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BIS Seeks Comments on Identifying “Foundational Technologies”

foundational technologies

BIS Seeks Comments on Identifying “Foundational Technologies”

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) recently published an Advanced Notice of Proposed Rulemaking (“ANPRM”) regarding the identification and review of controls for certain “foundational technologies.” This ANPRM represents another step toward implementation of the “emerging and foundational technology” provisions set forth in the Export Control Reform Act (“ECRA”) of 2018, which has been slow to get off the ground. Section 1758 of the ECRA requires that “foundational technologies” be identified and that BIS establish appropriate controls for that technology under the Export Administration Regulations (“EAR”).

The ANPRM solicits public comments concerning the definition of and criteria for identifying “foundational technologies” in order to apply controls to “emerging technologies” and “foundational technologies” which are essential to U.S. national security, pursuant to the ECRA. Specifically, BIS is asking interested parties to submit comments by October 26, 2020, responding to the following topics:

-How to further define foundational technology to assist in the identification of such items;

-sources to identify such items;

-criteria to determine whether controlled items identified in AT level Export Control Classification Numbers (ECCNs), in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a U.S. arms embargo, are essential to U.S. national security;

-the status of development of foundational technologies in the United States and other countries;

-the impact specific foundational technology controls may have on the development of such technologies in the U.S.;

-examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology-based controls;

-any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and

-any other approaches to the issue of identifying foundational technologies important to U.S. national security, including the stage of development or maturity level of a foundational technology that would warrant consideration for export control.

BIS explained that it does not seek to expand jurisdiction over technologies that are not already subject to the EAR. BIS, through an interagency process, seeks to determine whether there are specific foundational technologies that warrant more restrictive controls.  Interested parties may submit comments through the federal rulemaking portal (regulations.gov) or via mail to BIS.

Husch Blackwell encourages clients and companies to review the recent ANPRM for applicability.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Huawei

U.S. Adds 38 New Huawei Affiliates to Entity List While Again Expanding Foreign-Produced Direct Product Rule

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has announced that it is further restricting access by Huawei Technologies Co. Ltd. and its designated non-U.S. affiliates (“Huawei”) to U.S.-produced technology and software. BIS first added Huawei to its Entity List on May 15, 2019 and has continued to impose additional export restrictions on Huawei under the U.S. Export Administration Regulations (“EAR”). Most recently, BIS published a Federal Register notice to implement the following enhancements. Although BIS published this Federal Register notice on August 20, 2020, the following rule changes took effect retroactively as of August 17, 2020:

Addition of Thirty-Eight New Huawei Affiliates to the Entity List. In its announcement, BIS added thirty-eight (38) additional Huawei affiliates to the Entity List. This action now brings the total number of Entity List-designated Huawei affiliates to one hundred and fifty-two (152). The EAR generally prohibits anyone, anywhere in the world from supplying products, software or technology that is “subject to the EAR” to these Huawei affiliates without a BIS license.

Expiration of Huawei Temporary General License. BIS had previously issued (and then, on multiple occasions, extended) a Temporary General License which permitted certain transactions with Huawei Entity List affiliates in order to support existing networks, equipment and handsets that were in existence prior to Huawei’s initial Entity List designation on May 16, 2019. In its Federal Register notice, BIS announced that it would be allowing the Temporary General License to expire. As a result, pursuant to the expiration date set in its most recent renewal notice, the Huawei Temporary General License expired effective August 13, 2020.

Anyone who previously utilized the Temporary General License was required to obtain certain compliance certifications in connection with transactions conducted pursuant to the Temporary General License and the EAR will require those persons to retain those certifications in accordance with the EAR’s recordkeeping requirements.

Permanent Authorization for Cybersecurity Research and Vulnerability Disclosures to Huawei Entity List Companies. The Temporary General License also contained a provision which authorized the disclosure of certain information to Huawei Entity List companies in order to assist with maintaining the integrity and reliability of existing data networks. After allowing the remainder of the Temporary General License to expire, BIS permanently codified this narrow exception into the EAR in order to promote cybersecurity.

Expansion of the Huawei Foreign-Produced Direct Product Rule. In May 2020, BIS amended the EAR’s foreign-produced direct product (FPDP) rules to designate the following items as “subject to the EAR”: (i) foreign-produced items produced or developed by a Huawei Entity List affiliate through the use of technology or software controlled under certain Export Control Classification Numbers (ECCNs), and (ii) foreign-produced items that are produced using equipment which is the direct product of U.S. origin software or technology controlled under certain ECCNs and also produced according to software or technology specifications produced or developed by a Huawei Entity List affiliate. BIS has now significantly expanded this rule.

As amended, the new Huawei FPDP rule now completely disregards whether foreign-produced items produced by a 3rd party are produced according to Huawei specifications and instead extends the Huawei FPDP rule’s coverage to all foreign-produced items resulting from the specified software, technology or production equipment which are intended for incorporation into or for use in the “production” or “development” of any “part”, “component”, or “equipment” to be produced, purchased or ordered by a Huawei Entity List company or otherwise included in any transaction featuring a Huawei Entity List company as a “purchaser”, “intermediate consignee”, “ultimate consignee” or “end-user” (terms in quotation marks in the previous sentence are defined terms under the EAR).

As a result of these amendments, a much broader range of foreign-produced items are now “subject to the EAR” and therefore prohibited for export, reexport or in-country transfer to any Huawei Entity List company without an appropriate BIS license.  Although BIS will normally review such license applications on a “presumption of denial” standard, these amendments did create an exception which states that BIS will evaluate license applications involving Huawei Entity List companies on a “case-by-case” basis when they involve foreign-produced telecommunications systems, equipment and devices below the 5G level.

The amendment did feature a savings clause, which allowed the continuance of certain qualifying transactions which were initiated prior to August 17, 2020.

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Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

rural

RURAL EXPORT CENTER SUPPORTS THOSE IN THE AMERICAN BREAD BASKET SEEKING NEW GLOBAL MARKETS

The U.S. Commercial Service in July opened the Rural Export Center (REC) in Fargo, North Dakota, to promote rural America’s exports and equip its companies with the research and resources to compete and win in the global marketplace.

“The Rural Export Center addresses the unique needs of rural American companies by providing in-depth market research and training designed specifically for them,” explained Ian Steff, assistant secretary of Commerce for Global Markets and director general of the United States and Foreign Commercial Service.

“These companies are a crucial part of the continued growth of the American economy,” Steff continued, “and providing them with these essential, customized tools will help bolster their success in both the domestic and international markets and will increase U.S. exports worldwide.”

Companies from anywhere in rural America can request virtual consultations and assistance through the REC and many can apply grants from the Small Business Administration’s State Trade Expansion Program toward REC services. Armed with REC research, the company then collaborates with their local U.S. Commercial Service Trade Specialist to implement plans and strategies informed by REC analysis.

“Together, they leverage the global network of U.S. Commercial Service offices located in U.S. Embassies and Consulates in more than 75 markets around the world,” states a U.S. Commercial Service press release.

foreign

The Proposed Expansion of Mandatory Foreign Investment Filings During the Pandemic

In the midst of the pandemic, the Committee on Foreign Investment in the United States (“CFIUS”) has proposed several revisions to its regulations (“Regulations”) that change when short-form filings (called “declarations”) are required with respect to covered foreign investments of U.S. businesses which work with critical technology [2]. What is most significant for foreign investors is that the proposed rules expand the mandatory declaration and required CFIUS review to include critical technology transactions that range well beyond the 27 industries originally designated by CFIUS – to cover all sectors of the economy [3].

The raison d’etre for this proposed CFIUS rule change is not entirely clear. While the modification largely reads as being technical in nature, CFIUS does, however, observe that other, unspecified “national security considerations” are involved. Thus, a reasonable inference from current circumstances is that CFIUS seeks the ability during the Covid-19 crisis to review acquisitions by China in a broader range of business sectors in order to assess in advance the national security risk, if any, in situations where financially struggling U.S. firms with innovative dual-use technology might be more willing than before to consider such investments as a lifeline.

Interested parties in the business community should note public comments are due by June 22, 2020.

The Proposed Expansion of Mandatory Filings for Critical Technology Transactions

By way of background, under the existing Regulations, a mandatory declaration is required for transactions involving certain U.S. businesses that: 1) produce, design, test, manufacture, fabricate, or develop one or more “critical technologies”; and 2) use the critical technology in specified ways in one or more of 27 specified industries. Significantly, under the revisions, CFIUS eliminated the second prong of the requirement – i.e., the nexus to 27 industries, and refocused the requirement instead on companies that have critical technology that would require certain export licenses or other authorizations to export, re-export, transfer (in-country) or retransfer the critical technology to certain transaction parties and foreign persons in the ownership chain.

CFIUS indicates that the new focus of the mandatory filing requirement on export control requirements for critical technologies “leverages the national security foundations of the established export control regimes, which require licensing or authorization in certain cases based on an analysis of the particular item and end-user, and the particular foreign country for export, re-export transfer (in-country) or retransfer.” 85 Fed. Reg. 30894.

While that is true enough, in fact, the existing standard already is based on the export control standards. The term “critical technology” was and still is, defined as technologies that are subject to export controls (i.e., articles or services on the U.S. Munitions List, items on the Commerce Department’s Control List, and other specialized lists)[4]. Now, in addition to being subject to export controls (e.g., on one of the enumerated lists of controlled items), the technology must specifically be subject to a licensing requirement.

In effect, CFIUS has doubled down on export controls as the criteria for mandatory filing – the item must be on a controlled list and a license must be required for the particular foreign acquirer that is a party to the transaction.

The Significance of the Proposed Change in Mandatory Filing Requirement

Is this licensing requirement a meaningful distinction for foreign investors? While many of the items on these export control lists do require licenses or other authorizations for export, this is not necessarily the case for the export of all items to all countries for all uses. On some lists (e.g., the Munitions Lists), every article and service requires a license for export to all locations. On others (notably the Commerce List, the main list of “dual-use” technologies), items controlled are only licensable for certain countries and certain purposes to certain end-users, as designated on the list.

Overall, however, the universe of items on controlled lists versus those on the lists where licenses are required probably aren’t all that different – i.e., the range of mandatory filings is not very meaningfully limited by this change. Notably, for certain near-peer competitor countries like China and Russia, the distinction is particularly limited. Indeed, for these countries, many items on the Commerce List will require licenses in any event. Moreover, since China is under a U.S. arms embargo in place for many years, any export of an article or service on the Munitions List would certainly require a license (which would not be granted).

In any event, even if the new nexus to export license requirements narrows somewhat the class of critical technology transactions subject to mandatory declarations, this change is undoubtedly more than offset by the elimination of the required nexus to the 27 specified industries. Under the proposal, foreign acquisition of any U.S. business – regardless of what industry it works in – would require a mandatory declaration where the business utilizes critical technology provided that certain export licenses or other authorizations would be required to export such items to the foreign acquiring party.

On balance, this change is significant. It broadens the scope of the mandatory filing requirement to a wide variety of acquisitions involving critical technology applications from medical devices to commercial vehicles to a wide range of high tech sectors. Foreign investors thus would need to be considerably more diligent in considering the CFIUS risk with respect to structuring a broader range of these acquisitions.

Why the Expansion of the Mandatory Filing Requirement?

Why the expansion of mandatory declarations and does it relate to the pandemic?  CFIUS offers only vague explanations – noting its further consideration of public comments made in prior rulemakings, the Committee’s additional experience assessing mandatory declarations, and “other,” unnamed, national security considerations” [5].

One very possible set of such “national security considerations” is to afford CFIUS the ability to investigate a considerably broader range of transactions involving China where any critical technology requiring a license is involved. Since many dual-use items on the Commerce Control List and everything on the Munitions List do require licenses for China, the expansion of jurisdiction would be significant – as it applies without regard to the industry where the critical technology is used.

The logic of this expanded approach would be that, under Chinese laws and policies on civil-military fusion, any Chinese company, regardless of industry, could be required to divert the critical technology it is acquiring to the state sector for military use. Thus, it arguably makes sense for CFIUS to seek to examine these technology deals across the board.

This action also would be consistent with a range of other recent Administration actions during the Covid-19 crisis – from restrictions on participation in the U.S. bulk-power infrastructure to additional export control restrictions on Huawei – all of which appear to be focused on limiting U.S. high tech engagement with China.

Why now? The pandemic has raised the specter of foreign firms from potential adversaries buying sensitive assets at steep discounts. Numerous European governments are very focused on protecting sensitive assets against distress buying.  In this context, recent comments by Ms. Ellen Lord, the Under Secretary of Defense for Acquisition and Sustainment, suggest concern that during the pandemic smaller U.S. companies that support the aerospace and defense sector could experience “significant financial fragility” and therefore be more vulnerable to acquisition by potential adversaries [6]. She also noted the prospect of “nefarious” acquisitions involving the use of shell companies during the pandemic and indicated a desire for CFIUS to have more authority to address these situations. Thus, it just may be that the proposed revision to the Regulations is an effort to address this felt DoD need.

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A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos [1] previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

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References

[1] A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

[2] 85 Fed. Reg. 30893 (setting forth amendments to 31 C.F.R. §800). The mandatory filing requirements were established pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).  The proposed amendments also make clarifying changes with respect to mandatory declarations in transactions involving foreign States. Specifically,  section 800.244 of the Regulations (see 85 Fed. Reg 30898) would, among other things, change the definition of “substantial interest” with respect to transactions where a general partner, managing member or the equivalent is involved, to clarify that the foreign state’s interest is only relevant it applies only where a general partner, managing member, or equivalent “primarily directs, controls or coordinates the activities” of the entity that is the acquiring party.  In effect, this change narrows to a limited extent the range of transactions with foreign government involvement where a mandatory declaration is required.

[3] CFIUS accomplishes this expansion through a series of technical amendments to the Regulations: Section 800.254 (defining U.S. “regulatory authorization” to refer to the types of export licenses that require mandatory declarations); section 800.256 (introducing the concept of “voting interest” to include foreign persons in the ownership chain that would need to be analyzed from an export control standpoint to determine if a license would be required to transfer the technology in question to that party); and 800.401 (which re-scopes the mandatory declaration requirement for critical technology transactions).  See 85 C.F.R. 30895-8.

[4] 31 c.f.r. § 800.215.

[5] 85 Fed. Reg. 3894.

[6] See Transcript, Press Briefing of Ellen Lord, Undersecretary of Defense (A&S) Ellen Lord on COVID-19 Response Efforts (April 30, 2020).   Available at: https://www.defense.gov/Newsroom/Transcripts/Transcript/Article/2172171/undersecretary-of-defense-as-ellen-lord-holds-a-press-briefing-on-covid-19-resp/

export controls

The Effects of COVID-19 on Sanctions and Export Controls

The global outbreak of the novel COVID-19 virus and resulting pandemic have disrupted nearly all fields of commerce throughout the world. While the situation continues to develop and has had broader implications, the effect both on U.S. and EU sanctions and export control policies is notable. We summarize below some of the changes to U.S. sanctions and export controls that have occurred in recent weeks in response to the pandemic. We also present the European response to this crisis with respect to export control regulations. Because the situation is dynamic, compliance professionals should continue to monitor further developments closely.

The U.S. Response to COVID-19

Favorable Licensing for COVID-19 Related Goods and Services for the Time Being

For the time being, many items related to the coronavirus response are subject to general authorization and otherwise favorable review standards. Already the U.S. government has issued general licenses to facilitate the provision of humanitarian goods to Iran, where the virus has had a devastating impact. Specifically, on February 27, 2020, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) – the U.S. agency responsible for administering and enforcing most U.S. sanctions – issued General License 8. That general license authorizes payments and related transactions involving the Central Bank of Iran for exports of food, medicine, and medical devices. The general license builds upon several existing authorizations, which are summarized in a new Frequently Asked Question issued on March 6, 2020, and broadly permits certain donations and other humanitarian aid to Iran, so long as the recipients are not the Government of Iran, Specially Designated Nationals, or otherwise prohibited parties.

To date, there have been no similar general licenses issued by the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”), which is the U.S. agency responsible for dual-use export controls on goods and technology. For the time being, we anticipate that license requests for COVID-19 related items that would require authorization from BIS will generally be reviewed favorably by the agency, consistent with the policy underlying OFAC’s General License 8. In particular, on February 7, 2020, BIS issued guidance specifying that the COVID-19 virus is classified as EAR99, meaning that samples of the virus subject to the EAR (by, for example, being present in the United States) generally may be exported, re-exported, or transferred to most countries without a destination-based license. This is notable because the related virus from the SARS outbreak in 2003 is classified under ECCN 1C351.a.46, which is subject to more stringent licensing requirements. The current classification of the COVID-19 virus as EAR99 could, therefore, more easily facilitate international research on treatments and vaccines for the virus.

However, as the crisis continues to unfold, if certain essential resources become globally scarce – such as respirators and certain medicines – it is possible that BIS could control such items under its existing powers applicable to goods in “short supply,” which are described in Part 754 of the Export Administration Regulations. In the immediate aftermath of the outbreak, a number of countries around the world instituted unilateral trade controls on medical equipment and other supplies needed to respond to the pandemic.  Indeed, according to one report, as of March 21, 2020, at least 54 governments had instituted such controls. In addition, following restrictions by some individual member states, the EU instituted a license requirement for the export of personal protective equipment. Other counties – including Russia, Turkey, and India – have imposed similar restrictions or outright bans on export. The White House is also reportedly drafting a “Buy American” executive order intended to bring pharmaceutical and medical supply manufacturing back to the United States, but has been met with opposition within the administration.  In addition, on April 3, 2020, the White House used the Defense Production Act to block U.S.-based 3M from exporting surgical face masks abroad, signaling perhaps a more aggressive approach towards controls on items used to contain the outbreak.

Timing Delays

With the metropolitan Washington, D.C. area and other major cities throughout the United States subject to shelter-in-place orders, all but essential government employees have moved their work from their normal physical locations to home.  Inefficiencies, distractions, and family needs could delay and expand the review timelines of license applications and other requests for authorization. If a large number of the personnel responsible for license reviews or their immediate family members become ill, delays could be extended even further.

In addition, even for exports or re-exports that are authorized, finding available shippers and freight forwarders may prove challenging, with many non-essential shipments being delayed to free up supply-chain resources necessary to effectively respond to the pandemic. Shippers, such as FedEx, have reduced their capacity in response to the slowing economy, and have suspended their service guarantees in anticipation of delays.

Further, ongoing regulatory objectives may be put on pause or delayed. In particular, the Export Control Reform Act of 2018 directed BIS (in conjunction with the Departments of Defense, Energy, State, and other agencies as appropriate) to define the terms “emerging technologies” and “foundational technologies,” and to impose controls on such technologies that are “essential to the national security of the United States.” In late 2018, BIS issued an Advance Notice of Proposed Rulemaking to solicit comments on the criteria that should be considered in defining “emerging technology,” and recently – in January 2020 – issued an interim rule with the first restrictions applicable to artificial intelligence software. A proposed definition for “emerging technology” had been expected by the end of 2019, but it is likely that the COVID-19 crisis will result in further delay of additional rulemaking on this issue.

Enforcement Remains Steady

Nevertheless, enforcement activity – at least throughout the early part of the crisis – has continued. For example, during the week of March 16, 2020 alone, OFAC took three separate enforcement actions to designate nearly twenty parties involved in exporting Iranian petroleum products. Similarly, on March 26, 2020, U.S. Department of Justice announced that a federal grand jury had indicted Venezuelan President Nicolás Maduro on drug trafficking and money-laundering charges, even as courts across the country began to close and suspend proceedings in response to the crisis.  The devastating effect that the virus has had thus far in Iran in particular has drawn international pressure for the U.S. to lift sanctions targeting that country and others, with one of the most prominent calls coming on March 31, 2020, from the UN Special Rapporteur on the Right to Food. However, Treasury Secretary Steven Mnuchin vowed, “The Trump administration will continue to target and isolate those who support the Iranian regime.”

It is therefore imperative that companies remain vigilant in their compliance efforts, even while juggling a myriad of unprecedented and difficult challenges. In particular, employees working from home should exercise care, especially when utilizing technical data subject to export controls, to avoid inadvertent “deemed” exports to unauthorized persons. Compliance officers should also stress that companies’ compliance procedures – such as screening and third-party due diligence – remain in effect throughout the crisis.

The EU’s Response to COVID-19

In response to the crisis, EU Member States have aimed to protect the supply of goods and technologies within the medical and healthcare sector at the country level, while at the same time regulating EU exports to third countries at the European level.

The EU’s Limitations on Export Restrictions Between Its Member States

According to Article 168 of the Treaty on the Functioning of the EU (“TFEU”), public health falls within the jurisdiction of Member States themselves. Member States are therefore, in principle, free to organize and supply their healthcare systems as they see fit.

However, EU action can, by its own terms, “supplement” and “support” these national policies. As such, Article 4 of the TFEU and Article 168 of the TFEU provide for shared jurisdiction between the EU and Member States on common security and public health issues. This shared jurisdiction includes such issues as disease prevention, combating major health scourges, and combating serious cross-border threats to health. Nevertheless, it should be noted that the EU’s ability to legislate and adopt legally binding texts on these matters is limited to those that do not require legislative or regulatory harmonization of Member States’ national laws.

For their part, Member States have the obligation to respect the fundamental principle of the free movement of goods within the single EU market, as provided for in Articles 26 and 28 to 37 of the TFEU, and barriers to the trade of goods may only be re-established in certain circumstances, such as the protection of public health.

In this vein, since the beginning of the health crisis in Europe, several countries, including France and Germany, have taken national measures introducing requisitions of personal protective equipment (“PPE”) – which includes equipment such as masks, protective goggles and visors, face shields, oral-nasal protective equipment and protective clothing – and restrictions on the export of this PPE. For example, France seized all stocks of anti-projection and FFP2 type surgical masks from national producers and distributors, and then extended this requisition to other types of surgical masks. These national requisitions have de facto restricted all exports of masks outside French and German territories.

To respond to this seeming retreat within national boundaries, and in order to ensure the free movement of goods between Member States, the EU has reacted twofold: to provide a coordinated response to the health crisis and ensure unhindered access to medical supplies within the EU.

First, on March 13, 2020, the European Commission reminded the French and German governments, without naming them directly, that “[i]t is essential to act together to secure production, stocking, availability and rational use of medical protective equipment and medicines in the EU, openly and transparently, rather than taking unilateral measures that restrict the free movement of essential healthcare goods.”  In so doing, Brussels therefore called upon the crucial importance of solidarity between Member States during the current health crisis.

Second, the Commission issued new guidelines on border management measures to protect public health and ensure the availability of essential goods and services. The text emphasizes that “[t]he coronavirus crisis has highlighted the challenge of protecting the health of the population whilst avoiding disruptions to the free movement of persons, and the delivery of goods and essential services across Europe.” The EU, through these guidelines, thus reminded its Member States that safeguarding the functioning of the single market is essential to address shortages that would exacerbate the social and economic difficulties Member States are already experiencing.

In response to the Commission’s call, France and Germany decided to withdraw their restrictive measures on transfers of PPE to ensure that “the [PPE] equipment held goes where it is needed, to patients, doctors, hospitals, health care staff, etc.” By way of example, at the end of March, France and Germany each sent more than a million masks and 200,000 protective suits to Italy.

Export restrictions between EU Member States and third countries

The Commission has adopted Regulations (EU) 2020/402 and (EU) 2020/426, requiring PPE exports from the EU to non-EU states to be subject to prior authorization by the competent authorities of the Member States.

This measure is applicable for a period of six weeks starting on March 15, 2020. However, exports to Norway, Iceland, Liechtenstein, and Switzerland, as well as to the Overseas Countries and Territories (i.e., those countries identified in Annex II of the TFEU which are described in Article 198 of the TFEU as “non-European countries and territories which have special relations with Denmark, France, the Netherlands and the United Kingdom”), the Faroe Islands, Andorra, San Marino and Vatican City, will not be subject to these restrictions.

In France, it is the Service des Biens à Double Usage (i.e., the French Dual-Use Goods Agency, the “SBDU,” attached to the Ministry of the Economy), that has been designated by the Commission as the authority for issuing export authorizations for the medical protection goods listed in the Schedule to Regulation 2020/402 of March 13, 2020. The SBDU is authorized to receive applications, organize the administrative process, and make licensing decisions according to the criteria set out in the aforementioned Regulation.

Conclusion

The COVID-19 outbreak presents new and unprecedented challenges. Its effect on the U.S., EU and international approach to sanctions and export controls may be felt for months or even years to come. While the crisis is still in its early stages, compliance professionals should monitor developments daily, ensuring their respective companies are continuing to maintain appropriate risk-based compliance efforts.

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By Ryan Fayhee, Roy (Ruoweng) Liu, Alan G. Kashdan, Olivier Dorgans, Tyler Grove and Camille Mayet at Hughes Hubbard & Reed LLP

export control

New DOJ Sanctions and Export Control Enforcement Policy Incentivizes Self-Disclosure

On December 13, the U.S. Department of Justice (“DOJ”) released a revised policy that expands and clarifies certain incentives for voluntary self-disclosure of potential criminal sanctions and export control violations.

The new policy (the “VSD Policy”), which is effective immediately, has important ramifications for companies and their interactions with DOJ regarding potentially willful violations of US sanctions and export control laws.

Notably, the DOJ’s policy now extends to financial institutions and establishes disclosure benefits in mergers and acquisitions for acquiring companies who discover misconduct through “thorough and timely due diligence.” The policy also establishes a presumption of a non-prosecution agreement for companies that meet certain criteria in the absence of aggravating circumstances, as well as substantial mitigation credit where a penalty is warranted.

Components of the VSD Policy

Most notably, the VSD Policy specifies that, subject to certain conditions and absent aggravating factors, there will be a presumption that a company will receive a non-prosecution agreement and will not pay a fine for self-disclosed sanctions and export control violations. In order to be subject to such a presumption, the company must (1) voluntarily self-disclose violations, (2) fully cooperate with DOJ and (3) timely and appropriately remediate any violations.1

The VSD Policy also sets out specific definitions for these criteria. For instance, in order to “voluntarily self-disclose” pursuant to the VSD policy, a disclosure must be:

-Prior to an imminent threat of disclosure or government investigation;

-Within a reasonably prompt time after a company becomes aware of the offense; and

-Include all relevant facts known to the company at the time of disclosure, including with respect to individuals substantially involved or responsible for the disclosed violations.2

Importantly, voluntary self-disclosures must be made to DOJ in order for the VSD Policy to apply. In other words, companies that make self-disclosures to regulatory agencies but not to DOJ will not be able to receive the benefits of the VSD Policy. Equally of note is that any company receiving the benefits of the VSD Policy, including one that receives a non-prosecution agreement, will not be permitted to retain any gains from the unlawful conduct and will be required to pay all disgorgement, forfeiture, and/or restitution stemming from the disclosed violations.

The VSD Policy sets forth a number of specific requirements that companies must meet in order to “fully cooperate.” In order to “fully cooperate” under the VSD Policy, a company must:

-Disclose all facts relevant to the wrongdoing on a timely basis. This includes, inter alia, relevant facts from an internal investigation and updates to those facts (as well as updates on an internal investigation), attributed to specific sources. Such facts must include those related to involvement in criminal activity by officers, employees, or agents and facts about potential criminal conduct by third parties.

-Proactively, rather than reactively, cooperate. This proactive cooperation must include the timely disclosure of relevant facts, even if the company is not asked to do so.

-Preserve, collect, and disclose relevant documents and information in a timely manner. These actions include the disclosure of overseas documents (as well as where they are located and who found them), the facilitation of third-party production of documents, and document translations where appropriate.

-De-conflict witness interviews in order to align a company’s internal investigation with an investigation by DOJ when requested and appropriate (although, the VSD Policy notes, DOJ will not affirmatively direct a company’s internal investigation); and

-Make company officers and employees possessing relevant information available for interviews by DOJ when requested, including former employees and those located overseas, and facilitate interviews of third-party witnesses when possible.3

Finally, in order to “timely and appropriately remediate” pursuant to the VSD Policy, there are several actions that a company must undertake:

-A “root cause” analysis that analyzes underlying conduct and remediates those root causes where appropriate;

-The implementation of a compliance program, which would be updated periodically. The VSD Policy acknowledges that such a program will vary depending on the organization’s size and resources, but notes that it may include information on:

-A company’s culture of compliance, including that criminal conduct will not be tolerated by the company;

-Company resources dedicated to compliance, as well as the compensation and promotion of compliance personnel and their quality and experience;

-The independence of a company’s compliance function, the auditing of the compliance program, the access of the board of directors to compliance expertise, and the reporting structure of compliance personnel; and

-Details about a company’s risk assessment, its effectiveness, and how a compliance program has been tailored based on that risk assessment;

-Discipline of employees, including those responsible for misconduct and those with oversight and supervisory authority;

-Retention of business records and the prohibition on the improper destruction of such records, including guidance and controls on personal communications; and

-Any additional steps necessary to demonstrate recognition of misconduct, the acceptance of responsibility, and measures to reduce the risk of future misconduct.4

Aggravating Factors

As noted, the presumption of a non-prosecution agreement and the absence of a fine will only be available under the VSD Policy in cases of voluntary self-disclosures where there are no aggravating factors. The VSD Policy includes a non-exhaustive list of such aggravating factors, and specifies that if such factors are substantially present, a “more stringent” resolution may result:

-Exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country;

-Exports of items known to be used in the construction of weapons of mass destruction;

-Exports to a Foreign Terrorist Organization or Specially Designated Global Terrorist;

-Exports of military items to a hostile foreign power;

-Repeated violations, including similar administrative or criminal violations in the past; and

-Knowing involvement of upper management in the criminal conduct.5

Even if such aggravating factors are present, the VSD Policy provides incentives for companies to voluntarily self-disclose violations, cooperate with DOJ, and timely and appropriately remediate, consistent with the definitions in the VSD Policy. In such instances, DOJ will recommend a fine that is capped at 50 percent of the amount otherwise available. In addition, if the company has implemented an effective compliance program, DOJ will not require the appointment of a monitor for the company.

Takeaways for Companies

DOJ’s new VSD Policy is a clear effort by the agency to encourage and reward timely voluntary self-disclosure by companies that identify potential willful violations of export control and sanctions laws. The VSD Policy brings DOJ’s practices closer in line with those of the Office of Foreign Assets Control and the Bureau of Industry and Security, both of which also incentivize self-disclosure by limiting penalties. DOJ’s incentives aim to encourage the private sector to implement effective compliance programs to prevent and detect violations in the first place and report them to DOJ in a timely manner if they occur. A clear goal of the VSD Policy is also to provide DOJ with the information and resources to prosecute individuals responsible for wrongdoing.

Notably, unlike previous guidance issued by DOJ, the VSD Policy does not include a carve-out for financial institutions. As a result, these entities will be able to take advantage of the VSD Policy going forward. Additionally, the VSD Policy provides incentives for self-disclosure in mergers and acquisitions. Specifically, the VSD Policy specifies that a successor entity that makes a timely voluntary self-disclosure (even as a result of post-acquisition due diligence) will be able to take advantage of the incentives set forth in the VSD Policy. Companies wishing to review or strengthen their compliance programs should consult sanctions and export control counsel in order to ensure that such programs are tailored to the criteria set forth by DOJ and reflective of the risk involved in the company’s activities.

Also worth noting is that while the VSD Policy aims to incentivize self-disclosure to the DOJ by providing certain defined benefits, those benefits are not without cost or risk. Companies with a potential sanctions or export control violation should consult experienced sanctions and export control counsel to provide guidance on the decision of whether to self-disclose, which involves a complicated balance of numerous factors.

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1 U.S. Department of Justice, Export Control and Sanctions Enforcement Policy for Business Organizations, 2, Dec. 13, 2019 (hereafter “VSD Policy”).

2 VSD Policy at 2.

3 VSD Policy at 3-4.

4 VSD Policy at 5-6.

5 VSD Policy at 6.

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Greg Deis is a partner in Mayer Brown’s Chicago office and co-chair of the firm’s White Collar Defense & Compliance practice.

Ori Lev is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice and the Consumer Financial Services group.

Tamer Soliman is a partner in Mayer Brown’s Washington DC and Dubai offices, global head of the firm’s Export Control & Sanctions practice and a member of the International Trade practice.

Margaret-Rose Sales is counsel in Mayer Brown’s Washington DC office and a member of the International Trade practice.

Mickey Leibner is an associate in the Public Policy, Regulatory & Political Law, International Trade and Cybersecurity & Data Privacy practices in Mayer Brown’s Washington DC office.

US Satellite Export Controls Aligned, Relaxed

Washington, DC – Revisions to the federal Export Control Reform Initiative have been implemented that relax government controls over the overseas sales of satellites and satellite components.

According to the new regulations, these changes allow most commercial, scientific, and civil satellites and their parts and components to move to the Department of Commerce’s Commerce Control List (CCL).

The changes “will increase the competitiveness of cutting-edge, well-paying manufacturing and technology sectors by better aligning export controls with national security priorities,” the State Department said in a public statement.

The rules allow satellites controlled by the CCL to incorporate certain parts and components controlled by the USML to remain CCL—controlled, “if certain conditions are met.”

The revision removes communication satellites from the US Munitions List (USML) “that do not contain classified components; remote sensing satellites with certain performance parameters; any spacecraft parts, components, accessories, attachments, equipment, or systems that are not specifically identified in the revised category; and most radiation-hardened microelectronic microcircuits.”

It also removes from the USML certain spacecraft, while supporting US National Space Policy by creating conditions that allow the US Government to more easily host payloads on commercial satellites.

The Washington, DC-headquartered Aerospace Industries Association (AIA) applauded the move.

“While government spending on space has declined, the space market is rapidly changing with new opportunities in commercial space emerging,” the trade group said. “It therefore has become even more important to increase the space sector’s sales in the commercial arena and enhance its global competiveness.”

The AIA in a 2012 report estimated that US manufacturers lost $21 billion in satellite revenue from 1999 to 2009, costing about 9,000 direct jobs annually once USML controls were applied to commercial satellites.

Together with the re-authorization of the Export-Import Bank by Congress later this year, the trade group said, “would dramatically level the global market playing field and greatly enhance the prospects for US companies selling space related goods and services overseas.”

The projected international market outside the US for satellite manufacturing and launch services through 2021 is $132 billion with developing markets in South America and the Middle East experiencing a steady increase in growth, the AIA said.

06/03/2014