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18-1108 Thursday “Daily Bugle”

18-1108 Thursday “Daily Bugle”

Thursday, 8 November 2018

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The Daily Bugle is a free daily newsletter from Full Circle Compliance, containing changes to export/import regulations (ATF, DOE/NRC, Customs, NISPOM, EAR, FACR/OFAC, FAR/DFARS, FTR/AES, HTSUS, and ITAR), plus news and events.  Subscribe 
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  1. Justice/ATF Seeks Comments on List of Responsible Persons 
  1. Items Scheduled for Publication in Future Federal Register Editions
  2. Commerce/BIS: (No new postings.)
  3. DHS/CBP Posts Update on Submitting Imports of Products Excluded from Duties on Imports of Steel or Aluminum
  4. Justice: “PRC State-Owned Company, Taiwan Company, and Three Individuals Charged with Economic Espionage”
  5. OMB/OIRA Reviews of Proposed Ex/Im Regulations
  6. State/DDTC: (No new postings.)
  7. EU Amends Specific Restrictions on Economic and Financial Relations with Iraq
  1. Expeditors News: “WCO Leads Discussions on “Customs of the Future” Model”
  2. RadioFreeEurope/RadioLiberty: “U.S. Exempts Iran’s Chabahar Port from Sanctions in Nod To Afghanistan”
  3. ST&R Trade Report: “Export Controls, Technology Transfers Among New Items on DOC Regulatory Schedule”
  1. American Shipper: “U.S. Export Compliance Is Global Must”
  2. C.R. Brewster, E. Bruce-Iacobucci & C. Griner: “How Foreign-Controlled Companies Can Hold U.S. Security Clearances”
  3. K.C. Georgi, M.M. Hassoun & R.K. Alberda: “Iran Sanctions Are Back in Place as of Nov 5, 2018: Here’s What You Need to Know”
  1. ECS Presents “Seminar Level II: Managing ITAR/EAR Complexities” in Scottsdale, AZ on 26-27 Mar 2019 
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Latest Amendments: ATF (15 Jan 2016), Customs (19 Sep 2018), DOD/NISPOM (18 May 2016), EAR (1 Nov 2018), FACR/OFAC (5 Nov 2018), FTR (24 Apr 2018), HTSUS (2 Nov 2018), ITAR (4 Oct 2018) 
  3. Weekly Highlights of the Daily Bugle Top Stories 

EXIMITEMS FROM TODAY’S FEDERAL REGISTER

EXIM_a1

1. Justice/ATF Seeks Comments on List of Responsible Persons
(Source: Federal Register, 8 Nov 2018.) [Excerpts.]
 
83 FR 55911: Agency Information Collection Activities; Proposed eCollection eComments Requested; Extension Without Change of a Currently Approved Collection; List of Responsible Persons
* AGENCY: Bureau of Alcohol, Tobacco, Firearms and Explosives, Department of Justice.
* ACTION: 60-Day notice. …
* DATES: Comments are encouraged and will be accepted for 60 days until January 7, 2019.
* FOR FURTHER INFORMATION CONTACT: If you have additional comments, regarding the estimated public burden or associated response time, suggestions, or need a copy of the proposed information collection instrument with instructions, or additional information, please contact: Shawn Stevens, Federal Explosives Licensing Center, either by mail at 244 Needy Road, Martinsburg, WV 25405, by email at Shawn.Stevens@atf.gov, or by telephone at 304-616-4400.
* SUPPLEMENTARY INFORMATION: …
  – The Title of the Form/Collection: List of Responsible Persons.
  – Form number (if applicable): None.
  – Component: Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S. Department of Justice.
  – Abstract: 27 CFR 555.57, requires that all persons holding ATF explosives licenses or permits as of May 23, 2003, report descriptive information about their responsible persons and possessors of explosives to ATF. Subsequent changes to their list of responsible persons must also be reported to ATF. …
 
   Dated: November 5, 2018.
Melody Braswell, Department Clearance Officer for PRA, U.S. Department of Justice.

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OGSOTHER GOVERNMENT SOURCES

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

 

* U.S. Customs and Border Protection; NOTICES; Agency Information Collection Activities; Proposals, Submissions, and Approvals: Transfer of Cargo to a Container Station [Publication Date: 9 November 2018.]  

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OGS_a2
3. 
Commerce/BIS: (No new postings.)

(Source: 
Commerce/BIS)

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(Source:
CSMS #18-000663, 8 Nov 2018.)
 
BACKGROUND:
 
On March 19 and September 11, 2018, the Department of Commerce (DOC) published in the Federal Register (FR) the process for parties to submit requests for exclusions from Presidential Proclamations 9704 and 9705 on Adjusting Imports of Steel and Aluminum into the United States under section 232 of the Trade Expansion Act of 1962. See 83 FR 12106 and 83 FR 46026
 
IMPORTER OF RECORD INFORMATION:
 
Upon receipt of the approved product exclusion from the DOC, for the importer of record listed in the approved exclusion, please provide that company’s name, address and importer of record number, and the associated product exclusion number, to U.S. Customs and Border Protection (CBP) at Traderemedy@cbp.dhs.gov. For approved quota exclusions, send a cc: of the information to HQQuota@cbp.dhs.gov.
 
CBP needs this information in order to activate the approved product exclusion number in ACE, so that entries can be filed with this product exclusion number. You must provide this information to CBP before the filer submits the exclusion number with entries to CBP. For quota exclusions, CBP must activate the product exclusion number before any quota exemption can be processed, and goods subject to the quota exemption can be released.
 
CBP activates approved product exclusion numbers in ACE on a weekly basis. CBP, in most circumstances, will activate by close of business Thursday of every week any product exclusion numbers with corresponding importer information submitted by close of business Monday to Traderemedy@cbp.dhs.gov.  
 
Do not submit any product exclusion information to CBP until the Department of Commerce approves the product exclusion.
 
INSTRUCTIONS FOR FILING PRODUCT EXCLUSION NUMBERS:
 
Instructions on submitting entries to CBP of steel and aluminum products granted exclusions by DOC from the Presidential Proclamations are as follows:
 
Importers and filers importing products granted an exclusion should submit the product exclusion number based on the last six digits of the product exclusion docket number at Regulations.gov. The product exclusion number should be submitted in the Importer Additional Declaration Field (54 record) of the entry summary data, based on the following format:
 
  – For excluded steel mill articles = STLXXXXXX
  – For excluded aluminum articles = ALUXXXXXX
 
XXXXXX represent the last six digits of the Regulations.gov docket number; do not include spaces or special characters, such as hyphens.
 
Example: If a steel exclusion is granted under product exclusion docket number BIS-2018-0009-9002, the importer/filer should submit the exclusion number STL099002 (i.e. STL plus the last six digits of the docket number).
 
Please refer to the Importer’s Additional Declaration Detail (Input 54-Record) of the CBP and Trade Automated Interfaces Requirements (CATAIR) Manual for further guidance. The CATAIR document can be found here.
 
Only products from importer(s) designated in the product exclusion approved by the DOC are eligible for the exclusion from the Section 232 measures.
 
Steel importers are reminded to submit mill certificates with their import data as required by 19 CFR 141.89.
 
Do not submit the corresponding Chapter 99 HTS number for the Section 232 duties when the product exclusion number is submitted.
 
ADDITIONAL INFORMATION
 
Duty exclusions granted by DOC are retroactive on imports to the date the request for exclusion was accepted (date received) by the Department of Commerce. See Presidential Proclamations 9776 and 9777, August 29, 2018.
 
To request an administrative refund for previous imports of duty-excluded products granted by DOC, importers may file a PSC and provide the product exclusion number in the Importer Additional Declaration Field. If the entry has already liquidated, importers may protest the liquidation.
 
Once products are excluded from the Section 232 measures, importers may claim Generalized System of Preferences (GSP) or African Growth and Opportunity Act (AGOA) duty preferences on GSP and AGOA-eligible goods. If importers did not receive GSP or AGOA duty preferences on previous imports, and those imports are now covered by a retroactive duty exclusion, importers may request a refund of the duties subject to GSP or AGOA preferences through a PSC.
 
For more information about submitting Post Summary Corrections, see Section 11 of the ACE Entry Summary Business Rules and Process Document. The ACE Entry Summary Business Rules and Process Document can be found here.
 
For more information, please refer to the March 19 and September 11, 2018 FR notices on requesting product exclusions. Questions related to Section 232 entry filing requirements should be emailed to traderemedy@cbp.dhs.gov. For questions related to quota product exclusions filing requirements, email the Quota and Agriculture Branch, HQQuota@cbp.dhs.gov.
 
Questions from the importing community concerning ACE entry rejections involving product exclusion numbers should be referred to their CBP Client Representative.

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(Source:
Justice, 1 Nov 2018.)
 
A federal grand jury indicted a state-owned enterprise of the People’s Republic of China (PRC), a Taiwan company, and three individuals, charging them with crimes related to a conspiracy to steal, convey, and possess stolen trade secrets of an American semiconductor company for the benefit of a company controlled by the PRC government. All of the defendants are charged with a conspiracy to commit economic espionage, among other crimes.  …
 
In addition, the United States filed a civil lawsuit seeking to enjoin the further transfer of the stolen trade secrets and to enjoin certain defendants from exporting to the United States any products manufactured by UMC or Jinhua that were created using the trade secrets at issue.  The indictment was filed on September 27, 2018, and unsealed 1 November 2018. The civil lawsuit was filed also on this date.
 
  “I am announcing that a grand jury in San Francisco has returned a multi-defendant indictment alleging economic espionage on the part of a state-owned Chinese company, a Taiwanese company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi-conductor company,” said Attorney General Sessions.  “Micron is worth an estimated $100 billion and has a 20 to 25 percent share of the dynamic random access memory industry-a technology not possessed by the Chinese until very recently.  As this and other recent cases have shown, Chinese economic espionage against the United States has been increasing-and it has been increasing rapidly.  I am here to say that enough is enough. With integrity and professionalism, the Department of Justice will aggressively prosecute such illegal activity.” …
 
  “No country presents a broader, more severe threat to our ideas, our innovation, and our economic security than China,” said FBI Director Christopher Wray. “The Chinese government is determined to acquire American technology, and they’re willing use a variety of means to do that – from foreign investments, corporate acquisitions, and cyber intrusions to obtaining the services of current or former company employees to get inside information.  If China acquires an American company’s most important technology – the very technology that makes it the leader in a field – that company will suffer severe losses, and our national security could even be impacted.  We are committed to continuing to work closely with our federal, state, local, and private sector partners to counter this threat from China.”
According to the indictment, the defendants were engaged in a conspiracy to steal the trade secrets of Micron Technology, Inc. (Micron), a leader in the global semiconductor industry specializing in the advanced research, development, and manufacturing of memory products, including dynamic random-access memory (DRAM).  DRAM is a leading-edge memory storage device used in computer electronics.  Micron is the only United States-based company that manufactures DRAM.  According to the indictment, Micron maintains a significant competitive advantage in this field due in large part from its intellectual property, including its trade secrets that include detailed, confidential information pertaining to the design, development, and manufacturing of advanced DRAM products. 
 
Prior to the events described in the indictment, the PRC did not possess DRAM technology, and the Central Government and State Council of the PRC publicly identified the development of DRAM and other microelectronics technology as a national economic priority.  The criminal defendants are United Microelectronics Corporation (“UMC”), a Taiwan semiconductor foundry; Fujian Jinhua Integrated Circuit, Co., Ltd. (“Jinhua'”), a state-owned enterprise of the PRC; and three Taiwan nationals: Chen Zhengkun, a.k.a. Stephen Chen, age 55; He Jianting, a.k.a. J.T. Ho, age 42; and Wang Yungming, a.k.a. Kenny Wang, age 44.   UMC is a publicly listed semiconductor foundry company traded on the New York Stock Exchange; is headquartered in Taiwan; and has offices worldwide, including in Sunnyvale, California.  UMC mass produces integrated-circuit logic products based on designs and technology developed and provided by its customers.  Jinhua is a state-owned enterprise of the PRC, funded entirely by the Chinese government, and established in February 2016 for the sole purpose of designing, developing, and manufacturing DRAM.
 
According to the indictment, Chen was a General Manager and Chairman of an electronics corporation that Micron acquired in 2013.  Chen then became the president of a Micron subsidiary in Taiwan, Micron Memory Taiwan (“MMT”), responsible for manufacturing at least one of Micron’s DRAM chips.  Chen resigned from MMT in July 2015 and began working at UMC almost immediately.  While at UMC, Chen arranged a cooperation agreement between UMC and Fujian Jinhua whereby, with funding from Fujian Jinhua, UMC would transfer DRAM technology to Fujian Jinhua to mass-produce.  The technology would be jointly shared by both UMC and Fujian Jinhua.  Chen later became the President of Jinhua and was put in charge of its DRAM production facility.
 
While at UMC, Chen recruited numerous MMT employees, including Ho and Wang, to join him at UMC.  Prior to leaving MMT, Ho and Wang both stole and brought to UMC several Micron trade secrets related to the design and manufacture of DRAM.  Wang downloaded over 900 Micron confidential and proprietary files before he left MMT and stored them on USB external hard drives or in personal cloud storage, from where he could access the technology while working at UMC. …
 
Attachment(s): Download Indictment

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(Source:
OMB/OIRA, 7 Nov 2018.) 
 
* International Traffic in Arms Regulations: Categories I, II, and III
  – AGENCY: State
  – STAGE: Final Rule
  – RECEIVED DATE: 7 Nov 2018
  – RIN: 1400-AE30
  – STATUS: Pending Review

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Regulations:
* Commission Implementing Regulation (EU) 2018/1661 of 7 November 2018 amending Council Regulation (EC) No 1210/2003 concerning certain specific restrictions on economic and financial relations with Iraq

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NWSNEWS

NWS_a0
9. Expeditors News: “WCO Leads Discussions on “Customs of the Future” Model”

(Source:
 
Expeditors News
 
, 7 Nov 2018.)
 
In September 2018, the World Customs Organization (WCO) held the first meeting of the newly created working group to process the comprehensive review of Revised Kyoto Convention (RKC).
 
The working group is charged with reviewing the legal text of the RKC and exploring various options, such as “future proofing” it. In the September meeting, the working group agreed that the WCO should ensure an all-inclusive approach to the review.
 
On November 9, 2018, the WCO will hold a global conference on the Comprehensive Review of the RKC to further discuss the development of a “customs of the future” model.
 
To register for the conference contact the WCO RKC team at facilitation@wcoomd.org.
 
  – The WCO press release may be found here.
  – The Global Conference event page may be found here.

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

(Source:
RadioFreeEurope/RadioLiberty, 7 Nov 2018.) [Excerpts.]
 
The U.S. State Department says it is exempting Iran’s big port project in Chabahar from sanctions in recognition of its importance to landlocked Afghanistan.
 
President Donald Trump’s “South Asia strategy underscores our ongoing support of Afghanistan’s economic growth and development as well as our close partnership with India,” a State Department spokesman said on November 6.
 
Iran late last year inaugurated the port on the Indian Ocean, which is being built largely by India and is expected to provide a key supply route for Afghanistan while allowing India to bypass rival Pakistan to trade with Central Asia and Africa.
 
The State Department said it was carving exemptions from its sanctions on Iran’s economy for the development of Chabahar along with an attached railway project and Iranian petroleum shipments to Afghanistan. …
 
  “This exception relates to reconstruction assistance and economic development for Afghanistan. These activities are vital for the ongoing support of Afghanistan’s growth and humanitarian relief,” the spokesman said.
 
The U.S. sanctions had threatened India’s ability to obtain financing for the development of Chabahar, which could potentially end Afghanistan’s dependence on Pakistan’s port of Karachi.
 
The effort to build up Afghanistan’s economy is also aimed at reducing Kabul’s dependence on foreign aid and putting a major dent in the illicit opium trade that has been a major source of revenue for the Taliban insurgency. …

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NWS_a2
11. ST&R Trade Report: “Export Controls, Technology Transfers Among New Items on DOC Regulatory Schedule”
 
Expanded controls on exports to China, Russia, and Venezuela and mandatory reviews of technology transfers are among the new items on the Department of Commerce’s most recent 
semiannual regulatory agenda. This document lists the following regulations affecting international trade that could be issued within the next year as well as rulemaking proceedings that have been in process for some time and are not as likely to see further progress in the near term. The expected timeframes for issuance of the rules are indicated in parentheses.
 
Upcoming Regulations
 
  – a final rule eliminating the regulation describing how the DOC will issue licenses for the allocation of tariff-rate quotas on 
worsted wool fabric, as the underlying program has been transferred to the Department of Agriculture (November 2018; previously May 2018)
  – a final rule to eliminate the regulation describing how the DOC will determine whether applicants are bona fide 
motor vehicle manufacturers under the Automotive Products Trade Act of 1965, as the authority for this regulation is no longer part of the U.S. tariff schedule (November 2018; previously May 2018)
  – a final rule removing the complex provisions and related procedure setting forth review policy, licensing procedure, and reporting requirements for activities involving items subject to the Export Administration Regulations that may have been illegally exported or reexported to 
Libya before the embargo on that country ended in 2006 (November 2018; previously July)
  – a proposed rule on export controls for 
cybersecurity items (November 2018; previously July)
  – a final rule to establish a voluntary Commerce Trusted Trader Program for
seafood importers that aims to provide benefits such as reduced targeting and inspections and enhanced streamlined entry (November 2018; previously September 2018;
proposed rule published January 2018)
  – an advance notice of proposed rulemaking seeking comments on
export controls on spacecraft (November 2018; first time published)
  – a final rule clarifying the availability of
license exception STA (strategic trade authorization) for exports, reexports, and transfers (in-country) of certain items under the EAR (November 2018; first time published)
  – a proposed rule to clarify that for all entries subject to 
antidumping duties the importer must file its reimbursement certification in either proper electronic form or paper form in accordance with U.S. Customs and Border Protection requirements (December 2018; unchanged)
  – a proposed rule setting forth procedures to address 
covered merchandise referrals from CBP (December 2018; unchanged)
  – a final rule specifying that where the exporting country does not constitute a viable market the DOC will normally calculate 
normal value based on constructed value (December 2018, unchanged; 
proposed rule published in August 2016)
  – a proposed rule to eliminate references to (a) information provided by domestic interested parties regarding sales made below the cost of production in order to allege 
dumping and (b) allow the DOC’s use of voluntarily submitted information to calculate constructed value (December 2018; unchanged)
  – a proposed rule that would align DOC regulations with the Trade Preferences Extension Act of 2015, which provides that the DOC shall not be required to corroborate any 
dumping margin or CV duty applied in a separate segment of the same proceeding (December 2018; unchanged)
  – a final rule establishing requirements for requesting exclusions from 
steel and aluminum tariffs (January 2019, previously November 2018; 
interim final rule published March 2018)
  – a proposed rule on the definition of a 
routed export transaction and the responsibilities of parties in such transactions (February 2019, previously August 2018; 
advance notice of proposed rulemaking issued in October 2017)
  – a proposed rule to amend certain 
600 series ECCNs to clarify the controls on items related to military vehicles, vessels of war, submersible vessels, oceanographic equipment, and auxiliary and miscellaneous military equipment (February 2019; previously August 2018)
  – a proposed rule to expand license requirements on exports, reexports, and transfers (in-country) of items intended for military end use or military end users in
China, Russia, or Venezuela (February 2019)
  – a proposed rule to require review of certain
technology transfers that would not otherwise require licenses according to the Commerce Control List (March 2019; first time published)
 
Regulations in Process
 
  – a final rule establishing time limits for the submission of requests for sampling in administrative reviews of AD duty orders (proposed rule issued November 2013)
  – a proposed rule to adopt an export licensing amendment process and make other licensing process efficiencies
  – a final rule that (a) clarifies the parties’ responsibilities under the EAR in a routed export transaction, including when the U.S. principal party in interest maintains its responsibility for license requirement determination and licensing, and (b) details when and how a U.S. PPI may delegate to the foreign PPI its responsibilities to determine license requirements and apply for a license (proposed rule issued February 2014)
  – a proposed rule updating and clarifying certain license exception AVS provisions
 
Completed Regulations
 
  – a final rule revising export and reexport license requirements for South Sudan 

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COMMCOMMENTARY

(Source:
American Shipper, 7 Nov 2018.) [Excerpts.]
 
While your company may be confident in its export compliance program within the U.S., does it feel the same about its overseas subsidiaries, branches and affiliates that also handle its products?
 
If not, the company risks a visit from the Commerce Department’s Bureau of Industry and Security and other federal agencies involved with enforcing U.S. export control regulations. The result can be costly fines and penalties, not to mention the negative publicity that goes along with being involved in illicit export transactions.
 
  “It is evident that Commerce, Homeland Security Investigations and Treasury are cracking down on those overseas affiliates and distributors that are finding creative ways to avoid compliance with U.S. laws and regulations,” said Paul DiVecchio, head of export compliance consultancy DiVecchio & Associates.
 
The 2018 John S. McCain National Defense Authorization Act, which contains the Export Control Reform Act, has further intensified the emphasis on enforcement of the nation’s export control regulations not only within the U.S. but abroad.
 
In addition, the Trump administration over the past two years has unleashed a flurry of announcements that crack down on individuals and entities posing a threat to national security or violating export controls and embargoes.
 
The problem for many U.S. multinational companies, especially those with strong overseas sales and distribution operations, may be the inherent belief among some of their foreign staffs that U.S. regulations don’t apply to them and they may find ways to re-export U.S.-made items to individuals and entities in countries that are subject to strict U.S. export license requirements. …
 
However, there may still be that temptation by an overseas manager to circumvent U.S. export controls.
 
  “The commitment of the senior official within an overseas affiliate to abide by the corporate governance and ethics will dictate how subordinates will follow the procedures and policies established by the U.S. corporate compliance organization,” DiVecchio said. “Most subordinates tend to be subservient to the general manager of the affiliate, which in some cases runs counter to U.S. corporate governance.”
 
This problem becomes amplified for U.S. forwarders who are employed to facilitate export transactions, yet equally culpable in the eyes of U.S. export enforcement agencies if wrongdoing occurs.
 
  “Handling large multinational companies in the U.S., as well as overseas, requires you to be consistent with your order management practices when it comes to screening order parties against embargoes and sanctions and, of course, record keeping,” said Michael Ford, chief compliance officer of BDP International.
 
  “The internal challenge comes in the form of educating your staff overseas about U.S. export regulations,” he added. “The consistency of systems also helps a lot with meeting the U.S. regulations.” …

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(Source:
Stroock & Stroock & Lavan LLP, 1 Nov 2018)
 
* Authors: Christopher R. Brewster, Esq.,
cbrewster@stroock.com, +1 202-739-2880; Erin Bruce-Iacobucci, National Security Consultant,
ebruce@stroock.com, +1 202-739-2815; and Chris Griner, Esq.,
cgriner@stroock.com, +1 202-739-2850. All of Stroock & Stroock & Lavan LLP.
 
U.S. Government Facility Security Clearances (“FCLs”) may not be issued to U.S. companies under foreign ownership, control or influence (“FOCI”) unless adequate safeguards are in place to protect U.S. national security.  The National Industrial Security Program Operating Manual (“NISPOM”) provides guidance for determining whether U.S. companies are under FOCI and implements U.S. Government policy for granting or continuing FCLs for U.S. companies operating under FOCI.

Consistent with U.S. policy, the NISPOM recognizes that foreign investment in the defense industrial base, when consistent with national
security interests, is also, more broadly, in the national interest of the United States.  The National Industrial Security Program is designed, in part, to safeguard U.S. Government contractors against
improper foreign influence or control.

A thorough review of a U.S. company’s relationship with foreign persons, including (but not limited to) investors, directors, management, lenders, and customers is conducted to determine whether the company is under FOCI.  Foreign influence is assessed in the aggregate, and the presence of multiple FOCI factors does not necessarily damage a company’s eligibility for an FCL.  On the other hand, the determination that a company is under FOCI renders the company ineligible for an FCL unless and until FOCI factors have been mitigated to the satisfaction of the U.S. Government.

It is important for U.S. companies to consult with counsel when contemplating a merger or acquisition with or by a foreign investor, or when planning to establish significant relationships (including strategic alliances) with a foreign partner.   Foreign investors contemplating acquisition of a U.S. contractor that possesses an FCL should review the impact of the acquisition on the target company’s U.S. Government contracts, to include an assessment of whether the government is likely to require FOCI mitigation and if so, whether a FOCI mitigation plan can be structured to the satisfaction of both the U.S. Government and the foreign investor.

Industrial security investigation procedures for mergers or acquisitions under review by the U.S. Government’s Committee on Foreign Investment in the United States (“CFIUS”) are prescribed by the NISPOM.  The Exon-Florio provision of the Defense Production Act of 1950, as amended, establishes CFIUS by statute and authorizes the President to investigate and-if the President determines that the transaction threatens national security-block mergers, acquisitions, and takeovers of U.S. companies by foreign interests.  CFIUS and industrial security reviews move on parallel, but separate, tracks with different time constraints and considerations.  The proposal of a satisfactory security arrangement, while significant, is only one factor considered in a Department of Defense (“DoD”) or other U.S. agency recommendation to CFIUS.  In cases where the industrial security arrangement is the remaining issue, DoD (or another applicable agency) may recommend suspending or blocking the transaction if there is an indication that further negotiations are not likely to result in a mutually acceptable plan. 

 
The NISPOM Describes Four FOCI Mitigation Plans That Permit Foreign-Owned Companies To Hold FCLs:
 
  (1)
Board Resolution — Where foreign investment in a company is sufficient to raise national security concerns,
but not sufficient to allow representation by the foreign investor(s) on the Board of Directors, it will generally be acceptable for the Board to adopt a resolution certifying that the foreign investor will be prohibited from access to classified information and will not be permitted to influence the cleared company’s performance of classified contracts, among other things.  If foreign ownership is sufficient to elect a member to the Board, a Board Resolution may not be acceptable FOCI mitigation, even if the foreign owner is not, in fact, represented on the Board.

   (2)
Voting Trust Agreement and Proxy Agreement — Voting Trust Agreements and Proxy Agreements are applied in circumstances where a foreign investor is positioned to control a U.S. company.  Under these agreements, three trustees or proxy holders are typically vested with control of the company, except for a few, specifically identified matters such as mergers or bankruptcy, for which the consent of the stockholder may be required.  Proxy holders/trustees must be clearable U.S. resident citizens with no prior involvement with either company.  In practice, while the foreign interest may not influence the U.S. company under a Proxy Agreement, the U.S. Government generally permits the stockholder to consult with the proxy holders on matters of importance to the company, and the NISPOM expressly allows such interaction “where otherwise consistent with U.S. laws, regulations, and the terms of the Voting Trust or Proxy Agreement.”  Under both arrangements, there are no restrictions placed on the company’s eligibility to access classified information or to compete for classified contracts.  Although the U.S. Government generally views Voting Trusts and Proxy Agreements similarly for FOCI mitigation purposes, they impose different and significant legal constraints on the foreign owner.  For these reasons and others, consultation with U.S. counsel is advisable in structuring Proxy and Voting Trust Agreements.

  (3)
Special Security Agreements/Security Control Agreements — A Special Security Agreement (“SSA”) may be used when a foreign interest owns or controls a U.S. company.  Although a company under an SSA may access classified information for the performance of classified contracts, it may only access proscribed information [FN/1] with special authorization following a National Interest Determination (“NID”).  The standard for a NID is that the release of the proscribed information to the SSA company “is consistent with the national security interests of the United States.” [FN/2] Under an SSA, the foreign interest may have minority representation on the Board of Directors if the directors representing the foreign investor are excluded from unauthorized access to classified and export-controlled information, among other restrictions. 

If a company is not effectively owned or controlled by a foreign shareholder, but a foreign shareholder is represented on the Board of Directors, the company may be cleared under a Security Control Agreement (“SCA”).  The SCA is similar to an SSA, except that access to classified information is not typically limited under an SCA.

  (4)
Limited FCL — A Limited FCL may be available to a U.S. company under FOCI if the United States has entered into an Industrial Security Agreement with the government from which the foreign interest is derived, and the release of classified information is consistent with the U.S. National Disclosure Policy.  In extraordinary circumstances, a Limited FCL may also be available based on a statement provided by the U.S. Government Contracting Activity (“GCA”) identifying to the Cognizant Security Agency a compelling need that justifies the FCL and confirms that access to classified information is essential for contract performance.  Limited FCLs are only valid for contracts awarded by the initiating GCA.  Access limitations are inherent with the granting of a Limited FCL and apply to all of the cleared company’s employees, regardless of citizenship. 

The NISPOM requires any company operating under a Voting Trust, Proxy Agreement, SSA, or SCA to establish a permanent committee of its Board of Directors known as a Government Security Committee (“GSC”).  A GSC is composed of the voting trustees, proxy holders, or outside directors, as applicable, and directors who hold personnel security clearances and are also officers of the U.S. company (officer directors).  The GSC must ensure that the U.S. company maintains policies and procedures to safeguard classified information, ensure that the company complies with U.S. export control laws, and prevent improper control or influence from the foreign interest.

Under the NISPOM, all companies cleared under a Voting Trust, Proxy Agreement, SSA, or SCA must also establish a Technology Control Plan “to reasonably foreclose the possibility of inadvertent access by non-U.S. citizen employees and visitors to export-controlled information for which they are not authorized.”

The NISPOM provides for agreements that allow foreign investment in U.S. defense and national security contractors without jeopardizing the security clearances that make those companies valuable investments.  The NISPOM establishes an array of options that place varying degrees of restrictions on the foreign investor, based on the specific relationship that exists between the U.S. company and the foreign investor.  Careful attention to these requirements allows the foreign investor to address U.S. national security interests and provide significant protection for its investment.

————-

  [FN/1] Proscribed information is defined to include Top Secret information; Communication Security (COMSEC) material, excluding controlled cryptographic items when unkeyed or utilized with unclassified keys; Restricted Data; Special Access Program (SAP) information; and Sensitive Compartmented Information (SCI).
  [FN/2] Absent a secretarial waiver, the U.S. Departments of Defense and Energy are prohibited, by statute, from entering into contracts with certain foreign government-owned or -controlled corporations if the contract requires access to proscribed information.

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(Source:
Arent Fox LLP, 6 Nov 2018.)
 
* Authors: Kay C. Georgi, Esq.,
kay.georgi@arentfox.com, +1 202-857-6293; Marwa M. Hassoun, Esq.,
marwa.hassoun@arentfox.com, +1 213-443-7645; and Regan K. Alberda, Esq.,
regan.alberda@arentfox.com, +1 202-775-5771. All of Arent Fox LLP.
 
 
Back in May 2018, President Trump announced the United States’ intention to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose secondary sanctions on Iran.
 
The announcement was accompanied by 90- and 180-day wind-down periods during which non-US persons could wrap up transactions entered into prior to May 8 and that were otherwise consistent with the terms of the JCPOA. November 5, 2018 marked the expiration of the final wind-down period and re-imposition of secondary sanctions on a broad swath of Iranian persons and sectors of Iran’s economy.
 
Some of the key takeaways from this action include:
 
Lots More SDNs!
 
According to Treasury Secretary Mnuchin more than 700 individuals, entities, aircraft and vessels were sanctioned, and over 300 of these designations were new targets.
 
Nearly 250 entities were moved from the EO 13599 (Government of Iran list) list to Iran/SDN lists. Some of these were also designated on the SDN list for other reasons or have additional associated secondary sanctions. Watch out for the phrase “Additional Sanctions Information – Subject to Secondary Sanctions” as that is the key flag for secondary sanctions.
 
There are two types of designations, which mean different things to non-US companies that are NOT US-owned or -controlled:
 
  (1) Financial institutions whose only designation is [IRAN] with no mention of “Additional Sanctions Information – Subject to Secondary Sanctions”- These financial institutions are not subject to secondary sanctions. Thus, non-US companies that are NOT US-owned or-controlled can do business with [IRAN] entities without risking secondary sanctions PROVIDED the business does not involve other secondary sanctions areas (such as petroleum, petrochemical, gold or other independent grounds for secondary sanctions). For example, a European company can sell food to Iran using an Iranian bank only designated as [IRAN], provided no other party is an SDN. US companies and non-US persons, however, who are US-owned and -controlled violate US law by doing business with the Iranian bank and must block its property absent an OFAC license (which in the case of food exports from the US to Iran might be available).
  (2) Entities and Persons with “Additional Sanctions Information – Subject to Secondary Sanctions” [IRAN], and in many cases additional designations [SDGT, NPWMD, IRAN-HR etc.] – These entities are SDNs. Therefore, non-US companies that are NOT US-owned or -controlled doing business with them risk secondary sanctions. US companies and non-US persons who are US-owned and -controlled violate US law by doing business with them and must block their property (see below).
 
Secondary Sanctions Concerns for Non-US Persons NOT Owned or Controlled by US Persons:
 
The provision or delivery of goods or services (including the extension of additional loans or credits) to an Iranian entity or person after November 4, 2018, may subject a non-US person to secondary sanctions, even if done pursuant to a contract entered into prior to May 8, 2018, if the transaction is in a sector or with an SDN triggering secondary sanctions.
 
BUT, non-US persons who are not US-owned or -controlled can still receive payment for contracts entered into prior to May 8, 2018, provided the goods or services were fully provided or delivered to Iran prior to applicable wind-down date. (Any payments must be consistent with US sanctions and not include US persons or the US financial system nor involve any of the new SDNs).
 
Non-US persons, including foreign financial institutions, may be subject to secondary sanctions for receiving payment for transactions undertaken during the wind-down period if the payment involves a person that has been added to the SDN list (see above), regardless of whether it was previously on the EO13599 List to which secondary sanctions did not apply.
 
The re-imposition of secondary sanctions also prompted amendments to the Iranian Transactions and Sanctions Regulations (ITSR) to include blocking sanctions relating to support for the Government of Iran’s purchase or acquisition of US bank notes or precious metals; certain Iranian persons; and Iran’s energy, shipping, and shipbuilding sectors and port operators.
 
The re-imposition of sanctions has had an immediate impact on the provision of specialized financial messaging services to certain Iranian banks, including the Central Bank of Iran and Iranian banks designated in connection with Iran’s support for international terrorism or WMD proliferation. SWIFT, the world’s leading provider of secure financial messaging services, announced that it is suspending certain Iranian banks from access to its services.
 
Primary Sanctions Concerns for Non-US Persons Owned or Controlled by US Persons:
 
Non-US persons who are US-owned or -controlled CANNOT receive payment for contracts entered into prior to May 8, 2018. Such persons will need to apply to OFAC for a specific license.
 
Non-US persons who are US-owned or-controlled are required to block property of the government of Iran and entities designated as Iran in the same way as their US parent persons. This requirement applies to both a person whose property is blocked solely pursuant to the ITSR (e.g., SDN tag [IRAN]) as well as other sanctions programs (i.e., SDN tags [SDGT] for counterterrorism or [NPWMD] for nuclear proliferation).
 
Strategic Reduction Exceptions (SREs) Granted for Eight Countries to Purchase Iranian Oil
 
The US granted temporary exceptions to eight countries to continue to purchase Iranian oil: China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey.
 
If a foreign financial institution in a country that was not granted a SRE holds funds belonging to the Central Bank of Iran (or a non-designated Iranian bank), those funds may be used to facilitate humanitarian trade with Iran, including transactions for the sale of agricultural commodities, food, medicine and medical devices, as well as bilateral trade between the foreign financial institution’s home country and Iran (provided that trade is not subject to additional secondary sanctions).
 
The provision of certain services relating to the import of Iranian petroleum by a SRE country is not sanctionable to the extent the purchase meets the requirements of NDAA 2012 section 1245(d)(4)(D), and may include services provided certain sanctioned sectors, i.e., Iran’s shipping and port operation sectors, as long as no entities involved are SDNs in connection with international terrorism or WMD proliferation
 
October 16, 2018 SDN Designations
 
In a somewhat confusing move, prior to the JCPOA wind-down expiration, on October 16, 2018 OFAC announced the removal of several entities, including several major Iranian banks, from the EO 13599 List and their transfer to the SDN list. This sent foreign entities scrambling to figure out how and whether to deal with pending transactions involving the recently designated Iranian banks.  At first glance, to many, this move appeared to stem from the United States’ JCPOA withdrawal, as a result of which, many entities that appeared on the EO 13599 List of entities owned or controlled by the Government of Iran and Iranian financial institutions, would be transferred back to the SDN list, no later than November 5.
 
However with further clarification, it became evident that the October 16 designations were made independently of any JCPOA considerations and, as such, went into effect immediately rather than on November 5. By making no mention of the JCPOA, the press release suggested that the designations were not related to JCPOA actions on or before November 5.
Read the press release here
 
OFAC designated several Iranian financial institutions and other entities as Specially Designated Global Terrorists (SDGTs) pursuant to Executive Order 13224, for their support to designated global terrorist organizations. For example, Bank Mellat, Sina Bank and Parsian Bank, all of which appeared on the EO 13599 List were moved to the SDN List as SDGTs.
 
Further, in anticipation of deceptive measures Iran may employ with the JCPOA wind-down, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)
published an advisory on October 11, 2018. The aim of the advisory is to assist financial institutions in understanding their legal obligations under US sanctions and AML/CFT authorities, as well as the red flags potentially indicative of Iranian entities’ attempts to manipulate the global financial system. The deceptive measures are not limited to the financial sector, but may also involve shipping companies, the trade in precious metals, and virtual currency, to name a few.
 
In announcing the recent designations and publishing its advisory, the US Treasury Department is calling on international companies to further “sophisticate their compliance programs in anticipation of [Iran’s] continued attempts to circumvent sanctions.”

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TEEX/IM TRAINING EVENTS & CONFERENCES

 
* What: Seminar Level II – Managing ITAR/EAR Complexities; Scottsdale, AZ
* When: March 26-27, 2019
* Sponsor: Export Compliance Solutions (ECS)
* ECS Speaker Panel:  Suzanne Palmer, Lisa Bencivenga
* Register here or by calling 866-238-4018 or e-mail spalmer@exportcompliancesolutions.com

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ENEDITOR’S NOTES

Margaret Mitchell (Margaret Munnerlyn Mitchell, 8 Nov 1900 – 16 Aug 1949); was an American novelist and journalist who wrote under the name Peggy Mitchell. Her best known work was the novel, Gone with the Wind, for which she won the Pulitzer Prize for Fiction in 1937.)
  – “Life’s under no obligation to give us what we expect.”

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EN_a317
. 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: 19 Sep 2018: 83 FR 47283-47284: Extension of Import Restrictions Imposed on Archaeological Material From Cambodia  

 
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: 2 Nov 2018: 
83 FR 55099: Wassenaar Arrangement 2017 Plenary Agreements Implementation [Correction to 24 Oct EAR Amendment Concerning Supplement No. 1 to Part 774, Category 3.]

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

  – Last Amendment: 5 Nov 2018: 
83 FR 55269-55271: Iranian Transactions and Sanctions Regulations 

 
*
FOREIGN TRADE REGULATIONS (FTR)
: 15 CFR Part 30
  – Last Amendment: 24 Apr 2018: 3 FR 17749-17751: Foreign Trade Regulations (FTR): Clarification on the Collection and Confidentiality of Kimberley Process Certificates
  – HTS codes that are not valid for AES are available
here.
  – The latest edition (30 Apr 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 approximately 250 footnotes containing case annotations, practice tips, Census/AES guidance, and explanations of the numerous errors contained in the official text. Subscribers receive revised copies in Microsoft Word every time the FTR is amended. The BAFTR is available by annual subscription from the Full Circle Compliance websiteBITAR subscribers are entitled to a 25% discount on subscriptions to the BAFTR. Government employees (including military) and employees of universities are eligible for a 50% discount on both publications at www.FullCircleCompiance.eu.  
 
*
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 Nov 2018: 
Harmonized System Update 1819, containing 1,200 ABI records and 245 harmonized tariff records.

  – HTS codes for AES are available 
here.
  – HTS codes that are not valid for AES are available 
here.
 
INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130.
  – Last Amendment:
4 Oct 2018: 83 FR 50003-50007: Regulatory Reform Revisions to the International Traffic in Arms Regulations.

  – The only available fully updated copy (latest edition: 4 Oct 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_a0318
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, Alex Witt. The Ex/Im Daily Update is emailed every business day to approximately 6,000 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, DOE/NRC, DOJ/ATF, DoD/DSS, DoD/DTSA, FAR/DFARS, 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.  If you would to submit material for inclusion in the The Export/Import Daily Update (“Daily Bugle”), please find instructions here.

* 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.


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