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.

On December 19th, President Obama signed Executive Order (EO) 13685 specifically targeting Crimea and those responsible for the usurpation of the peninsula back in March. This latest EO was the forth in a series aimed at discouraging Russia from continuing its destabilization campaign in eastern Ukraine and the first dealing with the Ukraine crisis in 9 months. A full year after violent protests initially broke out in Kiev there appears to be no end in sight to the fighting between Ukrainian forces and pro-Russian rebels and the recent signing of EO 13685 suggests Ukraine, along with the U.S., EU, and Russia will continue to be embroiled in this conflict for months to come. Thus, in 2015 it remains as important as ever to stay abreast of new developments, incorporate new government directives into your existing procedures, and continue performing well-documented due diligence on all transactions that may touch an effected party or region.

The following is an overview of U.S. sanctions on Russia as of January 15. As you know, these prohibitions can be changed or added to at any time.  Currently, U.S. sanctions are focused mainly on the financial services, energy, and defense sectors so U.S. parties should be careful to vet all interactions with parties that may be involved in these industries. U.S parties are expected to know who they are doing business with, what related parties might be benefiting from the transaction (such as a parent company or third party), and the end-user and end-use of any exports. The expanding sanctions program does not require you to forgo all business opportunities in the region, but it does necessitate a heightened level of awareness and careful documentation of who you are doing business with in order to ensure compliance and avoid costly inadvertent violations.

Executive Orders: The Administration has issued the following executive orders giving the Department of Treasury the ability to block Russian parties from transacting with the United States.

13660 – Blocking Property of Certain Persons Contributing to the Situation in Ukraine (March 6, 2014)

13661 – Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 17, 2014)

13662 – Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 20, 2014)

13685 – Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine (December 19, 2014)

Ukraine-Related Sanctions Regulations: The Treasury Department’s Office of Foreign Assets Control (OFAC) issued regulations to implement the executive orders listed above (31 CFR Part 589). The regulations currently prohibit U.S. parties from transacting with listed entities and block listed entities’ assets.

Specially Designated Nationals List (SDN): On December 19, pursuant to President Obama’s most recent Ukraine-related executive order of the same date, OFAC added 17 individuals and 7 organizations to its SDN List, which imposes a blanket prohibition on transacting with the listed entities that applies to all U.S. parties.

Sectoral Sanctions Identifications List (SSI): In additional to listing certain prohibited parties on the SDN List, on July 16 OFAC created a list of entities with specific restrictions pursuant to Executive Order 13662 – the SSI List. U.S. parties were initially prohibited from transacting in, providing financing for, or dealing in new debt of longer than 90 days maturity or new equity for entities on this list. On September 12, OFAC further reduced the new debt dealing prohibition to 30 days for certain Russian entities in the financial services and defense sectors. Concurrently, OFAC prohibited U.S. parties from providing any goods, services (except for financial services), or technology supporting oil production. The restrictions also apply to entities that are owned 50 percent or more by the listed parties.  This means that U.S. parties need to ask questions and know who they are doing business with – especially when it comes to Russian banks and parties involved in Russian financing or the energy and defense sectors.

Entity List: Most recently on September 12, the Bureau of Industry and Security (BIS) at the Department of Commerce added five Russian entities in Russia’s defense sector as well as five of the Russia’s largest energy companies to its Entity List. The list bars the export and reexport of items under the Department of Commerce’s jurisdiction to listed parties.

Denial of export licenses: BIS has instituted a policy of denying licenses for exports, reexports, and foreign transfers of “items for use in Russia’s energy sector that may be used for exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil.” The timing and the exact goods affected were left unclear, however the policy appears to only effect items that would currently require a license to export. The Department of State’s Directorate of Defense Trade Controls has implemented a similar policy, indicating that it “will deny pending applications for export or re-export of any high technology defense articles or services regulated under the U.S. Munitions List to Russia or occupied Crimea that contribute to Russia’s military capabilities.”

General Licenses: Starting on September 12 OFAC has issued 5 Ukraine-related general licenses designed to either facilitate the winding down of activities otherwise prohibited by the sanctions program or provide for certain excepted transactions. Most notably, Ukraine General License Number 4 of December 19 authorizes the exportation of certain agricultural commodities, medicine, medical supplies, and replacement parts to Crimea (otherwise prohibited by EO 13685).

BOTTOM LINE: With each expansion of sanctions the bottom line remains the same. With continued fighting despite a truce announcement in September, crumbling peace talks, and the Russian-backed rebel’s continued insistence on independence from the government in Kiev, it doesn’t seem like U.S. sanctions on Russia will be lifted any time soon. So U.S. companies involved in business with Russian entities must continue implementing internal programs that will ensure they have valid export licenses for each transaction and periodically check their business partners (as well as their business partners’ associates and ultimate end-users of their products) against the lists discussed above. In the event that a transaction may be prohibited by any of the sanctions currently in force U.S. companies should make sure to follow up with thorough, documented due diligence and either clear the party beyond doubt or refrain from going forward. If you need further clarification on the sanctions programs or analysis regarding a specific transaction do not hesitate to contact us.

Take care,

Doreen

It is quite likely that the current and upcoming changes to the United States’ relationship with Cuba will be the most significant we’ve seen since 1961, when the U.S. government initially cut ties with Havana and imposed an embargo on Cuba that has only grown stricter over the years. President Obama’s December 17 announcement signaled the start of efforts to normalize U.S.-Cuba relations and was immediately echoed by Cuban President Raul Castro as the two countries exchanged numerous prisoners on humanitarian grounds. The U.S.’ new approach, details of which were released in a White House fact sheet, includes plans to rekindle diplomatic ties through discussions led by Secretary Kerry, the establishment of a U.S. Embassy in Havana in the coming months, and high-level exchanges between the two governments beginning with the next round of U.S.-Cuba Migration Talks to be held in Havana later this month. The White House also indicated that the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) would make adjustments to existing regulations in order to begin the normalization process. On January 15, both OFAC and BIS published final rules implementing President Obama’s initial reforms, which include the following changes, effective January 16th, 2014:

  • Travel: OFAC general licenses for 12 specific categories of travelers will make it easier for certain travelers such as those with family in Cuba, journalists, researchers, educators, and performers to visit Cuba as they will no longer need to apply for specific licenses.
  • Remittances: The amount a U.S. person will be able to remit to Cuba in a quarter will be increased from $500 to $2,000 and remittance forwarders and those sending money to support the development of private businesses in Cuba will no longer require specific licenses from OFAC to do so.
  • Exports: A small group of goods and services will be allowed to be exported from the U.S. to Cuba, including building materials for residential construction, agricultural equipment, consumer communication devices and related software, applications, hardware, and services, as well as other “goods for use by private sector Cuban entrepreneurs.”
  • Imports: Upon their return to the U.S., travelers to Cuba will be able to import up to $400 worth of Cuban goods ($100 of which can consist of tobacco or alcohol products).
  • Shipping: Certain vessels that have engaged in trade with Cuba will be allowed to enter the U.S.
  • Financial Institutions: U.S. entities will be allowed to open accounts at Cuban financial institutions and U.S. credit/debit cards will work in Cuba. Transactions incident to Cuban travel and related insurance coverage will also be permitted.
  • Extraterritorial Reach: The scope of U.S. sanctions against Cuba will be limited so that certain U.S. owned/controlled entities located in third countries will be allowed to transact with Cuban individuals in third countries.

For more details regarding these changes, you can take a look at the text of the OFAC changes here, the text of the BIS changes here, or review the Treasury Department’s fact sheet on the issue here.

It remains to be seen whether these initial executive-led changes open the door to a more comprehensive dismantling of the 50-year-old economic and financial embargo against Cuba and usher in a truly new chapter of normalized trade between the two countries. If this does occur, U.S. exporters and American industry as a whole will have the chance to gain big from opportunities made possible by the newly opened Cuban market. However, a more substantial easing of sanctions is unlikely absent direct congressional action to amend or repeal the various pieces of legislation underpinning the regulations promulgated by OFAC and BIS. President Obama along with the executive agencies can only go so far in suspending the economic embargo on Cuba due to limitations on their power to do so specified in Titles I and II of the Libertad Act (or Helms-Burton Act) of 1996. Undoubtedly, questions of the limits of executive power as compared to that of Congress to change U.S. law and foreign policy will fuel the debate, especially since President Obama must seek support for this initiative from a Republican Congress.

While drastic changes to the sanction regime will not happen overnight, how far OFAC is willing to go in implementing changes to the regulations and subsequent reaction in Congress will give us a better sense of how much support the President has, and how fierce the opposition is. These initial steps will help gage whether a transition to a truly “normalized” trade relationship with Cuba can be accomplished relatively quickly or if it will take many years to dismantle this longstanding policy. Stay tuned.