Yesterday, the United States imposed secondary sanctions on Turkey’s Presidency of Defense Industries (SSB), the country’s main defense procurement entity, for purchasing the Russian S-400 missile system.  The sanctions were imposed pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which authorize secondary sanctions against non-U.S. parties that conduct a “significant transaction” with the Russian defense or intelligence sectors.  The action marks the first time such sanctions have been imposed on a NATO country.

The U.S. State Department imposed the following five sanctions on SSB, out of a menu of 12 possible options:

  • Prohibiting issuance of specific U.S. export licenses/authorizations for any goods or technology transferred to SSB;
  • Prohibiting loans or credits by U.S. financial institutions to SSB totaling more than $10 million in any 12-month period;
  • Banning U.S. Export-Import Bank assistance for exports to SSB;
  • Requiring the U.S. to oppose loans benefitting SSB by international financial institutions; and
  • Imposing full blocking sanctions and visa restrictions on SSB’s Chairman and three other employees.

While not a complete blocking of SSB, the sanctions will likely limit the ability of the SSB to purchase defense-related goods and services from the United States and limit the company’s ability to partner with U.S. companies in the defense sector.

New “NS-MBS” (Non-Sanctions – Menu Based Sanctions) List

Yesterday, OFAC and the State Department also announced a new non-SDN list to identify parties subject to menu-based sanctions authorities, such as CAATSA.  The new “NS-MBS List” appears on OFAC’s Consolidated Screening List and will be used to identify parties subject to non-blocking sanctions only.  Parties subject to blocking requirements will continue to be identified on the Specially Designated Nationals (SDN) List.

Yesterday, the Department of Defense (DoD) designated four additional companies as owned or controlled by the Chinese military, expanding the list of “Communist Chinese military companies” (CCMCs) to 35 companies.  As previously recounted on this blog, Executive Order 13959 (the Order) will prohibit U.S. persons from purchasing the publicly traded securities of CCMCs once the Order comes into force early next year.

The four newly listed companies will be subject to restrictions 60 days after being added to the DoD list.  U.S. persons have 365 days from the date of designation to divest existing holdings in the four companies, provided the securities are sold to non-U.S. persons.

As noted previously, the next administration could suspend or modify the Order, but it may not be an immediate priority.  OFAC is also expected to issue guidance on the scope of the Order before it becomes effective on January 11, 2021.

 

On November 30, the United States sanctioned China National Electronics Import and Export Corporation (CEIEC) by adding the Chinese technology company to the Specially Designated National (SDN) List.  Treasury’s Office of Foreign Assets Control (OFAC) designated the company under Executive Order 13692 for providing goods and services to the Venezuelan government that were used to undermine democracy in that country, including technology that could be used to monitor political opponents and repress political dissent within Venezuela.  A press release issued by OFAC noted that CEIEC had provided censorship tools to CANTV, the Venezuelan state telecommunications company, which controls a substantial portion of internet service in the country.

As of the date of designation, U.S. persons are prohibited from conducting business with CEIEC and its over 200 subsidiaries without authorization from OFAC and all property and interests in property of the company are blocked (i.e., frozen) under U.S. law.  Because of the wide potential reach of the sanctions, OFAC issued General License 38 to allow U.S. persons to wind-down pre-existing business with the company and its subsidiaries over a 45-day period.

Please contact our economic sanctions team if you have any questions about the designation or your sanctions risk profile.

On November 12, 2020, the President issued Executive Order 13959 (the Order) to prohibit U.S. persons from purchasing the publicly traded securities of certain companies that are affiliated with China’s military.  While the Order does not come into force until January 11, 2021, U.S. financial services companies and U.S. investors will need to carefully review the Order to assess its potential impact.

What companies are targeted by the Order?

The Order applies to the securities of any company designated as a “Communist Chinese military company” (CCMC) by the U.S. Department of Defense (DoD) or Treasury’s Office of Foreign Assets Control (OFAC).  The Order initially applies to 31 companies previously designated as CCMCs by DoD earlier this year.  The Order will also apply to newly listed CCMCs 60 days after they are designated by the U.S. government.

As written, the Order does not appear to apply to subsidiaries of CCMCs that are not explicitly designated by DoD or OFAC.  Further guidance from OFAC on that point would be helpful, however.

What securities are subject to the Order?

The Order applies to all publicly traded securities of CCMCs, including securities that are derivative of or are designed to provide investment exposure to CCMC securities.  The Order defines “securities” to include those specified in Section 3(a)(10) of the Securities Exchange Act of 1934.

Are there any exceptions?

The Order allows U.S. persons to divest from existing holdings in the currently listed CCMCs until November 21, 2021, provided that the securities are sold to non-U.S. persons.  The Order provides for a 365-day divestment period for CCMCs that are designated in the future.  Similar divestment periods are available under various OFAC sanctions programs that target securities.

What’s next?

We expect OFAC to issue guidance clarifying the scope of the Order before it becomes effective, as the agency has done for similar sanctions programs in the past.  There are a number of questions that could be addressed by the agency, including how the Order will apply to U.S. broker dealers who facilitate divestment activities by U.S. persons and transactions by non-U.S. persons, U.S. and non-U.S. funds that are backed by CCMC securities, and to what extent the Order will apply to subsidiaries of listed CCMCs.

Notably, the Order takes effect only nine days before the inauguration of the Biden administration.  The next administration could suspend or modify the Order, although immediate action on the Order may not be a top priority given other challenges the administration is expected to face upon taking office.

The WTO has given final approval for the EU to impose tariffs on at least $4 billion of U.S. goods in retaliation over illegal aid in connection with the Boeing/Airbus aircraft dispute.  The EU has set a target date of November 10, 2020 to impose tariffs, regardless of the outcome of the U.S. presidential election.  Press accounts indicate the EU Commission has given EU member states until November 3 to provide input on the targeted products.

While the U.S. and the EU have indicated general support for a settlement of the 16-year aircraft dispute, the two sides continue to disagree on settlement terms.  The EU has urged the U.S. to remove tariffs over EU subsidies to Airbus because it has repealed those programs, while the U.S. contends that since it has already removed the subsidies to Boeing, there is no legitimate basis for EU retaliation.  It seems unlikely the parties will reach a settlement by the November 10, 2020 deadline.  The EU has stated that it will move forward with the tariffs if there is no settlement by November 10, 2020. Continue Reading EU Targets November 10 for Imposition of Nearly $4 Billion in Tariffs on U.S. Goods in Aircraft Case

Last week, the Office of Foreign Assets Control (OFAC) issued an Art Advisory, warning of the sanctions risk presented by high-value artwork transactions due to the anonymity, lack of transparency, mobility of assets, and subjective valuations that often characterize that market.  OFAC cautions that bad actors, like terrorist financiers and others subject to sanctions, may use the market to illicitly access the U.S. financial system, transfer funds, and hide assets.

Interestingly, OFAC cautions that the “informational materials” exemptions to its regulations do not apply to transactions involving artwork where the artwork functions primarily as an investment asset or medium of exchange, including transactions where artwork is exchanged for financial assets like gold, cash, or crypto-currency.[1]  It appears that this narrowed interpretation of the informational materials exemptions is designed to close a perceived loophole in the regulations that would otherwise allow sanctioned parties to utilize the art market to gain access to the U.S. financial system.

Accordingly, OFAC advises participants in the art market, including art galleries, museums, private collectors, auction companies, agents, brokers, and others to conduct appropriate due diligence to identify high-value transactions ($100,000 or more) involving potentially sanctioned parties.  OFAC also cautions that U.S. persons considering such transactions should seek guidance or an OFAC license prior to acting.

Please contact our economic sanctions team if you have any questions about the Advisory or your sanctions risk profile.

 


[1] Congress passed the Berman Amendment to the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) to generally prohibit OFAC from regulating exchanges of informational materials, including artwork.  See The Foreign Relations Authorization Act, Fiscal Years 1994 and 1995, Pub. L. No. 103-236 § 525, 108 Stat. 382, 474 (1994) (codified, as amended, at 12 U.S.C. § 95a, 50 U.S.C. § 1702 (2000); 50 U.S.C. § 4305(b)(4)).

Yesterday, the Office of Foreign Assets Control (OFAC) issued General License M, authorizing U.S. academic institutions to export certain online learning services and software to Iranian students to facilitate remote learning during the COVID-19 pandemic.  Students that are in Iran, or are ordinarily resident in Iran, are eligible to receive services under the general license if they qualify for an F (student) or M (non-academic student) non-immigrant U.S. visa classification, have a U.S. visa, and are located outside the United States due to the pandemic.

OFAC also issued a new FAQ clarifying OFAC policy on the types of remote learning services and software that are authorized pursuant to other Iran general licenses.  In the FAQ, OFAC indicates that General License G authorizes U.S. academic institutions to export services and related software that allow Iranian students to sign up for, and participate in, online undergraduate courses.  OFAC also indicates that Section 560.540 of the Iranian Transactions and Sanctions Regulations and General License D-1 generally authorize exports of video conferencing software and educational technology software that allow students to view course materials, complete assignments, receive grades, participate in discussions and other remote learning activities, because those services are “incidental to the personal exchange of communications over the internet.”  OFAC will prioritize the review of specific license requests for online learning services involving Iranian students that fall outside the scope of these general licenses.

Universities and technology companies using these licenses will need to pay close attention to the specific terms of each license in order to ensure compliance.  For example, General License M does not authorize the export of software that is listed on the Export Administration Regulations Commerce Control List. General License M currently expires on September 1, 2021.

Yesterday, OFAC announced amendments to the Cuba embargo that will further restrict the ability of U.S. companies to process remittances to or from Cuba.  Specifically, the new rules prohibit U.S. companies from processing remittances involving Cuban entities on the State Department’s Cuba Restricted List (CRL), which include Fincimex and American International Services, two major partners of foreign credit card and money transfer companies.  The changes are likely to have a significant impact on remittance flows from the United States to Cuba, as the restricted Cuban entities reportedly process almost half of all remittances to Cuba.

Companies that process remittances to or from Cuba must examine their exposure to the new restrictions and determine whether there are ways to continue to provide authorized remittance services to the island.  The new rules become effective on November 26, 2020.

The Department of Treasury’s office that administers reviews of foreign investments in U.S. companies is changing how it identifies critical technology businesses and related technologies that require mandatory review during a foreign investment process.  The Committee on Foreign Investment in the United States (CFIUS or the Committee) issued a final rule effective October 15, 2020 that updates its approach to identifying export controlled items and know-how (“technology”) of concern to the Committee when reviewing potential national security issues with respect to foreign investments in the U.S.  The Committee had earlier issued its own new approach to identifying those critical technology national security areas of concern, but appears to have recognized that the U.S. government already has a well-established system for determining whether U.S. military, nuclear, and dual-use items/know-how are critical technologies that are sensitive from a national security perspective.  The new CFIUS approach falls back on identifications of sensitive know-how in the existing export controls in the U.S. Department of State’s International Traffic in Arms Regulations (ITAR) governing military item/know-how exports, Nuclear Regulatory Commission and Department of Energy export controls on nuclear products/know-how, and the Commerce Department’s, Bureau of Industry and Security (BIS) controls on dual use items/know-how.

The new approach implements the requirements of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA, which amended the prior CFIUS statute) to clarify whether a review will be required of foreign investments by CFIUS for “critical technology businesses.” In short, mandatory review requirements now turn on whether an export license would be required to release export controlled “critical technology” (the know-how required to develop, produce and in some cases to use export controlled items) to the foreign investor country/personnel.  There are a few wrinkles related to export license exceptions, but those can be evaluated on a case-by-case basis for proposed acquisitions and investments.

This new approach provides more certainty for both U.S. and non-U.S. companies evaluating proposed investments in the U.S. as it relies on a long-established approach to the identification of export controlled know-how. That said, many U.S. companies make products that are subject to export controls and this new approach makes it clearer than ever that more foreign investment in the U.S. will be subject to mandatory CFIUS filings.  The ruling also puts some additional pressure on BIS to continue its progress toward identifying emerging and foundational technologies that should be added to existing traditional export control lists, which are primarily based on multilateral agreements, with some important additional unilateral U.S. controls.  As part of that effort, Commerce re-started its moribund Emerging Technologies and Research Technical Advisory Committee as one part of its effort to identify new technologies for export control.

The recent expansion by BIS of controls on a series of relatively low level technologies for military end use and end users (and those who provide “support” for those users) in China, Russia and Venezuela is likely to trigger even more mandatory filings, particularly for proposed Chinese investment.  The newly expanded scope of controls for military end users includes a broad swath of relatively basic products, including such common items as stainless steel plate, most industrial pumps and a variety of commonly used valves, items that are commonly traded and not typically thought of as sensitive from a national security standpoint. That said, not all of the newly-listed control categories have associated technology export controls.  Sorting out what is controlled for export and what is not for a particular proposed investment will be critical to determining CFIUS filing strategy.

 

This week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with Berkshire Hathaway Inc. involving apparent violations of the U.S. embargo on Iran by a subsidiary in Turkey.  Under the agreement, Berkshire Hathaway agreed to pay over $4.1 million to settle allegations that the Turkish subsidiary exported 144 shipments of cutting tools to third party distributors knowing that the goods would ultimately be shipped to Iran.  Although the violations were voluntarily disclosed to OFAC, the agency determined that the Turkish subsidiary’s actions were “egregious” due to the willful nature of the subsidiary’s conduct.  Among other things, the senior managers at the Turkish subsidiary intentionally pursued business with Iran when they knew such business was prohibited and took a number of steps to try to conceal their conduct, like using third party intermediaries in Turkey, corresponding via personal email accounts, and entering false information in internal systems.  Ultimately, the U.S. parent company launched an internal investigation after receiving an anonymous tip about the conduct of the subsidiary.  According to OFAC, the subsidiary’s bad acts continued during the investigation, lying to investigators and encouraging others to do the same.

The case documents are worth a full read, but there are a number of key takeaways for exporters:

  • Liability for foreign subsidiaries: This case is a reminder that U.S. parent companies are liable for violations of the Iran embargo committed by their foreign subsidiaries and other overseas operations that are owned or controlled by U.S. parent.  This is somewhat unusual under OFAC’s regulations, which generally treat foreign subsidiaries as non-U.S. persons.*
  • Intercompany orders can present risk: Many multinationals apply less trade due diligence to intercompany orders than to third party sales. This can make sense for some companies, because doing so often eliminates duplicative compliance steps and because the business unit that is closest to a customer is often the best positioned to conduct the necessary due diligence steps.  But this case also illustrates the danger of failing to identify red flags of non-compliance in intercompany orders.  OFAC noted that several Berkshire Hathaway foreign subsidiaries received emails from the Turkish subsidiary containing red flags of non-compliance, including an email address from Iran and the name of a company known to be located in Iran.  Only one of the intercompany orders from the Turkish subsidiary was flagged and stopped.  Employees involved in export transactions should be trained on how to spot red flags of non-compliance, even in intercompany orders, and know how to report potential compliance issues up the ladder.
  • Distributor danger: Companies remain liable for indirect sales through intermediaries when they know or should know that the intermediary will ship the items to sanctioned territories or sanctioned parties.  The presence of the third party intermediaries in this case counted against the company since they were used to hide the true end use of the products.  Even in less egregious cases, proper distributor due diligence and follow-up can help reduce the chances that your products end up in problematic jurisdictions.
  • The power and peril of an “egregious” determination: OFAC has the authority to obtain substantial penalties in “egregious” cases that involve, among other things, willful conduct, management knowledge or involvement, or harm to U.S. sanctions objectives.  Here, OFAC obtained a penalty of over $4.1 million, and could have imposed a penalty of over $18 million, for sales that were collectively worth only $383,443.  Absent a voluntary self-disclosure (VSD) by the company, OFAC could have sought penalties of over $36 million.  If the VSD had involved less serious, “non-egregious” conduct, the maximum penalty would have been only around $192,000, and the ultimate penalty assigned to the company would likely have been significantly less than that.  Companies that discover potentially egregious violations need to immediately remediate the issue and then carefully consider their options, including whether to pursue a VSD, which can substantially reduce penalty exposure.
  • Importance of auditing and monitoring: In this case, the U.S. parent company sent repeated reminders to its overseas operations that business with Iran was prohibited.  Those types of compliance reminders and directives are critical, but they cannot replace a solid auditing or monitoring program, which can catch and address bad actions before they become systemic issues.  Site visits, remote monitoring of data, and local compliance personnel are all important tools that can help to spot this type of activity and the more common inadvertent errors that can also generate liability for companies.

Please contact our trade compliance team if you have any questions about your company’s compliance with U.S. sanctions rules.


*Foreign subsidiaries are fully subject to the Cuba embargo, but not to other OFAC programs.