FinCEN identified China and Hong Kong as the highest risk countries. Other countries in the top ten were Turkey, the United Arab Emirates (UAE), the United Kingdom, Canada, Singapore, and Cyprus. Many of the examples of suspicious transactions involved entities, often intermediaries or subsidiaries, based in these countries and using complex corporate structures to hide the Russia nexus. In one example, a UAE company purchased goods for entities involved in disparate lines of business and located across at least six countries mostly near Russia. U.S. companies should look for warning signs that indicate potential circumvention, including complex corporate structures, entities in multiple different countries, and entities increasing orders for the high-risk countries.

FinCEN flagged the electronics industry as appearing frequently in the BSA reports. For example, microelectronic components, imaging technology, electronic filters, electromechanical instrumentation, and wireless radio products all appeared in the BSA reports. In addition, certain industrial machinery, including fluid transfer systems components, gas compressors, and tungsten rods were identified as potentially being diverted to Russia. U.S. companies selling these products should conduct additional diligence for circumvention risks.

The U.S. is not the only country urging vigilance against efforts to circumvent of sanctions against Russian aggression. On September 7, 2023, the EU published guidance for industry on how to enhance due diligence against the risk of Russia sanctions circumvention. The guidance lays out core steps for diligence, including a risk assessment, designing and implementing mitigation measures, and regularly updating procedures. Like FinCEN, the EU guidance identifies complex corporate structures and transit through countries that are “circumvention hubs” as red flags. The guidance also identifies high-risk products that are similar to those mentioned by FinCEN, namely microelectronics, wireless communications products, and electronic components. According to the guidance, the illegal re-export of a sanctioned item to Russia resulting from inadequate due diligence that, for example, fails to appropriately account for risk of diversion, may be regarded by Member States as a violation of EU sanctions law.

U.S. and EU companies who are transacting with high-risk countries or in high-risk sectors should ensure their compliance program is designed to identify and prevent circumvention of export controls and sanctions. Please contact our sanctions and export team for assistance in addressing these risks.

BIS can issue an extended renewal where TDO-sanctioned actors meet a new standard of misconduct under the EAR. Namely, BIS may select this new extended renewal option where, since issuance of the TDO, the named actor(s) is found to have engaged in a pattern of repeated, ongoing and/or continuous apparent violations of the EAR (including the terms of the TDO), and where BIS has shown with specific facts that extended renewal of the TDO is appropriate to address continued apparent violations. The 180-day renewal option otherwise remains in place for imminent violations.

BIS’s action is a response to several cases where international actors have been found to be engaged in deliberate and ongoing violation of the EAR. As examples, BIS cites the involvement of Russian and Belarusian airlines, as well as Iranian airline Mahan Airways, with sanctioned aircraft such as PJSC Aeroflot. These cases have necessitated issuance and repeated renewals of several TDOs.

In light of BIS’s recent expansion and the significant commercial impact of TDOs, companies must exercise a great deal of caution to avoid activity that could result in a TDO and to prevent dealings with those named by a TDO. As highlighted by BIS, recent cases reveal that such sanctioned actors may go to considerable lengths to obscure involvement in prohibited activities.

A notable example is BIS’s recent issuance of a TDO against parties to a Russia-based illicit procurement network supporting Russian aggression in Ukraine. The TDO, issued in coordination with a U.S. Disruptive Technology Strike Force, named Russian-German national Arthur Petrov, Russian nationals Zhanna Soldatenkova and Ruslan Almetov, and companies situated in Russia, Latvia, and Cyprus, for their roles in a transshipment scheme that deliberately and fraudulently misappropriated electronic components for delivery to the Russian military. Specifically, U.S. distributors were misled into shipping microelectronics that have been recovered on the Ukraine battlefield.

Please contact our sanctions and export team with any questions regarding these latest developments. Depending on the national security considerations, it is possible with the assistance of counsel to obtain authorization for transactions that may be otherwise prohibited under the EAR.

Deadline of October 12th to Submit Comments

On August 28, 2023, the U.S. Department of Commerce (“Commerce”) published in the Federal Register a proposed rule that makes certain revisions to the Section 232 steel and aluminum tariff exclusions process. The proposed rule is focused on changes that are expected to assist Commerce in more efficiently handing the continuing large volume of exclusion requests and objections submitted to the agency.

The deadline for submitting comments on the proposed changes is October 12, 2023, and comments must be identified by docket number BIS-2023-0021 or RIN 0694-AJ27, and submitted through the Federal eRulemaking website: http://www.regulations.gov.

Background

On March 8, 2018, President Trump exercised his authority under Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. § 1862) to impose a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum, following an investigation by Commerce that concluded imports of both metals posed a national security risk. Subsequent to these actions, the U.S. government negotiated several country-specific tariff exclusions, such as for Canada and Mexico. Additionally, to limit the tariffs’ potential negative impact on U.S. businesses and consumers, Commerce developed a mechanism for U.S. companies to apply for product-specific exclusions due to (1) domestic unavailability due to circumstances of quantity or quality, and (2) specific national security considerations. The exclusions process was established on March 19, 2018 pursuant to an interim final rule (“IFR”) issued by Commerce’s Bureau of Industry and Security (“BIS”). Since the implementation of the exclusions process, BIS issued four additional IFRs that made various revisions to the Section 232 exclusions process.

Proposed Revisions

The latest round of proposed revisions makes four key changes to the Section 232 exclusions process by: (1) creating a more expansive process for General Approved Exclusions (“GAE”); (2) establishing a General Denied Exclusions (“GDE”) process; (3) modifying existing certification language and introducing new certification requirements for exclusion requests; and (4) proposing similar certification language on the objection form to further ensure objectors can supply comparable quality and quantity steel or aluminum and make it “immediately available” to requesters in line with the standards described in the previously-issued Section 232 IFRs.

General Approved Exclusions

In December 2020, Commerce promulgated the fourth IFR pertaining to the Section 232 exclusions process. An important change in that rule was the creation of GAEs, which provide for an unlimited exclusion for certain products to which no domestic producer objected. The GAEs were identified at the ten-digit statistical reporting number of the Harmonized Tariff Schedule of the United States and intended to improve the overall efficiency of the exclusions process and to ease the administrative burden on the agency. As Commerce notes in the IFR, implementation of GAEs resulted in an immediate decrease of 5,000 exclusion requests annually.

BIS proposes changing the criteria from granting exclusions for products that have received no objections to HTSUS classification codes (or sub-products) with very low rates of successful objections. While BIS still believes that the number of objections received is generally the right criterion to use in identifying GAEs, the challenge with the current process is that any party seeking to prevent Commerce from establishing a GAE can submit an objection and the relevant HTSUS category would be ineligible for GAE status, regardless of the merits of the objections. BIS estimates that the suggested new approach could result in up to a 20 percent decline in the total number of exclusion requests received.

General Denied Exclusions

Similar to the existing GAE process, BIS is proposing to establish a GDE process to improve the efficiency of the Section 232 exclusions process. According to the proposed rule, GDEs will generally be implemented if, among other things, the HTSUS classification code (or sub-products) have very high rates of successful, substantiated objections. This change is aimed at reducing the burden on objectors and requesters with respect to Section 232 exclusion requests that historically have a very low likelihood of being approved. While BIS has not proposed any specific GDEs yet, in response to a public comment suggesting that semi-finished steel products should be removed from the list of products eligible for an exclusion, BIS stated that it will consider this further and that it is possible that this product could be covered by a GDE.

Exclusion Request Certifications and Evidence

The proposed rule adds new certification and evidentiary requirements for exclusion requesters. Pursuant to the new rule, before filing an exclusion request, requesters must certify that they have first made reasonable efforts to source their products from a supplier in the United States and then, if unsuccessful, that they have made reasonable efforts to source their product from a supplier in a country with which the United States has arrived at a satisfactory alternative means to address the threat to the national security under Section 232 (i.e., quota, tariff-rate quota, exemption, etc.), and provide evidence of those sourcing attempts simultaneously with the request submission. These sourcing attempts need to have been made within 12 months from the date of submission of the exclusion request. Failure to provide this information will result Commerce’s rejecting the exclusion request.

Additionally, in response to a public comment, BIS stated that it encourages requesters to include in their exclusion requests evidence of lack of responsiveness to requests for quotes from domestic producers that continue to file objections.

BIS is seeking comments regarding the appropriate form and substance of evidence that must be provided by requesters to support their certification of sourcing attempts.

Objection Certifications and Evidence

The proposed rule introduces additional certification requirements on objection forms, as well as evidence requirements for objection submissions. The proposed rule states that “{t}hese certifications and additional evidentiary requirements are designed to address concerns of objectors filing objections when they cannot or will not provide the requested product.” Under the proposed certification requirement, objectors must certify that they currently manufacture the requested product at a facility in the United States and that, in response to a written request by a requester within the next year, they will offer to sell and make “immediately available” to the requester the full quantity of the product at then-existing market rates and terms in accordance with the other terms specified in the objection.

Additionally, objectors will be required to file, simultaneously with their objection submission, evidence that they have commercially sold the product subject to the exclusion request within the last 12 months, or evidence that they have engaged in sales discussions with the requesting company or another company requesting the same product within the last 12 months.

BIS is seeking comments regarding the appropriate form and substance of evidence that must be submitted by objectors to support their certification of sales discussions. BIS is also seeking comments on whether it is appropriate to require objectors to certify that they can supply comparable quality and quantity steel or aluminum and make it “immediately available,” or whether a different time period should be specified for the certification. If a commenter suggests a different time period, BIS has urged commenters to address whether different types of products may require longer periods.

• Camel Group Co., Ltd. (“Camel Group”), and
• Chenguang Biotech Group Co., Ltd. (“Chenguang Biotech”) and its subsidiary Chenguang Biotechnology Group Yanqi Co. Ltd. (“Chenguang Biotech Yanqi”).

Goods produced by these companies, wholly or in part, will be restricted from entering the United States. The addition of these companies brings the total number of entries on the UFLPA Entity List to 24.

Camel Group, headquartered in Xiangyang City, Hubei Province, China, is one of the world’s leading manufacturers of car batteries, particularly lead-acid batteries. Camel Group was ostensibly added to the Entity List on the grounds that it is allegedly “working with the government of Xinjiang to recruit, transport, transfer, harbor or receive forced labor or Uyghurs, Kazakhs, Kyrgyz, or members of other persecuted groups out of Xinjiang.” (Sec. 2(d)(2)(B)(ii), Pub. L. 117-78).

Chenguang Biotech is headquartered in Handan, Hebei Province, China, and produces plant-based extracts, food additives, natural dyes, pigments, and supplements from agricultural products. Chenguang Biotech Yanqi is based in the Xinjiang Uyghur Autonomous Region and is engaged in the production of food additives and nutritional supplements. These companies were ostensibly added to the UFLPA Entity List on the grounds that they allegedly “source material from Xinjiang or from persons working with the government of Xinjiang or the Xinjiang Production and Construction Corps for purposes of the ‘‘poverty alleviation’’ program or the ‘‘pairing-assistance’’ program or any other government-labor scheme that uses forced labor.” (Sec. 2(d)(2)(B)(v), Pub. L. 117-78).

The 2023 UFLPA Strategy Updates are relatively limited. There have been no official changes to the list of high priority sectors, although the report notes that “CBP continues to enforce the UFLPA against all sectors, prioritizing across all tariff codes in the Harmonized Tariff Schedule that could be at risk of having a supply chain that touches Xinjiang.” These prioritized “tariff codes” are not disclosed, and their relationship to the so-called “high-priority sectors” is not discussed.

While not officially updating the list of high priority sectors, the 2023 UFLPA Strategy Update does call out several additional categories of products as “potential risk areas” including “red dates and other agricultural products, vinyl products and downstream products, aluminum and downstream products, steel and downstream products, lead-acid and lithium-ion batteries, copper and downstream products, electronics, and tires and other automobile components.”

The 2023 UFLPA Strategy Updates also discuss the FLETF’s ongoing engagement with nongovernmental organizations (NGOs). NGOs are given a direct line of access to FLETF, which means that NGO allegations of forced labor in global supply chains must be treated with extremely careful consideration.

[1] The 2023 UFLPA Strategy Updates was published on July 26, 2023, but shared publicly on August 1, 2023.

Specifically, these new controls add China and Macau to NP Column 2 (“NP2”) on the Commerce Country Chart as requiring a BIS export license, which is applicable to the below materials processing equipment and “technology” found in Category 2 of the Commerce Control List.

• 2A290: Generators and other equipment “specially designed,” prepared, or intended for use with nuclear plants (and corresponding “technology” under 2E001, 2E002, and 2E290)
• 2A291: Equipment, except items controlled by 2A290, related to nuclear material handling and processing and to nuclear reactors, and “parts” and “components” and “accessories” therefor (and corresponding “technology” under 2E001, 2E002, and 2E290)
• 2D290: “Software” “specially designed” or modified for the “development,” “production,” or “use” of items controlled by 2A290 or 2A291 (and corresponding “technology” under 2E001)

For purposes of the EAR, these controls do not change the status of Macau; it will continue to be treated as a separate destination from China. As a conforming change, the final rule adds China and Macau to § 742.3(a)(2) to impose licensing requirements on the NP2 controlled items. The NRC has published a separate notice issuing an order affecting general licenses for exports of special nuclear material, source material, and deuterium for nuclear end use to China issued under 10 CFR 110.21, 110.22, and 110.24, respectively.

The EO uses a “small yard, high fence” approach to address national security threats posed by certain countries advancing the sensitive technologies listed above. Specifically, the EO requires development of regulations that would prohibit or otherwise impose notification requirements for U.S. persons regarding certain transactions involving countries of concern and the sub-sets of the three advanced technology areas. Of note, covered transactions would include not only traditional M&A, but also greenfield investments, joint ventures, and certain debt financing arrangements.

Importantly, the authorization granted to Treasury by this EO is far more narrow, both in covered countries and in product scope, than the current regulations for inbound U.S. investment (i.e., the Committee on Foreign Investment in the United States). Indeed, according to the Proposed Rule, Treasury does not expect the new regulations to entail a case-by-case review of U.S. outbound investments. Rather, the expectation is that the transaction parties will have an obligation to determine whether a given transaction is prohibited, subject to notification, or permissible without notification. Treasury is also considering an exception for specific types of transactions, such as certain investments into publicly-traded securities or into exchange traded funds.

Treasury published an Advance Notice of Proposed Rulemaking (“ANPRM”) requesting public comment on various topics related to implementation of the EO’s mandate. Information regarding the submission of comments can be found here and comments are due by September 28, 2023. In the ANPRM, Treasury outlines the kind of information it is seeking from commenters, which includes:

• Requirements on U.S. persons;
• Specific categories of covered transactions;
• Transactions involving covered foreign persons;
• Treasury’s methodology for excepted transactions; and
• Details on sub-sets of technologies and products within the three identified categories.

An overview of the Outbound Investment Program as it stands can be found here. If you are interested in submitting comments on the Proposed Rule, please contact our team.

DOJ’s VSD Policy

Per a March 1, 2023 update, the DOJ’s National Security Division VSD policy encourages disclosure where companies identify or otherwise become aware of potential criminal violations of U.S. sanctions and export control laws. The DOJ will generally not seek a guilty plea against companies that submit a VSD; there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine. These incentives only apply in situations where there are not aggravating factors, such as egregious criminal misconduct within the company, repeated violations of national security laws, and the export of items that are particularly sensitive or to end users of heightened concern. However, the updated policy provides DOJ with the discretion to use other enforcement methods (e.g., guilty pleas or deferred prosecution agreements) to reach resolutions in instances where aggravating factors do exist.

Importantly, in order to have access to DOJ’s policy, a company must submit its disclosure within a reasonably prompt time frame after becoming aware of the potential violation(s). Disclosures made only to regulatory agencies such as OFAC or BIS do not qualify for DOJ’s VSD policy even if OFAC or BIS refer one of their cases to DOJ.

BIS’s VSD Policy

The Tri-Seal Guidance highlights BIS’s implementation of a dual-track process for handling VSDs and BIS’s policy on VSDs and third party disclosures. Namely, a June 30, 2022 policy update saw BIS’s introduction of the dual-track process for handling VSDs. VSDs involving minor or technical violations are now resolved on a fast-track basis, with the issuance of a warning or no-action letter within 60 days of final submission. If a VSD indicates a potentially more serious violation(s), BIS will do a deeper dive to determine whether enforcement action may be warranted. Expedited review of minor violations has allowed a greater commitment of BIS resources to VSDs that warrant a more intensive review. An April 18, 2023 update addresses the risk calculus that companies face when confronted with a potential violation: companies that submit timely and comprehensive VSDs, and that fully cooperate with BIS’s investigation, will be eligible for substantial reduction of the applicable civil penalties; deliberately overlooking or otherwise failing to disclose potential violation(s), however, may be cited as an aggravating factor, resulting in larger penalties. In a situation where a company discovers that a third party (such as an intermediate consignee) is potentially violating the Export Administration Regulations and submits a tip to BIS, the agency will consider that to be mitigating factor under the penalty guidelines if the information leads to an enforcement action.

OFAC’s VSD Policy

As with DOJ and BIS, OFAC’s Enforcement Guidelines allow for the evaluation of mitigating factors when determining enforcement actions. In cases where a civil monetary penalty is warranted, a qualifying VSD can result in a 50 percent reduction in the base amount of a proposed civil penalty. Such mitigation is contingent upon “the existence, nature, and adequacy of the subject’s compliance program at the time of the apparent violation and the corrective actions taken in response to an apparent violation.” OFAC considers a complete VSD to include “a sufficiently detailed report that provides a complete understanding of the circumstances of the apparent violation(s).”

Next Steps for Companies Under U.S. Jurisdiction

With this joint notice, the U.S. government is signaling to U.S. companies that the current global trade landscape is growing more complex, especially with the frequent issuance of new sanctions and export controls that U.S. companies must comply with. The advent of more trade controls and economic sanctions increases the prospects for a company to commit a potential violation of the rules, even if inadvertently, especially because U.S. export control and sanctions laws are extraterritorial in nature.

The incentives offered by DOJ, BIS, and OFAC recognize that accidents happen, but still need to be reported in a timely manner nonetheless. Companies involved with international trade supply chains, particularly with products considered sensitive to U.S. national security, should review and update their own policies in light of the above to emphasize the benefit of VSDs.

Tags: OFAC, Voluntary Self-Disclosure., VSD

The second measure adds antiboycott policy statements on the Acquisition Management websites. The policy statements recommend U.S. government contractors understand and comply with antiboycott requirements. While not mandating particular action, the policy statements suggest that failure to comply with antiboycott requirements could jeopardize a contractor’s ongoing U.S. government contracts or ability to contract for new opportunities in the future.

Coupled with the October 2022 “Enhanced Enforcement of the Antiboycott Rules” memorandum and recent enforcement actions, this new memorandum demonstrates the Commerce Department’s renewed focus on antiboycott compliance. U.S. companies should ensure they have adequate compliance policies in place now before potentially getting caught in the enhanced enforcement activity down the road.

Tags: Antiboycott Rules

The key findings of the report are as follows: (1) notwithstanding some noticeable impact of the USMCA on the U.S. economy and U.S. competitiveness, it is too early to understand the full extent of the effect of the agreement; (2) the automotive ROOs appear to have increased costs as well as the U.S. share of USMCA production; (3) there is a sharp increase in investment in electric vehicles (EVs) and the industry shift to EV production will likely require changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure they remain relevant; and (4) additional technological changes may also impact the relevancy of the USMCA automotive ROOs.

Background

The USMCA entered into force on July 1, 2020, and replaced the North American Free Trade Agreement (NAFTA). Over the past three years, the agreement has presented some opportunities and challenges for the United States and its main trading partners. Some of the biggest challenges pertain to the treatment of automotive goods under the agreement.

Under the USMCA, an originating good is one that meets the rules of origin set forth in General Note 11 of the Harmonized Tariff Schedule of the United States (HTSUS) and all other requirements of the agreement. An additional set of rules applies to automotive goods (specifically, passenger motor vehicles, light and heavy trucks, and certain automotive parts). Specifically, automotive goods must meet four additional ROOs: (1) regional value content (RVC) requirements; (2) North American steel and aluminum procurement requirements; (3) labor value content requirements; and (4) core parts requirements.

Pursuant to section 202A(g)(2) of the USMCA Implementation Act, the ITC is required to provide five biennial reports to the President, the House Committee on Ways and Means, and the Senate Committee on Finance, regarding (1) the economic impact of the automotive ROOs; (2) the operation of the automotive ROOs and their effects on the competitiveness of the United States; (3) whether the automotive ROOs are relevant in light of technological changes in the United States; and (4) any other matters the ITC considers relevant to the economic impact of the rules.

This is the first of five biennial reports on the economic impact of the USMCA automotive ROOs. The next report, due in 2025, has the same reporting requirements but will present updated data and information about the industries through December 31, 2024. Each subsequent report will report on the same topics and two new years of data and information.

ITC Findings

Economic Impact of the USMCA Automotive ROOs and Their Effects on U.S. Competitiveness

While the full impact of the USMCA will not be apparent until the agreement is fully implemented, in 2027 or later, the ITC has found that the economy-wide effects of the ROOs were marginal in the first two and a half years after the USMCA entered into force. According to the report, vehicle manufacturers and suppliers explain that the ROOs have increased costs at multiple stages of the supply chain, but that they have also increased the U.S. share of USMCA vehicle and parts production. The COVID-19 pandemic and global supply chain disruptions had a major impact on U.S. automotive production and trade. Consequently, there is no clear picture of the effect of the USMCA’s entry into force on U.S. competitiveness.

One potential indication of increased U.S. competitiveness is that the United States’ share of USMCA light vehicle production, as well as light vehicle and parts exports as a share of global exports, increased slightly after the agreement’s entry into force. U.S. light vehicle production as a share of USMCA production increased from 64.8 percent in 2018 to 68.1 percent in 2022. U.S. light vehicle exports as a share of global light vehicle exports increased from 6.6 percent in 2018 to 7.7 percent in 2022. U.S. automotive parts exports as a share of global parts exports also increased from 8.1 percent of global exports in 2018 to 8.4 percent in 2022.

Employment and investment data also indicate some changes in competitiveness. Investments in Canada and the United States have reportedly increased sharply, with most of the new investments going into EVs and EV batteries. The surge in investment in EVs is thought be in response to an increase in consumer demand, therefore, the extent to which these changes can be attributed to the ROOs remains unclear.

Technological Changes Impacting the Relevance of the USMCA Automotive ROOs

Because the agreement is in its early years of implementation, the overall impact of any technological changes is limited. According to the report, two recent technological changes in the U.S. automotive industry have created divergences in the tariff treatment of similar goods in the USMCA automotive ROOs. The first change pertains to the growth in production of electric and hybrid pickup trucks. Currently, the USMCA automotive ROOs do not categorize EV and hybrid pickup trucks as light trucks. Unlike other trucks, EV and hybrid pickup trucks are classified under HTSUS subheading 8704.90, which covers all trucks not classified elsewhere in heading 8704. Vehicles under 8704.90 are categorized as “heavy trucks” under the USMCA automotive ROOs. This difference in classification means that a different set of product-specific ROOs applies to EV and hybrid trucks. Until recently, sales of EV and hybrid trucks were really low or nonexistent. However, the increasing demand for EV and hybrid trucks means that the disparate treatment of these vehicles will have important practical implications. The report addresses several other instances of classification divergence that do not result in different tariff treatment for similar goods to demonstrate where Harmonized System (HS) classifications have changed since the USMCA entered into force.

The second technological change involves a new production process for aluminum vehicle bodies. Currently, the USMCA automotive ROOs do not allow for cast aluminum bodies to qualify as originating via the same product-specific ROOs as stamped aluminum bodies. The difference in treatment between stamped and cast aluminum body parts is due to the tariff shift rules for aluminum components. Under the USMCA, non-originating aluminum may be considered originating if the aluminum is subjected to a manufacturing process in a USMCA country that results in certain tariff shifts. For example, an aluminum product, such as an ingot, may be deemed originating if it is subjected to a manufacturing process such that it transforms into another intermediary aluminum product (classified under a different HS heading from the original product). However, the process of casting aluminum products, unlike the stamping process, does not produce an intermediary aluminum product. This allows for stamped body parts to qualify as originating more easily than cast body parts.

In addition to tariff classifications, the report addresses input from various stakeholders on proposed changes to the automotive ROOs. According to the report, some stakeholders believe that the industry-wide shift to EVs and hybrid vehicles merits changes to, or the continued monitoring of, the USMCA automotive ROOs to ensure that they remain relevant. Some stakeholders have proposed additions to the ROOs parts lists that they believe would better account for the increasing share of EVs in the U.S. market. The International Union, United Automobile, and Aerospace and Agricultural Implement Workers of America (UAW) have proposed adding EV components and EV battery components to the core parts list of the USMCA automotive ROOs. The list proposed by the UAW includes automotive-grade semiconductors, electric motors and electric drivetrains, non-lithium-ion batteries, charge ports and charging stations, various battery components (cathodes, anodes, separators, casings), and various critical minerals (cobalt, nickel, manganese, graphite, silicone). Other stakeholders stated that EV technologies are already addressed by the ROOs and that because the technology is still evolving and industry investments and changes are ongoing, any proposed changes are premature.

Finally, the report addresses additional ongoing technological changes in the U.S. automotive industry that may impact the relevancy of the USMCA automotive ROOs. One such change is with respect to the increasing value of nontraditional automotive inputs relative to the value of the final vehicle and how this might impact the RVC calculations for the larger vehicle components being produced with a growing share of nontraditional parts. The value of nontraditional automotive inputs (i.e., semiconductors and sensors) is rising both in an absolute sense as well as relative to traditional automotive inputs. Some in the automotive industry believe the rising value of nontraditional automotive inputs merits changes to the ROOs because electronic components typically originate from Asia. One industry proposal addressing this issue involves adding certain electronic components, such as automotive-grade semiconductors and sensors, to the USMCA automotive core parts list to incentivize USMCA-originating electronic supply chains. Core parts must satisfy the higher 75 percent originating content requirement to qualify for preferential treatment.

Another technological change relates to the lack of recycling-specific automotive ROOs. According to the report, the “current treatment of recycled battery materials under the USMCA automotive ROOs may pose challenges to emerging supply chains because of a lack of recycling-specific provisions in the ROOs.” Currently, for example, the determination of whether a battery made using recycled materials qualifies as originating under the USMCA relies on the same ROOs applied to the original battery, i.e., whether the recycled cells were created within the USMCA region.

Tags: ITC, Rules of Origin, USMCA

The bill may be a response to reported concerns over the number of Huawei-related export licenses BIS granted last year. Regardless of whether it passes, the bill communicates Congressional concerns that BIS’s licensing process is too lax with respect to technology transfers to China and Russia—a statement that may influence the agency’s licensing process going forward.

Remarkably, the bill also features a provision that would “flow down” Entity List requirements and restrictions to entities that are—or are considered by the Secretary to be—50 percent or more owned, directly or indirectly, in the aggregate, by entities on the Entity List. While the Treasury Department’s Office of Foreign Assets Control has employed a similar rule in its administration of the Specially Designated Nationals and Blocked Persons List, BIS has not done so with respect to the Entity List.

While the prospects for the DENIAL Act are uncertain, there is no shortage of legislative vehicles – including the FY24 defense authorization bill and a pending Senate China competition bill – should it garner some Democratic support. At a minimum, consideration of these provisions sends a message to BIS about Congress’s view of export licensing policy and license approvals. And, if passed, these provisions will require updates to U.S. export control compliance program and screening practices.

Please contact our sanctions and export team with any questions regarding these latest developments.

U.S. parties with business in Africa’s gold industry face heightened risk of a counterparty being designated as an SDN, particularly given the Advisory and recent SDN designations. As a reminder, SDNs are subject to “blocking sanctions,” meaning that U.S. persons are broadly prohibited from conducting business with the SDN or any entity owned 50 percent or more by SDN, and U.S. persons must formally “block” (freeze and report) any property or interests in property that are in an SDN’s possession or control. The Advisory notes several possible reasons for designation, including human rights violations, support for terrorist or armed forces organizations, or support for Russia’s war efforts. Even if OFAC does not designate a contractual counterparty, U.S. persons could face liability or reputational damage if the African entities are supporting SDNs or other sanctioned actors, or engaging in other malign activity such as corruption, money laundering, or smuggling.

It is critical to conduct fulsome, risk-based due diligence prior to engaging with the gold industry. Due diligence should not end at onboarding, and companies should develop procedures for ongoing auditing to quickly detect and deter any compliance concerns. Rights to exit the contractual relationship are also essential to avoid breach of contract concerns when terminating dealings with a newly designated SDN. As with other industries flagged by OFAC as high-risk (e.g., shipping, aviation), the gold industry presents unique challenges that require close attention and a robust compliance program to avoid potentially costly mistakes.

The EU added 87 new entities to its export controls covering dual-use goods and technology, as well as goods and technology which might contribute to the technological enhancement of Russia’s defense and security sector. For the first time, the EU is covering entities that are not just registered Russia or Iran, but also other jurisdictions, i.e., Armenia, Hong Kong, Syria, the United Arab Emirates, and Uzbekistan.

The EU also intends to deploy a new anti-circumvention tool to restrict the sale, supply, transfer, or export of specified sanctioned goods and technology to third countries that pose a high risk of circumvention. This tool would be employed as a “last resort” where other measures and outreach have proven insufficient. Moreover, the EU enhanced its anti-circumvention measures related to transportation, including denying access to vessels which manipulate or turn off their tracking system when transporting Russian oil subject to the oil import ban or G7 price cap.

This package contains a number of other new and notable measures, including:

• A requirement that all EU importers prove that their imports of iron and steel from third countries do not have any Russian inputs;
• An expansion of the luxury goods ban to include yachts and exports of all new and second-hand luxury cars above a certain engine size; and
• A full ban on certain types of machinery components.

Finally, the EU identified a list of economically critical goods (chemicals, machinery, electronics, maritime, and optics/related instruments) that businesses and third countries should be especially vigilant about in transactions.

• United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (DS436);
• India – Certain Measures Relating to Solar Cells and Solar Modules (DS456);
• United States – Certain Measures Relating to the Renewable Energy Sector (DS510);
• India – Export Related Measures (DS541);
• United States – Certain Measures on Steel and Aluminium Products (DS547); and
• India – Additional Duties on Certain Products from the United States (DS585).

While the United States made no additional concessions, India also agreed to remove retaliatory tariffs that it previously imposed on chickpeas, lentils, almonds, walnuts, apples, boric acid, and diagnostic reagents in response to former President Trump’s Section 232 duties on steel and aluminum.

In a release announcing the agreement, the Office of the U.S. Trade Representative stated that yesterday’s resolution “maintains the integrity of the U.S. Section 232 measures” and will “restore and expand market opportunities for U.S. agricultural producers and manufacturers.”

The new Entity List additions also cover BIS’s ongoing concerns with China’s human rights abuses and entities that have contributed to Pakistan’s ballistic missile program.

The fourth ministerial meeting covered a wide range of topics that focused on countering obstacles to the G7’s international rules-based system, including, among other things, diversifying supply chains, sanctions coordination, investment screening, and addressing emerging technologies such as quantum. Below is a select outline of the TTC’s outcomes and what to look for from the U.S. and EU going forward.

Cooperation on export controls and sanctions. Following Russia’s invasion of Ukraine, the U.S. and EU developed chains of communication to ensure that measures put in place to punish Russia for its actions were watertight. In particular, both the Treasury Department’s Office of Foreign Assets Control and the Commerce Department’s Bureau of Industry and Security have issued statements outlining the cooperation between the U.S. agencies and their European counterparts.

The TTC seeks to grow this cooperation through the consistent exchange of information on the application of controls as well as working to address enforcement and circumvention risks. Indeed, the U.S. and EU are coordinating with third countries to counter evasion of export restrictions on sensitive items and are conducting capacity building projects to enable third countries’ authorities to target export control evasion and circumvention more effectively.

Additionally, the TTC is working towards simplifying re-export procedures for exporters and developing a common understanding of how U.S. and EU export regulations are applied on both sides of the Atlantic. To that end, the U.S. and EU are also enhancing their technical consultation on regulatory developments.

Inbound investment screening. Last year, the U.S. announced measures aimed at strengthening its inbound investment screening mechanism, the Committee on Foreign Investment in the United States (“CFIUS”). The TTC recognizes the importance of CFIUS and similar EU mechanisms in flagging national security risks related to specific sensitive technologies and critical infrastructure. The TTC resolved to enhance U.S. and EU cooperation on inbound screening.

Outbound investment screening. Earlier this year, the U.S. took initial steps to “address the national security threats emanating from outbound investments from the United States in certain sectors critical for U.S. national security” and identify “the resources that would be required to establish and implement” such a screening program. The EU is also looking at developing a similar screening process for outbound investments. At the ministerial, the TTC recognized that addressing outbound investment concerns could be important to complement existing tools of controls on exports and inbound investments, and to that end, the TTC will be working on a coordinated response to outbound investment concerns pertaining to national security.

Semiconductors. One of the TTC’s overarching goals is securing supply chains for equitable use, which especially includes semiconductors as a critical technology. To that end, the TTC has developed an early warning mechanism for disruptions in the semiconductor supply chain. The TTC is also mindful of the competing U.S. CHIPS and Science Act and the European Chips Act. To prevent a “race to the bottom,” the TTC has put in place a consultation process to facilitate communication that will prevent further subsidy escalations.

Quantum technology. The TTC, recognizing the complex and fast-paced nature of the advancement of quantum technology, has established a joint Task Force to address open questions on science and technology cooperation in quantum technologies. The Task Force will be responsible for ensuring collaboration in research & development, the identification of critical components, standardization, defining benchmarking of quantum computers, and export control related issues for this technology.

Critical minerals. The TTC emphasized the need for the U.S. and EU to work together on supply chains for critical minerals, metals, and material inputs. The U.S. and EU are both reliant on imports, often from limited sources. This reliance leaves the countries vulnerable to disruptions such as geopolitical shocks and natural disasters. The TTC will be prioritizing securing the critical mineral supply chain going forward.

What’s Next?

The U.S. and EU, despite recent irritants regarding subsidies in the aforementioned CHIPS and Science Act and the European Chips Act, will continue to develop their policy coordination and implementation on amicable terms. The transatlantic economic relationship still has a lot of room to grow with a laser focus on boxing out countries that are looking to circumvent the G7’s international framework. While there may be challenges in implementing some of the outcomes of the TTC’s meeting, the U.S. and EU will likely be able to contain any potential setbacks through constructive dialogues established by the TTC.

Greater emphasis on the BAA and similar laws from the White House and Congress is likely to result in increased scrutiny from agency leaders, inspectors general, auditors, contracting officers, and others, followed by use of a variety of enforcement mechanisms. As noted in our prior advisory, government customers may seek to address non-compliance with these requirements through contractual remedies like rip-and-replace directives, nonpayment, price renegotiation, or termination, or, on the administrative side, through suspension or debarment from future contracting. Noncompliance with domestic sourcing laws also can result in civil false claims allegations from the Department of Justice or whistleblowers, as well as criminal liability, in severe cases. Sometimes, companies also can seek enforcement against competitors through the bid protest process, as a recent bid protest decision from the Government Accountability Office highlights.

In Unico Mechanical Corporation—Costs (B-420355.5), Unico, an unsuccessful offeror, had alleged (among other protest arguments) that the U.S. Army Corps of Engineers improperly waived BAA requirements in awarding a contract for replacement of generator turbine shut off valves and control systems to competitor McMillen, LLC. The Corps took corrective action after filing its agency report, and in a costs decision, GAO found Unico’s protest regarding the BAA waiver clearly meritorious because the agency failed to document its BAA waiver.

The facts of the case provide insight as to how Unico learned of its basis to protest. Prior to the offer due date, at least one offeror sought a BAA waiver for two butterfly valves on the grounds that they were not available from domestic manufacturers at a reasonable cost, and so the agency conducted market research by contacting manufacturers, including Unico. Based on these contacts, the Corps identified Unico and at least two other domestic manufacturers with an ability to provide BAA-compliant valves, and denied the waiver request.

McMillen later requested that the agency waive the BAA provisions for the two butterfly valves as well as a hydraulic power unit, on the grounds that they were not available from domestic manufacturers at a reasonable cost. The Corps initially denied McMillen’s request, but after seeking additional information from McMillen, the Corps awarded the contract to McMillen and exempted the foreign material in a post-award contract modification, without justifying the exemption in the contract file. In the absence of any documentation that the Corps had actually waived the BAA, GAO concluded that the award to McMillen violated the BAA and its implementing regulations. And even if the Corps had waived the BAA, its waiver was unreasonable because McMillen’s initial survey included only one foreign and one domestic supplier, without any indication that these sources were the only available, and its supplemental survey included additional foreign suppliers but ignored additional domestic suppliers like Unico that the agency knew could produce BAA-compliant valves.

Absent a circumstance like the procuring agency contacting a protesting company as part of BAA market research, it can be difficult for a protester to challenge an awardee’s noncompliance with the BAA. The legal standard is high: a contracting officer generally can rely on an offeror’s self-certification of BAA compliance; only if an agency has reason to believe that a firm will not provide domestic products need the agency go beyond a firm’s representation of compliance with the BAA. Sea Box, Inc., B-420130, B-420130.2, Nov. 18, 2021, 2021 CPD ¶ 364. A protester must raise more than inference or speculation when alleging that a competitor’s product does not comply with its BAA certification. Id. Companies typically lack the specific information needed to challenge a BAA certification.

But this does not make BAA certifications ironclad. Publicly available schedule listings or marketing materials might call into question a company’s BAA compliance, and proposals are often produced as part of the agency report or administrative record. A company might even have declined to provide a certification altogether (as was the case in Wyse Technology, Inc., B-297454, Jan. 24, 2006, 2006 CPD ¶ 23). Given increasing domestic content requirements in response to E.O. 14005, companies should consider tracking their competitors’ ability to comply with the BAA as well as their own. This goes for all levels of the supply chain. Subcontractors or domestic suppliers often have greatest insight into foreign sources of supply and may want to consider working with a prime offeror to challenge an awardee’s BAA compliance or an agency’s waiver, to ensure standing requirements for any protest are met. (At GAO, the most common forum for bid protests, protests must be filed by an actual or prospective bidder or offeror with a direct economic interest in the procurement.) Companies protecting their awards, meanwhile, should meticulously support the government with research to support an unreasonable cost or other exception, or should otherwise maintain records demonstrating compliance. The bid protest process may not be the BAA’s primary enforcement mechanism, but companies should keep in mind that non-compliance remains an issue to be considered in protesting and defending awards.

The Inflation Reduction Act of 2022 (“IRA”) overhauled a tax credit for purchasing EVs and introduced certain sourcing requirements for EV components. The goal of the IRA is to encourage companies to develop new supply chains for critical minerals such as lithium, graphite, cobalt, and nickel outside of China. Currently, the majority of lithium is produced in China, Australia, and Chile. China is also the world’s largest producer of graphite.

Under the IRA, consumers can get a tax credit of up to $7,500 for qualifying vehicles. In order to qualify, a certain percentage of the EV battery needs to be built in North America, and much of the critical minerals in a vehicle’s battery must be sourced from the United States or a country that has a “free trade agreement” with the United States.

Because the United States does not have traditional free trade agreements with many of its allies, including Japan, the European Union, and the United Kingdom, the Biden Administration is pursuing limited trade deals such as the one signed with Japan. Among other things, the United States and Japan have agreed not to levy export duties on critical minerals and to coordinate labor standards in producing minerals. The United States is currently negotiating similar agreements with the European Union and the United Kingdom.

Efforts to reach these deals with U.S. allies has raised the question of whether such narrow agreements will meet the definition of “free trade agreement” under the IRA. While the provision of the IRA that requires vehicles to be assembled in North America went into effect immediately when the IRA was signed in August 2022, the battery sourcing provisions were left to be decided by the Treasury Department. On March 31, 2023,Treasury issued long-awaited proposed guidance on the critical mineral sourcing requirements for the EV tax credit under the IRA. According to the guidance, to meet the critical mineral requirement, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or with a country with which the United States has a “free trade agreement,” or be recycled in North America. The qualifying critical minerals sourcing requirement will increase from 40 percent in 2023 to 80 percent by 2027.

Importantly, the guidance includes a set of principles to identify countries with which the United States has a free trade agreement in place, since the term is not defined in statute. According to the Treasury Department’s proposed definition, “free trade agreement” as used in the IRA could include newly negotiated limited agreements, such as the deal reached with Japan, to ensure that minerals from these trading partners will meet the sourcing requirement for the tax credit. Treasury’s guidance also specifically lists the following countries as already having a free trade agreement with the United States: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

The guidance also sets forth applicable percentages for the value of the battery components that must be manufactured or assembled in North America for the vehicle to qualify for tax credits under the IRA, ranging from 50 percent in 2023 to 100 percent by 2029. The four-step process for determining the value of the battery components includes: (1) identifying the batter components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component, including North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Further, beginning in 2024, an eligible vehicle may not contain battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. Treasury intends toprovide further guidance on this particular provision.

The guidance will be published in the Federal Register on April 17, 2023, and vehicles placed in service on or after April 18, 2023, will be subject to the critical mineral and battery component requirements in the rule. The Treasury Department and the Internal Revenue Service (“IRS”) will consider public comments, due by June 16, 2023, before issuing a final rule.

To mitigate any negative effect that these changes may have on compliance and list screening programs, OFAC has indicated that critical content will not change domains. List data—such as the Specially Designated Nationals and Blocked Persons List and Sectoral Sanctions Identifications List—will continue to remain at their current locations.

The website announcement from OFAC can be found here.