From Thursday October 10, 2024, the UK has an additional new sanctions regulator following the official launch of the Office of Trade Sanctions Implementation (“OTSI”).  First announced in December 2023, its establishment was confirmed last month with the publication of The Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the “Regulations). 

Sitting within the UK Department for Business and Trade (“DBT”), OTSI will be responsible for the civil enforcement of many UK trade sanctions and will act as a sister agency to the existing Office of Financial Sanctions Implementation (“OFSI”).  

What will OTSI enforce?

OTSI will have the power to investigate and bring civil enforcement action for breaches of certain trade sanctions, such as:

  • the provision of prohibited services (e.g., prohibited professional and legal services under the UK’s Russia sanctions regime);
  • the movement, acquisition and making available of sanctioned goods and technologies outside of the UK;
  • the provision of prohibited technical assistance, brokering services or financial services or funds in connection with sanctioned goods or technology outside of the UK;
  • any suspected circumvention of the aforementioned trade sanctions; and
  • compliance with any associated notification or reporting requirements. 

OTSI will not be responsible for the criminal enforcement of the above trade sanctions, which will stay with HM Revenue & Customs (“HMRC”). HMRC also retains responsibility for enforcing export controls (such as military and dual-use controls) and trade sanctions with respect to physical exports/imports and transfer of technology out of/into the United Kingdom (i.e., those which fall within its remit as the UK’s customs authority). OTSI will be responsible for issuing licences relating to the provision of standalone services, including professional and business services. The Export Control Joint Unit (“ECJU”) will remain responsible for licensing the export of goods, software and technology from the UK.   

Other agencies will be responsible for certain specified trade-related civil enforcement, namely OFSI retains responsibility for the Russian oil price cap mechanism and OFCOM is responsible for the civil enforcement of the internet services prohibitions under the UK’s Russia and Belarus sanctions regimes. The Department for Transport will be responsible for the civil enforcement of shipping and aircraft sanctions.

Civil Enforcement Powers

OTSI will be able to determine most breaches of trade sanctions on a strict liability basis, meaning that any defence that a person did not know or have cause to suspect that an offence had been committed will not protect them (this is not the case for some offences, for example circumvention of trade sanctions for which OTSI would need to prove that the person acted knowingly). This standard now mirrors the standard for the civil enforcement of the UK’s financial sanctions regime following changes in June 2022.

OTSI will be able to impose monetary penalties, with the maximum monetary penalty for breaching trade sanctions regulations being either £1 million or 50% of the estimated value of the breach – whichever is greater.  For aircraft and shipping sanctions, the Department of Transport can impose monetary penalties up to £1 million or 50% of the estimated value of the aircraft or ship used in connection with the breach (again, whichever is greater). OTSI therefore has the power to issue very substantial fines on entities falling afoul of the regulations.   

OTSI can also publicise information about the imposition of a civil monetary penalty.  This aligns OTSI with OFSI’s approach and is a divergence from HMRC, which publishes limited information about its enforcement. 

OTSI has published guidance about how it will assess suspected breaches of trade sanctions, which includes non-exhaustive mitigating factors that it may consider when enforcing an established breach.  These factors include: timely disclosure of any breaches; compliance with OTSI information requests; good record-keeping compliance; no previous record of having breached sanctions; and having proportionate compliance systems in place relative to the size, sanctions exposure and resources of a business.

Information Gathering Powers 

OTSI has been granted broad powers to request information, including where it may reasonably require information for the purposes of exercising its functions; monitoring compliance with, or detecting evasion of trade sanctions, or investigating a suspected breach or failure to comply with a trade sanctions obligation.  It can also request information about a person’s compliance with a trade licence. There are associated offences for failure to comply with these information provisions. 

Reporting Obligations

Finally, there are new reporting requirements in relation to suspected breaches of the trade, shipping and aircraft sanctions.  For trade sanctions, these requirements apply to (among others) financial institutions and legal practitioners.  For aircraft and shipping sanctions, the requirements apply to aircraft operators, people chartering aircrafts or ships by way of business, masters or pilots of vessels, and harbour authorities.

On September 26, 2024, Texas-based syringe importer Retractable Technologies, Inc. (“Retractable”) filed a complaint before the United States Court of International Trade contesting the Office of the United States Trade Representative’s (USTR) 100 percent tariff rate on imported needles and syringes from China. The tariff increase became effective on September 27, 2024.  In conjunction with the complaint, Retractable Technologies, Inc., also filed a motion for a temporary restraining order requesting the court suspend application of the tariff increase while the litigation is pending.

This action comes after USTR recently announced higher duties for needles and syringes from the previously proposed 50 percent to 100 percent as part its statutory four-year review of tariffs imposed on imported Chinese goods under Section 301 of the Trade Act of 1974.

Retractable’s complaint claims that USTR’s tariff increase on needles and syringes violated the Trade Act of 1974 and the Administrative Procedure Act. Further, the complaint claimed that the USTR failed to give Retractable fair notice and an opportunity to be heard prior to the imposition of the tariff.

Retractable specifically argues that needles and syringes were not included on the list of products that were subject to the four-year review notice and comment period, and therefore Retractable did not submit comments. Instead, Retractable Technologies, Inc. alleges that these tariffs were improperly “back-doored” as Section 301 tariffs through an unrelated USTR notice on supply chain resilience.

This case presents similar questions to that which arose before the CIT in HMTX Industries LLC v. US, which challenges original imposition of Section 301 tariffs. While this action arises from the actions of a different Presidential administration, the Court of Appeals’ ultimate decision in HMTX Industries LLC v. US case will likely guide how the CIT will decide this matter.

We expect the court to prioritize Retractable’s temporary restraining order and a decision will likely be issued in the near future.

Crowell & Moring, LLP continues to monitor developments in the customs and trade remedies space and their potential impact on businesses and customers going forward. For more information on USTR’s final decisions on Section 301 tariffs, read our previous post here.

With news of serious forced labour allegations emerging in the UK, calls for forced labour reforms will require companies to take proactive action to monitor and mitigate risk.

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At the inaugural Supply Chain Summit on September 10, 2024, the US Department of Commerce introduced an innovative diagnostic risk assessment tool, marking a significant investment in the U.S. government’s ongoing efforts to fortify the nation’s supply chain ecosystem.

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On September 12, 2024, the U.S. Department of Commerce Bureau of Industry and Security (BIS) issued a final rule to amend the Export Administration Regulations (EAR) revising provisions related to the voluntary self-disclosure (VSD) process for persons who believe that they may have violated the EAR, or any order, license or authorization issued thereunder. The final rule specifically provides clarified guidance on charging and penalty determinations in settlement of administrative enforcement cases.

BIS is incorporating into the EAR three Policy Memoranda issued on June 30, 2022; April 18, 2023; and January 16, 2024, each discussing the benefits of submitting a VSD, and the risks of deciding against submitting a VSD. BIS is also revising the BIS Penalty Guidelines (Supplement No. 1 to Part 766) to change how the Office of Export Enforcement (OEE) calculates the base penalty in administrative cases, and how it applies various factors to the base penalty to determine the final penalty.

The significant revisions to § 764.5 of the EAR are:

  • Adding a party’s failure to submit a voluntary disclosure of a significant violation to the list of aggravating factors.
  • Adding BIS’ new process for handling disclosures of minor or technical violations. OEE now processes VSDs in a dual-track manner, one for VSDs involving minor or technical violations (to be processed in 60 days), and another for potentially significant violations.
  • Streamlining the submission process for VSDs involving minor or technical violations using an abbreviated narrative only describing the general nature and extent of the violations (without requiring a five-year lookback) and providing the contact information of the party submitting the abbreviated narrative.
  • Adding  clauses explaining that (i) any person (not just the party submitting a VSD) may notify the Director of OEE that a violation has occurred and then request permission from the Office of Exporter Services to engage in activities described in § 764.2(e) that would otherwise be prohibited; (ii) actions to return to the United States unlawfully exported items that were disclosed in a VSD only require notification to the Director of OEE; and (iii) once the items are returned to the United States, no further authorization is required.

Significant revisions to Supplement No. 1 to Part 766 (regarding the BIS Penalty Guidelines) include:

  • Providing OEE increased discretion in determining penalties that appropriately reflect the individual circumstances of violations by removing the “applicable schedule amount” cap on penalties.
  • Formalizing non-monetary resolutions as an enforcement response for cases involving non-egregious conduct but that are above the level of cases warranting a warning letter or no-action letter.
  • Addition of human rights abuses as a specific consideration when BIS assesses the potential impact of a violation on U.S. foreign policy objectives.
  • Making clear that disclosures of conduct by others that lead to an enforcement remedy count as exceptional cooperation.

In the same publication, BIS announced it appointed Raj Parekh to be its first-ever Chief of Corporate Enforcement. BIS reports that he will be the primary interface between BIS, the Department of Commerce’s Office of Chief Counsel for Industry and Security, and the Department of Justice on corporate investigations.

The Office of the United States Trade Representative (“USTR”) today published a Federal Register notice announcing its final modifications to its Four-Year Statutory Review of U.S. Section 301 tariffs on a range of Chinese-origin goods. While the USTR declined to modify its proposed increase of additional duties on electric vehicles (to 100 percent in 2024), lithium-ion electric vehicle batteries and lithium-ion non-electric vehicle batteries (to 25 percent in 2024 and 2026, respectively), certain critical minerals (to 25 percent in 2024) or battery parts of non-lithium ion batteries (to 25 percent in 2024), changes will be implemented regarding the timing and rates of tariffs for other products, as well as exclusions for certain products. An overview of the most significant updates can be found below:

  • Face masks: Tariff rates for face masks will be increased to 25 percent in 2024 and further to 50 percent in 2026. Additionally, statistical reporting number 6307.90.9870 (face masks of textile, disposable) has been added. Previously, USTR proposed raising the rate of additional duties to 25 percent in 2024.
  • Medical gloves: Tariff rates for medical gloves will be increased to 50 percent in 2025 and to 100 percent in 2026. Previously, USTR proposed raising the rate of additional duties to 25 percent in 2026.
  • Needle syringes: Additional duties for needles and syringes will be increased to 100 percent in 2024. Previously, USTR proposed raising the rate of additional duties to 50 percent in 2024
  • Ship-to-shore cranes: Although the USTR will not be modifying the proposed additional duties of 25 percent in 2024, but will allow for exclusion for cranes that fulfill contracts executed prior to May 14, 2024 and that enter the U.S. prior to May 14, 2026.
  • Machinery under HTSUS Chapters 84 and 85: Five new subheadings have been added to be eligible for temporary exclusions. These subheadings are: 8421.21.00 (Machinery and apparatus for filtering or purifying water); 8421.29.00 (Filtering or purifying machinery and apparatus for liquids, nesoi); 8421.39.01 (Filtering or purifying machinery and apparatus for gases, other than intake air filters or catalytic conv. for internal combustion engines); 8428.70.00 (Industrial robots); and 33 8443.19.30 (Printing machinery, nesoi).
  • Solar manufacturing equipment: USTR has decided against implementing its five proposed exclusions for equipment to manufacture solar modules. However, USTR will be adopting the 14 proposed exclusions for equipment related to solar wafer and cell manufacturing. These exclusions will be effective January 1, 2024 through May 31, 2025

Crowell and Moring, LLP continues to monitor developments in the customs and trade remedies space and their potential impact on business and customers going forward.

On September 11, 2024, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it is seeking comments on a new interim final rule amending OFAC’s Reporting, Procedures and Penalties Regulations to extend recordkeeping requirements from five to ten years.  While OFAC is seeking comments within 30 days, the interim final rule is effective as of September 11, 2024.

This change is driven by the 21st Century Peace through Strength Act, signed into law by the President on April 24, 2024, which extended the statute of limitations for civil and criminal violations of the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) from five to ten years. As a result, the U.S. government may now commence an enforcement action for civil or criminal violations of IEEPA- or TWEA-based sanctions prohibitions within 10 years of the latest date of the violation.  Pursuant to subsequently issued guidance from OFAC, the agency interprets that to capture all activity that was not outside of the statute as of the time the act was passed; i.e., all activity on or after April 24, 2019 is subject to a ten-year statute of limitations while activity prior to that date is time barred (unless subject to certain limited exceptions to the five-year statute, such as an ongoing conspiracy).

Under the proposed interim final rule, OFAC is extending record-keeping obligations under the OFAC regulations to 10 years, to align with the new 10-year statute of limitations.

More than a year ago, the EU Batteries Regulation (Regulation (EU) 2023/1542) entered into force.  In approximately one year’s time, the EU Batteries Regulation is set to repeal the 2006 Batteries Directive (Directive 2006/66/EC), with some exceptions. During the 2024 summer, a number of the new requirements under the EU Batteries Regulation have begun to apply.  With these points in mind, it is an opportune time to take stock of the new requirements being phased-in under the EU Batteries Regulation, consider the most recent requirements which begun to apply last month (August 2024), and assess the significant, and growing, impact the EU Batteries Regulation is having more generally.

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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.

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