Lost in the Headlines about FCPA Violations, one Northeast Ohio Company Settles an Export Control Civil Penalty Case
On October 22, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced they had reached an agreement with Diebold, Inc. to settle allegations that the company violated the Foreign Corrupt Practices Act (FCPA). The ATM manufacturer, headquartered in North Canton, Ohio, settled with the DOJ and SEC by agreeing to pay nearly $50 million to resolve allegations that it violated the FCPA by bribing government officials in China and Indonesia and falsifying records in Russia in order to obtain and retain contracts to provide ATMs to state-owned and private banks in those countries. According to the DOJ press release, the company made payments and provided gifts and non-business travel to bank employees, recording leisure travel for bank employees as “training.” The DOJ acknowledged that Diebold cooperated in the investigation, including making a voluntary disclosure regarding the FCPA violations.
A few weeks later, in mid-November Cleveland-based Park-Ohio Holdings, Inc. stated in its quarterly SEC filing that it received a subpoena from the SEC in August in connection with a third-party and that the DOJ was conducting a criminal investigation of the third-party. According to the company’s SEC filing, the third-party paid a foreign tax official on behalf of the company in 2007 and that the activity “implicates” the FCPA. The country where the payment was made was not identified.
In the middle of those reports, on October 25, the U.S. Department of Commerce, Bureau of Industry and Security (BIS), released a settlement agreement and order relating to GrafTech International Holdings, Inc., with global headquarters in the Cleveland suburb of Parma. The company settled 12 proposed charges that it exported without required licenses, agreeing to pay $300,000.00 and complete an external audit of its export controls compliance program and those of three overseas operations. While the case did not result in eye-catching multi-million dollar penalties, it is noteworthy nonetheless.
BIS alleged that on four occasions between 2007 and 2009, GrafTech violated the export control regulations when it exported CGW grade graphite to China without an export license. The graphite was classified under ECCN 1C107.a and controlled for missile technology reasons. The shipments had a value of approximately $276,000.00. BIS also alleged that on eight occasions between 2007 and 2010, GrafTech exported CGW grade graphite to India, without required export licenses. The value of those shipments totaled approximately $248,000.00. The settlement agreement stated that GrafTech made a voluntary self-disclosure regarding the violations. Notably, in April 2010, BIS, Office of Technology Evaluation, issued Critical Technology Assessment: Fine Grain, High Density Graphite which addressed U.S. export controls, among other key topics. That report can be found here.
As mentioned, in addition to the $300,000.00 penalty, GrafTech agreed to complete an external audit export controls compliance program and the compliance programs’ three subsidiaries, located in France, Italy, and South Africa. The settlement agreement and BIS order did not detail the involvement of the subsidiaries in the violations, if any, but it can be presumed that the company’s export controls compliance program at each location were a concern to BIS.
According to the terms of settlement, GrafTech must hire a third-party consultant with expertise in U.S. export control law to conduct the audit with respect to all exports and re-exports of items on the Commerce Control List (CCL). The audit must cover a twelve-month period preceding the date of the order and must be delivered to BIS within eighteen (18) months. The order also requires the company to identify actual or potential violations by any of the four entities being audited, including the directive that GrafTech “promptly provide copies of the pertinent air waybills and other export control documents and supporting documentation” to BIS.
Why there is an apparent recent rash of enforcement actions involving Northeast Ohio companies doing business globally is a mystery. Certainly, these revelations should be a “wake-up call” for companies in the region that conduct business globally and have global operations. More broadly, of course, these reports emphasize the need for all U.S. companies to re-double their FCPA and export control compliance efforts in order to avoid costly civil and criminal penalties, additional enforcement expenses, and the reputational harm that violations can cause.
For assistance with understanding and complying with the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., firstname.lastname@example.org or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.
Yes, U.S. Importers (and Transactional Attorneys), There can be Successor Liability for Customs Duties and Penalties
These days, U.S. exporters and transactional attorneys know (or should know) that there is successor liability for export violations, whether the violations occurred under the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR). Press releases and publications of civil penalty settlements and consent agreements are issued almost daily by either or both of the agencies that administer and enforce these export control regimes and the related statutes – the U.S. Department of Commerce, Bureau of Industry and Security (BIS), and the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), respectively.
The same is true for violations of the numerous comprehensive and targeted sanctions programs administered and enforced by the Department of Treasury, Office of Foreign Assets Control (OFAC). In case you miss any of those publicly issued notices from the U.S. Government, law firms and consultants re-tell or provide a link to each announced settlement through client advisories, alerts, articles, blogs, and tweets. And there are plenty of scary presentations given around the world daily, rightfully extolling compliance, avoiding criminal investigations and penalties, and the threat of denial of export privileges. More than occasionally, the cases involve export violations that occurred at an acquired domestic or foreign subsidiary; yet, the successor company is “on the hook” for the violations.
But importers, both U.S.-based and non-resident importers, should not feel left out of the successor liability spotlight. U.S. Customs and Border Protection (Customs) does not routinely publish information about civil penalty cases that are resolved administratively. There are just too many and probably most are not as interesting to read as the export and sanctions penalty settlements tend to be. However, the U.S. Department of Justice (DOJ) regularly files cases to collect unpaid penalties and duties in the U.S. Court of International Trade. One such recently filed case is United States v. Adaptive Microsystems, LLC, et al., Court No. 12-00122, and this case involves a claim for successor liability.
In this case, CBP is pursuing a claim for unpaid duties and penalties under 19 U.S.C. § 1592 (“section 592”). CBP is pursuing it claim against a defendant that it alleges is responsible for the debts of a now-defunct Wisconsin company. Both that defendant and the defunct company have the same name – Adaptive Microsystems, LLC. Customs alleges that from 2005-10, the defunct company intentionally or negligently misclassified imports of LED panels from Malaysia, using duty-free tariff headings.
The facts show that 95% of the defunct company was owned by another Wisconsin, non-party company (of which a particular non-party individual owned a 15.8% share) and that the non-party individual served as executive vice president of the defunct company. In 2011, the defunct company’s bank initiated a receivership action against the company in state court, resulting in a receiver being appointed. Interestingly, Customs acknowledged that the receiver provided notice of the receivership action, yet Customs did not intervene in the action, instead relying on its priority creditor status under federal law.
A month after the receivership was initiated, however, Customs issued a pre-penalty notice of unpaid duties to the defunct company and upon apparently not receiving a response from any party, in July, 2011, Customs issued a penalty notice to the defunct company, demanding payment of outstanding duties and penalties in the amount of approximately $6.8 million. Meanwhile, after an unsuccessful auction of assets in the receivership action, at direction of the state court, the receiver entered into a purchase agreement with a Wisconsin company named AMS Acquisition , LLC. The purchase agreement called for AMS Acquisition, LLC to operate the business of the defunct company and its affiliates, including hiring a substantial number of employees to continue in their positions, and retaining the executive vice president who held the same position in the defunct company and has an ownership interest in the company that ultimately had an ownership interest in the defunct company. The sale was approved by the state court, but the Customs penalty was not addressed. Instead, the court approved the sale as free and clear of all claims and encumbrances, “or interests of any kind or nature.”
After the sale, company names were changed and the new company transferred shares of stock to the executive vice president. Less than a year later, Customs filed the lawsuit against the new entity, the defunct company, and the holding company that was organized for the underlying transaction, alleging that the new company defendant had purchased some portion of defunct company “out of receivership and it liable” for the defunct company’s debts.
Earlier this year, the defendant (“New AMS”) moved for summary judgment arguing that it did not succeed to the alleged unpaid duties and penalties of the defunct company and that its purchase of the defunct company’s assets did not assume these liabilities. Customs countered by arguing that there was a genuine issue of material fact as to whether one of four common law exceptions to Wisconsin’s general rule against successor liability applied.
Analyzing Wisconsin law, the Court of International Trade found that the de facto merger exception did not apply. There facts clearly showed that the executive vice president “did not receive his shares as consideration for the receivership sale” and the evidence also showed that at the time of the asset purchase, there was no plan that he was to become a shareholder. The court noted that under Wisconsin law, courts consistently refuse to apply the de facto merger exception when no shares changed hands in a sale. Accordingly, New AMS’s motion for summary judgment was granted as to this exception. The court then analyzed the mere continuation exception to the successor liability rule.
Under this exception, Customs argued that the new company was a mere continuation of the defunct company because there was “significant overlap” between the two companies. Customs pointed to the fact that New AMS hired substantially all of the defunct company’s employees and that the executive vice president was retained as an officer and owner the new company. Applying Wisconsin law, the court noted that the key element of mere continuation exception is a common identity of officers, directors, and shareholders in the purchasing and selling corporations and that the overlap of ownership and control, not merely the continuation of the same business operations, is the true test. The court also rejected New AMS’s argument that absolute identity of the officers and owners is required under the mere continuation exception and noted that the evidence presented by New AMS left open the possibility that other officers might have overlapped as well. For these reasons, the court found that a genuine issue of material fact existed and denied summary judgment on this exception.
This case illustrates that Customs is willing to pursue acquiring companies in asset purchase transactions for unpaid duties and penalties of the acquired company. Significantly, despite notice of the receivership, Customs chose not to participate in those proceedings, but instead issued a pre-penalty notice to the defunct company to which the Receiver apparently did not respond. Presumably, New AMS had knowledge of that notice and the ensuing penalty notice, yet none of the parties involved in the sale addressed the unpaid duties and penalties liability, instead apparently deciding that the state court’s approval of the sale as “free and clear” and the general rule against successor liability in an asset purchase would shield New AMS. While New AMS eventually may be relieved of liability for the defunct company’s unpaid duties and penalties, it is embroiled in litigation with the DOJ/Customs for more than a year now and little doubt has divulged details about the sale, company structure, and relationship of the parties that private companies tend to not have to provide to federal government lawyers and agencies.
Transactional attorneys should take particular note of this case and be sure to properly address outstanding Customs duty and penalty liabilities during due diligence or, as in this case, a receivership sale. Counsel experienced with identifying and addressing the Customs issues in a transaction such as this could have provided necessary support prior to the sale being consummated and head off the current litigation. Overlooking or ignoring unpaid duties and penalties can have unwelcomed and even dire consequences.
After ruling on the motion for summary judgment on April 10, 2013, the case has proceeded. On July 15 the court granted a joint motion to extend the fact discovery cut-off to October 31 and ordered the parties to file a joint status report proposing further proceedings by November 14, 2013. We will have to wait and see whether further motions for summary judgment are filed later this year, whether the parties potentially settle the case, or if it will proceed to trial.
For assistance with understanding and complying with U.S. Customs laws and regulations, due diligence support in merger and acquisitions and other strategic alliances, as well as representation before CBP in investigations, civil penalty, and prior disclosure matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, email@example.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.
This month, international business and trade attorney, Jon Yormick, will discuss Export Control Reform (ECR) in Cleveland and Rochester.
On October 10, Jon will speak at the monthly luncheon meeting of the Cleveland Foreign Credit Group, the group’s 300th meeting. The Cleveland Foreign Credit Group is made up of international credit managers from leading publicly-traded companies in Northeast Ohio, including Babcock & Wilcox, Lincoln Electric, Lubrizol, Materion, OMG Americas, Parker-Hannifin, and several others. In addition, regional and international banks are well represented in the membership, including Fifth Third Bank, HSBC, KeyBank, and PNC Bank. Half the member companies have annual turnover of at least $500 million. At each meeting, the companies have a presentation on a topic relating to international trade or credit, followed by a discussion of payment terms and experiences regarding customers in countries around the world. In 2007, Jon was recognized as the group’s Member of the Year.
Jon’s presentation on Preparing for Compliance and Enforcement Under Export Control Reform, will focus on the impact of ECR on a company’s sales opportunities and how international credit professionals play a key role in a company’s export compliance program.
One week later, on October 17, in Rochester, New York, Jon will participate on a panel at an ITAR & EAR Expert Roundtable Lunch presented by the Greater Rochester Enterprise, International Business Council. This sold-out event is the second time this year that the panel of experts will gather at the GRE to answer questions and discuss ECR with area companies. Joining Jon on the expert panel be export compliance leaders from Harris Corporation, Mohawk Global Trade Advisors, Qioptiq Defense, Inc., Redcom Laboratories, Inc., and Spectracom Corp.
Violations of the U.S. Antiboycott sections of the Export Administration Regulations (EAR) tend to not get much attention compared to other violations of the EAR, such as those involving evasion, acting with knowledge, or aiding and abetting. Antiboycott violations tend to lead to fewer civil penalty settlements with the Office of Antiboycott Compliance (OAC), Bureau of Industry and Security, U.S. Department of Commerce (BIS). When settlements are reported, they tend to be relatively minimal, but that might be changing in the wake of 2 settlements in the last several days.
In general, the OAC explains that the Antiboycott regulations “prohibit U.S. companies from furthering or supporting the boycott of Israel sponsored by the Arab League, and certain other countries, including complying with certain requests for information designed to verify compliance with the boycott.” Sales forces of U.S. companies that are well-trained in export control compliance know that complying with these requests might be prohibited under the EAR and just the request to comply may be reportable to BIS.
The June 7, 2013 Proposed Charging Letter to the Director of Sales & Marketing Operations at one of the companies that recently settled its alleged Antiboycott violations seems to show that the sales teams (and maybe the Credit Department) at some companies might not be knowledgeable enough about the Antiboycott regulations and compliance with them. The first case involved a $32,000 settlement with the OAC on 16 violations occurring between 2009-11 – one violation of furnishing information about business relationships with boycotted countries or blacklisted persons and 15 violations of failing to report the receipt of requests to engage in a restrictive trade practice or foreign boycott against a country friendly to the U.S. aka Israel. The company was alleged to be involved with selling or transferring goods or services from the U.S. to Bahrain, Oman, Qatar, and the UAE, all of which are generally friendly to the U.S. as well.
A table attached to the Proposed Charging Letter shows that the company provided information in a transport certificate for Oman stating “…the ship is permitted to enter Port Sultan Qaboos, in accordance with the Laws of Sultanate of Oman.” The company failed to report boycott compliance requests from Bahrain and Oman found in various transaction documents (possibly emails) and letters of credit. The requests included requests to ensure that the company “Delete all products, manufactured in Israel as they are banned in Bahrain,” or noting that “All Produce of Israel are Banned” and that the shipping company or agent was to issue a certificate that the ship was permitted to enter Muscat or Sultan Qaboos.
The second settlement with OAC involved 63 violations of the Antiboycott regulations – 5 for furnishing information and 58 for failing to report requests to comply with the boycott. This case was settled for $56,000. The 5 violations of furnishing information arose from emails and invoices, each confirming certain parts sold to a UAE party were not made in Israel. Additionally, 57 sales orders from the UAE and one from Malaysia each requested that the U.S. company cancel portions of the order because parts originated from Israel, requested substitute parts, confirm that parts were not made in Israel, of otherwise made clear that Israeli-origin products were prohibited.
As with all civil penalty settlements that are released to the public, these recent settlements with the OAC should be a “wake up call” for U.S. companies doing business in the Middle East and in other countries that support the Arab League boycott against Israel. The failure to train the sales and credit teams on identifying boycott requests, properly analyzing those requests for potential reporting to the OAC and complying with the U.S. Antiboycott regulations can be costly in terms of penalties and reputational harm.
For assistance with understanding and complying with the Antiboycott regulations, other provisions of the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., firstname.lastname@example.org or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.
Ms. Brenda A. Cisneros Vilchis has joined the Law Offices of Jon P. Yormick Co. LPA as Counsel in the firm’s Buffalo office. Ms. Cisneros is licensed to practice law in Mexico and is awaiting admission to the bar in New York State.
Ms. Cisneros is a native of Monterrey, Mexico and earned her LL.M. from SUNY Buffalo Law School, where her classmates included students from Canada, Colombia, India, South Korea, and Ukraine. The LL.M. program is designed for practicing lawyers who hold a law degree from outside the U.S. and wish to broaden their skills and knowledge by learning more about the U.S. legal system. Ms. Cisneros earned her law degree from Facultad Libre de Derecho de Monterrey, A.C. and she also holds a Masters in Banking and Finance from Universidad de Alcala de Henares in Madrid, Spain.
“My international law practice assists private and publicly-traded companies on a wide-range of matters. Brenda’s addition in Buffalo will help me to better serve middle market clients in Upstate New York and Ontario,” said Jon Yormick, founder of the international business law firm, based in Cleveland. The firm also has an affiliation with the Mexican law firm Boutique Legal Internacional, based in Chihuahua, with an office in Ciudad Juárez. “As more U.S. and Canadian companies focus attention on Mexico as a growing market and manufacturing location for sectors such as aerospace, Brenda and our affiliate firm will be able to serve the increasing needs of those companies,” added Yormick.
Ms. Cisneros will be advising U.S. and Canadian clients on doing business in Mexico with private and state-owned companies and throughout Latin America. She will also work with Boutique Legal Internacional to assist companies seeking to expand in the Mexican market, ensuring that companies with operations in Mexico are complying with customs and tax regulations, and maximizing the benefits of the maquiladora program, IMMEX. Ms. Cisneros’s practice also includes advising foreign clients on U.S. business formation, drafting, reviewing, and negotiating international commercial agreements, and general corporate law.
For assistance, Ms. Cisneros can be reached at email@example.com , Toll free: +1.866.967.6425 (Canada & U.S.) or Mobile: +1.716.930.0594.