Corporate due diligence is far from a new concept, and the words “due diligence” probably evoke mental images of associates plowing through stacks of documents or clicking through gigabytes of electronic files searching for potential lawsuits, unpaid bills and other scary things that turn a good-looking deal into a nightmare. Hidden in plain sight, and often overlooked, are the acquired company’s violations of U.S. trade laws, along with the associated fines, penalties and loss of productive hours in trying to figure out what the company did wrong and how to fix it in the future.
Here’s a common scenario: A U.S. company starts selling its products domestically, and as it expands, it begins exporting products and importing supplies. As sales drive more exports, the sales team grows, but the compliance team, if it exists at all, stays relatively small. Despite its lack of a robust compliance program, the company continues its international trade. The company relies heavily on its shipping companies to comply with U.S. trade laws – laws that are complicated and administered by multiple agencies, including the U.S. Customs and Border Protection, the U.S. Department of Commerce Bureau of Industry and Security, the Department of Defense Directorate of Defense Trade Controls and the Department of Treasury, Office of Foreign Affairs. Without a compliance program in place, it is unlikely that the growing company can keep up with the many complex laws, while the shipping companies file what they presume is accurate information but may or may not be compliant.
A second company looking to expand beyond domestic operations enters into a deal to acquire the company. The due diligence process begins, and a team crawls through the acquisition company’s records but never looks at trade compliance. The deal closes, and the acquirer is now an exporter and importer. Being inexperienced with U.S. trade laws, the acquirer continues the processes of the acquired company.