On June 28, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security issued a press release reporting formal cooperation amongst the Five Eyes Intelligence Oversight and Review Council (“Five Eyes”) to expand enforcement of export controls.  Five Eyes—an intelligence alliance between Australia, Canada, New Zealand, the United Kingdom, and United States—formalized its cooperation amid concerns about illicit transactions and the diversion of controlled items to Russia.  This is the first agreement of its kind since Russia’s full-scale invasion of Ukraine in February 2022.

With the agreement, Five Eyes will increase their exchange of information to identify export control evasion risks, prevent unauthorized transfers, and protect national security interests.  This move expands the existing Five Eyes intelligence-sharing partnership between English-speaking nations.  Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod stated: “By formalizing our coordination, we hope to drive additional enforcement outcomes in each of the Five Eyes countries, including detentions, penalties, and public identification of diversionary actors.”

On Monday, June 12, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”)  added 43 new entities under 50 entries to its Entity List. This list includes 31 entities in China, as well as entities located in Kenya, Laos, Malaysia, Pakistan, Singapore, South Africa, Thailand, the United Arab Emirates, and the United Kingdom. The same day, BIS also removed one entity from the Entity List.

Once a person is added to the Entity List, it is prohibited to export, reexport, or transfer to that person any item (including commodities, software, or technology) that is subject to the U.S. Export Administration Regulations (“EAR”).

In explaining the Entity List additions, BIS cited a variety of reasons, principally that each pose potential threats to U.S. national security and their involvement in human rights abuses. BIS determined that the majority of the entities designated are either involved in recruiting Western pilots to train pilots of China’s People’s Liberation Army Air Force (“PLAAF”); or are engaged in hypersonic weapons development, hypersonic flight modeling, or weapon lifecycle management using software from Western countries. Per BIS, these entities, with clear ties to China’s military, pose significant concerns given China’s military modernization.

U.S. Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod highlighted that “it is imperative that we prevent China from acquiring U.S. technologies and know-how to enable their military modernization programs.” Other entities in the recent additions include companies that “enable the Chinese government to carry out human rights abuses against individuals in China” and also entities that have contributed to Pakistan’s military modernization.

Finally, BIS removed one entity from the Entity List after review by the interagency End-User Review Committee (“ERC”), which consists of representatives from various U.S. federal government departments and determines Entity List additions and modifications.

Last Friday, the U.S. Departments of Commerce, Justice, State, and the Treasury issued a joint guidance sheet on Iran’s unmanned aerial vehicles (“UAVs”) program (the “Iran UAV Guidance”). The Iran UAV Guidance highlighted (I) the threat Iran’s UAV program poses; (II) the key items that Iran relies on to expand its UAV program; (III) the expansion of U.S. export controls on Iran; (IV) U.S. sanctions imposed on Iran; (V) red flag indicators of export control evasion; and (VI) penalties for violating these laws.

The multiple agencies that authored the Iran UAV Guidance have put companies and individuals that operate in Iran, or may operate in nearby countries, on notice of the elevated risks to those dealings. Additionally, all companies should take note of the red flags identified, and the specific parts and components highlighted, and enhance their compliance policies and procedures as necessary.

A summary of the key points follows.

  1. Threat from Iran: The Iran UAV Guidance explains that Iranian UAVs have been provided to Russia for use by Russia in its war against Ukraine, and to the Houthis for use in their strikes inside Yemen and neighboring countries. Iran has also reportedly offered to provide UAV production technology and facilities to Tajikistan and Russia.
  2. Key Items: To effectuate these shipments of UAVs, Iran relies on procurement of non-Iranian origin parts, with a particular preference for U.S.-origin technologies. According to the Iran UAV Guidance, the parts most sought after by Iran are:
    1. Electronics: Including transceiver modules, processors and controllers, memories, amplifiers, and other electronic integrated circuits, field programmable gate arrays (FPGAs), RF transceivers, microcontrollers, and capacitors;
    1. Guidance, navigation and control equipment: Including accelerometers, gyroscopes, inertial measurement units, and navigational sensors; and
    1. Related components: Including aircraft spark-ignition and compression-ignition internal combustion piston engines and associated spare parts, and modules such as flight computers.
  3. U.S. Export Controls: In response to these threats, the United States has expanded the export controls imposed on Iran. The Iran UAV Guidance highlighted the following additional controls.
    1. Certain EAR99 Items Controlled: Previously, only non-EAR99 items were controlled for export, reexport, and transfer to Iran under the EAR (U.S. sanctions, as described below, incorporate further controls catching many of these items). In February 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) identified a series of items (using HTS codes) normally classified as EAR99 that are now prohibited for export, reexport, and transfer to Iran (“Part 746 Supp. No. 7”). Moreover, the Russia and Belarus foreign direct product rules were expanded to include Part 746 Supp. No. 7. BIS further expanded Part 746 Supp. No. 7 in May 2023.
    1. Iran Foreign Direct Product Rule: At the same time, BIS also created a new foreign direct product rule applicable to these items as well as electronics, computers, communications and information security, and navigation and avionics identified on the Commerce Control List (“CCL”) (collectively, the “Iran FDPR”).
    1. Entity List Designations: BIS has added a series of persons to its Entity List due to their involvement in the production of Iranian UAVs or in the transfer of Iranian UAVs to Russia.
  4. U.S. Sanctions: The United States has imposed a comprehensive embargo on Iran for decades now. The Iran UAV Guidance reminds readers that the U.S. Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”) prohibits most direct or indirect commercial, financial, or trade transactions with Iran involving U.S. persons (which includes subsidiaries of U.S. persons) or within the United States.
    1. Reexport Prohibitions: Specifically, the Iran UAV Guidance highlights that non-U.S. persons are prohibited from reexporting, directly or indirectly, any goods, technology, or services originally exported from the United States if (1) there is knowledge (including reason to know) that the reexport is intended for Iran or the Government of Iran; and (ii) the item is subject to U.S. export licensing requirements. This prohibition applies to the reexportation by non-U.S. persons of any items that are made outside of the United States with 10% or more U.S.-controlled content by value.
    1. Prohibition on U.S. Dollar Transactions: Any provision of services to Iran by non-U.S. persons, when payment includes U.S. dollars processed by a U.S. financial institution, is prohibited since it would cause a U.S. person to violate U.S. sanctions on Iran.
    1. Secondary Sanctions Risk: The Iran UAV Guidance emphasizes that any person (U.S. or otherwise) could be designated on the List of Specially Designated Nationals and Blocked Persons (“SDN List”) if they provide material support to persons on the SDN List or, in the instance of foreign financial institutions, they knowingly conduct or facilitate significant financial transactions on behalf of certain SDNs.
    1. Targeting the UAV Sector of Iran: OFAC has designated on the SDN List a series of individuals and entities in Iran, Russia, China, and Turkey due to their involvement in the production, procurement, and proliferation of, or supplying components to, Iran’s UAV systems. The United States retains a wide variety of authorities to impose further designations on persons with a nexus to Iran’s UAV sector.
  5. Red Flag Indicators: The Iran UAV Guidance explains the importance of maintaining an effective compliance program, which should “reflect management commitment to compliance and include risk assessment, internal controls, testing, auditing, and training,” be tailored to the risk the company faces, and empower compliance personnel to prevent or cease violative conduct. Screening counterparties against the SDN List and any BIS restricted party lists is an important best practice. Moreover, in an effort to assist industry, the Iran UAV Guidance lists out a series of red flag indicators that a prospective customer or intermediary may be engaging in export control or sanctions evasion. These include:
    1. Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries/entities involved, particularly sanctioned jurisdictions or restricted entities;
    1. Reluctance to share information about the end use of a product, including reluctance to complete an end-user form;
    1. Declining customary installation, training, or maintenance of the purchased item(s);
    1. “Cyber spoofing” of email or web addresses to give the appearance that an illegitimate inquiry is coming from a legitimate business. Often these attempts will leverage known business relationships to lend credibility to the spoofing attempt.
    1. Internet or corporate website traffic originating from IP addresses that do not correspond to a customer’s reported location data;
    1. Transactions involving entities with little or no web presence;
    1. Use of personal rather than corporate email addresses;
    1. Last-minute changes to shipping instructions that appear contrary to customer history or business practices;
    1. Payment coming from a third-party country or business not listed on the End-User Statement or another applicable end-user form;
    1. Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration;
    1. Changes to standard business documents that obscure the ultimate customer;
    1. Operation of businesses using residential addresses or addresses found to be common to multiple corporate entities;
    1. Transactions involving the use of freight-forwarding firms or other mail forwarding addresses listed as the product’s ultimate customer address;
    1. Transactions associated with atypical shipping routes for a product and destination; or
    1. Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to embargoed destinations.
  6. Penalties: Finally, the Iran UAV Guidance describes the various penalties that can be applicable and how the U.S. government is enforcing these rules.
    1. Penalties: For U.S. export controls, civil penalties can be $353,534 or twice the value of the transaction per violation, and it can result in the denial of export privileges. For U.S. sanctions on Iran, civil penalties can be $356,579 or twice the amount of the underlying transactions per civil violation. In both instances, criminal penalties can be up to $1 million per violation and/or 20 years imprisonment. Notably, since multiple legal regimes (e.g., U.S. export controls, U.S. sanctions) can be applicable, any violation could be subject to multiple penalties.
    1. U.S. Government Taskforces: The U.S. Department of Justice (“DOJ”) leads its Task Force KelptoCapture to enforce sanctions, export controls, and other economic countermeasures imposed on Russia, such as the transfer of UAVs from Iran to the Russian military. DOJ has also partnered with BIS to create the Disruptive Technology Strike Force with a goal of investigating and prosecuting the illicit transfer of sensitive technologies to Iran and other adversaries.
    1. Updated DOJ Voluntary Self-Disclosure Policy: In March 2023, the DOJ issued an updated voluntary self-disclosure policy that explained if a company voluntarily discloses a potential criminal violation, but fully cooperates, takes remedial measures, and there is an absence of other aggravating factors, then the DOJ will offer a non-prosecution agreement and no fine will be issued.

Following a meeting of the G7 Summit Leaders, on May 19, 2023, the United States and the United Kingdom announced a new round of sanctions and export controls against the Government of the Russian Federation (“Russia”) to continue their efforts against key sectors of Russia’s military-industrial base.

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The Raising Tariffs on Imports from China Act was introduced by Senator Josh Hawley (R-Mo.) and aims to increase tariffs on imports from China until the United State’s bilateral trade deficit returns to balance. In tandem with this legislation, Senator Hawley is pushing for debt limit talks to focus on the reduction of the trade deficit.

Following the normalization of trade relations between the United States and China, the trade deficit grew to 382,917 million in 2022. Senator Hawley points to the ongoing trade deficit between the United States and China, which has averaged $350 billion annually since President Clinton granted China permanent Normal Trade Relations, as the catalyst for the loss of 3.82 million jobs, particularly 2.89 million manufacturing jobs.

As of 2020, China is the United States’ largest supplier of goods imports and the top two import categories include electrical machinery, machinery, toys and sports equipment, furniture and bedding, and miscellaneous textile articles. Additionally, China is the 7th largest supplier of agricultural imports to the United States and has steadily increased imports of services to the United States since 2010.

Senator Hawley’s legislation Raising Tariffs on Imports from China would:

  • Require the President to calculate and subsequently publish the total value of imports into the United States from China and total value of exports from the United States to China annually,
  • Mandates the President to impose an additional duty of 25% on all goods imported from China if, a bilateral deficit is published in the previous calendar year, and
  • Authorizes the President to remove duties if, during the previous calendar year, the United States publishes a bilateral surplus with China.

On May 3, 2023, Senators Tammy Baldwin, D-Wis., Sherrod Brown, D-Ohio, and J.D. Vance, R-Ohio, introduced the ‘‘Country of Origin Labeling Online Act’’ or the ‘‘COOL Online Act’’ in an attempt to require origin and location disclosure for new products of foreign origin offered for sale on the internet. Following previous unsuccessful attempts to pass similar legislation in 2020, this group of bipartisan senators has reintroduced legislation in an effort to promote goods made in America.

Currently only products sold in-person are required to disclose country-of-origin, however the Country of Origin Labeling Online Act seeks to amend labeling laws to force e-commerce sites to provide similar information. According to Senator Baldwin, “whether we buy things online or in-store, Americans have a right to know if the product they are purchasing was made in America, by American workers.” Senator Vance claimed that the legislation would, “close a legal loophole by extending current, commonsense labeling requirements to e-commerce.” Senator Brown asserted that, “companies shouldn’t be able to hide their ‘made in China’ label just because they’re selling online.” The percentage of total retail sales from e-commerce relative to in-store has been steadily increasing each year, causing groups such as the Coalition for a Prosperous America to become more vocal about the need for legislation. Proponents of this legislation argue that American consumers will prefer to buy American products should they have the full knowledge online of where retailed goods are manufactured which would be a boon for U.S. producers.

Big retailers, including electronics, furniture, and toy industries, have argued that this legislation would add onerous regulations for online sellers which could be complex both legally and technically to comply with. The National Retail Federation (“NRF”), the retail industry’s largest trade group, said back in 2021 that it “opposes the measure because it would create complications for retailers who might source any number of items – T-shirts, say, or strawberries – from multiple countries.”

The bill requires sellers to conspicuously disclose the country of origin of products sold over the internet. This includes compliance with the labeling of the country of origin of the product and the country of origin in which the seller has its principal place of business. There are several exclusions to this requirement – such as certain agricultural products, certain food and drug products, used or previously-owned articles, and small sellers with annual sales of less than $20,000 and fewer than 200 discrete sales. If passed and approved, the law would take effect 12 months after the date of the publication of the Memorandum of Understanding between the Federal Trade Commission, the U.S. Customs and Border Protection, and the Department of Agriculture, which must be signed within 6 months after the date of enactment.

While the Biden’s administration’s recent corporate enforcement actions and initiatives have garnered significant press attention, China has engaged in recent months in a series of less-publicized corporate enforcement actions and initiatives against non-Chinese companies (mostly, but not exclusively, U.S.-based) operating in the country, including through new investigations, raids of China-based offices, and even detention of employees.

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Tamara Capeta, Advocate General of the Court of Justice of the European Union, has given her opinion regarding the scope of the EU Foreign Direct Investment Screening Regulation. AG Capeta considers the Regulation to cover not only acquisitions by foreign (non-EU) investors, but also the acquisition of one EU undertaking by another, if the acquirer has third-country shareholding. AG Capeta’s opinion may foreshadow a revision of the EU FDI Screening Regulation.

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On April 18, 2023, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) released a memorandum entitled, “Clarifying Our Policy Regarding Voluntary Self-Disclosures and Disclosures Concerning Others” (the “April Memo”).  The April Memo highlights additional penalties and incentives to encourage exporters – and whistleblowers – to disclose potential violations of the Export Administration Regulations (“EAR”).  In a change of policy, BIS will now consistently treat a decision not to voluntary self-disclose significant violations of the EAR as an aggravating factor in the calculation of penalties.  The April Memo additionally reminds the regulated community that reporting another exporter’s violative conduct can act as a mitigating factor in future enforcement actions against the reporting party (even if the reported potential violations are unrelated to the future enforcement action).  Finally,  the April Memo calls out to the academic community (as opposed to just private sector exporters), as sharing a key role in identifying, preventing, and mitigating export control violations, in line with BIS’s initiative to encourage university compliance, namely through its Academic Outreach Initiative.

Minor Violations Still Get a Quick Response

Last June, BIS implemented a dual-track system to handle voluntary self-disclosures (VSDs), in which most minor violations are now fast-tracked and resolved within 60 days of final submission.  More serious cases are assigned a field agent, an Office of Chief Counsel Attorney, and occasionally, an attorney from the Counterintelligence and Export Control section of the Department of Justice (“DOJ”).  The April Memo confirmed this practice is still in effect, and actively encouraged submissions of a single VSD to report multiple minor technical violations that occurred close in time.

Not Submitting a VSD for “Significant” Violations is an Aggravating Factor

Prior to the April Memo, BIS has consistently treated the filing of a VSD as a mitigating factor.  Under the existing BIS settlement guidelines, it results in an automatic 50% reduction of any penalty, and, in some cases, even a full suspension of any penalty.  The April Memo clarifies that going forward, OEE will also “consistently apply [the submission of a VSD] as an aggravating factor when a significant possible violation has been uncovered by a party’s export compliance program but no VSD has been submitted.”  While this policy change only applies to “significant” violations, the April Memo does not define significant, nor provide examples.  

Disclosing Potential Violations of Others is a Mitigating Factor

The April Memo also encourages disclosures of potential violations by others.  BIS urges anyone to come forward and report potential EAR violations by others, including competitors and points to its confidential reporting form on the website as a mechanism by which to do so.  BIS will consider the provision of information that leads to an enforcement action against others to qualify as a mitigating factor of “exceptional cooperation,” meaning, for example, that if Company A reports potential violative conduct of Company B, and that tip results in enforcement action, BIS will consider that report to be a mitigating factor if a future enforcement action, even for unrelated conduct, is brought against Company A. 

To further encourage this reporting behavior, BIS notes the existence of whistleblower programs at Financial Crimes Enforcement Network (“FinCEN”) and DOJ that offer monetary rewards for information that leads to successful enforcement actions.  Although these programs were designed to encourage reporting of violations of sanctions programs and the Bank Secrecy Act, the April Memo notes that FinCEN has discretion to pay monetary awards if the reported information leads to successful enforcement of “related actions,” which could include violations of the EAR.  

After more than 6 months since the UFLPA went into effect in June 2022, CBP released its UFLPA Statistics Dashboard. The UFLPA Dashboard provides users a snapshot of the number of shipments that have been subjected to UFLPA-related reviews and enforcement actions. Per CBP, the Dashboard contains “data related to enforcement of the UFLPA,” covering data since June 21, 2022, the date when CBP began to enforce the UFLPA. CBP continuously updates the Dashboard on a quarterly basis.

Alongside the Dashboard, CBP also released the “Uyghur Forced Labor Prevention Act Data Dictionary,” which serves as a “how to” guide on how to maneuver the Dashboard. Of relevant importance, the Dashboard does not include any data related to other forced labor enforcement actions by CBP – such as Withhold Release Orders (WROs). In addition, all information provided in the Dashboard is “in the form of aggregated numbers and values in order to protect entities associated with its law enforcement investigations and actions, as well as other law enforcement sensitive information.” As such any specific company or product information, business confidential information, or information pertaining to active law enforcement actions, investigations, or pending cases are not disclosed.

The Dashboard itself provides an aggregate of the total shipments stopped by CBP for UFLPA related reasons. In addition, the Dashboard also provides a breakdown of the stopped shipments by noting which of the stopped shipments have been denied and which have been released. The difference between the total stopped shipments and the sum of the denied and released shipments is the number of shipments still pending a determination. Finally, the Dashboard includes an aggregate total dollar value of the total shipments stopped by CBP. In addition to these aggregate quantities and values, the Dashboard includes the following four filters:

  1. Fiscal Year
  2. Industry
  3. Exam Results
  4. Country of Origin

The four filters, all of which can be used individually or together, allow users to further breakdown the aggregate values, depending on the filters used. Of particular relevance, users are able to filter for stopped shipments belonging to the following 9 industries: Agriculture and Prepared Products; Apparel, Footwear, and Textiles; Automotive and Aerospace; Base Metal; Consumer Products and Mass Merchandising; Electronics; Industrial and Manufacturing Materials; Machinery; and Pharmaceutical, Health, and Chemicals. In addition, users can also filter for the following countries of origin: Malaysia, Vietnam, China, Thailand, Sri Lanka, and all others.

At the time of writing this post, with data that was current as of Aril 3, 2023, the total number of stopped shipments was 3,588. Of these, 490 shipments (approximately 14%) were denied compared to 1,323 shipments (approximately 37%) that were released. The value of the total stopped shipments represented approximately $1.078 billion. The top three industries related to the stopped shipments were Electronics; Apparel, Footwear, and Textiles; and Industrial and Manufacturing Materials.

With regards to country of origin, Malaysia represented the largest value of shipments at approximately $576 million and 1,042 shipments. In comparison, China represented a value of approximately $109.71 million with 1,300 shipments. Per the current data, while there are less shipments in terms of quantity with Malaysia as the country of origin compared to China, the shipment values from Malaysia are higher than those from China. As such, the average unit value of the stopped shipments from Malaysia is approximately $553,000 compared to $84,000 for shipments from China, suggesting that stopped shipments with a country of origin from Malaysia are likely from higher values, more developed industries when compared to those from China. As CBP continues to update the UFLPA Statistics Dashboard, Crowell & Moring LLP will continue to monitor and highlight major developments.

 For more information on actions addressing human rights and forced labor abuses and regulations, contact our team and see previous posts below.

BIS Amends EAR to Include Human Rights Protection as a Basis For Adding Entities To the Entity List | International Trade Law (cmtradelaw.com)

Congress Increases CBP’s Forced Labor Enforcement Budget to More Than $100 Million | International Trade Law (cmtradelaw.com)