Tax & Accounting Blog

Managing Company Acquisitions from a Trade Compliance Perspective

Blog, Checkpoint, Global Trade, ONESOURCE May 10, 2017

According to the Institute for Mergers, Acquisitions, and Alliances; in 2016 there were over 48 thousand worldwide mergers and acquisitions.   Regardless of what point the Global Trade Compliance team is included in acquisition discussions, it needs a process for assessing the existing risk, support from senior management when unacceptable risk is discovered, and creative thinking in how to leverage any resources made available for integration to help close a prioritized list of compliance gaps.

It should be obvious that the worst time to be brought into the acquisition process is after the deal has been closed.  When this occurs it is usually the result of low visibility to the trade compliance function within a company, or the notion that other departments within the company will be able to spot the most egregious risks.  This scenario can cause the most stress to compliance personnel as they start to evaluate the acquired company’s existing trade compliance processes, and increases the likelihood of having to make decisions about the filing of disclosures for past activities for which the acquiring company is now liable.

Whenever a trade compliance assessment is begun, it is useful to have an established acquisition process that includes a thorough checklist covering all the elements of trade compliance risk that may exist. It is helpful to have the list broken down by import activities, export activities, and compliance topics that fall under both import and export.   It is OK to have a list that may appear to be too detailed.  It is better to be asking questions that may be irrelevant to an acquired company’s business model than to leave something out and risk not discovering activities that should be known. The person doing the interviewing can use their professional judgment in leaving out questions that are clearly inapplicable.

There could be pressure on the trade compliance team to go lightly on the interviewing due to both the fact that there may be a large number of business groups doing their own investigating activities, and the overall desire to see the acquisition go through.  This is especially true when the target is more of a startup business that could be overwhelmed by the level of scrutiny they are suddenly receiving.  This is why it is important to reduce any duplication of questions among the business groups and why it is necessary that the trade compliance function be part of the main acquisition team where the groups have compared notes on what will be asked.

When the trade team spots a risk as part of an upfront acquisition evaluation process, it is more likely that the compliance team’s concerns will be taken seriously since lack of trade compliance approval may jeopardize the conclusion of the deal. It is also an opportunity to seek corrections to deficient trade compliance processes and the completion of necessary disclosures to the government as a condition.  While an existing trade compliance violation is unlikely to be severe enough to scuttle a large and important acquisition, the possibility does exist and at a minimum the trade team will have created leverage for fixing the deficiencies during integration activities.

While a common concern for all employees during an acquisition is whether their job function will become redundant, in the short term at least it is not usually something that the trade team has to worry about.  It is more likely the company being acquired does not have a trade compliance team at all, or compliance is being managed by an individual wearing many hats.  A typical scenario, for example, is that the compliance responsibilities fell into the lap of the logistics team after it was discovered that there were trade compliance regulations that had to be addressed.  This frequently leads to the discovery that some areas of trade compliance are not being covered, and/or solutions implemented that are ad hoc in nature and less than ideal.

A prioritized list of compliance issues needing attention is critical due to the probable lack of available resources and the ability to tackle everything at once.  What compliance areas present the greatest risk if not addressed immediately?  Denied party screening?  Export transaction screening? Import transaction screening?  The lack of import/export classifications by qualified individuals?  These are individual company decisions based on the level of risk it is willing to accept.  One viewpoint that needs to be strongly challenged is the idea that since the target company has not gotten into trouble while lacking controls, the current state can reasonably be left alone.

How a trade team moves forward with integrating the processes of the acquired company depends largely to the overall company plan for integration and the amount of IT resources dedicated.  There may be a desire by the company not to disturb the acquired company’s existing revenue stream by making too many changes at once.  That does not mean, however, that there will not be an expectation that compliance gaps be remedied or compliance functions consolidated.  More than likely, consolidation will have to be done without additional headcount.

If the acquiring company is already using a Global Trade Management (GTM) solution, there should be an analysis and a strategy to integrate the acquired company’s export and import operations into the solution.  This may require strong lobbying on the part of the compliance team since there will likely be other business groups competing for IT integration resources.  It will be very helpful if the compliance function can align itself with the Legal team to help gain influence and drive home the significance of compliance risk.

Since IT projects will take time to be completed, compliance gaps need to be evaluated for the need to be addressed in the interim.  An important decision will be to allow the existing process (or lack thereof) at the acquired company location to continue, implement a short term manual process, or opt for a third party solutions that does not require IT integration.  This will depend again on both the level of risk, and the amount of available resources on hand to take on additional responsibilities or pay for services.

Depending on the degree to which Trade Compliance personnel are integrated into the overall acquisition planning and execution process, the challenges faced by the trade team will vary.  With early inclusion into a company’s overall acquisition decision making process, a detailed check list of import/export compliance areas, a risk based plan for prioritizing compliance gaps, and a strategy for leveraging resources for GTM solutions, it is possible to ensure international trade compliance issues are properly covered.

Learn More About ONESOURCE Global Trade