Today, the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) further escalated sanctions on Burma by adding two large Burmese military holding companies to its List of Specially Designated Nationals (“SDNs”).  Myanmar Economic Holdings Public Company Limited (“MEHL”) and Myanmar Economic Corporation Limited (“MEC”) both dominate large sectors of the Burmese economy, with vast business interests.  MEHL operates in the banking, trade, logistics, construction, mining, tourism, agriculture, tobacco, food, and beverage sectors, while MEC has interests in mining, manufacturing, and telecommunications.

Until June 22, 2021, companies are permitted to wind-down any transactions with MEHL or MEC or any entities owned 50 percent or more by the two companies. After that date, U.S. persons are broadly prohibited from doing business with either entity or with any company owned 50 percent or more by the sanctioned holding companies.  Any of the sanctioned companies’ property or interests in property in the United States or within the possession or control of U.S. persons must be formally blocked and reported to OFAC.

OFAC also issued several general licenses authorizing activities related to the official business of the United States government, activities of international organizations and entities, and transactions in support of non-governmental organizations.

Companies doing business in Burma should carefully review their business relationships for the involvement of sanctioned parties.  Please reach out to the authors with questions.

 

 

Last week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with UniControl, Inc. (UniControl or “the company”) for shipping goods to European trading partners when UniControl knew or should have known that some of its products would ultimately be re-exported to Iran.  The enforcement action is a reminder that OFAC expects U.S. companies to perform appropriate due diligence when exporting products to intermediary parties like resellers and distributors.

According to OFAC, the Cleveland, Ohio-based manufacturer of process control products made 21 shipments of airflow pressure switches with a total value of $687,189 to European trading partners that were ultimately reexported to Iran in violation of U.S. law.  OFAC indicated that UniControl ignored or failed to respond to several red flags that its switches could be diverted to Iran by its European partners:

  • Intermediaries conveyed interest from Iran: UniControl’s European trading partners inquired whether the company would supply products into the Iranian market, given the significant market opportunity there.  Although UniControl declined the inquiry, the company did not later ensure that products sold to the European customers were not diverted to Iran.
  • Sales agreement included Iran:  Despite early warnings that its partners were interested in the Iranian market, UniControl and one of its European partners entered into a “Sales Representative Agreement” that listed Iran as a country where that trading partner could resell UniControl goods.  (This is a reminder for all U.S. companies that distribution and sales agreements should exclude Iran and other sanctioned jurisdictions from the authorized sales territory specified in any agreement.)
  • Obscured end user identity:  A European trading partner rebuffed UniContol’s offer to drop ship products directly to a purported European end user when the trading partner was facing shipment delays.   OFAC chided UniControl for failing to question the trading partner on its refusal to allow drop shipments or otherwise reach out directly to the end user, which presumably would have revealed that the end user was located in Iran, not Europe.
  • Meeting with prospective Iranian customers at trade show: Between 2012 and 2017, UniControl management and employees attended trade shows in Europe.  At a 2016 trade conference, UniControl managers met with Iranian visitors at a European trade partner’s booth.  According to OFAC, UniControl did not question why Iranians were interested in the company’s products.
  • Removal of a “Made in USA” label:  In one instance, a European trade partner requested that UniControl remove its “Made in USA” label so that, as the European trade partner explained, an Iranian end user could avoid problems with the stated origin of the product.  Although UniControl sought guidance from outside counsel, UniControl subsequently shipped switches to the same European trade partner that were ultimately re-exported to Iran.

Since UniControl voluntarily self-disclosed the apparent violations of OFAC’s regulations and the agency considered this to be a “non-egregious” case (e.g., the transactions did not involve willful or reckless conduct and did not present serious harm to sanctions program objectives), OFAC assessed a maximum civil penalty of one half the transaction value for each violation (i.e., each shipment).  OFAC further found several mitigating factors, such as ceasing trade with its European trading partners and strengthening its compliance program, that decreased the penalty amount to $216,464.  OFAC specifically cited UniControl’s adoption of end user certificates from secondary and tertiary buyers of its reexported products as well as the addition of a “Destination Control Statement” to documents like sales orders and invoices to remind end users of trade restrictions.

This case is a reminder that U.S. companies need to be vigilant for red flags of possible diversion to Iran or other sanctioned territories by intermediary parties.  Furthermore, once red flags are identified, U.S. companies must take action to investigate and remediate the issue through enhanced compliance checks and due diligence requirements on intermediary parties.

On February 24, 2021, 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.  The assessment will follow two tracks.

The first is a 100-day review involving four specific supply chains:

  • semiconductors and advanced packaging;
  • high-capacity batteries;
  • critical minerals and other identified strategic materials; and
  • active pharmaceutical ingredients.

The second is a year-long review of six sectors:

  • defense industrial base;
  • public health and biological preparedness industrial base;
  • information and communications technology (ICT) industrial base;
  • energy sector industrial base;
  • transportation industrial base;
  • agricultural commodities and food products.

Each supply chain review will result in the preparation of a report by the head of a designated federal agency that will be provided to the President through the Assistant to the President for National Security Affairs (“APNSA”) and the Assistant to the President for Economic Policy (“APEP”).

Industry participants will have a role in shaping these reports, though the order does not specify whether communications will be on the record through notice and comment or through informal contacts.  On March 15, 2021, however, the Commerce Department’s Bureau of Industry and Security 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.  The deadline to file comments is April 5, 2021, so industry participants will need to mobilize quickly.   Regardless of the process used for each industry and sector, these reviews provide an opportunity for industry participants to shape policy with respect to their respective supply chains in a variety of ways.

President Biden’s order is a continuation of the prior administration’s focus on supply chains, including an evaluation of the United States’ reliance on imports of critical minerals.  A summary analysis of President Trump’s executive order is available here.  EO 14017, however, provides some hints at differences in the approach the new administration might take.  For example, while President’s Trump’ order focused on alleviating the threat to national security posed by imports of critical minerals from adversaries, President Biden’s order appears to take a broader approach to supply chains.  In particular, as part of its statement on policy, EO 14017 states that “close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies.”  The focus on strengthening supply chains with allies and partners is somewhat a departure from the prior administration.

In a press briefing last Friday, White House National Security Adviser Jake Sullivan, in discussing an upcoming meeting with representatives of China, noted that before the administration undertakes a point by point discussion on tariffs and export controls, the U.S. has “more work to do with our allies and partners to come up with a common approach, a joint approach.”  This comment again demonstrates the Biden  administration’s departure from the Trump administrations go-it-alone approach.

In the coming days, the Kelly Drye team will continue to monitor the federal register and provide updates for industry participants on how they can engage in shaping policy concerning their supply chains.

 

On March 10, 2021, the United States Trade Representative (USTR) published an extension of the COVID-19 related medical-care and response product exclusions from Section 301 duties covering imports from China. The agency determined it would be inappropriate to allow the exclusions to lapse in consideration of the ongoing efforts to combat the COVID-19 pandemic. The extensions are effective for six months through September 30, 2021.

USTR originally extended the Section 301 exclusions for these 99 products on December 29, 2020. The extensions were set to expire on March 31, 2021. The list of products for which exclusions are being extended is included in the annex of the December 29, 2020 notice. The list of products includes x-ray equipment, oxygen tubes, hand soap, hand sanitizer, and personal protective equipment, among others.

USTR has made no announcement regarding plans to extend other non-COVID-19 related exclusions that expired on December 31, 2020, or earlier.

If you have any questions, please contact:  Jennifer McCadney or Matthew Pereira.

On March 1, 2021, the U.S. Court of International Trade (CIT) issued a decision with important ramifications for any company that uses “first sale” to reduce customs duty liability for goods imported into the United States.  The CIT’s ruling in Meyer Corp., U.S. v. United States calls into question the continued viability of first sale for suppliers located in non-market economies. This development has meaningfully altered the risk profile associated with using first sale for transactions in China and Vietnam.  All companies relying on first sale should review their first sale programs to evaluate the impact of this ruling and take adequate precautions.

The First Sale Rule

The first sale rule permits importers to declare a lower customs value—and by extension, to lower the customs duty liability—for certain types of qualifying importations. To be eligible, an importation must involve a multi-tiered transaction (i.e., there must be three or more parties involved in the sequence of sales leading to the importer). Under U.S. law, the earliest sale in such a sequence of transactions may be declared as the customs value provided that the goods are clearly destined for the United States at the time of such sale and the first sale value otherwise satisfies the requirements applicable to any transaction value (i.e., it must be a bona fide sale that has been conducted at arm’s length).

First sale is thus commonly described as having “three elements”: the first sale in a multi-tiered transaction may be used as a customs value provided (1) it is a bona fide sale, (2) the goods are clearly destined for the United States at the time of the transaction, and (3) the value is an arm’s length price.

Meyer v. United States

The CIT’s decision in Meyer hinges on additional language from the seminal 30-year-old case that established first sale as a viable basis for customs valuation—language that has frequently been quoted, but seldom, if ever, scrutinized for meaning.  The CIT interpreted that language to impose an overlooked requirement, namely that any legitimate first sale must be (4) absent any distortive non-market influences. While the first three requirements for the use of first sale are frequently assessed and litigated, the fourth requirement, the CIT notes, “has generally been neglected.” Continue Reading U.S. Importers Should Reevaluate “First Sale” Customs Programs

Today, the U.S. Bureau of Industry and Security (BIS) imposed additional export control restrictions on Myanmar (Burma) in response to the recent military coup in that country.  BIS previewed the new restrictions in an announcement last month when the U.S. imposed sanctions on the country’s military leadership.  Today’s changes include the following:

  1. BIS added the Burmese Ministry of Defence, the Ministry of Home Affairs, Myanmar Economic Corporation, and Myanmar Economic Holdings Limited to the U.S. Entity List.  U.S. and non-U.S. companies are prohibited from exporting, reexporting or transferring items subject to the Export Administration regulations (EAR) to these entities without prior approval from BIS.  License requests related to the sanctioned entities will be reviewed by BIS under a presumption of denial.
  2. BIS added Burma to the list of countries subject to ‘military end use’ and ‘military end user’ (MEU) restrictions under § 744.21 of the EAR.  The change will require exporters to acquire a license from BIS before exporting, reexporting, or transferring certain products to military end uses or end users in Burma.
  3. BIS limited the number of license exceptions available for Burma by moving the country from Country Group B into the more restrictive Country Group D:1 and from Computer Tier 1 and into Computer Tier 3 under License Exception Computers (APP), § 740.7.
  4. BIS will examine all export license requests related to Burma for the risk of diversion to military end users and military end uses pursuant to § 742.4(b)(7) of the EAR.  Licenses that are for civil end users and civil end uses will generally be approved, but license applications related to military applications will face a presumption of denial.

Companies doing business in Burma should examine these new rules closely and continue to monitor U.S. regulatory developments affecting the country.

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.