Fundamentals of International Trade Transactions & International Trade Compliance

Fundamentals of International Trade Transactions

&

International Trade Compliance

1

Annual International Trade Conference University of Nebraska-Omaha Thompson

Center

April 12, 2016

INTERNATIONAL CONTRACT ISSUES

Payment – Payment provisions should specify:

 Amount of payment

 Currency of payment

 Conditions to payment

Letters of Credit – If payment will be via L/C consider the following:

 Will L/C be confirmed?

 Who will bear issuing/confirmation costs?

 What documents must be presented for payment?

 The L/C issuing bank is not a party to your contract. Issuing bank will

only look to L/C payment instructions and will disregard any protective

contractual provisions you may have negotiated.

INTERNATIONAL CONTRACT ISSUES

INCOTERMS

 INCOTERMS provide consistent, internationally agreed-upon terms for when delivery occurs, customs clearance responsibility, insurance responsibility, etc.

– “Ex-Works”, “Free Carrier”, “Carriage & Insurance Paid”, “Delivery Duty Paid”.

 If you do choose to work with INCOTERMS, make sure your contract uses your selected INCOTERMS consistently.

 Review your contracts carefully and delete any boilerplate provisions that contradict your chosen INCOTERMS.

INTERNATIONAL CONTRACT ISSUES

Delivery Dates

If negotiating guaranteed delivery date or liquidated damages, consider the following:

 Potential transit delays.

 Expected time required for customs/port clearance.

 Foreign holiday schedules.

 If possible, define “delivery” and transfer of title as occurring upon arrival at named port but prior to customs and port clearance.

– If you are the importer, then you want to define “delivery” as occurring no earlier than when the goods arrive at your facility.

INTERNATIONAL CONTRACT ISSUES

Language

 If contract is provided in two languages, make it clear which language is the governing language and which language is provided only as a courtesy.

 Small translation mistakes can make a big difference.

“And” vs. “Or”, “May” vs. “Shall”, etc.

 Draft your contract as clearly as possible to avoid translation misunderstandings.

BAD – “Seller shall sell 3,000 cars – half black, half yellow.”

GOOD – “Seller shall sell 1,500 black cars and 1,500 yellow cars.”

INTERNATIONAL CONTRACT ISSUES

Force Majeure Clause

 Excuse either party’s non-performance as a result of “force majeure” events beyond their control.

 “Force Majeure” definitions typically include natural disasters, fires, explosions, war, terrorism, civil unrest, quarantines.

 If moving goods, should also include:

– Dockworkers’ strikes – Port closure

– Changes in laws, regulations and customs/port procedures

INTERNATIONAL CONTRACT ISSUES

Quality Standards & Certificates

 Be aware of whether the jurisdiction you are shipping to requires any sort of inspection or official certification.

 Goods could be blocked at customs if they have not received the appropriate certificate.

Examples:

– GOST-R Certificate – required by Russian government in order to verify that certain products meet applicable safety standards.

– Conformity Assessments and CE markings for products exported to the European Union.

– Grain/Commodity Inspections (required by multiple countries).

INTERNATIONAL CONTRACT ISSUES

Independent Contractor Clause

 If dealing with a third party service provider in a foreign country, need to include clauses and appropriate provisions to clarify that they are independent contractors and not an employee.

– If your independent contractors are deemed to be “employees” then you potentially owe employment tax withholding to the foreign government,

statutory pension contributions to the employee, additional employee benefits, etc.

Exclusivity & Termination Provisions

 Some jurisdictions will automatically give local sales agents, dealers or distributors exclusive representation rights or entitle them to termination benefits.

– Should expressly state non-exclusivity and your right to terminate or not renew without penalty.

INTERNATIONAL CONTRACT ISSUES

Choice of Law – Varies from country to country and transaction to transaction.

(1) Which contractual rights will be most important for you to enforce?

Ex: Right to repossess equipment, right to collect payment, enforcement of intellectual property rights, etc.

(2) Which country’s courts will have the authority to enforce those rights (i.e., where are your counter-party’s assets located)?

(3) Will the courts with that enforcement power honor a judgment obtained from a foreign jurisdiction and/or awarded under your choice of law?

Ex: If the goods you want to repossess are located in Mexico and Mexican courts will not honor a US judgment, then you might be wasting your money suing your counterparty in the US.

INTERNATIONAL CONTRACT ISSUES

Arbitration

 Arbitration may be preferable to some countries’ courts, but arbitration can also be significantly more expensive (will vary from country to country).

 Before selecting arbitration as your method of dispute resolution, consider which courts would be enforcing that arbitration award and whether those courts will recognize an award from your selected arbiter.

 Also consider jurisdictions where your counter-party might sue you and whether those jurisdictions will honor your agreement to settle disputes through arbitration.

 Other concerns:

– Which arbitration rules apply?

– Who pays arbitration fees?

– What language will arbitration be conducted in?

– Where will arbitration be conducted?

INTRO TO FCPA/EXPORT LAWS

 US government is enforcing these laws very aggressively.

– Ex: Wal-Mart investigation - $600 Mill. in legal/defense fees and still ongoing.

– Ex: Recent OFAC settlements with Commerzbank ($258 Mill.) and Barclays Bank ($2.4 Mill.).

– FBI has budgeted $15 Mill. for FCPA enforcement in 2016.

– Prosecutors trying to send individuals to jail whenever possible.

 Prosecuted on a “Should Have Known” Standard – effectively imposes a duty to investigate and resolve any “red flags” suggesting improper payments or exports.

 Important to establish compliance program. Prosecutors will grant leniency for companies with effective compliance programs and will issue harsher penalties when they are ignored.

– Official government statements do acknowledge that program should match your size and risk profile.

 Institutional investors expect companies to have adequate compliance programs.

INTRO TO FCPA/EXPORT LAWS

 Intermediaries such as dealers, distributors or sales agents greatly increase your risk under FCPA and Export Sanctions laws.

– Ex: Re-exporting purchased goods to prohibited persons or destinations.

– Ex: Making improper payments to government officials to win contracts or obtain permits.

 Foreign employees and intermediaries must understand these laws apply to them even if they are located outside the US.

 Important to: (i) perform diligence on intermediaries, (ii) provide them with FCPA/Export compliance training and (iii) include FCPA/Export compliance provisions in their agreements.

 Liability for FCPA/Export violations will flow to purchaser in an acquisition, so should perform FCPA/Export diligence as part of M&A transactions.

FOREIGN CORRUPT PRACTICES ACT

Basic Elements of an FCPA Violation:

1. Anything of Value

2. Corruptly Given or Offered 3. Directly or Indirectly

4. To a Prohibited Foreign Recipient

5. For an Improper Purpose or Advantage

More simply stated:

“Don’t give or offer bribes to foreign government officials and make sure that your foreign

employees and dealers/agents/distributors don’t

either!”

FOREIGN CORRUPT PRACTICES ACT

 Books and Records Standard – Creates higher standard for public companies.

– US government does not have to prove that an improper payment was made, they only have to prove that the payment was accounted for incorrectly.

 Hospitality Payments – it is permissible to provide reasonable meals, lodging, travel for government officials if provided with a clear business purpose.

– Important to document these payments very carefully.

 Facilitation Payments – FCPA provides a limited exception allowing nominal payments to government officials for routine actions that do not involve the exercise of discretion.

– In reality, this exception is very limited and very difficult to prove.

– At least 3/4ths of companies surveyed do not allow facilitation payments.

US EXPORT COMPLIANCE

1 or more of the following agencies may have jurisdiction over your international trade transaction, depending on the goods/services, countries and/or persons involved.

This presentation will discuss only BIS and OFAC rules, but other rules might also apply.

U.S. Department of Commerce

•Bureau of Industry and Security (BIS)

•Bureau of the Census

U.S. Department of State

•Directorate of Defense Trade Controls (DDTC)

U.S. Department of Treasury

•Office of Foreign Assets Control (OFAC) U.S. Department of Homeland Security

•U.S. Customs and Border Protection (CBP)

THIRD PARTY EXPORT LIABILITY

 Re-Exports Liability - you are liable for any exports you make but also for any re- exports of your products.

– Ex: if you ship to a dealer in the Middle East and that dealer then ships to Sudan/Iran/Syria then that violates export laws.

 Foreign Subsidiaries also cannot re-export U.S. goods to prohibited destinations/persons.

– Even if foreign subs are exporting foreign manufactured goods or foreign provided services, US persons cannot be involved in those transactions (concept of “involvement” is very broad – includes very minor involvement such as sending e-mail or making dollar limit approval).

 Referrals/Facilitation – if a customer from denied country or on a denied parties list contacts you to make a purchase, you cannot refer them to foreign supplier/

distributor or otherwise assist in any resulting transaction.

BIS EXPORT CONTROLS

 Focused on items and technology. Consist of the Export Administration

Regulations (“EAR”), which are administered by the Department of Commerce’s Bureau of Industry and Security (“BIS”).

 Items are divided into 10 different ECCN categories on the Commerce Control List:

0 – Nuclear Materials Facilities & Equipment

1 – Materials, Chemicals, Microogranisms and Toxins 3 – Electronics Design Development and Production 4 – Computers

5 – Telecommunications/Information Security 6 – Sensors and Lasers

7 – Navigation and Avionics 8 – Marine

9 – Aerospace and Propulsion

 Also includes “technology” such as source code or design info related to items.

BIS EXPORT CONTROLS

 If an Item falls under ECCN number on the CCL, it will very likely require BIS export license depending on the country you ship it to, the person you ship it to and what the product will be used for.

– At the very least will need to make a special Census filing at time of export.

 Items that do not fall within the CCL are considered “EAR99” and may be exported more freely (unless being exported to otherwise prohibited person or destination).

 BIS Export Controls also apply to “deemed exports”, which occur if you share ECCN technology with foreign nationals who are visiting the US.

DENIED PERSONS LISTS

 BIS, OFAC and other government agencies maintain a total of 11 lists of various terrorists and other individuals who are subject to sanctions.

 “Complete Consolidated List” covers all of these lists and can be searched online at: http://apps.export.gov/csl-search#/csl-search

 Sanctions also apply to entities owned 50% or more by any sanctioned individual/

entity.

 In addition to customers, should also screen financial institutions, freight forwarders, etc.

OFAC SANCTIONS

More focused on services and prohibited countries/persons.

Major Sanctions

 Cuba

 Iran

 Syria

 Sudan

Significant Sanctions

 Burma (Myanmar)

 North Korea

 Russia

 Ukraine

Limited Sanctions

 W. Balkans region

 Belarus

 Cote d’Ivoire

 DR Congo

 Liberia

 Zimbabwe

 Libya

POTENTIALLY EXEMPT ITEMS

 OFAC’s sanctions programs vary significantly from country to country, however certain items are sometimes eligible for export under exemptions or with special licenses.

 Examples include:

– Food

– Medical devices and medicine – Agricultural equipment

 If an export license is available for an item, then that license will typically impose very specific conditions (especially related to payment & financing).

CUBA – EXPORTS OF GOODS

Under recently amended rules, US persons and companies may now:

 Export agricultural equipment to private sector buyers (rare) without a license.

 Obtain BIS export license to sell agricultural equipment to government sector buyers if equipment will be used to benefit the Cuban people (but not to profit the Cuban government).

– Other items eligible for a license: telecommunications, renewable energy, food processing and construction infrastructure that benefits the Cuban people.

 Perform services in Cuba related to eligible sales (may require additional OFAC license depending on scope).

 Travel to Cuba (without license) to perform market research, marketing and contract negotiations related to eligible exports – however, tourism prohibited.

 US financial institutions may confirm Letters of Credit issued by Cuban financial institutions in connection with transactions described above.

CUBA – AGRICULTURE COMMODITIES

US persons and companies may also export agricultural commodities to Cuba without a license.

However, payment terms for agricultural commodities exports to Cuba are very limited:

 Cuban customer must pay via cash-in-advance; or

 Financing can only be provided by a financial institution from outside the US or Cuba.

IRAN

 With very few exceptions, the US trade embargo against Iran remains in place (this topic has received a great deal of incorrect reporting).

 However, European Union has significantly repealed its sanctions against Iran, which is creating confusion in the marketplace.

 If you are selling your products through distributors located in the EU or Middle East, they may be confused and it is important that they understand they cannot re-export US origin products to Iran.

RUSSIA AND UKRAINE

 Sanctions against Russia and Ukraine include complete embargo on

approximately 30 government officials and small number of financial institutions.

 However, those government officials and financial institutions control a very large portion of the Russian economy.

 Any entities 50% or more owned/controlled by these officials/institutions are also subject to the sanctions.

 Especially important to know exactly who your customer is and who their owners are when selling into Russia-Ukraine.

 Sanctions also prohibit exports for:

(1) Military or police use, and

(2) Oil, gas, energy or infrastructure use in Crimea/Sevastpol regions.

How do I sell goods and

services internationally?

OPTION 1 - SELLING DIRECT

Advantages

 Your own personnel have the strongest understanding of the goods and services that you provide.

 You have the most control over your own personnel.

Disadvantages

 Difficult for “outsiders” to overcome language barriers, cultural differences, etc. in foreign markets.

 Transit time for equipment shipments.

 Difficult to perform in-country services such as installation,

maintenance, training, etc.

OPTION 2 – ENGAGING FOREIGN SALES REPRESENTATIVES

Advantages

 Foreign sales representative can provide understanding of local market, translation, etc.

 Provides flexibility to condition compensation upon successful sales.

Disadvantages

 Intermediary risk under Export-FCPA laws.

 Transit time for equipment shipments.

 Sales representative may be unable to perform in-country services.

 Potential exclusivity and termination protections under local law.

 Potential wage withholding and benefit obligations if deemed an

employee under foreign law.

OPTION 3 – APPOINTING FOREIGN DEALERS/ DISTRIBUTORS

Advantages

 Can hold inventory in-country and fill orders more quickly.

 Can perform in-country services such as installation, maintenance, etc.

 Can assume collection responsibility from foreign customers.

Disadvantages

 Intermediary risk under Export-FCPA laws.

 Potential exclusivity and termination protections under local law.

 More difficult to control.

OPTION 4 – FORMING FOREIGN BRANCHES/ SUBSIDIARIES

Advantages

 Can hold inventory in-country and fill orders more quickly.

 Can perform in-country services such as installation, maintenance, etc.

 Under parent company’s control.

Disadvantages

 Assume responsibility for compliance with foreign laws in addition to US laws.

 Formation costs and ongoing administration costs.

 Local currency controls may prevent foreign branch/subsidiary from sending profits to or repaying loans from parent/affiliate companies.

 (Depending on the region) Political unrest and risks that foreign

governments may appropriate your facilities.

RESOURCE FOR BEGINNER INTERNATIONAL BUSINESSES

Nebraska Business Development Center

Website: http://nbdc.unomaha.edu/export/

Office: University of Nebraska at Omaha - CBA 6708 Pine Street

Omaha NE 68182 Tel: 402-554-2521

unonbdc@unomaha.edu

Offers assistance with foreign market research, developing international distribution plans, pricing products for international sales and

licensing/regulation questions.

RESOURCE FOR FINDING FOREIGN DEALERS / DISTRIBUTORS

US Commercial Service (Division of US Department of Commerce)

Website: http://www.export.gov/nebraska/index.asp

Office: Hruska Courthouse 111 S. 18 Plaza, C-52 Omaha, NE 68102-1321 Tel: 402-346-6947

Meredith Bond, Director

Meredith.Bond@trade.gov

RESOURCE FOR PERFORMING DILIGENCE ON FOREIGN

INTERMEDIARIES

Thomson Reuters

Website: http://thomsonreuters.com

Contact: Elizabeth Grande, Esq.

Account Director 651-687-8696

elizabeth.grande@thomsonreuters.com

RESOURCE FOR DEALING WITH CORRUPTION RISKS – TRANSPARENCY INTERNATIONAL’S CORRUPTION PERCEPTIONS INDEX (“CPI”)

CONTACT INFO

Grant Leach, Attorney Husch Blackwell LLP

grant.leach@huschblackwell.com

402.964.5143