The United States International Trade Commission (“USITC”) has finalized recommended modifications to the Harmonized Tariff Schedule of the United States (“HTSUS”). The revisions, which are set to go into effect on January 1, 2022, conform the HTSUS with World Customs Organization (“WCO”) amendments to the Harmonized System commodity codes.  A detailed report of all changes is available here at the USITC’s website.

The Harmonized System is an international nomenclature that classifies products using six-digit codes.  Signatories to the Harmonized System Convention, including the United States, agree to classify imported goods using the same six-digit codes in an effort to facilitate trade between countries.  Signatories are permitted to further define products beyond six-digits, as the United States does using eight- and ten-digit codes.  However, all signatory countries classify merchandise using the same six-digit codes.  As a result, while the USITC employs a separate process that allows interested parties to advocate for more specific 10-digit statistical breakouts for classification of merchandise entering the United States, any changes above the 10-digit level, which would impact all signatory countries, must begin with advocacy through the WCO.

There are several potential benefits for having more specific classifications of products.  Specific tariff classifications can allow companies and industries to better track trade flows helping to combat trade fraud and facilitate trade enforcement.  For companies and industries that sell products globally, a single clear tariff classification can also have substantial trade facilitation benefits.

The WCO’s modifications to the Harmonized System are the culmination of a multi-year process (that repeats every five years) and accommodates products of new or emerging commercial significance.  In particular, the changes that will take effect in January 2022, include new codes for flat panel display modules, smart phones, 3D printers, and unmanned aircraft.  Overall, the USITC implementation of the WCO’s modifications will impact the classifications of more than 350 products relevant to a wide-range of industries.

The modifications will not have a tariff impact per se, but importers and customs brokers should nevertheless be aware of the changes to ensure they continue to identify the appropriate classification for all imports.

If you have any questions regarding the appropriate classification for a particular article of commerce, or require assistance in achieving more specific or harmonized classifications for your products, don’t hesitate to contact Kelley Drye’s international trade team for assistance.

The Office of Foreign Assets Control (“OFAC”) recently tightened sanctions on Belarus by revoking and replacing General License 2G with General License 2H. General License 2H now requires U.S. persons to wind down transactions involving the following Belarusian Specially Designated Nationals and their subsidiaries by June 3, 2021:

  • Belarusian Oil Trade House
  • Belneftekhim
  • Belneftekhim USA, Inc.
  • Belshina OAO
  • Grodno Azot OAO
  • Grodno Khimvolokno OAO
  • Lakokraska OAO
  • Naftan OAO
  • Polotsk Steklovolokno OAO

Wind down transactions in excess of $50,000 must be reported to the U.S. Department of State no later than 30 days after executing the transaction.

Under the previous General License 2G and its predecessors, most business with these companies was authorized by OFAC.  Given this change, and the prominence of these state-owned entities in Belarus’s economy, U.S. companies that do business in Belarus should carefully review their business relationships to ensure that any dealings involving these nine entities and their subsidiaries are wound down prior to June 3, 2021.

Last week, three U.S. agencies – the Office of Foreign Assets Control (“OFAC”), the U.S. Department of Commerce (“Commerce”), and the U.S. Department of Justice (“DOJ”) – announced the global resolution of apparent U.S. sanctions violations by SAP SE (“SAP”), a German software company.

The settlement agreements with OFAC and Commerce, and the non-prosecution agreement with DOJ, highlight sanctions risks specific to the cloud and software industry and provide insight on the U.S. government’s compliance program expectations for companies that sell software and services online.

What happened

According to the agency notices, between 2010 and 2018, SAP supplied software and cloud-based services from the United States to third parties with reason to know that the offerings would be provided to users or customers in Iran.  The violations transpired in two ways:

  • Sales of software through “pass through” entities –  SAP sold software licenses and maintenance services to SAP resellers located in Turkey, the UAE, Germany, and Malaysia, which in turn, sold the licenses and services to third parties for end use in Iran.  Iranian end-users then downloaded SAP software, updates, or patches from the company’s servers in the United States.  The agencies noted that SAP failed to prevent downloads of its software from IP addresses associated with Iran, even though internal audits recommended the adoption of IP address geolocation screening.  SAP also failed to conduct sufficient due diligence on its resellers, many of which publicized ties with Iranian companies on their websites.
  • Cloud services – SAP’s Cloud Business Group subsidiaries allowed 2,360 users in Iran to access U.S.-based cloud services.  SAP became aware, through due diligence and audits, that its subsidiaries lacked adequate compliance controls over its cloud offerings, but did not take appropriate or timely remedial action.

SAP voluntarily disclosed the issues to the three agencies, cooperated with investigators, and made significant changes to its export controls and sanctions compliance program by (1) implementing an IP-based geoblock, (2) deactivating user accounts of cloud-based services in Iran, (3) auditing and suspending resellers that sold to Iranian entities, and (4) involving the export compliance team in any new acquisitions, among other improvements.

Compliance expectations & lessons learned

The SAP case is the latest sanctions enforcement action dealing with the provision of goods or services over the internet.  As with prior announcements, we can glean a few lessons for the technology industry and for companies that conduct business online:

  • Geo-blocking (again): The SAP case is the latest reminder that the U.S. government expects technology companies to adopt effective geo-blocking from IP addresses associated with sanctioned jurisdictions.  In its case summary, OFAC called out the particular need for an effective blocking solution when providing services indirectly through third parties.
  • U.S.-based servers are subject to U.S. rules:  U.S. sanctions and export control laws have broad extraterritorial reach.  This case highlights the fact that the provision of services and the download of software from U.S. servers are considered “exports” and may require approval from OFAC and/or Commerce.  Non-U.S. companies should take note and consider their use of U.S. servers when assessing business opportunities that implicate destinations subject to U.S. sanctions.  U.S.-based platforms should also consider whether customers’ use of their services in sanctioned jurisdictions could create liability for the U.S. company providing the service.
  • Due diligence on intermediaries: The SAP case exemplifies how intermediary parties can create liability for a company under U.S. sanctions and export control rules.  Appropriate due diligence, controls, and monitoring of distributers and resellers is a must in any industry, particularly when a U.S. company does not have full insight into the identity of the end users of its goods or services.
  • Intercompany business is not risk-free: SAP allowed its subsidiaries to operate independently, although SAP knew, based on pre- and post-acquisition due diligence and notification by SAP’s U.S. compliance team, that those subsidiaries had insufficient sanctions compliance programs.  Companies need to ensure that non-U.S. affiliates dealing in U.S. origin services or software maintain appropriate controls, especially after acquiring new entities.
  • Resourcing export and sanctions compliance teams: SAP relied on its U.S.-based compliance team to oversee the compliance of all of its Cloud Business Group subsidiaries.  However, the team received inadequate resources, lacked authority to manage the processes, and encountered resistance from the subsidiaries.  In its notice, OFAC emphasized that compliance teams must be resourced and empowered to implement compliance controls, when risks are identified.
  • Training is key: According to OFAC, SAP employees outside of the United States oversaw the sale of U.S.-based offerings to Iran, and even traveled to Iran on a sales trip.  Multinational companies with a U.S. presence should train all relevant employees on U.S. sanctions red flags so that these types of issues are spotted and appropriately reported.
  • Don’t ignore audit findings:  SAP auditors highlighted the company’s lack of IP address geoblocking as a sanctions compliance risk as early as 2006, but the company did not implement effective controls until 2015.  By failing to act in response to the audit findings, OFAC indicated that SAP “demonstrated reckless disregard and failed to exercise a minimal degree of caution or care” for U.S. economic sanctions and cited this failure as an aggravating factor in the case.

Over $8 million in fines and $27 million in remediation

All told, SAP paid $8.3 million in penalties and fines to resolve these cases, including a $3.2 million fine to Commerce and the disgorgement of $5.1 million in ill-gotten proceeds to DOJ.  OFAC suspended its separate penalty of $2.1 million.

Of course, those figures do not reflect the full cost of investigating and remediating the issues at hand.  According to DOJ, SAP spent over $27 million on remediation, which was noted as an important mitigating factor in the case.  SAP also agreed to three years of third-party compliance audits following the agreements with the U.S. government.

 

The United States Department of Agriculture (“USDA”) is now seeking comments from the public in connection with the Biden administration’s wide-ranging review of America’s supply chains.  USDA’s request is the first to address the administration’s year-long sectoral supply chain evaluations –  in this case agricultural commodities and food products.

Several agencies have already requested comments in connection with 100-day reviews of the supply chains for: semiconductors and advanced packaging; high-capacity batteries; and critical minerals and other identified strategic materials.

USDA’s notice requests comments and information on a wide-range of issues relating to labor acquisition and training, technology, climate and environment, transportation, storage and distribution, research and development, and financing.

The notice specifically calls out the following goods and materials as “critical and essential” that should be addressed in industry comments:

seed, fertilizer, pesticides, livestock/animal health, feed and feed additives, plant health, soil health, water (availability, quality, access, infrastructure), energy (availability, access, infrastructure), viability of pollinators, the agricultural workforce (sufficiency, reliability, documentation, health and well-being), access to capital/financing, access to farm production tools (including for farmers interested in value-added agriculture such as USDA organic certification), access to critical food distribution assets (shipping containers, cold chain equipment, and materials such as packaging) and technology, access to food processing and markets (including traceability and transparency), and access to training, education, and technical assistance.

Commenters should also consider providing recommendations on how USDA should use funding and programs arising out of the Consolidated Appropriations Act, 2021 (“CAA”) and American Rescue Plant Act of 2021 (“ARPA”) to increase durability and resilience within the U.S. food supply.

The deadline to file comments is Friday, May 21, 2021.

Additional notices concerning the administration’s sectoral supply chain evaluations will likely be forthcoming in the coming weeks.  Stay tuned to Kelley Drye’s Trade and Manufacturing Monitor for future updates.

Today, the United States announced new sanctions on Russia in response to a widespread hacking campaign targeting the United States, alleged interference in U.S. elections, and other “malign” actions carried out by the Russian government.  Today’s actions include sanctions on transactions in the primary market for Russian sovereign debt, Russian technology firms, parties involved in election interference, and parties involved in the Russian administration of the Crimea region.  Importantly, the new measures include an Executive Order (E.O.) that authorizes OFAC and other U.S. government agencies to impose additional significant sanctions on Russia in the future, if found to be necessary.  The E.O. is designed, in part, to deter future actions by the Russian government that are inimical to U.S. interests.

New Executive Order

Today’s E.O. provides OFAC with broad authority to impose substantial new sanctions on Russia in the future, should relations between the United States and Russia continue to deteriorate.  The E.O. allows OFAC, in consultation with the Secretary of State, to impose sanctions on a wide range of persons and sectors of the Russian economy, including:

  • Parties that operate in the Russian technology sector;
  • Parties that operate in the Russian defense or related materiel sector;
  • Parties that operate in any other sector of the Russian economy identified by the Secretary of the Treasury in the future;
  • Parties that are involved in Russian government activities related to:
    • Cyber-attacks;
    • Interference in U.S. or foreign government elections;
    • Actions that undermine democratic process in the United States or abroad;
    • Transactional corruption;
    • The assassination or targeting of U.S. persons or the nationals of U.S. allies and partners;
    • Undermining the peace, security, stability or territorial integrity of the U.S., its allies, or partners; or
    • Deceptive or structured transactions, including through the use of digital currency or other assets, to circumvent U.S. sanctions;
  • Leaders, officials, senior executive officers, or members of the board of directors of the Russian government, or entities engaged in the activities above, or other sanctioned entities;
  • Political subdivisions, agencies, or instrumentalities of the Russian government;
  • Any party owned or controlled by, or that has acted on behalf of, the Russian government or any party subject to sanctions under the new E.O.;
  • Any Russian citizen, national, or company, that has materially supported governments that are subject to U.S. blocking sanctions; and
  • Russian persons that disrupt natural gas supplies to Europe, the Caucasus, or Asia.

Additions to the SDN List: Technology companies, Crimea, and election interference

Pursuant to the new E.O. and existing sanctions authorities, OFAC added a number of individuals and entities to its List of Specially Designated Nationals (SDN List).   U.S. persons are broadly prohibited from conducting business with the sanctioned parties and with any entities owned 50 percent or more, directly or indirectly, by the SDNs.  In addition, any property or interests in property within the possession or control of U.S. persons must be formally “blocked” and reported to OFAC.

Today’s designations included:

  • Six technology companies that support Russian government intelligence operations;
  • Eight parties involved in the construction of the bridge connecting Crimea with the Russian mainland and/or involved for asserting Russian governmental authority over the region; and
  • 16 parties involved in election interference.

Sanctions on the primary Russian sovereign debt market

Today OFAC also issued a directive that prohibits U.S. financial institutions from participating in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 by Russia’s central bank, finance ministry, or sovereign wealth fund.  The directive also prohibits U.S. financial institutions from lending ruble or non-ruble funds to those entities.  These sanctions expand existing sovereign debt restrictions imposed in 2019 under the Chemical and Biological Weapons Act.

Notably, the prohibitions do not apply to any entity that is owned, directly or indirectly, 50 percent or more by the three named Russian entities and do not apply to dealings in the secondary bond market.

What does it mean?

Companies with operations in or exposure to the Russian market should continue to carefully watch this space.  Today’s action, while significant in its own right, is a calibrated move designed to signal that the United States has tools available to escalate sanctions on the Russian government and economy.  Further developments are likely during this period of heightened tensions between the two countries.

On April 8, Senate Foreign Relations Committee Chairman Bob Menendez (D-NJ) and Ranking Member Jim Risch (R-ID) announced a bipartisan agreement on a wide-ranging strategic approach towards China.  The Strategic Competition Act of 2021 addresses economic competition with China, as well as humanitarian, national security, and democracy-related issues.  Most significantly, the bill, if enacted, stands to significantly impact U.S. trade with China and other partners.

Notably, the bill – scheduled to be marked up by the committee on April 21 – seeks to shore up the competitiveness of U.S. companies operating in China by:

  • Promoting diverse global supply chains.  Section 101 directs the Secretary of State, with the Secretary of Commerce, to help U.S. persons and companies to move supply chains outside of China and identify alternative markets.

In addition, the bill requires U.S. agencies to gather information and monitor Chinese anti-competitive practices and violations of U.S. law by:

  • Tracking intellectual property (“IP”) violations by Chinese state-owned enterprises (“SOEs”).  Section 402 directs the Secretary of State, in coordination with other agencies, to publish an annual list of SOEs that have either stolen U.S. companies’ IP or forced technology transfer.  The list will also describe, without disclosing IP or trade secrets, the economic advantage obtained by the SOE.
  • Reporting on Chinese subsidies.  Section 403 requires the Secretary of State, in coordination with the U.S. Trade Representative and Secretary of Commerce, to publish a list of all subsidies provided by the Chinese government to Chinese enterprises and identify how that treatment discriminates against foreign market participants.  Subsidies to be included extend beyond the traditional definition in the WTO Agreement on Subsidies and Countervailing Measures; the list encompasses measures and policies that shield SOEs from competition.
  • Monitoring the use of Hong Kong to circumvent U.S. export controls.  Section 406 directs the Secretary of State to report on the extent to which China uses Hong Kong to get around U.S. restrictions placed on certain exports.

The bill also penalizes Chinese officials for their involvement in Uyghur forced labor by:

  • Imposing sanctions with respect to human rights violations in Xinjiang.  Sections 302 and 303 would extend the reach of the Uyghur Human Rights Policy Act, passed last year, by allowing the U.S. government to impose economic sanctions against Chinese officials for their involvement in Uyghur forced labor and other abuses.

Finally, the bill aims to enhance U.S. relationships with trading partners through new trade agreements on, for example, digital services; renewed participation in various international organizations; and, investing in global infrastructure, like 5G mobile networks and undersea cables.

The Strategic Competition Act is one component of a larger, bipartisan legislative effort being championed by Senate Majority Leader Schumer (D-NY) to “outcompete China and create new America jobs.”  Earlier this year, Schumer directed eight relevant Senate committees to begin drafting the broader China bill, with the bipartisan Endless Frontier Act (which invests in ten key technology areas, including semiconductors, AI and machine learning, and advanced energy technology) – itself the subject of an April 14 Senate Commerce Committee hearing – as its centerpiece. The comprehensive legislation could be on the Senate floor later this spring.

The Kelley Drye trade team will be actively monitoring the bill and providing updates.  Should you have any questions, please contact the authors.

Today, the Department of Defense (“DoD”) published in the Federal Register a request for comments on risks in the supply chain for strategic and critical materials. DoD’s request stems from an Executive Order signed in February by President Biden, which directed the DoD and three other federal agencies to closely examine America’s supply chains in four critical industries.  Additional information concerning President Biden’s executive order and requests for comments on the supply chains for semiconductors and advanced packaging and high-capacity batteries are available here and here.

DoD’s report will include an update to an ongoing inquiry initiated by President Trump at the end of last year concerning imports of “critical minerals,” which include the following 35 minerals as identified by the Department of the Interior:

Aluminum (bauxite), antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt,  fluorspar, gallium, germanium, graphite (natural), hafnium, helium, indium, lithium, magnesium, manganese, niobium, platinum group metals, potash, the rare earth elements group, rhenium, rubidium, scandium, strontium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, and zirconium.

DoD’s request for comments will also focus on a broader range of critical materials so parties involved in defense-related supply chains with interests outside of the 35 identified critical minerals should consider submitting their views.

Like President Biden’s order, DoD’s request for comments signal’s a potentially broader approach to supply chains than the approach taken by President Trump.  In particular, DoD is specifically requesting comments and information related to “diversifying sources of supply for strategic and critical materials, including domestic sources and foreign allies / partners.”

All members of the supply chain, including consumers and producers of both upstream and downstream products, are encouraged to participate. The deadline to file comments is Wednesday, April 28, 2021.

Last Friday, the Office of the United States Trade Representative (“USTR”) issued lists of products from six countries that may be subject to additional 25 percent tariffs.  The proposed product lists identified by USTR are designed to offset digital services taxes (“DST”)[1] imposed by Austria, India, Italy, Spain, Turkey and the United Kingdom, and that USTR has determined violate Section 301 of the Trade Act of 1974 (19 U.S.C. § 2411). Additional information on USTR’s investigations can be found here.

The initial Section 301 action was brought against 10 countries, however, USTR also announced it was formally terminating cases against Brazil, the Czech Republic, the European Union and Indonesia because these countries had not implemented or adopted any digital service taxes. USTR’s announcement did not address a separate Section 301 digital services action brought against France, covering $1.3 billion worth of French goods that was suspended by the previous administration.

For the cases going forward, each of USTR’s notices requests comments and information from parties on whether action is appropriate, and if so, the appropriate action to be taken.  In particular, USTR seeks comments on:

  • The level of the burden or restriction on U.S. commerce resulting from the country at issue’s DST.
  • The appropriate aggregate level of trade to be covered by additional duties.
  • The specific products to be subject to increased duties, including whether USTR’s proposed lists should be retained or removed, or whether tariff subheadings not currently on the list should be added.
  • The level of the increase, if any, in the rate of duty on items covered.

USTR will hold a hearing regarding the proposed remedy for each of the six subject countries, as well as a “multi-jurisdictional” hearing for issues that concern more than one country.  Requests to appear at each hearing (including a summary of the testimony to be given) must be submitted to USTR by April 21, 2021, and written submissions must be submitted by April 30, 2021.

USTR’s federal register notices, and prior relevant documents concerning the agency’s investigations, are available at the agency’s website.  Among the products identified on USTR’s six lists are seafood, children’s clothing, jewelry, and certain furniture items.  If you require assistance responding to USTR’s request, please don’t hesitate to contact Kelley Drye’s international trade team.


[1] Digital service taxes apply to revenues that certain companies generate overseas from the provision of digital services to, or aimed at, users in those jurisdictions.  Taxable digital services might include providing digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes.  The goods identified on USTRs list are not specifically linked to services subject to the relevant DSTs.

As discussed earlier this month here, President Biden issued Executive Order 14017 (“EO 14017”) establishing a wide-ranging evaluation of America’s supply chains that will take place over the next twelve months. This post provides updates with respect to two of the 100-day supply-chain specific reviews.

As previously reported, the Commerce Department’s Bureau of Industry and Security (“BIS”) published a federal register notice establishing a formal notice and comment period for industry participants to provide information on semiconductor manufacturing and advanced packaging supply chains.  BIS has also now announced that it will conduct a virtual forum that will allow industry participants to provide their views orally.  The forum will take place on Thursday, April 8, 2021 from 2:00 pm EST to 5:00 pm EST, but interested parties must submit a request to appear at the forum by Thursday, April 1, 2021 at 5:00 pm EST.  The virtual forum is in addition to (not a substitution) for public comments.

The Department of Energy’s (“DOE”) Office of Energy Efficiency and Renewable Energy has also now published a federal register notice requesting information from industry participants on the high-capacity batteries (including electrical vehicle batteries) supply chain.  Critical materials identified by the DOE include battery grade nickel, cobalt, and lithium.  Industry participants throughout the supply chain should consider expressing their views to the DOE but the agency’s notice specifically calls out extraction of raw materials, refining, separators, collectors and recyclers, among other supply-chain participants.  Responses to the agency’s request for information are due on April 14, 2021.

 

Today, the Bureau of Industry & Security (BIS) is amending the Export Administration Regulations (EAR) to eliminate most reporting requirements related to open source encryption software and certain “mass market” encryption items.  Today’s rule also revises the Commerce Control List (CCL) to implement updates from the December 2019 Wassenaar Arrangement (WA) Plenary meeting.

Open source software changes

Previously, software source code published online that called, contained, or used encryption functionality often remained subject to the EAR (and its licensing requirements) until the author of the code submitted an email notification report to the U.S. government.  Today’s amendment eliminates the reporting requirement for source code that uses standard cryptography, releasing source code from the EAR’s licensing requirements once the code is published online.  Under the new rules, only source code that implements proprietary or unpublished encryption must be reported to the U.S. government before being formally released from control under the EAR.  The change should substantially reduce the reporting burden for companies that frequently publish open source software online.

Changes to “mass market” reporting and classification requirements

 Today’s amendment eliminates the requirement that exporters submit an annual report to BIS for most “mass market” encryption items (e.g., software and other items generally available for sale to the public).  Under the revised rules, annual reports will only be required for a limited set of mass market items described in § 740.17(e)(3).  These items, including certain chips, chipsets, electronic assemblies, field programmable logic devices, and associated executable software, previously required the submission of a formal classification request to BIS before they could be exported as mass market items.  Pursuant to today’s updates, these items will be eligible for export following self-classification, but will be subject to an annual reporting requirement.

Wassenaar Arrangement updates

 Also included in today’s amendments are technical updates to the CCL agreed to at the December 2019 WA Plenary meeting.  The amendments modify about two dozen Export Control Classification Numbers (ECCNs) in CCL Categories 0-3, 5 (Part 2), 6, and 9. Exporters should examine these updates to determine whether the changes alert the classification of their products.