18-0124 Wednesday “Daily Bugle”

18-0124 Wednesday “Daily Bugle”

Wednesday, 24 January 2018

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/BIS: (No new postings.)
  3. DHS/CBP Releases Update on Statements Reports in ACE
  4. State/DDTC: (No new postings.)
  5. EU Adds Ethiopia to List of High-Risk Third Countries as a Result of its Money Laundering and Terrorist Financing Activities
  1. Reuters: “U.S. Says Hong Kong Must Tighten Rules to Enforce North Korea Sanctions”
  2. ST&R Trade Report: “WTO Membership for China and Russia Was a Mistake, USTR Says”
  1. D. Yang: “Navigating Violations in the Export Controls Minefield” (Part 3 of 3)
  2. J. Sturtevant: “‘Technology’ – Part II: Development, Production, & Use”
  3. M. Volkov: “The Convergence of Cybersecurity, Compliance, and Enterprise Risk Management”
  4. W.R. Vigdor: “CFIUS Annual Report Confirms Recent Trends and Highlights Factors to be Considered When Notifying Transactions to CFIUS”
  5. R.C. Burns: ” OFAC Doesn’t Understand How Money Works”
  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 (19 Jan 2018) 
  3. Weekly Highlights of the Daily Bugle Top Stories 



[No items of interest noted today.]

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


* President: ADMINISTRATIVE ORDERS: Defense and National Security:
  – Defense Production Act of 1950; Determination (Presidential Determination No. 2018-03 of January 23, 2018); and
  – Defense Production Act of 1950; Determination (Presidential Determination No. 2018-04 of January 23, 2018) Publication Dates: 25 Jan 2018.]

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DHS/CBP Releases Update on Statements Reports in ACE

CSMS# 18-000087, 24 Jan 2018.)

  (1) On Thursday, February 1, 2018, the following two data elements will be added as prompts (and will therefore appear as columns in the resulting reports) for the REV-101, REV-102, REV-103, and REV-104 reports: Monthly Payment Status and Monthly Payment Due Date. The default values for Monthly Payment Status will now be “unpaid” and “authorized.”  

  (2) For clarification, please see the updated definitions for each of the possible Monthly Payment Status values (authorized, not paid, and paid), and the definitions for the Statement Print Date and Statement Target Print Date data objects. 

  – Authorized (AU) – the daily statement has been authorized for payment, but the payment has not been fully processed.

  – Not Paid (NP) – the statement has not been paid or authorized for payment.

  – Paid (PD) – the statement has been paid and end-of-day processing is complete.

  – Statement Print Date – the date that the statement is delivered to the trade entity. 

  – Statement Target Print Date – the date that the trade entity requested the statement. 

  (3) Now that the Accounts Revenue (AR) quick view (available via the “Statements” task in the ACE Portal “Accounts” tab) and Revenue (REV) reports are based on data in the Statements universe, CBP will be retiring the Accounts Revenue universe no later than Thursday, February 8, 2018. Please note that the Accounts Revenue universe does not contain current data, and any saved reports that pull data from that universe are therefore based on outdated data. After February 8, such saved reports will no longer be functional.  

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EU Adds Ethiopia to List of High-Risk Third Countries as a Result of its Money Laundering and Terrorist Financing Activities


Commission Delegated Regulation (EU) 2018/105 of 27 October 2017 amending Delegated Regulation (EU) 2016/1675, as regards adding Ethiopia to the list of high-risk third countries in the table in point I of the Annex.

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6. Reuters: “U.S. Says Hong Kong Must Tighten Rules to Enforce North Korea Sanctions”

Reuters, 24 Jan 2018.) [Excerpts.]
Hong Kong needs to tighten rules to ensure the Asian financial hub is not used to violate international sanctions on North Korea to give up its nuclear ambitions, a senior U.S. Treasury official said on Wednesday. …
Bordering China, Hong Kong benefits from a surge of capital flows from the mainland that some say is one of the sources of dirty funds for North Korea.
Hong Kong has come under pressure from international bodies to clamp down on illegal money flows following cases involving local firms including so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally.
The former British colony has been beefing up its anti-money laundering laws, after recent scandals showed that Hong Kong was the most active center in the world for the creation of shell companies.
  “Hong Kong, of course, is an international financial hub and at the same time it has company formation and registration rules that we think need to be stronger,” said Sigal Mandelker, the U.S. Treasury’s Under Secretary for Terrorism and Financial Intelligence. …

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NWS_a27. ST&R Trade Report: “WTO Membership for China and Russia Was a Mistake, USTR Says”

China and Russia have failed to embrace the market-oriented economic policies championed by the World Trade Organization and are not living up to key commitments they made when they joined the WTO, according to the Office of the U.S. Trade Representative’s annual reports on each country’s compliance with WTO rules. USTR Robert Lighthizer said this year’s reports show that “the global trading system is threatened by major economies who do not intend to open their markets to trade and participate fairly.”
The report on China takes a decidedly sharper tone than in previous years, asserting that the U.S. “erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.” China has not dismantled policies and practices incompatible with the principles of non-discrimination, market access, reciprocity, fairness, and transparency, the report states, and instead remains a state-led economy that poses “serious problems” to the U.S. and other trading partners. Objectionable policies and practices include requiring or pressuring foreign companies to transfer technology as a condition for securing investment or other approvals; pursuing industrial policies that promote, guide, and support domestic industries while simultaneously and actively seeking to impede, disadvantage, and harm their foreign counterparts; and using policy tools not employed by other WTO members, including a wide array of state intervention and support that restricts, takes advantage of, discriminates against, or otherwise creates disadvantages for foreign enterprises and their technologies, products, and services.
The report also signals a shift toward more enforcement and away from the “cooperative high-level dialogues” of the past 15 years that “have largely failed” to bring China into compliance with its WTO commitments. “WTO rules are not sufficient to constrain China’s market-distorting behavior,” the report states, because Chinese policymakers are “not interested in moving toward a true market economy.” As a result, the idea that bringing more WTO cases alone will solve ongoing problems with China is “naïve at best” because the WTO dispute settlement mechanism “is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system.” While the U.S. will continue to use this mechanism as an enforcement tool, the report states, it will also “take all other steps necessary to rein in harmful state-led, mercantilist policies and practices pursued by China, even when they do not fall squarely within WTO disciplines.”
Similarly, USTR states that Russia’s actions to date “strongly indicate that it has no intention of complying” with many of its WTO accession commitments and that it was “a mistake to allow Russia to join the WTO if it is not fully prepared to live by WTO rules.” The past year did see some progress, the report notes, as Russia implemented its scheduled tariff reductions, notified many draft measures to the relevant WTO committees, and “occasionally worked” with WTO members to address concerns. At the same time, Russia has “increasingly appeared to turn away from the principles of the WTO,” such as by adopting local content policies and practices and relying on “arbitrary behind-the-border measures and other discriminatory practices to exclude U.S. exports.” Other problem areas include a “burdensome and opaque” import licensing regime, a “less than transparent” customs legal regime, export restrictions, and an import ban on nearly all agricultural goods from the U.S. and other WTO members.

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8. D. Yang: “Navigating Violations in the Export Controls Minefield” (Part 3 of 3)

Blank Rome LLP, 23 Jan 2018.)
* Authors: David Yang, Esq.,
DYang@BlankRome.com, Blank Rome LLP, Washington DC.
In the first two parts of this series, we covered 
companies’ obligations under U.S. export control laws [Part 1], such as the Export Administration Regulations (“EAR”) governed by the Department of Commerce, Bureau of Industry and Security (“BIS”), and military or defense exports governed by the International Traffic in Arms Regulations (“ITAR”) under the auspices of the State Department’s Directorate of Defense Trade Controls (“DDTC”), and 
common ways to mitigate your organization’s risk [Part 2] against violations. Unfortunately, no compliance program can prevent all violations, and this final part of our series addresses the key considerations your organization should keep in mind in the event you discover that an apparent violation may have occurred. How your company addresses apparent violations are as important as anything else, because they end up determining the repercussions that your organization may face from these and other enforcement agencies.
Even the best compliance programs will not be perfect. Compliance departments are typically overworked and mistakes and oversights can and do happen. When an incident happens, often the best advice is to slow down and develop a plan to examine the potential issue. It is imperative not to assume the worst and jump to a conclusion. Rather, start by gathering the basic facts-what happened, why did it happen, when did it happen, what countries are involved, and who was involved. Even some answers to these questions can help your organization quickly understand whether the issue is minor or more serious. For example, if the company shipped a product to an approved country a few days after its license expired and does not involve any national security concerns, your organization should be far less concerned about disclosing the issue or whether your company will face any ramifications, which should be unlikely under these circumstances. However, if you exported a sensitive defense article to a sanctioned country, that understandably and considerably changes the calculus.
Accordingly, the severity of the potential violation should shape your company’s response. Minor civil issues such as an oversight in paperwork to an approved country can and will likely to be handled by your company’s compliance team and, generally, will not require the involvement of counsel to resolve. In these instances, many companies will not report the incident to the government, as most of export regimes do not have a mandatory disclosure requirement. However, for more serious violations, and certainly those that may implicate criminal conduct, you should retain counsel to investigate the matter, preserve documents, and make a disclosure to the government even if no disclosure is required. Self-reporting a potentially serious matter allows your organization to get ahead of the issue, gives you the opportunity to shape the message to the government, and prevents any accusation of trying to conceal or delay the matter.  However, because investigations take time, you should submit an initial disclosure that advises the government that the matter is being investigated, provides a high-level summary of the issues, and a statement that a complete report will be furnished upon the completion of the investigation. 
An early disclosure of this type serves the twin purposes of demonstrating that your company takes compliance seriously and is being proactive in its investigation, which will enhance your credibility with the government. However, once a disclosure has been made, you must be prepared to conduct a fulsome investigation, determine whether corrective action or enhancements are needed to prevent any reoccurrences of violations, and assess whether you need to change your existing business relationships. You should be prepared to address follow-up questions, requests for information, and other requests from the government after you have submitted your disclosure. Moreover, while the first two considerations are obvious important mitigating factors from the government’s perspective, the last consideration is also very important. Once you are on notice about (and thus have knowledge of) a potential violation, you should examine whether any current or prospective business arrangements will create further violations. For example, if you shipped an exported defense article to a sanctioned country and the buyer asks you to repair or service the equipment, doing so would only create further violations, undermine your credibility, and ultimately exacerbate the situation. From the government’s standpoint, their most important considerations in favorably resolving your case will be how quickly your company accepted responsibility, whether your compliance systems are adequate to prevent reoccurrences, and that you are committed to adhering to U.S. export laws.

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9. J. Sturtevant: “‘Technology’ – Part II: Development, Production, & Use”

CTP, 24 Jan 2018.)
* Author: John Sturtevant, Esq., Commonwealth Trading Partners (CTP), Washington DC.
Part I, we looked at the fundamentals of the concept of controlled technology – its definition, the General Technology note, and an illustrative example. To recap briefly, “technology” is information, in any tangible or intangible form, necessary for the “development,” “production,” or “use,” of an item.
In this Part II post, we’re going to break down those three types of technology (“development,” “production,” and “use”) and see how they are applied in practice.
Let’s start with
development technology. Pursuant to Section 772.1 of the EAR, “development” is related to
all stages prior to serial production. For example, development stages include design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, the process of transforming design data into a product, configuration design, integration design, and layouts.
The threshold to meet development technology is relatively low since any design data related to controlled hardware or software could arguably be caught by the definition of “development.” The critical distinction is whether the design data is necessary or “required” (another defined term which we’ll parse in the next installment of this series) for the development of a controlled commodity.
Next up is
production technology. “Production” means all production stages, such as product engineering, manufacture, integration, assembly (mounting), inspection, testing, and quality assurance. Similar to development technology, production technology is broad in its application, especially considering that the definition encompasses common integration and assembly data.
Finally, we get to technology for the use of controlled items. “Use” means operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing. Use technology is notably different from development and production technology thanks to a qualifying note provided by the drafters of the EAR:
Note: If an ECCN specifies one or more of the six elements of “use” in the heading or control text, only those elements specified are classified under that ECCN.
The key thing is specificity. If one or more of the six elements are identified in the ECCN, then only those aspects can be controlled. If none are called out specifically however, then they ALL must be included for the “use” definition to be met.
This is an important point and BIS provides a helpful
FAQ on the matter:
: For technology to be “use” technology, must it include all six elements of the definition of “use” in § 772.1, i.e., operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing technology?
: Yes. However, if an ECCN specifies one or more of the six elements of “use” in the heading or control text, each element specified is classified under that ECCN.
With that setup, let’s take a closer look at these various types of technology with some examples. Say we have a flap actuator, “specially designed” (a topic for another blog!) for a FAA civil certified aircraft, not specified elsewhere on the CCL, and therefore controlled by ECCN 9A991.d.
Now say we have a datasheet with dimensions and materials, an OEM guide on how to assemble various parts and components into the actuator, and a service bulletin with specific maintenance information. Are these documents controlled “technology”? If so, what type?
To make these determinations, we must review the ‘9E’ ECCNs to see if and how any related technology is controlled. ECCN 9E991 controls “technology” for the “development,” “production” or “use” of equipment controlled by 9A991 or 9B991.
Since the datasheet includes design data (i.e., dimensions and materials) necessary for the development of the flap actuator, the datasheet will likely constitute controlled development technology. Similarly, the OEM guide will likely constitute controlled production technology because it contains information necessary for the assembly of the actuator.
What about the service bulletin? Could it be “use” technology? The text of ECCN 9E991 only mentions “use” technology generally, without making specific mention of any of the six elements of “use.” Accordingly, the service bulletin would have to include ALL six types of requisite information, that is, operation, installation, maintenance, repair, overhaul, AND refurbishing of the actuator for the document to constitute controlled use technology.
By way of contrast, say instead we have a service bulletin for an actuator “specially designed” for a 9A610.a military aircraft, with the actuator being 9A610.x. The text of ECCN 9E610 controls “technology ‘required’ for the ‘development,’ ‘production,’ operation, installation, maintenance, repair, overhaul, or refurbishing of military aircraft and related commodities controlled by 9A610 . . .” Note in this instance that the ECCN heading specifies the six elements of “use.” Therefore, even if the service bulletin only contains information required for the repair of the actuator but none of the other elements of “use,” it nonetheless will constitute controlled use technology because of the categorical specificity of this ECCN entry.
Hopefully you’re not left scratching your head quite as hard as you were after Part I. By the end of Part III, you’ll have excellent small talk ready for your next cocktail party.

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10. M. Volkov: “The Convergence of Cybersecurity, Compliance, and Enterprise Risk Management”

Volkov Law Group Blog, 23 Jan 2018. Reprinted by permission.)
* Author: Michael Volkov, Esq., Volkov Law Group,
mvolkov@volkovlaw.com, 240-505-1992.
When you survey business leaders on significant risks, they invariably cite cybersecurity as number one and anti-corruption as number two.  For global businesses, this makes total sense.  Cyber-crime damage is estimated to hit $6 trillion annually by 2021.  Information security and prevention are now required to protect a company from serious financial and operational harm.
We are in the midst of a real transformation in ownership and responsibility for cybersecurity as an emerging enterprise risk.  It does not take a rocket scientist to figure out that cybersecurity attacks can devastate a global business, cause serious harm to a company’s reputation, and damage large numbers of consumers.  Last year’s cyber hack and data breach against Equifax is an important reminder of how much harm a company can suffer for failing to protect its sensitive information.
A global company has to develop a comprehensive strategy across various functions to protect the company from any cybersecurity harm.  The natural internal leaders for this effort include chief compliance officers, information technology security officers (CISOs), and the chief legal officer.  A strategy has to include proactive and reactive tasks and functions.
At the outset, the company has to identify and measure its cybersecurity risks, taking into account external and internal threats and vulnerabilities.  In this respect, the evolving nature of external cybersecurity threats has to be updated and monitored on an ongoing basis.  In addition, the company has to examine carefully its internal cybersecurity vulnerabilities and implement risk mitigation strategies.
Based on the nature of these risks and vulnerabilities, an annual cybersecurity compliance plan has to identify the potential threats and risks based on information technology risks and specific vulnerabilities.
For example, based on an external threat assessment, a company may determine that it is vulnerable to malware attacks from phishing scams either directly to its employees or even its third parties.  As a result, a company may devote a significant effort to training its employees to avoid and reject phishing scams.  If the company may have a vulnerability to such an attack from a third party who has inadequate security technology or protocols in place may have to seek remediation by the third party as well as conduct training to avoid common phishing techniques.
Aside from proactive measures, including security technology and measures to prevent attacks and training of employees to avoid potential malware attacks, companies have to develop a crisis management strategy to respond to any significant breach or loss of confidential information.  Depending on the type of information or harm from a cyber-attack, the company has to coordinate compliance, legal, information technology, public relations, business, senior executives and board members to implement a coordinated response to a cyber-attack.  Such an attack, if harmful, will require key players to remediate the problem, communicate with key stakeholders in an effective manner, and then stabilize the company’s business operations.  As part of this response strategy, a company has to maintain significant insurance against a cyber-attack.
Chief compliance officers have to forge a close working relationship with information technology departments and bring in required expertise to asses a company’s vulnerabilities.  CCOs have a natural role to play in this area, like any other significant risk to the business, and can employ professional skills to adopt creative proactive and reactive strategies.

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11. W.R. Vigdor: “CFIUS Annual Report Confirms Recent Trends and Highlights Factors to be Considered When Notifying Transactions to CFIUS”

Vinson & Elkins LLP, 23 Jan 2018.)
* Author: William R. Vigdor, Esq.,
wvigdor@velaw.com, Vinson & Elkins LLP, Washington DC.
The Committee on Foreign Investment in the United States (“CFIUS,” or the “Committee”) has issued the public version of its annual report to Congress for calendar year 2015 (the “Report”). The relevant statute requires CFIUS to prepare an annual report to Congress and prepare a public version of the annual report. The Report: (i) identifies the number of transactions notified to CFIUS in 2015, as well as the number of transactions reviewed, investigated, withdrawn, abandoned, and rejected in that same year; (ii) provides specific, cumulative, and trend data for transactions, withdrawals, and investigations from 2009 to 2015; (iii) reports on mitigation measures and the perceived adverse effects of covered transactions; (iv) assesses transactions pertaining to critical technologies; and (v) comments on whether there has been any evidence of a coordinated strategy to acquire U.S. critical technology companies and evidence of foreign governments using espionage to obtain commercial secrets relating to U.S. critical technologies. Further, the Committee provided a table reporting on the number of transactions notified, reviewed, investigated, withdrawn, abandoned, and rejected in 2016.
Even though the Report is dated, several conclusions can be drawn from the Report, including:
  – In 2015, the Committee began identifying three additional national security risks that it had not disclosed in the past: (i) the potential disclosure of substantial pools of personal information; (ii) the potential loss of one of only a few U.S. suppliers; and (iii) the potential loss of U.S. technological advantages;
  – Increased scrutiny of semiconductor transactions, particularly for Chinese acquirers;
  – Increased concern regarding coordinated efforts to acquire U.S. critical technologies;
  – Providing complete and accurate information is critical because CFIUS has access to information sources that can identify inaccuracies or incompleteness with filings that will result in such filings being rejected;
  – There is a continued trend of increased numbers of notified transactions, investigations (meaning longer reviews), and transactions requiring mitigation; and
  – Additional mitigation measures.
The following provides additional detail on the trends highlighted above.
Identification of additional national security factors. The Report identified three national security risk factors that the Committee has not identified in the past. First, whether the transaction involves a U.S. business that possesses “substantial pools of potentially sensitive data about U.S. persons and businesses that have national security importance.” This risk is not limited to information related to U.S. Government employees. Thus, an acquisition of U.S. businesses containing a great deal of private information may pose a national security risk. These may include businesses in the financial, healthcare, and insurance sectors.
Second, the Report highlights transactions in fields with significant national security implications in which there are few alternative suppliers. This likely would be particularly important where the U.S. Government is concerned about U.S. supply chain issues or the ability to prioritize U.S. Government business.
Third, the loss of U.S. technological advantages that would be detrimental to U.S. national security. Increasingly, the U.S. Department of Defense and Congress are concerned about the U.S. losing its technological leadership, particularly through the foreign acquisition of companies developing emerging technologies. This is one of the key reasons Congress is considering the Foreign Investment Risk Review Modernization Act (the “Act”). The Act would expand CFIUS’ authority to review transactions, add to the list of national security factors (including the loss of emerging technologies and personal information), and require additional notifications to CFIUS (and require certain parties to notify transactions, e.g., state-owned-enterprises).
Increased scrutiny of semiconductor transactions, particularly for Chinese acquirers. The Report shows that, similar to 2009, parties are submitting a substantial number of notices to CFIUS involving the semiconductor industry. CFIUS annual reports show that between 2009 and 2013, the maximum number of semiconductor transactions notified to CFIUS in a given year declined steadily from a high of 20 in 2009 to a low of 6 in 2013. However, semiconductor-related transactions notified to CFIUS rebounded to 12 in 2014 and increased to 18 in 2015.
What appears to be more significant is the treatment of semiconductor transactions, particularly by Chinese acquirers. While CFIUS notifications are not public, we track the filings to the extent possible. From the information available to us, at least two semiconductor-related transactions involving Chinese acquirers were “cleared” by CFIUS in 2015 (OmniVision Technologies, Inc., which was acquired by a consortium composed of Hua Capital Management Co., Ltd., CITIC Capital Holdings Limited, and GoldStone Investment Co., Ltd., and Integrated Silicon Solution, Inc., which was acquired by Uphill Investment Co.).
However, based on publicly available information, in 2016 and 2017 the outcomes for Chinese acquirers were less than favorable. For example, in 2016 President Obama prohibited the proposed acquisition of Aixtron SE, a German semiconductor company with a U.S. subsidiary, by a Chinese-owned German company, Grand Chip Investment GmbH. In addition, CFIUS declined to “clear” Dutch company Philips NV’s proposed $3.3 billion sale of Lumileds, a manufacturer of lighting components and LEDs, which are forms of semiconductors, to a consortium that included several Chinese firms (e.g., GSR Ventures and Nanchang Industrial Group). Also, San’an Optoelectronics Co., Ltd., announced that its subsidiary, Xiamen San’an Integrated Circuit Co., Ltd., had agreed with the Taiwan publicly traded company GCS Holdings to abandon their proposed merger, which would have brought GCS Holdings’ wholly owned subsidiary Global Communications Semiconductors, LLC, in California into the San’an Group of companies. Finally, Fairchild Semiconductor International, a U.S.-based semiconductor chip manufacturer, rejected a $2.49 billion acquisition offer from China Resources Microelectronics Ltd. and Hua Capital Management Co., Ltd. due to CFIUS concerns. And, in 2017 President Trump prohibited the proposed $1.3 billion acquisition of Lattice Semiconductor Corporation, a publicly traded semiconductor manufacturer headquartered in Oregon, by Canyon Bridge Capital Partners, a U.S.-headquartered private equity fund whose sole investor reportedly is owned and controlled by the Chinese government. [FN/1]
Just last week, however, CFIUS reportedly “cleared” Beijing-based Naura Microelectronics Equipment Co. Ltd.’s deal to buy U.S. semiconductor manufacturing equipment company Akrion Systems LLC. It is not readily apparent how CFIUS distinguished this case from those described above, but one possibility is that CFIUS may be focusing on the technology currently being developed by U.S. firms more than existing semiconductor technology, including as embodied in manufacturing equipment. It also shows that CFIUS is not challenging all Chinese transactions.
Coordinated efforts to acquire U.S. critical technologies. The Report suggests that there is some continued concern that state actors were coordinating to acquire critical technology. Prior to 2014, CFIUS annual reports suggested the risk of such coordination was unlikely. In contrast, the 2014 annual report stated “the U.S. Intelligence Community (USIC) believes there may be an effort among foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer.” The Report now states only that: “A meaningful summary of the U.S. Intelligence Community (USIC) assessment cannot be provided on an unclassified basis. However, the USIC considered the unclassified data included in this section in conducting its analysis.” Based on this unreported assessment and our experience, we believe there is some level of coordination (or attempted coordination) that is of concern to CFIUS and its member agencies.
Second consecutive year in which a notice was rejected. According to the 2015 Report, CFIUS rejected a notice, apparently based on the fact that “information c[ame] to light that contradict[ed] material information provided in the notice by the parties.” CFIUS similarly rejected a filing in 2014. This should serve as a reminder to parties to a transaction notified to CFIUS that the agencies involved in reviewing and investigating a transaction have access to a wide breadth of public and non-public information, and any material errors in a notice are likely to be discovered with the consequence being outright rejection by the Committee.
Increases in the number of notices and investigations and the number and type of mitigation measures. The most obvious recent trend is the increasing number of transactions notified to CFIUS. According to the Report, CFIUS received notices for 143 transactions in 2015, four transactions shy of the total number for 2014, and 172 notices in 2016. And we understand that CFIUS received substantially more than 200 transaction notices in 2017. [FN/2] Staffing levels at the Committee, however, have not increased proportionally, and key senior CFIUS agency positions remain unfilled, which has caused delays in the CFIUS process. Delays due to insufficient staffing increases the difficulty of predicting national security risk because lack of staffing can be confused with substantive risk. We note, however, that in our recent experience transactions with little national security risk have been “cleared” within the initial 30-day review period. We have also seen CFIUS time its review to the termination date in the applicable purchase and sale agreement. If we are correct in our inference, the use of such contractual timing provisions demonstrates the stress on the CFIUS process.
The Committee’s increased workload, however, has not led to any decrease in the amount of attention shown to individual transactions. The number of secondary, 45-day CFIUS investigations has increased in absolute terms every year since 2009, and 2015 and 2016 were no different. For 2015, CFIUS investigated 66 transactions. That is 15 more investigations than the Committee initiated in 2014, despite four fewer total notified transactions. The statistics for 2016 again show an increase in CFIUS investigations. CFIUS reports that it initiated 79 investigations in 2016. The increasing reliance on investigations likely is attributable to the workload and staffing issues detailed above, but may also reflect a greater degree of scrutiny, even for transactions that previously might have been characterized as innocuous given the nature of the business being acquired or the identity and nationality of the acquirer. The table below shows that the percentage of notifications going to the investigation stage has been between 46 percent and 49 percent for three of the last four years. Accordingly, transaction parties are advised to allow for an elongated CFIUS clearance process, particularly when negotiating financing arrangements that may include “ticking” fees.
The increased number of CFIUS investigations for 2015 only corresponded with a moderate increase from 2014 in the number of transactions cleared upon implementation of some form of mitigation, approximately 8 percent of the total notified transactions. But the Report reflects the Committee’s growing toolbox of mitigation measures. Specifically, the Report noted that CFIUS is requiring transaction parties: (i) to notify customers about the change of ownership; (ii) to implement security protocols to ensure the integrity of goods or software sold to the U.S. Government; (iii) to assure the continuity of supply for defined periods, as well as to notify and consult with the U.S. Government prior to taking certain business decisions; and (iv) to exclude certain sensitive assets from transactions. In addition, during 2017, we are aware of CFIUS mitigation that imposed mandatory CFIUS notification requirements on a party, even for transactions that would not be subject to CFIUS jurisdiction. 
  [FN/1] See
  [FN/2] As noted above, the number of filings may materially increase if the CFIUS reform legislation recently introduced in the Senate by Senator Cornyn ultimately becomes law. For a detailed discussion of the implications of the passage of this legislation, please refer to our recent client advisory accessible

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12. R.C. Burns: “OFAC Doesn’t Understand How Money Works”

Export Law Blog, 23 Jan 2018; reprinted by permission.)
* Author: R. Clifton Burns, Esq., Bryan Cave LLP, Wash DC,
Clif.Burns@bryancave.com, 202-508-6067).
Venezuelan President Nicolas Maduro in December 
announced his plans to have Venezuela issue a commodity-backed cryptocurrency.  Although cryptocurrencies typically have no backing, there is no reason that they could not.  In such a situation, the blockchain would take over the validation function normally performed by a central bank.  Maduro’s cryptocurrency would, he says, be backed by oil, gas, diamond and gold reserves.  The opposition dismissed Maduro’s plan and called him a “clown” for even suggesting the new currency.
Not to be out-clowned, the Office of Foreign Assets Control last week issued its own FAQ on Maduro’s vague and unimplemented plan:
551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808?
A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk. [1/19/2018]
Oh dear. They really said that? Seriously??
For starters, let’s address the notion that using currency issued by a government is an extension of credit to the government. Credit is extended to a government when goods or services are supplied to that government without a requirement for immediate payment. By that common and uncontroversial definition, accepting fiat money or representative money in exchange for goods and services from a private individual is not an extension of credit by the purchaser to the government that issued the currency because no goods or services were supplied by the purchaser to the government. This is even the case even if goods and services are provided to the government because the currency obtained can be immediately used for other transactions and there is no delayed payment. If the government paid with a debt instrument, such as a bond with a future maturity, then that would be an extension of credit to the government.
It appears that the genesis of OFAC’s misconception here is that the currency can be exchanged later with the government for the underlying commodity. Even were that an extension of credit to the government, OFAC’s rules would only be implicated if that exchange was delayed for more than 30 days. But, of course, the point of commodity backed currency is that it is immediately convertible. One could take the new Venezuelan currency and immediately demand to exchange it for oil, gas, gold or diamonds, so it does not have a “maturity of greater than 30 days.”

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Full 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.

Registration & Information: please, complete the seminar registration form and send a copy to events@fullcirclecompliance.eu. More information is available 
at the Full Circle Compliance website or via events@fullcirclecompliance.eu

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

The official versions of the following regulations are published annually in the U.S. Code of Federal Regulations (C.F.R.), but are updated as amended in the Federal Register.  The latest amendments to applicable regulations are listed below.
: 27 CFR Part 447-Importation of Arms, Ammunition, and Implements of War
  – Last Amendment: 15 Jan 2016: 81 FR 2657-2723: Machineguns, Destructive Devices and Certain Other Firearms; Background Checks for Responsible Persons of a Trust or Legal Entity With Respect To Making or Transferring a Firearm. 
: 19 CFR, Ch. 1, Pts. 0-199
  – Last Amendment: 8 Dec 2017: 82 FR 57821-57825: Civil Monetary Penalty Adjustments for Inflation

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

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

  – Last Amendments: 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

: 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
  – Last Amendment: 28 Dec 2017: 
82 FR 61450-61451: Iraq Stabilization and Insurgency Sanctions Regulations

: 15 CFR Part 30
  – Last Amendment:
20 Sep 2017:
82 FR 43842-43844
: Foreign Trade Regulations (FTR): Clarification on Filing Requirements; Correction
  – HTS codes that are not valid for AES are available
  – The latest edition (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.
, 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.

  – Last Amendment: 19 Jan 2018: 83 FR 2738: Department of State 2018 Civil Monetary Penalties Inflationary Adjustment; Correction
  – The only available fully updated copy (latest edition: 19 Jan 2018) of the ITAR with all amendments is contained in Bartlett’s Annotated 

, by James E. Bartlett III. The BITAR contains all ITAR amendments to date, plus a large Index, over 800 footnotes containing amendment histories, case annotations, practice tips, DDTC guidance, and explanations of errors in the official ITAR text. Subscribers receive updated copies of the BITAR in Word by email, usually revised within 24 hours after every ITAR amendment.
 The BITAR is available by annual subscription from the Full Circle Compliance
. BAFTR subscribers receive a 25% discount on subscriptions to the BITAR, please
contact us
to receive your discount code.

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Weekly Highlights of the Daily Bugle Top Stories

(Source: Editor) 

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

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* The Ex/Im Daily Update is a publication of FCC Advisory B.V., compiled by: Editor, James E. Bartlett III; Assistant Editors, Alexander P. Bosch and Vincent J.A. Goossen; and Events & Jobs Editor, John Bartlett. The Ex/Im Daily Update is emailed every business day to approximately 8,000 readers of changes to defense and high-tech trade laws and regulations. We check the following sources daily: Federal Register, Congressional Record, Commerce/AES, Commerce/BIS, DHS/CBP, DOJ/ATF, DoD/DSS, DoD/DTSA, State/DDTC, Treasury/OFAC, White House, and similar websites of Australia, Canada, U.K., and other countries and international organizations.  Due to space limitations, we do not post Arms Sales notifications, Denied Party listings, or Customs AD/CVD items.

* RIGHTS & RESTRICTIONS: This email contains no proprietary, classified, or export-controlled information. All items are obtained from public sources or are published with permission of private contributors, and may be freely circulated without further permission, provided attribution is given to “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.

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