This week’s newsletter includes a lot of China-related news, the latest indictment for sending US goods to Iran, and interim final rules for new Commerce Department regulations. I also include what will probably be the first of many Simpsons references in the newsletter.
China Sanctions: New Proposed Commerce Regulations on Technology from Adversary Countries (Primarily China)
The Commerce Department continues to push out new anti-China rules in the last few days of the Trump Administration. The latest is an interim final rule setting out procedures to determine whether and how to block information and communications technologies or services sourced from “foreign adversaries.” The named foreign adversaries are the usual suspects: China, Iran, Cuba, Russia, North Korea, and the Venezuelan regime associated with Nicolas Maduro. Of course, because US high-technology imports primarily come from China among this group, the regulations are perceived as aimed at China.
The rule will take effect in about two months but the Department leaves open the possibility it will respond to additional comments in the meantime, so the emphasis may be on “interim” rather than “final.” There are six separate specified categories of technology regulated under the rule, but as a practical matter we’re talking about basically anything that when you look at it, you think “that’s technology.” If you need to know the details, Section 7.3(a)(4) of the interim final rule contains the list of affected technology. Otherwise, the Financial Times has a good overview.
China Sanctions: Major Chinese Companies Alibaba, Tencent, and Baidu Safe from Imposition of Investment Sanctions for Now
The Wall Street Journal reports the US Government has decided that the connections between the three companies above and the Chinese security complex, whatever they may be, are not significant enough to require that US investors divest their holdings in the three companies. Alibaba and Baidu are both listed on New York exchanges and Tencent is listed in Hong Kong. Taken together, the three companies have a market capitalization of $1.4 trillion.
Although the State and Defense Departments were apparently pressing for their inclusion, Treasury Secretary Steven Mnuchin resisted and the result is no action, at least for now. That said, reports suggest that nine new companies and around 100 subsidiaries of companies already on the list are soon to be designated.
Stepping back for a moment, the effectiveness of sanctions like these is bound to be decreasing over time, as other financial centers become available to sanctioned companies. Although the US exchanges will remain dominant for some time, how effective US unilateral sanctions will be in the future is an open question.
Commerce Department: Expansion of End Use/End User Controls Under Export Administration Regulations
As required by the Export Control Reform Act of 2018, the Commerce Department published an interim final rule expanding and codifying new license requirements on certain exports, reexports, and in-country transfers, as well as on activities of US persons related to foreign military-intelligence end uses and end users. As with the “foreign adversary” restrictions above, these rules will go into effect mid-March pending additional comments from industry, if any.
The new regulations establish restrictions on:
· Specific activities of US persons: actions relating to specified WMDs including nuclear, biological, and chemical weapons activities, and relating to certain foreign maritime nuclear and foreign military or intelligence-related activities, require licensing. The reference to military-intelligence end uses or end users is new.
· Military-intelligence end uses and end users in China, Russia, Venezuela, and Country Groups E:1 and E:2 (Cuba, Iran, North Korea, Syria, and (to be removed) Sudan).
· Certain chemical/biological weapons end uses, including items for use in the development, production, operation, installation, repair, overhaul, or refurbishing of a whole plant for specified chemical weapons precursors.
The interim final regulations are quite complex and if you are in or adjacent to these areas you should review them very carefully.
Cuba Sanctions: Trump Administration Re-Designates Cuba as a State Sponsor of Terrorism
In what can only be rationally described as a vindictive and political last minute wrench thrown into US-Cuba relations by the departing Administration, the State Department re-designated Cuba as a state sponsor of terrorism for “repeatedly providing support for acts of international terrorism in granting safe harbor to terrorists.” The designation will have ripple effects through US trade policies, including on foreign assistance and export controls.
The stated reason for the designation is pretty weak, claiming that safe harboring is sufficient for designation. As the Wall Street Journal points out, prior designations have been based on Cuba having repeatedly provided support for international terrorist acts. Not to minimize the underlying crimes, but giving safe harbor to some US fugitives from justice whose crimes date back to the 1970s doesn’t seem like enough to suddenly re-designate Cuba on the way out the door.
China Sanctions: License Revocations and Denials for Huawei-Related Transactions
It almost feels like this newsletter needs a “Last Minute Trump Administration Decisions” section. Reuters reported over the weekend that various industry players have received notice from the Commerce Department that it will deny dozens of pending license requests and revoke existing licenses for exports to Huawei. Details are somewhat sketchy, but the denied applications may involve as much as $120 billion worth of exports, with perhaps another $280 billion worth to be denied later.
Exporters receiving notices of intent to deny can appeal the decision, which triggers a 45 day period for Commerce to respond. Then, if the denial remains in place, there’s another 45 day appeal period. We’ll see what happens with any appeals, especially when and if the top officials of the Commerce Department below the Secretary/Deputy Secretary level start being named and put in place.
Iran Sanctions: Three Individuals Charged with Unauthorized Exports of US Goods to Iran
Three Iranian nationals – two in Canada and one in Iran – were charged with various export and money laundering violations in connection with a conspiracy to export electrical discharge boards, a CPU board for a precision fabrication machine, servo motors, and railroad crankshafts to Iran. While in Canada and Iran, they placed orders that were ultimately sourced from suppliers in the United States. The conspirators misled suppliers as to the destination of the goods and used Dubai as a transshipment point before their export to Iran. Third parties got caught up in the scheme as well, arranging for payment and transportation.
Somewhat surprisingly at least to me, a random news outlet in Newfoundland seems to have reviewed the indictment carefully and provides some details that should ring alarm bells for everyone exporting sophisticated and even not very sophisticated equipment overseas. Multiple times, suppliers and intermediaries raised questions about the destination of the equipment, and also multiple times some of those suppliers and intermediaries sent the equipment anyway despite their spidey senses tingling.
Similarly, the amount of due diligence performed by some of the suppliers also left something to be desired. After receiving an order supposedly from the Iraqi transportation ministry that a Croatian company passed on to one US supplier, that supplier responded by writing “I hope that this is not for Iran.” Not exactly the most searching inquiry. It appears this supplier didn’t actually send the equipment, but it’s not a good look to just “hope” something when your email will potentially be printed on a big piece of poster board for presentation to a jury.
Relatedly, when I was in Dubai multiple times for a sanctions/diversion investigation, these omnipresent road signs repeatedly reminded me of the reason for my visits.
China Sanctions: Entity List and Military End-User List Additions
Our newest member of the Commerce Department’s Entity List is China National Offshore Oil Corporation Ltd. CNOOC ends up on the Entity List because it allegedly “helps China intimidate neighbors in the South China Sea.” More colorfully, Secretary Wilbur Ross says that CNOOC “acts as a bully for the People’s Liberation Army.” I would have thought the PLA was quite capable of being its own bully, but what do I know.
Mandatory Nelson Muntz any time a bully is mentioned:
CNOOC was already under sanctions from the Defense Department as owned or controlled by the Chinese military.
The Chinese state-owned company Skyrizon (technically, Beijing Skyrizon Aviation Industry Investment Co., Ltd.) was also added to Commerce’s Military End-User List, therefore requiring US companies to secure Commerce Department licenses for designated items. The Department claims that Skyrizon helps the PLA access foreign-origin military equipment and technology, particularly military aircraft engines.
China Sanctions: Summary of 2020 Actions Against China by Commerce, Defense, State, and Treasury Departments
Readers of the “About” section of the newsletter’s website, and people who know me, are aware that I’m often critical of law firm client alerts. But by the same token, I want to give credit here where credit is due when a law firm does publish useful guidance. Attorneys at Kirkland & Ellis published a good summary of the many China-related regulatory actions the Trump Administration took over the course of 2020. As has often happened during the Trump years, I had the frequent realization while reading it, “Was that this year? It seems like it happened an eon ago.” Take a look to refresh your recollections of the year in China sanctions.
As the Trump Administration comes to an end, the incoming Biden Administration will have its hands full in deciding what to keep in place and what to pull back. My own sense is that the controls on actual goods and technology will likely remain, while the broader actions that seek to punish Chinese entities through actions like exchange delisting may be shelved. While the Trump team has been blundering into a broad conflict with China on many fronts, at least initially the Biden team may take a more nuanced approach, realizing that the US and China have many common interests alongside their increasingly competitive security relationship.
North Korea Sanctions: OFAC Settlement Agreement with Indonesian Paper Company Exporting Cigarette Paper to North Korea
Once again we have a sanctions case where completely foreign exports run afoul of OFAC regulations when US dollar-denominated transactions are involved. The Indonesian company, PT Bukit Muria Jaya (BMJ), exported just under $1 million worth of cigarette paper to a Chinese company that itself was operating on behalf of SDN Korea Daesong General Trading Company.
The violations emerged when BMJ directed the payments for the exports to its US dollar account at a non-US bank. Thus, 28 wire transfers cleared through US banks between 2016 and 2018, causing US banks to deal in property of an SDN, export financial services to an SDN, or otherwise facilitate transactions that would be prohibited if US persons engaged in them.
The story doesn’t end here; BMJ doesn’t actually have to pay OFAC the $1,016,000 fine quite yet because there appears to be a parallel DOJ proceeding underway. OFAC’s announcement of the settlement agreement states:
BMJ’s obligation to pay OFAC the settlement amount shall be deemed satisfied by BMJ’s payment of a greater amount in satisfaction of penalties assessed by the U.S. Department of Justice arising from the same course of conduct.
US Missile Technology Export Controls: New Licensing Policy for Certain Unmanned Aerial Systems (UAS)
The Commerce Department is unilaterally revising its license review policy for certain UAS that are subject to a high level of export control (Category I) under the multilateral Missile Technology Control Regime. The policy change means license applications for certain lower-airspeed items will be reviewed on a case-by-case basis rather than be subject to a strong presumption of denial (which was previously the case).
Category I exports are subject to MT controls under the EAR, and include UAS that have a range/payload capability equal to or greater than 300km/500kg. Under the revised policy, UAS that are otherwise Category I but have a maximum true airspeed of less than 800 km/hour will be reviewed on a case-by-case basis. The guidance states:
“This subset of UAS is widely used in intelligence, surveillance, and reconnaissance (ISR) missions and various commercial and other applications not involving WMD delivery, so a case-by-case license review policy is warranted . . . This approach will maintain particular restraint on exports and reexports of those UAS that present higher risk for WMD delivery – such as cruise missiles, hypersonic aerial vehicles, and advanced unmanned combat aerial vehicles – without unduly impeding exports for growing commercial and conventional military applications.”
The US made this argument to its MTCR partners unsuccessfully in 2019, so the Commerce Department is now exercising its national discretion as permitted under the MTCR.
The revised licensing policy applies not only to unmanned aerial vehicles themselves, but also MT-controlled items for the design, development, production, or use of UAV systems that meet the eased parameters.
Energy Department: Simplifying Short-Term Natural Gas Export Authorizations When a Long-Term Authorization Exists
If you’re in the business of exporting natural gas, including liquefied natural gas, compressed natural gas, and compressed gas liquid, your regulatory burden just became a little lighter. The Energy Department published a policy statement allowing domestic exporters with long-term export authorizations (typically 20 years or more) to make short-term or spot exports without seeking new authorizations, as long as the amounts exported do not exceed the long-term authorized amounts.
Previously, short-term exports required separate authorizations even when a facility or company held a long-term authorization. The Energy Department stated that when the first short-term authorizations were granted in 2016, the regulatory environment for exports was rapidly evolving and it made sense to proceed cautiously. Now that the Department has years of experience with this structure, separate short-term authorizations are no longer necessary.
OFAC Sanctions 2020: Year in Review
The Center for a New American Security published a summary of 2020 United States sanctions, reporting 777 new designations during the year. This is about the same as 2019, when there were 785 new designations. Surprising no one, Iran is the top target with 43% of designations, and China follows with 11.5%. Delistings were up significantly to 212, more than double 2019’s 101 delistings.
The Trump Administration has been especially busy on the sanctions front since the election, with 175 new designations after November 3. Almost 40% target Iranian entities close to the Supreme Leader or the Iranian intelligence ministry.
United Kingdom Export Controls: New Guidance on Certain Open General Export Licenses
The Export Control Unit of the UK Department of International Trade issued two revised guidance document regarding general licenses for (a) military goods technology and (b) dual-use items for export after warranty repair/replacement.
The details of the guidance are beyond this newsletter’s scope, but I provide links to the document themselves for any readers who may have missed them in the flurry of UK government guidance coming out in light of Brexit.
Reminder/Disclaimer: This newsletter is not intended as and should not be considered as legal advice. It may also be considered attorney advertising in certain jurisdictions.
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