Today, the United States announced new targeted sanctions, export control restrictions, and an arms embargo on Russia after the poisoning and imprisonment of Russian opposition leader Alexey Navalny.  All three of the agencies with primary authority to regulate exports – the Directorate of Defense Trade Controls (DDTC) at the State Department, the Bureau of Industry and Security (BIS) at the Commerce Department, and the Office of Foreign Assets Control (OFAC) at the Treasury Department – implemented new restrictions related to Russia.

The most significant change announced today is the State Department’s decision to add Russia to the International Traffic in Arms Regulations’ (ITAR) list of “proscribed countries,” commonly known as the Section 126.1 list.  Countries on this list are subject to a policy of denial for license applications, so the change will effectively subject Russia to a U.S. arms embargo, prohibiting the export of most ITAR-controlled defense articles and defense services to Russia.  Limited exceptions to the policy of denial will be made for exports in support of government space cooperation.  The State Department will also review licenses related to commercial space launches on a case-by-case basis, but only for six months, after which license requests related to commercial space launches will face a presumption of denial.   As noted below, the Commerce Department has announced corresponding changes to its licensing policy regarding exports related to commercial space flight activities in Russia.  Additionally, certain transactions with 126.1 countries are subject to mandatory disclosures to the DDTC, instead of the general rule that violations are subject to voluntary disclosures to the agency.

Below is a summary of the actions taken by other key U.S. regulators today, including the Treasury, State, and Commerce Departments:

  • New SDNs: OFAC added seven Russian government officials and three entities to the Specially Designated Nationals (SDN) List and imposed new sanctions on existing Russian SDNs;
  • Entity List Additions: The Commerce Department added 14 entities in Russia, Switzerland, and Germany to its Entity List due to their connection to WMD and chemical weapons production, barring exports of items subject to the Export Administration Regulations (EAR) to the designated entities.
  • Dual Use Export Control License Restrictions: The Commerce Department will limit the availability of certain license exceptions and licenses for exports of NS-controlled items to Russia.  Commerce indicated that exports of NS-controlled items to Russia will no longer be eligible for license exceptions Service and Replacement of Parts and Equipment (RPL), Technology and Software Unrestricted (TSU), and Additional Permissive Reexports (APR).  Commerce will reverse its existing licensing policy and replace it with a presumption of denial to license requests related to exports of NS-controlled items for commercial end-users related to civil end-uses in Russia. In six months, Commerce will also adopt a policy of denial for license requests involving exports of NS-controlled items to Russia related to commercial space flight activities.
  • Secondary Sanctions: The State Department added six scientific institutes to its Section 231 List of persons known to operate for or on behalf of the Russian defense or intelligence sectors.  As a result of the designations, non-U.S. persons that conduct significant transactions with these parties could be subject to U.S. secondary sanctions in the future.

Today, President Biden issued an Executive Order (E.O.) that authorizes new U.S. sanctions on Burma in response to the recent military coup in that country.  The E.O. allows the U.S. Office of Foreign Assets Control (OFAC) to impose sanctions on the country’s military leadership and could lead to broader sanctions on government-controlled ministries and companies in the future.

As a first step, OFAC added ten individuals associated with the coup and three ruby and jade companies to its List of Specially Designated Nationals (SDN List), effectively barring U.S. persons from doing business with those parties and any companies majority owned by those parties.  OFAC indicated in a press release that further sanctions under the E.O. are possible if the military regime does not change course or if there is further violence in the country.  The U.S. Commerce Department also made initial moves to tighten U.S. export controls on Burma.

New sanctions authority

Among other measures, the new E.O. authorizes OFAC to impose additional blocking sanctions on the following parties:

  • Parties that operate in the Burmese defense sector;
  • Parties that were involved in the undermining of democratic processes in Burma, the threatening of the peace, security, or stability of Burma, the limiting of freedom of speech in Burma, or related human rights abuses;
  • Leaders or officials of the Burmese military or security forces;
  • Leaders or officials of the Burmese government on or after February 2, 2021
  • Government of Burma political subdivisions, agencies, or instrumentalities (including the Central Bank of Myanmar); [1]
  • Spouses or adult children of any person that is sanctioned pursuant to the E.O.;
  • Parties owned or controlled by the military or security forces of Burma or by parties that become subject to sanctions under the E.O.; and
  • Parties that materially assist or provide material support persons sanctioned under the E.O.

Initial export control restrictions

The U.S. Bureau of Industry and Security (BIS) also announced a change to its licensing policy to deny export control licenses related to Burma’s Ministry of Defense, the Ministry of Home Affairs, armed forces, and security services and to revoke previously issued licenses involving those parties that remain open.

BIS indicated that it will suspend the availability of export control license exceptions for certain shipments to Burma, including Shipments to Country Group B countries (GBS), Technology and Software under restriction (TSR), Computers (APP), and Shipments of Limited Value (LVS).

BIS is considering adding Burma-related entities to its Entity List and/or the Military Intelligence End Use and End User List.  BIS may also downgrade Burma’s Country Group in the EAR, which would trigger further U.S. export restrictions.

Companies doing business in Burma should carefully examine their exposure under these new rules and watch this space for further developments.


[1] The “Government of Burma” includes any persons/entities owned or controlled by, or acting for or on behalf of, the Government of Burma.

On January 15, 2021, the Bureau of Industry and Security (BIS) published an Interim Final Rule to implement new end-user and end use controls mandated by the Export Control Reform Act of 2018 (ECRA).

Most notably, the rule adds a new control that will require U.S. persons to obtain a license before “supporting” certain “military-intelligence” end uses and end users in China, Russia, Venezuela, and Country Group E:1 and E:2 destinations.  The rule will also prohibit any person from exporting, reexporting, or transferring any item subject to the EAR to military-intelligence end uses and end users in those countries.

“Military-intelligence” end uses are defined as any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard) or national guard.  BIS provides an illustrative list of military-intelligence end users in the new rule, which includes China’s Intelligence Bureau of the Joint Staff Department, Russia’s Main Intelligence Directorate (GRU), and Venezuela’s General Directorate of Military Counterintelligence (DGCIM).  Military-intelligence end uses include those that support the actions or functions of a military-intelligence end user.[1]  The new controls are separate from the EAR’s other military end use and end user rules, which apply to a more limited set of items controlled under certain Export Control Classification Numbers when shipped to a broader array of military end users and uses in Russia, China, and Venezuela.

Among other changes, the rule also:

  • Broadens the existing WMD end use controls in the EAR to apply to U.S. person activities that “will support” prohibited end uses, as opposed to activities that “directly support” prohibited end uses.  Support is defined broadly to include shipping or transferring any item not subject to the EAR when you know it will be used for a prohibited end use, facilitating such a shipment, or performing any contract, service, or employment that you know will assist with or benefit a prohibited end use;
  • Broadens the existing WMD end use controls to apply to the operation, installation, maintenance, repair, overhaul, or refurbishing of items; and
  • Clarifies that a license is not required where another U.S. government agency has already granted a license for the same activities pursuant to its own regulations.

Companies that may do business with “military-intelligence” end users or end uses should update their internal procedures, including export control checklists, to ensure compliance with these new requirements.

BIS is accepting public comments on this rule through March 1, 2021.  The rule takes effect on March 16, 2021.

[1] More specifically, military-intelligence end uses are defined as the design development, production, development, production, use, operation, installation, maintenance, repair, overhaul, or refurbishing of, or incorporation of items controlled for defense purposes under the International Traffic in Arms Regulations or the EAR’s 600 series or A018 controls when such uses are intended to support the actions or functions of a military-intelligence end user.

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.