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Any questions regarding whether the Trump administration would continue the aggressive enforcement of anti-money laundering, economic sanctions and Foreign Corrupt Practices Act anti-bribery enforcement actions were answered in the first month of the new administration, when the Bureau of Industry and Security and the Office of Foreign Assets Control announced a record combined penalty of almost $1.2 billion against China’s Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd.
As this and other significant penalties for international regulatory infraction have demonstrated, multinational automotive companies are well advised to take all available steps to ensure the efficacy of their international regulatory compliance.
Compliance risks are prevalent in the automotive sector, which is a high-profile industry that attracts special enforcement attention. In recent years, U.S. government agencies have targeted automotive and automotive supply chain companies under a variety of regulatory regimes. Notable examples include FCPA enforcement actions against AB Volvo, Daimler AG, Fiat, Iveco, Ingersoll-Rand and Renault.
Sanctions enforcement is also on the rise with Toyota Motor Credit Corp. and Volvo Construction Equipment North America both being targeted by OFAC. Automotive companies like GM-Daewoo have even faced government enforcement under anti-boycott regulations, a little-known legal regime with both export and tax implications.
Many companies in the automotive sector have attributes that elevate risk. Chief among them are large global supply chains, downstream manufacturing by worldwide affiliates, and frequent international trade in U.S.-origin goods, services, and technologies. Multinational business practices also raise concerns, with sales, operations and joint ventures reaching into countries known for high levels of corruption, industrial espionage and illegal export diversion. A risk-based, integrated approach to international compliance offers the best means of identifying, managing and mitigating these risks.
Faced with these challenges, automotive companies must identify and address the risks posed by the unique ways they conduct their business, the places where they do so, and the customers they serve. It also means evaluating the degree to which foreign parties — whether subsidiaries, joint ventures, or even contractors — engage in activities that expose their U.S. counterparts to civil and criminal liability.
By taking a comprehensive approach, companies can best manage their risk and mitigate costs by conducting periodic risk assessments, crafting tailored internal controls, conducting frequent training, and coordinating common standards across their entire organizations. Conducting periodic internal reviews, reviewing and updating written policies and procedures, and regularly updating and enhancing training programs are all components of a robust compliance program.
Automotive companies also need to monitor legal developments in the international space. Many automotive companies have come to rely on the tariff-free movement of goods within the North American Free Trade Agreement region. Beyond the dollar-and-cents implications of the potential renegotiation of NAFTA, it should not be overlooked that the renegotiation of NAFTA will greatly increase compliance obligations.
Under the current regime, which allows many automotive-sector companies to export and import to and from Mexico and Canada without paying duties, it has become common for companies to pay less attention to customs compliance. But if the revised NAFTA raises tariff rates or changes regional content rules, missteps in classification, valuation or tracking regional content could be magnified.
Even something as simple as not having NAFTA certificates of origin in hand at the time of importation can lead to major bills from customs. A shifting NAFTA environment likely will multiply such opportunities for missteps.
These risks arise in an environment where customs enforcement risks already are rising. After years of focusing on security issues and the Customs Trade Partnership Against Terrorism program following the 9/11 terrorist attacks, customs once again is re-emphasizing revenue collection goals.
Even in a low-tariff environment, customs compliance missteps can be costly, particularly if they involve failure to recognize and declare anti-dumping and countervailing duties (where special tariffs can exceed 100 percent of the value of the goods in some cases). Major importers who fail to adapt to the new customs reality could be due for a major wake-up call from U.S. Customs and Border Protection.
Also of special concern are economic sanctions regulations. Many automotive companies — reading the headlines and not the actual changes in the law — have mistakenly concluded that the recent easing of sanctions with regard to Cuba and Iran mean that these countries are “open for business.” This is especially true with regard to their non-U.S. operations, which often have only a hazy understanding of how aggressive and creative the U.S. government is in applying these laws abroad. The primary sanctions remain in place for both countries (especially Iran), meaning that the risk of dealing with these countries remains high.
Many automotive companies have taken advantage of the Joint Comprehensive Plan of Action-related easing, particularly through use of “General License H,” which allows U.S. companies to establish separately incorporated subsidiaries to deal with Iran, provided that they divorce these separate legal entities from the United States and the U.S. financial system (no U.S. nationals involvement without a license, no use of the U.S. financial system, no facilitation by U.S. persons and so forth).
These legal but still risky efforts need carefully monitoring, not only to determine that the rules are followed, but also to ensure there are no changes in the regulatory structure that would once again disallow such methods for engaging with the Iranian economy.
In the end, compliance is all about identifying, managing and mitigating risk. Automotive companies that have not conducted a full risk assessment in the last two years, or engaged in regular compliance audits, likely are taking unintentional compliance risks.
With major enforcement actions continuing apace in the new administration, full attention to international regulatory risk is a prudent use of any multinational automotive company’s compliance resources.
Gregory Husisian is a partner with Foley & Lardner LLP, chair of the firm’s Export Controls and National Security Practice and co-chair of the firm’s Automotive Industry Team.
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