Going Global with Bryan Cave: Examining Trade and Regulatory Issues When Moving Goods and People Across Borders

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1 Going Global with Bryan Cave: Examining Trade and Regulatory Issues When Moving Goods and People Across Borders June 24, 2015 Nicole Simonian Clif Burns David Stepp Evan Chuck 1

2 Selling Goods: Regulatory Challenges Export Laws Economic Sanctions Anti-Boycott Compliance Country of Origin Issues and FTAs FCPA 2

3 Selling Goods: Regulatory Challenges U.S. Export Laws Defense Articles (USML) Dual-Use Articles (EAR) All goods must be classified before being sent outside the U.S. Penalties: 5 years in jail Challenges of Classification Ambiguous regulations Lack of adequate specifications on products from other vendors Time and difficulty of agency classification procedures Non-obvious controls on seemingly innocent goods (pipes, valves, network equipment, TEA) 3

4 Selling Goods: Regulatory Challenges Economic Sanctions Potentially covers shipments to other than sanctioned countries (e.g., Iran, Syria, etc.) because of transhipment risks. Know your customer and red flags analysis U.S. sanctions collide with foreign anti-boycott laws E.U., Canada, and others prohibit compliance with U.S. sanctions on Cuba U.S. laws prohibit foreign subsidiaries of U.S. companies in Europe from dealing with Cuba Plan ahead with carefully crafted but limited distribution agreements (N.B. all territories other than Cuba won t work!) 4

5 Selling Goods: Regulatory Challenges Anti-Boycott Laws U.S. Laws (EAR and IRS) prohibit compliance with Arab League Boycott of Israel Complying with primary aspects of boycott: generally good Can agree not to import Israeli goods into boycotting country Can agree not to carry goods into boycotting country on Israeli-flagged ship Complying with secondary aspects of boycott: always bad Agreeing not to use Israeli-origin goods in manufactured product Agreeing not to use ships that visited Israeli ports L/C: Certification by master, carrier or agent that ship is qualified to enter port 5

6 Selling Goods: Regulatory Challenges Anti-Boycott Laws L/C: Certification by master, carrier or agent that ship is qualified to enter port EAR: okay if agent removed IRS: not okay, in any circumstances Lower fines because OAC is afraid of challenge to its authority due to expiration of the Export Administration Act, which initially authorized the anti-boycott rules 6

7 Selling Goods: Regulatory Challenges Country of Origin and Free Trade Agreements Myth: False Certificate of Origin to a Foreign Government is not a violation of U.S. law Fact: 19 U.S.C provides penalties for false certificates of origin to officials of countries with which we have FTAs. Penalty: Fraud = Domestic Value of Merchandise + Unpaid Duties and Penalties Assessed by Foreign Country U.S. Penalties can only be avoided by disclosure to importer of false certificate of origin Foreign Duties and Penalties Owed. 7

8 Selling Goods: Regulatory Challenges The FCPA prohibits: Offering, paying, promising, authorizing payment of money or anything of value To a foreign official To influence any act or decision in his/her official capacity or to secure any other improper advantage For the purpose of obtaining or retaining business The FCPA s accounting provisions Apply to publicly traded companies Must keep accurate books and records and have internal accounting controls 8

9 Selling Goods: Regulatory Challenges FCPA Customs Officials MYTH: Payments to customs officials are permissible grease payments FACT: Very rarely do such payments meet the statutory requirement for facilitation payments No legal right to be moved up in line ahead of others DOJ excludes regular and systematic payments Almost always violate foreign laws, not just in the country where paid, but in UK. UK law has extraterritorial scope. 9

10 Selling Goods: Regulatory Challenges FCPA Distributors MYTH: I Don t Have To Worry About My Distributors, Just My Agents, And I Don t Have Any Agents FACT: FCPA Provisions Extend to Third Party Bribes Made on Your Behalf Eli Lilly sold its drugs in Brazil to distributors who resold them for their own account classic distribution model Lilly gave a discount of 10% to most distributors but a 17% discount to those selling to public hospitals 7 % difference was seen by DOJ as enabling distributor to pay bribes to employees of public hospitals NB: Employees of SOEs are government officials. 10

11 Customs Issues and Considerations Tariff Classification Valuation Free Trade Agreements VAT and GST Foreign Trade Zones, Drawback and Bonded Warehouses Country of Origin Marking and Rules of Origin C-TPAT, Cargo Security and Entry Procedures 11

12 Key Customs Compliance Areas Tariff Classification What is it? Valuation How much is it worth? Country of Origin Where was it made? Special Requirements Are unique reporting or documentary requirements applicable? Preferential Trade Programs Does the imported product qualify for duty-free or reduced duty benefits? Unfavorable Trade Issues Is the imported product subject to punitive duties or action? Recordkeeping Does the importer retain required documentation to substantiate claims made at the time of entry? 12

13 Why Is Tariff Classification Important? Determines total duty due General duty rate Antidumping/countervailing duties Retaliatory duties Special legislative exemptions Trade statistics treaties, trade agreements Compliance measurement Quota and admissibility May determine origin for FTAs 13

14 Duty Preference Programs Beyond tariff classification, there is the additional step of qualifying for potential preferential trade programs Allow for special duty treatment beyond the general rate of duty determined by tariff classification and country of origin Programs are optional Requires affirmative action and a system of internal controls Common area of importer non-compliance Often, failure to perform necessary due diligence and inappropriate reliance on foreign supplier 14

15 If Business is Becoming Increasingly Global Why Do You Still Need to Determine a Single Country of Origin for a Particular Good? TO ESTABLISH: Admissibility Duty rate Compliance with the customs laws concerning foreign origin marking Whether the imported article is subject to additional duties (e.g. antidumping or countervailing duties) Whether the imported article may be subject to a quota limitation 15

16 Intellectual Property Protection Intellectual property right holders may record their trademark, trade name or copyright with customs authorities to monitor and enforce the prohibition against the importation of infringing goods Trademark owner may seek to block imports of offending merchandise Important to work with local customs authorities to block unauthorized imports 16

17 Possible Customs Enforcement Actions Customs inspections and examinations of entry documentation and/ or merchandise Detention of merchandise Seizure of merchandise Civil Penalties Primary enforcement tool Penalties apply regardless of revenue impact Not exclusive remedy Criminal Penalties 17

18 Key Customs Relationships Must Exist Throughout the Company Accounting Distribution Services Law Tax Sales & Marketing Purchasing Import Department Customer Service Receiving Contracts Sub-contracts Engineering Manufacturing Export Other 18

19 Internal Import/Export Compliance Procedures and Best Practices All importers should have the following : Import/ Export Compliance Manual General corporate compliance mandate Detailed monitoring activities Risk management procedures Written internal controls and procedures (SOPs) Internal audit (pre and post-entry) procedures Review paperwork generated by all service providers (carrier, freight forwarder, customs broker) Review complete audit trail purchase order to payment ( womb to tomb ) Be proactive and implement corrective action for any systematic deficiencies Annual training (general awareness and specific issue training) 19

20 Corporate Structure & The Customs Function Where does the Customs Compliance function belong in the corporate structure? Logistics Legal Finance Elsewhere? 20

21 Assessment of Customs Risk How should a particular company s customs compliance risk be assessed? Industry Locations in Asia Locations in US/EU Headquarters verses regional offices Other factors? 21

22 Customs Compliance Automation Corporate software SAP/ Oracle Issue specific software Tariff Classification Compliance checks : PO/ Invoice/ Entry Declaration Third Party Logistics Providers Advantages/ Disadvantages 22

23 Foreign Direct Investment What if importing and exporting alone isn t enough? Coming up with an overall strategy for any FDI project Country considerations 23

24 FDI: The China Example 2014: Inbound: $119.6 billion of FDI Outbound: $102.9 billion Inbound FDI INTO CHINA FDI into China surged 29.4% year on year to US$13.9 billion in Jan China overtook US to become top FDI destination in 2014 FDI in services sector hit $9.2 billion in January (up 45.1% y-o-y) Outbound FDI FROM CHINA OFDI hit US$10.2 billion in January (up 40.6% y-o-y) 24

Foreign Investment Law New FIL drafted Jan 29, 2015 Allows for FIEs to benefit from national treatment principle and follow PRC company law in same way as domestic

25 Foreign Investment Law New FIL drafted Jan 29, 2015 Allows for FIEs to benefit from national treatment principle and follow PRC company law in same way as domestic enterprises Uses negative list approach Only sectors that are on list will be subject to approval Sectors not on list only require application process New FIL drafted Jan 29,

China s First Free Trade Zone in Shanghai s Pudong District Opened September 29, 2013 Creates easier access to domestic and foreign capital Simplifies filing system and shortens requirements to

26 China s First Free Trade Zone in Shanghai s Pudong District Opened September 29, 2013 Creates easier access to domestic and foreign capital Simplifies filing system and shortens requirements to obtain a wholly foreignowned enterprise ( WFOE ) or a joint venture ( JV ) Use of Negative List approach list of sectors where investment is not allowed, all other sectors allowed/encouraged Further opens up 18 service sectors within finance, shipping, trade and commerce, professional services, cultural services and social services 26

Free Trade Zone in Shanghai New opportunities through the Modern Services sector Examples: education/vocational training and travel agencies Allows wholly foreign-owned banks Currently 21 approved to

27 Free Trade Zone in Shanghai New opportunities through the Modern Services sector Examples: education/vocational training and travel agencies Allows wholly foreign-owned banks Currently 21 approved to open Trial program of RMB convertibility under capital account Foreign exchange management system will be set up to assist trade investments Machinery and other equipment imported besides those of consumer service enterprises are exempted from import taxes 27

28 Anticorruption in China Application of FCPA and local PRC law Common Flashpoints Travel and Entertainment China Customs Permitting Issues 28

Additional Anticorruption Flashpoints Offering money or gifts to a relative of a foreign official to influence business decisions Agreeing to hire a specific person or firm at the direction of

29 Additional Anticorruption Flashpoints Offering money or gifts to a relative of a foreign official to influence business decisions Agreeing to hire a specific person or firm at the direction of foreign official Excessive entertainment of a foreign official engaged in contract negotiation Directing contributions to a favored charitable organization of the foreign official Failing to account, or maintain official records, for payments made Failing to conduct regular internal audits 29

Going Global with Bryan Cave: Navigating Asia Today Unlocking Opportunities and Understanding Risks for Global Businesses.

Going Global with Bryan Cave: Navigating Asia Today Unlocking Opportunities and Understanding Risks for Global Businesses November 29, 2017 1 Presenters Nicole J. Simonian nicole.simonian@bryancave.com