Governments enforce laws and regulations to promote their national security, foreign policy, and economic interests, including those related to exports, imports, and trade sanctions, but also to combat bribery and corruption. US and EU trade regulations and sanctions are a case in point. Companies, therefore, find themselves increasingly exposed to multiple trade control regulations. The US in particular, tends to see these regulations as a common mosaic that calls for integrated enforcement. As a result, companies also face a growing multiplicity of penalties applied by different national regulations.
Penalties for breaching international trade regulations can be severe. Indeed, for the buyer in an M&A transaction, there is a real risk of a transaction being significantly devalued if it conveys non-compliance liability under international trade laws. For the vendor, the attractiveness of their asset remains under doubt and their liability is at stake if the full scope of risk and compliance in these areas remains undisclosed, as a vendor may have given warranties or indemnities in respect of regulatory compliance to the buyer.
It is therefore highly recommended for a prudent buyer to require a comprehensive international trade regulation review early in its due diligence processes. Where the risks are identified early on, potential deal-makers will have the opportunity to seek an international trade law expert to advise on ways to manage and mitigate these risks, and they can properly assess whether the benefits from the M&A transaction would outweigh the compliance costs. It may also be a defence to certain offences to demonstrate that an entity has taken ‘reasonable precautions and due diligence’ to assure compliance with these obligations.
The main importance of a trade-focused due diligence lies in controlling the risk of successor liability, whereby a buyer can be held liable for the violation of trade laws and regulations committed by the target prior to closing. Only if the buyer is able to adequately establish the vendors’ violations, can it take appropriate remedial action to cover the potential costs.
Secondly, trade-focused due diligence helps to ensure that the acquisition is valued correctly. Apart from being exposed to liability for past actions of the target, inadequate trade due diligence also puts the buyer at risk for other reasons. These include – but are by no means limited to:
- the loss of revenue streams from countries subject to trade sanctions;
- the costs of remedial actions to mitigate any residual risks;
- the termination of key employees, agents, business partners or contracts as a result of corruption;
- reputational and consequential damage;
- the loss of governmental exporting or contracting privileges; and
- potential delays with the transition of licenses and authorizations.
When carrying out international trade-focused due diligence, one should make specific requests with respect to export and import controls, trade sanctions, and anti-corruption and anti-boycott regulations. In addition, buyers should demand general information from targets about their compliance processes and procedures, their implementation of those processes and procedures, as well as about past disclosures, investigations and penalties regarding trade regulatory matters
Be aware, however, that identifying and exposing non-compliance with said trade regulatory matters will immediately call for remedial actions prior to or immediately after completion of the transaction, as often criminal sanctions apply. Furthermore, as banks are often involved in the due diligence process in the framework of their financing, these matters will be heavily scrutinized and may impact the ‘bankability’ of the transaction.
Co-authors of this post are:
Bert assists clients by drafting compliance programmes, giving trainings, as well as in performing internal scans and audits. He also represent clients before the Belgian and Dutch authorities and courts as well as before the European Commission, its advisory committees and the Court of Justice of the European Union. He has ample experience in counselling clients involved in (criminal) investigations on suspected tax and trade law violations.
He is a member of the Brussels Bar since 2000, the current President of the Global Legal Customs Association, a global network of trade-lawyers, a correspondent for the international VAT Club, a member of the ICC section on Customs and trade facilitation and the sub-committee on indirect taxes and a member of the steering committee of the ABA International Law Section on sanctions and export controls.
He is the co-founder and scientific coordinator of the blog www.worldtradecontrols.com in cooperation with ICC Belgium, VBO/FEB and Bryan Cave LLP where he comments the recent developments in sanctions and export controls.
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