On April 24, 2023, plaintiffs in an ongoing challenge at the U.S. Court of Appeals for the Federal Circuit filed a Petition for Rehearing En Banc of their argument that former President Donald Trump improperly imposed additional Section 232 national security tariffs on derivatives of certain imported steel articles. In their petition for consideration by the full court, the petitioners — PrimeSource Building Products, Inc. and Oman Fasteners, LLC — state that the prior three-judge panel, which heard arguments on the matter and upheld the president’s authority to expand national security tariffs even after certain statutory deadlines had passed, ignored the plain language of Section 232 of the Trade Expansion Act of 1962.

The petitioners argue that if the three-judge panel’s decision stands, “the President will enjoy unbounded legislative power to regulate foreign trade—to take any action, at any time, targeting any imported product, so long as at any point in the past, the Secretary [of Commerce] made a threat determination regarding either the targeted product or any material used to make that product. Given its profound expansion of the Executive’s power, this case merits rehearing by the Court en banc.” In addition to alleging that the plain language of the statute was ignored, the petitioners also argue that the panel abandoned strict limitations on presidential power under Section 232 that were set forth in an earlier appellate decision in Transpacific Steel LLC v. United States. In doing so, the three-judge panel, the petitioners claim, has done “far greater violence to the procedural safeguards Congress built into Section 232.” In seeking an en banc rehearing, the petitioners are asking a full Federal Circuit panel to affirm the U.S. Court of International Trade’s original decision invalidating the Section 232 duties on derivatives of certain imported steel products.

Our Update of  February 8, 2023 provides details on the three-judge panel’s opinion that reversed the CIT decision. See also Updates of April 6, 2021 and January 28, 2021 for additional background on the case and the CIT’s dismissal of other claims.

To increase disclosures of export violations, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a memorandum on April 18, 2023 “clarifying” its enforcement policy related to voluntary self-disclosures of “significant” possible violations of the Export Administration Regulations (EAR). The memo also elaborates upon the policy regarding disclosures of potential EAR violations by another party. The clarifications, which are effective immediately, aim to promote the “shared endeavor” of compliance, which the policy memo describes as “the first line of effective enforcement.”

The first clarification articulates how BIS will modify the interpretation of existing BIS settlement guidelines regarding voluntary self-disclosures (VSDs). Explaining the need for the clarification, the policy memo notes, “[w]hen someone chooses to file a VSD, they get concrete benefits; when someone affirmatively chooses not to file a VSD, however, we want them to know that they risk incurring concrete costs.” Thus, going forward, a party’s decision not to submit a VSD, despite learning of a “significant” possible violation through an internal export compliance program, will be considered an aggravating factor by BIS when applying its penalty matrix. In the past, deliberate non-submission of a VSD was neither an aggravating nor mitigating factor; rather, BIS only considered the submission of a VSD as a mitigating factor.

Importantly, the policy memo emphasizes that this clarification only applies to VSDs reporting a “significant” possible export violation – a type of violation defined as potentially harmful to national security interests. Accordingly, the policy is “not focused on increasing the number of minor or technical VSDs” received by BIS, which typically receive a fast-track response from BIS within 60 days of its submission.

The second clarification aims to “incentivize individuals, companies, and universities to come forward and tell [BIS] when they become aware of others who are violating [export control] rules,” whether reported directly to BIS or via the confidential reporting form. The policy memo details a two-prong incentive structure for a party that reports another party’s possible violation of the EAR. First, if the disclosure results in a successful enforcement action or in a successful enforcement of “related actions,” then the disclosing party will be eligible for “substantial financial rewards” for assisting the U.S. Government. Second, and perhaps even more beneficial for a disclosing party, if a disclosure about another party’s violation of the EAR results in enforcement action against the latter, then BIS will consider the disclosing party’s cooperation as a mitigating factor if a future enforcement action is ever brought against the disclosing party, even for unrelated conduct.

The BIS policy memo is significant not only because it clarifies the enforcement policy related to disclosures, but also because the document signals how BIS is implementing mechanisms to promote compliance among the trade community amid its renewed commitment to clamp down on export violations (see for example Update of April 20, 2023).

Internet

On April 19, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) imposed a $300 million civil penalty against Seagate Technology LLC (California) and Seagate Singapore International Headquarters Pte. Ltd. (Singapore) to resolve alleged violations of U.S. export controls related to selling hard disk drives (HDDs) to Huawei Technologies Co. Ltd. (Huawei) in violation of the foreign direct product (FDP) rule under the Export Administration Regulations (EAR). This penalty represents the largest standalone administrative penalty in BIS history. This enforcement action also includes a mandatory multi-year audit requirement and a five-year suspended Denial Order. As part of the BIS settlement, Seagate admitted to the conduct set forth in the Order and Proposed Charging Letter.

On May 16, 2019, Huawei and numerous of its non-U.S. affiliates were added to BIS’ Entity List for posing a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States. As a result, licensing requirements were imposed on exports, reexports, and transfers (in-country) of all items subject to the EAR destined to or involving these listed Huawei entities. See Update of May 17, 2019. On August 17, 2020, BIS added further Huawei affiliates to the Entity List (bringing the total number to over 150 Huawei-related entities) and imposed a license requirement on foreign produced direct products (FDP) of certain U.S.-origin software and technology when: (1) “there is “knowledge” that [a listed Huawei entity] is a party to any transaction involving the foreign-produced item” and (2) “the foreign-produced item is produced by any plant or major component of a plant that is located outside the United States… [and that] itself is a direct product of U.S.-origin “technology” or “software” subject to the EAR that is specified in” certain Export Control Classification Numbers (“ECCN”). See Update of August 19, 2020.

Upon implementation of the FDP rule in 2020, two of the three companies capable of manufacturing HDDs announced they had ceased sales to Huawei. According to the BIS Order, “[o]nly Seagate continued HDD sales and transactions involving Huawei. The company incorrectly interpreted the FDP rule to require evaluation of only the last stage of its HDD manufacturing process rather than the entire process.” Between approximately August 17, 2020 and September 29, 2021, Seagate engaged in the reexport, export from abroad, or transfer (in-country) of approximately 7.42 million foreign-produced HDDs, valued at over $1.1 billion. According to BIS, as these transactions continued, Seagate “repeatedly authorized extending lines of credit to Huawei totaling more than $1 billion between January and September 2021 resulting in an increasing volume of HDD exports to Huawei that the entity was otherwise unable to obtain.” In March 2021, “Seagate and Huawei even entered into a Long-Term Agreement involving a purchase agreement of over 5 million HDDs and naming Seagate a ‘key strategic supplier.’” 

BIS Penalty

Under the Penalty Order, Seagate has been assessed a civil penalty of $300,000,000 with payments due in quarterly installments of $15,000,000 over the next five years. In addition, Seagate must complete a total of three audits of its export controls compliance program. The first audit must be an external audit conducted by an unaffiliated third-party consultant, with the remaining two audits allowed to be internal audits. All audit results must be reported to BIS. Finally, both Seagate entities – California and Singapore – are subject to a five-year denial of export privileges under the EAR. However, this Denial Order is suspended so long as Seagate makes all of it quarterly payments in a timely manner and completes all three audits. In the Settlement Agreement, Seagate admitted to committing the alleged conduct and entered into the agreement voluntarily.

In announcing the Settlement Agreement and penalty, BIS’ Director of the Office of Export Enforcement John Sonderman stated, “Those who would violate our FDP rule restrictions are now on notice that these cases will be investigated and charged, as appropriate. …  Any company exporting to an entity subject to the additional FDP rule restrictions needs to evaluate its entire manufacturing process to determine if specified U.S. technologies or software were used in building the essential tools used in production.”

On April 19, 2023, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License (GL) 5K, “Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After July 20, 2023,” which continues to delay U.S. persons’ ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA) 2020 8.5% bond until on or after July 20, 2023.  The previous deadline had been April 20, 2023.  Effective April 19, 2023, this GL replaces GL 5J.

With this revised General License, U.S. persons remain prohibited until July 20, 2023 from engaging in any transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5% Bond unless specifically authorized by OFAC. In the modified FAQ 595, OFAC notes a favorable licensing policy toward those seeking to apply for a specific license in an effort to reach an agreement on proposals to “restructure or refinance payments due to the holders of the PdVSA 2020 8.5% bond.” 

On April 17, 2023, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) published an Alert warning U.S. persons about possible evasion of the price cap set on Russian-origin oil (see Update of December 5, 2022) and Russian-origin petroleum products (see Update of February 8, 2023) pursuant to Executive Order 14071. In particular, the Alert forewarns U.S. persons of the “deceptive practices” given recent reports of trading above the oil/petroleum price caps through the Eastern Siberia Pacific Ocean (ESPO) pipeline and ports on Russia’s eastern coast, such as the port of Kozmino. The Alert reminds U.S. persons that they “are required to reject participating in an evasive transaction or a transaction that violates the price cap determinations, and to report such a transaction to OFAC.”

As reminded by the Alert, U.S. persons are not only prohibited from trading above the price caps, but also barred from providing certain services related to the maritime transport of crude oil and petroleum products from Russia (see Update of November 29, 2022).

OFAC’s Alert warns ship owners, protection and indemnity clubs, and flagging registries that, for example, evasion may be occurring due to the transmittal of incomplete or falsified documentation. Additionally, some tankers may be evading the price cap by manipulating their Automatic Identification Systems — a practice known as “spoofing” – to disguise the fact that such tankers have actually called at Russian ports situated alongside the Pacific Ocean. Spoofing may be used to hide illegal ship-to-ship transfers as well.

In addressing commodities brokers and oil traders, the Alert also notes that because certain costs—shipping costs, freight fees, customs charges, and insurance costs—are factored out of the price of Russian-origin oil or a petroleum product, bad actors may purposefully fail to itemize these charges separately, thereby evading the two price caps by presenting a sole invoice with just one sum total price. The Alert notes, “the failure to itemize these costs can be used to obfuscate the fact that Russian oil was purchased above the price cap.”

To safeguard against such evasion, the Alert advises U.S. persons to be mindful of the specified evasion strategies and to counteract such practices with “appropriate due diligence measures.” Failure to do so, the Alert suggests, may be grounds for denying the protection afforded by the price cap policy’s “safe harbor” provision (see Update of November 29, 2022).

As a reminder, the Alert—and the two price caps—do not remove the separate, ongoing prohibition on the importation of Russian petroleum and petroleum products into the United States that went into effect pursuant to Executive Order 14066 (see Update of March 9, 2022).

On April 12, 2023, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced further efforts to deny Russia’s access to the international financial system through facilitators and their businesses. For example, OFAC has designated and sanctioned the “facilitation network” of Alisher Burhanovich Usmanov, who had previously been placed on OFAC’s Specially Designated Nationals (SDN) List in his individual capacity in March 2022. A  Russian oligarch and close associate of Vladimir Putin, Usmanov holds significant interests in Russia’s metals and mining, telecommunications and information technology sectors. As such, OFAC’s updated designations target Usmanov’s wide network of businesses in financial safe havens, business associates and family members through which Usmanov could potentially circumvent sanctions to conduct financial transactions. OFAC’s actions also sanction numerous nationals from Cyprus, financial trust service companies, management consulting firms and other Cyprus-based companies known to be connected to Usmanov. 

With these actions targeting Usmanov’s vast network of companies and associates, OFAC has revoked Russia-related General License 15, “Authorizing Transactions Involving Certain Blocked Entities Owned by Alisher Burhanovich Usmanov.” This General License had authorized transactions involving any entity owned 50% or more, directly or indirectly, by Usmanov that was not listed on OFAC’s SDN List. However, as a result of this revocation, any entity in which Usmanov had a 50% or more ownership stake, directly or indirectly, is now blocked regardless of whether such entity had been listed on the SDN List. Similarly, all transactions either by U.S. persons or within (or transiting) the United States that involve any property or interests in property of Usmanov are prohibited unless authorized by a general or specific license issued by OFAC or exempt.

Notably, OFAC also sanctioned the International Investment Bank (IIB), a Russia-controlled financial institution located in Budapest, Hungary, and its fully-owned Russia subsidiary, Joint Stock Company IIB Capital. According to OFAC, the entities operate in Russia’s financial sector and thus have the potential to “serve as a mechanism for corruption and illicit finance” for the government of Russia. 

In total, the actions taken by OFAC, in coordination with sanctions imposed by the State Department, targeted more than 120 individuals and entities. Several newly-designated entities operate in the defense sector of Russia’s economy, while other newly-designated entities are known for supporting Russia’s war against Ukraine, including several China-, Turkey-, and UAE-based companies. Several individuals associated with the Russian State Atomic Energy Corporation (Rosatom) were sanctioned as well. Finally, a number of Russian-and Turkey-flagged vessels have been added to the SDN List. For additional identifying details on these individuals, entities and vessels, see OFAC’s SDN List Update here.

As a result of these actions, all property and interests in property of the persons placed on OFAC’s SDN List above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited unless authorized by a general or specific license issued by OFAC or otherwise exempt. These prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.

Issuance of OFAC General Licenses

Due to the designation of several significant Russian entities, OFAC has issued multiple General Licenses which either allow for the wind-down of transactions and/or continued limited activities. These newly-issued General Licenses include:

  1. General License 62, “Authorizing the Wind Down of Transactions Involving Holdingovaya Kompaniya Metalloinvest AO, MegaFon PAO, Limited Liability Company USM Telecom, or Akkermann Cement Ca Limited Liability Company,” which permits transactions that are ordinarily incident and necessary to the wind down of any transaction involving these entities until July 11, 2023.
  2. General License 63, “Authorizing Transactions Related to Debt or Equity of, or Derivative Contracts Involving, Holdingovaya Kompaniya Metalloinvest AO,” which permits transactions that are ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity of this entity until July 11, 2023.
  3. General License 64, “Authorizing Certain Transactions Involving Kommersant,” which permits all transactions involving JSC Kommersant, or any entity in which JSC Kommersant owns, directly or indirectly, a 50% or greater interest, that are ordinarily incident and necessary to the operations of the newspaper, Kommersant.
  4. General License 65, “Authorizing Transactions Related to Telecommunications and Certain Internet-based Communications Involving MegaFon PAO or Digital Invest Limited Liability Company,” which permits transactions ordinarily incident and necessary to the receipt or transmission of telecommunications involving these entities and involves Tajikistan or Uzbekistan.

However, certain transactions remain unauthorized under these general licenses and still require close analysis.

On April 12, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a Final Rule in which it added 28 entities to the Entity List. The entities are companies located in Armenia , China, Malta, Russia, Singapore, Spain, Syria, Turkey, the United Arab Emirates (UAE), and Uzbekistan. Each was placed on the Entity List for attempting to evade export controls and acquiring, or attempting to acquire, U.S.-origin items in support of Russia’s military and/or defense industrial base. 

BIS determined that these companies have continued to procure, or attempt to procure, items on behalf of Russian entities that have been sanctioned since Russia’s invasion of Ukraine in February 2022. BIS further determined that most of the companies qualify as Russian or Belarusian ‘military end users’ under the Export Administration Regulations’ (EAR) controlled on certain end-users and end-uses. As such, these entities are receiving a Footnote 3 designation that subjects them to the Russia/Belarus-Military End User Foreign Direct Product (FDP) rule. These entities are added to the Entity List with a license requirement for all items subject to the EAR. They are added with a license review “policy of denial” for all items subject to the EAR apart from food and medicine designated as EAR99, which will be reviewed on a case-by-case basis.

The two UAE companies are added to the Entity List for coordinating flights that assisted in the transfer of Iranian unmanned aerial vehicles (UAVs), personnel, and related equipment from Iran to Russia, ultimately contributing to Russia’s military and defense industrial base. These UAE entities are now subject to a license requirement for all items subject to the EAR, and with a license review policy of a “presumption of denial.”

The full list of all 28 entities and identifying information is available here. 

This Final Rule is effective on April 12, 2023. However, BIS has stated that shipments of items removed from eligibility for a License Exception or export or reexport without a license (NLR) as a result of these this action that were en route aboard a carrier to a port of export or reexport, on April 12, 2023, pursuant to actual orders for export or reexport to or within a foreign destination may proceed under their previous eligibility without a license before May 12, 2023. Any such items not actually exported, reexported or transferred (in country) before midnight, on May 12, 2023, will require an export license from BIS.

Key Notes:

  • The Department of Commerce Bureau of Economic Analysis is conducting a five-year benchmark survey of incorporated U.S. businesses of which a foreign person or entity owns or controls, directly or indirectly, 10% or more of the voting securities (or an equivalent interest if an unincorporated U.S. business) as of the business’s 2022 fiscal year end.
  • Filing a response is mandatory under the International Investment and Trade in Services Survey Act unless the business does not meet the filing requirements. The act protects the confidentiality of the data that companies submit.
  • Qualifying U.S. businesses must file a response by May 31, 2023.

The Department of Commerce Bureau of Economic Analysis (BEA) has announced that it has initiated its five-year benchmark survey of U.S. businesses whose voting shares are 10% or more owned, directly or indirectly, by a foreign person or company. U.S. businesses that have such foreign direct investment are required to respond no later than May 31, 2023.

View this full client update in HTML or PDF format.

On March 30, 2023, the Department of Commerce’s Bureau of Industry and Security released a series of Frequently Asked Questions (FAQs) regarding human rights concerns and export controls. The FAQs address BIS’ authority under the Export Administration Regulations (EAR) to consider human rights concerns when reviewing export license applications, and states that exporters “are expected to exercise due diligence with regard to identifying human rights concerns.” The FAQs highlight that exporters should “know your customer” and may not “self-blind” by ignoring information that may indicate a proposed export may contribute to human rights violations or abuses.

In reviewing any license application for human rights concerns, BIS considers: (i) the items involved, (ii) country of destination, (iii) end-user(s), (iv) the specific nature of the end-use(s), and (v) the risk of unauthorized use or diversion as well as any assurances or safeguards to minimize such risk. The FAQs provide helpful links to policy guidance as well as Department of State and United Nations (UN) reference sources and advisories. BIS also notes that export controls for human rights concerns may be controlled under the “Crime Control,” “National Security,” “Regional Stability” and “Surreptitious Listening” reasons for control categories. 

The FAQS also confirm that BIS has the authority to place parties on the Entity List for engaging in or enabling human rights violations or abuses. See Update of March 30, 2023.

In December 2021, the United States, Australia, Denmark and Norway announced the Export Controls and Human Rights Initiative to address export controls and human rights particularly in the area of misuse of certain advanced technologies by authoritarian governments for surveillance and human rights abuses. See Update of December 14, 2021. Since that meeting, the list of “Subscribing States” to this Export Controls and Human Rights Initiative has grown to include: Albania, Australia, Bulgaria, Canada, Croatia, Czechia, Denmark, Ecuador, Estonia, Finland, France, Germany, Japan, Kosovo, Latvia, The Netherlands, New Zealand, North Macedonia, Norway, Republic of Korea, Slovakia, Spain, the United Kingdom, and the United States.

On March 30. 2023, at the second meeting of the Summit for Democracy, the participating states endorsed a voluntary Code of Conduct. This code calls for Subscribing States to:

  1. Make efforts to ensure, consistent with applicable law and existing multilateral commitments, that our domestic legal, regulatory, policy and enforcement tools are appropriate and updated to control the export of dual-use goods or technologies to end users that could misuse them for the purposes of serious violations or abuses of human rights.
  2. Consult with the private sector, academia, and civil society representatives on human rights concerns and effective implementation of export control measures.
  3. Share information with each other on emerging threats and risks associated with the trade of goods, software, and technologies that pose human rights concerns.
  4. Share, develop and implement best practices on export controls of dual-use goods and technologies that could be misused, reexported, or transferred in a manner that could result in serious violations or abuses of human rights.
  5. Encourage the private sectors to conduct due diligence in line with national law and the United Nations Guiding Principles on Business and Human Rights or other complementing international instruments, while enabling non-subscribing states to do the same.
  6. Seek to improve the capacity of States that have not subscribed to the Code of Conduct to do the same in accordance with national programs and procedures.

Subscribing States intend to meet at least annual to further develop the workings and application of the Code of Conduct.

Separately, the White House on March 30, 2023, released a Joint Statement on Efforts to Counter the Proliferation and Misuse of Commercial Spyware. This statement notes that the governments of Australia, Canada, Costa Rica, Denmark, France, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States recognize the threat posed by the misuse of commercial spyware and the need for strict domestic and international controls on the proliferation and use of such technology. According to the statement, such spyware has “been used to target and intimidate perceived opponents and facilitate efforts to curb dissent; limit freedoms of expression, peaceful assembly, or association; enable human rights violations and abuses or suppression of civil liberties; or track or target individuals without proper legal authorization, safeguards, or oversight.” The involved countries intend to work together to develop and implement policies “to discourage the misuse of commercial spyware and encourage the development and implementation of responsible use principles that are consistent with respect for universal human rights, the rule of law, and civil rights and civil liberties.”