Step Ahead

Far-reaching Trade Regulations Affect Slovak Businesses.

International trade and investment businesses are commonly affected by far-reaching domestic laws, particularly those international in nature such as export regulations. Managing a regulatory compliant business is an essential part of success, supplemental to quality products and services. Ensuring compliance with extraterritorial export laws may help businesses stand out against competitors by demonstrating essential qualities import partners demand for long-term cooperation or merger partners require - resulting in a direct increase in business value.

The United States of America, for example, has adopted numerous export regulations in the form of export controls and international trade sanctions which govern various activities and vary in jurisdictional scope. Many of these export laws have extraterritorial reach to actions in Slovakia. US export laws are generally given extraterritorial application based on either the particular item of export or the specific parties involved in the international transaction.

EXPORT ITEMS

The US Department of Commerce regulates exports involving many common commercial and consumer goods through its Export Administration Regulations (“EAR”). EAR is given extensive reach because the law covers the export and re-export of certain items of US origin. The scope of the law is not limited in any way by the location or nationality of the parties involved in the export. Simply put, a Slovak business is subject to EAR jurisdiction by reexporting an item of US origin to parties of another foreign country.

Foreign businesses re-exporting items subject to EAR may require an export license from the US Bureau of Industry and Security in order to comply with EAR. Whether a specific item requires a license depends on several factors related to the re-export. Exceptions to the licensing requirement do exist but most exceptions are contingent on the specific item, the destination and the end-use of the item by the particular end user – often requiring case-bycase consideration.

SANCTIONED PARTIES

US persons, including individuals and companies, are also subject to trade restrictions administered by the US Treasury Department’s Office of Foreign Assets Control (“OFAC”). The OFAC administers sanctions and embargoes which vary in degree on specific countries, entities, groups and individuals. OFAC regulations prevent US persons from engaging in transactions with OFAC sanctioned parties at all times, everywhere.

OFAC sanctions prohibit evasion by all US persons. As such, US persons cannot utilise Slovak subsidiaries or otherwise restructure transactions with Slovak parties to sidestep OFAC rules. US persons may also be prohibited from investing in Slovak companies doing business with listed sanctioned parties. Consequently, OFAC sanctions essentially limit the scope of transactions in which US persons may legally engage.

The obligations placed on US persons may compel foreign businesses to choose between competing interests. For example, Slovak businesses may have to choose between doing business with OFAC sanctioned parties or pursuing growth through cooperation with other businesses – particularly US related entities. Businesses which value a wide range of commercial opportunities should carefully consider the issues discussed in this article.

Businesses routinely dealing with US persons and OFAC sanctioned parties are operating in a legal minefield with numerous laws, including competing rules between the United States and the European Union. Slovak businesses joining the growing competition in soliciting foreign investors should be particularly cautious about export compliance andmay wish to consider the utility of a preliminary compliance analysis.

RISKS OF NONCOMPLIANCE

US export laws can have a direct negative impact on foreign businesses. US authorities could deny noncompliant foreign businesses the opportunity to receive US exports. Noncompliance may also obstruct Slovak companies from merging with US related entities. In such mergers, due diligence investigations by prudent US companies concerned about successor liability from violations of export regulations would scrutinise compliance with both Slovak domestic laws and applicable US regulations. Discovering a Slovak company is not compliant with EAR or OFAC sanctions could result in a reduction in purchase price, significant closing delays pending compliance or termination of the transaction. Other penalties for violations of export trade laws may include civil and criminal liabilities.

BEST COMMERCIAL PRACTICES

In today’s highly globalised economy, nearly every business engaging in international transactions is subject to both domestic and foreign laws. Certain businesses may instinctively resist the idea of complying with foreign laws. However, parties engaging in business involving extraterritorial regulations must realise that what one party may consider an unrealistic extraterritorial application of law, the other party may consider a practical source of substantial liability. Successful businesses will not consider bypassing regulatory compliance as an optional cost saving measure. Complying with all applicable regulations unquestionably provides a cornerstone in successful transactions and negotiations.

Author: Anthony P. Hernandez, Associate with Hillbridges, s.r.o.

This article is of an informative nature only.

For more information go to www.hillbridges.com