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A Hard Exit From the Iran Deal

US withdrawal from JCPOA impacts shipments of export cargo and import cargo in international trade.
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A Hard Exit From the Iran Deal

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In a sweeping action with immediate consequences for both US and non-US persons, President Trump announced the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA) on May 8, 2018. Following this announcement, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued new frequently asked questions (FAQs) that detail which sanctions will be re-imposed, the timeline for a full reinstatement of sanctions and how parties will be permitted to wind down existing operations inconsistent with the reinstated sanctions.

The process initiated on May 8, once fully implemented, will essentially amount to a complete return to pre-JCPOA US Iran sanctions. The move can best be described as a hard exit from the Iran deal, requiring anyone with Iran-related business and operations to promptly assess their risk and develop a plan to wind down operations as needed. The decision by the president is in fact not a snapback mechanism under the JCPOA, but rather a unilateral withdrawal from the pact and a reinstatement of US sanctions against Iran. Accordingly, it remains to be seen how the other parties to the JCPOA will react, especially given the intentionally global applications and impacts of the secondary sanctions.

Iran sanctions under the JCPOA

The JCPOA is an agreement reached in 2015 between Iran and the P5+1 — consisting of the five permanent members of the United Nations Security Council (China, France, Russia, the United States, and the United Kingdom) plus Germany.

The US sanctions relief under the JCPOA consisted primarily of the US:

  • Waiving or suspending the imposition of most of the secondary sanctions imposed on non-US Persons for conduct occurring entirely outside the United States;
  • Issuing certain general licenses, including General License H, which permitted non-US entities owned or controlled by US Persons to engage in transactions involving Iran;
  • Adopting a favorable licensing policy concerning commercial aviation exports to Iran and related transactions; and
  • Removing approximately 400 Iranian individuals and entities from the List of Specially Designated

Nationals and Blocked Persons (the SDN List), with the primary effect being that non-US Persons were no longer subject to secondary sanctions for engaging in significant transactions with such SDNs.

Every aspect of this relief will now terminate. While the Department of State will continue to waive, for the next 90 to 180 days, certain statutory secondary sanctions, those sanctions will be re-imposed according to the timeframe set out in OFAC’s FAQ. Parties engaging in transactions subject to sanctions must wind them down or face sanctions risk following the end of the wind-down periods. New transactions are, in general, not authorized, and OFAC will be individually reviewing and rescinding specific licenses issued during the period that the US was engaged in the JCPOA. Persons and entities that had been removed from the SDN List will now be added back to that list.

Below, we summarize the timing for the re-imposition of sanctions and relevant wind-down periods.

Reinstatement of sanctions following 90-day and 180-day wind down periods

To alleviate the impact of sanctions on activities authorized under the JCPOA prior to May 8, 2018, OFAC will delay re-imposition of sanctions and provide 90-day and 180-day wind-down periods for different categories of activity involving Iran that had been consistent with the sanctions relief afforded under the JCPOA. OFAC has made clear that these are truly wind-down periods, not grace periods under which Iran-related business may continue as usual. OFAC has advised that this should be viewed as reinstatement of sanctions immediately, though subject to waivers, rather than a continuation of the JCPOA for either 90- or 180-day periods.

The 90-day wind-down period ends on August 6, 2018, and the 180-day period ends on November 4, 2018. On those dates, waivers from enforcement will terminate, and virtually all transactions will be subject to enforcement, other than certain wind-down payments authorized by OFAC. By November 4, virtually all authorizations established under the JCPOA with respect to US sanctions will have been terminated.

90-day waiver of sanctions

The US may penalize transactions relating to the following activities after a 90-day wind-down period ending on August 6, 2018:

  • The purchase or acquisition of US dollar banknotes by the government of Iran
  • The direct or indirect sale, supply or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal and software for integrating industrial processes
  • Significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial
  • The purchase, subscription to or facilitation of the issuance of Iranian sovereign debt
  • Transactions involving Iran’s trade in gold or precious metals
  • Transactions involving Iran’s automotive sector

The re-imposition of dollar banknote sanctions on Iran is intended to further isolate Iran and put economic pressure on its government. Whether this will change anything in practice is subject to debate. This is because dollar-denominated transactions involving Iran were not per se prohibited under the JCPOA sanctions relief; however, USD-denominated transactions involving Iran remained effectively prohibited because US financial institutions remained prohibited from clearing them. In addition, Iran has taken steps to reduce its dependence on the dollar.

The restoration of sanctions on Iran’s automotive sector is also presumably aimed at deterring investment in one of Iran’s most active industries. Consistent with the JCPOA, a number of European automotive companies have sought to enter the Iranian market or have been reported to be in the process of doing so. However, these companies may now be subject to US sanctions for transacting in Iran’s automotive sector.

In addition, the US will revoke the following authorizations after a 90-day wind down period, which ends on August 6, 2018:

  • The importation of Iranian-origin carpets and foodstuffs and related financial transactions, which had been authorized pursuant to 31 C.F.R. §§ 560.534 and 560.535
  • Activities authorized under any specific license issued under the favorable licensing policy concerning the export or re-export of commercial passenger aircraft to Iran
  • Activities under General License I, which authorized entry into contracts related to the export or re-export of commercial passenger aircraft to Iran, contingent upon the granting of licenses under the favorable licensing policy regarding commercial aviation

180-day waiver authority

The following activity will again be subject to sanctions after a 180-day wind-down period ending on November 4, 2018:

  • Transactions with port operators, and shipping and shipbuilding sectors, including the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, and their affiliates
  • Petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO) and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products or petrochemical products from Iran
  • Transactions by foreign financial institutions with the Central Bank of Iran (CBI) and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act (NDAA)
  • Provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions
  • Provision of underwriting services, insurance or reinsurance
  • Certain transactions involving Iran’s energy sector

All of these sanctions, when re-imposed, will have significant impacts—both on Iran and on any non-Iranian parties engaged in activity targeted by the sanctions. Particularly noteworthy are the sanctions targeting Iran’s financial backbone—in this case, the threat of sanctions on foreign financial institutions dealing with the CBI and other Iranian banks, and measures designed to ensure that Iran is severed from a connection with non-Iranian banks and the global financial system via SWIFT.

Activity pursuant to General License H must wind down prior to November 5, 2018. Following that date, non-US Persons that are owned or controlled by US Persons will be prohibited from engaging in transactions involving Iran pursuant to 31 CFR § 560.215.

At some point prior to November 4, 2018, the US will re-designate persons it had removed from the SDN List pursuant to the JCPOA. Most of these persons had been removed from the SDN List and identified on the List of Persons Blocked Solely Pursuant to Executive Order 13599 (the EO 13599 List) because they are part of the government of Iran or an Iranian financial institution. US Persons have always been required to block the property of these persons and are generally prohibited from dealing with them, but under the JCPOA relief, non-US Persons would not be subject to secondary sanctions for engaging in transactions with persons on the EO 13599 List. Pursuant to the JCPOA withdrawal, however, by November 5, 2018, OFAC will re-impose, as appropriate, the sanctions that applied to these persons.

Depending on the basis on which these re-designations are made, there may be secondary sanctions exposure for parties that engage in certain activities with these persons after their re-listing.

Specific guidance concerning payments connected with wind-down activities

If a non-US, non-Iranian person is owed payment after the conclusion of the applicable wind-down period, for goods or services fully provided or delivered to an Iranian counterparty prior to the applicable wind-down period, pursuant to a written agreement entered into prior to May 8, 2018, and such activities were consistent with US sanctions in effect at the time of delivery or provision, the non-US, non-Iranian person will be permitted to receive payment for those goods or services under the pre-May 8 agreement. This would also be the case in circumstances where a non-US, non-Iranian person is owed repayment by an Iranian counterparty.

These allowances are designed for non-US, non-Iranian parties to be fully compensated for debts and obligations owed to them for goods or services provided or loans or credit extended to an Iranian party prior to the end of the applicable wind-down period.

Any such payments would need to be consistent with US sanctions, including not involving US Persons or the US financial system, unless the transactions are exempt from regulation or authorized by OFAC.

Relationship of withdrawal to United Nations snapback process

United Nations Security Council Resolution (UNSCR) 2231 of July 20, 2015 terminated provisions of the resolutions comprising the UN sanctions regime against Iran. It provides for a “snapback” mechanism, which can be triggered by a JCPOA participant alleging significant nonperformance by Iran. Under that process, the United Nations Security Council must vote on whether to continue the terminations of the above-listed resolutions. The United States has veto power over UNSC resolutions.

The unilateral withdrawal by the US from the JCPOA is not a “snapback.” There is little clarity concerning what impact, if any, the US withdrawal may have on the snapback process.  At present, the JCPOA remains in force among the other signatories to the agreement, and UN sanctions against Iran remain suspended.

Conclusion

By effectively reversing course from US sanctions policy direction of the past three years, the Trump administration’s withdrawal from the JCPOA and re-imposition of sanctions fundamentally changes the landscape under which a number of US and non-US firms have been operating with regard to Iran. Because most of the JCPOA relief pertained to secondary sanctions, the most significant impact is likely to be felt by non-US Persons, including foreign entities owned or controlled by US Persons, which conducted business with Iran under the JCPOA. US Persons conducting business pursuant to General License H, licenses issued in connection with commercial aviation or the general license for importation of certain foods and carpets will also be affected.

In short, OFAC has clearly stated its intention to enforce pre-JCPOA sanctions, and that persons engaged in activity involving Iran other than winding down JCPOA-authorized activity do so at their own peril.

Thus, any person, including non-US Persons, who may have business activity—or customers or counterparts who have business activity—involving Iran should promptly conduct a risk assessment and, where wind-down of such activity is warranted, begin that process. The move can best be described as a hard exit from the Iran deal, requiring anyone with Iran-related business and operations to promptly assess their risk and develop a plan to wind down operations as needed. The decision by the president is in fact not a “snapback” mechanism under the JCPOA, but rather a unilateral withdrawal from the pact and a reinstatement of US sanctions against Iran. Accordingly, it remains to be seen how the other parties to the JCPOA will react, especially given the intentionally global applications and impacts of the secondary sanctions.

The authors are attorneys at the global law firm Dentons. Peter Feldman is a partner in the firm’s London office. Partners Jason Silverman and Michael Zolandz, and associates Vedia Biton Eidelman and Nimrah Najeeb are based in the firm’s Washington, DC office.

regulatory changes impact companies with shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, International Trade

Global Regulatory Trends—2018

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Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2018, available here.  In this six-part series, Global Trade is publishing excerpts from the report focusing on public affairs, foreign investment, national security and economic sanctions, and trade across the world. Authors for these are listed at the end of the report on the firm’s downloadable link above.

­UNITED STATES

At the close of his first year in office, President Donald Trump released a lengthy National Security Strategy, focused on reshaping America’s approach to threats and global conflict, and also emphasizing economic security and an “America First” approach to setting US defense priorities. This comes on the heels of signing the most recent National Defense Authorization Act (NDAA), which sets the funding priorities and authorities for the US military for the fiscal year that runs through September 30, 2018.

The National Security Strategy comes at a time of growing influence from China and Russia, a concern over transnational terror organizations, and an intense focus on the nuclear threat posed by North Korea. In addition, some within the US national security community believe that the US must move to reinforce influence in the Western Hemisphere to prevent countries such as Russia and China from securing increased economic influence through foreign investment, petroleum development and trade, and direct lending to countries in Central and South America.

Among the core priorities of the Trump Administration for the coming year are the following:

  • Enhanced immigration enforcement and restrictions as a tool for domestic security;
  • Increased defense spending, including on missile defense systems and force projection; and
  • Building on the successful military efforts to defeat ISIS in Iraq by continuing funding for programs and resources to take military action against terrorist safe havens.

Cyber security remains a critical area of focus for both the White House and Congressional lawmakers, particularly with the continued investigations into the scope of the Russian election year interference in the US. Innovative technologies, as well as funding for modernization of both procurement and new technology deployment, remain high priorities in the US national security context.

Foreign direct investment will likely see policy changes in 2018. Support and momentum for further changes to the scope and influence of the Committee on Foreign Investment in the United States (CFIUS) continue to build, with a growing consensus that additional clarity is needed, along with a broader scope of review than national security and critical infrastructure. In 2018, legislation sponsored by Senator John Cornyn and backed by the Trump Administration, is likely to be considered by Congress. Coming on the heels of yet another year in which the volume of transactions reviewed by CFIUS increased, and with even greater scrutiny of foreign investment, the outcome of the debate over the Foreign Investment Risk Review Modernization Act (FIRRMA) will have meaningful national security and economic consequences. Among the changes proposed in FIRRMA are the following:

  • Expanding the scope of covered transactions to include real estate in close proximity to government installations, acquisitions of “innovative technologies,” and joint ventures and licensing arrangements that involve technology transfer;
  • Expanding the timeframe for CFIUS reviews to up to 120 days, from the current 75 days;
  • Creating mandatory filing circumstances, rather than solely voluntary proceedings;
  • Creating an expedited review process that allows CFIUS to review an overview of a transaction and the parties to it, rather than requiring a full Notice; and
  • Expanding the factors that CFIUS must consider in evaluating foreign acquisitions and investments.

CANADA

2017 saw a number of developments in Canada’s foreign investment review law, the Investment Canada Act, that will affect foreign investors in 2018. Foreign buyers of Canadian businesses are less likely to require approval from the Minister of Innovation, Science and Economic Development under the “net benefit to Canada” test as a result of increases in the review thresholds this year. This is a very positive change for foreign investors, especially those from certain countries as outlined below. At the same time, foreign investors looking to acquire Canadian businesses that may be engaged in the defense, telecommunications or otherwise technologically-sensitive sectors need to be aware of the potential for lengthy and rigorous national security reviews. There is no threshold for such reviews so that acquisitions of even small Canadian businesses— including minority investments—can be subject to national security review. While the Canadian Government’s August 31, 2017 Annual Report on the Investment Canada Act (the Report) highlights the relative infrequency of such reviews, the consequences of such a review can be draconian (e.g., divestiture of a completed transaction).

“Net benefit” review streamlined

The review of foreign investments into Canada under the “net benefit to Canada” test has been significantly streamlined this year for private sector investors— i.e., those that are not controlled or influenced by foreign governments—from certain countries. As of September 21, 2017, the new review threshold under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) came into effect, significantly increasing the threshold for EU investors to CA$1.5 billion in enterprise value of the Canadian target. This means that fewer transactions will be subject to the “net benefit to Canada” test which typically requires investors to provide commitments to the Government relating to, among other factors, levels of employment, participation of Canadians in senior management, maintaining head office functions in Canada and capital expenditures.

The increase in the review threshold is good news for foreign investors and not just those from the EU. Private sector investors from countries with which Canada has a free trade agreement also benefit from the higher review threshold. These “trade agreement countries” are: Chile, Colombia, Honduras, Mexico, Panama, Peru, South Korea and the US.

In addition to the higher threshold applicable to investors from the EU and the “trade agreement countries”, the Canadian Government has accelerated the increase in the “net benefit to Canada” threshold applicable to investors from other World Trade Organization countries from CA$800 million to CA$1 billion – two years ahead of schedule.

Five full-fledged national security reviews were conducted in 2016-17. Four of those were the result of Cabinet Orders, while one review was pursuant to a November 2016 Federal Court Order, which set aside a 2015 Cabinet Order (under the previous Government) for divestiture, and remitted the matter back to the Minister for a “fresh” review (the O-Net case). A final Cabinet Order was issued in all five cases in which reviews were conducted. In three cases, the non-Canadian was ordered to divest itself of control of the Canadian business. In two cases, the investment was authorized with the imposition of conditions that mitigated the identified national security risks to a degree that allowed the investment to proceed.

These results highlight two points for foreign investors. First, if there is any doubt whether national security could be a concern in a transaction, investors should make the appropriate filing (a notification or application for review) more than 45 days prior to closing to receive comfort that a review will not be ordered nor a divestiture remedy sought. Second, mitigation of the national security risk now appears to be a remedy that has become more accepted by the Government in certain circumstances.

The Report also notes that the most common factors in national security review were: the potential for transfer of sensitive dual-use technology or know-how outside of Canada; the potential to negatively impact the supply of critical services to Canadians or the Government; and the potential to enable foreign surveillance or espionage.

Finally, the Report also underlines the lengthy potential duration of the review process – more than 200 days if each stage of the national security process is fully engaged.

Conclusion

The Canadian Government’s efforts to reduce the number of “net benefit to Canada” reviews should be welcome news to investors looking to buy Canadian businesses. However, this streamlining leaves behind investors who are state-owned enterprises (SOEs), which continue to be subject to a lower review threshold (CA$379 million in the book value of the Canadian target’s assets). In addition, there has been no formal renunciation by this Government of the previous Government’s policy banning SOE acquisitions of control of Canadian oil sands businesses.

The Government’s provision of more guidance regarding national security review with the release of its guidelines late in 2016 and its enhanced communication relating to national security review in the Report are helpful to foreign investors and their advisors. At the same time, as a result of a few investments that have captured media attention in 2017, there is a perception in some quarters that national security reviews may be more subjective, politically motivated, and therefore, unpredictable than previously thought. Whether this view has merit is difficult to ascertain given that, despite the Government’s efforts to increase transparency, the national security review process in Canada remains largely opaque.

New NAFTA would govern North American shipments of export cargo and import cargo in international trade.
Commentary, EU Trade, Free Trade Agreements, Global Trade Daily, Imports/Exports, International Trade

Global Regulatory Trends—2018

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Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2018, available here.  In this six-part series, Global Trade is publishing excerpts from the report focusing on public affairs, foreign investment, national security and economic sanctions, and trade across the world. Authors for these are listed at the end of the report on the firm’s downloadable link above.

Trade and economic sanctions: Canada

Trade agreements. The single most important trade issue to face Canada in 2018 will be the renegotiation of the NAFTA. Given the drama associated with the NAFTA negotiations, other momentous trade agreement developments in the past year have received less than their fair share of attention. Notably, comparatively less attention has been given to the long-delayed implementation of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and the reboot of the Trans-Pacific Partnership (TPP) following the withdrawal of the US in the early days of the Trump Administration.

Looking ahead, the implementation of the CETA in September of 2017 will continue in 2018 to have a profound impact on Canada-EU trade and investment. Businesses are now starting to feel the concrete effects of the tariff reductions and other trade promoting measures of the agreement. The momentum of trans-Atlantic Canada-EU activity is accelerating, with more EU businesses looking at export and investment opportunities in Canada, notwithstanding uncertainties related to the NAFTA. We expect that this growth in activity will continue and that businesses in Canada and the EU will increasingly look for opportunities across the Atlantic and feel the competitive pressures of new entrants into established markets, including in government procurement, infrastructure, manufacturing, construction, financial and consulting services, IT, software and health care, among others.

When President Trump pulled out of the TPP (one of his very first acts in office), it was expected that this would spell the end of the agreement. Soon after the US withdrawal, however, the concept of a “TPP minus 1” (TPP11) started to gain momentum among the remaining participants in the agreement (including Australia, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and  Vietnam). In May 2017, at a TPP Ministerial Meeting, the TPP was reborn as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The new name is largely the result of Canadian pressure but, ironically, Canada is now one of the last stumbling blocks in finalizing the agreement.

In November 2017, at an APEC Trade Ministerial Meeting, the remaining 11 parties agreed to the “core elements” of the CPTPP but several news outlets blamed Canada for delaying the finalization of a deal. At press time, negotiations to finalize the CPTPP continue in earnest but concerns have emerged that unless a deal is concluded very soon, the political window for a deal may close. One of the remaining concerns for Canada involves rules of origin for automobiles. The original deal provided for duty free treatment if 45 percent of the vehicle’s value originated in the TPP region (by contrast, the same threshold is 62.5 percent in the NAFTA). This has raised concerns that the CPTPP will dampen Japanese car-makers’ incentive to invest in the Canadian auto sector.

Reports now suggest that Japan is pushing hard for a deal to be signed at an upcoming APEC Ministerial meeting in Chile in March. If a deal can be concluded, it will have significant implications for Canadian businesses across a wide cross-section of industries, notably the agri-food sector, forestry products and the auto industry.

Sanctions. On the sanctions front, there continue to be significant differences between Canadian and US sanctions, notably on Iran and Cuba. As Iran has opened up to greater economic exchanges with the West, Canadian companies have taken advantage of opportunities not available to US competitors. However, given remaining sanctions on Iran both in Canada and the US, compliance concerns persist. To control risks, Canadian companies need to proceed very carefully and have in place a strong suite of due diligence, contractual protections and other safeguards to ensure remaining sanctions are complied with. As Canadian trade with and investment in Iran continues to expand, sanctions compliance issues will continue to be of significant concern in 2018.

In 2017, Canada also adopted a so-called “Magnitsky Act”. The law’s formal title is the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) (S.C. 2017, c. 21). This law and its accompanying regulations impose targeted measures against foreign nationals who are, in the opinion of Canada, responsible for or complicit in gross violations of human rights, or are public officials involved in acts of significant corruption. The regulations prohibit anyone in Canada, or Canadians outside Canada, from, among other things, dealing in any property, wherever situated, of a listed person. So far, the Schedule to the regulations lists 52 foreign nationals from South Sudan, Russia and Venezuela. This new sanctions regime imposes on Canadian companies’ added obligations to screen counterparties against yet another list. This continues to be a cumbersome process as the Government of Canada does not publish a consolidated list of sanctions entities and individuals.

Trade disputes. As predicted in our Dentons’ Pick of Global Regulatory Trends to Watch last year, the Canada-US softwood lumber anti-dumping and countervailing duty (AD/CVD) dispute continued to work its way through the US AD/CVD investigation process throughout 2017, without a settlement of the case being reached. The outcome so far has been very high punitive AD and CVD duties being imposed on Canadian exports of softwood lumber to the US. Canada has launched several legal challenges against the duties, which will continue to grind their way through the various processes, including the WTO Dispute Settlement Body and NAFTA Chapter 19 panels. Historically, Canada has had some significant litigation successes in relation to previous softwood lumber investigations and is banking on being able to have the duties reduced again. In the meantime, we expect that the dispute will not be settled in 2018 and that US importers of Canadian softwood will continue to pay heavy duties. We also expect that alternative sources of lumber supply (such as Scandinavia and Russia) will continue to increase their market share in the US.

Canada itself has continued to use AD/CVD duties to target imports, particularly from China. In 2017, five new investigations were launched against imports of silicon metal, line pipe, PT resin, copper pipe fittings and pasta. For 2018, we anticipate continued AD/CVD activity as the remaining 2017 cases conclude and other findings come up for “sunset review” and new cases are initiated.

Canada has also been active at the WTO, notably launching in late 2017 (publicly disclosed in early 2018) a massive broadside complaint against numerous aspects of the US anti-dumping and countervailing duty system. This case comes on the heels of numerous US investigations that have targeted Canada, including on softwood lumber, newsprint and aircraft. Canada’s frustration with US AD/CVD duties has been building for years and the complaint seeks the elimination of numerous aspects of US trade remedies that Canada considers unfair. This huge case will continue to work its way through the WTO dispute settlement process in 2018 and may have a significant impact on trade agreement negotiations, including the ongoing negotiations on the renewal of the NAFTA and to settle the softwood lumber dispute.

Trade and economic sanctions: UK

Developing trading relationships with the wider world post-Brexit will need to be balanced against foreign policy objectives. Currently, the UK wields significant influence in relation to the development and imposition of sanctions (arms embargoes, asset freezes, visa or travel bans and trade embargoes) both as an EU Member State and a member of the UN Security Council. The applicable sanctions are implemented by unanimous agreement at the EU level, either following UN action or as a result of autonomous measures by the EU.

Leaving the EU raises a number of questions about how the UK can maintain its influence in this important area. The EU External Affairs Sub-Committee of the House of Lords has undertaken an inquiry into UK sanctions policy after Brexit and published its report on December 17, 2017. It concluded that the effectiveness of UK sanctions will be undermined unless the UK can quickly agree on arrangements for future sanctions policy co-operation with the EU. Without this, the UK could be left with the choice of imposing less effective unilateral sanctions or aligning with EU sanctions over which it will have no influence.

In particular, there are concerns the Government’s proposed “tailored” and “unprecedented” approach to UK-EU collaboration on sanctions policy is untested. Informal engagement with the EU is not regarded as a substitute for the force of joint decision-making at the EU level. A political forum has been suggested for regular discussion and coordination of sanctions policy. This would seem to be an area where there is political will on both sides to reach agreement quickly.

Meanwhile, the EU (Withdrawal) Bill will freeze current sanctions regimes and designations in effect on the date of the UK’s withdrawal from the EU. Further, the Sanctions and Anti-Money Laundering Bill, introduced to the House of Lords on 18 October 2017, proposes a legislative framework to “enable the UK to continue to implement United Nations (UN) sanctions regimes and to use sanctions to meet national security and foreign policy objectives”. If adjustments are required to the retained EU sanctions regimes, the Bill provides for temporary powers to make the necessary changes. Legal jurisdiction for matters relating to the post-Brexit sanctions regime will rest with the UK courts. However, it is unlikely that the UK will pursue a completely independent and divergent strategy. Instead, alignment with the EU and its other key trading partners, in particular the US, will be the likely outcome.

Trade and economic sanctions: US

2018 will likely be a challenging year for trade compliance around the world. From macro-challenges surrounding the status of long standing trade agreements such as the North American Free Trade Agreement (NAFTA), Britain’s post-BREXIT trading regimes, and the global trade rules under the WTO, to granular enforcement and regulatory actions at borders such as increased use of antidumping and countervailing duty mechanisms, supply chain issues around forced/slave labor and intellectual property enforcement, to name just a few, trade compliance professionals will have to keep a keen eye open to operational and compliance challenges.

Enforcement actions are a high priority in the US and other countries too. In the US, the trend towards high profile antidumping and countervailing duty investigations (such as cases involving newsprint, large civil aircraft and aluminum sheet) will likely continue in 2018. The enforcement agenda also includes novel cases including Section 232 national security investigations on aluminum and steel imports and safeguard investigations on solar products and washing machines. These cases may result in significant additional duties and increased friction with US trading partners. For example, the Trump Administration National Security Strategy states that the US “will no longer turn a blind eye to violations, cheating, or economic aggression,” and that the Trump administration may take further action against Chinese trading practices, as well as other countries viewed as threats to US economic and/or national security.

New Cuba regulations impact shipments of export cargo and import cargo in international trade.
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US Implements Changes To Cuba Sanctions

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Effective November 9, 2017, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) and the US Department of Commerce’s Bureau of Industry and Security (BIS) amended the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR), respectively, implementing the changes to the Cuba sanctions program initially unveiled by President Donald Trump on June 16.

The newly amended Cuba sanctions program adds significant restrictions relating to financial transactions and travel by persons subject to US jurisdiction. In particular:

Persons subject to US jurisdiction may not engage in direct financial transactions with persons and entities on the US Department of State’s List of Restricted Entities and Subentities Associated with Cuba (the “Cuba Restricted List”). Persons subject to US jurisdiction may no longer engage in individual educational travel to Cuba.

The list of “prohibited officials of the Government of Cuba,” with whom persons subject to US jurisdiction are restricted from certain dealings and who are not eligible to receive items under certain EAR license exceptions, has been significantly expanded.

License applications to export items for use by entities on the Cuba Restricted List will be subject to a general policy of denial. The types of items eligible for export under License Exception SCP (Support for the Cuban People) has been expanded.

Any person or company engaged in transactions involving Cuba, or planning to do so in the future, will need to assess the implications of these new restrictions to ensure compliance.

Background: Cuba sanctions program and recent developments

The US has maintained a comprehensive trade embargo against Cuba since shortly after the Cuban Revolution. The CACR generally prohibits persons subject to US jurisdiction from engaging in commercial transactions with the government of Cuba, Cuban entities and Cuban nationals, as well as from traveling to Cuba, with certain exceptions.

In 2009, and again in 2015, the Obama administration significantly eased travel restrictions by issuing general licenses covering 12 authorized categories of travel. The Obama-era policy changes also made it easier for US persons to support the Cuban people and private sector by relaxing, among other things, restrictions on financial transactions ordinarily incident to authorized activity involving Cuba and licensing requirements for exports of certain categories of goods to Cuban individuals or private-sector entrepreneurs.

While persons subject to US jurisdiction remain prohibited from traveling to Cuba for purely tourist reasons, general licenses authorize travel for 12 broad categories. Despite the easing of sanctions, transactions with or involving Cuba or Cuban nationals have remained significantly restricted.

In June 2017, President Trump announced a new Cuba policy in a National Security Presidential Memorandum on Strengthening the Policy of the United States Toward Cuba (Cuba NSPM). The stated aim of the Cuba NSPM was to exert pressure on the Cuban government to address its civil and human rights abuses by ending economic practices that disproportionately benefit the Cuban government and military. To that end, the new policy directed a move away from the relief implemented by the Obama administration by narrowing the scope of authorizations to support only the Cuban people and the Cuban private sector. You may read our alert on the Cuba NSPM here. Under the Cuba NSPM, OFAC was to issue revised regulations to implement this new policy within 30 days; however, it did not do so until November 9.

New transaction restrictions

Persons subject to US jurisdiction are now prohibited from engaging in “direct financial transactions” with entities on the Cuba Restricted List, which the State Department published on November 8. That list includes 180 entities and sub-entities that have been deemed to be under the control, or acting on behalf of the Cuban military, intelligence or security services. It includes not only government agencies, but also marinas, tour agencies, shops and hotels, and includes the Cuban locations of a number of international brands such as H10, Iberostar, Kempinski, and Meliá.

A “direct financial transaction” occurs where the person engaging in the transaction acts as the “originator on a transfer of funds whose ultimate beneficiary is an entity” on the Cuba Restricted List. OFAC has also amended a number of general licenses, including all travel-related general licenses, to include the prohibition on direct financial transactions involving entities on the Cuba Restricted List. This restriction has been broadly incorporated into virtually all aspects of the CACR, even including the statutorily mandated information and informational materials exception. The new transaction restrictions are intended to weaken Cuban military and certain government entities, while strengthening private Cuban enterprise.

Certain guidance from the State Department and OFAC are particularly noteworthy. First, unlike the List of Specially Designated Nationals and Blocked Persons (SDN List), OFAC’s “50-percent Rule” does not apply to the Cuba Restricted List, so entities owned by entities on the Cuba Restricted List are not themselves restricted merely as a result of such ownership. In addition, OFAC continues to place the burden on travelers to comply with limitations on general licenses. For instance, a new FAQ reaffirms that US financial institutions may rely on the statements of customers with respect to transactions, including those involving an entity on the Cuba Restricted List, and need not independently verify compliance with the CACR, unless the financial institution knows or has reason to know that the transaction is not authorized.

New travel restrictions

The general license for educational travel previously permitted individual academic (through an academic institution) and non-academic (“people-to-people”) travel. Under the recent amendments to that general license, individual educational travel is no longer permitted. US persons desiring to travel to Cuba for educational purposes must now do so through organizations subject to US jurisdiction, and must be accompanied by a representative of the sponsoring organization who is also a person subject to US jurisdiction. The predominant portion of the people-to-people travel must not involve a prohibited Cuban official (which is now a much larger category) or member of the Cuban Communist Party.

The amended general license for travel in connection with “support for the Cuban people,” like all other categories of authorized travel, contains a full-time schedule of activities of organizations aimed at improving human rights and promoting civil society and democracy. The license now specifies that such a full-time schedule of activities must “result in meaningful interaction with individuals in Cuba and that enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities.” In addition, persons traveling to Cuba under this general license must stay at private Cuban residences, dine at privately owned restaurants, and shop at privately owned small businesses.

Travelers to Cuba are required to retain records of their Cuba-related transactions and schedules for at least five years; however, in the case of individuals traveling under the amended general licenses for educational travel, individuals may rely on the sponsoring organization to maintain records reflecting compliance with the requirements of that license.

Grandfathering provisions

Financial transactions relating to authorized commercial engagements that were in place before November 9, as well as travel-related transactions initiated prior to that date, will remain authorized. Travel arrangements are considered “initiated” if traveler has completed at least one travel-related transaction, such as purchasing flight tickets or reserving accommodations.

Revised export control regulations

Effective November 9, 2017, BIS will apply a policy of denial to license applications to export items whose ultimate end-user will be entities on the Cuba Restricted List. Also, prohibited Cuban officials are now ineligible to receive exports and re-exports under license exceptions for gifts and humanitarian donations (GFT), consumer communication devices (CCD) and support for the Cuban people (SCP).

BIS also expanded the scope of license exception SCP, which authorizes certain license-free exports to the Cuban private sector. Prior to November 9, the SCP exception identified certain eligible types of items, limited to use by the private sector on privately owned buildings, private agricultural activities or private sector entrepreneurs. The new rule expands the types of eligible products to include all items for use by the Cuban private sector for private sector economic activities. Items used to primarily generate revenue for or contribute to Cuban state operations, however, are ineligible.

What these changes mean

Effective November 9, 2017, transactions with Cuba are more challenging and present greater risk, and travel to Cuba will likely become more difficult for certain travelers.

SDNs have always been off-limits to persons subject to US jurisdiction, but the new restrictions on financial transactions add an additional layer of complexity. The Cuba Restricted List is one more list for US persons to check in connection with transactions involving Cuba. This prohibition applies to all commercial transactions, including travel. Persons subject to US jurisdiction engaged in any commercial transactions involving Cuba, travel-related or otherwise, must determine whether those transactions involve newly-restricted persons and, if they do, whether the grandfathering provisions of Section 515.209 apply.

Given the relatively spontaneous nature of travel and the sheer number and variety of entities on the Cuba Restricted List, the new changes will make travel to Cuba significantly riskier for persons subject to US jurisdiction. Persons planning otherwise authorized travel must now carefully consider where they will stay, shop and eat while in Cuba.

In addition, financial institutions will need to consider what additional diligence measures might be appropriate in light of OFAC’s new guidance, including what constitutes a “reason to know” that a transaction involving an entity on the Cuba Restricted List is not authorized, as OFAC’s guidance suggests the mere involvement of a restricted entity may not by itself be such a “reason to know.”

The expanded Cuban Prohibited Officials list presents an additional layer of compliance challenges. Instead of naming specific individuals subject to restrictions, OFAC has identified a number of categories of persons (which includes persons associated with Cuban state-run media, certain provincial officials and members and employees of the Supreme Court) with whom persons subject to US jurisdiction are restricted from dealing. Because, unlike the SDN or Cuba Restricted Lists, the Cuban Prohibited Officials list does not identify individuals by name, diligence to ensure compliance is likely to present new challenges.

US persons planning educational—academic or non-academic—travel to Cuba will need to consider whether their travel will be conducted within the confines of the new restrictions. Organizations sponsoring such travel will also need to understand their recordkeeping obligations as to individual travelers.

Finally, while the CACR primarily applies to persons or entities that are subject to US jurisdiction, certain foreign entities need to consider whether and how the new US Cuba sanctions policy will affect them. For instance, a non-US entity that books travel for US persons, hosts educational trips, or is a foreign institution of higher learning with US person faculty and/or students will need to consider how it may be affected by the amendments to the CACR.

Conclusion

The newly implemented changes to the Cuba sanctions program adds significant restrictions relating to financial transactions and travel. While the primary application of these changes is to persons subject to US jurisdiction, any individual, company or institution engaged in transactions involving Cuba, or planning to do so in the future, will need to assess the implications of these new restrictions to ensure compliance.

The authors are attorneys at the global law firm Dentons. Peter Feldman is a partner in the firm’s London office. Partners Jason Silverman and Michael Zolandz and associate Vedia Biton Eidelman are based in the firm’s Washington, DC office.

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New US Sanctions Target Venezuela’s Debt And Equity Financing

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On August 25, 2017, US President Donald Trump issued an executive order (EO) limiting the government of Venezuela’s ability to access certain types of international financing. The new measures build on existing sanctions designations of senior Venezuelan officials and resemble the types of sectoral sanctions that the United States has imposed on Russia in recent years.

The new sanctions are effective immediately. However, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued four general licenses alongside the EO that provide, among other things, (i) a 30-day wind-down period for certain transactions involving entities owned or controlled by the government of Venezuela, (ii) authorization to transact in a “grandfathered” set of existing bonds, and (iii) relief for trade in agricultural commodities, medicine and medical devices.

Accordingly, now is the time to identify and inventory any financial exposure to the government of Venezuela, including its commercial entities (e.g., Petroleos de Venezuela, S.A. (PdVSA) and CITGO Holding, Inc.), and to consider how best to mitigate sanctions risk going forward.

The expanded Venezuela sanctions operate by limiting the ability of US persons to engage in certain types of transactions related to providing financing (debt or equity) to or for the benefit of the government of Venezuela, its property and its interests in property. This includes entities owned 50 percent or more, in the aggregate, by the government of Venezuela. As a consequence, both PdVSA and CITGO Holding, Inc. are now subject to sanctions, although both of these entities, in particular, are subject to less onerous restrictions than the rest of the Venezuelan government.

The new measures prohibit US persons from engaging in the following, without a license:

• Transactions related to, providing financing for or otherwise dealing in “new debt” with a maturity greater than 30 days by, on behalf of or for the benefit of the government of Venezuela (except for PdVSA).

• Transactions related to, providing financing for or otherwise dealing in “new debt” with a maturity greater than 90 days by, on behalf of or for the benefit of PdVSA.

• Transactions related to, providing financing for or otherwise dealing in “new equity” issued by, on behalf of or for the benefit of the government of Venezuela, including PdVSA.

• Transactions involving bonds issued by the government of Venezuela prior to August 25, 2017.

• Transactions involving dividend payments or other distributions of profits to the government of Venezuela by any entity owned or controlled, directly or indirectly, by the government of Venezuela (e.g., PdVSA).

• Purchasing any securities from the government of Venezuela, other than “new debt” with a maturity of less than or equal to 30 days (or, in the case of PdVSA, 90 days).

As noted above, OFAC issued four general licenses to accompany the EO. OFAC also provided interpretive guidance in the form of a set of FAQs.

General License 1 provides a 30-day wind-down period (i.e., through September 24, 2017) for US persons to conduct all transactions “ordinarily incident and necessary to winding down” agreements involving new debt with a tenor of greater than 30 days for the government of Venezuela or 90 days for PdVSA; bonds issued by the government of Venezuela prior to August 25, 2017; and the purchase of securities from the government of Venezuela with a tenor of greater than 30 days (or 90 days for PdVSA).

General License 2 authorizes US persons to engage in transactions for new debt, or securities, of any duration, so long as the only government of Venezuela entity involved is CITGO Holding, Inc. or its subsidiaries.

General License 3 authorizes US persons to engage in transactions related to OFAC’s newly published List of Authorized Venezuela-Related Bonds, as well as all transactions involving bonds issued prior to August 25, 2017, if the bonds were issued by US Person entities owned or controlled, directly or indirectly, by the government of Venezuela (e.g., CITGO Holding, Inc.). However, General License 3 does not permit US Persons to purchase bonds on the “List of Authorized Venezuela-Related Bonds” from the government of Venezuela (directly or indirectly).

General License 4 authorizes all transactions related to financing the export or reexport to Venezuela of certain agricultural commodities, medicines and medical devices, including to persons in third countries who are purchasing these items specifically for resale to Venezuela—provided the export or reexport is authorized by the US Commerce Department.

The August 25, 2017 EO significantly expanded US sanctions on Venezuela, and appears to incorporate some of the same types of restrictions that the US has implemented under Russian sectoral sanctions.

While the Venezuelan sanctions, like the Russian sanctions, do not include a commercial embargo, these finance-related restrictions are nonetheless likely to have a broad impact. Also of note, the FAQs highlight the licensing posture of the US government with respect to additional transactions with the government of Venezuela. Specifically, they highlight the policy behind the sanctions by expressly stating that any new debt or equity issuance by the Venezuelan government that has the support of the “democratically elected Venezuelan National Assembly” would likely receive an OFAC license.

The Venezuela sanctions reflect an evolving US approach to sanctions that utilizes targeted financial restrictions rather than purely “blocking and freezing” measures. As with other recent sanctions programs, the Venezuela sanctions also target specific sectors of the target state’s economy, imposing enhanced compliance obligations on financial and energy sector participants that are more substantial than other sectors.

The authors are attorneys at the global law firm Dentons. Peter Feldman is a partner in the firm’s London office. Partners Jason Silverman and Michael Zolandz and associate Nimrah Najeeb are based in the firm’s Washington, DC office.

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Key Takeaways: US Sanctions Legislation Against Iran, Russia, and North Korea

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On August 2, 2017, President Donald Trump signed into law one of the most wide-ranging sanctions measures of the last five years. The Countering America’s Adversaries Through Sanctions Act (CAATSA), expands and enhances three separate sanctions programs targeting Iran, Russia, and North Korea, and substantially curtails presidential authority to waive or modify sanctions against Russia without congressional oversight and approval.

CAATSA was enacted with overwhelming support in the US Congress, clearing the US House of Representatives on a 419 -3 vote, and the US Senate on a 98-2 vote. Many provisions of CAATSA are effective immediately. Others require implementing regulations and guidance from the US Treasury Department’s Office of Foreign Assets Control (OFAC) over the next 60 days. Thus, CAATSA creates a near-term series of compliance obligations for both US and non-US companies with respect to their commercial operations and transactions.

Key takeaways

It is clear at the outset that the universe of sanctions targets has been expanded—particularly against Russia. These new sanctions impact not only US businesses (and US citizens and permanent residents employed by foreign companies), but also impose enhanced secondary sanctions that target foreign businesses directly—particularly with respect to the sanctions against Russia and North Korea. In a departure from most other sanctions programs, these new authorities substantially limit the discretion of the president to terminate, waive or modify their application—a meaningful change in the way that US sanctions policy has evolved over the past several decades.

Key aspects of the new sanctions: Iran

CAATSA expands US sanctions targeting Iran’s ballistic missile program, weapons proliferation activities, and human rights abuses; enhances the legal basis for existing sanctions targeting Iran’s Islamic Revolutionary Guard Corps (IRGC); and requires certain periodic reviews and reports that lay the groundwork for further sanctions in the future. CAATSA also limits the ability of the president to waive or suspend the application of certain sanctions. These measures underscore the critical importance of identifying and addressing US sanctions with respect to any commercial interaction involving Iran.

Russia

CAATSA significantly expands the scope and applicability of US sanctions to additional sectors of the Russian economy, including the financial services, debt capital markets, energy, transportation, telecommunications, information technology, defense and aerospace. As such, US persons contemplating or engaging in transactions in these sectors, or with counterparties in these sectors, will need to navigate a significantly more restrictive sanctions landscape. Further, several of the new sanctions authorized under the act have extraterritorial reach, as they target foreign persons involved in certain transactions involving Russia.

For instance, CAATSA authorizes OFAC to impose sanctions on a foreign person as a “sanctions evader” for materially violating or causing a violation of US sanctions against Russia, or for facilitating certain transactions for a sanctioned person or a close relative. OFAC can also sanction persons for investing in or privatizing Russian state-owned assets in a way that “unjustly benefits” Russian officials or their close associates and family members. Finally, many of the “may impose” sanctions from the 2014 Ukraine Freedom Support Act, which President Obama indicated at the time he did not intend to impose, have been amended to “shall impose” sanctions. How OFAC will interpret its mandate under this new statutory authority remains to be seen, but it warrants significant attention and caution.

Accordingly, both US and non-US persons, including foreign financial institutions, should consider reviewing planned and existing activities and investments in sectors of the Russian economy that are targeted by the new sanctions, and those involving Russian state-owned enterprises and other assets. The act will alter the status quo as to existing sectoral sanctions by changing the permissible debt tenor under Directives 1 and 2, as well as the scope of the prohibitions on providing goods or services related to oil exploration and production under Directive 4. Persons engaged in ongoing activities relating to those directives should consider assessing what impact the changes may have on that activity.

North Korea

Similar to the Russia sanctions, the North Korea sanctions also have extraterritorial reach involving several different industries such as previous metals, aviation, textile, energy and agriculture. Accordingly, US and non-US companies transacting in any of the affected sectors are now within the purview of secondary sanctions against North Korea and face additional due diligence obligations.

Sectors affected

The new sanctions are likely to have the most significant impacts on the following sectors.

Energy. CAATSA imposes new restrictions on investments involving Russian oil companies in projects globally, and new diligence requirements with respect to sale and purchase of oil and petrochemical products of North Korean origin.

Insurance. The new sanctions require substantially enhanced diligence with respect to specific ports and vessels that will likely impact contracts of insurance in a wide range of applications.

Financial institutions. New sanctions on Russia target debt and equity investments in more than 200 Russian entities and expand the universe of targeted oil and gas projects subject to investment restriction, while the North Korea sanctions impose enhanced diligence requirements for correspondent banking relationships.

Manufacturing. Export restrictions on US technology for projects that involve Russian oil companies are enhanced and expanded beyond those already in place under Directive 4.

What comes next?

Within the next 60 days, OFAC is required to issue implementing regulations with respect to many of the new sanctions authorities. In addition, over the next six months the Trump administration is required to issues a series of reports to Congress on additional sanctions targets; explain the basis for imposing or refraining from imposing additional sanctions measures; and issue findings on the scope and extent of sanctions enforcement by other countries—particularly China and the European Union. In connection with these efforts, additional designation of sanctions targets by OFAC is likely.

If OFAC’s actions following the administration’s changes to Cuba policy are any indication, it may issue FAQs or limited guidance concerning the scope and timing of the changes to the sanctions programs in relatively short order.

Sanctions summaries

Iran. Title I of CAATSA provides for several new and enhanced sanctions on Iran, and mandates that the US Executive Branch produce several new reports regarding US government strategy to address Iran. Some of the key Iran-related measures include the following.

Ballistic missiles. CAATSA requires the president to impose blocking sanctions and a US visa ban on any person (US or non-US) that the president determines to be knowingly engaged “in any activity that materially contributes to Iran’s ballistic missile program or other Iranian weapons of mass destruction program, along with any other persons found to have provided material support to these sanctioned entities.” Here, “knowingly” means both actual knowledge and constructive (“should have known”) knowledge. Consistent with other US sanctions programs, this designation authority also covers a wide range of related parties, not just the person engaged in the ballistic missile activities (e.g., successor entities, affiliates, persons acting in concert, persons acting for or on behalf, persons providing material support, etc.)

Another basis for IRGC sanctions. CAATSA establishes an additional US legal basis for sanctions targeting Iran’s Islamic Revolutionary Guard Corps (IRGC): its support for terrorism. CAATSA also includes a congressional finding to clarify that it is the entirety of the IRGC, not just its Quds Force, which is responsible for Iran’s “destabilizing activities, support for acts of international terrorism, and ballistic missile program.” These measures do not, however, make a material change in the IRGC’s sanctions status; rather, they just add more statutory support for the sanctions.

Human rights abuses. CAATSA authorizes the president to impose sanctions on US and non-US persons who the Department of State determines are responsible for certain human rights violations in Iran, such as torture or extra-judicial killings of Iranian individuals seeking to expose illegal activity by Iranian government officials, or to exercise or promote human rights. This authority supplements existing US authorities targeting Iran’s human rights abuses, such as Executive Order 13606, (the GHRAVITY E.O.).

Arms embargo. CAATSA reinforces the power of the president to impose blocking sanctions on any person (US or non-US) who the president determines “knowingly engages in any activity that materially contributes” to the sale or transfer to or from Iran of specified arms including “battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, [and] attack helicopters” as well as persons found to have knowingly provided any services or assistance related to the sale, transfer, manufacture, maintenance or use of the such arms and related material.

Review of mandatory sanctions designations

CAATSA directs the president to review, every five years, all persons designated on the List of Specially Designated Nationals (the SDN List) in connection with Iran to assess the conduct of such persons as it relates to activities of the Iranian government with respect to its ballistic missile program, or support by the Iranian government for acts of international terrorism, in order to evaluate whether additional sanctions or penalties should apply to such persons.

Report on discrepancies between US and EU sanctions

CAATSA creates a new obligation for the president to submit periodic reports to Congress describing and explaining any discrepancies between US and European Union sanctions against persons for activity related to weapons proliferation in Iran, support for acts of international terrorism by Iran or human rights abuses in Iran.

Russia

Title II of CAATSA greatly expands the scope of the Russia/Ukraine sanctions program to target integral sectors of the Russian economy, including transportation, finance, and energy. The act also establishes an additional set of sanctions measures, including banking and export restrictions that affect both US and non-US persons. Further, the act reduces the discretion of the executive branch in choosing whether to implement certain sanctions, and curtails the power of the president to terminate, waive or amend certain sanctions unilaterally.

Codification of Obama administration executive orders

CAATSA codifies Executive Orders 13660, 13661, 13662, 13685, 13694 and 13757, all previously issued under the Obama administration. These executive orders form the basis of most the US Russia/Ukraine sanctions program administered by the Office of Foreign Assets Control (OFAC), as they contain designation authorities for certain Ukraine- and cybersecurity related conduct; authorize sectoral sanctions against financial, defense and energy sectors of the Russian economy; and prohibit most transactions involving Crimea. As a result of the codification of these executive orders, the sanctions contained therein cannot be revoked, waived or modified by subsequent presidential executive orders and may only be changed through congressional action.

As a general matter, US persons are prohibited from transacting with, and must block the assets of, individuals and entities designated on the SDN List. There are currently 303 entities designated on the SDN List and 278 entities designated on the Sectoral Sanctions Identification (SSI) List under Executive Orders 13660, 13661, 13662, 13685, 13694 and 13757, although under OFAC guidance sanctions also apply to any entities owned 50 percent or greater in the aggregate by designated persons.

Creation of new sanctions authorities

CAATSA establishes 11 new types of sanctions measures as described below. The president is directed to impose at least five of the new measures against persons determined to have: participated in significant transactions with the Russian intelligence or defense sectors; participated in certain investments in or privatization of Russian state-owned assets, where those transactions unjustly benefit Russian government officials, their close associates or family members; or materially assisted or provided support for activities that undermine cybersecurity on behalf of Russia. (Moreover, persons knowingly engaged in such activities are to be added to the SDN List).

As well, CAATSA authorizes (but does not require) the president, after consultation with US allies, to impose at least five of the new measures against persons involved in certain material transactions involving the development of energy export pipelines in Russia.

The 11 new types of sanctions measures are:

  1. Prohibition on Export-Import Bank assistance for exports to sanctioned persons
  2. Denial of export privileges and licenses for sanctioned persons
  3. Prohibition on US financial institutions from providing loans totaling more than US$10 million in any 12- month period to sanctioned persons
  4. Restrictions on loans to sanctioned persons from international financial institutions where the US is a party
  5. Prohibition on designation as primary dealer and on service as a repository of government funds if the sanctioned person is a financial institution
  6. Restrictions on contracting with the US government for the provision of goods and services
  7. Prohibition on transactions in foreign exchange that are subject to the jurisdiction of the United States in which the sanctioned person has any interest
  8. Prohibition on banking transactions for sanctioned persons
  9. Prohibition on acquiring property or dealing with property within the jurisdiction of the United States
  10. Ban of investment in equity or debt of sanctioned persons
  11. Denial of entry into the US of any person determined to be a corporate officer of, principal of or shareholder with a controlling interest in a sanctioned person

In addition, CAATSA authorizes the president to impose any of the 11 sanctions measures against the principal executive officers of a sanctioned person, or against persons performing similar functions and with similar authorities as officers.

Modification of sectoral sanctions

CAATSA also modifies the implementation of Executive Order 13662, which directed sanctions on entities operating in the financial services, energy, metals, mining, engineering and defense sectors of the Russian economy. OFAC has implemented these sectoral sanctions under four directives, each targeting a different sector or type of activity. In their current form, the directives impose restrictions on US persons dealing in new debt and equity of SSI- designated entities (Directives 1, 2 and 3) and on exporting goods, services or technology in support of certain oil exploration or production projects that involve SSI-designated entities (Directive 4).

New sanctions authority against Russia’s state-owned rail sector. CAATSA lays the groundwork for new sanctions against Russian state-owned entities operating in the railway sector, as it grants OFAC the authority to sanction such entities, as well as US or non-US persons found to have materially assisted them. It remains to be seen how OFAC will elect to exercise this new sanctions authority—whether in a manner consistent with existing directives that restrict the ability of US persons to engage in specified transactions with designated entities, or in more or less restrictive ways.

Reduced permissible debt tenor under Directives 1 and 2. CAATSA requires OFAC, within 60 days of the Act going into effect, to shorten the permissible maturity period of restricted new debt for entities designated under Directive 1 (Russian state-controlled financial institutions) from 30 to 14 days and from 90 to 60 days for entities designated under Directive 2 (Russian state-controlled energy firms).

Expanded sanctions on projects related to oil exploration and production. CAATSA requires OFAC, within 90 days of the act going into effect, to revise the restrictions on the provision of goods or services related to oil exploration and production in Directive 4, to now also apply to any new deep-water, Arctic offshore or shale projects that have the potential to produce oil anywhere in the world in which a designated entity has a controlling interest or a substantial non-controlling ownership interest. At present, the restrictions in Directive 4 apply only to such projects within Russia that involve designated entities, but with the changes will now also apply to projects in which designated Russian entities have a 33 percent or greater interest, regardless of whether the project is located in Russia. The addition of a “33 percent rule” is notable in that it introduces a definition of a “substantial non-controlling ownership interest.” Like the existing OFAC “50 percent rule” this 33 percent rule will now pose an additional set of counterparty due diligence challenges for US businesses working in this sector.

Secondary sanctions for foreign sanctions evaders and human rights abuses. CAATSA provides a new basis for the president to impose blocking sanctions and a ban on entry into the US for foreign persons found to have committed material violations of existing Russian sanctions, or the facilitation of significant transactions by sanctioned persons or entities, or their close family members, and provided material assistance to a foreign person identified as being responsible for human rights abuses.

Prohibited conduct related to the transfer of arms to Syria. CAATSA requires the president to enact blocking sanctions and a US visa ban against foreign persons the president ascertains to have engaged in certain activities relating to the export of munitions and other defense material to Syria, including their successors and subsidiaries. These secondary sanctions imposed against foreign persons for the export or transfer of arms to Syria are a result of US concern about Russian involvement in Syria.

Modification of optional sanctions to mandatory sanctions. CAATSA directs the president to impose sanctions by modifying the relevant statutory language from “may impose” to “shall impose” for the following types of conduct: certain activities relating to the export of munitions and other defense material to Syria; and facilitation by foreign financial institutions of certain defense and energy- related transactions and transactions on behalf of sanctioned persons or entities or their close family members.

Although Congress may have intended the change in language to instruct the president to impose mandatory sanctions, statutory directions that include “can,” “may” and “shall” have not always been interpreted by previous presidents in the same way. As such, there is a certain amount of discretion exercised by presidents when deciding to take action under such congressional direction. It is not yet clear whether President Trump will take action to enact sanctions against entities for the export of munitions and other defense material to Syria, or facilitation of defense and energy-related transactions on behalf of sanctioned persons and their close family members.

North Korea

Although not as far reaching as the changes made to the Russia sanctions program, Title III of CAATSA expands the North Korea sanctions to target activities involving several sectors of the North Korean economy, and align US sanctions with those imposed by the United Nations. Mandatory sanctions targeting the North Korean precious metals, aviation and finance industries CAATSA provides the president the authority to designate persons who the president determines knowingly trade in precious or rare earth metals from North Korea, including gold, titanium ore, vanadium ore, copper, silver, nickel, zinc or rare earth minerals; knowingly sell or transfer aviation or other fuels for aircraft or other vessels designated under UN or US sanctions; and knowingly open correspondent accounts for North Korean financial institutions.

Discretionary sanctions

CAATSA also authorizes the president to impose discretionary sanctions against persons determined to have engaged in the following types of activities related to North Korea and the government of North Korea: acquiring coal, iron or iron ore from North Korea in excess of the limitations provided in the applicable United Nations Security Council Resolutions; acquiring textiles from North Korea; selling crude oil, petrochemical products or natural gas to North Korea; supporting the online commercial activities of the North Korean government, including online gambling sites; purchasing agricultural products from North Korea; and supporting or facilitating the migration of North Korean workers where the workers would generate revenue for the North Korean government.

In addition, the act also sanctions individuals or entities that facilitate human rights abuses by the government of North Korea, including the use of forced labor and slavery overseas of North Koreans.

Both the mandatory and discretionary designations will result in the US imposing blocking and travel sanctions against designated persons and prohibiting US persons from transacting with the designated entities.

Conclusion

Many of the most potentially significant changes to these existing sanctions programs are not self- executing. Rather, they will require OFAC and the Bureau of Industry and Security (BIS) to issue new implementing regulations. CAATSA marks the beginning of what is likely to be at least two months of significant change in the Iran, Russia, and North Korea sanctions programs. Dentons continues to closely monitor the implementation of these new sanctions.

The authors are attorneys at the global law firm Dentons. Peter Feldman is a partner in the firm’s London office. Partners Jason Silverman and Michael Zolandz and associate Nimrah Najeeb are based in the firm’s Washington, DC office.

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Trump’s New Cuba Sanctions Policy Changes Landscape in Key Sectors

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On June‭ ‬16,‭ ‬2017,‭ ‬US President Donald Trump unveiled his much-anticipated Cuba sanctions policy in what was billed as a major speech in Miami,‭ ‬Florida.‭ ‬While implementing regulations have yet to be published,‭ ‬the president’s announcement and related guidance refocus US Cuba policy toward more restrictive measures and away from the several rounds of sanctions relief that had been implemented by the Obama administration.

Two of the key policy changes involve enhanced restrictions on travel and commerce:‭ ‬ending individual people-to-people authorized travel to Cuba,‭ ‬and prohibiting commercial transactions involving Cuban military and intelligence agencies or their commercial affiliates,‭ ‬such as Grupo de Administración Empresarial‭ (‬GAESA‭)‬.

These changes could have significant impacts across a range of sectors,‭ ‬especially travel,‭ ‬tourism and hospitality,‭ ‬and associated services,‭ ‬such as banking,‭ ‬insurance,‭ ‬and transportation.‭ ‬These effects are also likely to be felt by businesses around the world—including outside of the US and Cuba—because of the wide jurisdictional reach of the US Cuba sanctions.

Per the president’s directive,‭ ‬the US Department of Treasury’s Office of Foreign Assets Control‭ (‬OFAC‭) ‬and the US Department of Commerce will,‭ ‬within‭ ‬30‭ ‬days,‭ ‬begin the process of issuing regulations to implement the new policy,‭ ‬though the policy changes will not take effect until the regulations are finalized—a timeline the president said may take several months.‭ ‬Also,‭ ‬there will be carve-outs for existing transactions that are currently lawful but would violate the new restrictions upon their taking effect.‭

Given the dynamic policy environment,‭ ‬and the potentially significant penalties for sanctions violations,‭ ‬active monitoring of the US Cuba sanctions landscape will remain critical.‭ ‬A compliance review of existing or planned Cuba investments and operations may be prudent for any company doing business on the island,‭ ‬as well as for any company whose counterparties or customers do business in Cuba.

Background and context of President Trump’s new policy
The US has maintained a trade embargo against Cuba since the late‭ ‬1950s.‭ ‬As codified under the Cuban Assets Control Regulations‭ (‬31‭ ‬CFR Part‭ ‬515‭)‬,‭ ‬US sanctions generally prohibit‭ “‬persons subject to US jurisdiction‭” ‬from engaging in commercial transactions with the government of Cuba,‭ ‬Cuban entities and Cuban nationals,‭ ‬subject to certain exceptions,‭ ‬such as for humanitarian trade.‭ ‬US Cuba sanctions also generally prohibit persons subject to US jurisdiction from traveling to Cuba.

During the Obama administration,‭ ‬the US and Cuba re-established diplomatic relations,‭ ‬President Obama visited Cuba,‭ ‬and the US provided multiple rounds of sanctions relief,‭ ‬including easing the general ban on commerce and establishing‭ ‬12‭ ‬categories of authorized travel‭ (‬while maintaining the general prohibition on persons subject to US jurisdiction from engaging in tourist travel‭)‬.‭ ‬The authorized travel types include:

Family visits
Official business of the US government,‭ ‬foreign governments and certain intergovernmental organizations
Journalistic activity
Professional research and professional meetings
Educational activities
Religious activities
Public performances,‭ ‬clinics,‭ ‬workshops,‭ ‬athletic and other competitions,‭ ‬and exhibitions‭;
Support for the Cuban people
Humanitarian projects
Activities of private foundations or research or educational institutes
Exportation,‭ ‬importation,‭ ‬or transmission of information or information materials
Certain authorized export transactions

The embargo,‭ ‬however,‭ ‬remained US law and the relief measures were implemented by executive order,‭ ‬not by statute.‭ ‬Accordingly,‭ ‬President Trump‭ (‬or any future president‭) ‬can repeal or modify this relief as he or she sees fit,‭ ‬within the very broad parameters of executive branch authority.

In his June‭ ‬16,‭ ‬2017,‭ ‬announcement of the new Cuba policy,‭ ‬President Trump said that the US is adopting a new approach designed to achieve four objectives:‭ (‬i‭) ‬enhancing compliance with the embargo,‭ ‬particularly the ban on tourism‭; (‬ii‭) ‬holding Cuba accountable for human rights abuses‭; (‬iii‭) ‬advancing the national security and foreign policy interests of the US and the Cuban people‭; ‬and‭ (‬iv‭) ‬laying groundwork for the Cuban people to develop greater economic and political liberty.‭ ‬The president noted that the new policy is,‭ ‬among other things,‭ ‬specifically intended to roll back some of the Obama administration sanctions relief and to increase the pressure on the Cuban government and its military,‭ ‬intelligence and security agencies.

New travel restrictions:‭ ‬Ending individual people-to-people travel
President Trump directed OFAC to end individual people-to-people travel to Cuba.‭ ‬Under current policy,‭ ‬such travel has been permitted and has been defined to cover persons subject to US jurisdiction who engage in educational travel to Cuba that:‭ (‬i‭) ‬does not involve academic study pursuant to a degree program‭; ‬and‭ (‬ii‭) ‬does not take place under the auspices of a US organization that sponsors such exchanges to promote people-to-people contact.

While the president directed OFAC to end this authorization,‭ ‬OFAC,‭ ‬in its June‭ ‬16,‭ ‬2017,‭ ‬guidance,‭ ‬noted that individual people-to-people travelers who have either purchased a ticket or made a reservation prior to the June‭ ‬16,‭ ‬2017,‭ ‬announcement will be authorized to make all additional travel-related transactions for that trip,‭ ‬regardless of whether the trip occurs before or after OFAC’s new regulations are issued.‭ ‬Further,‭ ‬any‭ “‬travel-related arrangements that include direct transactions with entities related to the Cuban military,‭ ‬intelligence,‭ ‬or security services that may be implicated by the new Cuba policy will be permitted‭” ‬so long as those travel arrangements were made prior to the issuance of the regulations.

New sanctions targeting GAESA and its affiliates
As part of the new US policy to increase pressure on Cuba’s government,‭ ‬President Trump ordered OFAC and the Department of Commerce to enact regulations prohibiting persons subject to US jurisdiction from engaging in direct financial transactions with the Cuban military,‭ ‬intelligence and security services,‭ ‬including their commercial affiliates,‭ ‬such as GAESA.‭ ‬According to initial OFAC guidance,‭ ‬the US State Department will publish a list of entities with which direct transactions generally will not be permitted,‭ ‬and OFAC and/or the Departments of Commerce and State will also release guidance on the specifics of the prohibition.‭ ‬The specifics of the list and guidance will be critical to understanding the scope and nature of these new sanctions,‭ ‬as the policy,‭ ‬by its terms,‭ ‬only refers to‭ “‬direct‭” ‬transactions—raising questions about what this means in context and how a transaction might be defined as‭ “‬direct‭” (‬and prohibited‭) ‬or not direct‭ (‬and thus potentially not prohibited‭)‬.

The embargo remains—as does other Obama-era sanctions relief
In his June‭ ‬16,‭ ‬2017,‭ ‬announcement,‭ ‬President Trump underscored that the US embargo on Cuba remains in place,‭ ‬and that the US would continue to oppose calls in the United Nations or other international forums for its termination.‭ ‬The president noted in particular that‭ “‬any further improvements in the United States-Cuba relationship will depend entirely on the Cuban government’s willingness to improve the lives of the Cuban people,‭ ‬including through promoting the rule of law,‭ ‬respecting human rights,‭ ‬and taking concrete steps to foster political and economic freedoms.‭”

However,‭ ‬President Trump did not repeal all of the Obama-era sanctions relief or revoke diplomatic ties.‭ ‬Thus,‭ ‬for example,‭ ‬the new US Cuba policy does not end group people-to-people travel authorizations or any of the other categories of authorized travel to Cuba.‭ ‬Nor does the new US Cuba policy affect remittances,‭ ‬or the types of humanitarian trade in food,‭ ‬agricultural commodities and medical supplies permitted under existing law.‭ ‬The planned restrictions on transactions with the Cuban military,‭ ‬intelligence and security agencies also would not affect otherwise-authorized transactions with persons and entities that are not affiliated with those arms of the Cuban government.

Additionally,‭ ‬as noted above,‭ ‬the new policy is not effective until it is implemented by OFAC,‭ ‬the Departments of Commerce and State and,‭ ‬potentially,‭ ‬other agencies as may have jurisdiction‭ (‬e.g.,‭ ‬the US Department of Transportation‭)‬.‭ ‬And,‭ ‬once effective,‭ ‬the policy will include carve-outs for travel that is initiated prior to the issuance of the regulations,‭ ‬as well as for Cuba-related commercial engagements with entities related to the Cuban military,‭ ‬intelligence or services that were in place prior to the issuance of the regulations.‭

Next steps
As OFAC and other relevant US government agencies develop regulations to implement the president’s new approach,‭ ‬active monitoring of the policy landscape will remain critical due to the potential for severe penalties for sanctions violations‭; ‬the president’s call for OFAC to audit travel to ensure compliance‭; ‬and the wide sectoral and geographic scope of the potential impact of the new restrictions.‭

For example,‭ ‬the new US Cuba policy would appear to raise a range of questions—and issues—for both US and non-US:

Banks,‭ ‬insurers and reinsurers‭;
Airlines and cruise ship companies‭;
Hotel and hospitality businesses‭; ‬and
Lenders,‭ ‬suppliers and vendors for Cuban companies or non-Cuban companies doing business in that country.

Accordingly,‭ ‬businesses in these and other sectors should consider reviewing existing and planned Cuban investments and operations,‭ ‬and using the time before the new regulations take effect to identify and address the new sanctions landscape.‭ ‬This could include considering measures to enhance sanctions screening,‭ ‬flagging existing contractual representations and covenants,‭ ‬and otherwise aligning compliance programs and business plans to the government’s new approach to Cuba.

The authors are attorneys at the global law firm Dentons. Peter Feldman is a partner in the firm’s London office. Partners Jason Silverman and Michael Zolandz and associate Nimrah Najeeb are based in the firm’s Washington, DC office.

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Canada Trade: Getting the Relationship Right with Trump

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Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2017. In this five-part series, we are publishing excerpts from the report focusing on public affairs, anti-corruption, and economic sanctions and trade across the world, including the US, Europe, the UK, China, Canada and Mexico. Authors for these excerpts include: Paul Lalonde, Michael Zolandz, Jorge Jiménez .

Canada’s trade policy priorities will largely be driven by the Trump administration’s actions with respect to NAFTA. While there are indications that Canada is diversifying its trading patterns, with Asia and Europe taking an increasing share of merchandise trade, the US still purchases approximately 75 percent of all Canadian exports. Getting the relationship right with the Trump administration and preserving the crucial advantages of NAFTA is mission critical for the Canadian economy.

The Trump Administration has not specifically targeted Canada in its statements concerning the need to review NAFTA. However, the incoming administration repeats that its priority and focus will be in repatriating manufacturing jobs to the US. Canada will need to work hard to remind US decision-makers of the highly integrated nature of Canada-US supply chains and of the benefits of NAFTA for both countries.

As a trading nation highly dependent on predictable access to foreign markets, Canada is particularly vulnerable to the backlash against globalization that was exemplified in 2016 by the Brexit vote, the difficulties in securing ratifications of the Canada Europe Comprehensive Economic and Trade Agreement (CETA) and the US election. The UK is the main entry point for Canadian investment in the EU and Canada’s third largest trading partner (after the US and China). But the terms of the UK’s exit from the EU, and its impact on the CETA, remain uncertain and are unlikely to be settled in 2017. This presents continuing risks for Canadian traders and investors, and major challenges for policymakers.

With the Trans-Pacific Partnership Agreement likely to fold, and with US-EU free trade talks likely suspended by the Trump Administration, the anticipated landscape for Canadian traders has shifted significantly. This presents some risks but, on the bright side, the successful conclusion of the Canada – EU CETA may present significant competitive advantages for Canadian traders and investors.

Sanctions
The Trump administration’s approach to sanctions is also likely to have a major impact in Canada. If US sanctions on Iran and Russia are radically changed, will Canadian sanctions also be modified or will sanctions imposed by western allies increasingly diverge? If sanctions become very different from one country to the next, this will have a significant effect on the risks and opportunities faced by Canadian companies in competing for a share of Russian and Iranian business. To date, Canada has signaled that it has no intention of relaxing Russian sanctions or of tightening sanctions against Iran. However, Canada may need to qualify this approach as developments unfold in the US.

Trade disputes
Often referred to as the biggest trade dispute on the planet, the softwood lumber wars with the US were re-ignited in 2016 with the filing of a fresh petition targeting lumber exports from Canada to the US. This dispute will work its way through the US anti-dumping and countervailing duty process in the US and will continue to be a major irritant in the Canada-US relationship. Unless the US and Canada can come to a new agreement to manage lumber trade (the prospect of which currently seems remote), it is likely that the US legal process will sprout fresh cases before NAFTA Chapter 19 and WTO Dispute Settlement Body panels. In the interim, US importers of Canadian lumber will likely start paying new countervailing duties in February 2017, and anti-dumping duties in May 2017.

In the last several years, there has been a steady stream of Canadian anti-dumping and countervailing duty cases filed, particularly in relation to imported steel products, with China being the most frequent target of these investigations. This trend is likely to continue in 2017 with a fairly busy docket of new cases and various reviews of existing measures working their way through the Canada Border Services Agency and the Canadian International Trade Tribunal.

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Trade Policy Under Trump: A Look Ahead

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Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2017. In this five-part series, we are publishing excerpts from the report focusing on public affairs, anti-corruption, and economic sanctions and trade across the world, including the US, Europe, the UK, China, Canada and Mexico. Authors for these excerpts include: Paul Lalonde, Michael Zolandz, Jorge Jiménez .

International trade was a significant issue during the presidential campaign and one which President Trump returned to often on the trail. First, he promised that trade agreements would come under much greater scrutiny in his administration and that trade enforcement efforts would increase. He has already pulled out of the Trans-Pacific Partnership (TPP) Agreement and plans to renegotiate the North America Free Trade Agreement (NAFTA).

His inaugural remarks presage an America First strategy that is likely to have meaningful ramifications in the trade arena. His proposed appointment of John Lighthizer, a free-trade critic, further signals the president’s intent to address what were described during the campaign as imbalances in US trade. Lighthizer has endorsed limiting free trade where needed to protect domestic industries. Both during his prior tenure in the Reagan administration, and in private law practice thereafter, he worked to provide protection for US industries under siege from open trade policies. His appointment ties in directly with that of Commerce Secretary Wilbur Ross, who has both promoted and used trade remedies and trade restrictions to help insulate businesses he owns, first steel, then textiles.

The trade team that President Trump has assembled will likely develop a clear and coordinated strategy of revisiting existing agreements that they believe do not afford adequate quid pro quo protections for US industries, and using non-trade strategies to accomplish those means as well. In particular, President Trump’s team is likely to take an aggressive stance regarding China’s currency actions, and its desire to be reclassified as a market economy in the WTO.

TPP
On January 23, 2017, President Trump signed an executive order withdrawing the United States from the TPP. While the US had signed an agreement signifying its intention to implement the TPP Agreement, it had not been sent to Congress and had not been ratified by the required number of countries for it to go into effect. With significant Democratic and Republican congressional opposition, passage of the TPP, while supported by many in the business community, was never a foregone conclusion, so withdrawing from it will have little or no immediate impact on the US economy.

The bigger issue with TPP is what happens next. The remaining eleven countries may ratify the agreement without the United States. Alternatively, smaller subgroups—some involving China—may form. There will be future Pacific Rim trade agreements and the issue will be whether the US is part of those negotiations.

To counter China’s attempts to exploit discontent arising from the US rejection of the agreement, the Trump administration may launch an assertive agenda of bilateral agreements, or look for alternative strategies to keep China’s influence at bay. China’s desire to move these countries away from close relationships with the US will have to play a role in how the administration approaches these trade issues, which are integrally intertwined with important national security concerns.

NAFTA
President Trump spent much of his time on the campaign trail, especially in the Midwestern rust-belt states, expressing his dissatisfaction with NAFTA. He promised that his administration would renegotiate NAFTA to make it a better deal for US businesses and employees. While it is certainly an option for him to sign an executive order right away withdrawing from NAFTA, that would cause significant problems because many business models—including the location of manufacturing facilities—have been designed with the understanding that NAFTA would remain in force. Withdrawing suddenly from NAFTA would disrupt supply chains and could put manufacturers located in North America at a disadvantage compared to foreign producers, particularly those from China.

In addition, withdrawal from NAFTA would require Congress to pass legislation to address the implementing statutes it put in place after NAFTA was signed and ratified. Already, both the Mexican and Canadian governments have agreed to reopen the NAFTA negotiations and have indicated the priority issues that they would want to discuss. Given that his campaign pledge was to renegotiate NAFTA to obtain better terms for the US (with the threat to withdraw if Mexico and Canada refused to renegotiate), President Trump may focus his early discussions on identifying areas for renegotiation with Mexico and Canada.

While President Trump has reiterated his belief in free trade, he maintains his hardline stance on preventing jobs from moving into Mexico. Yet this simplified view does not recognize the impact of automation on the loss of jobs, or the number of jobs in the US economy that rely on exports to Mexico from the US. Trade between the two countries represents more than $1 million per minute. Nearly 20 US states count Mexico as their main trading partner. Texas alone sends as much as 40 percent of its exports to its southern neighbor. In strategic industries such as energy, the economies are too intrinsically linked: more than 70 percent of the gasoline and 55 percent of the natural gas consumed in Mexico comes from the US.

Further complicating US-Mexico discussions: President Trump’s proposed border wall, and questions over how it will be paid for. The president’s administration is seeking alternatives to his campaign promise to make Mexico pay for the initiative, including “border adjustment taxes.” These tax proposals raise serious issues not only with NAFTA, but also with the WTO.

Other trade priorities
As to other positions taken by President Trump, such as a 45-percent tariff on goods from China, there is a good chance that the new administration will ultimately back off. Imposing an across-the-board tariff increase—apart from its questionable legality—would be a disproportionate response, like using an axe where only a scalpel is needed. Many products imported from China are not produced in the United States, and the additional tariff would simply impose a large tax increase on American consumers.

That said, the focus on China will not go away. The more likely policy approach would be the use of existing trade laws to protect sensitive industries such as steel. There is already discussion of a Section 201 petition for import relief involving steel, and a similar action to address issues of overcapacity in aluminum could also be taken.

Overall, the Trump Administration could turn out to be more focused on managed trade as opposed to the traditional Republican free-trade position. A key issue for the new administration will be whether—given competing demands on the public purse—they can target sufficient resources to enforcement. The best trade agreement with the strongest enforcement mechanisms is ineffective without the manpower and resources to carry out their mission.

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Trump’s Challenge for Canada

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Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2017. In this five-part series, we are publishing excerpts from the report focusing on public affairs and economic sanctions and trade across the world, including the US, Europe, the UK, China, Canada and Mexico. Authors for these excerpts are Andrew Cheung, Joseph Lougheed, Adrian Magnus, James Moore, Kenneth Nunnenkamp, Michael Zolandz, and Richard Jenkinson.

The election of Donald Trump was, without question, the most important global event to happen in 2016. But Canada’s political, business and public policy leaders must not treat the election as just a uniquely ugly campaign with a surprise outcome that can be looked past. It was a historic event that should shift everyone’s thinking about the forces of resentment that resulted in the outcome, and what it means for the years ahead. This isn’t the first time a tectonic shift in thinking has been thrust upon Canadians.

On November 27, 2000, Prime Minister Jean Chrétien was elected to his third of three majority governments and his final term as Canada’s Prime Minister. The Official Opposition—Canada’s conservative movement—was directionless and in disarray. In Québec, the separatist parties, the Bloc Québecois and Parti Québecois, lost support for their cause following their defeat in the 1995 Referendum and passage of the federal Clarity Act in 2000. The separatist leader, Lucien Bouchard, resigned as Premier of Québec in 2001. The result was a wide open field for Prime Minister Chrétien to move forward on any domestic or foreign policy agenda he wished to pursue.

Once 9/11 happened, everything changed. Prime Minister Chrétien’s third mandate was set: the Afghanistan mission, establishing the Department of Public Safety, passing anti-terrorism legislation, creating the Canadian Air Transport Security Authority (CATSA), and eventually saying no to the war in Iraq. Mr. Chrétien experienced the Macmillan principle.

British Prime Minister Harold Macmillan was once asked by a young journalist what he feared most in office, and he famously responded, “Events, dear boy, events.” 9/11 was, for Mr. Chrétien, one of those “events”. For Prime Minister Stephen Harper, the global recession of 2008-2009 was his. For Prime Minister Justin Trudeau, the election of Donald Trump is his, and 2017 will be dominated by this event—the biggest event—of 2016.

In 2015, after his cabinet was sworn in, the government made public the mandate letters of Prime Minister Trudeau’s cabinet ministers. Those mandate letters all likely have an addendum now: regardless of portfolio, all ministers must have a comprehensive engagement plan with the United States for the life of this mandate.

The range of policy anxieties that are now clear and present to Prime Minister Trudeau’s government are broad. A few examples:

    Auto sector: Canada’s auto sector is the eight largest in the world, integrated through North America, globally competitive, and employs more than half a million Canadians. The Canadian auto industry depends heavily on access to the American market, with $135 billion in two-way trade, with America absorbing roughly two-thirds of Canada’s parts production and 85 percent of Canada’s vehicle output. With President Trump directly criticizing business decisions by auto firms to invest in Mexico, the Canadian sector is rightfully concerned.

    Regulatory cooperation: In 2011, the Canada-US Regulatory Cooperation Council and the Beyond the Border Initiative were put in place to spur greater economic integration. With the North American Free Trade Agreement (NAFTA) having been the subject of a withering attack by President Trump, Senator Bernie Sanders, and emboldened players in both the Republican and Democratic Parties, it is unclear where this integration initiative will now end up.

    Border management: While President Trump’s commitment to “build a wall” along America’s southern border is well known, what is less well known are his thoughts on the northern border. More than 400,000 people cross the Canada-US border each day, as does an average of $1.7 billion in commercial activity. Efficiency of infrastructure, data sharing, supply chain realities are all dependent on a cooperative and collaborative policy approach.

    Mutual defense: Canada and the United States have shared interests in the defense and security of the North American continent. From policing the Canada-US shared border to participation in joint operations through NORAD and NATO, Canada and the US share a deep commitment to mutual defense. Initiatives like the Shiprider program that allows Canadian and American enforcement officials to move in tandem to protect the waterways along the border demonstrate the interconnectedness of their security interests. The Permanent Joint Board on Defense also remains an important tool for the Canadian and American militaries to have frank discussions, and exchange views and information regarding joint security.

With one in five Canadian jobs dependent on trade with the United States, and those jobs at risk in export dependent industries from the auto sector to agriculture to forestry and more, Donald Trump’s Presidency must now be at the center of Canada’s policy planning. In every region, in every aspect of the Canadian economy, it is all at stake, and Canada will need to engage with America anew. While the Canada-US relationship has been a most prosperous two-way economic relationship, the election of President Trump presents a challenge to Canada and Canada needs to be ready, engaged and persistent in protecting our interests. This responsibility lies not only with Ottawa, but also with the provincial governments, big city mayors, business leaders, and others who must shoulder responsibility for engagement with a more distrusting and cynical leadership in the US.