20-1023 Friday “Daily Bugle”

20-1023 Friday “Daily Bugle”

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Friday, 23 October 2020

  1. Treasury/OFAC: “Notice of OFAC Sanctions Actions”
  1. Items Scheduled for Future Federal Register Edition
  2. Commerce/BIS: (No new postings)
  3. State/DDTC: (No new postings)
  4. Treasury/OFAC Sanctions Iranian Ambassador to Iraq
  1. Aljazeera: “Huawei Reportedly Hoarded 5G Chips Before Trump Sanctions”
  2. Armenpress: “Senator Menendez Spearheads Legislation Pushing Back Against Arms Sales to Turkey and Azerbaijan”
  3. Deutsche Welle: “Iran Plans to Export Arms with Sanctions Off”
  1. Covington: “China Enacts Export Control Law”
  2. Felice Laird: “A New Landscape for Information Technology Export Controls – Export Controls on Information Security” (Part III of III)
  3. Kirkland & Ellis: “CFIUS Goes Back to the Future by Tying Mandatory Filings Pertaining to Critical Technologies to U.S. Export Controls Assessments” [Part II of II]
  4. Pillsbury: “U.S. Government Issues Human Rights Policy for Export Licensing and Guidance to Prevent Misuse of Surveillance Tools”
  1. ECS Presents: 16-17 Nov; “ITAR/EAR Controls for Non-U.S. Companies”
  2. FCC Academy Presents: 1 and 3 Dec; “U.S. Export Controls: ITAR/EAR” and “FMS”
  3. Friday List of Approaching Events: 166 Events Posted This Week, Including 13 New Events
  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 
  4. Submit Your Job Opening and View All Job Openings 
  5. Submit Your Event and View All Approaching Events 

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85 FR 67607: Notice
* AGENCY: Office of Foreign Assets Control, Treasury.
* ACTION: Notice.
* SUMMARY: The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing the names of one or more persons that have been placed on OFAC’s Specially Designated Nationals and Blocked Persons List based on OFAC’s determination that one or more applicable legal criteria were satisfied. All property and interests in property subject to U.S. jurisdiction of these persons are blocked, and U.S. persons are generally prohibited from engaging in transactions with them.
* FOR FURTHER INFORMATION CONTACT: OFAC: Associate Director for Global Targeting, tel.: 202-622-2420; Assistant Director for Sanctions Compliance & Evaluation, tel.: 202-622-2490; or the Assistant Director for Licensing, tel.: 202-622-2480.

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OGS_a23. Commerce/BIS: (No new postings)

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OGS_a45. Treasury/OFAC Sanctions Iranian Ambassador to Iraq

  Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating Iraj Masjedi, a general in Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) and Iran’s Ambassador to Iraq, for acting for or on behalf of the IRGC-QF. A close adviser to former IRGC-QF Commander Qassem Soleimani, Masjedi played a formative role in the IRGC-QF’s Iraq policy. In his decades of service with the group, Masjedi has overseen a program of training and support to Iraqi militia groups, and he has directed or supported groups that are responsible for attacks that have killed and wounded U.S. and coalition forces in Iraq. In his current capacity, Masjedi has exploited his position as the Iranian regime’s ambassador in Iraq to obfuscate financial transfers conducted for the benefit of the IRGC-QF.
  “The Iranian regime threatens Iraq’s security and sovereignty by appointing IRGC-QF officials as ambassadors in the region to carry out their destabilizing foreign agenda,” said Secretary Steven T. Mnuchin. “The United States will continue to employ the tools and authorities at its disposal to target the Iranian regime and IRGC-QF officials that attempt to meddle in the affairs of sovereign nations, including any attempts to influence U.S. elections.”
  Masjedi is being designated pursuant to the counterterrorism authority Executive Order (E.O.) 13224, as amended, for acting or purporting to act for or on behalf of, directly or indirectly, the IRGC-QF. The IRGC-QF was designated pursuant to E.O. 13224 in 2007 for support to numerous terrorist groups. The IRGC, including its external arm, the IRGC-QF, was designated as a Foreign Terrorist Organization on April 8, 2019.
  Iran’s ambassador to Iraq since 2017, Masjedi has publicly admitted the IRGC-QF’s role in special operations and the training of militia groups in Iraq, Syria, and beyond. He claims credit for organizing and supporting regional militias to advance Iran’s interests throughout the Middle East an enterprise that has spawned untold destruction and corruption, robbing Iraq of a stable, prosperous future.
  Masjedi has facilitated financial transfers for the benefit of the IRGC-QF in coordination with IRGC-QF financial facilitator Hushang Allahdad, acting at the direction of former IRGC-QF Commander Soleimani and his successor, Esma’il Ghani. Soleimani was designated pursuant to multiple authorities, including E.O. 13224, in 2011, while Allahdad and Ghani were designated pursuant to E.O. 13224 in 2010 and 2012, respectively. Since 2018, Masjedi has helped the IRGC-QF obtain foreign currency in Iraq, in return for equivalent sums that the IRGC-QF in Iran has transferred to relevant entities. Most recently, Masjedi has provided direct assistance in obtaining tens of billions of dinars on behalf of the IRGC-QF in Iraq.
  In the decades prior to his ambassadorial appointment, Masjedi was a senior figure overseeing IRGC-QF activities in Iraq, which included attacks targeting U.S. and coalition personnel, as well as kidnappings and the assassination of Iraqi provincial officials who sought to curb Iranian influence in Iraq. The IRGC-QF provided training for Iraqi recruits, often inside Iran. The Iraqi recruits hailed from groups loyal to, and supported by, the IRGC-QF, which help maintain Iranian influence in Iraqi politics and security. The IRGC-QF also manufactured and distributed weapons, including explosively formed penetrators, that killed and wounded hundreds during Operation Iraqi Freedom.
Masjedi is being designated pursuant to E.O. 13224, as amended, for acting or purporting to act for or on behalf of, directly or indirectly, the IRGC-QF.
  All property and interests in property of the individual designated today, subject to U.S. jurisdiction, are blocked, and U.S persons are generally prohibited from engaging in transactions with him or the blocked property. In addition, foreign financial institutions that knowingly facilitate significant transactions for, or persons that provide material or certain other support to, the individual designated today risk exposure to sanctions that could sever their access to the U.S. financial system or block their property and interests in property under U.S. jurisdiction.

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(Source: Aljazeera, 23 Oct 2020) [Excerpts]

  Huawei Technologies Co. quietly spent months racing to stockpile critical radio chips ahead of Trump administration sanctions, ensuring it can keep supplying Chinese carriers in their $170 billion rollout of 5G technology through at least 2021.
  Partner Taiwan Semiconductor Manufacturing Co. began ramping up output in late 2019 of Huawei’s 7-nanometer Tiangang communications chips, the most crucial element in 5G base stations, people familiar with the matter said. The Taiwanese contract manufacturer eventually shipped more than 2 million units at Huawei’s behest ahead of the sanctions cutoff last month, one of the people said, asking not be identified discussing internal matters. The sheer magnitude of orders at one point got TSMC executives wondering whether they had underestimated global demand, the person said.
  Huawei’s breakthrough in securing essential supplies underscores the mixed success of a U.S. campaign against China’s largest tech company since 2018. Citing national security concerns, the White House started by trying to curtail the sale of American software and circuitry to Huawei before finally enacting sweeping restrictions against its suppliers including TSMC. It’s that last salvo, a ban on the sale of ready-made, commercially available semiconductors, that finally knee-capped Huawei’s smartphone business and forced it to curtail device production, the people said. Representatives for Huawei and TSMC declined to comment.
  But the Tiangang chip, designed in-house by secretive division HiSilicon, has proven pivotal to keeping the 5G business afloat. Huawei had leaned on TSMC in the months before Washington shut that loophole and it can now continue to supply China Mobile Ltd., China Telecom Corp. and China Unicom – the carrier trio now aggressively building out a nationwide 5G network Beijing considers instrumental to driving the world’s No. 2 economy. A China Mobile representative declined to comment for this story. A China Telecom spokesperson said the company will communicate any impact from curbs on Huawei but declined to comment on discussions about chip supply. Unicom representatives didn’t respond to requests for comment.

(Source: Armenpress, 23 Oct 2020) [Excerpts]
  Senator Bob Menendez has submitted two resolutions to the Congress, urging to stop selling arms to Turkey and Azerbaijan, ARMENPRESS was informed from the Armenian National Committee of America.
  “Azerbaijan’s ongoing aggression against the Armenian people – with Turkey’s full backing – has already exacted a painful toll on civilians in the region and resulted in appalling human rights abuses. The United States cannot continue providing security assistance and arms to Azerbaijan and Turkey as they move the region further and further away from peace,” said Ranking Member Menendez.
  “Turkey’s pattern of violence extends beyond the South Caucasus to Syria, Iraq, and Libya, and both President Aliyev and President Erdogan have inflicted appalling abuses on their own people. This resolution pushes back against Azerbaijan’s and Turkey’s human rights abuses and paves the way to stop arming two governments that so often use their security forces to harm innocent people”, he said.

(Source: Deutsche Welle, 22 Oct 2020) [Excerpts]

  On October 18, a 13-year UN arms embargo against Iran expired. Iranian news outlets had eagerly awaited the moment for weeks. The lifting of the embargo had been agreed in the 2015 Joint Comprehensive Plan of Action (JCPOA) – more commonly known as the Iran nuclear deal.
  Iranian President Hassan Rouhani heralded the step as a “diplomatic victory over the US.” After all, US President Donald Trump unilaterally withdrew from the nuclear deal in May 2018, yet insisted the arms embargo against Iran should remain in place indefinitely. But the vast majority of the UN Security Council members states, with the exception of the US and Dominican Republic, voted against upholding the embargo.
Green light for arms exports
  “Thanks to the nuclear deal, signed by my government, we are as of Sunday permitted to buy and sell weapons with whomever we want,” President Rouhani declared last week. The arms embargo was imposed in 2007, to thwart Iran’s nuclear ambitions.
  The terms of the 2015 nuclear deal oblige Iran to dismantle and accept checks on its nuclear program. In return, international sanctions – such as the 2007 arms embargo – will be gradually lifted. 
Arms for Armenia?
  Iranian security expert Hossein Dalirian, who sympathizes with Iran’s Revolutionary Guard, thinks Armenia could be a potential buyer. In a recent article for the Iranian daily newspaper Jam-e Jam, he says that Armenia – currently fighting Azerbaijan over the disputed Nagorno-Karabakh region – might be interested in acquiring Iranian air defense systems. According to Dalirian, “Iran is the only country in the Islamic world that builds modern missile defense systems, guided rockets and drones.”
  Public Radio of Armenia echoed Hossein Dalirian’s thinking on its website. The broadcaster writes: “Armenia and the Republic of Artsakh [the self-declared Nagorno-Karabakh Republic] can now legally buy Iran’s Khordad-3 air defense system for protection against Israeli-made and Turkish-made drones used by Azerbaijan.”   …
Vast arsenal
  Iran is said to possess the largest missile arsenal in the Middle East. “Iran has a vast arsenal, ranging from artillery units to short-range missiles and medium-range cruise missiles. In addition, Iran has a large arsenal of drones which it can effectively deploy,” Mauro Mantovani of the Military Academy at ETH Zurich told DW. Iran has, for instance, been mass producing short-range missiles, like the Qiam-1, since 2011. It is capable of delivering a 750-kilogram (1,600 pound) payload and strike targets some 700 kilometers (435 miles) away.
  The Islamic Republic of Iran has continued to unveil new missile systems even when the international community was still considering extending the arms embargo against the country this August. At the time, Iranian Defense Minister Amir Hatami presented an all new surface-to-surface missile and a cruise missile with a range of more than 1,000 kilometers on Iranian television. “Many countries want to buy our weapons,” Hatami asserted in a television interview just after the arms embargo was lifted: “We will definitely export more than we will import; our weapons are affordable and efficient.”
  There is certainly no consensus on that. “There are not many countries that will want to import Iranian weapons,” as German Middle East expert Udo Steinbach told DW. “Venezuela may be interested. Despite US sanctions, the country is still importing Iranian oil and has expressed interested in Iranian missiles.” Steinbach says Iran is very proud of its arms industry but doubts the country will become a major exporter. “Aside from a few fringe countries, few nations will be seriously interested in equipping their armed forces with Iranian weapons.”


(Source: Covington, 29 Oct 2020)

* Principal Author: Eric Carlson, 86-21-6036-2503, Covington & Burling LLP
  On October 17, 2020, China enacted an Export Control Law (“the Law”) that builds upon China’s existing export control regulations, which are scattered across multiple laws, administrative regulations, and rules and measures issued by various departments, with the goal of creating a unified export control system to promote China’s national security and interests and commitment to nonproliferation. While the Law sets out a framework for export controls in China, the Law leaves unanswered a number of key questions of how the system will work in practice, including how its provisions will apply outside of China.
  The Law takes effect December 1, 2020. Our translation of the Law can be found here.  
Significance and Background
  The Law brings China’s system somewhat closer to other export control regimes and has the potential to affect both domestic and international players that are exporting certain items, services, and technologies out of China.1
  The Law represents a continuation of the Chinese government’s efforts to strengthen national security during President Xi Jinping’s administration, focusing specifically on the export of dual-use, military, and nuclear goods, technologies and services, and other items that are related to the maintenance of national security and national interests and performance of non- proliferation and other international obligations (“Controlled Items”). The Law should read in connection with the recently enacted Encryption Law and the draft Data Security Law, as well as the earlier Cybersecurity Law, National Security Law, and Counterterrorism Law.
  The Law was first drafted in June 2017 and revised in December 2019 and June 2020. The final version of the law contains only minor differences from the most recent draft. Notably, the Law retains the key features of the earlier drafts, including that the Export Control Law applies extraterritorially.  
Key Provisions of the Law
Definition of “dual-use” and “military items”
The Law provides basic definitions of key terms (Article 2):
  • “Dual-use” is defined as “goods, technologies and services that can be used for not only civil purposes but also military purposes, or that are helpful to enhance military potential, especially those can be used for the design, development, manufacturing or use of weapons of mass destruction and their delivery vehicles”
  • “Military items” are defined as “equipment, special production equipment and other materials, technologies, and related services used for military purposes.”
  • “Nuclear” is defined as “nuclear materials, nuclear equipment, non-nuclear materials used in reactors, and related technologies and services.”
  • “Export control” means the prohibitive or restrictive measures taken by the State against the transfer of any Controlled Items out of the People’s Republic of China, and the provision of any Controlled Items by any citizens, legal persons or non-corporate organizations of the People’s Republic of China to any foreign organizations and individuals The Law states that technical information and data are included within the definition of Controlled Items. This parallels the reference in the draft Data Security Law, which refers to export control requirements on “data.”
  • The Law does not specifically define “export,” although the provisions are broad enough to cover both “deemed export” and “re-export”.
  • The Law does not define the term “exporter” (also translated as “export operator”). (An earlier draft defined the term as “a citizen, legal representative, or other organization that is engaged in exporting controlled items in accordance with the rules of laws and administrative regulations.”)
Extraterritoriality and Retaliation (Articles 44, 48)
  The Law makes the Export Control Law apply extraterritorially. According to Article 44, organizations and individuals outside of China who, in violation of the export control regulations of the Export Control Law, obstruct the fulfilment of international obligations such as non-proliferation and damage China’s national security and interests, shall be held legally accountable. The Law does not provide further detail, although some commentators have linked the new provision to the extraterritorial reach of the export regimes of other countries, such as the United States.
  The final version of the Law includes a broad provision permitting China to take unspecified “reciprocal measures” if another country “abuses” export controls to endanger China’s national security or national interests.  
Agencies and Their Responsibilities (Articles 4-5)
  The Law does not clearly specify departments under the State Council and the Central Military Commission that will handle export control regulation. Instead, it refers to the agencies as “State Export Control Administrative Departments” (“agencies”) and states that different agencies will regulate and license different controlled items under the Law.
  It seems the Law does not intend to change the current allocation of responsibilities among the various agencies. The future implementation rules might provide more details.
  Although the Law does not describe how the agencies will work together, it provides that an export control coordination mechanism and expert consultation mechanism should be established to strengthen the cooperation of different agencies and provide guidance to exporters. It remains to be seen whether implementing regulations provide more details.
  The agencies are obliged to establish a risk management system for end-users and end-uses, and to “inspect” and “enhance the management of end-users and end-uses.” In addition, the agencies also are authorized to assess the countries and regions to which the Controlled Items will be exported to determine the level of risk and implement corresponding controls.  
Control System and Control Lists (Chapter 2)
  The Law establishes a unified export control system that includes various elements, primarily including a controlled item list, interim measures, prohibited exports, a license system for exporters, and a list of controlled importers and end users.
  The Law does not contain the control list, although presumably it will build from existing lists scattered across different current laws and regulations. It is unclear whether China will continue to use its current system. For a particular product or technology that is not on the list, the Law allows certain agencies to designate such product or technology as a “temporarily controlled item” for up to two years. In addition, the Law authorizes the agencies, with the approval of the State Council and/or the Central Military Commission, to ban the export of certain items (regardless of the destination or end user), or prohibit the export of certain items to specific destinations or parties.  
Licensing (Article 13)
  The Law does not detail the process for granting licenses; presumably the implementing regulations will provide more guidance to supplement the current processes provided in the various department regulations and measures.
Eight factors are to be considered when the licensing agency makes licensing decisions:
  1. national security and national interests
  2. international obligations
  3. type of export
  4. degree of sensitivity of the item
  5. destination country or region
  6. end-user and end-use
  7. credit record of the exporter
  8. other factors provided by laws and regulations
  Some of the earlier drafts had included a deadline for the licensing agency to make a determination; the final version of the Law does not contain a deadline.  
Catch-All License Requirement (Article 12)
  Under the Law, an exporter must still apply for an export license, even if the item is not included on a control list, if the exporter knows or should know that the export of a product, technology, or service likely would:
  • “endangering [China’s] national security or national interests” (which is not further defined);
  • being used for the design, development, production, or use of weapons of mass destruction and their delivery vehicles; or
  • be used for terrorism.
  The agencies should respond “in a timely manner” to inquiries regarding whether an item is subject to control.  
End-User and End-Use Certifications (Article 15)
  The Law obliges the end user (or the government of the end user) to provide end-user and end- use certifications, and for exporters to proactively supply such documents to the regulators, presumably as part of the license application process. In addition, an export operator or importer is obliged to report any potential change to the end-user or end use.  
Restricted List for Certain Importers and End-Users (Article 18)
  The Law calls for a “restricted list” (also translated as “control list”) for importers and end users
  • violate the requirements regarding end users and end uses
  • may endanger national security or national interests; or
  • use Controlled Items for terrorist purposes.
  Importers and end users that are included in the restricted list are subject to additional restrictions or control measures when dealing with the relevant Controlled Items. Exporters are not allowed to transact with listed importers and end users without approval.
  The Law allows listed exporters and end users to apply to be removed from the list if they have remedied the original basis for listing
Other Requirements on Exporters (Article 14)
  Earlier drafts had required exporters to implement an “internal system for export control compliance.” The Law removes the explicit requirement for each exporter to implement such a system, instead giving exporters whose systems “work well” the possibility of a general license for certain controlled items or other unspecified benefits.
Hong Kong/Taiwan/Macau
  An earlier draft provided that the Law would apply to exports to Taiwan, Hong Kong, and Macau. That provision was deleted in later drafts and does not appear in the final version of the Law. We assume that implementing regulations will confirm that the controls will apply to exports from mainland China to Taiwan, Hong Kong, and Macau.
Investigative Powers and Penalties for Noncompliance (Chapters 3-4)
  The enforcement agencies have power to investigate potential violations, including the power to enter business premises, review and copy documents, interview witnesses, inspecting the delivery vehicles used for the export, seize the items involved in the investigation, and review bank account activity.
The Law outlines various penalties for violations, including warnings, orders to stop the violations, confiscation of illegal gains, fines on exporters and “responsible persons,” denial or revocation of licensing, suspension of business, and revocation of qualification to export related items.
  Companies or individuals can be subject to one or more of the above penalties for exporting without a license, obtaining a license through bribery or other fraudulent behavior, exporting prohibited items, circumventing export control measures, conducting transactions with parties on the Restricted List, or obstructing investigations (including not cooperating with a site inspection). Further, some of the penalties also apply to third parties providing freight services, customs declarations, electronic trading platforms, and financial services to exporters that violate the Law.
  The final version of the Law makes it clear that exporting Controlled Items that are prohibited from being exported or exporting Controlled Items without a license in violation of this Law shall be subject to criminal liability.
Export control agencies may deny applications for export licenses filed by exporters for five years after the penalty decisions. In addition, the information of exporters who violate this Law may be added to their credit records by the export control agencies.
  The Law does not specifically provide for a voluntary disclosure system, or potential mitigation for such disclosures.
Other Restrictions (Article 32)
  The Law contains a vague provision that prohibits – likely in the context of international communications and cooperation on export controls – an organization or individual within the territory of China to provide “export control-related information” to those outside of the territory of China, if such sharing of information endangers the national security or national interests of China. The Law does not clarify what information and what kind of information sharing is subject to such prohibition.  
Next Steps: Implementing Regulations and Compliance Challenges
  Companies that have focused their export control compliance efforts on regimes in the United States and Europe will need to determine whether their activities exporting items from China trigger China export control issues under the Law. This may include identifying tracking end users and end uses and reporting changes; establishing internal compliance systems to meet regulatory expectations in China; enhancing “know your customer” diligence to avoid providing services to parties engaging in activities violating the Law; and evaluating whether activities outside of China are subject to the Law due to its extraterritorial application. Companies that import or use Controlled Items from China shall also take caution to avoid being included in the restricted list for importers and end users.
  Like most laws in China, we anticipate that the government will in the future issue regulations with more details to implement the Law. Given the timing of the multiple drafts, we anticipate that the government may take some time to align with internal and external stakeholders before issuing these implementing regulations.
  Companies seeking to comply with the Law after its effective date of December 1, 2020 may have difficulty doing so until those implementing regulations are released. As suggested above, the Law lacks a number of key elements necessary for companies to comply:
  • clarification on deemed exports (e.g., whether the sharing of technical information or data between the Chinese employees of a foreign-invested enterprise and a foreign employee of the same company is subject to export controls)
  • clarification on the definition of “export control-related information” and when the sharing of such information with overseas parties is allowed
  • the mechanism for reporting potential changes of end users or end uses
  • standards and process for obtaining facilitation measures such as a general license for exporters with a satisfactory internal compliance program
  • more details on interim measures, prohibited exports, and restricted list of importers and end users
  • more details on the extraterritorial application of the Law and potential retaliatory measures

* Author: Felice Laird, Export Strategies LLC
  There is no question that the EAR is as clear as mud when it comes to establishing and maintaining controls on hardware and software used for information security.  Even the officials at the Bureau of Industry and Security admit that the rules are exceedingly complex.  We’ve had basically the same
structure of controls (i.e., Category 5 Part II, 740.17, odds and ends sprinkled over a few more sections of the EAR) since 2010.   We also have had the Department of Defense, the Intelligence Community, the Department of Justice and the FBI joining the export control party at various times asserting their jurisdiction over licensing and classification matters.  The Information Technology Controls Division at BIS, and the NSA remain the two primary decision makers.
  At the end of the day, most products in Category 5 Part II can be exported under license exception, but reaching that conclusion requires specific understanding of technical issues and attention to recordkeeping requirements.  

  In addition to the regulations, BIS has relied on charts, notes, decision trees, FAQ’s, and Advisory Opinions posted on its website to help companies to understand the rules.  These tools often reflect unwritten policy and interpretations that have proved to be somewhat fluid over the past 10 years.  Anyone trying to classify and determine licensing requirements for infosec products should review all of this guidance.

  There have been a few changes to Cat. 5 Part II in the past year and a half.   A new rule adding controls on “Post Quantum Cryptography” was added in May 2019.  This rule recognizes the fact that quantum computing is being developed in the R&D communities in academia, government labs and industry.  Computing leaders are building chips and system prototypes as quantum computing designs become realized.  The thought is that this technology will make today’s commonly used encryption vulnerable to brute force attacks.  This has been one of the first examples of actually amending the CCL to cover an “emerging technology” .
  Two other changes to 5×002 this past year clarify and codify de-control notes.  The first is aDecontrol Note added to 5A002 (Technical Note 2.j.) for “Items specially designed for a ‘connected civil industry’ application”.  The other relates to items designed to use encryption only if it has been activated (usually by way of a software key). 

(Source:  Kirkland Alert, 21 Oct 2020) (Part I was published yesterday)

* Principal Author: Ivan A. Schlager, P.C., Esq., 1-202-389-3150, Kirkland & Ellis LLP

Key Clarifications for Mandatory CFIUS Filings Involving a Substantial Foreign Government Interest in “TID U.S. Businesses” 

  A mandatory CFIUS filing also is triggered by transactions that result in a foreign government having a “substantial interest” in a Technology, Infrastructure, or Data (“TID”) U.S. business. A substantial interest arises when a foreign person obtains a 25% or greater voting interest, directly or indirectly, in a U.S. business if a foreign government in turn holds a 49% or greater voting interest, directly or indirectly, in the foreign person.
  The Treasury rulemaking clarified that for entities whose activities are primarily directed, controlled or coordinated by or on behalf of a managing partner, managing member or equivalent, the term “voting interest” is construed to mean 49% or more of the interest in the general partner, managing member, or equivalent. Furthermore, for purposes of determining the percentage of voting interest held indirectly by one person in another, any interest of a parent, as that term is defined for purposes of the CFIUS regulations (e.g., holding at least 50% of the outstanding voting interest in an entity), will be deemed to be a 100% interest in any entity of which that person is a parent.  

Status of BIS Identification of “Emerging” and “Foundational” Technologies and Growing Criticism  

  One of the driving forces behind FIRRMA was the concern that foreign persons were gaining access to sensitive U.S. technologies by virtue of investments that fell outside of CFIUS’ jurisdiction. Equally as concerning to Congress were outbound transfers of sensitive technologies. As a result, the earliest negotiations relating to what ultimately became FIRRMA included provisions expanding CFIUS’ jurisdiction beyond inbound investments to capture transfers of sensitive technologies outside the U.S. (e.g., in connection with license agreements and/or joint ventures). Of course, the prevailing U.S. export controls regimes already provided the foundation for controlling such technology transfers, which eventually resulted in the more limited expansion of CFIUS’ jurisdiction via FIRRMA. But as an acknowledgment of the risk to U.S. national security presented by technology transfers, Congress also enacted the ECRA, which, among other things, directed the U.S. Department of Commerce (“Commerce”) to spearhead the establishment of a formal, ongoing process to identify and review “emerging and foundational technologies that are essential to the national security of the United States” and require appropriate export controls for these technologies. As noted above, any such technologies also are treated as “critical technologies” for CFIUS purposes. 
  To date, Commerce has identified only a relatively small number of “emerging technologies” and has opted to impose controls only through multilateral regimes, such as the Wassenaar Arrangement and the Australia Group, including most recently through a notice published in the Federal Register on October 5, 2020.[FN/5]While Commerce enjoys the authority to impose unilateral controls, export controls are maximally effective when applied consistently by the U.S. and its allies. Nevertheless, as detailed below, there has been mounting criticism of the slow pace of the Commerce process, both with respect to the identification of “emerging” technologies, which at least has been initiated, and with respect to the identification of “foundational” technologies.
  Indeed, it was only on August 27, 2020, that BIS finally issued a long-awaited Advance Notice of Proposed Rulemaking (“ANPRM”) soliciting comments on the criteria to be used to identify “foundational technologies” that are essential to U.S. national security. But the “foundational technologies” ANPRM was not nearly as detailed as the corollary “emerging technologies” notice published in November 2018. Comments on the ANPRM initially were due to be submitted by October 26, 2020, but BIS recently extended the comment period  until November 9, 2020. 
  Because the treatment of “foundational technologies” will impact the scope of transactions within the jurisdiction of CFIUS, there has been recent congressional criticism regarding the slow pace of the rulemaking, including an attempt to legislatively authorize CFIUS to determine which technologies are deemed essential to U.S. national security.
  Specifically, a Congressional Research Service report, dated August 21, 2020, noted that the “absence of new technology controls arguably impedes not only ECRA implementation but also congressional reforms that expanded the authority of [CFIUS] to review Chinese and other foreign investments in critical and emerging technologies below a traditional threshold of foreign control . . . CFIUS can only act against noncontrolling foreign investments if the technologies involved in the transaction are [export] controlled.” Sensing this potential implementation gap, in August 2020, Senators Thom Tillis (R-NC), John Cornyn (R-TX) (who was a driving force behind FIRRMA) and Marco Rubio (R-FL) introduced legislation to expand CFIUS’ jurisdiction to review foreign investments in emerging and foundational technology in the U.S. In a press release, Sen. Tillis explained the need for this legislation as follows: “Right now, CFIUS relies heavily on the Commerce Department to determine what qualifies as an emerging and foundational technology as it relates to reviewing foreign investments . . . This legislation will simply extend the powers of the CFIUS chair and one other member of CFIUS to determine what technologies are deemed essential to the national security of the United States.” House Republicans and members of the so-called China Task Force echoed Sen. Tillis’ remarks in a report, dated September 30, 2020: “If [the Department of Commerce’s] Bureau of Industry and Security is unable to make substantial and measurable progress in fulfilling this requirement, Congress should consider whether a different bureau or department can better fulfill this statutory obligation.”
Consistent with the views expressed by key members of Congress, on October 15, 2020, the White House announced the issuance of the “National Strategy for Critical and Emerging Technologies,” which describes a more holistic approach to promoting and protecting U.S. technological leadership in a number of industries (detailed in Annex A below).[FN/6]One priority action identified by the report relates to ensuring that critical and emerging technologies are adequately controlled under relevant U.S. export laws and regulations, as well as under multilateral export regimes. Shortly after the issuance of the report, Commerce Secretary Ross lauded the Commerce Department’s supportive efforts, noting that 37 technologies have been designated as “emerging” thus far.

Key Takeaways
  • The elimination of the NAICS code prong of the prior test to determine whether there is a mandatory filing requirement in connection with an investment in a U.S. critical technology business will substantially increase the number of U.S. businesses that are considered critical technology businesses. This may, consequently, result in an increase in transactions subject to a mandatory CFIUS filing, which, in turn, might nudge parties toward filing notices, rather than short-form declarations, in an effort to ensure safe harbor protection.
  • The reliance on the prevailing U.S. export controls regimes likely will result in a greater degree of certainty regarding which investments will be subject to mandatory filing requirements, but also will likely increase the diligence burden significantly and, in a limited number of instances, could impact deal timing.

  • Congress is likely to be more actively policing BIS with respect to the implementation of controls on “emerging” and “foundational” technologies, which may force BIS to impose unilateral controls before proceeding with multilateral engagement. If so, U.S. exporters may suffer as customers turn to alternative non-U.S. suppliers for which there are limited or no export-related regulatory considerations.


*What: ITAR/EAR Controls for Non-U.S. Companies
*When: 16-17 Nov
*Where: Your Computer
*Sponsor: Export Compliance Solutions & Consulting (ECS)
*ECS Speakers: Suzanne Palmer, Marc Binder

*Register: Here or write to phyllis@exportcompliancesolutions.com or call 1-866-238-4018

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

U.S. Export Controls: ITAR & EAR from a non-U.S. Perspective (Tuesday, 1 Dec 2020)
Register or find more information here.

The ABC of Foreign Military Sales (FMS) (Thursday, 3 Dec 2020)
Register or find more information here.

* Register for both and take advantage of our discounted price!

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

(Sources: Event sponsors)  

Submit your event in the Submission section at the end of this newsletter.  
[Editor’s note:  This Daily Bugle Event List has grown so large that we have run out of space to display it, so we are displaying here only the new events in the Daily Bugle, while maintaining a LINK HERE to the full list.]

Published every Friday or last publication day of the week. Send events to events@fullcirclecompliance.eu, composed in the below format:
# * Date: (Location;) “Event Title”; <Weblink>” Event Sponsor;

* 27 Oct: “INCOTERMS 2020“; Commerce/Census

* 28 Oct: “How to Make Cross-Border Sales into Brazil“; Commerce/Census
* 28 Oct: “AfCFTA and Trade: A Game Changer for Africa“; Squire Patton Boggs
* 28 – 29 Oct: “ACE Exports Compliance Webinar“; Commerce/Census
* 29 Oct: “Firearms Imports Webinar“; Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)
* 4 – 5 Nov: “Global Aerospace Webinar“; Ohio Aerospace Institute
* 9 – 10 Nov: “Navigating Russia Sanctions Complexities“; American Conference Institute (ACI)
* 19 Nov: “Global Economic Sanctions for Canadian Operations“; The Canadian Institute (CI)
* 2 – 3 Dec: “Economic Sanctions“; American Conference Institute (ACI)

* 3 Dec: “The ABC of Foreign Military Sales (FMS) “; Full Circle Compliance (FCC) Academy 

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


EN_a116. Bartlett’s Unfamiliar Quotations

(Source: Editor)

* Saint Ignatius (born Iñigo López de Oñaz y Loyola; 23 Oct 1491 – 31 Jul 1556;  venerated as Saint Ignatius of Loyola, was a Spanish Basque Catholic priest and theologian, who co-founded the religious order called the Society of Jesus (Jesuits) and became its first Superior General at Paris in 1541.)
  – “Be slow to speak, and only after having first listened quietly, so that you may understand the meaning, leanings, and wishes of those who do speak. Thus you will better know when to speak and when to be silent.”
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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.
Latest Update 


5 Apr 2019: 84 FR 13499:

Civil Monetary Penalty Adjustments for Inflation. 

9 Oct 2020: 
85 FR 64014:  Revisions to the Unverified List (UVL)

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 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. 

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.


28 Sep 2020: 

85 FR 60874: Temporary Amendment for Republic of Cyprus. The latest edition of the BITAR is 28 Sep 2020. 

DOT FOREIGN ASSETS CONTROL REGULATIONS (OFAC FACR): 31 CFR, Parts 500-599, Embargoes, Sanctions, Executive Orders
International Criminal Court-Related Sanctions Regulations.

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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