The Office of the United States Trade Representative (“USTR”) announced on September 6, 2023 the further extension of 352 reinstated exclusions and 77 COVID-related exclusions from the Section 301 tariffs on imports from China. These exclusions, which cover a variety of products ranging from machinery components to medical equipment, constitute the only remaining active exclusions following the lapse of all other exclusions back in December 2020.  The remaining active exclusions were originally set to expire on September 30, 2023; however, the new deadline of December 31, 2023 will allow additional time for USTR to complete its statutorily mandated four-year review process.

As part of the four-year review process, USTR solicited public comments on the effectiveness of the Section 301 tariffs to combat unfair trade practices by China as well as how the actions have affected the United States economy, including U.S. workers and consumers. Interested parties submitted comments in an online portal, which included an option for commenting on 8-digit tariff codes.  The portal window closed in January 2023 with around 1,500 comments submitted on more than 115 HTS codes.

After over 4 years of Section 301 duties on imports from China, USTR may determine keeping tariffs in place on certain products may have adverse effects on the U.S. economy without placing pressure on China to change their trade practices. One major reason for eliminating tariffs on certain HTS codes is if it contains products that cannot be sourced from outside China and the burden of the tariff is entirely being passed on to U.S. businesses and consumers. Removing certain HTS codes from the Section 301 Tariffs could also help alleviate the administrative burden from maintaining the current exclusion process.

The timing of the extension suggests that USTR may terminate the current Section 301 exclusion regime and instead seek to remove particular tariff subheadings from the action as a replacement. Since USTR only extended the exclusions for 3-months, this appears to be the perfect amount of time to finish the four-year review which is expected to be completed in October or November of this year. If USTR had intention to keep the exclusions in place long-term then the extension most likely would have been for a longer duration.

Importers will need to closely monitor the news this autumn for the publication of USTR’s four-year review determination. HTS codes removed from the Section 301 tariffs could save importers millions of dollars, while an expiring exclusion without removing the tariff code from the action could significantly increase duties.

On August 28, 2023, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) proposed new rules to streamline and strengthen the Section 232 Exclusions Process for Steel and Aluminum imports. The proposed rules will build on the five existing interim final rules and respond to public comments received by BIS since February 2022. BIS is proposing these revisions almost a month after the U.S. Government Accountability Office (“GAO”) released a report calling for increased enforcement on Section 232 Exclusions. The rules seek to make four primary changes: 1) Modifies the existing certification language and introducing new certification requirements for exclusion requests relating to finding alternate suppliers from certain U.S. allies; 2) Requires similar certification language on the objection form to further ensure objectors can supply comparable quality and quantity steel or aluminum; 3) Proposes a more efficient General Approved Exclusions (“GAE”) process by changing the criteria; and 4) Introduces a “General Denied Exclusions” (“GDE”) process to limit further exclusions on products which have consistently been found to be manufactured in the United States. The public can submit comments on these regulations until October 12, 2023.

The new certification language in the proposed rules both increases the threshold for demonstrating reasonable efforts to source the product elsewhere and requires burden of proof for sourcing efforts. If the proposed changes are implemented, before filing an exclusion request, requesters would also need to certify that they first made reasonable efforts to source their product from the United States and then, if unsuccessful, that they made reasonable efforts to source their product from a country with which the United States has arrived at a satisfactory alternative agreement. The list of countries that meet that requirement includes Argentina, Australia, Brazil, Canada, the European Union, Japan, Mexico, South Korea, and the United Kingdom. Requestors will need to provide documentation demonstrating that an attempt was made to first procure from those partner countries. If the sourcing attempts evidence is not provided simultaneously with the request submission, then the request will be rejected.

These new requirements from BIS would significantly increase the burden on importers of steel and aluminum products from outside the list of approved countries. Reaching out to suppliers in the U.S. will no longer be sufficient and contacting supplies in foreign countries could be difficult without knowledge of those foreign markets. Even if an adequate supplier from another country is found, importers may still need to go through the exclusion process or risk running into issues with a quota. Furthermore, BIS has not yet clarified what documents will be required to prove sourcing attempts were made. At this moment, Crowell recommends keeping email records or notes from phone calls for any sourcing or validation efforts. Should a domestic producer object to a Section 232 exclusion, the best argument for importers is make is to have already tried sourcing from that entity.

In addition to new requirements for importers, BIS is proposing additional certification language on the objection form for domestic producers. Objectors would need to certify that they can supply comparable quality and quantity steel or aluminum and make it “immediately available” to requestors in line with the applicable standards (“immediately available” means within eight weeks). Along with the new certification, objectors would be required to simultaneously file evidence that they have commercially sold the product at issue within the last 12 months, or evidence that it has engaged in sales discussions with this requesting company or another company requesting the same product within the last 12 months. Domestic producers will need to closely review the product in the Section 232 exclusion request to ensure it is the same or substitutable with what they currently offer. Importers should be aware that submitting an exclusion request with too broad or generic of a product description could lead to a greater chance of objection.

In an attempt to reduce the quantity of exclusion requests received, BIS proposes changing the criteria that has generally been used for General Approved Exclusions (“GAE”). BIS currently focuses on whether an HTSUS code has received objections however this is problematic since this accounts for objections regardless of the merits of those objections. According to BIS, this “undermines the effectiveness of the Section 232 exclusions process, creates unnecessary burdens on BIS and industry, and reduces the fairness and efficiency of the process.” New GAEs will instead be decided upon an analysis of objections which most likely signifies that BIS will look closely at whether domestic actually produces products under certain HTSUS codes. In the Federal Register notice, BIS estimates that this change could result in up to a twenty percent reduction in the total number of exclusion requests submitted. Importers should monitor the list of GAEs to save time and money on submitting Section 232 exclusions.

Relatedly, the proposed rules also seek to establish a list of General Denied Exclusions” (“GDE”) to cutdown on the number of exclusions. BIS will use a similar analysis to the GAE to create a list of HTSUS codes where an existence of U.S. industry has been repeatedly proved. GDEs will generally be implemented if the HTSUS codes have very high rates of successful and substantiated objections. Exclusion requests filed with products of HTSUS codes on the GDE will automatically be rejected. If importers believe they have a product on the GDE that cannot be manufactured in the U.S. then the importer will want to submit comments to BIS to have the HTSUS removed from the GDE.

The proposed regulations serve two overall purposes: 1) to create additional burdens of proof on importers for sourcing efforts and manufacturers for production capacities; and 2) reduce the volume of exclusion request through the improvement of the GAE list and creation of a GDE list. Overall, these changes would make a more efficient and equitable Section 232 exclusion process, however the need to document sourcing attempts from third-countries could prove overly burdensome for importers. Comments can be submitted on docket number BIS–2023–0021 or RIN 0694–AJ27, through the Federal eRulemaking website: http://www.regulations.gov.

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On September 7, 2023, the U.S. Department of Commerce released the text of the Indo-Pacific Economic Framework for Prosperity (IPEF) Supply Chain Agreement three days before a U.S. delegation is set to travel to Bangkok, Thailand for the fifth negotiating round. In this round, IPEF partners will focus on Pillars I (Trade), III (Clean Economy), and IV (Fair Economy). The fifth negotiating round comes after previous negotiating rounds in Australia, Indonesia, Singapore, and South Korea, a special negotiating round in India, and a ministerial meeting in Michigan to announce the conclusion of negotiations on Pillar II (Supply Chains).

IPEF is not a traditional trade agreement. As it focuses on providing mechanisms for information sharing, its benefits will be realized as parties utilize them. Parties will have to collaborate with domestic industries to implement IPEF’s goals. In a press release by the U.S. Department of Commerce, U.S. Commerce Secretary Gina Raimondo commented that “[b]y working toward finalization of this monumental Agreement, the United States is taking an important step forward to fortify bonds with our partners throughout the Indo-Pacific. Working in lockstep, we will be prepared to best address our shared economic challenges together.”

In the text, the governments of Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand, the United States, and Viet Nam agree to advance collaboration to strengthen supply chains. This includes undertaking activities that “increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains, taking into account the different economic and geographic characteristics and capacity constraints of each Party as well as individual characteristics of different sectors and goods.”[1]

The text also makes clear that IPEF partners will collaborate to form an IPEF Supply Chain Council to oversee collaboration on supply chains, an IPEF Supply Chain Crisis Response Network to facilitate an emergency communication channel that could respond to, mitigate, and recover from supply chain disruptions, and an IPEF Labor Rights Advisory Board with government, workers, and employers to identify labor rights concerns and develop recommendations.

The IPEF Supply Chain Council will also focus on “key goods” and “critical sectors.” The text defines key goods as “raw, in-process, or manufactured materials, articles, or commodities…” and “critical sectors” as “sectors that produce goods and supply any related essential services critical to a Party’s national security, public health and safety, or prevention of significant or widespread economic disruptions….”

Additionally, the facility-specific labor rights provisions in the text echo the Rapid Response Labor Mechanism in the United States-Mexico-Canada Agreement (USMCA) in requiring parties to the IPEF to develop procedures for the receipt and consideration of “allegations of labor rights inconsistencies at subject facilities located in the territory of another Party.”[2] The procedures outlined in these provisions for handling the allegations also broadly parallel those under the USMCA. At this time, the IPEF Agreement has not entered into effect. In June 2023, Crowell & Moring International (CMI) and the Women in International Trade (WIIT) hosted IPEF’s Chief Negotiators in our DC offices. As negotiations move forward, CMI and Crowell & Moring LLP will continue to monitor IPEF and highlight major developments.

[1] IPEF Agreement Relating to Supply Chain Resilience, Article 2

[2] IPEF Agreement Relating to Supply Chain Resilience, Article 9

What You Need to Know

  • Key takeaway #1 As of October 12, 2023, companies active in the EU have to notify foreign financial contributions (FFCs) received from third countries to the Commission, when they engage in large M&A transactions or participate in high-value public procurements. Pending the Commission’s review of such notifications, a standstill obligation applies.
  • Key takeaway #2 While the focus of the Commission’s substantive review will be on those subsidies deemed most likely to distort the internal market, companies need to consider all of the (broadly defined) FFCs they have received to calculate whether they meet the notification thresholds.
  • Key takeaway #3 Companies active in the EU need to assess their notification risks and update their internal reporting and data management systems to continuously identify, track and categorize any FFCs received from third countries.

As from October 2023, companies receiving financial contributions from third countries will have to report these to the European Commission when engaging in M&A transactions or bidding for public contracts above certain thresholds. This alert guides you through the new notification obligations under the EU Foreign Subsidies Regulation (FSR): first, we situate these obligations within the overall set-up of the FSR; then we go into the detail of the notification obligations themselves; before concluding with practical advice on how to meet these new obligations.

I. Recap of the FSR

As we explained in previous alerts (available here and here), the FSR, which was adopted by the EU legislature in December 2022 and entered into force in January 2023, aims to address the potentially distortive effects of subsidies granted by non-EU countries to companies that are active within the EU. Whereas financial support granted to companies by EU Member States has long been subject to State aid controls, subsidies granted by third countries have so far mostly escaped regulatory scrutiny. To close this gap and create a level playing field for all companies active in the EU, the FSR adds three new tools to the regulatory arsenal of the Commission:

  1. a notification-based tool for large M&A transactions,
  2. a notification-based tool for large public procurements, and
  3. a general investigatory tool, empowering the Commission to conduct ex officio (own-initiative) investigations into any market situation involving potentially distortive third-country subsidies.

Since July 12, 2023, the Commission has had the power to conduct ex officio investigations. The notification obligations apply as of October 12, 2023.

The FSR defines a “foreign subsidy” as a financial contribution provided directly or indirectly by a third country (i.e., a non-EU country) which confers a benefit on a company engaging in an economic activity in the EU internal market and which is limited, in law or in fact, to one or more companies or industries. Notwithstanding terminological differences, this definition is similar to that of “aid” under EU State aid law.

Like the concept of “advantage” in State aid law, the concept of “financial contribution” is not limited to “subsidies” in the strict sense (direct grants), but encompasses various forms of government support, such as:

  1. the transfer of funds or liabilities (e.g., capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling);
  2. the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
  3. the provision of goods or services or the purchase of goods or services.

FFCs include not only financial contributions from central government and public authorities at all levels, but also financial contributions granted by any foreign public or even private entity whose actions can be attributed to the third country.

As discussed below, the notification thresholds are based on the notion of “FFC” rather than that of “foreign subsidy”, meaning that all FFCs count towards the thresholds, even those provided at normal market conditions (i.e., that do not confer a “selective advantage”). In this respect, the FSR’s approach differs from that under State aid rules, where only measures that confer a selective advantage can trigger a notification obligation.

Certain categories of foreign subsidies are deemed to be “most likely” to distort the internal market (Article 5 Subsidies). These include:

  1. a foreign subsidy granted to an ailing company;
  2. a foreign subsidy in the form of an unlimited guarantee for the debts or liabilities of the company;
  3. an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
  4. a foreign subsidy directly facilitating a M&A transaction; and
  5. a foreign subsidy enabling a company to submit an unduly advantageous tender for a public procurement contract.

As further discussed below, the Commission will primarily focus on these Article 5 Subsidies when looking at notified M&A transactions and tenders.

Where the Commission finds that a company has benefited from foreign subsidies, it must carry out a “balancing test”, weighing the negative effects of the foreign subsidies in terms of distortion of the market against its positive effects on the development of the subsidized economic activity.

The Commission can impose both behavioral and structural remedies to mitigate any identified market distortion attributable to foreign subsidies. In addition, the Commission can levy fines on companies of up to 1% of their annual turnover for providing incorrect or misleading information or otherwise obstructing investigations; or up to 10% for infringing the notification and/or standstill obligations (so-called gun jumping).

II. M&A Transactions

The FSR introduces a mandatory notification requirement for large M&A transactions fueled, or potentially fueled, by foreign subsidies. The transactions subject to the notification requirement are the same as under the EU Merger Regulation (EUMR), i.e., mergers, acquisitions and full-function joint ventures (collectively referred to as “concentrations”).

The notification is suspensive, i.e., the parties are not allowed to close the transaction prior to having received clearance from the Commission (standstill obligation).

A. Thresholds

As of October 12, 2023, a concentration is notifiable under the FSR, if the relevant agreement was concluded on or after July 12, 2023, was not already implemented on October 12, 2023, and meets both of the following quantitative thresholds:

  1. A turnover-based threshold: at least one of the merging undertakings, the acquired company or the joint venture generates an EU-wide turnover of at least EUR 500 million (approx. USD 526.5 million); and
  2. An FFC value-based threshold: the merging undertakings, or the acquirer(s) and the acquired undertaking, or the undertakings creating the joint venture and the joint venture, have been granted aggregate FFCs of more than EUR 50 million (approx. USD 52.65 million) from third countries in the three years preceding the transaction.

These thresholds relate to group figures, not just to the entities directly involved in the transaction. Therefore, in parallel with the rules under the EUMR, all group companies that are linked by control relations, have to be included in the assessment (except that, in the case of acquisitions, only the turnover of, and contributions to, the target are taken into account with respect to the seller). Consequently, all relevant FFCs received by all group companies during the three years prior to the transaction need to be considered.

The turnover-based threshold is very high, reflecting the aim to capture only the largest M&A transactions. By contrast, the FFC value-based threshold is comparatively low.

Even where the parties to an M&A transaction do not meet the abovementioned thresholds, the Commission may still require them to file an ad hoc notification, if it suspects that the companies received foreign subsidies during the three preceding years.

B. Which FFCs are reportable?

In its Implementing Regulation, the Commission has made efforts to reduce the administrative burden on notifying undertakings by limiting the information that needs to be provided in the notification form. Companies need to provide the following information concerning any received FFCs:

  • FFCs relating to Article 5 Subsidies: Detailed information has to be provided only as regards FFCs of at least EUR 1 million which may constitute Article 5 Subsidies. As mentioned above, the Article 5 Subsidies are those that are deemed “most likely” to distort the market. It should be noted that identifying those FFCs and providing information on all the related questions in the notification form will likely require companies to conduct some substantive assessment, even if the ultimate determination of whether an FFC constitutes an Article 5 Subsidy remains with the Commission.
  • Other FFCs: For all other FFCs, the notifying parties have to provide a general overview identifying the third country that provided the FFC, the type of contribution and a brief description of the purpose of the FFC and the entity granting it. In this overview, only countries for which the estimated aggregate amount of all FFCs granted in the three years prior to the transaction is at least EUR 45 million (USD 47.4 million) have to be included. Individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: FFCs relating to deferrals of tax payments, tax amnesties and tax holidays, as well as normal depreciation and loss-carry forward rules that are of general application, and also tax relief for the avoidance of double taxation, do not have to be reported. The same applies to the purchase or provision of goods or services at market terms.

To further alleviate the administrative burden, the Implementing Regulation also provides for the possibility to request waivers for information that is normally reportable. However, the Commission has indicated that waivers will only be granted in exceptional cases.

It should be noted that all FFCs, irrespective of whether they are reportable or exempted from the reporting obligation, count towards the notification thresholds. Therefore, companies have to keep track of them in any event to determine whether those thresholds are met.

C. The Review Procedure

Procedurally, the Commission’s review of M&A transactions under the FSR is very similar to that under the EU’s merger control regime:

  • Phase I: The Commission has 25 working days to conduct a preliminary review.
  • Phase II: Where the Commission concludes that an in-depth review is required, the Commission then has an additional 90 working days to complete this review.

In cases where companies offer commitments to the Commission to remedy any concerns, this 90-day period may be extended by a further 15 working days to allow the Commission to assess these commitments. The Commission may “stop the clock” if it has sent the parties a request for information, but has not received complete answers by the deadline set in the request. If the Commission does not adopt a decision within the set time limits, the concentration shall be deemed to have been cleared and the parties are allowed to implement it.

III. Public Procurement

In parallel with the notification regime for M&A transactions, the FSR also introduces a new notification regime in relation to public procurement. The notification obligation concerns all procedures covered by the EU public procurement directives, i.e., procedures for the award of supply, works or service contracts (including in the water, energy, transport and postal services sectors) as well as of concession contracts. However, procedures falling within the scope of the EU Defense Procurement Directive are exempted.

As of October 12, 2023, companies participating in public procurements have to submit a notification to the contracting authority (and not directly to the Commission) if the thresholds are met. The regime allows the Commission to assess whether a distortion in the internal market exists and a tender is unduly advantageous in relation to the works, supplies or services concerned.

A. Thresholds

Tender participants have to notify where the following thresholds are met:

  1. A contract value-based threshold: the estimated value of the contract net of VAT amounts to at least EUR 250 million (approx. USD 263.3 million); and
  2. An FFC value-based threshold: the economic operator, including, where applicable, its main subcontractors and suppliers involved in the tender, was granted aggregate FFCs of at least EUR 4 million (approx. USD 4.2 million) per third country in the preceding three years.

Where the procurement is divided into lots, a notification obligation arises where (i) the overall estimated value of the procurement net of VAT exceeds the EUR 250 million threshold and (ii) the value of the lot or the aggregate value of all the lots to which the tenderer applies is equal to or greater than EUR 125 million (approx. USD 131.6 million) and the FFC value-based threshold is also met.

There is an important difference here in terms of the scope of the notification, as compared with the notification regime for M&A transactions. Whereas in the case of M&A transactions, the notification concerns FFCs to all entities belonging to the same “group” as the parties, in the case of public procurements, the notification concerns FFCs to the “economic operator” involved in the public procurement procedure (including its subsidiary companies without commercial autonomy and its holding companies) as well as its “main subcontractors and suppliers.” In other words, the perimeter does not necessarily include all companies belonging to the same “group” (i.e., linked by control relationships), but may include companies that are not part of the same group as the tenderer (“main” subcontractors/suppliers). A subcontractor or supplier is deemed to be “main” where their participation ensures key elements of the contract performance and in any case where the economic share of their contribution exceeds 20% of the value of the submitted tender.

As in the case of M&A transactions, the Commission can also request ad hoc notifications of public procurements that do not meet these thresholds, where it suspects that potentially distortive foreign subsidies are at play.

B. Which FFCs are reportable?

Where the thresholds are met, a notification has to be submitted to the contracting entity using the standard form annexed to the Implementing Regulation (the so-called Form FS-PP). The contracting entity will then forward the notification to the Commission for its assessment, together with all the documents the contracting entity considers crucial for the investigation.

The notifying parties must provide the following information on the FFCs granted to them:

  • FFCs relating to Article 5 Subsidies: As in the case of concentrations, detailed information has to be provided only on FFCs of at least EUR 1 million that belong to one of the Article 5 Subsidies categories.
  • Other FFCs: For other FFCs, a general overview table must be completed, in which information on the granting third country and entity, the type of FFC and the purpose of the FFC must be included. An FFC only has to be included in the list if the estimated aggregate amount in the previous three years per third country equals or exceeds EUR 4 million. Again, individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: The same exemptions apply as in the case of concentrations (see above). In exceptional cases, it is also possible to request waivers for information that is normally reportable.

C. The Review Procedure

Similar to the procedure for M&A transactions, the review procedure for public procurements consists of a preliminary review (phase I) and an in-depth investigation (phase II).

  • Phase I: The Commission has 20 working days from receipt of a complete notification for its preliminary review, and this time limit may be extended once, by 10 working days, “in duly justified cases”.
  • Phase II: In case of an in-depth review, the Commission has a further 90 working days, which can be extended by 20 working days in “duly justified exceptional cases” and after consultation with the contracting authority.

Pending the Commission’s review, all procedural steps in the public procurement procedure may continue, except for the award of the contract. Contrary to the review procedure in M&A transactions, the Commission cannot “stop the clock” during a review, meaning that, as a rule and disregarding extensions, the Commission has to take a decision no later than 110 days after receiving a complete notification.

D. Declaration of below-threshold FFCs

Importantly, even where the FFC threshold of EUR 4 million is not met, the participating economic operator must submit a declaration listing all FFCs received during the previous three years, provided that the contract-value threshold is met.

The declaration needs to list all of the received FFCs with the exception of FFCs below the de minimis value of EUR 200,000 per third country over the previous three years. FFCs above the de minimis value but below EUR 1 million only have to be reported in aggregate by third country, with a brief description. Individual amounts only have to be provided upon request by the Commission.  

Declarations do not automatically trigger a review, but the Commission may decide on a case-by-case basis whether such declaration warrants an investigation.

IV. Practical Considerations regarding notifications

In light of the foregoing, we make the following practical recommendations:

  • Assessing notification risks: As a first step, companies should assess the likelihood of being involved in M&A transactions or public procurements that meet the turnover- or the contract-value-based thresholds mentioned above (for instance, by reference to past transactions or tenders).
  • Information gathering: Companies that anticipate being involved in such large transactions or tenders should identify all the FFCs granted over the previous three years with a value of at least EUR 1 million. If the aggregate amount of these FFCs already meets the EUR 50 million threshold for M&A transactions, or the EUR 4 million threshold for government contracts, a notification will be necessary, although detailed information need only be gathered about FFCs relating to Article 5 Subsidies. If the aggregate amount of the FFCs does not meet those thresholds, further analysis might be necessary, unless it is obvious that the thresholds will not be reached.
  • Internal reporting setup: Companies that expect to be caught by the notification obligations will have to introduce new dedicated reporting tools in their data management systems to identify, categorize and track all relevant FFCs. Since the notification thresholds refer to all FFCs received during the three years prior to the transaction or tender, these data management systems not only have to capture contributions received prior to the entry into force of the FSR, but must also be continuously updated for any future transactions. If analysis is only undertaken on an ad hoc basis at the time of a contemplated M&A transaction, there is a serious risk that this could use up substantial resources and cause significant delays in the deal timeline. Therefore, it is not only companies that are regularly involved in transactions that need to invest in their data management systems, but also companies that occasionally have M&A activities or occasionally participate in public tenders.
  • Coordination with other reporting obligations: The notification obligation for concentrations under the FSR is without prejudice to other notification requirements that may be applicable to the same transaction under EU or national merger control rules or under national foreign direct investment (FDI) screening regimes. Consequently, an M&A transaction can potentially be subject to several notification requirements, each with its own procedural timeline and standstill obligation. It is therefore important to conduct a comprehensive filing analysis across all regimes that may be applicable and, if the transaction is subject to several notification obligations, closely coordinate the various procedures. This will be all the more important in cases where the parties anticipate a need to offer remedies.

The summer has been anything but slow in the People’s Republic of China. China is leaning into its regulation of emerging technologies, while attempting to strike a balance with its domestic economic priorities. In just the past few weeks, state authorities have issued a slew of draft measures and announced new initiatives – all with significant ramifications for businesses processing data within the PRC.

Click here to continue reading the full version of this alert.

On August 18, the U.S. Department of Commerce concluded an investigation it launched early last year on solar cells and modules from the People’s Republic of China (PRC). Commerce provided its conclusions in a Federal Register notice, highlighting that five specific Chinese companies are shipping Chinese-origin solar products to certain Southeast Asian countries for minor processing in an attempt to circumvent U.S. Antidumping/Countervailing (AD/CVD) duties on such products. However, duties on these imports will not be collected or assessed until June 2024, when a waiver enacted by the Biden administration is set to expire.

Commerce’s investigation began in March 2022 in response to a complaint filed by Auxin Solar, a U.S. manufacturer which alleged that Chinese manufacturers were evading U.S. tariffs on such products from China by routing manufacturing through Thailand, Cambodia, Vietnam and Malaysia. Nearly three-quarters of solar modules imported into the U.S. originate from these countries. Commerce found that five out of the eight Chinese companies it investigated are engaged in evasion of U.S. AD/CVD duties by producing such products in the five countries from Chinese-origin components.  The Chinese companies are – BYD Hong Kong, New East Solar, Canadian Solar, Trina Solar, and Vina Solar. The other three entities investigated (Boviet Solar, Hanwha Q CELLS, and Jinko Solar) were determined to not be circumventing. The final results reflect those of Commerce’s preliminary report released in December of last year, with the exception of New East Solar, having previously been found not to be circumventing duties, but being added to the list after not cooperating with auditors during the investigation.

The investigation has generated significant controversy among policymakers due to its potential impacts on the Biden Administration’s climate and energy policy agenda – U.S. Energy Secretary Jennifer Granholm stated under congressional testimony that “at stake is the complete smothering of the investment and the jobs and the independence that we would be seeking as a nation to get our fuel from our own generation sources.” Solar industry groups have also voiced their disapproval with the investigation, highlighting that it puts the entire industry at risk. According to the Solar Energy Industries Association, 318 solar projects across the U.S. have been canceled or delayed as a result of Commerce’s investigation, which threatens the Biden Administration’s plan to cut the cost of solar electricity in half by 2030.

In response to these concerns, President Biden issued Proclamation 10414 on June 6, 2022, which temporarily suspends any antidumping or countervailing duties on imports of silicon photovoltaic cells and modules from Thailand, Cambodia, Vietnam and Malaysia and using parts and components manufactured in the PRC for two years up until the “Date of Termination” – June 6, 2024. In its final affirmative ruling issued last Friday, Commerce stated that it will not collect duties pursuant to Biden’s decision “as long as the imports are consumed in the U.S. market within six months of the termination of the President’s Proclamation”, meaning up until December 6, 2024. The ruling also highlights that, in order to be exempt from U.S. duties following the expiration of the waiver, all solar providers in Vietnam, Malaysia, Thailand, and Cambodia (including companies not specifically investigated by Commerce) must self-certify that they are not circumventing the AD/CVD orders and otherwise complying with all findings in this case, with those claims being subject to potential audit.

Both sides are likely to appeal this decision to the Courts.

What You Need to Know

  • Key takeaway #1 Issuance of Executive Order and Rulemaking: On August 9, 2023, President Biden issued a long-anticipated “Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (the “Executive Order”). The Executive Order, which the President issued pursuant to the International Emergency Economic Powers Act (“IEEPA”), authorizes the U.S. Department of the Treasury (“Treasury”), in consultation with the U.S. Department of Commerce and other relevant agencies, to establish a new and targeted national security program aimed at certain outbound investments.
  • Key takeaway #2 Opportunity to Influence Regulations: The Executive Order instructs Treasury to promulgate outbound investment regulations, and Treasury simultaneously issued an Advance Notice of Proposed Rulemaking (“ANPRM”) seeking comments, until September 28, 2023, on such key issues as what transactions and technologies should be covered. Treasury will then publish a proposed rule soliciting additional comments before publishing a final rule. Each step provides industry a meaningful opportunity to shape the final set of regulations.
  • Key takeaway #3 No Currently Effective Restrictions: The Executive Order itself does not impose any restrictions; rather, the applicable restrictions will take effect only after Treasury publishes final regulations. Moreover, Treasury’s ANPRM notes that the final regulations will not apply to any historic “covered transactions” (though Treasury has said that it may inquire about transactions completed or agreed to after issuance of the Executive Order for purposes of developing the program).
  • Key takeaway #4 Not a “Reverse CFIUS”, but Prohibitions and Notifications: Some transactions will be outright prohibited, while others will only require a notification to Treasury, both based on the specific technologies involved. Unlike CFIUS, which applies to inbound investments in the U.S., there will not be a case-by-case review process. However, similar to CFIUS, Treasury will have the authority to nullify, void, or otherwise compel the divestment of any prohibited transaction.
  • Key takeaway #5 Third Technology-Focused Legal Regime for China: Currently, the People’s Republic of China (including Hong Kong and Macau) (hereinafter “China”) is the only “country of concern” targeted by the Executive Order. Treasury proposes to control a broad scope of activity related to the following technologies: (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence (AI) systems. The identified categories of technologies do not mirror those already controlled for China under existing U.S. export controls, or the clawback provisions of the CHIPS Act. Investors and other actors would need to review at least three separate technology-focused legal regimes to ensure compliance.
  • Key takeaway #6 U.S. Person Jurisdictional Hook: The prohibitions and notification requirements will apply to U.S. persons, and employ a similar definition to that used in U.S. economic sanctions. In addition, based on Treasury’s ANPRM, U.S. persons will have certain obligations with respect to non-U.S. entities that they control and in certain scenarios where U.S. persons knowingly direct transactions by non-U.S. persons.
  • Key takeaway #7 Potential Exceptions and an Exemption: Treasury has proposed various carveouts or exceptions for specific types of transactions, such as investments into publicly-traded securities or into exchange-traded funds, as well as a case-by-case “national interest exemption” for otherwise prohibited transactions.

Proposed U.S. Outbound Investment Regulations

The Outbound Investment Program will be implemented through regulations issued by Treasury that will require notification for, or will otherwise prohibit U.S. persons from undertaking, certain transactions involving “covered national security products or technologies” and entities connected to a “country of concern.” Accordingly – concurrent with the Executive Order – Treasury released an Advance Notice of Proposed Rulemaking that provides some potential definitions of these terms, but the exact definitions and the details of the regulations will be developed through public notice and comment that concludes on September 28, 2023. Treasury also published a Fact Sheet that provides additional information on the proposed details and scope of the outbound investment prohibitions and notification requirements, which will likely not be finalized until 2024 sometime after Treasury has published draft regulations and gathered another round of public comments.

Discussions on restricting outbound investment have occurred since Committee on Foreign Investment in the United States (“CFIUS”) reform was implemented, and recent actions – like the investment prohibitions in the Office of Foreign Assets Control (“OFAC”)’s Chinese Military Industrial Complex Companies (“CMIC”) Program, the clawback provisions from the CHIPS Act, and the expansion of controls on semiconductor exports to China in October 2022 – previewed some of the U.S. government’s top concerns. Below is a more detailed summary of the ANPRM’s proposals, including: who the regulations cover, the transaction prohibitions and notification requirements, and what technologies and products are covered.

What Transactions Do the New Controls Cover?

U.S. persons are either prohibited from engaging in, or must provide notification to Treasury of, any “covered transaction” related to a “covered foreign person” (that is not an otherwise “excepted transaction”) and that involves a “covered national security technology or product.” In the ANPRM, Treasury proposes including the following definitions and scoping in its final regulations. It seeks input on 83 questions covering a variety of topics, including these definitions of key terms, as well as the scope of covered technology and products, and the anticipated burden of compliance with the proposed regulations.

  • U.S. Person: This term includes U.S. citizens and lawful permanent residents, U.S. entities and their non-U.S. branches, and any person in the United States. This definition, which mirrors the one OFAC uses for its sanctions’ programs, does not include non-U.S. subsidiaries of U.S. entities. That said, the ANPRM contemplates imposing on any U.S. person certain obligations with respect to any non-U.S. entity that the U.S. person “controls,” with “control” defined to mean ownership, directly or indirectly, of 50% or more. Also, in certain scenarios, U.S. persons would be prohibited from “knowingly directing transactions” by non-U.S. person, with “knowingly” and “directing” having their own definitions.
  • Covered Transaction: This term includes:
    • (1) Acquisition of an equity (or contingent equity) interest in a covered foreign person;
    • (2) Certain debt financing transactions that are convertible to equity;
    • (3) Greenfield investment that could result in the establishment of covered foreign person; or
    • (4) Establishment of a joint venture, wherever located, formed with a covered foreign person or could result in the establishment of a covered foreign person.
  • Covered Foreign Person:
    • This term includes any “(1) person of a country of concern that is engaged in, or… that a U.S. person knows or should know will be engaged in, an identified activity with respect to a covered national security technology or product; or (2) a person whose direct or indirect subsidiaries or branches are referenced in item (1) and which, individually or in the aggregate, comprise more than 50 percent of that person’s consolidated revenue, net income, capital expenditure, or operating expenses.” Currently, the only identified “country of concern” is China (which includes Hong Kong and Macao).
    • Moreover, the term “person of a country of concern” mean any non-U.S. person who is also (1) a citizen or permanent resident of China, (2) a Chinese entity due to incorporation or headquarters, (3) the Chinese government (including its agencies and state-owned entities), (4) or any entity owned individually or in the aggregate, directly or indirectly, 50 percent or more by a person in (1)-(3). Notably, this proposed definition of “person of a country of concern” captures non-Chinese entities owned 50% or more, directly or indirectly, by one or more Chinese persons.
  • Covered National Security Technologies or Products: The table above describes the proposed technologies to be covered. Significantly, these proposed technology categories generally do not mirror those in other existing and proposed controls over activities involving China, including under the U.S. Export Administration Regulations end use/end user controls, or those proposed by Commerce to implement the CHIPS Act national security guardrails.
  • Prohibition, Notification, and Enforcement:
      • As depicted in the table above, certain more advanced semiconductors and microelectronics, quantum technologies, and AI systems will be subject to prohibitions, while certain less advanced semiconductors/microelectronics and AI systems (but not quantum technologies) will be subject to a notification requirement. Any required notification would be filed within 30 days of closing and could be filed via Treasury’s online portal.
      • If a prohibited transaction occurs, or a required notification was not filed (or was filed with material misstatements or omissions), then Treasury can impose penalties pursuant to IEEPA, the statute that is the basis for the vast majority of OFAC’s various economic sanctions programs. Currently, penalties are approximately $356,000 per violation or twice the value of the transaction, whichever is greater, and any willful activity can be referred to the U.S. Department of Justice criminal violations (which can be up to $1 million per violation, or twice the value of the transaction).
      • Treasury has the authority to nullify, void, or otherwise compel the divestment of any prohibited transaction entered into after the effective date of the final regulations.
  • Excepted and Exempted Transactions: Treasury is considering a number of exceptions and an exemption. Some of the more notable exceptions include:
      1. Publicly-traded securities, index funds, mutual funds, exchange-traded funds;
      2. Certain investments made as a Limited Partner;
      3. Committed but uncalled capital investments; and
      4. Intracompany transfers of funds.

In addition, the ANPRM proposes a case-by-case exemption for any otherwise prohibited transaction that “(i) provides an extraordinary benefit to U.S. national security; or (ii) provides an extraordinary benefit to the U.S. national interest in a way that overwhelmingly outweighs relevant U.S. national security concerns.”

Now What?

Provide Feedback to Treasury

Interested members of the public have until September 28, 2023 to file comments in response to the ANPRM.

Further U.S. Government Action

Congress has debated the need for legislation concerning certain outbound investments to China since 2018. While Congress has not settled upon a legislative approach, it anticipated the current Executive Order through the Consolidated Appropriations Act of 2023. Signed into law by President Biden in December 2022, the Act required the Departments of Treasury and Commerce to submit reports on the establishment of an outbound investment screening mechanism and associated costs. The reports were submitted to Congress on March 7, 2023.  

The Senate recently approved the Outbound Investment Transparency Act, its own version of outbound investment screening, but this bill only includes notice requirements though across a broader range of technology sectors including satellite-based communications, network laser scanning systems, and other export-controlled technology. Whether the full Congress will pass this legislation remains unclear, but the bill may signal the industries that could be future targets of the Outbound Investment Program.

Look for Reactions from China

While the Executive Order is both long-anticipated and narrower than originally conceived, it has been “resolutely opposed” by China. On August 10, 2023, China’s Ministry of Commerce (MOFCOM) characterized the Executive Order as “decoupling and chainbreaking” in the area of investment under the guise of “de-risking.” MOFCOM’s spokesperson chided the U.S. for deviating “from the market economy and principle of fair competition that the U.S. has been advocating” and that China reserves the right to take countermeasures.

In light of the Executive Order’s singular focus on China as a “country of concern” and the ongoing geopolitical tensions between the U.S. and China, it is possible China may respond with heightened scrutiny on U.S. investors or companies in China (e.g., including through its Anti-Foreign Sanctions Law or AFSL) or new restrictions. U.S. companies and investors assessing the risks of prospective investments in China should take into account not only the imminent U.S. restrictions, but also the potential for a possible Chinese reaction.

In addition to possible Chinese government action, aggrieved Chinese parties involved in current or prospective U.S. investment could sue those investors under the AFSL if such U.S. investment is terminated or withdrawn.

Look for Actions and Reactions from Other Governments

Although outbound investment review regimes have historically been limited to only a few economies (e.g., Republic of Korea, Japan, China, and Chinese Taipei) and differ among these, there is active consideration outside the U.S. of potential restrictions on outbound investments in strategic technology with military capabilities. The European Commission is examining the issue in 2023 and European Commission president Ursula von der Leyen has spoken in favor of the establishment of a targeted outbound investment regime.    

Passage of CFIUS reform in 2018 led the U.S. to work with its allies to strengthen their investment review regimes to better address national security concerns. Investors will want to consider whether this Executive Order may lead to similar consideration of targeted outbound investment reviews in the European Union and elsewhere.  

On July 20, 2023, the U.S. Government Accountability Office (“GAO”) released a report titled, Steel and Aluminum Tariffs: Agencies Should Ensure Section 232 Exclusion Requests are Needed and Duties are Paid. Following an investigation analyzing import entry data from March 2018 through September 2021, GAO published a 66-page report about the usage and administration of the Section 232 steel and aluminum exclusion programs.  The report detailed the shortcomings of the Department of Commerce’s Bureau of Industry and Security (“BIS”) and the United States Customs and Border Protection (“CBP”) in administering the Section 232 exclusion programs. In light of the GAO report, importers of steel and aluminum should expect BIS to conduct additional quantity certification reviews and more closely scrutinize the data points included in exclusion requests. Importers may also face increased scrutiny from CBP, who will more closely examine and deny 232 exclusion claims that are not properly filed. Because of the likely increased scrutiny by BIS and CBP, importers should be extra vigilant of the information submitted in exclusion requests, carefully monitor their quota usage and ensure proper claims are filed with CBP. 

The BIS established the steel and aluminum exclusion programs in 2018 which allows organizations to submit requests which once granted permit a certain amount of steel or aluminum imports to avoid paying 25% and 10% tariffs respectively. While the steel and aluminum exclusion programs offer importers the opportunity for massive duty savings, the U.S. government has missed out on a significant amount of revenue since the inception of the program. Due to the massive administration burden on BIS and CBP to run and implement these exclusion programs, GAO identified several issues where enforcement of the exclusions is lacking. In response to their findings in the report, GAO proposed four recommendations: 1) for CBP to take additional steps to recover the duties owed by importers as a result of invalid use of Section 232 exclusions; 2) for CBP  to ensure that controls are implemented to prevent importers from exceeding the approved quantities of their Section 232 exclusions; 3) for BIS to evaluate the results of the certification requirement; and, 4) for BIS to develop a more consistent data transfer process. Both BIS and CBP concurred with these recommendations.

The headline number from the report is that GAO estimates that importers may owe about $32 million in duties because of invalid use of Section 232 exclusions, as of November 10, 2021. The analysis showed that during the period of review importers properly utilized 61,243 exclusions to avoid paying Section 232 duties. However, there were 3,959 instances of invalid use related to five exclusion parameters: exclusion identification number, HTSUS code, country of origin, validity period, and quantity. Of those 3,959 instances of incorrect use, 3,884 or 98% related to quantity.

One of the reasons for the loss in revenue is that CBP lacks effective controls to prevent importers from exceeding the approved exclusion quantities. GAO estimates that of the $32 million in lost revenue, an estimated $29.4 million of the duties were caused by invalid use related to the quantity parameter. According to CBP officials, CBP only had 90 days to develop and implement a method for validating Section 232 exclusion claims and did not have the resources to update ACE programming to provide for automatic validation of exclusion quantities. CBP officials told GAO that establishing an automated quantity control would have been highly time and labor intensive because then ACE would need to be programmed to track each exclusion’s quantity individually before it can automatically deactivate the exclusion when the approved quantity has been reached. Currently CBP needs to manually deactivate exclusions that have reached quota but the lag time between when importers reach approved quantities and CBP’s manual deactivation allows importers to overclaim exclusions and not pay duties on the overage. GAO asserts that until CBP implements more effective controls to prevent overclaiming and to recover duties owed, the U.S. government is at risk of losing millions of dollars in revenue. In addition, GAO urged that CBP take steps to recover the lost duties to the extent possible.

The GAO report analyzed the utilization of approved Section 232 exclusions. During the period of review only 29% of steel exclusions and 38% of aluminum exclusions were used. When exclusion utilization is measured in terms of quantity importers used an even smaller fraction of what BIS approved, partially because importers often do not use the full quantity even when they use exclusions. During the period of review only 9% of steel exclusion quantity and 9% of aluminum exclusions were used. In that time these exclusions resulted in an estimated $2.2 billion in tariff savings for steel importers and $440 million for aluminum importers. The report offers several explanations for why exclusion usage is so low. First, there are many granted redundant exclusion requests where exclusions have the same HTSUS code, approval date, countries of origin, and IOR name. Another explanation is that BIS approved exclusions with exceedingly large quantities which far exceeded historical import figures.

In response to the low utilization rates of the exclusion, BIS added a quantity certification requirement for exclusions in December 2020. This quantity certification required that requestor’s organization expects to “consume, sell, or otherwise use” the full quantity of product across all the requester’s active and pending exclusion requests within the next calendar year. In the same Federal Register notice, BIS also recognized the inefficiencies from reviewing and approving large numbers of exclusion requests that were not needed. BIS designed the volume certification program with the goal of discouraging parties from filing requests based on anticipated need and provide a basis for BIS to introduce robust reviews of the requests by asking parties to provide documentation of their past imports and projections for the current year. However, BIS and GAO have not fully assessed the effectiveness of the certification requirements.

Another problem identified in the report is that BIS and CBP have inconsistent data on some approved exclusions due to the lack of a consistent data transfer process for approval lists and change logs. For example, the BIS approval record for each exclusion shows the relevant HTSUS code, but if an exclusion is later changed, the change log may not include that information. During the review, GAO discovered almost 10,000 exclusions (around 5% of exclusions) contained inconsistencies between BIS and CBP’s data. According to the GAO, these inconsistencies create a risk that CBP would administer these exclusions in a manner that does not comport with BIS approval and recommends BIS explore the development of a data transfer process that reduces the potential for inconsistencies.

As both BIS and CBP take steps to address GAO’s four recommendations for Executive Action (which can be tracked here: Status of Recommendations for Executive Action), it is clear that maintaining the Section 232 exclusion process has proved to be a tremendous burden for BIS and CBP. As BIS continues to perform quantity certification reviews, Crowell recommends that requesting organizations confirm that their Section 232 requests are in accordance with Commerce’s guidelines. Importers should also track the usage of their exclusions to prevent exceeding the quotas and file any renewal exclusions in a timely manner. Failure to maintain a robust system of submitting and monitoring one’s own Section 232 exclusions could end up costing importer’s millions in duty savings opportunities.

What You Need to Know

  • Key takeaway #1 The European Commission has proposed reforming the Union Customs Code to strengthen the legal framework for customs and bring it into line with recent changes in IT technologies and e-commerce while improving the harmonization of EU customs rules.
  • Key takeaway #2 In principle, customs digitalization should be beneficial for all the stakeholders concerned. However, the roll-out of trans-European IT systems under the existing Union Customs Code largely depends on implementation by the Member States, and has already been subject to significant delay.
  • Key takeaway #3 A newly proposed EU Customs Data Hub should make it easier for customs authorities and economic operators to handle customs formalities, by improving data management and increasing the quality of customs-related decision-making. However, the Data Hub will be fully implemented only by the end of 2037. It is hard to anticipate what technological developments will be introduced over the next decades, and this raises the question of whether the Data Hub will by then have become outdated.

On May 17, 2023, ten years after the EU adopted its Union Customs Code (UCC), the European Commission published a proposal intended to begin the complex journey of modernizing this crucial cog in the EU’s customs union.

The proposal includes numerous changes to the current rules, adding new elements and replacing outdated provisions, and attempts to take into account developments in multiple areas such as technology, e-commerce, and customs administration.

In this alert, we will focus on one of the major pillars of the proposal – the EU Customs Data Hub, which should upgrade customs processes from the technological point of view.

Key ideas behind the creation of the EU Customs Data Hub

IT technologies emerge and develop very rapidly and keeping up with the pace can be a challenge, especially in the context of the regulatory efforts of a large economic bloc. In an EU 2020 report (The Future of Customs in the EU 2040), the authors pointed out the need to manage increasing data flows and reach significant cooperation in data exchange both between Member States and with other authorities and economic operators. The authors suggested creating a fully integrated customs system based on shared databases in line with modern technologies, which would require the EU harmonization of operations across Member States and an equivalent level of IT capabilities.

A similar approach was suggested in the Report by the Wise Persons Group on the Reform of the EU Customs Union, published on 31 March 2022. The report advocated that a new approach to data should be achieved by creating a centrally managed common system that would be built on reliable customs information, provided by trusted operators (with a special status similar to Authorized Economic Operators), who would be liable for inaccuracies. Other key suggestions included improvements relating to data validation, data sharing and the development of advanced tracing systems in the supply chain.

The Commission has shown that it shares a similar vision on how customs-related data management should develop, and has largely followed these ideas in its proposal that puts forward the concept of a centralized system at the European level.

How would the EU Customs Data Hub work?

The EU Customs Data Hub is described as a secure and cyber-resilient set of electronic services and systems that handles data, both personal and commercial, for customs purposes. It is designed to fulfil the following functionalities:

  • Electronic implementation of customs legislation.
  • Ensuring the quality, integrity, traceability and non-repudiation of processed data, including the amendment of such data.
  • Ensuring compliance with relevant regulations relating to the processing of personal data.
  • Enabling risk analysis, economic analysis and data analysis, including through the use of artificial intelligence systems.
  • Enabling the interoperability of those services and systems with other electronic systems, platforms or environments for the purpose of customs cooperation.
  • Integration with the EU Single Window.
  • Exchange of information with third countries.
  • Customs surveillance of goods.

It would be the role of the Commission to develop, implement and maintain the EU Customs Data Hub. However, Member States may develop their own applications to connect to the Data Hub.

Alternatively, Member States may rely on the EU Customs Authority once it is established to develop connective applications at the Member State’s expense. Any application so developed would then be made available to all Member States.

When would the Data Hub become operational?

The proposal sets December 31, 2037 as the deadline for the complete implementation of the EU Customs Data Hub. Therefore, from January 2038 all traders would be obliged to use it for customs formalities, e.g., when submitting a customs declaration. However, the proposal provides for the possibility to use the Data Hub in e-commerce in 2028, while economic operators may make use of the EU Customs Data Hub from March 1, 2032.  

Using the EU Customs Data Hub

The national customs authorities, the EU Customs Authority and the European Commission would all have to use the Data Hub when cooperating with other entities that have access to the Data Hub.

The Commission may set rules for interoperability and connection where authorities other than customs authorities or Union bodies make use of electronic means established by, used to achieve the objectives of, or referred to in Union legislation. If no electronic means are used, these authorities may use the specific services and systems of the EU Customs Data Hub.

A number of stakeholders will be able to access and process data in the EU Customs Data Hub depending on their status:

  • Persons, including economic operators;
  • National customs authorities;
  • EU institutions and agencies which deal with customs matters – European Commission and EU Customs Authority;
  • European Anti-Fraud Office (OLAF);
  • European Public Prosecutor’s Office (EPPO) and Europol;
  • National tax authorities of Member States;
  • Competent authorities:

(a) central authorities of a Member State responsible for the organization of official controls and of other official activities;

(b) any other authority to which that responsibility has been conferred;

(c) where appropriate, the corresponding authorities of a third country;

  • Market surveillance authorities;
  • Other national authorities and Union bodies, including the European Border and Coast Guard Agency (Frontex).

Despite the fact that a broad list of entities would have access to the Data Hub, that access would be tailored to their particular needs and purposes. For instance, persons may have access to data, including personal and commercially sensitive data, that was transmitted by or on behalf of that person, or that has been addressed to or intended for that person, and only for the purposes of carrying out reporting obligations or proving compliance under customs legislation or other legislation applied by customs authorities.

The EU Customs Authority (once established) and the European Commission would have wide access to the EU Customs Data Hub, but the modalities of access for other bodies would depend on their function and be determined by the Commission in an implementing act.

Interaction with existing or developing electronic systems

Article 6(1) of the current UCC stipulates that electronic data-processing techniques should be used for all exchanges and storage of information, including declarations, applications and decisions, between customs authorities or between economic operators and customs authorities. The IT implementation to carry this out requires the deployment of 17 electronic trans-European systems, including three national systems: Notification of Arrival, Presentation Notification and Temporary Storage (AN, PN and TS), National Import Systems (NIS), and Special Procedures (SP). Despite this ambitious goal, the deadlines for implementation have been repeatedly postponed (to 2020, 2022 and 2025). According to the most recent Commission’s report, only nine systems were completed by the end of 2022.

In addition, in late 2022, the EU adopted the Single Window Regulation No. 2022/2399, which provides for the establishment of an electronic system for non-customs and customs formalities. The system was designed to replace different portals used by authorities for border checks, and ensure interaction and enhance exchange of information between customs and non-customs procedures. The UCC proposal is not intended to replace the Single Window, but to rely on it as a core component in the EU’s electronic customs infrastructure.

The Single Window should be connected to mandatory non-customs systems such as the TRACES system – relating to health entry documents for animals, products, feed and food of non-animal origin, plants and plant products; the import of cultural goods (ICG); and concerning ozone depleting license (ODS 2) and fluorinated greenhouse gases license (F-GAS). It should also be linked to voluntary non-customs systems such as FLEGT, CITES, dual-use goods, and access to Information and Communication System for Market Surveillance. Thus, the Single Window would be a key element of the EU Customs Data Hub, providing automated documentary check of certain certificates and exchange of information between customs and market surveillance authorities during customs clearance via ICSMS module, and providing data relating to non-customs formalities to the EU Customs Data Hub.

Although most of these systems should be available in the Single Window in early 2025, economic operators will only be able to use the Single Window for the fulfilment of customs and non-customs formalities from December 13, 2031.

As for the other electronic systems that have been or are being developed by Member States as part of implementing the current UCC IT obligations, the Commission would adopt an implementing act on how to maintain, employ and phase out these electronic systems.

Conclusions

The EU Customs Data Hub is designed to make the compliance with customs and non-customs formalities more efficient and less burdensome, both for customs authorities and economic operators. Instead of having to navigate different systems, customs and non-customs information would be collected in one place to ensure better data management and increase quality of decision-making at customs. If realized, the EU Customs Data Hub will be a key tool in risk analysis and risk management as a centralized data repository at the Union level.

At the same time, since the adoption of the current Union Customs Code only nine trans-European systems have been deployed, with others planned to be completed by the end of 2025. Therefore, EU progress will likely be stalled in practice by slow Member State implementation. Twenty-four Member States have officially requested derogations in implementing the systems at national level on various grounds, such as lack of finances or personnel, COVID-19, different priorities, Brexit and the war in Ukraine.

Therefore, despite its potential to benefit both national customs authorities and economic operators, it remains to be seen how quickly the proposed EU Customs Data Hub would be able to bring about improved digital customs harmonization across the EU.

What You Need to Know

  • Key takeaway #1 Companies should be mindful that the U.S. agencies responsible for civil and criminal export controls and sanctions compliance maintain separate VSD policies. This announcement highlights key aspects of each VSD policy.
  • Key takeaway #2 Failure to initiate an internal investigation promptly after discovering a potential export controls or sanctions violation could be used by regulatory agencies to demonstrate a compliance gap.
  • Key takeaway #3 Companies that identify potential export controls or sanctions violations should consult with experienced counsel on whether to self-disclose and how to remediate their compliance programs.
  • Key takeaway #4 Given the expansion of export controls and sanctions, coupled with the coordinated focus on enforcement of these laws across agencies, companies should closely examine whether a VSD should be submitted to one regulator or multiple regulators (e.g., a VSD to OFAC vs. a VSD to both OFAC and DOJ).

On July 26, 2023, the U.S. Department of Justice (“DOJ”), the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued a Tri-Seal Compliance Note outlining their respective voluntary self-disclosure (“VSD”) procedures for potential violations of U.S. export controls and sanctions.  This announcement highlights the agencies’ focus on compliance with export controls, sanctions, and other U.S. national security laws, and reminds industry of the incentives for voluntarily disclosing potential violations, including mitigation of civil and criminal penalties. 

This issuance marks the second joint statement of the three agencies, and comes on the heels of the agencies’ March 2, 2023, Tri-Seal Compliance Note regarding the risk of third-party intermediaries’ involvement in Russia-related sanctions and export controls evasion, which we previously discussed here.  

DOJ’s National Security Division VSD Policy

The DOJ’s National Security Division (“NSD”), which enforces national security laws, including willful sanctions and export controls violations, recently updated its VSD policy (“NSD Policy”) on March 1, 2023, as part of the Department’s broader push for its components to review, draft, and publish VSD policies.  Under NSD’s Policy, when a company voluntarily self-discloses potential criminal sanctions or export control violations, fully cooperates, and timely and appropriately remediates, NSD generally will not seek a guilty plea from the company, and there is a presumption that the company will receive a non-prosecution agreement and no criminal fine.  The presumption surrounding non-prosecution agreements does not apply, however, if there are aggravating factors, including:

  • Egregious or pervasive criminal conduct within the company;
  • Concealment or involvement by upper management;
  • Repeated administrative or criminal violations of national security laws;
  • The export of items that are particularly sensitive or that are going to end users of heightened concern; and
  • A significant profit to the company from the misconduct.

If some or all of the listed aggravating factors are present, NSD may seek a different resolution, including a deferred prosecution agreement or guilty plea.  If a company qualifies for a non-prosecution agreement or a declination, it must still disgorge or forfeit all ill-gotten gains arising from the misconduct in question.  The NSD Policy also places significant emphasis on the timing and recipient of the disclosure, noting that a company’s disclosure must be made in a “reasonably prompt time after becoming aware of the potential violation,” and before any imminent threat of disclosure or government investigation, and must be specifically made to NSD in order to qualify for VSD credit.  An untimely disclosure, or a disclosure to another agency alone, such as only OFAC or BIS, will not qualify as a VSD under the NSD Policy.  Nevertheless, NSD will consider good faith disclosures to other DOJ components as a VSD under the NSD Policy, provided the matter is resolved with NSD.

While the agencies’ joint press release states that, “[i]f a company discovers a potential violation, whether it is an administrative or criminal violation, that company must promptly disclose and remediate,” the NSD Policy speaks only to VSDs for “potentially criminal,” that is, willful violations, of U.S. export controls and sanctions.  Furthermore, despite the use of the phrase “must promptly disclose and remediate” in the announcement, the announcement does not create a new requirement for disclosure, but rather explains the incentives that each agency applies to encourage voluntary disclosures.

BIS’s VSD Policy

On April 18, 2023, BIS released a memorandum entitled, “Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others” (the “April Memo”).  The April Memo highlights additional penalties and incentives to encourage exporters – and whistleblowers – to disclose potential violations of the Export Administration Regulations (“EAR”).  In a change of policy, BIS announced it would consistently treat a decision not to voluntary self-disclose significant violations of the EAR as an aggravating factor in the calculation of penalties.   For additional details, see our analysis of the April Memo.

OFAC’s VSD Policy

Finally, OFAC, which administers U.S. sanctions, sets forth its own VSD policy in its Economic Sanctions Enforcement Guidelines, which are set forth in Appendix A to Title 31, Part 501, of the Code of Federal Regulations.  OFAC’s VSD policy provides for a reduction of 50% of the base amount of the proposed penalty when a company has filed a VSD with OFAC.  However, for a VSD to OFAC to qualify for this credit, the VSD must be made prior to, or concurrent with, the discovery by OFAC or another government agency of the apparent violation or a substantially similar apparent violation.  Whether a notification of an apparent violation through a VSD to another agency will qualify as a VSD to OFAC is determined on a case-by-case basis. Importantly, there remain several scenarios where OFAC will not view a disclosure as “voluntary,” such as when a third party is required to notify OFAC of the apparent violation by filing a report of a blocked or rejected transaction, or if the disclosure is not self-initiated (such as in response to an OFAC subpoena), or if the disclosure contains false or misleading information.

FinCEN’s Whistleblower Program

The Tri-Seal Compliance Note also highlights the relatively new whistleblower program administered by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network’s (“FinCEN”).  The program was created under the Anti-Money Laundering Act of 2020 and recently expanded under the Anti-Money Laundering Whistleblower Improvement Act.  The agencies note that FinCEN is authorized to provide awards of between 10% to 30% of monetary penalties collected in an enforcement action, if the information provided by the whistleblower to FinCEN or DOJ results in an enforcement action relating to the Bank Secrecy Act or U.S. sanctions. The agencies also note that FinCEN may be able to pay awards to whistleblowers where the information provided leads to a successful “related action,” such as an export controls enforcement action. 

Takeaways

With DOJ’s proclamation that “sanctions are the new FCPA,” U.S. and multinational companies should assess their programs for complying with sanctions and export controls, and for addressing other national security risks.  If and when companies discover potential violations, they should retain counsel with expertise in export controls and sanctions to conduct an internal investigation, identify underlying causes or vulnerabilities that may have contributed to the violation, help determine whether to self-disclose (and to whom), and assist with remediation of compliance programs.  In such scenarios, internal investigations are critical, and the failure to initiate one within a reasonable timeframe of discovering the potential violation may be used to demonstrate a compliance gap.  

Crowell & Moring LLP will continue to monitor developments regarding export controls and sanctions regulations and enforcement and will provide updates as appropriate.  Please reach out to your Crowell & Moring contact, or any of the authors below, for additional information on these matters.