Today the Office of Foreign Assets Control (OFAC) announced a settlement agreement with Amazon for apparent violations of U.S. sanctions regulations by the company. The announcement puts e-commerce and online companies on notice to increase their vigilance when it comes to sanctions screening.

According to OFAC, Amazon violated U.S. regulations by conducting retail e-commerce transactions with persons in sanctioned territories, persons on OFAC’s List of Specially Designated Nationals (SDNs), and sanctioned country embassies around the world.  OFAC found particular fault with Amazon’s sanctions screening program, which failed to take into consideration all of the transaction and consumer information that was relevant to sanctions compliance.  For example, OFAC noted that Amazon’s system failed to stop transactions that included the names of sanctioned territories and consumers with exact name matches to parties on the SDN List.  OFAC noted that Amazon also failed to halt transactions involving common alternative spellings of sanctioned locations (“Krimea” instead of “Crimea”) or known cities in sanctioned locations (“Yalta,” which is in the Crimea region).

The announcement reads like a roadmap for what e-commerce and online companies should be doing to ensure compliance with OFAC’s regulations.  Among other measures, companies should consider:

  • Tailored controls: E-commerce companies should adopt screening programs that are adapted to the fast-paced and often high volume world of e-commerce.  By their nature, e-commerce companies must rely on highly automated systems to screen transactions for sanctions compliance.  The key is to design those programs to capture risky transactions without generating an overwhelming number of “false positives” that require individualized review by human analysts.
  • Poor data: Companies should take into consideration the limited or poor quality data that is often inherent in online transactions, data that can easily include misspelled or alternatively spelled locations.  Companies handling online transactions, especially those without a stable customer base, need to be able to efficiently screen and hold transactions that raise sanctions compliance concerns, despite these challenges.  Some companies may also benefit from improving the quality of data collected from customers, which will make screening more reliable and reduce false positives over time.
  • The right data: E-commerce companies must consider all of the data that they collect on customers and transactions and determine which elements contain information relevant to sanctions screening.  That data may exist in different databases or parts of companies’ systems and may need to be stitched together to obtain a full view of potential sanctions risks.
  • IP blocking: Companies should review their Internet Protocol (IP) blocking controls, which deny access from IP addresses associated with sanctioned territories, to ensure that they are effective.  While OFAC recognized improvements to Amazon’s IP blocking controls in its announcement, e-commerce companies should be wary of overreliance on IP blocking, which can miss customers that access sites through Virtual Private Networks (VPNs) or other tools that anonymize customers’ locations.
  • Testing:  Testing is the only way to tell if a sanctions compliance program is working as intended.  E-commerce companies should dig into their customer and transaction data, with help from qualified sanctions data analysts and counsel as needed, to periodically review whether their sanctions compliance screening program is capturing the right transactions and dispositioning them appropriately.
  • Training: OFAC recognized that Amazon took remedial action to ensure that employees received training tailored to their job responsibilities.  This type of targeted process-based training, in addition to broader “awareness” training, is the most effective way to ensure that employees understand their responsibilities and know where to get help on sanctions issues.

The Amazon settlement also highlights the benefits of submitting a voluntary self-disclosure (VSD) to OFAC when a company identifies past violations of the law.  OFAC’s VSD provisions allow companies to voluntarily come before the agency and describe past violations in exchange for an often substantial reduction in penalties.  The benefit is most pronounced for violations involving low-value transactions, like the retail sales involved in the Amazon case.  That is because, absent a VSD, OFAC can charge companies with penalties of about $300,000 to $1.5 million per violation.  In Amazon’s case, the base penalty outside of a VSD context was over $1 billion.  In contrast, the base penalty in a VSD context is often dropped to one-half of transaction value, although it can change, sometimes substantially, depending on the exact circumstances of a case.  By taking advantage of the VSD provisions, Amazon received a penalty of only $134,523 for transactions valued at about $269,000.

E-commerce and technology companies are often lucky to have deep benches of data science and programming expertise that can be used to design targeted, risk-based compliance solutions.  But technology companies also tend to capture a lot of relevant data on users that must be considered when adopting sanctions compliance solutions.  Getting a handle on what data is collected, and how to analyze it in light of OFAC’s rules is the first step to ensuring compliance – and avoiding penalties and bad press.

 

Today the Bureau of Industry and Security (BIS) announced that it is suspending license exceptions for exports, re-exports, or transfers to or within Hong Kong that provide differential treatment than license exceptions available for shipments to mainland China.  In other words, if a license exception is not available for shipments to China, then it can no longer be used for shipments to Hong Kong.  The rule change comes in response to new national security restrictions imposed on the territory by China.  If your company uses license exceptions to make shipments to Hong Kong, you must carefully review this rule to determine whether the license exception remains valid.  Several common license exceptions, including Additional Permissive Reexports (“APR”) and Temporary Imports, Exports, Reexports, and Transfers (“TMP”), among others, are affected.

The new rule is effective today, but there is a savings clause that authorizes the use of license exceptions for shipments that were on the dock for loading, already loaded, or already en route by today.  Certain deemed exports and deemed re-exports are also authorized under existing license exceptions until August 28, 2020.

This rule did not change the Export Administration Regulations’ (EAR) Country Chart, which means that all items that could be exported, re-exported, or transferred to Hong Kong without a license or the use of a license exception may still be shipped.  However, it is likely that further restrictions on exports to Hong Kong are coming, given recent statements from the Commerce and the State Departments and proposed legislation under consideration in the Senate.  Continued monitoring of these issues will be necessary to ensure compliance in this rapidly changing landscape.

Bureau of Industry and Security Issues Guidance on Rule

The new Bureau of Industry and Security (“BIS”) rule prohibiting certain exports, reexports, and transfers of items to “military end-users” and “military end-uses” in China, Russia, and Venezuela is effective today.

The new rule creates additional due diligence burdens on manufacturers and exporters in the materials processing, technology, electronics, telecommunications, information security, sensors and lasers, and propulsion sectors.  Under the new rule, exporters are prohibited from knowingly exporting, reexporting, or transferring enumerated items to the armed forces, certain state-owned enterprises, defense contractors, and other companies that develop, produce, maintain, or use military items in China, Russia, or Venezuela.

Although the rule is effective today, it includes a savings clause that provides that any item on the dock for loading or already en route as of today may be shipped until July 27, 2020.  In addition, certain aspects of the newly expanded Electronic Export Information (“EEI”) filing requirements are delayed until September 27, 2020.

Late Friday, BIS published a series of Frequently Asked Questions (FAQs) regarding the new restrictions.  Based on the FAQs, BIS expects exporters to perform robust due diligence to determine whether the rule applies.  Exports should consider developing and documenting internal processes and procedures to ensure compliance with this rule.  Given the administration’s focus on enforcing export controls rules with these countries, especially China, caution is warranted.  Below are key aspects of the BIS guidance:

  • The restrictions apply to several types of entities.  The rule not only applies to traditional foreign military and related organizations, but also to governmental organizations, state-owned enterprises (“SOEs”), and other private companies that support “military end-uses.”
  • The restrictions can apply to items that are not intended for a military end-use if those items are for export to a military end-userAn end-use statement that a product will not be used for a military end-use is therefore a necessary, but not a sufficient, part of the due diligence required by this rule.
  • Subsidiary agencies or authorities of military end-users may be, but are not necessarily, also military end-usersTo determine whether such an agency or authority also qualifies, the exporter must analyze its nexus and relationship to the military end-user, what role the agency or authority serves to the public, and whether it develops or uses military items.  The FAQs specifically identify military hospitals as an example of an entity that must be analyzed on a case-by-case basis.
  • Affiliated companies are not necessarily subject to the same restrictions as their related entities. Exporters must perform due diligence to determine the relationship between the affiliates.  If the parent or subsidiary is directly involved in military end-uses, and the specific end-user’s activities are “relevant” to those end-uses, then it is a factor that the exporter must consider in making its determination.  If a direct nexus exists between the two entities, it is very likely that the end-user will be subject to the restrictions in the rule.
  • Sales to distributors that sometimes supply military end-users will be subject to the restrictions if the exporter has knowledge that the distributor intends to supply your items for a military end-useTherefore, sales to distributors that supply military end-users are not necessarily subject to the restrictions.  However, it is now necessary to educate your distributors on these restrictions and to gain assurance that your items will not be re-exported or transferred to such end-users.

This rule will have a significant effect on exporters in certain industries, given its application to less sensitive goods, including most industrial pumps controlled under ECCN 2B999 and mass market software controlled under ECCN 5D992, among other items.  Companies need to adopt procedures to determine whether the new rule applies to their products and to determine whether sales of those items involve prohibited military end users or end uses.

 

On June 3, 2020, the U.S. Department of Commerce’s (“Commerce”) Bureau of Industry and Security (“BIS”) published notice in the Federal Register of its initiation of an investigation to determine whether imports of vanadium threaten to impair the national security.  According to a press release, Commerce is initiating the investigation based on a petition filed on November 19, 2019 by two U.S. producers of vanadium — AMG Vanadium LLC, and U.S. Vanadium LLC.

Vanadium is a metallic element often used as an alloying agent in the production of steel and other metals.  It is used to improve the resulting metal’s hardness, ductility, and toughness. Typical end uses for vanadium-alloyed steels include armor plates, parts of jet engines, and cutting tools.

According to the U.S. Geological Survey, vanadium is mined mostly in Brazil, China, Russia, and South Africa.  Vanadium can also be produced through a secondary process.  This source also indicates that from 2015-2018, U.S. demand was supplied 100 percent by imports. Continue Reading Commerce Department Set to Investigate Whether Imports of Vanadium Threaten to Impair National Security

On May 22, 2020, the Department of Commerce’s Bureau of Industry and Security (BIS) announced the addition of the following  businesses and a government institute to the agency’s Entity List in response to involvement in or support for human rights abuses related to the Xinjiang Uighur Autonomous Region (XUAR):

  • China’s Ministry of Public Security’s Institute of Forensic Science
  • Aksu Huafu Textiles Co.
  • CloudWalk Technology
  • FiberHome Technologies Group and the subsidiary Nanjing FiberHome Starrysky Communication Development
  • NetPosa and the subsidiary SenseNets; Intellifusion; and IS’Vision

All of these parties will be subject to significant restrictions on exports or reexport of products, software and technology from the U.S.  Contact us for details if you have existing or proposed business with any of these parties.

On May 21, the U.S. Treasury Department, as chair of the Committee on Foreign Investment in the United States (“CFIUS”), issued a proposed rule that more directly links mandatory filing obligations with export control restrictions administered by other federal agencies, including the Bureau of Industry and Security (“BIS”) and the Directorate of Defense Trade Controls (“DDTC”).  The rule is open for comment until June 22.

Pursuant to amendments implementing the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which expanded CFIUS jurisdiction in several respects, certain types of transactions are subject to mandatory declarations with CFIUS.  Currently, one type of transaction that requires a mandatory filing is one in which: 1) the target company produces, designs, tests, manufactures, fabricates, or develops a “critical technology.”  A “critical technology” is an item that is included on one of the U.S. export control lists, including the Commerce Control List (“CCL”), included within the Export Administration Regulations (“EAR”); and 2) the target company uses the critical in a sensitive industry, identified in Appendix B to the CFIUS regulations (31 C.F.R. Part 800).  This two-prong test is slightly more strict than the export control regulations themselves because an item included in the CCL is not generally restricted for export to all destinations.  For example, transactions with NATO allies are generally subject to more permissive restrictions than are transactions with other countries.  The current CFIUS mandatory declaration framework does not account for this distinction. Continue Reading CFIUS Issues Proposed Rule to Amend Mandatory Declaration Requirements

Comments Due by July 10, 2020

Today, the Department of Commerce’s Bureau of Industry and Security (“BIS”) published a Federal Register Notice seeking comments from interested parties to assist in its decisions on exclusions from the Section 232 tariffs and quotas imposed on imports of steel and aluminum articles.

Since issuing its interim final rule establishing the Section 232 exclusion request process, BIS has received over 179,000 exclusion requests (157,900 for steel and 21,100 for aluminum), with over 78,500 being granted and 25,400 being denied.

BIS is seeking public comment regarding “the appropriateness of the factors considered, and the efficiency and transparency of the process employed, in rendering decisions on requests for exclusions from the tariffs and quotas imposed on imports of steel and aluminum articles.”  The notice lists various topics for comments including but not limited to expanding or restricting eligibility requirements for requestors and objectors; the Section 232 Exclusions Portal; the factors considered in rendering decisions on exclusion requests; and the incorporation of steel and aluminum derivative products into the product exclusion process. Continue Reading Commerce Department Seeks Comments on Section 232 Exclusion Process for Steel and Aluminum

Earlier this week, the COVID-19 Accountability Act was introduced in the Senate and the House by Rep. Senator Lindsey Graham and Rep. Doug Collins respectively.  While the text of the draft legislation is not yet available, a summary indicates that it would require within sixty days that the President certify to Congress that China has:

“Provided a full and complete accounting to any COVID-19 investigation led by the United States, its allies, or United Nations affiliates, such as the World Health Organization (WHO);

  • Closed all wet markets that have the potential to expose humans to health risks; and
  • Released all pro-democracy advocates in Hong Kong that were arrested in the post COVID-19 crackdowns.”

If there is no such certification, the Act would then authorize the President to impose at least two of a variety of sanctions to hold China accountable, including travel bans, visa revocations, asset freezes, restricting U.S. financial institutions from loaning money to Chinese businesses, and barring Chinese firms from being listed on American stock exchanges.  Such sanction would be effective until the certification could be made. Continue Reading COVID-19 Accountability Act – New Potential Sanctions on China

Last week, the Department of Commerce (the “Department”) initiated two new Section 232 proceedings on mobile cranes and electrical transformer components. Section 232, a previously seldom used section of the Trade Expansion Act of 1962, is used to investigate the impact of certain imports on national security and provide relief if those imports threaten to impair U.S. national security. During the Trump Administration, Section 232 has been used to investigate imports of steel, aluminum, automobiles (and parts), titanium sponge, and uranium. Under Section 232, President Trump has imposed tariffs on steel and aluminum.

The investigation on electrical transformer components will cover laminations for stacked cores for incorporation into transformers, stacked and wound cores for incorporation into transformers, electrical transformers, and transformer regulators. Transformers are an essential part of the U.S. energy infrastructure. The Department’s press release notes that “[a]n assured domestic supply of these products enables the United States to respond to large power disruptions affecting civilian populations, critical infrastructure, and U.S. defense industrial production capabilities.” Several members of Congress had previously urged the Administration to initiate proceedings.

The investigation on mobile cranes follows a petition filed by domestic producer The Manitowoc Company, Inc. (“Manitowoc”), according to the Department’s press release. That petition, filed in December, alleges that “increased Continue Reading Commerce Launches 232 Investigations on Transformer Components and Mobile Cranes

On May 12, 2020, the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) announced that U.S. persons no longer need OFAC authorization to engage in dealings with Nynas AB, provided such activities do not involve blocked persons or otherwise prohibited activities.  Further, Nynas AB is no longer subject to U.S. blocking sanctions as the entity has restructured and is no longer majority-owned by a sanctioned party.

Below are the specific changes:

  • OFAC revoked General License (GL) 13E, “Authorizing Certain Activities Involving Nynas AB,” as it is no longer needed.
  • OFAC issued GL 3H (“Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds”), which replaces and supersedes GL 3G.  The only change was to remove Nynas AB, which was previously excepted from the GL’s authorization.  The GL continues to have restrictions on bonds issued by PDV Holding, Inc. and CITGO.
  • OFAC similarly issued GL 9G (“Authorizing Transactions Related to Dealings in Certain Securities”), replacing and superseding GL 9F, to remove the reference to Nynas AB, meaning that the authorization applies to Nynas AB-issued securities that otherwise meet the criteria set forth in the GL.   The GL continues to have restrictions on securities issued by PDV Holding, Inc. and CITGO.

OFAC emphasizes that absent agency authorization, U.S. persons continue to be prohibited from engaging in activities with Petróleos de Venezuela, S.A. (PdVSA), or entities in which PdVSA owns, directly or indirectly, a 50 percent or greater interest.