Assess Export Compliance Risk During the M&A Process

Article | September 20, 2024

Executive summary: Failing to incorporate export compliance reviews during the M&A process may result in multimillion dollar fines.

A high-profile American aerospace and defense company was recently fined for illegally transferring technology and defense articles in violation of US export control laws on multiple occasions, a large portion resulting from systemic errors committed by a company it acquired. The severity of the penalty underscores the importance of including export compliance assessments during the Merger and Aquisition (M&A) process.

Including Export Compliance Due-Diligence in the M&A Process Minimizes Risk

A US-based multinational aerospace and defense company recently agreed to a $200 million penalty for violations of the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR) for more than 700 export violations. This non-compliant activity resulted from systemic compliance failures stemming from jurisdiction and classification errors, including unauthorized exports of defense articles and technical data to China and Iran, both of which are proscribed countries - countries with whom the US prohibits exports and imports of sensitive technologies and materials described on the United States Munitions Lists (USML). A large percentage of the violations were committed by a company it acquired. It is important for companies to remember that when they acquire or merge with another entity, they inherit not just the assets, but also the liabilities.

The applied penalty – and its severity – underscores the importance of including export compliance due-diligence in the mergers and acquisitions (M&A) process. It is critical for several reasons:

• Ensuring that a company complies with export control laws and regulations helps avoid fines, penalties and sanctions as well as reduces risks of business disruptions arising from regulatory enforcement actions;
• Understanding potential past or ongoing compliance investigations allows the acquiring company to assess and mitigate risks;
• Discovering compliance issues may impact the purchase price – or finalizing the deal – as the acquiring company does not want to overpay for a company with unidentified liabilities;
• Understanding the target’s current compliance framework leads to better integration of compliance programs post-acquisition.

This article was written by Mark Ludwig, Jodi Ader and originally appeared on 2024-09-20. Reprinted with permission from RSM US LLP.
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