Last week, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $5,228,298 settlement agreement with Sojitz (Hong Kong) Limited (Sojitz HK) for causing U.S. financial institutions to process U.S. dollar payments related to the purchase and resale of Iranian-origin goods in Asia.  This case demonstrates how U.S. dollar payments often trigger OFAC jurisdiction over business dealings that otherwise occur outside of the United States, and highlights the need for effective internal controls to identify potential employee misconduct.

What Happened

Despite explicit and repeated advisements to the contrary, Sojitz HK employees, including one holding a mid-level managerial position, arranged a trading agreement with suppliers in Thailand for the purchase of Iranian-origin high density polyethylene resin (HDPE) to be resold to customers in China.  Sojitz HK used its Hong Kong bank to make payments to its suppliers totaling over $75 million.  Those U.S. dollar payments were processed and settled through U.S. financial institutions, causing those institutions to impermissibly facilitate the sale of Iranian-origin goods.  Company officials and executive management, as well as the U.S. institutions processing the payments, did not detect the involvement of the Iranian actors because the noncompliant Sojitz HK employees removed mention of Iran from relevant transactional documents.  Moreover, the employees concealed this circumvention of Sojitz HK policy during the company’s internal approval process.

The settlement amount reflects OFAC’s balancing of several mitigating and aggravating factors.  Mitigating factors include Sojitz HK’s organized and voluntary disclosure of the apparent violations, the lack of any violations in the past five years, and the company’s proactive implementation of strengthened compliance procedures.  Aggravating factors include the employees’ knowing violation of U.S. sanctions as well as OFAC’s finding that the trading agreement conferred a substantial economic benefit to Iran and undermined U.S. sanctions targeting Iran’s petrochemical sector.

Lessons Learned

U.S. dollars – This case is a reminder that the use of U.S. dollars in cross-border trade often triggers U.S. jurisdiction, even if the underlying trading activity occurs outside of the United States, because U.S. dollar payments often flow through U.S. financial institutions.  In this case, a non-U.S. company violated U.S. primary sanctions rules for “causing” U.S. financial institutions to support Iran-related business that was otherwise conducted outside the United States.

Iranian-origin goods – The U.S. embargo does not just apply to direct dealings with Iran; it also applies to dealings in Iranian-origin goods between non-sanctioned countries, like Thailand and China.  Companies outside the United States should have processes in place to identify transactions that may implicate U.S. sanctions rules and ensure that those transactions occur in compliance with OFAC’s regulations to the extent that U.S. jurisdiction applies.

Employee misconduct –  The violations in this case were the result of intentional employee misconduct.  As noted by OFAC in the settlement agreement, companies should adopt internal controls designed to spot this type of activity, to the extent possible, before it becomes a systemic issue that could generate substantial liability.  Such measures may include risk assessments, testing and auditing of compliance program procedures, and ensuring that appropriate controls apply to overseas subsidiaries.

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Please contact our sanctions and export control team if you have any questions about building an effective compliance program.

Last week, the Treasury Department and Commerce Department imposed new sanctions on dozens of Chinese firms linked to the Chinese military. 

Pursuant to Executive Order 13959, as amended by E.O. 14032, the Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned eight additional Chinese companies for operating as part of the Chinese Military-Industrial Complex (CMIC) and supporting human rights abuses against the Uyghur population in Xinjiang under China’s biometric surveillance apparatus.  The Commerce Department’s Bureau of Industry (BIS) imposed corresponding Entity List sanctions on 34 parties in China and six companies in other countries.

The following Chinese technology companies were added to OFAC’s “Non-SDN Chinese Military-Industrial Complex Companies List” (“NS-CMIC List”):

  • Cloudwalk Technology Co., Ltd.;
  • Dawning Information Industry Co., Ltd.;
  • Leon Technology Company Limited;
  • Megvii Technology Limited;
  • Netposa Technologies Limited;
  • SZ DJI Technology Co., Ltd.;
  • Xiamen Meiya Pico Information Co., Ltd.; and
  • Yitu Limited.

The NS-CMIC sanctions restrict the ability of U.S. persons to purchase or sell publicly traded securities or derivatives in the above entities.  Note that the 50 percent rule does not apply to entities on OFAC’s NS-CMIC List, meaning that only named entities are subject to these restrictions.

Of the 40 new entries to BIS’s Entity List, 34 pertain to entities located in China, three to entities located in Georgia, one to an entity located in Malaysia, and two to an entity located in Turkey, with three of the entities being located in multiple destinations.  The eight Chinese firms listed above are on BIS’s Entity List, and the final rule adds the following four Chinese entities previously identified under E.O. 13959:

  • Aerosun Corporation;
  • Changsha Jingjia Microelectronics Company Limited;
  • Fujian Torch Electron Technology Co., Ltd.; and
  • Inner Mongolia First Machinery Group Co., Ltd.

Citing national security and foreign policy concerns, BIS’s Entity List additions target an array of firms determined to have made efforts to support the modernization and enhancement of Chinese and Iranian military capabilities.  Such efforts include the purported use of biotechnology processes to support China’s development of brain-control weaponry, as well as the actual or attempted provision of U.S.-origin items to China and Iran.  Notably, BIS’s final rule also revises Huawei Technologies Co., Ltd.’s entry to add three additional aliases under one of its affiliated entities, Huawei Marine Networks:

  • HMN Technologies;
  • Huahai Zhihui Technology Co., Ltd.; and
  • HMN Tech.

U.S. and non-U.S. exporters are generally prohibited from transferring goods, software, or technology subject to the U.S. Export Administration Regulations to listed entities without first obtaining a U.S. export license.  BIS will review such requests under a “presumption of denial” licensing policy.

Please contact our sanctions and export control team with any questions about ensuring compliance with these latest developments.

On December 15, 2021, the Biden Administration issued a new Executive Order (E.O.) pursuant to the Fentanyl Sanctions Act (FSA) that modernizes the Treasury Department’s authority to impose sanctions on foreign drug traffickers and those that facilitate the international drug trade.  The new sanctions are intended to address the flow of fentanyl, methamphetamines, and precursor and essential chemicals into the United States from foreign sources.

In addition to traditional blocking sanctions, the E.O. authorizes U.S. government agencies to  impose menu-based sanctions on non-U.S. persons that:

  • Have materially contributed to the “international proliferation of illicit drugs” or their means of production;
  • Have knowingly received property that constitutes or is derived from the proceeds of the international proliferation of drugs or that was used or is intended to materially facilitate the international proliferation of drugs;
  • Have provided financial, material, or technological support for, or goods or services in support of the global drug trade or a sanctioned person;
  • Are or were a leader or official of any sanctioned person or any foreign person that has engaged in the foregoing; or
  • Are owned, controlled, or directed by, directly or indirectly, any sanctioned person.

The E.O. defines the “international proliferation of illicit drugs” to be any illicit activity to produce, manufacture, distribute, sell, or knowingly finance or transport narcotic drugs, controlled substances, listed chemicals, or controlled substance analogues, as defined in section 102 of the Controlled Substances Act.  Parties designated pursuant to the E.O. face a menu of sanctions possibilities, including at least one of the following:

  • Blocking sanctions that freeze the sanctioned actor’s U.S. property or interests in property;
  • Prohibition on U.S. transfers of credit or payments involving any interest of the sanctioned actor;
  • Prohibition on U.S. transactions in foreign exchange in which the sanctioned actor has any interest;
  • Prohibition on any U.S. person from investing in or purchasing significant amounts of the sanctioned actor’s equity or debt; and/or
  • Imposition of any of the foregoing sanctions on principle executive officers, officers, or the functional equivalent of such officers, of the sanctioned actor.

Pursuant to the new E.O., the Treasury Department’s Office of Foreign Assets Control (OFAC) announced the imposition or updating of sanctions on 25 foreign actors involved in the  international trade of illicit drugs.  OFAC updated its list of Specially Designated Nationals to designate 10 individuals and 15 drug trafficking organizations (DTOs) from Brazil, China, Mexico, and Colombia, as having materially contributed to the international proliferation of illicit drugs or their means of production.  Of particular note is OFAC’s designation of Chinese national Chuen Fat Yip, a trafficker of fentanyl, anabolic steroids, and other synthetic drugs to the United States.  According to OFAC, Chuen Fat Yip relies on virtual currency and fund transfers through money-service business and banks to finance his operations.  OFAC has recently signaled that it would ramp up efforts to counter illicit activities in which cryptocurrencies and digital payment services play a role.

Please contact our sanctions and export control team with any questions about ensuring compliance with these new sanctions.

On December 2, 2021, the Treasury Department’s Office of Foreign Assets Control (OFAC)  expanded its Belarus-related sanctions program by imposing restrictions on dealings in Belarusian sovereign debt and adding 32 individuals and entities to its List of Specially Designated Nationals (SDN List).  Among these additions are several state-owned or -controlled companies operating in the tourism, transportation, defense, security, and potassium chloride (potash) sectors of the Belarusian economy.  OFAC also issued a general license that temporarily authorizes the wind down of transactions involving specified Belarusian SDNs, and issued guidance clarifying the scope of this latest round of sanctions.

Last week’s sanctions were imposed pursuant to Executive Orders (E.O.) 14038 and 13405, which authorize OFAC to impose sanctions on the Government of Belarus and key sectors of the Belarusian economy.

Sectoral Sanctions on Belarusian Sovereign Debt

With the publication of Directive 1, OFAC imposed restrictions on dealings in certain debt of the Ministry of Finance of the Republic of Belarus (Ministry of Finance) and the Development Bank of the Republic of Belarus  (Development Bank).  The directive prohibits “all transactions in, provision of financing for, and other dealings in new debt with a maturity of greater than 90 days issued on or after December 2, 2021” by the Ministry of Finance or the Development Bank.   Notably, OFAC’s “50 percent rule” does not apply to Directive 1’s prohibitions, which means that these restrictions do not extend to entities owned 50 percent or more, directly or indirectly, by the Ministry of Finance or the Development Bank.

Interested persons should carefully review OFAC’s “Frequently Asked Questions,” as OFAC has issued important clarifications on how Directive 1 applies in a number of contexts.  For instance, OFAC has indicated that Directive 1’s prohibitions extend to derivative contracts linked to new debt issued by the Ministry of Finance and Development Bank.

New Belarusian Designations

OFAC also added 20 individuals and 12 entities to its SDN List.  Among the designations are Republican Unitary Enterprise Tsentrkurort, JSC Transaviaexport Airlines, CJSC Beltechexport, AGAT Electromechanical Plant OJSC, Joint Stock Company 140 Repair Plant, Kidma Tech OJSC, JSC Peleng, OOO Gardservis, Open Joint Stock Company Belarusian Potash Company (BPC), BPC’s subsidiary Agrorozkvit LLC, and Foreign Limited Liability Company Slavkali.

Pursuant to the new General License 5, U.S. persons are permitted to engage in certain, limited activities ordinarily incident and necessary to the wind down of transactions with BPC, Agrorozkvit LLC, and entities owned 50 percent or more by those companies until 12:01 a.m. eastern standard time, April 1, 2022.

Bottom Line

OFAC’s latest updates, taken in coordination with U.S. allies, introduce heightened sanctions risks for companies doing business in Belarus.  Companies with operations involving Belarus will need to carefully examine these developments and monitor future moves by OFAC and allied governments.

Please contact our sanctions and export control team with any questions about ensuring compliance with the evolving Belarus sanctions program.

The historic infrastructure bill, now approved by the U.S. Congress and pending President Biden’s signature, includes broad policy provisions designed to improve governmental sourcing from U.S. manufacturing sectors.  These new statutory authorities aim to:

  • Expand domestic preference procurement policies applicable to federal financial assistance programs for public works infrastructure;
  • Increase the domestic component content requirements of products and construction materials sold to the Federal Government under the Buy American Act; and
  • Provide transparency into governmental contracting decisions related to domestic sourcing.

Suppliers to public works projects and to the Federal government should assess these new statutory directives as they will impose new domestic origin requirements and standards for construction materials and products acquired for federally-aided public works infrastructure projects at the state and local levels, and impose new domestic component content standards for goods and construction materials acquired by the Federal Government.

BACKGROUND

On November 5, 2021 the U.S. House of Representatives passed a bipartisan $1.2 trillion “physical” infrastructure bill, paving the way for enactment of a major component of President Biden’s “Build Back Better” domestic infrastructure agenda. The Infrastructure Investment and Jobs Act (IIJA) H.R. 3684 – also known as the Bipartisan Infrastructure Deal – was passed by the House by a vote of 228-206, with 13 Republicans joining all but six Democrats in supporting the measure. The bill now awaits the President’s signature, nearly three months after Senate passage.

The IIJA contains approximately $550 billion in new infrastructure spending over current spending levels and covers roads and bridges, public transit, rail, safety and research programs that are typically included in five-year surface transportation reauthorizations. Additionally, the five-year bill makes major investments in drinking and wastewater infrastructure; ports and airports; broadband; grid security; and clean energy programs (e.g., electric vehicle infrastructure and carbon capture). The bill also includes major domestic procurement (“Buy America”) requirements for infrastructure materials.

“BUILD AMERICA, BUY AMERICA”

Perhaps most significantly, the IIJA includes the Build America, Buy America Act (BABA).  The BABA statutorily directs the application of “Buy America” domestic preference policies to federal financial assistance programs for infrastructure, both to programs not subject to any such laws currently, as well as to those that are currently subject to Buy America laws that may be limited in scope to specific materials or products.  In contrast to the Buy America requirement applied to the 2009 American Recovery and Reinvestment Act, the statutory authority provided by the BABA is not limited to the funds appropriated or authorized in the IIJA.  Rather, the BABA directs the application of Buy America laws to federal-aid infrastructure programs that will have enduring, permanent impact.

In summary, the BABA would bar the award of federal financial assistance for infrastructure unless all of the iron, steel and manufactured products and construction materials used in the project are produced in the United States.[1]

Waivers traditionally available under existing Buy America laws are authorized under the BABA where (1) applying the Buy America requirement would be inconsistent with the public interest; (2) where the iron, steel, manufactured products and construction material is not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality; and (3) where inclusion of the domestic products or construction materials will increase the cost of the overall project by more than 25 percent.  In addition, Congress directs that the BABA be applied in a manner consistent with U.S. trade agreement obligations related to government procurement.

Robust Origin Standards

The BABA imposes robust origin standards for the products and construction materials acquired for federally-assisted infrastructure projects.   The bill defines “produced in the United States” to mean, “in the case of iron or steel products, that all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States.”   Similar origin standards for iron and steel are currently imposed by regulation and agency guidance to federal-aid subject to existing Buy America laws, including those applicable to certain federal-aid transportation infrastructure programs as well as federal-aid clean and drinking water infrastructure programs.

The BABA will impose Buy America requirements on nonferrous construction materials – a break in precedent from existing Buy America laws applicable only to iron and steel.  It identifies common construction materials as nonferrous metals, plastic and polymer-based products, glass (including optic fiber), lumber, and drywall. The BABA directs the imposition of similarly significant “all manufacturing processes” origin standards for non-ferrous construction materials.  The OMB is required by the BABA to issue standards that define “all manufacturing processes” for construction materials.

Relative to the origin standard for manufactured products, the BABA is more explicit.  Manufactured products will be deemed produced in the United States if: (1) the product was manufactured in the United States; and (2) the cost of the product’s components mined, produced or manufactured in the United States exceeds 55 percent of the total cost of the product’s components.  This origin standard is consistent with the recently revised origin standard for domestic end products and construction materials under the federal BAA, but not reflective of changes to the BAA’s origin standard imposed by another section of the IIJA.

Rapid Timeline for Implementation

The BABA imposes a rapid timeline for implementation.

Upon enactment:  The Office of Management and Budget (OMB) is directed to issue guidance to Federal agencies to assist in identifying programs that have “deficient” Buy America coverage and to issue guidance to assist Federal agencies in applying new domestic content preferences.

The BABA deems as deficient those programs that are not currently subject to Buy America requirements at all, are subject to limited Buy America requirements, the scope of which does not include iron, steel, manufactured products and construction materials, or are subject to Buy America requirements that have been waived by generally-applicable and longstanding waivers.  For example the Buy America requirement imposed by 23 U.S.C. § 313 is limited in application by the Agency’s implementation policy to iron and steel only.  The Federal Highway Administration has estimated that the ferrous inputs account for less than 5 percent of the cost of a federally-aided highway project.

Within 60 Days of Enactment:  Federal agencies will be required to submit to the OMB and appropriate congressional committees a report that identifies each Federal financial assistance program for infrastructure administered by the agency, identify the Buy America-type requirements applied thereto, if any, and assess the applicability of any existing domestic content procurement preference, including its purpose, scope, applicability and any exceptions or waivers of the requirement.   The agency report must identify the deficient programs not subject to domestic procurement preferences required by the BABA.

Within 180 Days of Enactment:  Federal agencies must begin applying Buy America preferences meeting the scope of products required by the BABA.  By this time, OMB must issue standards satisfying the “all manufacturing processes” origin standard required by the BABA for “construction materials.”

“MAKE IT IN AMERICA”

The BABA also includes a “Make it in America” section, which directs changes to the BAA, paves the way for increased domestic component content standards, improves waiver processes and creates a Made in America Office.  The “Make it in America” provisions of the BABA reflect many of the directives included in President Biden’s January 2021 Executive Order 14005 Ensuring the Future Is Made in All of America by All of America’s Workers.

Specifically, the “Make it in America” section of the BABA provides statutory authority for the establishment of the new Made in America Office within the OMB.  It also includes language aimed at reducing the use of waivers and strengthened application of the BAA, which as noted above, applies to direct procurement by Federal agencies.

The BABA directs the Made in America Office to promulgate guidance to Federal agencies aimed at standardizing and simplifying how agencies comply with the BAA.  The guidance is to  include the criteria agencies utilize to grant “public interest” and “non-availability” waivers of the BAA, providing some framework to what has traditionally been very murky process.  In the context of non-availability waivers the BABA identifies appropriate considerations contracting officers should base waiver determinations upon, including anticipated project delays as well as lack of substitutable articles, materials and supplies.

Similarly, the BABA directs agencies to avoid issuing public interest waivers that would result in decreased employment in the United States both among the entities that produce the product or construction material or that would result in a contract award that would decrease domestic employment.  It will also require for the first time that Federal agencies consider whether the cost advantage of a foreign product is the result of unfair trade practices such as dumping or subsidization.

Notably, the “Make it in America” section of the BABA includes a sense of Congress that  BAA’s domestic component content standard should be amended by the Federal Acquisition Regulatory Council (FAR Council) upward from 55 percent currently to 75 percent.  This sense of Congress is consistent with both the directives of EO 14005 and proposed changes to the Federal Acquisition Regulations (FAR) included in a notice of proposed rulemaking (NPRM) issued by the FAR Council in July of 2021.  The July NPRM proposed graduated increases to the BAA’s component content standard from 55 percent currently to 75% over five years with a fallback mechanism at prior lower percentage standards in the event of no qualifying offers meeting the higher component content standards.  The sense of Congress in the BABA also endorsed a fallback mechanism in the event of no qualifying offers.  The BABA directs the FAR Council to amend the Part 25 of the FAR to provide a definition for an “end product manufactured in the United States,” which the FAR Council is poised to do with the current rulemaking.

TRADE AGREEMENT OBLIGATIONS PRESERVED; DIRECTED TO BE REVIEWED

The IIJA’s Buy America provisions are universally directed to be applied in manners consistent with United States obligations under international trade agreements applicable to government procurement.  To that end, covered agency procurements at the federal and sub-federal levels of government that are open to the products and materials of other parties to these trade agreements, by virtue of the identity of the procuring entity and the value of the procurement, will continue to be.

Notably, the IIJA directs an assessment of the impacts of all United States free trade agreements, the World Trade Organization’s Government Procurement Agreement and federal permitting processes on the operation of Buy American laws.  The required report is to be made public.  While the assessment does not direct a change in policy, it could spur the Administration to reconsider how it interprets limitations on the scope of parties’ obligations embodied in these agreement texts as well as its construction and reliance on delineated reservations to its market access obligations under these agreements.

BUYAMERICA.GOV

The IIJA also includes the BuyAmerican.gov Act, which among other things, directs the establishment of the BuyAmerican.gov website, a publicly available and free to access website repository of information on all waivers and exceptions to the various Buy America laws.

Notably, the Director of the Made in America Office at OMB issued late last month a memorandum for senior federal procurement officials that provides specific guidance to Federal executive branch agencies on the use of a digital waiver portal to submit proposed waivers to the Made in America Office and posted on a new dedicated website MadeInAmerica.gov.

CONSIDERATIONS FOR MANUFACTURERS

Opportunity exists for manufacturers of construction materials with U.S. manufacturing operations as well as for their upstream suppliers of essential inputs as origin standards for nonferrous materials are adopted and the BABA’s domestic preference procurement requirements are imposed on federally-aided infrastructure spending.

Manufacturers of nonferrous products used in public works infrastructure projects are likely unfamiliar with the Buy America requirements applicable to certain federal-aid infrastructure programs.  Federal agencies subject to existing Buy America laws applicable to iron and steel have, over the last nearly 40 years, adopted consistent standards construing “all manufacturing processes” that require the initial melting stage of steelmaking to occur in the United States.  Manufacturers of nonferrous construction materials should take note of this precedent and consider what a comparably inclusive origin standard would look like for their industry sector.

Manufacturers should also assess how the BABA’s waiver transparency requirements and supplier scouting programs may be leveraged to identify gaps in domestic sourcing and inform capital investment planning.

 


[1]         The BABA defines infrastructure as: roads, highways, and bridges; public transportation; dams, ports, harbors, and other maritime facilities; intercity passenger and freight railroads; freight and intermodal facilities; airports; water systems, including drinking water and wastewater systems; electrical transmission facilities and systems; utilities; broadband infrastructure; and buildings and real property.

After months of deliberation, the U.S. Congress has passed the $1.2T Infrastructure Investment and Jobs Act, which will deliver $550 billion of new federal investments in America’s infrastructure over five years.  The bipartisan bill contains $260 billion for transportation and transit investment; $90 billion for investment in clean technologies; $84 billion for water infrastructure and $100 billion for digital infrastructure.

Our team at Kelley Drye has prepared a high level summary of the bill, and will host a webinar on Friday, November 19th to review the details of the bill and discuss its implementation.  We invite you to join us next Friday.

 

 

On October 15, 2021, the Office of Foreign Assets Control (OFAC) issued an advisory providing sanctions compliance guidance for the virtual currency industry (Guidance).  The Guidance follows a series of recent enforcement actions targeting the industry and the designation of a cryptocurrency exchange for facilitating ransomware payments.  These developments highlight OFAC’s continued focus on this sector and virtual currency, which is seen as a potential tool to evade U.S. sanctions and diminish the efficacy of U.S. sanctions policy.

The Guidance provides additional insight into OFAC’s expectations with respect to identifying sanctioned parties online, which is helpful for any company that provides services to customers over the internet, even if not directly dealing with virtual currencies.

Level setting

As an initial matter, OFAC cautions that its rules apply to virtual currency transactions to the same extent that they apply to transactions involving fiat currencies.  For example, U.S. persons remain subject to the prohibitions on dealing with sanctioned jurisdictions (Cuba, Iran, North Korea, Syria, or Crimea) and sanctioned parties when they are conducting transactions denominated in virtual currencies or engaging in related services.  And non-U.S. persons can similarly face penalties for violating U.S. sanctions if their conduct involves the United States, U.S. persons, or goods or services that originate from the United States.

As with fiat currency, OFAC’s Guidance confirms that participants in the virtual currency space must “block” virtual currency by denying all parties access to the asset and report the blocked property to OFAC within 10 business days.  However, there is no requirement to convert the virtual currency into fiat currency or to hold the virtual currency in an interest-bearing account, unlike other blocked funds.

Best Practices for the Virtual Currency Industry

The Guidance strongly recommends that industry members adopt a risk-based approach to sanctions compliance based on OFAC’s “Framework for OFAC Compliance Commitments.”  OFAC notes that traditional financial institutions and other companies with exposure to virtual currencies or related service providers should adopt appropriate controls to address sanctions risks.  These include:

Management Commitment  Many members of the fast-growing virtual currency industry may be slow to develop and implement sanctions compliance programs, which can risk exposure to sanctions violations.  OFAC counsels early managerial commitment to the development and implementation of compliance programs.  Building these processes in early can prevent costly violations later on.

Risk Assessment – The Guidance recommends that companies conduct routine risk assessments to identify potential sanctions issues before providing services or products to customers.  The risk assessment should be tailored to what and where products or services are offered, account for customers, reflect the company’s supply chain, and also evaluate counterparty and partner risk, including whether those parties have adequate compliance procedures.  The results of that assessment should feed into the development of an effective sanctions compliance policy.  Outside advisors can help craft risk assessments that highlight key risks for virtual currency companies.

Internal Controls – The Guidance document contains a number of recommendations related to internal controls and processes that should be considered in designing a sanctions compliance program for virtual currencies and digital payments.  As noted above, many of these recommendations apply to any company that provides digital services over the internet and reflect lessons learned from recent enforcement actions targeting online commerce.  These tools include:

  • Geolocation and IP Address Blocking – As in several recent enforcement actions (including those involving Payoneer, BitGo, and Amazon), the Guidance makes clear that OFAC expects companies to consider IP address geolocation data to identify customers that may be in or ordinarily reside in sanctioned jurisdictions and to adopt blocking controls that deny access to IP addresses associated with sanctioned jurisdictions.  OFAC notes that analytics tools can play an important role in identifying the likely location of customers by addressing IP address geolocation misattribution caused by the use of anonymization services like Virtual Private Networks (VPNs). Other information, such as an address from a customer or counterparty, an email address top-level domain (e.g., user@domain.ir or user@domain.gov.ir), or transactional details, like an invoice, can also be relevant for a company’s sanctions controls, even if that information was initially obtained for a non-compliance purpose.
  • Know Your Customer (KYC) Procedures – Conducting due diligence at onboarding, during periodic reviews, and when processing transactions helps to reduce potential sanctions-related risks.  For individuals, this means screening customers’ names, dates of birth, physical and email addresses, nationality, IP addresses associated with transactions and logins, bank information, and government-issued or other documentation against sanctions lists (like the SDN List) and for any “red flags.”  For entities, this can also include type of business, ownership information, physical and email address, and where the entity does business.  A keyword list of sanctioned jurisdiction cities and regions can also be an important part of a KYC screening.
  • Transaction Monitoring and Investigation – OFAC’s Guidance endorses the use of software to monitor and investigate transactions involving sanctioned individuals and entities or persons located in sanctioned jurisdictions based on identifying information associated with transaction data.  As of 2018, OFAC began to include virtual currency addresses in the “ID #” field for persons listed on the SDN List.  Companies should calibrate software to identify and block transactions associated with those virtual currency addresses, in addition to those otherwise associated with SDNs or persons located in sanctioned jurisdictions.
  • Implementing Remedial Measures – Should a virtual currency company identify an apparent sanctions violation, that company should take immediate and effective remedial actions, which OFAC may consider as a mitigating factor in a potential enforcement action.
  • Monitoring Transactions and Users for “Red Flags” – OFAC’s Guidance notes that there are several “red flags” that may indicate a transaction’s or user’s connection to sanctions, including providing inaccurate or incomplete KYC information at onboarding; attempting to access a virtual currency exchange from an IP address or VPN connected to a sanctioned jurisdiction; failing or refusing to provide updated KYC information or to provide requested additional transaction information; and, attempting to transact with a virtual currency address associated with a blocked person or a sanctioned jurisdiction.

Testing and Auditing –  OFAC’s Guidance advises that companies operating in the virtual currency industry test and audit their sanctions compliance programs to ensure they are operating as intended, and highlights a few best practices, such as:

  • Ensuring sanctions and KYC screening tools effectively flag transactions and customers related to SDNs or sanctioned jurisdictions;
  • Confirming IP address software properly prevents sanctioned jurisdiction access; and
  • Reviewing procedures for investigating and, if applicable, blocking and reporting to OFAC flagged transactions identified through the screening process.

Training – The Guidance stresses the importance of conducting, on at least an annual basis, mandatory training that is informed by the profile of the company and tailored to the responsibilities and functions of all relevant employees.  Especially in the virtual currency industry, sanctions training should take into account frequent developments and updates regarding both the governing sanctions programs and underlying technologies in the virtual currency space.

Final Considerations

The publication of the Guidance underscores the growing importance of implementing effective sanctions compliance programs tailored to the risks presented by virtual currencies given increased OFAC and U.S. government focus on the sector.  The Guidance is another signal that OFAC will be ramping up enforcement efforts to address illicit activities in which cryptocurrencies and digital payment services play a large role.

Today, the Office of the U.S. Trade Representative (USTR) announced an agreement reached with five countries – Austria, France, Italy, Spain, and the United Kingdom – on digital services tax (DST) measures that had been subject to recent investigations by USTR under Section 301 of the Trade Act of 1974.  These countries will avoid 25 percent duties on certain imports into the United States as a result of the deal.

We previously reported on the investigations here and here, which concluded that these countries’ DST measures (plus measures announced in India and Turkey) burden or restrict U.S. commerce, and are discriminatory and inconsistent with prevailing principles of international taxation.[1]  With the affirmative investigation findings, in March 2021, USTR proposed lists of products from Austria, India, Italy, Spain, Turkey, and the United Kingdom that would be subject to an additional 25 percent import tariff, subject to public comment and hearing.  In June 2021, USTR announced that it would be suspending the proposed tariff measures for each of the six countries for 180 days to “to allow additional time for multilateral and bilateral discussions that could lead to a satisfactory resolution of this matter.”  USTR had previously and separately investigated France’s DST measures, determining in June 2020 to impose an additional 25 percent tariff on certain French imports and, in January 2021, deciding to indefinitely suspend that action pending further negotiations.

The agreement reached today terminates the United States’ proposed Section 301 tariffs with respect to Austria, France, Italy, Spain, and the United Kingdom.  India and Turkey did not join in the agreement.  The “political compromise” reached does not require the five countries involved to withdraw their existing DST measures.  Instead, those countries have agreed that to the extent U.S. companies accrue any DST liability before implementation of Pillar 1 of the Organization for Economic Co-operation and Development (OECD) global tax agreement, such liability will be creditable against future income taxes as determined under Pillar 1.  The OECD global tax agreement is a historic, multilateral tax reform project aimed at addressing the challenges of the digital economy and earning the high-level political support of the G7, G20, and 136 members of the OECD.  Pillar 1 of the OECD agreement relates to a global framework allocation of firms’ digital services profits by introducing new profit allocation mechanisms and nexus rules to expand the taxing authority of market jurisdictions.  According to today’s Section 301 deal, once OECD Pillar 1 is in effect (2023), the United States will work with the five countries to roll back their existing, individual digital services taxes.

The suspended 25 percent tariffs on certain imports from India and Turkey are set to go into effect on November 30, 2021, barring satisfactory resolution of the dispute before that time or USTR’s decision to further suspend the tariff actions.


 

[1] USTR also investigated DST measures by Brazil, the Czech Republic, the European Union, and Indonesia.  In March 2021, USTR announced the termination of these investigations, without further action, because none of the four investigated jurisdictions had adopted or implemented the DST policies at issue.

Yesterday, the Biden Administration released the results of a broad review of U.S. economic sanctions policy following two decades of expanding use of sanctions as a foreign policy tool.  The report recognizes that U.S. sanctions policy must evolve to confront changes to the global payments system, including the rise of digital currencies, reduced use of the U.S. dollar for cross-border transactions, and evolving foreign policy challenges presented by cybercriminals and strategic economic competitors.

In part, the report reflects concerns that the United States has become over-reliant on sanctions in recent years, encouraging adversaries and others to build alternative payment systems using digital currencies and other mechanisms that do not involve U.S. dollars or the U.S. financial system.  Such developments threaten to reduce the effectiveness of U.S. sanctions in the long run, as more payments occur outside of U.S. regulatory jurisdiction.

Below are the key recommendations from the report, which may reduce the number of sanctions actions by the United States, but will also likely increase complexity for the companies and financial institutions that must comply with these rules:

  • Crypto, digital currencies, and digital payments: The report makes clear that Treasury will continue to focus on digital currencies and alternative payment platforms, which adversaries and others can use to avoid the U.S. financial system and blunt the impact of U.S. sanctions policy.  The report follows the recent designation of a cryptocurrency exchange for facilitating ransomware payments and the issuance of guidance for the virtual currency industry on sanctions compliance.
  • Multilateral approach: Reflecting a marked shift in strategy from the last administration, the report indicates that the Biden Administration should seek to continue to coordinate with allies and other international partners to impose multilateral sanctions to increase the effectiveness of sanctions as a policy tool and retain the “credibility of U.S. international leadership.”  Recent U.S. sanctions actions targeting Belarus and others are examples of a renewed U.S. focus on collaboration with allies on the deployment of multilateral sanctions.
  • Avoiding unintended harm: Treasury intends to further tailor sanctions to limit unintended economic, humanitarian, and political impacts on U.S. businesses, allies, and non-sanctioned populations abroad.  One potential outcome of this approach may be the continued development of bespoke sanctions restrictions, such as Russia-related sectoral sanctions and Chinese Military-Industrial Complex Company securities sanctions, and a reduced reliance on traditional blocking sanctions.  While these more tailored measures are intended to limit unintended harm, they also increase complexity for companies and compliance programs.  The report also highlights a renewed focus on expanding sanctions exceptions related to the flow of legitimate humanitarian goods and services that support basic human needs, which are often restricted due to sanctions compliance concerns.
  • Investment in Treasury resources: As anyone who interacts with U.S. sanctions officials know, the agencies responsible for implementing and enforcing U.S. sanctions face resource constraints, including staffing and technology limitations.  The report calls for investing in the modernization of Treasury’s workforce and operational capabilities, particularly in the digital assets and services space, and updating OFAC’s website and guidance documents to make them easier to navigate and understand.
  • Increased industry coordination:  Treasury intends to increase coordination and reach out to industry, including companies operating in the digital currency and payments space, to encourage effective implementation of sanctions restrictions.
  • Structured framework for new sanctions: The report indicates that Treasury should adopt a more structured framework to assess the potential impact of new sanctions, akin to the vetting process used to authorize military force.  The new five-point framework should be designed to ensure that sanctions support a clear policy objective within a broader foreign policy objective and consider the factors noted above when crafting new sanctions restrictions.

Overall, the report suggests a more restrained approach to U.S. sanctions policy designed to tackle the evolving nature of international payments and more sophisticated efforts to evade U.S. sanctions.  While the number of sanctions actions may decrease under the new framework, compliance departments will likely remain busy as Treasury crafts more complex sanctions rules designed to maximize pressure on adversaries and minimize impacts on the United States, allies, and vulnerable populations.

 

On Monday, October 4, U.S. Trade Representative Katherine Tai delivered a long anticipated speech framing the Biden Administration’s trade policy toward China.

Among the announcements made were that (1) a Section 301 product exclusion process would be “restarted” with respect to the tariffs currently in effect, and (2) additional enforcement actions against China could be initiated, potentially to include another Section 301 investigation.  Recall that the existing tariffs were imposed beginning in March 2018 under Section 301 of the Trade Act of 1974, pursuant to an investigation concerning “China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.”

On Tuesday, October 5, the USTR announced as a first step toward (1) that it would open a proceeding to consider whether to renew any Section 301 product exclusions that had previously been granted and that had previously been extended.  The USTR granted about 2,200 product exclusions between 2019 and 2020, and 549 of those were subsequently extended.  Those 549 exclusions are now up for renewal.  Comments are being invited on whether this particular universe of previously granted exclusions should be reinstated.  USTR will be looking for information on (1) whether the product remains available only from China, (2) changes in the product’s global supply chain/relevant industry developments since September 2018, (3) efforts importers have taken since September 2018 to source the product from the U.S. or third countries, and (4) domestic capacity for producing the product.  Any reinstated exclusions will be retroactive to October 12, 2021 and run for a time period yet to be determined.

It is possible that this exclusion renewal process is only a first step preceding a more extensive reopening of the product exclusion process, although no concrete indications of that have been made by the Administration.  We will continue to make announcements as opportunities arise.

The Federal Register notice announcing the exclusion renewal process is available here.  The USTR’s official list of 549 previously extended exclusions is available here.   We have also prepared a fully sortable Excel based version of USTR’s list, available here.  The comment period will be open between October 12, 2021 and December 1, 2021.  We are available to assist with the preparation of comments either supporting or opposing renewal of exclusions on any of the listed products.  Please let us know if you have any questions.