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20-0805 Wednesday ” Daily Bugle “

20-0805 Wednesday “Daily Bugle”

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Wednesday, 5 August 2020

(No items of interest posted) 

  1. Items Scheduled for Future Federal Register Edition
  2. Commerce/BIS: (No new postings)
  3. State/DDTC: “(No new postings)
  1. UrduPoint: “US Investigates Turkish Companies for Violating US Sanctions Against Venezuela”
  1. Haynesboone: “China Released the Draft Export Control Law”
  2. Husch Blackwell: “USTR to Consider Extending List 1 Exclusions Past October 2nd Expiration Date”
  3. Volkov Law: “OFAC Enforcement and “Screening Errors”
  4. Winston & Strawn: “BIS Closes Loopholes for Huawei”
  1. FCC Academy Presents September Webinars: U.S. Export Controls: ITAR & EAR, and FMS
  1. Bartlett’s Unfamiliar Quotations 
  2. Are Your Copies of Regulations Up to Date? Find the Latest Amendments Here. 
  3. Weekly Highlights of the Daily Bugle Top Stories 
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EXIM ITEMS FROM TODAY’S FEDERAL REGISTER

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OGS OTHER GOVERNMENT SOURCES

OGS_a11. Items Scheduled for Future Federal Register Editions

 
* Treasury/OFAC; NOTICES; Blocking or Unblocking of Persons and Properties; [Pub. Date: 6 Aug 2020] (PDF)
(PDF)

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OGS_a22. Commerce/BIS: (No new postings)

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COM NEWS

(Source: UrduPoint, 5 Aug 2020)
 
The United States is continuing to investigate Turkish companies to designate them for violating US sanctions against Venezuela, Special Representative for Venezuela Elliott Abrams told reporters on Tuesday.
 
“We keep trying. Again, as Treasury and OFAC [Office of Foreign Assets Control], we keep going after companies as we find them,” Abrams said.
 
Asked to provide a list of the Turkish companies under investigation, Abrams said, “I can’t today, but I’d be happy to supply it to you.”
 
However, Abrams noted that some investigations are ongoing and “we wouldn’t be able to do it in a classified form.
 
Abrams pointed out that Turkish presence in Venezuela is a big problem, albeit their presence is not so great compared to that of Russia and Cuba.
 
“But they are lending themselves to this kind of corrupt activity. Also, gold. We see a lot of gold passing through Turkey,” Abrams said.
 
Maduro has accused the United States and its allies of using sanctions and other means to topple his government and take hold of Venezuela’s assets and resources.

COM COMMENTARY

(Source: Haynesboone, 4 Aug 2020)
 
* Principal Author: Liza L.S. Mark, Esq., 86-21-6062-6183, Haynesboone
 
On December 28, 2019, the Standing Committee of China’s National People’s Congress (“CNPC“) published the Draft Export Control Law (“Draft ECL“) on with comments due by January 26, 2020. According to the 2020 Annual Work Report recently released by the Standing Committee of CNPC, it is anticipated that the Draft ECL will be finalized and become effective within the year 2020.
Key Contents: 

1) The First Omnibus National Export Control Law
     China’s current export control legal regime is not set out in an unified legislation, but rather is spread across several different laws, including the Foreign Trade Law (rev. 2016) and Customs Law (2017), and administrative regulations, including the Regulations on Arms Export (2002), Regulations on Control of Nuclear Export (2006), and Regulations on Control of Nuclear Dual-Use Items and Related Technologies (2007), as well as the Administrative Measures for the General Licensing for Export of Dual-Use Items and Technologies (2009). Meanwhile, administrative authority is divided among several Chinese government agencies: the Ministry of Commerce of the People’s Republic of China, the State Administration of Science, Technology and Industry for National Defense, the Ministry of Science and Technology, the Central Military Commission and the General Administration of Customs. 
The newly drafted ECL would mark the first omnibus and comprehensive national export control legislation and would create clear legal authority and investigation powers for enforcement of China’s export controls.

2) Export Control List
     Items, including goods, technologies and services, characterized as (i) dual-use; (ii) military; (iii) nuclear; or (iv) otherwise related to performing international obligations or national security protection would be designated on export control lists (regular or temporary) and would be subject to export licensing requirements. Licenses are required for exporting the items described on the control lists.
     For controlled items not on the above-mentioned control lists, i.e., category (iv), including critical technologies, China would also be able to (a) impose an embargo; (ii) prohibit exports to certain destinations, individuals or entities; and (iii) apply temporary controls for up to two-years. 
China may blacklist foreign importers and end-users for (1) violating end-user or end-use commitments; (2) endangering national security; or (3) terrorism.       The Draft ECL would abolish the retaliation provision that would have prohibited exports of controlled items to countries, such as the US, that have imposed restrictions or prohibitions on exports of such items to China.
Implications:
    It appears that China intends to strengthen its export control regime in part to provide counter measurements to the tightened US export controls perceived as targeting China and Chinese companies such as Huawei. 
After the ECL is adopted, we expect to see new and consolidated export control lists. Such lists would likely include sensitive and cutting-edge technologies, likely resulting in a tit-for-tat regulatory response to similar export control measures adopted by US. These control lists may also include critical natural resources such as rare earth metals, a potentially powerful tool for China to disrupt global supply chains. Thus, the Draft ECL reflects a continued movement towards the US and China “de-coupling”, especially in certain sensitive sectors. 

Multinational companies (MNCs) outside and inside China should be aware of the changes in the export control regimes. When exporting to China, overseas MNCs will need to comply with overseas, especially US or EU, export control requirements, and when exporting from China, MNCs within China will need to comply with the Chinese ECL.  

(Source: Husch Blackwell, 4 Aug 2020)
 
* Author: Turner A. Kim, Esq., 1-202-378-2410, Husch Blackwell
 
On August 3, 2020, the Office of the U.S. Trade Representative (USTR) issued a notice requesting comments on whether to extend specific exclusions on Chinese imports from the Section 301 List 1 that are set to expire on October 2, 2020.  Companies whose products were granted exclusions in notices published on  October 2, 2019December 17, 2019, and February 11, 2020 are eligible to submit comments. The due date for companies to submit their comments is August 30, 2020. USTR has stated that it will focus its evaluation on whether, despite the first imposition of these additional duties, the particular product remains available only from China. Additionally, USTR encourages companies to specifically address the following in their submission:
 
(1) Whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
 
(2) Any changes in the global supply chain since July 2018 with respect to the particular product or any other relevant industry developments.
 
(3) The efforts, if any, the importers or U.S. purchasers have undertaken since July 2018 to source the product from the United States or third countries.
 
(4) Whether the imposition of additional duties on the products will result in sever economic harm to the commenter.

(Source: Volkov Law, 4 Aug 2020)
 
* Author: M. Volkow, Esq., Vokov Law
 
Here is another profound grasp of the obvious (for which I have a knack for delivering) – compliance and legal professionals can learn a number of lessons from individual enforcement actions.  In many cases, however, there is much more to the story than the headline or the list of so-called lessons learned.
One category of enforcement actions is a perfect example – OFAC has brought several significant enforcement actions in last two years that are described as the result of “screening errors.” These screening errors are sometimes described as the fault of sanctions screening software or human error. 
 
OFAC Sanctions Compliance Guidance
To bring some light to these cases, I am posting a three-part series to review the OFAC Sanctions Compliance Guidance and four relevant enforcement actions focused on screening issues.
As set forth in OFAC’s Sanctions Compliance Guidance, one of the five requisite elements of an effective sanctions compliance program is titled, “Internal Controls,” which should “enable the organization to clearly and effectively identify, interdict, escalate, and report” potential violations.  With specific reference to automated screening programs, OFAC stated:
 
To the extent information technology solutions factor into the organization’s internal controls, the organization has selected and calibrated the solutions in a manner that is appropriate to address the organization’s risk profile and compliance needs, and the organization routinely tests the solutions to ensure effectiveness.
A company’s OFAC compliance program is built on a screening system.  But, a screening program is just one piece of an effective set of internal controls.  It is imperative that a company build appropriate controls around the screening technology to ensure that relevant information is collected, the screening system is calibrated to work efficiently, and that controls are in place to identify, escalate and report to appropriate personnel potential transactions and risks of an OFAC violation. 
 
Sanctions Screening Errors
The Sanctions Compliance Guidance included an appendix of the ten most common root causes of OFAC sanctions violations, one of which is entitled, Sanctions Screening Software or Filter Faults.  Under this heading, OFAC explained
[O]rganizations have failed to update their sanctions screening software to incorporate updates to the SDN List or SSI List, failed to include pertinent identifiers such as SWIFT Business Identifier Codes for designated, blocked, or sanctioned financial institutions, or did not account for alternative spellings of prohibited countries or parties-particularly in instances in which the organization is domiciled or conducts business in geographies that frequently utilize such alternative spellings (i.e., Habana instead of Havana, Kuba instead of Cuba, Soudan instead of Sudan, etc.),
 
In this last description, OFAC highlights in a passive voice “instances” in which the organization failed to account for alternative spellings; in other words where errors (human or machine) occurred.  However, in context, OFAC’s expectations are clear that internal controls should account for human and/or machine error and include specific processes to mitigate those specific risks. 
With respect to the technology solution or screening software, OFAC has made it clear that organizations should calibrate their systems and test the system to make sure it operates correctly.  To the extent human error may be the root cause, OFAC expects that organizations conduct regular training of responsible control persons, which would obviously include persons responsible for conducting and processing screening for OFAC compliance purposes.  

(Source: Winston & Strawn, 3 Aug 2020)
 
* Principal Author: David B Houck, Esq., 1202-282-5219, Winston & Strawn
 
Over the past year, the U.S. government has tightened export control restrictions on technology entities in China, most particularly phone and 5G infrastructure manufacturer Huawei Technologies Co., Ltd (Huawei). We have written about Huawei’s addition to the Bureau of Industry and Security (BIS) Entity List here and here.

In short, due to these designations any business or individual exporting, reexporting, or transferring goods and technology subject to BIS jurisdiction to Huawei requires a license from BIS. Pursuant to the Export Administration Regulations (EAR), BIS claims jurisdiction over U.S.-origin products, wherever located, and among other things, certain foreign-made commodities that incorporate more than a de minimis percentage of controlled U.S.-origin content. However, Huawei has still been able to source U.S. origin chipsets and schematics through holes in BIS jurisdiction due to the foreign direct product rule (FDPR) that places certain goods outside of the jurisdiction of BIS.

To help close these holes, BIS has expanded restrictions on General Prohibition Three, which describes the FDPR.[FN/1] The FDPR extends BIS jurisdiction to certain foreign-made products that are created as a “direct product” of U.S.-origin goods. Though this prohibition generally applies only to a narrow band of items, on May 15, 2020, BIS announced that it was expanding the FDPR as it applies to Huawei to “narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”[FN/2]

The change applies newly-added “footnote 1” to certain entities (currently, only Huawei and related entities). Footnote 1 expands the FDPR to capture the export, reexport, or transfer of goods that may ultimately benefit Huawei that were not previously captured because those products, by the time they reached Huawei, fell outside of the jurisdiction of BIS under the EAR. Specifically, the rule “prohibits the reexport, export from abroad, or transfer (in-country) without a license, of certain foreign-produced items when there is knowledge that the item is destined to an entity with a footnote 1 designation [here, Huawei] on the Entity List.”[FN/3]

This newly expanded authority specifies two groups of items to which footnote 1 applies when there is “knowledge” that the foreign-produced item is destined to any entity with a footnote 1 designation.
 
Group (a) includes items that are
 
  • the direct products of certain “technology” or “software” subject to the EAR; and
  • the foreign-produced item is produced or developed by any entity with a footnote 1 designation (i.e. Huawei)
 
Group (b) similarly includes direct products of plants or major components of plants. Specifically, it includes
  • items produced by a plant or major component of a plant outside the United States
  • when the plant or major component of a plant itself is a direct product of certain U.S.-origin technology or software; and
  • the item is a direct product of software or technology produced by an entity with a footnote 1 designation (i.e. Huawei)
 
These categorizations, in effect, allow BIS to maintain jurisdiction over the products developed by Huawei itself, where before certain products would have fallen out of BIS jurisdiction before reaching Huawei, and therefore BIS could not require a license for a certain transaction. However, it is worth noting that this rule retains a “knowledge” requirement. The EAR defines “knowledge” as “not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person’s willful avoidance of facts.”

Exporters should perform appropriate due diligence to determine whether an export is ultimately destined for Huawei or one of its affiliates listed on the Entity List, and should not willfully ignore any red flags that such a destination is possible. The heightened scrutiny that Huawei has received, with BIS going so far as to create a new classification just to close the loopholes for Huawei in particular, demonstrates the hostile stance that the U.S. government has taken toward Huawei, and suggests that BIS will interpret its enforcement mandate broadly.
 
[FN/1] 15 C.F.R. § 736.2(b)(3). 
[FN/2] Commerce Addresses Huawei’s Efforts to Undermine Entity List, Restricts Products Designed and Produced with U.S. Technologies, U.S. Dept. of Commerce Office of Public Affairs,
[FN/3] Export Administration Regulations: Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule) and the Entity List, 85 Fed. Reg. 29851 (May 19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10856.pdf.

TE EX/IM TRAINING EVENTS & CONFERENCES

 
ITAR & EAR from a non-US perspective
Tuesday, 8 September 2020
More Info
The ABC of Foreign Military Sales (FMS)
Tuesday, 29 September 2020
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EN EDITOR’S NOTES

EN_a110. Bartlett’s Unfamiliar Quotations

(Source: Editor)
 

* Bruce Barton (Bruce Fairchild Barton (5 Aug 1886 – 5 Jul 1967; was an American author, advertising executive, and politician. He served in the U.S. Congress from 1937 to 1940 as a Republican from New York.)
  – “If you can give your child only one gift, let it be enthusiasm.”
  – “When you’re through changing, you’re through.”
  – “It would do the world good if every man would compel himself occasionally to be absolutely alone. Most of the world s progress has come out of such loneliness.”
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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 are listed below.
 
Agency 
Regulations 
Latest Update 
DHS CUSTOMS REGULATIONS: 19 CFR, Ch. 1, Pts. 0-199.

 

5 Apr 2019: 84 FR 13499:

Civil Monetary Penalty Adjustments for Inflation. 
DOC EXPORT ADMINISTRATION REGULATIONS (EAR): 15 CFR Subtit. B, Ch. VII, Pts. 730-774. 
31 Jul 2020: 85 FR 45998: Revision of the Export Administration Regulations and Suspension of License Exceptions for Hong Kong. 
DOC FOREIGN TRADE REGULATIONS (FTR): 15 CFR Part 30.   24 Apr 2018: 83 FR 17749: Foreign Trade Regulations (FTR): Clarification on the Collection and Confidentiality of Kimberley Process Certificates.  
DOD NATIONAL INDUSTRIAL SECURITY PROGRAM OPERATING MANUAL (NISPOM)

: DoD 5220.22-M. Implemented by Dep’t of Defense. 

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.)  
DOE ASSISTANCE TO FOREIGN ATOMIC ENERGY ACTIVITIES: 10 CFR Part 810.    23 Feb 2015: 80 FR 9359: comprehensive updating of regulations, updates the activities and technologies subject to specific authorization and DOE reporting requirements. 
DOE EXPORT AND IMPORT OF NUCLEAR EQUIPMENT AND MATERIAL; 10 CFR Part 110.  

15 Nov 2017, 82 FR 52823: miscellaneous corrections include correcting references, an address and a misspelling.

 
DOJ ATF ARMS IMPORT REGULATIONS: 27 CFR Part 447-Importation of Arms, Ammunition, and Implements of War. 
14 Mar 2019: 84 FR 9239: Bump-Stock-Type Devices.

DOS INTERNATIONAL TRAFFIC IN ARMS REGULATIONS (ITAR): 22 C.F.R. Ch. I, Subch. M, Pts. 120-130. 

29 Jul 2020: 85 FR 45513 Extension to Certain Temporary Suspensions, Modifications, and Exceptions due to Corona Virus.  The latest edition of the BITAR is 29 July 2020.  

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

17 Jul 2020: 85 FR 43436: Nicaragua Sanctions Regulations. 

 
 
 
USITC HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES (HTS, HTSA or HTSUSA), Revision 8.

1 Jan 2019: 19 USC 1202 Annex.
  – HTS codes for AES are available here.
  – HTS codes that are not valid for AES are available here.

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