According to the Executive Order, all property and interest in property that are in the U.S. currently or come within the U.S. or possession or control of a U.S. person (including foreign branches) are blocked for any person determined to be “responsible for or complicit in, or have engaged in, directly or indirectly” actions or policies that undermine the democratic processes or institutions in Ukraine; actions or policies that threaten peace, security, stability, sovereignty and the territory of Ukraine; or misappropriate Ukraine state assets. In addition, property is blocked for those determined to be a “leader of an entity that has, or whose members have” engaged in or materially assisted, sponsored, or provided financial, material, or technological support, or goods or services in support of such activities.
An entity is broadly defined as “partnership, association, trust, joint venture, corporation group, sub-group, or other organization.”
The Executive Order also suspends immigrant and non-immigrant entry into the U.S. of those determined to have participated in such activities.
Additionally, donations and other contributions of support to those determined to be involved in such activities are prohibited.
Lastly, the Executive Order prohibits any transaction that evades or attempts to evade or avoid the prohibitions, as well as any conspiracy to evade or avoid the prohibitions.
Noting that the transfer of funds and assets can be done instantaneously, the Executive Order also states that “no prior notice of a listing or determination made” pursuant to Executive Order shall be provided.
In light of this just released Executive Order, companies are urged to immediately review their business relationships in and with Russian and Ukrainian parties and take necessary actions to avoid possible violations of the Executive Order. Clearly, this is a developing situation and companies will need to actively monitor whether further sanctions will be imposed and their business relationships with individuals and entities that are or may be affected by this Executive Order.
For assistance with understanding and complying with this Executive Order, other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, 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.), +1.216.928.3474, or Skype at jon.yormick.
The “deemed export” rule under the Export Administration Regulations (EAR) presents unique compliance challenges for universities, R&D centers, and any number of companies and organizations involved in high-tech fields.
In short, under the EAR, the release of export controlled technology to a foreign national is deemed to be an export to the country of which the foreign national is a citizen. A “release” includes giving a foreign national access to the controlled technology. The deemed export rule applies to foreign national employees who may be authorized to work in the U.S. under an H1-B, O, L-1 or other visa, as well as foreign national visitors, those employed by business partners, graduate assistants and other researchers and student interns. The deemed export rule does not apply, however, to foreign nationals who have become naturalized U.S. citizens; those who are legal permanent residents of the U.S. (have “green cards”). The rule applies equally to organizations with overseas operations, such as subsidiaries, JVs, affiliates, and other partners.
The sharing of or giving access to controlled technology, blue prints, formulations and the like with a foreign national during a meeting in a conference room, in an email or text message, in a Skype or phone call, are all considered to be a release under the deemed export rule. Therefore, just as an exporter of a commodity must determine whether its export controlled item is subject to licensing requirements or if it chooses to rely on an applicable export license exception, organizations that have controlled technology must similarly analyze whether a release of that technology, in whatever format and via whatever media, must also carefully analyze whether a deemed export license may be required before the release to the foreign national colleague can occur.
This week, a civil penalty settlement announcement made by the U.S. Department of Commerce, Bureau of Industry and Security (BIS), Office of Export Enforcement (OEE) gave organizations with controlled technology another reminder (perhaps a jolt for some) that violations of the deemed export rule are detectable and costly. In a press release, BIS announced that it reached a $115,000 civil settlement with a Santa Clara, California company resulting from five violations of the EAR’s deemed export rule.
The company’s violations included the unauthorized release of export controlled manufacturing technology to a Russian national engineer working at its U.S. headquarters. This occurred in 2007. The unauthorized release involved drawings and blueprints for parts, identification numbers for parts, and development and production technology. The information is used for a product in hard disk drive manufacturing. The controlled technology was stored on a server at the company’s headquarters. (Best Practice Tip: store controlled technology on U.S. servers only, not abroad and not in the cloud). The company “released” the controlled technology to its Russian national engineer by providing the employee with a login ID and password “that enabled him to view, print, and create attachments.” After that occurred, the company applied for a deemed export license from BIS, but continued to store controlled technology on its server and failed to take steps to deny access of the technology to its Russian national while the license application was pending. This resulted in charges of knowingly violating the EAR on three occasions. Apparently, those applying for the license failed to inform the IT department to disable the engineer’s login or otherwise deny access to the controlled technology. In 2010, a similar release violation occurred when a Chinese national working in the company’s Shenzhen, China subsidiary accessed similar controlled technology on the company’s server in California using a login ID and password to open an attachment containing the technology.
The company voluntarily disclosed its violations to BIS. But it should be recalled that for many visa categories used to employee foreign nationals in the U.S. Part 6 of the I-129 requires the applicant to certify compliance with the EAR (and ITAR), including obtaining an export license when necessary and not releasing or giving access to the controlled technology to the foreign national employee. In other words, BIS and U.S. Citizenship and Immigration Services (USCIS) have information available to help detect and penalize deemed export violations in addition to information provided to BIS through a voluntary self-disclosure (VSD).
In announcing the penalty, BIS stated that the company’s failure to prevent access while the deemed export license was pending was considered to be an aggravating factor in determining the penalty. There can be no doubt that BIS is serious about protecting U.S. technology that is subject to export controls, enforcing the deemed export rule, and penalizing violators. “Deemed export compliance is a top priority for the Bureau of Industry and Security,” said David W. Mills, Assistant Secretary of Commerce for Export Enforcement. “Today’s settlement highlights the need for companies to be vigilant to prevent the unauthorized release of U.S. technology and data.”
The BIS case documents can be accessed here, http://1.usa.gov/1jCWCEk.
For assistance with understanding and complying with the deemed export rule, sections 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.
International trade and business attorney, Jon Yormick, will discuss Export Control Reform (ECR) and economic sanctions in 2 separate presentations in Buffalo next month.
On January 15, the Law Offices of Jon P. Yormick Co. LPA is co-sponsoring a 2-hour workshop, Export Control Reform, Revisited, with Mohawk Global Trade Advisors and Daemen College. The event will be held at Daemen College, with check-in beginning at 8:30 am. The program will run from 9:00-11:00 am. In addition to Jon, the workshop will feature Jim Trubits of Mohawk Global Trade Advisors, and Rae Perrott of Moog, Inc. They will discuss and share experiences with the recently implemented ECR from the perspectives of a global exporting company, a freight forwarder, and legal counsel. The focus will be on the transition of defense articles from the ITAR to the EAR, new AES documentation requirements, and tips for export compliance based on lessons learned from recent consent decrees. The cost is $35 and includes breakfast. For registration, contact Abby Frank at 315.552.3001 or at email@example.com.
Also on January 15, Jon will give a presentation at the Buffalo World Trade Association’s monthly dinner meeting. The BWTA was founded in 1921 and has the mission of expanding international business knowledge and activity of U.S. and Canadian companies in the Buffalo Niagara region. In his presentation, Navigating Economic Sanctions Successfully, Jon will discuss economic sanctions regimes, OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases. The meeting will be held at the Millennium Hotel, 2040 Walden Ave., with cocktails beginning at 5:30 and dinner at 6:30 pm. For registration and membership information, visit www.bwta.us.
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.