research agreements.

Screen all contracts, employees, suppliers and customers.

Do NOT travel to embargoed countries without consulting and advisor and satisfying requirements.

General

Do’s & Don’tsHow do I comply?

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What changes can I expect?Export Control Reform Initiative: ECR Four key areas of reform

Controlled items on a single list

Build a single licensing agency

Create modern IT system for export controls

Export control enforcement

Why? Currently there are three different primary licensing agencies, each applying their own policies, and none

seeing the others’ licenses, and all operating under unique procedures and definitions.

55% of all licenses currently issued for Category VII (military vehicles) items will be eliminated.

Brake pads for the M1A1 tank are virtually identical to the brake pads for fire trucks and heavy equipment.

Under the current system, “we devote the same resources to protecting the brake pad as we do to protecting the M1A1 itself.” – White House Press Release July, 2011

“The current export control system is

still based on the geopolitical,

economic, and technological realities of

the Cold War era and must be changed

to meet 21st century national security

needs.”

-White House Press Release July, 2011

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Imports Into a Market

The export of goods, services, technology, IP, people, money from USA is also . . .

The import of goods, services, technology, IP, people, money into the foreign market.

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Foreign Market Requirements

Import Export Process

Register with the governmental registration system (if required)Generally, Secretary of Foreign Trade

Obtain import license (if required)Automatic

Non-Automatic (process may take several months)

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Agents, Distributors and Labor

Employee Considerations

Agents & Distributors

Immigration

In many countries, labor rights are outlined in the Constitution, as well as

laws, decrees, provisional measures, ordinances and regulations and

international conventions and treaties.

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Is the person an employee? Is an employment contract required?

Rights and duties? Taxes, benefits

Termination Severance

Does settlement extinguish a private right of action?

Permanent Establishment?

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Ok, but they aren’t employees; they are . . .

In many countries, it does not matter what the parties call the relationship, regardless of whether there is a written contract.

Courts will weigh factors, including:

The regular payment of salary

Required personal rendering of service

Subordination (direct control by employer, hours worked, benchmarks)

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What is the relationship? Agent, distributor, . . . employee?

Is a written agreement required? Compensation, territory, products, time of payment?

Rights and duties? Taxes, benefits Reimbursement for investments made to promote the company? Exclusivity presumed?

Termination Enumerated “for cause” reasons?

Permanent Establishment? Treaties

Effectively Connected Income (ECI)

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General Themes Agents & Distributors

Agent Distributor

Activities subject to some control by supplier Activities subject to only minimal control by

supplier

Does NOT take title to goods Takes title to goods, buys and sells for own

account

May handle products of other suppliers; but, is

less likely to do so than distributor

May handle products of other suppliers

Generally compensated on a commission basis Earnings based on resale profit margin

Usually does not warehouse goods Usually warehouses and physically delivers

goods

Usually does not use own capital Uses own capital

Bears no risk of failure of payment Bears economic risk of failure of payment by

customer

May have power to contract on behalf of the

supplier

Has no power to bind the supplier contractually

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In Brazil

Agent Distributor

Creation Statutory requirements Contract law

Compensation Commission Sells on own account

Termination Enumerated “just cause” reasons Contract law

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If properly structured commercial representative and distributorship agreements may require less up-front investment than a more direct presence in the market.

The tradeoff for this can be less control over how the product is promoted, sold and serviced in the market.

Regardless, using commercial representatives or distributors may make sense as a means to first enter the market or even as a permanent business model.

However, if the proper safeguards are not in place, mismanagement of the product by the commercial representative or distributor can permanently damage a brand.

Foreign companies should structure commercial representative and distribution agreements with a long term strategy that preserves maximum flexibility and may include a future more direct presence in the market. For this strategy to work a well-crafted written agreement is imperative.

Best PracticesAgents & Distributors

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Care must be exercised to not blur the distinctions between a commercial representative and a distributor.

Long term exclusive contracts should generally be avoided.

In some countries, short term contracts once renewed may be considered contracts for "indefinite terms" after the first renewal, by some courts.

Foreign companies should fully understand the facts and local law before creating or terminating a commercial representative or distributorship relationship.

Minimum sales requirements should generally be established in the agreement.

Standards for product service and maintenance should generally be set out in the agreement.

Generally, regular and adequate reporting should be required.

Other key points to address often include termination and causes for termination, distribution points and control over distribution in case of termination.

Best PracticesAgents & Distributors

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Immigration

Visa

Permanent Visas

Temporary Visas

Technical Visa

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Legal Advice

The content of this presentation is for educational purposes only. Each legal issue is fact dependent, THIS PRESENTATION SHOULD NOT BE USED OR VIEWED AS LEGAL ADVICE; your legal counsel should be consulted on the application of your particular factual situation to the current law.

Copyright: 2014 Kegler Brown Hill + Ritter

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Exporting from the United States: Key Legal Considerations

Luis Alcalde, Esq. and David M. Wilson, Esq.

2014 Ohio Export Internship Program

@LMAlcalde | @DwilsonJDMBA