International Trade Law News

Webinar on September 24, 2020: Huawei, Hong Kong, and Xinjiang – What You Need to Know About US Sanctions and Export Controls on China

2020-09-22T11:18:00.002-04:00

Jacobson Burton Kelley PLLC will be speaking at the following webinar presented by the Association of Certified Sancitons Specialists (ACCS) and Computer Services Inc. (CSI) on September 24, 2020:

Huawei, Hong Kong, and Xinjiang – What You Need to Know About US Sanctions and Export Controls on China

This webinar is free to non-members of ACSS.

For more information and to register see: https://sanctionsassociation.org/20200924upcoming

Important Changes to the EAR Take Effect Today

2020-06-29T10:06:00.006-04:00

China/Russia/Venezuela Military End-Use/End-Users

This is a reminder that today, June 29, 2020, is the effective date of the amendments to BIS's military end-use/end-user rule for certain exports/reexports to China, Russia, and Venezuela is now in effect. See https://is.gd/kpIWRA and amended 15 CFR § 744.21 of the EAR.

Below is a redlined version of Supplement 2 to Part 744 of the EAR showing the ECCNs that are affected by the amended military end-use/end-user rule. It is important to note that items classified as EAR99 or in other ECCNs not on this list are not subject to these changes, although certain ECCNs, of course, may require a license to be exported/reexported to China or Russia. In addition, Venezuela is also subject to certain OFAC sanctions.

New BIS FAQs

Late Friday, BIS issued 31 FAQs on the military end-use/end-user rule at https://is.gd/sM2GZz.

The bottom line: Perform Due Diligence. We are strongly recommending that exporters/reexporters update and obtain end-use/end-user statements from customers.

New EEI Filing Requirements

Importantly, effective today an EEI filing is required for ALL exports of items to China, Russia, or Venezuela listed in amended Supplement 2 to Part 744, regardless of value.

Starting on September 27, 2020, an EEI filing will be required for ALL exports to China, Russia, or Venezuela, regardless of value and ECCN. This requirement does not affect items classified as EAR99.

Elimination of License Exception CIV

Finally, today license exception CIV (civil end-users) was been removed from section 740.5 of the EAR and can no longer be used for any exports or exports. As a result, many companies will have to obtain export/reexport licenses from BIS.

US Customs and Border Protection to Increase Merchandise Processing and Other User Fees on Imports Effective January 1, 2018

2017-11-29T11:25:00.002-05:00

US Customs and Border Protection (CBP) recently announced that effective January 1, 2018 the minimum and maximum Merchandise Processing Fee (MPF) on imported goods will increase.

This increase is a result of the Fixing America’s Surface Transportation Act (FAST Act) that was passed by Congress and signed into law in 2015. The FAST Act, which was recently implemented by CBP, requires certain customs user fees to be adjusted for inflation when the consumer price index increases by more than one percent.

CBP has announced that effective January 1, 2018, the minimum and maximum MPF will increase as follows:

Current MPF Amounts	New MPF Amounts Effective January 1, 2018
Minimum MPF = $25.00	$25.67
Maximum MPF = $485.00	$497.99 (which applies to entries greater than $143,760)(see below)

While the minimum and maximum MPF amounts will increase, the manner in which the MPF is calculated on formal entries will remain unchanged. The MPF on formal entries will continue to be equal to 0.3464 percent of the entered value of the goods (not including freight, insurance, or duties). Based on the 0.3464 percent MPF rate, the maximum MPF amount of $497.99 will only apply to entries with an entered value greater than $143,760.

Imports qualifying for certain free trade agreements, such as NAFTA, and other trade preference programs will continue to be exempt from MPF. CBP recently published a useful table showing which preference programs are eligible for MPF exemptions.

As indicated in CBP’s notice, a number of other CBP user fees will also increase, including the MPF on informal entries (increased to $2.05).

Impact of President Trump's Iran Policy Announcement: No Changes for Now, but the Future of the JCPOA Remains Uncertain

2017-10-17T21:42:00.003-04:00

By Glen Kelley, Doug Jacobson, Michael Burton & David Brummond

Jacobson Burton Kelley PLLC

www.jbktradelaw.com

On October 13, 2017 President Trump announced the long-awaited results of his Administration's Iran policy review. The key aspect of the announcement was that President Trump will not renew certification of Iranian compliance with the Joint Comprehensive Plan of Action (“JCPOA”) as required by the Iran Nuclear Agreement Review Act of 2015 (“INARA”), a law passed by the US Congress to provide oversight of the JCPOA. President Trump stated that his decision was made because Iran "has committed multiple violations of the JCPOA" and "has not lived up to the spirit of the agreement."

President Trump also stated that he will "terminate" US participation in the JCPOA unless the parties to the JCPOA agree to make various changes to the JCPOA and that he will request the US Congress to modify INARA to reflect the Administration's concerns. Following President Trump's announcement, OFAC designated the Iranian Revolutionary Guard Corps ("IRGC") as a Specially Designated Global Terrorist (SDGT) as required by Congress in a law passed in August 2017. While there has been much discussion on the designation of the IRGC as a SDGT, in practice the designation was purely symbolic as the IRGC has been listed on OFAC's Specially Designated National List since 2007 under various Executive Orders.

Though significant, these announcements do not trigger any changes in the status of the JCPOA or to existing US sanctions.

Following the President's announcement, Secretary of State Rex Tillerson indicated that staying in the JCPOA "was in the best interests of the US." In addition, Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker said yesterday that it "is important not to confuse the internal US legal process of certification under INARA with our continued implementation of the JCPOA."

President Trump's decision not to certify Iran's compliance with the JCPOA under Inara now shifts the burden to the US Congress, which could in the coming months reimpose some or all of the secondary sanctions on Iran that were waived on January 16, 2016 when the JCPOA was implemented. In addition, President Trump could in the future refuse to waive the secondary sanctions on Iran that remain suspended and could direct OFAC to terminate OFAC General License H.

While the US position on Iran should become clearer in the coming months, President Trump's continued criticism of the JCPOA increases the uncertainty regarding (1) the future of US sanctions relief that was a key part of the nuclear agreement with Iran, and (2) whether non-US companies will continue to be able to conduct business with Iran without fear or being subject to US sanctions.

Increased Risk of US Withdrawal from JCPOA and "Snap-Back" of US Sanctions on Iran

It is important to recall that the US has suspended only a small portion of its Iran sanctions for US companies (relating to commercial aircraft), and "US persons" remain prohibited from nearly all transactions involving Iran or its government.

Nearly all of the suspended US sanctions were “secondary” sanctions primarily directed at non-US companies and individuals. The recent events increase the risk of reimposition or "snap-back" of US sanctions, which could be done in one of the following ways:

1. Reimposition of Sanctions Within Next 60 Days – Once the President fails to certify Iran's compliance with the JCPOA, Congress can pass "qualifying legislation" under INARA in 60 days choosing to reimpose all or some of the Iranian sanctions that have been suspended. However, there does not appear to be significant interest by Congress to proceed in this direction at this time and it is not likely that the necessary votes can be obtained to proceed under this route.

2. Contingent Future Sanctions – Another scenario that is being contemplated by congressional leadership (the Corker-Cotton proposal) is to amend INARA to automatically reimpose US sanctions on Iran’s nuclear program in the future if Iran crosses key thresholds. Among the thresholds being considered is if weapons-grade nuclear material accumulates to the point where there is less than a one-year “breakout” period for obtaining a nuclear weapon.

3. Failure to Waive Suspended Sanctions – Under the JCPOA the President must waive the various sanctions that were suspended. Depending on the underlying law, these waivers must be renewed every 120 days to every six months. It is possible that the Trump Administration could simply choose not to renew one or more of the waivers, which would automatically reimpose the US sanctions. The next waiver deadline is in mid-January 2018. Such action would not require congressional approval and would effectively snap-back sanctions on Iran.

4. Unilateral Withdrawal from JCPOA – The JCPOA does not specifically authorize any party to the agreement to “withdraw." However, the US could choose to cease implementing its commitments under the agreement, which would effectively lead to US abrogation of the JCPOA.

Next Steps and Practical Impact

Because the JCPOA is a multilateral arrangement, a decision by the US to withdraw from the agreement or to reimpose sanctions would have significant ramifications. Iran has threatened to stop complying with its commitments to curtail its nuclear program if the US reimposes sanctions. The costs of Iran’s reinitiating its nuclear program, however, could undercut the sanctions relief it has received from trading partners other than the US. The EU has made clear that if the suspended US sanctions are reimposed, the EU intends to continue to abide by the terms of the JCPOA so long as Iran does. If US sanctions are reimposed, the EU member states would likely support their companies in their Iranian activity and would strongly oppose any US government move to penalize them under reimposed sanctions. There is also the possibility that the EU would expand its sanctions blocking legislation (sometimes referred to in the EU as antiboycott laws) to cover US secondary sanctions on Iran. If Iran stopped complying with the JCPOA, the EU member states would likely withdraw their support for their companies’ activities in Iran, and might even move to the dispute resolution procedures of the JCPOA or a UN Security Council review, which could lead to the reimposition of EU sanctions.

While we are currently in uncharted waters and are dealing with an unpredictable US Administration, the following is a summary of the possible changes to impact on the JCPOA and US sanctions:

1. Incremental non-nuclear additional sanctions are likely, but the reimposition of the suspended US secondary sanctions or other major changes in the near future seem unlikely at this time. It is important to recall that there have been no immediate changes to US sanctions on Iran.

2. The Trump Administration could terminate US participation in the JCPOA and reimpose sanctions in the future, if insufficient progress is made with the parties to the JCPOA to address certain concerns relating to Iran. There are early indications that EU leaders might try to find a way to provide these additional assurances from Iran regarding their activities of concern.

3. The US could reimpose the suspended secondary (extraterritorial) sanctions. While appearing dramatic, this may not have much practical impact on many non-US companies. Moreover, if discreet secondary (extraterritorial) sanctions are "snapped-back", it seems likely the EU and its member states would defend EU-based companies from the adverse economic consequences of a reimposition of sanctions.

4. If US sanctions are reimposed, there is reason to believe that Iran, after protesting, would continue to abide by its JCPOA commitments, particularly if it remains clear that the EU and other countries involved in the JCPOA intend to continue to abide by its terms and authorize business with Iran. Of course it is possible that Iran would follow through on its threat to pull out, and this likely would have a more dramatic practical impact.

Whatever the outcome, the OFAC policy that authorizes the export of US-origin humanitarian products to Iran, including medicine, medical devices, and agricultural products, will remain unchanged, just as it was during the height of US sanctions. However, payments for these transactions remains difficult due to the reluctance of many non-US banks to handle Iran-related payments.

International Sanctions Lawyer David J. Brummond Joins Jacobson Burton Kelley PLLC

2017-08-01T03:30:00.000-04:00

International trade law firm Jacobson Burton Kelley PLLC today added leading international sanctions lawyer David J. Brummond as Of Counsel in the firm’s Washington D.C. office. Brummond joins the firm from DLA Piper LLP where he practiced sanctions law after serving as Senior Sanctions Advisor – Insurance for the United States Treasury Department’s Office of Foreign Assets Control (OFAC) from 2006 to 2014.

At Jacobson Burton Kelley, Brummond will work in tandem with firm members Doug Jacobson, Michael Burton and Glen Kelley to advise U.S. and non-U.S. companies and financial institutions on sanctions compliance and enforcement matters.

“Dave’s knowledge of U.S. and international sanctions law and related compliance requirements, particularly in the insurance sector, will be a tremendous addition to our sanctions practice” said Doug Jacobson, the firm’s managing partner.

In addition to his unique background and expertise with economic sanctions, Dave has over 40 years of experience in the insurance industry and its regulatory environment. Brummond previously served as legal counsel for the Terrorism Risk Insurance Program at the Treasury Department. Earlier in his career, he served as legal officer for various insurance trade groups, as well as general counsel and acting staff director for the National Association of Insurance Commissioners, the national organization of state insurance regulators.

“Dave will greatly enhance our ability to advise clients on the increasingly complex and global nature of insurance coverage for international trade transactions,” added Glen Kelley.

Michael Burton said “Dave is a well-respected sanctions and insurance industry practitioner with a depth and breadth of experience that complements our existing sanctions practice.”

“Dave was very well-respected while he was at OFAC and I am pleased that he is joining our firm,” said Doug Jacobson. “With our combined experience we are now even better able to provide our clients with solutions to their most complex sanctions and export compliance issues.” Jacobson added that “Dave’s unique insight into the U.S. government's processes and sanctions programs will complement the firm's experience and capabilities in economic sanctions and international trade law.”

About Jacobson Burton Kelley PLLC

With offices in Washington, DC and New York, New York, Jacobson Burton Kelley PLLC advises U.S. and non-U.S. companies on a wide variety of international trade issues, including compliance, investigations and audits, enforcement and transactional matters. The firm’s practice areas include sanctions and export controls, anti-bribery, U.S. foreign investment reviews, customs, and trade remedies.

Jacobson Burton Kelley PLLC's attorneys are ranked in the leading international attorney guides, including Chambers and Partners and Who's Who Legal. Jacobson Burton Kelley PLLC is a member of the Trusted Trade Alliance and has strategic alliance with MME, a Switzerland-based law and consulting firm, and with True Compliance Group a Los Angeles-based law firm. The firm was recently recognized by the publication WorldECR as one of the leading export controls law firms in the United States.

New US Sanctions Expected for Russia, Iran and North Korea

2017-07-28T17:47:00.000-04:00

On July 25 and 27, 2017, both houses of US Congress passed almost unanimously a lengthy bill expanding US sanctions on Russia, Iran and North Korea. President Trump was expected to sign the bill into law. It is titled the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).

The provisions that are likely to have the greatest practical impact are those seeking to expand US capital markets and other “sectoral” sanctions targeting major Russian banks and oil and gas companies. The bill also introduces “secondary sanctions” for non-US persons engaged in certain types of transactions with Russia. However, it is far from clear that the Trump Administration will implement these sanctions.

In this summary we use the term “persons” to refer to both individuals and companies and other entities, and the term “US persons” to refer to US citizens and permanent residents, entities formed under US law, and any other person engaged in conduct within the United States.

Expanding and Locking in Russia Sanctions

Restrictions on lifting of sanctions

Under CAATSA, the Trump Administration will not be able to lift the Russia sanctions without first going through a Congressional review procedure. The statute also “codifies” almost all existing US sanctions executive orders focused on Russia, which means the President will not be able to lift sanctions imposed on any specific person without first submitting certain specified determinations or certifications to Congress.

Before the bill passed Congress, the White House indicated it was reluctantly prepared to accept these provisions, after a last-minute compromise reached with Congressional negotiators, that:
- increased the procedural hurdles for Congress to block a lifting of sanctions, and
- ruled out Congressional review of any “routine” US government license (authorization) of a specific transaction that “does not significantly alter United States foreign policy”.

The bill also authorizes the imposition of sectoral sanctions on companies in Russia’s railways, mining and metals sectors. However this already overlaps with existing sanctions authorities, and the Trump Administration is unlikely to choose to implement these sanctions.

Expanded sectoral sanctions

In 2014, the US and EU imposed “sectoral sanctions” on many of the largest Russian banks, oil and gas companies and dozens of their subsidiaries.

The bill directs the US Office of Foreign Assets Control (“OFAC”) to expand its Directives 1 and 2 under the sectoral sanctions. These Directives prohibit US person involvement in new financing for such Russian banks and oil and gas companies, and new share issuances by such banks. The bill directs that the Directives be broadened to cover new debt of such banks with a maturity longer than 14 days (currently only debt with a maturity over 30 days is covered), and new debt of such oil and gas companies with a maturity over 60 days (currently 90 days).

This could have a significant practical impact. OFAC interprets the prohibition on new debt to include the payment terms of any invoice for goods or services rendered to these covered companies. After the changes go into effect, there could be a US sanctions issue for any US person who is not paid within 14 or 60 days (rather than the current 30 or 90 days) by a covered company.

The bill also directs OFAC to expand its Directive 4, which prohibits US persons from providing goods, technology and non-financial services for exploration and production by certain targeted Russian oil and gas companies, and their subsidiaries, in Russian deepwater, arctic offshore and shale oil and gas fields. The bill directs that Directive 4 be broadened to cover new projects in deepwater, arctic offshore or shale oil and gas fields anywhere in the world (not just in or offshore Russia), if a company covered under Directive 4 has at least a 1/3 ownership interest.

New secondary sanctions

The bill establishes new secondary sanctions, giving the Trump Administration the option of penalizing non-US companies engaged in certain sensitive activities relating to Russia, even if the penalized company has no ties or contact with the United States. However, unless there is a change in Trump Administration policy on Russia, we think it is unlikely that there will be significant enforcement of these new sanctions.

Companies and banks involved in covered transactions may need to decide whether to avoid those transactions, on the basis that they could theoretically trigger US secondary sanctions penalties in future. As part of that decision-making process, companies should consider that such penalties are unlikely under present circumstances, and that they could become more likely if there is a change in the Russia-related policies of the US President and his Administration.

Under the new secondary sanctions President Trump will have the authority to penalize non-US persons engaging in the following activities:
- investing, or providing goods, technology or services, that directly and significantly contributes to Russian energy export pipelines, in each case with a value of $1 million or in smaller transactions with an aggregate value of $5 million in any 12-month period;
- investing or facilitating investment by others, with a value of $10 million, related to Russian privatization of state assets that unjustly enrich Russian government officials or their associates; or
- a significant transaction, more than 180 days after the bill becomes law, with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Russian government.

In the first of these new measures Congress apparently had the planned Nord Stream 2 pipelines in mind, which will transport natural gas from Russia to consumers in the EU. In a June 15 joint statement, Germany and Austria, which support the pipelines, said the new sanctions measure “introduces a completely new, very negative dimension into European-American relations” and “we can't accept the threat of illegal and extraterritorial sanctions against European companies”.

In addition, President Trump will have the authority to penalize non-US persons for the following types of transactions, though he is likely to waive or decline to exercise that authority:
- investments by non-US persons in any of the projects covered by Directive 4;
- significant transactions by non-US banks related to such investments, arms exports to Syria, or any withholding by Gazprom of significant natural gas supplies from NATO or certain Eastern European countries; and
- significant financial transactions by non-US banks on behalf of any Russian persons added to the SDN List under the Russia sanctions.

Expanded blocking sanctions

Finally, the bill expands existing sanctions authorities under which non-US persons engaged in certain activities can be blocked (meaning their assets can be frozen). For example, blocking can now be imposed for:
- a broader range of hacking activities on behalf of the Russian government;
- transactions seeking to evade the effect of Russia sanctions;
- human rights violations in territories occupied by Russia; and
- support to the Syrian government in acquiring significant weapons, ballistic or cruise missiles or weapons of mass destruction.

The practical impact for the private sector may be limited, so long as companies keep a close watch on any entities added to the US List of Specially Designated Nationals and Blocked Persons (“SDN List”).

Adjustments to Iran Sanctions

Most of the Iran sanctions provisions will have limited or no practical impact on the private sector, because they (i) largely overlap with existing sanctions measures, (ii) will likely be interpreted by the Trump Administration to not require any additional sanctions, or (iii) merely require the executive branch to carry out analysis or provide reports to Congress.

For example, the new sanctions relating to persons who materially contribute to Iranian missile programs, or for persons involved in the supply to or from Iran of major weapons systems, arguably do not greatly expand the Administration’s ability to sanctions such persons under existing authorities.

While the new human rights sanctions arguably expand existing authorities to target Iranian government officials and others engaged in gross violations of human rights against Iranians, this is unlikely to directly impact most private companies outside Iran.

The bill calls for the terrorist designation of the Iranian Revolutionary Guard Corps (IRGC) and its officials, agents and affiliates. There would be little practical impact for the private sector, as the IRGC and many related persons are already targeted under similar sanctions authorities.

Further limiting the practical impact on the private sector, the new sanctions expressly do not impact humanitarian transactions, including the sale of agricultural commodities, medicine and medical devices to Iran, and related payments and transportation.

North Korea

The bill amends a February 2016 statute that sought to expand US sanctions on North Korea, and codified (locked in) the existing sanctions. The current sanctions bill adds the following to the list of sanctionable activities:
- purchasing certain metals and minerals from North Korea, or selling to North Korea of rocket, aviation or jet fuel;
- supporting the operation and maintenance of vessels and aircraft covered by the sanctions, or insuring or registering North Korean government vessels; or
- maintaining a correspondent account for a North Korean financial institution (this has been prohibited for US banks since November 2016 under a separate “special measure” under US anti-money laundering law).

As with the 2016 statute, the bill seeks to require the President to implement these sanctions. However, the Trump Administration could react in the way the Obama Administration did in 2016, and decline to do so.

Under the bill, if a US bank learns that a correspondent account they maintain for a non-US bank is being used by the non-US bank to indirectly provide significant financial services to a person added to the SDN List pursuant to the 2016 statute, the US bank will be required to ensure that this conduct is terminated. The practical impact of this is not yet clear.

The bill prohibits the entry or operation in US waters of vessels included on a list to be developed by the Department of Homeland Security, of vessels over 300 gross tons owned or operated by the North Korean government, by any North Korean person, or by a country not complying with UN sanctions on North Korea. Potentially, 180 days after the publication of this list, the denial of entry will be extended to all vessels registered to any flag state that has registered any of the vessels on the list. This could have a broad impact, depending on how it is implemented.

There are a number of other provisions relating to Russia, Iran and North Korea sanctions that are unlikely to be implemented, or are unlikely to have a practical impact on the private sector.

New Harmonized EAR and ITAR Destination Control Statement Requirements Take Effect Today

2016-11-15T09:48:00.004-05:00

Today is the effective date of the final BIS and DDTC rules implementing the new harmonized EAR and ITAR Destination Control Statement (DCS) and making changes to other shipping requirements. The text of the final rules published by DDTC and BIS on August 17, 2017 can be found here (ITAR) and here (EAR).

As a result, the following language must now be included on the Commercial Invoice associated with items on the Commerce Control List (CCL) or US Munitions List (USML) that are exported from the United States:

These items are controlled by the U.S. Government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations.

This new DCS language only has to be included on the Commercial Invoice and no longer needs to be included on the shipping documents, such as the bill of lading or airwaybill, as in the past. While we have had a number of clients express concerns that this language exceeds the size fo the current DCS field on invoices generated in their ERP system, BIS and DDTC have stated that this language cannot be shortened or modified.

While this language only has to be included on the commercial invoices for items actually on the CCL (i.e., those items with an ECCN and not classified as EAR99), BIS has stated that it is permissible to include this DCS language on commercial invoices associated with the export of EAR99 goods, if the exporter chooses to do so.

In addition to including the new DCS language on the commercial invoices, the following additional requirements also take effect today:

Exports of ITAR controlled goods on the USML – New section 123.9 of the ITAR requires the commercial invoice associated with the shipment of ITAR controlled defense articles to include the following additional information:

name of country of ultimate destination;
name of the end-user; and
license or other approval number or exemption citation

Exports of "600" series and 9x515 Controlled Goods – The BIS final rule also modifies section 758.6 of the EAR to require the commercial invoice to include the ECCN(s) for any goods that are classified in the "600 Series" on the CCL (military parts and components) or items that are classified in ECCNs 9x515 (i.e., ECCNs 9A515 and 9B515 covering spacecraft and commercial satellites) that are exported from the US. The ECCN of other items not included in these classifications does not have to be included on the Commercial Invoice, but it is useful to include them.

The purpose of the DCS and other informational requirements "is to ensure that [the export control information regarding the item] reaches the ultimate consignee and/or end user(s) that will be in a position to make a subsequent reexport or transfer (in-country), so they are aware the item in question is subject to U.S. reexport controls."

It is important to note that the EAR does not require the DCS to be included on the Commercial Invoice associated with the reexport or transfer of US export-controlled items from one country to another.

However, section 123.9 of the ITAR requires the DCS to be included on the commercial invoice when ITAR-controlled are "transferred".

Overview of Possible Post-Election Changes in US Trade and Sanctions Policy

2016-11-10T20:57:00.001-05:00

By Glen Kelley, Doug Jacobson, and Michael Burton

Jacobson Burton Kelley PLLC

With Donald Trump’s surprise election victory, there is now a great deal of uncertainty regarding the future direction of the US government on international trade and foreign policy issues. President-elect Trump’s campaign and transition teams have released few specific policy proposals and plans in these and other areas.

Just as the pollsters could not predict the outcome of the election, no one really knows what will happen after January 20, 2017. Candidate Trump took many conflicting positions during the campaign and many campaign promises are never implemented.

However, we can already envision some significant changes in US trade and sanctions policy. We will closely watch the Trump transition team and the new Administration over the next few months for indications of the policies they will be formulating.

Trade Policy

For more than a year, a major part of President-elect Trump’s platform has been rejecting major US free trade agreements as “bad deals” for America, promising dramatic changes in the US approach to trade agreements. Ostensibly the goal is to better protect the interests of American workers and consumers.

As set out in President-elect Trump’s “100 day action plan”, his Administration could:

terminate US support of the Trans-Pacific Partnership (TPP), which would, if adopted, greatly reduce the remaining trade barriers between the US and 11 other countries in the Americas and Asia. If the US chooses to withdraw from TPP, the other 11 countries may choose to enact their own free trade agreement. It is possible that Trump Administration will seek to re-open the TPP to new negotiations, although that will be difficult since many of the TPP member countries have already commenced the ratification process.

seek to renegotiate the terms of the North American Free Trade Agreement (NAFTA), which could trigger substantial regulatory uncertainty, and possibly economic disruption, for manufacturers and exporters in the US, Mexico, and Canada. It is important to note that this same promise was made by candidate Obama during the 2008 presidential campaign and was never acted upon. President Obama became a leading advocate of free trade agreements during his second term.

reject other trade agreements and arrangements that “unfairly impact American workers”. How a Trump Administration views the US-EU Transatlantic Trade and Investment Partnership (T-TIP), which is currently being negotiated, remains to be seen. It is possible the US will choose to enter into a free trade agreement with the United Kingdom, once Brexit has occurred.

As set out on the Trump campaign website, the Trump Administration can be expected to ramp up enforcement of US trade remedy laws, as authorized in the Trade Facilitation and Trade Enforcement Act (TFTEA) that was enacted in early 2016, to combat perceived unfair trade practices and subsidies by major US trading partners, particularly China. Also, candidate Trump indicated that he would direct the Secretary of the Treasury to take action against China's alleged currency manipulation. Of course, there is a significant risk that these measures could trigger a damaging trade war (such as mutually escalating tariffs) with China and other trading partners.

Economic sanctions

Iran – During the presidential campaign, President-elect Trump frequently disparaged the current multilateral nuclear agreement with Iran and several other countries, known as the Joint Comprehensive Plan of Action (JCPOA) (commonly known as the Iran deal). Since the JCPOA was implemented on January 16, 2016, most US sanctions have remained on Iran ("primary sanctions") although most US and EU sanctions applicable to EU and other non-US companies have been suspended by waivers, general licenses and other regulatory action ("secondary sanctions"). Non-US companies have been gradually increasing their new business and investment in Iran.

It is possible that the Trump Administration could reject all or some of the terms of the JCPOA and choose to reimpose some of the suspended sanctions, or the US Congress could enact additional sanctions on Iran. Either action would be viewed by Iran and the other parties to the agreement as a violation of the JCPOA. It seems unlikely that the EU, Russia or China would agree to any US request to renegotiate the JCPOA or to reimpose sanctions on Iran.

If the US reimposes sanctions, the Iranian government may be willing to continue with their nuclear-related commitments in exchange solely for continued EU sanctions relief, considering that the practical impact of US sanctions relief has been limited. On the other hand, if Iran rejects the JCPOA and accelerates its nuclear program, the world could once again see tensions escalate towards potential armed conflict.

Cuba – Over the last two years, the Obama Administration has made numerous gradual amendments to the US sanctions regulations on Cuba. This has opened up opportunities for greater travel and cargo service between the US and Cuba, exports from the US of certain categories of goods, and US participation in the development of Cuban infrastructure, agriculture, and telecommunications. Last month the White House made clear these changes were intended to “make our opening to Cuba irreversible”.

However, all of these changes were made by executive action, without the active support of Congress, and so the next President could immediately unwind them and put all of the sanctions back in place. President-elect Trump has signaled that he intends to “renegotiate” with the Cuban government. It seems that further relaxation of the sanctions will come slowly, if at all, and we will be watching for any indication that some of the sanctions could be reimposed next year.

Russia and Ukraine – President-elect Trump has expressed skepticism over the current US sanctions related to the situation in and around Ukraine and the underlying policies. These sanctions include a broad embargo of the Russian-occupied territory of Crimea, capital markets and other targeted sanctions on the Russian oil and gas, banking and defense sectors, and targeted sanctions on numerous Russian companies and individuals.

With a weakened US commitment to the sanctions, we might see the US sanctions start to fall away in 2017. For example, they might be traded away in exchange for agreement with Russia on other issues. If this occurs, the voices within the EU against the continuation of sanctions may gain the upper hand, and we could also see some or all of the EU sanctions lifted.

Export controls

To date, there has been no indication how the Trump Administration will view export controls, many of which are subject to multilateral agreements. The Trump campaign website suggests that simplifying and reducing regulation will be a focus of the new Administration, but this may not apply as directly to regulations such as export controls that are primarily intended to protect US national security interests. We will be watching to see whether the current level of funding and support for the export control agencies can be expected to continue.

While President Obama's Export Control Reform initiative (ECR) has made significant progress toward accomplishing the goal of achieving the "Four Singles" – a single control list, single licensing agency, single enforcement coordination agency, and single government IT system – the process is incomplete. The most significant progress from the perspective of exporters has been: (1) the review and update of the US Munitions List (USML) and the Commerce Control List (CCL); (2) the transfer of jurisdiction from the USML to the CCL of a broad range of less sensitive defense articles, such as parts and components; and (3) reducing the differences in the definitions of key terms in the two main sets of regulations, the ITAR and EAR.

The overall process, however, remains incomplete and further progress under the next Administration is in question given the close association of ECR with President Obama, a potential leadership gap within the agencies due to retirements and replacement of key political appointees driving ECR, and whether this initiative will be a priority of the next Administration. That being said, such significant investments have been made in ECR and momentum created that completing the less controversial portions of ECR seems likely. In sum, we may see further regulatory reforms next year, but it is unlikely that Congress will enact implementing legislation required to combine US export control agencies and lists.

Regarding defense manufacturing and exports, the Trump campaign website suggests that the new Administration will seek to enact legislation to expand all of the branches of the US military, to expand the US missile defense system and to expand US cyber warfare and defense capabilities. This implies an emphasis on growing the US defense industrial base.

Other trade and investment controls

‎Anti-corruption – it is difficult to say whether the Trump Administration will continue the aggressive enforcement of the Foreign Corrupt Practices Act (FCPA) against non-US and US companies found to have engaged in bribery or corruption. In a 2012 CNBC interview Trump stated that the FCPA is a “horrible law and it should be changed.” Relevant factors include president-elect Trump's stated focus on domestic (US) political corruption, on reducing regulations impacting US companies, and avoiding an interventionist foreign policy. It is possible FCPA enforcement could be de-prioritized in favor of national security, anti-terrorism and a greater focus on domestic corruption.

Anti-money laundering (AML) – much of the AML regulatory system built up by the last several presidential administrations is focused on countering the financing of terrorism. While little specifics can be gleaned from candidate Trump's public statements thus far, with the overall focus on anti-terrorism we can assume that AML compliance and enforcement will remain a priority, both for financial institutions and companies involved in cross-border payments and transactions.

Foreign investment review/ CFIUS – we anticipate that the Trump Administration will be very focused on reviewing ‎foreign investments into the United States. The Trump campaign has emphasized national security issues and on the perceived harm to the US economy of the policies of other countries and has had an unfortunate tendency to espouse protectionist policies. The range of transactions scrutinized by the US Committee on Foreign Investment in the United States (CFIUS) may continue to expand. Unfortunately, as with the risk of a tariff-based "trade war", any significant tightening of the US foreign investment review process could trigger increased restrictions on US companies investing in other countries.

BIS to Use Single License Type Code for EEI Export Filings Starting on October 1, 2016

2016-06-10T08:49:00.001-04:00

U.S. exporters and freight forwarders should be aware that on October 1, 2016, the Department of Commerce's Bureau of Industry and Security (BIS) will remove License Type code C32, No License Required (NLR), from the list of "License Types" for purposes of filing Electronic Export Information (EEI) in the in the Automated Export System (AES).

As a result, License Type code C33 will be the only License Type in AES designating an NLR shipment from the U.S.

This change is being made as a result of requests from industry to simplify the NLR reporting in AES by using only a single NLR License Type Code.

NLR is the export authorization reported in EEI filings for items classified as EAR99 or items on the Commerce Control List that do not require a license for the destination.

However, exports of an EAR99 item to a country subject to anti-terrorism controls or comprehensive sanctions (AT Controls), a restricted end-user (i.e., a party on the BIS Entity List), or in support of a prohibited end-use may require a BIS export license and would not be eligible to be exported NLR.

Changes to License Type C32 will be accepted in AES for 180 days after the effective date (i.e., until March 30, 2017). In the meantime, for items that have a reason for control other than or in addition to Anti-Terrorism (AT), License Type Code C33 should be used as the License Type in the EEI filing.

A complete list of all of the AES License Type codes and reporting instructions for these types can be found at http://www.cbp.gov/document/guidance/aestir-appendix-f-license-and-license-exemption-type-codes.

DDTC Implements Policy Change on Exports of Certain ITAR-Controlled Items to Vietnam

2016-05-23T16:44:00.001-04:00

During President Obama's trip to Vietnam today, the U.S. announced that it will fully lift the long-standing ban on the sale or transfer of lethal weapons to Vietnam that is currently contained in section 126.1(l) of the ITAR.

As a result, the State Department's Directorate of Defense Trade Controls today published the following notice on its website regarding the implementation of this policy changes:

Industry Notice: Change in Policy on Exports of Munitions to Vietnam (05.23.16)

Pursuant to a decision made by the Secretary of State and effective immediately, the Department of State's policy prohibiting the sale or transfer of lethal weapons to Vietnam, including restrictions on exports to and imports from Vietnam for arms and related materiel, has been terminated. Consequently, in accordance with the Arms Export Control Act, the Directorate of Defense Trade Controls (DDTC) will review on case-by-case basis applications for licenses to export or temporarily import defense articles and defense services to or from Vietnam under the International Traffic in Arms Regulations (ITAR). DDTC will soon publish a rule in the Federal Register to implement a conforming change to ITAR §126.1.

DDTC maintains an unofficial list of country policies and embargoes on its website, which includes a disclaimer that the information is not complete and that the latest version of the ITAR should be reviewed to determine the current list of ITAR proscribed countries and other country-specific restrictions.

The US Narrows its Remaining Financial Sanctions on Myanmar (Burma)

2016-05-18T16:56:00.000-04:00

Effective today, the US Office of Foreign Assets Control (“OFAC”) has narrowed the remaining US sanctions restricting trade and investment in Myanmar by US companies, US individuals and other persons located in the US (“US persons”). Some significant US sanctions remain on Myanmar, to which the US government continues to refer, for policy reasons, as “Burma”.

These changes may make it easier, going forward, for US companies to find a non-sanctioned bank in Myanmar to support trade or business in Myanmar, and may reduce the number of US investors that must file lengthy “responsible investor” reports with the US State Department. With these changes, the US government intends to recognize Myanmar’s transition to a democratically-elected government, and signal its “strong support for this political and economic progress”.

This is the first significant relaxation of the remaining US sanctions on Myanmar since February 2013. The US has for several years been alone in maintaining substantial sanctions on Myanmar. The EU suspended in 2012 and permanently lifted in 2013 essentially all of its sanctions, other than an arms embargo and export controls on certain sensitive items.

Exports of non-export controlled items
US sanctions and export controls generally do not restrict the export of goods and technology that are not export-controlled (meaning they are classified "EAR99" under US export controls), so long as no prohibited end-use or prohibited end-user is involved. US persons generally cannot engage in a transaction involving any person on the primary US list of sanctioned persons, the US Specially Designated Nationals List (“SDN List”), or any entity in which they hold a 50% or greater ownership interest.

Lifting of most banking sector sanctions
OFAC has noted, in announcing today’s changes, that most transactions are no longer prohibited with the Myanmar banks that were, prior to yesterday, on the SDN List:
- Transactions with Asia Green Development Bank and Ayeyarwady Bank have been generally authorized by general license since February 2013. These banks remain on the SDN List, so any of their assets “blocked” (frozen) by US persons must remain blocked.
- Innwa Bank and Myawaddy Bank were added today to this general license, so all prospective transactions with these banks are now authorized, though their previously blocked assets must remain blocked.
- The same was true until yesterday for Myanma Economic Bank and Myanma Investment and Commercial Bank. They were removed from the SDN List yesterday, so transactions with these banks are no longer prohibited.

Remaining sanctioned persons
Yesterday OFAC removed several state-owned banks and companies from the SDN List. However, several of the largest companies and most prominent businessmen in Myanmar remain on the SDN List. US persons are generally prohibited from dealing with such persons and entities in which they hold a 50% or greater ownership interest, and must “block” (freeze) their assets. Flagging the importance of these remaining listings, several more of these entities were added to the SDN List yesterday.

Many of the sanctioned persons have interests in a number of other companies through complex corporate structures, and in several sectors of the Myanmar economy it can be a challenge to find suitable investment targets or business partners that are verifiably free of direct or indirect SDN ownership. While today’s easing of the sanctions may be helpful, it will not greatly reduce this due diligence and compliance burden for US companies considering an investment.

Other remaining sanctions
US persons remain prohibited from making any “new investment” in Myanmar involving the Ministry of Defense, other Myanmar armed groups or their majority-owned subsidiaries, or involving any of person remaining on the SDN list which still includes four Myanmar banks as noted above. It is also generally prohibited for US persons to provide financial services to Myanmar if those services would be related to the provision of security services to the Myanmar military or armed groups.

US persons must file a detailed “responsible investor” report with the State Department on new investment aggregating over $500,000. The State Department is currently considering whether to increase this threshold to $5 million. Separately, US persons must report any investments involving Myanma Oil and Gas Enterprise (MOGE). Some US companies have filed lengthy reports in response to this requirement, and most sections of these reports are released to the public. In some other cases the reporting requirement may not be triggered if the investment is made independently by a non-US affiliate or subsidiary.

US law still restricts the import of Myanmar jadeite or rubies to the US, and exports to Myanmar of US-export controlled items.

Burma was designated as a “jurisdiction of primary money laundering concern” in 2004 under Section 311 of the USA PATRIOT Act, and as a result US banks are generally restricted from providing correspondent accounts to Myanmar banks. However, OFAC has confirmed that correspondent accounts may be opened, following the sanctions relief described above, so long as the transactions carried out through those accounts do not violate any of the remaining sanctions.

Other general licenses
A general license is an authorization of certain otherwise-prohibited activity that OFAC releases to the public. Any person may rely on a general license, if their transaction meets the terms and conditions set out in the general license, in most cases without prior notice to or approval by OFAC.

Effective today, OFAC has eliminated the expiration date of a general license it issued five months ago to authorize certain transactions “ordinarily incident to” exports to or from Myanmar that indirectly involve an SDN or other “blocked” person under US sanctions. Several major banks had requested this because such sanctioned persons are apparently indirectly involved in certain port or airport operations in Myanmar. This general license was expanded today to cover certain transactions relating to the movement of goods within Myanmar.

OFAC also issued today a general license that expands on existing authorizations and exemptions to authorize transactions ordinarily incident to routine and necessary expenses of US persons residing in Myanmar. The general license does not authorize employment of a US person by an SDN or other blocked person.

US Customs and Border to Increase De Minimis Value of Duty Free Imports from $200 to $800 on March 10, 2016

2016-03-09T23:58:00.002-05:00

By Doug Jacobson, Jacobson Burton Kelley PLLC

As as result of a provision contained in the recently enacted Trade Facilitation and Trade Enforcement Act of 2015 (Public Law No: 114-125), US Customs and Border Protection (CBP) will increase the low value (de minimis) exemption from duties and taxes on goods imported by a single person on one day into the US from $200 to $800.

The low value exemption can be claimed on goods imported on commercial goods as well as goods purchased by individuals from parties outside the US.

This is the first increase in the low value exemption since 1993 and makes the duty exemption identical to that which can be claimed by travelers entering the US.

These low value entries, which are entered as an informal customs entry, are often referred to as "section 321" shipments, since they are authorized under section 321(a)(2)(C) of the Tariff Act of 1930, as amended (19 U.S.C. § 1321(a)(2)(C)).

CBP has stated that it will publish an Interim Final Rule amending the appropriate regulations (e.g, 19 CFR § 10.151) and soliciting comments from interested parties. However, beginning on March 10, 2016, shipments valued at $800 or less will be eligible for release under the same processes and with the same restrictions as currently apply for de minimis shipments of $200 or less.

CBP has indicated that it retains the right to require a formal entry on any shipment where additional information, bonding or protection is required. In addition, CBP stated the low value treatment can be denied "if used for the purpose of avoiding compliance with any pertinent law or regulation."

China's ZTE Added to BIS Entity List: The Impact on ZTE, US and Non-US Companies

2016-03-08T01:40:00.001-05:00

By Doug Jacobson, Jacobson Burton Kelley PLLC, Washington, DC

The Commerce Department's Bureau of Industry and Security today published a notice in the Federal Register (reprinted below) announcing that China's ZTE Corporation (ZTE or ZTEC), and three of its affiliates, have been added to the Entity List.

Founded in 1985 and headquartered in Shenzhen China, ZTE, whose shares are traded on the Shenzhen, China and Hong Kong stock exchanges, is China's second largest telecommunications company. ZTE is also the world's seventh largest producer of smartphones and has operations in the US and more than 160 other countries. ZTE has annual revenues of approximately $15 billion per year.

ZTE is being added to the BIS Entity List for allegedly reexporting US origin products to sanctioned countries, including Iran, and for planning "a scheme to establish, control, and use a series of “detached” (i.e., shell) companies to evade US export controls.

This action, which comes after a four-year investigation of ZTE by BIS's Office of Export Enforcement and the Federal Bureau of Investigation will have a major impact on ZTE and US and non-US companies.

BIS Entity List

The BIS Entity List, found at Part 744 of the US Export Administration Regulations (EAR), includes non-US businesses, research institutions, government and private organizations, individuals, and other types of legal persons, that are subject to specific license requirements for the export, reexport and/or transfer (in-country) of specified items. Parties are added to the Entity List by BIS when there is an increased risk of diversion of US-origin items or where the parties engaged in activities contrary to U.S. national security and/or foreign policy interests. BIS has been using the BIS more frequently in the past few years.

Specific entries on the Entity List identify the items that are subject to a license requirement and BIS's licensing policy regarding any license applications that are submitted.

Parties Added to Entity List and Licensing Requirements

As a result of today's BIS action, which takes effect immediately, BIS will impose a license requirement for all persons and companies, wherever located, to export, reexport or transfer to "all items subject to the EAR" to the following four companies:

1. Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)

Address: ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, China;

2. Beijing 8 Star International Co.

Address: Unit 601, 6thFloor, Tower 1, Prosper Center, No. 5, Guanghua Road, Chaoyang District, Beijing, China;

2. ZTE Kangxun Telecommunications Ltd.

Address: 2/3 Floor, Suite A, Zte Communication Mansion Keji (S) Road, Hi-New Shenzhen, 518057 China

4. ZTE Parsian.

Address No. 100, Africa Ave., Mirdamad Entersection [sic], Tehran, Iran.

The license review policy for all four entities is "presumption of denial", meaning that is not likely that BIS will approve any license applications to these four parties.

Because the license requirement for all four companies applies to all "items subject to the EAR", as defined in section 734.3 of the EAR, a license will be required to export, reexport or transfer all US-origin goods, software or technology, wherever located, whether classified as EAR99 or listed on the Commerce Control list (i.e., identified with an ECCN number, such as ECCN 3A001).

This will also have an impact on non-US companies because the license requirement will also apply to any item produced outside the US and sold to the four ZTE entities that incorporates US-origin parts, components, software if the total value of the controlled US content exceeds the de minimis level in section 734.4 of the EAR (e.g., 25% for reexports to China).

Impact on ZTE and US and non-US companies

This action will have a major impact on ZTE and many US companies as it has been estimated that ZTE sources more than 40% of its parts and components from US suppliers. As a result of ZTE's size and international footprint, US and non-US companies should immediately screen their customer databases to make sure that ZTE is flagged as a party subject to Entity List restrictions and that any shipments be stopped. While the BIS notice contains a "savings clause" for certain items that were already en route aboard a carrier to ZTE, there is no "grandfathering" of items that had been ordered but have not been shipped.

Unlike parties included on OFAC's SDN List, the addition of ZTE to the Entity List does not prohibit US or non-US persons from engaging in financial transactions with ZTE or require that any of the listed companies' assets be frozen. Rather, BIS is restricting the export, reexport or transfer of any goods, technology, or software to these ZTE companies. Also, unlike OFAC, BIS does not control the export of services to a listed party. However, the term “technology” is broadly defined in the EAR to include certain types of information, including specific information necessary for operation, maintenance, repair, overhaul and refurbishing of items subject to the EAR.

In addition, BIS does not have a 50% rule that applies to companies owned by the four ZTE companies listed. BIS has stated that the licensing requirements imposed on a listed entity by virtue of its being listed do not per se apply to its subsidiaries, sister companies, or other legally distinct affiliates that are not listed on the Entity List. However, BIS has also stated that if affiliates of the listed company act as an agent, a front, or a shell company for the listed entity in order to facilitate transactions that would not otherwise be permissible with the listed entity, then the company is likely violating General Prohibition 10 and other provisions of the EAR. Therefore, exporters are encouraged to take extra steps in an effort to make sure that items are not ultimately destined for the listed entities.

Reasons for Adding ZTE to Entity List

The Federal Register notice specifies that ZTE was added to the BIS Entity List because it reexported controlled US origin items to Iran in violation of US law. In addition, BIS noted that the company created an internal document entitled: “Proposal for Import and Export Control Risk Avoidance” describing how ZTE planned and organized a scheme to use a series of shell companies to reexport controlled items to Iran in violation of US export control laws.

In an unusual move, BIS published on its website documents obtained during its investigation of ZTE to support its findings. These documents, which are published below, are very thorough and read like a playbook on how to circumvent US export controls.

“Report Regarding Comprehensive Reorganization and the Standardization of the Company Export Control Related Matters”

“Proposal for Import and Export Control Risk Avoidance”

These documents, which were posted by BIS in their original Mandarin and translated English versions, provide detailed information on ZTE's understanding of how US export control laws applied to them and the repercussions if they were unable to continue with their work in the US sanctions countries, including Iran, Sudan, North Korea, Cuba and Syria. The documents even included a summary of the enforcement actions that could be taken against the company, including listing the US supply chain, and provided examples of prior export control issues the company had faced, and recent enforcement cases brought against other Chines companies. The documents show that ZTE tried to attract members to its export control team by paying a bonus.

For example, the "Proposal for Import and Export Control Risk Avoidance" describes how ZTE planned to establish and use "detached" (i.e., shell) companies and other measures to avoid "risks of import and export control". The document suggests that the company use the Jebel Ali Free Zone in Dubai as the "primary choice" to locate one of the companies. The document also describes ways to properly handle and pack the goods to minimize the risks to ZTE.

Repercussions

Because ZTE is a major telecommunications company the addition of ZTE to the Entity List has already had ripple effects. ZTE's stock has been suspended from trading on the Hong Kong and Shenzhen Stock Exchanges and China's Ministry of Foreign Affairs denounced the BIS actions in the following statement:

"The Chinese side is firmly opposed to the US using domestic laws to place sanctions on Chinese companies. The Chinese side urges the US side to call off the wrong action lest it should jeopardize economic cooperation and relationship between China and the US."

Representative Eliot L. Engel (D-NY), Ranking Member of the House Committee on Foreign Affairs, called for further restrictions on ZTE in the following statement:

"Today's action to impose a virtual embargo on exports to China's number-two telecom company, ZTE, reveals publicly for the first time that this company has systematically violated U.S. sanctions on Iran, North Korea, and other proscribed countries. ZTE bought U.S. telecom equipment and illegally incorporated it into communications systems for the Iranian and North Korean security, military, and intelligence agencies. I commend the federal agents at the Commerce Department, FBI, and Homeland Security Department for carrying out this four-year investigation. Additional criminal charges are likely to be brought. I believe that the U.S. sanctions should be extended to cut off all ZTE commercial activity and investment in the United States.”

It has been widely reported that BIS and the FBI commenced an investigation on ZTE's compliance with US export control laws in 2012. It has also been reported that senior ZTE executives have not traveled to the US over the past few years for fear of being arrested.

Given the activities described in the ZTE documents and in the BIS Entity List notice, it appears likely that ZTE will remain in the crosshairs of the US Government for some time to come.

BIS ZTE Federal Register Notice and Related Documents

The Impact of the Third Round of Regulatory Changes to the US Embargo on Cuba: Licenses Now Available for Products to Support Construction Projects in Cuba

2016-01-31T21:13:00.000-05:00

By Doug Jacobson, Glen Kelley and Michael Burton, Jacobson Burton Kelley, PLLC

On January 27, 2016, the Office of Foreign Assets Control (“OFAC”) and the Bureau of Industry and Security (“BIS”) published a third round of coordinated amendments to the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR). The Federal Register notices published by the agencies can be found here (OFAC) and here (BIS).

These regulatory changes are intended to further implement President Obama’s policy of seeking to thaw the longtime stalemate in political and economic relations between the US and Cuba. However, because most aspects of the US travel, trade and financial embargo of Cuba is governed by US law, the Obama Administration remains limited in the regulatory "tweaks" to the embargo, absent further action by the US Congress.

The recent changes, described below, build on the amendments to the U.S. regulations implementing the Cuban embargo that were made in 2015, including:

The January 2015 amendments to the CACR and EAR regulations expanding the scope of the 12 authorized categories of travel to Cuba and authorizing certain trade and financial transactions between the US and Cuba;

The July 2015 removal by the State Department of Cuba from the list of State Sponsors of Terrorism and the corresponding increase by in the de minimis threshold for reexports to Cuba of "items subject to the EAR" from 10% to 25%; and

The September 21, 2015 amendments to the CACR and EAR authorizing certain business activities and physical presence by US companies in Cuba, expanding the scope of EAR License Exceptions SCP (Support for the Cuban People) and AVS (Aircraft, Vessels and Spacecraft).

Our summary of the impact of these prior regulatory changes can be found here.

Major Changes to the US Embargo on Cuba Resulting from the January 27, 2016 BIS and OFAC Amendments

The OFAC and BIS regulations issued on January 27, 2016 made a number of changes to the restrictions on traveling to and doing business in Cuba. While some of the changes have a very limited scope some of the changes are more much more significant and could open up a wide range of new business with Cuba, assuming a counterparty in Cuba can be found.

The following is an overview of the major changes made by OFAC and BIS to the regulations implementing the US embargo on Cuba.

A. Exports and Reexports Involving Cuban Infrastructure and Other Projects Now Subject to Case-By-Case Licensing Policy

The most significant change made by the January 27, 2016 amendments was the amendment by BIS of section 746.2 of the EAR in order to establish a case-by-case review policy for exports and reexports of "items" for use in construction of various infrastructure products in Cuba, such as facilities for treating public water supplies, facilities for supplying electricity or other energy to the Cuban people, public transportation projects, food processing, public health and sanitation, sports and recreation facilities, and other infrastructure that directly benefits the Cuban people. This is particularly important given Cuba's infrastructure needs. The fact that BIS may issue licenses for transactions with Cuban state-owned enterprises is significant given the Cuban Government's pervasive role in the Cuban economy.

This new case-by-case licensing policy also now authorizes exports and reexports to wholesalers and retailers of items for domestic consumption by the Cuban people. While the term "item" is not defined, this should allow a wide range of consumer and other products to be exported from the US to Cuba as long as a BIS license is obtained in advance.

It is important to note that these changes only authorize the export of goods and software associated with these infrastructure projects. The provision of services by US companies and persons involving such projects in Cuba, such as engineering and architectural services, remain prohibited by OFAC.

In addition, a general policy of denial continues to apply to exports and reexports of items from the US for use by Cuban state-owned enterprises, the Cuban military, agencies, or other organizations of the Cuban government that primarily generate revenue for the state, including those engaged in tourism and those engaged in the extraction or production of minerals or other raw materials.

B. Exports and Reexports Now Subject to General Policy of License Approval

BIS also amended section 746.2 of the EAR to add a general policy of approval for certain exports and reexports previously subject to case-by-case review and a policy of case-by-case review for exports and reexports of items not eligible for license exception to meet the needs of the Cuban people.

Specifically, the January 27, 2016 rule revises the licensing policy from possible approval on a case-by- case basis to a general policy of approval for exports and reexports of the following items to Cuba:

Telecommunications-related items that would improve communications to, from, and among the Cuban people (to the extent not eligible for license exception SCP);

Parts and components necessary to ensure the safety of civil aviation and the safe operation of commercial aircraft engaged in international air travel, including the export or reexport of such aircraft leased to state-owned enterprises (this includes cargo aircraft); and

Agricultural products that are outside the scope of “agricultural commodities” as defined in Part 772 of the EAR, such as insecticides, pesticides and herbicides, as well as agricultural commodities not eligible for License Exception Agricultural Commodities (AGR).

C. Changes Made to Financing of Certain Export Transactions Involving Cuba

OFAC's amendments to the CACR remove the long-standing cash in advance payment requirement and therefore US banks are now authorized to finance authorized exports and reexports to Cuba, except for agricultural commodities. As a result, US banks are now authorized to issue, advise, negotiate, pay or confirm letters of credit, including those issued by a Cuban bank.

OFAC remains prohibited by US law to authorize payment and financing terms for the export and reexport to Cuba of agricultural commodities and agricultural items, which remain subject to the cash in advance payment terms.

D. Limited Expansion of Certain Authorized Travel Activities to Cuba

OFAC made a number of "tweaks" to the existing 12 categories of authorized travel to Cuba, including changes made to eliminate some of the unintended consequences resulting from the September 21, 2015 amendments.

Temporary Sojourn in Cuba by Aircraft and Vessel Crew Members. OFAC has authorized by general license personnel, such as crew members, who are operating vessels or aircraft to engage in travel-related and other transactions in Cuba in order to facilitate the temporary sojourn of aircraft and vessels authorized by BIS in connection with the transportation of OFAC authorized travelers between the US and Cuba.

Movies and Television Programs. OFAC has authorized travel-related and other transactions directly incident to professional media or artistic productions for exportation, importation, or transmission, including the filming or production of media programs (such as movies and television programs); music recordings; and the creation of artworks in Cuba by persons that are regularly employed in or have demonstrated professional experience in a field relevant to such professional media or artistic productions.

Organizing Professional meetings in Cuba. OFAC authorized by general license travel-related and other transactions to organize professional meetings or conferences in Cuba. The existing general license authorizes only attendance at such meetings or conferences.

Scope of Humanitarian Projects Expanded. OFAC expanded the list of authorized humanitarian projects to include disaster preparedness and response.

E. Air Carrier Services to Cuba

In anticipation of the operation of commercial flights to Cuba later this year, OFAC authorized by general license the entry into blocked space, code-sharing, and leasing arrangements to facilitate the provision of air carrier services including the entry into such arrangements with Cuban nationals.

Conclusion

While some of the changes to US licensing policy on transactions with Cuba that went into effect on January 27, 2016 are significant in scope, many challenges remain in doing "normal" business with Cuba. Despite early enthusiasm many US companies have been frustrated by the extremely limited business possibilities in Cuba given that much of Cuba's economy is owned and controlled by the Cuban Government and individuals in Cuba face significant obstacles on engaging in business transactions directly with US companies, let alone having access to US financing or other authorized credit facilities.

A View From the Trenches: The Practical Impact of the Iran JCPOA on US and Non-US Companies

2016-01-22T20:14:00.004-05:00

By Doug Jacobson, Michael Burton and Glen Kelley, Jacobson Burton Kelley PLLC

We have spent the last few days on the ground in Europe and in the US advising clients on the impact of the January 16, 2016 Implementation Day sanctions relief under the Joint Comprehensive Plan of Action (JCPOA) with Iran.

Now that Executive Order 13716 and the regulatory changes to the US Treasury Department's Office of Foreign Assets Control's (OFAC) Iranian Transactions and Sanctions Regulations have been published in the Federal Register, and we have had the benefit of initial discussions with the regulators and our clients, we wanted to provide you a summary of the lessons learned and practical impact of these changes on US and non-US persons and companies.

As discussed below, the best way to describe this week's actions in terms of sanctions relief is that the calendar has been rolled back to mid-2010 and most dealing with Iran that were prohibited then involving US financial transactions and US products are still prohibited today.

1. Despite Various Reports Most US Primary Sanctions on Iran Remain and Changes Were Limited to Application of Secondary Sanctions Affecting Non-US Companies and Non-US Financial Institutions

During the past few days we have seen the following headlines in major newspapers in the US and around the world:

International Sanctions on Iran Canceled

US, Europe Remove Sanctions as Iran Nuclear Deal Takes Effect

US Lifts Sanctions on Iran

These headlines are inaccurate and misleading, particularly as they relate to most aspects of the US sanctions on Iran.

Despite the various media reports to the contrary nearly all US sanctions and export controls on Iran that have been effect since the mid-1980s remain in place. The only sanctions relief offered by the US government was to scale back the "secondary" (or extraterritorial) sanctions on non-US persons, companies and banks that were greatly expanded since 2012. However, most of the other aspects of the long-standing US sanctions program on Iran (referred to as primary sanctions) remains in place. In addition, the export and reexport controls on Iran administered by the Commerce Department's Bureau of Industry and Security (BIS) have not been modified in any way.

We have confirmed that most reports suggesting specific non-US companies were rushing back into Iran or had already signed contracts with the Government of Iran (GOI) are not accurate. In addition, we are already seeing evidence that many US persons and companies have been misled into overestimating the scope of sanctions relief offered by the US under the JCPOA.

Given the extensive restrictions remaining on the export and reexport of US product to Iran, the significant financial restrictions remaining in place, and the potential risks of non-compliance, even non-US companies should proceed cautiously and only after identifying all remaining prohibitions that are relevant.

2. Scope of Sanctions and Export Controls Remaining in Effect on US Persons, US-Based Companies and US Origin Goods, Software and Technology

The following is a summary of the current restrictions on US persons, US-based companies and US goods, software and technology.

As has been the case since the Clinton Administration, US persons, meaning US citizens, green card holders (permanent resident aliens), entities formed under US law and any person located within the United States, remain broadly prohibited from involvement in activity involving Iran, the GOI or persons on any US list of sanctioned or prohibited parties (i.e, OFAC's SDN List and BIS Entity List).

US-origin goods, software and technology cannot be exported or reexported to Iran in most cases. General and specific licenses (authorizations) can be used for humanitarian items to Iran, such as US origin agricultural products, medical devices and medicines.

Non-US subsidiaries that are owned or controlled by a US individual or company are now authorized by OFAC General License H to engage in certain activities with Iran. However several significant restrictions remain, and any business with Iran could create direct legal risk for the US investor. See sections 4 and 5 below.

It remains generally prohibited for US banks to process payments relating to Iran, the GOI, Iranian banks or sanctioned persons, including US dollar payments related to authorized activities by non-US entities owned or controlled by a US person or related to activities no longer covered by US secondary sanctions. While several hundred Iranian banks and companies were removed from OFAC's SDN List, more than 200 Iranian and Iran-related parties remain on the list and remain subject to secondary sanctions.

3. Significant Restrictions Remain for Non-US Companies in Dealing With Iran

While most of the US secondary (extraterritorial) sanctions have been lifted on Iran (see section 7 below), a number of US sanctions applicable to non-US persons remain (see section 8 below).

Not all EU sanctions on Iran have been lifted and the EU continues to imposed export controls on many products to Iran. In addition, many countries continue to prohibit activities relating to Iran, or require prior authorization from the appropriate regulator. As of this writing, Canada has not made any changes to its very broad sanctions program on Iran.

4. Impact on Non-US Companies Owned or Controlled by US Persons

General License H issued on January 16, 2016 authorizes entities formed under the law of a non-US country that are owned or controlled by a US individual or entity to engage in transactions involving Iran, subject to several limitations. Note that this does not apply to offices or branches outside the United States that are part of an entity formed under US law. See also the helpful OFAC guidance in FAQs K1 – K13.

Since October 2012, such non-US entities had been generally prohibited from dealing with Iran under the OFAC regulations (31 C.F.R. § 560.215), which provides that:

"Except as otherwise authorized pursuant to this part, an entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States."

Thus, non-US subsidiaries owned or controlled by a US company were treated as if they were US persons, and their actions in violation of the Iran sanctions regulations could be imputed to their parent companies. General License H effectively rolls the regulatory clock back to before October 2012, providing that:

"Except as provided in paragraph (c), an entity owned or controlled by a United States person and established or maintained outside the United States (a “U.S.-owned or -controlled foreign entity”) is authorized to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by 31 C.F.R. § 560.215."

This may create a meaningful opportunity for some non-US subsidiaries of US companies to (re)enter the Iranian market. This will depend on case-by-case analysis of a number of factors.

Covered non-US entities must continue to comply, as if they were US persons, with certain US sanctions relating to Iran:

- general prohibitions on exports from the United States (31 C.F.R. § 560.204), reexports from another country (31 C.F.R. § 560.205), transfers of funds through US banks or broker-dealers, and transactions with persons that remain on the SDN List or Foreign Sanctions Evaders List maintained by OFAC;

- the end-use restrictions under Part 744 of the Export Administration Regulations (EAR) or prohibitions on dealing with denied parties under Parts 764 or 766 of the EAR; and

- other OFAC sanctions as they relate to Iran, the GOI, Iranian banks and other persons targeted under Iran sanctions, including Executive Orders 12938 and 13382 (relating to weapons of mass destruction (WMD) and missiles), 13224 (international terrorism), 13572 and 13582 (Syria); 13611 (Yemen), 13553 and 13606, and sections 2 and 3 of Executive Order 13628 (human rights abuses in Iran).

In addition, covered non-US entities cannot engage in transactions that must go through the Iranian civil nuclear procurement channel established by the JCPOA that have not been approved through that channel, or transactions with any “military, paramilitary, intelligence, or law enforcement entity” of the GOI, or any official, agent, or affiliate thereof.

5. Rules for US Parent Companies With Non-US Subsidiaries That Deal With Iran

To OFAC and the State Department's credit, General License H addresses certain “facilitation” issues inherent in the relationship between a US parent company and a non-US subsidiary. This occurred after these issues were brought to the attention of the senior OFAC and State Department staff involved in implementing the JCPOA

A. Operating policies and procedures

General License H authorizes a US parent to establish or alter its operating policies and procedures, or those of the non-US entity it owns or controls, to the extent necessary to allow the non-US entity to engage in authorized transactions involving Iran. Absent this authorization, such changes in policies or procedures would fall expressly within the definition of prohibited “facilitation” in the OFAC regulations (31 C.F.R. § 560.417). The OFAC guidance clarifies that:

- US persons, including senior management of a US parent company or its owned or controlled non-US entities, can be involved in the initial determination whether to engage in activities with Iran authorized by General License H.

- US person board members, senior management, and employees of either a US parent company or an owned or controlled non-US entity can be involved in the establishment or alteration of operating policies and procedures of the parent or non-US entity, to the extent necessary to allow the non-US entity to engage in transactions authorized by General License H.

- US persons can act as outside legal counsel or consultants to draft, alter, advise, or consult on such operating policies and procedures.

General License H does not authorize US person involvement in ongoing Iran-related operations or decision-making of its owned or controlled non-US entity after the determination to enter Iran has been made and policies / procedures are established. To be clear, US persons may not be involved in the Iran-related day-to-day operations of a US-owned or controlled non-US entity, including by brokering, referring, approving, financing, facilitating, or guaranteeing any Iran-related transaction by the non-US entity.

B. Automated global business support systems

The US parent may make available to an owned or controlled non-US subsidiary any “automated and globally integrated” computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to transactions authorized by General License H.

The OFAC guidance explains that the term “automated” refers to any of the aforementioned systems that operate “passively and without human intervention to facilitate the flow of data between and among the United States person and its owned or controlled foreign entities.” It goes on to explain that “globally integrated” includes those systems that are “available to, and in general use by, the United States person’s global organization, including the United States person and its owned or controlled foreign entities.”

General License H expressly excludes from its authorization the use of business systems in connection with any transfer of funds to, from, or through a United States bank or broker-dealer.

All other prohibitions set forth in the OFAC regulations – including the prohibition against facilitation set forth in 31 C.F.R. § 560.208 – continue to apply to US parent companies, except as otherwise authorized.

6. Practical Impact of US Sanctions Changes on Trade with Iran

Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions. Very broad US primary sanctions remain in place unchanged, except for two specific changes made pursuant to the JCPOA. These two changes are a new general license for imports to the US of Iranian carpets and foodstuffs, and an expanded specific licensing program for exports to Iran of aircraft and related equipment and services.

Under the aircraft licensing program, US and non-US companies may now apply to OFAC for a specific license (authorization) to export to Iran commercial passenger aircraft for exclusively civil aviation end-use, and spare parts, components and services for such aircraft. This specific licensing program might not result in significant exports for some time, as potential exporters seek clarity on how it will function. Also OFAC could take several months to process license applications, as was the case under the narrower aviation licensing program initiated in January 2014 under the interim agreement with Iran known as the Joint Plan of Action (JPOA).

With the January 16 sanctions relief, we could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List and from secondary sanctions could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).

In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions.

Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions.

We could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).

In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions. And non-US banks may now be able to engage in payments with most (but not all) major Iranian banks.

Many non-US companies considering exports to Iran of items with US content, or to the US of items with Iranian content, are working through the complex provisions of the OFAC regulations and the EAR administered by BIS related to incorporation, de minimis levels, and substantial transformation of such content. These rules remain unchanged, but the new OFAC guidance reconfirms some key points:

Non-US persons remain prohibited from directly or indirectly reexporting to Iran from a third country items originating in the US or containing 10 percent or more by value of US-controlled content (meaning US content classified under an ECCN other than EAR99).

However, the OFAC guidance also confirms that it is not generally prohibited for non-US persons or companies to reexport EAR99 items from a third country to Iran, if no US person is involved, the items have come to rest outside the US, were not procured from the US in order to be sent to Iran, and no prohibited end-uses or end-users are involved.

7. Many US Secondary Sanctions on Iran Have Been Lifted

Non-US persons will no longer be penalized under US secondary sanctions for engaging in the following activities, unless their conduct involves any of the other activities or persons that remain sanctioned (see #8 below):

- investing $20 million or more in the development of the Iranian upstream or downstream oil, gas or petrochemical sectors;

- providing to Iran goods, services, technology, information or support for the development of Iranian petroleum resources or Iranian production of gasoline, diesel or jet fuel;

- providing to Iran gasoline, diesel or jet fuel, or assisting with Iran’s import of such fuel;

- selling, leasing or providing to Iran or the GOI goods, technology or services for Iran’s production of petrochemicals;

- transactions involving crude oil, petroleum or petrochemicals from Iran, or involving the National Iranian Oil Company (NIOC) or its subsidiaries, though certain such sanctions were suspended in January 2014 under the Joint Plan of Action (JPOA);

- providing insurance or reinsurance for NIOC or the National Iranian Tanker Company (such sanctions were suspended under the JPOA);

- assisting GOI acquisition of US bank notes or precious metals, or purchasing or facilitating the issuance of GOI debt;

- entering into a joint venture with the GOI regarding petroleum or uranium resources outside of Iran;

- owning, operating or insuring a vessel transporting crude oil from Iran (except pursuant to the JPOA sanctions suspension) or concealing its transportation of crude, gasoline, diesel or jet fuel from Iran, or transporting to or from Iran goods related to terrorism or WMD;

- selling or supplying to Iran significant goods or services used in the Iranian automotive sector (such sanctions were suspended under the JPOA), or the Iranian energy, shipping, or shipbuilding sectors;

- selling or supplying to or from Iran precious metals (such sanctions were suspended under the JPOA);

- a significant transaction involving Iranian rials, a derivative based on the rial, or funds or accounts outside Iran denominated in the rial; and

- insurance or reinsurance of activities listed above, or paying a claim arising from any such activity prior to Implementation Day if no person on the SDN list is involved.

8. Remaining US Sanctions and Export Controls Applicable to Non-US Persons

As noted below, most US sanctions and export controls relating to Iran remain in place. Many can have direct or indirect application to non-US persons seeking to re-engage in business with Iran:

A. Secondary sanctions can still be imposed for any of the following activities.

- Materially assisting, sponsoring or supporting any of the more than 200 Iranian persons remaining on the SDN list, or for a financial institution, engaging in a significant transaction involving any such person. These sanctions are broad - for example, the Iranian Revolutionary Guard Corps (IRGC) and its affiliates, which play an important role in several sectors of the Iranian economy, are still covered on the SDN list.

- For a non-US bank, (i) a significant transaction involving any person on the SDN list for reasons related to Iran’s proliferation of WMD or terrorism, or (ii) any transaction involving WMD, terrorism or money laundering activities by the GOI.

- The provision of financial messaging services (eg SWIFT) to Iranian banks that remain on the SDN List, which include Ansar Bank, Bank Saderat, Mehr Bank

- Sales of goods or services to Iran or other transactions subject to the Iranian nuclear procurement channel established by the JCPOA, without approval under that channel.

- Selling or supplying to or from Iran graphite, raw or semi-finished metals, coal or software for industrial processes, if the transaction supports the military or missile program of Iran.

- Exporting or providing goods, services or technology to Iran or a third country knowing they would contribute to Iranian WMD or advanced conventional weapons capabilities.

- Supplying or operating telecoms equipment, technology or services that could be used to commit human rights abuses or for censorship, surveillance or network disruption.

B. US primary sanctions remain on Iran, meaning US persons are generally prohibited from transactions or dealings involving Iran, the GOI, an Iranian bank, or any person on an OFAC sanctions list. A non-US person could be penalized under the primary sanctions for taking action within the United States or causing another person to do so, in a transaction involving Iran, the GOI or a sanctioned person.

C. US and non-US persons can be added to a US sanctions list if they engage in deceptive transactions for sanctioned persons, support activities related to terrorism, proliferation of WMD or missiles, undermine the peace, security or stability of Yemen or certain other countries, or engage in activities covered by other OFAC sanctions programs.

D. Any US or non-US company listed on a US stock exchange must disclose in its quarterly and annual reports a range of activities that the company or its affiliates engage in involving the GOI (unless authorized by the US), the Iranian energy sector or certain sanctioned persons.

E. US and non-US persons are required to certify, at the time of any US government contracting or US Export-Import Bank financing, that neither it nor any entity it owns or controls engages in certain activities relating to Iran.

F. Public pension and retirement funds may be restricted under US state or local laws from investing in or purchasing goods or services from companies doing business with Iran.

G. In December 2015 Congress modified the US Visa Waiver Program to require individuals in the 38 participating countries to go through a full US visa application process if, since March 2011, they have been in Iran, Iraq, Syria or Sudan for any reason. This could have an impact on executives and other staff that travel between the US and these countries and require these individuals to obtain visas to enter the US for business or personal travel.

9. Next Steps, Snap-Back Risk and Iran Sanctions Enforcement and Compliance Considerations

We expect there will be a great deal of Iran-related interest and activity in the coming weeks as companies, investors and financial institutions assess what they can and cannot do in Iran. In addition, there are already a number of unanswered questions on various aspects of the changes that have been made and we will continue to engage with OFAC, BIS and the State Department to seek clarification on these questions.

US and non-US companies that decide to engage in authorized business in Iran must also weigh the potential of the so-called "snap-back" or reimposition of sanctions on Iran. While the risk of the reimposition of sanctions on Iran if they fail to uphold their end of the JCPOA is unclear, OFAC has said that if sanctions are reimposed there will be no “grandfather clause” for pending transactions. In addition, the US has also made clear that any transactions conducted after the snap-back occurs are sanctionable and there is no provision in the JCPOA that protects contracts signed prior to snap-back. In addition, given that there will be a new US president in less than one year, it remains to be seen whether the next Administration will choose to uphold the US commitments made in the JCPOA.

With respect to enforcement, the Treasury Department has previously stressed that it will continue to “vigorously enforce" all US sanctions on Iran that have not been suspended. Given that the US Congress will be closely monitoring the JCPOA and the significant sanctions and export controls that remain, we expect that OFAC, BIS and other US law enforcement agencies will remain vigilant in combating conduct that remains prohibited by US law. We expect that Iran will remain the primary target of US sanctions and export control enforcement.

As a result, US and non US companies must remain vigilant in complying with the existing US primary and secondary sanctions on Iran, particularly given the significant facilitation risks that remain.

BIS Proposes New Export Enforcement Guidelines Drawing on OFAC’s Approach

2015-12-29T18:08:00.002-05:00

By Michael Burton, Glen Kelley and Doug Jacobson, Jacobson Burton Kelley PLLC

On December 28, 2015, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published the long-awaited proposed rule to revise its guidance on administrative enforcement actions under the U.S. Export Administration Regulations (“EAR”) ("BIS Guidelines"). If adopted in final form, the proposed rule would significantly revise BIS's longstanding "Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases" (currently found in Supplement No. 1 to part 766 of the EAR) and would make them substantially similar to the Economic Enforcement Guidelines that have been used by the Treasury Department's Office of Foreign Assets Control (OFAC) since 2009.

Background

BIS's Assistant Secretary of Export Enforcement, David Mills, served in many senior roles at OFAC for many years before being confirmed in his current position in January 2010. In 2013, Assistant Secretary Mills announced that BIS was considering updating the agency's enforcement guidelines for administrative cases to better align them with the guidelines published by OFAC. In 2014 he noted that:

OFAC's Guidelines - premised upon the statutory criteria set forth in IEEPA, the statutory authority pursuant to which both agencies now administer and enforce their respective regulations - uses the transaction value to determine the baseline for assessing a civil penalty. The OFAC Guidelines also provide greater transparency and predictability for the exporting community, an important objective of ECR [Export Control Reform].

Consistent with these goals, the preamble to the proposed rule notes that BIS is proposing to update its penalty guidelines "to make civil penalty determinations more predictable and transparent to the public and aligned with those promulgated by [OFAC]."

Public comments on the proposed changes to the BIS Guidelines are due on February 26, 2016.

Determining the Base Penalty Amount

The proposed BIS Guidelines largely mirror OFAC’s Economic Sanctions Enforcement Guidelines (“OFAC Guidelines”), which have been in force since November 9, 2009.

Like the OFAC Guidelines, the proposed BIS Guidelines would as a first step categorize an enforcement case as “egregious” or “non-egregious.” A different base penalty amount would apply depending on this characterization and whether the case resulted from a valid voluntary self-disclosure. Egregious cases would be those deemed to constitute the “most serious violations” following an analysis of all applicable enforcement factors (discussed below). In making this determination, BIS would accord particular weight to considerations of willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, and harm to the regulatory program objectives (Factors A-C), in light of the individual characteristics of the parties involved.

If BIS intends to impose an administrative penalty, BIS would next make a determination as to how many violations of the EAR had occurred. As noted below, BIS has some discretion and for many commonly recurring fact patterns it may be difficult to predict how many violations BIS will find to have occurred.

Next, BIS would set the “base penalty amount” for each violation based on one of three values -- the applicable statutory maximum ($250,000), the “transaction value,” or the “applicable schedule amount.”

As with the OFAC Guidelines, the concept most critical to the base penalty amount besides “egregiousness” is “transaction value,” a concept that is not precisely defined. The BIS Guidelines provide that transaction value “means the U.S. dollar value of a subject transaction, as demonstrated by commercial invoices, bills of lading, signed Customs declarations, or similar documents. Where the transaction value is not otherwise ascertainable, BIS may consider the market value of the items that were the subject of the transaction and/or the economic benefit derived by the Respondent from the transaction, in determining transaction value. In situations involving a lease of U.S.-origin items, the transaction value will generally be the value of the lease. For purposes of these Guidelines, ‘transaction value’ will not necessarily have the same meaning, nor be applied in the same manner, as that term is used for import valuation purposes at 19 CFR 152.103.” This begs the critical questions: what is the “subject transaction,” and how is it to be valued in a given case?

Again mirroring the OFAC Guidelines, the BIS Guidelines would define the “applicable schedule amount” by reference to a table that lists several different amounts, and provides a range of transaction values corresponding to each of these applicable schedule amounts. For example, the applicable schedule amount is $1,000 if the transaction value is less than $1,000, it is $10,000 if the transaction value is at least $1,000 and less than $10,000, and so on. The maximum applicable schedule amount is $250,000 if the transaction value is $170,000 or more. This approach would assign a great deal of weight to transaction value.

Based on our experience with the similar OFAC approach to penalty calculations, this can become a point of contention in settlement negotiations.

Enforcement Factors

After the base penalty amount has been determined, BIS would then consider numerousfactors to adjust the base penalty amount for each violation downward or upward, up to the statutory cap ($250,000 per violation under the International Emergency Economic Powers Act, which is the current statutory authority for the EAR). Many of the factors are the same as under the current BIS penalty guidelines, and there is some degree of overlap among the factors themselves. The proposed rule organizes the factors into four categories – aggravating factors, general factors (which can either increase or decrease penalty), mitigating factors, and other factors that may be considered on a case-by-case basis.

1.  Aggravating Factors

A.  Willful or Reckless Violation of Law. This factor involves an evaluation by BIS of the willfulness, recklessness/gross negligence, concealment, pattern of conduct, prior notice, and management involvement for the company involved in the enforcement action. The degree to which these actions are present would determine the degree of aggravation factored into any administrative penalty calculation.

B.  Awareness of Conduct at Issue. This factor would consider actual knowledge, reason to know, and management involvement. According to the Guidelines, “Generally, the greater a Respondent's actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the BIS enforcement response will be. In the case of a corporation, awareness will focus on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers.”

C.  Harm to Regulatory Program Objectives. This factor would take into account U.S. national security and foreign policy implications with reference to the destination involved, the end-use and end-user, and the sensitivity and control level of the item(s) involved in the transaction, as well as the licensing policy. These three aggravating factors would be particularly important in determining the egregiousness of a violation.

2. General Factors

D.  Individual Characteristics. This factor would evaluate the Respondent’s commercial sophistication, exporting experience, regulatory history (prior enforcement actions), related illegal conduct and criminal convictions, among other issues. Interestingly with regard to regulatory history, the BIS Guidelines note that “[w]hen an acquiring firm takes reasonable steps to uncover, correct, and voluntarily disclose or cause the voluntary self-disclosure to [the BIS Office of Export Enforcement] of conduct that gave rise to violations by an acquired business before the acquisition, BIS typically will not take such violations into account in applying these Factors in settling other violations by the acquiring firm.” For purposes of calculating the base penalty amount, first offenses could result in a reduction of that amount by up to 25%. Generally, an apparent violation would be considered a “first violation” if the Respondent has not been convicted of an export-related criminal violation or been subject to a BIS final order in five years, or a warning letter in three years.

E.   Compliance Program. This would involve a determination of whether the Respondent had an effective risk-based BIS compliance program in place at the time of the apparent violation, including an assessment of the extent to which it complied with BIS’s Export Management System (EMS) Guidelines. “In this context, BIS will also consider whether a Respondent’s export compliance program uncovered a problem…and whether the Respondent has taken steps to address compliance concerns raised by the violation.” These general factors may be considered either aggravating or mitigating depending on the circumstances.

3. Mitigating Factors

F.   Remedial Response. This factor would consider whether the Respondent took appropriate corrective actions in response to the apparent violation.

G.  Exceptional Cooperation with OEE. This factor could result in a 25% to 40% reduction of the base penalty amount. It is noteworthy that to gain mitigation credit under this factor, the level of cooperation is expected to go beyond what would be considered minimally necessary to address a violation and take corrective measures.

H.  License Was Likely To Be Approved. Transactions that would likely have received a license had one been sought also may result in a reduction of up to 25% of the base penalty amount. Although mitigating factors could be combined for a greater reduction in penalty, BIS indicates that mitigation generally would not exceed 75% of the base penalty. Although no longer an express mitigating factor in its own right, voluntary self-disclosure would continue to weigh heavily in the base penalty amount, with a deduction of 50% of the transaction value in non-egregious cases or the applicable schedule amount in egregious cases.

4.    Other Relevant Factors Considered on a Case-by-Case Basis

I.    Related Violations. If a single export transaction might give rise to multiple violations, (e.g., one unlicensed export resulting in multiple violations of the EAR and the Foreign Trade Regulations), BIS has discretion to charge one or more violations. For example, a single export could give rise to one or more violations of the EAR, and BIS has expressly retained the discretion to consider each separate incorrect statement made in an Automated Export System (“AES”) filing as a separate violation. In many commonly recurring fact patterns, it could be difficult to predict how many violations BIS might find to have occurred.

J.    Multiple Unrelated Violations. Under the proposed BIS Guidelines, BIS would be more likely to seek a denial of export privileges and/or a greater monetary penalty in cases of multiple unrelated violations where the pattern of violations might indicate serious compliance problems and a resulting greater risk of future violations. In deciding whether such heightened penalties / denial order are warranted BIS also may consider whether a Respondent has taken effective steps to address compliance concerns.

K.  Other Enforcement Action. Enforcement action taken by federal, state, or local agencies in response to the apparent violation or similar apparent violations could be considered, particularly with regard to global settlements or criminal convictions and/or plea agreements. BIS retains discretion as to whether such related enforcement actions will result in increased or decreased penalty levels and collateral sanctions.

L. Future Compliance/Deterrence Effect. This Factor would address the impact that the administrative action may have with regard to promoting future compliance and deterring such conduct by other similar parties, particularly in the same industry sector. In other words, BIS would consider what message the case would send to the regulated industry.

M.  Other Factors That BIS Deems Relevant. According to BIS, this factor would “serve as a ‘catch-all’ category to retain flexibility to consider factors not already specifically addressed in the proposed BIS Guidelines, whether proposed by the Respondent or BIS.” The proposed BIS Guidelines articulate this as more of a proportionality principle and state that: “On a case-by-case basis, in determining the appropriate enforcement response and/or the amount of any civil monetary penalty, BIS will consider the totality of the circumstances to ensure that its enforcement response is proportionate to the nature of the violation.” According to BIS, “Consideration of these Factors would not dictate a particular outcome in any particular case, but rather is intended to identify those Factors most relevant to BIS’s decision and to guide the agency’s exercise of its discretion.

The proposed BIS Guidelines would provide sufficient flexibility to allow for the consideration of the Factors most relevant to a particular case. Penalties for settlements reached after the initiation of an enforcement proceeding and litigation through the filing of a charging letter will usually be higher than those described by these Guidelines.”

A Few Thoughts on the Proposed BIS Guidelines

While a more transparent and predictable approach by BIS certainly is welcome, the proposed BIS Guidelines largely seem to formalize what has been BIS policy and practice for the past several years rather than pave new ground. Moreover, based on experience with the similar approach OFAC has had for over six years, in the relatively small percentage of cases that result in administrative penalties, there are a number of ways in which the seemingly mechanical penalty calculations can yield unpredictable results, for better or worse. Three examples illustrate this point.

First, most penalty calculations start with transaction value, a difficult concept to pin down, all the more so with the open-ended definition BIS has proposed. It would be preferable for BIS to start with the transaction value (or half of that for VSD cases) but use a more precise definition of that term.

Second, many cases will involve several mitigating factors, with cumulative reductions in any otherwise applicable penalty. Mathematically it is unclear how these add up. If there is 25% mitigation of a base penalty of $100 because a license would likely have been approved, plus 40% mitigation for cooperation, is the proposed penalty reduced to $35 (a 65% reduction) or $45 (a 25% reduction from $100 to $75, and then a 40% reduction from $75 to $45)? In addition, what is the cumulative mitigating effect of all the other factors without specified percentages of reduction?

Third, while BIS indicates that cumulative penalty mitigation will not exceed 75%, in our experience many OFAC administrative penalty cases, other than simple ones involving few violations, appear to involve a higher cumulative mitigation. In many cases, OFAC often appears to apply an additional discretionary mitigation after taking into account any mechanical penalty reductions such as for cooperation.

Thus, an OFAC administrative penalty may be reduced much more than 75% from the base penalty. It may be more realistic, and more favorable for exporters, if BIS would expressly reserve the discretion to do the same. Indeed, a review of BIS enforcement actions suggests that mitigation of greater than 25% is not uncommon, although the role of transaction value in those determinations is less clear.

In sum, any increased predictability in enforcement outcomes as a result of the proposed BIS Guidelines is balanced with enforcement flexibility, and the proposed BIS Guidelines arguably provide the appearance of greater objectivity to enforcement and penalty decisions that are and will remain a largely subjective exercise. That said, the goal is laudable and BIS’s efforts should be appreciated.

Deadline and Importance of Public Comments

Public comments on the proposed BIS Guidelines are due on February 26, 2016. Given the importance of this proposed changes we expect that bar associations and trade associations will and should take the lead in drafting the comments to BIS.

Season's Greetings From Jacobson Burton Kelley PLLC

2015-12-24T08:39:00.000-05:00

BIS Announces that Crude Oil is now Classified as EAR99 and May be Exported from US Without a License

2015-12-22T10:59:00.002-05:00

Following last week's passage of the omnibus appropriations bill (HR 2029) lifting restrictions on the export of crude oil from the US, today the Bureau of Industry and Security (BIS) announced that the export classification of crude petroleum is now classified as EAR99 (formerly ECCN 1C981) and may be exported from the US without a license (i.e., NLR).

Of course, the normal restrictions on the export and reexport of EAR99 will apply and therefore no transactions involving embargoed countries or with restricted parties can occur.

The following is the text of BIS's announcement:

Effective immediately, pursuant to section 101 of Division O of the Consolidated Appropriations Act, 2016, signed on December 18, 2015, a Department of Commerce license is no longer required to export crude oil. Crude oil is now classified as EAR99. Most exports of crude oil may now be made as NLR (no license required).

Exporters should be aware that exports to embargoed or sanctioned countries or persons, including those listed in parts 744 and 746 of the EAR and persons subject to a denial of export privileges, continue to require authorization. BIS will shortly be taking steps to amend the Export Administration Regulations to reflect this change. Companies holding current licenses for crude oil exports should be aware of section 750.7(i) of the EAR terminating license conditions upon the termination of the requirement for the export license.

DDTC: No Further Need to Lodge Licenses for Permanent Export of ITAR Items With CBP

2015-12-22T09:09:00.000-05:00

Yesterday, the State Department's Directorate of Defense Trade Controls (DDTC) announced on its website that licenses to export ITAR-controlled goods from the US on a permanent basis (e.g., DSP-5s) no longer have to be lodged (i.e., deposited) with US Customs (CBP). This policy is effective immediately.

The lodging of the hard copy of export licenses with CBP at the port of exit is an antiquated and problematic process that frequently results in export delays and penalties, since the license must be lodged before the EEI filing is made. This is a welcome development for US exporters of ITAR-controlled items.

DDTC’s announcement is below:

Rule Waiver for Exporters to Deposit Permanent Export Licenses with CBP

In anticipation of the implementation of the U.S. Customs and Border Protection (CBP) Automated Commercial Environment (ACE), DDTC is electronically sending CBP registration and licensing data on a daily basis. Since CBP port officials will have access to the DDTC registration and licensing data through ACE, there is no longer a need for exporters to deposit permanent export licenses with CBP prior to filing in ACE.

Effective immediately, the Deputy Assistant Secretary for Defense Trade Controls is exercising the authority under 22 CFR 126.3 to waive the requirement under 22 CFR 123.22(a)(1) for exporters to deposit permanent export licenses with CBP prior to filing in the Automated Export System (AES) or ACE. This exemption will remain in effect until DDTC amends the language of 22 CFR 123.22(a)(1) to remove the requirement.

We anticipate that DDTC will issue a final rule amending the ITAR to implement this change early next year.

Update on Iran and Other OFAC Sanctions Programs

2015-12-07T10:50:00.002-05:00

By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC

During the past few weeks there have been a number of important developments in varoius US economic sanctions programs adminsitered by the US Treasury Department's Office of Foreign Assets Control (OFAC). The following is a summary of some of the key developments and links to the relevant documents.

A. Timing of Iran Sanctions Relief Under Iran Nuclear Agreement

There is widespread interest in the timing of the implementation of the sanctions relief called for under the July 2015 multilateral agreement with Iran. This agreement, the Joint Comprehensive Plan of Action (JCPOA), is commonly referred to as the Iran nuclear agreement.

As discussed in our previous update, on October 18, 2015 the United States and the EU marked “Adoption Day” of the JCPOA. On that day Iran formally began to implement its extensive obligations to dismantle significant portions of its nuclear program.

When Iran has completed these obligations, as verified by the IAEA, the “Implementation Day” milestone will be reached under the JCPOA, and the JCPOA sanctions relief will take place. There is widespread speculation as to when Implementation Day will occur. Numerous Iranian government officials and some EU government officials have suggested that sanctions relief will take place as early as January 2016. In our view January 2016 is optimistic, given the numerous steps that Iran must implement to comply with the JCPOA and since everything related to the JCPOA has taken much longer than anticipated.

As we have previously noted, after Implementation Day there will be very few changes in the broadest US sanctions on Iran that are applicable to US persons, companies and US-origin products. Rather, the changes will primarily involve the easing of US secondary (extraterritorial) sanctions on Iran, and the lifting of primary sanctions on Iran imposed by the EU and other countries.

B. US Treasury Department Statement and Guidance on Iran Business Activities

Reacting to the interest in Iran-related business expressed by many companies, on November 25, 2015 the US Treasury Department spokesperson for the Office of Terrorism and Financial Intelligence issued a statement on sanctions relief under the JCPOA, which noted:

“non-U.S. companies and individuals will not be subject to U.S. sanctions if they engage in initial discussions about potential business opportunities or travel to Iran to examine the possibilities of business relationships after sanctions are lifted. However, entering into contracts involving Iran prior to Implementation Day may be sanctionable. For this reason, we recommend the companies seek expert guidance before executing any contract or beginning a formal business relationship involving Iran prior to Implementation Day.”

The Treasury spokesperson also referred to OFAC guidance released on Adoption Day stating that before JCPOA implementation, a non-US person may be penalized under US sanctions if they enter into a contract involving Iran or its government, even if the contract is made contingent on the JCPOA sanctions relief. As always, whether US primary or secondary (extraterritorial) sanctions apply to a non-US person depends upon a number of factors involving the parties and activities involved.

This statement appears to strike a balance between encouraging non-US companies to consider the possibility of re-engaging with Iran in certain areas, after the JCPOA sanctions relief is implemented, and reminding companies that primary and secondary sanctions are still in place.

C. Belarus Sanctions Temporarily Suspended

On October 30, 2015 the United States temporarily suspended its sanctions targeting certain Belarusian companies and the EU suspended most, but not all, of its sanctions against Belarus the following day. These measures are particularly significant for petroleum and petrochemical companies, which had been unable to engage in many transactions in Belarus due to the pervasive and non-transparent roles the sanctioned entities play, particularly Belneftekhim (the Belarusian State Concern for Oil and Chemistry).

The suspension of US sanctions on these entities should mitigate this compliance challenge, though certain transactions may still be prohibited if they involve President Lukashenko or any other person who remains on OFAC's List of Specially Designated Nationals (“SDN list”). However, companies should bear in mind that it is possible the US or EU will not renew the respective sanctions suspensions when they expire in April and February 2016.

Our detailed explanation of the US and EU suspension of the Belarus sanctions is available here.

D. Cuba Payments Guidance

The US government has signaled that it will continue to try to clear the way for US companies and financial institutions to engage in the transactions relating to Cuba that are now authorized under the recent amendments to US sanctions, although most transactions remain prohibited. We summarized the last major round of Cuba sanctions relief and related guidance in our September 21,2015 update.

In a further small step in this direction, on November 25, 2015 OFAC added a new item to its frequently asked questions guidance for the Cuba, available here. This new guidance is intended to assist US financial institutions in becoming more comfortable in processing payments related to authorized travel to and from Cuba. It reads in part as follows:

52. Is a financial institution required to independently verify that an individual’s travel is authorized when processing Cuba travel-related transactions?

No. A financial institution may rely on U.S. travelers to provide their certifications of authorized travel directly to the person providing travel or carrier services when processing Cuba travel-related transactions, unless the financial institution knows or has reason to know that the travel is not authorized by a general or specific license.

E. US Sanctions Relating to Conflicts in Africa

There have been a number of recent developments in US sanctions relating to various African conflicts.

First, on November 12, 2015, President Obama issued Executive Order 13710 terminating the OFAC sanctions program targeting former Liberian President Charles Taylor and other persons. President George W. Bush had originally established this program in 2004. Along with the lifting of the Liberia sanctions program, a number of individuals now playing significant roles in Liberia’s companies and political scene were removed from the SDN list.

Separately, on November 23, 2015, President Obama issued Executive Order 13712 creating a US sanctions program for specified individuals in Burundi. Four individuals were immediately designated under the order, two being senior Burundi government officials and two being two senior opposition figures that earlier this year had led a failed coup seeking to overthrow the current government. Additional individuals may be designated for contributing to instability, undermining democratic processes, violating human rights or committing acts of violence in Burundi.

The United States, in many cases acting alongside the UN or EU, has recently imposed or updated targeted sanctions on individuals and entities involved in several other conflicts in African countries. These include the sanctions programs for the Central African Republic (established in 2014), Cote-d’Ivoire (2006), the Democratic Republic of the Congo (2006), Somalia (2010), South Sudan (2014) and Zimbabwe (2003).

F. US Sanctions Network Providing Support to Syrian Government and Facilitating Oil Purchases from ISIL

On November 25, 2015, the US Treasury Department added four individuals and six entities to the SDN List for allegedly providing support to the Government of Syria, acting pursuant to Executive Order 13582 of 2011. All assets of the designated persons that are located in the US or that are in the control of US persons must be blocked (frozen) and US persons are generally prohibited from engaging in transactions with the designated persons.

As explained in the Treasury Department’s statement, the designations were made for various reasons, including facilitation of oil purchases by the Syrian Government from the Islamic State of Iraq and the Levant (ISIL or ISIS). One of the designated individuals is a Russian national who has served for many years as president of the World Chess Federation (FIDE). OFAC also added to the SDN List a Syrian engineering company, a Russian bank, a trading company and several other companies owned by the individuals that were designated.

G. OFAC Updates List of Medical Supplies Eligibile to be Exported to Iran Under a General License

OFAC recently published an updated list of medical supplies that are eligible to be exported to Iran under the general license contained in OFAC’s Iranian Transactions and Sanctions Regulations (ITSR).

Items that are included on OFAC’s list of medical supplies do not require a specific license to be obtained from OFAC prior to being exported or reexported to Iran, but can be exported to permissible customers in Iran under the authority of the general license.

The updated list includes a number of new cardiology, radiology and other medical products, including CPAP systems and contraceptives.

To reflect that this list now contains a broader category of items than basic medical supplies, OFAC also changed the name of the list to “List of Medical Supplies” from “List of Basic Medical Supplies”.

US and EU Temporarily Suspend Certain Sanctions on Belarus

2015-11-01T14:42:00.000-05:00

By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC

The United States and European Union last week announced that the targeted sanctions against Belarus that were first imposed in 2004 will be relaxed effective October 30, 2015.

Although the sanctions relief at this point is of limited duration and scope, it will allow new transactions with Belneftekhim State Concern for Oil and Chemistry, one of Belarus' largest groups of companies.

For several months EU officials had been signaling that the EU might suspend certain sanctions targeting Belarusian companies and individuals, if the Belarusian government took steps to better respect political and social rights. With the Belarusian government’s release of political prisoners in August, and elections in October that were perceived to involve less government intimidation of the opposition than in recent years, the EU is taking the view that this condition has been met.

On October 29, 2015 the EU announced the suspension of most, but not all, of its sanctions against Belarus. The EU sanctions suspensions are effective as of October 31, 2015, the date each year when the EU sanctions targeting Belarusian companies and individuals either expire or are renewed.

In a less widely expected move, on October 29 the US also suspended many of its sanctions targeting certain Belarusian companies on the US list of Specially Designated Nationals and Blocked Persons ("SDN list"), effective October 30. In announcing the suspension, a US State Department spokesperson commented that “this limited reprieve from sanctions opens the door to expanded commercial ties for the Belarusian economy”.

The key documents on the EU side include an implementing regulation, available here. On the US side, the US Treasury Department's Office of Foreign Assets Control (“OFAC”) issued Belarus General License No. 2 that can be found here.

Subject to a number of caveats mentioned below, OFAC Belarus General License 2 provides that "All transactions otherwise prohibited by Executive Order 13405 involving the following named entities, or any entities that are owned, individually or in the aggregate, directly or indirectly, 50 percent or more by one or more of the following named entities, are authorized":

Belarusian Oil Trade House
Belneftekhim (formally known as Belneftekhim State Concern for Oil and Chemistry)
Belneftekhim USA, Inc.
Belshina OAO
Grodno Azot OAO
Grodno Khimvolokno OAO
Lakokraska OAO
Naftan OAO
Polotsk Steklovolokno OAO

The OFAC and EU measures are particularly significant for US and EU petroleum and petrochemical companies, which had largely been prohibited from engaging in many transactions in Belarus due to the pervasive and non-transparent roles these entities play. In particular, the Belneftekhim Concern has numerous affiliates that are widely involved in Belarus' oil and gas sector.

At the same time, OFAC's general license does not authorize transactions, directly or indirectly, with any other person whose property and interests in property are blocked pursuant to the Belarus sanctions program. Also, the US sanctions relief only applies to prospective transactions with the named entities, meaning the blocked (frozen) assets of the named entities must remain blocked.

Please note that the Belarusian entities covered by the OFAC general license remain on the SDN list even through sanctions against them have been suspended, so automated sanctions screening systems may continue to pick up any references to these entities.

While the US and EU actions clearly were coordinated and intended to complement each other, there are some important practical differences in the US and EU sanctions and the sanctions relief, including the following.

First, the EU sanctions suspensions have effect only for four months, through February 29, 2016, while the US suspensions will remain in place for six months, unless modified by OFAC, until April 30, 2016. Whether the sanctions will remain suspended will be evaluated early next year by the EU and US governments.

Second, the EU suspended its sanctions on many Belarusian individuals and government officials, including President Lukashenko. By contrast, the US did not suspend any sanctions targeting Lukashenko or any other individuals.

Third, the impact of sanctions designations on the subsidiaries and other affiliates of designated persons is different under EU and US sanctions, and arguably broader on the US side:

Under EU sanctions it is prohibited to indirectly make available funds or other economic resources to a designated person, and this could for example impact some transactions with a non-designated subsidiary of a designated person.

On the US side, under OFAC's "50% rule", an entity is considered “blocked by operation of law" (subject to asset freezing), even if it is not on the SDN list, if one or more persons on the SDN list have a 50% or greater ownership interest in that entity. The Belarus sanctions program was the initial context for OFAC to release the 50% rule.

OFAC's 50% rule was particularly challenging to apply under the Belarus sanctions because Belneftekhim is widely understood to be effectively a holding company for the government’s extensive interests in companies across the Belarusian economy, in many cases through non-transparent structures. The suspension of US sanctions on Belneftekhim and other entities should mitigate this compliance challenge, though certain transactions may still be prohibited if they involve President Lukashenko or any other person who remains on the SDN list. We expect that OFAC would approach the degree of involvement by an individual blocked person similar to the manner its approach under the Russia/Ukraine sanctions program.

Fourth, the US has imposed a reporting requirement on US persons that engage in transactions with any of the Belarusian entities for which sanctions are suspended. The EU has not imposed such a special reporting requirement. US persons must submit reports must to the US Department of State within 15 days of any transaction or series of transactions that have an aggregate value exceeding US $10,000.

US and EU Mark "Adoption Day" of Iran Nuclear Agreement

2015-10-19T00:24:00.000-04:00

While US and EU Mark Adoption Day of the Iran Nuclear Agreement, Current Sanctions Regime on Iran Will Remain in Effect Until Implementation Day

By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC

We continue to follow the gradual progress by the

United States

, the EU,

Iran

and other countries towards the implementation next year of sanctions relief under the July 2015 agreement with

Iran

, formally called the Joint Comprehensive Plan of Action (“JCPOA”).

Our most recent post on

Iran

sanctions compliance for US and non-US companies under the JCPOA can be found here.

Adoption Day and Implementation Day

Yesterday, October 18, the

United States

and the EU marked “Adoption Day”, a milestone that follows several initial steps by the

, EU and

Iran

, pursuant to the phased timeline set out in the JCPOA.

Iran

must now satisfy its extensive obligations to scale back its nuclear activities, and the

and EU have formally begun preparing to ease sanctions next year if

Iran

verifiably meets those commitments. To this end, on October 18 both the

and EU released a number of legal and guidance documents relating to the planned sanctions relief.

It is important to note that none of the sanctions relief will be effective until Iran has satisfied its nuclear-related commitments under the JCPOA.

Once

Iran

has satisfied its JCPOA conditions and this is verified by the IAEA, the next JCPOA milestone known as “Implementation Day” will be reached. While Iranian officials have ambitiously announced they intend to fulfill their commitments within a few months, this is not widely expected to occur until at least mid-2016.

As we noted in our previous alerts, even if the JCPOA is fully implemented, very little will change with respect to the broad

embargo of

Iran

. In practical terms, most transactions with

Iran

, its government, and many targeted Iranian companies will remain prohibited if

persons, US products or US dollar payments are involved.

If the JCPOA is implemented next year, the EU will lift the majority of its sanctions on

Iran

, and the

will lift the majority of its “secondary” (extraterritorial) sanctions that apply to non-US companies and banks. However, a number of EU sanctions and US secondary sanctions will remain, presenting compliance challenges for many otherwise-permissible transactions by non-US persons.

Key US and EU Documents

The principal legal instruments and guidance issued on October 18 in relation to the anticipated US and EU sanctions relief are as follows:

The US Treasury Department's Office of Foreign Assets Control (“OFAC”) issued guidance on frequently asked questions (“FAQ”) related to JCPOA implementation. These are available at http://1.usa.gov/1hM0zdj.

The US State Department issued “contingent waivers” of the US secondary sanctions covered by the JCPOA, which will not become effective until Implementation Day. These are available at http://1.usa.gov/1hMsFFo.

A Decision and two implementing Regulations issued by the Council of the European Union, setting out the precise parameters of the EU sanctions that will be lifted if Implementation Day is reached. These are available at http://bit.ly/1XdKvRy.

Sanctions Compliance Issues Worth Noting

There is little that is new or unexpected in the documents released by the

on October 18, 2015. However, the following points are worth noting:

Until Implementation Day, non-US persons could be penalized by the US government for entering into certain types of contracts with Iran, its government or sanctioned Iranian persons. The OFAC FAQ guidance indicates that this could include contacts “that are contingent on the implementation of sanctions relief under the JCPOA”, meaning contracts that will not be performed until applicable sanctions are lifted.
If US sanctions relief occurs next year, many entities owned or controlled by the Iranian government will be removed from the primary US sanctions list (the list of Specially Designated Nationals, or “SDN List”). However, all Iranian government entities will remain “blocked”, and OFAC officials have publicly stated that those removed from the SDN List likely will be included in a special new list of blocked entities.
Many of these Iranian government entities play an important role in the Iranian economy, so it will be important to know whether they can be involved in transactions carried out pursuant to any JCPOA sanctions relief that is implemented next year. The new State Department guidance suggests that these entities could be involved in transactions that are authorized pursuant to the JCPOA, including any export from the US of commercial passenger aircraft or related equipment and services that is specifically licensed by OFAC.
On the other hand, it appears from the State Department guidance that the US secondary sanctions to be suspended on Implementation Day will remain in effect for transactions involving entities or individuals that remain on the SDN List. This could complicate US sanctions compliance for non-US persons after the JCPOA is implemented. It is possible non-US persons with no ties or connections to the United States could still be penalized under US secondary sanctions for engaging in certain activities relating to Iran, such as support for the Iranian oil and gas, shipping or shipbuilding sectors, or for providing insurance or reinsurance related to those activities, if any person on the shortened SDN List is involved.
The Joint Commission called for under the JCPOA, consisting of high-level representatives of the US, EU, Iran and the five other countries party to the JCPOA, has been formed and will have its first meetings this week. The commission may soon begin hearing complaints from both sides that actions are falling short of commitments, for example by Iran regarding the anticipated US sanctions relief, and by the other parties regarding Iranian action to dismantle its nuclear program and other Iranian actions. The US will be represented on the Joint Commission by, among others, Ambassador Stephen Mull, who heads up a new State Department office for JCPOA implementation.

Conclusion

OFAC has reiterated on numerous occasions that it intends to publish on its website detailed guidance on the implementation of US sanctions relief under the JCPOA. We expect this to be posted several weeks before Implementation Day occurs next year.

We will continue to monitor the sanctions relief under the JCPOA and will issue further updates when significant developments occur.

Brian Nilsson is now Serving as Deputy Assistant Secretary of State for Defense Trade Controls

2015-10-13T16:30:00.000-04:00

Effective today, October 13, 2015, Brian Nilsson will serve as the Deputy Assistant Secretary of State for Defense Trade Controls and will manage the Directorate of Defense Trade Controls (DDTC) in the State Department's Political-Military Affairs.

Mr. Nilsson has extensive experience with U.S. export control matters, having served for the past seven years on the White House National Security Council (NSC) as the Director of Nonproliferation and Export Controls, chairing the White House Export Control Reform Task Force.

Prior to joining the NSC Mr. Nilsson held many positions at the Commerce Department’s Bureau of Industry and Security (BIS), including Deputy Director of the Foreign Policy Controls Division, Acting Director of the Office of Strategic Trade and Foreign Policy Controls, Senior Advisor to the Assistant Secretary of Commerce for Export Administration, acting Deputy Assistant Secretary on behalf of the Assistant Secretary and Chairman of the Operating Committee (OC) for Export Policy.

Anthony Dearth, who has been serving as the Acting DAS for the past three and half months, will return to his duties as Director of the Office of Defense Trade Controls Licensing.

US Issues Regulations Further Easing US Sanctions on Cuba but Significant Restrictions and Compliance Challenges Remain

2015-09-21T11:51:00.002-04:00

By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC

On September 21, 2015 the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS) issued final regulations making additional changes to the US financial and trade embargo of Cuba.

These changes build on changes in the embargo from earlier in 2015, including:

The January 2015 expansion of authorized categories of trade and commercial activity between the US and Cuba; and

The July 2015 removal of Cuba from the US list of state sponsors of terrorism.

While the recent changes expand the scope of authorized travel and business by US persons and companies in Cuba, most financial, investment, services and business transactions with Cuba remain prohibited and significant sanctions and export compliance challenges remain.

This is particularly true since some members of the US Congress have expressed their displeasure by the Obama Administration's regulatory efforts to chip away the existing embargo and it is likely that Congress will continue to pressure OFAC and BIS to enforce those restrictions that remain in place.

As a result, US companies and their controlled foreign affiliates exploring business opportunities in Cuba must be vigilant to ensure they remain compliant with the ever-changing regulations on Cuba, which have made compliance challenges more complex.

Practical impact of changes to Cuba embargo

The September 21, 2015 changes to OFAC's Cuban Assets Control Regulations (CACR) and BIS's Export Administration Regulations (EAR), which can be found here (OFAC) and here (BIS), make possible some limited additional trade and transactions by US companies with Cuba. However, any new opportunities will be subject to navigating the broad remaining prohibitions under the embargo, and the perhaps even more difficult Cuban regulatory and business environment. Many activities now authorized by the US will not be possible pending further authorizations or other action by the Cuban government.

Overall, in recent years the thaw in US-Cuba relations and the expansion of US travel and commercial exports to Cuba seem to have primarily benefited non-US companies that already have a substantial local presence. For the foreseeable future that trend is likely to continue.

The following is a summary of the September 21, 2015 changes to the CACR and EAR.

Authorized business activity and physical presence in Cuba

Authorized physical presence in Cuba

The amendments to OFAC's CACR for the first time authorize certain US companies, and non-US companies owned or controlled by US persons, are now generally authorized to establish a physical presence in Cuba, including offices, warehouses or retail outlets. This applies only to companies engaged in the following categories of authorized transactions with Cuba, most of which were established or expanded either in the January or September 2015 changes:

(a) Exporters of certain authorized goods to Cuba, including food and agricultural products; medicine and certain medical devices; materials and equipment for use on privately-owned buildings; equipment and supplies for private sector Cuban entrepreneurs; and tools and equipment for private agricultural activity

(b) Authorized air and vessel carriers and other providers of authorized travel services (but a physical presence in Cuba is not authorized for the purpose of providing lodging services)

(c) Providers of authorized telecommunications and Internet-based services to companies and individuals in Cuba

(d) Companies carrying authorized cargo, parcel or mail to or from Cuba

(e) Organizations involved in authorized educational or religious activities

(f) News bureaus in Cuba.

Any companies not within one of these six categories are not authorized to establish a physical presence in Cuba.

Physical presence - practical aspects

As part of establishing an authorized local presence in Cuba, companies may send US employees to reside and work in Cuba, and may hire local employees as well. They may open local bank accounts and fund them, including by wire transfer, provided the funds are used only for authorized activities in Cuba. When such local accounts are closed, the funds must be sent by wire transfer to a US bank.

Two related authorizations are noteworthy. First, BIS has generally authorized the export to Cuba of goods and technology to help establish an authorized physical presence, if those goods are not tightly restricted under US export controls. Items are authorized if they are EAR99 or are controlled for AT (anti-terrorism) reasons only.

Second, other US persons generally are not restricted from dealing with the authorized Cuban operations of these types of companies, notwithstanding the fact that US persons are otherwise generally prohibited from dealing with any person or business operations in Cuba.

Changes in US export controls

Several of the existing categories of authorized trade and commercial transactions were broadened by the September 2015 changes to the EAR and related policy guidance. For example, under certain circumstances, goods authorized for export to the Cuban private sector can be sold to Cuban state-owned enterprises, if they are resold or distributed to the private sector. This highlights a major impediment to exports to Cuba since nearly all items sold to Cuba must be purchased and imported by Cuban state-owned enterprises.

Of potentially greater significance to a broader universe of companies are the July 2015 regulatory changes following the removal of the Cuba terrorism designation that made possible exports to Cuba of a wide range of items covered under BIS license exceptions (general authorizations).

The July 2015 changes to the EAR also removed US jurisdiction over the reexport to Cuba of certain items produced outside the US containing up to 25% US-origin content. The prior de minimis threshold had been 10 percent for many years. Note that all US-origin content counts toward the 25 percent threshold, even if it is EAR99 (not identified on the US Commerce Control List).

Telecommunications and internet-based services

Under the September 2015 amendments to OFAC's CACR, US providers of authorized telecommunications and internet services in Cuba may maintain a more substantial local presence than other categories of US companies:

(1) These US companies may establish Cuban subsidiaries, branches, joint ventures, franchises or other business relationships with any Cuban person including ETECSA, the Cuban government telecoms monopoly.

(2) Unlike other categories of US companies, they are generally authorized to put in place arrangements for licensing and marketing of the authorized telecom and Internet-based services.

Also, most Internet-based services previously authorized for provision to Cuban persons may now also be provided to Cuban government entities. This reduces the compliance burden that US Internet service providers had faced in seeking to ensure that no recipient of such services is a governmental person. This is a pragmatic approach for the government, given the reality that the sector is still government dominated.

Changes to travel and carrier services and aviation sector

Authorized travel transactions

Twelve categories of authorized travel by US persons to Cuba were established or expanded in January 2015. Although legislative constraints would complicate the creation of additional categories of authorized travel, several of the existing categories were broadened in the September 2015 changes.

Anecdotal evidence also suggests that, since January, OFAC has been interpreting some of the travel general licenses in an uncharacteristically broad manner, including the general license covering market research activities. On the other hand, some members of Congress have expressed concern over the use of general licenses to authorize such a broad range of travel.

Authorized travelers in Cuba may now open local bank accounts and may fund them, including by wire transfer, as long as the funds are used only for their authorized travel while in Cuba.

Vessels and aircraft to Cuba

Vessels are now generally authorized to travel between the US and Cuba and to remain in Cuba for up to 14 days, including the provision of on-board lodging (which may be intended to help make possible US-to-Cuba cruises), subject to obtaining required Cuban government authorizations.

General aviation (i.e., private aircraft flights) are now generally authorized to Cuba, and US aircraft may remain in Cuba for up to 7 days, under license exception AVS pursuant to BIS’s Export Administration Regulations. However, the crew operating the aircraft will still require a specific license from OFAC to travel to Cuba since it is unlikely that they will fall within one of the 12 categories of generally licensed travel. This presents a significant practical limitation that warrants additional guidance from OFAC, particularly in the case of aircraft on temporary sojourn in furtherance of one of the 12 authorized travel categories.

OFAC also has added to its regulations the guidance it released several months ago regarding the categories of US and Cuban persons whom carriers may transport to and from Cuba.

Safety of flight licenses

It is now possible to seek specific licenses (transaction-specific authorizations) from BIS to export to Cuba equipment and technology that is located in the US, or is otherwise subject to US export control regulations, for safety of flight purposes.

We expect this specific licensing program will look a lot like the existing programs for other embargoed countries, including Iran (although Iran aviation-related licenses are issued by OFAC, not BIS).

Credit card and banking transactions

Credit card transactions

OFAC has greatly broadened the January 2015 authorization of US credit card network activity in Cuba. It appears that US credit card operators are generally authorized to process credit card transactions of individuals traveling in Cuba, regardless of whether they are US persons or are traveling under any of the 12 categories of authorized travel.

Note that the preceding point is based on new OFAC guidance stating that its regulations authorize “all transactions incident to the processing and payment of credit and debit cards transactions for third-country nationals traveling to, from, or within Cuba”, even if they “may not fall within the 12 categories of authorized travel”.

US Dollar funds transfers

In January 2015, OFAC made several potentially important changes in the banking sanctions on Cuba:

Since then, US banks have been generally authorized to reject (refuse to process) rather than block (freeze) funds transfers involving foreign parties that do not involve either a US person or the Cuban government.

US banks have also been generally authorized to process such funds transfers if related to a transaction that a US person would be authorized to carry out.

Now, under the September 2015 changes, US banks may retroactively unblock (unfreeze) and return funds that would have qualified for such treatment had they been submitted after the September 2015 changes entered into effect.

Other potential practical effects of these changes

Services to Cubans outside Cuba

The September 2015 OFAC regulation modifies the remaining restrictions on US companies, and non-US companies owned or controlled by US persons, on providing services to Cubans located outside of Cuba, provided the services do not relate to commercial exports of goods or services to or from Cuba.

The restrictions on non-US subsidiaries of US companies providing services to Cuban nationals (particularly in Europe, Canada and Mexico) had presented very serious compliance challenges, as they directly conflicted with local non-discrimination and sanctions blocking laws.

Authorization of related transactions

OFAC and BIS have made an effort in the September 2015 changes to make possible related transactions that are necessary and ordinarily incident to the trade and commercial activities in and with Cuba that are now authorized.

However, some additional clarification might be needed in this area. As previously noted, the OFAC regulations do not authorize the crew of aircraft and vessels authorized to travel to Cuba during the 7- or 14-day period that the aircraft or vessel may remain in Cuba. Thus, an OFAC specific license is needed until further changes are made to the CACR.

Legal services to and from Cuba

It is also now possible for US lawyers to be paid for legal services provided to Cuba or Cuban persons without first having to seek a specific license (authorization) from OFAC, subject to some limitations and reporting requirements.

Generally, it is also now authorized for US persons to seek and obtain legal services from persons in Cuba, which should simplify the process of engaging local Cuban counsel necessary to navigate the local regulatory environment.

Humanitarian and educational activities

OFAC and BIS have expanded the humanitarian and educational activities that are authorized for US persons, including a new authorization of certain microfinance programs in Cuba, and certain standardized testing and Internet-based undergraduate courses provided to Cubans.

Conclusion

While the further relaxation of the Cuba embargo is a positive development, many restrictions and compliance challenges remain. We urge caution for US companies and their controlled foreign affiliates seeking to enter the Cuban market.

That being said, the existing limited commercial channels are slowly being expanded, but there is still a long way to go before US and Cuba commercial and financial relations are normalized.
__________________________

Disclaimer: The information contained herein is for general informational and compliance purposes and does not constitute legal advice. This information is not intended to facilitate or otherwise assist in any prohibited transaction involving Cuba, nor is it intended to evade or avoid any applicable US sanctions. Qualified counsel should be consulted with respect to any specific transaction contemplated with Cuba.

Iran Sanctions Compliance Considerations Under the Joint Comprehensive Plan of Action

2015-09-17T21:06:00.003-04:00

By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC

Since the Joint Comprehensive Plan of Action (JCPOA) between the P5+1 countries and Iran was announced in mid-July, the focus has been on whether the US Congress could pass a resolution of disapproval. Now that the deadline has passed and the JCPOA has passed the first hurdle, the attention will now turn to implementation of the sanctions relief by various countries and the corresponding impact on companies once the JCPOA's Implementation Day takes place, which is likely to occur in mid-2016.

The JCPOA provides for a lifting of a majority of the EU economic and trade sanctions on Iran, and the suspension of a majority of the US secondary (extraterritorial) sanctions on Iran.

JCPOA Sanctions Compliance Considerations

In our July 24, 2015 post on International Trade Law News, we addressed a number of recurring questions that our US and non-US clients are facing in assessing the JCPOA and the potential practical impact if it is implemented next year. The following are a number of the key compliance-related considerations from that post and a few additional ones based on questions that we have received during the past few weeks:

Manage Your Company’s Expectations and Don’t Jump the Gun. Have realistic expectations regarding sanctions relief under the JCPOA and permitted business development activities (see below). Most countries are not likely to implement sanctions relief until mid-2016 and US primary and secondary sanctions will remain unchanged until the IAEA verifies that Iran has met its obligations under the JCPOA.

Despite Some Reports, the US Embargo on Iran Will Remain Nearly Unchanged. While many EU sanctions on Iran will be lifted if the JCPOA is implemented, the broadest US sanctions on Iran, including the prohibitions applicable to US persons, US companies and US-origin products will remain essentially unchanged.

A General License to Authorize non-US Affiliates of US Companies to Conduct Business with Iran Will be Issued, but Facilitation and Other Risks Remain. The US Government is expected to authorize non-US entities that are owned or controlled by a US person, such as a non-US subsidiary of a US company, to engage in activities with Iran that are consistent with the terms of the JCPOA. We understand that this authorization is likely to take the form of a general license from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) that will be issued in the coming months. Although this general license represents an opportunity for some non-US companies affiliated with US companies to conduct business with Iran, there will be a significant risk of US persons unlawfully facilitating their non-US affiliates’ lawful transactions involving Iran. While the scope of authorized activities will depend on the breadth of authorization in the general license, more information will be available once the general license is published by OFAC. We encourage you to read the general license carefully and consult counsel as needed to determine what activities are permissible.

US Companies Should be Cautious Toward Relaxing any Existing Policies Prohibiting Their Foreign Affiliates Trading with Iran. OFAC views a change in existing policy specifically to enable business with Iran to be form of prohibited facilitation. It is important to have a good understanding of this issue before approving any change in policy as it relates to doing business with Iran.

Pay Attention to Remaining US Secondary Sanctions and Blocked Parties in Iran. Some US secondary (extraterritorial) sanctions on Iran are expected to remain in place once the JCPOA is implemented. For example, more than 200 Iranian-linked companies and individuals will remain on OFAC's Specially Designated Nationals (SDN) List, including major Iranian firms in the military, defense, banking engineering, construction and energy fields. Secondary sanctions continue to apply to all of these Iran-related individuals and entities and therefore will remain problematic, even for non-US persons.

Early Entrants Might not be Compliant. While competitors might commence activity involving Iran or Iranian companies, this does not mean that business is compliant with the laws of the US or other countries. OFAC, the Commerce Department's Bureau of Industry and Security (BIS) and the Department of Homeland Security, will be closely monitoring transactions with Iran, both before and after the JCPOA is implemented and enforcement of the applicable Iran sanctions will remain a priority for the US.

Financial Institutions are Likely to Remain Conservative Regarding Iran. In light of the wave of large penalties assessed against banks in the EU and elsewhere for alleged violations of OFAC sanctions and New York State banking regulations, we expect that many banks will continue to be conservative with regard to sanctions compliance and treat themselves as subject to US law, notwithstanding their being incorporated outside the US, due to their dependence on US correspondent banking relationships. It is important to consider this factor with regard to payment and financing that might relate to authorized activities involving Iran, including humanitarian items that are currently permissible to be exported to Iran under OFAC general and specific licenses.

US Export and Reexport Controls Will Remain in Place. Goods, software and technology subject to US law (which includes US origin products and products containing more than a de minimis amount of US content) still will require US authorization for export or reexport to Iran. While certain general licenses authorize limited export activity (e.g., food, agricultural commodities, medicine, medical devices and personal telecommunications equipment) and reexports of non-controlled items by non-US persons outside the United States are not prohibited, any transactions involving controlled items or US persons will still require a license from OFAC or BIS. As a result, non-US companies must determine whether the items they manufacture or procure are subject to US law and should recognize that US suppliers are likely to remain vigilant regarding potential end-use of their products in Iran.

Business Risks If Sanctions are Reimposed on Iran. Should Iran violate its commitments once sanctions have been suspended, the JCPOA includes mechanisms to "snap them back" into place. In fact, the US could restore sanctions within a matter of days in some cases. The JCPOA does not include any grandfather clause that would protect preexisting contracts against the snap-back of sanctions. While the US will not retroactively penalize permissible activities while the JCPOA is in place, the US will require any prohibited activity to cease if sanctions are reimposed. Thus, if the US reimposes sanctions in 2018, a contract that was entered into in 2016 gives it no special status under the JCPOA and any new transactions taking place under that contract will be subject to sanctions as any new contract would be. In light of this risk companies should consult counsel regarding appropriate contractual safeguards to ensure ongoing compliance.

Business Development Activities in Iran

As JCPOA implementation seems more likely, many companies and financial institutions will be interested in engaging in general discussions and research to better understand the Iranian market, and to identify potential opportunities to explore once the JCPOA is implemented. We set out below a few key principles to bear in mind in any such discussions or market research.

Generally speaking, it is not prohibited under current US or EU sanctions to engage in exploratory and non-binding business discussions about the Iranian market, including with Iranian companies and individuals, either within or outside of Iran.

It is also generally not prohibited to provide information to other parties regarding potential business or projects in Iran if the information is clearly in the public domain (meaning it is published on a website or a widely available printed publication). However, gathering or formulating public domain information into a new document or communication takes that information out of the public domain. Also be careful regarding technology in the public domain, as its treatment under US sanctions regulations can depend on the export controls classification of that technology.

Generally Prohibited Activities Involving Iran

On the other hand, the following business development activities are generally prohibited under current US sanctions and those that are expected to remain in place after the JCPOA is implemented. These prohibitions may be applicable if any US company or other US person is involved (any US citizen or permanent resident, company formed under US law or non-US citizen located in the US), or if there is any other sufficient nexus (connection) to the US:

No Specifics. No specific transactions should be discussed or negotiated with Iranian companies or individuals.

No Contracts, Even if Executory. It is generally prohibited to enter into any contract, agreement or memorandum of understanding, whether written or oral, with regard to potential business or projects in Iran, involving any Iranian government agency or entity, or involving any US-sanctioned person. This is generally impermissible even if the document is made conditional on the lifting of sanctions.

No Services to Iran. It is also generally prohibited for companies and individuals subject to US jurisdiction to take any action that could be considered a “service” to any such person, including steps to prepare to enter into or perform an agreement. This includes any action that might confer a benefit, directly or indirectly, on any person in Iran, Iranian government agency or entity, or US-sanctioned person.

No Pre-Performance Activities in Anticipation of Market Opening. There should not be any planning or preparation of products or services intended for the Iranian market, in preparation for the easing of sanctions. If no US person or other US nexus is involved, it would not be prohibited to carry out such work if it is general in nature and is not undertaken for any particular potential Iranian customer.

In other words, talking with and thinking about Iran is not prohibited, but business activity related to Iran still is until the sanctions are formally relaxed. In addition, under US secondary sanctions, some of which are expected to remain after JCPOA implementation, a non-US person or company can be penalized for entering into significant agreements relating to certain targeted sectors, persons and activities relating to Iran, its government, Iranian persons or Iranian-origin petroleum products. We expect that the US government will release guidance in the coming months to clarify which secondary sanctions will remain in place after JCPOA implementation.

Iran Sanctions Enforcement Will Remain High

Various US Government law enforcement agencies, including OFAC and BIS's Office of Export Enforcement, will continue to monitor closely US and non-US business activities involving Iran to see if any companies have overstepped the bounds of US primary and secondary sanctions or the limited sanctions relief in the Joint Plan of Action announced in November 2013.

The US Government has stressed that they will continue to “vigorously enforce" all US sanctions that have not been suspended. We believe that Iran remains the primary target of US sanctions and export control enforcement and will continue to generate a large number of enforcement cases.

Other Considerations

Despite many media reports to the contrary, much of the complex US sanctions architecture on Iran will remain in place after JCPOA implementation.

A full analysis should be carried out prior to engaging in any negotiations or other business activity, other than the generally permissible activities set out above, relating to Iran, its government or US-sanctioned persons. This analysis should include US sanctions considerations if the proposed conduct would involve any US person or other US nexus, or any sectors, persons or activities covered by US secondary sanctions.

For further information, see www.jbktradelaw.com for our contact information.

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Disclaimer: The information contained herein is for general informational and compliance purposes and does not constitute legal advice. This information is not intended to facilitate or otherwise assist in any prohibited transaction involving Iran, nor is it intended to evade or avoid any applicable US sanctions. Qualified counsel should be consulted with respect to any specific transaction contemplated with Iran.