In ruling NY N311428, Customs and Border Protection (CBP) discussed the classification of the DisinfectBot, which is a remote controlled machine used for spraying disinfectant over a large area at a safe distance. The device consists of a moving body with nozzles for spraying and a remote control used to operate the moving body. Rechargeable lithium batteries power both the body and the remote control. The spray body has six nozzles that can spray disinfectant covering 10,000 square meters or 107,000 square feet per hour. The remote control uses either Bluetooth or RF in range within 100 meters. The moving spraying body measures 49.2 inches x 33.8 inches x 21.6 inches. The retail box consists of the DisinfectBot moving body, charger, remote controller, installation tools, spare spray head, spare gasket for leaking, instruction manual and warranty card.

CBP determined the applicable subheading for the DisinfectBot is 8424.89.9000, HTSUS, which provides for “Mechanical appliances (whether or not hand operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines; parts thereof: Other appliances: Other.” The general rate of duty will be 1.8% ad valorem.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 8424.89.9000, HTSUS, unless specifically excluded, are subject to an additional 25% ad valorem rate of duty. At the time of importation, the Chapter 99 subheading, 9903.88.02, in addition to subheading 8424.89.9000, HTSUS, must be reported.

On May 15, 2020, President Trump issued an executive order establishing the “Forced Labor Enforcement Task Force” required by the U.S.-Mexico-Canada Agreement (USMCA) implementing bill. Section 741 of the USMCA Implementation Act requires the Department of Homeland Security the Task Force as the central hub for the U.S. government’s enforcement of the prohibition on imports made through forced labor. After missing the original April 28 deadline for the Task Force creation as outlined in the USMCA implementing bill, members of the House Ways & Means Committee wrote a letter to the administration to comply with the original commitments.

The Mandate of the Task Force is to improve coordination among U.S. agencies to prohibit forced labor imports and ensure the continuation of forced labor prohibition under U.S. law. The Task Force will be chaired by the Secretary of Homeland Security and will include representatives from the Department of State, Department of the Treasury, Department of Justice, Department of Labor, and the Office of the United States Trade Representative. According to the Executive Order, the Task Force will endeavor to make all decisions under consensus but shall decide matters by a majority vote in the case of disagreement.

The Task Force will eventually establish the procedures and timelines for petitions submitted to the U.S. Customs and Border Protection regarding forced labor allegations. In addition, the Task Force will submit biannual reports to Congress summarizing governmental efforts to prohibit the importation of goods produced via forced labor. According to comments made by the Chairman of the House Ways & Means committee, the Task Force will be necessary to combat pressing forced labor problems currently facing the U.S. such as imports from the agricultural sector in Mexico and various industrial sectors in China.

 

On May 14, 2020, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the U.S. Department of State, and the U.S. Coast Guard issued a long-awaited “Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities” (the “Advisory”). The Advisory substantially expands on previous shipping advisories that OFAC and other U.S. agencies have issued that were specific to the Iran, Syria, and North Korea programs (see our previous summary) by not only offering global guidance, but also by issuing more than a dozen pages of detailed industry-specific recommendations across 10 sectors that touch the maritime industry. In many cases, these recommendations go substantially beyond the compliance expectations that OFAC or its peers had previously articulated.

The Advisory consolidates the list of “deceptive shipping practices” that were identified in previous advisories and adds several new practices:

  • Disabling or Manipulating the Automatic Identification System (AIS) on Vessels;
  • Physically Altering Vessel Identification;
  • Falsifying Cargo and Vessel Documents;
  • Ship-to-Ship (STS) Transfers;
  • (New) Voyage Irregularities;
  • (New) False Flags and Flag Hopping; and
  • (New) Complex Ownership or Management.

To identify these deceptive practices and mitigate these risks, the Advisory recommends that all industry actors should “implement appropriate due diligence and compliance programs based on their risk assessments,” but then proceeds to offer a list of suggested compliance steps that “may assist in more effectively identifying potential sanctions evasion.” These are:

  1. Institutionalize Sanctions Compliance Programs;
  2. Establish AIS Best Practices and Contractual Requirements;
  3. Monitor Ships Throughout the Entire Transaction Lifecycle;
  4. Know Your Customer and Counterparty;
  5. Exercise Supply Chain Due Diligence;
  6. Contractual Language; and
  7. Industry Information Sharing.

The suggested practices are consistent with previous guidance that OFAC issued with respect to North Korea (in February 2018 and updated in March 2019) and Iran and Syria (November 2018 and March 2019). The Advisory goes substantially further than the prior guidance, however, by including an Annex in which it provides specific compliance recommendations for each of the following industries touching on the maritime sector:

  1. Maritime Insurance Companies;
  2. Flag Registry Managers;
  3. Port State Control Authorities;
  4. Shipping Industry Associations;
  5. Regional and Global Commodity Trading, Supplier, and Brokering Companies;
  6. Financial Institutions;
  7. Ship Owners, Operators, and Charterers;
  8. Classification Societies;
  9. Vessel Captains; and
  10. Crewing Companies.

We will not repeat the 14 single-spaced pages of recommendations, but the following are a few of the key features or implications of these recommendations:

  • Establishes the New Compliance Baseline: The Advisory goes out of its way to repeat that the recommendations are not legal requirements, for example, by having 11 separate footnotes that all state that the recommendations are not intended to be and should not be interpreted as “imposing requirements under U.S. law or otherwise addressing any particular requirements under applicable law.” Nevertheless, they will likely be treated as doing exactly that. While OFAC does not formally require a compliance program, as articulated in its Compliance Framework, OFAC expects all companies to implement a “risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP),” including through the implementation of internal controls that are “capable of adjusting rapidly to changes published by OFAC.” Having now published the Advisory, OFAC will almost certainly evaluate companies in, or engaging with, the maritime sector against these new recommendations when determining the reasonableness of a company’s compliance program in an enforcement context. In cases where these controls could prove practically or commercially impossible (e.g., continuous AIS monitoring), companies may find themselves in the position of having to convince OFAC to agree with this position and to find their programs otherwise reasonable without them.
  • Extends AIS Monitoring Recommendations to “Continuous” Monitoring: OFAC’s previous guidance had focused heavily on use of AIS monitoring, encouraging companies to utilize it to identify potential evasion activity. This is something many companies had implemented when signing contracts or renewals, or processing related payments. OFAC had only recommended companies “monitor” AIS when vessels were operating in high-risk areas (e.g., the East China Sea, around the Korean peninsula, or in the Gulf of Tonkin). The Advisory goes further. While the general language recommends that companies should be monitoring on a risk-based approach, in several places in the sector-specific recommendations, OFAC recommends that, for example: (a) ship owners, managers, and charterers should “continuously monitor vessels,” and (b) flag registries should have the “capability to monitor AIS transmissions continuously,” and (c) insurers should monitor for “any significant time period with non-transmission that is not consistent with the International Convention for the Safety of Life at Sea” (SOLAS) or any “suspicious deviations in routes,” which effectively assumes continuous monitoring. If implemented in full, this recommendation would flip many compliance programs from using AIS reactively (e.g., reviewing historical data when a claim arises or prior to entering into a new relationship or renewal) to requiring that it be proactively monitored throughout the lifecycle of a relationship.
  • Requires Access to AIS Monitoring Tools: Implicit in the above recommendation is a requirement for companies to have the ability to research AIS history. The Advisory makes this recommendation explicit for maritime insurers providing cover for ship owners, suppliers, buyers, charterers, and managers, as well as for flag registries, recommending that they have the ability to “research the AIS history for all the vessels under the ownership or control of such parties,” a recommendation that likely requires the use of subscription tracking tools to access vessels’ historic AIS data.
  • Requires Substantially More Detailed Ownership Checks: Generally speaking, in the United States only companies that are subject to U.S. anti-money laundering (AML) obligations (i.e., financial institutions) are legally required to acquire ultimate beneficial ownership (UBO) information on their counterparties. However, given how difficult it is to manage sanctions risk without knowing UBO information, and in light of OFAC’s 50 Percent Rule, OFAC has increasingly recommended that all parties conduct “know your customer” (KYC) analyses, which would include acquiring UBO information. The Advisory, however, goes further, specifically recommending that for vessels determined to be operating in areas at high risk for sanctions evasion not only do (a) marine insurers and (b) classification societies acquire UBO information, but that they acquire, as appropriate, “a color photocopy of the passports, names, business and residential addresses, phone numbers, email of all individual owners of the vessel…” (emphasis in original). The Advisory goes further to recommend that marine insurers seek adequate release in their contracts to allow this personally identifiable information (PII) to be shared with competent authorities if illegal activities are identified, “as allowed by applicable laws and regulations.” This concept overlaps with expectations under U.S. AML requirements, which by contrast apply only to financial institutions.
  • Creates an Implied “Know Your Customer’s Controls (KYCC) Obligation: Finally, the Advisory extends these KYCC obligations even further by specifically recommending that (a) ship owners, operators, charterers, and (b) classification societies require that counterparties maintain an “adequate and appropriate” compliance policy. This would include: (1) conducting activities consistent with sanctions; (2) adequate resourcing to ensure sanctions compliance; (3) ensuring sanctions compliance by affiliates and subsidiaries; (4) having controls to monitor AIS; (5) having controls to assess loading or unloading of cargo in high risk locations; (6) having controls to verify the authenticity of bills of lading; and (7) having controls to operate consistent with the Advisory. While OFAC has increasingly commented on the risks that downstream customers can create for companies, this is its most explicit recommendation that these parties implement a KYCC type system, a concept that again overlaps with expectations under U.S. AML requirements.

While the Advisory arguably substantially raises the publicly articulated compliance recommendations across the industry, OFAC is likely to begin using it almost immediately in its communications with industry. This could be in the licensing, policy, or enforcement context. We therefore recommend that all companies with marine sector exposure closely review the recommendations contained in the Advisory and assess whether their current compliance program meets the standards expressed and, if not, be able to articulate a risk-based reason why the particular recommendations are not appropriate to the company, prior to any OFAC-facing engagement.

Note on AIS

The Automatic Identification System (AIS) is an automated tracking system that transmits a vessel’s identification and navigational positional data via high frequency radio waves. The IMO Convention for the Safety Of Life At Sea (SOLAS) Regulation V/19.2.4 requires all vessels with a gross tonnage of 300 and above engaged on international voyages and all passenger ships irrespective of size to carry AIS onboard. The AIS onboard must be switched on at all times unless the Master considers that it must be turned off for security reasons (such as in areas at high risk for piracy) or anything else.

AIS is intended to enhance safety of life at sea; the safety and efficiency of navigation; and the protection of the marine environment. Using AIS to detect potential illicit or sanctionable activities is a fairly recent phenomenon and while it can provide helpful data, like any electronic equipment, AIS has limitations including that the accuracy of the data received depends on the accuracy of date transmitted (i.e., errors with the positioning system can provide inaccurate locations), not all vessels are fitted with AIS, or AIS might be turned off for legitimate reasons (e.g., in high-risk piracy locations) or be defective.

On May 12, 2020, the China State Tariff Commission of the State Council issued a new round of tariff exemptions on China’s Batch 2 of $60 billion worth of US imports. China implemented retaliatory tariffs following the Trump administration’s imposition of Section 301 tariffs on Chinese imported goods. This is the second instance of exclusions in this Batch and the announcement from the State Tariff Commission claims that several of the products of this list include goods which are being excluded for the second time.

The exclusions will be valid from May 19, 2020 through May 18, 2021 and the refund of duties will apply to relevant imports within the past 6 months from the date of publication of this exclusion notice. In total, the exclusion list includes 79 products. Notable products included on these exclusions include various rare earth metal ores, certain chemical products, and alloy wires and tube.

Here is a link to an unofficial translation of the exclusion list in English:

https://www.crowell.com/files/China-Second-Round-of-US-Exclusions-on-Retaliatory-Tariffs.xlsx

Here is a link to the official announcement in Chinese:

http://gss.mof.gov.cn/gzdt/zhengcefabu/202005/t20200512_3512030.htm

Here is a link to the official exclusion list in Chinese:

http://gss.mof.gov.cn/gzdt/zhengcefabu/202005/P020200512358043966954.pdf

On May 8, 2020, the Financial Crimes Enforcement Network (FinCEN) renewed its Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to obtain and verify identifying information for the natural persons behind shell companies used to make all-cash purchases of residential real estate with values equal to or greater than $300,000.  The GTOs only apply in certain metropolitan counties within the following nine states: California, Florida, Hawaii, Illinois, Massachusetts, Nevada, New York, Texas, and Washington.  No new jurisdictions were added to those covered by previous GTOs, and the reissuance mirrors the November 2019 GTOs.  Covered transactions include purchases made using currency, cashier’s checks, certified checks, traveler’s checks, personal checks, business checks, money orders, funds transfers, or virtual currencies.

FinCEN also provided related FAQs, which are identical to those released in the November 8, 2019 renewal.

These latest GTOs went into effect on May 10, 2020 and remain in effect until November 5, 2020.

Under the Bank Secrecy Act, the Director of FinCEN may issue GTOs that impose temporary recordkeeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area within the U.S.  These orders can be in effect for up to 180 days and can be renewed thereafter following a finding that the circumstances justifying the original GTO continue to exist.

 

In a press release published on May, 15, 2020, the Bureau of Industry and Security (BIS) announced plans to move forward with a long debated rule change that will extend US export jurisdiction over additional foreign-produced items.  Though not yet published in the Federal Register, BIS announced a change to the foreign-produced direct product rule and the Entity List “to make the following foreign-produced items subject to the Export Administration Regulations (EAR):

(i)        Items, such as semiconductor designs, when produced by Huawei and its affiliates on the Entity List (e.g., HiSilicon), that are the direct product of certain U.S. Commerce Control List (CCL) software and technology; and

(ii)       Items, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List (e.g., HiSilicon), that are the direct product of certain CCL semiconductor manufacturing equipment located outside the United States.  Such foreign-produced items will only require a license when there is knowledge that they are destined for re-export, export from abroad, or transfer (in-country) to Huawei or any of its affiliates on the Entity List.”

BIS described the changes as “narrowly and strategically target[ing] Huawei’s acquisition of semiconductors,” but the phrase “such as” suggests the precise wording of this new restriction will be important.   In any event, to minimize the economic effect for foreign foundries using U.S. semiconductor manufacturing equipment, the rule will effectively provide a 120 day wind-down period to allow the reexport, export, or transfer of items newly “subject to the EAR” that were already under production at the time of the rule change.

 

In ruling NY N311303, Customs and Border Protection (CBP) discussed the classification of a laser hair therapy system from China. It is comprised of a helmet-shaped dome housing which is incorporated with 51 laser diodes and 30 LEDs. The system further consists of a foam pad, safety sensors, a power wire, and remote control. The system is used in the home to promote hair growth in men and women.

In use, the device is placed on the user’s head. The lasers and LEDs emit light energy that works to stimulate the hair follicles to promote growth and reactivate dormant growth areas of the scalp. These units are not meant to be used by medical professionals, but instead are only used by individuals in their home.

CBP determined that the applicable subheading for the laser hair therapy system is 9013.80.9000, HTSUS, which provides for “Liquid crystal devices…: Other devices, appliances and instruments: Other.” The general rate of duty will be 4.5% ad valorem.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 9013.80.9000, HTSUS, unless specifically excluded, are subject to an additional 7.5% ad valorem rate of duty. At the time of importation, the Chapter 99 subheading, 9903.88.15, in addition to subheading 9013.80.9000, HTSUS, must be reported.

On May 11, 2020, the Directorate of Defense Trade Controls (DDTC) published nine new Frequently Asked Questions (FAQ) on exemptions related to §126.4 of the International Traffic in Arms Regulations (ITAR), Transfers by or for the United States Government (USG).

In April 2019, DDTC issued the long-awaited final rule to modernize §126.4 exemptions for exports in support of the U.S. Government (please click).  The FAQs discuss certain clarifying requirements for use of §126.4(a) and §126.4(b), though remain silent on Defense Technology Security Administration (DTSA)’s anticipated guidelines regarding the process for certification of exemption under 126.4(b)(2) for Department of Defense contracts.

On April 20, 2020, the U.S. Attorney for the Southern District of New York (SDNY) announced that the Industrial Bank of Korea (IBK) agreed to a deferred prosecution agreement (DPA) and $51 million penalty related to a one-count felony information charging IBK with violating the Bank Secrecy Act (BSA). On the same day, the New York Department of Financial Services (DFS) announced a consent order with IBK, including a separate $35 million penalty, and the New York Attorney General (NYAG) announced a non-prosecution agreement, with respect to the same conduct.

The agreements relate to failures by IBK to administer an effective anti-money laundering program at its New York branch (IBKNY) over an extended period, during which time a U.S. citizen, Kenneth Zong, and various co-conspirators, including several Iranian nationals, allegedly were able to transfer more than $1 billion from IBK accounts through U.S. financial institutions, including IBKNY, in violation of U.S. sanctions against Iran.

The one-count information charged only a violation of the BSA, and did not charge IBK with causing a violation of, or IBKNY with violating, U.S. sanctions on Iran under the International Emergency Economic Powers Act (IEEPA).

SDNY’s Deferred Prosecution Agreement

The SDNY charged IBK with violating BSA regulations by failing to provide the resources, staff, and training necessary to adequately monitor transactions at IBKNY.

From roughly 2006 until at least 2013, IBKNY relied on manual review of transaction alerts to identify suspicious activity. During at least 2010-2011, this manual review was conducted by a single AML compliance officer. Although the compliance officer repeatedly warned bank leadership at IBKNY and IBK that the existing manual review system and staffing was not adequate, and requested additional resources, IBK failed to invest in either automated transaction monitoring or additional trained staff.

As a result of this deficiency, IBKNY’s review of potentially suspicious transactions fell behind, and the compliance officer was unable to identify suspicious transactions until months after they were completed. During this period, between January and June 2011, Kenneth Zong and his co-conspirators, including several Iranian nationals, used shell companies to submit fictitious documentation to Korean banks, including IBK, in order to obtain payment from Korean won-denominated accounts established for the Central Bank of Iran to facilitate certain limited trade between South Korea and Iran. The funds were transferred into accounts in South Korea that Zong controlled. From there, the co-conspirators converted the funds into U.S. dollars and transferred the U.S. dollars through U.S. financial institutions to accounts controlled by Zong and the co-conspirators, who were primarily Iranian.

As a result of its inadequate transaction review system, IBKNY did not review and identify the Zong transactions as suspicious until July 2011, by which time IBK had cleared $10 million in such transactions through IBKNY and $990 million in such transactions through other U.S. correspondent accounts. On August 22, 2011, IBKNY filed a suspicious activity report (SAR) with FinCEN regarding the transactions that had cleared through IBKNY, and later submitted a voluntary self-disclosure (VSD) to the Office of Foreign Assets Control (OFAC) regarding the same. However, IBK did not disclose either its involvement in the other $990 million in transactions that it cleared through other U.S. correspondent accounts, or the inadequacies in IBKNY’s transaction monitoring that violated the BSA and caused IBKNY to identify Zong’s transactions as suspicious months after they occurred. IBK also failed to preserve 18 months of relevant records, and continued to fail to remedy the inadequacy of the AML program at IBKNY. IBKNY ultimately adopted a new automated transaction monitoring system, but this did not become operational until January 2013, and was not verified by IBKNY’s auditors until 2014. IBK also did not hire a second full-time AML compliance officer until October 2014.

The DPA noted that, despite these prolonged violations, federal prosecutors considered the DPA appropriate in light of the facts that IBK undertook a “thorough internal investigation and transactional analysis,” provided “frequent and regular updates to the U.S. Attorney’s Office,” collected and produced evidence located in other countries, and made employees located in other countries available for interviews in the United States. SDNY also acknowledged that IBK, by the time of the DPA, had made significant efforts to remediate its AML program.

DFS’s Consent Order

Based on the same conduct, DFS entered into a consent order with IBK and IBKNY predicated on violations of the New York Banking Law relating to books and records and to the requirement to maintain an effective and compliant AML program. In addition to the basic conduct described above, DFS emphasized that it repeatedly had identified deficiencies in IBKNY’s AML compliance program, including its transaction monitoring, in examinations from 2011 onward, and that these deficiencies were only remedied in 2019.

In addition to finding that IBKNY had failed to maintain an AML program reasonably designed to detect suspicious activity and to screen transactions for sanctions compliance, DFS found that IBKNY had failed to comply with a provision of New York’s AML law – commonly referred to as Part 504 – that requires financial institutions to maintain AML transaction monitoring and sanctions filtering programs meeting certain specifications and to certify annually that their programs are in compliance with these requirements. DFS noted that IBKNY made the certification in 2018 despite inadequacies in IBKNY’s transaction monitoring, which had been identified in previous DFS examinations and by IBKNY’s own internal consultant, and which had not been fully remedied.

NYAG’s Non-Prosecution Agreement

The NYAG resolved its investigation of IBK and IBKNY with a non-prosecution agreement also announced on April 20, 2020. The press release notes that since 2014 the NYAG Crime Proceeds Strike Force investigated IBK alongside prosecutors from SDNY and also concludes that IBK and IBKNY violated the law by willfully failing to establish, implement, and maintain an adequate anti-money laundering program at IBKNY to prevent the illegal transfer of funds in the Zong transactions. The non-prosecution agreement between NYAG and IBK is not available on the NYAG website. Historically, NYAG has not prominently been involved in bank-related AML and sanctions indictments. The NYAG’s involvement in this case may signal a more robust posture in these areas going forward.

Practical Considerations

These settlements show a continued pattern of action by federal regulators and law enforcement targeting financial institutions that fail to provide adequate resources, staff, and training to their AML compliance function, including, most recently, the combined $598 million in fines and forfeiture brought against U.S. Bank National Association for resource-related issues that allegedly resulted in failures to timely review alerts of potentially suspicious activity. (This was followed by a $450,000 assessment by FinCEN against U.S. Bank’s Chief Operational Risk Officer for his role in failing to address resource-related issues.)

Together, these and other recent AML penalties show the importance of adequate resourcing of the AML compliance function. In particular, regulated financial institutions should ensure that they:

  • are using transaction monitoring technology and methodology commensurate with their AML and sanctions risk and capable of identifying potentially suspicious or prohibited activity in a timely fashion;
  • have adequate personnel to review and act on alerts generated by these systems; and
  • consider seriously complaints of inadequate resources from the AML and sanctions compliance functions, documenting any review of such requests and explaining any decisions made in response.

May 19, 2020

Starts: 9:30 AM (EDT)
Ends: 10:30 AM (EDT)

For Crowell & Moring LLP’s next event in our series, Emerging Issues in Sanctions, AML, and Everything in Between in the Time of COVID-19, our Global Head of Blockchain & Digital Assets, Michelle Gitlitz, will moderate a discussion on the AML & Sanctions risks that digital assets companies are currently grappling with.

Join us from the comfort of your home office (couch, bed, bathroom—we see you working parents), to hear our AML & Sanctions pros discuss the following pressing topics:

How Do AML and Sanctions Laws Apply to Digital Assets? What are the Key Regulatory Risks?

  • What kinds of digital assets businesses are subject to AML regulation?
  • What kind of AML obligations do regulated entities have?
  • How do sanctions apply to digital assets transactions, assets, and wallets?
  • What sanctions obligations do digital assets businesses have?

 Potential Areas for AML and Sanctions Enforcement for Digital Assets in 2020

  • Unregistered money transmitter
  • Inadequate AML programs and failure to file SARs
  • The Funds Transfer and Travel Rules
  • OFAC’s interest in digital assets companies
  • Expert advice on virtual currency to sanctioned parties

The potential Impact of COVID-19

  • Is there an increase in the use of cryptocurrency by sanctioned persons, money launderers and fraudsters during COVID-19?

 Contact: Crowell & Moring Events (events@crowellevents.com)

Please click here to register.