An ounce of due diligence is worth a pound of dispute resolution, as federal regulators lately have reconfirmed. Recent actions affecting all businesses (1) with an import-export function or (2) exposed to commercial bribery risks, demonstrate how proactive regulatory compliance protects the value of commercial assets in the expanding climate of aggressive governmental enforcement.

New "Red Flag" Guideposts for International Commercial Shipments:
The Commerce Department's Bureau of Industry and Security ("BIS") has issued what amounts to a checklist of suggested procedures for exporters of materials which have been designated as adaptable to military or strategic use (even where the materials normally are intended for civilian consumer use, such as the precious metals in jewelry, agricultural machinery or gaming software with encrypted codes). Originally drafted to deter the diversion of U.S. exports to Iran, the BIS compliance guideposts have proven useful as general safeguards and should be reviewed by risk managers and supply-chain executives to reduce chances of adverse regulatory action and possible criminal prosecution.

The BIS guidance identifies various governmental databases, available for public use, against which parties to a proposed transaction should be checked to determine if matches occur with groups or individuals associated with prohibited conduct, such as arms trafficking or money laundering. In addition, a list is offered of abnormal circumstances or "red flags" which indicate an increased likelihood that the transaction has been purposefully structured to circumvent U.S. trade sanction laws. Such warning factors include:

1. requests for an unusual quantity of components or replacement parts (for example, one high-performance tractor, but with four replacement engines);
2. agreement to a purchase price significantly above market;
3. unusual or unnecessarily complicated payment methods (for example, wire transfers through multiple intermediaries);
4. requests for delivery to a freight forwarder rather than to the purchaser;
5. disinterest in customary installation, training or maintenance agreements.

The agency release may be found at www.bis.doc.gov

Unfamiliarity with the requirements of U.S. trade laws or with recommended compliance safeguards will not mitigate enforcement procedures or the severity of applicable penalties by BIS or by its companion agency, the Treasury Department's Office of Foreign Assets Control ("OFAC"). Indeed, recently released enforcement guidelines by OFAC confirm that leniency for trade law violations will be considered only in situations where the business in question (a) had proactively assessed its legal requirements and maintained a credible compliance program, (b) had voluntarily come forward to disclose a possible violation, and (c) had maintained adequate transactional records to document regulated operations. (See, Legal Alert, "Comprehensive Enforcement Guide Finally Issued for U.S. Economic Sanctions," at www.harrisbeach.com/newsandevents).

Significantly, the U.S. Justice Department has indicated it will correlate trade law violations with its heightened investigation and prosecution of impermissible conduct under the Foreign Corrupt Practices Act.

Justice Department Releases Opinion on Preacquisition Due Diligence of Target Company's Anti-Bribery and Recordkeeping Compliance:
Different countries are adopting their own trade sanction and anti-corruption laws, some of which are increasingly inconsistent with one another. What's to be done when a commercial transaction is covered by conflicting legal requirements? A recent opinion by the U.S. Justice Department advises American companies to: (1) have business executives and legal counsel articulate the issues succinctly, (2) be ready to suggest a reasonable solution in detail, and (3) then go see your primary domestic regulator as soon as possible.

Case in point: A publicly-held U.S. multinational sought to acquire a U.K. firm listed on the London Exchange. The target conducted operations in the U.S. and also in overseas jurisdictions high on the public corruption rankings of prominent watchdog organizations. However, the corporate disclosure and data privacy laws of the target's home country deemed it illegal for there to be pre-closing release of the detailed information sought on its international operations, including public contracts, government relations consultants, etc. Thus, while the domestic company had an otherwise successful acquisition bid pending, it wanted no part of any inherited liability for Foreign Corrupt Practices Act ("FCPA") or other trade violations uncovered after the deal was consummated.

A will, and a way: The domestic suitor prepared a detailed statement of the problem, and a proposed resolution based on its assessment of applicable compliance laws. This document was submitted to the Justice Department, primary enforcement agency of the FCPA, as a request for guidance on how to deal with this conflict-of-laws conundrum. The U.S. acquirer proposed a comprehensive due diligence and compliance plan which included the following:

1. a voluntary obligation to retain outside counsel and forensics consultants to perform an investigation of the target company's operations, licensing, accounting and tax functions for anti-bribery and other trade law compliance;
2. a commitment to have all of the target's business agents and vendors execute new retainer agreements with FCPA warranties and audit rights;
3. a sequential disclosure schedule of the investigation and due diligence results;
4. an obligation to keep the target as a wholly-owned but separate subsidiary (that is, to delay integration of operations) for so long as the Justice Department wished to further investigate the target or any individual affiliated with it.

   Based upon the extremely thorough due diligence and compliance work plan undertaken by the domestic acquirer, the Justice Department concluded that satisfactory performance of that work plan and its conditions would result in the Department not taking enforcement action against the acquirer for preacquisition offenses of the target, its contractors or vendors.

   The full agency response, Opinion Procedure Release 08-02, may be found at www.usdoj.gov

   Compliance Officer's Handbook: Recent Items of Interest, Briefly Noted

   Canadian Employees Given Super-Priority in Bankruptcy Proceedings:
   Canadian law now gives employees a super-priority over the rights of secured creditors in bankruptcies occurring after July 6, 2008, affecting the interests of any lender (Canadian, American or otherwise) which extends business credit to Canadian employers, and of any business employer in Canada (including the affiliates of American parent organizations) seeking commercial financing. This super-priority was created by adoption of amendments to Canada's Bankruptcy Insolvency Act and of the Wage Earner Protection Program Act. In summary, the new provisions give each Canadian worker a super-priority of up to CD$2000 for wages due and in arrears; that priority trumps any other liens on the employer's accounts receivable, inventory or other current assets, but does not affect third-party liens on equipment or real estate. In addition, a super-priority over other creditors is created for any and all unpaid pension plan contributions--the pension plan feature is not capped in any amount. It is anticipated that a new Canadian federal agency will be created to administer these laws so that when business insolvencies occur, the agency promptly will pay out qualified super-priority claims and, in turn, intervene in bankruptcy actions to recover those amounts from the debtor's estate.

   Compliance with U.S. Trade Sanction Laws May Be Illegal in Canada:
   Canada remains one of the most significant commercial and investment partners of Cuba, a relationship set to increase as the Cuban government transitions from the overarching influence of Fidel Castro. However, a U.S. embargo against Cuban trade remains in place, vigorously enforced by OFAC. That embargo covers not only trade in goods, but financial transactions as well, and several U.S.-based banks have been penalized by OFAC for handling wire transfers initiated by Cuban expatriates seeking to financially assist their families. At the same time, regulatory orders issued under Canada's Foreign Extraterritorial Measures Act render it illegal under Canadian law for businesses located there--including U.S. owned affiliates--to refuse proper consumer commerce based upon the U.S. embargo. In addition, any entity which receives communications (even from parent organizations outside Canada) directing compliance with U.S. trade sanctions against Cuba is directed to inform the Canadian Attorney General of such instructions. This situation may repeat itself for any other instance where the U.S. and Canadian governments have unsynchronized lists of prohibited trading partners, and businesses with cross-border operations either in goods, banking or finance should assess whether this conflict in trade laws exposes it to regulatory risks and adverse publicity.

   If you have questions about these compliance developments or wish further information, please contact the members of the Harris Beach Government Compliance & Investigations Practice Group as listed below, or the Harris Beach attorney with whom you regularly confer, at 800-685-1429.

   Government Compliance & Investigations Team:
   Co-Chair Thomas A. DeSimon (585-419-8609/tdesimon@harrisbeach.com ) Co-Chair Karl J. Sleight (518-427-9700, ext. 2716/ksleight@harrisbeach.com) Allen E. Molnar (212-313-5401/amolnar@harrisbeach.com) Charles D. Steinman (585-419-8706/csteinman@harrisbeach.com) Joan P. Sullivan (518-701-2732/jsullivan@harrisbeach.com)

   In addition, Joy Goodman (585-419-8769/jgoodman@harrisbeach.com) focuses on matters affecting U.S./Canadian transactions, and Russell W. Roberts (585-419-8767/rroberts@harrisbeach.com) maintains a practice involving immigration and naturalization issues facing executives, academics and other business travelers.

   This Legal Alert addresses developments affecting trade compliance and internal corporate investigations for information purposes only. This alert does not purport to be a substitute for advice of counsel on specific matters.

   Harris Beach has offices throughout New York state in Albany, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse and Yonkers, as well as Newark, New Jersey.