ReedSmith Export, Customs & Trade

Summer 2005 Volume II, Number 3 Sentinel

When a Disclosure may not be “Voluntary”: In This Issue: Liability for Trade Violations and When a Disclosure may not be Sarbanes-Oxley “Voluntary”: Liability for Trade Violations and Sarbanes-Oxley— Companies with international trade operations are required to navigate a Page 1 complex web of laws and regulations, governed by a multitude of govern- Promoting Foreign Investment; ment agencies. Corporate officers must make difficult decisions regarding The U.S. Government is Here to when to disclose export and other trade violations to the government in Help—Page 2 hopes of avoiding or reducing what could otherwise be severe liability. But are there ever situations where those officers must admit to the gov- FinCEN Issues New Anti-Money ernment that their company has violated United States trade laws? Laundering Rule for Dealers in Precious Metals, Precious Stones In 2002, Congress passed the Sarbanes-Oxley Act (the “SOX”) in response and Jewels—Page 4 to a series of corporate and accounting scandals involving companies such Focus on Foreign Corrupt Practices as Enron, WorldCom and Global Crossing. The SOX is multi-faceted Act Enforcement—Page 6 legislation that impacts certified public accounting firms, publicly traded Your Competitors Are Watching: companies, corporate attorneys, financial analysts, brokers and dealers. False Claims and Customs Through its reforms, the SOX seeks to tighten standards for corporate Compliance—Page 8 financial disclosure, increase requirements for director independence, and increase penalties for corporate wrongdoing. The SOX is generally ap- ATF Now Requires Importers to plicable to: (1) companies required to file reports with the Securities and Identify all Explosive Materials— Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 Page 12 and (2) companies that have a registration statement on file with the SEC Export Enforcement Highlights— under the Securities Act of 1933. Foreign companies with securities listed Page 14 on United States markets must also comply with the SOX. As discussed below, the SOX’s disclosure requirements may take away the voluntary nature of disclosure to the government for public companies with interna-

LONDON tional trade operations. NEW YORK LOS ANGELES Certification Requirements SAN FRANCISCO WASHINGTON, D.C. Under the SOX, both the Chief Executive Officer (“CEO”) and the Chief PHILADELPHIA Financial Officer (“CFO”) are required to certify in their quarterly and PITTSBURGH annual reports that: (1) they reviewed the report being filed; (2) the OAKLAND report does not contain any untrue statements of material fact or omit any MUNICH PRINCETON material facts; and (3) the financial statements fairly present the financial NORTHERN VA condition of the company. The officers must also certify that they are WILMINGTON responsible for establishing and maintaining internal controls for the com- NEWARK pany. The CEO and CFO must design corporate-wide disclosure controls MIDLANDS, U.K. CENTURY CITY and procedures to ensure that material information is made known to RICHMOND them. Lack of knowledge is not a defense if the officers failed to imple- ment an effective compliance system. r e e d s m i t h . c o m (continued on page 10) ReedSmith

Promoting Foreign Investment: The U.S. Government is Here to Help

The U.S. government promotes U.S. Acquisitions of existing operations exports to create domestic jobs and are eligible for financing if the inves- to support the international expan- contributes additional capital for sion of U.S. companies of all sizes modernization and/or expansion. through three specialized agencies: OPIC’s major support for foreign the Overseas Private Investment Com- investment is through the provision of pany (“OPIC”), the Export-Import political risk insurance. This includes (the “Ex-Im Bank”), and the the following products: U.S. Trade and Development Agency (“TDA”). U.S. companies can utilize  Currency Inconvertibility – deterio- the various programs of OPIC, the ration in the investor’s ability to Ex-Im Bank, and TDA to foster their convert profits, debt service, and own foreign expansion. This article other investment returns from lo- summarizes the activities of these U.S. cal currency into U.S. dollars and federal agencies and explains how to transfer U.S. dollars out of the they can help U.S. companies proper host country. internationally.  Expropriation – loss of investment OPIC: Insuring U.S. Foreign because of expropriation, national- U.S. companies can utilize Investment Abroad ization, or confiscation by the host government. the various programs of OPIC’s core mission is to support OPIC, the Ex-Im Bank, and economic development by promoting  Political Violence – loss of assets TDA to foster their own U.S. private investment in developing or income because of war, revolu- countries and transition economies. tion, insurrection, or politically foreign expansion. Its programs currently are available in motivated civil strife, terrorism, or more than 150 countries. In order to sabotage. be eligible for OPIC support, an appli- cant must meet the following criteria: OPIC can insure up to $250 million per project (and up to $300 million  Be a citizen of the United States; for offshore oil and gas projects with hard currency revenues) and has no  Be a corporation, partnership or minimum investment size require- other association created under the ments. The term of an insurance laws of the United States, its states policy for an equity investment may or territories, and be beneficially extend up to a maximum of 20 years. owned by U.S. citizens; OPIC can insure up to 90 percent of  Be a foreign corporation at least an eligible investment. OPIC’s statute 95 percent owned by investors generally requires that the investor eligible under the above criteria; or bear at least 10 percent of the risk  Be a foreign entity that is 100 per- of loss. However, and capital cent U.S.-owned. leases from financial institutions to unrelated third parties may be insured As highlighted below, OPIC provides for 100 percent of principal and inter- both political risk insurance and fi- est. For equity investments, OPIC nancial support. OPIC generally pro- typically issues insurance commit- vides assistance for new investments, ments equal to 270 percent of the privatizations, and expansions and initial investment—90 percent repre- modernizations of existing businesses.

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senting the original investment and to up to $250 million, taking into financing to: (1) purchase products 180 percent to cover future earnings. account such factors as: the project’s for export; (2) pay for raw materials, Coverage amounts may be limited for contribution to the host country’s equipment, supplies, etc; (3) cover investments in countries where OPIC development, the project’s financial stand-by letters of credit serving as has a high portfolio concentration. requirements, and the extent to which bid bonds, performance bonds, or the financial risks are shared among payment guarantees; or (4) finance In addition to straight political risk the investors and the lenders. OPIC foreign receivables. The Ex-Im Bank insurance programs, OPIC has several financing is designed to complement generally assumes 90 percent of the insurance programs offering cover- other public and private sector financ- bank , including principal and age tailored to meet political risk and ing, and often involves at least one interest. other performance issues associated other lender or independent investor. with certain types of foreign invest- The Ex-Im Bank also assists export- ments. These special programs Ex-Im Bank: Financing ers by guaranteeing term financing include: institutional loans, capital Opportunities Abroad to creditworthy international buyers, market transactions, leasing, oil and both private and public sector, for gas, national resources (except oil The Ex-Im Bank is the official export purchases of U.S. goods and services. and gas), and contractors and export- credit agency of the United States. Its This enables foreign purchasers to ers. For contractors and exporters, mission is to assist in financing the obtain competitive term financing for example, OPIC insures against the export of U.S. goods and services to which would otherwise be unavail- wrongful calling in of a bid, customs international markets. Qualified ex- able. Most guarantees are used to bonds, and losses because of certain porters must be located in the United purchase U.S. capital equipment and breaches by the foreign buyer of the States, have at least a one-year operat- services, although financing is also contractual disputes resolution proce- ing history, and have a positive net available for software, some banking dure. This insurance is in addition to worth. Eligible exports, in turn, must and legal fees, and certain local costs OPIC’s standard political risk insurance. be shipped from the United States and and expenses. Ex-Im Bank also offers have at least 50 percent U.S. content. guarantees and direct loans to finance OPIC’s Quick Cover program al- Eligible services must be performed U.S. exports for the construction and lows certain projects in the financial by U.S. personnel. operation of projects through struc- services, wireless telecommunications tured finance transactions, including services, electricity distribution and Among its primary activities, Ex-Im limited recourse project finance. hotel sectors to receive political risk Bank provides working capital guar- insurance coverage on an expedited antees (pre-export financing), export As with OPIC, the Ex-Im Bank basis. Insurance coverage under this credit insurance, and loan guarantees provides insurance policies to limit program will be put in place for proj- and direct loans (buyer financing). a U.S. exporter’s risk in international ects meeting OPIC’s criteria within There is no minimum or maximum transactions. The Ex-Im Bank’s two weeks of receipt by OPIC of a transaction amount. The Country export credit insurance covers the completed application by the investor. Limitation Schedule is used to identify risk of buyer nonpayment for com- what sort of public and private invest- mercial risks (e.g., bankruptcy), and While OPIC is mostly known for ments are supported for a particular certain political risks, such as war its various insurance policies, OPIC country. On average, 85 percent of or the inconvertibility of currency. can provide medium- and long-term Ex-Im Bank’s transactions directly Enhanced coverage exists for qualify- financing in countries where conven- benefit U.S. small businesses. ing small businesses, such as a no tional financial institutions are either first-loss deductible and a simplified unwilling or unable to provide such The Ex-Im Bank’s pre-export financ- premium-rate schedule. The Ex-Im assistance. OPIC specifically provides ing enables U.S. exporters to obtain Bank’s export credit insurance further loan guarantees for large projects and, commercial loans backed by the enables exporters to provide qualify- under certain conditions, direct loans Ex-Im Bank’s guarantees to produce ing international buyers with advanta- to small business. OPIC can guaran- or buy goods or services for export. Exporters may use the guaranteed tee or loan anywhere from $100,000 (continued on page 7)

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FinCEN Issues New Anti- Rule For Dealers in Precious Metals, Precious Stones, And Jewels

In the aftermath of 9/11 and the war aggregate, of two or more of the on terror, the USA PATRIOT Act metals listed above; called for all financial institutions, as  A “precious stone” means a sub- so defined by the Bank Secrecy Act stance with gem-quality, market- (“BSA”), to establish comprehensive recognized beauty, rarity, and anti-money laundering compliance value, and includes diamond, co- programs. Since the BSA identified rundum (including rubies and sap- more than 20 different types of finan- phires), beryl (including emeralds cial institutions, many of which had and aquamarines), chrysoberyl, no prior experience in establishing spinel, topaz, zircon, tourmaline, such a program, the Treasury Depart- garnet, crystalline and cryptocrys- ment’s Financial Crime Enforcement talline quartz, olivine peridot, tan- Network (“FinCEN”) decided to intro- zanite, jadeite jade, nephrite jade, duce this requirement in stages. This [Precious metals, precious spodumene, feldspar, turquoise, gradual approach enabled FinCEN to lapis lazuli, and opal. stones, and jewels] are properly assess the risk for each finan- easily transportable, cial institution and create the appro- The Rule itself applies to a “covered highly concentrated priate anti-money laundering program good,” meaning not only individual for that industry. jewels, precious metals, and precious forms of wealth that can stones, but also finished goods that On June 9, 2005, FinCEN issued be attractive to money derive 50 percent or more of their a new Interim Final Rule (“Rule”) value from jewels, precious metals, launderers and to other requiring that dealers in precious or precious stones contained in or at- metals, precious stones, and jewels criminals. tached to such finished goods. establish comprehensive anti-money laundering programs. According to In order to distinguish between deal- FinCEN, these items are easily trans- ers and persons who trade in precious portable, highly concentrated forms of metals, precious stones, and jewels wealth that can be highly attractive to as a hobby or on a more occasional money launderers and other crimi- basis, the Rule defines a dealer as a nals. person with a physical presence in the United States who has purchased Each item subject to the Rule is de- at least $50,000 and sold at least fined as follows. $50,000 worth of covered goods  A “jewel” means an organic sub- during the preceding year. The Rule stance with gem-quality, market- further distinguishes between a dealer recognized beauty, rarity, and and a retailer, i.e., a person engaged value, and includes pearl, amber, within the United States in sales of and coral; covered goods primarily to the public. Most retailers are exempt from the  A “precious metal” means gold, Rule, since according to FinCEN, they iridium, osmium, palladium, do not pose the same level of risk for platinum, rhodium, ruthenium, money laundering as dealers. Howev- or silver having a level of purity of er, if during the prior tax or calendar 500 or more parts per thousand, year a retailer both purchased more and an alloy containing 500 or than $50,000 of goods from persons more parts per thousand, in the

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other than U.S. dealers or retail-  The appointment of a compliance  Is 50 percent the appropriate value ers, and sold more than $50,000 of officer to ensure that the program threshold for determining whether covered goods, then the retailer would is implemented effectively; finished goods (including jewelry) be deemed a dealer and required to containing jewels, precious met-  Ongoing employee training; and establish an anti-money laundering als, or precious stones should be program to review all purchases from  The establishment of an indepen- subject to the rule? non-U.S. dealers. A retailer’s anti- dent testing mechanism to monitor  What is the Rule’s potential impact money laundering program under the program. such circumstances would not be on small businesses that may be required to address sales. Unlike other financial institutions, “dealers” subject to this Rule? dealers are not required to prepare Comments regarding the above ques- In addition to the retailer exception, Suspicious Activity Reports, although tions must be received by FinCEN by the Rule explicitly excludes pawnbro- they still are required to report all July 25, 2005, and Reed Smith can kers from the definition of a dealer. cash transactions in excess of $10,000 help you in the preparation and sub- Furthermore, trade-in transactions to the IRS. where a dealer or retailer accepts a mission of such comments. Finally, covered good from a customer, the In addition to implementing the anti- FinCEN is still considering introduc- value of which the retailer or dealer money laundering requirements for ing mandatory anti-money launder- credits to the account of the customer dealers, the Rule seeks comment on ing programs for other financial and where no funds are provided to the following issues: institutions (most notably, insurance the customer, are excluded from the companies and persons involved in  Should silver be removed from the real estate closings and settlements), terms “sale” and “purchase” for calcu- definition of a “precious metal”? lating whether the $50,000 threshold and the Sentinel will update all new has been met. The terms “sale” and  Should “precious stones” and requirements as they are released by “purchase” further do not include the “jewels” be defined more specifi- FinCEN. purchase of jewels, precious metals, cally, for example, by reference to William E. Pomeranz or precious stones that are incorpo- a minimum price per carat, and if Leigh T. Hansson rated into machinery or equipment so, how? to be used for industrial purposes, as well as the purchase and sale of such machinery or equipment. Reed Smith in Print and at the Podium If a person qualifies as a “dealer”  Jason Matechak spoke at Cassa Nazionale di Previdenza ed Assistenza for the year 2005, then that person Forense in Rome on June 17 to the Bar Association of Rome on a panel of is required to have an anti-money European and American lawyers on the Negotiation Strategies in Interna- laundering program in place by Janu- tional Transactions. ary 1, 2006 (or six months after that date that a person becomes subject  On July 12, Jason Matechak, Chair of the American Bar Association’s to the anti-money laundering pro- International Procurement Committee, facilitated a discussion on the gram requirement). Any anti-money Department of State’s Brokering Regulations under the International laundering program must contain the Traffic in Arms Regulations. following components:  Eric Dubelier is co-chairing the American Conference Institute’s National  Policies, procedures, and internal Forum on Export Enforcement and Investigations in Washington, D.C. controls, based on a company’s on October 17–18, 2005. overall risk of money laundering  Leigh Hansson will be conducting a workshop on Export Compliance activities; Audits on October 17–18 at the American Conference Institute’s National Forum on Export Enforcement and Investigations in Washington, D.C.

55 ReedSmith

Focus on Foreign Corrupt Practices Act Enforcement

Although there has been a “changing jin”) agreed to resolve its potential of the guard” in the Fraud Section of liability with the SEC and DOJ regard- the Criminal Division of United States ing violations of the FCPA. DPC Department of Justice (“DOJ”), the reached an agreement with the SEC following survey of cases indicates to disgorge $2.8 million in net profit that Foreign Corrupt Practices Act earned in China for the period of its (“FCPA”) cases remain a high prior- alleged misconduct, plus prejudgment ity. Specifically, over the past six interest. DPC Tianjin separately pled months, DOJ and the U.S. Securities guilty to DOJ charges and agreed to and Exchange Commission (“SEC”) pay an additional criminal penalty of have announced five FCPA cases with $2 million. DPC, through DPC Tian- penalties ranging from $450,000 to jin, allegedly made illicit payments of $13 million. Considering these recent approximately $1.6 million to doctors results, companies should redouble and laboratory staff in China to in- their efforts to ensure that FCPA con- duce them to purchase DPC products. siderations are incorporated into an Micrus Corporation: $450,000 overall compliance program. Further, (March 2005): Micrus Corpora- companies should ensure that FCPA tion (“Micrus”) agreed to resolve violations, when discovered, are ad- its criminal liability associated with Over the past six months, equately addressed. potential violations of the FCPA by DOJ and the SEC have By way of background, the FCPA paying $450,000 in penalties to the announced five FCPA cases generally prohibits American indi- United States. Micrus is a privately with penalties ranging from viduals and companies from making held company based in California that illicit payments to foreign officials for develops and sells medical devices. $450,000 to $13 million. the purpose of obtaining or retain- Through its officers and agents, the ing business. The FCPA also requires company allegedly paid more than that U.S. publicly traded companies $105,000 to doctors in France, Tur- keep corporate records in a way so key, Spain and Germany to induce as to minimize the likelihood of “off them to purchase its medical devices. the book” payments. As enforced Titan Corporation: $13 million by the DOJ and the SEC, the FCPA (March 2005): The Titan Corpora- can result in criminal penalties up to tion (“Titan”) pled guilty to violating $2 million per offense and civil fines the FCPA and agreed to pay a crimi- up to $10,000 per offense for com- nal fine of $13 million. Titan is a panies. Individuals who violate the California-based military intelligence FCPA are subject to criminal penal- and communications company. It ties of not more than $100,000 per reportedly paid more than $2 million offense and up to five years in prison, in illicit payments to officials in the and civil fines of up to $10,000 per African nation of Benin towards the offense. The following recent cases election campaign of Benin’s then- demonstrate that the DOJ and the incumbent President, in exchange for SEC enforcing the FCPA to the fullest preferential treatment for projects in extent of the law. Benin. Diagnostic Products Corporation: Monsanto Company: $1 million $4.8 million (May 2005): Diagnostic (January 2005): Monsanto Company Products Corporation (“DPC”) and (“Monsanto”) agreed to pay a penalty its wholly owned Chinese subsidiary, of $1 million to the United States for DPC (Tianjin) Co. Ltd. (“DPC Tian- violating the FCPA. Monsanto is a

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Missouri-based public company and InVision was aware that its agents and screen foreign sales representatives global producer of technology-based distributors in Thailand, China and and commercial agents before they are solutions and agricultural products. the Philippines had paid or offered engaged to identify and address FCPA It reportedly paid $50,000 to a senior to pay money to foreign officials to red flags. Further, an FCPA review Indonesian environment official to increase the sales of its products. must be included in any merger or “incentivize” him to repeal an environ- acquisition when international sales While enforcement actions are on the mental law. The law required com- and transactions are involved. Finally, rise, these cases result from familiar panies to conduct an environmental companies must have compliance fact patterns that have led to FCPA impact study before the government plans in place and provide adequate liability for other companies in the would authorize the cultivation of training so that not only transactional past. For example, the DPC, Micrus, genetically modified crops. FCPA issues, but regulatory issues as and InVision cases involve FCPA li- well are addressed. InVision Technologies: $800,000 ability incurred by foreign sales agents Jason P. Matechak (December 2004): InVision Tech- of U.S. parent companies. The Titan Gregory S. Jacobs nologies, Inc. (“InVision”) agreed case involved an FCPA violation that Natalie R. Linendoll to pay a penalty of $800,000 to the was discovered during merger and United States for violating the FCPA. acquisition due diligence, while the InVision is a California-based public Monsanto case highlights how FCPA company that sells airport security violations occur in non-transactional screening products. Investigations scenarios. Considering these scenari- by the DOJ and the SEC revealed that os, companies must properly vet and

“Promoting Foreign Investment: The U.S. Government is Here to Help” – continued from page 3 geous terms of credit. cro level, TDA promotes U.S. business to expand overseas and find new interests in a variety of ways. It works foreign buyers for U.S. goods and TDA: Doing Well By Doing Good and gives grants to overseas project services. Small and medium-sized Somewhat akin to the U.S. Agency for sponsors who, in turn, select U.S. businesses are especially encouraged International Development, the TDA companies to perform TDA-funded to take advantage of these programs. is primarily an international develop- activities. It also provides training if Reed Smith’s Export, Customs & ment agency that seeks to promote an overseas project sponsor awards a Trade team can review with you the economic growth in developing and procurement contract to a U.S. firm. eligibility and application require- middle income countries around the The TDA funds feasibility studies to ments for OPIC, Ex-Im Bank, and world. However, unlike a traditional evaluate the technical, financial, legal, TDA, so that your company can maxi- international development organi- and economic aspects of a develop- mize its international opportunities. ment project, which may lead to U.S. zation, TDA meets its mandate by Jason P. Matechak exports. TDA-sponsored reverse trade promoting U.S. commercial interests William E. Pomeranz as an engine for international develop- missions offer U.S. suppliers an op- ment. Thus, TDA focuses on eco- portunity to showcase their products nomic sectors that are vital to overseas to foreign procurement officials inter- development and strategic to U.S. ested in purchasing U.S. goods and business interests. services. Finally, TDA workshops and conferences provide U.S. firms with TDA generally operates at two levels. face-to-face contact with key foreign At the macro level, TDA provides procurement officials. technical assistance in the areas of laws and regulations, technical stan- OPIC, Ex-Im Bank, and the TDA can dards, and sector policies. At the mi- assist U.S. companies in their efforts

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Your Competitors are Watching: False Claims and Customs Compliance

Although U.S. Customs and Border upheld the application of the False Protection (“Customs”) has been con- Claims Act to the underlying facts. sistently urging companies to develop Of particular importance to import- written internal Customs compliance ers, companies which finance import programs under Customs’ informed operations, and any other import- compliance/shared responsibility prin- related businesses, is the way in ciples, a recent federal case has pro- which these alleged violations were vided another reason for companies brought to the attention of federal to implement or strengthen internal authorities. The case against NFP customs compliance controls—Qui was originally brought as a Qui Tam Tam liability under the False Claims action by Huangyan Import & Export Act. Corp. (“Huangyan Import & Export”), On May 3, 2005, the U.S. District a competitor of NFP, who discovered Court for the Northern District evidence of NFP’s scheme while con- of California denied a motion by ducting discovery in an unrelated civil Nature’s Farm Products (“NFP”) to lawsuit. Under the False Claims Act, dismiss a false claims action brought a private citizen, referred to as a Rela- by the United States for fraudulent tor, is permitted to file a Qui Tam suit The allowance of Qui Tam misstatements of country of origin on in the name of the U.S. Government suits for Customs violations Customs documents. According to by charging government contrac- provides another incentive the opinion, in 1998, the Internation- tors and other entities who receive, al Trade Administration found that use, or owe government funds with for companies to devise Chilean mushrooms were being sold defrauding the government. Often or strengthen Customs at less than fair value, and applied an referred to as the “whistle-blower” compliance programs. antidumping duty of 148.1 percent on statute, the False Claims Act provides NFP’s mushrooms. In reaction, NFP incentives to persons filing a Qui Tam officers allegedly devised a scheme to suit by sharing any funds recovered circumvent the antidumping duties with the person bringing the suit. In by shipping large drums of “brined” cases of False Claims Act liability, the mushrooms to Canada, where they government is entitled to collect and were “de-brined,” repackaged for the Relator is entitled to share in the retail sale, and labeled as products of recovery of three times the loss result- Canada. During a period of a year- ing from the false claim. Thus in the and-a-half, NFP reportedly made NFP case, $25.4 million is reportedly approximately 150 such fraudulent at stake. Although Huangyan Import shipments to the United States with a & Export was ultimately dismissed total declared value of approximately from the case, the United States has $4.8 million, thus evading approxi- continued to pursue NFP under the mately $7.8 million in antidump- False Claims Act, thus keeping open ing duties. Court documents also the door to future Qui Tam actions for indicate that the United States has Customs violations and compliance reached separate settlements with shortcomings. Ravine Foods, Inc., Aliments Heritage, The allowance of Qui Tam suits for and the Bank of China, related to their Customs violations creates a power- alleged participation in this scheme. ful financial incentive for persons in a Although the court has not yet de- position of trust within a company, or cided on the merits of the case, it has who are otherwise aware of internal

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company dealings, to take action on ment authorities. While it is impos- compliance program can ensure that any perceived wrongdoing related sible to control the business dealings such misconduct is quickly identified to Customs violations. Also, com- of other companies, a company may and appropriately addressed. Such pany competitors not only have this dramatically reduce the likelihood it decisive internal action could have financial incentive, but have a strong will become involved with defraud- saved NFP, Ravine Foods, Aliments competitive incentive to report false ing companies, and may significantly Heritage, and the Bank of China from claims as well. Just as importantly, reduce the impact of any enforcement years of problematic and burdensome an unrelated company may be pulled action, by implementing a Customs federal scrutiny. into a broader enforcement action compliance program with appropriate Jason P. Matechak because of a Qui Tam suit filed against transaction screening, recordkeeping, Benjamin R. Lindorf one of its customers, clients, or af- internal audit, and training provi- filiates. Even if this company is not sions. While no amount of internal directly involved in the wrongdoing, controls can completely thwart em- its records could be subject to audit ployees determined to commit fraud and investigation by federal enforce- on the federal government, a Customs

Would You Like to Receive Future (or Past) Issues Topics Covered in Recent Issues… of Export, Customs & Trade Sentinel by E-Mail?  ABCs of CBP: A Glossary of U.S. Customs Acronyms We would be happy to send it to you as an Adobe Acrobat® file. Please  BIS Proposes Revised Definition of provide your e-mail and any mailing address updates below, and send the “Knowledge” Under the EAR information to Ari Wolfe by mail, phone, fax or e-mail.  The Commerce Department’s Re- newed Focus on Deemed Exports: Ari Wolfe Do You Need an Export License for Reed Smith LLP Your Employee? 1301 K Street, N.W. · Suite 1100 – East Tower · Washington, D.C. 20005  Customs Considerations: Don’t Phone: 202.414.9328 · Fax: 202.414.9299 · [email protected] Lose Value in Your Supply Chain  Department of Commerce Revises Encryption Regulations ______ Do Due Diligence Before an Acqui- Name sition: Don’t Buy an Enforcement Action ______Company  FDA Issues Rules on the Admin- istrative Detention of Food Under ______the Bioterrorism Act Title  National Security Hurdles to Foreign ______Investment in the United States Address  New FDA Food Allergen Requirements ______ The Official End of the Libyan and City State Zip/Postal Code Iraqi Sanctions ______ A Review of the U.S. Anti-boycot- Phone ting Regulations  Ups and Downs at the Bureau of ______E-mail Industry and Security

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“When a Disclosure may not be Voluntary: Liability for Trade Violations and Sarbanes-Oxley” – continued from page 1

The SOX increases the penalties for material changes in the financial false certification of financial reports condition or operations of the com- with fines of up to $5 million and pany “in plain English.” 15 U.S.C. prison terms of up to 20 years. Ad- § 78m(l). Examples of required ditionally, if a company restates its financial disclosures include: (1) entry financial statements as a result of into material agreements not made material misconduct, CEOs and CFOs in the ordinary course of business; may face forfeiture of certain bonuses (2) termination or reduction of a busi- and profits. ness relationship with a significant customer; (3) the creation of a direct An important step in preventing po- or contingent financial obligation tential liability for trade violations is that is material to the company; and the development of a comprehensive (4) an appointment or departure of a compliance program. An effective director, CEO, CFO or Chief Operat- compliance program is tailored to the ing Officer (“COO”). Under the SOX, specific business structure, products, companies should disclose potential processes, and control environment of liabilities in their financial reports be- the company at issue. A compliance cause such liabilities would represent program generally includes the fol- a “contingent financial obligation.” An important step in lowing compliance elements: a strong preventing potential commitment from senior manage- SOX Implications on Trade ment to company-wide compliance; a Operations liability for trade violations specific delegation of authority from is the development of a senior management to the persons Because potential liability stemming comprehensive compliance responsible for internal compliance; from violations of trade laws and a clear and concise summary of the regulations may have an effect on a program. relevant laws and regulations with a company’s financial well-being, the targeted analysis of how these laws CEO and CFO of a publicly traded and regulations apply to the company company may have an obligation as a whole and its employees on an under the SOX to disclose any mate- individual basis; a series of step-by- rial import, export, and trade issues. step order-processing flowcharts and This disclosure obligation may be at checklists which break down the odds with the traditionally voluntary individual compliance responsibilities nature of reporting trade violations. of all relevant company actors; a prod- A hypothetical illustrates this point: uct classification system; a transaction The CEO of a publicly traded, mul- screening program; a consistent and tinational corporation discovers that comprehensive training program; a the company may have exported a recordkeeping program; internal and significant number of defense articles external audit schedules and proce- without an export license in violation dures; a notification procedure for of the International Traffic in Arms potential violations; and internal dis- Regulations (“ITAR”). Under ITAR, ciplinary policies for employees who the corporation would normally have knowingly violate any of the compli- discretion as to whether it should ance procedures implemented by the make a voluntary disclosure to the company. Directorate of Defense Trade Controls (“DDTC”). However, under the SOX, Financial Disclosure Requirements because the CEO has discovered a material contingent financial obli- According to the SOX, officers must gation, he or she may have a duty disclose “on a rapid and current basis”

10 Export, Customs & Trade Sentinel

to disclose this information in the sion, because of the penalties associ- determination and tariff classification. company’s financial reports. Such ated with violations of country of In addition, corporate officers must disclosure could then lead to liability origin marking requirements, again, ensure that adequate internal report- under ITAR. the officers may be required under the ing controls and procedures are in SOX to disclose the potential liability. place in their companies. In order to In another hypothetical, auditors comply with the financial disclosure discover suspicious payments on the These hypotheticals demonstrate provisions of the SOX, these officers books of a multinational, publicly how the financial disclosure require- may be required to disclose trade vio- traded corporation that they suspect ment of the SOX may have serious lations where such disclosure would may be bribes to foreign officials consequences for corporations with otherwise be voluntary. However, in violation of the Foreign Corrupt international trade operations. While making these disclosures is likely al- Practices Act (“FCPA”), and they the requirement that a publicly traded ready in the company’s best interests. inform the CEO and CFO of the company disclose its violations of company. Under FCPA, the CEO and United States trade law may seem to Leigh T. Hansson CFO would have no duty to disclose be a harsh result, the good news is Gregory S. Jacobs those potentially illegal payments. that voluntary disclosure is often the Natalie R. Linendoll However, because the company could best option for a company in such a potentially face large civil and crimi- situation. As a key mitigating factor nal penalties as a result of the viola- used by agencies to determine the ex- tions (see the FCPA “Enforcement tent of any liability on the part of the Highlights” in this issue), the SOX company, voluntary disclosure gener- may require the CEO and CFO to ally results in dramatically reduced disclose the contingent liability in the fines and penalties, provided that the company’s financial reports. disclosure is made before the govern- ment learns of the possible violation. In a final hypothetical, the CEO of a publicly traded corporation learns Conclusion that the company has not been prop- erly marking the country of origin of In order to comply with the SOX, imported items in accordance with businesses must demonstrate a com- U.S. Customs and Border Protection mitment to trade compliance, includ- (“Customs”) regulations. While the ing the development of a compliance Customs regulations do not require a program, maintaining procedures company to disclose such an omis- for restricted party screening, license

11 ReedSmith

ATF Now Requires Importers to Identify all Explosive Materials The Bureau of Alcohol, Tobacco, Fire- importers for all explosive materials arms, and Explosives (“ATF”) is re- that they import for sale, distribu- sponsible for implementing U.S. laws tion, or for their own use. This rule, regarding the regulation of explosives effective July 26, 2005, imposes in order to reduce the hazards to marking requirements on explosive persons and property arising from the materials which are substantially misuse of explosive materials. The similar to those currently imposed on list of explosive materials includes domestic manufacturers. These mark- explosives, blasting agents, water gels, ing requirements are summarized as detonators, and all other items on the follows: “List of Explosive Materials” found  Importer and Manufacturer at www.atf.treas.gov/forms/notices/04- Information: Licensed importers 7020.pdf. ATF Regulations gener- must place the following marks of ally require domestic manufacturers identification on the explosive ma- of explosive materials to mark all terials they import: (1) the name explosive materials manufactured for and address (city and state) of the sale or distribution, but foreign-origin ATF Regulations importer; (2) the location (city explosive materials have been allowed generally require domestic and country) where the explosive to enter the domestic market without materials were manufactured; and manufacturers of explosive any corresponding markings. (3) the date and shift of manufacture. materials to mark all ATF requires that each person intend-  Location of Marks: Licensed explosive materials ing to engage in business as an im- importers must place the required porter of explosive materials obtain an manufactured for sale or marks on each cartridge, bag, or ATF-issued license. The license ap- other immediate container of ex- distribution, but foreign- plication requirements vary depend- plosive materials that is imported, origin explosive materials ing on the materials being imported as well as on any outside container and the frequency of the imports, but have been allowed to used for their packaging. enter the domestic market generally require the payment of a fee; the name, photo identification, and  Coding System Option: Licensed without any corresponding fingerprints of each person who will importers may request permission markings. be responsible for the explosives; and to use a coding system and omit the name and identifying information printed markings on the container of each person who will be authorized by filing a letterhead application by the responsible persons to possess with ATF, displaying the coding the explosives. that they plan to use and explain- ing the manner of its application. Despite these rigid restrictions on importers of explosive materials,  Deadline to Place Marks: Licensed ATF marking requirements have importers must place the required not historically applied to imported marks on all explosive materials explosives, because ATF does not imported prior to distribution or have jurisdiction over foreign manu- shipment for use, and in no event facturers of explosive materials. For later than 15 days after the date of this reason, and in order to ensure release from Customs custody. that imported explosive materials can be effectively traced for criminal  Exceptions: Licensed importers are enforcement purposes, on May 27, only required to place such iden- 2005, ATF issued a final rule impos- tification marks on the containers ing marking requirements on licensed used for the packaging of blasting

12 Export, Customs & Trade Sentinel

caps, and may request approval shipment, receipt, or importation of ry chemicals that are intended for use from ATF to use other reasonable explosive materials for delivery to as reagents and packaged and shipped means of identifying explosive the federal government or any state pursuant to U.S. Department of materials. government; small arms ammunition Transportation regulations which do and components of small arms ammu- not require explosives hazard warning Failure to comply with these marking nition; the importation, distribution, labels. All other parties will have less requirements may result in monetary and storage of consumer fireworks; than one month to shift their internal fines by ATF, as well as the seizure gasoline, fertilizers, propellant actu- systems to ensure that their imported or forfeiture of the explosive materi- ated devices, or propellant actuated explosive materials are properly als. In addition, these requirements industrial tools manufactured, import- marked under this new regulation. specifically do not apply to the use of ed, or distributed for their intended explosive materials in medicines and Benjamin R. Lindorf purposes; and industrial and laborato- medicinal agents; the transportation,

Recent Reed Smith Publications

To obtain a copy of any of these resources, please contact Sue Kosmach at 412.288.7179 or [email protected].  Client Bulletin 2005-08—PERM: Avoiding the Consequences of Corporate Audits (Susan Storch, Patrick C. McGuiness)  Client Bulletin 2005-09—Ninth Circuit Promulgates Standards for Implementing New Federal Rule Permitting Interlocutory Appeal From a Class Certification Order (Paul D. Fogel)  Client Bulletin 2005-10—Department of Labor Provides Guidance on Receipt of Mutual Fund Fees (Donald J. Myers, Michael B. Richman)  Client Bulletin 2005-11—Supreme Court’s Spector Opinion Muddies the Water Respecting the Application of American Employment Laws Abroad (Robert H. Bernstein, Gregory B. Reilly)  Client Bulletin 2005-12—CA Supreme Court Interprets and Applies Federal Due Process Limitations on Punitive Damages (Michael K. Brown, Lisa M. Baird)  Client Bulletin 2005-13—U.S. Supreme Court Allows Supplemental Jurisdiction Over Claims Even When Amount in Controversy Not Satisfied (Michael K. Brown, Lisa M. Baird, Thomas L. Allen, Robert “Bo” D. Phillips, Jr.)  Client Bulletin 2005-14—California Court of Appeals Ruling Good News for Prescription Product Companies with Foreign Affiliates (John M. Wood)  Client Bulletin 2005-15—Grokking Grokster: Staying Out of Court and in Business in the Wake of the Supreme Court’s Decision (Denise M. Howell, Gregory L. Beattie, Joseph I. Rosenbaum)  Client Bulletin 2005-16—Appeals Court Upholds Much of Bush Administration’s 2002 New Source Review Rule (Lawrence A. Demase, Louis A. Naugle, Harley N. Trice)  The Critical Path (newsletter focusing on issues of interest to the Construction Industry): Spring 2005  Employment Law Review (newsletter focusing on developments relating to employment, benefits and labor law): July 2005  Government Contracts, Grants & Trade Federal Forecaster (newsletter focusing on legal developments pertaining to recent trends and compliance issues related to government contracts and grants): April 2005  Health Law Monitor (newsletter focusing on the Health Care Industry): Summer 2005  Legal Bytes (newsletter focusing on the Technology Industry): April, May and June 2005  Material Matters (newsletter focusing on legal developments pertaining to the financial services industry): May 2005  PrivilEdge Update (newsletter focusing on attorney-client privilege and work product doctrine): March 2005  Sidebar (newsletter focusing on developments in the area of commercial litigation): May 2005

1313 ReedSmith

Export Enforcement Highlights

 On May 5, 2005, the United States commits no further violations dur- Attorney for the Eastern District ing the period of suspension. of Wisconsin, announced that two Chinese citizens pled guilty  On May 19, 2005, the U.S. Justice to criminal charges in connec- Department announced that Office tion with a conspiracy to illegally Max Inc., based in Itasca, Illinois, export controlled semi-conduc- agreed to pay $9.8 million to end tors and other electronic compo- a False Claims Act (“FCA”) suit nents from the United States to accusing the company of violating the People’s Republic of China federal law by supplying a govern- (“PRC”). Jian Guo Qu, the owner ment agency with products made of the Beijing Rich Linscience in countries that do not have recip- Electronic Company in the PRC, rocal trade agreements with the pled guilty in federal district court United States. In January 2003, in Green Bay, Wisconsin, to one Safina Office Products and two of count of conspiring to illegally ex- its employees, Edward Wilder and port dual-use semi-conductors and Robert Hsi Chou Lee, sued Office other electronic components from Max in U.S. District Court for the the United States to China without District of Columbia, alleging that the proper export licenses from the Office Max violated the FCA by Department of Commerce, Bureau failing to abide by the Trade Agree- of Industry and Security (“BIS”). ments Act (“TAA”). The plaintiffs Qu could face up to four years in alleged that when providing the prison. Ruo Ling Wang, the wife General Services Administration of Qu and an employee of the (“GSA”) with office supplies under Beijing Rich Linscience Electronic a federal contract, Office Max pro- Company, also pled guilty in fed- vided products that were manufac- eral district court in Green Bay to tured in countries such as China, one count of falsifying and under- which does not have a reciprocal valuing a shipment of illegally ex- trade agreement with the United ported electronics in an attempt to States. avoid scrutiny or inspection. Wang  On May 26, 2004, BIS announced was sentenced to time served (six- that it had entered into a Settle- and-a-half months) and ordered to ment Agreement with Laurel pay a $1,500 fine. Industrial, Inc. (“Laurel”) of San  On May 11, 2005, BIS announced Jose, California. As part of that that EMD Biosciences, Inc. settlement, Laurel agreed to pay (“EMD”) of San Diego, California, a $44,000 civil fine and perform agreed to pay a civil penalty in an audit of the company’s internal the amount of $904,500 to settle compliance program within one charges that it committed 134 year. BIS alleged that in 1999– violations of the Department of 2000, Laurel exported certain Commerce’s Export Administration underwater acoustic detection Regulations (“EAR”) when it im- equipment to the PRC without the properly exported biological toxins required licenses. BIS also alleged to Canada. In addition, EMD’s that Laurel made false/misleading export privileges were denied for a statements on documents related period of two years, which BIS to the exports. then suspended provided that EMD

14 Export, Customs & Trade Sentinel

 On June 1, 2005, BIS announced List (“CCL”) without the appro- including: exporting a thermal that it had entered into a settle- priate BIS authorizations. BIS imaging camera to Israel in viola- ment agreement dated May 25, maintained that Bullard Germany tion of the terms and conditions of 2005, with Mobil International improperly reexported thermal an export license that only per- Petroleum Corporation (“Mobil imaging cameras to Austria and mitted reexports of that product, International”) in the amount of in violation of condi- not direct export from the United $12,000 to settle charges related to tions placed on an export license States; exporting thermal imaging the re-export of computer prod- which only permitted the reexport cameras to Germany, the Czech ucts to Sudan. The settlement of those cameras to NATO coun- Republic, the Netherlands, and agreement also stated that Mobil tries. Neither Austria nor Switzer- Spain in quantities that exceeded International’s failure to timely land is a member of NATO. BIS the amounts authorized by BIS pay that civil penalty may result in also alleged that Bullard Germany export licenses; exporting, resell- the denial of Mobil International’s reexported thermal imaging camer- ing or reexporting thermal imaging export privileges for one year. as to Austria, which were licensed cameras from Germany to Aus- In a draft-charging letter that for export to Switzerland, and tria and Switzerland in violation resulted from a voluntary disclo- exported thermal imaging cameras of a BIS export license that only sure submitted by Exxon Mobil to France, which were licensed for authorized export to Germany for Corporation on behalf of Mobil export to Germany. reexport to other NATO countries; International, BIS alleged that as exporting thermal imaging cameras This case demonstrates the need the former parent company to to end users through intermediate for exporters to comply with all Mobil Oil Sudan, Ltd. (“Mobil consignees without authorization terms and conditions of their Sudan”), Mobil International was from BIS; exporting and reexport- export licenses. Although Bul- liable for certain export violations ing thermal imaging cameras to lard Germany would have likely committed by Mobil Sudan. The destinations not approved under received an export license from draft-charging letter further stated valid BIS export licenses; export- BIS to reexport the cameras at that from June 1999 through Feb- ing thermal imaging cameras after issue, the company’s failure to ruary 2000, Mobil Sudan ordered the expiration of a valid export follow the terms and conditions BIS-controlled computer products license; transferring a thermal of its export licenses resulted in a that were exported from England imaging camera to a party not au- civil penalty. An effective export to Sudan through Egypt without thorized under the export license; compliance program is a must first obtaining the required licenses and submitting Shipper’s Export even for foreign companies that for the reexports. BIS also entered Declarations that contained false deal with controlled products and into a settlement agreement with statements. technology. Mobil Services Company, Ltd. of  On June 3, 2005, BIS announced London in the amount of $19,500,  On June 1, 2005, BIS entered into that Wilden Pump and Engineer- and Exxon Mobil Egypt (S.A.E), of a settlement agreement with E.D. ing Co., LLC (“Wilden”), of Grand Cairo in the amount of $18,000, Bullard Co. of Cynthiana, Ken- Terrace, California, agreed to pay for their roles in these transactions. tucky (“Bullard”), in the amount a $700,000 civil penalty to settle of $330,000. The settlement  On June 1, 2005, BIS entered charges that it violated the EAR agreement also required Bullard to into a settlement agreement with in connection with the export of perform an audit of the company’s Bullard Gmbh of Bonn, Ger- diaphragm pumps from the United internal compliance program many (“Bullard Germany”), in the States to Iran, Israel, the PRC, between 18–24 months follow- amount of $36,000. Through Syria, and the United Arab Emir- ing the date of the entry of the a proposed charging letter, BIS ates without the required export order approving the terms of the alleged that Bullard Germany licenses. BIS also imposed a settlement agreement. Through committed a number of violations three-year denial of export privi- a proposed charging letter, BIS of the EAR by reexporting ther- leges against Wilden for items on alleged that Bullard committed a mal imaging cameras controlled the EAR’s CCL. According to BIS, number of violations of the EAR under the Commerce Control (continued on page 16)

15 ReedSmith

“Export Enforcement Highlights” – continued from page 15 CONTRIBUTORS TO THIS ISSUE Leigh T. Hansson the denial will be suspended for two years as long as Wilden does not commit any Washington, D.C. violations of the EAR during that two-year period. BIS specifically alleged that 202.414.9394 between 2000–2003, Wilden committed 71 violations of the EAR by exporting [email protected] diaphragm pumps without the required licenses, transferring diaphragm pumps Gregory S. Jacobs knowing that violations of the EAR would occur, and by making false statements Washington, D.C. on export control documents. 202.414.9480 [email protected]  On June 3, 2005, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) announced a number of civil penalties it had recently assessed. Benjamin R. Lindorf Washington, D.C.  OFAC reached a $63,853 settlement with Fidelity Brokerage Services, Inc. 202.414.9253 d/b/a Fidelity Investments of Boston, Massachusetts, for allegedly operating an [email protected] Iranian account in 1999–2000. Natalie R. Linendoll Washington, D.C.  OFAC reached a $750 settlement with Pioneer Valley Travel of Northhamp- ton, Massachusetts, for providing unlicensed travel-related services to Cuba in Jason P. Matechak 2001. Washington, D.C. 202.414.9224  OFAC reached a $2,500 settlement with Zooma Enterprises, Inc. of San Diego, [email protected] California, for allegedly attempting to export goods to Iraq in 1998. William E. Pomeranz Washington, D.C.  OFAC assessed a $3,000 penalty against WTS Agencies, Inc. (formerly Inch- 202.414.9349 cape Shipping Services) of Mobile, Alabama, for facilitating trade with Sudan [email protected] in 1997.

 On June 8, 2005, BIS entered into a settlement agreement with Lufthansa German Airlines, owner of Lufthansa Cargo AG of Boston, Massachusetts (“Luf- thansa Cargo”), in the amount of $18,000. Through a proposed charging letter, BIS alleged that Lufthansa Cargo violated the EAR by forwarding a shipment of Cobalt-57 to the Department of Atomic Energy, Directorate of Purchase and Stores (“DAE”) in India without the required export license. DAE is an organization listed on the Department of Commerce’s Entity List. BIS also alleged that Lufthan- sa Cargo attempted to forward a shipment of Cobalt-57, iron foil and potassium ferrocyanide to DAE without the required authorization. Under the terms and conditions of the settlement agreement, failure of Lufthansa Cargo to pay the civil penalty within 30 days from the date of entry of the order will result in the denial of the company’s export privileges for a year.

 On June 17, 2005 the Department of State announced that it had imposed an administrative debarment on Hughes Network Systems (Beijing) Co. Ltd. (“Hughes”), pursuant to a January 26, 2005 consent agreement with the com- pany. Under the terms of the debarment, Hughes is ineligible to participate in any activities regulated under the ITAR, including license applications, agreements, Export, Customs & Trade Sentinel is published by Reed Smith to keep clients or other requests for approvals. According to the Federal Register notice, Hughes and friends informed of legal developments failed to comply with terms of a March 2003 consent agreement related to its in- pertaining to the international trade industry. It is not intended to provide legal advice to volvement with failed satellite launches in the People’s Republic of China (“PRC”). be used in a specific fact situation; the con- The internal investigation revealed that many of the practices which led to viola- tents are for informational purposes only. tions of the ITAR and the March 2003 consent agreement had not been rectified The editor of Export, Customs & Trade within the company. Although notice of the debarment was not published until Sentinel is Leigh Hansson, a partner in the June 17, 2005, the debarment appears to have been effective as of the January Washington, D.C. office. 2005 consent agreement, and appears to have expired on May 14, 2005. “Reed Smith” refers to Reed Smith LLP, a limited liability partnership formed in the Leigh T. Hansson state of Delaware. ©Reed Smith LLP 2005. Quality Matters 16