Managing International Business Risks Thomas B Mc Vey

Managing International Business Risks Thomas B. Mc. Vey Williams Mullen Washington, DC 202. 293. 8118 tmcvey@williamsmullen. com www. williamsmullen. com

Risk Mitigation In International Business The difference between success…. 2

…. And Disaster 3

Risks and Mitigation Strategies Six Greatest Risks In International Transactions: Risks Mitigation Strategies 1. Not getting paid • Use confirmed letter of credit, documentary collections, payment in advance 2. Currency Fluctuation • • Sell in your home country Hedge foreign currency risk 3. Piracy of Intellectual Property • Register all IP in foreign country and use full legal protections Use security device Obtain guarantee backed up by letter of credit or bond for infringement Careful due diligence of parties to whom you will disclose IP Do not disclose most valuable IP in high-risk countries • • 4

Risks and Mitigation Strategies (Continued) Six Greatest Risks In International Transactions: Risks 4. Mitigation Strategies • Contract enforcement – weak enforcement of rights under foreign legal system • • 5. 6. • Political risk – government expropriates your assets or disrupts your business • • Compliance risk – compliance under U. S. and foreign laws 5 Have agreements provide for choice of law in reliable third country Set dispute resolution through arbitration by international arbitration organization to be conducted in reliable third country Letter of credit, performance bond to provide security for breach Obtain advice of local expert to assess risk of political disruption and/or interference with your business Political risk insurance (OPIC, MIGA, private) Compliance program; Training company personnel Careful selection of marketing agents, reps Contract clauses with marketing agents that they will not make prohibited payments

1. Protection of Intellectual Property • Intellectual Property: Trademarks, Patents, Copyrights, Domain Names, Software, Trade Secrets, Proprietary Information, Trade Dress • Register your IP in each country in which you operate (this should be one of the first steps you take in each country) • Register trademarks and domain names in both the local language and your home country language • Develop a strategy for worldwide IP protection at the start of your international development process • For high risk countries with weak IP enforcement, adopt specialized protection strategy 6

IP Protection – Specialized Strategies for High Risk Countries • Register all IP in the foreign jurisdiction • Use of § 337 trade relief actions to block access to U. S. market for parties that pirate your IP • Use robust confidentiality/non-disclosure agreements • Obtain financial security from foreign recipient for unauthorized disclosure or use: letter of credit, bonds, personal guaranty • Deploy robust physical security measures in your office in the foreign country • Conduct frequent IP security audits and market surveillance for joint venture partners • Have IP reside in a secure “offshore” third country • Have different parts of the manufacturing process conducted in different locations – no one party sees all of the IP • Utilize imbedded security feature in invention (e. g. , in software program, etc. ) • Manufacture the “high tech” components in the U. S. and “low tech” in the foreign country • Conduct careful due diligence review of recipient of IP – release IP only to trusted local partners • Lower the retail price of consumer media to slightly above the pirated price (Disney in China) • In China, file patent application before entering joint venture or distribution agreement • Do not transfer company’s most sensitive IP to the high risk country 7

2. Tax Planning • Permanent Establishment – Company’s foreign agent creates a taxable presence in the foreign country and subjects the Company to taxation there • Double Taxation – Company owes tax in two countries from a single business activity • Solution -- Effective use of tax treaties and holding companies • Transfer Pricing – Allocation of income among different countries • Goal: To establish the lowest overall worldwide tax rate 8

3. International Contracts • Choice of law favorable to U. S. party • Dispute resolution – arbitration and enforcement under New York Convention • Identify key provisions in company agreements that must be duplicated in each foreign country (distribution agreements, product marketing agreements, license agreements, etc. ) • Conform key company agreements to local law in foreign countries • Avoid completely re-writing company agreements for each country – maintain key provisions in each foreign country. Goal is uniform worldwide agreements with limited local law adjustments 9

4. Entity Selection – Limitation of Liability • Strategic use of entities to shield parent from liability in foreign country • Limitation of personal liability of officers and directors • Reduce regulatory burdens in foreign jurisdiction • Conducting business in foreign country through local entity gives customers the impression that they are dealing with a local company – increases likelihood of acceptance in foreign market • Coordinate with tax planning 10

5. Compliance with Local Laws in Foreign Country • Regulation of proposed business • Enforceability of contracts • Marketing, advertising, consumer protection laws • Restrictions on foreign ownership • Termination laws (for agents, distributors, consultants and employees) 11 • Employment laws

6. U. S. International Business Laws • Foreign Corrupt Practices Act • Export Administration Regulations • International Traffic In Arms Regulations • U. S. Sanctions Laws • Restrictive Trade Practices – Anti-Boycott Law 12

Foreign Corrupt Practices Act Under the FCPA, U. S. parties are prohibited from: – Making or promsing to make a payment – To a foreign government official – For purposes of obtaining or retaining business. 13

Application of FCPA to International Operations • Actions by foreign agents, sales representatives, distributors, brokers, consultants – U. S. parent company can be liable • Actions by foreign subsidiary – U. S. parent company can be liable • Actions by foreign employees (non-U. S. citizen) – U. S. parent company can be liable • Payments by independent agents, marketing reps, distributors, brokers, subcontractors, joint venture partners are the highest area of FCPA risk for most U. S. companies 14

FCPA – Steps To Reduce Liability • Use FCPA clauses in agents’ agreements • Agent signs annual FCPA certification; agrees to comply with company’s FCPA compliance policy • Company-wide compliance program and employee training • Due diligence background review of agent • FCPA compliance training foreign agents 15

Export Administration Regulations 16

Commerce Control List – Examples of Products Covered - encryption aerospace lasers chemicals power generation high strength fibers electronics sensors electronics machine tools telecom equipment fingerprint/biometrics - computers, networking devices - high performance materials - police equipment - nuclear industry products - high performance pumps, generators, processing equipment - others 17

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Requirements for all exports (even if product is not on CCL): • Know Your Customer Requirements – 15 CFR Part 732, Supplement No. 3 • Denied Persons List – 15 CFR § 764 • Recordkeeping requirements – 15 CFR § 762 • Shipment documentation – 15 CFR § 758 19

The BIS Denied Persons List 20

International Traffic In Arms Regulations (ITAR) 21

U. S. Munitions List (USML) • Category 13: Auxiliary equipment (cameras, encryption, camouflage) • Category 14: Toxicological, chemical, biological agents, protective equipment Category 4: Launch vehicles, missiles, rockets • Category 15: Space systems and equipment • Category 5: Explosives, incendiary agents • Category 16: Nuclear weapons, technology • Category 6: Naval vessels • • Category 7: Military vehicles Category 17: Classified technical data and services • Category 8: Aircraft and equipment • Category 18: Directed energy weapons • Category 9: Military training services, equipment • Category 19: Reserved • Category 20: Oceanographic equipment • Category 10: Protective personnel equipment and shelters • Category 21: Other items designed or adapted for military use • Category 11: Military electronics • Category 12: Optical and guidance control equipment • Category 1: Firearms, weapons • Category 2: Guns and armaments • Category 3: Ammunition, ordinance • 22

USML Category 21 • Category XXI – Miscellaneous Articles: “Any article not specifically enumerated in the other categories of the U. S. Munitions List which has substantial military applicability and which has been specifically designed, developed, configured, adapted or modified for military purposes. ” 23

U. S. Sanctions Programs 24

Sanctions Programs - Summary OFAC Non-Country-Specific Programs OFAC Country Programs • • • • Balkans Belarus Burma Cote D’Ivoire (Ivory Coast) Cuba Democratic Republic of the Congo Iran Iraq Liberia (Taylor Regime) Libya North Korea Sudan Syria Zimbabwe • Anti-terrorism Sanctions Program • Non-Proliferation Sanctions Program • Narcotics Trafficking Sanctions Program • Diamond Trading Sanctions Program • Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions 25

U. S. Sanctions Programs – SDN’s • Prohibition against dealing with Specially Designated Nationals anywhere in the world – 3, 000 Parties – 15 CFR Chapter 5, App. A-C 26

Consolidated Screening List 27

U. S. Anti-Boycott Laws • U. S. persons prohibited from honoring foreign boycott request • U. S. persons prohibited from providing information in response to a boycott request • U. S. persons required to report illegal boycott request to (i) BIS; and (ii) Treasury Department • Most significant examples: Arab boycott of Israel 28

Enforcement of U. S. Laws • Criminal sanctions – up to 20 years imprisonment • Civil fines - $250, 000 per violation or 2 x the value of transaction • Denial of Export Privileges • Debarred status – loss of government contracts • Other 29

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SENTENCING OF COMPANY FOR EFFORTS TO TRADE WITH IRAN U. S. Department of Justice United States Attorney's Office District of Columbia (202) 514 -2007 For Immediate Release: July 31, 2008 Contact - BIS Public Affairs 202 -482 -2721 Raleigh, North Carolina - United States Attorney George E. B. Holding announced today that on Monday July 28, 2008, Allied Telesis Labs, Inc. (ATL), was sentenced in United States District Court in Elizabeth City to a $500, 000 criminal fine and was placed on probation for two years for violating United States law regarding conducting business with Iran. ATL was successfully engaged in the design of telecommunication equipment and systems including high capacity Multiservice Access Platforms (i. MAPs) and related items capable of routing a large volume of messages/information/data. ATL’s guilty plea acknowledged that the corporation conspired with another to trade with the Islamic Republic of Iran in violation of the law. Specifically, ATL and its related corporate entities conspired to land execute a $95, 000 contract with the Iranian Information Technology Company (IRITCO) to rebuild and upgrade the telecommunications systems of approximately 20 Iranian cities, including Tehran. The i. MAPS developed here in the Triangle were to be a central component of this system. Preparation for the execution of the contract went as far as the manufacture of approximately $2 million worth of i. MAPS at ATKK facilities in Singapore. The contract negotiations eventually collapsed, the telecommunications system was not installed and the i. MAPs were sold elsewhere at a loss. Mr. Holding noted the importance of the case: “Every American is aware of the sensitive nature of the United States’ relationship with Iran. That relationship is a central focus of our foreign policy and the work of our Government. The International Emergency Economic Powers Act allows the President to regulate the conduct of business internationally under certain circumstances, a step which was taken with regard to Iran. When the President imposes these types of authorized restrictions, it is incumbent on all citizens, including our corporate citizens, to adhere to those regulations and to follow the strict letter of the law. Only then can we be confident that our country speaks with one voice in our relationships with our international friends and foes. The plea of guilty and the sentence in this case should act as a reminder to our business community of the seriousness with which the Department of Justice takes this issue. ” The case was investigated by the United States Department of Commerce. Assistant United States Attorney John Bowler represented the United States in federal court. 31

HOUSTON FIRM SETTLES EXPORT ALLEGATIONS For Immediate Release: May 1, 2009 Contact - BIS Public Affairs 202 -482 -2721 U. S. Department of Commerce Bureau of Industry and Security WASHINGTON, D. C. -The Commerce Department's Bureau of Industry and Security (BIS) announced today that B. J. Services Company, a provider of specialty products and services to the oil and gas industries, has agreed to pay an $800, 000 civil penalty to settle allegations that it exported certain butterfly and check valves in violation of the Export Administration Regulations. B. J. Services Company is headquartered in Houston, Texas. "An effective compliance program requires continuous oversight and revision, " said Kevin Delli-Colli, the Acting Assistant Secretary of Commerce for Export Enforcement. "Failing to keep pace with changing business practices can result in numerous violations and degrade our system of export controls. " The allegations involved 63 unlicensed exports to a variety of countries of various service parts controlled under Export Commodity Classification Number 2 B 350 for reasons of chemical and biological weapons proliferation, specifically, Teflon-coated valves. The violations occurred between 2003 and 2007. The company voluntarily disclosed the violations, and cooperated fully with the investigation. Acting Assistant Secretary Delli-Colli praised the BIS Dallas Field Office for its outstanding work on this case. BIS controls exports and re-exports of dual-use commodities, technology, and software for reasons of national security, missile technology, nuclear nonproliferation, chemical and biological weapons non-proliferation, crime control, regional stability and foreign policy. Criminal penalties and administrative sanctions can be imposed for violations of the Export Administration Regulations. For more information, please visit www. bis. doc. gov. 32

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Compliance Program -- Major Components 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Export Compliance Official Appointed Within Company Written Policy and Procedures Employee Training List Screening Recordkeeping Internal Compliance Audit Procedure Internal System For Reporting Violations Periodic Updating Penalties for Employees Who Violate Program Adopted At Senior Company Level 34 16146367_1