Export Compliance Matters

Insight on Export/Import & Compliance Issues

Update: Export Control Reform – One Year Later

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.

Update: U.S. Ramps Up Ukraine-Related Sanctions Yet Again

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

What Will the “New Chapter” in U.S.-Cuba Relations Entail?

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.

 

Recent Elections Produce Trade-Friendly Congress: U.S. Exporters Stand to Gain

Apart from the Republican takeover of the Senate, the most noteworthy result of the recent U.S. midterm elections may well be the fact that both Houses have received a substantial infusion of pro-trade members. What’s more is that many of these new members of Congress won tight races by running on openly pro-trade platforms and even attacking their opponents for their general lack of enthusiasm or outright opposition to the passage of Free Trade Agreements (“FTAs”) in the recent past (for some details on these races check out The Hill.  In recent years, members of Congress have generally been hesitant to back any major pro-trade initiatives for fear that their constituencies would view a vote for free trade as one against creating jobs at home.

But the fact that the issue of free trade was a prominent one in such key elections and that the voters overwhelmingly opted for the pro-trade candidate may signal that both the politicians and their constituents are beginning to recognize that the two are not mutually exclusive, and that in fact, American industries from agriculture to aerospace need to remain competitive abroad in order to expand and create more jobs at home. This realization just might give these new faces in Washington the courage to throw their support behind the large FTAs currently in the works, namely the Trans-Pacific Partnership (“TPP”), that is currently being negotiated between the United States and more than 10 other Asia-Pacific countries, and the Transatlantic Trade and Investment Partnership (“TTIP”), an agreement in the works between the United States and the European Union.

Of course, for these agreements to be finalized and incorporated into U.S. law there must be some cooperation between the Republican dominated Congress and their Democratic counterparts in the Obama Administration – an alliance many say is quite unlikely. Ideally, the new Congress will eventually grant President Obama trade promotion authority (“TPA”), also known as Fast Track – a power granted to the President to negotiate trade agreements that may then be passed by Congress as they are, rejected altogether, but not amended or filibustered. This authority would ensure an up or down vote in Congress once a given FTA has been negotiated and signed and prevent amendments that would force the United States to dishonor certain of its obligation to partner nations, which would effectively invalidate the agreement as a whole.

TPA has been granted to presidents in the past and used to pass FTAs, most notably the North Atlantic Free Trade Agreement (“NAFTA”), but the authority expired in 2007. Since 2012, the Obama Administration has been quietly trying to get Congress to renew TPA. But these new pro-trade members entering the fray coupled with the President’s own recent emphasis on trade may be enough to finally create bipartisan support for TPA and lead to the ultimate completion and passage of these big trade agreements and others. And more FTAs would undoubtedly open up more markets to U.S. exporters and ensure that they remain competitive globally – so let’s keep our fingers crossed.

Have a great day.

Doreen

 

BIS Ramps Up Restrictions on Trade With Venezuela

The Department of Commerce’s Bureau of Industry and Security (“BIS”) recently published a final rule adding to existing U.S. government restrictions on trade with Venezuela. The November 7th rule amends Section 744.21 of Commerce’s Export Administration Regulations (“EAR”) to add license requirements on the export, reexport, and transfer of certain items destined for “military end use” or a “military end user” in Venezuela. These items may include dual-use telecommunication equipment, certain software, aircraft navigation systems and lasers. Section 744.21 restrictions originally applied only to China and were extended to cover Russia about a month ago. These latest restrictions on trade with Venezuela come as a response to Venezuelan government and military reactions to domestic protests that began in February 2014. According to BIS the Venezuelan anti-democratic crackdown included “direct violence against protesters, detentions of protesters and political leaders, and acts of intimidation, resulting in numerous deaths and injuries.” The BIS action follows the imposition of visa restrictions on Venezuelan government officials last July and complements an arms embargo imposed on Venezuela by the State Department’s Directorate of Defense Trade Controls (“DDTC”) in August of 2006. Additionally, a select number of former and current Venezuelan government officials have been listed on the Office of Foreign Assets Control’s Specially Designated Nationals (“SDN”) List in past years and as a result, have had their assets frozen and are unable to transact with US persons.

Despite this recent ramp up, keep in mind that there is still not a complete embargo on trade in place against Venezuela – many non-defense related exports are still fair game. So if you are exporting to Venezuela or thinking about it, here is a list of some steps you can take to avoid breaching current trade regulation when transacting with your Venezuelan trade partners:

  • Check DDTC’s U.S. Munitions List to make sure that your export item is not included on the list as there is a complete embargo on such items (and any services related to them).
  • Check BIS’s Commerce Control List to see if there are any general license requirements that apply to your item’s ECCN.
  • Check Supplement 2 to Section 744 of the EAR to make sure the item does not require an export license under the new restrictions imposed by Section 744.21 as of November 7, 2014. If they are listed in Supplement 2, they require an export license if they are intended for “military end use” or a “military end user.” (Note: 600 Series items cannot be exported to Venezuela without a license.)
  • Run the names and aliases of all parties involved in the transactions against OFAC’s SDN List to make sure they are not listed (for a more thorough check, online screening tools that run party names against all U.S. government lists are available).
  • Perform thorough anti-corruption due diligence on all parties involved in the transaction in accordance with your company’s compliance program, including obtaining anti-corruption policy certifications and completed questionnaires from your business partners and following up on any red flags.

Have a great day.

Doreen

Five Export Markets Offer Growth Opportunities – Are you ready?

According to a recent report released by Moody’s credit rating agency, among the world’s top 20 economies, China, India, Indonesia, Saudi Arabia, and Turkey will be the fastest-growing economies of 2014.  At the very least, they offer a starting point for exporters and investors with little experience in expanding their business abroad to begin searching for new opportunities.

The following suggestions will help you avoid wasting valuable time and money:

  1.  Be proactive not reactive.  In my opinion, the key to your success is finding the right local partner or distributor.  Your long-term success depends on the relationship with this party. Therefore, you must actively research and investigate potential partners. There are cost-effective ways to do this research to reduce your risk
  2. Make sure you understand export “dos and don’ts,” including the export licensing requirements of each relevant government agency, U.S. economic sanctions, and your liability regarding the end-use and end-users of the items you export.
  3. Make sure you have a written agreement. This sounds simple but many companies skip this step and there are contract terms that can minimize your liability in the local country.
  4. Screen your foreign distributors, agents, and third-party business partners. With U.S. sanctions changing so often (sometimes weekly) it is best to screen these parties at least twice: once just before you sign the contract and again right before you ship your product. Manually checking government lists is one option, but screening software packages provide a quicker, more cost-effective and comprehensive check.
  5.  Ensure that you and your partners have an up-to-date anti-corruption program that includes policies and training. This is vital to remaining compliant with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the growing body of parallel foreign anti-corruption legislation that may apply in the new market where you are doing business. Relationships between government officials and the private sector in foreign markets may not always be easy to parse, so having a system in place to vet and clear each relationship and transaction is key, as is maintaining clear records of your accounting practices and compliance efforts.
  6. Avoid opportunities that seem too good to be true. They still are. Really. I still see this over and over. Clients receive an opportunity to participate in a foreign project that is not what it seems. In the long run making a commitment to a country and building trust with a reputable local partner will protect you and your company, make your management confident, and create viable economic growth.

Check out our online training… You get written materials including a checklist that covers all of your exporting requirements.  It makes the process simple. We also have suggestions in earlier blog posts regarding finding partners overseas. And, of course were happy to discuss this with you. We have particular expertise in the Turkish market and the Middle East. We are happy to help.

Have a great day,

Doreen

New DDTC Re-export Requirement – What You Need to Know

As of October 1, the State Department’s Directorate of Defense Trade Controls (DDTC) has added an additional requirement for foreign parties looking to re-export or re-transfer items that are under their jurisdiction by virtue of the fact that they are  U.S. made (or made with U.S. parts or materials) and appear on the U.S. Munitions List (USML). Luckily, the new requirement is very straightforward. It consists of one piece of additional paperwork (a letter) that must be submitted by foreign parties when they are applying for a license from DDTC to re-export/re-transfer a USML item. The letter must say whether:

  1. The applicant or any senior officer of the co has been charged with violating ITAR or is ineligible to receive a license to temporarily import/export USML items.
  2. Any party involved in the export transaction has been charged with the same or is ineligible.

The statement also must be signed by a “responsible official empowered by the applicant.” The DDTC’s 1-page guidance on the new requirement can be found here. Make sure to update your procedures accordingly and inform your foreign partners immediately to avoid costly licensing delays.

Have a good day.

Doreen

Export Control Reform Update: 2014 and Beyond

It’s been just about a year since the President’s Export Control Reform Initiative kicked off with revisions to four categories of the United States Munitions List (USML). Since then, two more rounds of changes has brought the total number of revised categories to 13, more than half of the total 21 categories contained in the USML. As a result of rounds 1-3, 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
  • XIII – Materials and Miscellaneous 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

And in the last few months of 2014 certain items included in two more categories will be taken off of the USML and transferred 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). 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 separate 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 is to simplify the licensing process for exporters by relaxing controls on less sensitive items. But keep in mind that relaxed controls doesn’t mean that your licensing responsibilities will either remain the same or disappear altogether. They may require the implementation of a different procedure altogether. In light of this, it is important to keep in mind that the following two USML categories will be revised in the last few months of 2014:

  • Revisions to XV – Spacecraft and Related Articles will take effect on November 10, 2014
  • Revisions to XI – Military Electronics will take effect on December 30, 2014

By the end of the year, 15 USML categories out of 21 will have been revised. What’s unclear is when the following 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. 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 rather 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.

As always, we are happy to help with the classification process of a specific item. Our online training program also comes with a step-by-step chart to ensure you are considering all the current regulatory requirements. And we will update the blog as more information becomes available regarding revisions to the final six categories.  Have a great day!

Doreen

 

China Amps Up Anti-Corruption Effort – What This Means for Your Company

Last Friday, China’s 15-month-long bribery investigation into British multinational pharmaceutical GlaksoSmithKline (GSK) ended after a one-day trial in which the court found GSK’s local subsidiary guilty of bribing doctors and hospitals and fined the company $490 million. The penalty – the largest ever imposed by a Chinese court – included suspended prison sentences for four Chinese GSK managers found guilty of bribery-related charges as well as a three-year suspended prison sentence and deportation order for their British former head of Chinese operations. The Chinese government has said that GSK made more than $150 million in profits by widely disbursing bribes meant to encourage the promotion of their products. In addition to this record-breaking case, GSK is currently being investigated for bribery in Poland, Syria, Iraq, Jordan and Lebanon. In the future, GSK could also be fined for its illegal behavior in China and elsewhere by the United States under the Foreign Corrupt Practices Act and Britain under the U.K. Bribery Act due to these laws’ extraterritorial reach. In China, GSK issued a formal apology to the government and plans to update its procedures to conform with evolving Chinese anti-corruption requirements and begin the long road towards rebuilding its tainted brand in this large, growing, but potentially perilous market.

In a sense, the message sent by the Chinese government in this case is clear: the days when illicit gift-giving and bribery were an entrenched and accepted cost of doing business in China are quickly coming to an end. And most importantly, foreign firms, their executives, and investors are in no way exempt from prosecution in China. In fact, some believe that foreign firms may be even more closely scrutinized than locally-owned businesses. At the same time, the Communist Party’s stronghold on the Chinese government and its courts and the lack of transparency has created an environment in which selective prosecution is a real possibility and the best way to minimize your Chinese compliance risk is often unclear. Fortunately for U.S. exporters the United States’ Foreign Corrupt Practices Act, a model for many of the bribery standards adopted by foreign governments in recent years, requires all U.S. firms (as well as some non-U.S. firms that fall under its jurisdiction) to apply FCPA standards globally. Therefore, remaining FCPA-compliant when transacting with Chinese parties can also ensure that you and your company remain compliant with the similar regulatory requirements that are being increasingly enforced by the Chinese government. As a refresher, a strong global anti-corruption compliance program that would provide protection against U.S. and Chinese prosecution should include:

  • The tone at the top: a zero-tolerance policy with respect to corruption clearly articulated by management to all employees and business partners and reinforced regularly
  • A sufficiently autonomous compliance officer with enough resources and authority (including access to outside counsel) to effectively perform necessary oversight and third party due diligence
  • Written compliance procedures, policies, and certifications as well as periodic training (for both employees and third party business partners)
  • Books and records that accurately reflect all transactions and payments
  • An effective internal investigations apparatus, including confidential reporting and standardized disciplinary measures
  • Continuous improvement through periodic testing, review, and modification of the compliance program based on specific and evolving industry risks and legislative developments

The GSK case is good news in that it signals that China has joined the global fight against corruption, fueling the continued trend towards a single, universally enforced global standard against bribery. As more countries follow suit international companies’ compliance obligations will become increasingly clear and uniform, driving down compliance  costs and cross-border risk. As a result, your company will stand to make ever-larger gains in foreign markets, responsibly expand operations, and safely increase your bottom line. If you have any questions regarding the particulars of your company’s anti-corruption or export compliance program do not hesitate to contact me – I offer general as well as company-specific training.

Have a great weekend,

Doreen

Sanctions on Russia Expanded Despite Tenuous Truce

On Friday , September 12th, while a tenuous truce between Ukraine and rebel forces showed signs of cracking and government officials continued to trade verbal jabs, the United States amped up pressure on Russia by expanding its sanctions program to include some of the country’s largest companies. The following is an overview of U.S. sanctions on Russia as of September 18.  As you know, these prohibitions can be changed or added to at any time.  Currently, U.S. sanctions are focused mainly on the financial, energy, and military sectors so U.S. parties should be careful to vet all interactions with Russian parties 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.
 
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)
Ukraine-Related Sanctions Regulations: The Treasury Department’s Office of Foreign Assets Control (OFAC) issued regulations to implement the three Executive orders listed above. The regulations currently prohibit U.S. parties from transacting with listed entities and block their assets. 
 
Specially Designated Nationals List (SDN): On Friday, OFAC added five parties 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, OFAC has created a list of entities with specific restrictions – the SSI List. Implemented under Executive Order 13662, U.S. parties are generally 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 Friday, OFAC further reduced the new debt dealing prohibition to 30 days for certain Russian entities, including many of its large oil companies and banks. 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 sector. Specifics regarding both recent additions and changes to the SDN and SSI Lists are available here.
 
Entity List: On Friday, 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. This list bars the export and reexport of items under the Department of Commerce’s jurisdiction to listed parties. Specifics regarding the most recent additions can be found here.
 
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 from either of the two departments 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.”
 
BOTTOM LINE: Even with this substantial expansion of sanctions the bottom line remains the same. With continued fighting despite the truce announcement, threats of retaliatory action from President Putin that might even include prohibiting western airliners from using Russian airspace, and the rebel’s continued insistence on total 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 me.
Have a great day,
Doreen