17-1129 Wednesday “Daily Bugle”

17-1129 Wednesday “Daily Bugle”

Wednesday, 29 November 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 here for free subscription. Contact us for advertising inquiries and rates.

  1. Commerce/BIS Seeks Comments Concerning Impact of CWC Implementation on Commercial Activities Involving “Schedule 1” Chemicals
  1. Items Scheduled for Publication in Future Federal Register Editions 
  2. Commerce/BIS: (No new postings.)
  3. DHS/CBP Requires Action from all VPN Users
  4. State/DDTC: (No new postings.)
  5. Treasury/OFAC Issues Finding of Violation to Dominica Maritime Registry Inc. of Fairhaven, MA, for Violating Iranian Transactions and Sanctions Regulations
  6. European Commission Releases Agenda for 2017 Export Control Forum
  7. UK DIT/ECO Delays Planned Update to 9 OGELS
  1. Reuters: “Turkish Gold Trader Becomes U.S. Witness in Iran Sanctions Case”
  1. E.J. Krauland, M. Rathbone & A. Rapa: “Trump Designates North Korea as a ‘State Sponsor of Terrorism,’ Makes Additional Sanctions Designations”
  2. S.S. Rana & Co: “India: Government Amends Arms Rules to Boost ‘Make in India'”
  3. S.T. Boyce, C.D. Kaniecki & S.L. Rafferty: “U.S. Government Takes Steps Toward Implementation of Sanctions on Russia”
  4. Gary Stanley’s ECR Tip of the Day
  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 (9 Nov 2017), FACR/OFAC (13 Nov 2017), FTR (20 Sep 2017), HTSUS (20 Oct 2017), ITAR (30 Aug 2017)
  3. Weekly Highlights of the Daily Bugle Top Stories 


Federal Register
, 29 Nov 2017.) [Excerpts.]
82 FR 56581-56582: Impact of the Implementation of the Chemical Weapons Convention (CWC) on Legitimate Commercial Chemical, Biotechnology, and Pharmaceutical Activities Involving “Schedule 1” Chemicals (Including Schedule 1 Chemicals Produced as Intermediates) Through Calendar Year 2017
* AGENCY: Bureau of Industry and Security, Commerce.
* ACTION: Notice of inquiry.
* SUMMARY: The Bureau of Industry and Security (BIS) is seeking public comments on the impact that implementation of the Chemical Weapons Convention (CWC), through the Chemical Weapons Convention Implementation Act (CWCIA) and the Chemical Weapons Convention Regulations (CWCR), has had on commercial activities involving “Schedule 1” chemicals during calendar year 2017. The purpose of this notice of inquiry is to collect information to assist BIS in its preparation of the annual certification to Congress on whether the legitimate commercial activities and interests of chemical, biotechnology, and pharmaceutical firms are being harmed by such implementation. This certification is required under Condition 9 of Senate Resolution 75, April 24, 1997, in which the Senate gave its advice and consent to the ratification of the CWC.
* DATES: Comments must be received by December 29, 2017. …
* SUPPLEMENTARY INFORMATION: … The CWC is an international arms control treaty that contains certain verification provisions. In order to implement these verification provisions, the CWC established the Organization for the Prohibition of Chemical Weapons (OPCW). The CWC imposes certain obligations on countries that have ratified the Convention (i.e., States Parties), among which are the enactment of legislation to prohibit the production, storage, and use of chemical weapons, and the establishment of a National Authority to serve as the national focal point for effective liaison with the OPCW and other States Parties in order to achieve the object and purpose of the Convention and the implementation of its provisions. The CWC also requires each State Party to implement a comprehensive data declaration and inspection regime to provide transparency and to verify that both the public and private sectors of the State Party are not engaged in activities prohibited under the CWC.
“Schedule 1” chemicals consist of those toxic chemicals and precursors set forth in the CWC “Annex on Chemicals” and in Supplement No. 1 to part 712 of the Chemical Weapons Convention Regulations (CWCR) (15 CFR parts 710-722). The CWC identified these toxic chemicals and precursors as posing a high risk to the object and purpose of the Convention.
The CWC (Part VI of the “Verification Annex”) restricts the production of “Schedule 1” chemicals for protective purposes to two facilities per State Party: A single small-scale facility (SSSF) and a facility for production in quantities not exceeding 10 kg per year. The CWC Article-by-Article Analysis submitted to the Senate in Treaty Doc. 103-21 defined the term “protective purposes” to mean “used for determining the adequacy of defense equipment and measures.” Consistent with this definition and as authorized by Presidential Decision Directive (PDD) 70 (December 17, 1999), which specifies agency and departmental responsibilities as part of the U.S. implementation of the CWC, the Department of Defense (DOD) was assigned the responsibility to operate these two facilities. Although this assignment of responsibility to DOD under PDD-70 effectively precluded commercial production of “Schedule 1” chemicals for protective purposes in the United States, it did not establish any limitations on “Schedule 1” chemical activities that are not prohibited by the CWC. However, DOD does maintain strict controls on “Schedule 1” chemicals produced at its facilities in order to ensure accountability for such chemicals, as well as their proper use, consistent with the object and purpose of the Convention.
The provisions of the CWC that affect commercial activities involving “Schedule 1” chemicals are implemented in the CWCR (see 15 CFR 712) and in the Export Administration Regulations (EAR) (see 15 CFR 742.18 and 15 CFR 745), both of which are administered by the Bureau of Industry and Security (BIS). Pursuant to CWC requirements, the CWCR restrict commercial production of “Schedule 1” chemicals to research, medical, or pharmaceutical purposes (the CWCR prohibit commercial production of “Schedule 1” chemicals for “protective purposes” because such production is effectively precluded per PDD-70, as described above–see 15 CFR 712.2(a)). The CWCR also contain other requirements and prohibitions that apply to “Schedule 1” chemicals and/or “Schedule 1” facilities. Specifically, the CWCR:
(1) Prohibit the import of “Schedule 1” chemicals from States not Party to the Convention (15 CFR 712.2(b));
(2) Require annual declarations by certain facilities engaged in the production of “Schedule 1” chemicals in excess of 100 grams aggregate per calendar year (i.e., declared “Schedule 1” facilities) for purposes not prohibited by the Convention (15 CFR 712.5(a)(1) and (a)(2));
(3) Provide for government approval of “declared Schedule 1” facilities (15 CFR 712.5(f));
(4) Provide that “declared Schedule 1” facilities are subject to initial and routine inspection by the Organization for the Prohibition of Chemical Weapons (15 CFR 712.5(e) and 716.1(b)(1));
(5) Require 200 days advance notification of establishment of new “Schedule 1” production facilities producing greater than 100 grams aggregate of “Schedule 1” chemicals per calendar year (15 CFR 712.4);
(6) Require advance notification and annual reporting of all imports and exports of “Schedule 1” chemicals to, or from, other States Parties to the Convention (15 CFR 712.6, 742.18(a)(1) and 745.1); and
(7) Prohibit the export of “Schedule 1” chemicals to States not Party to the Convention (15 CFR 742.18(a)(1) and (b)(1)(ii)).
For purposes of the CWCR (see 15 CFR 710.1), “production of a Schedule 1 chemical” means the formation of “Schedule 1” chemicals through chemical synthesis, as well as processing to extract and isolate “Schedule 1” chemicals produced biologically. Such production is understood, for CWCR declaration purposes, to include intermediates, by-products, or waste products that are produced and consumed within a defined chemical manufacturing sequence, where such intermediates, by-products, or waste products are chemically stable and therefore exist for a sufficient time to make isolation from the manufacturing stream possible, but where, under normal or design operating conditions, isolation does not occur. …
Dated: November 22, 2017.
Matthew S. Borman, Deputy Assistant Secretary for Export Administration.

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. Items Scheduled for Publication in Future Federal Register Editions

Federal Register)

* Commerce/BIS; NOTICES; Meetings; Regulations and Procedures Technical Advisory Committee [Publication Date: 30 Nov 2017.]  
* Treasury/OFAC; NOTICES; Blocking or Unblocking of Persons and Properties [Publication Date: 30 Nov 2017.] 

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CSMS #17-000744, 29 Nov 2017.)
Due to a VPN maintenance performed on 11/6/2017, CBP is requesting that all trade partners attempt to authenticate at least once before 12/9/2017. Failure to perform an authentication may result in the connection being automatically inactivated.
In the event that you have access issues after 12/9/2017, please contact the CBPNOC (CBP Network Operations Center) @ 1-800-927-8729. The CBPNOC will put in a ticket with OneNet NOC to fix the problem.
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State/DDTC: (No new postings.)

(Source: State/DDTC)

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Treasury/OFAC, 28 Nov 2017.)
OFAC has issued a Finding of Violation to Dominica Maritime Registry, Inc. (DMRI), of Fairhaven, Massachusetts, for a violation of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR). Specifically, OFAC determined that on July 4, 2015, DMRI violated § 560.211 of the ITSR by dealing in the property or interests in property of the National Iranian Tanker Company (NITC), an entity identified by OFAC as meeting the definition of the Government of Iran and whose property and interests in property are blocked. [FN/1] In particular, DMRI executed a binding Memorandum of Understanding with NITC, which OFAC determined was a contingent contract and therefore property in which NITC, a blocked person, had an interest.  
Section 560.211 of the ITSR prohibits U.S. persons from dealing in the property or interests in property of the Government of Iran. Since NITC is identified as an entity meeting the definition of the Government of Iran, DMRI was prohibited from dealing in its property or interests in property. Section 560.325 of the ITSR defines “property” and “property interests” to include “services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.”      
OFAC determined that DMRI did not voluntarily disclose the violation and that the violation constitutes a non-egregious case. The determination to issue a Finding of Violation to DMRI reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors as outlined in OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. OFAC considered the following to be aggravating factors:
  (1) DMRI failed to exercise a minimal degree of caution or care by executing a contingent contract with an entity it knew was listed on the SDN List at the time of the violation;
  (2) DMRI executives had actual knowledge of, and actively participated in, the conduct the led to the violation, and were aware of NITC’s status when DMRI executed the contingent contract; and
  (3) DMRI undermined the policy objectives of the ITSR by dealing in the blocked property of a Government of Iran entity identified on the SDN List.    
OFAC considered the following to be mitigating factors:
  (1) DMRI has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transaction giving rise to the violation;
  (2) DMRI is a small company; and
  (3) DMRI has taken remedial actions, including engaging trade counsel to assist it in understanding its obligations under U.S. sanctions laws, updating its OFAC compliance procedures, and undertaking a process to establish an OFAC compliance training program for all employees.
Based on the foregoing analysis of the General Factors, the conduct at issue, and the size of DMRI, OFAC determined that the issuance of this Finding of Violation is the appropriate enforcement response. OFAC found that DMRI is a small company and the scope of the underlying conduct at issue was limited. Additionally, based on information DMRI provided to OFAC, there was no performance of the contingent contract and DMRI represented that it has had no further dealings with NITC or any other sanctioned party. 
  [FN/1] At the time of the violation, NITC was identified on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”).  On January 16, 2016 – Implementation Day of the Joint Comprehensive Plan of Action between the P5+1 and Iran – OFAC removed NITC from the SDN List and added it to the List of Persons Identified as Blocked Solely Pursuant to Executive Order 13599.  The purpose of the latter list is to clarify that, regardless of their removal from the SDN List, persons that OFAC previously identified as meeting the definition of the Government of Iran or an Iranian financial institution continue to meet those definitions and continue to be persons whose property and interests in property are blocked pursuant to Executive Order 13599 and § 560.211 of the ITSR.
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European Commission Releases Agenda for 2017 Export Control Forum


The European Commission has posted the agenda and poster for the 2017 Export Control Forum, which will take place on 19 Dec 2017 in Brussels, on its website. 

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UK DIT/ECO Delays Planned Update to 9 OGELS

UK DIT/ECO, 29 Nov 2017.) [Excerpts.]    
The planned updates to 9 open general export licenses (OGELs) announced in notice to exporters 2017/27 [and in the Daily Bugle of Monday, 27 Nov 2017], which were due to come into force on 29 November 2017, have been delayed.
The planned updates reflect changes to the EU dual-use export control list in Annex I to regulation (EC) No 428/2009, which we expected to be published around 26 November 2017.
The export control joint unit anticipates that this change to the EU dual-use export control list will happen in the next few days. When it does, the changes to the OGELs will be made and a further notice to exporters will be issued. …  

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Reuters: “Turkish Gold Trader Becomes U.S. Witness in Iran Sanctions Case”

Reuters, 28 Nov 2017.) [Excerpts.]
A Turkish-Iranian gold trader has pleaded guilty to conspiring to evade U.S. sanctions against Iran and will testify against a Turkish bank official who is charged with arranging illegal transactions involving American banks, a U.S. prosecutor said on Tuesday.
The trader, Reza Zarrab, will describe a multibillion-dollar international money laundering scheme “from the inside,” Assistant U.S. Attorney David Denton said during his opening statement in the New York federal court trial of Mehmet Hakan Atilla, the deputy general manager of Turkey’s Halkbank.
Atilla’s lawyer, Victor Rocco, attacked Zarrab’s credibility in his opening statement, telling jurors that Zarrab was prepared to lie to avoid jail time.
According to court records made public Tuesday, Zarrab pleaded guilty on Oct. 26 to six charges related to the sanctions against Iran.
Zarrab also pleaded guilty to a charge that he bribed a U.S. jail guard to obtain alcohol and a cell phone in 2016, records showed. …

U.S. prosecutors have charged nine people in the case, though only Zarrab and Atilla are known to be in U.S. custody. The other defendants include the former head of Halkbank, Suleyman Aslan, and the former economy minister of Turkey, Zafer Caglayan. … 

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E.J. Krauland, M. Rathbone & A. Rapa: ”
Trump Designates North Korea as a ‘State Sponsor of Terrorism,’ Makes Additional Sanctions Designations

* Authors: Edward J. Krauland, Esq., 
ekrauland@steptoe.com; Meredith Rathbone, Esq., 
mrathbone@steptoe.com; and Anthony Rapa, Esq., 
arapa@steptoe.com.  All of Steptoe & Johnson LLP.
On November 20, 2017, President Trump announced that North Korea would be designated a “state sponsor of terrorism” – a designation shared by only Syria, Iran, and Sudan. The president also stated that the United States would announce the imposition of additional sanctions on Pyongyang.  A day later, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against one individual, 13 entities, and 20 vessels operating in or with ties to North Korea.
“State Sponsor of Terrorism” Designation
Countries determined by the Secretary of State to have “repeatedly provided support for acts of international terrorism” may be designated state sponsors of terrorism under three laws: section 6(j) of the Export Administration Act (as continued in effect under the International Emergency Economic Powers Act pursuant to Executive Order 13222), section 40 of the Arms Export Control Act, and section 620A of the Foreign Assistance Act. Under these laws, designation results in:
  – A ban on US government foreign assistance
  – A ban on exports and sales of defense articles and support
  – Enhanced export controls over dual-use items
  – A variety of other US government financial and immigration restrictions
Each of these restrictions may be waived by the president in consultation with relevant congressional committees on a case-by-case basis.  The designation also has other consequences under US law.  For example, state sponsors of terrorism are subject to a limited exception to sovereign immunity under the Foreign Sovereign Immunities Act for personal injury and death claims resulting from certain acts associated with terrorism.
In addition, the designation of North Korea under section 6(j) of the Export Administration Act triggers the application of the Terrorism List Governments Sanctions Regulations, 31 CFR Part 596, to the DPRK government.  This does not appear to have any material impact on the current restrictions, as well as authorizations, under existing executive orders and the North Korea Sanctions Regulations, 31 CFR Part 510.  For example, existing authorizations under OFAC-issued General Licenses, as well as the authorization for necessary financial services related to activities covered by the General Licenses, should not be affected by application of Part 596 restrictions.  See, e.g., 31 CFR §§ 596.503 & 504.
Secretary of State Rex Tillerson indicated that, because existing US laws and regulations already impose substantial limitations on interactions between the United States and North Korea, the “practical effects” of state sponsor of terrorism status “may be limited.” The designation may have symbolic significance, however. North Korea was previously designated a state sponsor of terrorism in 1987, following the bombing of a Korean Air flight that killed the 115 passengers on board. The Bush Administration rescinded North Korea’s previous state sponsor of terrorism designation in 2008 as part of a policy initiative to encourage North Korea’s de-nuclearization. At the time, the DPRK government viewed removal from the list as an important step in improving bilateral relations. Thus, it may see this re-designation as provocative or escalatory.
In explaining the designation, President Trump and Secretary Tillerson referenced North Korean involvement in “assassinations on foreign soil.” This reference likely included the assassination in Malaysia earlier this year of Kim Jong-nam, North Korean Supreme Leader Kim Jong-un’s half-brother.  President Trump also mentioned the 2017 death of Otto Warmbier, the American college student who was arrested in North Korea and later died, soon after his release to the US, after suffering a traumatic injury or illness while being detained, although this incident was unlikely considered an “act of international terrorism” under the relevant statutes.
Sanctions Designations
On November 21, 2017, OFAC imposed new sanctions against one individual, 13 entities, and 20 vessels operating in or with ties to North Korea, all of which are listed below. The sanctions were imposed under Executive Order 13810 (issued in September 2017) and Executive Order 13722 (issued in March 2016).  See our previous advisory for a discussion of existing sanctions.
As a result of these designations, the sanctioned persons are listed as Specially Designated Nationals (SDNs), meaning that all US persons worldwide are required to freeze all assets of these SDNs in their possession or control, and are prohibited from engaging in practically all transactions and dealings with such persons. Furthermore, non-US persons can be subject to secondary sanctions for providing significant support to such persons or facilitating significant financial transactions on behalf of such persons.
Chinese Trading Companies and Individual
OFAC designated four Chinese entities and a Chinese individual involved in trade with North Korea, as follows:
  – Dandong Kehua Economy & Trade Co., Ltd.
  – Dandong Xianghe Trading Co., Ltd.
  – Dandong Hongda Trade
  – Dandong Dongyuan Industrial Co., Ltd.
  – Sun Sidong
OFAC stated that these companies and Mr. Sidong cumulatively exported approximately $678 million worth of goods to North Korea and imported more than $100 million worth of goods from North Korea. None of these sanctioned firms are publicly traded. The focus on Chinese entities is notable as China is reported to be North Korea’s channel to the international market.
North Korean Shipping and Trading Companies and Vessels
OFAC identified the following entities as “agencies, instrumentalities, or controlled entities of the Government of North Korea,” and subject to sanctions pursuant to Executive Order 13722:
  – Maritime Administration of the Democratic People’s Republic of Korea (DPRK)
  – Ministry of Land and Maritime Transportation of the DPRK
It also designated the following shipping and trading companies, and blocked 20 of their vessels:
  – Korea Rungrado Shipping Company and its vessels Pu Hung 1, Rung Ra Do, and Yang Gak Do
  – Korea Rungrado Ryongak Trading and its vessels Rung Ra 1 and Rung Ra 2
  – Yusong Shipping Company and its vessels Won San 2, Za Ryok 2, 7-28, Yu Song 12, and Yu Song 7
  – Dawn Marine Management Co. Ltd and its vessels Jang Gyong, Kum Song 3, Kum Song 5, Kum Song 7, and Kum Un San 3
  – Korea Daebong Shipping Company and its vessel Rak Rang
  – Korea Kumbyol Trading Company and its vessels Kang Song 1, Ku Bong Ryong, So Baek San, and Rye Song Gang 1
In its press release, OFAC shared four photos of a “recent attempt by Korea Kumbyol Trading Company’s vessel RYE SONG GANG 1 to conduct a ship-to-ship transfer, possibly of oil, in an effort to evade sanctions,” supporting its decision to impose sanctions against these entities. 
North Korean Overseas Labor Revenue
OFAC designated the following entity, pursuant to Executive Order 13722, for “having engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea:”
  – Korea South-South Cooperation Corporation
The Treasury Department’s notice indicated that Korea South-South Cooperation Corporation has operated in China, Russia, Cambodia, and Poland.
Although the designation of North Korea as a state sponsor of terrorism is likely to have little practical effect, it is another sign of the deepening rift between the United States and North Korea and the isolation of North Korea from the global community. The designations of persons under various North Korea sanctions authorities indicate that the Trump Administration will continue to use these tools vigorously to impose new designations, and underscores the risk for non-US persons that engage with North Korea.

Although the President and Secretary Tillerson both stated that North Korea would be designated as a state sponsor of terrorism, the State Department has not yet updated its website and no Federal Registrar notice has been issued. These materials should be updated and released in the coming days.

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S.S. Rana & Co: “India: Government Amends Arms Rules to Boost ‘Make in India'”

The Ministry of Home Affairs 
(hereinafter referred to as the “MHA”) has amended the Arms Rules, 2016 
(hereinafter referred to as the “Parent Rules) vide notification G.S.R. 1342(E) dated October 27, 2017, and has subsequently brought into force the Arms (Amendment) Rules, 2017 
(hereinafter referred to as the “Amendment Rules). [FN/1] The Amendment Rules have been liberalized to boost “Make in India” manufacturing policy of the Government as well as to promote employment generation in the field of manufacturing of arms and ammunition.
Applicability of the Amendment Rules
The Arms Rules, 2016, have been amended to define ”
existing manufacturers” to mean any manufacturer holding manufacturing license under the Arms Rules, 1962 or under the Industrial Development (Regulation) Act, 1951. Therefore, the Amendment Rules shall now apply to licenses granted by MHA for small arms & ammunition and licenses granted by Department of Industrial Policy and Promotion, under powers delegated to them, for tanks and other armored fighting vehicles, defence aircrafts, space crafts, warships of all kinds, arms and ammunition and allied items of defence equipment other than small arms.
Validity of Licenses
The Amendment Rules now state that licenses granted to licensee companies for manufacture of arms are now valid for life-time of the company.  The requirement of renewal of the license after every 5 years under Rule 54 (2) of the Parent Rules has been done away with.
 However, the life-time validity of the license is subject to the following conditions:
  – The licensee shall be required to setup the facility for manufacture or proof test of arms and/or ammunition, recruit technical and administrative staff, develop and proof test proto-types of arms and ammunition, conduct trial runs and any other activity related to the setting up of the facility for the manufacture or proof-test of arms and ammunition, within a period of seven years from the date of grant of a licence
  – The licensing authority may extend the period of seven years by a further period of three years, on the basis of a written representation received from the licensee.
  – If during the period of seven years or the extended period of three years, the licensee fails to setup the manufacturing or proof-test facility or is unable to take other operating steps required for starting commercial production, the licence shall be suspended or revoked.
Sale and export of small arms and light weapons
The Parent Rules had prescribed that small arms and light weapons produced by manufacturers would be sold to the Central Government or the State Governments with the prior approval of MHA. However, this condition has been done away in the Amendment Rules. However, the rules with respect to export of small arms and light weapons remains the same, i.e., they may be allowed for export subject to the approval of MHA in consultation with the Ministry of External Affairs, Ministry of Defence and Ministry of Commerce, on a case to case basis.
Enhanced production
The Amendment Rules have introduced a new provision with respect to enhanced annual production of firearms and ammunitions by a licensee company, wherein licensee companies will be permitted to have enhanced production capacity up to 15% of the quantity approved under licence by giving only prior intimation to the licensing authority in this regard.
License Fees

The licence fee for manufacture of arms has been reduced significantly. The previous licence fee was INR 500 per firearm which added up to very large sums and was a deterrent to seeking manufacturing licenses. The licence fee will now range from INR 5,000 to the maximum of INR
50,000. Further, the fee for manufacturing licence shall be payable at the time of grant of license rather than at the time of application.
The Amendment Rules have been relaxed considerably to encourage manufacturing of arms. The provisions of doing away with renewal of licence every five years, allowing increase in capacity up to 15 % without prior permission and introducing a one-time licence fee is envisaged to encourage investment in the manufacturing of arms and ammunition and weapon systems in the country, and hence will generate more employment in this field. The liberalized Rules are expected to encourage the manufacturing activity and facilitate availability of world class weapons to meet the requirement of Armed Forces and Police Forces in sync with country’s defence indigenization programme. [FN/2]

  [FN/1] See

  [FN/2] See here

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S.T. Boyce, C.D. Kaniecki & S.L. Rafferty: “U.S. Government Takes Steps Toward Implementation of Sanctions on Russia”

Jones Day, White Paper of Nov 2017.)
* Authors: Sean T. Boyce, Esq., sboyce@jonesday.com; Chase D. Kaniecki, Esq., ckaniecki@jonesday.com; and Sara L. Rafferty, Esq., srafferty@jonesday.com.  All of Jones Day, Dubai and Washington DC, respectively. 
The United States has taken significant steps toward fully implementing the sanctions imposed on Russia pursuant to the Countering America’s Adversaries Through Sanctions Act of 2017, which codifies and strengthens certain existing sanctions on Russia.
Although the Act was enacted in August 2017, the full scope of the sanctions it imposes on Russia recently have come into greater focus with issuance of formal guidance from the U.S. Department of the Treasury’s Office of Foreign Assets Control and the U.S. Department of State. U.S. and non-U.S. companies and financial institutions should continue to review their business activities involving Russia to ensure ongoing compliance with applicable U.S. sanctions.
Over the past few weeks and, most significantly, at the end of October, the United States has taken significant steps toward fully implementing the sanctions imposed on Russia pursuant to the Countering America’s Adversaries Through Sanctions Act of 2017, P.L. 115-44 (“CAATSA”). As we previously reported here, CAATSA codifies and strengthens certain existing sanctions on Russia and imposes an array of new sanctions with extraterritorial effect-or “secondary sanctions”-targeting certain categories of transactions, involving, among other things, the Russian energy, intelligence, and defense sectors, persons that violate sanctions on Russia and human rights abusers, and the privatization of Russian state-owned assets.
Although CAATSA was enacted in early August 2017, the full scope of the sanctions it imposes on Russia have come into greater focus in the past weeks with issuance of formal guidance from the U.S. government agencies responsible for administering and enforcing these new measures-namely, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of State (“State”).
Below, we explore the recently implemented provisions of CAATSA and summarize the key guidance provided by OFAC and State regarding those provisions.
Sectoral Sanctions
Since the inception of the sanctions program targeting Russia, the United States has maintained so-called “sectoral sanctions” targeting certain transactions involving Russia’s energy, defense, and finance sectors. Parties subject to those sanctions are designated on the Sectoral Sanctions Identifications List (“SSI List”) maintained by OFAC. Prior to CAATSA, sectoral sanctions were implemented through four directives issued pursuant to Executive Order 13662, each of which imposed varying restrictions on designated persons. As we previously reported, CAATSA, through Section 223, codified these directives and, more significantly, strengthened the restrictions imposed by three of the directives. Revised versions of the three directives, which were amended in accordance with Section 223 of the CAATSA, have now been published by OFAC. Also, since the beginning of October, OFAC has progressively issued guidance regarding the application and effective date for these strengthened sectoral sanctions.
First, on September 29, 2017, OFAC issued, for the third time, revised versions of Directives 1 and 2, which, variously, prohibit U.S. persons from engaging in or facilitating certain dealings involving debt or equity issued by designated persons. With implementation of these revised directives on November 28, 2017, U.S. persons will face increasingly restrictive prohibitions on dealing in debt and/or equity issued by designated per- sons based on date of issuance and tenor. Accordingly, U.S. persons should carefully review any dealings that trigger the restrictions imposed by these directives in advance of implementation at the end of November.
Second, on October 31, 2017, OFAC issued a revised version of, and guidance regarding CAATSA’s modifications to, Directive 4. Through the guidance issued by OFAC, which was in the form of frequently asked questions (“FAQs”), OFAC clarified that the amended version of Directive 4 prohibits certain transactions with designated persons in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia or in maritime area claimed by Russia and extending from its territory, and that involve any person determined to be subject to Directive 4, but also any such projects that meet the following criteria: (i) are initiated on or after January 29, 2018; (ii) have the potential to produce oil in any location; and (iii) any person determined to be subject to Directive 4 either has a 33 percent or greater ownership interest in the project or owns a majority of the voting interests in the project. As a result, the amended version of Directive 4 significantly expands the geographic scope of the prohibitions; although it still does not apply to projects that only have the potential to produce natural gas.
Finally, Section 223 of CAATSA expressly reinforces OFAC’s authority, as set out in Executive Order 13662, to designate state-owned entities operating in the railway, mining, and metals sectors pursuant to sectoral or blocking sanctions. OFAC has, however, noted that this provision does not require the imposition of sanctions and implied that, at this point, it does not intend to impose any sanctions on persons operating in those sectors.
Secondary Sanctions
Pursuant to CAATSA, the United States has imposed an array of sanctions measures with extraterritorial effect-so-called “secondary sanctions-intended-similar to the secondary sanctions implemented in respect of Iran-to discourage foreign persons from engaging in certain types of activities involving Russia. Although discretionary secondary sanctions on Russia were introduced by the Ukraine Freedom Support Act of 2014, P.L. 113-272 (“UFSA”) (but never enforced), CAATSA marks an expansion of the approach in respect of Russia and, accordingly, may have substantial impact on the business activities and decisions of foreign companies.
At the end of October, OFAC and State issued, for the first time, guidance regarding certain of these secondary sanctions, bringing their potential application into greater focus.
Financial Institutions. Pursuant to Section 226 of CAATSA (which amends Section 5 of UFSA), the United States has strengthened its as-yet unused secondary sanctions targeting Russia’s financial sector and imposed restrictions similar to those implemented in respect of Iran through the Iranian Financial Sanctions Regulation, 31 C.F.R. Part 561 (“IFSR”). Specifically, foreign financial institutions are now subject to the mandatory (rather than discretionary) imposition of sanctions if they are determined to have knowingly engaged in or facilitated significant transactions involving (i) certain defense- and energy-related activities or (ii) certain Russian parties, including parties designated on OFAC’s list of Specially Designated Nationals and Blocked Persons pursuant to Ukraine-related sanctions authorities.
In keeping with its practice in other sanctions programs, OFAC has indicated that, for purposes of this and other CAATSA pro- visions, it will broadly interpret the terms “facilitate” and “financial transaction,” including, in the case of the latter, to capture most financial transactions. However, as has been the case for the IFSR, OFAC will consider the totality of the facts and circumstances in determining whether a transaction is “significant,” including:
  – The size, number, and frequency of the transactions;
  – The nature of the transactions;
  – The level of awareness of management and whether the
transactions are part of a pattern of conduct;
  – The nexus between the transactions and a sanctioned
  – The impact of the transactions on sanctions objectives;
  – Use of deceptive practices; and
  – Any other factors deemed relevant on a case-by-case basis.
Moreover, notwithstanding these factors, foreign financial institutions will not be subject to the imposition of sanctions solely on the basis of knowingly facilitating significant financial trans- actions on behalf of persons designated on the SSI List.
In addition to being subject to restrictions on opening and maintaining correspondent accounts or payable-through accounts in the United States, any foreign financial institutions sanctioned pursuant to Section 226 of CAATSA will be identified on a new list, which will be established and maintained by OFAC.
Energy Sector. Pursuant to CAATSA, the United States has implemented two significant secondary sanctions measures in respect of Russia’s energy sector, which, based on State’s recent guidance, appear designed to extend existing U.S. sanctions and export controls on Russia’s energy sector to foreign persons.
First, pursuant to Section 225 of CAATSA (which amends Section 4 of UFSA), the United States has, in effect, extended the prohibitions of Directive 4 to foreign persons. Specifically, pursuant to Section 225, foreign persons are now subject to the imposition of mandatory sanctions if, on or after September 1, 2017, they knowingly make a significant investment in a “special Russian crude oil project,” which is defined as any project intended to extract crude oil from: (i) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (ii) Russian Artic offshore locations; or (iii) shale formations located in Russia. Pursuant to State’s October 31, 2017, guidance, an investment may include arrangements where goods or services are provided in exchange for equity in an enterprise or rights to a share of the revenue or profits of an enterprise. Moreover, similar to OFAC’s approach, an investment will be considered “significant” for purposes of Section 225 of CAATSA based on a totality of the circumstances, which will be assessed on a case-by-case basis and consider factors such as the nature and magnitude of the investment and the significance of the investment to U.S. national security and foreign policy interests (including the possibility of an adverse impact on these interests). Notably, an investment will not be considered “significant” if U.S. persons would not require specific licenses from OFAC to make or participate in it, which complements OFAC’s approach to implementation of Directive 4.
Second, pursuant to Section 232 of CAATSA, the United States has implemented discretionary sanctions that appear to expand,
albeit narrowly, on U.S. efforts to restrict Russia’s energy exports. Specifically, Section 232 allows for the imposition of discretionary sanctions on any person that knowingly engages in certain transactions related to the construction of energy export pipelines. State has indicated that implementation of this provision will focus on energy export pipelines that originate in the Russian Federation and transport hydrocarbons across an inter- national land or maritime border for delivery to another country. Implementation will not, however, focus on pipelines that originate outside Russia and merely transit through Russian territory. Further, the State guidance clarifies that, for the purposes of these sanctions, a project is considered to have been initiated only when a contract for the project is signed. As a result, neither investments and loan agreements made prior to August 2, 2017, nor investments or other activities related to the standard repair and maintenance of existing pipelines will be sanctionable. More significantly, State has indicated that the intent of this provision is “to impose costs on Russia for its malign behavior, such as in response to aggressive actions against” the United States and its allies and partners. Accordingly, the United States will work, in implementing sanctions under this provision, with the European Union to “promote energy security through developing diversified and liberalized energy markets that provide diversified sources, suppliers, and routes.”
Intelligence and Defense Sectors. Section 231 of the CAATSA extends existing U.S. efforts to isolate Russia’s intelligence and defense apparatus. Specifically, pursuant to Section 231, all per- sons are subject to the imposition of mandatory sanctions if they knowingly engage in significant transactions with persons that are part of, or operating for or on behalf of, the Russian defense and intelligence sectors. As noted above, State will determine whether a transaction is “significant” for the purposes of this provision based a totality of the facts and circumstances. However, consistent with general licenses issued by OFAC, State has indicated that a transaction will generally not be considered “significant” for purposes of Section 231 if it: (i) relates to goods or services with purely civilian end-uses and/or civilian end- users, and does not involve entities in the intelligence sector; or (ii) is necessary to comply with rules, regulations, actions, or investigations administered by or involving the Federal Security Service, including rules and regulations for the importation, distribution, or use of information technology products in the Russia and the payment of any fees to the Federal Security Service for such licenses, permits, certification, or notifications.
On October 27, 2017, State published a long-expected and delayed
list of persons that are part of, or operating for or on behalf of, the Russian defense and intelligence sectors, some of whom have already been sanctioned under other U.S. sanctions authorities. According to State, initial implementation of Section 231 is expected to focus on significant transactions of a defense or intelligence nature with these listed persons, and will only begin on or after January 29, 2018.
Privatization of State-Owned Assets and Dealings with Designated Persons. Finally, OFAC has provided hoped-for guidance regarding the application of CAATSA’s two relatively unique and potentially broadest provisions.
First, OFAC has provided some focus to the potential implications of CAATSA’s sanctions in respect of the privatization of Russia state-owned assets. Specifically, Section 233 requires the mandatory imposition of sanctions on any person that, with actual knowledge, makes or facilitates an investment over certain monetary thresholds that directly and significantly con- tributes to Russia’s ability to privatize state-owned assets in a manner that unjustly benefits officials of the Russian government or close associates or family members of those officials. As elsewhere, OFAC will, for the purposes of this provision, broadly interpret the scope of applicable investments and “facilitation.” Nevertheless, OFAC’s guidance may indicate that enforcement of the provision will be relatively focused and require a substantial burden of proof. Specifically, OFAC’s interpretations of other key terms-namely, “unjust benefits” (which include activities, such as public corruption, that result in any direct or indirect advantage, value, or gain, whether the benefit is tangible or intangible, by specified persons) and “close associates” and “family members”-indicate that implementation of this provision may focus primarily on countering corruption, rather than privatization. Further, the use of an actual knowledge standard for this provision-as opposed to the knowingly standard employed in all other CAATSA provisions-appears to indicate that a higher burden of proof will be required to impose sanctions; although it remains unclear how the standard will be applied in practice.
Second, OFAC provided greater clarity regarding the potential imposition of sanctions pursuant to Section 228 of CAATSA on foreign persons that knowingly (i) materially violate, attempt to violate, conspire to violate, or cause a violation of U.S. sanctions or (ii) facilitate significant transactions, including deceptive or structured transactions, for or on behalf of any person subject to Russia sanctions or their immediate family members. While, as elsewhere, OFAC will broadly interpret the scope of sanctionable “facilitation,” OFAC has indicated that there will be limitations on its interpretation of other key terms. In particular, OFAC has indicated that it will interpret the term “materially violate” to refer only to “egregious” violations of U.S. sanctions. Further, while OFAC will, as elsewhere, assess whether a transaction is “significant” based on a totality of the facts and circumstances, in consideration of its standard factors, transactions will not generally be considered significant where: (i) U.S. persons would not require a license to participate; and/or (ii) they merely involve a person designated on the SSI List, in the absence of deceptive practices. Nevertheless, as OFAC’s assessment of significance will be assessed based on a totality of the circumstances, caution will be warranted under all circumstances.
Looking Ahead
In light of the recent guidance from OFAC and State, U.S. and non-U.S. companies and financial institutions should continue to review their business activities involving Russia to ensure ongoing compliance with applicable U.S. sanctions and update or refine their sanctions compliance policies and procedures to account for these developments. Jones Day will continue to monitor and report U.S. efforts to implement and impose sanctions under the CAATSA. 

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Gary Stanley’s ECR Tip of the Day

* Author: Gary Stanley, Esq., Global Legal Services, PC, (202) 352-3059,
EAR License Exception TMP can be used for remote access to U.S. servers by a U.S. person, or a foreign person employee of a U.S. person traveling or on temporary assignment abroad, provided the terms of EAR 740.9(a)(3) are met, i.e.:
  – Foreign persons may only export, reexport, transfer (in country) or receive such “technology” as they are authorized to receive through a license, license exception other than TMP, or because no license is required.

   – “Technology” exported, reexported, or transferred under this provision of License Exception TMP may only be possessed or used by a U.S. person or authorized foreign person. Sufficient security precautions must be taken to prevent the unauthorized release of the “technology.” Such security precautions may include encryption of the “technology,” the use of secure network connections, such as Virtual Private Networks, the use of passwords or other access restrictions on the electronic device or media on which the “technology” is stored, and the use of firewalls and other network security measures to prevent unauthorized access.
   – The individual is an employee of the U.S. Government or is directly employed by a U.S. person and not, 
e.g., by a foreign subsidiary.

   – “Technology” authorized under this exception may not be used for foreign production purposes or for technical assistance unless authorized through a license or license exception other than TMP.

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. Bartlett’s Unfamiliar Quotations

(Source: Editor)

* Louisa May Alcott (29 Nov 1832-6 March 1888; was an American novelist and poet best known as the author of the novel Little Women (1868) and its sequels Little Men (1871) and Jo’s Boys (1886).
  – “I’m not afraid of storms, for I’m learning how to sail my ship.”
* John Ray (29 Nov 1627 – 17 Jan 1705; was an English naturalist widely regarded as one of the earliest of the English parson-naturalists.)
  – “Beauty is power; a smile is its sword.”

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EN_a215. 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: 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 


  – Last Amendment:
9 Nov 2017: 82 FR 51983-51986: Amendments to Implement United States Policy Toward Cuba


FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR): 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders

  – Last Amendment:
13 Nov 2017: 82 FR 52209-52210: Removal of Côte d’Ivoire Sanctions Regulations


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, 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: 20 Oct 2017: 
Harmonized System Update 1707, c
27,291 ABI records and 5,164 harmonized tariff records.
  – HTS codes for AES are available 
  – HTS codes that are not valid for AES are available 
  – Last Amendment: 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: 19 Nov 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 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 website. 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 Daily Bugle Top Stories” posted here.

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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 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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