Trade and Manufacturing Monitor https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor News and insight from our international trade practice group Thu, 06 Feb 2025 07:59:17 -0500 60 hourly 1 New Updates to Customs De Minimis Exemption https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-updates-to-customs-de-minimis-exemption https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-updates-to-customs-de-minimis-exemption Mon, 20 Jan 2025 09:52:00 -0500 On January 13 and 17, 2025, U.S. Customs and Border Protection (“Customs”) issued two notices of proposed rulemakings that would impose new requirements on “de minimis” imports, including gifts, valued at $800 or less. These low-value or de minimis shipments are eligible for an exemption to enter the U.S. market duty free and with less information than other imports.

As we noted in our prior post, the Biden administration announced in September 2024 that it would take action to enhance supply chain visibility into the low-value shipment exemption. Over the past decade, the number of low-value shipments has increased significantly, with Customs processing, on average, over 4 million low-value shipments per day. The volume, combined with the minimal information requirements, has made it difficult for Customs to identify and interdict shipments that may conceal dangerous and illicit products, like fentanyl, counterfeit goods, and goods produced with forced labor.

The first rulemaking, entitled “Entry of Low-Value Shipments” (ELVS NPRM), if codified, would establish a dual-track entry process for de minimis shipments, revising the existing “basic” entry process (i.e., release from manifest process) and creating an “enhanced” entry process. Importers would be free to choose which track to use and both would permit claims of tax- and duty-free treatment, but only merchandise entered through the enhanced process would receive expedited clearance. In addition, the rulemaking would codify Customs’ existing practice to deny the de minimis exemption to merchandise subject to antidumping and countervailing duties.

The second rulemaking, entitled “Trade and National Security Actions and Low Value Shipments” (TNSA NPRM), would make merchandise subject to trade or national security actions (namely Section 201, 232, or 301 tariffs) ineligible for the de minimis exemption, unless that merchandise is excluded from the tariffs. The rule is intended to address tariff circumvention, where importers deconsolidate merchandise into multiple, low-value shipments to avoid Customs’ scrutiny. In addition, the rule would require providing the 10-digit HTSUS classification for merchandise entered under the basic entry process to enable Customs to confirm whether the merchandise is subject to Section 201, 232, or 301 tariffs.

Basic Entry Process

Taken together, the two rulemakings would amend Customs’ regulations to slightly modify current rules governing the basic entry process. As before, merchandise entered under the basic entry process will be released with an individual bill of lading, but the rulemakings would require importers to provide additional data elements. Presently, importers must provide the country of origin of the merchandise; shipper name, address and country; ultimate consignee name and address; specific description of the merchandise; quantity; shipping weight; and value. The ELVS NPRM would also require name and address of the person claiming the exemption and the name and address of the final deliver-to party, meaning the final party in the United States to whom the merchandise is delivered, if distinct from the person claiming the exemption. The TNSA NPRM would also require provision of the 10-digit HTSUS classification of the merchandise claiming basic entry to enable Customs to determine whether the merchandise is subject to Section 201, 232, or 301 duties. Finally, the rulemakings would make gifts eligible only for basic entry, not enhanced entry.

Enhanced Entry Process

Customs’ proposed enhanced entry process combines aspects of two successful voluntary pilot programs, the Section 321 Data Pilot and Entry Type 86 Test, pertaining to low-value shipments. The Section 321 Data Pilot tested the feasibility of Customs accepting advance data for low-value shipments from parties other than carriers, which were unlikely to possess all information regarding shipments, such as e-commerce platforms. The Entry Type 86 Test allowed entry of low-value shipments under a new, informal entry type 86 for shipments subject to other U.S. agencies’ regulatory requirements, rather than going through formal entry. Type 86 entries were also eligible for expedited clearance through electronic release.

Like the Section 321 Data Pilot, the enhanced entry process would require submission of advance data about the content, origin, and destination of the items. And, like the Entry Type 86 Test, compliant shipments would receive expedited clearance of shipments and duty- and tax-free treatment. Merchandise entered under the basic process would not be eligible for expedited clearance.

The following data elements would be required for all entries made under the enhanced process: the Clearance Tracing Identification Number (or the individual bill of lading number or other unique identification number to associate the merchandise on the bill of lading with the merchandise); country of shipment of the merchandise; 10-digit HTSUS classification, including indication of applicability of Section 201, 232, or 301 tariffs; and, at least one of the following: URL to the marketplace’s product listing for the merchandise in the entry, product picture, product identifier, and/or shipment x-ray or other security screening report number. Additional required elements to be provided, when available, include the seller name and address, purchaser name and address, any data or documents required by other government agencies, advertised retail product description, and marketplace name and website or phone number. Notably, a party eligible to make enhanced entry may seek a waiver of submission of a 10-digit HTSUS classification when the filing party has documented internal controls to ensure compliance and the merchandise is not subject to other U.S. agency import requirements (e.g., health and safety requirements).

Importers filing entries made under the enhanced process would have prescribed deadlines for submitting the required information in advance, depending on the mode of transportation. For example, for vessel cargo, the filing must be received at least 24 hours before the cargo is brought aboard at the foreign port. The timing requirements are the same as provided for Advance Electronic Data filings. Further, the entry can only be filed by one of the parties eligible to make entry.

Entries Not Eligible for the De Minimis Exemption

Merchandise covered by an antidumping or countervailing duty order is not eligible for low-value entry under Customs’ existing practice. The ELVS NPRM would make this practice explicit in the regulations.

Further, the TNSA NPRM would make goods subject to Section 201, 232, or 301 tariffs ineligible for the de minimis exemption. Importers cannot use the basic or enhanced entry processes and must make entry through an alternative method. Further, importers would be required to pay both standard duties and any additional Section 201, 232, or 301 duties, even when the entry value is less than $800.

* * *

Both rulemakings invite members of the public to comment on the proposed rulemaking within 60 days (i.e., March 17, 2024 for the ELVS NPRM, and March 21, 2024 for the TNSA NPRM). Specifically, regarding the ELVS NPRM, Customs seeks feedback on aspects of the enhanced entry process, namely the “product identifier” and “security screening report number” data elements and the proposed HTSUS waiver process. In the TNSA NPRM, Customs requests comments on whether international mail should be within the scope of that rulemaking or warrant a different approach.

Please contact Kelley Drye’s International Trade team with any questions on how this proposed rule may affect your company or for assistance with preparing comments on either NPRM, and watch for updates on potential additional changes to the de minimis exemption.

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Commerce Department Publishes Artificial Intelligence “Diffusion” Rulemaking https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-department-publishes-artificial-intelligence-diffusion-rulemaking https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-department-publishes-artificial-intelligence-diffusion-rulemaking Tue, 14 Jan 2025 12:17:00 -0500 On January 13, 2025, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published an interim final rule (IFR) announcing (1) updated controls for advanced computing chips and associated license exceptions; (2) updates to the Validated End User (VEU) Program for Data Centers (DCs); and (3) new controls on the model weights of the most advanced closed-weight artificial intelligence (AI) models. Given the breadth of changes included with this announcement, the IFR will be open for public comment until May 15, 2025.

License Review Process and New License Exceptions

The IFR creates a worldwide licensing requirement for the export, reexport, or transfer (in-country) of advanced computing integrated circuits (ICs) or the model weights of the most advanced AI models to any end user in any destination. For many countries, license applications will be considered under a presumption of approval up to a cap per country, while more sensitive countries will be subject to a presumption of denial. The IFR also includes the following license exceptions and authorizations to help ensure that commercial transactions that do not pose heightened national security risks can proceed and the benefits of AI can be broadly shared.

  • License Exception Artificial Intelligence Authorization (AIA): allows the export, reexport, or transfer (in-country) of advanced computing chips, without an authorization, to a set of allies and partners, which are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Republic of Korea, Spain, Sweden, Taiwan, the United Kingdom, and the United States.
  • License Exception Advanced Compute Manufacturing: authorizes the export, reexport, and transfer (in-country) of eligible items to private sector end users located in a destination not listed in Country Group D:5 or Macau, provided the end user’s company is not headquartered in, and does not have an ultimate parent company headquartered in, Macau or a destination specified in Country Group D:5, and only if the ultimate end use is the “development,” “production,” or storage of such eligible items.
  • License Exception Low Processing Performance: authorizes the export and reexport of low amounts of compute that do not present significant national security risks, up to 26,900,000 Total Processing Performance of advanced computing ICs per-calendar year to any individual ultimate consignee. There is no restriction on the number of shipments from exporters or re-exporters, provided the volume limit is not exceeded.

Update to Data Center Validated End User Program

The IFR also split the DC VEU program into two separate programs to better delineate that advanced compute DCs may involve corporate relationships in which different parties own the data center, provide physical security, own the advanced compute assemblies, provide logical security, and are able to access the compute. Specially, BIS created:

  • Universal VEUs (UVEU): provides U.S. and certain allied and partner country entities with the opportunity to obtain a single authorization that will allow the company to build DCs around the world without additional authorizations, except in arms-embargoed countries; and
  • National VEUs (NVEU): provides entities headquartered outside arms-embargoed countries the opportunity to obtain an authorization that will allow the company to build DCs in specified locations, and up to a specified scale, without additional authorizations, except in arms-embargoed countries.

Both the UVEU and NVEU programs contain eligibility requirements and restrictions on the kinds of activities that can be performed under the program, as well as certain reporting requirements to BIS. For example, authorized UVEUs will be required to keep at least 75% of their controlled advanced chips within the United States and certain allied and partner countries, and will be prohibited from installing more than 7% of their controlled chips in any single other country. To that end, companies should carefully review the new UVEU and NVEU requirements if they plan on exporting in the AI market.

New Controls on Model Weights of the Most Advanced Closed-Weight AI Models

Lastly, the IFR requires a license to export, reexport, or transfer (in-country) the model weights of any closed-weight AI model – i.e., a model with weights that are not published – that has been trained on 10^26 computational operations or more. Additionally, the rule creates a new foreign direct product rule that applies these controls to certain model weights produced abroad using advanced computing chips made with U.S. technology or equipment. Two exceptions are available for theses weight-based controls. The first, available through License Exception AIA, allows for the export, reexport, or transfer (in-country) of otherwise controlled closed AI model weights, without an authorization, by companies headquartered in the United States and certain allies and partners, except to an arms-embargoed country. The second applies to AI models with widely available model weights (i.e., open-weight models), which are not subject to controls.

This IFR is the culmination of the Biden Administration’s efforts to curtail the use of advanced AI by adversaries who threaten U.S. national security, and as such, it is a complicated piece of economic rulemaking. Our export controls and sanctions team is tracking this issue closely and can help navigate these new developments. Please contact us if you have any questions.

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Biden Administration’s 2021-2024 Quadrennial Supply Chain Review: Highlighting Areas for Trade Law Reform https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administrations-2021-2024-quadrennial-supply-chain-review-highlighting-areas-for-trade-law-reform https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/biden-administrations-2021-2024-quadrennial-supply-chain-review-highlighting-areas-for-trade-law-reform Fri, 10 Jan 2025 16:34:00 -0500 On December 19, 2024, the Biden administration released a report, the Quadrennial Supply Chain Review. This report, and the accompanying fact sheet, assess improvements made in American supply chains since 2021 and identify opportunities for further improvement. This post distills key takeaways from the National Security Council and National Economic Council’s assessment and recommendations pertaining to key trade laws. Specifically, the report details the need for: (i) increased transparency and traceability of imports, as well as tariff code updates; (ii) more targeted action and legal authority addressing entire supply chains of imports, including components and inputs; (iii) codification of legal authority to address transnational subsidies; (iv) additional legal tools to combat circumvention of U.S. trade measures; and (v) updating trade laws to provide swift relief to domestic industries.[i] With emphasis on reforming the trade laws to improve their effectiveness in responding to non-market policies and practices, the report offers a roadmap of areas where the incoming Trump administration and the 119th Congress might find bipartisan support for legislative and regulatory action.

Background

The Quadrennial Supply Chain Review is the product of Executive Order 14123 on White House Council on Supply Chain Resilience (June 14, 2024). That executive order tasked the White House Council on Supply Chain Resilience with conducting a four-year assessment of industries critical to national or economic security and submitting to the President a report every four years, beginning with this first report issued on December 19, 2024. The report also builds on Executive Order 14017 on America’s Supply Chains (Feb. 24, 2021), which established policy objectives for pursuing more resilient, diverse, and secure American supply chains. For more information and related context, please refer to our prior blog post.

Areas for Trade Law Reform

The report recommends updating the four primary trade statutes used to address non-market policies and practices: Title VII of the Tariff Act of 1930, Sections 201 and 301 of the Trade Act of 1974, and Section 232 of the Trade Expansion Act of 1962. Specifically, the report identifies the following areas for improvement to U.S. trade laws to enhance import transparency and traceability, update the breadth of potential remedies, address circumvention, and provide swift relief to domestic industries negatively affected by trade.

1. Increasing Import Transparency and Traceability

The report notes current impediments to the U.S. Government’s efforts to address non-market threats, such as the limiting of the government’s ability to share confidential trade, manufacturing, and supply chain data collected for other purposes even within the government. The report proposes updating statutes to facilitate the sharing of such sensitive data for critical sectors – while noting the need for maintaining confidentiality.

The report also proposes updating statutes to require importers to report components of specific imported final products, or the intended use of imported component parts, when such information is critical to responding to non-market economy threats. U.S. Customs and Border Protection and the U.S. Department of Commerce already collect data on the country of the melt and pour of steel imports and the countries of smelt and cast for aluminum imports, but the report contemplates expanding this concept to additional sectors.

In addition, the report identifies as a priority updating the Harmonized Tariff Schedule of the United States (“HTSUS”). For example, the HTSUS could be updated “to allow for more precise targeting of imports with trade actions and any tariff rate updates considered by Congress” by, for example, distinguishing the tariff classifications of critical minerals and disaggregating certain tariff lines that comingle products with very different end uses. This would allow the U.S. Census Bureau to collect and report more focused data that are specifically relevant to products and industries negatively affected by imports

2. Improving Remedies to Address New Challenges and Global Supply Chains

The report proposes several improvements to U.S. trade laws to address a variety of non-market policies and practices that are, for example, aimed at controlling entire supply chains, “including final products, intermediate goods, and key components and materials.” These improvements are necessary, according to the report, because upstream and downstream products are currently overlooked when specific imported products become subject to U.S. trade measures. The report highlights the following areas for reform. First, the U.S. unfair trade laws could be updated to provide U.S. producers of inputs or components of products with additional opportunities for participation in antidumping and countervailing duty proceedings. Second, the Section 201, 301, and 232 statutes could be clarified to make explicit existing legal authority for the U.S. Government to take actions on products throughout a supply chain, including inputs and components (wherever located) and derivative products as appropriate.[ii] Third, Section 301 could be updated to explicitly provide the government with the authority to execute sectoral agreements with foreign allies and partners to further address non-market policies and practices.

In addition, the report touts recent regulatory reform designed to ensure that countervailing duty proceedings and measures can more effectively address unfair transnational subsidies. According to the report, codification of the U.S. Department of Commerce’s ability to continue addressing transnational subsidies and to address instances of shifting production patterns would further improve the ability of the U.S. trade laws to counter non-market policies and practices. Accordingly, the report points to bipartisan, bicameral legislation introduced in the 118th Congress designed to achieve this purpose (commonly known as the “Levelling the Playing Field Act 2.0”). Reintroduction and consideration of this or similar legislation, would thus likely be an additional opportunity for improving U.S. trade laws.

3. Countering Circumvention of U.S. Trade Measures

The report notes that not all U.S. trade laws contain provisions to combat circumvention, making measures vulnerable to circumvention in the form of misclassification of products, third-country exportation, and shifting of production to different countries. The report recommends updating the Section 201 and 301 statutes to add circumvention procedures to address these issues. In addition, the report recognizes that foreign producers can avoid U.S. trade enforcement actions and other border-based measures by investing in U.S.-based operations. The report recommends that the U.S. Government monitor such investments and develop a policy response if necessary.

4. Authorizing Swift Import Relief for Affected U.S. Industries

The report also notes that the trade laws often only provide relief after an industry has been harmed to the point where the remedy may be less effective in helping the industry. Accordingly, one relevant tool that the report highlights for greater consideration and use is the provision under the U.S. antidumping and countervailing duty laws authorizing duties to counteract headwinds from unfair imports that prevent the establishment of a U.S. industry. In addition, to improve the ability of the U.S. trade laws to proactively address threats from imports, the report recommends updating the Section 201 and 301 statutes to allow for provisional measures while investigations are ongoing or relaxing requirements that an industry be harmed before actions are taken.

Stay tuned to Kelley Drye’s Trade & Manufacturing Monitor for updates as the incoming Trump administration takes the helm and the 119th Congress prepares to continue working on crafting solutions to effectively safeguard U.S. economic and national security from foreign threats.

[i] While this blog post focuses on the recommended trade law reforms, the report also recommends U.S. Government actions that could be undertaken without legislative action, such as (i) publishing an annual public list of U.S. sectors vulnerable to being harmed by non-market policies and practices, (ii) the development of sector-specific response plans by the Office of the U.S. Trade Representative and U.S. Department of Commerce to address related harms and threats to U.S. industry, and (iii) engagement with U.S. allies and partners to address global economic harms posed by non-market policies and practices.

[ii] The report notes that Section 232 already “allows action to be taken against imports and their derivative products on the basis of a threat to national security,” but that the statute could nonetheless be improved to explicitly provide for action to be taken to address non-market policies and practices throughout a supply chain.

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OFAC Issues New Determinations, Sanctions, Targeting Russian Energy and Petroleum https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-issues-new-determinations-sanctions-targeting-russian-energy-and-petroleum https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-issues-new-determinations-sanctions-targeting-russian-energy-and-petroleum Fri, 10 Jan 2025 16:21:00 -0500 This blog post was drafted with assistance from Sean C. Church, Paralegal.

On January 10, 2025, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued significant new sanctions targeting Russia’s primary oil revenue sources, including sanctions against Public Joint Stock Company Gazprom Neft (Gazprom Neft) and Surgutneftegas. OFAC issued several General Licenses (GL) covering wind down operations in the Russian energy sector. Finally, OFAC sanctioned more than 180 vessels, dozens of oil traders, oilfield service providers, insurance companies, and energy officials. These actions were implemented in coordination with the United Kingdom. The full announcement can be found here. Those engaging in dealings involving the Russian energy sector, including under prior GLs, should closely review the new sanctions before continuing business.

The first determination issued by OFAC, effective on January 10, 2025, authorizes sanctions pursuant to Executive Order (E.O.) 14024 against persons operating or having operated in the energy sector of the Russian economy, substantially increasing the sanctions risks associated with the Russian oil trade. Any person determined, pursuant to E.O. 14024, to operate or have operated in this sector shall be subject to sanctions pursuant to the directive.

The second determination was issued pursuant to E.O. 14071 and prohibits the export, reexport, sale, or supply, directly or indirectly, from the United States or by a United States person, wherever located, of petroleum services to any person located in Russia. The prohibition takes effect beginning at 12:01 a.m. eastern standard time on February 27, 2025. The determination contains certain exclusions related to (1) medical, agricultural, and environmental uses, (2) the G7 price cap on Russian crude oil, and (3) any service in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person.

As noted above, OFAC issued multiple GL’s related to the wind down of operations in the Russian energy sector. These include:

  • GL 8L (Authorizing the Wind Down of Transactions Related to Energy, expiring on March 12, 2025);
  • GL 115A (Authorizing Certain Transactions Related to Civil Nuclear Energy and covering transactions related to civil nuclear projects that were initiated before November 21, 2024);
  • GL 117 (Authorizing the Wind Down of Transactions Involving Gazprom Neft, Surgutneftegas, and Certain Additional Entities Blocked on January 10, 2025, expiring on February 27, 2025);
  • GL 118 (Authorizing Certain Transactions Related to Debt or Equity of, or Derivative Contracts Involving, Gazprom Neft, Surgutneftegas, and Certain Additional Entities Blocked on January 10, 2025, expiring on February 27, 2025)
  • GL 120 (Authorizing Limited Safety and Environmental Transactions and the Unloading of Cargo Involving Certain Persons or Vessels Blocked on January 10, 2025, expiring February 27, 2025); and
  • GL 121 (Authorizing Petroleum Services Related to Certain Projects, expiring June 28, 2025).

OFAC also revoked GL 93 covering transactions with Sovcomflot vessels, as the agency included the Sovcomflot network with this sanctions announcement.

Companies working in or adjacent to the energy sector should carefully review this announcement and ensure that none of the entities sanctioned today are included in any transactions going forward. Please contact our sanctions and export team if you need assistance navigating these latest developments, including with the application of the GL’s issued pursuant to this sanctions action.

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BIS Issues Formal ICTS Program Final Rule https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-formal-icts-program-final-rule https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-formal-icts-program-final-rule Thu, 05 Dec 2024 16:27:00 -0500 This blog post was drafted with assistance from Sean C. Church, Paralegal.

On December 5, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS or the Agency) issued a Final Rule formalizing the procedures the Agency will follow when reviewing transactions involving information and communications technology and services (ICTS) designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary that may pose a risk to the United States or U.S. persons. This Final Rule was published pursuant to Executive Order 13873 (“Executive Order on Securing the Information and Communications Technology and Services Supply Chain”).

This Final Rule is being published three years after BIS published the corresponding Interim Final Rule (IFR) on January 19, 2021. This Final Rule addresses feedback from the public on a number of issues, including the scope, the timeline of investigations, the procedures to make determinations, and the role of interagency partners. Notably, despite numerous comments received on the subject, BIS declined to establish a published procedure for determining what constitutes a “foreign adversary” for the purposes of ICTS transactions, and instead deferred to the general definitions provided in EO 13873.

The Agency did make a number of clarifying and organizational changes to the Final Rule from the 2021 IFR, including:

  • Removing the requirement that a party must collect sensitive personal data from more than one million U.S. persons to be included in the scope of certain aspects of the regulations;
  • Clarifying the software, hardware, and other products and services that may be considered for review;
  • Clarifying who are considered parties to an ICTS Transaction;
  • Consolidating the list of technologies within the scope of the rule; and
  • Outlining the sources of information the Secretary of Commerce may consider when formulating Initial and Final Determinations.

This rule will come into effect on February 3, 2025. If you have any questions regarding these ICTS developments, please contact our sanctions and export team.

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Commerce Department Strengthens Export Controls Through New Interim Rules to Restrict Development of Chinese Advanced Semiconductors https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-department-strengthens-export-controls-through-new-interim-rules-to-restrict-development-of-chinese-advanced-semiconductors https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-department-strengthens-export-controls-through-new-interim-rules-to-restrict-development-of-chinese-advanced-semiconductors Tue, 03 Dec 2024 16:42:00 -0500 This blog post was drafted with assistance from Sean C. Church, Paralegal.

On December 2, 2024, the Department of Commerce’s Bureau of Industry and Security (BIS) published two interim final rules (IFR’s) making the latest round of updates to regulations on advanced computing items, supercomputers, and semiconductor manufacturing equipment. BIS also announced the addition of 140 entities to the Entity List.

The new rules are designed to further impair the People’s Republic of China’s (PRC) capability to produce advanced-node semiconductors that can be used in advanced weapon systems, artificial intelligence (AI), and advanced computing, which have significant military applications. The rules are effective immediately with a delayed compliance date of December 31, 2024 for certain controls. Public comments can be submitted on the Interim Final Rule. Although the rules contain a significant number of changes to the EAR and should be closely reviewed, a brief summary of key provisions is below.

Foreign-Produced Direct Product Rule Additions, and Refinements to Controls for Advanced Computing and Semiconductor Manufacturing Items

The five key categories of changes implemented by this IFR are as follows:

  • Addition of two new FDP rules in § 734.9 of the Export Administration Regulations (EAR) for certain types of advanced Semiconductor Manufacturing Equipment (SME) and for entities on the Entity List, designated with new Footnote 5, involved in the production of “advanced-node ICs”;
  • Additional revisions to de minimis provisions that correlate to the new Foreign-Produced Direct Product (FDP) rules, establishment of new License Exception Restricted Fabrication “Facility” (RFF), and conforming changes to other parts of the EAR;
  • Further changes and clarification to the end use controls in 744.23 related to semiconductor manufacturing equipment;
  • Addition of high-bandwidth memory (HBM) controls, including addition of new ECCN 3A090.c and License Exceptions HBM;
  • Eight new red flags providing guidance on diligence standards;
  • Clarification on export controls applicable to software keys to address when authorization is required; and
  • Revisions to the Commerce Control List (CCL) in supplement no. 1 to part 774, including revisions to eight existing ECCNs and addition of eight new ECCNs.

The full text of the Foreign-Produced Direct Product IFR can be found here.

Additions and Modifications to the Entity List; Removals from the Validated End-User (VEU) Program

The changes made by this IFR are described as follows:

  • Addition of 140 entities to the Entity List, including entities from the PRC, Japan, South Korea, and Singapore;
  • Modification of 14 existing entries on the Entity List, consisting of revisions to 14 entries under the PRC;
  • Removal of three entities from the VEU Program.

The full text of the Additions and Modifications IFR can be found here, including a list of the entities mentioned.

As with the October 2023 regulations, the two new IFRs are highly complex and contain many changes that are not fully summarized above. Please contact our sanctions and export team if you need assistance navigating these latest developments.

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OFAC Issues New Russia-Related SDN Designations and Alert for Financial Institutions https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-issues-new-russia-related-sdn-designations-and-alert-for-financial-institutions https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-issues-new-russia-related-sdn-designations-and-alert-for-financial-institutions Thu, 21 Nov 2024 16:44:00 -0500 This blog post was drafted with assistance from Sean C. Church, Paralegal.

On November 21, 2024, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) updated the Specially Designated Nationals and Blocked Persons List (SDN List) and issued an alert regarding the sanctions risks to foreign financial institutions. These actions further decrease the number of unsanctioned financial institutions in Russia and create heightened risks for future financial transactions involving Russian parties. Several notable designations of entities are:

  • Gazprombank Joint Stock Company
  • Over 50 small-to-medium Russian Banks
  • Multiple Russian securities entities
  • 11 Central Bank of the Russian Federation officials
  • Key Russian staff members of VTB Bank Public Joint Stock Company’s branch in Shanghai, China and Public Joint Stock Company Sberbank of Russia’s branch in New Delhi, India

A full press release with the names of the newly designated parties can be found here.

OFAC also provided an alert regarding the sanctions risk for foreign financial institutions participating in the Russian financial messaging system called “System for Transfer of Financial Messages” (SPFS). The alert warns that SPFS was created to help diminish the effects of sanctions imposed following the invasion of Crimea, and any foreign financial institution that joins or has already joined SPFS may be as an SDN. As part of this alert, OFAC has made clear that institutions that join SPFS after the issuance of this alert will be subject to aggressive targeting. Foreign financial institutions should also be cautious of their exposure to other institutions participating in SPFS, which could be helping Russia evade U.S. sanctions.

Additionally, OFAC issued general licenses on various types of transactions and services, including a winddown general license for transactions with Gazprombank. OFAC also published two new Russia-related Frequently Asked Questions (FAQ 1201, FAQ 1202), and amended three Russia-related Frequently Asked Questions (FAQ 976, FAQ 1096, FAQ 1197). These refer to topics such as the effects on diplomatic and consular missions; processing of personal, non-commercial remittances; blocking securities held at the National Settlement Depository; and more.

Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

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Treasury Issues Final Rule on Outbound Investments to China https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/treasury-issues-final-rule-on-outbound-investments-to-china https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/treasury-issues-final-rule-on-outbound-investments-to-china Wed, 30 Oct 2024 10:00:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal.

On October 28, 2024, the Treasury Department issued its final regulations (the Final Rule) implementing new controls on outbound investments under Executive Order 14105, issued on August 9, 2024 by President Biden. This Final Rule comes after public comments were received by Treasury on both an Advanced Notice of Proposed Rule-Making in August of 2023 (ANPRM) and a Notice of Proposed Rule-Making in July of 2024 (NPRM). This Final Rule applies to outbound investment in China, Hong Kong, and Macau, and will go into effect on January 2, 2025. The Final Rule requires US Persons to notify Treasury of certain outbound investments before proceeding and outright prohibits other outbound investments.

Key areas that have evolved since the NPRM include:

  • The scope of coverage of transactions includes:
    • A transaction made by a US person to a person of a country of concern.
    • Acquisitions of an equity interest or contingent equity interest.
    • A greenfield Investment or other corporate expansion.
    • Entrance into a joint venture.
    • Certain investments as a limited partner or equivalent.
  • The knowledge standard (which describes the knowledge a U.S. person must have about certain facts and circumstances related to a transaction to trigger obligations under the Final Rule).
  • The scope of the prohibition on U.S. persons “knowingly directing” certain transactions.
  • The definition of covered foreign person with respect to persons holding an interest in a person of a country of concern.
  • The treatment of certain debt and contingent equity transactions.
    • An exception is granted where the U.S. person, as a member of a lending syndicate, acquires a voting interest in a covered foreign person upon default and the U.S. person cannot initiate any action vis-à-vis the debtor and is not the syndication agent.
  • Scope of exceptions, including for certain transactions between a U.S. person and its controlled foreign entity and for employee compensation in the form of stock or stock options.

Companies and investors should carefully review the Final Rule to understand the requirements coming in January 2025. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

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BIS Issues Guidance to Financial Institutions on Best Practices for Compliance with the Export Administration Regulations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-guidance-to-financial-institutions-on-best-practices-for-compliance-with-the-export-administration-regulations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-guidance-to-financial-institutions-on-best-practices-for-compliance-with-the-export-administration-regulations Fri, 11 Oct 2024 00:00:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On October 9, 2024 the Department of Commerce’s Bureau of Industry and Security (BIS) published guidance for financial institutions (FIs) which outlines best practices for compliance with the Export Administration Regulations (EAR). BIS provided recommendations for financial institutions to minimize the risk of violating the EAR.

These recommendations describe recommended due diligence practices, encourage transaction reviews, and clarify which types of real-time transaction screenings are considered to be the best practices. The guidance is yet another example of the U.S. Government’s view that all parties to a transaction -- whether the exporter, financial institution, freight forwarder, or others – have a role to play in compliance. Although FIs have historically focused diligence on sanctions and anti-money laundering laws, BIS has made it clear this approach will be insufficient to capture FIs risks under the EAR. This guidance for FIs focuses on General Prohibition 10 (GP 10), which prohibits both individuals and FIs from financing or servicing items subject to the EAR with the knowledge that a violation has occurred, is about to occur, or is intended to occur. The term ​“knowledge” includes an awareness of a high probability and violation has occurred or will occur. To avoid such violations and identify EAR violations associated with financial transactions, BIS provided several best practices listed below:

Screening customers during and after onboarding against the U.S. Consolidated Screening List; Customers of FIs that deal with EAR items should certify compliance with the EAR under certain circumstances; Establishment of risk-based procedures to identify and examine red flags after transactions and, where necessary, to take action to proactively stop violations of the EAR before proceeding with additional transactions involving the same customer of counterparties.

In this guidance, BIS also recommended that FIs closely review transactions involving Common High Priority List (CHPL) items to Russia since 2023. This is the second guidance that refers companies to the Trade Integrity Project as a source for diligence information. FIs will need to consider how to structure diligence to dig into customers’ export compliance practices, which is an expansion of traditional know-your-customer diligence conducted by FIs.

Please contact our sanctions and export controls compliance team if you have any questions regarding these latest developments.


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New Actions Announced by the Biden-Harris Administration May Signal Changes to De Minimis Exemption https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-actions-announced-by-the-biden-harris-administration-may-signal-changes-to-de-minimis-exemption https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-actions-announced-by-the-biden-harris-administration-may-signal-changes-to-de-minimis-exemption Fri, 13 Sep 2024 00:00:00 -0400 On September 13, the Biden-Harris Administration published a fact sheet regarding its intended plans for tackling the exponential increase of shipments claiming the de minimis exemption and calls upon Congress to complement those plans with legislation. The de minimis exemption for imports, which allows for packages of goods costing $800 or less to enter the U.S. with limited documentation and free from duties and taxes, has been a flashpoint in Congress as the volume of packages entering the country under the exemption has increased by an order of magnitude over the last decade. With nearly a billion de minimis packages entering the country this year already, Congress – and now the Biden-Harris Administration – has been seeking a way to allow Customs and Border Protection (“CBP”) to effectively handle the increase in the volume of shipments while ensuring the U.S. trade laws, health and safety laws, and consumer protection laws are enforced. The proposed changes to de minimis are animated by concerns over by the explosion of sales by Chinese e-commerce giants, especially those in the apparel space, as well as concerns about illicit content, including fentanyl and precursor chemicals, products dangerous to the health and safety of U.S. consumers, as well as goods made with forced labor.

Against this background, the Administration announced its intent to issue a Notice of Proposed Rulemaking that would exclude from the de minimis exemption all shipments containing products covered by tariffs imposed under Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962, positioning such products alongside products subject to antidumping or countervailing duty orders which are already ineligible to benefit from the exemption. Approximately 40% of U.S. imports – including 70% of textile and apparel imports from China – are covered by Section 301 tariffs. The Administrative also intends to issue a Notice of Proposed Rulemaking requiring additional data for de minimis shipments, including the 10-digit tariff classification number and the entity on whose behalf the exemption is being claimed, allowing CBP much greater insight into the contents of the package and the purpose for importation.

The White House also announced that the Consumer Product Safety Commission (CPSC) intends to propose a final rule requiring importers of consumer products to file Certification of Compliance with CBP and CPSC at the time of entry for all shipments, including de minimis shipments.

In addition to announcing this intended rulemaking, the Administration also called for Congress to enact legislation by the end of the year, which would exclude import-sensitive products and products subject to Section 301, 201, and Sections 232 tariffs, especially textile and apparel products, from de minimis eligibility. The White House explicitly endorsed the proposed de minimis reforms set forth in the Detect and Defeat Counter-Fentanyl Proposal. This Proposal, set forth by the Administration on July 31 of this year, is intended to incorporate bipartisan ideas already put forward by members of Congress, namely establishing a nation-wide pill press and tableting machine registry and permanently regulating fentanyl-related substances as “Schedule I” drugs subject to heightened penalties for distribution and possession, as well as expanding CBP’s authority to demand additional documentation regarding de minimis packages.

The call for legislation regarding de minimis comes approximately one month after the Fighting Illicit Goods, Helping Trustworthy Importers, and Netting Gains (FIGHTING) for America Act was introduced senators Ron Wyden, Cynthia Lummis, Sherrod Brown, Susan Collins, and Bob Casey. The legislative priorities endorsed by the Administration closely follow those in the FIGHTING for America Act, including barring import-sensitive goods and goods subject to tariffs under Section 301, Section 201, or Section 232. However, the Administration did not mention the bill’s proposal of expanding CBP’s discretion in determining which goods should be barred from de minimis eligibility or the establishment of a $2 fee per shipment.

The Administration’s plan for executive action adds to the bipartisan calls by members of Congress and domestic trade associations to reform the de minimis exemption. With the alignment between the Administration and the FIGHTING for America Act – at least on barring import-sensitive goods and goods subject to tariffs – it may be that a consensus on what to do about de minimis is near at hand and could manifest in legislation by the end of the year. If you have any questions about how a potential change in the de minimis exemption could affect your company, Kelley Drye’s International Trade team is here to help.

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BIS Publishes New Controls on Quantum Computing and Other Advanced Technologies in Accordance with International Partners https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-publishes-new-controls-on-quantum-computing-and-other-advanced-technologies-in-accordance-with-international-partners https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-publishes-new-controls-on-quantum-computing-and-other-advanced-technologies-in-accordance-with-international-partners Fri, 06 Sep 2024 11:44:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On September 5th, 2024 the Bureau of Industry and Security (BIS) of the U.S. Commerce Department issued an interim final rule (IFR) which imposes controls on advanced technologies, specifically quantum computing, semiconductor manufacturing, gate all-around field effecter transistor (GAAFET) technology, and additive manufacturing items. BIS said that these technologies pose “serious threats” to the United States’ national security when wielded by adversaries. The rule is intended to align with similar controls from international partners.

The new rule adds Export Control Classification Numbers (ECCNs) to the Commerce Control List to cover the advanced technologies, revises existing ECCNs, and adds worldwide license requirements for both. It also adds a new license exception to authorize exports and reexports to and by countries that have implemented equivalent technical controls for these newly added items, and addresses the scope of deemed export controls for newly added technology and software ECCNs.

BIS also noted that as technologies with military applications evolve, the Bureau will continue to regulate their movement in the future to prevent such threats to national security and U.S. foreign policy.

In a press release, BIS defined the technologies that they are implementing worldwide export controls on as:

  • Quantum Computing Items: quantum computers, related equipment, components, materials, software, and technology that can be used in the development and maintenance of quantum computers.
  • Advanced Semiconductor Manufacturing Equipment: tools and machines that are essential for the production of advanced semiconductor devices.
  • Gate All-Around Field-Effect Transistor (GAAFET) Technology: technology that produces or develops high-performance computing chips that can be used in supercomputers.
  • Additive Manufacturing Items: Equipment, components and related technology and software designed to produce metal or metal alloy components.

While the new ECCNS will be subject to worldwide license requirements, a new License Exemption Implemented Export Controls (IEC) would mean that countries which meet the terms by implementing comparable national controls would no longer need license applications for these aforementioned technologies, allowing for more economic opportunities between nations aligned on this foreign policy issue.

Companies should review the new controls and confirm whether any of their products, technology, or software are subject to additional licensing requirements. We recommend contacting our sanctions and export controls compliance team if you have any questions regarding these latest developments.

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Commerce, Treasury, and State Announce Measures Targeted at Further Restricting Russia and Belarus https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-treasury-and-state-announce-measures-targeted-at-further-restricting-russia-and-belarus https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/commerce-treasury-and-state-announce-measures-targeted-at-further-restricting-russia-and-belarus Fri, 23 Aug 2024 17:25:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On August 23, 2024, the U.S. Departments of Commerce, Treasury, and State published new restrictions on Russia aimed at further limiting its access to U.S. materials and international procurement networks for its military.

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) and the State Department targeted nearly 400 individuals and entities both in Russia and outside its borders—including in Asia, Europe, and the Middle East. These designations cover a broad swath of Russian procurement activity, including numerous transnational networks, companies facilitating sanctions evasion for Russian oligarchs through offshore trust and corporate formation services, those evading sanctions imposed on Russia’s cyber actors, companies laundering gold for a sanctioned Russian gold company, and entities supporting Russia’s military-industrial base by procuring sensitive and critical items such as advanced machine tools and electronic components. Many of OFAC’s designations targeted companies and individuals supplying items listed on the U.S. “Common High Priority List,” which contains items that Russia seeks to procure for its weapons programs. Companies should make sure to conduct restricted party screening on counterparties to ensure they are not on a sanctions watchlist. A number of the designated entities are not based in Russia or Belarus, and therefore any screening procedures that only focus on those countries will not fully cover the risks.

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued final rules which will:

  1. Expand the scope of the Russia/Belarus Military End User (“MEU”) Foreign Direct Product (“FDP”) rule to cover a new category of entities: Procurement Entities. Commerce will designate Russian and Belarus Procurement Entities, e.g., those procuring products for Russia’s war effort, on the Entity List with a footnote, and subject them to controls under the FDP rule.
  2. Impose new license requirements on operation software for computer numerically controlled (“CNC”) machine tools. This will have a delayed effective date of September 16, 2024;
  3. Add more than 100 entities to the Entity List, including companies located in Russia, the Crimea Region of Ukraine, China (including Hong Kong), Turkey, Iran, and Cyprus, for shipping U.S.-origin and U.S.-branded items to Russia contrary to U.S. export controls or for engaging in other activities contrary to U.S. national security and foreign policy interests. Many of these entities are designated as MEUs or Procurement Entities and are subject to the FDP rule;
  4. Issue guidance to exporters on identifying suspicious transactions related to foreign corporate service providers and listed foreign addresses; and
  5. Provide guidance and recommendations on contractual language that can be used to assist in export compliance.

It is important for companies to conduct enhanced due diligence for any sales to Russia or Belarus, or to customers in countries that may be acting as a procurement agent for Russia or Belarus (e.g., Turkey, the United Arab Emirates, China, Hong Kong, etc.). The above BIS guidance on contractual language will be beneficial for companies to ensure their standard contract language or terms and conditions account for export controls as well.

Please contact our sanctions and export controls compliance team if you have any questions regarding these latest developments.

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New Export Control Compliance Resources for Academic Institutions https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-export-control-compliance-resources-for-academic-institutions https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/new-export-control-compliance-resources-for-academic-institutions Thu, 15 Aug 2024 11:32:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On August 14, 2024, the Department of Commerce’s Bureau of Industry and Security (BIS) issued two new resources for academic institutions to help them navigate and comply with export controls. These come in the form of a compliance note on voluntary-self disclosure trends and a compendium of other compliance resources.

The compliance note includes common conduct by academic institutions that have violated export controls within the last 10 years. The compliance note also provides details on prevention and the remedial actions that occurred from these violations. Such conduct includes:

  • The unauthorized export of chemicals
  • Unauthorized exports to a party on the Entity List
  • Unauthorized releases of EAR-controlled tech to foreign national employees or students
  • Improper use of license exception for temporary imports, exports, reexports, and transfers
  • Failure to file electronic export information in the Automated Export System
  • Failure to maintain accurate export records

The compendium provided by BIS is a guide to the tools of export compliance, including informational and vetting resources, BIS-specific resources, and examples of recent enforcement actions.

These resources and guidance materials serve as examples for the academic community on the “dos and don’ts” in regard to export controls. The conduct listed above demonstrates the various risks that colleges and universities face without updated and reviewed internal policies. Many academic institutions use a very similar, yet potentially outdated, export control policy statement on their website. Without periodically reviewing the policy statement and underlying procedures, institutions could have unintended violations with steep penalties. As export rules are constantly developing, we recommend regular reviews and updates.

For help integrating export requirements into everyday operations at an academic institution, please contact our sanctions and export controls compliance team.

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DOJ Announces New Corporate Whistleblower Awards Pilot Program https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/doj-announces-new-corporate-whistleblower-awards-pilot-program https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/doj-announces-new-corporate-whistleblower-awards-pilot-program Mon, 05 Aug 2024 17:27:00 -0400
This blog post was drafted with assistance from Sean C. Church, Paralegal

On Thursday, August 1st, the Department of Justice announced a new Corporate Whistleblower Awards Pilot Program to “uncover and prosecute corporate crime.” This new program incentivizes whistleblowers with potentially very significant payouts if they provide the Criminal Division with original and truthful information about corporate misconduct, including reports of certain trade compliance violations. With this program, companies face higher risk that employees may report legal violations to the government because of the potential financial reward. We recommend that companies reexamine their trade compliance and other policies and revise them as needed to encourage employees to notify company officials, internal legal, or company trade compliance teams to potential concerns regarding non-compliance with company policies and applicable laws. This is a good opportunity to review and update company policies.

The information provided by a whistleblower must relate to one of the following areas:

a. Violations by financial institutions, their insiders, or agents, including schemes involving money laundering, anti-money laundering compliance violations, registration of money transmitting businesses, and fraud statutes, and fraud against or non-compliance with financial institution regulators (such as OFAC).

b. Violations related to foreign corruption and bribery by, through, or related to companies, including violations of the Foreign Corrupt Practices Act, violations of the Foreign Extortion Prevention Act, and violations of the money laundering statutes.

c. Violations committed by or through companies related to the payment of bribes or kickbacks to domestic public officials, including but not limited to federal, state, territorial, or local elected or appointed officials and officers or employees of any government department or agency.

d. Violations related to (a) federal health care offenses and related crimes involving private or other non-public health care benefit programs, where the overwhelming majority of claims are submitted to private or other non-public health care benefit programs, (b) fraud against patients, investors, and other non-governmental entities in the health care industry, where the overwhelming majority of the actual or intended loss was to patients, investors, and other non-governmental entities, and (c) any other federal violations involving conduct related to health care not covered by the Federal False Claims Act, 31 U.S.C. § 3729, et seq.

Companies should ensure they have fulsome internal reporting procedures to incentivize employees to report potential issues internally before going to regulators. Companies should make sure employees know that reports of potential compliance issues will be taken seriously and that whistleblowers will be protected. Companies should also be aware that any potential violations of law now face more risk of coming to DOJ’s attention given the large possible financial gain for whistleblowers.

For more on whistleblowers’ eligibility and considerations for payment, please see the guidance provided by the Department of Justice.

Please contact our sanctions and anti-corruption compliance team if you need assistance navigating these latest developments.

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BIS Proposed Rule Expands Scope of Military End Uses and Users https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-proposed-rule-expands-scope-of-military-end-uses-and-users https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-proposed-rule-expands-scope-of-military-end-uses-and-users Fri, 02 Aug 2024 08:19:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On July 25, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced revisions to the Export Administration Regulations (EAR) through a proposed rule revising certain restrictions on military end uses and end users and a proposed rule covering foreign security-based restrictions. BIS is accepting comments on these proposed rules until September 27, 2024.

The new rules would expand the military end use/user controls to apply to all items subject to the EAR (including EAR99 items), rather than only the items specified in supplement no. 2 to part 744, as it is now. Further, the revised controls would expand the country scope for certain military end-use and end-user controls to apply to certain countries identified in Country Group D:5 and Macau, or wherever located when identified on the Entity List, a significant expansion of the existing controls.

The proposed rules would also impose end use and end user controls on certain items subject to the EAR involving military support, intelligence, and security, an expansion beyond the prior military end-use rules. The new controls also cover exports to private entities that provide military (e.g. mercenary) services, and private entities that supply substantive services to foreign intelligence and to foreign security entities. These are broad ranging revisions to the rules that may affect licensing requirements for many exports.

The proposed rules also implement additional restrictions on U.S. persons’ support for particular military, military support, and intelligence end uses and end users of concern. These controls address situations where U.S. persons are not exporting products for such end users or end uses, but are otherwise providing support, such as financing, freight forwarding, or support services.

Companies should consider whether their current activity might require a license under the proposed rules. If so, companies may want to submit comments during the comment period or otherwise prepare for the new restrictions. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

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BIS Proposes New Rule on Facial Recognition Systems https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-proposes-new-rule-on-facial-recognition-systems https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-proposes-new-rule-on-facial-recognition-systems Fri, 02 Aug 2024 08:16:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On July 25, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced a proposed rule amending the Export Administration Regulations (EAR) by adding two new unilateral item controls covering facial recognition technology to the Commerce Control List (CCL). BIS is accepting comments on the proposed rule until September 27, 2024.

The proposed rule would create a new crime control for facial recognition systems that are particularly designed for mass surveillance and crowd scanning, which give state actors the ability to monitor, track, or possibly detain people unlawfully. The new controls would apply to crime control and detection equipment, in addition to other technology and software listed under the Export Control Classification Numbers (ECCN) on the CCL. BIS also noted that a license would be required for export of such items to countries of concern listed in CC Column 1 (CC1) in the Commerce Country Chart at Supplement No. 1 to part 738 of the EAR. The controls would be narrowly tailored and not applicable to systems that use such facial recognition technology for individual access to personal devices, automobiles, or residential or work premises that verify identities of people attempting to gain access.

The proposed rule would also amend ECCN 3A981 to control facial recognition systems in addition to what it already controls. Accordingly, facial recognition software would be controlled under ECCN 3A981 and facial recognition technology under ECCN 3E980. These would both be controlled for CC1 reasons.

Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

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OFAC Publishes Guidance on Extension of Statute of Limitations and Recordkeeping Requirements https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-extends-statute-of-limitations-for-trading-with-the-enemy-act https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/ofac-extends-statute-of-limitations-for-trading-with-the-enemy-act Mon, 22 Jul 2024 18:16:00 -0400 This blog post was drafted with assistance from Sean C. Church, Paralegal

On July 22nd, 2024, OFAC published a guidance document regarding the 21st Century Peace through Strength Act’s extension of the statute of limitations for civil and criminal violations of the International Emergency Economic Powers Act (IEEPA) or the Trading with the Enemy Act (TWEA) from five years to 10 years.

OFAC’s guidance clarified that they may now enforce civil violations of IEEPA- or TWEA- based sanctions prohibitions within 10 years of the latest violation, assuming the latest violation happened after April 24th, 2019. Therefore, the extended statute of limitations does not apply to violations that occurred more than 5 years before the recent rule change.

OFAC also announced that they would publish a new interim final rule, with an opportunity to provide comment, changing recordkeeping requirements to align with the extended statute of limitations. The rule would extend the requirements from five to 10 years. OFAC stated that they expect a 10-year recordkeeping requirement would be effective within six months of the interim final rule’s publication.

The guidance document from OFAC can be found here.

Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

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U.S. Treasury Department Issues Proposed Rule Expanding CFIUS Coverage of Real Estate Transactions Near Military Installations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-treasury-department-issues-proposed-rule-expanding-cfius-coverage-of-real-estate-transactions-near-military-installations https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/u-s-treasury-department-issues-proposed-rule-expanding-cfius-coverage-of-real-estate-transactions-near-military-installations Fri, 12 Jul 2024 16:10:00 -0400

On July 8, 2024, the U.S. Treasury Department (“Treasury”), as the lead agency of the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”), issued a proposed rule to expand the Committee’s jurisdiction over certain transactions by foreign persons involving real estate in the United States. This proposed rule would add over 50 military installations to the existing list of installations around which CFIUS has jurisdiction.

Specifically, the proposed rule would:

  • Expand CFIUS’s jurisdiction over real estate transactions to include those within a one-mile radius around 40 additional military installations;
  • Expand CFIUS’s jurisdiction over real estate transactions to include those within a 100-mile radius around 19 additional military installations;
  • Expand CFIUS’s jurisdiction over real estate transactions between 1 mile and 100 miles around eight military installations already listed in the regulations;
  • Update the names of 14 military installations already listed in the regulations to better assist the public in identifying the relevant sites; and
  • Update the location of seven military installations already listed in the current regulations to better assist the public in identifying the relevant sites.

In addition to the above expansion of CFIUS jurisdiction, the proposed rule would also amend various definitions within the regulations.

Please contact our CFIUS team if you need assistance navigating these latest developments.

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BIS Issues Guidance on Addressing Export Diversion Risks https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-guidance-on-addressing-export-diversion-risks https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/bis-issues-guidance-on-addressing-export-diversion-risks Thu, 11 Jul 2024 16:38:00 -0400 On July 10, the Department of Commerce’s Bureau of Industry and Security (BIS) published guidance on how to identify parties that present a heightened risk of diversion to Russia’s military-industrial sector, as well as information about the various mechanisms BIS uses to inform companies about these parties. The guidance also outlines certain responsibilities companies have to comply with BIS regulations and additional steps to mitigate diversion risks.

The most notable update is that BIS now strongly encourages companies to screen transaction parties against those identified on the Trade Integrity Project website. The Trade Integrity Project (TIP) is an initiative of the UK-based Open-Source Centre and the website monitors military and dual-use trade with Russia. Specifically, the website identifies entities that have shipped Common High Priority List (CHPL) items to Russia since 2023. The CHPL includes a number of items used to produce Russian weaponry – including, but not limited to, electronic integrated circuits and fixed capacitors – and are controlled for export. Companies that produce or sell CHPL items should closely scrutinize parties identified on the TIP website to determine whether any red flags are present before proceeding with an export, reexport, or transfer.

Please contact our sanctions and export team with any questions regarding these latest developments, or if you require assistance with screening your products or customers and related risk reduction strategies for your supply chains.

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DHS and FLETF Release Updated UFLPA Strategy https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/dhs-and-fleft-release-updated-uflpa-strategy https://www.kelleydrye.com/viewpoints/blogs/trade-and-manufacturing-monitor/dhs-and-fleft-release-updated-uflpa-strategy Wed, 10 Jul 2024 07:27:00 -0400 This summary was drafted with assistance from Matthew Chang and Brianna Robinson, participants in Kelley Drye's 2024 Summer Associate Program

On July 9th, the Department of Homeland Security (“DHS”), on behalf of the Forced Labor Enforcement Task Force (“FLETF”), released its 2024 Updates to the Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China (the “Update”), as required by the Uyghur Forced Labor Prevention Act (“UFLPA”). Notably, the FLETF added three new high-priority sectors for enforcement: polyvinyl chloride (“PVC”), aluminum, and seafood. The Update noted that the FLETF will prioritize review of potential entities within these sectors for inclusion in the UFLPA Entity List – now including 68 entities – and the federal agencies will also target entities within these sectors for relevant enforcement.

The Update also shed light on the process for identifying high-priority sectors for enforcement. It stated that any “member agency may submit a recommendation to the FLETF to add a new high-priority sector” based on the following (non-exhaustive) criteria: (1) credible evidence, including from civil society, media, or academic reporting, of multiple entities in the sector having a high risk of utilizing or facilitating forced labor; (2) the sector was designated by the People’s Republic of China (“PRC”), the Xinjiang Uyghur Autonomous Region (“XUAR”), the Xinjiang Production and Construction Corps, and/or provincial or municipal governments as a target for investment and expansion in the XUAR based on government directives; and (3) XUAR-based production of goods in that sector represent 15 percent or more of total production in the PRC or 10 percent more of global production.

The FLETF encouraged importers of high-priority sector goods to heavily scrutinize their supply chains to ensure any such goods are not made with forced labor. FLETF agencies will closely monitor developments in the high-priority sectors and, in addition to prioritizing addition of entities from these sectors to the UFLPA Entity List, will “review information and developments in these sectors in order to deploy their respective tools and authorities, including economic sanctions, visa restrictions, and export control measures, as appropriate.”

Two of the high-priority sector additions were foreshadowed by the FLETF’s announcement on June 11, 2024, in which it added three new entities – one each from the seafood, aluminum, and footwear industries – to the UFLPA Entity List. The companies in the seafood and aluminum sectors, Shandong Meijia Group Co., Ltd. and Xinjiang Shenhuo Coal and Electricity Co., Ltd., respectively, were the subject of significant forced labor allegations in recent years:

Shandong Meijia Group Co., Ltd. (“Meijia Group”) is based in Shandong Province and sells frozen seafood products, vegetables, quick frozen convenience food, and other aquatic foods. In May 2023, the Outlaw Ocean Project reported on an email that stated that Meijia Group, which does business in the U.S., received labor transfers from the XUAR. Following reports of Uyghur and other forced labor in seafood markets, the Natural Resources Committee wrote a letter in October 2023 urging U.S. Customs and Border Protection (“CBP”) to investigate these reports and enforce any UFLPA violations. That same month, the Congressional-Executive Commission on China (“CECC”) held a hearing on how forced labor in China taints America’s seafood supply chain. In November 2023, a SkyNews article on the Outlaw Ocean investigation on Uyghur forced labor found nine seafood entities connected to UK seafood suppliers, including the Mejia Group. In January 2024, the Outlaw Ocean Project formally filed a recommendation to implement Global Magnitsky sanctions against connected Chinese entities. Additionally, the Southern Shrimp Alliance sent a letter on January 2024 to the FLETF asking it to add Meijia Group, among other companies, to the UFLPA Entity List and “identify seafood as a high-priority sector” for enforcement. In February 2024, the Ways and Means Committee sent a letter to the U.S. Trade Representative (“USTR”), Department of State (“DOS”), and CBP urging them to investigate the allegations of forced labor in seafood supply chains associated with China, including Meijia Group. In March 2024, the CECC asked the Biden Administration to quickly act and address issues of forced labor in the seafood industry.

Xinjiang Shenhuo Coal and Electricity Co., Ltd. (“Xinjiang Shenhuo”) is a state-owned enterprise based in XUAR that produces electrolytic aluminum, graphite carbon, and prebaked anodes. In April 2022, Horizon Advisory wrote a report that named Xinjiang Shenhuo as one of eight major aluminum companies associated with government-led forced labor transfer programs. The report indicated that Xinjiang Shenhuo is involved in labor transfers and organizes transfer of labor programming in concert with the local government and other companies. For example, Xinjiang Shenhuo partnered with other companies in March 2017 to hold a “special job fair” that targeted migrant workers. Xinjiang Shenhuo utilizes “real-time monitoring,” which is considered an indicator of forced labor. In December 2022, a Sheffield Hallam University report on automotive supply chains and forced labor in XUAR stated that Xinjiang Shenhuo’s participation in the labor transfer program is “alive and well . . . and may have even accelerated,” despite the publication of Horizon Advisory’s report. The enterprise produced approximately half of its aluminum – 800 tons of its 1.7 million ton capacity– in XUAR in 2021.

Notably, Mejia Group and Xinjiang Shenhuo were explicitly mentioned in the Update in explaining the FLETF’s addition of seafood and aluminum as high-priority sectors.

Key Takeaways

The announcement of these three new high-priority sectors for enforcement increases the likelihood of detentions in those sectors: Any imports that “wholly or in part” contain inputs linked to PRC forced labor in the PVC, aluminum, and seafood sectors are now at heightened risk of UFLPA enforcement. The FLETF underscores in the Update that it will prioritize the addition to the UFLPA Entity List of entities from these three sectors. Such Entity List additions increase the likelihood of an identified supply chain connection, and thus a detention, for businesses operating in these sectors.

Effective due diligence is key: It is always better to catch a potential problem before you are subject to a detention or investigation. The Update highlights the importance of examining your supply chains in detail, especially in high-priority sectors. Indeed, business with PRC links operating in the PVC, aluminum, and seafood sectors are now on notice of the necessity of effective supply chain due diligence. As we have noted previously – and as the FLETF emphasizes in the Update – effective due diligence and supply chain mapping is the most effective tool to identify forced labor risks in the PRC. Companies that rely on social compliance audits conducted in the PRC – including, but not limited to, the XUAR – should not presume the accuracy of such audits as a factual matter, much less that they accurately identify forced labor trade enforcement risks under the UFLPA and related laws.

Paying close attention to public reporting and FLETF actions can highlight risks: There are millions of business entities in China. Although funding for UFLPA enforcement has been significant, only a tiny fraction of those entities will ever be investigated thoroughly enough to be placed on the Entity List. The Update highlights the importance of credible evidence from civil society, media, or academic reporting. As demonstrated by the recent addition of the seafood and aluminum industries as high-priority sectors, it is important to stay up to date on forced labor reporting and UFLPA Entity List additions. Both industries recently had entities added to the UFLPA Entity List. Both industries, especially the seafood industry, have been subject to extensive reporting, and even congressional hearings, over the past few years. Sectors under intense public scrutiny are much more likely to be added as high-priority enforcement sectors.

Please reach out to a Kelley Drye attorney if you have concerns about your supply chain and how your company could be impacted.

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