Compliance Challenges
For Multinational Companies
2011 OFII General Counsel Conference
Washington, D.C.
Export Controls Enforcement
“Each year, billions of dollars in ‘dual-use’
items—which have both commercial and
military applications— and defense items
are exported from the U.S. To protect
national security, foreign policy, and
economic interests, the U.S. government
controls the export of these items
[collectively referring to commodities,
software, technology and services]. The
Departments of Commerce and State are
principally responsible for regulating the
export of dual-use and defense items,
respectively.”
--Government Accountability Office
Report, December 2006
2011 OFII General Counsel Conference
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U.S. Interests
• National Security: Iran
• Foreign Policy: Cuba
• Economic Interests: China
2011 OFII General Counsel Conference
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Export Controls Enforcement Landscape
• National Security Issues: Post-9/11
• Economic Concerns: Global Market Challenges
• Customs Enforcement: Munitions
– Clearer violations involving weapons and classified technology
• Commerce Enforcement: Dual Use
– More difficult compliance issues/classification
• FBI: Jurisdiction as of 2003
– Resources
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What Do We Mean By Export Controls?
• Bureau of Industry and Security (BIS)
– “Dual-use” commodities, software and technology
(collectively “items”)
– Export Administration Regulations (EAR)
• Directorate of Defense Trade Controls (DDTC)
– Defense articles and defense services
– International Traffic in Arms Regulations (ITAR)
• Office of Foreign Assets Control (OFAC)
– Range from total embargoes to more limited
sanctions
– Various regimes, each unique
2011 OFII General Counsel Conference
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Penalties/Consequences
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Criminal Prosecution
Denial of Export Privileges/Debarment
Fines
Intrusive Monitorships
Reputational Harm
2011 OFII General Counsel Conference
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Drastic Rise in Enforcement Penalties
1979
2001
2002
2003
2004
2011 OFII General Counsel Conference
2005
2006
2007
2008
2009
Washington, D.C.
Iran
National Security Interest
• Enforcement / FBI
• Cooperation
• U.S. Persons
– International Internal Investigations
• Inventory Rule
• Broader Pressures
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Cuba
Foreign Policy
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U.S. Embargo
Canada / European Union
10 Percent Rule – U.S. Content
S.E.C. Reporting
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China
Economic Interests
• Economic Espionage / FBI
• Market Forces
• Competition
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Deemed Exports
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What is a Deemed Export?
• “Release” of technology/technical data or source code to a
“foreign person”
– Can occur in the United States or abroad (deemed reexport)
– Deemed to be an export to the home country or countries of the
foreign national
• A “release” includes:
– Visual inspection by foreign nationals of U.S.-origin equipment
and facilities
– Oral exchanges of information
– Application to situations abroad of personal knowledge or
technical expertise acquired in the U.S.
2011 OFII General Counsel Conference
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When Do Deemed Exports Happen?
• Foreign national employee or visitor at your U.S. facility
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Involved in developing sensitive/controlled software
Using sensitive/controlled equipment
Repairing a sensitive/controlled part
Observing the production of a sensitive/controlled device
Reviewing blueprints
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Why Can Deemed Exports Be
More Likely for a U.S. Subsidiary?
• Foreign management and technical experts often visit
facilities of subsidiaries
– Ensure that global quality standards are being met
– Collaborate on a technical problem
– Install a new production line to mirror overseas production
• Headquarters staff are often seconded to subsidiaries
– Develop relationships within the global enterprise
– Share ideas across entities in a global group
• Multinational companies often attract international talent
• Parent company employees are unfamiliar with requirements
and find them intrusive
2011 OFII General Counsel Conference
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Technology Transfers
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What is a Technology Transfer?
• Closely related to deemed exports because typically not
characterized by physical shipments
• Transfer of controlled technology/technical data to a foreign
person abroad
• Examples:
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Email
Fax
Technical discussions
Electronic file access
2011 OFII General Counsel Conference
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Why Can Technology Transfers Be
More Likely for a U.S. Subsidiary?
• Collaboration with headquarters technical experts is common
– Pool resources to develop a new product
– Collaborate on a technical problem
– Share technical tips to improve global output
• Sales territory may extend into Canada, Mexico and/or
Central/South America
• Sourcing is centralized to achieve economies of scale across
the corporate group
• IT management is centralized at headquarters to reduce costs
and ensure that global systems interface smoothly
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Tips for Accessing Data
• U.S. subsidiaries should not assume that their electronic data
are stored in the United States
– Increasingly common for parent company to institute centralized
IT systems, with systems located abroad
– Consider location of:
• Document server
• Email server
• Technical specification database (e.g., MFG/Pro)
– Be comprehensive:
• Primary server
• Backup server
• Backup tapes
• Must incorporate export controls into physical set-up of IT
system
2011 OFII General Counsel Conference
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Tips for Accessing Data (cont.)
• Note that many parent companies maintain global sales and
invoicing databases
– Example: U.S. subsidiary has access to all sales files of
overseas affiliates
• Does not implicate U.S. export controls
– This is because data is being transferred to the U.S.
– Export controls of other countries may be implicated
• But may implicate U.S. economic sanctions (facilitation)
– Example: U.S. subsidiary has access to and in some way helps
to process sales files from overseas affiliates, which sell
products to Iran
– Consider need for access controls here as well
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Other Export Vulnerabilities
• Acquisitions
– Buying an Export Problem
– Company-Wide Policy Flowing Down to Local Levels and
Locations
• Anti-Boycott Rules
• Lack of Industry Standards
– Resources / Training / Background
– Structure / Reporting
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Environmental Compliance and the
Global Supply Chain – An Update
Sam Boxerman
Sidley Austin LLP
November 16, 2011
2011 OFII General Counsel Conference
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Summary
• Environmental issues in your supply chain – an update
• Real world examples
• Some thoughts on best practices
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Global Supply Chain
• Wherever you manufacture, assemble, sell – you are
connected to the global supply chain
– Raw materials, components, finished products, etc.
– Not limited to a single home market
• EHS / product compliance increasingly extended
– Back to suppliers/forward to customers
– You can outsource: but still retain the risk
• Supply chain interruptions critical business issues
– Reliability critical, “just-in-time” manufacturing
– EHS supply chain issues are business issues
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Some pressure points
• Environmental chemical/product content restrictions
– EU: REACH, RoHS
– US: Conflict minerals
CA: “Green Chemistry”
• Other product performance, labeling
– Globally Harmonized System (GHS) of classification and labeling
– Prop 65
• “End of life” requirements
– EU WEEE directive + states in the U.S.: “take back” electronics
• http://www.electronicstakeback.com/promote-good-laws/state-legislation/
• Increased attention to outsourced operations
– E.g., California Transparency in Supply Chains Act
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EU – REACH - Update
• Registration implementation continues
– 3500 dossiers for existing + 1300 new chemicals
– Next dossier registration deadline - May 31, 2013
• Manufacture/import > 100 tonnes/yr of covered substance
• Listing of “Substances of Very High Concern”
– Growing: 50+ listed and more under consideration
– Some widely used (e.g., boric acid, used in glass/fiberglass)
• SVHC listing triggers supply chain notifications
– “Articles” contain > 0.1% = notice to ECHA, customers/recipients
• Q: complete product (ECHA) or components (States)
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EU - REACH – Annex XIV
• REACH Annex XIV ‘authorisation’ list
– No use/mfg in EU after sunset date (3-4 yrs)
– Can obtain authorisation – but burden on petitioner
– Several listed this year – more under consideration
• Should be actively managed
– Users should monitor and engage in advocacy on SVHC and
authorisation listings to avoid supply disruptions
– http://echa.europa.eu/chem_data/authorisation_process_en.asp
-- can track authorisation activities
• Risk of market removal of SVHCs
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EU – RoHS
• Restriction of Hazardous Substances Directive
– Restricts usage of lead, mercury, cadmium, etc. in electrical and
electronic equipment (EEE)
• EU has “re-cast” RoHS effective July 2011
– Member States have 18 months to adopt national law
– 3–8 year compliance phase-in for newly covered equipment
• List of restricted substances was not expanded
– But – there will be enhanced compliance obligations
2011 OFII General Counsel Conference
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EU – RoHS
• Existing requirements for demonstrating compliance
– Putting a product on the market was a declaration of compliance
– So – implemented through voluntary declarations / due diligence
• ROHS Recast expands compliance requirements
– Require documented declaration of compliance and CE marking
– Additional notification and record keeping requirements
• Note: Similar process underway for EU’s “WEEE”
2011 OFII General Counsel Conference
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US – TSCA
• TSCA “reform” received a lot of attention
• Proposals would make it more like REACH:
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Review of chemicals that have not gone through PMN
Enhanced testing and information gathering
Whether should be requirement to prove a chemical is safe
Any legislation in this Congress unlikely
• EPA regulatory initiatives
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US – California’s “Green Chemistry”
• New proposal 10/31/2011 – creates multi-step process:
– Identify “chemicals of concern”
– Identify/prioritize combinations of products and chemicals of
concern for which assessments must be conducted
– The “responsible entities” (i.e., mfrs, retailers, importers) will
have to notify CA of their “products of concern” and conduct
“alternatives assessments” on those products (e.g., how to
reduce use of or exposure to chemicals of concern), and
– CA will then take regulatory action based on those assessments
• Given size of CA market, this would be very significant
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US - Conflict Minerals Law
• Buried in financial legislation
– Dodd-Frank § 1502
• Intent – curb “conflicts minerals” sourced in central Africa
– E.g., tin, tungsten, tantalum, gold (and others to be identified by
State Department) from Democratic Republic of Congo +
neighboring countries
• SEC reporting requirement
– Disclosure, not a prohibition
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US - Conflict Minerals Law
• Scope to be defined by regulation
– Draft regulations – final due November/December 2011
• Who is subject
– Files with the SEC + minerals are “necessary to the functionality
or production” of products manufactured
• What will be required – still uncertain
– A “reasonable” inquiry + declaration “conflict free” or not
– If use / cannot declare non use – “Conflicts Minerals Report”
• Need active engagement – 4Q 2012/1Q 2013
– To comply will have to know what is in your products
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Some examples
• Who bears the risk of errors in declarations
• Engineer signs a “declaration” of compliance; but customer’s products are
denied entry due to what you supplied.
• Communication among marketing, EHS, and Legal
• Your marketing dept. sees opportunity to ship into a market, only to find out
that the product was not properly registered.
• Your operations/purchasing find a new supplier with a lower cost raw
material, but that supplier has not registered or properly labeled its product.
• Know the details
• An R&D program to conclude with roll-out of a new product, but you can’t
ship key materials because not registered and volume exceeds exemption.
• Do your due diligence
• You are importing a product into the U.S. You rely on supplier assurances,
but find out that the product contains a regulated hazardous substance and
there might be both worker and public exposure.
2011 OFII General Counsel Conference
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What to Know….
• Know your products
– What substances are in them? What is in the design pipeline?
– Take EHS into account when considering new markets, new
product lines, transactions, etc.
• Know your supply/value chain
– Who is in it? Where are they? What do they do/supply?
– How do they get it to you or your customers?
– How do you manage changes (e.g., in supplier or substances)?
• What are the impacts and risks?
– Over the life cycle of your products and services?
– What is “carbon footprint” of supply chain, products services?
– Regulatory trends in key markets?
2011 OFII General Counsel Conference
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Managing the Risk
• Integrate EHS into supply chain/vendor selection
– Include competence on complying with regulatory requirements
• Communication
– Avoid surprises to/from suppliers, customers or the public
• Traditional risk management measures
– E.g., insurance
• Auditing and verification
– The fact that a contract says it is so doesn’t mean that it is true
• Advocacy
– Don’t just let it happen to you: monitor what is going on and get
involved to defend your interests
2011 OFII General Counsel Conference
Washington, D.C.