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17-0307 Tuesday “The Daily Bugle”

17-0307 Tuesday “The Daily Bugle”

Tuesday, 7 March 2017

TOPThe Daily Bugle is a free daily newsletter from Full Circle Compliance, containing changes to export/import regulations (ATF, Customs, NISPOM, EAR, FACR/OFAC, FTR/AES, HTSUS, and ITAR), plus news and events. Subscribe 
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  1. Commerce/BIS: ETRAC to Meet on Mar 23-24 in Wash DC
  2. Commerce/BIS: RPTAC to Meet on Mar 30 in Wash DC
  3. Commerce/BIS: SITAC to Meet on Apr 18 in Wash DC
  4. Commerce/BIS Posts Notice of TAC Recruitment
  5. Commerce/OPSP Seeks Comments on the Impact of Federal Regulations on Domestic Manufacturing
  1. Ex/Im Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS: ZTE of Shenzhen and Hi-New Shenzhen, China, to Pay $661,000,000 to Settle Alleged Export Violations 
  3. DHS/CBP Announces FDA Webinar for Software Vendors to Discuss Product Code Builder API, 15 Mar 
  4. DoD/DSCA Posts SAMM and Policy Memoranda, Week 5-11 Mar
  5. Justice: “ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for U.S. Sanctions Violations”
  6. Justice: “South Florida Tobacco Importer Sentenced to Seven Years in Prison for Violating Probation and Failing to Pay Over $13 Million in Federal Excise Taxes” 
  7. State/DDTC: (No new postings.) 
  8. Treasury/OFAC Posts Settlement Agreement ZTE for ITSR Violations
  9. UK/DIT ECO Posts Correction of 1 Mar Notice Concerning Update of Six Open Licenses
  1. ST&R Trade Report: “Industry Advisors Offer Recommendations for NAFTA Changes” 
  2. ST&R Trade Report: “Largest Ever Civil Penalty for Export Control Violations Assessed on Chinese Company [ZTE]” 
  1. D. Luther: “My Customs Broker Handles That” 
  2. The Export Compliance Journal: “One Thing’s Cl(EAR)-BIS Export Enforcement Efforts Are Working” 
  3. G. Husisian: “Private Equity and the New Trump Administration: Your Top Ten Questions Answered” (Part I of IV) 
  4. Gary Stanley’s ECR Tip of the Day 
  5. R.C. Burns: “Penn Senate Rum Runners Eye Cuban Rum” 
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Changes: ATF (15 Jan 2016), Customs (27 Jan 2017), DOD/NISPOM (18 May 2016), EAR (24 Feb 2017), FACR/OFAC (10 Feb 2017), FTR (15 May 2015), HTSUS (10 Feb 2017), ITAR (11 Jan 2017) 

EXIMEX/IM ITEMS FROM TODAY’S FEDERAL REGISTER

EXIM_a11.

Commerce/BIS: ETRAC to Meet on 23-24 Mar in Wash DC

 
82 FR 12791: Emerging Technology and Research Advisory Committee; Notice of Partially Closed Meeting
  The Emerging Technology and Research Advisory Committee (ETRAC) will meet on March 23-24, 2017, 8:30 a.m., Room 3884, at the Herbert C. Hoover Building, 14th Street between Pennsylvania and Constitution Avenues NW., Washington, DC. The Committee advises the Office of the Assistant Secretary for Export Administration on emerging technology and research activities, including those related to deemed exports. …
  The open sessions will be accessible via teleconference to 25 participants on a first come, first serve basis. To join the conference, submit inquiries to Ms. Yvette Springer at
Yvette.Springer@bis.doc.gov no later than, March 16, 2017.
  A limited number of seats will be available for the public session. Reservations are not accepted. To the extent that time permits, members of the public may present oral statements to the Committee. The public may submit written statements at any time before or after the meeting. However, to facilitate the distribution of public presentation materials to the Committee members, the Committee suggests that presenters forward the public presentation materials prior to the meeting to Ms. Springer via email.
  The Assistant Secretary for Administration, with the concurrence of the delegate of the General Counsel, formally determined on February 22, 2017, pursuant to Section l0(d) of the Federal Advisory Committee Act, as amended, that the portion of the meeting dealing with matters the of which would be likely to frustrate significantly implementation of a proposed agency action as described in 5 U.S.C. 552b(c)(9)(B) shall be exempt from the provisions relating to public meetings found in 5 U.S.C. app. 2 Sec. Sec.  10(a)1 and 10(a) (3). The remaining portions of the meeting will be open to the public.
  For more information, call Yvette Springer at (202) 482-2813.
 
  Dated: March 2, 2017.
Yvette Springer, Committee Liaison Officer.

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EXIM_a22.

Commerce/BIS: RPTAC to Meet on 30 Mar in Wash DC

 
82 FR 12790: Regulations And Procedures Technical Advisory Committee; Notice of Partially Closed Meeting
 
  The Regulations and Procedures Technical Advisory Committee (RPTAC) will meet March 30, 2017, 9:00 a.m., Room 3884, in the Herbert C. Hoover Building, 14th Street between Constitution and Pennsylvania Avenues NW., Washington, DC. The Committee advises the Office of the Assistant Secretary for Export Administration on implementation of the Export Administration Regulations (EAR) and provides for continuing review to update the EAR as needed. …
  The open session will be accessible via teleconference to 25 participants on a first come, first serve basis. To join the conference, submit inquiries to Ms. Yvette Springer at
Yvette.Springer@bis.doc.gov no later than March 23, 2017.
  A limited number of seats will be available for the public session. Reservations are not accepted. To the extent that time permits, members of the public may present oral statements to the Committee. The public may submit written statements at any time before or after the meeting. However, to facilitate the distribution of public presentation materials to the Committee members, the Committee suggests that presenters forward the public presentation materials prior to the meeting to Ms. Springer via email.
  The Assistant Secretary for Administration, with the concurrence of the delegate of the General Counsel, formally determined on February 15, 2017, pursuant to Section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. app. 2 Sec.  10(d)), that the portion of the meeting dealing with pre-decisional changes to the Commerce Control List and the U.S. export control policies shall be exempt from the provisions relating to public meetings found in 5 U.S.C. app. 2 Sec. Sec.  10(a)(1) and 10(a)(3). The remaining portions of the meeting will be open to the public.
  For more information, call Yvette Springer at (202) 482-2813.
 
  Dated: March 2, 2017.
Yvette Springer, Committee Liaison Officer.

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EXIM_a33.

Commerce/BIS: SITAC to Meet on 18 Apr in Wash DC

 
82 FR 12789-12790: Sensors and Instrumentation Technical Advisory Committee; Notice of Partially Closed Meeting
 
  The Sensors and Instrumentation Technical Advisory Committee (SITAC) will meet on April 18, 2017, 9:30 a.m., in the Herbert C. Hoover Building, Room 3884, 14th Street between Constitution and Pennsylvania Avenues NW., Washington, DC. The Committee advises the Office of the Assistant Secretary for Export Administration on technical questions that affect the level of export controls applicable to sensors and instrumentation equipment and technology. …
  The open session will be accessible via teleconference to 20 participants on a first come, first serve basis. To join the conference, submit inquiries to Ms. Yvette Springer at
Yvette.Springer@bis.doc.gov no later than April 11, 2017.
  A limited number of seats will be available during the public session of the meeting. Reservations are not accepted. To the extent that time permits, members of the public may present oral statements to the Committee. The public may submit written statements at any time before or after the meeting. However, to facilitate distribution of public presentation materials to the Committee members, the Committee suggests that the materials be forwarded before the meeting to Ms. Springer.
  The Assistant Secretary for Administration, with the concurrence of the General Counsel, formally determined on January 12, 2017 pursuant to Section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. app. 2 Sec.  10(d), that the portion of this meeting dealing with pre-decisional changes to the Commerce Control List and U.S. export control policies shall be exempt from the provisions relating to public meetings found in 5 U.S.C. app. 2 Sec. Sec.  10(a)(1) and 10(a)(3). The remaining portions of the meeting will be open to the public.
  For more information contact Yvette Springer on (202) 482-2813.
 
  Dated: March 2, 2017.
Yvette Springer, Committee Liaison Officer.

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EXIM_a44

Commerce/BIS Posts TAC Recruitment Notice

 
82 FR 12790-12791: Technical Advisory Committees; Notice of Recruitment of Private-Sector Members
 
* SUMMARY: Seven Technical Advisory Committees (TACs) advise the Department of Commerce on the technical parameters for export controls applicable to dual-use commodities and technology and on the administration of those controls. The TACs are composed of representatives from industry representatives, academic leaders and U.S. Government representing diverse points of view on the concerns of the exporting community. Industry representatives are selected from firms producing a broad range of goods, technologies, and software presently controlled for national security, non-proliferation, foreign policy, and short supply reasons or that are proposed for such controls, balanced to the extent possible among large and small firms.
  TAC members are appointed by the Secretary of Commerce and serve terms of not more than four consecutive years. The membership reflects the Department’s commitment to attaining balance and diversity. TAC members must obtain secret-level clearances prior to appointment. These clearances are necessary so that members may be permitted access to the classified information needed to formulate recommendations to the Department of Commerce. Each TAC meets approximately four times per year. Members of the Committees will not be compensated for their services.
  The seven TACs are responsible for advising the Department of Commerce on the technical parameters for export controls and the administration of those controls within the following areas: Information Systems TAC: Control List Categories 3 (electronics), 4 (computers), and 5 (telecommunications and information security); Materials TAC: Control List Category 1 (materials, chemicals, microorganisms, and toxins); Materials Processing Equipment TAC: Control List Category 2 (materials processing); Regulations and Procedures TAC: The Export Administration Regulations (EAR) and Procedures for implementing the EAR; Sensors and Instrumentation TAC: Control List Category 6 (sensors and lasers); Transportation and Related Equipment TAC: Control List Categories 7 (navigation and avionics), 8 (marine), and 9 (propulsion systems, space vehicles, and related equipment) and the Emerging Technology and Research Advisory Committee: (1) The identification of emerging technologies and research and development activities that may be of interest from a dual-use perspective; (2) the prioritization of new and existing controls to determine which are of greatest consequence to national security; (3) the potential impact of dual-use export control requirements on research activities; and (4) the threat to national security posed by the unauthorized exports of technologies.
  To respond to this recruitment notice, please send a copy of your resume to Ms. Yvette Springer at
Yvette.Springer@bis.doc.gov.
  Deadline: This Notice of Recruitment will be open for one year from its date of publication in the Federal Register.
* FOR FURTHER INFORMATION CONTACT: Ms. Yvette Springer on (202) 482-2813.
 
  Dated: March 2, 2017.
Yvette Springer, Committee Liaison Officer.

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EXIM_a55.

Commerce/OPSP Seeks Comments on the Impact of Federal Regulations on Domestic Manufacturing

 
82 FR 12786-12788: Impact of Federal Regulations on Domestic Manufacturing
 
* AGENCY: Office of Policy and Strategic Planning (OPSP), Department of Commerce.
* ACTION: Notice; request for information (RFI).
* SUMMARY: The Department of Commerce is seeking information on the impact of Federal permitting requirements on the construction and expansion of domestic manufacturing facilities and on regulations that adversely impact domestic manufacturers. As directed by President Trump’s Memorandum of January 24, 2017, “Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing,” the Secretary of Commerce, in coordination with the Secretaries of Agriculture and Energy, the Administrator of the Environmental Protection Agency, the Director of the Office of Management and Budget, the Administrator of the Small Business Administration, and other appropriate agency heads, is conducting outreach to stakeholders concerning the impact of Federal regulations on domestic manufacturing, and is soliciting comments from the public concerning Federal actions to streamline permitting for the construction and expansion of domestic manufacturing facilities and to reduce regulatory burdens for domestic manufacturers. Responses to this RFI — which will be posted at
http://www.regulations.gov — will inform the report of the Secretary of Commerce to the President, required under the Presidential Memorandum, setting forth a plan to streamline Federal permitting processes for domestic manufacturing and to reduce regulatory burdens affecting domestic manufacturers.
* DATES: Comments must be received by 5 p.m. Eastern time on March 31, 2017.
* ADDRESSES: The preferred method for submission of comments is via
http://www.regulations.gov (at the home page, enter DOC-2017-0001 in the “Search” box, click the “Comment Now!” icon, complete the required fields, and enter or attach your comments). Alternatively, comments may be sent: Via mail carrier to The Office of Policy and Strategic Planning, Department of Commerce, H.C. Hoover Building Rm. 5863, 1401 Constitution Ave. NW., Washington, DC. 20230. All submissions, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Submissions will not be edited to remove any identifying or contact information. Do not submit confidential business information, or otherwise sensitive or protected information. Attachments to electronic comments will be accepted in Microsoft Word or Excel, or Adobe PDF formats only. Please do not submit additional materials. Comments containing references, studies, research, and other empirical data that are not widely published should include electronic copies of the referenced materials. All comments received in response to this RFI will be made available publicly at
http://www.regulations.gov.
* FOR FURTHER INFORMATION CONTACT: For questions about this notice, contact: Carter Halfman, U.S. Department of Commerce, Office of Policy and Strategic Planning, at 202-482-7466. Please direct media inquiries to the Department of Commerce Office of Public Affairs at 202-482-4883, or
publicaffairs@doc.gov.
* SUPPLEMENTARY INFORMATION: …
 
  Dated: March 2, 2017.
Earl Comstock, Director of Policy and Strategic Planning.

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OGS
OTHER GOVERNMENT SOURCES

OGS_a16. Ex/Im Items Scheduled for Publication in Future Federal Register Editions

(Source: Federal Register)

[No items of interest noted today.] 
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OGS_a27. Commerce/BIS: ZTE of Shenzhen and Hi-New Shenzhen, China, to Pay $661,000,000 for Export Violations

(Source: Commerce/BIS) [See related items #10, #13, and #16.]
 
* Respondents: Zhongxing Telecommunications Equipment Corporation, Shenzhen, China, and ZTE Kangxun Telecommunications Ltd., Hi-New Shenzhen, China, collectively known as ZTE
  – One Charge of 15 C.F.R. § 764.2(d) -Conspiracy
  – 283 Charges of 15 C.F.R. § 764.2(e) – Acting with Knowledge of a Violation in Connection with Unlicensed Shipments of Telecommunications Items to North Korea via China
  – 16 Charges 15 C.F.R. § 764.2(h) – Evasion
* Penalty: Civil penalty of $661,000,000. The payment of $361,000,000 shall be made to the U.S. Dept. of Commerce within 60 days of the date of this Order. Payment of the remaining $300,000,000 shall be suspended for a probationary period of seven years provided that all the requirements set out in the Order are met.
* Main requirements:
  – ZTE shall complete and submit six audit reports of its compliance with U.S. export control laws, with respect to all exports, reexports, or transfers (in-country) that are subject to the EAR;
  – ZTE shall hire an unaffiliated third party consultant with expertise in U.S. export control laws to conduct the external audits;
  – The audits required shall be in substantial compliance with the Export Management Program sample audit module, available on the BIS website;
  – ZTE will ensure that all records required to be kept or retained under the EAR are stored in or fully accessible from the United States;
  – ZTE will allow the U.S. government to verify ZTE’s adherence to its export control compliance program and the EAR
  – ZTE shall provide extensive training on applicable export control requirements to its leadership, management, and employees, including the leadership, management and employees of its affiliates, subsidiaries, and other entities worldwide over which it has ownership or control
* Debarred: Not if penalty is paid as agreed and all requirements set out in the Order are met.
* Date of Order: 7 March 2017

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(Source:
CSMS# 17-000126
, 6 March 2017) 
 
The Food and Drug Administration (FDA) will host a webinar for software vendors on Wednesday, March 15, 2017 from 2:30 pm – 3:30 pm Eastern Time. As a result of feedback received, FDA has developed an API which will enable brokers to query, populate, and validate product codes from within their Automated Broker Interface (ABI) software. The technical team that developed the API will provide information related the implementation of the Product Code Builder API.
 
 
Once you are approved by the host, you will receive a confirmation email with instructions for joining the session.
 
Please contact FDA ACE Support for questions: ACE_Support@fda.hhs.gov or 877-345-1101.
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OGS_a49
. DoD/DSCA Posts SAMM and Policy Memoranda, Week 5-11 Mar

 
  – This memorandum provides notification of a revision to Condition 2.2. of the Letter of Offer and Acceptance (LOA) Standard Terms and Conditions found in Figure C5.F4.

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OGS_a5
10
. Justice: “ZTE Corporation to Plead Guilty and Pay Over $430.4 Million for U.S. Sanctions Violations”

(Source: Justice) [Excerpts. See related items #7, #13, and #16.]
 
ZTE Corporation has agreed to enter a guilty plea and to pay a $430,488,798 penalty to the U.S. for conspiring to violate the International Emergency Economic Powers Act (IEEPA) by illegally shipping U.S.-origin items to Iran, obstructing justice and making a material false statement. ZTE simultaneously reached settlement agreements with the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). In total ZTE has agreed to pay the U.S. Government $892,360,064. The BIS has suspended an additional $300,000,000, which ZTE will pay if it violates its settlement agreement with the BIS. …
  
  “ZTE Corporation not only violated export controls that keep sensitive American technology out of the hands of hostile regimes like Iran’s – they lied to federal investigators and even deceived their own counsel and internal investigators about their illegal acts,” said Attorney General Sessions. “This plea agreement holds them accountable, and makes clear that our government will use every tool we have to punish companies who would violate our laws, obstruct justice and jeopardize our national security. I am grateful to the Justice Department’s National Security Division, the U.S. Attorney’s Office for the Northern District of Texas and the FBI for their outstanding work on this investigation.”
 
  “ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports. The plea agreement, which is pending before the Court, alleges that the highest levels of management within the company approved the scheme. ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said Acting Assistant Attorney General McCord. “The enforcement of U.S. export control and sanctions laws is a major component of the National Security Division’s commitment to protecting the national security of the United States. Companies that violate these laws – including foreign companies – will be investigated and held to answer for their actions.”
 
  “ZTE Corporation not only violated our export control laws but, once caught, shockingly resumed illegal shipments to Iran during the course of our investigation,” said U.S. Attorney Parker. “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.” 
 
  “The plea agreement in this case shows ZTE repeatedly violated export controls and illegally shipped U.S. technology to Iran,” said Assistant Director Priestap. “The company also took extensive measures to hide what it was doing from U.S. authorities. This case is an excellent example of cooperation among multiple U.S. agencies to uncover illegal technology transfers and make those responsible pay for their actions.”
 
The plea agreement, which is contingent on the court’s approval, also requires ZTE to submit to a three-year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program. ZTE is also required to cooperate fully with the Department of Justice (DOJ) regarding any criminal investigation by U.S. law enforcement authorities. The plea agreement ends a five-year joint investigation into ZTE’s export practices, which was handled by the DOJ’s National Security Division, the U.S. Attorney’s Office for the Northern District of Texas, the FBI, the BIS and the Department of Homeland Security, U.S. Immigration and Customs Enforcement’s Homeland Security Investigations.
 
A criminal information was filed today in federal court in the Northern District of Texas charging ZTE with one count of knowingly and willfully conspiring to violate the IEEPA, one count of obstruction of justice and one count of making a material false statement. ZTE waived the requirement of being charged by way of federal indictment, agreed to the filing of the information and has accepted responsibility for its criminal conduct by entering into a plea agreement with the government. The plea agreement, which is contingent on the court’s approval, requires that ZTE pay a fine in the amount of $286,992,532 and a criminal forfeiture in the amount of $143,496,266.  The criminal fine represents the largest criminal fine in connection with an IEEPA prosecution.
 
SUMMARY OF THE CRIMINAL CONDUCT
 
According to documents filed today, for a period of almost six years, ZTE obtained U.S.-origin items – including controlled dual-use goods on the Department of Commerce’s Commerce Control List (CCL) – incorporated some of those items into ZTE equipment and shipped the ZTE equipment and U.S.-origin items to customers in Iran. ZTE engaged in this conduct knowing that such shipments to Iran were illegal. ZTE further lied to federal investigators during the course of the investigation when it insisted, through outside and in-house counsel, that the company had stopped sending U.S.-origin items to Iran. In fact, while the investigation was ongoing, ZTE resumed its business with Iran and shipped millions of dollars’ worth of U.S. items there.
 
ZTE also created an elaborate scheme to hide the data related to these transactions from a forensic accounting firm hired by defense counsel to conduct a review of ZTE’s transactions with sanctioned countries. It did so knowing that the information provided to the forensic accounting firm would be reported to the U.S. government by outside counsel. Outside counsel was not aware of this scheme and indeed was wholly unaware that ZTE had resumed business with Iran. After ZTE informed its counsel of the scheme, counsel reported – with permission from ZTE – the conduct to the U.S. government.
 
THE IRAN BUSINESS
 
According to court documents, between January 2010 and January 2016, ZTE, either directly or indirectly through a third company, shipped approximately $32,000,000 of U.S.-origin items to Iran without obtaining the proper export licenses from the U.S. government. In early 2010, ZTE began bidding on two different Iranian projects. The projects involved installing cellular and landline network infrastructure. Each contract was worth hundreds of millions of U.S. Dollars and required U.S. components for the final products.
 
In December 2010, ZTE finalized the contracts with Iranian customers. The contracts were signed by four parties: the Iranian customer, ZTE, Beijing 8 Star and ZTE Parsian. Court documents explain that ZTE identified Beijing 8 Star (8S) as a possible vehicle for hiding its illegal shipments of U.S. items to Iran. It intended to use 8S to export U.S.-origin items from China to ZTE customers in Iran. As part of this plan, ZTE supplied 8S with necessary capital and took over control of the company.
 
Under the terms of the Iran contracts, ZTE agreed to supply the “self-developed equipment,” collect payments for the projects and manage the whole network. ZTE Parsian was to provide locally purchased materials and all services. 8S was responsible for “relevant third-party equipment,” which primarily meant parts that would be subject to U.S. export laws. ZTE intended for 8S to be an “isolation company,” that is, ZTE intended for 8S (rather than ZTE) to purchase the embargoed equipment from suppliers and provide that equipment under the contract in an effort to distance ZTE from U.S. export-controlled products and insulate ZTE from U.S. export violations. However, 8S had no purchasing or shipping history and no real business reputation.
 
Ultimately, although 8S was a party to the contracts, ZTE itself purchased and shipped the embargoed goods under the contract. In its shipping containers, it packaged the U.S. items with its own self-manufactured items to hide the U.S.-origin goods. ZTE did not include the U.S. items on the customs declaration forms, though it did include the U.S.-origin items on the packing lists included inside of the shipments.
 
In early 2011, when ZTE determined that the use of 8S was insufficient to hide ZTE’s connection to the illegal export of U.S.-origin goods to Iran, senior management of ZTE ordered that a company-level export control project team study, handle and respond to the company’s export control risks. In September 2011, four senior managers signed an Executive Memo, which proposed that the company identify and establish new “isolation companies” that would be responsible for supplying U.S. component parts necessary for projects in embargoed countries. The isolation companies would conceal ZTE’s role in the transshipment scheme and would insulate ZTE from export control risks.
 
In March 2012, Reuters published an article regarding ZTE’s sale of equipment to Iran. In response, ZTE made a decision to temporarily cease sending new U.S. equipment to Iran. By November 2013, however, ZTE had resumed its business with Iran. Beginning in July 2014, ZTE began shipping U.S.-origin equipment to Iran once again without the necessary licenses.
 
Instead of using 8S, however, ZTE identified a new isolation company. ZTE signed a contract with the new isolation company, which in turn signed contracts with the two Iranian customers. According to the new scheme, ZTE purchased and manufactured all relevant equipment – both U.S.-origin and ZTE-manufactured – and prepared them for pick-up at its warehouse by the new isolation company. The new isolation company then shipped all items to the Iranian customers. Shipments to Iran continued from January 2014 through January 2016.
 
THE OBSTRUCTION AND FALSE STATEMENT
 
According to court documents, despite its knowledge of an ongoing grand jury investigation into its Iran exports, ZTE took several steps to conceal relevant information from the U.S. government. It further took affirmative steps to mislead the U.S. government. In the summer of 2012, ZTE asked each of the employees who were involved in the Iran sales to sign nondisclosure agreements in which the employees agreed to keep confidential all information related to the company’s U.S. exports to Iran.
 
During meetings throughout late 2014, late 2015 and early 2016, outside counsel for ZTE, unaware that the statements ZTE had given to counsel for communication to the government were false, represented to the DOJ and federal law enforcement agents that ZTE had stopped doing business with Iran and therefore was no longer violating U.S. export laws. Similarly, on July 8, 2015, in-house counsel for ZTE accompanied outside counsel in a meeting with the DOJ and federal law enforcement agents and reported that ZTE was abiding by U.S. laws. That statement was also false.
 
ZTE also hid data related to its resumed illegal sales to Iran from a forensic accounting firm hired by defense counsel to conduct an internal investigation into the company’s Iran sales. ZTE knew the forensic accounting firm was reviewing its systems and knew that the analysis was being reported to the DOJ and U.S. law enforcement. To avoid detection of its 2013-2016 resumed illegal sales to Iran, ZTE formed the “contract data induction team” (“CDIT”). The CDIT was comprised of approximately 13 people whose job it was to “sanitize the databases” of all information related to the 2013-2016 Iran business. The team identified and removed from the databases all data related to those sales. ZTE also established an auto-delete function for the email accounts of those 13 individuals on the CDIT, so their emails were deleted every night – a departure from its normal practices – to ensure there were no communications related to the hiding of the data. …
 

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OGS_a6
11. Justice: “South Florida Tobacco Importer Sentenced to Seven Years in Prison for Violating Probation and Failing to Pay Over $13 Million in Federal Excise Taxes”


(Source: Justice) [Excerpts.]
 
Gitano Pierre Bryant, Jr., 56, of Palmetto Bay, was sentenced today to a consecutive term of 48 months’ imprisonment, by U.S. District Judge Cecilia M. Altonaga, for fraudulently evading $13 million in Federal taxes on imported cigars. Bryant, who was on probation at the time of the offense, was previously sentenced to 36 months’ imprisonment, by Chief U.S. District Judge K. Michael Moore, for violating the terms of his probation. …
 
Bryant previously pled guilty to one count of mail fraud, in violation of Title 18, United States Code, Section 1341. According to court documents, Bryant unlawfully enriched himself by evading Federal Tobacco Excise Tax properly due and owing on imported cigars. According to court documents, Bryant lied about the price he paid for the cigars and the price for which he sold them.
 
According to the court record, including the factual proffer supporting his guilty plea, Bryant was the owner of Havana ’59 Cigar Company (“Havana 59”). Between 2008 and 2014, Havana 59 was a licensed importer of tobacco products, including cigars. Bryant consistently underpaid the Federal Tobacco Excise Tax due on imported cigars and, in an attempt to cover up the scheme, altered documents to conceal the price he paid for foreign-made cigars. Bryant continued to underpay taxes on imported cigars after May of 2015, when he was convicted and placed on Federal probation for evading Federal Tobacco Excise Tax due on cigarettes. Between January of 2012 and June of 2016, Bryant evaded over $13 million in Federal Tobacco Excise Tax.
 
In addition to the imposed prison sentence, Bryant was also ordered to pay over $9 million in restitution to U.S. Customs and Border Protection-the agency tasked with collecting excise tax on imported tobacco products. …
 
Related court documents and information may be found on the website of the District Court for the Southern District of Florida at www.flsd.uscourts.gov or on http://pacer.flsd.uscourts.gov.

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OGS_a7
12. State/DDTC: (No new postings.)


(Source: State/DDTC)

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OGS_a8
13. Treasury/OFAC Posts Settlement Agreement ZTE for Apparent Violations of the ITSR


(Source: Treasury/OFAC) [See related items 7, 10, and 16.]
 
Zhongxing Telecommunications Equipment Corporation, a telecommunications corporation established in the People’s Republic of China, and its subsidiaries and affiliates, as well as ZTE Kangxun Telecommunications Ltd. and its subsidiaries and affiliates (collectively referred to hereafter as “ZTE”), have agreed to settle their potential civil liability for 251 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR), in the amount of $100,871,266.
 
ZTE’s settlement with OFAC is concurrent with a settlement agreement between ZTE and the Department of Commerce’s Bureau of Industry and Security, and ZTE’s plea agreement (pending court approval) with the Department of Justice’s National Security Division and U.S. Attorney’s Office for the Northern District of Texas.
 
From on or about January 2010 to on or about March 2016, ZTE engaged in: (i) the exportation, sale, or supply, directly or indirectly, from the United States of goods to Iran or the Government of Iran; (ii) the reexportation of controlled U.S.-origin goods subject to the Export Administration Regulations from a third-country with knowledge that the goods were intended specifically for Iran or the Government of Iran; and (iii) activity that evaded or avoided, attempted and/or conspired to violate, and/or caused violations of the prohibitions set forth in the ITSR. Specifically, ZTE appears to have engaged in 251 transactions in apparent violation of §§ 560.203, 560.204, and/or 560.205 of the ITSR. The total value of the transactions constituting the apparent violations was $39,622,972.
 
OFAC determined that ZTE did not voluntarily self-disclose the apparent violations to OFAC and that the apparent violations constitute an egregious case. Both the base civil monetary penalty and statutory maximum civil monetary penalty amounts for the apparent violations was $106,180,280.
 
From on or about January 2010 to March 2016, ZTE’s highest-level management developed, approved, and implemented a company-wide plan that utilized third-party companies to conceal and facilitate ZTE’s illegal business with Iran. ZTE’s highest-level management was specifically aware of and considered the legal risks of engaging in such activities prior to signing contracts with Iranian customers and supplying U.S.-origin goods to Iran. Essential to the performance of such contracts was ZTE’s procurement of and delivery to Iran of U.S.-origin goods, including goods controlled for anti-terrorism, national security, regional stability, and encryption item purposes. Pursuant to its contracts with Iranian customers, ZTE was required to and did in fact enhance the law enforcement surveillance capabilities and features of Iran’s telecommunications facilities and infrastructure.
 
ZTE’s unlawful business activities with Iran were publicly disclosed in a media report in 2012. Shortly thereafter, ZTE learned of the U.S. government’s investigation into the company’s business activities with Iran. ZTE subsequently communicated to the U.S. government that it had wound down and ceased its Iran-related activities. However, ZTE’s highest-level leadership decided to surreptitiously resume its Iran-related business in 2013, which it continued until 2016, when the Department of Commerce suspended the company’s export privileges by adding it to the Entity List. Under the direction of its leadership, ZTE deleted evidence and provided the U.S. government with altered information to hide the fact that it had resumed its unlawful business with Iran.
 
For more information regarding the conduct that led to the apparent violations, please see the Settlement Agreement between OFAC and ZTE here.
 
This settlement reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Enforcement Guidelines.
 
The General Factors that OFAC considered to be aggravating included the following:
 
  – ZTE willfully and recklessly demonstrated disregard for U.S. sanctions requirements in engaging in the egregious behavior that led to the apparent violations of U.S. economic sanctions laws. Various executives and senior executives knew or had reason to know of the conduct that led to the apparent violations and engaged in a long-term pattern of conduct designed to hide and purposefully obfuscate its conduct in order to mislead U.S. government investigators for several years. ZTE’s conduct was the result of a widespread pattern or practice involving the coordination of many divisions and departments within the company.
 
  – ZTE had actual knowledge that the conduct giving rise to the apparent violations took place. The conduct was undertaken pursuant to directives and business processes that were illegitimate in nature and specifically designed and implemented to facilitate the violative behavior. ZTE had actual notice from multiple sources that both its initial business with Iran and its later resumption of business with Iran constituted or likely constituted a violation of U.S. economic sanctions laws, including, with respect to the later resumption of business with Iran, being the subject of a federal investigation at the time it decided to resume such activities, transactions, and its practices. ZTE’s management played a key role in authorizing and carrying out the transactions at issue, and ZTE’s senior leadership and management appear to have been involved with and possessed actual knowledge of the company’s violative patterns and practices.
 
  – ZTE caused significant harm to the integrity of the ITSR and its associated policy objectives by engaging in the supply of a high volume and high value of U.S.-origin goods to Iran and the Government of Iran for several years, including items subject to the Commerce Control List for anti-terrorism, national security, regional stability, and encryption item reasons. ZTE systematically undermined the integrity of the sanctions program objectives, and conferred significant economic benefits to Iran and/or the Government of Iran.
 
  – ZTE is a sophisticated and experienced telecommunications company that has global operations and routinely deals in goods, services, and technology subject to U.S. laws.
 
  – From at least January 2010 to March 2016, ZTE’s compliance program was either non- existent or unenforced.
 
The General Factors that OFAC considered to be mitigating included the following:
 
  – ZTE has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the earliest transaction giving rise to the apparent violations.
 
  – ZTE cooperated with OFAC’s investigation by executing three tolling agreements with OFAC for a total of 803 days. Beginning after March 2016, ZTE cooperated with OFAC’s investigation by responding to requests for information, making witnesses available for interviews, providing data analytics regarding apparent violations, and submitting documentation associated with apparent violations of U.S. economic sanctions and export control laws committed by the company. ZTE took certain remedial steps in the final stages of the investigation in 2016 and 2017, including implementing an economic sanctions and export controls compliance program
 
For more information regarding OFAC regulations, please go to: www.treasury.gov/ofac.

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OGS_a9
14. UK/DIT ECO Posts Correction of 1 Mar Notice Concerning Update of Six Open Licenses


(Source: UK/DIT ECO)
 
This notice corrects and replaces the notice to exporters issued on 1 March (2017/05).
 
The Export Control Organisation has updated and amended 6 open general export licenses (OGELs). Changes are detailed in the table below.
 
These changes reflect amendments to the Export Control Order 2008 which came into force on 22 February (see notice to exporters 2017/02) and the replacement of Schedule 1 to the OGEL for printed circuit boards (PCBs) and components for military goods. All the licenses have been updated to refer to the new Department for International Trade, of which Export Control Organisation now forms a part.
 
The updated OGELs have been published and are accessible via the links in the table below. The licenses were published on 1 March 2017. However, to give exporters time to absorb the changes, these new licenses will not come into force until 8 March 2017.
 
The previous OGELs will remain in force until 11:59 on 7 March. You should refer to the current OGELs until 7 March. After this date you will need to refer to the updated license.
 
If you no longer meet the terms and conditions of a particular license you will need to de-register from the licence via SPIRE.
 
Control list classification PL5017 has been removed from five of the amended OGELs. You will still need to complete an annual return at the end of the calendar year in December if you have been using OGELs to export PL5017 goods during 2017.
 
The range of PCBs and Components for military goods listed in Schedule 1 to that OGEL has been considerably extended.

See Open general export licences (OGELs) for further information about OGELs.
 
OGEL
Main Reason for Change
Schedule 1 replaced with revised list
control list classification table: removal of rating code PL5017
control list classification table: removal of rating code PL5017
control list classification table: removal of rating code PL5017
control list classification table: removal of rating code PL5017
control list classification table: removal of rating code PL5017
 
Copies of the current OGELs, which are in force until 11:59pm on 7 March 2017, can be viewed on the same publication page as notice to exporters 2017/05.

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COMMNEWS

NWS_a115. ST&R Trade Report: “Industry Advisors Offer Recommendations for NAFTA Changes”

 
The Commercial Customs Operations Advisory Committee approved March 1 a number of recommendations to U.S. Customs and Border Protection on improvements to NAFTA. The U.S., Canada, and Mexico are expected to launch negotiations on updating the agreement within the next few months.
 
Advances from other FTAs.
CBP should work with the Office of the U.S. Trade Representative and the private sector to review the text of more recent trade agreements to adopt modernized provisions, particularly in the areas of simplified rules of origin, importer self-certification, trade facilitation, enforcement, supply chain security, and non-tariff trade barriers.
 
Continuity in trade preferences.
CBP should work with USTR and the private sector to ensure there is a continuity of trade preferences that provide a significant economic impact to U.S. workers and the long-term investments of U.S. companies, that tariffs and non-tariff barriers remain minimal, and that positive U.S. trade and investment persists with Canada and Mexico.
 
Consistency in implementation.
To improve the consistency of NAFTA treatment to the same goods within the NAFTA region, CBP should work with Canada and Mexico to establish standardized processes in NAFTA trade preference qualification, consistent enforcement, and other applicable areas.
 
North American Single Window.
CBP should work with Canada and Mexico to collaborate on cross-border data sharing and data harmonization and remove or modernize unnecessary regulatory barriers within North America through the use of a single window.
 
Regulatory cooperation.
For products that are subject to partner government agency regulations, CBP should work with PGAs in the U.S., Canada, and Mexico to streamline and harmonize those regulations to create alignment in regards to documentation and data requirements, inspections, and enforcement.
 
E-commerce.
CBP should work with USTR and the private sector to ensure that NAFTA reflects the need for modernized regulations affecting e-commerce, including in the areas of admissibility, targeting, and PGA regulations.
 
Small business.
The U.S. has a de minimis value (i.e., the value at which companies pay no duties or tariffs) while Canada’s is $20 and Mexico’s is $50. CBP should work with Canada and Mexico to achieve a commercially significant de minimis level that reflects inflation and the modern reality of e-commerce.
 
Express delivery services. CBP should work with USTR to ensure that NAFTA includes modern provisions that specifically focus on the facilitation of EDS shipments and break down the barriers for all businesses, particularly small and medium-sized companies.
 
Trade facilitation.
CBP should work with Canada and Mexico to utilize prior FTAs’ trade facilitation chapters as a baseline to create a high standard in trade facilitation, including stronger language for commitments to reach a commercially significant standard and deliverables for how modern borders should operate in the NAFTA region.

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NWS_a216. ST&R Trade Report: “Largest Ever Civil Penalty for Export Control Violations Assessed on Chinese Company”

(Source: Sandler, Travis & Rosenberg Trade Report) [See related Items 7, 10, and 13, above.]
 
The Department of Commerce announced March 7 that a Chinese company (ZTE, ed.) has agreed to a record-high combined civil and criminal penalty of $1.19 billion for an “egregious scheme” to illegally ship telecommunications equipment to Iran and North Korea. Commerce Secretary Wilbur Ross said this penalty, the largest ever imposed by the U.S. government in an export control case, highlights that the Trump administration “will be aggressively enforcing strong trade policies” and that “those who flout our economic sanctions and export control laws … will suffer the harshest of consequences.”
 
The penalty amount includes a $661 million penalty to be paid to the Bureau of Industry and Security (with $300 million suspended during a seven-year probationary period), $430.5 million in combined criminal fines and forfeiture under a plea agreement with the Department of Justice, and $100.8 million as part of a settlement agreement with the Office of Foreign Assets Control. The company has also agreed to active audit and compliance requirements designed to prevent and detect future violations as well as a seven-year suspended denial of export privileges that DOC states “could be quickly activated if any aspect of this deal is not met.”
 
From January 2010 through April 2016 the company conspired to evade the U.S. embargo against Iran to obtain contracts with and related sales from Iranian entities to supply, build, operate, and/or service large-scale telecom networks in Iran, the backbone of which would be U.S.-origin equipment and software. Shipped items included routers, microprocessors, and servers controlled under the Export Administration Regulations for national security, encryption, regional security, and/or anti-terrorism reasons.
 
According to information from DOC and OFAC, members of the company’s highest-level management were specifically aware of and considered the legal risks of engaging in the illegal activities prior to signing contracts with Iranian customers and supplying U.S.-origin goods to Iran. After telling the U.S. government the company had ceased its Iran-related activities following the initiation of a government investigation, those leaders decided to surreptitiously resume those activities, which continued until BIS added the company to the Entity List in 2016. Under the direction of those leaders the company engaged in an elaborate scheme to delete evidence of the illegal activities and make knowingly false and misleading representations and statements to U.S. law enforcement agencies.

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COMMCOMMENTARY

COMM_a117. D. Luther: “My Customs Broker Handles That”

(Source: Torres Law PLLC)
 
* Author: D. Luther, Esq., Torres Law PLLC Dallas.
Contact: 214-593-7120,
info@torrestradelaw.com
.
 
It’s common for importers to rely heavily on the services of their customs brokers. Customs brokers are knowledgeable professionals licensed by U.S. Customs and Border Protection (“CBP”). They are “plugged in” to CBP’s computer systems, and get real-time updates on changes to regulations and practices. Brokers do a complicated job with precision and speed. But there’s a limit to how much importers should rely on them.
 
IMPORTER OF RECORD
 
Under U.S. Customs laws and regulations, the importer of record (the actual owner or purchaser of the imported goods) is responsible for all aspects of compliance, including the correctness of entry information and the payment of duties. See 19 U.S.C. 1484(a)(1). In fact, your customs broker is merely your representative before the agency. It works much the same way as your tax return. Your accountant may prepare the return, but if extra taxes are owed, it’s not your accountant who will be paying them.
 
Under Customs law, the penalty statute (19 U.S.C. 1592) is generally used against importers for false statements, acts, or omissions that affect compliance. (There are separate statutes generally covering brokers’ conduct.) The importer also has specific recordkeeping responsibilities. Importers are required to keep customs records (entries, invoices, purchase orders, etc.) generally for five years. The penalties for not being able to produce these records are often greater than the penalties for negligence in making the entry.
 
As the importer of record, your company is the principal on the surety bond that is used to secure the entry of goods and payment of duties. If the duties are not paid, or if CBP finds that additional duties are owed, the importer of record, not the broker, is the responsible party. The insurance company that underwrites the bond will go to great lengths to make sure that the responsible party pays its debt.
 
SUPERVISION OF BROKERS
 
Because the importer is responsible for all aspects of compliance, it is incumbent on the importer to provide accurate information and answer any questions the broker has in service of preparing the entry. Given sparse or incomplete information, and given the time pressures facing all brokers, there is a natural tendency for brokers to do the best they can with the information available. This can result in imported goods being misclassified, merchandise value not being correctly declared, and customs violations occurring.
 
Customs brokerage is a competitive business, with a big emphasis on keeping the importer / customer happy. Pressures like these, along with insufficient supervision and communication from the importer, can lead the broker to err on the side of duty savings. For example, we’ve seen situations where brokers appear to automatically claim NAFTA preference on goods from Canada or Mexico, even if the importer didn’t tell them to. NAFTA preference is not automatic; there are specific and complicated rules in play. Similarly, some brokers tend to use the duty free “U.S. Goods Returned” provision for merchandise returning from the U.S., even if the required documentation is not present.
 
These “favors” some brokers do for their importers are anything but favors! Duty free claims such as these increase the likelihood of Customs scrutiny of an importer, and if they were made incorrectly, they will subject the importer to bills for increased duties, as well as civil penalties under the fraud statute. Moreover, it’s important to keep in mind that while most import transactions are paperless and are not subject to an in-depth review by CBP officials, during a Customs audit (or even a routine post-entry inquiry), the same transactions will be reviewed with a heightened level of scrutiny, and reviewed for complete adherence to regulatory requirements. Simply put, it’s easy for the broker to err on the side of duty savings. But it’s equally easy for CBP to question such activities, and even easier for them to issue bills for additional duties and to assess penalties.
 
Even if the broker is only trying to help you, they’re human and can make mistakes. It’s your responsibility as the importer to check their work. You can do this yourself, or hire someone to do it for you. Many brokerages have consulting operations that offer such services. It’s best, however, to have the work checked by someone other than the person who initially performed the work. (And as you might expect a law firm to point out, only when such consulting and internal audit work is performed by a law firm is it protected under attorney-client privilege.)
 
Your customs broker is a valuable part of the team. But YOU must be part also.

 

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COMM_a218. The Export Compliance Journal: “One Thing’s Cl(EAR)-BIS Export Enforcement Efforts Are Working”

 
In a case almost five years in the making, the Department of Justice (DOJ) announced last month that Alexander Posobilov, indicted in 2012 for unlawfully exporting over $50M worth of microelectronics and other technologies to the Russian military, and convicted in 2015 on all counts, will spend the next 11 years in prison. [FN/1]
 
In addition to Posobilov, 10 other people were also charged in 2012 in connection with this case. Of the 10, two were convicted and sentenced with Posobilov, five pleaded guilty, while three individuals have managed to evade authorities. At the time of the indictment, 165 individuals and entities were also added to the Commerce Department’s denied party “Entity List,” demonstrating just how wide-reaching their criminal operation had spread.
 
The case is an interesting one in that it demonstrates the efforts some individuals, and the entities they operate, will go to in order to willfully circumvent U.S. export controls. Posobilov and his co-conspirators worked under the banner of ARC Electronics Inc., a Texas-based export company that went to extraordinary lengths to hide the true nature of their business. In fact, their company website claimed they manufactured harmless technology, such as that used in traffic lights and navigation systems, and concealed from their suppliers that they exported goods outside the U.S. at all. In truth, ARC Electronics manufactured nothing themselves. [FN/2]
 
The story gets even more interesting when you consider ARC Electronics’ owner, Alexander Fishenko, was sentenced to a 10-year prison term in 2016, in part for his role in the conspiracy, but also in his capacity working as a spy for the Russian Government (among other charges). [FN/3] Moreover, the dual U.S.-Russian citizen was ordered to forfeit over $500,000 in proceeds.
 
A SOPHISTICATED – AND AUDACIOUS – SCHEME
 
Posobilov, Fishenko, ARC Electronics, as well as a second entity called Apex System, L.L.C., had multiple methods in place to conceal their scheme to ship high-tech military-use goods to Russia-many products too sophisticated to be manufactured by the Russians domestically (and which have likely advanced Russia’s military technological capabilities). Among their practices included:
 
   – Attending BIS seminars to become experts in understanding the EAR and its workings;
   – Providing false end-user information in connection with the goods;
   – Falsely classifying the goods they exported on export records submitted to the Department of Commerce; and
   – Forging documents regarding certain transactions to hide connections to the Russian military.
 
Ultimately, it was tips from vigilant members from the U.S. business community to law enforcement officials that helped identify the front company organization and, subsequently, the individuals involved.
 
LESSONS TO BE LEARNED
 
For their part, various U.S. agencies have used this case as an example of how export control laws are helping to keep the nation safe. Speaking at the 8th Annual Export Control Forum, the Assistant Secretary for Export Enforcement, David Mills, called particular attention to the important role the “Entity List” played in helping to change the business practices of many of the 165 names added to the List as a result of this case, thereby improving export compliance overall. [FN/4]
 
For one, those individuals and organizations who wished to remove themselves had to take a closer look at the risk measures they have in place if they want the lucrative privilege of doing business with U.S. companies once again. Many might have avoided being added to the list if they’d had appropriate export controls in place in the first place -denied party screening, classification and export license management, to name just a few.
 
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COMM_a0219. G. Husisian: “Private Equity and the New Trump Administration: Your Top Ten Questions Answered” (Part I of IV)

 
* Author: Gregory Husisian, Esq., Foley & Lardner LLP,
ghusisian@foley.com, 202-945-6149.
 
[Editor’s note: This client alert is the sixth of a series of Foley & Lardner LLP Alerts being prepared to help companies navigate the uncertain international trade and regulatory environment. Due to space limitations, this alert is divided into four parts. Part II, III IV will be posted in the Daily Bugle of Wednesday, 8 March, Thursday, 9 March and Friday, 10 March, respectively.]
 
INTRODUCTION
 
The election of President Trump contained more than a few positive signs for Private Equity (PE) firms. Promises of a lower corporate tax environment, a ten-percent tax holiday for funds parked overseas, large infrastructure investments, and deregulation could portend increasing portfolio returns. Yet on the other side of the scale are troubling regulatory concerns, what with President Trump also promising restrictions on international investment in the United States (which could complicate investment and exit strategies, including through hard-nosed national security reviews by the Committee on Foreign Investment in the United States (CFIUS), withdrawing from NAFTA (thereby disrupting the trade relationship with one of the three largest U.S. trading partners), and maybe even welcoming an international trade war, particularly with China (which could complicate cross-border supply chains and raise input costs).
 
Further complicating the picture, the U.S. government over the last decade has emphasized regulatory initiatives that directly and indirectly target PE firms and their portfolio companies. Generally these enforcement actions have involved regulations with an international hook, including: (1) the Foreign Corrupt Practices Act (an antibribery statute barring the payment of bribes to non-U.S. government officials); (2) economic sanctions administered by the Office of Foreign Assets Control (OFAC) (which restrict dealings with targeted foreign countries, governments, and persons who have taken actions against U.S. national and foreign policy interests); (3) export controls (with the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) restricting the export of controlled U.S. goods, information, software, and technology); (4) anti-money laundering (AML)restrictions; and (5) international antitrust actions, especially for collusion and price fixing.
 
In each of these areas, civil and criminal penalties, both at the corporate and individual level, have been used as a massive deterrence club. This enforcement focus has sharply increased regulatory risks for PE firms that raise money internationally or that own portfolio companies that operate internationally or that export or sell to foreign countries. With the SEC using its Dodd-Frank powers to target PE firms with enforcement attention, and the U.S. government recently assessing the fourth-largest FCPA penalty of all time ($412 million) against PE firm Och-Ziff, PE firms have never faced a riskier regulatory environment.
 
The confluence of the campaign rhetoric, the uncertain enforcement environment, and the international flavor of many PE firm’s fundraising, investments, and operations, raise numerous regulatory questions at the dawn of the new administration.
 
  – Will the Dodd-Frank Act and its compliance requirements targeting PE firms be repealed?
  – Will the potential trade war being telegraphed by the administration become a reality?
  – Will NAFTA be repealed, upsetting the international supply chains of many PE portfolio companies?
  – Will the enforcement attention on PE firms continue? Does the Och-Ziff FCPA action, which included a multi-million penalty on the head of the PE firm, represent a new trend of personal liability for PE firm senior management?
  – And is there anything that PE firms can do to cope with this perilous regulatory environment?
 
To help navigate this uncertain future, this client alert presents the “top ten” regulatory and trade questions every PE firm company with international interests or that raises investment funds internationally should be considering. This client alert is part of a series of “top ten” articles on the future of key international trade and regulatory issues expected to change under the Trump administration. Previously issued client alerts discuss the future of
NAFTA, [FN/1]
Customs and Border Protection, [FN/2] and
international trade litigation under the Trump Administration (including antidumping and countervailing duty actions), [FN/3] the future of the
CFIUS review process, [FN/4] and
likely developments impacting white collar enforcement. [FN/5] Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.
 
THE TOP TEN PE REGULATORY QUESTIONS ANSWERED (OR, WILL PRESIDENT TRUMP MAKE PE RETURNS GREAT AGAIN?)
 
(1) “What has President Trump promised?”
 
During the campaign, President Trump’s populist instincts appeared to be aligned against PE firms. President Trump’s frequent criticisms of U.S. manufacturers moving jobs overseas implicitly targeted the decisions of PE firms, which often take a global strategy to allocating capital and sourcing manufacturing to maximize investor returns. Mr. Trump’s criticisms of PE powerhouse Goldman Sachs, in particular, were frequent and seemed to telegraph hostility towards the industry.
 
In this case, however, elected actions likely trump election rhetoric, as the Trump transition team and high-level nominations are heavily drawn from the PE world – including from Goldman Sachs. Chief strategist Stephen Bannon, Secretary of the Treasury nominee Steve Mnuchin, and National Economic Council Director Gary Cohn all previously worked at Goldman Sachs, while SEC Chair nominee Jay Clayton was a partner at Sullivan & Cromwell, where he represented Goldman Sachs. Other senior and transition advisors have ties to Goldman Sachs as well. Additional Cabinet nominees, such as Department of Commerce nominee Wilbur Ross (hailing from PE firm WL Ross & Co.) and economic advisory council member Stephen Feinberg (former CEO of Cerberus Capital Management) also have strong PE roots.
 
This is hardly a murderer’s row of populist advisors looking to crack down on PE firms. Indeed, in at least one way – the fate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) – it appears that momentum is building in the new Republican Congress to give Mr. Trump a victory in substantially curtailing or even repealing the Act, which is a course Mr. Trump recently endorsed. Since the Dodd-Frank Act subjects many PE firms to strict SEC oversight and compliance requirements, curtailing or repealing the Act would be a welcome development to many PE firms, which have chafed at the aggressive application of SEC regulatory requirements.
 
(2) “What is the landscape for international regulatory enforcement? Is it likely these trends will continue under the new administration?”
 
There have been many trends related to the regulation of exports and international conduct that are of concern both with regard to the operation of PE portfolio companies and at PE firm’s own operations. Chief among these are the following:
 
  –
Emphasis on International Regulations. The largest penalties in recent enforcement actions (outside of the crackdown on sub-prime mortgage abuses) have involved U.S. regulations governing exports and international conduct. In particular, the U.S. government has emphasized the areas of international antitrust (particularly collusion and price fixing), export controls, OFAC economic sanctions, anticorruption (FCPA), and AML for enforcement attention, imposing tens of billions of dollars of penalties under these regulatory regimes. Because PE firms often invest in companies that operate in, sell into, and trade with foreign countries, this trend of increasing penalties sharply increases the risk profile of the investment portfolios of most PE firms.
 
  –
Individual Liability. The U.S. government, including through the issuance of the “Yates Memorandum” (
discussed here [FN/6]), has emphasized individual liability, believing that nothing has a greater deterrent effect than the prospect of hefty fines or jail time for senior executives. The imposition of a multi-million dollar fine and other sanctions directly on senior managers at PE firm Och-Ziff, including the head of the company, illustrates that the U.S. government easily can apply this focus to PE firms.
 
  –
Increasing Use of Criminal Penalties. The U.S. Government has increasingly been willing to use either the threat, or the actual imposition, of criminal proceedings as enforcement tools. This combines with another trend discussed below, which is to use penalties – including criminal penalties against individuals – to send a compliance message. Even where civil penalties are the result, the threat of criminal penalties can be used as leverage to extract a larger civil penalty.
 
  –
Liability Based Upon Control. Many PE firms have (falsely) taken comfort in the idea that operating models emphasizing the role of the PE firm as an allocator of capital and management expertise, while leaving the active management of the companies to senior portfolio company managers, insulates them from direct liability for compliance lapses at portfolio companies. SEC actions, however, have introduced the concept of liability for failure to maintain adequate internal controls and failure to notice indications of fraud or regulatory lapses. The DOJ, as well, has no problem going after owners of third-tier subsidiaries, joint ventures, and other parties that control an entity, even if they do not directly participate in the management of the company. Similar logic applies equally to PE firms. The U.S. government believes ownership confers compliance responsibilities, with failures being punishable by hefty fines. The hands-off approach to compliance that is the rule at many PE firms no longer is tenable (if it ever was).
 
(3) “Are there regulatory areas of special concern for PE firms?”
 
The U.S. government has made PE firms an enforcement and compliance target in recent years. These efforts include the SEC sending the largest PE firms letters of inquiry into their compliance practices, which some link to the September of 2016 SEC announcement that Och-Ziff Capital Management Group would pay approximately $200 million to settle SEC charges of FCPA violations, along with a DOJ criminal penalty of $213 million (plus individual fines, including a settlement of FCPA violations with the CEO of Och-Ziff having to pay nearly $2.2 million in individual fines). Total fines criminal and civil penalties of $412 million underscore the importance of U.S. government compliance expectations for PE firms.
 
Some other areas of special concerns for PE firms include the following:
 
  –
SEC Enforcement. In addition to the Och-Ziff developments noted above, the SEC in other ways has made PE firms a focus, including through the creation of an Asset Management Unit to focus exclusively on PE firms, hedge funds, and mutual funds. Because the SEC also is in charge of FCPA enforcement of the internal controls and books and records provisions of the FCPA, this SEC focus exposes PE firms to scrutiny for one of the legal regimes that consistently sees the highest level of fines.
 
  –
Dodd-Frank Effect. Traditionally, PE firms have operated largely free of regulatory oversight (with the exception of normal regulatory requirements placed on portfolio firms or on the PE firm directly, such as EEOC compliance requirements). But the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) required that PE firms with more than $150 million in assets under management register with the SEC, subjecting them to various SEC rules. These rules include the Compliance Program Rule (Rule 206(4)-7), which requires that PE firms have and maintain an effective compliance program designed to prevent violations of the Advisers Act. Required actions include the adoption and implementation of written policies and procedures reasonably designed to prevent violations of the Advisers Act, the conduct of a compliance program review at least annually, and the appointment of a chief compliance officer.
 
  –
Multiplying Risk Factors. The manner in which PE firms typically operate increases their risk profile in myriad ways:
 
* PE firms often manage multiple funds, investing in a portfolio of companies. This multiplication of investment vehicles and holdings complicates compliance oversight, as regulators increasingly view the role of the PE firm as enforcing compliance expectations across portfolio companies through the conduct of risk assessments, implementation of compliance programs and internal controls, and oversight of the adequacy of compliance. Fragmented investments and individual implementation of compliance initiatives complicate achieving a high level of compliance across the full portfolio of investments.
 
* Most legal regimes do not allow changes in corporate form to alter liability for the underlying conduct. Since most PE firms frequently are in acquisition mode to fill out their investment portfolio, onboarding transactions multiply the risk of acquiring violations.
 
* PE firms frequently invest in multinational companies, which often operate in industries and in countries at heightened risk of enforcement activity under such high-risk legal regimes as the FCPA, OFAC sanctions, export controls, antitrust, and AML laws.
 
* With many PE firms being currently regulated under the federal securities laws, they remain liable for the bookkeeping and internal control requirements of the FCPA, which require accuracy in books and records and an effective internal control environment sufficient to give the company control of the disbursement and use of assets.
 
* The opening of an investigation at one portfolio company can quickly become an investment of a group of companies or even all portfolio investments, as regulators have the discretion to inquire broadly into potential issues across the PE firm’s investments.
 
———
  [FN/1] See Gregory Husisian and Robert Huey, “NAFTA and the Trump Administration: Your Top Ten Questions Answered,” available at
here.
  [FN/2] See Gregory Husisian and Robert Huey, “U.S. Customs and the Trump Administration: Your Top Ten Questions Answered,” available at
here.
  [FN/3] See Gregory Husisian and Robert Huey, “International Trade Litigation and the Trump Administration: Your Top Ten Questions Answered,” available at
here.
  [FN/4] See Gregory Husisian, “CFIUS Reviews and the Trump Administration, Your Top Ten Questions Answered,” available at
here.
  [FN/5] Scott Fredericksen & Gregory Husisian, “White Collar Enforcement and the New Trump Administration: Your Top Ten Questions Answered,” available at
here.
  [FN/6] See Scott Fredericksen & Gregory Husisian, “White Collar Enforcement and the New Trump Administration: Your Top Ten Questions Answered,” available at
here.

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COMM_a3
20. Gary Stanley’s ECR Tip of the Day

(Source: Defense and Export-Import Update; available by subscription from
gstanley@glstrade.com
)
 
* Author: Gary Stanley, Esq., Global Legal Services, PC, (202) 352-3059,
gstanley@glstrade.com
 
The BIS website provides useful guidance on “How Do I Avoid Dealing with Unauthorized Parties?” It includes tips on “knowing” your customers and how to identify “Red Flag Indicators in transactions.

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COMM_a4
21. R.C. Burns: “Penn Senate Rum Runners Eye Cuban Rum”

(Source:
Export Law Blog
. Reprinted by permission.)
 
* Author: R. Clifton Burns, Esq., Bryan Cave LLP, Wash DC,
Clif.Burns@bryancave.com
, 202-508-6067)
 
A story in the Pittsburgh Post-Gazette (and not, I swear, in The Onion) reveals that a bunch of Pennsylvania state legislators flew off to Cuba where they concocted this genius plan. Step 1: ship boatloads of rum from Cuba to state liquor stores in Pennsylvania without an OFAC license and in defiance of the embargo. Step 2: argue that Pennsylvania can simply ignore the embargo and import all the rum it wants for ever and ever because of Clause 2 of the Twenty-First Amendment to the U.S. Constitution. Seriously. (The esteemed University of Pennsylvania Law School is reportedly so embarrassed by the legal reasoning of its local legislators that it packed up in the middle of the night and relocated to the recently vacated Qualcomm Stadium in San Diego.)
 
If you just clicked on the above link to the Twenty-First Amendment, you are probably pretty confused as to how anyone, state senators included, could argue that this clause allows a state to import Cuban rum in violation of the Cuban embargo. After all, it reads:
 
The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.
 
It seems clear from the language and the history of Clause 2 that it was designed to allow states, if they wanted, to remain dry and regulate the sale of liquor in their own states. Mississippi, bless its heart, stayed dry until 1966. Kansas prohibited public bars until 1987. (Useful trivia: the reason Dorothy said to Toto, after landing in Oz, that they weren’t in Kansas any more was because she saw a bar.)
 
The clause has been read to give states the right to regulate the importation of liquor from other states by imposing taxes that would otherwise violate the Commerce Clause. But the courts have pretty much stopped there, with Craig v. Boren holding that Clause 2 did not permit states to set different drinking ages for men and women and California Liquor Dealers v. Midcal Aluminum holding that Clause 2 did not override the federal Sherman Act.
 
All that being said, nothing in Clause 2 which allows states to restrict importation and sale of liquor to their hearts’ content also allows states to import liquor in violation of federal law.  It says that imports prohibited by state law are prohibited, not that imports permitted by state law are permitted. Morever, even if it did, the embargo would still apply.  If Clause 2 doesn’t trump the Sherman Act, it certainly doesn’t trump the Trading with the Enemy Act or Helms-Burton.
 
Moral of the story: legal theories concocted after long afternoons of daiquiris and mojitos in Havana will not likely survive judicial scrutiny.

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ENEDITOR’S NOTES

(Source: Editor)

*
Ring Lardner (Ringgold Wilmer “Ring” Lardner, 6 Mar 1885 – 25 Sep 1933, was an American sports columnist and short story writer best known for his satirical writings about sports, marriage, and the theatre. He was a contemporary of Ernest Hemingway, Virginia Woolf and F. Scott Fitzgerald, all of whom professed strong admiration for Lardner’s writing.)

  – “A good many young writers make the mistake of enclosing a stamped, self-addressed envelope, big enough for the manuscript to come back in. This is too much of a temptation to the editor.”

 

*
Daniel D. Palmer (Daniel David Palmer, 7 Mar 1845 – 20 Oct 1913, Canadian, was the founder of chiropractic.)

  – “Little deeds are like little seeds, they grow to flowers or to weeds.”

* * * * * * * * * * * * * * * * * * * *

EN_a223
. Are Your Copies of Regulations Up to Date?
(Source: Editor)

The official versions of the following regulations are published annually in the U.S. Code of Federal Regulations (C.F.R.), but are updated as amended in the Federal Register.  Changes to applicable regulations are listed below.
 
*
ATF ARMS IMPORT REGULATIONS
: 27 CFR Part 447-Importation of Arms, Ammunition, and Implements of War
  – Last Amendment: 15 Jan 2016: 81 FR 2657-2723: Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity With Respect To Making or Transferring a Firearm 
 
*
CUSTOMS REGULATIONS
: 19 CFR, Ch. 1, Pts. 0-199
  – Last Amendment: 27 Jan 2017: 82 FR 8589-8590: Delay of Effective Date for Importations of Certain Vehicles and Engines Subject to Federal Antipollution Emission Standards; and 82 FR 8590: Delay of Effective Date for Toxic Substance Control Act Chemical Substance Import Certification Process Revisions 

* DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM): DoD 5220.22-M
  – Last Amendment: 18 May 2016: Change 2: Implement an insider threat program; reporting requirements for Cleared Defense Contractors; alignment with Federal standards for classified information systems; incorporated and canceled Supp. 1 to the NISPOM  (Summary here.)

* EXPORT ADMINISTRATION REGULATIONS (EAR): 15 CFR Subtit. B, Ch. VII, Pts. 730-774 
  – Last Amendment: 24 Feb 2017: 82 FR 11505-11506: Temporary General License: Extension of Validity

  
*
FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR)
: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
  – Last Amendment: 10 Feb 2017: 82 FR 10434-10440: Inflation Adjustment of Civil Monetary Penalties.  
 
*
FOREIGN TRADE REGULATIONS (FTR)
: 15 CFR Part 30
  – Last Amendment: 15 May 2015; 80 FR 27853-27854: Foreign Trade Regulations (FTR): Reinstatement of Exemptions Related to Temporary Exports, Carnets, and Shipments Under a Temporary Import Bond 
  – HTS codes that are not valid for AES are available
here.
  – The latest edition (9 Mar 2016) of Bartlett’s Annotated FTR (“BAFTR”), by James E. Bartlett III, is available for downloading in Word format. The BAFTR contains all FTR amendments, FTR Letters and Notices, a large Index, and footnotes containing case annotations, practice tips, and Census/AES guidance.  Subscribers receive revised copies every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance website.  BITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR.
 
*
HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES (HTS, HTSA or HTSUSA)
, 1 Jan 2017: 19 USC 1202 Annex. (“HTS” and “HTSA” are often seen as abbreviations for the Harmonized Tariff Schedule of the United States Annotated, shortened versions of “HTSUSA”.)

  – Last Amendment: 10 Feb 2017: Harmonized System Update 1701, containing 1,295 ABI records and 293 harmonized tariff records.   

  – HTS codes for AES are available
here
.
  – HTS codes that are not valid for AES are available
here.
 
INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130.
  – Latest Amendment: 11 Jan 2017: 82 FR 3168-3170: 2017 Civil Monetary Penalties Inflationary Adjustment
 – The only available fully updated copy (latest edition 6 Mar 2017) of the ITAR with all amendments is contained in Bartlett’s Annotated ITAR (“BITAR”), by James E. Bartlett III.  The BITAR contains all ITAR amendments to date, plus a large Index, over 750 footnotes containing case annotations, practice tips, DDTC guidance, and explanations of errors in the official ITAR text.  Subscribers receive updated copies of the BITAR in Word by email, usually revised within 24 hours after every ITAR amendment.  The BITAR is available by annual subscription from the Full Circle Compliance
website
.  BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please
contact us
to receive your discount code.  

* * * * * * * * * * * * * * * * * * * *

EPEDITORIAL POLICY

* The Ex/Im Daily Update is a publication of FCC Advisory B.V., edited by James E. Bartlett III and Alexander Bosch, and emailed every business day to approximately 8,000 subscribers to inform readers of changes to defense and high-tech trade laws and regulations. We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOJ/ATF, DoD/DSS, DoD/DTSA, State/DDTC, Treasury/OFAC, White House, and similar websites of 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.

* RIGHTS & RESTRICTIONS: This email contains no proprietary, classified, or export-controlled information. All items are obtained from public sources or are published with permission of private contributors, and may be freely circulated without further permission. Any further use of contributors’ material, however, must comply with applicable copyright laws.

* CAVEAT: The contents cannot be relied upon as legal or expert advice.  Consult your own legal counsel or compliance specialists before taking actions based upon news items or opinions from this or other unofficial sources.  If any U.S. federal tax issue is discussed in this communication, it was not intended or written by the author or sender for tax or legal advice, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any transaction or tax-related matter.

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