Published by Wall Street Journal

United Parcel Service Inc. could be opening itself up to new risks as it moves forward with its acquisition of Netherlands-based TNT Express NV, an express-mail company with a global reach that includes Iran, Cuba and Syria.

In order to avoid running afoul of U.S. sanctions and embargoes, UPS may have to unwind TNT’s business in those countries or institute rigorous and costly compliance and due diligence systems, according to experts on trade and export law.

In March, UPS said it had reached a $6.8 billion deal to acquire Dutch rival TNT Express, cementing UPS’s position as a leading package-shipping company in Europe. The deal is currently waiting for antitrust approval by European Union authorities and appears to be moving forward.

The acquisition would give UPS, already the world’s largest international package shipper by revenue, a larger foothold in the European, African and Middle Eastern markets where TNT has its strongest presence. But UPS may also be acquiring TNT’s business in several high-risk countries.

According to its website, TNT currently ships packages to Iran, Syria, Somalia, Sudan and Cuba, all of which fall under a complicated web of sanctions and embargoes that effectively bar U.S. citizens and companies from trading with or doing business in those locales.

Atlanta-based UPS doesn’t ship parcels to any of those countries under its current policy, unless customers get prior approval for goods qualifying for certain exceptions granted by the Treasury Department’s Office of Foreign Asset Control. According to a January 2011 notice, the service ban includes the transport of mail or parcels to individuals, institutions, organizations, embassies and consulates of the restricted country in a non-restricted third country.

“UPS is unable to service countries that are subject to comprehensive OFAC trade embargoes or where the economic sanctions imposed by OFAC make it difficult for UPS to ensure 100% compliance,” the notice says.

Clif Burns, counsel at Bryan Cave LLP, said that given the cost and difficulty of complying with U.S. sanctions, it might be best to drop TNT’s business in those countries altogether.

“Depending on the volume of the business, sometimes it’s just not worth it,” Burns said. “A lot of times companies will just shut down the foreign subsidiaries business in those countries.”

It remains unclear whether UPS will continue TNT’s operations in those countries. A UPS spokeswoman declined to comment, as did a TNT spokesman.

In its 2011 annual report, TNT touted its “leading market positions” in Europe, the Middle East and Africa. The company reported 7.2 billion euros ($9.1 million) in revenue in 2011, EUR4.5 billion of which came from those three regions. TNT didn’t disclose its revenue in any of the countries under U.S. sanctions.

According to Burns, UPS could try to continue TNT’s business in the sanctioned countries by setting TNT up as an entirely independent foreign subsidiary, keeping it outside the scope of U.S. jurisdiction. But even that could be risky.

“It’s illegal for a U.S. person to facilitate any action that would break sanctions laws if a U.S. person did them,” Burns said. “Structuring the deal could fall under facilitation. It’s hard to tell what the definition is because OFAC doesn’t provide clear guidance on that.”

There are other exceptions to sanctions that could allow UPS to continue doing business in some of the countries. For example, the U.S. permits exports of informational material and some agricultural and medical products to certain sanctioned countries.

Of course, those exceptions also carry risks. German-based DHL Express is currently the only express company to serve Cuba, Iran, Syria and Sudan from the U.S. A wide swath of its shipments are informational materials on behalf of U.S. government agencies, NGOs, charities, universities and private companies.

In 2009, DHL paid a $9.4 million penalty to U.S. authorities for allegedly aiding and abetting the illegal exportation of goods to Syria, Iran and Sudan. The alleged violations primarily involved DHL’s failure to comply with record-keeping requirements about exports to those countries. DHL declined to comment.

Amanda Debusk, a partner at Hughes Hubbard & Reed LLP, said that delivery companies can sometimes do business in sanctioned countries depending on the role of U.S. employees in the business or through the use of certain exceptions. Such business requires a base level of due diligence such as asking a customer to verify the contents of a parcel, she said.

“It’s OK if they take the customers word for it, provided there are no red flags,” Debusk said. “But if there’s reason to be suspicious and they don’t do more, the government can nail you.”

TNT has previously disclosed that OFAC is investigating the company related to its “involvement in exports” to sanctioned countries. As of May 1, TNT began requiring customers shipping to Iran and Syria to sign a statement verifying the contents of their parcel and to provide “export paperwork and necessary trade documents.”

As a part of its settlement, DHL had to hire an external monitor and implement a rigorous set of screening procedures. In addition to requiring pre-approval from its shippers for exports to U.S.-embargoed countries, DHL now routes all such shipments through its main hub in Ohio, where their contents are verified by x-ray. If there are additional red flags, manual screening is performed. All details related to shipments to embargoed countries are logged and archived, and the company performs weekly audits to ensure compliance