On August 23rd, 2024, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), the U.S. Department of State (State), and the Commerce Department’s Bureau of Industry and Security (BIS) acted against Russia’s international supply chains.

OFAC and State collectively sanctioned nearly 400 individuals and entities. Of note, this included a substantial focus on targeting non-Russian persons for supporting Russian evasion efforts, including in more than a dozen countries outside of Russia.  The pie chart below shows the location of the new non-Russian SDN designees.

In parallel, BIS published two new rules. The first expands Russian and Belarusian sanctions under the Export Administration Regulations (EAR), while the second adds 123 entities to the Entity List.

A summary of BIS’ expanded Russian and Belarussian sanctions follows:

  • The Russia/Belarus-Military End User (MEU) Foreign-Direct Product (FDP) rule has been changed to include Russia and Belarus procurement entities.
  • License requirements have been added for the below types of EAR99 software:
    •  Enterprise resource planning (ERP); customer relationship management (CRM); business intelligence (BI); supply chain management (SCM); enterprise data warehouse (EDW); computerized maintenance management system (CMMS); project management software, product lifecycle management (PLM); building information modelling (BIM); computer aided design (CAD); computer-aided manufacturing (CAM); engineering to order (ETO); and software for the operation of computer numerical control (CNC) machine tools.
    • This also includes software updates to the software identified above that is subject to the EAR and designated as EAR99.

The bulk of the 123 entities added to the Entity List are being added under the destinations of Russia (63) and China (42). Other destinations include Canada, the Crimea Region of Ukraine, Cyprus, Iran, Kazakhstan, Kyrgyzstan, Turkey, Ukraine, and the UAE.

The SDN designations took immediate effect (albeit with several general licenses allowing for wind-down of activity with certain of the designees), while the Entity List and FDP rule updates took effect on August 27, and the new CNC controls and other corrections take effect September 16.

On August 20, 2024, the Department of State’s Directorate of Defense Trade Controls (DDTC) published an interim final rule to streamline defense trade between and among Australia, the United Kingdom (UK), and the United States in furtherance of the trilateral security partnership (the “AUKUS” partnership). The interim final rule implements the proposed rule DDTC published on May 1, 2024 with changes and is effective September 1, 2024, though DDTC is seeking comments on or before November 18, 2024.

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

On August 15, 2024, the DDTC published a final rule to expand the ITAR’s definition of “activities that are not exports, reexports, retransfers, or temporary imports.”  The final rule implements the amendments the DDTC originally proposed on December 16, 2022 with six changes.  The rule is effective on September 16, 2024 and codifies longstanding DDTC policies and clarifies the jurisdiction of the ITAR.

First, the final rule codifies existing DDTC policy that taking a defense article subject to the reexport or retransfer requirements of the ITAR on a deployment or training exercise outside a previously approved country is not a reexport or retransfer provided:

  • there is no change in end-use or end-user;
  • the defense article is transported by and remains in the possession of the previously authorized armed forces of a foreign government or United Nations military personnel; and
  •  the defense article is not being exported from or temporarily imported into the United States.

Second, the final rule clarifies that the transfer of a foreign defense article previously imported into the United States that has since been exported from the United States pursuant to a license or other approval is not a reexport or retransfer provided:

  • the foreign defense article was not modified, enhanced, upgraded, or otherwise altered or improved in a manner that changed the basic performance of the item prior to its return to the country from which it was imported or a third country;
  • a U.S.-origin defense article was not incorporated into the foreign defense article; and
  •  the defense article is not being exported from or temporarily imported into the United States.

While the rule change appears to have fairly narrow implications for industry, it does confirm that foreign-origin defense articles (including technical data) that come within U.S. jurisdiction (for example, transit a U.S. server) do not effectively become U.S. origin, and that ITAR-control over these items, if unmodified, extends only to the import or export from the United States.

On August 8, 2024, the U.S. Department of Homeland Security (DHS) added five companies to the Uyghur Forced Labor Prevention Act (UFLPA) Entity List.

The companies are:

  • Kashgar Construction Engineering (Group) Co., Ltd.;
  • Xinjiang Habahe Ashele Copper Co., Ltd. (also known as Ashele Copper);
  • Xinjiang Tengxiang Magnesium Products Co., Ltd.;
  • Century Sunshine Group Holdings, Ltd.; and
  • Rare Earth Magnesium Technology Group Holdings, Ltd.

The listings take effect on August 9.

Over the last few months. pressure from Congress has led to DHS and CBP working together to expand the scope of the UFLPA by increasing the number of entities designated on the entity list and has identified new high priority sectors subject to stricter enforcement.

The UFLPA requires the Forced Labor Enforcement Task Force (FLETF) to develop and update the UFLPA Entity List. U.S. Customs and Border Protection (CBP) enforces a rebuttable presumption that the importation of goods produced by entities identified in the UFLPA Entity List (as well as all goods produced wholly or in part in Xinjiang Uyghur Autonomous Region) is in violation of 19 U.S.C. § 1307 and prohibited from entry to the United States.

Senate Finance Chairman Wyden (D-OR) is expected to soon introduce legislation that will target de minimis reform. The legislation, dubbed the Fighting Illicit Goods, Helping Trustworthy Importers, and Netting Gains (FIGHTING) for American Act, would prohibit goods impacted by Sections 232, 301, and 201, as well as those considered sensitive goods by GSP, from entering the U.S. via de minimis.

This legislation aims to curb the flood of goods currently eligible for de minimis entry. Specifically, it would ban de minimis treatment for any product that doesn’t qualify for duty-free status under the U.S. Generalized System of Preferences program, which benefits developing countries. This would notably impact “sensitive” items such as textiles and apparel, which are excluded from GSP. In addition, the legislation would make goods subject to anti-dumping duties, countervailing duties, Section 232 tariffs, Section 301 tariffs, or Section 201 tariffs ineligible for de minimis entry. It also proposes heftier penalties for shipments that flout de minimis rules and introduces a $2 fee per shipment.

The de minimis provision has been a staple of U.S. customs law based on the idea that the administrative effort to process low-value shipments isn’t worth the revenue they generate. It is named for a Latin phrase which refers to something so minor it can be disregarded. In fiscal 2023, U.S. Customs and Border Protection processed over 1 billion de minimis shipments valued at more than $50 billion, a drastic increase from only 134 million shipments in 2015. CBP estimates the average value of de minimis shipments entering the U.S. is about $54, well below the maximum threshold for duty-free purchases from abroad.

On July 30, 2024, the Office of the U.S. Trade Representative (USTR) announced the increased Section 301 tariffs proposed on May 28, 2024, would not go into effect as planned on August 1, 2024.

USTR is still reviewing the 1,100 public comments it received. It now expects its final determination will be issued sometime in August 2024. It would then take effect two weeks after publication.

For more on the proposed changes, please see our previous post from May 24, 2024.

On July 23, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a notice about new reporting requirements (the OFAC Reporting Notice) under the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO for Ukrainians Act).  As discussed in our previous client alert, the REPO for Ukrainians Act authorizes the President to seize Russian sovereign assets subject to U.S. jurisdiction and transfer them to a fund that can be used to support Ukraine.

OFAC now requires financial institutions that hold Russian sovereign assets to report them to OFAC by August 2, 2024, or within 10 days of the detection that a financial institution holds such Russian sovereign assets.

Who Must File Reports with OFAC?

Certain categories of entities defined as “financial institutions” in the Bank Secrecy Act, 31 USC § 5312(a)(2), specifically:

  • FDIC-insured banks
  • Commercial banks or trust companies
  • Agencies or branches of foreign banks in the U.S.
  • Private bankers
  • Credit unions
  • Thrifts
  • Brokers or dealers registered with the SEC
  • Brokers or dealers in securities or commodities
  • Investment bankers or investment companies
  • Currency exchanges
  • Insurance companies
  • Any other business as designated by the Secretary of the Treasury

See OFAC Reporting Notice at 2.

What Assets Must Be Reported to OFAC?

Russian sovereign assets located at the financial institution, whether blocked or not, including:

  • funds and other property of (i) the Central Bank of the Russian Federation, (ii) the Russian National Wealth Fund, or (iii) the Ministry of Finance of the Russian Federation; or
  • “any other funds or other property that are owned by the Government of the Russian Federation, including by any subdivision, agency, or instrumentality of that government.”

OFAC Reporting Notice at 2.

Notably, financial institutions are not required to report to OFAC Russian sovereign assets previously reported to OFAC by the financial institution (1) as blocked property or (2) pursuant to Directive 4 under Executive Order (E.O.) 14024.  Financial institutions may rely on these reports previously filed with OFAC to comply with the OFAC Reporting Notice.  Id. at 1. 

What Information Must Be Reported to OFAC?

Reports should be submitted to OFAC by email (ofacreport@treasury.gov), with the subject line, “[Name of Financial Institution] REPO for Ukrainians Act Report,” and enclose a completed OFAC REPO Report Form.  Reports should include, among other things:

(1) The name and address of the person (e.g., the specific financial institution) in possession or control of the Russian sovereign asset;

(2) The date the Russian sovereign asset was detected as coming into possession or control of the financial institution;

(3) The actual, or if unknown, estimated value of the property in U.S. dollars. Foreign currencies must be reported in U.S. dollars with the foreign currency amount and notional exchange rate in the narrative;

(4) The person who legally owns the account or property;

(5) For each Russian sovereign asset reported, a description of the property and its location in the United States or otherwise, including asset type, any relevant account types, account numbers, reference numbers, dates, or other information necessary to identify the property; and

(6) A copy of the most recent relevant account statement or other documentation to support the estimated value of the property.

See OFAC Reporting Notice at 1; OFAC REPO Report Form.

Implications

Financial institutions, including those maintaining correspondent or payable-through accounts for foreign financial institutions, should undertake a review of their touchpoints with Russian clients to assess if they hold Russian sovereign assets, and report them to OFAC within the required time periods.

Assets reported under the OFAC Reporting Notice, unless blocked separately under a sanctions program, do not themselves become blocked because of this OFAC Reporting Notice.  Under the REPO for Ukrainians Act, OFAC must report such Russian sovereign assets to Congress starting in October 2024, and annually thereafter for 3 years.

On July 22, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) released guidance (“Guidance”) on how it will implement the new authority it was granted in the April 24, 2024 National Security Supplemental (“the Act”).  The Act extended the statute of limitations for civil, criminal, and forfeiture violations of sanctions programs promulgated pursuant to the International Emergency Economic Powers Act (“IEEPA”) or the Trading with the Enemy Act (“TWEA”) from five to 10 years.

In the Guidance, OFAC addressed two of the larger questions the new statute of limitations raised for businesses and compliance professionals surrounding scope and recordkeeping requirements.

First, OFAC clarified that the 10-year statute of limitations applies to any civil violation of IEEPA- or TWEA-based sanctions prohibitions that was not time-barred at the time of the Act’s enactment.  In other words, OFAC may now commence enforcement actions for such violations within 10 years of the latest date of the violation, if such date was after April 24, 2019.  By way of example, here is how OFAC’s Guidance would apply depending on the date of the violation:

  • Violation occurred before April 24, 2019: Remains time-barred.
  • Violation occurred after April 24, 2019: Previously would have been subject to a five-year statute of limitations; now that time period runs for 10 years.

OFAC considers the issuance of a pre-penalty notice or finding of violation to be the commencement of an action for statute of limitation purposes, and the 10-year statute of limitations starts at the time of the most recent violation. 

Second, while OFAC has yet to amend its recordkeeping requirements, which today generally only require records to be kept for five years, OFAC anticipates publishing an interim final rule, with an opportunity to provide comment, extending the recordkeeping requirement to 10 years under 31 C.F.R. § 501.601, in order to correspond with the new statute of limitations.  OFAC anticipates the final rule will likely become effective six months after the publication.  

On July 25, 2024, the U.S. Departments of State and Commerce issued new proposed rules that, if implemented, would (1) increase the restrictions associated with U.S. persons providing services in support of non-U.S. military-related end users / uses; and (2) implement new controls associated with exports, reexports, and transfers of items subject to the EAR if they involve a broader swath of non-U.S. military-related parties.

Both departments are accepting comments until September 27, 2024.  Quick summaries of the rules, and key points follow.

Proposed Revisions to the ITAR’s Definition and Controls Related to Defense Services

The ITAR proposed amendments:

  • Create new U.S. Munitions List entries to broadly control U.S. person’s creating, supporting, or improving (i) foreign government “intelligence activities”, or (ii) a foreign government’s organization, formation, or operation of military paramilitary operations or capabilities; irrespective of whether a defense article is involved. Both include a “catch” and “release” approach, to release certain categories of activities from control.
  • Clarify that consulting services provided by a U.S. person can also be a defense service, to correct a misconception that DDTC interprets “training” to mean only direct instructional activity.
  • Add new controls for U.S. persons providing services that result in the disabling or degradation of a defense article.

Proposed Revisions to the EAR’s Military-Related and Foreign Security End User Controls

The EAR proposed amendments:

  • Expand the Military End Use/User rule to extend to the transfer of all items on the CCL (and reorganizes the definitions Military End Uses/Users and Military Support End Users).
  • Add a control on transfers of all items subject to the EAR to “Intelligence End Users” in specified countries.
  • Add new prohibitions on U.S. persons “supporting” (a broadly defined term) activities associated with these end uses/users, even where no item subject to the EAR is involved.
  • Expand ECCNs in Category 3 to control facial recognition software for Crime Control reasons, meaning a license would be required to export to China, among other countries.

The following brief table helps to summarize the numerous EAR proposed changes:  

 Military End UsersMilitary Support End UsersMilitary Production ActivitiesIntelligence End UsersForeign Security End User
DefinitionThe national armed services (army, navy, marine, air force, or coast guard), the national guard, or any person or entity performing the functions of a ‘military end user,’ including mercenaries, paramilitary, or irregular forcesAny person or entity whose actions or functions support “military end uses”Incorporation into the following types of items or any other activity that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production” of (i) 600 series items; or (ii) any other item subject to the EAR that you know is ultimately destined to or for use by a MEUAny foreign government intelligence, surveillance, or reconnaissance organizations or other entities performing functions on behalf of such organizationsGovernmental and other entities with the authority to arrest, detain, monitor, search, or use force in the furtherance of their official duties
Export Destination Country Groups in ScopeD:5 + MacauD:5 + MacauD:5 + MacauD and E (other than Israel and Taiwan)D:5 and E
Is this a Non-Exhaustive List of Prohibited End UsersYesYesN/A – Control applies to the activity if occurring within the countries in scope, regardless of the parties.YesYes
Items within ScopeAll Items Subject to EARAll Items on the CCLN/A – only a prohibition on “supporting”All Items Subject to EARAll items on the CCL
Prohibition on U.S. Persons Providing SupportYesYes, only to parties designated with Entity List footnote 6YesYesYes, only to parties designated with Entity List footnote 8

In the ever-evolving landscape of English law credit agreements in the European leveraged loan market, the dynamics of lending have undergone significant transformations in the last few years. One issue that has gained prominence is the increase in limits on the ability of lenders to transfer their loans and the associated restrictions imposed on potential new lenders. European syndicated loan agreements have historically included a standardised and expected set of transfer restrictions applicable to prospective lenders, reflective of the market guidance and templates issued by the Loan Market Association (“LMA”). Certainty of terms and the capability of an existing lender to sell out of a loan position have been the hallmark (and expectation) of the LMA loan market. However, trends in the drafting of credit agreements have contained a concerning increase in limitations on loan liquidity. As a result, many lenders are finding it difficult to sell their distressed loans. This article explores these trends, as well as their implications on the secondary loan trading market. Click here to continue reading this client alert.