Effective January 14, 2021, the Bureau of Industry and Security (“BIS”) announced amendments to Export Administration Regulations (“EAR”) to implement the rescission of Sudan as a State Sponsor of Terrorism.  The U.S. Department of State removed Sudan’s designation effective December 14, 2020.

The changes to the EAR remove export control licensing requirements for many exports and reexports of less sensitive items to Sudan.  In particular, goods, software, and technology controlled solely for anti-terrorism (AT) purposes no longer require an export license or the use of a license exception to be shipped to Sudan.  In addition, the de minimis level for Sudan increased from 10 to 25 percent, which means that fewer items manufactured outside the United States that incorporate U.S.-origin content will be subject to U.S. export control restrictions.  The amendment also makes Sudan eligible for additional license exceptions.

The EAR amendments are a significant step towards removing prior terrorism-related restrictions on Sudan.  Other agencies, including  U.S. Department of the Treasury, are also expected to make conforming amendments to their regulations.

Please contact our export control and sanctions team if you have any questions about these developments.

 

Today, the Bureau of Industry & Security (BIS) added China National Offshore Oil Corporation Ltd. (CNOOC) to the U.S. Entity List.  Under the new rule, U.S. and non-U.S. exporters are generally prohibited from transferring items subject to the U.S. Export Administration Regulations (EAR) to CNOOC without first obtaining a U.S. export license.  As noted in the rule, license applications will face a presumption of denial.

Certain exports of crude oil, condensates, aromatics, natural gas liquids, hydrocarbon gas liquids, natural gas plant liquids, refined petroleum products, liquefied natural gas, natural gas, synthetic natural gas, and compressed natural gas to CNOOC are excluded from the license requirement, as are exports of items to joint ventures with persons from Country Group A:1 countries that operate outside of the South China Sea.

In the notice, the Commerce Department indicated that CNOOC was added to the Entity List due to the company’s involvement in the South China sea dispute.  Suppliers and other companies doing business with CNOOC should carefully review whether these rules apply to their operations and implement controls to prevent exports, re-exports, or transfers of items to CNOOC, unless licensed by BIS.

Following our reporting earlier this week on the Section 301 determinations regarding digital services tax (DST) measures in India, Italy, and Turkey, the Office of the U.S. Trade Representative (USTR) has today issued additional findings regarding DSTs in Austria, Spain, and the United Kingdom.  USTR issued reports regarding each country and notices of affirmative conclusions under Section 301 of the Trade Act of 1974 that “each of the DSTs discriminates against U.S. companies, is inconsistent with prevailing principles of international taxation, and burden or restricts U.S. commerce.”

These investigations were launched in June 2020 along with investigations into DST proposals or policies in a number of other countries.  As with the affirmative Section 301 findings issued with respect to India, Italy, and Turkey last week, USTR has stated that it is not taking any specific action with respect to Austria, Spain, and the UK, but will “continue to evaluate all available options.”  The delay in immediate action gives some room for a multilateral solution currently being pursued at the OECD, which generally has bilateral support in Congress and would correspond to President-Elect Biden’s interest in a multilateral approach to resolving trade disputes.

USTR also provided a status update as to its investigations of DSTs proposed, but not yet implemented, in Brazil, the Czech Republic, the European Union, and Indonesia.  The report on these DST proposals raises concerns, but does not reach any conclusion, noting that the analyses are ongoing.  The report further states that the United States is encouraging “engagement on these matters through bilateral discussions and on related taxation issues through multilateral forums.”

 

 

The Office of the U.S. Trade Representative (UST) has issued determinations in the investigations of digital services taxes (DSTs) adopted or considered by India, Italy, and Turkey, finding that “each of the DSTs discriminates against U.S. companies, is inconsistent with prevailing principles of international taxation, and burden {sic} or restricts U.S. commerce.”  Notably, USTR is not taking any specific action at this time, noting that it will “continue to evaluate all available options.”  Thus, any action taken in response to these determinations, if any, is likely to be decided and implemented by the Biden Administration and President-Elect Biden’s nominee for the USTR role, Katherine Tai.

These investigations were conducted under Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411).  Under the law, the president may direct USTR to remedy violations of bilateral or multilateral trade agreements, or unreasonable, unjustifiable, or discriminatory foreign government practices that burden or restrict U.S. commerce.  While the law expressly allows the use of Section 301 action to address violations of agreements, prior U.S. policy has been to address trade agreement violations under the applicable dispute settlement procedures, including through the World Trade Organization (WTO).  There have been over 125 cases under Section 301 since the law’s enactment, of which only about 25 percent have been initiated since the WTO’s establishment in 1995.  Most investigations have involved government measures affecting trade in goods – especially agricultural goods – such as export restraints, subsidies, or other discriminatory policies.

The completed investigations regarding Indian, Italian, and Turkish DSTs stem from a set of investigations initiated in June 2020 on DST measures or proposals in these three countries, plus Austria, Brazil, the Czech Republic, the European Union, Indonesia, Spain, and the United Kingdom.  The subject DSTs apply to revenues that certain companies generate from providing digital services to, or aimed at, users in those jurisdictions.  UST has stated that it “USTR expects to announce the progress or completion” of these additional DST investigations “in the near future.”

The president must typically make a determination within 12-18 months of investigation initiation (depending on the practice investigated) if dispute settlement procedures are not invoked.  Remedies may include tariffs or other import restrictions, suspension of concessions under a trade agreement, an agreement to end the practice at issue or compensate the United States, or the imposition of fees on or restriction or denial of services.  Section 301 also includes a general authorization that permits USTR to take any actions that are “within the President’s power with respect to trade in goods or services, or with respect to any other area of pertinent relations with the foreign country.”

The most well-known and impactful example of recent use of Section 301 has been the Trump Administration’s imposition of tariffs on nearly all imports from China due to Chinese laws and practices related to intellectual property rights and forced technology transfer (we have written on this a number of times).  At the end of 2019, USTR concluded another Section 301 investigation into France’s DST, finding the measure discriminates against (large) U.S. digital companies and is inconsistent with prevailing tax principles.  Imposition of tariffs on $2.4 billion in luxury French imports such as wine, handbags, makeup, and cheese was delayed and has most recently been suspended for purposes of promoting a coordinated response across all DST cases according to USTR.  In October 2020, UST also initiated Section 301 investigations into Vietnam’s importation of illegally harvested timber and currency undervaluation.

On December 30, 2020, the Office of Foreign Assets Control (“OFAC”) announced a settlement agreement with BitGo, Inc. (“BitGo”) for providing digital wallet services to users located in sanctioned jurisdictions, including Crimea, Cuba, Iran, Sudan, and Syria.  The case is notable because OFAC makes clear its expectation that companies consider Internet Protocol (“IP”) address geolocation data when assessing whether online customers are located in sanctioned jurisdictions.

BitGo processes digital currency transactions on behalf of users with “hot wallet” accounts, the company’s secure digital wallet service.  Prior to 2018, users could open a BitGo digital wallet account by providing only a name and an email address. In April 2018, BitGo began requiring new accountholders to self-report their location to the company.  Throughout this period, BitGo also tracked users’ IP addresses and related geolocation data for account security purposes, but did not use that information to identify users who may be located in sanctioned jurisdictions.

OFAC concluded that BitGo had reason to know that users were located in sanctioned jurisdictions based on the collected IP address data, even though the data was not actively screened by the company for sanctions compliance purposes.  Based on the IP address data, OFAC found that BitGo failed to prevent users in Crimea, Cuba, Iran, Sudan, and Syria from accessing its services in 183 instances and facilitated transactions with those users worth $9,127.79.

The maximum penalty in this case, which was not voluntarily self-disclosed to the agency, was over $53 million.  However, OFAC determined that the violations were “non-egregious”  in nature (e.g., they did not involve willful or reckless conduct and did not present serious harm to sanctions program objectives) and that substantial mitigating factors, including the adoption of a robust compliance program, warranted a settlement amount of $93,380.  OFAC specifically cited BitGo’s implementation of IP address blocking, email-related restrictions, and batch screening of users against the SDN List as sanctions compliance measures adopted by the company.

The BitGo settlement is another example in an emerging pattern of enforcement actions against companies – like Amazon – that fail to use all collected data, like IP addresses, as part of their sanctions compliance programs.  Fintech and other companies that conduct transactions online are on notice that reliance on self-reported location is not sufficient to identify users subject to sanctions.

Please contact our export control and sanctions team if you have any questions about developing a sanctions compliance program for online transactions.

Today, the Bureau of Industry and Security (BIS) announced that it will create a new “Military End-User List” (MEU List) to help exporters comply with the recently expanded military end-use and end-user restrictions (MEU Rule) that apply to exports of certain items to China, Russia, and Venezuela.  The current MEU List includes 102 entities from China and Russia, although the list is designed to be dynamic and will change over time.  The MEU List will be included in a revised Supplement No. 5 to Part 744.

When the MEU Rule was implemented, it created significant due diligence burdens for the exporting community, because it was incumbent on those companies to determine whether certain entities in China, Russia and Venezuela would qualify as “military end-users.”  Although the publication of the MEU List will reduce that burden somewhat, the MEU List is non-exhaustive and BIS stated that an entity’s exclusion from the list does not mean that the entity is not subject to the MEU Rule.  For example, BIS specifically cautioned that a party not included on the MEU List, but included on Department of Defense lists of military companies in China, would raise a red flag that would require due diligence.  Therefore, even though a transaction with a party included on the MEU List is certainly subject to the MEU Rule, exporters, re-exporters, and transferors (e.g., freight forwarders) are still responsible for conducting their own due diligence to identify potential military end users not yet listed by BIS.

The End-User Review Committee (the interagency body composed of the Departments of Commerce, Defense, Energy, State, and sometimes Treasury) is responsible for adding and deleting additional entities from the MEU List.  License applications for transactions that are subject to the MEU Rule (i.e., that include a military end-user and an item enumerated in Supplement No. 2 to Part 744) will be reviewed by BIS subject to a presumption of denial.

Please contact our export control and sanctions team if you have any questions about these developments.

Today, the United States added 60 companies in China and 17 companies located elsewhere to the Commerce Department’s Entity List.  Among the Chinese firms targeted are chipmaker Semiconductor Manufacturing International Corporation (SMIC) and ten semiconductor companies related to SMIC, shipbuilder China State Shipbuilding Corporation (CSSC), and drone manufacturer DJI.  The move is the latest step in escalating U.S. trade restrictions on China.

The new rule prohibits U.S. and non-U.S. persons from providing the listed entities with goods, software, or technology (collectively, “items”) that are “subject” to the U.S. Export Administration Regulations (EAR) without first obtaining a license from the Bureau of Industry and Security (BIS), which administers the EAR.  License applications involving exports or transfers to most listed companies will face a presumption of denial, although BIS appears willing to entertain license applications for exports of less sensitive items to SMIC and certain items necessary to detect, identify and treat infectious disease to certain other companies, including DJI.  The broad license requirement applies to all items in the United States, items made in the United States, and certain non-U.S. items that contain more than de minimis U.S.-origin content or were made using certain U.S.-origin technology.

Companies doing business with the listed parties should carefully review whether these rules apply to their operations and implement controls to prevent exports, reexports, transfers, or releases of items to the listed parties without U.S. government approval.

Please contact our sanctions and export team with any questions regarding this new rule.

Yesterday, the United States imposed secondary sanctions on Turkey’s Presidency of Defense Industries (SSB), the country’s main defense procurement entity, for purchasing the Russian S-400 missile system.  The sanctions were imposed pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which authorize secondary sanctions against non-U.S. parties that conduct a “significant transaction” with the Russian defense or intelligence sectors.  The action marks the first time such sanctions have been imposed on a NATO country.

The U.S. State Department imposed the following five sanctions on SSB, out of a menu of 12 possible options:

  • Prohibiting issuance of specific U.S. export licenses/authorizations for any goods or technology transferred to SSB;
  • Prohibiting loans or credits by U.S. financial institutions to SSB totaling more than $10 million in any 12-month period;
  • Banning U.S. Export-Import Bank assistance for exports to SSB;
  • Requiring the U.S. to oppose loans benefitting SSB by international financial institutions; and
  • Imposing full blocking sanctions and visa restrictions on SSB’s Chairman and three other employees.

While not a complete blocking of SSB, the sanctions will likely limit the ability of the SSB to purchase defense-related goods and services from the United States and limit the company’s ability to partner with U.S. companies in the defense sector.

New “NS-MBS” (Non-Sanctions – Menu Based Sanctions) List

Yesterday, OFAC and the State Department also announced a new non-SDN list to identify parties subject to menu-based sanctions authorities, such as CAATSA.  The new “NS-MBS List” appears on OFAC’s Consolidated Screening List and will be used to identify parties subject to non-blocking sanctions only.  Parties subject to blocking requirements will continue to be identified on the Specially Designated Nationals (SDN) List.

Yesterday, the Department of Defense (DoD) designated four additional companies as owned or controlled by the Chinese military, expanding the list of “Communist Chinese military companies” (CCMCs) to 35 companies.  As previously recounted on this blog, Executive Order 13959 (the Order) will prohibit U.S. persons from purchasing the publicly traded securities of CCMCs once the Order comes into force early next year.

The four newly listed companies will be subject to restrictions 60 days after being added to the DoD list.  U.S. persons have 365 days from the date of designation to divest existing holdings in the four companies, provided the securities are sold to non-U.S. persons.

As noted previously, the next administration could suspend or modify the Order, but it may not be an immediate priority.  OFAC is also expected to issue guidance on the scope of the Order before it becomes effective on January 11, 2021.

 

On November 30, the United States sanctioned China National Electronics Import and Export Corporation (CEIEC) by adding the Chinese technology company to the Specially Designated National (SDN) List.  Treasury’s Office of Foreign Assets Control (OFAC) designated the company under Executive Order 13692 for providing goods and services to the Venezuelan government that were used to undermine democracy in that country, including technology that could be used to monitor political opponents and repress political dissent within Venezuela.  A press release issued by OFAC noted that CEIEC had provided censorship tools to CANTV, the Venezuelan state telecommunications company, which controls a substantial portion of internet service in the country.

As of the date of designation, U.S. persons are prohibited from conducting business with CEIEC and its over 200 subsidiaries without authorization from OFAC and all property and interests in property of the company are blocked (i.e., frozen) under U.S. law.  Because of the wide potential reach of the sanctions, OFAC issued General License 38 to allow U.S. persons to wind-down pre-existing business with the company and its subsidiaries over a 45-day period.

Please contact our economic sanctions team if you have any questions about the designation or your sanctions risk profile.