As you know there are ongoing changes to the Cuba export regulations.  President Obama announced the reopening of the U.S. embassy in Havana and a Cuban embassy in Washington. The Commerce Department will remove Cuba from list of countries subject to anti-terrorism (AT) controls, and Cuba has been removed from the list of state sponsors of terrorism (SSOT).  Our January blog is still the state of play for permissible business.

However, the Commerce Department issued a Final Rule on  July 22, 2015 to implement regulator changes consistent with the above changes. Here are the highlights:

  • Foreign made items with up to 25% U.S. content can now be re-exported to Cuba without the need for a re-export license from the Commerce Department.
  • Replacement parts can be exported for items legally exported to Cuba.
  • General Aviation flights, such as corporate jets, may now apply for and use license exceptions for trips to Cuba.
  • AVS limitations that operated on Cuba no longer apply.  This means that more options are available for aircraft to use the AVS exception for temporary sojourn for aircraft leaving the U.S.
  • Airlines can engage in transactions incident to approved travel to Cuba without obtaining specific licenses from Treasury’s Office of Foreign Assets Control   (“OFAC”). Note that no other OFAC prohibition has been altered.
  • The scope of sanctions against Cuba is now limited so that U.S. owned or controlled entities in third countries will be allowed to transact with Cuban individuals in third countries.

So far these changes do not alter the longstanding comprehensive trade embargo.  Consistent with the embargo, a license will still be required to export or reexport to Cuba any item subject to Export Administration Regulations unless a license exception is available.

Doreen

 

Iran entered into a historic nuclear agreement with the U.S. and other world powers on July 14th 2015. The agreement will allow the licensing of the export, re-export, sale, lease or transfer to Iran of commercial passenger aircraft for commercial and civil aviation use. The deal also grants the export of spare parts and components for commercial passenger aircraft.  It is reported that Iran is looking to replace hundreds of commercial aircraft.

 

Although this is potentially fabulous news for the commercial airline supply chain the lifting of such sanctions against Iran is not immediate.  The sanctions will be lifted and ultimately terminated in accordance with the deal’s “Implementation Plan,” As part of the plan, Iran will implement various nuclear-related measures and then the U.S. will then cease the application of various sanctions including those relating to “the sale of commercial passenger aircraft and related parts and services to Iran by licensing the export, re-export, sale, lease or transfer to Iran of commercial passenger aircraft for exclusively civil aviation end-use and the export of spare parts and components for commercial passenger aircraft.”  OFAC will be the agency in charge of drafting the new regulations.  No timeline is yet available concerning the export of civilian aircraft to Iran. With the UN Security Council vote behind us, there is now a 90 day time period before Implementation Day which will begin Iran’s implementation. During this period Congress will vote on the deal as well. Buckle your seat belts for the Congressional debate  and also start considering potential market opportunities for your company in the future.

 

Remember, it is a large market of more than 70 million people and the population is young. REMEMBER  Food, agricultural commodities, and medical suppliers already have a free pass to export.  Just remember to do your diligence and ensure compliance with the OFAC requirements.

Doreen

The Idea Behind TPA

On September 24 a rare alliance between Republicans and the Obama Administration led to passage of the ‘fast-track’ bill granting the President a 6-year renewal of Trade Promotion Authority (TPA). As a result, for the first time since 2007, the President has the power to negotiate trade deals with foreign governments and present them to Congress to be approved or rejected with no amendments. The bill also requires the President to notify and consult with Congress throughout the negotiation process and prohibits Senators from filibustering to prevent passage of finalized free trade agreements (FTAs). TPA is indispensable to successfully negotiating FTAs because it prevents Congress from dragging its feet or altering final agreements reached by the President. (more…)

The Bureau of Industry and Security (BIS) is currently accepting comments on methods of improving the Export Administration Regulations (EAR) as well as harmonizing these regulations with the clearance requirements under the International Traffic in Arms Regulations (ITAR). This notice and comment period is open until July 6. (more…)

On March 8 President Obama signed Executive Order 13692 Executive Order 13692, which initially adds seven former or current Venezuelan government officials to OFAC’s Specially Designated Nationals (SDN) List. Once they have been added to the SDN list, the law prohibits any U.S. entity from doing business with them (or entities owned or controlled by them) in addition to freezing their assets and suspending their U.S. entry visas. The move comes months after Congress granted President Obama the power to impose sanctions by passing “The Venezuela Defense of Human Rights and Civil Society Act of 2014” late last year in response to the Venezuelan government’s violent crackdown on anti-government protests that began in February 2014, when 43 people were killed and more than 3,000 arrested. The additions to the SDN list come amid continually worsening economic and social conditions within the country that have been exacerbated by falling oil prices and food shortages. The individuals targeted by the sanctions are said to have committed human rights violations and participated in corruption.

After strongly condemning the United States’ decision to impose sanctions on his country’s government, Venezuelan President Nicolas Maduro sought the power to rule the country by decree. On March 15, Venezuela’s parliament approved the President’s request – a development that, along with President Maduro’s consistent and fiery anti-American rhetoric, suggests US-Venezuela relations will likely get worse before they get better.

The Bottom Line: These initial sanctions are limited to the seven individuals added to the SDN list. They do not include any type of overarching sanctions that would prohibit U.S. entities from exporting to the country or receiving imports from Venezuelan businesses (such as the broader programs in force against Iran and Cuba). Nevertheless, those that are doing business with Venezuela must run the names of their business partners against the SDN list to ensure that they are not one of the seven prohibited parties. Additionally, the ban on doing business imposed on individuals on the SDN list also applies to entities that are owned or controlled by those individuals, so U.S. companies must also ensure that a prohibited party is not involved in ownership or management of the entity they seek to do business with. Finally, it is important to keep in mind that such programs are in constant flux, so additions to the list may be made at any time or a new Executive Order could expand the sanctions program more substantially. I will bring future changes to the Venezuela-related sanctions program to your attention via this blog. I also recommend you consult OFAC’s newly-created webpage devoted to the topic.

Have a great day,

Doreen

On February 24 the SEC charged Ohio-based Goodyear Tire and Rubber Company with violating the books and records provisions of the Foreign Corrupt Practices Act (FCPA). Goodyear agreed to  pay $16.2 million to settle the charges, which stemmed from allegations that the company failed to prevent or detect bribes amounting to more than $3.2 million distributed by local executives at two of its Sub-Saharan subsidiaries in order to obtain tire sales. Most of the illicit payments were made prior to Goodyear’s acquisition of the Kenyan company in 2007. The SEC’s enforcement order suggests that the pre-acquisition due diligence Goodyear conducted was insufficient to uncover the illicit behavior. Furthermore, the SEC found Goodyear’s post-acquisition compliance efforts insufficient as well.

Evidence of improper payments in Kenya first came to light five years after Goodyear’s acquisition through an employee tip submitted via Goodyear’s ethics hotline. The company later disclosed its findings to the SEC and increased compliance trainings and audits. Goodyear’s cooperation and compliance efforts helped it avoid additional criminal fines. However, the dollar amount of the settlement doesn’t quite capture the extent to which this lapse in due diligence cost the company. Goodyear is also required to unwind its operations in Sub-Saharan Africa and stomach the loss of  investment funds, time, and future opportunity in the region.

Takeaway:

Ignorance of foreign subsidiaries’ illicit behavior does not shield a parent company from liability under the FCPA. In this case, Goodyear’s Kenyan subsidiary had independently initiated the illegal practices prior to the acquisition and continued to be managed locally even after Goodyear acquired a majority stake in the company. The U.S. government was able to establish jurisdiction and charge Goodyear with FCPA violations because it had incorporated misleading records of the illicit payments into its accounting records. However, the company could have avoided the violations if it had conducted better pre-acquisition due diligence and implemented anti-corruption training with the subsidiaries right off the bat.

Pre-acquisition due diligence should include:

  • A complete audit of all books and records
  • An assessment of risks based on the location of the business and the nature of the particular industry
  • A review of internal control measures and the compliance culture
  • Risk assessments of political activities and third-party relationships (customers, contractors, vendors, agents, distributors, investors and partners)
  • A violations inquiry to assess target’s relationship with the DOJ and SEC as well as local agencies
  • Pre-acquisition actions to address red flags before the deal goes through
  • Thorough documentation of all due diligence efforts (to present in the event of a government investigation)
  • Immediate implementation of a compliance education and training program including manuals, policies, certifications and management support of the overall compliance program assessing the likelihood of violations, ability to provide mitigation, and the need for restructuring to provide effective protection against future violations.

If you would like assistance in formulating a compliance program tailored to the specific size, location, and industry of your company or have any other compliance-related questions please feel free to contact my office.

Have a great day,

Doreen

After President Obama’s announcement that his Administration will pursue a policy aimed at improving U.S.-Cuba diplomatic relations and ultimately eliminating the economic embargo on Cuba, the U.S. Treasury and Commerce Departments took the first step towards lowering barriers to trade with Cuba by amending existing sanctions regulations. The changes to the Cuban Assets Control Regulations (31 C.F.R. §515) and Export Administration Regulations (15 C.F.R. §§730-774) went into effect on January 16, 2015 and include a number of amendments that open up doors for trade and investment in Cuba, particularly for U.S. companies in the travel and medical industries. Below is a list of dos and don’ts for transactions involving Cuba and Cuban nationals to help your company determine how to take advantage responsibly and effectively of these recent developments.  Whether Congress acts to inhibit or roll back these foreign policy changes remains a question at this writing.

NOW PERMITTED:

  • U.S. companies can export and sell certain communications devices, related services, building materials, equipment, tools for use by the private sector to construct or renovate privately-owned buildings, and tools and equipment for private agricultural activity under new license exception SCP (Support for the Cuban People) and license exception CCD (Consumer Communication Devices) has been expanded to include certain personal computers, mobile phones, and consumer software.
  • With proper agency approval, U.S. companies can potentially export items related to environmental protection.  This includes energy efficient items.
  • Airlines and travel agents can engage in transactions incident to approved travel to Cuba without a specific license from the Treasury’s Office of Foreign Assets Control.
  • Certain U.S. persons can travel to Cuba without a specific license.  This change applies to individuals that would have been authorized to travel to Cuba under one of the 12 preexisting categories, including journalistic activity; professional research; educational activities; religious activities; public performances, and athletic and other competitions.
  • U.S. travelers can spend an unlimited amount on expenses incident to travel to Cuba and can also use credit and debit cards while in Cuba.
  • U.S. travelers can take $10,000 of family remittances with them to Cuba.
  • U.S. travelers can bring $400 of goods back to the U.S. from Cuba.  This includes up to $100 of tobacco or alcohol products.
  • Insurers can provide health, travel, and life insurance to U.S. travelers and third-country nationals that travel to Cuba.

STILL NOT PERMITTED:

  • U.S. persons still cannot export or import items to or from Cuba for commercial purposes absent an applicable license or license exception.
  • U.S. persons still cannot transact with Cuban entities absent an applicable license or license exception.

Have a great week.

Doreen

It has now been over a year since the President’s Export Control Reform Initiative kicked off in October 2013 with revisions to four categories of the United States Munitions List (USML). Since then, 4 more rounds of changes have brought the total number of revised categories to 15, well over half of the total 21 categories contained in the USML. As a result of rounds 1-5, the following categories have been revised:

  • IV – Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs, and Mines
  • V – Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents
  • VI – Surface Vessels of War and Special Naval Equipment
  • VII – Ground Vehicles
  • VIII – Aircraft and Related Articles
  • IX – Military Training Equipment
  • X – Personal Protective Equipment
  • XI – Military Electronics
  • XIII – Materials and Miscellaneous Articles
  • XV – Spacecraft and Related Articles
  • XVI – Nuclear Weapons Related Articles
  • XVII – Classified Articles, Technical Data, and Defense Services
  • XIX – Gas Turbine Engines and Associated Equipment
  • XX – Submersible Vessels and Related Articles
  • XXI – Articles, Technical Data, and Defense Services Otherwise Not Enumerated

 

The two latest rounds of revisions were implemented in the final few months of 2014 and included the transfer of certain items under Categories XV – Spacecraft and Related Articles (on November 10) and XI – Military Electronics (On December 30) from the USML to the 600 Series of the Commerce Control List (CCL). As was the case with items that were transferred to the 600 Series in previous rounds, the classification change will result in differing controls on those items and consequently, will require your company to reclassify items in the newly revised categories to determine whether they remain under the jurisdiction of the State Department’s International Traffic In Arms Regulations (ITAR, which apply to USML products) or have been moved to the CCL, which falls under the jurisdiction of the Commerce Department’s Export Administrations Regulations (EAR).

It is still unclear when the remaining six categories will be revised as the State Department has still not announced effective dates for changes to these categories, which include I – Firearms; II – Artillery; III – Ammunition; XII – Fire Control, Sensors, and Night Vision; XIV – Toxicological Agents; and XVII – Directed Energy Weapons.

Remaining Compliant in This Time of Transition

Practically speaking, the potential classification changes brought about by the category revisions matter to exporters because they may bring about changes in licensing requirements as each department has a distinct set of requirements and a separate license application process. If an item you export may be reclassified as a result of the upcoming changes, it is important to determine if your licensing responsibilities have also changed so you don’t get caught inadvertently exporting with outdated paperwork – something that could stall your delivery and create export violations and penalties. Obviously, the whole point of Export Control Reform has been to simplify the licensing process for exporters by relaxing controls on less sensitive items. But keep in mind that relaxed controls doesn’t necessarily mean that your licensing responsibilities will either remain the same or disappear altogether. Rather, these changes may require the implementation of a totally different procedure governed by a different government department.

As a reminder, it is not only items on the USML that are actually being used for military purposes that require a license from the State Department’s DDTC to be exported lawfully, but any item that is specifically enumerated in a USML category or included in a category by virtue of the fact that it is deemed to have been specially designed for military use (“specially designed” is the new definition that is now applied to determine if an item that is not directly mentioned is nevertheless included in a revised category). So if you know or suspect your item is included in a USML category make sure to consult the revisions to that category to ensure that your procedures satisfy the new regulatory framework. During this extended time of transition, it is important that companies not only continue to initially classify new products, but review past classifications to ensure they are still accurate once reforms to an applicable category are implemented. (Note that even apart from the changes brought about by Export Control Reform, best practices require exporters to perform periodic classification reviews to ensure continued compliance.) If your company cannot “self-classify” a product, you should seek assistance of outside counsel or request a binding ruling from the government regarding classification and/or licensing requirements. Checklists and procedural flow charts can be used, and compliance officers can be consulted when red flags are raised based on the product itself or the destination. The State Department’s Export Control Reform website also features free tools that guide you through the classification process and help determine if a particular item is “specially designed” under a particular USML category.

When it comes to ensuring that your employees are provided with the proper tools and information to maintain compliance on a day to day basis, a periodic position-specific export control training program should be implemented company-wide that concentrates on identifying the sorts of things that are controlled within your specific product line, focusing on those that are less obvious. For example, companies with any involvement in aviation should highlight the prohibition on exports of night vision equipment and night vision compatible lighting.

Furthermore, written compliance policies and procedures should supplement periodic trainings and careful documentation of due diligence should be preserved to ensure that your business has proof of its efforts in the event an inadvertent violation does occur. As mentioned above, a checklist before a sales transaction is approved is a good methodology. Some companies prepare such checklists for all foreign sales to ensure that there is no transshipment or red flags that could lead to a violation. Finally, the human element should never be neglected: tone at the top is key. Senior management and company policy documents should plainly articulate management’s commitment to prioritizing compliance and reiterate that all employees at all levels of the organization are expected to comply with all applicable laws.