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 OhioExport Internship Program
@LMAlcalde| @DwilsonJDMBA

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Our export journey, together.
Start Here
International Trade in a Legal Context
FCPA
Master Export Guru
Agents, 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 Intoa 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 PhoneA 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.

zExporting & ImportingSales Agents in foreign countryEmployees in foreign countryContract ManufacturingJoint VentureForeign SubsidiaryDistributorshipFranchisesLicensing and other contractual arrangements
Principal Means of Cross Border Business

zSuccessful 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

zAnalysis 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

zAnalysis 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

zGovernment & Political EnvironmentJudicial SystemTransparency, fairness, IP protection, rule of lawTaxation system on imports, income, and salesEase of repatriation of funds and earningsEase of starting a business & types of structuresEase of avoiding permanent establishmentLabor/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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FCPA
Applies 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 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 penalties20 years imprisonment$1 million per violation, or 5xthe 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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Criminal penalties
Civil penalties
Administrative penalties
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
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
PPG
-$3.75 million criminal + civil

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Civil penalties
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 notinclude 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? ITAR120.17, 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 US
Physical shipments or hand carried items
Release of technical data or software in a foreign country
Releasing Information IN the US
Release 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”? ITAR120.10, 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 Department
Directorate 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 Department
Bureau of Industry and Security (BIS)
Export Administration Act
Export Administration Regulations (EAR)
15 C.F.R. Parts 700-799
CCL -Commerce Control List
Treasury Department
Office 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

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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

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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 Kit
Specially Designated Nationals (SDNs) list
Industry specific information
Interdiction software
OFAC “Regulations by Industry” brochure
OFAC Exporter assistance Hotline 1-800-540-6322

zStep 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.

zStep 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?

zDo 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, suppliersand customers. Do NOT travel to embargoed countries without consulting and advisor and satisfying requirements.
General
Do’s & Don’ts
How 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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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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Employee Considerations
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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Employee ConsiderationsOk, 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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Agents & Distributors
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
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
Statutoryrequirements
Contract law
Compensation
Commission
Sells on own account
Termination
Enumerated “just cause” reasons
Contract law

zIf 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 Practices

zCare 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 Practices

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ImmigrationVisa
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

Exporting from the United States: Key Legal Considerations

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Exporting from the United States: Key Legal Considerations