Tracking Trade

DATE: June 2009

Your company has done its due diligence, all the papers are signed and now you own a new subsidiary or division. It looks like a great match, but suddenly you find out that the old company was importing products without declaring all of the components from third-country procurement contracts. Or the company has been exporting to a distributor overseas that then sold to restricted parties and/or countries in the Middle East.

Although internal corporate papers indicate that the company unknowingly violated U.S. law, your company is now liable for these activities and the government can look back 5 years to determine fines, penalties and corrective action. Although the likelihood of jail time for senior executives is highly unlikely since there was no fraudulent intent, there is still the financial cost. One export violation could have a penalty of up to $250,000. With multiple shipments the penalty could be substantially higher, and don’t forget the potential legal cost.

Can your company afford the risk? Trade compliance is no longer a concept it is a necessity. Auditing a going concern for trade compliance prior to acquisition is a critical component of the assessment process. A going concern is different than the acquisition of assets (inventory, receivables, plant and equipment, patent rights etc.). It does not have the same trade compliance risks as acquiring a “going concern”. Customs and most other US government agencies presume that the “continuing concern” is still liable and the only thing that has changed is the name.

Before a merger, not after, due diligence should encompass trade compliance:

Phase I: checklist (see attached) – this is a way to think about the merger or acquisition from a trade compliance perspective.

Phase II: Examine trade compliance activities of the three entities – buyer, seller, and acquisition target. This has to include imports, exports, foreign trade zones (FTZs) and intra-company sales. Customs wants imported goods valued at the highest rate possible for maximum duty collection. However the IRS wants the lowest import value possible to generate taxes from the highest possible profits. The resulting issues can be simple or complex.

Phase III: Determining any financial cost that should be addressed before the transaction is consummated (duties, fines, penalties, and interest). Any potential compliance liability should be factored into the acquisition price. Conversely any customs rulings, import permits or export licenses etc. that exist under the old company’s name have to be transferred to the new entity …if they can be. If a portion of the company (subsidiary or line of business) is spun off, deciding what the “continuing concern” is could get tricky. There may be more than one company that wants to own rulings, licenses, or permits.

Phase IV: Documenting new or revised compliance policies and procedures to be implemented at or before deal closing.