Name: Julia K. Bailey, Esq. Title: Associate General Counsel – International Trade

International Compliance & Ethics Name: Julia K. Bailey, Esq. Title: Associate General Counsel – International Trade Company: BAE Systems North America, Inc. Date Time

Overview • Export Issues • EAR and ITAR Enforcement • Anti-boycott • Embargoes • Using Agents • Part 130 • Payments on FMS/FMF sales • Anticorruption • FCPA • Several important points

Export Issues: EAR and ITAR Enforcement

Export Controls Regulatory Environment DEPT OF STATE (DDTC) [Directorate of Defense Trade Controls] Defense Articles ITAR [INTERNATIONAL TRAFFIC IN ARMS REGS] USML [U.S. MUNITIONS LIST] DEPT OF COMMERCE (BIS) [BUREAU OF INDUSTRY & SECURITY] Dual Use Articles EAR [EXPORT ADMINISTRATION REGS] CCL [COMMERCE CONTROL LIST] USG AGENCY: COMMODITIES: REGULATIONS: CONTROL LIST:

Know your exports! Exports include: • The shipment of goods abroad, • The performance of services abroad, • The transmission and/or licensing of software, technical data and information to overseas destinations, • The posting of data, including software, technology and other information, on a computer network which is accessible from overseas, and • Permitting foreign nationals to have access to data, including software, technology and other information which is controlled under U.S. export laws, whether such access is provided in the U.S. or abroad, including by providing such persons access to U.S. data bases or computer systems.

Know your re-exports! Re-exports include: • The export of products from a foreign country if such products were manufactured in the United States; • The export of products from a foreign country if such products were manufactured abroad based on technology which originated in the United States; and • The export of products from a foreign country if such products utilize U.S.-origin components or raw materials which exceed the De Minimis Rules set forth in the EAR’s.

Export Controls Violations Civil violations: up to $500K fine per violation on business unit (comes out of profit/no tax write-off). Criminal violations: up to $1M per violation and suspension of export privileges on business unit and the corporation Criminal penalties: for willful and conscious avoidance of knowledge of violations also include the threat for both the perpetrator and Senior Management of (a) prison terms and (b) loss of personal assets.

Major Export Violations • Numbers of major US Corporations continue to experience difficulties in the export arena. • In addition to explicit penalties for violations, export control mistakes can result in substantial direct and indirect costs e.g. program delays; potential debarment from bidding on USG contracts and exclusion from international competition; large fees for legal counsel; and personal fines and penalties for the individual involved.

Father and Son indicated for Brokering Manufacture and Export of Six Armored Patrols Boats to Iraq. Sabri Yakou, and his son Regard Yakou violated the International Traffic in Arms Regulations by exporting six armored patrol boats to Saddam Hussein in Iraq from November 2000 to July 2003. If convicted of the charge, both defendants face ten years in prison and a $1M fine. Major Export Violations Emcore Corporation of Somerset, NJ Agreed to Pay a $400,000 Civil Penalty Fine. Emcore violated the Export Administration Regulations (EAR) in connection with the exports of Metal Organic Vapor Disposition (MOCVD) tools. The Bureau of Industry and Security (BIS) charged that between 1998 and 2003, Emcore committed 71 violations of the EAR related to the export of MOCVD tools to China and Taiwan.

Major Export Violations (Cont’d) Canadian Denied Export Privileges for Five Years to Settle Charge of Attempted Export to Iran Mahmoud Hagsheno Kashani (also known as Mike Kashani), acting as an officer of Zimex, Inc. in Ontario, Canada, agreed to a two-year denial of export privileges to settle charges that he attempted to export U.S.-origin parts to Iran in violation of U.S. export control laws. Florida Company Settles Allegations of Illegal Export of Night Vision Equipment to Japan ABO (USA) Inc. of Miami, Florida has agreed to a suspended civil fine of $20,000 and the denial of export privileges for two years to settle charges that the company violated the EAR by exporting night vision scopes to Japan without the required US Government authorization. ABO’s export privileges are denied to all destinations other than Canada.

Major Export Violations (Cont’d) Reversal For Scholar Once Held by China Gao Zhan a former American University researcher was once imprisoned by the Chinese government as an accused spy was charged by the U.S. of exporting technology to Beijing that could be used in weapons systems. Zhan admitted that she made more than $539,000 selling 80 microprocessors to a procurement agency of the Chinese government.

Export Issues: Antiboycott

Foreign Embargoes and U.S. Anti-boycott Laws • Many countries restrict trade relations with other countries • Bans on imports, exports • May be enforced through contract clauses, import license procedures, country-of-origin certificates • Some of these restrictions are consistent with U.S. policy, some are not

Foreign Embargoes And U.S. Anti-boycott Laws • Anti-boycott provisions of EAR apply to all “U.S. persons,” defined to include individuals and companies located in the United States and their foreign affiliates. • There are also IRC requirements that apply to all U. S. taxpayers (and their related companies).

Foreign Embargoes And U.S. Anti-boycott Laws Includes: • Agreements to refuse or actual refusal to do business with or in Israel or with blacklisted companies. • Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality. • Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies. • Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person. • Implementing letters of credit containing prohibited boycott terms or conditions.

Export Issues and Enforcement:Embargoes

Overview of Embargoes • Economic sanctions are imposed by the U.S. against other countries for foreign policy reasons. • They are the weapons of choice for the U.S. short of military action. • Most U.S. sanctions are unilateral. They are widely criticized around the world and by some in the U.S., but they are administered aggressively by the U.S. • They are administered by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury.

Countries Currently Subject to U.S. Sanctions • Burma/Myanmar (1997) • Cuba (1963) • Iran (1995) • Sudan (1998) • OFAC administers numerous additional programs of lesser scope or severity than these four, e.g., Libya, North Korea, Weapons of Mass Destruction, and Syria.

Types of Sanctions Tools • Asset Freezes – Includes Assets and Liabilities (Bars ALL Dealings) • Trade Embargoes – Goods, Services and Technology • New Investment Prohibitions

Who Is Targeted by the Sanctions? • Cuba: The government, its agents and controlled entities, anyone in Cuba and any Cuban national residing anywhere in the world (except those licensed by OFAC, including residents of the U.S.) • Sudan, Burma (Myanmar) and Iran: Generally the government, its agents and controlled entities, or anyone in the country. • Terrorists, Narcotics Traffickers, Many More: Designated on the SDN List.

The SDN List Sanctions Programs • OFAC’s Specially Designated Nationals List of individuals and entities is posted on its website: http://www.treas.gov/offices/enforcement/ofac/sdn/ • Some OFAC sanctions programs apply only to individuals and entities on the SDN List, e.g., narcotics traffickers and terrorists. • In other cases, the SDN List supplements more generic country sanctions, e.g., Cuba, Iran. • The SDN List changes frequently.

Other OFAC Sanctions Programs Implemented Through the SDN List • Iraq (1990 & 2003 programs) • Liberia • Serbia/Miloševic/Western Balkans • Syria (none designated as of 9/2004) • Taliban • Zimbabwe • Colombian Narcotics Traffickers • Foreign Narcotics Kingpins • Foreign Terrorist Organizations • Global Terrorists & Terrorist Financing • Middle East Terrorists

Denied Persons Review Screens Determine if the purchaser, transferee, ultimate end-user, any intermediate consignee or any other party to a transaction is a person denied export privileges. Review the following denied parties lists published by the following agencies: • Denied Persons List - Department of Commerce (15 C.F.R. Part 764) • Specially Designated Nationals List - Department of The Treasury (60 Fed. Reg. 41909) • List of Specially Designated Organizations - Department of the Treasury (31 C.F.R. Appendices A and B) • List of Specially Designated Narcotics Traffickers - Department of the Treasury (Executive Orders No. 12978, October 21, 1995) • Optional - For Munitions Exports: Debarred Persons List - Department of State • Optional - For Nuclear, Missile and Chemical/Biological Weapons Exports: Entities List - Department of Commerce - 15 C.F.R. Part 744, Supplement No. 4.

Using Agents: • Reporting fees (ITAR, Part 130) • Allowability of Fees Under Foreign Military Sales Program (AECA, DFAR, SAMM) • Anticorruption Efforts (FCPA, etc.)

Reporting Agents’ Fees: Suppliers and Applicants must disclose actual or offered agent’s fees (or political contributions) to the State Department’s Office of Defense Trade Controls (“DTC”). ITAR, §130.9

Reporting Agents’ Fees: Who must report: • FMS contractors for contracts valued at/over $500,000 (“Suppliers”); and • Exporters of defense articles and services valued at/over $500,000 (“Applicants”) ITAR, §130.7, §130.2

Reporting Agents’ Fees: What must be reported: Must disclose the payment, or intended payment, of any aggregate agents’ fees or commissions that equal or exceed $100,000. ITAR, §130.9.

Reporting Agents’ Fees: Reporting obligations apply to a contractor in Government-to-Government or direct commercial context – regardless of whether the sale is to be financed with FMF

Reporting Agents’ Fees: Fees or Commissions do not include: • Normal salary paid to a regular employee; • General advertising or promotional expenses; • Payments for technical, operational or advisory services that are not disproportionate to value of service.

Reporting Agents’ Fees: (In addition, any Applicant or Supplier seeking a license for the export of defense articles or services valued in excess of $500,000 must disclose the payment, or intended payment, of any aggregate political contributions that equal or exceed $5,000.) ITAR, §130.9.

Allowability of Agents Fees, Generally • The AECA prohibits the inclusion of fees or political contributions which are: • Unreasonable in amount • Not allocable to the contract price • Made to obtain improper influence 22 U.S.C. §2779(c)

Allowability of Fees: FMS • Contingent fees generally are allowable under DoD contract iffair and reasonable and paid to a bona fide employee or established commercial or selling agency for the purpose of securing business.DFARS §225.7303-4 • Allowable fees up to$50,000, i.e., nothing in excess thereof may be included in the price.DFARS §225.7303-4

Allowability of Fees: FMS • Caveat: contingent fees are unallowable under contracts with certain foreign customers, unless payments have been identified and approved in writing by the foreign customer before contract. See DFARS §225.703-4(d); SAMM, ch. 8, p. 801-6.

Allowability of Fees: FMF • If merely a direct sale, you need only disclose fees or political contributions on your export application. • However, if FMF is used to finance a sale, no portion of agents’ commissions may be treated as an allowable cost, i.e., it must be treated as unallowable.

Anticorruption • The Foreign Corrupt Practices Act prohibits company employeesas well as its agents from making bribes to foreign government officials.

The Foreign Corrupt Practices Act (“FCPA”) • The FCPA makes it a civil and criminal offense for: • anyone subject to U.S. jurisdiction • to do some act in furtherance of an • offer, promise, gift or authorization of the giving of • anything of value • corruptly • to a non-U.S. “official” • directly or indirectly • to secure an improper business advantage

Five FCPA Elements:Element 1: Who is Governed (Nationality Principle) • U.S. citizens and nationals • Businesses organized in the U.S. (including overseas branches) • Officers, directors, employees, agents or stockholders acting on behalf of such businesses Anywhere, Whether or Not Using U.S. Commerce

Five FCPA Elements:Element 1: Who is Governed (Nationality Principle) U.S. Companies Using Agents: • The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. • The term "knowing" includes conscious disregard and deliberate ignorance. • Government warns that: “To avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives.”

Agents: Warning Signs • Country has reputation for corruption • Relative of foreign official • High expenses • Unusually large commission • Refusal to sign FCPA representations • Agent has bad reputation • Request for cash or offshore payments • Request for false invoices • Agent is specified by foreign official • Other suspicious conduct or characteristics • Agent appears unqualified or understaffed

Five FCPA Elements:Element 2: Who is Governed (Territoriality Principle) • U.S. residents • Businesses organized outside the U.S. with principal place of business in the U.S. • Non-U.S. issuers of U.S. securities • Any other individual or foreign company while in the U.S. [or causing an act to be done in the U.S.] • Officers, directors, employees & agents of the foregoing; stockholders acting on their behalf Using Instrumentalities of U.S. Commerce in Furtherance of the Impermissible Action

Instrumentalities of U.S. Interstate Commerce • Telephone calls • Faxes • E-mails • U.S. mail or other carrier services • U.S. travel

FCPA Headline: Foreign Company, Syncor, to Pay up to $2 Million • Taiwanese company (indirect subsidiary of U.S. company) • Paid commissions to doctors of state owned hospitals • Sent an e-mail from California to Taiwan • E-mail amounted to an “act within the territory of the U.S. in furtherance of an offer of a payment to influence a foreign government official.”

Five FCPA Elements:Element 2: Corrupt Intent • With evil motive or purpose • With intent to wrongly influence recipient • Expecting a quidproquo • Sometimes evidenced by secret payments

Five FCPA Elements:Element 3: “Payment” Some act in furtherance of an: • Offer • Gift • Promise • Authorization of an offer, gift or promise Of anything of value

Value Includes: • Cash • Impermissible travel or entertainment payments • Overpayments for shares • Loans (at very favorable interest rates) • Scholarship to relative of an official • Some payments to charity of official’s choice • Other

Five FCPA Elements:Element 4: the Recipient “To a Non-U.S. Official” Includes: • Any officer or employee of a non-U.S. government department/agency/instrumentality • Any employee of a state-owned or state-controlled non-U.S. enterprise • Any official of a public international organization • Any non-U.S. political party/party official/candidate • Any person acting in an official capacity on behalf of any of the above, e.g., consultant for non-U.S. government • Anyone else if it is “known” that the value will be offered or promised or given to a non-U.S. official

Five FCPA Elements:Element 5: Business Purpose Test To violate the FCPA, the payment or gift must be to: • influence an official act or decision of a foreign official; or • induce the official to use influence; or • secure an improper advantage • in order to obtain or retain business Payment or gift does not actually have to be made, and/or purpose does not have to be achieved!

Penalties under the FCPA • Criminal: • $2 million for companies • Up to 5 years imprisonment and $100,000 in fines for individuals • Civil: • $10,000in fines + penalties ranging from $5,000 - $100,000 for individuals; $50,000 - $500,000 for companies.

FCPA Provisions in Agreements • Include a covenant that spells out the elements of the FCPA. • Include a certification that they have read your policies on the FCPA and that they understand them. • Include FCPA certification language that must be submitted with each invoice for payment. • Include automatic immediate termination for any violation of the FCPA and forfeiture of all amounts payable. • An indemnification clause is not enough!

Name: Julia K. Bailey, Esq. Title: Associate General Counsel – International Trade