China Sanctions: Executive Order 13971 Addressing the Threat Posed by Applications and Other Software Developed or Controlled by Chinese Companies
The latest salvo in the ongoing series of trade disputes between the US and China is a new Executive Order banning transactions with persons developing or controlling the following Chinese software applications: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office. The Order also directs parts of the government to undertake various studies and reports on Chinese activities in this area.
Although the Order’s impact seems quite sweeping, it only goes into effect 45 days after its release, which would be February 19. The Order is also a little slapdash in its drafting; it gives the Secretary of Commerce 45 days to announce who are the actual companies and persons that control the applications listed in the Order. It seems like the USG could have made a little more of an effort if the Order were meant to be anything more than end-of-term window dressing.
Naturally, the new Administration will be in place by then and the Biden transition team has already made clear it will be reviewing and potentially rescinding a lot of last-minute Trump Administration actions. I expect this Executive Order to be one of them, considering its potential breadth and impact on US-China relations. How much the new Administration backs away from the aggressive Trump posture is an open question, but vast new requirements that won’t even be in place yet on January 20 seem to be good candidates for further reflection.
The Executive Order is available here: https://bit.ly/2LsPIKe
China Sanctions: New York Stock Exchange Delisting of Targeted Chinese Companies (Eventually)
OFAC experts are quite familiar with the agency’s “Frequently Asked Questions.” After last week’s back and forth about how and whether the New York Stock Exchange would delist certain Chinese telecommunications companies, one frequently asked question in the sanctions world was “what the heck is going on here?”
In the last week of December, the NYSE first announced that it would delist the American depositary receipts of three Chinese companies targeted by the Trump Administration in November: China Mobile Ltd., China Telecom Corp., and China Unicom (Hong Kong) Ltd. Guidance from the Treasury Department suggested that while these companies would be banned, the ban would not take effect until sixty days after the specific entities were identified. So, on January 4, the Exchange reversed course, saying it was relying on that guidance.
The story doesn’t end there, however. On Wednesday, now referring to more specific guidance from OFAC and, according to the Wall Street Journal, specific guidance from Treasury Secretary Steven Mnuchin in a phone call to NYSE President Stacey Cunningham, the ban was back on, effective 4 am EST January 11, 2021. Then on Thursday, various companies said they would remove the Hong Kong stocks or their ADRs from certain stock tracking indices.
This whole process is baffling on both policy and practical levels. If the US Government wanted to put the restrictions in place immediately or with a very short time fuse, it could have done so. But it didn’t. It is therefore confusing why the NYSE acted now rather than wait. Particularly in light of the imminent Biden Administration, the quick action runs the risk of punishing US holders unnecessarily or at least prematurely. Similarly, forcing fire sale prices of stock by existing holders has little practical impact on the companies involved. Like much else in the China-US relationship, how this plays out remains to be seen.
A WSJ article on the flip-flop is here (subscription required): https://on.wsj.com/39g9Gjp
An Economist article is here (with the charming Economist headline “NYSE knowing you” – subscription also required): https://econ.st/35p6G3p
Commerce Department: Biden Administration Secretary and Deputy Secretary of Commerce Nominated
President-Elect Biden named current Rhode Island Governor Gina Raimondo to be Secretary of Commerce, and long-time Biden adviser Don Graves to be Deputy Secretary. Their views on international matters are unknown, as both of their professional backgrounds are more domestically focused. Once additional appointments become public we will have a better sense of the new Administration’s posture on export controls and related matters.
As a Georgetown Law alum myself, I am also morally and perhaps contractually obligated to mention that incoming Deputy Secretary Graves is a Georgetown Law graduate.
The press release from the transition office is here: https://bit.ly/2XlNf7d
Syria Sanctions: French Bank to Pay $8.6 Million to Settle Syria Sanctions Case
Paris-based Union de Banques Arabes et Françaises SA (UBAF) will soon be firing off an $8.6 million wire transfer to OFAC to atone for its processing of 127 Syrian transactions worth $2.08 billion between August 2011 and April 2013.
As is often the case in bank sanctions cases, the violations involved dollar-denominated transactions cleared through a US bank. UBAF operated US dollar accounts for sanctioned Syrian financial institutions and engaged in various foreign exchange, bank transfer, and letter of credit transactions on behalf of sanctioned entities. The fine amounts to roughly .4% of the value of the underlying transactions.
OFAC determined that this was a non-egregious case – a somewhat surprising finding considering the language in the OFAC announcement:
“The bank acted recklessly by failing to exercise a minimal degree of caution or care in accounting for the risks associated with continuing to provide USD-based services to OFAC-sanctioned parties.”
It may have something to do with UBAF’s upgrading of its compliance structures in September 2013, after the violations in question, “based on the compliance policies of its largest shareholder, a large and sophisticated financial institution, at the invitation and with the support of the shareholder.” The shareholder, not mentioned in the OFAC release or even the Wall Street Journal article on the settlement agreement, is Crédit Agricole, 47.01% owner of UBAF.
But wait, you say – the same Crédit Agricole that paid $787 million in sanctions-related fines in 2015? Yes, the same one. As we’ve seen for a long time, major international banks and their affiliates tend to be repeat players in the sanctions violations sweepstakes.
The takeaway is that if you think you figured out a legal way to process dollar-denominated transactions for sanctioned entities, you’re probably wrong.
The WSJ article is available here (subscription only): https://on.wsj.com/38lteE6
The OFAC release is available here: https://bit.ly/38jBgx1
Russia Sanctions: Gazprom Restarting NordStream 2 Construction
If you happen to be spending time in Denmark’s area of the Baltic Sea this week, be on the lookout for pipeline laying operations for the NordStream 2 project. The US Government imposed sanctions on the project but Russia, in cooperation with Germany, has been actively seeking ways to continue construction activities in the face of sanctions. 120 kilometers of pipe remain to be laid, with the project 94% complete.
The pipeline and sanctions have been a source of dispute between the US and Germany, complicating efforts to present a united front against Russian adventurism. But at the same time, significant commercial imperatives argue for finding a compromise to finish the pipeline. Add the NordStream situation to the long list of challenges facing the Biden Administration.
An FT article on the restart is available here: https://on.ft.com/3oAAwcL
China Sanctions: PRC Government Launches Measures to Protect Companies from US Sanctions
Over the weekend, the Chinese commerce ministry announced new regulations intending to shield domestic companies from the impact of “unjust” US and other foreign sanctions. If Chinese companies determine that they have been targeted by sanctions, they can appeal to the Chinese commerce ministry for assistance. Relatedly, companies complying with sanctions can themselves now be sued in Chinese courts.
One analyst described the rules as “more bark than bite,” which seems accurate considering the whiplash effect PRC companies will be subject to if they face punishment on both ends of the stick – damned if they do, et cetera.
A Financial Times article on the regulations is here: https://on.ft.com/3q7xLA4
United Kingdom: Guidance on Penalty Calculations for Financial Sanctions Violations
Her Majesty’s Treasury’s Office of Financial Sanctions Implementation published a useful guide on how it (a) decides whether to impose monetary penalties on financial sanctions violators, and (b) calculates the relevant penalty amount.
The structure will be familiar to those who have struggled through similar OFAC guidance on the US side, but the UK’s version is significantly clearer in presentation. Of course, “OFAC’s gonna OFAC,” but if you are subject to US or UK sanctions the guidance is worth a quick review.
Some highlights include:
· OFSI uses a ‘more likely than not’ standard when determining if an offense has taken place, deciding whether (a) a prohibition has been breached or an obligation has not been followed, and (b) the person involved knew or had reasonable cause to suspect that there was a breach.
· Maximum penalties are the greater of £1 million or 50% of the value of the underlying funds or resources involved in the transaction.
· The guidance explicitly states that OFSI may impose monetary penalties on individual employees if the violation took place with the “consent or connivance” of the person or was due to “any neglect” on the part of the employee. Employees in such cases are those senior enough to be in a high-level managerial role (“director, manager, secretary, or other similar officer”).
· As in the US, voluntary disclosures are encouraged and will give you an automatic 50% decrease of the baseline penalty in “serious” cases, but not in “most serious” cases. In “most serious” cases, the voluntary disclosure reduction is up to 30% but could be zero. “Most serious” cases are those that “involve a very high value, blatant flouting of the law, or severe or lasting damage to the purposes of the sanctions regime.”
I do prefer the UK’s terminology of “serious” and “most serious” to OFAC’s “egregious/non-egregious” language. It paints a vivid picture of British people sitting in a London conference room discussing the issue. “Well, this sounds like a serious case, Nigel.” “Most serious, I would submit, Graham.”
The guidance is available here: https://bit.ly/3pUYbEZ
United Kingdom: Post-Brexit Guidance
At the end of 2020, the UK Government published new sanctions guidance documents in light of Brexit (finally!) taking place. Covering all these sanctions programs is beyond the scope of this newsletter, but the UK Foreign and Commonwealth Office has a good web page with the updated guidance for all of its sanctions programs.
In general, and likely oversimplifying in particular cases, Brexit has not led to a sea change in UK sanctions. Rather, the details of implementation and enforcement will begin to diverge, while both the EU and UK claim they will continue to coordinate closely on sanctions matters.
On the regulatory front, one new fact is that the UK will begin to provide general licenses for otherwise prohibited activities, similar to OFAC’s general license structure.
The guidance page with links to specific geographic and thematic summaries is available here: https://bit.ly/3bdys6w
Iran Sanctions: GitHub Secures OFAC License to Provide Both Free and Paid Services in Iran
In good news for software engineers in Iran, GitHub announced this week that OFAC issued a specific license allowing GitHub to provide both free and paid services to people and entities in Iran, with some obvious exceptions (e.g., SDNs and certain government entities). Credit where credit is due to OFAC for thinking more outside the box than is typical for the agency – and acting pretty quickly, for OFAC. From a quick review of GitHub’s announcement and related blog posts, it appears they started engaging with OFAC sometime in 2019.
Naturally, life probably won’t be too simple for Iranian developers quite yet, particularly for paid services. Although the license apparently allows for paid services, the reality will be that finding payment processors will be tricky at best. That said, kudos to OFAC for its action.
GitHub’s announcement is here, along with other interesting links to prior blog posts on this issue: https://bit.ly/2LgZ248
China Sanctions: Restrictions on Import of Materials Made with Forced Uighur Labor
For those who have not been closely following legislative or executive developments regarding restrictions on imports from Xinjiang Province alleged to be made with forced labor, The Economist this week has a good review of the state of play.
Although the US House passed the Uighur Forced Labor Prevention Act in September, the bill will need to be reintroduced in the new Congress. In the meantime, fierce lobbying by the clothing and related industries is underway, asking at least for a long transition period to find new sources. Some also argue that tracing the origin of textiles is difficult at best.
In the meantime, some question whether the restrictions will have significant impact, because a shirt not imported to the US can be sent elsewhere, and most of the market (88%, according to the Center for Strategic and International Studies) is domestic to China anyway.
The article is available here (subscription required): https://econ.st/39fpPWs
State Department: Global Magnitsky Human Rights Accountability Act Report
The State Department’s yearly report on Global Magnitsky sanctions appeared in the Federal Register, summarizing State’s calendar year 2020 designations of people or entities involved in corruption or human rights abuses.
State added 35 names to the Global Magnitsky list, thereby making them all SDNs. China leads the pack with nine new entries, followed by Russia (6), Yemen (5), Uganda (4), Haiti (3), South Sudan (2), and Cambodia, the Gambia, Lebanon, Libya, Liberia, and the Kyrgyz Republic with one each.
One wonders as to the timing of new designations and what meaningful impact the US Government believes the designations will have on those named. The report states that when:
“considering economic sanctions under Global Magnitsky, the United States prioritizes actions that are expected to produce a tangible and significant impact on the sanctioned persons and their affiliates and prompt changes in behavior or disrupt the activities of malign actors.”
More realistically, placing people on these lists is more likely to drive their activities further underground while giving the US Government the opportunity to show that it is taking some action, even if relatively futile in practical terms.
For example, it is difficult to imagine that these sanctions will have “tangible and significant impact” on individuals like Satish Seemar, a horse trainer for Chechen leader Ramzan Kadyrov, sanctioned in December 2020 and apparently resident in Dubai. Kadyrov himself was also sanctioned on the same day in December, which is odd considering he’s been sanctioned under the Russia-specific Magnitsky Act since 2017. Piling new sanctions on Kadyrov has no practical effect except in the press release sense.
Similarly, a man named Wan Kuok Koi (colorfully known as “Broken Tooth Koi”), leader of a significant Chinese organized crime network, now appears on the Global Magnitsky list. Perhaps I am too cynical, but I suspect Wan is not very troubled by his addition to the list. It may increase his costs of doing business, but his alleged deep financial connections to the Chinese Communist Party are probably more important to Mr. Broken Tooth.
The report is available here: https://bit.ly/38fVesC
Venezuela Sanctions: Revised/Updated General License 31A
The original General License 31 authorized various transactions related to the interim President of Venezuela, Juan Gerardo Guaidó Marquez, and various people he appointed or certain organizations where he can appoint officials. Updated GL 31A expands the authorizations to more precisely specify the “IV Venezuelan National Assembly” that has been in place since early 2016, and excludes the “Venezuelan National Constituent Assembly” and the so-called “illegitimate National Assembly to be seated on January 5, 2021.”
This general license provides clearer authorization of activities related to the opposition to President Nicolas Maduro that do not require an OFAC specific license. Parties doing business with the Venezuelan Government or its entities should remain aware of updates to these rapidly changing sanctions, with no fewer than 27 general licenses available at this writing.
General License 31A is available here: https://bit.ly/3pSKgPJ
Commerce Department: Clarifications to Scope of ECCN 1C991 (Certain Vaccines and Related Items)
A new change to ECCN 1C991 illustrates the difficulty of keeping government regulations up to date in light of rapidly developing scientific advances. The origin of these clarifications to ECCN 1C991 significantly predates the pandemic; the changes stem from an Australia Group meeting in June 2019.
Very generally, an interpretive problem emerged because certain viruses controlled under strict ECCNs can be genetically modified and then themselves added to vaccines that are controlled under less restrictive ECCNs. A strict reading of the regulations would imply that the less-controlled vaccines would now be subject to more restrictive export controls than intended because of the presence of the modified yet controlled viruses. The regulatory changes here are intended to resolve that ambiguity in favor of making it easier to export the affected items, which will now be subject to only AT-level controls.
Hopefully this will also ease controls on future COVID-19 vaccines. As the regulatory summary states:
“Although certain COVID vaccines are not affected by this rule, the development of an unknown number of other vaccines, COVID and otherwise, is expected to be greatly facilitated as a result of these amendments to the vaccine controls in ECCN 1C991.”
The Federal Register notice is here: https://bit.ly/2LcU3kZ
Commerce Department: Extension of ECCN 0D521 (Software Specially Designed to Automate the Analysis of Geospatial Imagery) until January 6, 2022
Under the EAR, the 0Y521 temporary ECCN series is designed as a short-term(ish) ECCN establishing unilateral US export controls over certain items until multilateral controls can be established via the Wassenaar Arrangement. In January 2020 the Commerce Department put the above software in the 0D521 ECCN, pending discussion at Wassenaar. But the pandemic intervened and there has been no multilateral action to date.
Commerce therefore is extending the ECCN for an additional year, as provided for by the underlying 2012 rule allowing for these temporary ECCNs. Further extensions require a decision by the Under Secretary for Industry and Security (whoever that is going to be under the Biden Administration) that the extension is in the national security or foreign policy interests of the United States.
Considering that this software sounds super-complex to this unfrozen caveman lawyer – “Geospatial imagery ‘software’ ‘specially designed’ for training a Deep Convolutional Neural Network to automate the analysis of geospatial imagery and point clouds” – I would expect further extensions if Wassenaar loses another year to the pandemic.
1990s unfrozen caveman lawyer reference point:
The Federal Register notice is available here: https://bit.ly/39eovTD
Commerce Department: Additions to Chemical Weapons Convention Annex on Chemicals (Schedule 1A)
As a result of multilateral agreement in late 2019, various chemicals were newly added to Schedule 1A to the Chemical Weapons Convention Annex on Chemicals. The CWC requires participating states to bring their domestic regulations into line; the Commerce Department has done so with a rulemaking published last week.
The practical impact of this change is near zero, considering that few if any of these chemicals are commercially produced in the US, and they are already considered defense articles under the ITAR. But for completion’s sake and in case anyone wants to read lists of chemicals to fall asleep after a long day, you can refer to the Federal Register notice.
The notice is available here: https://bit.ly/2XjMFXw
European Union: National Authorities in the EU Empowered to Grant Export Licenses and Take Similar Actions
In the Helpful Link of the Week category, the EU published an update of ministry names, contact persons, physical and email addresses, and websites for ministries and offices responsible for export control matters throughout the EU. Anyone doing export-controlled work related to the EU should take note and bookmark this page.
The page is here: https://bit.ly/2Xp6Wli