Compliance Challenges

1
Compliance Challenges
For Multinational Companies
2
Export Controls Enforcement
Each year, billions of dollars in dual-use
itemswhich have both commercial and military
applications and defense items are exported from
the U.S. To protect national security, foreign
policy, and economic interests, the U.S.
government controls the export of these items
collectively referring to commodities, software,
technology and services. The Departments of
Commerce and State are principally responsible
for regulating the export of dual-use and defense
items, respectively. --Government
Accountability Office Report, December 2006
3
U.S. Interests

• National Security Iran
• Foreign Policy Cuba
• Economic Interests China

4
Export Controls Enforcement Landscape

• National Security Issues Post-9/11
• Economic Concerns Global Market Challenges
• Customs Enforcement Munitions
• Clearer violations involving weapons and
  classified technology
• Commerce Enforcement Dual Use
• More difficult compliance issues/classification
• FBI Jurisdiction as of 2003
• Resources

5
What Do We Mean By Export Controls?

• Bureau of Industry and Security (BIS)
• Dual-use commodities, software and technology
  (collectively items)
• Export Administration Regulations (EAR)
• Directorate of Defense Trade Controls (DDTC)
• Defense articles and defense services
• International Traffic in Arms Regulations (ITAR)
• Office of Foreign Assets Control (OFAC)
• Range from total embargoes to more limited
  sanctions
• Various regimes, each unique

6
Penalties/Consequences

• Criminal Prosecution
• Denial of Export Privileges/Debarment
• Fines
• Intrusive Monitorships
• Reputational Harm

7
Drastic Rise in Enforcement Penalties
250,000
200,000
150,000
100,000
50,000
1979
2001
2002
2003
2004
2005
2006
2007
2008
2009
8
Iran

• National Security Interest
• Enforcement / FBI
• Cooperation
• U.S. Persons
• International Internal Investigations
• Inventory Rule
• Broader Pressures

9
Cuba

• Foreign Policy
• U.S. Embargo
• Canada / European Union
• 10 Percent Rule U.S. Content
• S.E.C. Reporting

10
China

• Economic Interests
• Economic Espionage / FBI
• Market Forces
• Competition

11
Deemed Exports
12
What is a Deemed Export?

• Release of technology/technical data or source
  code to a foreign person
• Can occur in the United States or abroad (deemed
  reexport)
• Deemed to be an export to the home country or
  countries of the foreign national
• A release includes
• Visual inspection by foreign nationals of
  U.S.-origin equipment and facilities
• Oral exchanges of information
• Application to situations abroad of personal
  knowledge or technical expertise acquired in the
  U.S.

13
When Do Deemed Exports Happen?

• Foreign national employee or visitor at your U.S.
  facility
• Involved in developing sensitive/controlled
  software
• Using sensitive/controlled equipment
• Repairing a sensitive/controlled part
• Observing the production of a sensitive/controlled
  device
• Reviewing blueprints

14
Why Can Deemed Exports Be More Likely for a U.S.
Subsidiary?

• Foreign management and technical experts often
  visit facilities of subsidiaries
• Ensure that global quality standards are being
  met
• Collaborate on a technical problem
• Install a new production line to mirror overseas
  production
• Headquarters staff are often seconded to
  subsidiaries
• Develop relationships within the global
  enterprise
• Share ideas across entities in a global group
• Multinational companies often attract
  international talent
• Parent company employees are unfamiliar with
  requirements and find them intrusive

15
Technology Transfers
16
What is a Technology Transfer?

• Closely related to deemed exports because
  typically not characterized by physical shipments
• Transfer of controlled technology/technical data
  to a foreign person abroad
• Examples
• Email
• Fax
• Technical discussions
• Electronic file access

17
Why Can Technology Transfers Be More Likely for
a U.S. Subsidiary?

• Collaboration with headquarters technical experts
  is common
• Pool resources to develop a new product
• Collaborate on a technical problem
• Share technical tips to improve global output
• Sales territory may extend into Canada, Mexico
  and/or Central/South America
• Sourcing is centralized to achieve economies of
  scale across the corporate group
• IT management is centralized at headquarters to
  reduce costs and ensure that global systems
  interface smoothly

18
Tips for Accessing Data

• U.S. subsidiaries should not assume that their
  electronic data are stored in the United States
• Increasingly common for parent company to
  institute centralized IT systems, with systems
  located abroad
• Consider location of
• Document server
• Email server
• Technical specification database (e.g., MFG/Pro)
• Be comprehensive
• Primary server
• Backup server
• Backup tapes
• Must incorporate export controls into physical
  set-up of IT system

19
Tips for Accessing Data (cont.)

• Note that many parent companies maintain global
  sales and invoicing databases
• Example U.S. subsidiary has access to all sales
  files of overseas affiliates
• Does not implicate U.S. export controls
• This is because data is being transferred to the
  U.S.
• Export controls of other countries may be
  implicated
• But may implicate U.S. economic sanctions
  (facilitation)
• Example U.S. subsidiary has access to and in
  some way helps to process sales files from
  overseas affiliates, which sell products to Iran
• Consider need for access controls here as well

20
Other Export Vulnerabilities

• Acquisitions
• Buying an Export Problem
• Company-Wide Policy Flowing Down to Local Levels
  and Locations
• Anti-Boycott Rules
• Lack of Industry Standards
• Resources / Training / Background
• Structure / Reporting

21
Environmental Compliance and the Global Supply
Chain An UpdateSam BoxermanSidley Austin
LLPNovember 16, 2011
22
Summary

• Environmental issues in your supply chain an
  update
• Real world examples
• Some thoughts on best practices

23
Global Supply Chain

• Wherever you manufacture, assemble, sell you
  are connected to the global supply chain
• Raw materials, components, finished products,
  etc.
• Not limited to a single home market
• EHS / product compliance increasingly extended
• Back to suppliers/forward to customers
• You can outsource but still retain the risk
• Supply chain interruptions critical business
  issues
• Reliability critical, just-in-time
  manufacturing
• EHS supply chain issues are business issues

24
Some pressure points

• Environmental chemical/product content
  restrictions
• EU REACH, RoHS
• US Conflict minerals CA Green Chemistry
• Other product performance, labeling
• Globally Harmonized System (GHS) of
  classification and labeling
• Prop 65
• End of life requirements
• EU WEEE directive states in the U.S. take
  back electronics
• http//www.electronicstakeback.com/promote-good-la
  ws/state-legislation/
• Increased attention to outsourced operations
• E.g., California Transparency in Supply Chains
  Act

25
EU REACH - Update

• Registration implementation continues
• 3500 dossiers for existing 1300 new chemicals
• Next dossier registration deadline - May 31, 2013
  
• Manufacture/import gt 100 tonnes/yr of covered
  substance
• Listing of Substances of Very High Concern
• Growing 50 listed and more under consideration
• Some widely used (e.g., boric acid, used in
  glass/fiberglass)
• SVHC listing triggers supply chain notifications
• Articles contain gt 0.1 notice to ECHA,
  customers/recipients
• Q complete product (ECHA) or components (States)

26
EU - REACH Annex XIV

• REACH Annex XIV authorisation list
• No use/mfg in EU after sunset date (3-4 yrs)
• Can obtain authorisation but burden on
  petitioner
• Several listed this year more under
  consideration
• Should be actively managed
• Users should monitor and engage in advocacy on
  SVHC and authorisation listings to avoid supply
  disruptions
• http//echa.europa.eu/chem_data/authorisation_proc
  ess_en.asp -- can track authorisation activities
• Risk of market removal of SVHCs

27
EU RoHS

• Restriction of Hazardous Substances Directive
• Restricts usage of lead, mercury, cadmium, etc.
  in electrical and electronic equipment (EEE)
• EU has re-cast RoHS effective July 2011
• Member States have 18 months to adopt national
  law
• 38 year compliance phase-in for newly covered
  equipment
• List of restricted substances was not expanded
• But there will be enhanced compliance
  obligations

28
EU RoHS

• Existing requirements for demonstrating
  compliance
• Putting a product on the market was a declaration
  of compliance
• So implemented through voluntary declarations /
  due diligence
• ROHS Recast expands compliance requirements
• Require documented declaration of compliance and
  CE marking
• Additional notification and record keeping
  requirements
• Note Similar process underway for EUs WEEE

29
US TSCA

• TSCA reform received a lot of attention
• Proposals would make it more like REACH
• Review of chemicals that have not gone through
  PMN
• Enhanced testing and information gathering
• Whether should be requirement to prove a chemical
  is safe
• Any legislation in this Congress unlikely
• EPA regulatory initiatives

30
US Californias Green Chemistry

• New proposal 10/31/2011 creates multi-step
  process
• Identify chemicals of concern
• Identify/prioritize combinations of products and
  chemicals of concern for which assessments must
  be conducted
• The responsible entities (i.e., mfrs,
  retailers, importers) will have to notify CA of
  their products of concern and conduct
  alternatives assessments on those products
  (e.g., how to reduce use of or exposure to
  chemicals of concern), and
• CA will then take regulatory action based on
  those assessments 
• Given size of CA market, this would be very
  significant

31
US - Conflict Minerals Law

• Buried in financial legislation
• Dodd-Frank 1502
• Intent curb conflicts minerals sourced in
  central Africa
• E.g., tin, tungsten, tantalum, gold (and others
  to be identified by State Department) from
  Democratic Republic of Congo neighboring
  countries
• SEC reporting requirement
• Disclosure, not a prohibition

32
US - Conflict Minerals Law

• Scope to be defined by regulation
• Draft regulations final due November/December
  2011
• Who is subject
• Files with the SEC minerals are necessary to
  the functionality or production of products
  manufactured
• What will be required still uncertain
• A reasonable inquiry declaration conflict
  free or not
• If use / cannot declare non use Conflicts
  Minerals Report
• Need active engagement 4Q 2012/1Q 2013
• To comply will have to know what is in your
  products

33
Some examples

• Who bears the risk of errors in declarations
• Engineer signs a declaration of compliance but
  customers products are denied entry due to what
  you supplied.
• Communication among marketing, EHS, and Legal
• Your marketing dept. sees opportunity to ship
  into a market, only to find out that the product
  was not properly registered.
• Your operations/purchasing find a new supplier
  with a lower cost raw material, but that supplier
  has not registered or properly labeled its
  product.
• Know the details
• An RD program to conclude with roll-out of a new
  product, but you cant ship key materials because
  not registered and volume exceeds exemption.
• Do your due diligence
• You are importing a product into the U.S. You
  rely on supplier assurances, but find out that
  the product contains a regulated hazardous
  substance and there might be both worker and
  public exposure.

34
What to Know.

• Know your products
• What substances are in them? What is in the
  design pipeline?
• Take EHS into account when considering new
  markets, new product lines, transactions, etc.
• Know your supply/value chain
• Who is in it? Where are they? What do they
  do/supply?
• How do they get it to you or your customers?
• How do you manage changes (e.g., in supplier or
  substances)?
• What are the impacts and risks?
• Over the life cycle of your products and
  services?
• What is carbon footprint of supply chain,
  products services?
• Regulatory trends in key markets?

35
Managing the Risk

• Integrate EHS into supply chain/vendor selection
• Include competence on complying with regulatory
  requirements
• Communication
• Avoid surprises to/from suppliers, customers or
  the public
• Traditional risk management measures
• E.g., insurance
• Auditing and verification
• The fact that a contract says it is so doesnt
  mean that it is true
• Advocacy
• Dont just let it happen to you monitor what is
  going on and get involved to defend your
  interests