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18-0110 Wednesday “Daily Bugle”

18-0110 Wednesday “Daily Bugle”

Wednesday, 10 January 2018

TOP
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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.

[No items of interest noted today.]

  1. Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/Census: “Employer Identification Numbers: Guidance for Exporting Goods from the United States”
  3. Commerce/BIS: (No new postings.)
  4. CRS Releases Report on the Export Control Reform Initative
  5. State/DDTC: (No new postings.)
  1. Fast Company: “What’s on Your iPhone? Device Searches by U.S. Border Officials are Skyrocketing”
  2. The Globe and Mail: “Court Rejects Ottawa’s Bid to Halt Saudi Arms Deal Lawsuit”
  3. The New York Times: “Three Sentenced in Stolen Military Equipment Scheme”
  4. Reuters: “Canada Takes U.S. to WTO, U.S. Says Case Helps China”
  5. Ukraine News: “German Company Fined for Violating Sanctions Against Russia”
  1. A. Kerr: “Mergers & Acquisitions: Provoking Thought and Action in Customs and Trade-focused Due Diligence”
  2. The Export Compliance Journal: “Export Compliance in 2017-the Year the Feds Upped Their Game”
  3. M. Volkov: “Time to Test and Audit Your Compliance Program”
  4. N. Bolin & M.D. Sitkowski: “Export Controls and OFAC Sanctions 2017 Update and 2018 Forecast: Key Takeaways”
  5. Gary Stanley’s ECR Tip of the Day
  1. Full Circle Compliance and the Netherlands Defense Academy Will Present “Winter School at the Castle”, 5-9 Feb 2018 in Breda, the Netherlands
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Amendments: ATF (15 Jan 2016), Customs (8 Dec 2017), DOD/NISPOM (18 May 2016), EAR (8 Jan 2018), FACR/OFAC (28 Dec 2017), FTR (20 Sep 2017), HTSUS (1 Jan 2018), ITAR (3 Jan 2018) 
  3. Weekly Highlights of the Daily Bugle Top Stories 

EXIMITEMS FROM TODAY’S FEDERAL REGISTER

EXIM_a1

 [No items of interest noted today.]

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OGSOTHER GOVERNMENT SOURCES

OGS_a11. Items Scheduled for Publication in Future Federal Register Editions
(Source: Federal Register

* Commerce/BIS; NOTICES; Meetings: Information Systems Technical Advisory Committee [Publication Date: 11 Jan 2018.]
 
* Treasury/OFAC; NOTICES; Blocking or Unblocking of Persons and Properties [Publication Date: 11 Jan 2018.]

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OGS_a22.

Commerce/Census: “Employer Identification Numbers: Guidance for Exporting Goods from the United States”

(Source:
Global Reach Blog
, 10 Jan 2018.)
 
Exporting goods from the United States to a foreign country may require having Electronic Export Information (EEI) in the Automated Commercial Environment (ACE). If filing is required for your shipment, an Employer Identification Number (EIN) issued by the U.S. Department of Treasury, Internal Revenue Service (IRS) is needed prior to exporting.
 
What is an EIN?
 
An EIN is a nine-digit numerical code typically used by the IRS to identify a business entity. EINs are also used by individuals exporting goods from the United States when applying for an ACE exporter account. Individuals exporting from the United States must have an EIN even if they do not own a business. Whether you are exporting on behalf of a U.S. company or simply shipping a personal vehicle or gift to a family member, the requirement to obtain an EIN remains the same.
 
Why do you need an EIN?
 
The Office of Management and Budget mandated the U.S. Census Bureau eliminate the collection of the Social Security Number (SSN) for EEI filing purposes. This rule was implemented to ensure that a U.S. citizen’s or resident’s SSN is protected in accordance with the Privacy Act of 1974, Title 5, United States Code, Section 552a. The Census Bureau complied with this federal law by eliminating the use of the SSN as of December 3, 2009.
How do you obtain an EIN?
 
An individual can apply for an EIN by phone, fax, mail and online. The approximate timeframes for receiving an EIN are as follows:
 
  – Online or by telephone: Approximately 15 minutes.
  – Fax: Four business days.
  – Mail: Four weeks.
To access step-by-step instructions to apply for an EIN, go to <
www.census.gov/foreign-trade/regulations/trb_obtaining_an_ein.pdf
>. 


For additional information on applying for an EIN, go to <
www.irs.gov/businesses/small-businesses-self-employed/online-ein-frequently-asked-questions
>. 


For questions about obtaining an EIN, please contact the EIN Help Line at 1-800-829-4933.

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OGS_a44. CRS Releases Report on the Export Control Reform Initiative

(Source: CRS, 8 Jan 2018.)
 
The Congressional Research Service (CRS) has released a 28-page report, entitled “The U.S. Export Control System and the Export Control Reform Initiative”. The report is written by Ian F. Ferguson, specialist in International Trade and Finance, and Paul K. Kerr, specialist in Nonproliferation. The report’s summary is included below.
 
Summary
 
Difficulty with striking an appropriate balance between national security and export competitiveness has made the subject of export controls controversial for decades. Through the Arms Export Control Act (AECA), the International Emergency Economic Powers Act (IEEPA), and other authorities, the United States restricts the export of defense items or munitions; dual-use goods and technology; certain nuclear materials and technology; and items that would assist in the proliferation of nuclear, chemical, and biological weapons or the missile technology used to deliver them. U.S. export controls are also used to restrict exports to certain countries on which the United States imposes economic sanctions. The Export Administration Act (EAA) legislated dual-use controls, but it has expired and such controls are presently maintained under IEEPA authorities. 
 
The U.S. export control system is diffused among several different licensing and enforcement agencies. Exports of dual-use goods and technologies-as well as some military items-are licensed by the Department of Commerce, munitions are licensed by the Department of State, and restrictions on exports based on U.S. sanctions are administered by the U.S. Department of the Treasury. Administrative enforcement of export controls is conducted by these agencies, while criminal enforcement is carried out by the Department of Commerce, units of the Department of Homeland Security, and the Department of Justice.
 
Aspects of the U.S. export control system have long been criticized by exporters, non-proliferation advocates, allies, and other stakeholders as being too rigorous, insufficiently rigorous, cumbersome, obsolete, inefficient, or combinations of these descriptions. In August 2009, the Barack Obama Administration launched a comprehensive review of the U.S. export control system. In April 2010, then-Defense Secretary Robert M. Gates proposed an outline of a new system based on four singularities: 
 
  – a single export control licensing agency for dual-use, munitions exports, and Treasury-administered embargoes,
  – a unified control list,
  – a single primary enforcement coordination agency, and
  – a single integrated information technology (IT) system.

The rationalization of the two control lists was the Obama Administration’s focus. The Administration made no specific proposals concerning the single licensing agency, although the Administration implemented some elements of a future single system, such as a consolidated screening list and harmonization of certain licensing policies.
 
In considering the future of the U.S. export control system, Congress may weigh the merits of a unified export control system-a chief goal of President Obama’s proposal-or the continuation of the present bifurcated system by reauthorizing the EAA or enacting replacement legislation. In doing so, Congress may debate the record of the present dual-use system maintained by emergency authority, the aims and effectiveness of the present non-proliferation control regimes, the maintenance of the defense industrial base, and the balance between maintaining economic competitiveness and preserving national security.

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NWSNEWS

NWS_a1
6. Fast Company: “What’s on Your iPhone? Device Searches by U.S. Border Officials are Skyrocketing”

(Source: Fast Company, 9 Jan 2018.)
 
International travelers headed to the U.S. should be prepared to hand over their smartphones. The U.S. Customs and Border Patrol conducted 30,000 searches of international travellers’ electronic devices in 2017, a 50% increase, USA Today reports. The agency claims that it only searches through the phones and laptops of a small fraction of people traveling and that those searches have turned up evidence on terrorism, child pornography, violations of export controls and visa fraud.
On January 4, CBP issued 
new rules
 on electronic device border searches that clarify its search policy, but many people consider the searches to be both contentious and 
possibly unconstitutional
 as they let federal agents rifle through phones and laptops without warrants, probable cause, or anything other than a burning desire to see someone’s Facebook status. The Electronic Frontier Foundation, which views device searches as “exceptionally intrusive,” has filed suit against these 
electronic border searches
.

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NWS_a2
7. The Globe and Mail: “Court Rejects Ottawa’s Bid to Halt Saudi Arms Deal Lawsuit”

(Source: The Globe and Mail, 9 Jan 2018.) [Excerpts.]
 
A Federal Court judge has rejected the Trudeau government’s attempt to sink a fresh legal challenge of the $15-billion sale of weaponized armored vehicles to Saudi Arabia, saying evidence last summer showing Canadian-made machines being deployed in a Saudi neighborhood has breathed life into the matter.
 
This means a new lawsuit to block these arms exports will be allowed to proceed and Ottawa will be forced to shed light on what happened in the summer of 2017 when Canadian-made armored vehicles were filmed and photographed taking part in a fight between Riyadh and residents of the Saudi kingdom’s Eastern Province. …
 
The House of Saud’s use of Canadian fighting vehicles against its Shia population in eastern Saudi Arabia goes to the heart of a long-running controversy over whether the Trudeau government is violating Canada’s weapons export-control rules.
 
The rules call for restrictions on arms exports to countries with a “persistent record of serious violations of the human rights of their citizens.” Shipments are supposed to be blocked if there is a real risk the buyer could turn arms against its own population. … 

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NWS_a3
8. The New York Times: “Three Sentenced in Stolen Military Equipment Scheme”

(Source: The New York Times, 8 Jan 2018.)
 
A military equipment dealer who pleaded guilty to buying and selling stolen military equipment overseas has been sentenced to more than 3 ½ years in prison.
 
The Tennessean reports 42-year-old Cory Wilson was sentenced Monday in federal court in Nashville. In addition to the 44-month sentence, Wilson was ordered to pay $500,000 in restitution to the Army.
 
Two former soldiers, Michael Barlow and Kyle Heade, were also sentenced. Barlow was ordered to serve five years’ probation, and Heade 30 months in prison.
 
Eight people were involved in the plan to steal items from the large military installation along the Kentucky-Tennessee state line. Four were previously sentenced, and another man is set to be sentenced on Tuesday.

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NWS_a4
9. Reuters: “Canada Takes U.S. to WTO, U.S. Says Case Helps China”

(Source: Reuters, 10 Jan 2018.) [Excerpts.]
 
Canada has launched a wide-ranging trade complaint against the United States, the World Trade Organization said on Wednesday, in a dispute that Washington said would damage Canada’s own interests and play into China’s hands.
 
Canada’s complaint, challenging Washington’s use of anti-dumping and anti-subsidy duties, was based on almost 200 examples of alleged U.S. wrongdoing, almost all of them concerning other trading partners, such as China, India, Brazil and the European Union.
 
  “Canada’s new request for consultations at the WTO is a broad and ill-advised attack on the U.S. trade remedies system,” U.S. Trade Representative Robert Lighthizer said in a statement.
 
  “Even if Canada succeeded on these groundless claims, other countries would primarily benefit, not Canada,” he said. “Canada’s complaint is bad for Canada.”
 
The 32-page complaint faulted technical details of the U.S. trade rulebook, ranging from the treatment of export controls to the handling of split decisions at the six-member U.S. International Trade Commission.
 
Canada said U.S. procedures broke the WTO’s Anti-Dumping Agreement, the Agreement on Subsidies and Countervailing Measures, the General Agreement on Tariffs and Trade and the Understanding on Rules and Procedures Governing the Settlement of Disputes.
 
Anti-dumping and countervailing duties – punitive tariffs to restrict imports that are unfairly priced or subsidized in order to beat the competition – are a core component of Washington’s trade arsenal, and frequently used to defend U.S. interests.
 
For President Donald Trump, who has espoused an “America first” trade policy and the unraveling of multi-party trade agreements, those levers for managing individual U.S. trade relationships appear even more important than before.
 
Under WTO rules, the United States has 60 days to try to settle the complaint, or Canada, which sends 75 percent of its goods exports to the United States, could ask the WTO to adjudicate. … 

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NWS_a5
10. Ukraine News: “German Company Fined for Violating Sanctions Against Russia”

(Source: Ukraine News, 10 Jan 2018.)
 
Ulm-based company which exported dual-purpose equipment to Russia has been fined EUR 190,000, according to the Stuttgarter Nachrichten.
 
The equipment supplied to the Russian Federation could be used including for military purposes, Stuttgarter Nachrichten noted.
 
To export such equipment to the Russian Federation, the company had to receive a special permit, given the sanctions earlier imposed on Russia over its aggression against Ukraine. The company apparently went forward with their deal with the Russians despite restrictions in place.
 
  “The request for permission is usually denied if the political situation in the country where the cargo is supplied is not in line with Germany’s foreign and security policy, i.e. if a decision has been taken on embargoes or sanctions,” according to the German customs service.
 
The publication does not specify the name of the company and the kind of equipment delivered.
 
Customs officers learned about illegal exports as they were inspecting a spare part for one of the vehicles.
 
According to the publication, the equipment has already left EU borders without a proper permit. The German customs service suggested that the company had delivered the vehicles in advance in order to avoid contractual penalties. … 

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COMMCOMMENTARY

COMM_a01
11. A. Kerr: “Mergers & Acquisitions: Provoking Thought and Action in Customs and Trade-focused Due Diligence”

(Source: Mayer Brown LLP, 9 Jan 2018.)
 
* Author: Anthony Kerr, Esq., anthony.kerr@mayerbrown.com, Mayer Brown LLP, Singapore.
 
As we ring in a new year, you are probably looking forward to finalizing a potential merger, acquisition of joint venture target. You go through your checklist one last time and all looks great, you did your due diligence and everything looks good to go.
 
However, if the target company has manufacturing plants in customs controlled zones, is trading goods across borders, has a large footprint in several countries in Asia where laws and processes are not so transparent, and is trading goods using free trade agreements, don’t you want to ensure that any potential areas of exposure there are identified? Do you know the potential consequences that Customs could have on your new business if there is non-compliance?
 
In hindsight, including a Customs and Trade-focused due diligence in your checks of the target company is critical since a company cannot afford:
 
  – a customs investigation that brings a key manufacturing or distribution entity to a halt or at least a crawl if non-compliance is found;
  – disruption to supply chain through greater inspections at the border;
  – severe penalties for non-compliance or imprisonment or both;
  – possible seizure of goods;
  – possible criminal offence.
 
In addition, Customs and other Government trade enforcement agencies across Asia don’t care about the nature of the transaction, whether it is an asset purchase or a stock sale, or involving successor liability for all trade liabilities, including fines and penalties that will be attached to the buyer.
 
The purpose of international trade due diligence is, foremost, to identify existing or potential compliance problems with the laws that various customs authorities in each country enforce. This would include customs laws and regulations, sanctions, export controls or equivalent local legislation, environmental regulations, anti-corruption laws, and other lesser-known ones such as labelling and country of origin regulations.
 
From a pure customs and trade perspective, the term “caveat emptor”, “buyer beware”, most certainly applies when considering merger and acquisition (M&A), joint ventures (JV), and consolidation.
 
Intricate Web of Laws
 
An intricate web of laws, regulations and practices exists in many countries in Asia. There are regulations and laws that govern key aspects in the relationships between manufacturers, distributors, related suppliers, third-party suppliers, third-party service providers and the consumers. These regulations and laws also govern key aspects of the movement, manufacture, distribution, and use of products including raw materials and capital equipment.
 
In addition, in the last ten years customs authorities have progressively moved towards greater facilitation of the movement of goods and people across their borders. In doing so the onus for ensuring declarations to Customs are accurate, complete and authorized, and for full compliance with all Customs and related laws, moved totally to the importer-on-record.
 
Customs have also enhanced their investigative tools and one of those has been the sharing of information between revenue authorities within a country as well as Customs to Customs information sharing.
 
A key source of information for some Customs authorities comes from the implementation by direct tax revenue authorities of the Base Erosion and Profit Shifting (BEPS) Action items, which includes Action 13, documentation and reporting requirements.
 
These changes have been indirectly beneficial for some customs authorities. The information made available is quite substantive if the target company was required to submit full transfer pricing documentation. That would provide transparency to the total supply and value chains of any company and in a Merger or Acquisition, the target company.
 
We advocate that companies contemplating any M&A, JV, or consolidation seriously consider including a customs and trade due diligence as part of their normal due diligence.
 
The following are a selection of certain areas that would require some form of check:
 
 
Third-Party Service Providers: Customs brokers, logistics services providers, suppliers, buying and selling agents, all pose potential areas of exposure if the target company has not put in place sound selection, appointing and managing procedures.

  – Valuation of Product: Customs valuation where there are related party transactions is a key area of exposure. Ensuring all the relevant elements of value that need to be included in the declared value have been included. Ensuring that the correct method of value has been used as well. Items to consider are:
    (i) Royalties
    (ii) Assists (items/materials provided by the buyer to the manufacturer free of charge or at reduced costs for use in the manufacture of the finished goods)
    (iii) Related party transactions

  – Preferential Origin: Is the target company importing and/or exporting under any Free Trade Agreements? If yes, have they correctly applied the regional value rules or classification rules? If the products’ main local/regional content is profit, that may not be sustainable in a future customs audit, and that preference could be lost causing the goods to become subject to normal tariff duty rates.

  – Classification of Goods: Harmonized System (HS) classification of a good determines the import or export duty rate, whether it requires a license or permit, if there are other restrictions, or if it is prohibited. Hence, correct classification is essential.

  – Movement of raw materials within a country: Often a target company may have more than one manufacturing plants in a country or they may have unrelated contract manufacturers in that country. This may require the movement of semifinished components or product between plants. If these plants are within Free Trade Zones, then there are regulations in most countries governing that movement including the need to obtain prior approval.

  – Investment approvals and incentives: the target companies may have investment incentives covering capital equipment and plant, duty and VAT/GST/S.Tax relief incentives. Is the equipment still subject to the conditions of the incentives, has anything been moved and have proper approvals been sought?

  – Anti-dumping duties: Are any of the target company’s goods or materials subject to antidumping duties? These duties can exceed 30 percent, and can and are often missed at the time of import.

  – Document retention: The retention of documents for customs purposes is usually three to five years, and it is essential to ensure that the target company does in fact comply with its requirements. As a buyer, the lack of documentation can lead to potential penalties from customs. It also puts the buyer at a disadvantage should there be a customs audit covering that period. The buyer will not have records to use in their defense of any potential offence.

  – Practice vs. Law: In some countries, authorities have allowed some businesses to use processes to be operated which may differ from the law. These are practices and while they have tentative approval from the direct local customs office, they pose a potential risk for the buyer if there is a clamp down on practices.
 
Above mentioned are just a few of the many areas that would need to be considered when undertaking a due diligence for customs and trade.
 
Not being aware of customs issues at the time of an acquisition may result in serious consequences: it can potentially close that business in any country. Customs retains a lot of power, and in most Asian countries they are not afraid to use that. The fact that they can impose full border checks on the movement of your imports and exports, which will effectively bring your production to a crawl at best or a complete stop, should be further reason to consider this type of due diligence. Furthermore, Customs’ ability to detain without arrest for periods up to 30 days in some countries is another reason to ensure that you are fully aware of any potential issues before the Customs has spotted it. While each country’s Customs has different look-back periods, that right to review past records normally ranges between three to 10 years of past transactions.
 
Yet even with proper due diligence, buyers will want to ensure that seller indemnification covers all duties as well as fines and penalties, with a minimum five-year indemnification period.

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COMM_a2
12The Export Compliance Journal: “Export Compliance in 2017-the Year the Feds Upped Their Game”

(Source: The Export Compliance Journal, 9 Jan 2018.)
 
Looking back at 2017, there were the usual litany of people and companies convicted of violating export control laws. 
They included a Florida firm for shipping rifle scopes and night vision lenses to various countries using the ECCN EAR99; [FN/1] and a man from Texas for conspiring to illegally export radiation hardened integrated circuits to China and Russia by repackaging the controlled item and falsely declaring them as touch screen parts. [FN/2] Then there was the Singaporean who duped his U.S. suppliers into believing that the thousands of radio frequency modules he was buying were destined for end users in Singapore, when in fact they were exported to Iran, some of which were later found in unexploded improvised explosive devices in Iraq. [FN/3]
 
But the past year will also be remembered for something quite extraordinary in the compliance world-the largest civil penalty ever meted out in a Bureau of Industry and Security (BIS) Export Control case.
 
The 411 on ZTE
 
It involved China’s Zhiongxing Telecommunications Equipment Corp and ZTE Kangxun Telecommunications, together known as ZTE, which agreed to a penalty of US$1.19 billion for illegally shipping telecom equipment to Iran and North Korea in violation of the Export Administration Regulations (EAR), the Iranian Transactions and Sanctions Regulations (ITSR), and the International Emergency Economic Powers Act (IEEPA). [FN/4]
 
ZTE, it should be noted, is a China-headquartered multinational telecommunications equipment and systems company, with some 70,000 employees working in offices worldwide, including the United States and Europe.
 
ZTE’s breaches occurred between 2010 and 2016, with the conspirators forming a 13-member team who allegedly attempted to cover their tracks by destroying or concealing materials related to their illicit transactions on an ongoing basis, at times nightly.
 
Despite the best efforts of the gang of 13, U.S. authorities comprising the Bureau of Industry and Security, the U.S. Attorney’s Office for the Northern District of Texas, the Department of Justice Counterintelligence and Export Control Section, FBI, and the Department of Homeland Security were able to uncover what they described as “damning” evidence, even bringing to light the fact that the perpetrators had to sign a non-disclosure agreement (and who said honor among thieves was dead!).
 
The message is simple: circumventing the law under any circumstance is not a good idea.
 
For all the cases mentioned, the authorities stressed their commitment to continually root out export violators. The BIS release on the ZTE case summed up the sentiment best with the terse statement: “We are putting the world on notice. The games are over … Those who flout our economic sanctions and export control laws will not go unpunished.” [FN/5]
 
———-
  [FN/1] Florida Firm Fined $27 Million for Export Violations. News release. Bureau of Industry and Security, available here. Accessed January 8, 2018.
  [FN/2] Texas Man Pleads Guilty to Conspiring to Illegally Export Radiation Hardened Integrated Circuits to Russia and China. Press Release. U.S. Department of Justice, available here. Accessed January 8, 2018.
  [FN/3 Singapore Man Pleads Guilty to Plot Involving Illegal Exports of Radio Frequency Modules From the U.S. To Iran. Press release. U.S. Department of Justice, available here. Accessed January 9, 2018.
  [FN/4] ZTE Corporation Agrees to Plead Guilty and Pay Over $430.4 Million for Violating U.S. Sanctions by Sending U.S.-Origin Items to Iran. Press release. The United States Department of Justice, available here. Accessed January 8, 2018.
  [FN/5] Secretary of Commerce Wilbur L. Ross, Jr. Announces $1.19 Billion Penalty for Chinese Company’s Export Violations to Iran and North Korea. Press Release. U.S. Department of Commerce, available here. Accessed January 8, 2018.

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COMM_a3
13. M. Volkov: “Time to Test and Audit Your Compliance Program”

(Source: Volkov Law Group Blog, 9 Jan 2018. Reprinted by permission.)
 
* Author: Michael Volkov, Esq., Volkov Law Group, mvolkov@volkovlaw.com, 240-505-1992.  
 
We all enjoy citing government sources for guidance on an effective ethics and compliance program. Whether it is the United States Sentencing Guidelines, the Justice Department’s and SEC’s FCPA Guidance, Health and Human Services – Office of Inspector General, or the many other sources for guidance, companies have to test and audit their compliance programs to ensure that the program reflects the company’s changing constellation of risks and continuously improves.
 
As companies have scrambled to implement effective ethics and compliance programs, chief compliance officers understandably have devoted time and energy to building out compliance programs and controls. These basic tasks have included, just for example, updating risk assessments; adopting and revising compliance policies and controls; tailoring training to risks and specific audiences; adopting and implementing due diligence systems; updating and expanding internal investigations procedures and ensuring basic speak up culture messages are communicated throughout the organization. Even these tasks show that CCOs face a mountain of responsibilities and compliance tasks.
 
Government expectations for effective ethics and compliance programs are not standing still. To the contrary, prosecutors and regulators expect that the message of compliance has been heard and followed from the corporate boardroom, through the C-Suite and ultimately with the CCO. As a consequence, CCOs have a responsibility to act and address a significant responsibility – to test and audit the company’s ethics and compliance program, and report the results to senior management and the board of directors.
 
The board and senior management have a responsibility to oversee and monitor the company’s ethics and compliance program. To do so, they have to learn about the performance of the company’s compliance program. Such testing has to include objective measurements based on data as well as non-objective assessments of key compliance functions.
 
In order to test and audit a compliance program, a CCO should define the project and address key issues:
 
  – Time frame
  – Geographic areas
  – Culture measurements (and possible surveys)
  – Specific controls to conduct testing
  – Documents to review
  – Interviews (including focus groups)
  – Internal investigations sampling
  – Training program
 
I will discuss a few of these:
 
Culture Measurements
: A testing review of a compliance program has to include an assessment of a company’s culture. This is perhaps one of the two important areas to assess -a company’s culture and its overall compliance with its controls. A company with a positive ethical culture has its most important and effective control against violation of its code of conduct or laws. Further, a company with an ethical culture is likely to perform better over the long run than a company without a positive culture. For this reason, the assessment has to measure and report on the company’s overall culture.
 
A culture assessment provides an important baseline against which future testing and focused testing of specific regions, divisions, and products can be conducted.  A baseline culture assessment gives the company an important view on its overall values and whether those values are embraced and understood by the rank and file within the company.
 
Compliance Controls
: A meaningful testing program has to develop data and performance measurements for each of its controls. To accomplish this task, the CCO has to examine each compliance control, identify control requirements, develop sampling approaches and define review criteria for each control. A sampling approach is often the most effective way to test a compliance program given the sheer number of compliance transactions that can occur within a large organization. Based on a sampling strategy, the CCO has to review each sample transaction and apply a consistent standard.  In the end, a raw calculation can be computed for each control based on a sampling and analysis of relevant transactions.
 
I am often asked if a compliance department can conduct its own audits for fear of a conflict of interest. Assuming that a compliance function has sufficient resources to conduct the audit, there is no reason to prevent such a review so long as it is done transparently and fully documented. Obviously, if Internal Audit has the time and resources to conduct an assessment, a CCO can work closely with Internal Audit to develop a testing protocol. An independent test and audit process is also valuable as a means to ensure consistency and provide insights that reflect best practices and industry benchmarks.

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COMM_a4
14. N. Bolin & M.D. Sitkowski: “Export Controls and OFAC Sanctions 2017 Update and 2018 Forecast: Key Takeaways”

(Source: Drinker Biddle & Reath LLP, 3 Jan 2018.)
 
* Author: Nate Bolin, Esq., nate.bolin@dbr.com; Mollie D. Sitkowski, Esq., mollie.sitkowski@dbr.com. Both of Drinker Biddle & Reath LLP.
 
Nate Bolin and Mollie Sitkowski of Drinker Biddle’s Customs and International Trade Team presented a webinar at the close of the year titled “Export Controls and OFAC Sanctions Update.” The webinar addressed recent changes in the U.S. export and sanctions regime and highlighted some developments expected in 2018, including the following:
 
Changes to U.S. Economic Sanctions under the Countering America’s Adversaries Through Sanctions Act (CAATSA)
 
Signed into law on August 2, 2017, CAATSA made a number of changes to the U.S. sanctions programs on Russia, North Korea and Iran, which continue to be implemented by the U.S. State Department and the Treasury Department’s Office of Foreign Assets Control (OFAC).
 
  – Russia. CAATSA codified many of the substantive provisions of Obama-era Executive Orders and OFAC Directives that had implemented sanctions against certain individuals and entities and sectors of the Russian economy beginning in 2014. For example, CAATSA enacted into law prior OFAC directives (Directives 1 and 2) that prohibit persons subject to U.S. jurisdiction from transacting in or financing debt of certain Russian entities and – effective November 28, 2017 – significantly reduced the term of any remaining permissible debt transactions to as little as 14 days. CAATSA also expanded the scope of OFAC Directive 4 (which prohibits U.S. persons from providing or exporting goods, services or technology to certain energy projects owned or controlled by designated Russian individuals or entities) to make it applicable to projects outside Russia and to entities that are owned or controlled more than 33 percent by sanctioned persons.
 
At the same time, CAATSA reduced the president’s discretion to reduce or waive Russian sanctions and required him to impose secondary sanctions on certain cybercriminals, individuals found to be involved in corrupt practices in Russia, and individuals or entities found to be engaging in specific “significant transactions” with certain sectors of the Russian economy. In compliance with these provisions, in October 2017, the State Department published a list of entities and individuals associated with the Russian intelligence and defense industries with whom significant transactions are prohibited. The State Department and OFAC are expected to continue to update that and similar lists of sanctioned Russian individuals and entities in the months ahead.
 
  – North Korea. CAATSA expanded the already significant U.S. sanctions on transactions with North Korea by providing for secondary sanctions on individuals and entities that engage in certain transactions with North Korea and by requiring U.S. Customs and Border Protection to investigate and seize imported merchandise believed to have been produced by North Korean workers (wherever located) or from North Korean-origin inputs. Companies suspected of importing merchandise produced in whole or in part from those sources are now required to prove by “clear and convincing evidence” that their goods are “North Korea-free” or face seizure of their merchandise.
  – Iran. CAATSA’s passage and President Trump’s increased criticism of Iran’s record of compliance with the 2015 Joint Comprehensive Plan of Action (JCPOA) also marked a possible turning point in the U.S. sanctions policy on Iran. CAATSA enhanced existing sanctions with respect to Iran by requiring the president to impose sanctions on persons contributing to Iran’s ballistic missile or weapons of mass destruction programs, increasing sanctions on individuals and entities supporting Iran’s armed forces, and codifying the designation of the Islamic Revolutionary Guard Corps as a sanctioned entity. In October, President Trump declined to certify Iran’s compliance with certain provisions of the JCPOA and threatened to resume secondary sanctions. His next opportunity to do so is January 12, 2018, when he must decide whether to continue certain secondary sanction waivers issued by President Obama. The current unrest in Iran, President Trump’s recent statements about protests there, and new legislation that seeks to sanction Iran for its ballistic missile development activities only add to the uncertainty surrounding the future direction of U.S. sanctions on Iran.
 
Other Changes to U.S. Sanctions Programs outside of CAATSA
 
  – Sudan. On October 12, 2017, OFAC removed comprehensive U.S. sanctions on Sudan that had been suspended earlier in the year. Many transactions involving items on the Commerce Control List and certain transactions with sanctioned Sudanese individuals and entities remain restricted.
  – Venezuela. On August 24, 2017, OFAC increased sanctions on Venezuela, prohibiting transactions involving certain debt, bonds and dividends of the Venezuelan government and Petroleos de Venezuela, S.A. and putting in place other restrictions on specific Venezuelan individuals and entities.
  – Cuba. Some aspects of the Obama administration’s liberalization of U.S. sanctions on Cuba were rescinded or modified by the Trump administration in 2017. On November 9, 2017, OFAC revised the Cuban Assets Control Regulations to prohibit individual travel to Cuba. All travel to Cuba by U.S. persons must now be conducted under the auspices of authorized entities, educational institutions and non-governmental organizations. The license exception “Support for the Cuban People” remains in place but has been consolidated. Finally, the Trump administration prohibited transactions with entities on the State Department’s recently published list of entities associated with the Cuban government and communist party.
 
Changes to U.S. Export Controls
 
During 2017, the Bureau of Industry and Security and the Directorate of Defense Trade Controls continued to revise and review U.S. export control regulations as part of the “Export Control Reform” process that was launched in 2009 by President Obama. Among the changes on the horizon for 2018 are a wholesale revision of the International Traffic in Arms Regulations (ITAR); updates to the list of items controlled under the U.S. Munitions List and Commerce Control List; and the removal of certain semi-automatic rifles, handguns and ammunition from the jurisdiction of the ITAR. How quickly these changes will proceed will depend on agency staffing levels and the identification of areas where new regulations can be substituted for old regulations at the 1-for-2 ratio required by the Trump administration’s Executive Order 13771. Companies that are subject to these regulations should carefully review upcoming notices of proposed rulemaking and requests for comment and be prepared to make their views known.
 
Global Developments
 
The webinar also discussed a number of important changes expected in 2018 in other countries’ export control laws:
 
  – China is expected to implement a new set of export controls that may mirror the extraterritorial aspects of the U.S. export control and sanctions laws. For example, Chinese authorities would be given the ability to regulate goods, technology and software of Chinese origin, and the international transactions of companies operating from China.
  – In December 2017, India joined the multilateral Wassenaar Arrangement, which requires its members to control exports of goods, software and technology that have potential military applications or that could otherwise threaten the national security of Wassenaar members. As a result, the United States is expected to reduce U.S. export controls on transactions with India, making it easier for U.S. and Indian companies to work collaboratively on export-controlled projects and technologies.
 
Conclusion
 
Developments in 2017 illustrate the extensive reach of U.S. sanctions and export controls and how they are subject to almost constant change in line with changes in U.S. national security policies and global risks. The pace of change is expected to accelerate in 2018 as U.S. policy regarding Iran, North Korea, Russia and the perceived leakage of critical technologies to China remains subject to review and revision by the Trump administration and increased attention from Congress. At the same time, U.S. sanctions and export controls are becoming more nuanced, with many sanctions limited to specific individuals, entities and economic sectors. Companies should carefully follow these developments and be prepared to quickly adjust their own policies and activities in the months ahead.

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COMM_a5
15Gary Stanley’s ECR Tip of the Day

(Source: Defense and Export-Import Update, 9 Jan 2018; available by subscription from
gstanley@glstrade.com
.)
 
* Author: Gary Stanley, Esq., Global Legal Services, PC, (202) 352-3059,
gstanley@glstrade.com
.
 
Determining whether an in-country transfer is a controlled event under the EAR often depends on the authorization by which the item was received. If a 600 series item was previously exported or reexported under a U.S. Department of Commerce license, then it is likely that the license has a condition stating that any subsequent in-country transfer requires authorization under the EAR. Similarly, if a 600 series item was previously exported or reexported under a prior or grandfathered Department of State license or other approval, then subsequent transfer within a foreign country would likely require EAR authorization in accordance with General Order No.5 in Supplement No.1 to EAR Part 736. Also, if a 600 series item was exported or reexported under a U.S. Department of State license or other approval under ITAR § 120.5(b), then subsequent transfers within a foreign country would also likely require EAR authorization. If a 600 series item was received under an EAR license exception, then subsequent in-country transfers would generally not be a controlled event, unless the subsequent transfer exceeds the terms and conditions of the license exception (e.g., the license condition is premised on a certain type of end user such as a government agency of a country listed in Country Group A:5).

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TEEX/IM TRAINING EVENTS & CONFERENCES

TEC_01
16Full Circle Compliance and the Netherlands Defense Academy Will Present “Winter School at the Castle”, 5-9 Feb 2018 in Breda, the Netherlands

 
The Netherlands Defense Academy presents a winter seminar, “Compliance and Integrity in International Military Trade,” 5-9 February 2018, in the charming town of Breda, the Netherlands, an hour’s drive south of Amsterdam. Many hotels and restaurants are within walking distance of the Defense Academy, which is the Dutch equivalent of the U.S. military academies. The course is designed for NATO+ military officers, government employees, and employees of NATO+ defense contractors. Participants will receive certificates of completion from the Academy.
 
* Course Contents:
  – Day 1: International Trade in Defense Markets and Relevance of Trade Compliance.
  – Day 2: U.S. Export Control Regulations (International Traffic in Arms Regulations), and the EU Perspective.
  – Day 3: U.S. Export Control Regulations (Export Administration Regulations), and EU Export Control Regulations (Military and Dual-Use).
  – Day 4: Compliance & Integrity / Ethics, and Setting up an Internal Compliance Program.
  – Day 5: Setting up an Internal Compliance Program
* When: 5-9 February 2018.
* Where: the Netherlands Defense Academy (“The Castle”), Breda, the Netherlands.
* Event Sponsors: Full Circle Compliance & the Netherlands Defense Academy, Faculty of Military Sciences.
* Speakers include: Prof. dr. J.M. Beeres; Col. Dr. Robert M.M. Bertrand, RA RC RO; Drs. Ghislaine C.Y. Gillessen, RA; James E. Bartlett III, JD, LL.M; Michael E. Farrell; and Drs. Alexander P. Bosch.
* Registration & Information: please, complete the seminar registration form and send a copy to events@fullcirclecompliance.eu. M
ore information is available
here
or via 
events@fullcirclecompliance.eu

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ENEDITOR’S NOTES


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EN_a318
. 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.  The latest amendments 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: 8 Dec 2017: 82 FR 57821-57825: Civil Monetary Penalty Adjustments for Inflation
 
DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM): DoD 5220.22-M

  – Last Amendment: 18 May 2016: Change 2
: Implement an insider threat program; reporting requirements for Cleared Defense Contractors; alignment with Federal standards for classified information systems; incorporated and cancelled Supp. 1 to the NISPOM (Summary 
here
.)


EXPORT ADMINISTRATION REGULATIONS (EAR)
: 15 CFR Subtit. B, Ch. VII, Pts. 730-774

  – Last Amendment(s): 8 Jan 2018: 83 FR 709-711: Revisions, Clarifications, and Technical Corrections to the Export Administration Regulations; Correction; and 83 FR 706-709: Civil Monetary Penalty Adjustments for Inflation

  
*
FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR)
: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
  – Last Amendment: 28 Dec 2017: 
82 FR 61450-61451: Iraq Stabilization and Insurgency Sanctions Regulations

 
*
FOREIGN TRADE REGULATIONS (FTR)
: 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
here.
  – The latest edition (1 Jan 2018) 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.
 
*
HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES (HTS, HTSA or HTSUSA)
, 1 Jan 2018: 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: 1 Jan 2018: Updated HTS for 2018

  – HTS codes for AES are available here.
  – HTS codes that are not valid for AES are available here.

 
INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130.
  – Last Amendment: 3 Jan 2018: 83 FR 234-237: Department of State 2018 Civil Monetary Penalties Inflationary Adjustment
  – The only available fully updated copy (latest edition: 3 Jan 2018) 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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EN_a0319
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 
here

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EPEDITORIAL POLICY

* 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, provided attribution is given as “Reprinted from The Export/Import Daily Bugle of (date)”. 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.

* TO UNSUBSCRIBE: Use the Safe Unsubscribe link below.

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