Enigmas Unraveled! Representations/Indemnities April 27, 2006

Transcription

1 2006 Spring Forum American College of Investment Counsel Chicago, Illinois Enigmas Unraveled! Representations/Indemnities April 27, 2006 Keith D. Bilezerian Day, Berry & Howard LLP Anthony J. Carbone Bingham McCutchen LLP Simeon M. Kriesberg Mayer, Brown, Rowe & Maw LLP Daniel I. Papermaster Bingham McCutchen LLP

2 Enigmas Unraveled! Representations/Indemnities ERISA Plan Investment Basics Keith D. Bilezerian Day, Berry & Howard LLP American College of Investment Counsel Spring Forum April 27, 2006 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

3 Background Pension funds represent the largest pool of investable capital ICI says $12.9 trillion held by pension plans as of December 31, 2004 Pension funds governed by ERISA are subject to restrictions on investments due to ERISA s fiduciary standards and prohibited transaction rules 2 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

4 ERISA Fiduciary Standards An ERISA fiduciary must act: solely in the interest of plan participants and beneficiaries; for the exclusive purpose of providing benefits and defraying plan expenses; with the care, skill, prudence and diligence that a prudent man acting in like capacity and familiar with such matters uses in conducting a similar enterprise, with similar aims; to diversify investments to minimize large losses, unless prudent not to do so; and in accordance with the terms of the plan, to the extent consistent with ERISA. 3 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

5 ERISA Prohibited Transactions ERISA plans generally may not engage in certain transactions with a Party in Interest which include plan fiduciaries, service providers (e.g., trustee or custodian), employer whose employees are covered by the plan, and related entities (i.e., entity 50% or more owned by PII) Transactions include the direct or indirect sale, exchange, leasing, lending of money or other extension of credit and furnishing of goods or services ERISA prohibits a fiduciary from dealing with plan assets in his own interest or for his own account Section 6.2 of Model Form No. 1 of Note Purchase Agreement addresses source of fund issues 4 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

6 Plan Assets Regulation ERISA applies to Plan Assets If source of funds constitute Plan Assets, must address ERISA issues Assets not Plan Assets if benefit plan investors constitute less than 25% of the value of any class of equity interests benefit plan investors include all pension and welfare benefit plans (including governmental and foreign plans and IRAs) equity interest means anything other than investment treated as debt under applicable local law and which has no substantial equity features 5 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

7 Plan Assets Regulation Assets not Plan Assets if invested in publicly offered securities which are freely transferable, widely held (owned by 100 or more investors independent of issuer and one another) and registered Assets not Plan Assets if investment is in Operating Company which is defined as any entity primarily engaged in production or sale of product or service other than investment of capital Operating company includes a Venture Capital Operating Company and a Real Estate Operating Company 6 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

8 Plan Assets Regulation Venture Capital Operating Company ( VCOC ) at least 50% of assets invested in operating companies with respect to which VCOC actually exercises management rights management rights include the right to appoint directors or have a representative serve as corporate officer or special rights to examine books of non-public issuer and routinely consult with and advise management 7 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

9 Plan Assets Regulation Real Estate Operating Company ( REOC ) at least 50% of assets invested in real estate which is managed or developed and with respect to which the REOC obtains and exercises the right to substantially participate directly in the management or development activities 8 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

10 Prohibited Transaction Exemptions The U.S. DOL has issued a number of class exemptions: Qualified Professional Asset Manager ( QPAM ) Insurance Company General Account Bank Collective Investment Funds and Insurance Company Separate Accounts In-House Asset Manager ( INHAM ) 9 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

11 Prohibited Transaction Exemptions QPAM Bank, S&L or insurance company with over $1M in net worth RIA with net worth over $1M and over $85M in assets under management QPAM must have full fiduciary responsibility with respect to investments and must negotiate the terms of the investment QPAM may not engage in transactions with itself, affiliated parties, parties who have authority to appoint or terminate QPAM as manager or PII to a plan that has assets managed by the QPAM that exceed 20% of the QPAM s total managed assets See Section 6.2(d) of Model Note Purchase Agreement 10 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

12 Prohibited Transaction Exemptions Insurance Company General Account when transaction entered into, and at time of any later renewal that requires the insurance company s consent, terms of transaction must be at least as favorable to insurance company general account as terms that are generally available in arm s-length transactions between unrelated parties; transaction must not be part of an agreement, arrangement or understanding designed to benefit a PII; and PII must not be insurance company, pooled separate account of insurance company, or affiliate of insurance company. At the time of the transaction, acquisition or holding, the amount of reserves and liabilities for general account contract held by plan may not exceed 10% of total reserves and liabilities of general account plus surplus. See Section 6.2(a) of Model Note Purchase Agreement 11 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

13 Prohibited Transaction Exemptions Bank Collective Investment Funds/Insurance Company Separate Accounts Terms of transaction may not be less favorable to the collective trust fund or pooled separate accounts than terms generally available in an arm s-length transaction between unrelated parties Bank or insurance company must maintain records of the transaction for 6 years and records must be made unconditionally available to DOL, IRS, any plan fiduciary with authority to acquire or dispose of plan interest in the fund, any contributing employee to a plan with an interest in the fund and any participant or beneficiary Plan s interest in fund (aggregated with other plans maintained by the same employer) must not exceed 10% of the fund s total assets See Section 6.2(b) and (c) of Model Note Purchase Agreement 12 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

14 Prohibited Transaction Exemptions Any organization that is either: INHAM a direct or indirect wholly-owned subsidiary of employer or of a parent organization of an employer OR AND a membership nonprofit corporation, a majority of whose members are officers or directors of such an employer or parent organization; is a Registered Investment Advisor that has under its management and control total assets attributable to plans maintained by affiliates of the INHAM at least $50M and plans maintained by affiliates of the INHAM (and/or the INHAM) must have at least $250M in aggregate assets 13 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

15 Prohibited Transaction Exemptions INHAM (cont d) Basic Requirements INHAM must have discretionary authority or control with respect to plan assets involved in transaction Terms of transaction must be negotiated by INHAM INHAM must make decision to enter into transaction i.e., INHAM retains fiduciary responsibility. Plan sponsor may not retain right to veto or approve transaction 14 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

16 Prohibited Transaction Exemptions INHAM (cont d) Transaction not part of arrangement designed to benefit PII Terms at least as favorable as arm s-length transaction PII is service provider (or related to service provider) who does not have discretionary authority or control over investment of plan assets involved in transaction and does not render investment advice for a fee with respect to such assets. PII may not be INHAM or person related to the INHAM 15 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

17 Prohibited Transaction Exemptions INHAM (cont d) INHAM must adopt written policies and procedures to ensure compliance with exemption Independent auditor must conduct exemption audit annually and issue written report to plan on compliance with policies and procedures See Section 6.2(e) of Model Note Purchase Agreement 16 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

18 Section 6.2 of Model Form No. 1 Section 6.2. Source of Funds. [1] Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a Source ) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder: (a) the Source is an insurance company general account (as the term is defined in the United States Department of Labor s Prohibited Transaction Exemption ( PTE ) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the NAIC Annual Statement )) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser s state of domicile; or [1] Form Note: Subdivisions (c), (d), (e) and (g) of this Section 6.2 all may require a Purchaser to furnish the Company with the names of plans or a relevant QPAM under certain circumstances. 17 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

19 Section 6.2 of Model Form No. 1 (b) the Source is a separate account that is maintained solely in connection with such Purchaser s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or (c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or 18 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

20 Section 6.2 of Model Form No. 1 (d) the Source constitutes assets of an investment fund (within the meaning of Part V of PTE (the QPAM Exemption )) managed by a qualified professional asset manager or QPAM (within the meaning of Part V of the QPAM Exemption), no employee benefit plan s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of control in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or 19 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

21 Section 6.2 of Model Form No. 1 (e) the Source constitutes assets of a plan(s) (within the meaning of Section IV of PTE (the INHAM Exemption )) managed by an in-house asset manager or INHAM (within the meaning of Part IV of the INHAM exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of control in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or (f) the Source is a governmental plan; or (g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or (h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 6.2, the terms employee benefit plan, governmental plan, and separate account shall have the respective meanings assigned to such terms in section 3 of ERISA. 20 Day, Berry & Howard LLP C O U N S E L L O R S A T L A W

22 April 27, 2006 American College of Investment Counsel Spring Forum INTERNATIONAL TRADE COMPLIANCE IN LENDING TRANSACTIONS: AN OVERVIEW * Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, D.C Main Tel (202) Main Fax (202) Simeon M. Kriesberg Direct Tel (202) Direct Fax (202) skriesberg@mayerbrownrowe.com By Simeon M. Kriesberg Lending transactions almost always require compliance with various U.S. international trade laws, even if neither the lender nor the borrower is organized under U.S. law or based in the United States. This paper focuses on four such international trade laws that warrant the attention of counsel to lenders and borrowers: (i) the U.S. Foreign Corrupt Practices Act, (ii) the U.S. export control laws, (iii) the USA PATRIOT Act, and (iv) the U.S. embargoes or economic sanctions laws. Because the application of these laws to specific lending transactions depends heavily on the particular factual circumstances, this paper seeks only to provide an overview of these laws and does not constitute legal advice. Following a summary of these laws, the paper comments on certain standard provisions in lending agreements that raise issues for international trade compliance. * 2006 Mayer, Brown, Rowe & Maw LLP. Simeon M. Kriesberg is a partner in the Washington, D. C. Office of Mayer, Brown, Rowe & Maw LLP, who has advised clients on international trade compliance for nearly 30 years. He may be reached at skriesberg@mayerbrownrowe.com. For more information, visit

23 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 2 OUTLINE I. THE U.S. FOREIGN CORRUPT PRACTICES ACT A. The Accounting Provisions B. The Antibribery Provisions C. Penalties for Violations II. THE U.S. EXPORT CONTROL LAWS A. Exports of Products, Software, and Technology from the United States B. Re-Exports of U.S.-Origin Products, Software, and Technology C. Re-Exports of Foreign-Produced Products Incorporating U.S. Content D. Deemed Exports E. Exportation of Encryption Items F. Penalties for Violations III. THE USA PATRIOT ACT A. Application to Financial Institutions B. Main Compliance Requirements C. Penalties for Violations IV. THE U.S. EMBARGO LAWS A. UTransactions with Embargoed Countries B. UTransactions with Prohibited Entities and Individuals C. Prohibited Facilitation of Transactions Involving Foreign Entities D. Prohibited Involvement by U.S. Citizens and Permanent Residents E. Penalties for Violations V. STANDARD PROVISIONS OF LENDING AGREEMENTS: INTERNATIONAL TRADE COMPLIANCE A. Representation and Warranty on General Compliance with Laws B. Representation and Warranty on International Trade Compliance Laws C. Covenant on General Compliance with Laws D. Covenant on International Trade Compliance Laws CONCLUSION

24 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 3 I. The U.S. Foreign Corrupt Practices Act The combination of wide-ranging application and aggressive enforcement make the U.S. Foreign Corrupt Practices Act ( FCPA ) a law to be reckoned with in lending transactions. The FCPA includes both accounting and antibribery provisions. A. The Accounting Provisions The accounting provisions of the FCPA apply to issuers of securities registered with the Securities and Exchange Commission; officers, directors, employees, and agents of such issuers; and stockholders acting on behalf of such issuers. The accounting provisions require that an issuer maintain books, records, and accounts that accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The accounting provisions also require that an issuer maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management authorizations, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. B. The Antibribery Provisions The antibribery provisions of the FCPA apply to the persons subject to the accounting provisions as well as to the following persons: individuals who are citizens, nationals, or residents of the United States; corporations, partnerships, associations, joint-stock companies, business trusts, unincorporated organizations, and sole proprietorships, insofar as such entities have their principal place of business in the United States or are organized under the laws of any State, territory, possession, or commonwealth of the United States; officers, directors, employees, and agents of the foregoing entities; and stockholders acting on behalf of the foregoing entities. Also covered are foreign persons that commit in the United States an act in furtherance of a foreign corrupt practice, as defined below. The antibribery provisions of the FCPA prohibit any subject person from offering or giving anything of value to a foreign government official, a foreign political party or party official, a foreign political candidate, or an official of a public international organization for purposes of (i) influencing any act or decision of such recipient in an official capacity, (ii) inducing the recipient to do or omit to do an act in violation of the lawful duty of such recipient, or (iii) securing any improper advantage, all in order to obtain, retain, or direct business for or to any person. The antibribery provisions also prohibit any such person from offering or giving anything of value to any other person if the giver knows that all or a portion of the gift will be offered or given, directly or indirectly, to a foreign government official, a foreign political party or party official, a foreign political candidate, or an official of a public international organization

25 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 4 for the foregoing purposes. In the context of this latter prohibition, the requisite knowledge exists if the giver is aware or has the firm belief that the prohibited conduct is substantially certain to occur; conscious disregard or deliberate ignorance of pertinent circumstances are not excused. The antibribery provisions include one exception and two affirmative defenses. Pursuant to the exception, the antibribery provisions do not apply to any facilitating or expediting payment the purpose of which is to expedite or secure the performance of routine governmental action by a foreign government official, a foreign political party, a foreign political party official, or an official of a public international organization. Routine governmental action includes (i) obtaining permits or licenses, (ii) processing governmental papers, (iii) scheduling inspections, (iv) providing police protection, postal services, and telephone service, (v) supplying power and water, (vi) loading and unloading cargo, (vii) protecting perishable products from deterioration, and (viii) other similar actions ordinarily and commonly performed by foreign officials. Routine governmental action does not include decisions to award or continue business nor actions affecting such decisionmaking. Pursuant to the affirmative defenses, a person may defend against prosecution for violations of the FCPA s antibribery provisions on the grounds that (i) the offering or giving of something of value was lawful under the written laws and regulations of the country of the official, party, or candidate involved, or (ii) the offering or giving of something of value was a reasonable and bona fide expenditure (such as travel or lodging expenses) incurred by or on behalf of the official, party, or candidate involved and was directly related to the promotion, demonstration, or explanation of products or services or to the execution or performance of a foreign government contract. As the foregoing summary suggests, the application of the FCPA to particular transactions or circumstances depends heavily on the specific facts. It is advisable to consult with knowledgeable counsel with respect to the application of the FCPA to particular transactions or circumstances. Consultation is especially advisable in determining whether any of the statutory exceptions or affirmative defenses might apply. C. Penalties for Violations Violators of the FCPA may incur criminal or civil penalties, depending on the circumstances. Corporations may be fined up to $2 million per violation, while individuals can be fined up to $100,000 per violation and imprisoned for up to five years. Any fines imposed upon officers, directors, stockholders, employees, or agents of a corporation must be paid by the individuals without reimbursement by the corporation. In addition to these penalties, corporate or individual violators of the FCPA may be subject to additional fines or prison sentences under other federal criminal statutes, such as the Racketeer Influenced and Corrupt Organizations ( RICO ) Act. Moreover, corporate violators may be barred from contracts with the United

26 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 5 States Government, may be required to disgorge unlawfully obtained profits, and may be denied export licenses. The United States Government takes the FCPA quite seriously and is not hesitant to prosecute violators. In 1995, for example, Lockheed paid a fine of nearly $25 million for violations of the FCPA by a foreign affiliate in connection with business dealings in Egypt. In 1996, IBM activities in Argentina were the subject of a criminal indictment under the FCPA, in 1997 Triton Energy Corporation settled charges of FCPA violations arising from transactions in Indonesia, and in 1999 Metcalf & Eddy settled charges of FCPA violations arising from transactions in Egypt. In 2002, BellSouth paid $150,000 to settle civil charges that it had violated the accounting provisions of the FCPA with respect to possible FCPA violations by Latin American subsidiaries. Also in 2002, Syncor International and its Taiwanese subsidiary paid some $2.5 million in fines for payments made to doctors in state-run hospitals to obtain and retain business at those hospitals. In 2004, the Swiss company ABB, Ltd. and its subsidiaries paid $10.5 million in fines and disgorged $5.9 million in profits to settle FCPA charges relating to its worldwide operations; Monsanto agreed to pay $1 million in fines and to retain an independent compliance expert for three years in exchange for deferral of prosecution of FCPA charges arising from activities in Indonesia. In the largest total penalty paid to date, Titan Corporation pleaded guilty to criminal FCPA charges arising from payments made in Benin and paid $28 million in criminal and civil fines in A number of other major investigations are reportedly underway, as are criminal prosecutions. Enforcement actions have been frequent in recent years, often based on expansive interpretations of the FCPA. Having an effective FCPA compliance program in place is crucial preventive medicine. Furthermore, in the event that a violation does occur, the existence of an effective FCPA compliance program may mitigate the sanctions that are otherwise applicable. The Securities and Exchange Commission and the Department of Justice, which enforce the FCPA, as well as the U.S. Sentencing Commission, which promulgates sentencing guidelines for the federal courts, have all emphasized the relevance of compliance programs in determining the severity of the sanctions that are imposed for violations of law. II. The U.S. Export Control Laws Broadly, U.S. export controls are restrictions on the exportation from the United States, by U.S. or non-u.s. persons, of products, software, and technology, and the re-exportation from foreign countries of U.S.-origin products, software, and technology. Although several U.S. government agencies administer export controls, the Department of Commerce has the broadest jurisdiction and is the most relevant to non-military export activities. So-called dual-use controls controls applicable to items that are of commercial or both commercial and military use are set forth in the Export Administration Regulations ( EAR ), and are administered by

27 TP PT Export Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 6 the Bureau of Industry and Security ( BIS ) of the Department of Commerce. The EAR and 1 other useful compliance information can be found at the BIS website: HTUhttp:// PT The EAR impose varying levels of controls on the exportation and re-exportation of products, software, and technology based on: (i) the technical sophistication and potential use of the item to be exported; (ii) the country of destination; (iv) the proposed end-use of the item; and (v) the particular end-user that will receive the item. Generally, all products, software, and technology exported from the United States, or made in the United States and exported from abroad, are subject to the requirements of the EAR. The EAR also apply to some foreign-made items if they contain certain proportions of U.S.-origin content or if their manufacture uses U.S.- origin technology. The rationale for export controls is the furtherance of U.S. foreign policy objectives, including national security, limitation of the proliferation of nuclear weapons and weapons of mass destruction, elimination of terrorism, and so forth. Any item that is sent from the United States to a foreign destination is considered to be exported. Exportation includes not only shipping merchandise abroad but also such alternative means as carrying product samples outside the United States, bringing software to a foreign country on a laptop computer, and transferring technology to a wholly-owned U.S. subsidiary in a foreign country. As discussed in greater detail below, exportation also includes affording to foreign nationals in the United States access to U.S.-origin technology or source code. A. Exports of Products, Software, and Technology from the United States With the exception of most exports to Canada, exportation from the United States of any product, software, or technology (collectively, items ) must be authorized either (i) by a BISissued license or classification ruling, or (ii) by the exporter s own determination that the exportation is permissible under a license exception set forth in the EAR or that the exportation is permissible because no license is required. Licensing requirements also apply to the reexportation of items subject to the EAR, as discussed below. The first step in determining whether an export license is needed is to ascertain whether the item to be exported has a specific Export Control Classification Number (ECCN). All ECCNs are listed on the Commerce Control List (CCL), which is part of the EAR. Exporters are 1 controls on articles and services that are primarily for military use are set forth in the International Traffic in Arms Regulations ( ITAR ), and are administered by the Directorate of Defense Trade Controls of the Department of State. Lenders to companies that export U.S.-origin military and other defense items should become familiar with the ITAR. The antiboycott regulations, which are part of the EAR, govern the action of U.S. persons with respect to unsanctioned international boycotts and bar participation by U.S. persons in the Arab League boycott of Israel. Lenders and borrowers that engage in transactions in the Middle East must pay particular attention to these complex regulations. The ITAR and the antiboycott regulations are beyond the scope of this paper.

28 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 7 responsible for determining the correct ECCN for all the items that they export. An exporter may classify an item on its own, or the exporter may, for greater assurance, obtain a classification from BIS by submitting a classification request. BIS does not charge a fee for a classification ruling or for an export license. The ECCN entry on the CCL states the types of controls placed on that item, along with a country chart designator. These designators refer to the Commerce Country Chart contained in the EAR, which lists the types of export controls generally applicable to items destined for specified countries. By identifying the type of control required by the ECCN classification and the country to which the particular item is to be exported, an exporter can ascertain whether a license is needed to export that particular item to that particular country. Certain items are subject to the jurisdiction of the EAR, but are not described on the CCL by a particular ECCN. These items are classified as EAR 99. Typically, items classified as EAR 99 do not require an export license based on national security or other policy concerns reflected in the Commerce Country Chart. Certain restrictions may apply, however, based on the country of destination, the end-use, and the end-user, as discussed below. Only a small percentage of all U.S. exports require a license from BIS based upon their classification. Even if a license is required for a particular transaction, a license exception may be available. For example, license exceptions may be available for low-value shipments and for temporary exports that remain under the exporter s control. The availability of a particular license exception may depend upon the country of destination and the item exported. License exceptions and the conditions for their use are set forth in the EAR. For certain destinations, all items, even those classified as EAR 99, require a license prior to exportation. These destinations are embargoed countries or countries designated as supporting terrorist activities, currently Cuba, Iran, Libya, North Korea, Sudan, and Syria. BIS has overlapping jurisdiction with the Office of Foreign Assets Control of the Department of the Treasury ( OFAC ) with respect to embargoed countries. The OFAC-administered embargo programs are discussed in Part IV of this paper. The EAR also contain certain end-use restrictions. Some end-uses are prohibited while others may require a license. For example, without a license from BIS, an exporter may not export items of any kind to entities involved in the proliferation of nuclear, biological, or chemical weapons and the missiles to deliver them. Finally, there may be restrictions on export transactions based upon the end-user of the items. Certain entities and individuals are prohibited from receiving U.S. exports and others may only receive items if the exportation has been licensed. These restricted end-users are identified by BIS and posted on its website, in such listings as the Denied Persons List, the Entity List, and the Unverified List. Exporters are responsible for ensuring that their exports are not destined for such end-users.

29 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 8 B. Re-Exports of U.S.-Origin Products, Software, and Technology Of particular importance to international lending transactions is the application of U.S. export controls to re-export transactions occurring outside the territory of the United States. The EAR apply to U.S.-origin items, wherever located, and place restrictions on foreign persons reexporting to a third country items that were originally exported from the United States. If the items are of U.S.-origin, or in some cases based on U.S.-origin technology, or contain a certain percentage of U.S.-origin content, then the exporter in the foreign country may have to obtain a U.S. export license before it may re-export the items. Generally, a license is not required for items that at the time of re-exportation could be exported directly from the United States to the new destination without a license. C. Re-Exports of Foreign-Produced Products Incorporating U.S. Content The EAR also place restrictions on the re-exportation of certain foreign-produced products incorporating U.S.-origin parts, components, or software, or foreign-produced products based on U.S. technology. The EAR exempt from control, however, those foreign-made items with de minimis U.S. content. For products destined for embargoed countries, de minimis U.S. content is 10 percent of the total product value. For products destined for non-embargoed destinations, de minimis U.S. content is defined as 25 percent of the total value. The EAR contain detailed rules regarding the calculation of the value of U.S.-content. There are limitations on the de minimis exception for foreign-made products that incorporate U.S.-origin encryption items. D. Deemed Exports The release to a foreign national of software source code (but not encryption source or object code) or technology (including encryption technology) is deemed to be an export to the country of origin of the foreign national, even if the release occurs in the United States. The release of software source code or technology includes visual inspection of such items by visiting foreign nationals or provision of technical assistance to foreign nationals. As a general rule, if an exporter needs a license to export software source code or technology to a particular country, then the exporter also needs a license to release such items to a foreign national of that country, even though the foreign national is located in the United States or a third country. E. Exportation of Encryption Items BIS maintains special controls on encryption items, such as encrypted hardware and software and encryption technology. In many cases, application must be made to BIS for a onetime review of the encrypted software before it can be exported. In addition, there are semiannual reporting requirements for the exportation of certain encrypted items. Posting encryption source code and object code on the Internet or making such code available for download to locations outside the United States is considered an exportation.

30 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 9 F. Penalties for Violations Penalties for violations of the EAR include denial of export privileges, fines, or in some cases imprisonment. Civil fines of up to $12,000 per violation, and up to $120,000 for each violation involving national security controls, may be imposed. Criminal sanctions for knowing violations include fines of the greater of $50,000 per violation or five times the value of the exportation, and imprisonment for up to five years. Criminal sanctions for willful violations include, for corporations, fines of the greater of $1 million per violation or five times the value of the exportation, and, for individuals, $250,000 per violation and imprisonment for up to 10 years. Since BIS publicizes the denial of export privileges and the imposition of fines, the corporate image of a violator may also suffer. III. The USA PATRIOT Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act or the PATRIOT Act ) brought about significant change to federal money laundering law requirements for a broad range of financial institutions, as defined by the Bank Secrecy Act ( BSA ). All financial institutions are required to undertake certain compliance procedures in accordance with implementing regulations, including the implementation of overall anti-money laundering ( AML ) programs, and procedures to verify the identity of customers. Certain categories of financial sector industries involved in financing, lending, securitization, and capital markets transactions are expressly enumerated, but not defined, in the BSA definition of financial institution. Specifically, these include (but are not limited to) the following categories: (i) banks and broker-dealers; (ii) insurance companies; (iii) investment bankers and investment companies, including unregistered investment companies; (iv) loan or finance companies; and (v) persons involved in real estate closings and settlements. The Department of the Treasury ( Treasury ) is in the process of issuing industry-specific regulations that apply certain compliance obligations by industry and simultaneously define each industry. Banks, broker-dealers, and insurance companies have been addressed in final rules. The category of investment companies has been (tentatively) defined by Treasury via proposed rules. Treasury has also issued proposed rules to apply the PATRIOT Act to another category not specifically enumerated in the BSA: investment advisers. No regulations have been proposed or finalized for loan or finance companies or persons involved in real estate closings and settlements, though Treasury has issued an advance notice of proposed rulemaking soliciting comments on the scope of the latter. A. Application to Financial Institutions 1. Banks and Broker-Dealers Banks and other depository institutions have had longstanding (pre-usa PATRIOT Act) AML obligations, imposed mainly by the BSA and guidance issued by federal functional

31 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 10 regulators. Among the AML obligations that banks were required to undertake prior to the Act were the establishment and implementation of BSA compliance programs, including measures to identify customers. The BSA requirements closely resemble the USA PATRIOT Act s requirements for AML programs and customer identity verification. The regulations issued under the USA PATRIOT Act enhance the due diligence measures and expand the AML compliance programs that banks are required to undertake. In addition, the USA PATRIOT Act requires additional compliance obligations of banks and other depository institutions, including the imposition of restrictions on private banking, correspondent, and shell banking relationships. Prior to the enactment of the USA PATRIOT Act, broker-dealers had little in the way of formal AML obligations. Regulations issued after the enactment of the Act, however, rapidly imposed comprehensive compliance requirements, including requiring broker-dealers to (i) establish AML programs, (ii) establish customer identity verification programs, (iii) undertake measures to enhance due diligence for correspondent account relationships, and (iv) file suspicious activity reports. Certain requirements have also been imposed on futures commission merchants and introducing brokers in commodities. 2. Insurance Companies In imposing AML and suspicious activity report ( SAR ) requirements on insurance companies, Treasury limited the requirements to companies engaged in issuing or underwriting certain insurance products that Treasury considered most likely to pose a high risk of money laundering. Specifically, the requirements apply to permanent life insurance policies (other than group life insurance policies), annuity contracts (other than group annuity contracts), and any other insurance product with features of cash value or investment. The term insurance company does not include insurance agents and brokers, though insurance companies are responsible for integrating their agents and brokers into the companies AML and SAR programs. The AML and SAR requirements applicable to insurance companies take effect as to transactions on or after May 2, Investment Companies The term investment company is not defined in the BSA, the PATRIOT Act, or their respective legislative histories. In implementing the BSA, Treasury has construed the term to include companies registered under the Investment Company Act as well as certain companies not required to be registered. Thus, Treasury has issued rules applicable to mutual funds to establish AML compliance programs (interim final rule), to establish customer identity verification procedures (final rule), and to file suspicious activity reports (proposed rule); and Treasury has issued a proposed rule ( Proposed Rule ) that would apply the AML compliance program requirement to unregistered investment companies. Companies that fall within this latter category are required to implement the AML program required by Section 352 of the USA PATRIOT Act and to file a notice with the Financial Crimes Enforcement Network ( FinCEN ),

32 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 11 containing certain identifying information. The Proposed Rule would appear to be more relevant to hedge funds and actively managed shorter-term trading strategy funds, whereas other types of private investment funds, in particular many private equity funds, would not likely be covered. 4. Loan or Finance Companies The term loan or finance company is not defined in the BSA, the PATRIOT Act, or their respective legislative histories. Further, no regulations have been proposed or finalized that define or offer guidance on the scope of the term. 5. Persons Involved in Real Estate Closings and Settlements The term persons involved in real estate closings and settlements is not defined in the BSA, the PATRIOT Act, or their respective legislative histories. Further, no regulations have been proposed or finalized that define or offer guidance on the scope of the term. In 2003, Treasury published an advance notice of proposed rulemaking, soliciting initial comments on the application of the PATRIOT Act to persons involved in real estate closings and settlements. 6. Investment Advisers The term investment adviser is not expressly included in the BSA s definition of financial institution. The BSA, however, confers upon Treasury the authority to include other businesses within the definition of financial institution so long as the activities of such business are similar to, related to, or a substitute for the activities of other financial institutions. Under that authority, Treasury published in 2003 a proposed rule ( Proposed IA Rule ) under Section 352 of the USA PATRIOT Act to require investment advisers ( IAs ) to establish AML programs. The Proposed IA Rule applies the AML program requirement to any investment adviser, which is defined as: a person whose principal office and place of business is located in the United States that: (1) [i]s registered or required to be registered with the Securities and Exchange Commission under Section 203(a) of the Investment Advisers Act of 1940 and reports or is required to report in Part IA of SEC Form ADV that it has assets under management; or (2) [i]s exempt from registration with the SEC pursuant to section 203(b)(3) of the Investment Advisers Act and that would be required, if it were registered with the SEC, to report in Part IA of SEC Form ADV that it has $30 million or more of assets under management, unless such person is otherwise required to have an [AML] program pursuant to [other regulations issued under Section 352]. Thus, like the rules applicable to investment companies, the investment adviser rule covers businesses required to be registered as investment advisers as well as certain businesses that are

33 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 12 exempt from such registration under the Investment Advisers Act. In addition to the AML program requirements, the Proposed IA Rule requires businesses that are not required to be registered as IAs due to an exemption under the Investment Advisers Act to provide certain information to FinCEN. B. Main Compliance Requirements The principal compliance obligations of the USA PATRIOT Act and the BSA are (i) the comprehensive AML program requirement, (ii) the customer identity verification procedure requirement, (iii) the heightened due diligence requirement for certain foreign and other accounts, and (iv) the suspicious activity filing requirement. Industry-specific implementing regulations have been proposed under certain of these requirements for some, but not all, financial institutions. 1. Anti-Money Laundering Program Section 352 of the USA PATRIOT Act requires all financial institutions to establish AML programs, which, at a minimum, must include four elements: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. The Act also requires Treasury, in consultation with federal functional regulators (which, for purposes of the Act, includes the Commodity Futures Trading Commission) to prescribe minimum standards for AML programs. The statutory effective date for compliance with Section 352 was originally April 24, 2002, but Treasury deferred the deadline for industries as to which implementing regulations have yet to be issued. Thus, compliance with Section 352 by any particular institution is required when applicable industry-specific rules are finalized or issued in interim final form. Final rules are currently in effect as to banks and broker-dealers, and those as to insurance companies apply for transactions on or after May 2, Section 352 regulations have also been (i) issued in interim final form for mutual funds, (ii) proposed for unregistered investment companies, and (iii) proposed for investment advisers (including unregistered investment advisers). 2. Customer Identity Verification Section 326 of the USA PATRIOT Act requires Treasury and functional regulators to promulgate rules requiring identification verification procedures, which at a minimum must require financial institutions to implement, and customers to comply with, reasonable procedures for: (i) verifying the identity of any person seeking to open an account to the extent reasonable and practicable; (ii) maintaining records of the information used to verify a person s identity, including name, address, and other identifying information; and (iii) consulting lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any

34 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 13 government agency to determine whether a person seeking to open an account appears on any such list. At a minimum, an institution s customer identification program ( CIP ) should address the following: (i) customer identity verification procedures, including certain basic information (i.e., name, address, date of birth, and taxpayer identification number); (ii) verification of customer-provided information through documentary or non-documentary information; (iii) any additional verification methods for certain customers based upon the institution s assessment; (iv) comparison with government lists to determine whether the customer is a known or suspected terrorist; (v) notice to the customer regarding the request for information; and (vi) circumstances in which the institution will rely on another financial institution (with an AML program) to verify the customer s identity and to so certify. Treasury, jointly with the appropriate federal functional regulators, has finalized customer identity regulations for the following types of institutions: banks, savings associations, credit unions, securities brokers and dealers, mutual funds, futures commission merchants, introducing brokers, and private banks and trust companies that do not have a federal regulator. The federal bank regulatory agencies have also issued interpretive guidance on customer identification program requirements under Section 326. The Final Rules cover accounts opened by customers at banks. An account is a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. The term customer means (i) a person that opens a new account, or (ii) an individual who opens a new account for either an individual that lacks capacity or a legal entity that is not a person. 3. Heightened Due Diligence for Certain Foreign and Private Accounts The USA PATRIOT Act, inter alia, prohibits certain financial institutions from providing correspondent accounts to foreign shell banks and requires such financial institutions to take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used indirectly to serve foreign shell banks. Thus, financial institutions covered by the rules implementing these restrictions are required to employ enhanced due diligence procedures to ensure that their relationships with foreign entities are not shell bank relationships. Similar due diligence measures are required with respect to other financial relationships, including private banking and payable-through accounts. Currently, the rules applicable to correspondent account due diligence only apply to banks, bank holding companies, other depository institutions, and broker-dealers. However, these rules could be expanded to include other financial institutions in the future, especially in light of the USA PATRIOT Act s broad definition of correspondent account.

35 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page Suspicious Activity Reporting The BSA authorizes Treasury, in its discretion, to promulgate rules requiring financial institutions to file SARs for transactions that satisfy certain thresholds. Prior to the enactment of the USA PATRIOT Act, Treasury had issued such regulations for various industries, such as depository institutions and money transmitters. Section 356 of the USA PATRIOT Act requires Treasury, in consultation with the Federal Reserve Board and the Securities and Exchange Commission, to issue proposed regulations requiring registered broker-dealers to file SARs under the BSA. Similarly, the PATRIOT Act authorizes Treasury, in consultation with the Commodity Futures Trading Commission, to prescribe regulations requiring registered futures commission merchants, commodity trading advisors, and commodity pool operators to file SARs under the BSA. In 2002, Treasury issued a final rule requiring brokers and dealers to file SARs. In addition, subsequent to the passage of the USA PATRIOT Act and under its existing BSA authority, Treasury issued final rules requiring insurance companies, casinos, card clubs, and currency dealers and exchangers to file SARs, and proposed rules (which have not yet been finalized) requiring mutual funds to file SARs. It is likely that, as Treasury perceives suspicious transactions to be occurring in a particular industry, it will accordingly require that that industry file SARs. 5. Special Designation of Countries or Accounts Section 311 of the USA PATRIOT Act grants Treasury authority to designate a foreign jurisdiction, institution(s), class(es) of transactions, or type(s) of account(s) to be of primary money laundering concern, and to require U.S. financial institutions to take certain special measures against the primary money laundering concern. Section 311 identifies factors to consider as well as agencies to consult before Treasury may designate a primary money laundering concern. Section 311 provides Treasury with a range of options that can be adapted to target specific money laundering and terrorist financing concerns. If Treasury determines that a foreign jurisdiction is of primary money laundering concern, then Treasury must determine the appropriate special measure(s) to address the specific money laundering risks. Section 311 provides a range of special measures that can be imposed, individually, jointly, in any combination, and in any sequence. Available special measures include requiring: (i) recordkeeping and reporting of certain financial transactions; (ii) collection of information relating to beneficial ownership; (iii) collection of information relating to certain payable-through accounts; (iv) collection of information relating to certain correspondent accounts; and (v) prohibition or conditions on the opening or maintaining of correspondent or payable-through accounts. Treasury has used its authority under Section 311 to issue final regulations imposing special measures against several countries and banks, including Burma (Myanmar), Nauru, Ukraine, Myanmar Mayflower Bank, Asia Wealth Bank, and Commercial Bank of Syria. It has also issued proposed regulations imposing special measures against a number of additional

36 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 15 entities, including Multibanka, Infobank, and First Merchant Bank OSH Ltd. Most of the final and proposed regulations impose restrictions on the opening or maintaining of correspondent or payable-through accounts for the identified entities. C. Penalties for Violations Violations of the PATRIOT Act s AML provisions, its due diligence requirements for correspondent accounts and private banking accounts, or its prohibition against U.S. correspondent accounts with foreign shell banks can incur civil or criminal fines of at least two times the value of the unlawful transaction, up to $1 million. IV. The U.S. Embargo Laws The United States maintains embargoes, or economic sanctions, targeted at specific countries, entities, and individuals. Embargo programs are administered by the Office of Foreign Assets Control ( OFAC ) within Treasury and impose restrictions on the activities of all persons subject to the jurisdiction of the United States ( U.S. Persons ). Each of the embargo programs has unique features and a separate set of implementing regulations. The OFAC website is located at HTUhttp:// A. UTransactions with Embargoed Countries In general, the embargo programs prohibit U.S. Persons from engaging in virtually all transactions involving embargoed countries, unless a license is obtained from OFAC. Currently, comprehensive embargoes are maintained against Cuba, Iran, and Sudan. More limited restrictions are maintained against the Balkans, Burma (Myanmar), Liberia, North Korea, Sierra Leone, Syria, and Zimbabwe. The formerly comprehensive embargoes against Iraq and Libya were dismantled in recent years, though exports and re-exports to Iraq of certain items controlled by the EAR continue to require a license, and transactions with certain members of the former regime are barred. The targets of embargoes are subject to abrupt change (as the examples of Iraq and Libya demonstrate); changes are publicized at the OFAC website. The definition of U.S. Persons varies among the different embargo programs. Under most of the programs, U.S. Persons includes U.S. citizens, permanent resident aliens of the United States, entities organized under the laws of the United States (including foreign branches), and any entities or individuals located in the United States. The embargoes of Cuba and North Korea also include in the definition of U.S. Persons any entities owned or controlled by other U.S. Persons, such as foreign subsidiaries of U.S. companies. 2 2 Certain of the embargoes are supplemented by other sanctions laws with expansive extraterritorial application. For example, the Cuba embargo is bolstered by the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, commonly known as the Helms-Burton Act. The Helms-Burton Act authorizes U.S. claimants whose property was expropriated by the Cuban

37 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 16 B. Transactions with Prohibited Entities and Individuals In addition to prohibiting U.S. Persons from engaging in transactions involving embargoed countries, the embargo programs prohibit transactions with certain entities and individuals determined to be affiliated with the governments of embargoed countries, as well as entities and individuals involved in certain activities of U.S. concern, such as terrorism and narcotics trafficking. The prohibited entities and individuals are identified on OFAC s list of Specially Designated Nationals and Blocked Persons ( the SDN List ), which is published on OFAC s website. Prior to engaging in any transactions with foreign entities or individuals, U.S. Persons are responsible for ensuring that such entities or individuals are not included on the SDN List. C. Prohibited Facilitation of Transactions Involving Foreign Entities U.S. Persons are also prohibited from facilitating transactions by a foreign entity, including a subsidiary or a foreign related company, with countries, entities, or individuals if the U.S. Persons themselves may not engage in the transactions due to embargo restrictions. Facilitation includes authorizing, supervising, managing, financing, or otherwise enabling such transactions. Thus, even a foreign entity not subject to the U.S. embargo programs may entangle its U.S. parent or affiliate in an embargo violation if the U.S. parent or affiliate facilitates a transaction by the foreign entity with an embargoed country, entity, or individual. Facilitation also includes referrals by a U.S. company to foreign entities of business opportunities that the embargoes bar the U.S. company from pursuing itself. D. Prohibited Involvement by U.S. Citizens and Permanent Residents U.S. citizens and permanent residents, wherever located, are prohibited from engaging in transactions with embargoed countries. Thus, U.S. citizens and permanent residents employed abroad may not participate, through management, supervision, facilitation, or otherwise, in transactions with embargoed countries, entities, or individuals. Furthermore, any U.S. citizens or permanent residents serving on the boards of directors of any entities must recuse themselves government and is being used by third-country companies to sue those companies in U.S. federal courts for damages up to three times the current market value of the property. This right of action has been suspended by the President of the United States but could take effect at any time that the President decides no longer to suspend the provision. The Helms-Burton Act has also been applied to bar from the United States the directors and officers of third-country companies that are involved in the use of confiscated property in Cuba. The Iran embargo is reinforced by the Iran and Libya Sanctions Act of 1996 ( ILSA ), which authorizes the imposition of sanctions whenever a third-country company invests over $20 million in any year in the petroleum resources sector of Iran. Congress is currently considering renewing the Iran provisions of ILSA, which expires in 2006.

38 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 17 from any deliberations or authorizations relating to transactions with embargoed countries, entities, or individuals. E. Penalties for Violations Penalties for violations of the embargo programs vary according to the program. For the most comprehensive embargoes, civil penalties range from $11,000 per violation to $65,000 per violation. Criminal sanctions include fines up to $1.075 million for corporations and $325,000 for individuals, and imprisonment for up to 10 years. Other U.S. laws are sometimes invoked to augment the penalties available under the embargo laws. OFAC publishes on its website the names of parties subjected to penalties assessed or settled, including the amount of the penalty or settlement and the type of violation. V. Standard Provisions of Lending Agreements: International Trade Compliance Standard provisions of lending agreements (drawn from Model Form No. 2 of the Note Purchase Agreement) crystallize some of the issues relating to international trade compliance in the lending context. Several such standard provisions follow, with accompanying commentary on international trade compliance implications. A. Representation and Warranty on General Compliance with Laws Section 5.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not... violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. Comments: This provision may prove difficult for borrowers in Canada, the European Union, and Mexico, which have enacted so-called blocking statutes to bar companies in those jurisdictions from complying with the U.S. embargo against Cuba, including the Helms-Burton Act. To the extent that the lending agreement includes a covenant calling for compliance with U.S. embargo laws, the performance of the agreement by the borrower may violate a blocking statute applicable to the borrower. If the issue arises, one option may be to carve out Cuba from the covenant dealing with U.S. embargo laws and have a separate covenant against dealings with Cuba. B. Representation and Warranty on International Trade Compliance Laws Section Foreign Assets Control Regulations, Etc. (a) Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign

39 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 18 assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. (b) Neither the Company nor any Subsidiary (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and its Subsidiaries are in compliance, in all material respects, with the USA Patriot Act. (c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company. Comments: This representation and warranty makes no mention of the EAR. Since violations of the EAR may result in denial of export privileges, which could damage the financial health of any business with material export operations, it may be prudent to include an EARspecific representation and warranty. The reference in (a) above to the Trading with the Enemy Act ( TWEA ) is superfluous in light of the inclusion of the embargo regulations; moreover, the TWEA is the statutory basis only for the embargoes of Cuba and North Korea. The warranty in (a) above is ambiguous insofar as it does not state whether it covers potential violations by the borrower only or also by the lender; if the borrower is a non-u.s. person, it could use proceeds in a transaction with a sanctioned country and not violate an embargo, while a U.S. lender might thereby be in violation. The reference in (b)(i) above to the Anti-Terrorism Order is superfluous in light of the reference to the SDN List, which is more inclusive. The warranty in (b)(ii) could be narrowed by a reference to constructive or actual knowledge and by a reference to use of proceeds, without materially increasing a lender s potential liability. Furthermore, the warranty in (b)(ii) would more effectively serve the lender s interests if it referred to dealings and transactions that would cause the lender to be in violation of the embargo laws cited in (a) above. The reference in (b) to the PATRIOT Act needs reworking, since a borrower that falls outside the financial institutions range of the PATRIOT Act would not be subject to the PATRIOT Act, though the lender might be. It may be more useful to require the borrower to represent and warrant that the proceeds of the loan will not be used in any money-laundering or other unlawful activities and that the loan will not be repaid with the proceeds of money-laundering or other unlawful activities. The warranty in (c) above would be improved by substituting the phrase to give anything of value for the phrase for any payments, by adding a specific reference to official of any public international organization, and by deleting the last clause (since the FCPA could apply to the lender regardless whether it applies to the borrower). Generally, the FCPA warranty is an inexact paraphrase of the FCPA s antibribery language, and ignores the FCPA s accounting provisions.

40 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 19 C. Covenant on General Compliance with Laws Section 9.1. Compliance with Law.... the Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation,... the USA Patriot Act... to the extent necessary to ensure that noncompliance with such laws, ordinances or governmental rules or regulations... could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Comments: There is no reason for the specific inclusion of the PATRIOT Act in this general covenant, given the omission of any reference to embargoes and other trade laws. Furthermore, the reference to compliance by the borrower with the PATRIOT Act does not make sense unless the borrower is a financial institution as defined in the PATRIOT Act. Of more importance to the lender is whether the performance of the lending agreement will constitute a violation of the PATRIOT Act by the lender, and the covenant does not assure against that. It may be more useful to require the borrower to covenant that the proceeds of the loan will not be used in any money-laundering or other unlawful activities and that the loan will not be repaid with the proceeds of money-laundering or other unlawful activities. D. Covenant on International Trade Compliance Laws Section Terrorism Sanctions Regulations. The Company will not and will not permit any Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person. Comments: As noted with respect to the representation and warranty on embargo compliance, the reference in the covenant in (a) above to the Anti-Terrorism Order is superfluous in light of the reference to the SDN List, which is more inclusive. The covenant in (b) above could be narrowed by a reference to constructive or actual knowledge and by a reference to use of proceeds, without materially increasing a lender s potential liability. Furthermore, the covenant in (b) would more effectively serve the lender s interests if it referred to dealings and transactions that would cause the lender to be in violation of the embargo laws cited in the model Section 516(a) above. The covenant seems unnecessarily narrow in its exclusive focus on compliance with U.S. embargo laws: it would be prudent to include a covenant with respect to actions by the borrower that might result in violations of specified international trade compliance laws by the lender.

41 Mayer, Brown, Rowe & Maw LLP April 27, 2006 Page 20 Conclusion Compliance with U.S. international trade laws by a borrower may be crucial both to the ability of the borrower to perform under a lending agreement and to the lender s management of liability risk. Appropriate representations, warranties, and covenants in lending agreements are one means of reducing a lender s liability risk. Even more important is an effective internal compliance program that enables the lender systematically to identify and avoid those situations most likely to result in violations of law. The government agencies that enforce the four international trade laws highlighted in this paper are continually raising their expectations as to the internal compliance programs of those subject to these laws. Failure to maintain a robust compliance program increases the risk of violation and increases the sanctions likely to be imposed in the event of a violation. Lenders and borrowers beware. DCDB Apr-06 12:37

42 International Trade Compliance in Lending Transactions: An Overview Simeon M. Kriesberg Mayer, Brown, Rowe & Maw LLP American College of Investment Counsel Spring Forum April 27, Mayer, Brown, Rowe & Maw LLP

43 International Trade Compliance in Lending Transactions Introduction a. A Riddle Wrapped in a Mystery Inside an Enigma b. Focus on Four International Trade Compliance Laws i. U.S. Foreign Corrupt Practices Act ii. U.S. Export Control Laws iii. USA PATRIOT Act iv. U.S. Embargo Laws c. Critique of Standard Provisions in Lending Agreements d. Caveat: Overview Only; Not Legal Advice 1

44 International Trade Compliance in Lending Transactions U.S. FCPA: Who is Covered? a. Any entity whose securities are traded or registered in the United States b. Controlled-in-fact foreign subsidiaries or joint ventures of such entity c. Directors, officers, employees, and agents of such entity and any shareholders acting on behalf of such entity d. In addition, for antibribery provisions, i. Any entity organized under U.S. law or based in the United States ii. Any citizen or resident of the United States iii. Any foreign person who commits subject act in United States 2

45 International Trade Compliance in Lending Transactions U.S. FCPA: What is Prohibited? a. Accounting Provisions i. Books and Records Must Accurately and Fairly Reflect Transactions and Dispositions of Assets ii. System of Internal Controls Must Suffice to Provide Reasonable Assurances that Transactions are Executed in Accordance with Management Authorizations 3

46 International Trade Compliance in Lending Transactions U.S. FCPA: What Is Prohibited? b. Antibribery Provisions i. Offering or Giving Anything of Value ii. Indirectly or Directly iii. To Foreign Government Official, Foreign Political Party or Party Official, Foreign Political Candidate, or Official of Public International Organization iv. For Purposes of (i) Influencing Any Act or Decision of Such Recipient in an Official Capacity, (ii) Inducing Recipient to Do or Omit to Do an Act in Violation of Lawful Duty, or (iii) Securing Any Improper Advantage v. All in Order to Obtain, Retain, or Direct Business for or to Any Person 4

47 International Trade Compliance in Lending Transactions U.S. FCPA: What Knowledge is Required? a. Awareness or Firm Belief that Prohibited Conduct is Substantially Certain to Occur b. Conscious Disregard or Deliberate Ignorance of Pertinent Circumstances Not Excused c. Expectation of Effective Corporate Compliance Program d. Knowledge More Relevant to Mitigation Than to Violation 5

48 International Trade Compliance in Lending Transactions U.S. FCPA: What are the Penalties? a. Civil Fines on Entities, Individuals of $10,000 b. Criminal Fines on Entities of $2 Million c. Criminal Fines on Individuals of $100,000 d. Criminal Sentences on Individuals of Five Years e. No Reimbursement of Individuals Fines f. Other Penalties Include Disgorgement of Profits, Debarment from Government Contracts, Denial of Export Licenses, and Reputational Damage 6

49 International Trade Compliance in Lending Transactions U.S. Export Control Laws: Who is Covered? a. U.S. Manufacturers and Exporters of Goods and Technology b. Non-U.S. Manufacturers and Exporters that Re-Export U.S.-Origin Goods or Technology c. Non-U.S. Manufacturers and Exporters of Goods Made Abroad with U.S. Goods or Technology Valued at Over Ten Percent of Value of Finished Goods 7

50 International Trade Compliance in Lending Transactions U.S. Export Control Laws: What is Prohibited? a. Unlicensed Exports of Controlled U.S.-Origin Goods and Technology, including Deemed Exports b. Unlicensed Re-exports of Controlled U.S.-Origin Goods and Technology c. Unlicensed Exports of Foreign Goods Made with Controlled U.S.-Origin Goods or Technology Exceeding Ten Percent of Value of Finished Goods d. Separate Regulatory Regime for Military Exports 8

51 International Trade Compliance in Lending Transactions U.S. Export Control Laws: What Knowledge is Required? a. By Regulation, Actual Knowledge is Required b. In Practice, Constructive Knowledge Suffices: No Blinders Are Acceptable c. Expectation of Effective Corporate Compliance Program d. Knowledge More Relevant to Mitigation Than to Violation 9

52 International Trade Compliance in Lending Transactions U.S. Export Control Laws: What are the Penalties? a. Civil Fines of $120,000 for Entities or Individuals b. For Knowing Violations, Criminal Fines of Greater of $50,000 or Five Times Value of Transaction for Entities or Individuals, and Sentences of Up to Five Years for Individuals c. For Willful Violations, Criminal Fines of Greater of $1 Million or Five Times Value of Transaction for Entities, and Greater of $250,000 or Five Times Value of Transaction for Individuals, and Sentences of Up to Ten Years for Individuals d. Denial of Export Privileges e. Reputational Damage 10

53 International Trade Compliance in Lending Transactions USA PATRIOT Act: Who is Covered? a. Banks b. Broker-Dealers c. Insurance Companies d. Registered and Unregistered Investment Companies e. Loan and Finance Companies f. Persons Involved in Real Estate Closings g. Investment Advisers h. Other Financial Institutions 11

54 International Trade Compliance in Lending Transactions USA PATRIOT Act: What is Prohibited? a. Failure to Maintain Specified Anti-Money Laundering Program b. Failure to Maintain Specified Customer Identity Verification Program c. Failure to Exercise Due Diligence with Respect to Correspondent Accounts, Private Accounts, Payable- Through Accounts d. Failure to File Suspicious Activity Reports e. Failure to Take Special Measures against Primary Money-Laundering Concerns 12

55 International Trade Compliance in Lending Transactions USA PATRIOT Act: What Knowledge is Required? a. Actual or Constructive Knowledge b. Expectation of Effective Corporate Compliance Program c. Knowledge More Relevant to Mitigation Than to Violation 13

56 International Trade Compliance in Lending Transactions USA PATRIOT Act: What are the Penalties? a. Civil or Criminal Fines of at Least Two Times the Value of Transaction, Up to $1 Million b. More Vigorous Oversight by Federal Banking Regulators c. Reputational Damage 14

57 International Trade Compliance in Lending Transactions U.S. Embargo Laws: Who is Covered? a. Individuals Who Are Citizens of, Residents of, or Located in the United States b. Entities That are Incorporated Under U.S. Law c. Entities That are Located in the United States d. For Cuba Embargo, Foreign Subsidiaries of U.S. Entities 15

58 International Trade Compliance in Lending Transactions U.S. Embargo Laws: What is Prohibited? a. Virtually All Transactions with Certain Embargoed Countries b. Many Transactions with Other Embargoed Countries c. Virtually All Transactions with Specially Designated Nationals (SDNs) d. Facilitation of Foreign Transactions with Embargoed Countries or SDNs 16

59 International Trade Compliance in Lending Transactions U.S. Embargo Laws: What Knowledge is Required? a. Virtually Strict Liability for Major Corporate Entities b. Expectation of Effective Corporate Compliance Program c. Knowledge More Relevant to Mitigation Than to Violation 17

60 International Trade Compliance in Lending Transactions U.S. Embargo Laws: What are the Penalties? a. Civil Fines of $11,000 to $65,000 Per Violation b. Criminal Fines for Entities of $1.075 Million c. Criminal Fines for Individuals of $325,000, and Sentences of Up to Ten Years d. Sometimes Penalties are Compounded by Use of Other Statutes, Such as Bank Secrecy Act e. Reputational Damage 18

61 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions a. Rep/Warranty re General Compliance with Laws i. Section 5.6 The execution, delivery and performance by the Company of this Agreement and the Notes will not... violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 19

62 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions b. Rep/Warranty re International Trade Compliance i. Section 5.16(a). Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 20

63 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions b. Rep/Warranty re International Trade Compliance ii. Section 5.16(b). Neither the Company nor any Subsidiary (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and its Subsidiaries are in compliance, in all material respects, with the USA Patriot Act. 21

64 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions b. Rep/Warranty re International Trade Compliance iii. Section 5.16(c). No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company. 22

65 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions c. Covenant re General Compliance with Laws i. Section the Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation,... the USA Patriot Act... to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations... could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 23

66 International Trade Compliance in Lending Transactions Critique of Standard Lending Provisions d. Covenant re International Trade Compliance i. Section The Company will not and will not permit any Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person. 24

67 International Trade Compliance in Lending Transactions Conclusion a. Be Alert to International Trade Compliance Issues in Lending Transactions b. Carefully Review Provisions in Lending Agreements that Purport to Address Those Issues c. Enter into Lending Transactions Only After Ensuring that International Trade Compliance is No Longer A Riddle Wrapped in a Mystery Inside an Enigma 25