Anticipating and Controlling International Trade Risk Under the Trump Administration Considerations for PE Funds Gregory Husisian April 6, 2017 Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 1
Topics What to Expect from the Trump Administration Protection Strategies CFIUS Due Diligence and Integration International Regulatory Compliance Questions? Appendix: Compliance Best Practices for High-Risk Legal Regimes FCPA Export Controls OFAC
What to Expect from the Trump Administration Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 3
What to Expect from the Trump Administration President Trump s campaign promises template for actual action Preference for areas where can act by Executive fiat Travel ban Steps to build the wall Trade war NAFTA/FTAs Deregulation push? Dodd-Frank repeal? Border tax? Tax reform?
Areas of Key Exposure for PE Funds Key Nominees Appear Sympathetic to PE Fund Issues Bannon Mnuchin Cohn Clayton Potential Minefields Changes to Dodd-Frank Potential Trade war Potential Repeal of NAFTA Increasing Fines/Enforcement Actions
Areas of Key Exposure Expectation of Ongoing Strong Enforcement Environment AG Sessions is Hard-line Prosecutor Institutional Support for Continuing Aggressive Use of Laws Formula for Heightened Enforcement Increasing Use of Criminal Penalties Increasing Focus on Individuals Enforcement Priorities Unlikely to Change Current Areas of Highest Risk Exposure Antitrust AML Export Controls Economic Sanctions FCPA Up and Coming Cybersecurity Privacy
Special Concerns for PE Funds PE Funds Believe Limited Direct Role Shields Them from Enforcement Actions But Opposite is True Och-Ziff as a Wake-up Call In Fact, PE Funds Have Multiplied Risks Management of multiple funds in multiple companies increases risk vectors Frequent purchases = increased opportunities to inherit problems Frequent investments in multinational companies, or companies that sell abroad, expose PE funds to highest-risk legal regimes Dodd-Frank opens up many PE funds to SEC overview Investigations at one portfolio company can become investigation of many PE funds often do not directly control management, meaning they may lack knowledge of compliance lapses Layoffs at portfolio companies = disgruntled workers = whistleblower possibilities
PE Funds Protection Strategies Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 8
PE Funds CFIUS Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 9
CFIUS Foreign Direct Investment President Trump has promised increased scrutiny of FDI Potential legal changes Net economic benefits test Possible reciprocity test Likely CFIUS changes even absent legislation New personnel Opaque standards Focus on China
CFIUS Focus on PE Funds Heightened consideration of CFIUS filings Consider country of acquisition Export controlled goods/technical data Classified facilities Agricultural/food companies Unique technology/ip Economic not just national security importance Political factors
PE Funds Due Diligence and Integration Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 12
Due Diligence Protection strategies Reps & Warranties Protections Limitations Due Diligence Should not be considered a check-off item Enhanced liability risks Higher penalties Government focus on PE funds
Due Diligence General Topics Evaluation of risk profile of target Countries of operation Types of products sold Interactions with foreign governments Use of third parties/consultants Structure of target s operations Rigor of target s compliance and financial oversight Structure of compliance Policies in place Internal controls Training Audits and process of improvement Prior investigations
Due Diligence Integration Plan Don t Assume target already has good compliance in place That due diligence found all issues Just integrate target into acquiring entity compliance program Recycle old compliance template Do Have an integration plan with set guideposts (30, 60, 90, 180, and 360 day plan) Perform a risk assessment promptly Conduct a compliance gap analysis Follow up on identified issues Pay attention to company culture Set a training schedule
International Regulatory International Regulatory Compliance Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 16
Regulatory Risk Management at Portfolio Funds Compliance = Identifying and Controlling Risk Och-Ziff Settlement and Impact on Portfolio Company Compliance Compliance Lapses Risk large fines Management Distraction Reputational losses Impact on Exit Strategy 17
Regulatory Risk Management: Assessing Risk How is a risk assessment performed? Survey of Current Controls Evaluation of Efficacy of Current Programs Consideration of Business Profile of Company and How It Impacts Compliance Goals Often Conducted Through Questionnaire or Interviews Consideration of Third-party Risk Consideration of Areas Where Troubles Have Arisen in Past Consideration of Industry Risks 18
Twelve Steps to Compliance Step 1: Buy-in at the Top Step 2: Perform a Risk Assessment Step 3: Survey Current Controls Step 4: Assess Local Oversight Step 5: Identify Available Resources Step 6: Create Compliance Program Step 7: Create Internal Controls Step 8: Training, Training, Training Step 9: Integrate Outsiders Step 10: Auditing and Checkups Step 11: Monitor Red Flags Step 12: Communicate with Senior Management/Board 19
Questions? Greg Husisian Foley & Lardner, LLP Washington Harbour 3000 K. St., NW Suite 600 Washington, DC 20007-5109 +1 202.945.6149 ghusisian@foley.com 20
Appendix Compliance Best Practices for High-Risk Legal Regimes Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 21
International Regulatory FCPA Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 22
FCPA 101: The Antibribery Provisions The Antibribery Provisions of the FCPA Prohibit: Paying or offering to pay anything of value Directly or indirectly To a foreign official While knowing that all or part of the thing of value will be paid or offered to a foreign official Corruptly For the purpose of influencing the official in some official act or to secure any improper advantage In order to obtain or retain business 23
What Has President Trump Stated? What Has Trump Promised? FCPA is Bad Law That Disproportionately Impacts U.S. Companies (Trump 2012) Trump 2017: Will be Counseled that Law Often Hits non- U.S. Companies and Actually Levels Playing Field AG Sessions Expected to Prosecute Hard
Ways to Cope? Focus on FCPA Issues Dealings in High-Risk Countries Gift Card Requests Agents and Third-Party Liability Joint Venture Dealing with Whistleblowers Commercial Bribery 25
FCPA: Best Compliance Practices Identification of Risk Points Conducting a Risk Assessment Establishing Procedures for High-Risk Countries Evaluating Dealings with Government Officials Effective Anticorruption and GME&T Programs Regular and Effective Training Active Oversight of Dealings with Third Parties Anti-corruption Audits 26
FCPA: Red Flags Transaction-specific Red Flags for Intermediaries An agent, distributor, or joint venture partner refuses to provide confirmation of willingness to abide by the FCPA. Family or business ties of an intermediary with a government official. Bad reputation of the agent. The intermediary requires that its identity not be disclosed. The intermediary lacks adequate facilities and staff Insistence on using third parties who appear unnecessary 27
FCPA: Red Flags Payment Requests for Intermediaries (cont d) Over-invoicing (i.e., the intermediary asks you to issue a check for more than the actual amount of expenses). Requests that checks be made out to cash or bearer, or that payments be made in cash. Requests that payments be made to a third party. Requests to pay in a third country. 28
FCPA: Audits Typical FCPA Audit Items Include Asset management, such as policies relating to cash management, disbursements, and reimbursements Company policies regarding gifts, entertainment, and travel Third-party foreign relationships and company procedures regarding same Training and education used to ensure employees understand FCPA compliance Accounting of foreign commission payments and professional service fees Recording of expenses and their description 29
FCPA: Audits Typical FCPA Audit Items Include Employee expense reports for employees who have frequent interactions with foreign officials Sales and marketing Those who deal with state-owned entities Those who work closely with third-party intermediaries Expense reports for employees who have large entertainment expenses Third-party contracts and arrangements to determine that they were entered into based upon appropriate due diligence and include anticorruption provisions Third-party payments to confirm they relate to legitimate sales activity Gift, travel, or entertainment provided to foreign officials, including the reasons for the item, its business purpose, and amount involved Third-party due diligence files Third-party certifications to determine that they are complete and up-todate Sample testing of payments under third-party contracts 30
International Regulatory Export Controls Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 31
US Export Controls: An Overview Export Controls International Traffic in Arms Regulations (ITAR) Military Items Found on the US Munitions List (USML) Items Modified to Meet Military Specifications Export Administration Regulations (EAR) Default Export Controls Regime All US-origin Commercial Items Controls Certain US-origin Designated Goods Items with military or sensitive specifications Goods designed to work with military goods 32
What Has President Trump Stated? What Has Trump Promised? Little Focus on Export Controls Specifically Focus on National Security Consistent with Continuing High Level of Export Controls Enforcement
Export Controls: Compliance Recommendations Export Controls Perform a Classification Review Ensure Compliance Program Meets Needs of Entity Given its Risk Profile Review Internal Controls (Controlled Technical Data) Technology Control Plan Clean Desk Policy Technology Transfer Control Plan Off-site Storage Procedures VPN Access Policies Implement Internal Controls (Controlled Goods) Physical Security/Segregated Inventory Plan Logistics and Shipping Screening Integration Evaluate Physical and Data Security 34
Ways to Cope? Issues for Companies with Export-Controlled Goods or Technical Data Perform Classification Review Review Licensing Ensure Entity Has Good Shipping/Logistics Controls Ensure Entity Has In Place Strong Knowledge of Red Flags/Stop-holdrelease Procedures Review of Deemed Export Issues Insufficient Segregation of Controlled Technical Data Not Paying Attention to Non-US Nationals Data Centers/Backups/Cloud Computing Remote Access 35
International Regulatory Economic Sanctions Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients; Foley represents people, not cartoon characters 3000 K Street, NW; Washington, DC 20007 202.945.6149 36
Economic Sanctions: An Overview Most Sanctions Programs Prohibit Engaging in commercial or financial transactions with designated countries, governments, industries, entities, or persons Making payments, entering into contracts, or holding any kind of property in which a sanctioned person has an interest Dealing with any company or entity that is at least 50 percent owned or controlled by sanctioned person 37
Economic Sanctions: Ways to Cope Iran, Iran, Iran Misunderstanding of easing Extra-territorial application of laws Differences in EU and US approach Re-exports/Diversion 3d Parties/Agents/ JVs Poor compliance Inadequate screening Red flags Poor training 38
Economic Sanctions: Ways to Cope Review Compliance Program Annually Review of Full Company Customers and Partners Perform reasonable due diligence to ensure they are not owned or controlled by SDNs (many SDNs have ties to SDNs, or else are owned or controlled by embargoed governments (Iran, Syria) Review Internal Controls Screening controls consistent check of customers, business partners, and other transaction parties against the SDN list and other US Government blacklists Logistics and shipping Training Risk-Based Make certain non-us persons understand extra-territorial application of law Diversion/Re-Export/Red Flags Awareness Contractual Outs for Sanctions Changes Have Contingency Plan for End of General License H 39