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.
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.
]]>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:
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.
]]>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:
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.
]]>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 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.
]]>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.
]]>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.
]]>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.
]]>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.
]]>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:
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.
]]>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.
]]>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.
]]>The Chevron framework required a court to first ascertain, in reviewing agency action, “whether Congress has directly spoken to the precise question at issue.” If the answer was no—meaning the governing statute was ambiguous or silent—then the court would proceed to step two of the analysis: “whether the agency’s answer is based on a permissible construction of the statute,” later formulated as a “reasonableness” standard (even if the court would have reached a different conclusion). Both Skidmore deference (a pre-Chevron doctrine discussed further below) and this Chevron two-step test stemmed from a fundamental recognition of an agency’s technical and practical expertise regarding the statute it is authorized to administer.
The Court in Loper Bright eliminated the agency deference afforded by step two of Chevron. In particular, the Court held that courts “may not defer to an agency interpretation of law simply because a statute is ambiguous” because courts, rather than agencies, have sole competency to resolve statutory ambiguity. Because countless statutes task federal agencies with administering and enforcing laws, issuing rules and regulations, and deciding disputes—often requiring an agency to fill in a gap or construe statutory text—the end of Chevron deference is a significant change in administrative law. How agencies and lower courts interact with Loper Bright, and the issues raised in unique areas of regulatory law, will take time to play out, and will likely result in substantial variation and disagreement across administrative and judicial bodies.
While Loper Bright marks a significant turning point by closing the door on Chevron deference, the Court’s decision does not entirely erase existing jurisprudence. Three takeaways from the decision stand out:
First, and perhaps most notably, the decision contemplates some continuity for prior holdings based on Chevron. The Court in Loper Bright emphasized that its overruling of Chevron did not “call into question prior cases that relied on the Chevron framework.” The Court stressed that “{m}ere reliance on Chevron cannot constitute a ‘special justification’ for overruling” settled cases.
Second, the question of what deference, if any, should be afforded to agency action will likely become more context-dependent and nuanced. Loper Bright makes clear that agency interpretations of law are not entitled to any deference, but also recognizes that the interpretation of statutory meaning by a responsible agency may aid, but not control, the court’s analysis. To that end, certain pre-Chevron frameworks ostensibly remain intact. For example, Justice Kagan in her dissenting opinion to Loper Bright notes that the Court’s decision leaves in place so-called “Skidmore deference,” stemming from the Court’s decision in Skidmore v. Swift & Co., 323 U.S. 134 (1944). Under that framework, an agency interpretation (including of legal issues, as the Loper Bright majority notes), may warrant consideration depending on “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.”
Third, and in the same vein, the Court noted that agencies are still entitled to a deferential level of judicial review for “agency policymaking and factfinding,” citing the Administrative Procedure Act (“APA”). Under section 706(2)(A) of the APA, a court will defer to agency actions unless they are “arbitrary, capricious, {or} an abuse of discretion.” Under section 706(2)(E) of the APA, a court will defer to agency factfinding in formal proceedings unless such factfinding is “unsupported by substantial evidence.”
Despite these three takeaways from the Court’s decision, as with countless other areas of law, Loper Bright may portend changes in trade law. The agencies heavily involved in administering trade laws include U.S. Customs and Border Protection, the Office of the U.S. Trade Representative, the U.S. Department of Commerce, and the U.S. International Trade Commission. These agencies and the federal courts that hear most of the challenges to their decisions, the U.S. Court of International Trade (“CIT”) and the U.S. Court of Appeals for the Federal Circuit (“CAFC”), have invoked Chevron on many occasions. Here are three initial implications for trade law:
First, relatively new applications and rulemakings involving interpretations of trade statutes may be attractive targets for litigation in this new post-Chevron landscape. Agencies have had less time to interpret these newer laws. Thus, these laws implicate few if any “prior cases that relied on the Chevron framework” that might otherwise shield them from Loper Bright-motivated challenges. At the same time, not all agency actions, recent or otherwise, involve interpretation of the governing law. Commerce and the International Trade Commission, for example, conduct factfinding proceedings. Factual determinations in these proceedings will continue to be afforded deference under the APA standard and statutory text that closely tracks the APA (see 19 U.S.C. § 1516a) setting forth the standard of review applied by the CIT and CAFC.
Second, existing agency rules may present risks and opportunities for fresh analysis of the underlying statutory authority in the context of challenges to agency actions. Whether and when the CIT and the CAFC will be inclined to flex their statutory interpretative power, however, is difficult to predict. For example, both of these courts have cited Chevron in numerous cases: 828 before the CIT and 543 before the CAFC, according to a July 1, 2024 case search. Of these 1,371 decisions, however, the vast majority have merely mentioned or cited Chevron—and, thus, may not be viewed as having relied on Chevron for their holdings—rather than including a full analysis or discussion. The Court’s discussion of the stare decisis principle in Loper Bright has the potential to raise a number of questions regarding, for example, what constitutes “mere reliance” on Chevron that might protect a prior holding from being overruled and what subsequent agency actions stemming from that prior holding might also enjoy such protection.
In addition, these courts of specialized jurisdiction that are national in scope have often expressed deference toward the fact-intensive and particularized nature of trade agency actions and interpretations of relevant statutes. For example, the CAFC has previously held that the Commerce Department “is the ‘master of the antidumping law,’ and reviewing courts must accord deference to the agency in its selection and development of proper methodologies,” noting that “{a}ntidumping investigations are complex and complicated matters in which Commerce has particular expertise.” Thai Pineapple Pub. Co., Ltd. v. United States, 187 F.3d 1362, 1365-67 (Fed. Cir. 1999). Conceptually, that view suggests that actions by trade agencies may still warrant Skidmore deference.
Third, ongoing legislative reform attempts in Congress concerning trade matters might warrant greater attention. Affected industries should monitor proposed legislative bills for areas of potential ambiguity and an absence of clear delegation of discretionary authority to “give meaning to a specific statutory term.” The Loper Bright decision recognizes that even under the APA, the court’s role is to determine whether decision-making by an agency was “reasoned” within the bounds of its delegated statutory authority (itself a form of deference), thus bringing into stark relief the weight of such delegation, among other aspects of Congressional intent, when expressly stated by Congress. Stakeholder input at the congressional level will also take on added importance now that input through agency rulemaking and guidance may be less impactful in clarifying statutes.
In sum, in the short- and even medium-term, the likely scenario is substantial variation in application of Loper Bright in lower courts as litigation swells, which will almost certainly filter up to appellate circuit-specific disagreement. This expectation applies equally in the area of trade law, where decisions coming out of the CIT are unlikely to be uniform, as are decisions by different CAFC panels reviewing the CIT until the law resulting from Loper Bright settles.
]]>The NPRM would curtail the outflow of investment to “countries of concern” in relation to certain sensitive U.S. products and technology. The People’s Republic of China (PRC), along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, remain the sole focus of the Executive Order and NPRM, subject to revision.
Overview
The outbound investment screening program will prohibit certain transactions while subjecting others to notification requirements. Of note, unlike the CFIUS review process, the notification requirement is post-closing and there is no review process under which notified transactions could be unwound.
The outbound investment screening program’s prohibitions would kick in for certain kinds of undertakings related to technologies and products that pose a particularly acute national security threat. The program’s notification requirements would similarly apply to other categories of activities related to technologies that may contribute to the threat to national security. The rules set out criteria for determining whether the transaction is prohibited or notifiable, such as by specifying certain performance parameters.
Subject to specific criteria, below is a list of activities that may be prohibited or otherwise subject to notification requirements based on the proposed rule:
Both triggers would be designed with a focus on preventing outbound U.S. investments that could enhance a country of concern’s military, intelligence, surveillance, or cyber-enabled capabilities.
Knowledge Requirement and Standard
Notably, in the case of certain greenfield, brownfield, or joint venture investments, the program’s requirements would trigger where a U.S. actor knows that the project will or intends to undertake any covered activity. Whether to incorporate a “knowledge” standard was a central point of discussion during the ANPRM process. In response to concerns surrounding the difficulty of ascertaining when a transaction is covered by the program, the NPRM defines “knowledge” as actual knowledge and also knowledge that could be gleaned from reasonable diligence, or awareness of a high probability a fact will occur.
Another key difference between the program’s prohibitions and notification requirements is that the rule as proposed would extend to instances where a U.S. actor knowingly directs a non-U.S. person or entity to engage in a transaction that would prohibited if undertaken by a U.S. person. The rule also covers investments in entities that are not in “countries of concern” in some situations where those entities are themselves investing in or controlling entities that do fall within the scope of the restrictions. The goal is to limit the workarounds that could exist through indirect investment activity.
Because U.S. actors will be responsible for determining their obligations under the rules, it is critical to become familiar with the reach of the Treasury Department’s proposed rule over U.S. and foreign entities’ activities.
Additional Changes
Other areas of evolution to note are the following:
An overview of the latest updates to the proposed Outbound Investment Program can be found here, alongside a Fact Sheet that addresses Frequently Asked Questions. Companies that are potentially impacted by the restrictions should consider commenting before the August 2, 2024 date. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.
]]>Secondary Sanctions
The Treasury Department’s Office of Foreign Assets Control (“OFAC”) expanded its definition of “Russia’s military-industrial base” to include all persons blocked pursuant to Executive Order (“EO”) 14024. To that end, foreign financial institutions that are not currently subject to U.S. sanctions may run the risk of being sanctioned by OFAC for conducting or facilitating transactions, or providing any service, to any person blocked pursuant to EO 14024. OFAC has updated its guidance to foreign financial institutions on how to identify and mitigate sanctions risks. Such transactions would not need a U.S. nexus to be targeted by OFAC for secondary sanctions.
Software and Information Technology (“IT”)-Related Services Prohibitions
OFAC issued a Determination pursuant to EO 14071 prohibiting certain IT and software services to Russia. The Determination applies to IT consultancy and design services, and IT support services and cloud-based services for enterprise management software and design and manufacturing software. Certain services are excluded from the Determination, including:
OFAC issued General Licenses 6D and 25D to maintain authorizations for certain telecommunication and internet-related transactions, as well as humanitarian transactions. OFAC also issued FAQs 1181 - 1188 related to this Determination, which help explain what is and is not covered.
In conjunction with OFAC’s Determination, the Commerce Department’s Bureau of Industry and Security (“BIS”) issued a Final Rule imposing a license requirement on the export, reexport, or transfer (in country) of the following EAR99-designated software to Russia and Belarus:
These new BIS software restrictions are effective September 12, 2024. Importantly, this license requirement will also encompass any updates to the above software. There are limited exceptions to the above EAR99-designated software licensing requirement for certain civil end users, such as entities that operate exclusively in the medical or agricultural sectors. This new export controls ultimately expand the scope of prohibited services under the OFAC Determination above.
Restrictions on the use of License Exception Consumer Communications Devices (“CCD”)
In the Final Rule, BIS also narrowed the scope of commodities and software that may be authorized for export, reexport, or transfer (in-country) to Russia or Belarus under License Exception CCD. Specifically, BIS reorganized paragraphs (b)(1)-(17) and added new paragraph (18) of the license exception to make clear that the items under paragraphs (b)(1)-(8) are eligible for Cuba, Belarus, and Russia, and that the items under paragraphs (b)(9)-(b)(18) are only eligible for Cuba. These items include certain mobile phones, batteries and chargers, memory devices, and accessories thereof, among others, under certain Export Control Classification Numbers.
Further Restrictions Based on the U.S. Harmonized Tariff Schedule (“HTS”)
BIS added controls on 522 additional 6-digit HTS codes to the list of items requiring a license for export, reexport, or transfer (in-country) to Russia or Belarus in Supplement No. 4 to Part 746. The additional controls cover certain items in HTS Chapters:
A comprehensive spreadsheet of all HTS codes subject to BIS export controls can be found here under “Downloadable Compliance Resources.” Exporters should carefully review the items enumerated under the above chapters given the broad scope of these new restrictions.
Evasion, Circumvention, and Facilitation Related to U.S. Sanctions and Export Controls
In today’s announcement, both OFAC and BIS also continued to crack down on third-party procurement networks that aid Russia’s war effort in Ukraine. BIS added 5 entities in China and Russia to the Entity List for acquiring and attempting to acquire U.S.-origin items contributing to Russia’s military-industrial base.
Importantly, in an effort to target shell companies, BIS also introduced a new regulatory framework for listing addresses on the Entity List that present a high risk of unlawful diversion. Under the new framework, any company that uses an address previously identified via the Entity List (as a Purchaser, Intermediate Consignee, Ultimate Consignee, or End-User), will trigger a license requirement for transactions subject to the EAR, and BIS would not need to identify an associated entity name in order to list the address. To that end, BIS added eight addresses in Hong Kong to the Entity List under this new framework.
Additionally, OFAC targeted more than a dozen procurement networks, designating more than 90 individuals and entities across Russia, Belarus, the British Virgin Islands, Bulgaria, Kazakhstan, the Kyrgyz Republic, China, Serbia, South Africa, Türkiye, and the United Arab Emirates. The products produced by these entities cover machine tools, industrial materials, Russian-origin gold, microelectronics, chemicals, and unmanned aerial vehicle proliferation. All told, OFAC targeted more than 300 individuals and entities both in Russia and outside its borders.
If you have any questions regarding these developments, please contact our export and sanctions team for help analyzing the new restrictions and how to navigate them.
]]>The Federal Register notice (“Notice”) detailing USTR’s proposed modifications lists subheadings under the Harmonized Tariff Schedule of the United States (“HTSUS”) that would be eligible for temporary exclusion from Section 301 tariffs. Specifically, the Notice proposes that 19 product descriptions covering certain solar manufacturing equipment be granted temporary exclusion from Section 301 tariffs in order to promote the manufacture of solar panels in the United States and reduce reliance on imported panels. Further information about the machinery exclusion process will be set out in a separate notice published by USTR.
The deadline to submit comments addressing the proposed tariff increases is June 28, 2024, at 11:59 p.m. EST. Comments are to be submitted via the appropriate docket on USTR’s web portal at https://comments.ustr.gov.
Product Coverage
Appended to the Notice are two Annexes that, respectively, list the various tariff classifications for products that are covered by USTR’s proposed modifications to Section 301 tariffs, and, that are eligible for temporary exclusion from the tariffs. Under Appendix A, as proposed, U.S. imports from China would see an additional 382 HTSUS subheadings subject to heightened 301 tariffs, covering approximately $18 billion in trade. In addition to a wide array of aluminum and steel products and critical mineral subheadings, Appendix A provides for tariffs that would cover the following categories of products:
USTR’s proposed modifications to Section 301 ad valorem duty rates track those that were set out in the President’s announcement, including a 100% increase for certain Electric Vehicles, 50% for certain Solar Cells, and 25% for certain Steel and Aluminum products and Critical Minerals.
Implementation of the increased tariffs will be staggered, with increases taking effect between 2024 and 2026, according to the following schedule:
Please consult the Notice for a more detailed and comprehensive description of covered products.
Eligible and Proposed Exclusions
Appendix B, as proposed, identifies tariff classifications under Chapters 84 and 85 of the HTSUS that would be eligible for consideration under USTR’s temporary exclusion process for particular machinery used in domestic manufacturing. The identified subheadings involve products ranging from certain drilling and boring-machines, to certain hydraulic presses, to certain electric machines and more.
It is important to note that the Appendix B list of products-eligible for temporary exemption is merely a proposal, and will not necessarily take effect upon promulgation of USTR’s final rule. As such, it is imperative that interested parties carefully review Appendix B, and, where necessary, request temporary exclusion for any products by the June 28, 2024, at 11:59 p.m. EST deadline. As noted previously, USTR will be publishing a notice with additional guidance on the machinery exclusion process.
Appendix C proposes 19 temporary exclusions for solar manufacturing equipment, including tariff classifications applicable to the following categories of products:
The proposed exclusions took effect on May 22, 2024 and will remain in effect through May 31, 2025.
Comment Process
USTR is soliciting comment on the various proposals outlined in the Notice. With respect to USTR’s modifications to Section 301 tariff rates on Annex A items from China, the agency has invited interested parties to comment on the following:
With respect to Annex B products eligible for exclusion from the modified Section 301 tariffs, USTR’s notice invites comments on the following:
Lastly, USTR has requested comments on the proposed scope of subheadings excluded from the modified Section 301 tariffs under Annex C, including any amendment to product descriptions provided therein.
Again, comments on USTR’s proposed modifications to the Section 301 program must be submitted at https://comments.ustr.gov/ by June 28, 2024 at 11:59 p.m. EST.
* * *
Please contact our International Trade and Trade Remedies team with any questions or concerns about participating in the notice-and-comment process for modifying the Section 301 tariffs.
]]>On Tuesday, May 28, 2024, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations, 31 C.F.R Part 515 (CACR) in order to further loosen sanctions against Cuba. The changes are primarily related to the scope of authorized internet-based services and authorized dealings with the Cuban private sector. There are also changes related to “U-Turn” transactions, reporting requirements for telecommunications-related transactions, and educational activities, among other small language changes.
OFAC is now providing additional examples of services that will be allowed regarding communications over the internet, such as an amendment to § 515.578(a)(1) clarifying that cloud-based services that support internet communications may be exported to Cuba. The changes will include and expand other permitted services to support such communications. However, OFAC is still requiring that services related to items subject to the EAR can only be provided to items that are licensed or otherwise authorized by the Department of Commerce for exportation or re-exportation to Cuba. OFAC has also authorized exports and reexports of Cuban-origin software and mobile applications from the U.S. to third countries.
Under the regulations, OFAC historically authorized some transactions with “self-employed individuals.” The amendments also change the term “self-employed individual” to “independent private sector entrepreneur.” The term will continue to include self-employed individuals (cuentapropistas), but is expanded to cooperatives and private businesses wholly owned by or consisting solely of individuals to its definition. Private businesses and sole proprietorships of up to 100 employees will also be covered by the updated term. These changes will open the door to further transactions in Cuba that involve solely the private sector.
OFAC is also reinstating an authorization for “U-turn” transactions. This will facilitate remittances and payments for authorized transactions in the Cuban private sector. Any banking institution which is a person subject to U.S. jurisdiction will now be allowed “to process funds transfers in which Cuba or a Cuban national has an interest if the funds transfers originate and terminate outside the United States, provided that neither the originator nor the beneficiary is a person subject to U.S. jurisdiction.” Transactions outside of this scope will still be prohibited unless otherwise authorized or exempt under the regulations.
The reporting requirements are being amended to replace the fax or mailing requirement with a requirement to email reports to [email protected]. OFAC is also clarifying that the reporting requirement in paragraph (g) of § 515.542(g) applies to entities engaging in transactions to provide telecommunication services pursuant to paragraph (b), (c), or (d), and not banking institutions processing payments on behalf of such providers.
OFAC also published several new FAQs which can be found here. They address questions related to the definition of “independent private sector entrepreneur,” situations where Cuban state-owned entities are involved, authorized internet-based services to prohibited officials and communist party members in Cuba, due diligence expectations, and more.
For the full changes to the CACR by OFAC, please click here.
Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.
]]>On May 13, 2024, the United States-Mexico-Canada Agreement (USMCA) Rapid Response Labor Mechanism (RRM) panel decision in the San Martin mine case was published. The panel decision – dated April 26 – confirms previous reports that Mexico prevailed in the first RRM case to reach a panel, concerning events at Grupo Mexico’s lead, zinc, and copper mine in Zacatecas, Mexico.
The case began with a petition filed on May 15, 2023, by the three labor unions: the AFL-CIO, the United Steel Workers (USW), and Los Mineros, a Mexican mining union. The petition alleged that Grupo Mexico committed “denials of rights” (the term of art for a violation of Mexican law actionable under the RRM) by resuming operations at the San Martin mine despite an ongoing strike and by engaging in collective bargaining with a coalition of workers despite Los Mineros holding the right to represent workers at the mine.
The U.S. government agreed. On June 16, the U.S. requested that Mexico review the matter and suspended the final settlement of customs accounts related to entries into the U.S. of goods from the San Martin facility. The Government of Mexico reviewed the matter, but disagreed with the U.S. that there was a denial of rights. The U.S. then requested the establishment of an RRM panel on August 22 to decide the case. The panel was composed on August 30.[1][2]
What did the panel say?
The panel reached its decision on jurisdictional grounds – determining that denials of rights alleged by the U.S. were outside the scope of the RRM – and did not opine directly on the substantive merits of the case. In reaching this conclusion, the panel centered its analysis on three questions: (1) Is the San Martin mine a Covered Facility?; (2) Is the alleged Denial of Rights “brought under legislation that complies with Annex 23-A?”; and (3) Did the Denial of Rights occur before the USMCA entered into force?
Is the San Martin mine a Covered Facility?
Under the USMCA, the RRM can only be applied with respect to violations of certain Mexican labor laws at a Covered Facility.[3] The Agreement defines a Covered Facility as, “a facility in the territory of a Party[4] that: (i) produces a good or supplies a service traded between the Parties; or (ii) produces a good or supplies a service that competes in the territory of a Party with a good or a service of the other Party, and is a facility in a Priority Sector.”[5]
For both (i) and (ii), the panel determined that the U.S. government, as the complainant party, had the burden of demonstrating that the relevant goods originated from the specific facility in question. While the U.S. introduced evidence showing that IMMSA – a subsidiary of Grupo Mexico that owns the San Martin mine and other metal ore mines in Mexico – produced goods traded between the Parties and within Mexico, the panel found that the U.S. had not introduced sufficient evidence supporting such a conclusion for the San Martin mine, specifically. However, support for the U.S. argument came from an unexpected place.
In addition to the various filings of the U.S. and Mexican governments, Grupo Mexico/IMMSA also filed a brief with the panel. The panel found that while the U.S. had not established that the specific San Martin mine produced a good that met the requirements of (i) or (ii), the filing submitted by Grupo Mexico/IMMSA provided an admission that goods from the mine were sold within Mexico, satisfying the requirement under (ii).[6] The panel noted that, “IMMSA has provided during the verification process what the United States needed to show to meet its burden.” Finally, the panel concluded that the evidence submitted by the U.S. was sufficient to meet the “that competes” prong of (ii), and that the San Martin mine is thus a Covered Facility.[7]
Is the alleged Denial of Rights “brought under legislation that complies with Annex 23-A?”
For alleged denials of rights occurring in Mexico, the USMCA establishes that, “a claim can be brought only with respect to an alleged Denial of Rights under legislation that complies with Annex 23-A (Worker Representation in Collective Bargaining in Mexico).”
Annex 23-A of the USMCA describes a variety of labor law provisions that are reflected in the 2019 version of Mexico’s federal labor law (LFT). After a rather robust discussion, the panel concluded – and suggested that both the U.S. and Mexico agree – that the scope of Mexican labor laws that “comply with Annex 23-A” are those contained in the 2019 version of the LFT.[8] In the words of the panel, “it does not apply to prior versions of the 2019 LFT or other laws not currently in force.”
The alleged denials of rights in this case stemmed from a 2007 strike by Los Mineros at the San Martin mine. Throughout the many legal and procedural twists and turns that followed that strike, Los Mineros and Grupo Mexico/IMMSA both sought relief from the Mexican labor administrative entities that existed at the time, including the relevant Conciliation and Arbitration Board (CAB).
The 2019 LFT ended the CAB system in Mexico, replacing it with new labor courts and a new Federal Center for Conciliation and Labor Registration. However, the 2019 LFT contains a transitory article providing that cases initiated before the labor law reform – presumably for reasons of judicial and procedural economy – will continue to be heard by the CABs under the pre-2019 labor law.
Given this, the panel concluded that the alleged denial of rights was subject to the pre-2019 LFT law and Mexican labor institutions, and therefore outside the jurisdictional scope of the RRM.[9] This determination was the key issue for the panel in ruling against the U.S. in this case.
Did the Denial of Rights occur before the USMCA entered into force?
The panel, the U.S., and Mexico all agreed that matters occurring exclusively before the USMCA entered into force on July 1, 2020, are outside the scope of the RRM. However, the U.S. government argued that regardless of when the underlying labor strife at the San Martin mine began, there were specific denials of rights in this case that occurred after the USMCA entered into force, and these denials of rights anchored the dispute within the RRM’s temporal jurisdiction. Mexico, to the contrary, argued that the timing of the initiation of this sequence of events is dispositive, and that if activities post-entry into force derive from pre-entry into force events, the entire case is outside the temporal scope of the RRM.
The panel rejected Mexico’s argument, but neither did it directly adopt the U.S. argument. Rather, it put forward its own “framework for the Parties and future Panels to consider if a dispute with similar jurisdictional questions should again arise.” This framework elucidates three circumstances and their jurisdictional implications for the RRM:
The panel determined that the facts of the San Martin case align with the first circumstance of its framework. As such, it did not opine directly on the USMCA entry into force issue in this case.
And what about the underlying labor issues?
Since the San Martin case was decided on jurisdictional grounds, the panel did not address the merits of the underlying labor-related claims by the U.S. However, a separate, non-dissenting opinion written by one of the (unnamed) San Martin panelists details how events that occurred after entry into force of the USMCA – specifically, the San Martin mine’s management engaging in collective bargaining with a coalition of workers despite the fact that Los Mineros holds the right to represent workers there, as mentioned by the U.S. government in its request for review – likely would have constituted violations of the 2019 LFT if they had been subject to that law.
What happens next in this matter?
The panel’s decision is final, and no appeal of an RRM case is available. The only question in such cases is whether the losing Party will comply with the panel’s decision. In this case, the U.S. has already complied, announcing on May 13 that liquidation of entries from the San Martin mine into the U.S. would resume. However, outside of the RRM, it is not immediately clear whether the U.S. government will walk away from the San Martin mine situation or continue to press the matter under the USMCA via other mechanisms.
First, some context. The political dynamics involved in this case are significant. Grupo Mexico is ranked by Forbes as the fourth largest company in Mexico and has a significant political presence in the country. Los Mineros are led by a Mexican Senator affiliated with the same political coalition as Mexico’s current President and presumptive next President.[11] Los Mineros are also affiliated with the USW – a major U.S. labor union with a significant voice in U.S. trade policy across the last two U.S. Presidential administrations. USW published a statement on the San Martin panel decision, noting, “The fight for workers’ rights, including those at issue in this case, is far from over and we will examine what further actions are necessary and appropriate.” This does not seem like the sort of dynamic the U.S. is likely to just walk away from.
The mining industry is an area of emphasis for U.S. labor enforcement under the USMCA and is specifically designated as a priority sector for the RRM. A second RRM mining case, also filed by Los Mineros – this one against Peñoles’ Tizapa mine in the State of Mexico – is working its way through the process. The U.S. requested that Mexico review the matter on April 3 and Mexico’s report to the U.S. announcing the results of that review was expected last week.
In her statement regarding the San Martin panel’s decision, U.S. Trade Representative Katherine Tai said, “The Biden-Harris Administration remains steadfastly committed to using all the tools available under the USMCA to seek redress for the persistent problems in San Martin, and to continue to deliver real, tangible benefits for workers both at home and abroad.” What other tools under the USMCA might she be contemplating?
One possibility is that the U.S. government will decide to respond to the San Martin panel decision by filing a state-to-state case against Mexico under Article 23.3 or 23.5 of the USMCA. Such a case could focus on: (a) any alleged Mexican government labor law enforcement failures in the Mexican mining industry broadly, including with respect to the San Martin mine; or (b) any alleged insufficiency of Mexican labor laws, including the pre-2019 LFT as it is still being applied. If the U.S. were to prevail in such a case, the remedy it may impose – such as suspension of USMCA preferential tariff benefits – could also impact the entire Mexican mining industry. Notably, a state-to-state USMCA Chapter 23 case would avoid the jurisdictional issues that were decisive in the San Martin RRM case.[12] The likelihood of a state-to-state USMCA Chapter 23 case would seem to increase if the U.S. does not prevail in the current Tizapa mine case.
What does this decision mean for future cases? For the RRM overall?
1. No stare decisis, but RRM panelists are people, too. As a legal matter, RRM panel decisions do not set precedents for future cases. However, RRM panelists will certainly be aware of, and likely will have read, prior RRM panel decisions. And, of course, people are generally likely to agree with themselves. The pool of RRM panelists is relatively small – three pools of five panelists each. So having recurrent panelists in distinct RRM cases is not only likely, it is a certainty: one of the San Martin RRM panelists has already been named as a panelist for the second RRM panel, in the Atento case (for a broader discussion of that case and its implications, see my previous post).[13]
2. 2019 was five years ago (to be updated in 2025). The facts of the San Martin case are quite distinct. Based on my understanding, only two of the 21 other RRM cases brought by the U.S. to date could have been impacted by application of the San Martin panel’s approach, and both of those cases were among the first handful brought by the U.S in 2021 and 2022. Put another way, I do not believe that any of the 15 RRM cases brought by the U.S. government in the last year, other than San Martin, would have been impacted by this approach. The San Martin panel acknowledged the rarity of this fact pattern, stating that “[t]he factual and legal history of this dispute is highly unusual and unlikely to repeat itself.” As more time passes between the enactment of the 2019 LFT and the present moment, the more unlikely it becomes that RRM cases will focus on situations subject to pre-2019 law and labor institutions. Nevertheless, both the panel’s analytical approach to evaluating the issues presented in the San Martin case and its decisions on procedural elements of the case may present indicia of how future panels will consider similar circumstances.
3. Will this impact the type of RRM cases the U.S. government brings? To be candid, I think the U.S. government needs to decide what it wants the RRM to be, and what sorts of cases it wants to bring. The RRM can be (A) primarily a petition-driven process with a low evidentiary bar, resulting in a high quantity of cases, even if some cases are fairly weak and/or the magnitude of some cases (e.g., impact on trade, number of workers directly affected, market signal to other employers in Mexico, etc.) is minimal. Or it can be (B) a process with a balance of petition-driven cases – probably with a higher evidentiary bar for acting on those petitions in order to reserve some staffing resources – and cases self-initiated by the U.S. government that focus on strategically significant situations with greater magnitude. Thus far, 20 of the 22 cases brought by the U.S. government have been driven by petitions. I suspect that petitions will always be an important part of the U.S. view of the RRM, but it also seems possible that the San Martin decision, among other factors, could lead the U.S. to put more resources into building strong, strategically significant RRM cases on its own. Something to watch for.
4. Don’t forget about the 2026 USMCA joint review. Under USMCA Article 34.7, the Agreement terminates in 2036, unless each of the three countries decides to continue it. The countries are required to conduct a “joint review” of the operation of the USMCA on the sixth anniversary of the Agreement’s entry into force, which is July 1, 2026. At the joint review meeting, each country must indicate whether it wishes to extend the USMCA for another sixteen years, until 2052. If any country says no, then the countries must continue to meet annually until 2036 to see if they can reach consensus to extend the Agreement. This dynamic creates considerable leverage for a USMCA country that may seek to negotiate changes to the Agreement. Mexico and Canada seem likely to support the USMCA status quo; the U.S. may feel differently, regardless of the outcome of the November election.[14]
It's worth remembering how important the RRM was in generating U.S. political support for the USMCA. With the RRM, the USMCA was approved by both chambers of the U.S. Congress with historic margins and, in a first for a free trade agreement, was supported by the AFL-CIO.[15] The RRM is important to many members of the U.S. Congress and stakeholder groups they care about. It’s also worth remembering how we got to the RRM. The RRM was developed in response to the 2017 loss by the U.S. in the CAFTA-DR labor dispute with Guatemala. Like San Martin, the Guatemala decision included dicta from the panel noting that the U.S. had proven the existence of the underlying labor concerns, but the panel ruled against the U.S. on jurisdictional grounds. Hearing that the labor concerns were real, but the mechanism wasn’t apt to address them led to a rethink on how to develop a more tailored tool in future trade negotiations, landing on the USMCA RRM. Will the U.S. use the 2026 joint review to seek to make further tweaks, jurisdictional or otherwise, to the RRM?
5. Procedural rulings. The San Martin panel’s decision included annexes that shed light on various procedural issues that came up during the panel process. Given the uniqueness of the fact pattern in the San Martin case, these procedural rulings may be among the panel’s most enduring legacy in future cases. Here are a couple of the rulings in those annexes that are of particular relevance:
A. Assistance of counsel in RRM proceedings. In a ruling dated February 13, 2024, the panel clarified the role of private counsel for a Covered Facility in the RRM process. According to the panel, counsel for a Covered Facility (or its parent company) (a) may submit written views to the panel, (b) may submit additional information to the panel after their original submission, and (c) may participate in the verification process (where the panelists question representatives of the Covered Facility). The panel noted that counsel for IMMSA had been extended all of these opportunities. In fact, its filing was found by the panel to decisively support the U.S. government’s jurisdictional argument that the San Martin mine is a Covered Facility. However, the panel ruled that counsel for the Covered Facility may not participate in the hearing before the panel,[16] which is a government-to-government process where representatives of the Covered Facility are not present.
B. Submission of amicus curiae and filings by the public. In a ruling dated January 18, 2024, the panel clarified that, under the USMCA, a dispute settlement panel may accept written views by non-governmental entities, but any such filing must meet the specific criteria established in the Agreement, including with respect to the timing of the filing. In this case, the panel rejected an amicus curiae brief submitted by the U.S. Chamber of Commerce nearly four months after the relevant filing deadline.
The San Martin panel decision immediately marks a victory for Mexico and for Grupo Mexico, and a loss for the U.S and the petitioning unions. But answers to several of the broader questions referenced above – Will the U.S. walk away from San Martin or go bigger? What could this mean for the types of RRM cases the U.S. brings? What could this mean for the future of the RRM, particularly in light of the 2026 USMCA joint review? – could have the most profound implications going forward. Stay tuned.
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[1] Under the USMCA Rules of Procedure, the Mexican Section of the USMCA Secretariat composed the panel by selecting one panelist from each of the three lists under the Agreement – a list of Mexican nationals proposed by Mexico, a list of U.S. nationals proposed by the U.S. and a list of third-country nationals agreed upon by the U.S. and Mexico. The three panelists in this dispute were: Kevin Kolben (U.S.), a professor at Rutgers Business School; Lorenzo Roel (Mexico), an employer-side labor lawyer associated with Mexico’s major employers’ confederation; and Gary Cwitco (third-country), the panel’s chair, a Canadian union-side labor advocate.
[2] The USMCA required establishment and composition of the three lists by the date of the USMCA’s entry into force on July 1, 2020. For the U.S., this means that the lists of RRM panelists were developed during the Trump Administration. The USMCA requires that panelists be appointed for a minimum of four years or until the Parties constitute new lists.
[3] The RRM “shall apply whenever a Party (the “complainant Party”) has a good faith basis belief that workers at a Covered Facility are being denied the right of free association and collective bargaining under laws necessary to fulfill the obligations of the other Party (the “respondent Party”) under this Agreement (a “Denial of Rights”).” USMCA, Art. 31-A.3.
[4] The Parties in this case were the relevant USMCA Parties: the U.S. and Mexico. Canada has a separate RRM with Mexico, which it has utilized on one occasion. There is no RRM between Canada and the U.S.
[5] Id., Art. 31-A.15. Priority sectors are defined by the USMCA as “a sector that produces manufactured goods [including, but not limited to, aerospace products and components, autos and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastic, forgings, and cement], supplies services, or involves mining.”
[6] According to the panel, “[a]s indicated by IMMSA, all the production from the San Martin mine is captively consumed by other IMMSA-affiliated facilities located in Mexico, which shows that the San Martin mine does indeed sell in Mexico and prima facie competes with other suppliers in the Mexican market.” Mexico – Measures Concerning Labor Rights at the San Martin Mine (MEX-USA-2023-31A-01), FN 71.
[7] The panel applied a preponderance of the evidence standard in finding competition, noting, “if it can be shown that like or substitutable goods or services are bought and sold in a market, it is more probable than not that they compete with each other.” Id., paragraph 60.
[8] While the panel did not directly address the issue, it is worth noting that the 2019 LFT revised and replaced portions of the prior LFT, and introduced new substantive and procedural provisions, but did not replace the entirety of the pre-existing LFT. In the panel proceedings, the U.S. argued that the entirety of the 2019 LFT is within scope for the RRM, not just the new provisions added on May 1 of that year. Mexico argued that only the new 2019 additions or revisions to the LFT are within the RRM’s scope. Of the four LFT articles cited by the U.S. as bases for Grupo Mexico’s denial of rights, three were new additions to the LFT in 2019 (Arts. 133 IV, 449, and 935) and one existed in the LFT prior to 2019 and was retained (Art. 133 VII). It is unclear from the panel’s discussion of the issue which scope they adopted in their references to the “2019 LFT.”
[9] As the panel put it, “[t]he litigation, the institutions involved, and the length of time to adjudicate are all specific to the prior system, and thus the Panel does not believe that the [RRM] envisages…that such cases were subject to its jurisdiction.” Mexico – Measures Concerning Labor Rights at the San Martin Mine (MEX-USA-2023-31A-01), paragraph 113.
[10] For example, if the 2007 strike had occurred after the relevant portions of the 2019 LFT entered into force, the subsequent parts of this fact pattern occurring after July 1, 2020, would be within the RRM’s scope.
[11] If the polling in advance of the country’s June 2 Presidential election is to be believed.
[12] USMCA Articles 23.3 and 23.5 do not require that a labor violation occur at a Covered Facility, but the relative jurisdictional equivalent is that a violation must occur “in a manner affecting trade or investment between the Parties.” However, both Articles contains a footnote that flips the burden of proof on that element, requiring that a panel presume a violation to be in a manner affecting trade or investment between the Parties, unless the responding Party demonstrates otherwise. Chapter 23 – unlike Annex 23-A – also clearly pertains to all Mexican labor laws, not just the 2019 LFT. This would seem to bring in any post-entry into force violations of the Chapter, even those still regulated and administered by the pre-2019 law and institutions.
[13] On May 8, Politico reported that the Atento RRM panel had been composed with the following members: Kevin Kolben (U.S.), a professor at Rutgers Business School; Graciela Bensusan (Mexico), a labor professor at UAM in Mexico City; and Pablo Lazo Grandi (third-country), the panel’s chair, a former Chilean labor official. In addition to Professor Kolben’s participation on both panels, the separate (non-dissenting) opinion written by one of the San Martin panelists cited to the statements of Professor Bensusan to establish the proposition that the 2019 LFT was violated in the San Martin case, notwithstanding the jurisdictional elements.
[14] On March 6, 2024, U.S. Trade Representative Katherine Tai described the 2026 joint review thus: “[Y]ou do not want that review to happen in a way that all three parties come to the conversation too comfortable. The whole point is to maintain a certain level of discomfort, which may involve a certain level of uncertainty, to keep the parties motivated to do the really hard thing, which is to continue to reevaluate our trade policies and our trade programs to ensure that they're really responding to the changes that are happening around us.” On May 16, 2024, U.S. National Economic Advisor Lael Brainard said, “To the extent that there are more systemic challenges that arise, we think about [the] 2026 review as being the opportunity to address those, to find areas where perhaps the USMCA was not sufficiently well engineered.”
[15] The AFL-CIO statement specifically referenced what would become the RRM: “For the first time, there truly will be enforceable labor standards—including a process that allows for the inspections of factories and facilities that are not living up to their obligations.”
[16] Verifications occur when the panel conducts its own fact-finding, including by visiting a Covered Facility (in-person or virtually) and speaking with affected workers and employers. USMCA, Rules of Procedure for Chapter 31 (Dispute Settlement), Section C, Arts. 11-12. This is distinct from the hearing before the panel, in which the Parties present their arguments and answer the panel’s questions. Id., Arts. 13-16.
]]>On May 16, 2024, the U.S. government’s Forced Labor Enforcement Task Force (“FLETF”) announced the addition of 26 new entities to the Uyghur Forced Labor Prevention Act (“UFLPA”) Entity List. The announcement was published on the Department of Homeland Security (“DHS”) website and can be found here. The draft Federal Register notice can be found here and will be published on May 17th. This brings the total number of entities to the list, available here, to 65.[1]
All of the entities were added to the section 2(d)(2)(B)(v) list of the UFLPA, which identifies entities that source material from Xinjiang, participate in “poverty alleviation” programs, or facilitate other government programs connected to forced labor. According to Appendix 1 of the Federal Register notice, the 26 entities are “cotton traders or warehouse facilities” which FLETF has found to source cotton from the Xinjiang region. Of the 26 entities, 21 were found to have marketed cotton sourced from Xinjiang on an online wholesale platform, which Kelley Drye has identified as likely being Mcotway. The remaining five were identified as sourcing cotton from Xinjiang through “corporate documents, websites, or media reports.” The majority of the 26 entities are located outside of Xinjiang.
The addition of 26 new entities is a significant increase to the Entity List and the largest that FLETF has undertaken since the UFLPA was passed. This suggests that FLEFT is responding to the calls from activists and Congress to further expand the Entity List.[2] It also suggests that FLETF is using a number of different tools to ease the burden of examining individual entities on its own, potentially including information received by CBP in connection with previous UFLPA detentions. There is significant overlap between the companies listed now by FLETF and companies which have made appearances in reports on forced labor from Sheffield Hallam University (including 17 out of this batch of 26), a reminder of the importance of paying attention to activist reporting in this space.
This update is significant not only for the number of companies added to the Entity List, but for the type of companies added. Notably, none of the entities on this list are producers of cotton in Xinjiang, or manufacturers engaged in a value-added process. Rather, these companies are trading and logistics companies, only two of which are located in the Xinjiang region. The consequence of including these companies, which operate in a strictly buy-sell capacity, is that shipments which have no Xinjiang-origin cotton may now be detained and not clearable through CBP custody simply as a result of connection to such traders in their supply chains.
Cotton is one of the high-priority sectors designated for UFLPA enforcement. Should FLETF continue this strategy of adding intermediate buyers and sellers of goods to the Entity List in other high-priority UFLPA enforcement sectors (such as polysilicon, or other sectors that may be added as high-priority sectors in the near future), then ensuring that raw materials are not sourced from Xinjiang (or China) will not necessarily be sufficient to avoid UFLPA detentions, or to successfully navigate such detentions that occur. Supply chains that are compliant today—even supply chains already reviewed and approved by CBP—could become non-compliant overnight, simply because a Chinese party in the supply chain has received shipments from Xinjiang, even if that company is not transacting in Chinese material in the context of that specific supply chain. While isotopic testing and certificates of origin have never been able to secure the release of detentions on their own, this expansion of Entity List scope to include cotton purchasers further underscores that such certification is not sufficient proof of a supply chain devoid of forced labor.
These developments underscore the importance of developing an in-depth understanding of the parties at every level of the supply chain through traceability and risk assessment efforts and providing detailed and thorough vetted traceability packages when a shipment is detained. Should you need assistance with either, Kelley Drye is able to help.
[1] Note that FLETF began counting named subsidiaries individually in December 2023, increasing the Entity List count by nine.
[2] Kelley Drye has been tracking Congressional letters on forced labor and the UFLPA, and this information is available upon request.
]]>Companies will need to account for this change when implementing sanctions compliance programs. Recordkeeping policies should be updated to ensure that companies keep ten years’ worth of transactional and compliance data to navigate future enforcement cases. Although the Act did not explicitly change recordkeeping requirements in the law, in practice companies are wise to change internal recordkeeping because regulators can now ask about compliance going back ten years. Internal investigations and voluntary self-disclosures will need to expand to review ten years of compliance as a best practice to cover the broader statute of limitations. Given already significant costs for internal investigations looking back five years, the new ten-year statute of limitations may change the calculus for conducting and scoping internal reviews. Additionally, in the mergers and acquisitions context, acquirers will need to expand due diligence to look back further in time, and seek representations and warranties that account for the longer statute of limitations.
It remains to be seen whether a similar expansion of the statute of limitations is forthcoming under export controls, including the Export Administration Regulations, to align with the Act’s changes. Many companies treat export and sanctions compliance under the same policies and procedures based on significant overlap between compliance with such laws. As a result, companies implementing changes to their sanctions compliance practices to account for the Act may also want to consider extending such changes to export controls compliance as well.
Please contact our sanctions compliance team for any further questions.
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