In ruling N312096 (June 22, 2020) CBP discussed a video camera from China. The EYENIMAL Pet Videocam is a small battery-operated camera that is designed to be attached to a pet’s collar.  The subject camera can record videos onto its internal memory. It is waterproof and meant for cats and small dogs. To charge or view the video content the camera is connected to a computer via a USB cable.  The camera cannot capture and record still images.

CBP determined that the applicable subheading for the subject Pet Videocam is 8525.80.5050, HTSUS, which provides for Transmission apparatus for radio-broadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus;…: Television cameras, digital cameras and video camera recorders: Other: Other.  The rate of duty will be free.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 8525.80.5050, HTSUS, unless specifically excluded, are subject to an additional 25 percent ad valorem rate of duty.  At the time of importation, the Chapter 99 subheading, 9903.88.03, in addition to subheading 8525.80.5050, HTSUS, must be reported.

Only four months after the the United Kingdom’s Office of Financial Sanctions Implementation (OFSI) issued a £20.47 million penalty against Standard Chartered Bank (SCB) for alleged violations of the U.K.’s Ukraine- and Russia-related sanctions (see our alert here), another bank is in the news for regulatory breaches. This time it is the London arm of Commerzbank AG (Commerzbank), which was hit by the United Kingdom’s Financial Conduct Authority (FCA) on 17 June with a fine of £37.8 million ($47.4 million) for failures in its anti-money laundering controls.

The FCA is the UK’s conduct regulator for financial services firms. Financial institutions operating in the UK are required to take steps to minimise their risk of being used to facilitate money laundering or terrorist financing. These include taking reasonable care to establish and maintain an effective, risk-based anti-money laundering (AML) control framework, and to comply with applicable Money Laundering regulations.

Commerzbank is a large international, commercial bank headquartered in Frankfurt, Germany, which operates in the UK through its branch, Commerzbank London. Commerzbank London acted as a hub for sales, trading and the due diligence process for a significant number of the bank’s global customers, and was required to have in place AML policies and procedures, comprehensive and proportionate to these activities, to enable it to identify, assess, monitor and manage money laundering risk. During the period from October 2012 to September 2017, the FCA identified a number of alleged shortcomings in Commerzbank London’s financial crime controls. These included alleged failures to:

  • Conduct timely periodic due diligence on its clients, which resulted in a significant number of existing clients not being subject to timely know-your-client (KYC) checks. By 1 March 2017, 1,772 clients were overdue for updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process, which was not adequately controlled or overseen and which became “out of control” by the end of 2016;
  • Address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients. For example, in 2015 Commerzbank London identified that 40 high-risk countries were missing from, and 1,110 high-risk clients had not been added to, the bank’s transaction monitoring tool; and,
  • Have adequate policies and procedures in place when undertaking customer due diligence (CDD) on clients.

The FCA therefore found Commerzbank London to have breached Principle 3 of its Principles for Businesses, which requires firms to have adequate risk management systems in place. The FCA stated that these failings created “a significant risk that financial and other crime might be undetected.”

The FCA found that the failings were particularly serious because they persisted following visits by the FCA to Commerzbank London in 2012, 2015 and 2017, in which the agency specifically pointed out these weaknesses. Further, they occurred against a backdrop of heightened awareness within Commerzbank of weaknesses in its global financial crime controls following action taken against the bank by US regulators in 2015.

Commerzbank London benefitted from a 30% discount on the original penalty of £54,007,800 because it agreed to resolve the matter at an early stage. It also undertook a significant remediation exercise to address the shortcomings in its AML control framework and increased the number of employees in the Financial Crime Team in Compliance from what had been just three full-time employees in London to 42.

This penalty is the second-largest to be imposed by the FCA following the penalty it imposed on Standard Chartered Bank last year of £102 million over breaches of AML regulations.

Practical Considerations

The FCA notice provides useful reminders for financial institutions about what they are required to do in order to manage their AML risks. These include:

  1. Ensuring that they have appropriate, risk-based procedures for applying CDD measures when establishing a business relationship or carrying out a transaction for a customer;
  2. Applying CDD at other appropriate times to existing customers on a risk basis;
  3. Applying scrutiny to transactions undertaken throughout the course of their relationship with a customer;
  4. Keeping documents, data or information obtained for the purposes of applying CDD measures up-to-date;
  5. Applying, on a risk basis, enhanced customer due diligence measures (EDD) and enhanced ongoing monitoring in any situation which by its nature presents a higher risk of money laundering or terrorist financing; and
  6. Establishing and maintaining appropriate and risk-based policies and procedures relating to the above.

It will also be important for financial institutions to ensure that, if they are given warnings by the regulator about weaknesses in their AML control frameworks, they take immediate remediative action. This may include pausing new customer onboarding until such time as appropriate CDD checks can be completed; ensuring that customers’ CDD information is updated on a periodic basis according to each customer’s risk profile, and increasing the headcount of financial crime control staff and/or engaging third-party vendors to ensure that KYC and other customer diligence can be carried out timely.

Based on recent enforcement actions, regulators in the UK are beginning to police and enforce financial crime regulations more stringently and successfully. This is in line with the recent, more aggressive approach to AML enforcement taken by other EU regulators in recent years such as those in Denmark and Sweden. With the departure of the UK from the EU and following the end of the transition period on 31 December 2020, how the UK proceeds in relation to implementation of any further EU AML legislation will depend on what, if any, withdrawal agreement applies. If there is “no deal”, the UK will have to decide whether to remain aligned with the EU or not. Whatever the position on new legislation, it seems doubtful that the UK will weaken its enforcement approach.

On June 17, 2020, Team Telecom, the multiagency body that reviews certain Federal Communications Commission (FCC) licensing applications for national security and law enforcement concerns, recommended that the FCC deny the portion of the Pacific Light Cable Network (PLCN) submarine cable system application that would have established a direct connection between the U.S. and Hong Kong, citing national security concerns.  Team Telecom recommended that the FCC approve the portions of the application in so far as the undersea cable connects the U.S., Taiwan, and the Philippines, which are separately owned and controlled by subsidiaries of Google LLC and Facebook, Inc. and do not involve People’s Republic of China (PRC)-based ownership.  The recommendation that the FCC approve those portions of the application is subject to final mitigation agreements negotiated with the parties before the FCC issues an order.

In April, Team Telecom granted a six-month special temporary authority (STA) for the operation of the portion of the cable system that connected the U.S. to Taiwan, subject to terms set forth in a provisional National Security Agreement (NSA) between Google and the agencies that comprise Team Telecom, the U.S. Departments of Justice, Defense, and Homeland Security.  Among other requirements, the terms of the provisional NSA included notice obligations, access and security guarantees, and auditing and reporting duties, as well as a commitment to “pursue diversification of interconnection points in Asia.”

According to the DOJ, which chairs Team Telecom, the PLCN application raises several national security concerns, based, in part, on corporate ownership and whether information carried by the cable would be vulnerable to collection by the PRC at the Hong Kong landing station.  Team Telecom cited concerns surrounding the relationship between an investor in PLCN, Pacific Light Data Co. Ltd., a Hong Kong company and subsidiary of Dr. Peng Telecom & Media Group Co. Ltd., and PRC intelligence and security services.  Dr. Peng is the fourth largest provider of telecommunication services in China.  The Executive Branch agencies also expressed concern with the track record of Dr. Peng’s compliance with U.S. laws and regulations “stemming from separate acquisitions involving U.S. telecommunications assets” and Pacific Light Data’s connections to the Chinese state-owned telecom China Unicom, the authorizations for which the FCC is currently considering terminating.

Team Telecom’s concerns mirror many of those that formed the basis for its 2018 recommendation to deny China Mobile’s international 214 application, a license that allows for international telecommunications operations that would have enabled the company to operate in the United States, and its recent April 2020 recommendation that the FCC revoke existing authorizations for China Telecom.  Both China Mobile and China Telecom are Chinese state-owned companies.  This recommendation – like those before it – revolves around concerns that the authorizations put at risk “the sensitive data of millions of U.S. persons,” in this case through a cable system vulnerable to exploitation by the PRC.  Team Telecom expressed concerns that, if approved in full, the cable system would transit through Hong Kong before continuing on to other destinations in the Asia Pacific region, exposing large amounts of internet, data, and telecommunications traffic containing U.S. persons information to collection by the Chinese.  Recent actions by the PRC regarding Hong Kong’s autonomy have exacerbated those concerns.

Team Telecom, formally the Committee on the Assessment of Foreign Participation in the United States Telecommunications Services Sector, was recently the subject of an April 4, 2020 Executive Order that established more robust processes and procedures for the national security review body.

Takeaways for Industry

The recommendation is the latest in a series of actions that signal that Team Telecom is taking a tough stance on China projects and will oppose those transactions that involve PRC-based ownership or that present concerns regarding PRC access to sensitive data.  Currently, the existing authorizations of four Chinese state-owned companies lie in wait for an ultimate determination by the FCC as to whether they can continue to operate in the United States.  While the FCC is the ultimate arbiter of whether a company receives a license to operate, it has deferred to Team Telecom’s recommendations in the past, and is likely to do so again here.

In their recommendation, the Executive Branch agencies also noted that allowing a direct cable connection with Hong Kong would “advance the PRC government’s goal that Hong Kong be the dominant hub in the Asia Pacific region for global information and communications technology and services infrastructure.”  Team Telecom’s reluctance to approve a pathway that would almost certainly provide the PRC with such a competitive advantage is consistent with what seems to be a broader U.S. strategy to reduce the opportunities for China to wrest control from the United States and its allies over certain supply chains and reduce the PRC’s access to U.S. critical infrastructure.

DOJ stated that pending before Team Telecom are several other applications for undersea cable landing licenses that would similarly allow for a direct connection between the United States and Hong Kong.  Given the concerns surrounding a direct connection to Hong Kong identified in this recommendation, those applications – along with the large amounts of money invested and cables already installed – could ultimately meet the same fate as that of PLCN. Accordingly, the companies and investors involved in those transactions should prepare for increased scrutiny from Team Telecom and extensive and time-consuming engagement with those agencies, including responding to multiple rounds of Team Telecom’s “triage questions.”  Companies should also be prepared to discuss and consider possible mitigation strategies, which could include Team Telecom-approved third party monitors, onsite audits by U.S. government personnel, additional security protocols, and frequent reporting obligations.

As has been the case with 214 authorizations, the FCC and Team Telecom might also look anew at existing authorizations for undersea cable systems to reassess national security considerations such as those identified in this recommendation, particularly those that involve PRC-ownership or that may ultimately connect the United States to mainland China.  Companies operating under those licenses that were previously reviewed by Team Telecom might also prepare for renewed interest by the FCC and Team Telecom.  To the extent that licenses are conditioned upon mitigation agreements, companies might review their compliance with those agreements, and prepare for reinvigorated engagement with Team Telecom and the FCC.

In ruling NY N311797 (June 9, 2020) CBP discussed the classification of a zip line kit from China. The products under consideration are five models of zip line kits which are designed to enable children ages 8 years and older to ride a few feet off the ground as they are propelled by gravity to travel from the top to the bottom of the inclined cable while holding on to the freely moving pulley.  Each zip line kit consists of a seat with a rope, a heavy duty trolley with sealed ball bearing pulleys, a 5.25 steel spring braking system, and all the necessary hardware for outdoor installation.  The variations between the kits are the length of the steel cables and the maximum weight capacity allowed. 

Explanatory Note 95.06 (B) (12) states that this heading includes equipment of a kind used in children’s playgrounds (e.g. swings, slides, see-saws and giant strides).

CBP believes that the subject play equipment (namely zip line kits) are of a kind principally used in playgrounds.  It has been CBP’s position that the construction of similar items of play equipment to the ones described above are distinguishable from toys of heading 9503, HTSUS.

CBP determined the applicable subheading for the five models of zip line is 9506.99.6080, HTSUS, which provides for “Articles and equipment for general physical exercise, gymnastics, athletics, other sports…or outdoor games…; swimming pools and wading pools; parts and accessories thereof: Other: Other: Other…Other.” The rate of duty will be 4% ad valorem.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 9506.99.6080, HTSUS, unless specifically excluded, are subject to an additional 7.5 percent  rate of duty.  At the time of importation, the Chapter 99 subheading, 9903.88.15, in addition to subheading 9506.99.6080, HTSUS, must be reported.

Crowell & Moring Monthly Webinar Series

Tuesday, June 23, 2020

12:00 – 1:30 pm EDT

In the past several years, the U.S. government has issued a series of sweeping Executive Orders, policy announcements, and other regulatory and enforcement actions as part of a multi-pronged approach to protect U.S. national interests against the perceived challenges a rising China presents.  To help industry contextualize these actions within the broader framework of the U.S. approach to China, and to understand the emerging trends, our C&M International trade professionals and C&M International Trade and Government Contracts attorneys will provide commentary and insight across a series of topics, including:

  • Recent changes to national security reviews by the Committee on Foreign Investment in the U.S. (CFIUS) targeting capital from China;
  • The new EAR foreign-direct product rule aimed at Huawei and its affiliates, and the Military End user / End Use Rule;
  • Entity List additions;
  • Tariffs and Trade Remedies developments;
  • Establishing the new Team Telecom;
  • Securing U.S. Bulk Power Systems;
  • FAR Supply Chain restrictions and implementation plans;
  • The U.S. Department of State’s announcement on the revocation of Hong Kong’s trade status; and
  • Criminal prosecution of sanctions violations and trade secret theft.

Speakers:  Andrew Blasi, Caroline Brown, Adelicia Cliffe, Stephanie Crawford, Jana-del Cerro, Chandler Leonard, David Stepp, Erik Woodhouse, and Gail Zirkelbach

Questions?

Please contact Denise Giardina for questions about this webinar series.

Transfer pricing is a major enforcement priority of China Customs in 2020. In April 2020, China Customs launched a national enforcement action to investigate and audit import transactions between related companies. More than 1000 multinational companies have received notices from China Customs requesting information on their transfer pricing policies and activities.

  1. Who will be impacted?

China Customs has initially targeted certain industries including companies in the automotive, auto parts, electronics, mechanical, and medical devices industries. China Customs may expand the scope of this enforcement action if it finds similar transfer pricing issues in other industries.

In 2016, China Customs initiated a similar national enforcement action on dutiable royalty payments by companies operating in China to overseas licensors.1 China Customs started with audits and investigations of companies in the automotive and auto parts industries, and then expanded to electronics, pharmaceutical, machinery, luxury products, and many other industries. This enforcement action lasted for more than two years. Our experience has been that companies that were prepared and organized in their responses to government inquiries associated with the enforcement action were generally able to mitigate damages and penalties.

China Customs initiated a series of reforms beginning in 2018, which included establishing three centralized Tax Collection Centers (TCCs) in Shanghai, Beijing and Guangzhou to scrutinize all import and export transactions across China. The establishment of the TCCs gives China Customs access to broader price data sources to be used to identify high-risk entries for further investigation and verification. Companies that declare a price lower than the average price for the goods across the country, based on information collected by the TCCs, are more likely to be selected by China Customs as targets for audit and investigation.

  1. Importers have the burden to disprove the influence of the relationship between importers and exporters on the import price

Consistent with the WTO Customs Valuation Agreement, China enacted customs valuation regulations that regard “transaction value” as the primary method of establishing the customs value of imported goods. An important caveat, however, is that the transaction value method applies only if the buyer and seller are not related, or if the buyer and seller are related, the relationship did not influence the import price. This is a key issue for multinational companies that send goods to their related affiliates or subsidiaries operating in China.

A related party import does not, by itself, make the transfer price unacceptable. China Customs, however, may conduct a further inquiry with the importer about a declared import price if it has reason to doubt that “the [transfer] price may have been influenced by the relationship between the importer and exporter.” (Article 44 of the Measures of the Customs of People’s Republic of China on Determination of Dutiable Value for Imported and Exported Goods). According to the PRC Customs Audit Regulations, China Customs is entitled to carry out an audit on the acceptability of declared import prices within three years from the date of release by Customs of the goods. (Article 2 of the PRC Customs Audit Regulations).

If China Customs challenges an importer’s declared transfer price, the importer has the burden to prove that such price has not been influenced by the relationship between the importer and its related multinational exporter and therefore constitutes an acceptable basis for China Customs valuation purposes. (Article 17 and Article 18 of the Measures of the Customs of People’s Republic of China on Determination of Dutiable Value for Imported and Exported Goods). Generally, the importer may disprove the influence of the relationship in the following two ways:

  1. The transfer price closely approximates one of the “test values” including the transaction value of identical or similar goods, the deductive value and computed value for identical or similar goods. The test provides importers an opportunity to demonstrate that the transfer price closely approximates a value that has been previously accepted by China Customs and is therefore acceptable for China Customs valuation purposes; or
  2. The transfer price satisfies the “circumstances of the sale test.” No further guidance is provided on the application of the test under China Customs’ valuation regulations. Based on our experience, the test is satisfied if (1) the price is settled in a manner consistent with the normal pricing practices of the industry in question; (2) the price is settled in a manner consistent with the way the exporter settles prices for sales to unrelated buyers; or, (3) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the exporter’s overall profit realized over a representative period of time in sales of goods of the same class or kind.

On its face, the circumstance of sales test in China is consistent with the standards set forth in the World Trade Organization Valuation Code and the U.S. valuation laws and regulations. However, Chinese importers should seek expert guidance if their transfer prices are questioned because China Customs’ actual practice in analyzing the arm’s length nature of transactions may differ from U.S. and EU customs authorities.

  1. Importers that fail to disprove the influence of the relationship between related parties may be subject to additional duty liabilities and/or penalties

If an importer fails to prove that a transfer price between related parties has not been influenced by the relationship between the importer and exporter, China Customs may reject the transfer price declared by the importer and re-appraise the customs value of the goods with another alternative method. This generally results in a higher appraised value and assessment of additional import taxes. More importantly, a change in valuation is not just a one-time event for previous transactions; the new valuation method determined by China Customs will also be used for future imports.

Before 2016, the primary China transfer pricing Customs risk was reassessment of the subject goods to a higher price. China Customs rarely assessed any penalties on an importer unless there was evidence of intentional misconduct. In 2016, however, China Customs amended its Import and Export Declaration Guidelines by requiring importers to fill in the corresponding columns in the declaration form with a simple “Yes” or “No” answer to confirm the existence of affiliated relationship between the importer and exporter and the influence of such relationship on the import price. If China Customs finds the declaration to be inconsistent with facts discovered in an audit or investigation, China Customs may impose administrative or criminal penalties on the importer.

  1. Now is the time to prepare for potential transfer pricing customs audits or investigations

In the light of the increased China Customs transfer pricing enforcement risk, multinational companies who frequently import goods and components into China from their affiliated companies operating outside of China should review their intercompany import prices and prepare for a China Customs audit or investigation.

Below are defensive strategies that multinationals should consider in anticipation of a China Customs audit or investigation.

First, prepare arguments based on China Customs’ valuation rules. China Customs valuation rules are separate and distinct from the transfer pricing rules applied for income tax purposes. The fact that a transfer price is acceptable to the income tax authorities (China State Administration of Taxation) does not necessarily mean it is also acceptable to China Customs2. In practice, many multinationals rely on their transfer pricing studies and/or contemporaneous documents prepared for income tax purposes to justify their import price to the customs authorities. Although China Customs regularly requests transfer pricing studies and contemporaneous documents as part of its investigations and audits, such studies can be insufficient or even damaging to the importer. For example, information in transfer pricing studies3 can be used against the multinational companies by China Customs. Some companies use such studies to set their profit margin in the upper quantile range of prices used by comparable companies to establish a benchmark of “arm’s-length” pricing for products sold between related companies. From a China Customs perspective, however, this could be interpreted as prima facie evidence that the price has been influenced by the relationship between the importer and exporter. As such, it is important for multinationals to address the inherent tension between China Customs and income tax authorities related to transfer pricing and make sure your arguments are based China’s customs valuation rules.

Second, in China, it is important to understand common practices and work effectively with China Customs. When China Customs considers using an alternative valuation method to establish the dutiable value, it should properly consult with the importer. Having the ability to understand and negotiate with China Customs about their proposed approaches should be based on recent trends and China Customs practices. Of course, such consultations should always be conducted in a manner consistent with corporate compliance policies.

Third, multinational companies should carefully assess and manage the risks of escalation of the customs audit or investigation. The scope of a China Customs audit or investigation is not static and restricted by administrative law. China Customs may expand the audit or investigation to other products or entities of your company at any time in the course of the ongoing process. China Customs may also transfer the case to the China Anti-Smuggling Bureau for further administrative or criminal investigation if any noncompliance or violations are identified. Companies should carefully manage the risks of escalation and consider voluntary self-disclosures where necessary.

It is important to note that the decision to make a voluntary disclosure to Chinese authorities is complex and is significantly different from considerations involved in making a voluntary disclosure to U.S. authorities.

Fourth, multinational companies should be careful when making transfer pricing adjustments as a result of the COVID-19 pandemic and/or U.S.-China trade war. Multinational companies may find themselves making new and larger-than-usual transfer pricing adjustments to reflect the impact of the COVID-19 pandemic and/or the increased tariff costs as a result of the U.S.-China trade war. Typically, these adjustments are made to bring transfer prices within arm’s length ranges for tax purposes. We recommend that companies review these adjustments to make sure they are also consistent with China Customs’ valuation regulations.

Please contact us with any questions.

The Bureau of Industry and Security (BIS) published a final rule in the Federal Register effective June 17, 2020, amending the Export Administration Regulations (EAR) to implement the decisions made at the February 2020 Australia Group Intersessional Implementation Meeting, and those subsequently  adopted pursuant to the group’s procedures.

The Australia Group is a multilateral forum consisting of 42 participating countries and the European Union that maintain export controls on a list of chemicals, biological agents, and related equipment and technology that could be used in a chemical or biological weapons program.

Specifically, this rule amends the following Export Control Classification Numbers (ECCNs) to reflect the AG changes:

  • ECCN 1C350 is amended by adding 24 precursor chemicals, as well as mixtures in which at least one of these chemicals constitutes 30 percent or more of the weight of the mixture, to ECCN 1C350.d.
  • ECCN 1C351 is amended to add Middle East respiratory syndrome-related coronavirus (MERS related coronavirus).
  • ECCN 2B352 is amended by adding a Technical Note to indicate that cultivation chamber holding devices controlled in 2B352.b.2.b include single-use cultivation chambers with rigid walls.

The items addressed by this final rule were not previously listed on the CCL or controlled multilaterally. BIS’ notice states that it identified the items now controlled pursuant to this change as emerging technologies that are essential to U.S. national security and for which effective controls can be implemented, “consistent with the inter agency process described in Section 1758 of the Export Control Reform Act of 2018 (ECRA).”  BIS did not, however, provide a notice and comment period prior to issuing this final rule, as required under the Section 1758 ECRA process for identifying emerging technologies for control.  As a result, it remains unclear whether the items now controlled as a result of this final rule constitute “emerging and foundational technologies controlled under Section 1758” for purposes of the Committee on Foreign Investment (CFIUS) definition of  “critical technologies,” under 31 C.F.R. § 800.215(f).  In any event, the newly controlled technologies now meet the second prong of that definition because they are controlled on the Commerce Control List pursuant to a multilateral regime (the Australia Group).

In ruling NY N311951 (June 9, 2020), Customs and Border Protection (CBP) discussed the classification of the Hy-Genie No Touch Hand Tool. The tool is flat and made of brass, comprised of 60% copper and 40% zinc.  It measures 3” long, 1” wide, and .1875” thick.  It features a round hole on one end to provide easy access for an index finger, and incorporates a keychain hole that can be used to attach to a keyring.  The tool is designed to help the user avoid direct contact with contaminated surfaces or objects. Its various uses include pressing buttons, opening doors, signing your name on touch screens and pulling levers.

CBP determined the applicable subheading for the Hy-Genie No Touch Hand Tool is 8205.59.6000, HTSUS, which provides for “Handtools (including glass cutters) not elsewhere specified or included; blow torches and similar self-contained torches; vises, clamps and the like, other than accessories for and parts of machine tools; anvils; portable forges; hand- or pedal-operated grinding wheels with frameworks; base metal parts thereof: other handtools (including glass cutters) and parts thereof: other: other: of copper.  The rate of duty will be free.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 8205.59.6000, HTSUS, unless specifically excluded, are subject to an additional 25% ad valorem rate of duty.  At the time of importation, 9903.88.03, in addition to subheading 8205.59.6000, HTSUS, must be reported.

On May 1, 2020, the Department of Defense Trade Controls (DDTC) issued a Federal Register notice informing companies of the temporary suspension, modification, and exception to several International Traffic in Arms Regulations (ITAR) provisions because of the COVID-19 pandemic.

DDTC is now requesting comments from the public regarding the temporary changes announced May 1st, giving companies the opportunity to weigh-in on DDTC policies. The agency is asking commenters to provide feedback on the following topics:

  1. The efficacy of each of the temporary suspensions, modifications, and exceptions to the ITAR on the operating environments of the regulated community members during the COVID–19 emergency.
  2. Expiration dates of suspensions, modifications, and exceptions to the ITAR—for each expiration date, is the period of efficacy sufficient, or should DDTC consider an extension of the expiration date, and why?
  3. Are there additional temporary suspensions, modifications, or exceptions to the ITAR that DDTC should consider in response to specific difficulties in operating conditions under the regulations that have arisen for the regulated community as a direct result of the crisis, and why?

Comments are due by June 25, 2020.

As a refresher, DDTC implemented the following changes on May 1:

  1. A two-month extension from the original date of expiration to renewing registration as a manufacturer, exporter, and/or broker and to pay the required fees. The extension covered companies with a registration date of February 29, March 31, April 30, May 31, or June 30, 2020.
  2. The extension by six months of any license or agreement that expires between March 13, 2020 and May 31, 2020—for six (6) months from the original date of expiration so long as there is no change to the scope or value of the authorization and no Name/Address changes are required.
  3. The requirement that a regular employee work at the company’s facilities, allowing the individual to work at a remote work location, so long as the individual is not located in Russia or a country listed in ITAR § 126.1. This change terminates on July 31, 2020, unless otherwise extended in writing.
  4. Authorization for regular employees of licensed entities who are working remotely in a country not currently authorized by a technical assistance agreement, manufacturing license agreement, or exemption to send, receive, or access any technical data authorized for export, re-export, or retransfer to their employer via a technical assistance agreement, manufacturing license agreement, or exemption so long as the regular employee is not located in Russia or a country listed in ITAR § 126.1. This change ends on July 31, 2020, unless otherwise extended in writing.

On June 11, 2020, President Trump signed an Executive Order (EO) (as yet unnumbered) authorizing blocking sanctions and additional visa restrictions against personnel of the International Criminal Court (ICC). The White House took the action in response to the ICC authorizing an investigation into alleged crimes by U.S. personnel in connection with the war in Afghanistan. Although no individuals are immediately designated for sanctions under this authority, the EO represents a stark escalation in the fraught relationship between the United States and the ICC.

Background

Although the United States has cooperated with the ICC on a number of fronts, the relationship has been difficult from the beginning. President Clinton signed the Rome Statute – the treaty that established the ICC – in 2000, but he did not transmit it to the Senate for advice and consent. In 2002, President Bush announced the United States’ intention not to ratify the Rome Statute, and his administration went to great lengths to shield U.S. forces from ICC jurisdiction. Among other measures, the United States concluded dozens of bilateral agreements with other states, including Afghanistan, in which those states commit not to surrender U.S. personnel to the ICC. Although the relationship with the ICC was more cooperative during the Obama Administration, the United States has never become party to the Rome Statute.

The current tension dates back to 2017, when the ICC Prosecutor, Fatou Bensouda, sought authorization to investigate crimes committed in connection with the conflict in Afghanistan. The Rome Statute defines the court’s jurisdiction to include certain serious crimes committed in the territory of a State Party. Bensouda’s application made clear that she sought to investigate not only alleged crimes by the Taliban and associated armed groups, and by the Afghan National Security Forces, but also alleged crimes by U.S. armed forces and intelligence personnel in Afghanistan, and by U.S. intelligence personnel in detention centers in Poland, Romania, and Lithuania. Those states are all parties to the Rome Statute.

The U.S. government warned it would respond to any investigation of U.S. personnel. In 2018, then-National Security Advisor John Bolton threatened to impose sanctions on the ICC for any such investigation. And in 2019, Secretary of State Michael Pompeo announced a policy restricting visas to ICC personnel involved in investigating U.S. personnel. Later that year, the United States revoked Bensouda’s visa to enter the United States.

Although the Pre-Trial Chamber of the ICC denied Bensouda’s application, on March 5, 2020, the Appeals Chamber reversed that decision and authorized an investigation of alleged war crimes and crimes against humanity committed in Afghanistan and in the territory of other States Parties to the Rome Statute related to the conflict in Afghanistan.

Afghanistan has submitted a request that the ICC defer its investigation of crimes that fall within Afghanistan’s jurisdiction in favor of Afghanistan’s own domestic investigations. That request remains under consideration by the Prosecutor, and if necessary would be decided by the Pre-Trial Chamber, including possible review by the Appeals Chamber.

The Executive Order

The EO describes the “situation with respect to the International Criminal Court” as involving “illegitimate assertions of jurisdiction over personnel of the United States and certain of its allies,” and finds that the ICC’s investigation threatens to “subject current and former United States Government and allied officials to harassment, abuse, and possible arrest” and to “impede the critical national security and foreign policy work of United States Government and allied officials.” In response, the EO declares a national emergency with respect to “any attempt by the ICC to investigate, arrest, detain, or prosecute any United States personnel without the consent of the United States,” as well as with respect to such efforts directed at U.S. allies who have not consented to the ICC’s jurisdiction.

The EO authorizes the imposition of blocking sanctions on any foreign person determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General, “to have directly engaged in any effort by the ICC to investigate, arrest, detain, or prosecute any United States personnel without the consent of the United States” or any personnel of a U.S. ally without the consent of that country’s government. The term “United States personnel” is defined to include “any current or former members of the Armed Forces of the United States, any current or former elected or appointed official of the United States Government, and any other person currently or formerly employed by or working on behalf of the United States Government.”

The designation authority extends to any foreign persons determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of,” any such efforts by the ICC or any person designated under the EO, and to persons determined “to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked” pursuant to the EO. The EO also suspends entry into the U.S. of any person designated under the EO and their immediate family, as well as aliens determined to be employed by or acting as agents of the ICC.

Executive orders imposing new sanctions programs often are accompanied by an Annex identifying initial targets that are subject to the sanctions imposed by the order. This order does not do so, and so it remains to be seen when and if the U.S. government will use the authorities established by the EO.

Commentary

The United States’ relationship with the ICC has long been fraught, but this action represents a serious escalation. This appears to be the first time that the United States has authorized sanctions against an international organization.

In practical terms, the scope of the authority to designate persons who have “directly engaged in any effort by the ICC to investigate, arrest, detain, or prosecute any United States personnel without the consent of the United States” has the potential to reach well beyond ICC employees and agents, and potentially to include third parties that cooperate with such investigations. Furthermore, because the ICC authorized investigation into “other alleged crimes that have a nexus to the armed conflict in Afghanistan and are sufficiently linked to the situation in Afghanistan and were committed on the territory of other States Parties to the Rome Statute,” persons who “directly engage” in the ICC’s investigation not only in Afghanistan but also in other States Parties to the Rome Statute may face risk of designation, in particular in Poland, Romania, and Lithuania.

Because no one has yet been designated, the EO may be intended as a warning to deter the ICC and others who might cooperate in an investigation. Whether it has that effect remains to be seen. At the same time, this move by the United States could become another point of contention for the EU and its member states, which have been increasingly frustrated with U.S. sanctions policy, in particular the current administration’s unilateral withdrawal from the Joint Comprehensive Plan of Action with respect to Iran’s nuclear program.