On February 16, U.S. Secretary of Commerce Wilbur Ross released the findings of the Department of Commerce (Commerce) investigations on the effects of steel and aluminum imports on U.S. national security pursuant to Section 232 of the Trade Expansion Act of 1962.

Commerce concluded the present quantities of steel imports are “weakening [the U.S.] internal economy” and threaten to impact the national security of the United States. The same was said of aluminum imports, with the report noting that “recent import trends have left the U.S. almost totally reliant on foreign producers of primary aluminum … that is essential for key military and commercial systems.”

Steel Remedies

In terms of specific remedies, Commerce recommends the President adjust the level of steel imports through quotas and/or tariffs imposed on a broad range of all major categories of steel currently produced in the United States. The relief is intended to ensure that U.S. domestic steel producers maintain a capacity utilization rate of 80 percent or better. The report does not mention the duration of any proposed remedies.

Commerce presented two recommendations:

  • A global quota of 63 percent or global tariff of 24 percent on imports from all countries.
    • Commerce proposes that under this option the President could exempt specific countries by granting them a quota of 100 percent of their 2017 import volumes. Such exemption would be based on an overriding U.S. economic or security interest.
  • A higher overall tariff of 53 percent, but only on a subset of countries (Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia, and Costa Rica

Under either alternative, quotas and/or tariffs would be imposed on imports of all steel products that fall into one of the following five broad product categories:

Carbon and alloy flat products produced by rolling semi-finished steel through varying sets of rolls, including sheets, strips, and plates;
Carbon and alloy long products that fall outside the flat products category, including bars, rails, rods, and beams;
Carbon and alloy pipe and tube products either seamless or welded pipes and tubes, some of which may include stainless and alloys other than stainless;
Carbon and alloy semi-finished products consisting of initial, intermediate solid forms of molten steel, to be re-heated and further forged, rolled, shaped, or otherwise worked into finished steel products, including blooms, billets, slabs, ingots, and steel for castings; and
Stainless steel products in flat-rolled, long, pipe and tube, and semi-finished forms, containing at minimum 10.5 percent chromium and, by weight, 1.2 percent or less of carbon, offering better corrosion resistance than other steel.

Steel Exclusions

The Secretary also proposes a separate exclusion process through which affected U.S. parties may seek exclusions from the quota or tariff for specific products based on the following: (1) lack of sufficient U.S. production capacity of comparable products; or (2) specific national security-based considerations. Commerce will lead the exclusion appeal process, providing for public comment on exclusion requests and decisions within 90 days of the requests’ filing. Commerce will also consider whether the quota or tariff for remaining products must be adjusted to ensure the domestic industry achieves projected production levels.

Aluminum Remedies

The Secretary determined it necessary to reduce imports to a level that will allow the domestic industry to restart idled capacity of primary aluminum in order to remove the threat of impairment. The Secretary recommends the President impose quotas and/or tariffs on a wide range of aluminum products to ensure that U.S. aluminum producers operate profitably and maintain an average capacity utilization rate of 80 percent. The remedies’ duration is fairly open-ended, as the Secretary recommends that the action taken remain in effect long enough to “stabilize the U.S. industry” by building cash flow to reduce debt and raising capital for plant modernization. (The report mentions that it can take up to nine months to restart idled smelting capacity.)

Commerce presented two recommendations:

  • A global quota of 86.7 percent or global tariff of 7.7 percent on imports from all countries.
  • A higher overall tariff of 23.6 percent, but only on a subset of countries (China, Hong Kong, Russia, Venezuela, and Vietnam).

Under either alternative, quotas and/or tariffs would be imposed on imports of:

Unwrought aluminum (HTS code 7601)
Aluminum castings and forgings (HTS codes 7616.99.5160 and 7616.99.5170)
Aluminum plate, sheet, strip, and foil (HTS codes 7606 and 7607)
Aluminum wire (HTS code 7605)
Aluminum bars, rods and profiles (HTS code 7604)
Aluminum tubes and prices (HTS code 7608)
Aluminum tube and pipe fittings (HTS code 7609)

Aluminum Exemptions/Exclusions

Importantly, Commerce further proposes that under either alternative the President could exempt specific countries either entirely or by granting them a quota of 100 percent of their 2017 import volumes. Such exemption would be based on an overriding U.S. economic or security interest, including the exempted countries’ willingness to help address “global excess capacity and other challenges facing the U.S. aluminum industry.” (Any exemption would require a corresponding adjustment to the final quota or tariff imposed on the other countries.)

The Secretary also proposes a separate exclusion process through which affected U.S. parties may seek exclusions from the quota or tariff for specific products based on the following: (1) lack of sufficient U.S. production capacity of comparable products; or (2) specific national security-based considerations. Commerce will lead the exclusion appeal process, providing for public comment on exclusion requests and decisions within 90 days of the requests’ filing. Commerce will also consider whether the quota or tariff for remaining products must be adjusted to ensure the domestic industry achieves projected production levels.

Deadline for President Trump

President Trump has until April 11, 2018 to determine whether he agrees with the Secretary’s recommendations on steel, and until April 20, 2018 on aluminum.

On February 15, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), in coordination with the Office of the Comptroller of the Currency (OCC), and the U.S. Department of Justice (DOJ), announced the assessment of a $185 million civil money penalty against U.S. Bank for willful violations of several provisions of the Bank Secrecy Act (BSA).

According to FinCEN’s press release, since 2011, U.S. Bank willfully violated the BSA’s program and reporting requirements by failing to establish and implement an adequate anti-money laundering program (AML), failing to report suspicious activity, and failing to adequately report currency transactions.

Banks are required to conduct risk-based monitoring to sift through transactions and to alert staff to potentially suspicious activity. Instead of this, U.S. Bank:

  • Capped the number of alerts its automated transaction monitoring system would generate to identify only a predetermined number of transactions for further investigation, without regard for the legitimate alerts that would be lost due to the cap.
  • Systemically and continually devoted an inadequate amount of resources to its AML program.
    • Internal testing by U.S. Bank showed that alert capping caused it to fail to investigate and report thousands of suspicious transactions.
    • It also allowed, and failed to monitor, non-customers conducting millions of dollars of risky currency transfers at its branches through a large money transmitter.
    • In addition, the bank filed over 5,000 Currency Transaction Reports (CTRs) with incomplete or inaccurate information, impeding law enforcement’s ability to identify and track potentially unlawful behavior.

U.S. Bank also had an inadequate process to handle high-risk customers. As a result:

  • Customers whom the bank identified or should have identified as high-risk were free to conduct transactions through the bank, with little or no bank oversight.
  • By not having an adequate process in place to address high-risk customers, U.S. Bank failed to appropriately analyze or report the illicit financial risks of its customer base.

FinCEN noted these failures precluded the bank from addressing the risks that such customers posed, which included not filing timely suspicious activity reports (SAR) used by law enforcement investigators to recognize and to pursue financial criminals.

On Valentine’s Day, two subcommittees of the House Committee on Science, Space, and Technology held a joint hearing on the potential application of blockchain technology beyond cryptocurrency and financial technology. This hearing highlights the U.S. Government’s growing interest in blockchain, a Distributed Ledger Technology (DLT) that has powered platforms for secure and decentralized transactions. While its most visible exponent, Bitcoin, has been a hot topic, blockchain is gaining traction among some federal agencies as a tool of the future.

Given the sheer data demands on modern government, blockchain, which would enable what some call “democratized trust,” shows promise to cut red tape without compromising the security and integrity of government transactions. The potential use cases for blockchain are many—just to name a few: identity management, supply chain management, smart contracts, patents, and foreign aid delivery. Federal government agencies are making their own forays into this area:

  • Department of Homeland Security: prove the integrity of captured data from border devices to help secure the Internet of Things (IoT);
  • GSA: automating the FASt Lane process for IT Schedule 70 contracts to give end-user agencies quicker access to innovative suppliers;
  • Navy: secure sharing of data within the Naval Additive Manufacturing process.

But, the government is still cautious. With a view towards cybersecurity vulnerabilities, Section 1646 of the 2018 National Defense Authorization Act requires DoD to brief on the offensive and defensive cyber applications of blockchain by the early half of this year. In practice, the government has been experimenting mostly through vehicles such as proofs of concepts and Small Business Innovation Research (SBIR) projects. These initiatives, while distinct from traditional procurements, provide low-cost opportunities for entry. Industry should be on the lookout for ways to engage the government and articulate viable uses of blockchain for particular mission requirements.

On 13 February, the EU published an Information Note to EU business operating and/or investing in Crimea/Sevastopol.

The new version of this note includes updates about relevant regulations as well as more information about precautions to take when doing business in the region.

On the last page, it provides links to further information on the implementation of restrictive measures in the following documents:

  • Guidelines on implementation and evaluation of restrictive measures, see here
  • Best Practices for effective implementation of restrictive measures, see here
  • Guidelines on the implementation of the prohibition on making indirectly available of funds and economic resources and the notions of ownership and control, see here
  • Frequently Asked Questions (FAQ), click here
  • EU sanctions map, see here

On February 13, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a finding pursuant to Section 311 of the USA PATRIOT Act identifying ABLV Bank of Latvia as a “primary money laundering concern.” FinCEN also issued a notice of proposed rulemaking (NPRM) under that section which, if adopted, would prohibit financial institutions from opening or maintaining a correspondent account in the United States for, or on behalf of, ABLV. In practice, financial institutions (both U.S. and non-U.S. headquartered) often do not wait for such a rule to be finalized but instead move immediately to close out banking relationships with the designated foreign financial institution as soon as the finding and NPRM are announced.

Under Section 311, if FinCEN’s Director finds that a foreign financial institution qualifies as a “primary money laundering concern,” they may propose a rule that would impose one or more of five different “special measures” against it. The most serious special measure, and the one typically imposed, is the fifth, which prohibits U.S. banks from maintaining correspondent relationships with the named foreign financial institution. Proposed rules to impose special measures are made available for public comment and become effective once the rule is finalized.

FinCEN is proposing this action based on its finding set out in the NPRM that ABLV is a foreign bank of primary money laundering concern. In particular, the FinCEN NPRM reports that ABLV has institutionalized money laundering as a business practice and has been involved in the provision of banking services to entities designated by the United Nations – including North Korean entities.  FinCEN also found that ABLV has assisted North Korea in the procurement or export of ballistic missiles.

It should be noted that the last two instances of FinCEN’s use of its Section 311 authority were ultimately resolved in FinCEN’s favor.

  • On May 23, 2017, the United States Court of Appeals for the District of Columbia affirmed the dismissal of a challenge to the U.S. Treasury’s use of Section 311 of the USA PATRIOT Act against Andorran bank Banca Privada d’Andorra (BPA) by the bank’s majority shareholders. Please click here for Crowell’s Client Alert on the BPA case.
  • In April of 2017, the U.S. District Court for the District of Columbia upheld the Treasury Department’s use of Section 311 of the USA PATRIOT Act to impose “special measures” with respect to Tanzanian Bank FBME, Ltd. Please click here for Crowell’s Client Alert on the FBME case.

Written comments on the NPRM may be submitted within 60 days of publication.

On February 12, the State Department’s Directorate of Defense Trade Controls (DDTC) published a Federal Register Notice seeking comments to inform its review of controls implemented in recent revisions to the following United States Munitions List (USML) Categories:

V – Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents;

X – Personal Protective Equipment; and

XI – Military Electronics

Commerce’s Bureau of Industry and Security (BIS) also published a notice on February 12. The agency is seeking public comments to perform a complementary review of items on the Commerce Control List (CCL) concurrent with DDTC’s review to ensure that the descriptions of these items on the CCL are clear, items for normal commercial use are not inadvertently controlled as military items on the USML, technological developments are accounted for on the control lists, and controls properly implement the national security and foreign policy objectives of the United States.

This is part of DDTC and BIS’ periodic post-Export Control Review (ECR) of the USML/CCL.

Comments for both notices are due on April 13.

During the long-anticipated sixth round of talks in Montreal to update NAFTA, from January 23-29, negotiators made progress in some issue areas while avoiding any major clashes that might have led to U.S. withdrawal from the existing agreement. Officials advanced discussions on digital trade, sanitary and phytosanitary measures, and technical barriers to trade to near completion while closing a chapter on anti-corruption measures.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer acknowledged progress in these areas, while highlighting the importance of the need to make progress on the “core issues” of greatest interest to the United States. These core issues, which could include the rules of origin for automobiles as well as other difficult issues (i.e., investment, procurement, dispute settlement and the U.S. proposal for a five-year “sunset clause” in the agreement), are ultimately what the U.S. will judge as determining the success or failure of the talks.

Despite some initial constructive engagement, however, negotiators remain far from resolving these issues. Canada responded to a few U.S. proposals during the round:

  • On the rule of origin for autos, Canada reportedly proposed expanding the formula for calculating regional and national content values to include intellectual property and new technologies. Lighthizer rejected this approach in his closing remarks, finding it to be the “opposite” of U.S. interests because it would lead to less regional content than the status quo. The initial U.S. proposal would increase the regional value content for automobiles from the current 62.5 percent to 85 percent, with 50 percent reserved for U.S.-origin content.
  • On investor-state dispute settlement (ISDS), Canada proposed a mechanism that would exclude the U.S., while maintaining mutual protections only for Canada and Mexico. While it is unclear whether USTR will favor this approach, U.S. industry groups will likely be opposed.
  • On the “sunset clause,” Canada made a counterproposal of a five-year review process for the agreement, without the threat of automatic termination.

Canada also proposed departing from a proposed rule that would require the NAFTA parties to automatically extend to one another the same level of market access for services as each commits to in future trade agreements—the so-called “MFN-forward” rule that Canada had already agreed to in TPP. Lighthizer said in his closing remarks that the proposal was “unacceptable” and referred to it as a “poison pill.”

The Trump Administration overall appears to be signaling that negotiations are likely to proceed without disruption at least through the next round, which will take place in Mexico City from February 26-March 6.

While officials initially set a target date of concluding talks by March 31, there are hints that negotiations could last beyond that date, even perhaps after Mexico’s general election on July 1. President Trump said on January 11 that he could be flexible on the timetable, and U.S. Secretary of Agriculture Sonny Purdue testified to the House Agriculture Committee on February 6 that he expects talks to be extended beyond March but completed before the end of the year.

Members of Congress representing agricultural interests continue to press the Trump administration to conclude an agreement that will “do no harm” to the U.S. agricultural sector, which has benefitted from expanded access to Canada and Mexico under NAFTA. These Members would prefer to see the negotiations extended beyond March, provided that the overall result remains favorable for U.S. agribusiness.

On January 24, a day ahead of a Senate Banking Committee hearing on reforming the Committee on Foreign Investment in the United States (CFIUS), the White House issued its official endorsement of Senator John Cornyn’s (R-TX) bill, “Foreign Investment Risk Review Modernization Act” (“FIRRMA,” S. 2098). Congressman Robert Pittenger (R-NC) has introduced companion legislation in the House of Representatives (H.R. 4311).

In its press statement, the White House noted that CFIUS modernization as outlined in FIRRMA would “achieve the twin aims of protecting national security and preserving the longstanding United States open investment policy.” If passed, FIRRMA would expressly expand CFIUS’ scope to review certain additional transactions, such as purchases of land near sensitive U.S. military facilities and joint ventures where U.S. firms share technology with foreign entities, although as a practical matter, CFIUS already reviews many such transactions. Of particular note, FIRRMA would direct CFIUS to more closely examine foreign investment in “critical emerging technologies,” which may have military uses in the future.

Critics of the FIRRMA legislation point to the bill’s broad and vague language as potentially deterring foreign investment into the United States. The statement from the White House emphasized the importance of maintaining an open investment environment – a theme that was echoed during President Trump’s speech at Davos when he claimed America was “open for business.”

Given the need to strike the right balance between protecting national security and attracting foreign investment, Congress has convened several hearings within the past three months to debate how best to approach CFIUS reform. Conveying a sense of urgency to address the perceived gaps within current CFIUS review, some Members of Congress have even indicated that they would like to put a bill on the President’s desk before the August recess. FIRRMA remains the most widely supported legislation both within Congress and the Trump administration. However, a difficult legislative year and mixed reactions from the U.S. business community could delay passage of a final bill.

The following lists the key takeaways from witness testimony during the four most recent Congressional hearings on CFIUS reform:

  • China dominates the conversation: Across Members of Congress and witnesses, there is agreement that China’s aggressive industrial policy is a real threat that can come from the private sector in addition to state-owned enterprises. Proponents of FIRRMA suggest that China has weaponized foreign investment in emerging technologies to erode U.S. military advantage and U.S. dominance in high-tech industries. These proponents further assert that an expansion in CFIUS’ scope will help close perceived gaps in the U.S. investment review process that have allowed potentially malicious Chinese firms to invest in emerging critical technologies.
  • Critics of FIRRMA worry about the impact on U.S. enterprise: Among some in the U.S. business community, there is concern that an expansion of CFIUS’ review of minority investments and joint ventures would disadvantage U.S. firms. The regulatory burden imposed by FIRRMA on transaction reviews might dissuade foreign companies from entering into deals with U.S. partners, which could diminish U.S. competitiveness in the long run.
  • Export controls vs. CFIUS: Other critics of FIRRMA emphasize that CFIUS was meant to act as a complement to existing export control regimes that already regulate technology transfers to countries of concern and that the CFIUS process is a blunt instrument that cannot and should not attempt to supplant those controls. Existing export controls can be updated to encompass new categories of critical technologies and would also invite coordination with other advanced markets like Europe and Australia to ensure consistency and thoroughness of control.
  • CFIUS needs more resources: There is a near-unanimous plea for more resources for CFIUS. FIRRMA would introduce filing fees at 1 percent of the transaction value (capped at $300,000) for each written notice and would and facilitate the addition of staff to undertake what will likely be an increase in the transactions identified to the Committee through the new contemplated process of voluntary and in some cases mandatory declaration.

Even without FIRRMA, Chinese transactions have faced increased scrutiny over the past few years, a trend continuing under the Trump administration. In September 2017, President Trump acted on a recommendation from CFIUS and blocked a $1.3 billion M&A deal between Oregon-based Lattice Semiconductors and Canyon Bridge Capital Partners – a private equity firm with Chinese backers. More recently this year, a $1.2 billion transaction between Dallas-based MoneyGram and AliPay (the financial payments subsidiary of Chinese internet giant Alibaba) collapsed after CFIUS indicated that it would not clear the proposed acquisition by AliPay.

While the Lattice-Canyon Bridge deal raised concerns about the dual-use capabilities of Lattice’s semiconductor technologies, the MoneyGram-AliPay transaction drew national security concerns around access to personal data. If AliPay had successfully acquired MoneyGram, then it (and presumably its parent company Alibaba) would have received access to the personal information of U.S. citizens. CFIUS’ failure to clear the transaction demonstrates the broad view of U.S. national security that the Committee has taken.

As reported in Crowell & Moring’s previous post, the U.K. government announced a Sanctions and Anti-Money Laundering (AML) Bill to provide the U.K. with the necessary framework and powers to implement economic sanctions and AML regulations once it formally exits the European Union.

The Sanctions and AML Bill was introduced in the House of Lords in October 2017. Several matters were discussed and amended during the Report stage in the House of Lords:

Sanctions:
The government restricted the regulation-making powers of the executive branch to cases in which there is good and reasonable cause for action and where the Parliament has issued a report.
Designations require procedural fairness and proportionality. In addition, the power to designate by description is now limited to cases in which it is not practicable for the Minister to identify by name all the persons falling within the description, and the description is sufficiently precise that a reasonable person would know whether any person falls within it.
The licensing regime was also discussed and the U.K. government stated that an initial framework for exceptions and licenses will be published and the interested parties will continue to be consulted before the Sanctions and AML Bill enters into force.

 

AML:
The government did not establish a broad power to create new criminal offenses in the AML context.
The new Bill will not implement a beneficial owner registry in overseas territories or a register of beneficial ownership of U.K. property registered outside the U.K. However, Clause 44 of the report requires the Secretary of State to publish and lay before Parliament three reports on the progress that has been made to put in place a register of beneficial owners of overseas entities.

The review of the Sanctions and AML Bill in the House of Lords was completed on January 24. The Bill was then introduced in the House of Commons for first reading on January 25. The version of the Bill introduced in the House of Commons can be found here, along with Explanatory Notes.

No amendments were made during this first reading, and the Bill’s second reading is scheduled for February 20. Three more steps are still necessary within the House of Commons (Committee Stage, Report Stage, and Third Reading) before the Bill is ready to receive royal assent and be enacted into law. There is no set time period for the discussion of amendments and royal assent.

 

In the context of the negotiations on the terms of the transition period during which the U.K. will remain bound by EU rules following its official exit, the applicability and enforcement of international trade agreements between the EU and third countries is an important question. Although the U.K. would remain bound by the terms of the free trade agreements (FTA) concluded by the EU, the major trading partners with which these FTAs have been concluded would not necessarily be bound to respect the terms of the agreements in relation to the U.K.

Certain trading partners including Canada and Japan appear determined to follow a more conciliatory approach, emphasizing the desirability of preserving a degree of predictability in their trade relations with the U.K. Japanese officials have mentioned the onerous nature of renegotiating existing trading terms with the U.K., while Canadian officials refer to the fact that the FTA with the EU (CETA) has been concluded and entered into force so recently.

However, other trading partners including Chile and South Korea have suggested they might seek to condition the extension of their FTAs’ applicability to the U.K. during the transition period. South Korea in particular appears to see two opportunities to extract concessions from the U.K. to remedy the trade deficit it has maintained with the U.K. in recent years. The first opportunity would arise in the context of agreeing to the transition period, and the second in the subsequent negotiation of bilateral trade terms with the U.K. to apply after the transition period.

As a result, in an attempt to protect FTAs from renegotiation, the EU and U.K. will likely agree on a declaration confirming the continued applicability of these FTAs to the U.K. during the transition period.