On December 19, 2022, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) introduced the first set of regulations to be issued under the new Illicit Drug Trade Sanctions (to be codified at 31 CFR part 599).  The regulations will go into effect on December 20 pursuant to Executive Order (“E.O.”) 14059 (December 15, 2021), which calls for sanctions on foreign persons “engaged in, or attempted to engage in…or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production[.]”  Thus, the regulations represent an essential tool for the United States to address the “national emergency” declared in E.O. 14059 due to the global illicit drug trade (see Update of December 15, 2021).

The regulations formally set the procedures for foreign persons to be designated and placed on OFAC’s Specially Designated Nationals (SDN) List, including persons who have provided, or attempted to provide, financial, material, or technological support for, or goods or services in support of illicit drug trade.  Specific definitions are set forth, as are any general and specific licensing procedures, license exceptions, and other regulatory provisions.

Recognizing that the regulations are the first to take effect under the Illicit Drug Trade Sanctions, OFAC has noted that it intends to supplement these regulations with a more comprehensive set of regulations at a later date.

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On December 16, 2022, the Office of the U.S. Trade Representative (USTR) released a Federal Register notice announcing that it was extending the termination date — from December 31, 2022 until September 30, 2023 — for Section 301 tariff exclusions that apply to 352 Chinese products. These exclusions were initially reinstated on March 28, 2022 (see  Update of March 25, 2022), and the USTR noted that the extension “will help align further consideration of these exclusions with the ongoing comprehensive four-year review” of the Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.  

In early September 2022, the USTR confirmed that domestic industries had reported benefiting from the tariffs — prompting the review — and that such tariffs would continue during the review process (see Update of September 6, 2022). For more details on the review and the public comment period, see Updates of May 3, 2022, October 13, 2022, and November 2, 2022. All comments on this four-year review must be submitted via the online portal at https://comments.USTR.gov on Docket No. USTR-2022-0014. The docket closes on January 17, 2023.

Effective December 16, 2022, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a Final Rule adding 36 Chinse entities to BIS’s Entity List. These additions are intended to further restrict China’s “ability to leverage artificial intelligence, advanced computing, and other powerful, commercially available technologies for military modernization and human rights abuses,” according to Under Secretary of Commerce for Industry and Security Alan Estevez.

This Final Rule follows BIS’s advanced computing and semiconductor manufacturing equipment rule of October 7, 2022 (see Thompson Hine bulletin dated October 31, 2022), and the majority of these additions to the Entity List are directly related to U.S. efforts to further restrict access to such advanced technologies. The additions include:

  • Twenty-one entities that are major artificial intelligence (AI) chip research and development, manufacturing, and sales entities. According to BIS, these companies are, or have close ties to, government organizations that support the Chinese military and the defense industry. For these entities, BIS is also applying the Foreign Direct Product (FDP) rule as indicated with a footnote 4 designation on the Entity List. The application of the FDP rule further restricts their ability to obtain U.S.-origin technologies and other items produced in foreign countries if they are produced using substantial U.S. technology, tools, or other inputs or components.
  • Two entities are being added for acquiring or attempting to acquire U.S.-origin items in support of the China’s military modernization.
  • Seven entities have been added for engaging in support of China’s military modernization and reportedly have direct ties to activities of concern, including hypersonic weapons development, design and modelling of vehicles in hypersonic flight, designing and producing ballistic missile radomes, using proprietary software to model weapons design and damage, and other efforts to support China’s military-civil fusion activities.
  • Four entities have been added due to a “significant risk” of a negative impact on U.S. national security and potential diversion.

Notably, two of the companies are Yangtze Memory Technologies Co. (and its Japanese subsidiary) and Shanghai Micro Electronics Equipment (Group) Co., Ltd., both major Chinese semi-conductor chip manufacturers. For Yangtze Memory, BIS cited concerns of diverting U.S. export controlled items to Huawei and Hikvision entities that are on the Entity List. Both Yangtze Memory and Shanghai Micro were previously on BIS’s Unverified List.

One Chinese entity, Tianjin Tiandi Weiye Technologies Co., Ltd., is being added for engaging in or enabling activities involving China’s campaign of repression and human rights violations against Uyghurs and other Muslim minority groups in the Xinjiang Autonomous Region, as well as enabling the procurement of U.S.-origin items for use by Iran’s Islamic Revolutionary Guard Corps (IRGC).

The final entity has been added for Iranian-related concerns. Beijing UniStrong Science & Technology Co., Ltd. has been added to the Entity List for facilitating the illegal export of U.S.-origin electronics to Iran for use in the production of military unmanned aerial vehicles (UAV) and missile systems that have been used for attacks throughout the Middle East.

As a result, licenses are required from BIS for all exports, reexports or transfers (in-country) to these entities for all items subject to the Export Administration Regulations (EAR). BIS will review any license applications pertaining to these entities under a policy of denial, and no license exceptions are available.

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Effective December 16, 2022, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a Final Rule announcing that it was moving nine Russian companies from the Unverified List to the more restrictive Entity List. BIS stated it has continuously been unable to verify the bona fides of these companies due to the Russian government’s prevention of timely end-use checks. Thus, BIS determined there exists “an unacceptable risk of diversion or misuse of items subject to the EAR [Export Administration Regulations].” As a result, these entities have been added to the Entity List with a license requirement for all items subject to the EAR.  BIS will review any license applications pertaining to these entities under a policy of denial, and no license exceptions are available for exports, reexports, or transfers (in-country) to these entities.

This is the first rule issued pursuant to changes announced in October 2022 which clarified that a sustained lack of cooperation by a host government that effectively prevents BIS from determining compliance with the EAR, including allowing for timely end-use checks by a foreign government, is grounds for adding an entity to the Entity List. See Update of October 11, 2022.

In addition, BIS has issued a Temporary Denial Order (TDO) immediately suspending the export privileges of three persons for 180 days for the unauthorized export of sensitive items subject to the EAR to Russia. According to BIS, the individuals were affiliated with Moscow-based companies that operate under the direction of Russian intelligence services to procure advanced electronics and sophisticated testing equipment for Russia’s military industrial complex and research and development sector. The individuals allegedly attempted to evade export controls by creating shell companies and associated bank accounts in the United States, to route shipments and layer financial transactions in order to obscure the true Russian end users. 

In this Final Rule, it should also be noted that BIS removed 27 persons from the Unverified List – one under the destination of Pakistan and 26 under the destination of China – because enforcement officers were able to verify the bona fides of these companies.

On December 15, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it was adding Russian banks and financial services entities as well as additional Russian persons to the Specially Designated Nationals (SDN) List in order to further isolate Russia from global markets. For additional information on these entities and persons, see here.

Designation of PJSC Rosbank

Significantly, OFAC has designated major Russian bank, PJSC Rosbank. According to the Treasury Department, the Central Bank of the Russian Federation considers Rosbank to be an important credit institution to the Russian Federation. The United Kingdom and Canada designated Rosbank earlier this year under their respective sanctions programs.

Contemporaneous with Rosbank’s designation, OFAC has issued the following Russia-related General Licenses (GL):

  • GL 58 – authorizing all transactions that are ordinarily incident and necessary to the wind down of transactions involving Rosbank, or any entity in which Rosbank owns, directly or indirectly, a 50 percent or greater interest, through 12:01 a.m. eastern daylight time, March 15, 2023.
  • GL 59 – authorizing the wind down of certain securities and derivatives transactions involving Rosbank and U.S. persons divestment or transfer of securities of Rosbank to non-U.S. persons through 12:01 a.m. eastern daylight time, March 15, 2023.
  • Amended GL 8E – adding Rosbank to this general license which authorizes certain blocked financial institutions to process energy-related transactions through 12:01 a.m. eastern daylight time, May 16, 2023.

These GLs are subject to certain conditions and must be reviewed carefully. OFAC has issued a FAQ to assist persons regarding the wind-down period for transactions involving Rosbank.

Designation of Specific VTB Subsidiaries

OFAC has also designated an additional 17 subsidiaries of VTB Bank, Russia’s second largest bank. VTB was placed on the SDN List in February 2022 and, thus, under OFAC’s 50% ownership and control rule all VTB related entities owned 50% or more, directly or indirectly, by the bank have been blocked even if not specifically designated by OFAC. Nevertheless, OFAC noted that by identifying these additional subsidiaries of VTB Bank it would help strengthen compliance with existing sanctions.

Designation of Russian Oligarch Vladimir Potanin and Additional Russian Officials

In addition, and in coordination with the State Department, OFAC has designated Vladimir Potanin, one of Russia’s richest persons. He formerly served as Deputy Prime Minister for Russia and recently acquired Rosbank. The State Department also designated five senior officers and directors of Russian Railways, a Russian state-owned entity, and 29 additional members of the government of the Russian Federation and certain family members. The additional government officials have been placed on the SDN List for reportedly overseeing and enforcing the conscription of citizens in response to Russia’s recent mobilization order for more soldiers. For detailed information on these individuals, see the State Department’s Fact Sheet.

As a result of these actions by the Departments of the Treasury and State, all property and interests in property of these newly designated Specially Designated Nationals (SDN) List entities 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 otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.

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On December 14, 2022, the United States and African Continental Free Trade Area Secretariat (AfCFTA) signed a Memorandum of Understanding on Cooperation for Trade and Investment between the United States and the African Continental Free Trade Area (MOU). The MOU  was signed by U.S. Trade Representative (USTR) Katherine Tai and AfCFTA Secretary General Wamkele Mene during the 2022 U.S.-Africa Business Forum. The African Continental Free Trade Area was established in March 2018 and currently includes 55 African nations and eight Regional Economic Communities. The AfCFTA’s mandate is to create a single continental market with a population of about 1.3 billion people and a combined GDP of approximately $3.4 trillion. In remarks at the forum, President Joseph Biden said, “The United States is all in on Africa’s future. … This MOU will unlock new opportunities for trade and investment between our countries and bring Africa and the United States even closer than ever.”

The MOU seeks to develop cooperation among the parties to promote sustainable trade and economic integration in Africa and between the U.S. and AfCFTA member states. It establishes annual high-level engagement between the United States and the AfCFTA Secretariat, as well as quarterly meetings of technical working groups (TWGs), to discuss issues to be identified by the participants. The TWGs will bring together representatives from the AfCFTA Secretariat, the Office of the USTR, and other stakeholders to exchange information on best practices and have an open dialogue to enhance the relationship between the United States and the AfCFTA Secretariat, the AfCFTA member states, and related stakeholders. In announcing the MOU, the White House released a Fact Sheet announcing new initiatives and investments to promote two-way trade and investment between the United States and AfCFTA member states.

In a brief statement, Ambassador Kathrine Tai stated, “We signed this MOU to create a platform for a regular dialogue with the AfCFTA Secretariat and other stakeholders to address matters of mutual interest about the negotiation and implementation of the AfCFTA.” She added, “In terms of size and population, Africa’s significance is undeniable…. and the continent is becoming an increasingly important economic partner to the United States.”

On December 5, 2022, the Department of State’s Directorate of Defense Trade Controls (DDTC) released updated Compliance Program Guidelines that provide an overview of what it considers an effective compliance program. The document also provides both an introduction to the Arms Export Control Act (AECA), the International Traffic in Arms Regulations (ITAR), and the manufacturing and export of defense articles and services. 

The guidelines outline the key elements of an effective ITAR compliance program, including: corporate Board and management commitment, conducting risk assessments, providing sufficient compliance education and training, compliance monitoring, and undertaking periodic audits. The guidelines also discuss how to implement such a program for companies that manufacture, export, broker, or temporarily import defense articles and defense services identified on the U.S. Munitions List (USML). The ITAR Compliance Program Guidelines are available here.

In releasing these new guidelines, DDTC notes that it provides a basic structure, is not exhaustive, is intended only as a guide, and that, “to the extent there is any discrepancy between these guidelines and either the AECA or the ITAR, the AECA and ITAR will prevail.”

On December 9, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned two Chinese individuals and a vast network fishing vessels they control, including Pingtan Marine Enterprise Ltd. (PME) and Dalian Ocean Fishing Co., Ltd. (Dalian), for perpetrating serious human rights abuses and corruption via illegal, unreported, and unregulated (IUU) fishing. Although this is not the first time Dalian has been adversely identified by a U.S. agency (see Update of June 2, 2021), OFAC’s action does mark the first time an entity listed on the NASDAQ stock exchange, PME, has been designated.

IUU fishing refers to fishing that: (i) contravenes applicable laws and regulations, including fishing in unregulated areas, other countries’ waters, or international waters, (ii) goes unreported or misreported to relevant authorities, or (iii) targets unregulated species contrary to countries’ conservation responsibilities. Although often associated with harmful environmental effects, IUU fishing also has a strong nexus with human rights abuses, especially related to human trafficking and inadequate labor standards. The International Labor Organization, for example, has identified instances of crewmember abuse and forced labor (or conditions of forced labor) aboard vessels engaged in IUU fishing. President Biden also emphasized the negative consequences of leaving IUU fishing unchecked in his recent Memorandum on Combatting Illegal, Unreported and Unregulated Fishing and Associated Labor Abuses (June 27, 2022).

OFAC’s designation of the two Chinese individuals includes designations of 157 fishing vessels reportedly owned by these individuals and flying the flag of the People’s Republic of China. Additional identifying information and details on the entities sanctioned are available here. All property and interests in property of these newly designated Specially Designated Nationals (SDN) List entities 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 otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.

As a result of these designations, OFAC has issued two general licenses (GL) under the Global Magnitsky Sanctions Regulations – GL 3 and GL 4 – authorizing U.S. persons to engage in “certain transactions ordinarily incident and necessary to the wind down of financial contracts and other agreements” with PME and Dalian by March 9, 2023.

On December 5, 2022, the plaintiff group filed its final reply to the government defendants’ response on the remand determination of the Office of the U.S. Trade Representative (USTR) in the ongoing Court of International Trade (CIT) litigation challenging the validity of Section 301 tariffs on certain imports of Chinese products. This final reply continued the plaintiff group’s argument that USTR’s remand determination lacks “any showing that USTR considered commenters’ major objections contemporaneously with its decisions to levy the List 3 and List 4A tariffs on hundreds of billions of dollars of imports from China.” Since USTR can point to “no explanation from the contemporaneous record” for many of the objections to the tariffs that were raised, the plaintiff group argues that there is a clear reason for this failure – “USTR cannot ‘elaborate’ on explanations it never gave.”

The plaintiff group reiterated that the government defendants in their response cannot fix USTR’s fatal flaws in its remand determination to cure any Administrative Procedure Act (APA) violations, arguing:

  1. “Non-responsive and conclusory statements grounded in presidential direction do not show that USTR engaged in reasoned decision-making when it selected the duty rates and covered amounts of trade.” Instead, failing to respond to comments “demonstrates that the agency’s decision was not based on a consideration of the relevant factors” and “raises doubts” about the discretion shown by USTR;
  2. “USTR’s explanations are missing, conclusory, or (at best) post hoc” rationales in its consideration of the harm caused by the tariffs to U.S. consumers and the economy and, as such, “the record remains devoid of any reasoned explanation as to how USTR arrived at the conclusion that the List 3 and List 4A actions overall were ‘appropriate’”; and
  3. USTR concedes that it failed to consider a number of alternatives proposed by interested parties and this “failure to give reasoned consideration to alternatives [to tariffs] renders its determination arbitrary and capricious.”

Because USTR continues to fail to satisfy “basic APA obligations,” the plaintiff group argues, the CIT should vacate the List 3 and List 4A tariffs and order refunds of the duties paid. With this reply, briefing by the parties on the CIT’s remand decision is complete. The three-judge panel will now consider the arguments, and a decision is expected in the new year.

See Update of November 8, 2022 for details on the government defendants’ final response. See also Updates of September 15, 2022 for details on the plaintiff group’s comments in response to the USTR’s remand determination, and Update of August 2, 2022 for details on the USTR’s Remand Results explanation. The Update of April 6, 2022 summarizes the CIT’s decision directing such further explanation.

On December 2, 2022, the Department of the Treasury (“Treasury”) issued a Determination pursuant to Executive Order 14071 of April 6, 2022 imposing a price cap of $60 per barrel on seaborne crude oil of Russian origin, effective December 5, 2022.  Thus, companies can purchase and/or provide services related to the maritime transport of Russian-origin oil only if the oil is traded at or below $60 per barrel; otherwise, they may be subject to sanctions by Treasury’s Office of Foreign Assets Control (“OFAC”) for offering prohibited services to Russia.  The prohibited services related to the maritime transport of crude oil of Russian origin were outlined earlier in a Determination dated November 21, 2022 that was also issued pursuant to Executive Order 14071 (see Update of November 29, 2022).  The price cap and its policy structure will be imposed by the European Union, the G7, and Australia—collectively the “Price Cap Coalition”—as well.

Treasury anticipates the price cap to encourage countries—particularly low- and medium-income countries—to use the price cap as leverage to bargain for steeper discounts on Russian oil, thus fomenting greater discounted Russian oil on the global energy market.  In doing so, the price cap aims to limit Russia’s “most important source of revenue,” which, in turn, will constrain Russia’s ability to fund its ongoing invasion of Ukraine.

Further, to deter purchasers from buying seaborne crude oil of Russian origin above $60 per barrel, Treasury affirmed its commitment to the Price Cap Coalition’s plans to ban more services related to the maritime transport of seaborne crude oil of Russian origin next week, including a ban on maritime insurance and trade finance.  The additional ban on maritime insurance is particularly noteworthy as companies based in the G7 control approximately 90% of the market for relevant maritime insurance products and reinsurance, and are less expensive than their non-G7 counterparts.  Treasury also confirmed the additional bans will apply to Russian-origin petroleum products beginning on February 5, 2023—the date when the price cap for Russian-origin petroleum products will be announced.

The price cap also clarifies the Preliminary Guidance published in September 2022 by OFAC, which notably extended service providers with a “safe harbor” from strict liability for breach of sanctions if Treasury concluded service providers inadvertently purchased Russian oil above the price cap due to falsified or erroneous records provided by persons who act in bad faith or made material misrepresentations.  The “safe harbor,” though, is only for persons who comply with the price cap program’s recordkeeping and attestation process to demonstrate or confirm that seaborne Russian oil had been purchased at or below the price cap (see Update of September 19, 2022).