April 24, 2007 John W. Chierichella, Anne B. Perry and David S. Gallacher Sheppard Mullin Richter & Hampton, LLP Wa

2. Globalization – Practical Considerations In Day-To-Day Business With An International Focus April 24, 2007 John W. Chierichella, Anne B. Perry and David S. Gallacher Sheppard Mullin Richter & Hampton, LLP Washington, DC

3. Introduction • U.S. export and trade laws are far reaching and pervasive • When you expand into international markets, U.S. export laws will follow you into those markets • When you expand with an international work force, U.S. export laws may “grab” you on U.S. soil • And when you team with international partners, U.S. laws may frustrate or complicate the deal

4. Introduction • Globalizing your business can be perilous – you must be careful • The potential negative consequences of being reactive are significant • Fines and penalties • Revocation of export privileges • Criminal charges

5. Introduction • Companies must be proactive and ensure that they have export procedures in place • Due diligence • Management awareness • Employee training • Compliance reviews • Navigating the regulatory maze can be a daunting task

6. The Regulatory Maze • Foreign Investment • Exon-Florio Amendment • Congressional Scrutiny • Shipping and Selling Products Overseas • EAR • ITAR • OFAC • Country of Origin Requirements • BAA • TAA • Berry Amendment • Foreign Sales Agents Fees • FCPA • FMS/FMF transactions • Employing Foreign Nationals • EAR • ITAR • OFAC

7. U.S. Export Regulations There are three primary control regimes in the U.S. • The U.S. Department of Treasury, through the Office of Foreign Assets Control (OFAC), administers embargoes and the Trading With the Enemy Act • The U.S. Department of State with the Arms Export Control Act and the International Traffic in Arms Regulations (ITAR) • The U.S. Department of Commerce with the Export Administration Act and the Export Administration Regulations (EAR)

8. U.S. Export Regulations • Which regime controls what? • OFAC administers embargoes and U.N. sanction programs • For example: Cuba, Iran, North Korea • ITAR restricts products, services and technologies specifically designed or adapted for military/space use • For example, military avionics, munitions, space-qualified electronics • EAR restricts “dual-use” products, services, and technologies with commercialand military applications. • Most commercial products are controlled under the EAR • The governing agencies issue export licenses authorizing foreign shipments • Many products subject to the EAR do not require licenses

9. Shipping and Selling Products Overseas • But watch out… • The export regulations apply to both hardware andintangible data • Software • Sales brochures • Data sheets • Manufacturing “know-how”

10. Shipping and Selling Products Overseas • Common Problems • What are your sales agents telling your customers? • What information is included in your sales materials? • What type of data is included on your sales agent’s laptop? What do they show to your customers? • What are you showing your customers when they come to visit your facilities? • Have the sales agents been trained on export restrictions?

11. Employing Foreign Nationals • The “Deemed Export” Rule • Disclosure of information to a non-U.S. person is deemed an export to the country of that person’s citizenship • This includes disclosures in the U.S. and abroad • There is no exception for employees • However, a Permanent Resident (a “green card” holder) is considered a U.S. person • Examples • Disclosures to a Chinese-national employee in the U.S. are exports to China • Disclosures to a Syrian sales agent in France are exports to Syria • Disclosures to a computer “help desk” staffed in India are exports to India

12. Manufacturing and Exporting from Overseas • What if you want to avoid U.S. laws by selling through international subsidiaries? • Be aware that any conduct by any U.S. persons (including parent companies) may be enough to subject foreign-manufactured articles to U.S. law • Iran and Cuba embargoes, for example • Ensure that no U.S. persons are involved with selling in sensitive markets • Ensure that products or software contain a de minimis portion of U.S. content • There is no de minimis threshold for ITAR-controlled products • Watch out for the “facilitation” trap

13. Compliance with U.S. Export Laws • What does all of this mean to you? • It means that you must be careful • It means that every company must have policies and procedures in place to ensure that shipments and disclosures are proper • It means that you must pay particular attention to: • Hardware shipments • Intangible data • Access by foreign national employees • Providing open, unrestricted access to servers and intranets containing restricted information • Email • Statements and disclosures by sales agents

14. Foreign Sales Agent Fees • The Foreign Corrupt Practices Act prohibits giving any item of value while “knowing” that the “gift” is for the corrupt purpose of obtaining or retaining business • FCPA does not prohibit “facilitating or expediting” payments for certain ministerial actions – “Grease payments” • FCPA is a U.S. law, but it is gaining traction internationally through various trade conventions

15. Foreign Sales Agent Fees • Suggestions on how to mitigate FCPA risk • Be aware of the agent’s reputation • Obtain an opinion from counsel that contracting with the agent does not violate the law • Ensure that your agents’ contracts require them to follow the law absolutely • Be aware of “red flags”

16. Foreign Sales Agent Fees • Examples of “red flags” • Agent Refuses to accept an FCPA clause in its contract • Has a reputation for bribery or breaking laws • Has a close relationship with senior foreign officials • Is paid unusually high commissions • Requests payment in an account outside of country of residence • Has undisclosed principals or subcontractors with whom it splits fee

17. Foreign Sales Agent Fees • Also be aware of restrictions with Foreign Military Sales and Foreign Military Financing transactions • Commissions and contingent fees are not funded by the U.S. • Contractor must disclose any commissions or contingent fees it pays personally • Report must be filed when contractor anticipates fees or commissions over $100,000 • Report political contributions over $5,000 • Record information on any fee or commission greater than $1,000 for ITAR products • “Fees” or “commissions” do not include: • Salary • Advertising or promotional expenses • Advances

18. Foreign Investment in U.S. Companies • In 2005, global mergers totaled $2.8 trillion • Mergers and investment in U.S. business at its highest level since 2001 • The Exon-Florio amendment restricts foreign ownership in the interest of national security • U.S. Department of Treasury may investigate to see if there is a national security risk • Key issue is “control” • Foreign control can be limited through a number of mitigation plans • Only 3 deals halted since 1997 – telecom and port security

19. Foreign Investment in U.S. Companies • Foreign ownership is currently a very hot issue • Has anyone ever heard of “Dubai Ports World”? • Congress is currently debating tightened restrictions • Proposed changes would apply greater scrutiny to foreign acquisitions • Don’t be surprised if other countries do the same to push back against the U.S. • “The Law of Unintended Consequences”

20. Country of Origin Requirements • There are a number of U.S. domestic preference laws • Trade Agreements Act • Buy American Act • Berry Amendment • These laws aim to protect the U.S. industrial base • But they restrict opportunities for foreign vendors • Create logistical nightmares for companies selling to the U.S. • “Where were your components manufactured?” • Contractors are required to certify compliance

21. Country of Origin Requirements

22. Country of Origin Requirements

23. Country of Origin Requirements • What does all this mean to you? • When selling to the U.S. Government, you need to be aware of country of origin requirements under your contract • Track country of origin with your purchases • This creates a huge logistical burden • This requirement usually even applies to commercial products • Do not certify compliance if you are unsure • False claim • False statement

24. Conclusion • Corporate policies and procedures are key to navigating the maze • Know your products • Know your markets • Know your customers • Make sure you are obtaining export licenses if necessary • Make sure you are taking precautions against unauthorized “deemed exports”

25. Conclusion • Make sure your people are fully trained • Especially foreign sales agents • “What they say and who they pay.” • Ensure that all payments to your sales agents are proper • Be aware of potential regulatory hurdles associated with foreign investment in U.S. companies • Ensure that country of origin requirements are satisfied

26. Questions? John Chierichella jchierichella@sheppardmullin.com Anne Perry aperry@sheppardmullin.com David Gallacher dgallacher@sheppardmullin.com