17-1003 Tuesday “Daily Bugle”

17-1003 Tuesday “Daily Bugle”

Tuesday, 3 October 2017

The 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 Amends EAR, Updates CFR Authority Paragraphs For 23 Affected Parts of the EAR
  1. Ex/Im Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS: (No new postings.)
  3. DoD/DSS Provides Guidance for NISP Contractors with DSS Authorized Information Systems
  4. State/DDTC: (No new postings.)
  5. Treasury/OFAC Publishes FAQ Concerning Venezuela
  6. UK/DIT ECO Releases New Export Control Training Bulletin
  1. Reuters: “EU Sets New Trade Rules to Limit Cheap Chinese Imports”
  2. ST&R Trade Report: “Advance Notice Required for Imports of Chemical Substance”
  1. Flash Global: “Trade Compliance Must-Know: 7 Friendly Countries to Which the EU Can Export Encrypted Products”
  2. H. Krause, M. Huizinga & M. Daghles: “Foreign Investment Control in Germany: Berlin Wall Rebuilt or Storm in a Water Glass?” (Part 1 of 2)
  3. K. Nunnenkamp, G.M. Cinelli & C.J. Kozlowski: “Implications Arising from the Recent Venezuelan Sanctions”
  4. M. Volkov Releases New Podcast: “Too Big to Fail, Too Big to Jail, DOJ’s Outsourcing of Criminal Investigations”
  5. W. Shahid, R. Cook, R. Giambalvo: “Separating Signal from Noise: A Framework for Monitoring Compliance Program Performance” (Part 1 of 3)
  1. ECS Presents ITAR/EAR Critical Compliance & Agreement Workshop on 17-18 Oct in Charleston, SC 
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Changes: ATF (15 Jan 2016), Customs (28 Sep 2017), DOD/NISPOM (18 May 2016), EAR (3 Oct 2017), FACR/OFAC (16 Jun 2017), FTR (20 Sep 2017), HTSUS (25 Jul 2017), ITAR (30 Aug 2017) 
  3. Weekly Highlights of the Daily Bugle Top Stories 


1. Commerce/BIS Amends EAR, Updates CFR Authority Paragraphs For 23 Affected Parts of the EAR

(Source: Federal Register) [Excerpts.]
82 FR 4 5959-45962: Updated Statements of Legal Authority for the Export Administration Regulations

* AGENCY: Bureau of Industry and Security, Commerce.
* ACTION: Final rule.
* SUMMARY: This rule updates the Code of Federal Regulations (CFR) legal authority paragraphs in the Export Administration Regulations (EAR) to cite the most recent Presidential notice continuing a national emergency declared pursuant to the International Emergency Economic Powers Act. This is a procedural, non-substantive rule that only updates authority paragraphs of the EAR. It does not alter any right, obligation or prohibition that applies to any person under the EAR.
* DATES: The rule is effective October 3, 2017. …
* SUPPLEMENTARY INFORMATION: The authority for all parts of the EAR (15 CFR parts 730-774) other than part 745 rests, in part, on Executive Order 13222 of August 17, 2001-National Emergency with Respect to Export Control Regulations, 66 FR 44025, 3 CFR, 2001 Comp., p. 783 and on annual presidential notices continuing the national emergency which was declared in that executive order pursuant to the International Emergency Economic Powers Act. This rule revises the authority paragraphs for the 23 affected parts of the EAR to remove references to the previous notice and add references to the most recent such notice, which the President signed on August 15, 2017.
This rule is purely procedural and makes no changes other than to revise CFR authority paragraphs for the purpose of making the authority citations current. It does not change the text of any section of the EAR, nor does it alter any right, obligation or prohibition that applies to any person under the EAR. …
  Dated: September 25, 2017.
Richard E. Ashooh, Assistant Secretary for Export Administration.

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OGS_a12. Ex/Im Items Scheduled for Publication in Future Federal Register Editions
(Source: Federal Register

* Justice/ATF; NOTICES; Agency Information Collection Activities; Proposals, Submissions, and Approvals: Release and Receipt of Imported Firearms, Ammunition and Defense Articles [Publication Date: 4 Oct 2017.]

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DoD/DSS Provides Guidance for NISP Contractors with DSS Authorized Information Systems

DSS provides guidance on the removal of Kaspersky Labs software/hardware from DSS authorized information systems in cleared industry. Effective immediately, all NISP contractor facilities possessing classified information systems (IS) under DSS cognizance and authorization are directed to remove all Kaspersky Labs software or hardware from the authorized IS. Click here to read the guidance.

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Treasury/OFAC Publishes FAQ Concerning Venezuela

(Source: Treasury/OFAC)     

OFAC is publishing an
explaining what constitutes “profit” for purposes of Subsection 1(a)(iv) of Executive Order 13808 (“
Imposing Additional Sanctions With Respect to the Situation in Venezuela

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UK/DIT ECO Releases New Export Control Training Bulletin

The Export Control Organisation (ECO) of the UK Department of International Trade (DIT) has published Issue 5 of the Export Control Training Bulletin. This bulletin includes:
  – Oil and gas intermediate course, Aberdeen, 11 October
  – Two (2) new control list classification courses in London for November and December
  – Regional courses up to March 2018
The bulletin is available here

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8. Reuters: “EU Sets New Trade Rules to Limit Cheap Chinese Imports”

(Source: Reuters, 3 Oct 2017.) [Excerpts.]
The European Union agreed new rules on Tuesday to guard against excessively cheap Chinese imports, ending 18 months of wrangling over trade ties with Beijing.
The European Union and many of China’s other trading partners have debated whether to treat China as a “market economy”, which Beijing says was its right at the end of 2016, some 15 years after it joined the World Trade Organization.
The EU kicked off discussions early in 2016 and held public consultations, gathering over 5,000 opinions on how to handle trade complaints against China.
The European Commission, member states and EU lawmakers finally overcame their differences on Tuesday after a number of failed attempts, representatives of all three told a news conference.
In determining whether to impose import tariffs, the EU will now treat all WTO members the same. Their businesses will only be dumping if their export prices are below domestic prices.
But the EU will make exceptions for cases of “significant market distortions”, such as excessive state intervention, an exception expected to cover many Chinese firms. … 

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ST&R Trade Report: “Advance Notice Required for Imports of Chemical Substance”

The Environmental Protection Agency has issued a final significant new use rule that, effective Nov. 2, will require persons who intend to manufacture (including import) or process a bimodal mixture consisting of multi-walled carbon nanotubes and other classes of carbon nanotubes for an activity designated as a significant new use by this rule to notify the EPA at least 90 days before commencing that activity.
Importers must certify that shipments of this substance comply with all applicable rules and orders under the Toxic Substances Control Act, including any SNUR requirements. In addition, any persons who export or intend to export this substance are subject to the export notification provisions of 15 USC 2611(b) and must comply with the export notification requirements in 40 CFR part 707, subpart D.

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10. Flash Global: “Trade Compliance Must-Know: 7 Friendly Countries to Which the EU Can Export Encrypted Products”

Flash Global
) [Excerpts.]
Dual-use goods, such as software and technology, refers to items that may be used by both civilians and military personnel. The nature of these items may result in potential use in the development and growth of weapons of mass destruction (WMDs). Therefore, the European Union, specifically the UN Security Council Resolution 1540, sets forth specific guidelines for which countries may receive encrypted exports from the EU, one piece in the puzzle of
global trade compliance
. To prevent a violation of these guidelines, you need to know what constitutes encrypted exports, which countries are appropriate for exporting such goods and how a violation could impact your organization.
What Are Encrypted Exports?
Encrypted exports are pieces of technology and data that may be used to develop WMDs. As a result, encrypted information may not be sold to countries that are the subject of trade embargos by either the United Nations or EU. Thus, the EU stands in accordance with the trade limitations for encrypted exports under the U.S. Bureau of Industry and Security’s
Export Administration Regulations (EAR)
These regulations define five types of technology, including mass-market software, operations technical data, operations software or patches, sales technical data and other non-conforming pieces of technology or information that may lead to the development of a WMD,
explains Benjamin H. Flowe, Jr.
of Berliner, Corcoran & Rowe, LLP. Moreover, any disclosure of data, without being pre-exempted from obtaining an export authorization, may constitute a violation of the EAR.
Exports also include the transmission of technology or data through any means, such as email, hand delivery, shipping or download. …
Which Countries Can the EU Export Encrypted Products Without Violating Regulations?
EU members have the authority to export encrypted products to other EU members without obtaining export authorizations. However, the EU has also established seven countries that are classified as an EU General Export Authorization (GEA), asserts the
European Commission on Trade
. These friendly countries allow for export of encrypted products from the EU, reducing
risk in the global supply chain
, provided the end-use of such items will not be used in the development or proliferation of WMD. They include the following:
  • The United States
  • Australia
  • Canada
  • Japan
  • New Zealand
  • Norway
  • Switzerland
Now, the EU may grant additional licenses to cover individual exporters or multiple items to multiple countries. The key is making sure a license or GEA exists for the given export. Furthermore, the future of the UK regarding
may play a role in changing this list. In the interim, Britain will remain a member of the EU.
What Can a Violation of EU Encrypted Export Regulations Cost?
The exact costs of a violation of EU encrypted product regulations are unclear, but they may also incur additional fines and costs set forth by other
global trade compliance statutes
. There is great authority in the EU regarding the assessment of penalties and punishments for knowingly or unknowingly violating existing trade regulations. However, past assessments of penalties against parties that violated such laws have resulting in costs exceeding $10,000 per transaction, administrative penalties of more than $275,000 and extensive, 20-year denials of all export privileges. Civil penalties may also be applied at the discretion of the courts.
Protect Yourself Against Violations Today
The solution to preventing a violation is correctly mapping the likelihood of an item’s possible application to WMDs in various destinations. Unless the destination is a member of the seven countries identified, you need to make sure it does not fall within the EU’s existing encrypted export restrictions. … 

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H. Krause, M. Huizinga & M. Daghles: “Foreign Investment Control in Germany: Berlin Wall Rebuilt or Storm in a Water Glass?” (Part 1 of 2)

Allen & Overy)

* Authors: Hartmut Krause, Esq.,
hartmut.krause@allenovery.com; Michiel Huizinga, Esq.,
michiel.huizinga@allenovery.com; and Murad Daghles, Esq.,
murad.daghles@allenovery.com. All of Allen & Overy, Frankfurt and Düsseldorf, respectively.
[Editor’s Note: due to space limitations, this article is divided into two parts. Part 2 will be published in tomorrow’s Daily Bugle.]
Germany’s new rules on foreign direct investment control in light of the new approach presented by European Commission President Juncker
Just a few weeks after Germany amended its rules on foreign direct investment (FDI) control, European Commission President Juncker announced a legislative proposal for, and the European Commission published a draft regulation dealing with, the screening by EU Member States of foreign takeovers and investments. In a nutshell, the Commission does not plan to create a centralised European body for the screening of foreign investment, like the Committee on Foreign Investment in the United States (CFIUS), but rather proposes a legal framework for the EU Member States, and in certain cases the Commission, to review foreign direct investments and take into account their individual situations (see Allen & Overy Client Briefing, “European Commission proposes common approach to foreign direct investment screening”, dated 15 September 2017).
Whilst the legislative procedure for a new European Regulation is just starting, the German rules have already taken effect. Key aspects of the amended German rules can be summarised as follows:
  – It is important to emphasise that Germany remains open to foreign investment. In line with past practice, corporate acquisitions by non-European purchasers can be prohibited only if they present a threat to the public order or safety of the Federal Republic of Germany. Generally, such interests may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society, which must always be determined in the individual case.
  – Nevertheless, the amended German legal framework presents non-European purchasers with a significantly more complex regulatory situation and with a more intense and time-consuming FDI screening process, all of which they will have to navigate.
  – For one thing, screening periods have been extended to allow the Commission and other EU Member States to comment on, and be given due consideration, in the German screening process. In practice, most of these extensions are not too significant because the relevant deadlines start running only after the file is complete. As the Ministry of Economic Affairs can always ask for additional information, it is in the hands of the Ministry to have the deadline start running again. However, if no clearance is applied for, the Ministry can open screening proceedings at any time up to five years after the signing of the relevant share or asset purchase agreement, potentially even leading to an order to unwind the relevant transaction years after completion. Whilst it has always been a risky strategy to proceed without the blessing of the Ministry, after the amendments this strategy has become even riskier.
  – Furthermore, the reach of governmental screening has been clarified by a number of examples, including operators of critical infrastructure and businesses producing software for the steering of critical infrastructure. These examples do not, however, incorporate all of the sectors mentioned in the proposed European Regulation. It cannot be ruled out that the Ministry of Economic Affairs will construe them in the light of the proposed European Regulation, where the notion of a threat to public order or safety is illustrated by examples ranging from critical infrastructure to critical technologies, critical inputs (natural resources) and data security.
  – In addition, it cannot be ruled out that the Ministry will take the aspect of reciprocity into consideration when deciding on clearing an FDI transaction, i.e. the German authorities could decide to screen a transaction stricter where the investor is based in a country with limited market access or where the proposed acquisition is funded by a foreign government or sovereign wealth fund.
  – Regarding investments in the defence sector, the reach of governmental screening has been extended. Non-German purchasers need FDI clearance not only when purchasing developers or manufacturers of weapons of war, tank engines and cryptography products, but also when the target business develops or manufactures goods subject to export control or machinery designed to produce such goods.
  – When issuing the legislative amendment in July 2017, the German government expected a modest increase in the number of foreign investment control filings. Now, two months later, it is becoming clear that significantly more filings have been submitted than expected, which is likely due to the increased complexity and uncertainties ingrained in the amended legal framework.
  – Against this background, non-European purchasers are well advised to analyse transaction risks early on and prepare their moves very thoroughly from a legal, political and communications point of view and consult with their legal advisors at an early stage of the proposed transaction to avoid any impediments resulting from the German FDI screening rules.
* Political initiatives for enhanced screening of foreign direct investment led to an amendment of the German rules on the control of foreign direct investment.
After the takeover of KUKA, Germany’s iconic specialist in robotics, by Chinese Midea Group and the attempted takeover of Aixtron, an engineering business producing machinery for the manufacture of semiconductors, in mid and late 2016, the M&A activities of Chinese investors in Germany attracted attention at the highest political levels, leading to political initiatives for stricter control of foreign direct investment both at German and European levels.
At a European level, a group of members of the European Parliament (from Germany, France and Italy) called on the European Commission to provide a set of instruments for (i) cases where the investor is domiciled in a country where outbound investment is subsidised by the government, distorting competition for the target business, and (ii) where the investor’s home country restricts market access for European investors so that they cannot compete fairly with domestic businesses. According to this initiative, the existing rules on foreign investment control were to be extended to investments in strategically important sectors such as energy, transport, telecommunications, health and water. The European Commission announced that it would examine the effectiveness of EU policies to safeguard key technologies and ensure reciprocity of market access. On 13 September 2017, in view of the exclusive competence of the EU in the area of commercial policy, the European Commission presented a draft regulation designed to create an enabling framework for EU Member States to adopt or maintain a review mechanism for foreign direct investment.
At a German level, at the request of the Free State of Bavaria, the upper house of parliament (
Bundesrat) adopted a resolution entitled “Foreign investment – securing technological sovereignty”. The upper house considered it appropriate that (i) control and prohibition options should be fixed on the principle of reciprocity, i.e. foreign direct investors based in countries whose markets are not freely accessible to foreign investors should be subject to stricter screening, and (ii) foreign direct investments should be prohibited if not primarily driven by market economy considerations. The upper house expressly asked the Federal Government to examine how the loss of industrial core competencies and key technologies can be counteracted by amending the Foreign Trade Regulation (
Außenwirtschaftsverordnung; FTR) or other instruments.
On 12 July 2017, the Federal Government amended the FTR, following the upper house’s request only in part – the topic of reciprocity of market access was not addressed. The amendments became effective on 18 July 2017. … 

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K. Nunnenkamp, G.M. Cinelli & C.J. Kozlowski: “Implications Arising from the Recent Venezuelan Sanctions”

(Source: Editor)
* Authors: Kenneth J. Nunnenkamp, Esq.
Kenneth.nunnenkamp@morganlewis.com; Giovanna M. Cinelli, Esq.,
Giovanna.cinelli@morganlewis.com; and Christian J. Kozlowski, Esq. Christian.Kozlowski@morganlewis.com. All of 
Morgan Lewis & Bockius, Wash DC.
Though intended to avoid stifling trade in existing Venezuelan government bonds, the sanctions include restrictions on dealings in certain bonds that could impact bond holders.
The US government imposed additional sanctions on the Venezuelan government on August 25, 2017, for a variety of actions that the administration deems violations of the human and political rights of the people of Venezuela. The sanctions are the latest in a series of actions taken by the US government against Venezuelan President Nicolás Maduro and those in his inner circle. These sanctions are designed to close some of the loopholes in prior sanctions aimed at Venezuela and further restrict the Maduro government from access to cash, which has been used to fund the human rights violations and political oppression of the Venezuelan people and political opposition. The newest sanctions restrict the ability of the Venezuelan government and its state-owned oil company Petroleos de Venezuela, S.A. (PdVSA) to raise funds through new debt or equity offerings, and make it illegal for US persons (individuals or entities) to participate in debt or equity offerings that extend beyond 30 days for the government and 90 days for PdVSA.
The approach to these new sanctions follows the “catch-and-release” methodology that has become typical in the implementation of targeted sanctions by the US government. Executive Order 13808, which imposes the sanctions, includes broad prohibitions, in this case making it illegal for US persons to transact or otherwise deal in: new Venezuelan or PdVSA “debt” longer than 30 or 90 days, respectively; and Venezuelan government bonds. The Order also prohibits dividend payments to the Venezuelan government. At the same time, the US Office of Foreign Assets Control (OFAC) issued General Licenses authorizing activities that would otherwise violate the Executive Order, having the effect of narrowing the sanctions. By using the catch-and-release approach, the United States has in place broader sanctions, giving OFAC the authority to tighten the sanctions should the need arise.
In the case of the Venezuela action, OFAC issued four General Licenses simultaneous with implementation of the Order. The General Licenses cover actions needed to wind down existing contracts with the Venezuelan government (General License 1), debt related to exports of certain agricultural and humanitarian goods and services (General License 4), transactions with Citgo Holdings, Inc. (General License 2), and, the focus of this discussion, dealings in “certain bonds” (General License 3).
Interpreting the New Sanctions
As with any new sanctions, the imperative is to determine what actions, previously permitted, are now prohibited. When sanctions follow the catch-and-release approach described above, it allows OFAC to take the position that because an Executive Order broadly describes the scope of prohibited activity, that which is not expressly permitted remains prohibited. For example, the Executive Order 13808 broadly prohibits “all transactions related to, provision of financing for, and other dealings” in:
  (1) New PdVSA “debt” with a maturity greater than 90 days;
  (2) New Venezuelan government “debt” with a maturity greater than 30 days;
  (3) Bonds issued by the Venezuelan government prior to August 25, 2017; and
  (4) Dividend payments or other distributions of profits to the Venezuelan government “from any entity owned or controlled, directly or indirectly, by” the Venezuelan government-depriving the Venezuelan government of dividends and/or profits from Citgo in the United States.
Recognizing that significant Venezuelan and PdVSA debt is currently traded in world markets, including the United States, and that the objectives of the sanctions-to deprive the Venezuelan government of new funds-would not be served by prohibiting transactions involving that debt, OFAC issued General License 3 authorizing “all transactions related to, the provision of financing for, and other dealings in” virtually every known Venezuelan and PdVSA existing bond as of August 25, 2017, except one 2036 bond that was not then trading. Thus, although the Order initially prohibits transactions relating to Venezuelan government bonds, in fact, this provision is substantially diluted by General License 3, which allows for the continued trading in the bonds listed in the Annex to that license. (Paragraph (b) of the license also authorizes “all transactions” in bonds that meet two specific criteria: (1) the bonds were issued prior to August 25, 2017, and (2) the bonds were issued by a US entity “owned or controlled, directly or indirectly” by the Venezuelan government. This provision is potentially redundant, in part, in light of General License 2, which authorizes “all transactions” relating to Citgo Holdings, Inc., but reflects OFAC’s concern that there might be further debt, and other entities owned by the Venezuelan government, of which it was unaware.)
While the implementation of these sanctions was covered extensively (See, e.g., Rebecca M. Nelson, “New Financial Sanctions on Venezuela: Key Issues,” CRS Insight, September 1, 2017), little attention has been given to the long-term impact these sanctions may have on the bonds currently being traded. These are significant questions that can impact the viability of continuing to hold these instruments, and which OFAC has yet to address.
Trading in Bonds Exempt from the Sanctions
OFAC issued General License 3 to authorize continued trading in about 75 bonds issued by either the Venezuelan government or PdVSA. The maturity dates on these bonds extend from before the issuance of the sanctions to 2038. While paragraph (a) of General License 3 authorizes “all transactions related to the provision of financing for, and other dealings” in the bonds listed in the License 3 Annex, the license excepts from its coverage any transactions “otherwise prohibited by” the Executive Order. As with other sanctions regimes, no specific guidance was provided describing what actions fall within the meaning of “financing for and other dealings in.” OFAC has offered only limited suggestions as to what these terms might mean in its FAQ responses, where it states that dealings or transactions include entering into contracts, negotiations, or processing transactions. (See OFAC FAQ 505). Therefore, understanding OFAC’s approach to these terms is essential to ensuring compliance with the sanctions.
While General License 3 clearly authorizes continued trading in the bonds listed in the Annex, the authorization to engage in “financing for and dealings in” extends only to activities associated with the existing bonds in the Annex (i.e., trading in, financing and other dealings in those specific bonds). Section (c) of the General License confirms that it extends no further by making clear that actions “otherwise prohibited” by the Executive Order remain prohibited. In OFAC terms, this language is designed to limit the scope of activities to the existing bonds and make clear that actions relating to “new debt” longer than authorized remain prohibited, even if that “new debt” is meant to replace the bonds in the Annex.
OFAC regulations traditionally preclude any action that “facilitates” a violation of the sanctions. As with other sanctions programs, the authority to prohibit facilitation is found in language prohibiting any act that “causes” a violation. (See, e.g., Executive Order 13808, Section 1(c)). Facilitation generally is not well defined by OFAC but construed broadly, and can include almost any activity that assists with or otherwise aids in violating the sanctions. For example, OFAC has found facilitation violations where a company provided “various back-office functions for the sales by a foreign affiliate” (Great Western) and where a US entity assisted its foreign affiliate with prohibited sales (World Fuel Services Corp). Thus, while US persons may continue to trade in the bonds in License 3’s Annex, and the license should also act to authorize those actions necessary to deal in them (i.e., dividend payments or potentially even pay off at maturity), it does not go so far as to authorize the issuance of new debt longer than 30 or 90 days, as the case may be, to replace those bonds. Moreover, because the issuance of such new debt is prohibited, any actions to “facilitate” the issuance of the new debt remains prohibited. For example, engaging in negotiations to establish such “new debt” would generally be viewed as “facilitation.”
These prohibitions highlight the risks in trading (and owning) even the bonds in the Annex. Since government bonds are often (if not always) paid from newly issued bonds, and US persons cannot facilitate the issuance of nor accept new debt from the Venezuelan government longer than 30 days, a holder of these bonds may be functionally unable to collect from the Venezuelan government at maturity.
It is not clear whether the Venezuelan government will locate new sources to repay these bonds as they become due. Presumably, however, if Venezuela is able to repay the bonds at maturity, and a bondholder has not facilitated the issuance of any new debt, then the authorization to deal in these bonds should extend to accepting payment at maturity. Nonetheless, these uncertainties have led some US firms to stop trading even in the Venezuelan bonds listed in the Annex to License 3. The overall reticence is already impacting the market as Citgo was reportedly having difficulty with routine financing even though General License 2 specifically exempts Citgo Holdings and its subsidiaries from the sanctions. Suppliers and others who provide credit to Citgo expressed fears of default and the uncertainties surrounding the sanctions outlook.
“Debt” and “Equity” Covered by the Sanctions
Like the Ukraine-related sanctions imposed on Russian authorities and entities, the Venezuela sanctions leave open some of the same questions about when a transaction constitutes “debt” or “equity.” While the Executive Order does not define these terms, OFAC confirms in its FAQs that debt includes “bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper,” and “equity” includes “stocks, share issuances, depositary receipts, or any other evidence of title or ownership.” As broad as these lists are, they do not address numerous types of transactions that may or may not constitute “debt” or “equity”.
With debt including any “extension of credit,” even routine transactions can be subject to the sanctions. Further, except for debt relating to Citgo Holdings, none of the general licenses authorizes these other forms of new debt for the Venezuelan government or PdVSA. For a country like Venezuela, where most significant industry and commerce has been nationalized, this means that any transactions where goods or services could end up in or for the benefit of a Venezuelan entity must be subjected to extra scrutiny. Routine transactions such as leases or payment terms would fall within the broad definition of debt if they run past the 30 or 90-day limits in the Executive Order. These transactions would be prohibited absent OFAC authorization.
The restrictions on the issuance of new equity similarly prohibit any transaction whose effect is to “deal in” or provide “financing for” anything that would constitute any new equity interest. This restriction does not prohibit, for example, trading in existing equity, but means that entities that engage in underwriting or transactions must be careful not to engage in actions that result in new equity for Venezuelan government entities.
When the Music Stops
One risk created by the new sanctions that seems to have evaded extensive discussion is what happens to those holding Venezuelan bonds at their time of maturity. Although the Venezuelan government might want to roll over the debt, the sanctions prohibit any formal or effective rollover, because any such “new debt” could not be for longer than 30 days. If the maturity date for a bond passed, only default would avoid this result, since accepting continued payments extends the debt. But OFAC has yet to provide guidance on the implications of a default by the Venezuelan government. Although defaults are not extensions of credit per se, they can operate like a credit extension. Thus, it is not clear if a license would be required to collect following a default because the effective extension operates as “new” debt, even though involuntarily created. Certainly, any extension of an existing credit facility or other debt could trigger the sanctions, but OFAC has not advised whether this would be the case where the “credit” results from a refusal to pay. If it did, the sanctions could give Venezuela an excuse to unilaterally extend repayment terms while the sanctions are in place.
OFAC will likely provide further guidance on how or whether it will address these problems, but until it does, there is enhanced risk in holding even the debt authorized by General License 3. While non-US persons can purchase the debt, as the bonds get closer to maturity, the price could plummet in a reverse auction atmosphere as foreign buyers seek to take advantage of the sanctions’ impact on US bond holders.

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M. Volkov Releases New Podcast: “Too Big to Fail, Too Big to Jail, DOJ’s Outsourcing of Criminal Investigations”

(Source: Volkov Law Group Blog. Reprinted by permission.)
* Author: Michael Volkov, Esq., Volkov Law Group, mvolkov@volkovlaw.com, 240-505-1992.
The Department of Justice’s approach to criminal prosecution of corporations and individuals has evolved over the last 20 years. Beginning with the traditional model of building criminal cases, brick-by-brick, by investigating and prosecuting individuals, traditionally used to dismantle organized crime and drug trafficking/gang organizations, the Justice Department has now embraced a new model of enlisting corporations to conduct internal investigations, usually with the assistance of outside counsel, and reporting back to the Justice Department on what occurred and who was involved in the criminal violations.  As part of this new strategy, the Justice Department has ignored its traditional role in prosecuting culpable individuals.

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W. Shahid, R. Cook, R. Giambalvo: “Separating Signal from Noise: A Framework for Monitoring Compliance Program Performance” (Part 1 of 3)

* Authors: Waqas Shahid, Esq., 646-291-8546, waqas.shahid@ankuraconsulting.com; Randy Cook, Esq., randy.cook@ankuraconsulting.com, 646-291-8545; and Rosanne Giambalvo, Esq., rosanne.giambalvo@ankuraconsulting.com, 646-291-8575. All of Ankura Consulting Group LLC.
[Editor’s Note: Due to space limitations, this article is divided into three parts. Parts 2 and 3 will be published in the Daily Bugle of Wednesday 4 October and Thursday 5 October, respectively.]
As a compliance professional, you learn something about organizational noise. On any given day, you may hear from a program manager that you are single-handedly shutting down the business, from the Chief Financial Officer that you are breaking the budget, and from the General Counsel that you are enabling excessive risk. In this real compliance world of cross-cutting interests, tight timelines, and hard choices, you need a clear picture of your company’s compliance posture and performance. But how do you make sure that your picture is accurate? Is the crisis du jour or a squeaky wheel stakeholder obscuring the riskiest and most critical parts of your compliance program? Can you objectively measure your program’s performance and improvement over time to justify the budget allocated to your program? Are you sure you are effectively allocating your limited resources to tackle your highest-risk items instead of spending time on a low-risk, low-activity area? And can you communicate the effectiveness of your program to others inside and outside your organization? This piece describes a deliberate process for collecting and utilizing data and metrics to assess and optimize your company’s compliance programs.
A data analytics-based oversight framework is now a necessary component of every competent compliance program. Indeed, US enforcement authorities increasingly expect to see the metrics and data that companies use to evaluate compliance performance and make compliance decisions, and have repeatedly emphasized the need for such risk-tailored compliance programs at industry conferences and in compliance consent agreements. Equally important (and typically more immediate) corporate operational and financial decisions rely heavily on quantitative metrics.
A data and metric-based monitoring effort can, however, be more than a shield against government enforcement and internal budget constraints. It can also be used as a sword to relentlessly attack risks and inefficiencies, identify hidden opportunities, and nip problems in the bud. For example, data showing that export license applications or entertainment authorization requests bottleneck at certain times of the year could provide insights about business and workflow cycles, and could present an opportunity to pre-allocate additional resources during those periods to support optimal business performance or tweak workflow cycles to avoid those time periods altogether. Similarly, tracking “Returned Without Action” rates for export license applications companywide and by preparer over time could help you identify when additional or refresher training on license preparation is warranted.
These factors highlight the need to obtain hard data about your company’s compliance programs through a systematic monitoring effort. Indeed, the collection and analysis of hard data about your company’s business and compliance activities is a critical part of identifying compliance patterns over time, pinpointing potential problems, and forming effective solutions. But taking an ad-hoc approach to gathering and analyzing data can sometimes make it hard to separate signal from noise and lead to “analysis paralysis.” You need to take a measured, systematic approach. Below, we present a robust framework for effectively measuring and communicating the effectiveness of your compliance programs to internal and external stakeholders.
In a nutshell, our compliance measurement framework consists of two three-step sub-cycles that recur with different frequencies: an annual Planning Cycle aimed at developing relevant, useful metrics and key performance indicators (KPIs), and figuring out how to collect the needed data; and a monthly Execution Cycle that focuses on recurring collection and analysis of relevant data to drive continuous improvement of your compliance program.

  (1) Understand Your Business
  (2) Articulate What You Want to Measure
  (3) Build/Update Your Data Map

  (1) Collect, Sanitize, and Transform
  (2) Chart, Analyze, and Present
  (3) Take Action
In Part 2 of the article, we will take a look at the Monitoring Planning Cycle in more detail, and in Part 3 we will dive into the Monitoring Execution Cycle.

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ECS Presents ITAR/EAR Critical Compliance & Agreement Workshop on 17-18 Oct in Charleston, SC

* What: ECS Presents ITAR/EAR Critical Compliance & Agreement Workshop
* When: 17-18 Oct 2017
* Where: Charleston Marriott ECS Group Rate
* Sponsor: Export Compliance Solutions (ECS)
* ECS Speaker Panel: Suzanne Palmer, Lisa Bencivenga
* Register: Here or by calling 866-238-4018 or e-mail spalmer@exportcompliancesolutions.com

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* James Herriot (James Alfred Wight; 3 Oct 1916 – 23 Feb 1995, known by the pen name, James Herriot, was a British veterinary surgeon and writer, who used his many years of experiences as a veterinary surgeon to write a series of books each consisting of stories about animals and their owners. He is best known for these semi-autobiographical works, beginning with If Only They Could Talk in 1970. The British television series adapted from the books is titled All Creatures Great and Small.)
  – “I have felt cats rubbing their faces against mine and touching my cheek with claws carefully sheathed. These things, to me, are expressions of love

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. 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.
: 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. 
: 19 CFR, Ch. 1, Pts. 0-199
  – Last Amendment: 28 Sep 2017: 82 FR 45366-45408: Changes to the In-Bond Process [Effective Date: 27 Nov 2017.]

  – 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 cancelled Supp. 1 to the NISPOM (Summary 

: 15 CFR Subtit. B, Ch. VII, Pts. 730-774

  – Last Amendment: 3 Oct 2017: 82 FR 4 5959-45962: Updated Statements of Legal Authority for the Export Administration Regulations

: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
  – Last Amendment: 16 Jun 2017: 82 FR 27613-27614: Removal of Burmese Sanctions Regulations 
: 15 CFR Part 30
  – Last Amendment: 20 Sep 2017: 82 FR 43842-43844: Foreign Trade Regulations (FTR): Clarification on Filing Requirements; Correction  
  – HTS codes that are not valid for AES are available
  – The latest edition (20 Sep 2017) 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, Census/AES guidance, and to many errors contained in the official text. 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.
, 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: 25 Jul 2017: Harmonized System Update 1706, containing 834 ABI records and 157 harmonized tariff records.
  – HTS codes for AES are available
  – HTS codes that are not valid for AES are available
  – Last Amendment: 30 Aug 2017: 82 FR 41172-41173: Temporary Modification of Category XI of the United States Munitions List
  – The only available fully updated copy (latest edition: 12 Sep 2017) of the ITAR with all amendments is contained in Bartlett’s Annotated 

, by James E. Bartlett III. The BITAR contains all ITAR amendments to date, plus a large Index, over 800 footnotes containing amendment histories, 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
. BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please
contact us
to receive your discount code.

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Weekly Highlights of the Daily Bugle Top Stories

(Source: Editor) 

Review last week’s top Ex/Im stories in “Weekly Highlights of the Daily Bugle Top Stories” published 

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* The Ex/Im Daily Update is a publication of FCC Advisory B.V., compiled by: Editor, James E. Bartlett III; Assistant Editors, Alexander P. Bosch and Vincent J.A. Goossen; and Events & Jobs Editor, John Bartlett. The Ex/Im Daily Update is emailed every business day to approximately 8,000 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 of this newsletter 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.

* SUBSCRIPTIONS: Subscriptions are free.  Subscribe by completing the request form on the Full Circle Compliance website.

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