3 minute read 1 May 2021
Hubble Space Telescope above earth

How to consider export control in your due diligence process

Authors
Sajeev Malaveetil

EY Americas Government Contract Services Leader

Enabling businesses and communities to serve our government and the people they represent — ethically, honestly and with integrity.

Timothy Manning

Senior Manager, Forensic & Integrity Services, Ernst & Young LLP

Working with EY for over 10 years. Supports government contractors with a variety of accounting and compliance issues. Familiar with FAR, CAS, Export and NIST.

3 minute read 1 May 2021
Related topics Forensic & Integrity Services
Upvote

Show resources

  • Export control due diligence considerations (pdf)

    Download 294 KB

If your acquisition risk assessment doesn’t consider export control, then you have a significant gap in your due diligence process.

US export control enforcers continue to apply the concept of successor liability when reviewing export control practices in businesses that have made recent acquisitions. It has proven to be an attractive enforcement area precisely because so many companies forget to consider export control during their mergers and acquisitions (M&A) process. M&A activity is already fraught with uncertainty, and with civil penalties for US export control capable of reaching over $1m per violation, it is imperative you understand the export implications for your business in M&A and how to mitigate the risks.

Show resources

  • Download full article on: Export control due diligence considerations

    pdf (294 KB)

Export control gaps and violations are notoriously difficult to identify within large, complex businesses. Therefore, mitigating the risk of expensive or unforeseen liabilities throughout the M&A process begins with conducting adequate due diligence of the seller’s export compliance record commensurate with their international profile and the complexity of their business.

Buyers should understand the full extent of the seller’s export control organization, including policies, procedures, internal audit reports, product classifications, disclosures, licenses, foreign subsidiaries or partners, brokers, records retention and more.

Together, due diligence and effective controls can protect your investment and provide dividends long after the purchase is concluded.
Sajeev D. Malaveetil
EY Americas Government Contract Services Leader

While understanding the seller’s export control environment can provide greater confidence in the decision to purchase a company, buyers must also remember their responsibilities extend beyond the purchase itself. Over the years, US export control enforcement has sent a clear message that sanctions and export compliance measures must be in place at the acquired company immediately after any acquisition. There is no grace period and little to no space to deny responsibility for violations. Therefore, verifying that a plan exists to consolidate efforts and implement export control is crucial.

Together, due diligence and effective controls can protect your investment and provide dividends long after the purchase is concluded. A thorough understanding of the seller’s export control environment can reveal avenues for applying the necessary controls swiftly. Additionally, open communication among parties involved with the transaction provides an opportunity to discover leading practices in export compliance, increasing the efficiency of your export organization. Remembering to consider export control during M&A quite simply provides the peace of mind that a costly surprise is not just hiding around the corner.

How EY can help

Government Contract Services

The U.S. Government is the world’s largest buyer of goods and services. Keys to a successful business relationship with the U.S. Government include knowledge of applicable regulations, operational capability and innovation that you bring to the table to achieve, maintain and demonstrate economic viability, security, efficiency and compliance.

Read more

We continue to see consolidation in many industries so more mergers are expected.  We also see more attention being paid to export control rules.  Companies should limit post acquisition risk by performing export focused procedures during a diligence process to limit post-merger risks.

Now, next and beyond

Now: focus on the current state

  • Review export control procedures conducted during recent merger activity — was export included in the risk assessment? Was misconduct found during diligence or post acquisition?

Next: change remediation of practices

  • Has compliance been able to integrate different export control functions? Have you been able to implement an effective compliance program at the acquired entity?

Beyond: embed export considerations in strategic growth plan

  • How will you incorporate export control procedures into future diligence activities? How will you refine data requests? How will you increase focus on foreign sales and subsidiaries of any targets?

Three steps to take now:

  1. Conduct post-acquisition assessments to determine maturity of export controls and potential gaps
  2. Review due diligence practices and build in steps for export control procedures
  3. Confirm that foreign third parties related to recent acquisitions are being properly screened

How can we help?

Contact the EY Forensic & Integrity Services team

Contact us

Summary

If your company doesn’t already include export focused procedures as part of your acquisition diligence process, then your organization is leaving itself open to additional significant risk if those processes are inadequate.

About this article

Authors
Sajeev Malaveetil

EY Americas Government Contract Services Leader

Enabling businesses and communities to serve our government and the people they represent — ethically, honestly and with integrity.

Timothy Manning

Senior Manager, Forensic & Integrity Services, Ernst & Young LLP

Working with EY for over 10 years. Supports government contractors with a variety of accounting and compliance issues. Familiar with FAR, CAS, Export and NIST.

Related topics Forensic & Integrity Services
Upvote

Contact us

Like what you’ve seen? Get in touch to learn more.

Contact us