Partner Eric McClafferty and trade analyst, Wyatt Mince, co-authored the World Pumps Magazine article “Regulatory Issues When Acquiring U.S. Pump Companies.” When a non-U.S. pump company is buying a U.S. pump company, the proposed acquisition may need to be reviewed by the Committee on Foreign Investment in the United States (CFIUS).  In this article, Eric and Wyatt explain some new rules surrounding foreign acquisition of U.S. companies producing “critical technologies,” including pumps, valves and other industrial manufacturers, as well as the CFIUS review process and best practices for due diligence.

For nearly a century, “Buy American” provisions and similar laws have mandated or otherwise instituted purchasing preferences for U.S. materials and products when using federally-appropriated funds. Recently, these requirements have become more stringent through executive orders, legislation, and implementing regulations, including E.O. 14005 (resulting in revisions to procurement regulations implementing the Buy American Act (BAA), addressed in our prior advisory) and the Build America, Buy America provisions of the Infrastructure Investment & Jobs Act (attaching to federal financial assistance).

Greater emphasis on the BAA and similar laws from the White House and Congress is likely to result in increased scrutiny from agency leaders, inspectors general, auditors, contracting officers, and others, followed by use of a variety of enforcement mechanisms. As noted in our prior advisory, government customers may seek to address non-compliance with these requirements through contractual remedies like rip-and-replace directives, nonpayment, price renegotiation, or termination, or, on the administrative side, through suspension or debarment from future contracting. Noncompliance with domestic sourcing laws also can result in civil false claims allegations from the Department of Justice or whistleblowers, as well as criminal liability, in severe cases. Sometimes, companies also can seek enforcement against competitors through the bid protest process, as a recent bid protest decision from the Government Accountability Office highlights.

In Unico Mechanical Corporation—Costs (B-420355.5), Unico, an unsuccessful offeror, had alleged (among other protest arguments) that the U.S. Army Corps of Engineers improperly waived BAA requirements in awarding a contract for replacement of generator turbine shut off valves and control systems to competitor McMillen, LLC. The Corps took corrective action after filing its agency report, and in a costs decision, GAO found Unico’s protest regarding the BAA waiver clearly meritorious because the agency failed to document its BAA waiver.

The facts of the case provide insight as to how Unico learned of its basis to protest. Prior to the offer due date, at least one offeror sought a BAA waiver for two butterfly valves on the grounds that they were not available from domestic manufacturers at a reasonable cost, and so the agency conducted market research by contacting manufacturers, including Unico. Based on these contacts, the Corps identified Unico and at least two other domestic manufacturers with an ability to provide BAA-compliant valves, and denied the waiver request.

McMillen later requested that the agency waive the BAA provisions for the two butterfly valves as well as a hydraulic power unit, on the grounds that they were not available from domestic manufacturers at a reasonable cost. The Corps initially denied McMillen’s request, but after seeking additional information from McMillen, the Corps awarded the contract to McMillen and exempted the foreign material in a post-award contract modification, without justifying the exemption in the contract file. In the absence of any documentation that the Corps had actually waived the BAA, GAO concluded that the award to McMillen violated the BAA and its implementing regulations. And even if the Corps had waived the BAA, its waiver was unreasonable because McMillen’s initial survey included only one foreign and one domestic supplier, without any indication that these sources were the only available, and its supplemental survey included additional foreign suppliers but ignored additional domestic suppliers like Unico that the agency knew could produce BAA-compliant valves. 

Absent a circumstance like the procuring agency contacting a protesting company as part of BAA market research, it can be difficult for a protester to challenge an awardee’s noncompliance with the BAA. The legal standard is high: a contracting officer generally can rely on an offeror’s self-certification of BAA compliance; only if an agency has reason to believe that a firm will not provide domestic products need the agency go beyond a firm’s representation of compliance with the BAA. Sea Box, Inc., B-420130, B-420130.2, Nov. 18, 2021, 2021 CPD ¶ 364. A protester must raise more than inference or speculation when alleging that a competitor’s product does not comply with its BAA certification. Id. Companies typically lack the specific information needed to challenge a BAA certification.

But this does not make BAA certifications ironclad. Publicly available schedule listings or marketing materials might call into question a company’s BAA compliance, and proposals are often produced as part of the agency report or administrative record. A company might even have declined to provide a certification altogether (as was the case in Wyse Technology, Inc., B-297454, Jan. 24, 2006, 2006 CPD ¶ 23). Given increasing domestic content requirements in response to E.O. 14005, companies should consider tracking their competitors’ ability to comply with the BAA as well as their own. This goes for all levels of the supply chain. Subcontractors or domestic suppliers often have greatest insight into foreign sources of supply and may want to consider working with a prime offeror to challenge an awardee’s BAA compliance or an agency’s waiver, to ensure standing requirements for any protest are met. (At GAO, the most common forum for bid protests, protests must be filed by an actual or prospective bidder or offeror with a direct economic interest in the procurement.) Companies protecting their awards, meanwhile, should meticulously support the government with research to support an unreasonable cost or other exception, or should otherwise maintain records demonstrating compliance. The bid protest process may not be the BAA’s primary enforcement mechanism, but companies should keep in mind that non-compliance remains an issue to be considered in protesting and defending awards.

On March 28, 2023, the United States and Japan signed an agreement on trade in critical minerals used in electric vehicle (“EV”) batteries (“Agreement Between the Government of Japan and the Government of the United States of America on Strengthening Critical Minerals Supply Chains”). The agreement builds on the United States’ limited trade accord with Japan reached in 2019 and the goal is to address China’s dominance of the global supply of critical minerals that are necessary for the production of EVs, as well as to address the U.S. government’s recent restrictions on new subsidies for EVs.

The Inflation Reduction Act of 2022 (“IRA”) overhauled a tax credit for purchasing EVs and introduced certain sourcing requirements for EV components. The goal of the IRA is to encourage companies to develop new supply chains for critical minerals such as lithium, graphite, cobalt, and nickel outside of China. Currently, the majority of lithium is produced in China, Australia, and Chile. China is also the world’s largest producer of graphite.

Under the IRA, consumers can get a tax credit of up to $7,500 for qualifying vehicles. In order to qualify, a certain percentage of the EV battery needs to be built in North America, and much of the critical minerals in a vehicle’s battery must be sourced from the United States or a country that has a “free trade agreement” with the United States.

Because the United States does not have traditional free trade agreements with many of its allies, including Japan, the European Union, and the United Kingdom, the Biden Administration is pursuing limited trade deals such as the one signed with Japan. Among other things, the United States and Japan have agreed not to levy export duties on critical minerals and to coordinate labor standards in producing minerals.  The United States is currently negotiating similar agreements with the European Union and the United Kingdom.

Efforts to reach these deals with U.S. allies has raised the question of whether such narrow agreements will meet the definition of “free trade agreement” under the IRA. While the provision of the IRA that requires vehicles to be assembled in North America went into effect immediately when the IRA was signed in August 2022, the battery sourcing provisions were left to be decided by the Treasury Department.  On March 31, 2023,Treasury issued long-awaited proposed guidance on the critical mineral sourcing requirements for the EV tax credit under the IRA. According to the guidance, to meet the critical mineral requirement, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or with a country with which the United States has a “free trade agreement,” or be recycled in North America.  The qualifying critical minerals sourcing requirement will increase from 40 percent in 2023 to 80 percent by 2027.

Importantly, the guidance includes a set of principles to identify countries with which the United States has a free trade agreement in place, since the term is not defined in statute. According to the Treasury Department’s proposed definition, “free trade agreement” as used in the IRA could include newly negotiated limited agreements, such as the deal reached with Japan, to ensure that minerals from these trading partners will meet the sourcing requirement for the tax credit.  Treasury’s guidance also specifically lists the following countries as already having a free trade agreement with the United States: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

The guidance also sets forth applicable percentages for the value of the battery components that must be manufactured or assembled in North America for the vehicle to qualify for tax credits under the IRA, ranging from 50 percent in 2023 to 100 percent by 2029. The four-step process for determining the value of the battery components includes: (1) identifying the batter components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component, including North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Further, beginning in 2024, an eligible vehicle may not contain battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. Treasury intends toprovide further guidance on this particular provision.

The guidance will be published in the Federal Register on April 17, 2023, and vehicles placed in service on or after April 18, 2023, will be subject to the critical mineral and battery component requirements in the rule. The Treasury Department and the Internal Revenue Service (“IRS”) will consider public comments, due by June 16, 2023, before issuing a final rule.

On April 3, 2023 the Office of Foreign Assets Control (“OFAC” or “the agency”) launched a new domain for its website at This update aims to make it easier for users to navigate OFAC’s sanctions database, find industry guidance, utilize the reporting system, and stay current on policy updates. In particular, for guidance on the agency’s sanctions programs, the new website makes it easier to search hundreds of frequently asked questions (“FAQ”) via specific keywords or by exact phrases within the FAQ. The update also embeds any OFAC recent action announcements to the applicable sanctions program page.

To mitigate any negative effect that these changes may have on compliance and list screening programs, OFAC has indicated that critical content will not change domains. List data—such as the Specially Designated Nationals and Blocked Persons List and Sectoral Sanctions Identifications List—will continue to remain at their current locations.

The website announcement from OFAC can be found here.

On February 28, 2023, the U.S. Department of Commerce announced the first funding opportunity under the CHIPS and Science Act (“CHIPS Act”), bipartisan legislation signed into law in 2022. The funding opportunity provides “manufacturing incentives to restore U.S. leadership in semiconductor manufacturing, support good-paying jobs across the semiconductor supply chain, and advance U.S. economic and national security.” 

The CHIPS Act can be thought of as the “carrot” – designed to bolster American semiconductor manufacturing – to the “stick” of recent export controls that the United States (and the Netherlands and Japan) have implemented targeting China’s ability to both purchase and manufacture certain high-end chips used in military and AI applications.  In particular, the strategic objectives of the CHIPS Act are to “(1) make the U.S. home to at least two, new large-scale clusters of leading-edge chip fabs, (2) make the U.S. home to multiple, high-volume advanced packaging facilities, (3) produce high-volume leading-edge memory chips, and (4) increase production capacity for current-generation and mature-node chips, especially for critical domestic industries” by the end of the decade.

The CHIPS Act provides “$50 billion to revitalize the U.S. semiconductor industry, including $39 billion in semiconductor incentives.” The funding provided will be distributed across several programs, each targeting a specific area of need. Eligible applicants for the first round of funding are those seeking funds to “construct, expand, or modernize commercial facilities for the production of leading-edge, current-generation, and mature-note semiconductors. This includes both front-end wafer fabrication and back-end packaging.”

The first round of funding will focus on how projects will advance U.S. economic and national security. Candidates will also “be evaluated for commercial viability, financial strength, technical feasibility and readiness, workforce development, and efforts to spur inclusive economic growth.”

Parties interested in applying must first submit a statement of interest to Commerce. Afterwards, applicants may submit a pre-application (recommended) before submitting a full application. Commerce began accepting pre-applications for leading-edge facilities on March 31, 2023, and will be accepting full applications for those facilities on a rolling basis. On May 1, 2023, Commerce will begin accepting pre-applications for current-generation, mature-node, and back-end production facilities on a rolling basis and full applications for these categories will be accepted on a rolling basis beginning June 26, 2023.

Recipients will receive funds in the form of direct funding, federal loans, and/or federal guarantees of third-party loans. For additional information on the application process, visit: CHIPS Act Fact Sheet.

The next round of funding will be announced in late spring for semiconductor materials and equipment facilities and Commerce will release one more round in the fall for research and development facilities.

Investment screening has become an increasingly important topic for the United States and its allies, as concerns grow about the accumulation of sensitive information and technologies by strategic adversaries like China and Russia. The Biden administration is currently contemplating taking action in the near future, likely in the form of an executive order, to establish an outbound investment screening regime focusing on U.S. investments in certain sectors inside or in partnership with countries of concern. The goal of the program is to limit the transfer of technology to such countries through U.S. investments that could be used to bolster foreign military and civilian surveillance capabilities. While the United States already has a robust mechanism in place to screen inward foreign investments for national security reasons (through the Committee on Foreign Investment in the US, or CFIUS), an outbound screening regime is a novel approach, that some refer to as “CFIUS in reverse.”

In March, the U.S. Departments of Commerce and Treasury issued reports pursuant to the Consolidated Appropriations Act enacted last year, describing their efforts to establish a program to “address the national security threats emanating from outbound investments from the United States in certain sectors critical for U.S. national security” and “identifying the resources that would be required to establish and implement” such a program.[1]

While details of the scope of the proposed screening regime are limited, the Commerce and Treasury Department reports indicate that the focus would be on “investments that could result in the advancement of military and dual-use technologies by countries of concern” and “certain entities involved in a sub-set of certain key advanced technologies that are critical to U.S. national security.” Earlier reporting suggested that the focus would be limited to semiconductors, artificial intelligence, and quantum technology. The program would be implemented and administered by the Commerce and Treasury Departments, covering investments not already addressed by export controls, sanctions, or other related authorities, and actions taken under the program “may include prohibiting certain investments and/or collecting information about other investments to inform potential future action.”  

The outbound investment screening regime has been the subject of some controversy, with some arguing that it can deter foreign investment in the United States, while proponents argue that it is necessary to protect national security and ensure that foreign investments do not pose a threat to the U.S. economy or its citizens.

This is not the first time the United States has pursued this kind of action. In 1968, President Johnson issued Executive Order 11378, “Governing Certain Capital Transfers Abroad,” which established an outbound investment review process to be administered by the Commerce Department, in response to the growing deficit and turmoil in the money markets. In 1986, President Reagan terminated the program and the program was determined not to be successful.

The United States is not alone in considering implementation of outbound investment screening to counter national security threats posed by China. On March 30, 2023, European Commission President Ursula von der Leyen addressed the Mercator Institute for China Studies and the European Policy Centre in Brussels. While discussing EU relations with China, President von der Leyen stated that the EU is “currently reflecting on if and how – Europe should develop a targeted instrument on outbound investment” that “would relate to a small number of sensitive technologies where investments can lead to the development of military capabilities that pose risks to national security.”

The executive order is expected as early as April of 2023 and is currently undergoing interagency review.

Last Friday, on the anniversary of the Ukraine invasion, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) took significant action by imposing sanctions against the Russian economy, targeting Russia’s financial services sector, sanctions evasion networks, military supply chains, and metals and mining sector.  The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), concurrently, amended the Export Administration Regulations (“EAR”) to extend export controls on Russia and Belarus and align U.S. restrictions with those of U.S. allies.  BIS listed nearly 90 Russian and third-country entities (here and here) for engaging in sanctions evasion and activities that support Russia’s military.  BIS also extended restrictions on luxury goods, as well as issued new restrictions targeting the supply of Iranian drones to Russia

New Blocking Sanctions: Financial Services, Wealth Management, Sanctions Evasion, Metals and Mining

In total, OFAC added 22 individuals and 83 entities to its list of Specially Designated Nationals (“SDN”) for their connections to Russia’s economy and war efforts.  U.S. persons are broadly prohibited from conducting business with SDNs or entities owned 50 percent or more by SDNs, and U.S. persons must formally “block” (freeze and report) any property or interests in property that are in an SDN’s possession or control.  Moreover, non-U.S. dealings with SDNs may risk exposure to sanctions in the future.

OFAC sanctioned Russian banks and key parties involved in wealth management within Russia’s financial services sector.  Notably, OFAC designated the Credit Bank of Moscow and prominent Russian national and Rosbank executive Ulan Vladimirovich Ilishkin.  (Rosbank itself was designated an SDN late last year.)  OFAC also designated members of cross-border networks that support Russia’s evasion of U.S. sanctions, such as by procuring sensitive Western technologies, arms, and securing illicit financing for Russian intelligence and defense.  OFAC’s action additionally targets military supply chains, including  several parties operating in Russia’s aerospace sector, and individuals and Russia’s technology and electronics sector, and more.

OFAC issued a new determination to E.O. 14024 that identifies and authorizes OFAC to impose sanctions on actors operating within the metals and mining sector of the Russian economy.  As a result, any person determined to operate within that sector may risk blocking sanctions.

In connection with the above, OFAC issued Russia-related General Licenses Nos. 60 and 61.  General License No. 60 authorizes the wind down and rejection of transactions involving designated financial institutions through 12:01 a.m. eastern daylight time, May 25, 2023.   General License No. 61 authorizes the wind down of certain securities and derivatives transactions involving designated financial institutions through 12:01 a.m. eastern daylight time, May 25, 2023.  OFAC also updated existing general licenses:  General License No. 8F expands the authorization relating to the processing of certain energy-related transactions to include certain newly designated financial institutions.  And General License No. 13D extends,  through 12:01 a.m. eastern daylight time, June 6, 2023, the authorization to conduct certain administrative transactions prohibited by Directive 4, such as taxes, fees, or import duties.

Enhanced Export Control Restrictions on Russia and Belarus, New Entity List Designations, and New Restrictions Targeting Iranian Drones

BIS added nearly 90 entities to the Entity List for their activities contributing to the Russian defense sector and the war in Ukraine.  As a result, most exports of U.S. items, including technical know-how, to these entities require a license from BIS.  The listings prevent these entities from procuring key U.S. components, like semiconductors, that can be used for military applications.

BIS also expanded existing export control restrictions to align with U.S. allies’ measures.  In particular, BIS added new industrial and commercial items used in Russian and Belarusian industry that now require an export license.  Many of the items are so-called EAR99 items, like electric coffee or tea makers, that would not have previously required an authorization for export, reexport, or transfer to Russia or Belarus.  BIS also extended “luxury goods” controls by requiring a license to export, reexport, or transfer an additional 276 luxury items, ranging from hair dryers to keyboards, destined for Russian and Belarusian oligarchs and malign actors.  The new export restrictions aim to impose additional costs on Russian and Belarusian industry and persons supporting the war in Ukraine.

Finally, BIS imposed a new license requirement on certain EAR99 items destined for Iran, regardless of U.S. person involvement, that may be used in Iranian Unmanned Aerial Vehicles (“UAVs”).  BIS also added a new foreign direct product rule that brings within the scope of the EAR certain foreign-produced items.  Consequently, items made outside of the United States may require a license to export, reexport, or transfer to Iran.  The measures are intended to address Russia’s use of UAVs in Ukraine.

The Office of Foreign Assets Control (“OFAC”) recently announced a settlement agreement with Danfoss A/S (“Danfoss” or “the company”) in response to allegations that Danfoss directed its customers in Iran, Syria, and Sudan to make payments through third-party agents to Danfoss’s bank account at the branch of a U.S. financial institution located in the United Arab Emirates (“UAE”). These directions apparently came to customers via Danfoss FZCO, Danfoss’s wholly owned UAE entity. 

According to OFAC, the Danish manufacturer of cooling products directed its sanctioned customers to remit payments to the U.S. financial institution in the UAE worth a total value of approximately $17 million.  OFAC indicated that although Danfoss FZCO did not willfully use third-party agents for the purpose of evading sanctions, it ignored or failed to respond to red flags that its activities could be considered in violation of U.S. sanctions regulations. 

The company’s inability to recognize these red flags, according to OFAC, came from deficiencies within its own sanctions compliance program.

OFAC considered Danfoss’s activities to be “non-egregious” (e.g., the transactions did not involve willful or reckless conduct and did not present serious harm to sanctions program objectives) and assessed a maximum civil penalty equal to the sum of the applicable schedule amount for each violation. OFAC did find several mitigating factors, and as a result, OFAC assessed Danfoss’s ultimate penalty to be $4,379,810. 

Having a robust sanctions compliance program in place, and regular compliance training for employees is critical to avoiding these types of penalties.

Today, the Office of Foreign Assets Control (“OFAC”) added Russian oligarch Vladimir Potanin along with several of his companies to the Specially Designated Nationals (“SDN”) List.  OFAC’s action specifically targets Mr. Potanin, Interros, an investment holding company controlled by Mr. Potanin, and Rosbank, a major Russian bank owned by Interros.  U.S. persons are prohibited from engaging, directly or indirectly, in any transaction or activity involving an SDN, as well as with any entities owned 50 percent or more, directly or indirectly, by one or more SDN(s). 

According to OFAC’s press release, Mr. Potanin is a close associate of President Vladimir Potanin, and Rosbank has served as an important credit institution for the Government of Russia, helping to fuel the war in Ukraine.  Mr. Potanin is also a major shareholder of Norilsk Nickel, one of the world’s largest producers of palladium and refined nickel.  OFAC confirmed in an FAQ that Norilsk Nickel is not blocked as a result of Mr. Potanin’s designation, which is consistent with publicly available information that Mr. Potanin owns less than the 50 percent required to trigger the extension of blocking sanctions on Norilsk Nickel.

Concurrent with Rosbank’s designation, OFAC issued General Licenses (“GLs”) 58 and 59 that authorize certain wind-down activities until 12:01 AM eastern daylight time, March 15, 2023.  GL 58 authorizes transactions ordinarily incident and necessary to exit operations, contracts, or other agreements involving Rosbank or entities owned 50 percent or more, directly or indirectly, by Rosbank (collectively, “Rosbank entities”).  GL 58 also authorizes U.S. financial institutions to reject, rather than block, all transactions ordinarily incident and necessary to the processing of funds involving Rosbank entities, as well as for individuals to close their accountsGL 59 authorizes U.S. persons to divest or transfer securities in Rosbank entities during the wind-down period.

OFAC also added 17 subsidiaries of VTB Bank Public Joint Stock Company, Russia’s second largest bank, to the SDN List as part of this action, among other individuals and entities.

As part of a comprehensive streamlining effort, the U.S. State Department’s Directorate of Defense Trade Controls (DDTC) issued an interim final rule that reorganizes and restructures Part 120 of the International Traffic in Arms Regulations (ITAR).  This action marks the initial stage of the DDTC’s effort to restructure and consolidate the ITAR through a series of rulemaking proceedings.  The interim final rule divides DDTC’s changes to Part 120 of the ITAR into general and section-specific revisions.

Generally, the newly amended Part 120 seeks to prioritize a clearer regulatory framework and roadmap by taking a functional approach to grouping regulatory measures and statements.  Namely, rather than situating general definitions and statements at disparate locations, Part 120 is now divided into three subparts based on the function of the underlying provisions.  Subpart A consolidates general information useful for understanding the ITAR, such as the legislative authorities and regulatory intent underlying the ITAR’s provisions.  Subpart B consolidates statements of policy and other information about processes under the ITAR.  And Subpart C provides a consolidated set of defined terms that are applicable throughout the rules.

Section-specific changes to Part 120 focus on clarifying edits and deleting redundancies.  These changes are described by DDTC as “non-editorial.”  Edits include express reference to Blue Lantern—the program used by DDTC for end-use monitoring—the creation and grouping of international organizations and arrangements, and the removal, in its entirety, of the Missile Technology Control Regime Annex formally found at § 121.16.  And section 120.12 has been revised in its entirety so that it now describes the process for obtaining a Commodity Jurisdiction determination.  Note that, for certain revisions, DDTC specifically mentions that the change is non-substantive or otherwise not intended to reflect a substantive change, such as for certain changes relating to the introduction of and references to the U.S. Munitions List.   Interim final rule is effective as of September 6, 2022.  And, for clarity, the rule features a table that details the movement of all sections.

Please contact our export control and sanctions compliance team if you have any questions about this development.