The Department of the Treasury has released the long-awaited proposed rules that would complete implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 that expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review investments by foreign persons. One proposed rule will revise and restate the general CFIUS regulations, 31 C.F.R. Part 800, while the second proposed rule will provide a separate process, 31 C.F.R. Part 802, for CFIUS review of certain real estate transactions that do not involve acquisition of a U.S. business. Among the key elements of FIRRMA addressed in the proposed rules are:

  • Expanded jurisdiction to review non-controlling investments in so-called “TID U.S. businesses”; i.e., companies involved in certain technology, infrastructure or data.
  • Extended mandatory review over acquisition of a “substantial interest” in a “TID U.S. business” by a foreign person in which a foreign government has a “substantial interest.”
  • Exemption of investments by certain foreign persons from certain foreign states (to be identified separately) from CFIUS jurisdiction over “covered investments.”
  • Provision of an option to initiate CFIUS review via a short-form voluntary declaration in lieu of a joint voluntary notice.

The current proposals do not yet seek to implement the statutory authority to impose a fee in connection with CFIUS reviews.

The proposed rules are scheduled to be published in the Federal Register on September 24, 2019, which will trigger a compressed 30-day time frame to submit comments (during which Treasury has suggested it may hold a teleconference with interested participants). The Interim Rule establishing the mandatory declaration under the Critical Technologies Pilot Program remains in effect and both prior comments and any new comments submitted will be addressed when Treasury publishes its final rule.

In ruling NY N305669, Customs and Border Protection (CBP) determined the classification of the LARQ Water Bottle System from China. The item is a stainless steel vacuum seal bottle, complete with a cap containing a UV-C LED chip and lithium-polymer 3.7v battery. The bottle keeps 500 mL of water cold for up to twenty-four hours or hot for up to twelve hours. The cap, designed to work exclusively with the LARQ bottle, uses a patented UV-C technology to purify both water and the interior of the bottle. To operate, the user will press the button on the cap and then shake the bottle for sixty seconds. The cap also has the ability to automatically turn on every two hours to ensure fresh water.

Heading 8421 specifically provides for purifiers of all types, including small domestic appliances, Note II of the Explanatory Notes to heading 8421 noted. Therefore, CBP determined that the applicable subheading for the stainless steel vacuum sealed bottle with cap is 8421.21.0000, HTSUS, which provides for “Centrifuges, including centrifugal dryers; filtering or purifying machinery and apparatus, for liquids or gases; parts thereof: Filtering or purifying machinery and apparatus for liquids: For filtering or purifying water.” The rate of duty will be free.

Products of China classified under subheading 8421.21.0000, HTSUS, unless specifically excluded, are subject to Section 301 List 1 25% ad valorem rate of duty. At the time of importation, 9903.88.01 in addition to subheading 8421.21.0000 must be reported.

 

On September 9, 2019, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) published amendments to the Cuban Assets Control Regulations (the “Cuba Sanctions”) to limit “U-turn” transactions and remittances.

“U-turn” transaction is a reference to a Cuba Sanctions authorization (31 CFR § 515.584(d)) for banking institutions subject to U.S. jurisdiction to process transactions prohibited by the Cuba Sanctions if the transaction originated and terminated outside the United States, and the originator and the beneficiary of the funds transfer are not persons subject to U.S. jurisdiction. This “U-turn” authorization had the net effect of enabling non-U.S. persons to conduct U.S. dollar denominated transactions with Cuban persons or involving a benefit in Cuba, even though those transactions were processed or cleared through a U.S. financial institution (“USFI”).  Now, pursuant to the amended Cuba Sanctions, USFIs will be required to reject and report such transactions to OFAC. These Cuba Sanctions changes will take effect on October 9, 2019.

Practical Points for Consideration

As a reminder, on June 21, 2019 OFAC expanded its reporting requirements (31 CFR § 501.604(a)) to now require any “U.S. person (or person subject to U.S. jurisdiction)” to file an OFAC reject report within 10 business days of rejecting any transaction that would be prohibited by U.S. sanctions.  OFAC has not provided new industries now captured by the rejecting reporting requirements with guidance on the type of activity OFAC is expecting such industries to report as rejected.

If you have any questions on how to interpret your company’s potential new reject requirements under the revised Cuba Sanctions, the attorneys below would be happy to assist.

For additional information on other Cuba Sanctions changes effective October 9, 2019, including remittances, OFAC updated its Frequently Asked Questions Related to Cuba which may be found here: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf

As a “gesture of good will”, President Trump this week announced a two-week delay on the planned 5% increase in tariffs on $250 billion (Lists 1-3) of Chinese goods.

The tariffs on items included on Lists 1-3 were slated to increase from 25% to 30% on October 1st. The increase is now set for October 15th.

Trade negotiations between the U.S. and China resume next month.

On September 11, 2019, China’s Ministry of Finance announced exemptions for sixteen (16) U.S. product lines from its retaliatory tariffs against the United States. These exemptions may be viewed as a gesture of good will from China and an attempt to de-escalate the tariff and trade war between the two countries that has been waging for over a year now. Deputy-level trade negotiators from Washington and Beijing have agreed to meet in the coming days in an attempt to re-spark trade talks between the nations. Chinese state media has also confirmed that Liu He, the top Chinese economic official, will travel to Washington in October for ministerial-level talks.

The products excluded by the Chinese Ministry of Finance include shrimp, various oils such as mineral oils and lubricating oils, anti-cancer drugs, whey protein, and fish meal. The notice specified that the exclusions would run from Sept. 17, 2019 until Sept. 16, 2020. China’s second tranche of their exclusion process remains open until October 8, 2019 and a third tranche for Chinese tariffs on $75 billion will be launched in the future. At the end of the notice, the Finance Ministry said they will consider additional products for exemptions and will have further announcements “in due course.”

In ruling HQ H303063, Customs and Border Protection (CBP) revoked ruling NY N295514 and discussed the classification of the Latex Rubber Boot Saver. In NY N295514, CBP had classified certain disposable latex shoe/boot covers under subheading 6401.92.9060 HTSUS, which provides for “waterproof footwear with outer soles and uppers of rubber or plastics, the uppers of which are neither fixed to the sole nor assembled by stitching, riveting, nailing, screwing, plugging or similar processes: other footwear: covering the ankle but not covering the knee: other: other: other.” Tingley Rubber Corporation filed a request for modification of NY N295514. HQ H303063 discussed whether the Latex Rubber Boot Saver should be classified under subheading 3926.90.9990, 6401.99.3000, or 6401.92.9060, HTSUS.

CBP noted the following:

Chapter 39 Note 2 provides, in pertinent part:

“2. This chapter does not cover:

(q) Articles of section XII (for example, footwear, headgear, umbrellas, sun umbrellas, walking-sticks, whips, riding-crops or parts thereof);”

Chapter 64, Note 1 provides, in pertinent part:

“1. This chapter does not cover:

(a) Disposable foot or shoe coverings of flimsy material (for example, paper, sheeting of plastics) without applied soles. These products are classified according to their constituent material;”

The Explanatory Notes (EN) to Chapter 64 provide:

“(A) […] The Chapter includes:

(10) Disposable footwear, with applied soles, generally designed to be used only once.”

CBP mentioned that it has consistently determined that disposable latex shoe covers, similar to the Boot Savers, are not flimsy pursuant to Chapter 64, Note 1(a), HTSUS, despite being intended for a one-time limited use. See NY M86014 (Sept. 8, 2006); NY L81039 (Dec. 13, 2004); and, NY E81872 (June 8, 1999). Moreover, the Oxford English Dictionary defines “flimsy” as “insubstantial and easily damaged.” See https://en.oxforddictionaries.com/definition/flimsy (accessed May 15, 2019). From inspecting the samples provided, CBP determined that the Boot Saver’s latex rubber material is strong and stretchy, and does not tear or rip when pushing a finger through it with little effort. Accordingly, CBP found the Boot Saver’s latex rubber material is not flimsy.

Chapter 64 includes disposable footwear, generally designed to be used only once, if it has an applied sole. Whether footwear has an applied sole pursuant to Note 1(a) to Chapter 64 depends on whether a “line of demarcation” between the outer sole and the upper can be identified. The Boot Savers, while made from a single material, have two additional, distinguishable, applied layers on the bottoms: a second coating of latex and a texturized outer sole. Due to the distinguishable outer soles and line of demarcation, CBP determined that the Boot Savers have applied soles. Therefore, CBP believed that the Boot Savers are classifiable as footwear in Chapter 64, HTSUS, pursuant to Note 1(a), because they are not flimsy and have applied soles.

Whether the Boot Saver is classified under subheading 6401.92.9060 or 6401.99.30 depends on whether it covers the ankle. 6401.99.30, HTSUS, covers waterproof footwear with uppers and soles of rubber/plastic which do not cover the ankle. Based on observations of the National Import Specialist and CBP’s examination of the samples, the Boot Savers do not cover the ankle. Therefore, CBP determined that the Latex Rubber Boot Saver is classified under subheading 6401.99.30, HTSUS, which provides for “Waterproof footwear with outer soles and uppers of rubber or plastics, the uppers of which are neither fixed to the sole nor assembled by stitching, riveting, nailing, screwing, plugging or similar processes: Other footwear: Other: Other: Designed to be worn over, or in lieu of, other footwear as a protection against water, oil, grease or chemicals or cold or inclement weather: Designed for use without closures.” The duty rate is 25% ad valorem.

On August 28, 2019 the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) announced the launch of a Global Investigations Division (GID), which will be led by Matthew Stiglitz, a former Principal Deputy Chief in the Department of Justice’s (DOJ’s) Criminal Division. The GID replaces and expands on FinCEN’s Office of Special Measures (OSM), which was a part of FinCEN’s Enforcement Division. On September 3, 2019, FinCEN also announced that AnnaLou Tirol would depart her role as the Acting Chief of the DOJ’s Public Integrity Section to serve as the head of FinCEN’s Liaison Division.

The new GID will oversee FinCEN’s use of Section 311 of the USA PATRIOT Act and a variety of unique enforcement information collection authorities available to FinCEN, including Geographic Targeting Orders (GTOs) and Foreign Financial Agency (FFA) regulations. FinCEN’s use of these authorities has expanded substantially over the last several years, and GID will continue to use them to investigate and take actions against targets “that have a nexus to the proliferation of weapons of mass destruction, rogue state actors, transnational organized crime, international narcotics trafficking, and terrorism.” GID will also look to increase cooperation and coordination with foreign counterparts. This signals a continued expansion of FinCEN’s role with respect to foreign national security threats.

FinCEN’s Liaison Division administers the Bank Secrecy Act Advisory Group (BSAAG), a group of representatives across different categories of financial institutions regulated under the Bank Secrecy Act (BSA), and also organizes information-sharing partnerships between law enforcement and regulated industry, as well with foreign governments. These functions too have expanded in recent years, leading FinCEN in December 2017 to launch a new “FinCEN Exchange” program to institutionalize more frequent and reciprocal sharing between law enforcement and financial institutions, making use in particular of FinCEN’s authority under Section 314(a) of the USA PATRIOT Act to request information from financial institutions regarding accounts and transactions with persons suspected of money laundering or terrorist activity. FinCEN also has said that its sharing with foreign governments has including sharing “in crisis situations,” which again may point to an increased role for the agency in national security matters.

Practical Considerations

FinCEN’s creation of the GID suggests potential increased use of Section 311, GTOs, FFAs, and other information gathering authorities. BSA rules require U.S. financial institutions to engage in enhanced due diligence to ensure that their foreign correspondent accounts are not used to process transactions for prohibited foreign financial institutions designated under Section 311 authorities, including through “nested” correspondent accounts. U.S. financial institutions should be alert to accounts where the risk of nested correspondents for designated targets is elevated. GTOs and FFA regulations may alert financial institutions to areas of potential money laundering or other risk which should be investigated similar to potential risks identified by other FinCEN information requests, such as those under Section 314(a) of the USA PATRIOT Act. That is especially true in cases like the real estate GTOs, where FinCEN has encouraged third parties to file SARs on transactions that also may involve U.S. financial institutions, and where any such SARs might cause FinCEN or other regulators to conclude that any financial institutions involved in the transactions also were required to file.

Regulated financial institutions may wish to consider the option of participating in FinCEN Exchange and related efforts, which may provide information on money laundering or terrorist financing risks and better suspicious activity reporting, or applying for membership in BSAAG, which affords a useful window into FinCEN’s enforcement priorities and the agency’s approach to its authorities.

In ruling NY N305275, Customs and Border Protection (CBP) determined the classification of the “Suncycle,” a pedal driven motorized personal transport vehicle equipped with a rear hitch that can tow items such as kayaks, small boats and the like. The single occupant vehicle is equipped with four wheels with either a 250 or 350 watt electric motor which is powered by solar energy. The vehicle is capable, using electric propulsion only, of travelling at a maximum of 16 mph. The Suncycle will be imported assembled.

CBP determined that the applicable subheading for the Suncycle with the 250 watt electric motor is 8711.60.0050, HTSUS, which provides for “Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side cars; side-cars: With electric motor for propulsion: Of an output not exceeding 250 W”. The rate of duty will be Free.

The applicable subheading for the Suncycle with the 350 watt electric motor is 8711.60.0090, HTSUS, which provides for “Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side cars; side-cars: With electric motor for propulsion: Other”. The rate of duty will be Free.

Products of China classified under subheading 8711.60.0050 and/or 8711.60.0090, HTSUS, unless specifically excluded, are subject to the List 2 25 percent ad valorem rate of duty. At the time of importation, 9903.88.02 must be reported, in addition to subheading 8711.60.0050 and/or 8711.60.0090, HTSUS.

According to a Federal Register Notice published on September 3, 2019, the U.S. Trade Representative (USTR) proposes to increase additional duties from 25 percent to 30 percent on the products from China currently subject to Section 301 tariff actions first taken in June, August, and September 2018, with an aggregate annual trade value of approximately $250 billion (Lists 1-3).

The USTR invites public comment on the proposed modification. There will be no hearing on this proposal. The important dates in the comment process are:

September 20, 2019: To be assured of consideration, submit written comments by September 20, 2019.

October 1, 2019: The proposed modification would be effective on October 1, 2019.

Parties can submit public comments and the public version of comments containing business confidential information (BCI) through the Federal eRulemaking Portal: http:// www.regulations.gov. The docket number is USTR–2019–0015.

A statement on the Office of the U.S. Trade Representative’s (USTR) website announced the Trump administration will add 5% to all Section 301 tariffs. List 4 duties on goods worth $300 billion will now be 15%. These tariffs are scheduled to be implemented on September 1st and December 15th.

On October 1st, the $250 million of Chinese imports currently at a 25% tariff rate will increase to 30%, following a notice and comment period. These are the goods on U.S. Lists 1-3.

Both moves are in response to Chinese retaliation to the latest (List 4) U.S. tariffs.