The Changing Regulatory Environment
The federal regulatory environment related to export control is currently undergoing significant revision. Goals of the revision include improving access to global markets for American business; and reducing the regulatory burden and expense of export controls. Large revisions are in the works for weapons, firearms, and related technologies export controls. Amid rapidly changing regulatory environment, how should these issues be evaluated during the due diligence preceding a merger or acquisition?
An Export Control Monitoring Program?
An export control compliance monitoring program that is both written policy and functioning is a very big plus. Most developed compliance programs have a specific leadership position detailed as compliance manager. This point person should have adequate documentation of monitoring procedures, citations, violation, and fines, with corrective action taken; any pending issues that have not been resolved; documentation of internal and external audits, reviews, and violation reporting. Programs should access current Red Flags and Watch Lists from the Department of State. Monitoring for changes in the rapidly evolving regulatory landscape shows good risk management practices.
Previous Fines and Violation Citations?
Tracking violations should include the status of corrective action. Some critical violations may involve more detailed monitoring and reporting to the federal agency involved; that responsibility transfers with the company. If a cited violation will restrict trade or export in some fashion, such as if a weapons export to a sanctioned nation or conflict zone has occurred, that degree and length of trade restriction may impact value. Monitoring of the export of sensitive technologies which may impact foreign policy or national security remains of high interest to federal regulators.
While the majority of export control violations involve matters of the license and the proper paperwork, some are considered dangerous, and have been known to carry jail terms as well as significant monetary penalties. In many cases, penalties can be mitigated for self-reporting at the time of an audit or internal review.
Violations of the Foreign Corrupt Practices Act?
While monetary payments or bribes have been considered in the past a normal part of doing business overseas, efforts to reduce corruption and level the playing field both at home and abroad means this issue is being addressed with more vigor. In the US, the Foreign Corrupt Practices Act is the law and violations will carry a monetary penalty for the company. This law is enforced by the Criminal division of the Department of Justice; and by the enforcement branch of the Securities and Exchange Commission. The SEC has published a resource guide on the FCPA for American business that details specifics for accounting and record keeping requirements.
Will you have Successor Liability?
Citations and unpaid monetary penalties to the federal government over export control violations remain the responsibility of the company; they will transfer to new ownership. This issue has been validated in the courts regularly since 2002; this includes both mergers and acquisitions and acquired equity shares and other assets. Fines and penalties have been especially severe related to the export of sensitive technologies to governments or end-users who are restricted or sanctioned for reasons of national security or foreign policy.
There are legal remedies to reduce liability for new company leadership for previous export control violations. An attorney who is experienced in both business law and the issues related to merger and acquisition liability may be able to craft a specific solution.
Transparency related to export control policy, monitoring procedures, and citation violations are critical pieces of the due diligence when evaluating a potential partnership for merger or acquisition.
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