On June 5, 2020, the Department of Treasury, Office of Foreign Assets Control (OFAC), published a final rule (85 FR 34510) establishing the Syria-Related Sanctions Regulations (31 CFR Part 569), which implement Executive Order 13894.  The new regulations are in addition to OFAC’s existing Syria Sanctions Regulations (31 CFR Part 542).

Although titled “Syria-Related Sanctions,” the sanctions regulations are targeted at Turkish entities involved in the Turkish military offensive in northern Syria.  The criteria for listing includes (among others) Turkish government officials and agencies and persons operating in targeted sectors of the Turkish economy determined by the Secretary of the Treasury to be contributing to various destabilizing activities or human rights abuses in relation to Syria.

The current notice does not create any newly sanctioned parties, but implements Executive Order 13894 and provides the criteria for the Secretary of Treasury, in consultation with the Secretary of State, to make these designations.  Sanctions include blocked property and other related financial sanctions.

OFAC’s Syria-Related Sanctions page includes additional information on the new rule, including information previously published regarding Executive Order 13894 (October 14, 2019).  Executive Order 13894 was used to briefly add the Turkish Ministry of National Defence, the Turkish Ministry of Energy and Natural Resources, and three senior Turkish government officials to OFAC’s Specially Designated Nationals List (SDN List).

The issuance of the Syria-Related Sanctions Regulations provide a valuable reminder that sanctions programs affect transactions beyond the obvious countries of concern.  Raising similar issues a few days earlier, three companies and vessels from the Marshall Islands and one company and vessel from Greece were listed under OFAC’s Venezuela-Related sanctions program.  Denied party screening for all countries is a must-do to prevent serious compliance problems.

DDTC Adjusts to Social Distancing

As we noted recently on this blog, the Department of State, Directorate of Defense Trade Controls (DDTC) remains open, but will be making adjustments in response to the Coronavirus Disease 2019 (COVID-19) pandemic.  This includes an electronic process for submitting disclosures to the office of Defense Trade Controls Compliance (DTCC).

Since that announcement, DDTC has:

• Cancelled its Wednesday, April 29 In-House Seminar
• Suspended pick-up/drop off courier services while continuing to send and accept U.S. mail
• Indicated that it is considering a one-time temporary reduction in registration fees for “certain categories of DDTC registrants”
• Implemented procedures to send DSP-85 and General Correspondence (GC) responses by email when possible
• Began accepting FMS Part 130 reports via email at DDTC-Part130Notices@state.gov
• Moved to electronic submissions of Congressional Notifications.

DDTC has also provided extensions as follows:

• Temporarily extended ITAR registrations expiring on February 29 through June 30, 2020 for two months from the original date of expiration
• Extended licenses expiring “between March 13, 2020 and May 31, 2020 for six (6) months from the original date of expiration”
• Granted an additional 30 days for responses to request-for-information letters related to DTCC disclosures.

Finally, DDTC made the following announcements to address remote working and expedited licenses:

• Suspended “the requirement that a regular employee, for purposes of ITAR § 120.39(a)(2), work at the company’s facilities, to allow the individual to work at a remote work location, so long as the individual is not located in Russia or a country listed in ITAR § 126.1” through July 31, 2020.
• Suspended a similar requirement for regular employees of licensed entities working under a TAA, MLA, or exemption.
• Reissued guidance for requests submitted in support of U.S. Operations (USOP) (exports in support of U.S. and coalition forces that are deployed or scheduled to be deployed within 90 days).

Please monitor the DDTC website for additional announcements.

OFAC Publishes Pandemic Guidance

On April 20, 2020, the Department of the Treasury, Office of Foreign Asset Control (OFAC) released a statement on compliance concerns during the COVID-19 pandemic.

The announcement addresses exemptions and authorizations that allow humanitarian assistance to countries subject to OFAC sanctions.  It specifically addresses the Iran, Venezuela, North Korea, Syria, Cuba, and Ukraine/Russia sanctions programs.

OFAC also requests anyone affected by the pandemic to contact OFAC as soon as practicable if delays associated with OFAC’s regulatory requirements (e.g., various reporting requirements and responding to administrative subpoenas).

OFAC has also established an e-mail account for electronic submission of disclosures at OFACdisclosures@treasury.gov.  OFAC has previously published specific guidance on how to organize and submit electronic correspondence.

Finally, OFAC acknowledged that the pandemic “can cause technical and resource challenges for organizations” that will be evaluated as a factor in potential violations on a case-by-case basis.

Compliance During the Pandemic – ECS Can Help

The U.S. government offices are making efforts to alleviate some difficulties in dealing with them, but this is not an excuse to ignore export compliance.  Enforcement may be hampered now, but any compliance problems left to fester are just going to get worse for when they are back to “normal.”

We continue to offer training, with live streaming two-day seminars and an eight-part webinar series currently in progress.  Click here for more on ECS training options.

Our consulting practice continues to operate remotely and can assist with license drafting and review, Technical Assistance Agreements (TAAs), product classifications, risk assessments, and any other assistance you may need to keep your compliance program in order and business moving along.

DDTC Open and Accepting Electronic Disclosures

On March 9, 2020, the Department of State, Directorate of Defense Trade Controls (DDTC) announced that it remains open, but will be making staffing and other adjustments in response to the Coronavirus Disease 2019 (COVID-19) pandemic.

Electronic licensing and registration processes are operating as normal, but may be subject to additional processing delays.  The same applies to Commodity Jurisdiction (CJ) and General Correspondence (GC) requests.

Most notable, disclosures submitted pursuant to ITAR §127.12 may now be submitted by email.  Disclosures and related information should be emailed in pdf format on company letterhead to DTCC-CaseStatus@state.gov.  Duplicate hard copies are not required, but hard copies may continue to be submitted if necessary.

Please monitor the DDTC website for additional announcements.

ITAR Cloud Rule Almost Here

The new International Traffic in Arms Regulations (ITAR) cloud rule is scheduled to go into effect March 25, 2020.  DDTC has release a two-page pdf handout summarizing the changes.

Commerce Changes Country Groups for Russia and Yemen

On February 24, 2020, the Department of Commerce, Bureau of Industry and Security (BIS) published a rule (85 FR 10274) revising the Country Chart and Country Groups for Russia and Yemen in the Export Administration Regulations (EAR).  A subsequent rule (85 FR 13009) made a minor correction.

The rule removes Russia from more favorable treatment under Country Groups A:2 (Missile Technology Control Regime) and A:4 (Nuclear Suppliers Group) and adds it to Country Groups D:2 and D:4 to reflect nuclear and missile technology proliferation concerns.  It also adds an “X” in the “NP 1” column of the Commerce Country Chart for Russia, establishing a license requirement for items controlled for those purposes.

The rule removes Yemen from more favorable treatment under Country Group B and adds it to Country Group D:1 based on national security concerns.

Under these changes, certain license exceptions are no longer available for Russia and Yemen.  For transactions that would previously have been authorized under a license exception, a BIS license will be required (exports, reexports, and transfers of certain controlled items).

CFIUS Filing Fees Proposed

On March 9, 2020 (85 FR 13586, corrected in 85 FR 14837), the Department of the Treasury issued a proposed rule to establish a filing fee for voluntary notices submitted for by the Committee on Foreign Investment in the United States (CFIUS).  The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) provided for, but did not immediately require, filing fees.

The proposed rule adds implementing regulations including the following fee schedule:

• $750 for transactions valued at greater than $500,000 but less than $5,000,000;
• $7,500 for transactions valued at equal to or greater than $5,000,000 but less than $50,000,000;
• $75,000 for transactions valued at equal to or greater than $50,000,000 but less than $250,000,000;
• $150,000 for transactions valued at equal to or greater than $250,000,000 but less than $750,000,000; and
• $300,000 for transactions valued at equal to or greater than $750,000,000.

Comments will be accepted through April 3, 2020.  Refer to the original Federal Register Notice for more information and how to comment.

ECS Working Remotely Since 2003

While events have turned our next scheduled seminar from on-site in Park City, Utah to on-site on your computers nationwide, ECS remains available to assist with your export compliance needs.  Contact us today and keep your business moving despite recent disruptions.

On November 27, 2019, the Department of Commerce published a notice (84 FR 65316) proposing new regulations on Information and Communications Technology and Services (ICTS) supply chain transactions with “foreign adversaries”  The proposal would add 15 CFR Part 7 to implement Executive Order 13873 of May 15, 2019.  The executive order had directed the Commerce Department to come up with regulations under the International Emergency Economic Powers Act (IEEPA).

In the proposal, “transaction” is are defined broadly as:

any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.

“Information and Communications Technology and Services (ICTS)” are defined as:

any hardware, software, or other product or service primarily intended to fulfill or enable the function of information or data processing, storage, retrieval, or communication by electronic means, including through transmission, storage, or display.

The proposal does not specifically identify “foreign adversaries” but these will be determined by the Secretary of Commerce.

Foreign adversary means any foreign government or foreign non-government person determined by the Secretary to have engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons for the purposes of Executive Order 13783.

It is anticipated that foreign adversaries could include parties on the Entity List such as Huawei.

The review of transactions would begin at the discretion of the US government, including when based on credible information from private parties.  Unlike the Committee on Foreign Investment in the United States (CFIUS), the Commerce Department’s review does not include an approval process and specifically excludes issuing advisory opinions and declaratory rulings.

Potentially prohibited transactions include those where:

The transaction involves information and communications technology or services designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and

…

(i) Poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of information and communications technology or services in the United States;

(ii) Poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the digital economy of the United States; or

(iii) Otherwise poses an unacceptable risk to the national security of the United States or the security and safety of United States Persons.

ICTS transactions with foreign adversaries may be subject to mitigation, prohibition, or unwinding.

Violations (including misrepresentation and concealment of material facts) may be subject to civil penalties of up to $302,584 (as adjusted annually for inflation).

The Department of Commerce specifically requests comments on the following areas:

• Categories of transactions or persons that would never be prohibited under the EO;
• Types of transactions that may be prohibited, but where risks can be mitigated;
• The proposed definition of “transaction”; and
• Recordkeeping requirements.

Comments may be submitted through December 27, 2019.  Review the Federal Register Notice for the full proposed rule and how to submit comments.  Detailed comments and proposed revisions may be particularly helpful in completing the final rule.

Always working to improve on crucial services like denied party screening, ECScreening, ECS’s Denied Party Screening solution for small and medium-sized companies has recently rolled out a series of updates for an improved user interface.  Based on user feedback, we have revised the appearance and functionality of the site, including updates to:

• Main Menu Task Bar
• Helpful FAQs
• Blog: the Denied Party Digest
• Quick access menu

The quick access menu displays all research options at the top of appropriate pages.

Importantly, we’ve expanded service for commercial and enterprise users: Recurring Search no longer has any record limits!

Denied party lists are constantly changing and apply worldwide.  Recurring Search eases the burden of keeping up with these changes.  For example, when changes to the SDN (Specially Designated Nationals) List and/or Entity List occur, like the ones below, Recurring Search keeps your business from missing these changes because your searches are continuously screened:

• November 18, 2019 – nine new SDNs from Turkey, Kuwait, Afghanistan, and Syria;
• November 13, 2019 – twenty-two entities from Bahrain, France, Iran, Jordan, Lebanon, Oman, Pakistan, Saudi Arabia, Senegal, Syria, Turkey, the United Arab Emirates, and the United Kingdom added to the Entity List plus one modification and three removals;
• November 7, 2019 – four new SDNs from Nicaragua and Mali;
• November 5, 2019 – five new SDNs from Venezuela;
• October 11, 2019 – eight new SDNs from South Sudan, United Kingdom, Kenya, and the United Arab Emirates;
• October 10, 2019 – four new SDNs and two updates in South Africa, Iran, and the United Arab Emirates;
• October 9, 2019 – twenty-eight Chinese entities added to the Entity List; and
• September 30, 2019 – five new SDNs from Russia, Seychelles, and the Czech Republic, plus one vessel, three aircraft, and seven other updates.

Check out ECScreening.com and contact us for a 7 day free trial coupon.

On Wednesday, May 15, 2019, the Department of Commerce, Bureau of Industry and Security (BIS) announced the addition of Huawei Technologies Co. Ltd., a Chinese telecommunications and electronics manufacturing giant, to the Entity List.  A Federal Register Notice (84 FR 22961) followed on Tuesday, May 21, 2019.

What is the Entity List?

The Entity List is one of many U.S. Government lists that restricts business dealings with individuals, companies, and other entities worldwide.

As described by BIS:

Additions to the Entity List are decided by the End-User Review Committee which is comprised of officials from the Department of Commerce, Department of Defense, State Department, and Department of Energy. Under § 744.11(b) of the Export Administration Regulations, persons or organizations for whom there is reasonable cause to believe that they are involved, were involved, or pose a significant risk of becoming involved in activities that are contrary to the national security or foreign policy interests of the United States, and those acting on behalf of such persons, may be added to the Entity List.

Why was Huawei Listed?

Huawei’s listing was based on BIS’s conclusion that “Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interest” and includes 68 non-US affiliates in 26 countries (Belgium, Bolivia, Brazil, Burma, Canada, Chile, China, Egypt, Germany, Hong Kong, Jamaica, Japan, Jordan, Lebanon, Madagascar, Netherlands, Oman, Pakistan, Paraguay, Qatar, Singapore, Sri Lanka, Switzerland, Taiwan, United Kingdom, and Vietnam).

What does the Listing Establish?

The listing creates a license requirement with a presumption of denial for items subject to the EAR (including EAR99 or other items that would otherwise be shipped No License Required, or NLR).

The listing was followed by the announcement of a temporary General License that creates a limited 90-day reprieve from May 20, 2019 to August 19, 2019.  During this time, some transactions are authorized when relating to supporting existing networks, supporting existing handsets, and cybersecurity research and vulnerability disclosure, and 5G standards development.

The General License and any subsequent publications should be reviewed closely for their applicability to any transaction.  Use of the General License also requires a certification statement.

Best Practice – Screen Your Customers and Suppliers

The Entity List as well as other government lists are continuously updated.  To ensure compliance, all parties should be screened regularly, using software such as ECS’s own ECScreening.

As anticipated following the August enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the Department of the Treasury has issued new regulations implementing changes to the Committee on Foreign Investment in the United States (CFIUS).

CFIUS Amendments

The first, an interim rule issued October 11, 2018 (83 FR 51316), primarily makes technical amendments to the CFIUS Part 800 regulations.  These changes include:

• Extending CFIUS review period from 30 to 45 days,
• Revising various definitions to be consistent with FIRRMA,
• Providing examples of covered transactions,
• Implementing electronic submissions,
• Allowing parties to stipulate that a transaction is a covered transaction, and
• Revising language regarding violations and remedies.

This rule was effective immediately and comments may be submitted through November 10, 2018.  Please see the Federal Register Notice for more information on how to comment.

Pilot Program

The second notice, also issued on October 11, 2018 (83 FR 51322) implements a “pilot program” expanding CFIUS review and mandatory declarations to a specific list of covered industries when dealing with “critical technologies.”

Under the new rule, “critical technologies” include:

• Defense articles or defense services included on the United States Munitions List (USML) controlled by the Department of State,
• Commerce Control List (CCL) items controlled pursuant to multilateral regimes, for regional stability, or surreptitious listening by the Department of Commerce,
• Nuclear equipment and technology controlled by the Department of Energy,
• Nuclear facilities, equipment, and material controlled by the Nuclear Regulatory Commission, and
• Select agents and toxins controlled by the Department of Agriculture or the Department of Health and Human Services.

Companies in or developing products for the industries listed in the new Annex A to Part 801 are covered by the pilot program as follows, including North American Industry Classification System (NAICS) codes:

Transactions in these areas are covered by the pilot program when the investment would give a foreign investor:

• Access to material nonpublic technical information;
• Membership, observer, or nomination rights on the board of directors; or
• Involvement in substantive decision-making regarding critical technology.

This rule will take effect on November 10, 2018 and comments may be submitted through that date.  Please see the Federal Register Notice for more information on how to comment.

The Department of the Treasury has also published a press release and fact sheet that summarize these changes.

The pilot program is scheduled to end no later than March 5, 2020, once replaced by a full expansion of CFIUS review.

This year’s defense authorization bill didn’t just fund the Department of Defense, but also set the stage for big changes to foreign investment and export controls.  Signed on August 13, 2018, the John S. McCain National Defense Authorization Act (NDAA) included the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the Export Control Reform Act (ECRA).

Foreign Investment Risk Review Modernization Act

The Foreign Investment Risk Review Modernization Act (FIRRMA) expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS).  CFIUS, an interdepartmental committee chaired by the Treasury Department, was already authorized to review certain business transactions involving foreign investment in the United States that involve national security considerations.

FIRRMA expands the scope of transactions subject to CFIUS review to include transactions involving foreign persons including:

• real estate located in proximity to airports, maritime ports, or sensitive government facilities such as military bases;
• critical infrastructure, critical technologies, or sensitive personal data of US citizens;
• membership on the board of directors or other decision-making rights;
• changes in a foreign investor’s rights resulting in foreign control; and
• other transactions designed to circumvent CFIUS jurisdiction.

FIRRMA also revises filing and review processes and timelines, expanding the ordinary review period from 30 to 45 days, effective when FIRRMA became law.  Notices received before August 13^th will remain subject to the 30 day review period.  FIRRMA also provides for the option for CFIUS to implement filing fees.

The most significant provisions will not be effective until the earlier of eighteen months after the enactment (February 2020) or 30 days after the Secretary of the Treasury publishes a notice that the necessary regulations and resources are in place.  CFIUS may also conduct pilot programs under the new law.

CFIUS has advised businesses to continue to notify transactions as provided in current CFIUS regulations.

The Treasury Department has released a summary of FIRRMA and FIRRMA FAQs.

The International Traffic in Arms Regulations (ITAR) continue to require notification when there are changes to ownership or control (as well as other material changes) under 122.4.  Notification of transfer of ownership or control to a foreign person is required 60 days in advance and is independent of CFIUS processes.  See the State Department’s Directorate of Defense Trade Controls Mergers/Acquisition/Divestitures page for more information.

Export Control Reform Act

The new Export Control Reform Act (ECRA) provides statutory authority for the Export Administration Regulations (EAR) and Antiboycott rules, which have been maintained by emergency executive orders under the International Emergency Economic Powers Act (IEEPA) since the Export Administration Act (EAA) expired in 1994.

Notably, the ECRA also directs the Departments of Commerce, Defense, Energy, and State to “identify emerging and foundational technologies” that may warrant export controls, including CFIUS and export licensing.

Continuing developments from the last year, the ECRA establishes a US government procurement ban on telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation.  It does not reinstate the Department of Commerce’s denial order for ZTE which was lifted in July.  The procurement ban also includes video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company.

The ECRA also increases potential civil penalties to $300,000 (from the most recently inflation-adjusted $295,141).

ECS will continue to monitor developments as new CFIUS regulations and the reviews of “emerging and foundational technologies” are discussed, proposed for comment, and implemented.