Export Controls


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By John McKenzie, Baker & McKenzie, San Francisco

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Export Controls

  1. 1. EXPORTING TO CHINA United States Export Controls, Chinese Import Requirements and the Foreign Corrupt Practices Act
  3. 3. UNITED STATES EXPORT CONTROLS: AN OVERVIEW <ul><li>TWO SEPARATE EXPORT CONTROL REGULATORY PROGRAMS </li></ul><ul><ul><li>International Traffic in Arms Regulations (ITAR) </li></ul></ul><ul><ul><ul><li>Administered by the State Department’s Directorate of Defense Controls (DDTC) </li></ul></ul></ul><ul><ul><ul><li>Imposes Controls and Licensing Requirements on the Export/Reexport of Defense Articles and Defense Services </li></ul></ul></ul><ul><ul><ul><li>A License or other Authorization from DDTC is Required for the Export/Reexport of any Defense Articles or Defense Services to Virtually any Foreign Destination </li></ul></ul></ul><ul><ul><li>Export Administration Regulations (EAR) </li></ul></ul><ul><ul><ul><li>Administered by the Commerce Department’s Bureau of Industry and Security </li></ul></ul></ul><ul><ul><ul><li>Imposes Controls and Licensing Requirements on the Export/Reexport of Commercial and “Dual Use” Items </li></ul></ul></ul>
  4. 4. UNITED STATES EXPORT CONTROLS: SCOPE OF CONTROLS ON COMMERCIAL AND DUAL USE ITEMS <ul><li>Apply to Commodities, Software and Technology “Subject to the EAR” </li></ul><ul><ul><li>United States Origin Commodities, Software and Technology </li></ul></ul><ul><ul><li>Commodities Manufactured Abroad with More than De Minimis U.S. Origin Content (Parts, Components, Materials, Software or Technology) </li></ul></ul><ul><ul><li>Software and Technology Originally Developed in the United States and then Reproduced or Commingled Abroad </li></ul></ul><ul><ul><li>Foreign Produced Direct Product of United Sates Origin Software or Technology </li></ul></ul>
  5. 5. UNITED STATES EXPORT CONTROLS: EXPORT CONTROL OBJECTIVES <ul><li>Export Control Objectives </li></ul><ul><ul><li>Protect United States National Security by Restricting Exports of Items with Strategic or Military Applications </li></ul></ul><ul><ul><li>Retard Proliferation of Weapons of Mass Destruction </li></ul></ul><ul><ul><li>Foster Other United States Foreign Policy Objectives </li></ul></ul><ul><ul><ul><li>Promote Regional Stability </li></ul></ul></ul><ul><ul><ul><li>Anti-Terrorism </li></ul></ul></ul>
  6. 6. UNITED STATES EXPORT CONTROLS: EXTRATERRITORIAL APPLICATION <ul><li>United States Export Controls Apply to: </li></ul><ul><ul><li>Export of any Item from the United States, Regardless of Origin </li></ul></ul><ul><ul><li>Reexport of United States Origin Items form One Foreign Country to Another </li></ul></ul><ul><ul><li>Shipment of Foreign Manufactured or Produced Items with Substantial United States Origin Content from One Foreign Country to Another </li></ul></ul><ul><ul><li>Shipment of Foreign Made Direct Product of United States Origin Technology from One Foreign country to Another </li></ul></ul><ul><ul><li>Disclosure of United States Origin Technology to a Foreign National within or without the United States </li></ul></ul><ul><ul><ul><li>Such Disclosures are Deemed to be Exports or Reexports to that Foreign National’s Home Country </li></ul></ul></ul>
  7. 7. UNITED STATES EXPORT CONTROLS: IMPLEMENTATION <ul><li>The United States Export Controls Are Implemented by a Licensing Procedure </li></ul><ul><li>The Export or Reexport of Items Subject to the EAR May Require Prior Authorization, in the Form of an Export License, from the Bureau of Industry and Security, Depending on: </li></ul><ul><ul><li>Export Classification of the Item </li></ul></ul><ul><ul><li>Destination to Which the Item will be Exported or Reexported </li></ul></ul><ul><ul><li>End-Use of the Item </li></ul></ul><ul><ul><li>End-User to Which the Item will be Exported or Reexported </li></ul></ul>
  8. 8. UNITED STATES EXPORT CONTROLS: PRODUCT CLASSIFICATION <ul><li>Products Classified on the Basis of Technical Parameters as Specified on the Commerce Control List by Export Classification Control Number (ECCN) </li></ul><ul><li>Technology Required for the Design, Development, Production or Use of a Controlled Commodity is also Subject to Control </li></ul><ul><li>If an Item is Covered by a Specific ECCN, an Export License is Required for Export to Some or All Foreign Destinations, unless an “Export License Exception” is Available under the Specific Provisions of the EAR </li></ul>
  9. 9. UNITED STATES EXPORT CONTROLS: RESTRICTED DESTINATIONS <ul><li>Embargoed and Terrorist Supporting Countries </li></ul><ul><ul><li>Cuba, Iran, North Korea, Sudan and Syria </li></ul></ul><ul><li>Countries Restricted on National Security Grounds </li></ul><ul><ul><li>China, Russia, other countries of the former Soviet Union, Vietnam, Cambodia, Laos, Mongolia </li></ul></ul><ul><li>Countries Restricted on Proliferation Grounds </li></ul><ul><ul><li>China, Taiwan, Russia, India, Pakistan, Israel, Various Middle Eastern Countries </li></ul></ul>
  10. 10. UNITED STATES EXPORT CONTROLS: RESTRICTED END-USES <ul><li>Activities Related to the Proliferation of Nuclear Weapons and Other Nuclear Activities </li></ul><ul><li>Activities Related to the Design, Development, Production, Testing, Stockpiling or Use of: </li></ul><ul><ul><li>Chemical or Biological Weapons </li></ul></ul><ul><ul><li>Missiles </li></ul></ul><ul><li>Certain Other Military End-Uses, Especially in Restricted Countries </li></ul>
  11. 11. UNITED STATES EXPORT CONTROLS: RESTRICTED AND PROHIBITED END-USERS <ul><li>Persons and Firms Listed on the Commerce Department’s Denied Parties List </li></ul><ul><li>Entities Listed on the Commerce Department’s BIS Entities List </li></ul><ul><ul><li>Entities Located in China, India, Israel, Pakistan, Russia and Syria that are Deemed to be Involved in those Countries’ Nuclear Weapons or Missile Programs </li></ul></ul><ul><li>Persons and Firms Listed on the Treasury Department’s OFAC List of Specially Designated Nationals and Blocked Persons </li></ul><ul><li>Military and Other Government End-Users in Certain Restricted Countries Especially China </li></ul>
  12. 12. UNITED STATES EXPORT CONTROLS: PENALTIES FOR VIOLATIONS <ul><li>Criminal Penalties </li></ul><ul><ul><li>Fines of Up to $1 Million </li></ul></ul><ul><ul><li>Imprisonment for Up to 10 Years </li></ul></ul><ul><li>Civil fines </li></ul><ul><ul><li>$250,000 Per Violation </li></ul></ul><ul><ul><li>Enhanced Penalty Effective October 16, 2007 but with Retroactive Effect </li></ul></ul><ul><li>Administrative Sanctions </li></ul><ul><ul><li>Revocation or Denial of Export Licenses </li></ul></ul><ul><ul><li>Restrictions on, or Denial of, Export Privileges </li></ul></ul><ul><ul><ul><li>A. “Denied Party” is Ineligible to Participate in any way in any Transaction Involving Items Exported or to be Exported from the United States or Otherwise Subject to the EAR </li></ul></ul></ul>
  14. 14. INTRODUCTION: FUNDAMENTAL PRINCIPLES OF CUSTOMS AND IMPORT LAW AND REGULATION <ul><li>Restricted and Prohibited Products </li></ul><ul><li>Customs Classification </li></ul><ul><li>Valuation of Merchandise </li></ul><ul><li>Duty Rates (Typically Ad Valorem Duties, stated as a Percentage of the Dutiable Value) </li></ul><ul><li>Other Import Taxes and Fees </li></ul><ul><li>Country of Origin Analysis </li></ul>
  15. 15. INTRODUCTION: HISTORICAL PERSPECTIVE ON IMPORTING INTO CHINA <ul><li>Extensive List of Prohibited and Restricted Imports </li></ul><ul><li>Limited Authorization for Chinese Companies to Deal with Foreign Entities or to Import Products into China </li></ul><ul><ul><li>Requirement to Import Products Through an Authorized, State-Owned Import/Export Corporation </li></ul></ul><ul><li>Foreign Invested Enterprises Prohibited from Engaging in Product Distribution within China </li></ul><ul><li>Separate Product Classification System and Valuation Requirements </li></ul><ul><li>High Duty Rates on Most Products </li></ul>
  16. 16. LIBERALIZATION OF CHINESE IMPORT RULES: ACCESSION TO THE WORLD TRADE ORGANIZATION: DECEMBER 11, 2001 <ul><li>Implementation of the Harmonized Commodity Description and Coding System for customs classification purposes </li></ul><ul><ul><li>Global System for Classifying Merchandise for Customs Purposes </li></ul></ul><ul><ul><li>Implementation of the WTO Valuation Code for determining the value of imported merchandise </li></ul></ul><ul><ul><li>As Customs Duties and Import Taxes (Value Added Tax) Are Assessed on an Ad Valorem Basis, Proper Valuation is Critical to the Import of Merchandise into China </li></ul></ul><ul><ul><li>Preferred Valuation Methodology: Transaction Value, defined as the “Price Paid or Payable” for the Imported Merchandise </li></ul></ul><ul><ul><ul><li>Implications for Foreign Supplier’s Commercial Invoice </li></ul></ul></ul>
  17. 17. LIBERALIZATION OF CHINESE IMPORT RULES: (cont’d) <ul><li>Changes in Duty Rates </li></ul><ul><ul><li>Pre-WTO Accession Duty Rates as High as 100 Percent, and Average Duty Rates of 25 Percent </li></ul></ul><ul><ul><li>2008 Average Chinese Duty Rate of 9.8 Percent </li></ul></ul><ul><li>Implementation of the Information Technology Agreement </li></ul><ul><ul><li>Duty Rates on Information Technology Products Reduced from 13.3 Percent to Zero </li></ul></ul>
  18. 18. LIBERALIZATION OF CHINESE IMPORT RULES: (cont’d) <ul><li>Execution of Various Free Trade Agreements </li></ul><ul><ul><li>Closer Economic Partnership Arrangements with Hong Kong and Macau </li></ul></ul><ul><ul><li>ASEAN Free Trade Agreement </li></ul></ul><ul><li>FTAs in Various Stages of Negotiation with the European Union, Australia, New Zealand, India, Singapore </li></ul>
  19. 19. CHINESE IMPORT VALUE ADDED TAX (VAT) <ul><li>The Import of Most Merchandise into China is Subject to VAT at a Rate of 17 Percent </li></ul><ul><li>2007: VAT Rate Reduced for Certain Products, including Audio and Video Products, from 17 Percent to 13 Percent </li></ul><ul><li>Products Imported into China and then Subsequently Exported </li></ul><ul><ul><li>4 Percent VAT Trap, in the Form of Unrecoverable Import VAT </li></ul></ul>
  20. 20. CONTINUING IMPEDIMENTS AND BARRIERS TO IMPORTS INTO CHINA <ul><li>Remaining Restrictions on the Import of Certain Categories of Product </li></ul><ul><ul><li>MOFCOM Catalogue of Goods Subject to Import Licensing Requirements </li></ul></ul><ul><li>Continuing High Duties to Protect Certain Domestic Industries </li></ul><ul><li>Chinese Individuals and Some Chinese Entities, including State-Owned Entities, Are Not Authorized to Engage in Foreign Trade Operations </li></ul><ul><li>Foreign Invested Enterprises Require Commercial License from MOFCOM in order to Import and Distribute Products in China </li></ul><ul><ul><li>Increased Scrutiny of Intercompany Transfer Pricing between Foreign Suppliers and Chinese Affiliates </li></ul></ul>
  21. 21. CONTINUING IMPEDIMENTS AND BARRIERS TO IMPORTS INTO CHINA (cont’d) <ul><li>Increased Restrictions on Duty-Free Import of Capital Equipment into China for Export Processing Operations </li></ul><ul><ul><li>Limited to “Encouraged” Foreign Investment Activities </li></ul></ul><ul><ul><li>AQCIQ Inspection Requirements for Import of Used Capital Equipment into China </li></ul></ul><ul><ul><ul><li>Beneficiary of the Inspection Required to Bear the Expense, including Foreign Travel, of the Inspection </li></ul></ul></ul>
  22. 22. CONTINUING IMPEDIMENTS AND BARRIERS TO IMPORTS INTO CHINA (cont’d) <ul><li>General Prohibition on Import of Used and Refurbished Spare and Replacement Parts </li></ul><ul><li>SEMB Restrictions on Import, Distribution and Use of Foreign Encryption Products </li></ul><ul><ul><li>SEMB Registration and Approval </li></ul></ul><ul><ul><li>Sales only to Foreign Invested Enterprises </li></ul></ul><ul><ul><li>Distinction between “Core” and “non-Core” Encryption Items </li></ul></ul>
  24. 24. UNITED STATES FOREIGN CORRUPT PRACTICES ACT OVERVIEW <ul><li>The Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 (the “FCPA”) generally prohibits any United States person or firm from paying or giving, or offering or promising to pay or give, any money or any other thing of value, directly or indirectly, to any foreign government official, foreign political party or candidate for foreign political office for the purpose of obtaining or retaining business or some other unfair advantage. </li></ul>
  25. 25. PERSONS SUBJECT TO THE FCPA <ul><li>Publicly Traded United States Corporations </li></ul><ul><li>Foreign Corporations whose shares (ADRs) are traded on a United States Stock Exchange </li></ul><ul><li>Domestic Concerns (Sole Proprietorships, Partnerships, Privately Held Corporations, etc.) </li></ul><ul><li>Officers, Directors, Employees and Agents of the Foregoing Corporations and Domestic Concerns </li></ul><ul><li>Foreign Corporations that take any action within the United States in furtherance of the making of an improper payment to a Foreign Official </li></ul>
  26. 26. CATEGORIES OF FOREIGN RECIPIENTS UNDER THE FCPA <ul><li>Foreign Government Officials (including Officers and Employees of Foreign State-Owned Corporations and other Commercial Enterprises) </li></ul><ul><li>Foreign Political Parties </li></ul><ul><li>Candidates for Foreign Political Office </li></ul><ul><li>Officials of Public International Organizations </li></ul><ul><li>Any Third Party With Knowledge that the Payment Will be Paid Over to a Foreign Official, Etc. </li></ul>
  27. 27. PROSCRIBED PURPOSES UNDER THE FCPA <ul><li>To Obtain or Retain Business </li></ul><ul><li>To Direct Business to Another Person or Firm </li></ul><ul><li>To Obtain any other Unfair Advantage, such as: </li></ul><ul><ul><li>Tax Exemption or Benefit (Baker Hughes) (Bristow Group) </li></ul></ul><ul><ul><li>Reclassification or Undervaluation of Merchandise for Customs Purposes (Kay) </li></ul></ul><ul><ul><li>Issuance of a Government License or Permit (Chiquita Brands) (Dow Chemical) </li></ul></ul><ul><ul><li>Award of a Government Concession, Franchise or Contract (Giffen) (ABB Vetco) </li></ul></ul><ul><ul><li>Waiver of Penalties for Non-Compliance with Law (BJ Services) </li></ul></ul><ul><ul><li>Legislative and Regulatory Changes (Monsanto) (Bell South) </li></ul></ul>
  28. 28. EXCEPTIONS TO THE PROHIBITIONS OF THE FCPA <ul><li>Facilitating or “Grease” Payments for Routine Governmental Actions </li></ul><ul><li>Payments that are Lawful under the Written Laws and Regulations of the Foreign Official’s Country </li></ul><ul><li>Payments that are Reasonable and Bona Fide Expenditures for Travel and Lodging by Foreign Officials, Directly Related to: </li></ul><ul><ul><li>Promotion, Demonstration or Exhibition of Goods or Services </li></ul></ul><ul><ul><li>Execution or Performance of a Contract with a Foreign Government or Agency Thereof </li></ul></ul>
  29. 29. PENALTIES FOR VIOLATIONS OF THE FCPA <ul><li>Corporations, Other Business Entities and Other Domestic Concerns – </li></ul><ul><ul><li>$2 Million per Violation </li></ul></ul><ul><li>Individuals, including Persons acting as Officers, Directors, Employees or Agents of a Corporation or Domestic Concern – </li></ul><ul><ul><li>$100,000 per Violation </li></ul></ul><ul><ul><li>Up to Five (5) Years Imprisonment </li></ul></ul>
  30. 30. THE FCPA’S ACCOUNTING STANDARDS <ul><li>The “Books and Records” Requirement: </li></ul><ul><ul><li>Publicly Traded United States Corporations are Required to keep Accounting Books and Records which Accurately Reflect all Corporation Transactions </li></ul></ul><ul><li>The Internal Accounting Controls Requirements </li></ul><ul><ul><li>Publicly Traded United States Corporations are Required to Devise and Maintain Adequate Systems of Accounting Controls which Assure that: </li></ul></ul><ul><ul><ul><li>Transactions are Executed solely in accordance with Management Directives </li></ul></ul></ul>
  31. 31. THE FCPA’S ACCOUNTING STANDARDS (cont’d) <ul><ul><ul><li>Transactions are properly Recorded so as to Permit Preparation of Financial Statements in accordance with GAAP </li></ul></ul></ul><ul><ul><ul><li>Access to Corporate Assets is Permitted only as Authorized by Management </li></ul></ul></ul><ul><ul><ul><li>Recorded Asset Accounts are Compared with Existing Assets at Regular Intervals </li></ul></ul></ul>
  32. 32. PROBLEM AREAS UNDER THE FOREIGN CORRUPT PRACTICES ACT <ul><li>Payments to Intermediaries Involved in Government Transactions </li></ul><ul><ul><li>Sales Representatives and Commission Agents to Win Government Contracts </li></ul></ul><ul><ul><ul><li>Examples: Titan Corporation; GE Invision; IBM Argentina </li></ul></ul></ul><ul><ul><li>Consultants to Secure Changes in Legislation or Regulations </li></ul></ul><ul><ul><ul><li>Example: Monsanto: Indonesia </li></ul></ul></ul><ul><ul><li>Consultants to Obtain a Reduction in Tax Liability </li></ul></ul><ul><ul><ul><li>Baker Hughes: Indonesia </li></ul></ul></ul><ul><ul><li>Distributors Reselling Products to Government Customers </li></ul></ul><ul><ul><ul><li>Example: GE Invision: China, Thailand, Philippines </li></ul></ul></ul>
  33. 33. PROBLEM AREAS UNDER THE FOREIGN CORRUPT PRACTICES ACT (cont’d) <ul><li>Merger and Acquisition Transactions </li></ul><ul><ul><li>Pre-Acquisition Due Diligence </li></ul></ul><ul><ul><ul><li>Example of Inadequate Due Diligence – Tyco </li></ul></ul></ul><ul><ul><li>Structuring Deals with State-Owned Enterprises in Russia and China </li></ul></ul><ul><ul><ul><li>Is the Acquisition of State Assets a Potential FCPA Violation </li></ul></ul></ul><ul><ul><li>Post-Acquisition Compliance </li></ul></ul><ul><li>International Joint Ventures with Foreign State-Owned Enterprises </li></ul><ul><ul><li>Relative Value of Equity Contributors </li></ul></ul><ul><ul><li>Objective in Forming the Joint Venture </li></ul></ul><ul><ul><ul><li>Example: Diagnostics Products </li></ul></ul></ul>
  34. 34. PROBLEM AREAS UNDER THE FOREIGN CORRUPT PRACTICES ACT (cont’d) <ul><li>Hosted Visits for Foreign Officials </li></ul><ul><ul><li>Application of the “Affirmative Defense” for Reimbursement of Bona Fide Reasonable Business Expenses </li></ul></ul><ul><ul><li>Problem Areas </li></ul></ul><ul><ul><ul><li>Trips Unrelated to Bona Fide Business Expenses </li></ul></ul></ul><ul><ul><ul><ul><li>Example: Monsanto </li></ul></ul></ul></ul><ul><ul><ul><li>Side Trips ( e.g. , Trip to Las Vegas in Connection with Business Visit to Silicon Valley) </li></ul></ul></ul><ul><ul><ul><li>Unreasonable Business Expenses </li></ul></ul></ul><ul><ul><ul><li>Providing Foreign Officials with Per Diems </li></ul></ul></ul><ul><ul><ul><ul><li>Example: ABB, Ltd. </li></ul></ul></ul></ul>
  35. 35. PROBLEM AREAS UNDER THE FOREIGN CORRUPT PRACTICES ACT (cont’d) <ul><li>Gifts and Hospitality for Foreign Officials </li></ul><ul><ul><li>Lavish Gifts (as determined with Reference to Local Standards) </li></ul></ul><ul><ul><ul><li>Example: Monsanto </li></ul></ul></ul><ul><ul><li>Note the Importance of Rules and Regulations on the Acceptance of Gifts by Public Officials </li></ul></ul><ul><li>Charitable Contributions </li></ul><ul><ul><li>Made for the Specific Purpose of Obtaining or Retaining Business </li></ul></ul><ul><ul><ul><li>Example: Schering Plough </li></ul></ul></ul>
  36. 36. OTHER COMPLIANCE ISSUES <ul><li>Overinvoicing and Kickback Schemes </li></ul><ul><ul><li>Local Law </li></ul></ul><ul><ul><li>FCPA Accounting Standards </li></ul></ul><ul><li>Offshore Payment Arrangements </li></ul><ul><ul><li>Local Currency Controls </li></ul></ul><ul><ul><li>Anti-Money Laundering Legislation </li></ul></ul><ul><li>Evasion of Local Customs and Tax Laws </li></ul><ul><ul><li>Mail and Wire Fraud Statutes </li></ul></ul><ul><ul><ul><li>Pasquantino Case </li></ul></ul></ul>
  37. 37. FCPA COMPLIANCE ISSUES REVEALED: FIVE “DIS” <ul><li>Disgruntled Employees </li></ul><ul><li>Disappointed Competitors </li></ul><ul><li>Dismissed Distributors and Sales Representatives </li></ul><ul><ul><li>Example: Lucent </li></ul></ul><ul><li>Disposition of Business (Acquisition Transaction) </li></ul><ul><ul><li>Examples: Syncor, Titan Corporation, Tyco International, GE Invision </li></ul></ul><ul><li>Discovery by Auditors </li></ul>