Export Compliance for Pump Companies A Changing World

Transcription

1 Export Compliance for Pump Companies A Changing World Scott Sullivan Vice President Ethics, Compliance & Legal Flowserve Corporation Eric McClafferty Partner, Kelley Drye Warren LLP

2 Snapshot of Export Compliance Topics Export Control Issues for the Pump Industry Key Economic Sanctions Developments Enforcement

3 Why Should We Care? It is the law U.S. Government Cares and they are actively enforcing these rules It protects US national security 3

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5 Export Controls on Chemical Equipment 5

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7 Australia Group Formed in 1985 Countries seeking to ensure that the industries do not assist states or terrorists seeking to acquire a chemical and/or biological weapons (CBW) capability. US is a leading member Meets regularly to review control lists, including pumps 7

8 Australia Group Australia Group Common Control Lists Dual-use chemical manufacturing facilities and equipment and related technology and software Chemicals, Biological agents, Plant pathogens, Animal pathogens The above items form part of the basis for the Group's 'common control lists which change over time 8

9 Australia Group and U.S. Rules The U.S. Implements Australia Group Changes primarily in the Export Administration Regulations Commerce Control List Export Control Classification Numbers (ECCN) Administered by U.S. Department of Commerce, Bureau of Industry and Security (BIS) 9

10 Example -- Main Pump Control Language ECCN 2B350 Multiple-seal and seal-less pumps with Manufacturer's specified maximum flow-rate greater than 0.6 m3 /hour (600 liters/hour), or Vacuum pumps with manufacturer's specified maximum flow-rate greater than 5 m3 /hour (5000 liters/hour) (under standard temperature (273 K (0 C)) and pressure (101.3 kpa) conditions), And casings (pump bodies), preformed casing liners, impellers, rotors or jet pump nozzles designed for such pumps, In which all surfaces that come into direct contact with the chemical(s) being processed are made from any of the following materials 10

11 Materials Alloys with more than 25% nickel and 20% chromium by weight; Nickel or alloys with more than 40% nickel by weight; Fluoropolymers Glass Tantalum or tantalum alloys; Titanium or titanium alloys; Zirconium or zirconium alloys; Niobium (columbium) or niobium alloys. Graphite or carbon-graphite; Ceramics; or Ferrosilicon (high silicon iron alloys). 11

12 Changes to AG and Commerce Department Chemical Equipment Export Controls Changed from Specific Types of Pumps to Multiple-seal and Seal-less Pumps But considering a reversal to listing certain pump types Added parts

13 Changes, Cont d Has become more specific regarding certain materials of construction: 1. Fluoropolymers as polymeric or elastomeric materials with more than 35% fluorine by weight 2. Ferrosilicon refers to high silicon iron alloys

14 Proposed Changes to ECCN 2B350 Valves: Expand 2B350 control to include Valves between 1 to 4 inches Where the closure element is designed to be interchangeable (i.e. not custom made for one valve), and Control trigger would be focused on material of body or liner of the valve, not the entire wetted path Similar change for pumps coming? Under discussion.

15 Recent Changes to Pressure Transducer Control in ECCN 2B230 August 2014 Before Change Pressure transducers capable of measuring absolute pressures at any point in the range 0 to 13 kpa and having both of the following characteristics a. Pressure sensing elements made of or protected by aluminum, aluminum alloy, nickel or nickel alloy with more than 60% nickel by weight; and b. Having either of the following characteristics: b.1. A full scale of less than 13 kpa and an accuracy of better than + 1% of full-scale; or b.2. A full scale of 13 kpa or greater and an accuracy of better than Pa.

16 Recent Changes to ECCN 2B230 Cont d After Change All types of pressure transducers capable of measuring absolute pressures and having all of the characteristics described in this ECCN a. Pressure sensing elements made of or protected by aluminum, aluminum alloy, aluminum oxide (alumina or sapphire), nickel, nickel alloy with more than 60% nickel by weight, or fully fluorinated hydrocarbon polymers; b. Seals, if any, essential for sealing the pressure sensing element, and in direct contact with the process medium, made of or protected by aluminum, aluminum alloy, aluminum oxide (alumina or sapphire), nickel, nickel alloy with more than 60% nickel by weight, or fully fluorinated hydrocarbon polymers; and c. Either of the following characteristics: c.1. A full scale of less (than) 13 kpa and an accuracy of better than ± 1% of full scale; or c.2. A full scale of 13 kpa or greater and an accuracy of better than ± 130 Pa when measuring at 13 kpa.

17 Export Reform New Control Lists New Licensing Policies and License Exception Enhanced Export Enforcement Coordination New Information Technology (IT) Infrastructure

18 Export Control Reform Some Specifics for Pump Industry Final Rules for ITAR Categories VI (Surface Vessels) and XX (Submarines) published January 6, 2014 Most pump and valve components (not involving nuclear propulsion) that used to be in ITAR Cat VI are now in CCL category 8A609.x Cat XX has not been significantly reformed Classify products moving from ITAR to EAR carefully. Some may land in ECCN 2B350 or other controlled categories More changes to track!

19 Export C-TPAT Worthwhile to Participate? Goal, Improve Border Security Customs-Trade Partnership Against Terrorism (C-TPAT) certification was an importers-only program Expanding the program to exporters Benefit -- lower level of scrutiny for export documentation when goods destined Mutual Recognition Agreement (MRA) country Reduce the number of export exams by Customs and get priority processing when an export exam is initiated Voluntary

20 ENFORCEMENT 20

21 How Export Violations are Detected Disgruntled employees who turn into whistleblowers (Dodd Frank monetary incentives) Export documentation review by US government analysts (happens daily) Company audits and compliance reviews (internal and external) Inspections and detentions by government agencies (e.g EXODUS process) Export license reviews Government outreach visits and pre and post-shipment verifications (US or abroad) Agents, distributors, freight forwarders, competitors, etc. Intelligence cooperation with other agencies and governments Sudden change in regulatory behavior Ongoing service/ warranty obligations M&A due diligence Banks filing blocking and rejection reports with OFAC Public sources (e.g., newspapers, trade publications, internet)

22 Impact of Export Control Violations Depends heavily on laws and enforcement environment Civil and criminal (knowing/ willful) penalties (can be easily triggered) Corporate and individual penalties Monetary fines- $250,000 to $10 million per violation Imprisonment- up to 30 years Forfeiture of funds/ property Deactivation of AES electronic filing capability Suspension/ revocation of export licenses Debarment from government contracting Government mandated/ monitored compliance program, director, monitor, and/ or audit Negative publicity Damage to corporate reputation and shareholder value Loss of IRS tax benefits & credits

23 Impact, Cont d Suspension/ revocation of export privileges Designation as a Denied Party Corporate equivalent of death penalty

24 Weatherford Settlement Government reports indicated: Sanctions evasion by Weatherford and its subsidiaries Apparent participation of executives, managers, and employees Accused of knowing violations of the regulations Failure to establish an effective system of internal controls

25 Weatherford Settlement $50,000,000 civil penalty paid to BIS Instructed to hire third-party consultant to conduct 3 annual audits of export and re-export to sanctioned destinations $65,612,360 paid to SEC to settle FCPA allegations $137,200,000 paid to DOJ as part of deferred prosecution agreements Plead guilty to 2 criminal counts

26 Criminal Case Charges Weatherford Manager for International Subsidiaries Permanent Resident of U.S. (Green Card?) Co-conspirators in Thailand and Canada Export violations involving oilfield equipment to Iran Charged with fraudulently re-exporting and attempting to reexport EAR items Charged with fraudulently facilitating the re-export of equipment knowing that activity was contrary to U.S. law Question: What did he do? Answer: He forwarded an .

27 SANCTIONS DEVELOPMENTS 27

28 Reminder Principal U.S. Economic Sanctions: Cuba Iran North Korea Sudan Syria Russia! Variety of Denied Party lists Smart Sanctions 28

29 IRAN January 20, Temporary Relief OFAC and State jointly issued formal guidance on the implementation of the temporary sanctions relief package Followed by Fed. Reg. notice from State Temporary 6 month period: January 20 through July 20, 2014 Temporary period extended through November 24, 2014 All activities must take place before the relief terminates including performance and payment Narrow relief 29

30 Scope of Temporary Relief Non-U.S. companies may engage in: Certain activities related to petrochemical exports, crude oil exports, the auto industry, and gold and precious metal, but Dealings with blacklisted Specially Designated Nationals (SDNs) generally remain prohibited, with limited exceptions U.S. companies and persons still generally barred from involvement without OFAC authorization, But with favorable licensing policy regarding safe civil aviation Among other measures 30

31 Cautionary Notes Scope of authorized activity is narrow Fluid situation, contingent on: Iran s compliance Progress on negotiations with Iran on nuclear program Affected by campaign against ISIS and security situation in Iraq and Syria The U.S. Congress s attitude toward Iran and possible new legislation Promised continued enforcement by OFAC 31

32 Evolution of Sanctions CISADA 2012 TRA / ITSR U.S. U.S. Sub. Non-U.S. U.S. U.S. Sub. Non-U.S. U.S. U.S. Sub. Non-U.S. U.S. persons No No No No No No No No No U.S. products No No* No* No No* No* No No No* Exports No Yes Yes No Yes Yes No No Yes Transactions No Yes Yes No Yes Yes No No Yes Sector Limits n/a No No Some Some Some Some Some Some Disclosures No No No No No No Yes Yes Maybe 2013 IFCA Temporary Relief U.S. U.S. Sub. Non-U.S. U.S. U.S. Sub. Non-U.S. U.S. persons No No No No No No U.S. products No No No* No No No* Exports No No Yes No No Yes Transactions No No Yes No No Yes Sector Limits More More More More More Some Disclosures Yes Yes Maybe Yes Yes Maybe 32

33 UKRAINE and RUSSIA March 2014 Executive Orders EO Sectoral Sanctions Apply to various sectors of the Russian Federation economy such as financial service, energy, metals and mining, engineering, and defense and related materiel OFAC sanctions on financing and extended payment terms on sales transactions (among other prohibitions) BIS list of specific ECCN and HTS numbers subject to a presumption of denial for export licensing

34 Russian Industry Sector Sanctions License Requirement for: any person (U.S. or foreign) to export, reexport, or transfer (in-country) any item "subject to the EAR listed on the new Russian Industry Sector Sanctions List (Supplement No. 2 to Part 746 of the EAR)) by HTS numbers (new approach) And items specified on the Commerce Control List (CCL) under ECCNs 0A998 (which is new), 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 (also new)

35 Russian Industry Sector Sanctions Cont d New ECCN 0A998: Oil and gas exploration equipment, software b. Hydraulic fracturing items, as follows: b.3. High pressure pumps Unfortunately no definition or technical specifications are given for what constitutes a high pressure pump Supplement No. 2 to Part 746 Lists 52 Schedule B (export) HTS classifications Be sure to carefully review the classification of items potentially subject to the new rule

36 Russian Industry Sector Sanctions Cont d When the exporter, reexporter, or transferor knows or is informed that The items will be used directly or indirectly In exploration for, or production of oil or gas In Russian deepwater (greater than 500 feet), or Arctic offshore locations, or shale formations in Russia Or is unable to determine whether the listed item will be used in such projects

37 Russian Industry Sector Sanctions Cont d Also BIS license requirement for: any person (U.S. or foreign) to export, reexport, or transfer (in-country) any item "subject to the EAR when the exporter, reexporter, or transferor knows that the items will be used directly or indirectly In exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia; and Gazprom OAO, Gazpromneft, Lukoil OAO, Rosneft, or Surgutneftegas is involved

38 Questions?