The Daily Bugle Monthly Highlights: July

Every month we post the highlights of FCC’s Export/Import Daily Update (“The Daily Bugle”). The Daily Bugle is sent out every business day to approximately 10,000 readers, who keep up to date with changes in defense and high-tech trade laws and regulations. It is a free daily newsletter from Full Circle Compliance, edited by James E. Bartlett III and Elina Tsapouri.

We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOE/NRC, DOJ/ATF, DoD/DSS, DoD/DTSA, FAR/DFARS, State/DDTC, Treasury/OFAC, White House, and similar websites of European Union, Australia, Canada, U.K., and other countries and international organizations.  Due to space limitations, we do not post Arms Sales notifications, Denied Party listings, or Customs AD/CVD items. To subscribe, click here.

Last month’s highlights of The Daily Bugle included in this edition are:

1. Commerce/BIS Announces Changes to Administrative Enforcement Program; Friday, 1 Jul 2022; Item #4
2. EU Council Requests European Parliament Consent to Add the Violation of Restrictive Measures to the List of EU Crimes; Tuesday, 5 Jul 2022; Item #9
3. UN Publishes Guidance Note on Overcompliance with Unilateral Sanctions and its Harmful Effects on Human Rights; Friday, 8 Jul 2022; Item #7
4. Justice: “Intertech Trading Corp. Pleads Guilty to 14 Felonies for Failure to File Export Information on Shipments of Lab Equipment to Russia and Ukraine”; Thursday, 9 Jul 2022; Item #6
5. DHS/CBP: “Increased Column 2 Duties on Certain Articles from the Russian Federation”; Thursday, 14 Jul 2022; Item #4
6. EU Commission Publishes Guidance to EU Member States; Monday, 18 Jul 2022; Item #6
7. State/DDTC Issues Open General License No. 1 and Open General License No. 2 for Australia, Canada, and UK; Wednesday, 20 Jul 2022; Item #6
8. Treasury/OFAC: “Issuance of Russia-Related General Licenses and FAQs; Russia-related Designation Update”; Friday, 22 Jul 2022; Item #5
9. State/DDTC: “DECCS Release – Submissions Now Viewable as PDFs”; Tuesday, 26 Jul 2022; Item #5
10. EU Commission Renews Economic Sanctions Over Russia’s Military Aggression Against Ukraine for Further Six Months; Wednesday, 27 Jul 2022; Item #5

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Commerce/BIS Announces Changes to Administrative Enforcement Program

(Source: Commerce/BIS, 30 Jun 2022) [Excerpts]

Washington, D.C.—Today, the Bureau of Industry and Security (BIS) announced four significant policy changes that will strengthen BIS’s administrative enforcement tools. The announcement was made in remarks by Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod during the 2022 BIS Update Conference on Export Controls and Policy.

“Export controls are a critical strategic national security tool for responding to the current threat environment, as we have seen from the powerful response to Russia’s further invasion of Ukraine,” said Under Secretary of Commerce for Industry and Security Alan Estevez. “We need to back up the new policies we’ve put in place with robust enforcement, and the changes being made today will improve the already strong work being done by our Export Enforcement team in that area.”

“Our enforcement tools have never been a better match for the global threat environment than they are right now, and today’s changes will help to make sure that we are using those tools to their fullest potential to protect our national security,” said Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod. “The changes we are announcing today will ensure that we are focusing our greatest attention on the most serious violations, that we are creating a level playing field that incentivizes investments in compliance, and that our penalties are appropriately commensurate with the harm to national security.”

The changes being announced today are detailed in a memorandum from Assistant Secretary of Commerce for Export Enforcement, Matthew S. Axelrod and will take effect immediately. The full memo is available online HERE. …

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EU Council Requests European Parliament Consent to Add the Violation of Restrictive Measures to the List of EU Crimes

(Source: EU Council, 30 Jun 2022) [Excerpts]

The Council today requested the European Parliament’s consent on a decision to add the violation of restrictive measures to the list of ‘EU crimes’ included in the Treaty on the Functioning of the EU.

The EU has adopted a number of restrictive measures in the context of Russia’s war of aggression against Ukraine and it is essential that these measures are fully implemented. Currently member states have very different definitions of what constitutes a violation of restrictive measures and what penalties should be applied in the event of violation. This could lead to different degrees of enforcement of sanctions and a risk of these measures being circumvented, potentially allowing sanctioned persons to continue accessing their assets and supporting regimes targeted by EU measures.

A unanimous decision to add the violation of restrictive measures to the list of ‘EU crimes’ will allow, as a second step, the adoption of a directive containing minimum rules concerning the definition of criminal offences and penalties for the violation of EU restrictive measures. This will ensure a similar degree of sanctions enforcement throughout the EU and will dissuade attempts to circumvent or violate EU measures.

Next steps

The draft text will now be sent to the European Parliament for its consent. Once the Parliament has given its consent and internal national procedures have been finalised, the decision can be formally adopted unanimously by the Council.

Background

Under article 83(1) of the Treaty on the Functioning of the EU, the Parliament and the Council may establish minimum rules concerning the definition of criminal offences and sanctions in areas of particularly serious crime with a cross-border dimension. The areas of crime currently listed in this article are terrorism, trafficking in human beings and sexual exploitation of women and children, illicit drug trafficking, illicit arms trafficking, money laundering, corruption, counterfeiting of means of payment, computer crime and organised crime.

On 25 May 2022, the European Commission presented a proposal for a decision to extend the list of these areas of crime to include the violation of restrictive measures adopted by the EU.

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UN Publishes Guidance Note on Overcompliance with Unilateral Sanctions and its Harmful Effects on Human Rights

(Source: United Nations)

As governments increasingly use unilateral sanctions to pursue foreign policy objectives, it has become common for banks and other financial service providers to over-comply with them to reduce legal, regulatory or business risks associated with inadvertent violations. Yet over-compliance with such sanctions has harmful effects on the entire range of human rights.

Over-compliance is a form of excessive avoidance of risk. It may involve blocking all financial transactions with a sanctioned country, entity or individual even when some transactions are authorized by humanitarian exemptions or fall outside of the sanctions’ scope. It may also take the form of deterring authorized transactions by requiring cumbersome, onerous documentation or certification, charging higher rates or additional fees, or imposing discouraging long delays. Over-compliance also occurs when banks decide to freeze assets that are not targeted by sanctions, or deny individuals the possibility to open or maintain bank accounts or to engage in transactions simply because they are nationals of a sanctioned country, even when the individuals are refugees from that country.

Documented cases show that over-compliance with sanctions prevents, delays or makes more costly the purchase and shipment to sanctioned countries of goods, including humanitarian goods and services such as essential food, medicine, medical equipment and spare parts for such equipment, even when the need is urgent and if of life-saving nature Such practices also prevent international organizations and humanitarian NGOs from transferring funds to pay their employees in sanctioned countries, and block people in these countries from accessing their property, meeting their financial obligations, exercising business activities and handling normal day-to-day interactions, including ordering goods, transferring money for or getting money from their families, making simple payments for ordinary needs and purposes, booking flights and hotels, and participating in international cooperation including in the spheres of art, science, sport, culture and many others. They also impede their access to justice, including in national and international courts and investment tribunals, to respond to accusations and defend themselves, thus denying such fundamental rights as the presumption of innocence, due process, the right to defence and to a fair hearing and trial.

The complexity of many unilateral sanctions regimes, burdensome administrative processes, extraterritorial enforcement and the magnitudes of financial or business penalties for breaching sanctions are some of the reasons why financial, business and numerous other actors (such as shipping companies, insurances, but also publishers of scientific and academic journals) prefer resorting to over-compliance rather than facing the risk of being sanctioned themselves. Obligations to comply with financial sector regulations aimed at minimizing risk are also a key factor.

Some over-compliance policies of banks do prevent states, international organizations, diplomats and individuals in targeted countries from participation in international cooperation. They do also often result in the cancellation or suspension of membership or voting rights in international organizations. They impede the normal functioning of diplomatic missions, missions of international organizations and the implementation of humanitarian and development projects. They do also prevent foreign diplomats living in these countries to accesses to their own private resources, such as their bank accounts at home, including salaries, import their own private vehicles, or pay school feed for their children studying abroad.

De-risking (avoiding risk) and over-compliance with the requirement of unilateral sanctions by banks force companies and individuals to look for alternative ways to transfer money, making the mechanisms of financial transactions opaque, increasing costs and time for transferring money and goods, creating a flourishing underground economy, giving rise to smuggling, fostering corruption and criminal activities, within the borders of targeted countries but also often outside them in neighboring countries.

In this context, where overcompliance often undermines economic development and fosters impoverishment, ordinary people, men but also often women and girls, seek to escape poverty by engaging in illegal activities, such a prostitution or drug trafficking or fall prey of powerful individuals who traffic them into criminal activities, for which, in turn, they are prosecuted and sanctioned, sometimes with death.

The UN Security Council, in resolution 2615 (2021) relating to its sanctions against individuals, groups and entities associated with the “Taliban” in Afghanistan,[FN/1] decided that “humanitarian assistance and other activities that support basic human needs in the country are not a violation” of the freeze on their assets “and that the processing and payment of funds, other financial assets or economic resources, and the provision of goods and services necessary to ensure the timely delivery of such assistance or to support such activities are permitted (…)” as long as “reasonable efforts” are made to minimize any benefits to the sanctioned individuals and entities.

The Special Rapporteur on the negative impact of unilateral coercive measures on the enjoyment of human rights, recommends to banks and other financial institutions and service providers to act in the spirit of that resolution, and avoid over-compliance with sanctions when it impacts human rights. She recommends them to align their compliance with human rights policy, and to comply with their responsibilities under the UN Guiding Principles for Business and Human Rights[FN/2] and General Comment No. 24 of the Committee on Economic, Social and Cultural rights.[FN/3] She further recommends to states to act in line with their obligations under the international law treaties they have ratified to protect human rights by preventing financial and other private companies under their jurisdiction from over-complying with sanctions, and to adjust regulatory requirements for the financial sector where necessary.

She underscore the illegality under international law of imposing secondary sanctions or threating with secondary sanctions, civil and/or criminal penalties for non-compliance with their sanctions regimes, which are often extraterritorial.

She also emphasizes that under international law, including human rights treaty law, all states are required to observe their international obligations, including in the sphere of human rights, the Special Rapporteur calls of states to review and lift all unilateral sanctions which are not authorized by the UN Security Council, are not in conformity with their international obligations, or the wrongfulness of which cannot be excluded in accordance with the law of international responsibility.

RECOMMENDATIONS

Against this background, the Special Rapporteur recommends banks and other financial service providers:

(1)  To review their sanctions compliance policy to determine if the restrictions they impose on the provision of financial services are broader than those actually required by the sanctions, and to adjust their compliance to exclude, to the extent possible, any over-compliance.

(2)  To assess whether any over-compliance with unilateral sanctions has, or may have, a harmful impact on the enjoyment of human rights by individuals for whom it restricts financial services, and by others affected by the consequences of the restrictions, particularly in cases when the restrictions impact financial services for humanitarian actors. The impact assessment should focus on the rights affected and the magnitude of the impact, in line with due diligence responsibilities under the UN Guiding Principles on Business and Human Rights. Whenever negative effects are identified, prompt corrective action should be taken to eliminate or mitigate the harm.

(3)  To monitor the human rights impact of their sanctions compliance policy on an ongoing basis to eliminate, mitigate or prevent any harmful impact; due diligence relating to the human rights impact of over-compliance with sanctions is both an initial act and an ongoing process.

(4)  To provide for free flow of payments for goods necessary to guarantee the basic needs of the population in targeted countries such as medicines, medical equipment, raw materials, spare parts, food, seeds, fertilizers, electricity, water, housing, transportation systems, delivery of humanitarian aid and implementation of humanitarian and development projects.

(5)  The Special Rapporteur additionally wishes to clarify that:

(6)  Unilateral blocking statutes adopted in some jurisdictions against the extraterritorial enforcement of sanctions imposed by other states apply only to banking services that are restricted by the sanctions, and not to any over-compliance. Therefore when restrictions on banking and other financial services to sanctioned parties are lifted as a result of complying with blocking statutes, this should also be extended to all parties affected by over-compliance.

(7)  Banks may not have the internal resources or expertise necessary to evaluate the human rights impact of their sanctions compliance policies and practices, particularly as the impact may occur abroad and in multiple locations at once. In such cases, it is desirable to rely on outside expertise for this information, and banks are urged to engage with existing sources of expertise or experience such as United Nations in the field as well as non-governmental actors that monitor humanitarian and human rights situations around the world. She invites these institutions to engage in dialogue with the mandate in this respect, which might be able to provide useful advice and guidance.

(8)  Individual banks may minimize the risks and consequences of violating human rights through their sanctions compliance activities, including any over-compliance, by developing collective sanctions compliance policies, for example through banking associations, that address the human rights impact of their policies.

(9)  States are advised to ensure that banks and other financial service providers under their jurisdiction comply with the UN Guiding Principles, to avoid any negative impact on human rights from their activities, due in particular to over-compliance.

(10)        States are advised to assess the elements of their financial sector regulations that may encourage banks to over-comply with sanctions, and to reconsider such elements with a view toward removing this encouragement.

(11)        Last, states are advised to monitor how financial sector over-compliance with sanctions affects critical infrastructures in sanctioned states that are necessary for the maintenance of basic living conditions, and the related enjoyment of human rights by their populations, including in such vital spheres of health care, food security, seeds, fertilizers, housing, electricity, water, gas and gasoline supply; and the ability of humanitarian organizations to perform essential work in those countries and to provide vital aid to those in need without discrimination, while eliminating or mitigating any harm to the beneficiaries.

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Justice: “Intertech Trading Corp. Pleads Guilty to 14 Felonies for Failure to File Export Information on Shipments of Lab Equipment to Russia and Ukraine”

(Source: Justice) [Excerpts]

Intertech Trading Corporation, an Atkinson, New Hampshire-based laboratory equipment distributor, pleaded guilty in federal court to 14 felony counts of failure to file export information on shipments to Russia and Ukraine, United States Attorney Jane E. Young announced today.

     According to court documents and statements made in court, between 2015 and 2019, Intertech exported laboratory equipment to Russia, Ukraine, and elsewhere, falsely describing the nature and value of the exported items on the commercial invoices and shipping forms. 

In its plea agreement, Intertech admitted that it used false, innocuous descriptions such as “lamp for aquarium” or “spares for welding system,” rather than accurately identifying the sophisticated scientific equipment actually contained in the shipments. Intertech admitted that it drastically undervalued the shipments, thereby evading the requirement to file Electronic Export Information, which would have been reported to the Departments of Commerce and Homeland Security.

      Intertech is scheduled to be sentenced on October 17, 2022. If the court accepts the terms of the binding plea agreement, Intertech will pay the maximum allowable fine of $10,000 per count and be subject to a two-year term of corporate probation and monitoring. …

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DHS/CBP: “Increased Column 2 Duties on Certain Articles from the Russian Federation”

(Source: DHS/CBP)

CSMS #52458835: The purpose of this guidance is to inform the trade community of an increase in Column 2 duties for certain articles from the Russian Federation by Presidential Proclamation 10420, effective June 27, 2022.

Background.

On April 8, 2022, President Biden signed H.R. 7108, the “Suspending Normal T\rade Relations with Russia and Belarus Act”. With this legislation, imports from the Russian Federation and the Republic of Belarus were subject to the rates of duty set forth in Column 2 of the Harmonized Tariff Schedule of the United States (HTSUS). This legislation also granted authorization to the President to proclaim increases in the Column 2 rates of duty applicable to the products of Russia or Belarus.

Implementation

Effective on 12:01 a.m. EDT on July 27, 2022, for goods entered for consumption, or withdrawn from warehouse for consumption, subchapter III of chapter 99 of the HTSUS is modified by inserting the following new heading 9903.90.08: Articles the product of the Russian Federation, as provided for in U.S. note 30(a) to this subchapter and as provided for in the subheadings enumerated in U.S. note 30(b) to this subchapter: 35%”.

All articles that are the product of the Russian Federation imposed by heading 9903.90.08, under subheadings enumerated in U.S. note 30(b) (document attached), shall be subject to a 35 percent ad valorem rate of duty in lieu of the rates of duty provided for such articles in Column 2 of the HTSUS in chapters 1 to 97.

The duties imposed by heading 9903.90.08 do not apply to goods for which entry is claimed under a provision of chapter 98 of the HTSUS, except for goods entered under subheadings 9802.00.40, 9802.00.50, and 9802.00.60, and heading 9802.00.80. 

For subheadings 9802.00.40, 9802.00.50, and 9802.00.60, the duties imposed by heading 9903.90.08 apply to the value of repairs, alterations, or processing performed abroad, as described in the applicable subheading. 

For heading 9802.00.80, the duties imposed by heading 9903.90.08 apply to the value of the article less the cost or value of such products of the United States, as described in heading 9802.00.80.

Products of the Russian Federation that are provided for in heading 9903.90.08 and classified in one of the subheadings enumerated in U.S. note 30(b) to subchapter III of chapter 99 shall continue to be subject to antidumping, countervailing, or other duties, fees, exactions and charges that apply to such products, as well as to the 35 percent ad valorem rate of duty imposed by heading 9903.90.08.

Filers are instructed to enter 9903.90.08 in addition to the Chapter 1-97 HTS on the entry summary line. HTS hierarchical guidance has been issued previously, please refer to CSMS 39587858 for guidance related to reporting multiple HTS when chapter 98 and 99 are required.

All entry summary related questions regarding this guidance should be addressed to the Commercial Operations, Revenue and Entry Division at otentrysummary@cbp.dhs.gov.

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EU Commission Publishes Guidance to EU Member States 

(Source: EU Commission)

• In response to Russia’s aggression against Ukraine, the EU has adopted a series of far- reaching restrictive measures against Russia in 2022. In particular, Council Regulation (EU) 833/2014 (‘the Regulation’) sets out a number of specific and targeted import and export restrictions in relation to certain goods originating in Russia. 
• These sanctions are justified and fully compatible with the security exceptions in the relevant international agreements. Under Article 19 and Article 99 of the PCA prohibitions or restrictions on goods in transit can be imposed if justified, inter alia, on grounds of public security or protection of health and life of humans, or protection of intellectual, industrial or commercial property, and to protect essential security interests. 
• At the same time, Article V GATT and Article 12 of the PCA, as well as the 2004 EU- Russia Declaration, establish a general principle of freedom of transit. 
• The question has now arisen whether these restrictive measures prohibit the transport of essential goods in transit through the European Union between non-contiguous parts of the Russian Federation. In particular, this question has come up for a number of sanctioned products, such as iron and steel, cement and wood, coal and crude oil and oil products. 
• This Guidance Note does not affect the guidance provided by the Commission with respect to the application of sanctions in other cases. 
• The relevant EU trade sanctions in the Regulation regularly prohibit “to purchase, import/export or transfer, directly or indirectly [the goods in question], if they originate in Russia or are exported from/to Russia”. 
• Under Article 3(l) of the Regulation, road transport undertakings established in Russia are prohibited to transport goods by road within the territory of the Union, including in transit. However, this ban does not apply to the transport of goods in transit through the Union between the Kaliningrad Oblast and Russia, provided that the transport of such goods is not otherwise prohibited under the Regulation. Transit of sanctioned goods by road is therefore not allowed. 
• No such specific regime applies to rail transport on the same route, without prejudice to Member States’ obligation to perform effective controls as set out below, in conformity with EU law. 
• The transit of sanctioned military and dual use goods and technology, as defined in Regulation (EU) 2021/821, is prohibited in any event. 
• Member States must also ensure that sanctioned goods that have illegally arrived in any part of Russia cannot be transported onwards via the EU customs territory. 
• Member States are under the legal obligation to prevent all possible forms of circumvention of EU restrictive measures. For that purpose, it is necessary for Member States to continue monitoring the two-way trade flows between the non- contiguous parts of the Russian Federation. Targeted, proportionate and effective controls and other appropriate measures to prevent violation of the EU Regulations should be carried out by Member States authorities. 
• Member States shall check whether transit volumes remain within the historical averages of the last 3 years, in particular reflecting the real demand for essential goods at the destination, and that there are no unusual flows or trade patterns which could give rise to circumvention. In such a case, Member States shall take all necessary measures provided for under EU law, including where appropriate the refusal of transit and the holding of the goods in question. 
• Member States authorities and the European Commission shall continue to cooperate and coordinate closely on this matter. The Commission stands ready to provide further guidance, guidelines for monitoring the two way flows and administrative best practices and advice to Member States, to ensure uniform implementation.

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State/DDTC Issues Open General License No. 1 and Open General License No. 2 for Australia, Canada, and UK

(Source: State/DDTC)

The Department of State, Directorate of Defense Trade Controls (DDTC) is issuing two open general licenses as part of a new pilot program: 

Open General License No. 1 and Open General License No. 2.  Section 126.9(b) of the International Traffic in Arms Regulations (ITAR) allows DDTC to provide export authorization for DDTC’s own initiatives, including specifically anticipated circumstances for which it considers special authorizations appropriate.  DDTC considers the activities described in Open General License No. 1 and Open General License No. 2 to be scenarios for which special authorizations are appropriate. It is issuing the licenses as part of a pilot program to assess the viability and appropriateness of the open general license concept. A link to each open general license, as well as a fact sheet, is provided below. 

Open General License No. 1 permits the retransfer (as defined in ITAR § 120.51) of unclassified defense articles to the Governments of Australia, Canada, or the United Kingdom, and to members of the Australian and United Kingdom communities (as defined in ITAR §§ 126.16(d) and 126.17(d)) and Canadian-registered persons (as defined in ITAR § 126.5(b)). 

Open General License No. 2 permits the reexport (as defined in ITAR § 120.19) of unclassified defense articles between or among the Governments of Australia, Canada, and the United Kingdom, and to members of the Australian and United Kingdom communities (as defined in ITAR §§ 126.16(d) and 126.17(d)) and Canadian-registered persons (as defined in ITAR § 126.5(b)). 

Both licenses are subject to requirements, limitations, and provisos as described in each license. These open general licenses are valid for one year, effective August 1, 2022, through July 31, 2023.

• Open General License No. 1
• Open General License No. 2
• Open General License Fact Sheet

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Treasury/OFAC: “Issuance of Russia-Related General Licenses and FAQs; Russia-related Designation Update”

(Source: Treasury/OFAC, 22 Jul 2022) [Excerpts]

The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is issuing Russia-related General License 45 and General License 46. OFAC is also publishing two new Frequently Asked Questions and two amended Frequently Asked Questions.

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State/DDTC: “DECCS Release – Submissions Now Viewable as PDFs”

(Source: State/DDTC)

The Defense Export Control and Compliance System (DECCS) Registration, Commodity Jurisdiction and Advisory Opinion applications have been updated to display submitted forms as PDFs, as opposed to a webform view. This update allows DDTC to store the request exactly as it was submitted, and the form will remain unaffected by any future policy changes or system updates.

   – For Registrations, you will access your submission in the “Form” view, and click the “Print Registration” button to download the PDF.

   – For Advisory Opinions, select your submission, then click the “Download DS-7786” button in the top blue banner to download the PDF.

   – For Commodity Jurisdictions, select your submission, then click the “Download DS-4076” button in the top blue banner to download the PDF.

If you have questions concerning the update, please contact the DDTC Help Desk

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EU Commission Renews Economic Sanctions Over Russia’s Military Aggression Against Ukraine for Further Six Months

(Source: EU Commission, 26 Jul 2022) [Excerpts]

The Council today decided to prolong by six months, until 31 January 2023, the restrictive measures targeting specific sectors of the economy of the Russian Federation.

These sanctions, first introduced in 2014 in response to Russia’s actions destabilising the situation in Ukraine, were significantly expanded since February 2022, in light of Russia’s unprovoked and unjustified military aggression against Ukraine. They currently consist of a broad spectrum of sectoral measures, including restrictions on finance, energy, technology and dual-use goods, industry, transport and luxury goods. …