1
From PLI’s Course Handbook
Coping with U.S. Export Controls 2007
#11207
Get 40% off this title right now by clicking here.
19
“MISTAKES WERE MADE” ASSESSING
RISKS & LIABILITIES IN MERGERS &
ACQUISITIONS UNDER THE EXPORT
CONTROL LAWS
Wendy L. Wysong
Clifford Chance US LLP
The author is grateful for the assistance of Clifford
Chance attorneys David Dibari, Jason D’Angelo,
Adam Klauder, and Michael P. Holland for their
thoughtful review and invaluable suggestions.
2
“MISTAKES WERE MADE”
ASSESSING RISKS &
LIABILITIES IN MERGERS &
ACQUISITIONS UNDER THE
EXPORT CONTROL LAWS
Wendy L. Wysong
Clifford Chance US LLPi
3
Wendy L. Wysong
Partner, Clifford Chance US LLP
2001 K Street NW, Washington, DC 20006-1001
(202) 912-5030, wendy.wysong@cliffordchance.com
Wendy L. Wysong is a partner at Clifford Chance US LLP in its
white collar regulatory and litigation group. Her concentration is compliance
and enforcement under the Export Administration Act, Export
Administration Regulations, Arms Export Control Act, International Traffic
in Arms Regulations, and International Emergency Economic Powers Act.
She has significant background in parallel criminal and civil proceedings, and
has over 21 years of trial experience.
Ms. Wysong is the former Deputy Assistant Secretary for Export
Enforcement and Acting Assistant Secretary at the Bureau of Industry and
Security, U.S. Department of Commerce, where she served from December
2004 through August 2007. She has been an instructor for the Department of
Justice, FBI, Customs Academy, and the Department of Defense.
Prior to joining BIS, Ms. Wysong was an Assistant United States
Attorney for the District of Columbia for 16 years. Working in the
Transnational/Major Crimes Section, she was responsible for overseeing the
investigation, indictment, and trial of international crimes, including export
fraud cases, terrorism and immigration. Before working in the international
area, she prosecuted public corruption cases, including former House
member Dan Rostenkowksi.
Ms. Wysong received her law degree in 1984 from the University
of Virginia School of Law, where she was a member of the University of
Virginia Law Review. She clerked for Judge Stanley S. Harris of the U.S.
District Court for the District of Columbia and later worked at the law firm of
Hogan & Hartson, before joining the U.S. Attorney’s Office in 1989. She is
a member of the Virginia and District of Columbia bars.
4
I.
Introduction
The trend toward globalization and cross-border
transactions has increased the risk and potential liability
arising from export control violations — not just for the
company committing the violation, but also for any company
considering a merger, acquisition, joint venture, investment,
development or licensing deal with a company engaging in
foreign business. Companies entering into such a transaction
must review thoroughly the contemplated transaction itself to
ensure compliance with the myriad export control laws that
may be triggered by the transaction. But significantly, preacquisition due diligence must also include a determination
as to whether the target entity has complied with those laws
in the past. The failure to do so may result in the
acquiring/merging/investment
company
unwittingly
assuming on-going violative practices, for which it will be
held independently liable, or even assuming liability for
export violations committed long before the acquisition.
“Mistakes were made” is a quasi-confessionii that is all-toocommon today and yet, particularly apt in this context. The
key for companies hoping to avoid potentially devastating
liability and penalties is to ensure applicability of the implied
clause, “but not by me.”
Accordingly, it is critical that lawyers handling
transactional matters include export controls in their due
diligence reviews: first, to determine whether the transaction
itself is subject to export licensing requirements or
restrictions, which could halt the deal if compliance cannot
be ensured; and second, to determine the level of export
control compliance by each of the parties previously involved
in foreign activities. Notably, the discovery that export
5
compliance “mistakes were made” in the past need not be a
deal-killer. Carefully negotiated disclosures made to the
relevant export licensing agencies can limit collateral
consequences and determine penalties. The structure of the
transaction can be altered, the contracts rewritten, and the
purchase price adjusted, if the mistakes are discovered prior
to acquisition. If such mistakes are not discovered until after
the deal closes, however, severe consequences could result
for the acquiring company, which now stands in the shoes of
the non-compliant acquired company. Importantly, while
monetary penalties can be steep, there can be even more
damaging consequences such as suspension of export
privileges, debarment from government contracts, and the
imposition of costly auditing and monitoring programs.
II.
Applicable U.S. Export Control Laws
Including export control analysis in a routine due
diligence review can be daunting even to an informed
practitioner considering the profusion and complexity of U.S.
export laws. There are some 30 overlapping federal statutes
and regulations,iii as well as 16 federal agencies,iv involved in
export controls. However, most companies must contend
with only three agencies administering three regulatory
regimes:

Most exports involve “dual-use” items, that is,
commodities, software and technology that can be
used for civilian and military applications. These
are regulated by the Bureau of Industry and
Security (BIS), within the Commerce Department,
pursuant
to
the Export Administration
Regulations (EAR).v
6

More restricted are products (and related technical
data and services) specifically designed or
modified for military applications, which are
designated as “defense articles.” These are
regulated by the Directorate of Defense Trade
Controls (DDTC), within the State Department,
pursuant to the Arms Export Control Act
(AECA)vi and the International Traffic in Arms
Regulations (ITAR).vii

Exports to most embargoed countries, entities,
and individuals are regulated by the Office of
Foreign Assets Control (OFAC), within the
Treasury
Department,
pursuant
to
the
International Emergency Economic Powers Act
(IEEPA),viii and various other statutes and
regulatory sanctions programs.ix Countries with
current embargoes include Cuba, Iran, Sudan and
North Korea. Exports to Syria are also restricted,
but those prohibitions arise under the EAR,x not
OFAC’s Syria sanctions.
Generally, a U.S. company contemplating a
transaction with a foreign customer, performing a service
overseas, or even working with a foreign national in the
United States must consider

the nature of the item or activity,

the country involved in the transaction,

the identity of the person using the item or
service, and
7

its ultimate end-use
in deciding whether a license must be obtained from
Commerce, State, or Treasury before the transaction
proceeds or whether the transaction can proceed at all. The
export controls apply to the specific transaction being
contemplated, such that a U.S. company could not enter into
certain joint ventures where, for example, the foreign
company had preexisting trade relationships with embargoed
countries.
Additionally, those engaged in transactions involving
defense articles must register with the State Department.xi
This would include manufacturers, brokers, and exporters.
Notification of changes in ownership and registration
amendments also may be required after some transactions
have closed.xii
Each of the government agencies maintains published
lists of individuals and entities for whom transactions with
U.S. persons are restricted.xiii Companies are expected to
review the lists and to prevent such transactions. Entering
into almost any type of business relationship with a listed
entity would be prohibited, and acquiring a company with
such a relationship would require immediate attention.
Further, conditions such as recordkeeping, postshipment verifications, and resale restrictions may be
imposed on a license held by a target company. Those
conditions will apply equally to a successor company that
continues to export under that license. The license may also
need to be transferred officially to the new company, and
licenses that are not amended properly, where necessary,
become invalid.
8
U.S. export control laws are considered
extraterritorial, generally following a U.S.-origin item to its
ultimate destination. Thus, even non-U.S. persons overseas
can be charged if they deal with U.S.-origin goods. But even
further, a U.S. person dealing with non-U.S.-origin goods
overseas may be charged depending on the other entities
involved. Thus, the activities and management structure of
foreign subsidiaries must be scrutinized to determine the
level of U.S. parent company involvement.
Notably, releases of controlled technological
information to foreign nationals in the United States, such as
international students or foreign delegations, may be
“deemed exports”xiv and subject to licensing requirements,
even though no tangible item is passed, either domestically or
internationally.
Therefore, while disclosing controlled
technical information in e-mails or conference calls overseas
is considered to be an export, so, too, is a mere viewing of
information by a foreign national that would be controlled for
export to that individual’s country of nationality. As a result,
joint research and development projects must be carefully
scrutinized for compliance.
III.
Potential Risks
As noted above, besides the risk of independent
liability arising from a new strategic relationship or M & A
transaction involving a company with foreign operations,
there is also the risk of successor liability. Both the
Department of Commerce and the Department of State have
aggressively pursued companies under this doctrine to hold
acquiring companies liable for the predecessor company’s
pre-acquisition export violations.
9
Generally, a business entity acquiring only the assets
of another business entity is not liable for the selling entity’s
liabilities unless one of these four exceptions applies:

there is an agreement to assume liability, explicit
or implicit;

it is a de facto consolidation or merger;

the transaction is a mere continuation or there is
substantial continuation of the predecessor
business; or

the transaction was fraudulent to escape liability.
Substantial continuity can be found when any of the
following is present:

retention of the same employees, supervisory
personnel, same production facilities and same
location;

production of same products;

retention of the same business name;

same assets and business operations; and/or

the new company holds itself out to the public as
a continuation of the previous corporation.
The doctrine of successor liability applies even if no
charges are lodged against the predecessor. The question is
whether the predecessor is a shell or an entity with assets
answerable to judgment. Either both parties or one of the
predecessor or the successor can be charged. As the below
10
example illustrates, the successor’s knowledge or notice of
potential liability is one factor but can be inferred from facts,
taken in the totality of the circumstances.
In 2002, an administrative law judge (“ALJ”) upheld
BIS’s charges, under IEEPA and the EAR, against SigmaAldrich and various other related entities which had
purchased the partnership interests of a company that had
illegally exported biological toxins on more than 500
occasions prior to the acquisition in 1997.xv The elaborate
corporate structure, with subsidiaries and holding companies
created following the acquisition, had received all rights, title
and interest of the assets of the predecessor company. The
ALJ pierced the corporate veil and determined that the
subsidiary created to operate the predecessor’s business
exhibited all the “hallmark signs” of the substantial
continuity exception. The subsidiary agreed to perform
preexisting contracts, it had received the acquired company’s
assets, and it continued export practices (including illegal
exports for one year) without interruption. Not only could
the new subsidiary be held liable, but so also could SigmaAldrich, the parent company, as well as a partner company,
the ALJ ruled. Direct knowledge of potential liability was
not required but could be inferred based on the totality of
circumstances, including the way the assets and liabilities
had been transferred to the subsidiary (payment of $1) as
well as the inclusion of an indemnification clause in the
purchase documents if the predecessor company was not in
compliance with government regulations.
Sigma-Aldrich, its subsidiary and the partner
company, settled the charges by paying a fine of $1.76
million. The fine was attributed not only to the violations
11
that occurred prior to the acquisition, but also the violations
that continued thereafter when the subsidiary failed to cease
the illegal practices. At the time, it was one of the largest
penalties ever paid to the Department of Commerce for
export violations — equaling eight times the value of the
actual shipments involved. Since then, BIS has continued to
charge successor companies,xvi stating that “successor
liability can attach to a successor company for any disclosed
or undiscovered acts of a prior company if that successor
business substantially carries on the predecessor’s business
without interruption.”xvii
The State Department has also held successor
companies liable for the transgressions of a predecessor
company. As an example of the breadth of successor
liability, DDTC held both Hughes Electronics Corporation
and Boeing responsible for export violations by Hughes
Space and Communication, a Hughes subsidiary that Boeing
acquired in 2000. In the mid-1990s, Hughes Space had
provided technical assistance to various Chinese entities
following the failed launches of Chinese rockets carrying
Hughes communication satellites. Thereafter, when Boeing
acquired the assets of the subsidiary Hughes Space, its
former parent Hughes Electronics agreed to be responsible
for any pre-acquisition export control violations, an
indication of knowledge. DDTC charged both Boeing and
Hughes even though the violations ended by 1996 and even
though it was an asset sale only.
In 2003, Boeing and Hughes agreed to jointly pay a
$32 million fine. Each company also agreed to remedial
compliance measures, the costs of which were partially offset
by a portion of the fine. In addition, the companies were
12
required to appoint special compliance officials to oversee
their operations in China and other countries.xviii
IV.
Potential Liability
Violations of the export control laws can give rise to
substantial civil and criminal penalties. Those penalties can
include monetary fines, imprisonment, and collateral
consequences that can destroy a company.
Presently, violations of the Export Administration
Regulations can result in civil monetary penalties of up to
$50,000 per charge, as well as denial of export privileges.xix
If the violations were willful (i.e., done with specific intent),
criminal charges can be brought, which currently could result
in a maximum penalty of twenty years imprisonment and/or
up to $250,000 (or twice the gross gain) for individuals and
$500,000 (or twice the gross gain) for corporations.xx
The Arms Export Control Act carries a maximum
civil penalty of $500,000 per violation, in addition to
possible administrative debarment from exporting.xxi
Criminal violations of AECA can carry ten-year sentences
and monetary penalties as high as $1 million for each
violation.xxii In those cases, automatic debarment is usually
mandated by statute.xxiii
Violations of the various economic sanctions
programs presently in place against countries such as Burma,
Iran, or Sudan are charged under the International
Emergency Economic Powers Act, which currently carries
civil penalties as high as $50,000. Criminal penalties can
include imprisonment of up to twenty years and fines as high
13
as $250,000 (or twice the gross gain) for individuals and
$500,000 (or twice the gross gain) for corporations.xxiv
Under any of these regimes, parallel civil and
criminal charges may be pursued, subjecting a company to
the possibility of two different and potentially conflicting
proceedings. For example, providing cooperation in a civil
proceeding can have obvious negative consequences in a
parallel criminal action. Moreover, there may be parallel
civil proceedings conducted by two separate agencies as
conduct forming the basis for one agency may also be
independently chargeable under another agency’s authority.
Therefore, it is not unusual for companies to face civil
charges by BIS and OFAC, while simultaneously addressing
criminal charges brought by the Department of Justice.
Potential results before one agency may have
collateral consequences for resolution by the other agencies.
This arises frequently when future export privileges are in
question. Both Commerce and State can limit future exports,
either by imposing a presumption of denial of future license
applications, which can be overcome but are delaying, or by
suspending export privileges for as long as 20 years. Often,
the threat of such a “denial order” can be more significant to
a company than a monetary penalty. Indeed, for a company
contemplating or conducting international business, it can be
a death blow or at least draw into question the company’s
ability to fulfill preexisting contracts.
For the Commerce Department, these denial orders
can be either permanentxxv or temporary,xxvi the latter being
issued ex parte during the pendency of an investigation to
prevent future exports. Again, the effect of temporary denial
orders may be permanently destructive of a company’s on-
14
going business even if it is thereafter lifted. Moreover, both
the State Department and Commerce Department may crossdebar or deny export privileges based on denials of export
privileges under the other agency’s regulations.xxvii Thus, a
carefully constructed plea or settlement agreement with one
agency, perhaps limiting the scope of an export denial to
certain countries, may still result in a broad denial by an
agency left out of the negotiation. Convictions under other
non-export statutes may also form the basis for a denial
order, so that companies with foreign operations negotiating
a plea to a charge under the Foreign Corrupt Practices
Act,xxviii for example, must consider whether the conviction
would trigger a State Department debarmentxxix or Commerce
Department denial order.xxx
Other unanticipated collateral consequences could
include debarment from government contracts following
conviction or settlement. The U.S. Department of Defense
and other U.S. government agencies, as well as foreign
governments, can debar companies charged with export
violations on contracts involving defense articles or services.
The attendant delay that can occur while a company seeks to
convince the government that it can obtain the license so that
it should be awarded the contract can be equally as damaging
as actual debarment.
Beyond possible statutory and regulatory penalties, a
company must consider the economic impact of the potential
damage to its reputation and business relationships.
Customers wary of a company’s ability to obtain licenses
necessary to perform supply contracts may find other
suppliers. Vendors may be unwilling to risk their products
getting into the wrong hands or may simply be concerned
15
about their customer’s economic viability and may no longer
be committed to serving that client. A company’s reputation
and business relationships are a key factor in its enterprise
value, and the damage to either must be factored into the
decision to move forward with a transaction.
Accordingly, in contemplating the risks of moving
forward, it is well worth the effort to consider all potential
liabilities. The potential liability a company may assume by
acquiring a company with foreign business or that has
committed export violations, even well before the
acquisition, is not limited to a few fines, and should not be
thought of as the “cost of doing business.” The reaction of
each relevant agency must be considered, and all collateral
consequences must be taken into account.
Carefully
negotiated pleas can unravel when an inexperienced attorney,
unfamiliar with the substantive area of export controls, fails
to address the possible civil consequences of conviction. It is
also not unusual, unfortunately, for one agency to offer
assumptions as to the possible outcome before another
agency; in truth, all that agency can do is guess. Separate
resolutions must be worked out with each relevant agency.
Global resolutions are possible only if all relevant agencies
are involved.
V.
Due Diligence Compliance Review
Given the risks and liabilities for violations of the
U.S. export control laws, careful due diligence review of a
significant transaction involving an entity with international
business is critical. Again, discovery of a violation need not
scuttle the deal, but it is important to identify such a violation
16
and affirmatively take corrective and ameliorative action that
may not be possible post-acquisition.
The benefit of adequate due diligence review in
minimizing liability, ensuring appropriate valuation given the
risks involved, lessening delay and disruption of the
transaction, and identifying and avoiding future compliance
issues justifies the effort. In order to maximize the
effectiveness of the review, it is wise to include export and
import professionals, as well as financing, contractual, and
distribution specialists.
Two overarching questions should be kept in mind
during the analysis: first, is this transaction itself compliant
with the export control laws and second, is/was the target
company compliant with those laws. While both questions
can be answered through the same process, their resolution
may be very different.
Required Analysis
1. The full scope of the target company’s
international activities (including all partners,
affiliates, and foreign subsidiaries wherever located)
must be identified. This includes all products and
services, as well as all suppliers and vendors, markets
and customers, agents, and distribution networks.
The acquiring company must completely understand
the full range of operation to determine whether the
target company:
a. manufactures, distributes or exports controlled
items, services or technology,
17
b. is involved with individuals or entities whose
names appear on BIS’s Entity List of weapons
proliferators, OFAC’s list of Specially
Designated Nationals, or the denied parties
lists of BIS and DDTC, and
c. is doing business in restricted countries.xxxi
Dealings with China, Russia, India, and
Pakistan, though not restricted are sensitive
and have a high risk of potential liability. The
UAE, Hong Kong, Singapore, Malaysia, and
other countries identified as transshipment
hubs also bear a close look.
The inquiry should focus on (1) the nature of the
items or service involved: are they OTS or specially designed
in some manner for a particular application; (2) if made
overseas, whether they incorporate U.S.-origin components
or technology; (3) whether the items or services are listed on
the Commerce Control Listxxxii or U.S. Munitions List;xxxiii
(4) what the country of ultimate destination is, through which
countries the items will pass, what their intended/actual end
use is; and (5) who the intended/actual end user will be.
Questions should also focus on the extent of foreign
involvement. For example: are foreign persons employed
domestically and what is their involvement in any controlled
projects; are outside contractors, consultants or outsourcing
companies involved and what is being transferred to them in
order for them to perform their function; what is the nature of
the ownership, control or influence of foreign owners.
Practitioners should keep in mind that transfers of technology
overseas or domestically to foreign nationals through
electronic transmissions, speeches, demonstrations, or
18
website postings are considered exports. Therefore, if it is
determined that an item is controlled, all transfers of related
technologies to foreign entities should be explored. The
company’s website, internet and intranet computer systems,
as well as e-mails or faxes should be reviewed as there can be
“deemed export” violations even if the item itself never
leaves the country.
If a company has dealings in the Middle East with a
country that has recognized the Arab League boycott of
Israel, its export documents and that of its financing
institutions and freight forwarders must be scrutinized for
violations of the U.S. anti-boycott laws.xxxiv These laws
prohibit U.S. companies from entering into agreements to
support the boycott and from responding to inquiries about
their dealings with Israel or Israeli companies. Requests for
such information must be reported to the Department of
Commerce. Importantly, all entities in the chain of a
prohibited response may be held liable for the response
and/or the failure to report the request. The practitioner
should be aware that such requests often appear in letters of
credit and boilerplate contracts from entities even in
countries where the Arab League boycott has officially
ended.
2. The target company’s operations should be
examined to understand its corporate structure,
governance, process ownership, compliance policies,
practices and competencies, corporate culture,
economic stability, and financing. The focus should
be on the company’s relationships with foreign
subsidiaries, the day-to-day involvement of upper
management in operations, the financial pressures
19
particular divisions may have faced, and whether
there is a culture of “yes” at all costs.
3. The company’s export compliance practices,
program, and licensing history must be thoroughly
investigated.
a. Practices: Questions should be raised as to
whether the company is aware of the export
control laws, whether the laws apply to the
company’s activities, and whether the
company is in compliance.
If licensing
requirements apply, inquire as to whether the
appropriate licenses were obtained and
whether license conditions are satisfied.
Review the company’s documents relating to
licensing, but also its shipping records for
items
shipped,
appropriately
or
inappropriately, without a license.
With
regard to defense articles and services being
manufactured or exported, it must be
determined whether the company is
appropriately registered with the State
Department.
b. Program: Because companies that regularly
export are expected to maintain an export
compliance program, a lack thereof could be a
red-flag, and will certainly increase the
complexity and intensity of the due diligence
review. A company that regularly exports, yet
has managed to avoid putting a compliance
program into place, will have to convince the
government that its export violations were
20
something less than deliberate ignorance or
willful blindness.
If the company has an export compliance
program, it should be evaluated to ensure that
it contains elements that would make it
effective, depending on the size and scope of
the export business. Guidance is provided on
agency websites,xxxv but an export compliance
program should encompass the following
criteria, both in design and implementation.
1) Performance of a risk analysis to determine
the need for compliance. It should include
a record of classification or other means by
which the level of controls for an item was
determined.
2) A formal written compliance program.
Both the design and a record of its
implementation should be included. Any
export manuals distributed to employees or
available for their review should be
examined.
3) Oversight
by
appropriate
senior
organizational officials with access to all
levels, including corporate executives and
counsel.
4) Adequate and regular training on export
controls for all employees who may
become
involved
in
international
operations, such as sales personnel,
21
shipping staff, and financial analysts. An
attendance record should be kept of this
training as well as some measure of its
effectiveness.
5) Adequate screening of customers and
transactions against lists maintained by
U.S. export control agencies.xxxvi
6) Recordkeeping practices that
requirements of all relevant laws.
meet
7) Existence of an internal system for
reporting export violations.
8) Regular internal or external reviews or
audits, and a record of the results of
reviews and audits.
9) Procedures for remedial actions, such as
voluntary disclosures and licensing.
Of course, it is not sufficient to develop
such a program, without adequate
implementation.
When a problem is
discovered and a decision is made to
disclose the violation to the government,
the government is willing to give
mitigation credit for an effective
compliance program, but only if there is
proof of its actual implementation.xxxvii
Moreover, it will make a difference
whether the program was in place before
the violation was discovered or whether it
was implemented as a result of discovering
22
the violation; credit is given for both, but
the former receives a higher level of
mitigation, i.e., “great weight.”
c. Licensing history: The licensing paper trail
can be extensive and can be found in
surprising places within the company. A nonhypothetical example: A vice president of
marketing takes it upon himself to obtain a
commodity classification (CCAT) that the
international sales manager says may provide
a negative result. Instead of forwarding the
negative CCAT to the international sales
department or even the shipping department,
the Vice President buries it in his files and
allows the illegal shipments to continue. His
company is held criminally liable on a theory
of corporate knowledge for the Vice
President’s secret knowledge of the illegality
of the sales.
The entire licensing trail must be obtained,
including records of phone calls to agency
advice lines, commodity classifications
obtained prior to license applications, and
licensing decisions. The acquiring company
should review records of past enforcement
actions, prior disclosures made to agencies
and the results thereof, and legal advice
obtained as well as the results of internal
investigations or audits. The violations giving
rise to any investigations, external or internal,
should be examined to determine the
23
possibility of recurrence and remediation
effectiveness.
If there are pending
investigations, all records should be obtained
— even records of innocuous agency inquiries
and outreach as well as records of attendance
at export seminars are relevant as they will
indicate a level of knowledge of export
controls.
4. Sources of information include all relevant
documents going back to original requests for quotes
from the customer and to any suppliers or vendors, all
shipping
documents
and
correspondence,
correspondence with relevant agencies, and any
documents pertaining to licensing or permits to
export. Export compliance staff, shipping personnel,
and sales staff (both domestic and international),
agents and distributors, vendors and suppliers are also
good sources of information.
5. The review should also consider the company’s
compliance with the laws of its host nation.
VI.
Recommended Compliance, Remediation, and
Resolution Measures
After the due diligence review is complete, measures
may be necessary to bring the transaction into compliance,
corrections of past practices may need to be implemented,
and questions of liability for violations may need to be
resolved.
1.
Compliance measures to consider
24
If the transaction is a takeover or merger with a
foreign entity in which assets or ownership will be held in
foreign hands, special export licensing and approval may be
required from the Department of Commerce, particularly if
sensitive technology is involved or the investors or buyers
are from high-risk countries. If the company is registered
with the State Department, approval for some parts of the
transaction will need to be obtained from DDTC.
Approval for the transfer of export licenses may also
be necessary. BIS, for example, will require approval of the
transfer of export licenses following the sale of the licenseholder’s assets, but not for a mere stock sale where the entity
remains intact.
DDTC has specific procedures for
transferring export licenses, beginning with notification
within 60 days of the time the decision is made to enter into
the transaction if it involves a foreign person and 5 days if
only U.S. persons are involved.xxxviii Both parties must
provide notification. A second notification is required within
5 days of closing, with specific information and certification.
A filing must be made to amend licenses and all Technical
Assistance Agreements must be amended and a copy of the
amendment sent to DDTC within 60 days of closing.
U.S. persons are barred from entering into
transactions with certain countries and entities set forth on
the various lists maintained by BIS, OFAC, and DDTC. The
due diligence review set forth above would expose such
transactions and perhaps prevent the deal from proceeding.
Alternatively, if the deal proceeds, the safest course would be
to cease any such dealings or divest that operation,
understanding that if those dealings or operations were
illegally conducted by the predecessor company, the
25
successor company could be liable. However, if an acquired
company legally conducted those activities through a foreign
subsidiary or if the foreign company with such dealings is
being acquired and structured as an independent subsidiary, it
is possible that the deal could proceed without issue,
although it would depend on the acquiring company’s
comfort with any potential liability and tolerance for negative
press reports surrounding its dealings with prohibited parties
and pariah countries. If the foreign subsidiary is completely
outside the supervision of the U.S. parent company and
involves no U.S. persons, and if it was not created solely to
deal with the prohibited parties or sanctioned countries, it
may be possible to avoid export control issues. There is no
specific guidance, however, as to what level of contact is
permitted —certainly integration of IT services, finances,
procurement or other global services would raise concerns
with BIS, OFAC, DDTC, and the Department of Justice.
Whether sufficient isolation is even possible to immunize the
acquiring company is an open question.
Finally, an export compliance program should be put
into place or a pre-existing program should be reviewed and
integrated into that of the parent company.
2.
Remediation options
The measures described above can be taken if the due
diligence review uncovers no export violations and are
simply good business practices to avoid export compliance
problems that could arise from international transactions,
particularly mergers and acquisitions.
On the other hand, if an export violation is uncovered,
steps must be undertaken to correct the problem. To avoid
26
the possibility of independent liability, the illegal activity
should cease. It is always worse if a company knowingly
inherits an illegal export practice and allows it to continue
following acquisition. Disciplinary action or reassignment of
the responsible parties can be considered, along with
improvements to the compliance program, increased
compliance resources for training, hiring an export
compliance expert or a reputable outside consulting
company, and implementing IT improvements with export
software. Senior management should be involved so as to
demonstrate a renewed culture of compliance.
The next step is an internal investigation of the
violation to discern the extent of the activity. At the outset,
consideration should be given to whether the investigation
should be undertaken by internal employees or by an
independent third-party. Investigations conducted by the
latter may be viewed by regulatory enforcement authorities
as more robust and impartial. If the independent third-party
is a law firm, work product that is produced during the
investigation will also fall within the attorney-client
privilege.
Oftentimes, diligent investigation will uncover related
violations, such as exports of different items or to different
destinations, illegal transfers of technology or “deemed
exports” related to the initial item, and antiboycott violations.
The possibility of violations of FCPA, money laundering
laws, and disclosure requirements should also be considered
in the internal investigation.
Finally, data privacy and bank secrecy laws
applicable in many non-U.S. jurisdictions, as well as
restrictive employment laws, must be taken into account in
27
designing both the scope and methodology of the
investigation. Companies operating internationally should
take care to ensure that their good faith efforts to cooperate
with authorities in one jurisdiction do not result in violations
of law in another.
Equally important, international
companies need to be careful not to make representations to
U.S. authorities regarding cooperation that they may be
prohibited from fulfilling under other applicable laws. It is
essential that any such conflicts of law be identified early in
this process and proactively managed.
Once the full extent of non-compliant conduct is
identified, corrective measures should be taken such as
obtaining accurate classifications and licenses, if appropriate.
False statements made on documents filed with the
government, such as shipping documents or licensing
applications, may need to be corrected.xxxix In doing so,
however, one is almost ensuring government discovery of the
violation. Accordingly, whether to make a voluntary
disclosure to the relevant government agency must be
considered, as discussed below.
3.
Resolution of liability
Although there is no requirement to disclose past
violations of the export control laws, it may be advantageous
to do so. Agencies will take disclosure into account in
evaluating the violations and whether and at what level to
assess penalties.xl The full benefits are available only if the
agency has not already learned of the violations, an
increasing likelihood given the competition’s incentive to
level the post-acquisition playing field by tipping the
government, increased investigative resources with the
addition of the FBIxli and the recently heightened focus of
28
DOJ,xlii expanded law enforcement tools under the PATRIOT
Act, and increasing international law enforcement
cooperation.
Moreover, the failure to disclose may call into
question a company’s reliability and trustworthiness as an
exporter, and may subject that company’s license
applications to heightened scrutiny by DDTC (with attendant
delays and perceived inability to honor contracts). Failure to
provide notice in time for an illegal shipment to be stopped
through prompt government action, if the company knows of
the on-going shipment, may constitute more serious
violations.
Besides the risk of discovery, other considerations
include the potential penalties without disclosure, including
those for any additional charges relating to a cover up of the
original violation. In addition to the civil and criminal
penalties specified above, consider the cost of litigation, the
disruption to business by the government investigation, and
damage to business relationships.
The benefit of voluntary disclosure arises both from
containment and minimization of penalties, but also through
the certainty derived therefrom. Disclosing the violation and
resolving the issue of liability and potential penalties
provides a more accurate valuation of the target company and
revenue projections moving forward. As a result, the parties
can consider whether the purchase price should be
renegotiated, whether the transaction should be restructured
as a stock sale instead of an asset sale, whether an
indemnification clause is necessary, whether an escrow
arrangement should be created to handle financial liability,
29
whether the closing should be postponed or whether the
transaction should move forward at all.
VI.
Conclusion
The implication of export control restrictions must be
considered in contemplating significant transactions with
foreign companies. Careful review and accurate assessment
of the potential risks and liabilities is essential for the
companies involved. It is also critical for the other
companies involved in such transactions, such as investment
banks, accounting firms, and other entities to ensure proper
valuation and pricing. Early involvement of knowledgeable
export counsel in a transaction to identify and resolve
potential risks will prevent further mistakes from being
made.
30
Endnotes
i
The author is grateful for the assistance of Clifford Chance attorneys
David Dibari, Jason D’Angelo, Adam Klauder, and Michael P. Holland
for their thoughtful review and invaluable suggestions.
This familiar construct, called the “past exonerative tense,” by New
York Times writer William Schneider, is generally used to obfuscate
accountability in other contexts. See, e.g., Ronald Reagan, Address
before Joint Session of Congress on State of Union (Jan. 27, 1987);
Alberto Gonzalez, News Conference (Mar. 13, 2007). As will be
explained below, in the context of successor liability, it appropriately
places mistakes, but not accountability, elsewhere.
ii
iii
Besides those specified in the text, other significant laws relating to
export controls include the Trading With the Enemy Act (TWEA), 50
U.S.C. app. §§ 1-44; Antiterrorism & Effective Death Penalty Act of
1996, Pub. L. 104-132, 110 Stat. 1214-1319; Toxic Substances Control
Act, 15 U.S.C. §§ 2601-2629; Foreign Corrupt Practices Act, 15 U.S.C. §
78dd-1 and 78dd-2; Atomic Energy Act of 1954, 42 U.S.C. § 20112297g-4 and 10 C.F.R. parts 110 and 810; Endangered Species Act of
1973, 16 U.S.C. §§ 1531-44.
iv
Bureau of Industry & Security, Department of Commerce; Directorate
of Defense Trade Controls, Department of State; Office of Foreign Assets
Control, Department of Treasury; Immigration & Customs Enforcement
and Customs & Border Protection, Department of Homeland Security;
Federal Bureau of Investigation; Department of Justice; Defense Criminal
Investigative Service; Defense Threat Reduction Agency, Department of
Defense; Office of International Programs, U.S. Nuclear Regulatory
Commission; Office of Fossil Energy, Department of Energy;
International Affairs Office, U.S. Fish & Wildlife Service, Department of
Interior; Drug Enforcement Administration; Food & Drug
Administration; International Affairs, Environmental Protection Agency.
v
15 C.F.R. §§ 730-744.
vi
22 U.S.C. §§ 2778-2799.
vii
22 C.F.R. §§ 120-130.
viii
50 U.S.C. §§ 1701-1706.
ix
See Foreign Assets Control Regulations at 31 C.F.R. part 500.
31
x
See the Syria Accountability and Lebanese Sovereignty Act of 2003,
22 U.S.C. § 2151, as expanded 69 FR 26766 (May 14, 2004).
xi
22 C.F.R. § 122.1; 22 C.F.R. part 129.
xii
See 22 C.F.R. § 122.4. Intended ownership or control changes
involving foreign persons require 60-day advance notice and notification
within five days of closing is also required. Given these tight deadlines
during fast-paced negotiations, it is necessary to involve an export
compliance expert from the beginning of the transactions. There is also a
legal process governing clearance of foreign investment under the ExonFlorio Amendment and the Foreign Investment and National Security Act
of 2007, which is administered by the Committee on Foreign Investment
in the United States.
xiii
See, e.g., OFAC Entities List, 31 C.F.R. ch. V, apps. A,B,C; BIS
Entity List, 15 C.F.R. part 744 (Supp. No. 4); BIS Denied Persons List,
15 C.F.R. part 764 Sch. No. 2; DDTC Debarred Parties List, 22 C.F.R. §
127.7.
15 C.F.R. § 734.2 contains the regulations dealing with “deemed
exports” under the EAR. There are also “deemed export” provisions in
the ITAR at 22 C.F.R. §§ 120.17 and 125.2.
xiv
xv
Documents relating to this case, In the Matter of Sigma Aldrich
Business Holdings, Inc. et al., Case Nos. 01-BXA-06, 01-BXA-07, and
01-BXA-11, including the ALJ’s decision, can be found at
http://www.bis.doc.gov/Enforcement/CaseSummaries/sigma_aldrich_alj_
decision_02.pdf.
See, e.g., “BIS Export Enforcement: Major Cases List, August 2007,”
at
11,
available
at
http://www.bis.doc.gov/ComplianceAndEnforcement/Majorcaselist.pdf
(detailing WesternGeco LLC’s $2,890,600 administrative penalty, which
was paid by its parent company, Baker-Hughes, for failure to follow
conditions placed on export licenses issued for mapping equipment
exported to China); “Symmetricom, Inc. Settles Charges of Unlicensed
Exports,” BIS Press Release (Oct. 28, 2004) available at
https://www.bis.doc.gov/News/2004/SymmetriconOct04.htm (noting that
Symmetricom was held liable for predecessor’s unlicensed exports and
fined $35,500); “Saint-Gobain Settles Charges of Unlicensed Exports,”
BIS
Press
Release
(Jun.
25,
2004)
available
at
xvi
32
http://www.bis.doc.gov/News/2004/StGobainPerf_June04.htm
(successor held liable for predecessor’s violations and fined $697,500);
“Rockwell Automation Settles Charges of Unlicensed Exports,” BIS
Press
Release
(Mar.
14,
2005)
available
at
http://www.bis.doc.gov/news/2005/Rockwell.htm (noting that Rockwell
was held liable for predecessor’s violations and its own and fined
$46,700); “GE Ultrasound and Primary Care Diagnostics, LLC Settles
Charges of Unlicensed Exports,” BIS Press Release (Oct. 18, 2004)
available at
https://www.bis.doc.gov/News/2004/GEUltrasound.htm
(noting that GE Ultrasound and Primary Diagnostics was held liable for
predecessor’s violations and its own and fined $32,500); “South African
Company Settles Charges of Unlicensed Resale of Cyanides to
Unauthorized End Users,” BIS Press Release (Nov. 17, 2005) available at
http://www.bis.doc.gov/news/2005/ProChem.htm (noting that ProChem
(Proprietary), Ltd., as successor corporation to Protea Chemicals
(Proprietary), Ltd. agreed to pay civil penalties totaling $1.54 million
pertaining to unauthorized sales); see also “Voluntary Self Disclosure
Cases
FY2006,”
available
at
http://www.bis.doc.gov/News/2007/cases/FY2006VSD.pdf (noting that
Cerac, Inc. was held liable as a successor and fined $297,000 and UGS
Corp. was held liable as successor to Structural Dynamics Research Corp
and fined $57,750).
xvii
Presentation by Wendy Wysong, Deputy Assistant Secretary for
Export Enforcement BIS, 2005 AAEI Annual Conference (May 23,
2005).
DDTC’s focus on remediation and compliance in this context is also
illustrated by another successor liability case in which DDTC charged
both General Motors and General Dynamics for violations committed by
General Motors’ subsidiaries before they were acquired by General
Dynamics. General Dynamics had discovered the violations during its
due diligence review and made a voluntary disclosure to DDTC. Of the
$20 million fine imposed, General Dynamics’ share was only $5 million
which it was to spend on improving its internal compliance practices.
xviii
xix
The Export Administration Act (EAA), 50 U.S.C. app. §§ 2401-20,
pursuant to the EAR is not permanent legislation and is currently in lapse.
During lapse periods, the EAR are kept in effect by Presidential Order
under IEEPA. Exec. Order No. 13222, Aug. 17, 2001, 66 FR 44025,
Aug. 22, 2001 (3 C.F.R. Comp. 783 (2002)), as extended by the Notice of
Aug. 15, 2007, 72 FR 46137, Aug. 16, 2007. During these periods,
penalties for violations of the EAR are limited to those set forth in IEEPA
as specified above. It should be noted, however, that for violations
33
committed prior to March 9, 2006, when IEEPA was amended, the civil
fine is $11,000. H.R. 3199, USA PATRIOT Act Improvement and
Reauthorization Act of 2005, Pub. L. 109-177, § 402(1), (2). During the
rare periods when the EAA is in effect (the last period ended August 20,
2001), civil penalties can be as high as $120,000 for national security
violations. Finally, it should be noted that there is legislation pending
that would renew the EAA and raise the penalties still higher. A bill
introduced in the Senate on August 3, 2007, S. 2000, would raise civil
penalties to $500,000 per violation and criminal penalties for individuals
to $1 million and for corporations to $5 million or ten times the value of
the export. The Senate also passed legislation on June 26, 2007, to
amend IEEPA that would raise the civil penalty to $250,000 or twice the
value of the exports and the criminal penalties to $1 million for
individuals and corporations. See S. 1612, International Emergency
Economic Powers Enhancement Act.
xx
The penalties set forth above are those available under the alternative
fine provision, 18 U.S.C. § 3571. Under IEEPA, the maximum criminal
monetary fine is $50,000. Accordingly, prosecutors generally seek the
alternative fines. For violations committed before March 9, 2006,
imprisonment is limited to ten years. When the EAA is in effect, criminal
penalties are $250,000 for individuals and for corporations, the greater of
$1 million or five times the value of exports involved.
xxi
22 U.S.C. § 2778(e); 22 C.F.R. § 127.7.
xxii
22 U.S.C. § 2778(c); 22 C.F.R. § 127.3. The alternative fine
provision, 18 U.S.C. § 3571, is also available.
xxiii
22 C.F.R. § 126.7(a), 127.7.
xxiv
See supra endnotes xix and xx.
xxv
15 C.F.R. § 764.3(a)(2).
xxvi
15 C.F.R. § 766.24(b)(3).
xxvii
See 15 C.F.R. § 766.25; 22 C.F.R. § 12.7(a)(6).
xxviii
15 U.S.C. § 78dd-2.
xxix
22 U.S.C. § 2778(g); 22 C.F.R. § 120.27.
34
xxx
15 C.F.R. § 766.25.
xxxi
Countries for whom certain activities are restricted currently include:
the Balkans, Belarus, Burma, Cote d’Ivoire, Cuba, Democratic Republic
of Congo, Iran, Iraq, Liberia, North Korea, Sudan, Syria, and Zimbabwe.
The countries and the extent to which the restrictions apply frequently
change
so
the
OFAC
website
(http://www.treas.gov/offices/enforcement/ofac/programs/index.html)
should be checked regularly.
xxxii
15 C.F.R. § part 774 (Supp. No. 1).
xxxiii
22 C.F.R. § part 121.
xxxiv
15 C.F.R. § part 760. The antiboycott laws cover U.S. citizens and
business entities organized under U.S. law, U.S. branches or subsidiaries
of foreign companies, foreign nationals in the United States foreign
operations of U.S. concerns “controlled-in-fact” by U.S. concerns but not
U.S. citizens residing outside the U.S. employed by non-U.S. persons.
Id. at 760.1. For an excellent discussion of the antiboycott laws, see
Edward O. Weant III, “An Overview of U.S. Antiboycott Law and
Regulations,” PLI Coping with U.S. Export Control Laws at 145 (2006).
xxxv
See, e.g.,
http://www.bis.doc.gov/exportmanagementsystems/Reviews.html;
http://www.pmdtc.org.
xxxvi
xxxvii
See supra endnote xi.
See, e.g., 15 C.F.R. § part 766 (Supp. No. 1 III.B.2) (noting that the
BIS Penalty Guidelines provide that BIS will consider whether the party
has an effective compliance program and whether its overall export
compliance efforts have been of high quality). 15 C.F.R. § part 766
provides that “[i]n determining the presence of this factor, BIS will take
account of the extent to which a party complies with the principles set
forth in BIS’s Export Management System Guidelines (EMS).
Information about the EMS Guidelines can be accessed through the BIS
Web site at http://www/bis.doc.gov. In this context, BIS will also
consider whether a party’s export compliance program uncovered a
problem, thereby preventing further violations, and whether the party has
taken steps to address compliance concerns raised by the violation,
including steps to prevent reoccurrence of the violation, that are
reasonably calculated to be effective.”
35
xxxviii
22 C.F.R. § 122.4.
xxxix
15 C.F.R. § 764.2(g)(2)(requiring disclosure to BIS of changes of
“any material fact or intention from that previously represented, stated or
certified); 50 U.S.C. app. § 2410(b)(2)(requiring disclosure to the
Secretary of Defense of actual knowledge that licensed goods are being
used by a controlled country for military or intelligence purposes).
xl
For detailed information concerning BIS Voluntary Self-Disclosures
(“VSDs”), see 15 C.F.R. § 764.5 and Wendy Wysong, “Voluntary SelfDisclosure
at
BIS,”
(Oct.
11,
2006)
(available
at
http://www.bis.doc.gov/ComplianceAndEnforcement/VSDPaper101105.
pdf). For information concerning VSDs to the DDTC, see 22 C.F.R. §
127.12.
xli
28 C.F.R. § 0.85(d), 69 FR 65,542 (Nov. 15, 2004) (granting the FBI
the authority to investigate any criminal violations of law, including
violations of the AECA, EAA, TWEA, and the IEEPA, in certain foreign
counterintelligence areas).
See Mark A. Kirsch & Jason A. D’Angelo, “Export Control Cases on
the Rise,” The National Law Journal (July 23, 2007); Chitra Ragavan,
“Justice Department to Focus on Technology Transfer,” U.S. News &
World Report (Feb. 20, 2007).
xlii