International Trade Law News /title <!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> <html xmlns="http://www.w3.org/1999/xhtml" xml:lang="en" lang="en"> <meta name="verify-v1" content="6kFGcaEvnPNJ6heBYemQKQasNtyHRZrl1qGh38P0b6M=" /> <head> <title>International Trade Law News

May 23, 2016 

DDTC Implements Policy Change on Exports of Certain ITAR-Controlled Items to Vietnam

During President Obama's trip to Vietnam today, the U.S. announced that it will fully lift the long-standing ban on the sale or transfer of lethal weapons to Vietnam that is currently contained in section 126.1(l) of the ITAR. 

As a result, the State Department's Directorate of Defense Trade Controls today published the following notice on its website regarding the implementation of this policy changes:

Industry Notice: Change in Policy on Exports of Munitions to Vietnam (05.23.16) 
Pursuant to a decision made by the Secretary of State and effective immediately, the Department of State's policy prohibiting the sale or transfer of lethal weapons to Vietnam, including restrictions on exports to and imports from Vietnam for arms and related materiel, has been terminated. Consequently, in accordance with the Arms Export Control Act, the Directorate of Defense Trade Controls (DDTC) will review on case-by-case basis applications for licenses to export or temporarily import defense articles and defense services to or from Vietnam under the International Traffic in Arms Regulations (ITAR). DDTC will soon publish a rule in the Federal Register to implement a conforming change to ITAR §126.1.
DDTC maintains an unofficial list of country policies and embargoes on its website, which includes a disclaimer that the information is not complete and that the latest version of the ITAR should be reviewed to determine the current list of ITAR proscribed countries and other country-specific restrictions.  

May 18, 2016 

The US Narrows its Remaining Financial Sanctions on Myanmar (Burma)

Effective today, the US Office of Foreign Assets Control (“OFAC”) has narrowed the remaining US sanctions restricting trade and investment in Myanmar by US companies, US individuals and other persons located in the US (“US persons”). Some significant US sanctions remain on Myanmar, to which the US government continues to refer, for policy reasons, as “Burma”.

These changes may make it easier, going forward, for US companies to find a non-sanctioned bank in Myanmar to support trade or business in Myanmar, and may reduce the number of US investors that must file lengthy “responsible investor” reports with the US State Department. With these changes, the US government intends to recognize Myanmar’s transition to a democratically-elected government, and signal its “strong support for this political and economic progress”.

This is the first significant relaxation of the remaining US sanctions on Myanmar since February 2013. The US has for several years been alone in maintaining substantial sanctions on Myanmar. The EU suspended in 2012 and permanently lifted in 2013 essentially all of its sanctions, other than an arms embargo and export controls on certain sensitive items.

Exports of non-export controlled items
US sanctions and export controls generally do not restrict the export of goods and technology that are not export-controlled (meaning they are classified "EAR99" under US export controls), so long as no prohibited end-use or prohibited end-user is involved. US persons generally cannot engage in a transaction involving any person on the primary US list of sanctioned persons, the US Specially Designated Nationals List (“SDN List”), or any entity in which they hold a 50% or greater ownership interest.

Lifting of most banking sector sanctions
OFAC has noted, in announcing today’s changes, that most transactions are no longer prohibited with the Myanmar banks that were, prior to yesterday, on the SDN List:
- Transactions with Asia Green Development Bank and Ayeyarwady Bank have been generally authorized by general license since February 2013. These banks remain on the SDN List, so any of their assets “blocked” (frozen) by US persons must remain blocked.
- Innwa Bank and Myawaddy Bank were added today to this general license, so all prospective transactions with these banks are now authorized, though their previously blocked assets must remain blocked.
- The same was true until yesterday for Myanma Economic Bank and Myanma Investment and Commercial Bank. They were removed from the SDN List yesterday, so transactions with these banks are no longer prohibited.

Remaining sanctioned persons
Yesterday OFAC removed several state-owned banks and companies from the SDN List. However, several of the largest companies and most prominent businessmen in Myanmar remain on the SDN List. US persons are generally prohibited from dealing with such persons and entities in which they hold a 50% or greater ownership interest, and must “block” (freeze) their assets. Flagging the importance of these remaining listings, several more of these entities were added to the SDN List yesterday.

Many of the sanctioned persons have interests in a number of other companies through complex corporate structures, and in several sectors of the Myanmar economy it can be a challenge to find suitable investment targets or business partners that are verifiably free of direct or indirect SDN ownership. While today’s easing of the sanctions may be helpful, it will not greatly reduce this due diligence and compliance burden for US companies considering an investment.

Other remaining sanctions
US persons remain prohibited from making any “new investment” in Myanmar involving the Ministry of Defense, other Myanmar armed groups or their majority-owned subsidiaries, or involving any of person remaining on the SDN list which still includes four Myanmar banks as noted above. It is also generally prohibited for US persons to provide financial services to Myanmar if those services would be related to the provision of security services to the Myanmar military or armed groups.

US persons must file a detailed “responsible investor” report with the State Department on new investment aggregating over $500,000. The State Department is currently considering whether to increase this threshold to $5 million. Separately, US persons must report any investments involving Myanma Oil and Gas Enterprise (MOGE). Some US companies have filed lengthy reports in response to this requirement, and most sections of these reports are released to the public. In some other cases the reporting requirement may not be triggered if the investment is made independently by a non-US affiliate or subsidiary.

US law still restricts the import of Myanmar jadeite or rubies to the US, and exports to Myanmar of US-export controlled items.

Burma was designated as a “jurisdiction of primary money laundering concern” in 2004 under Section 311 of the USA PATRIOT Act, and as a result US banks are generally restricted from providing correspondent accounts to Myanmar banks. However, OFAC has confirmed that correspondent accounts may be opened, following the sanctions relief described above, so long as the transactions carried out through those accounts do not violate any of the remaining sanctions.

Other general licenses
A general license is an authorization of certain otherwise-prohibited activity that OFAC releases to the public. Any person may rely on a general license, if their transaction meets the terms and conditions set out in the general license, in most cases without prior notice to or approval by OFAC.

Effective today, OFAC has eliminated the expiration date of a general license it issued five months ago to authorize certain transactions “ordinarily incident to” exports to or from Myanmar that indirectly involve an SDN or other “blocked” person under US sanctions. Several major banks had requested this because such sanctioned persons are apparently indirectly involved in certain port or airport operations in Myanmar. This general license was expanded today to cover certain transactions relating to the movement of goods within Myanmar.

OFAC also issued today a general license that expands on existing authorizations and exemptions to authorize transactions ordinarily incident to routine and necessary expenses of US persons residing in Myanmar. The general license does not authorize employment of a US person by an SDN or other blocked person.

March 09, 2016 

US Customs and Border to Increase De Minimis Value of Duty Free Imports from $200 to $800 on March 10, 2016

By Doug Jacobson, Jacobson Burton Kelley PLLC

As as result of a provision contained in the recently enacted Trade Facilitation and Trade Enforcement Act of 2015 (Public Law No: 114-125), US Customs and Border Protection (CBP) will increase the low value (de minimis) exemption from duties and taxes on goods imported by a single person on one day into the US from $200 to $800. 

The low value exemption can be claimed on goods imported on commercial goods as well as goods purchased by individuals from parties outside the US. 

This is the first increase in the low value exemption since 1993 and makes the duty exemption identical to that which can be claimed by travelers entering the US. 

These low value entries, which are entered as an informal customs entry, are often referred to as "section 321" shipments, since they are authorized under section 321(a)(2)(C) of the Tariff Act of 1930, as amended (19 U.S.C. § 1321(a)(2)(C)).

CBP has stated that it will publish an Interim Final Rule amending the appropriate regulations (e.g, 19 CFR § 10.151) and soliciting comments from interested parties. However, beginning on March 10, 2016, shipments valued at $800 or less will be eligible for release under the same processes and with the same restrictions as currently apply for de minimis shipments of $200 or less.  

CBP has indicated that it retains the right to require a formal entry on any shipment where additional information, bonding or protection is required.  In addition, CBP stated the low value treatment can be denied "if used for the purpose of avoiding compliance with any pertinent law or regulation."


March 08, 2016 

China's ZTE Added to BIS Entity List: The Impact on ZTE, US and Non-US Companies

By Doug Jacobson, Jacobson Burton Kelley PLLC, Washington, DC

The Commerce Department's Bureau of Industry and Security today published a notice in the Federal Register (reprinted below) announcing that China's ZTE Corporation (ZTE or ZTEC), and three of its affiliates, have been added to the Entity List.

Founded in 1985 and headquartered in Shenzhen China, ZTE, whose shares are traded on the Shenzhen, China and Hong Kong stock exchanges, is China's second largest telecommunications company. ZTE is also the world's seventh largest producer of smartphones and has operations in the US and more than 160 other countries. ZTE has annual revenues of approximately $15 billion per year.  

ZTE is being added to the BIS Entity List for allegedly reexporting US origin products to sanctioned countries, including Iran, and for planning "a scheme to establish, control, and use a series of “detached” (i.e., shell) companies to evade US export controls.

This action, which comes after a four-year investigation of ZTE by BIS's Office of Export Enforcement and the Federal Bureau of Investigation will have a major impact on ZTE and US and non-US companies.

BIS Entity List

The BIS Entity List, found at Part 744 of the US Export Administration Regulations (EAR), includes non-US businesses, research institutions, government and private organizations, individuals, and other types of legal persons, that are subject to specific license requirements for the export, reexport and/or transfer (in-country) of specified items. Parties are added to the Entity List by BIS when there is an increased risk of diversion of US-origin items or where the parties engaged in activities contrary to U.S. national security and/or foreign policy interests. BIS has been using the BIS more frequently in the past few years.

Specific entries on the Entity List identify the items that are subject to a license requirement and BIS's licensing policy regarding any license applications that are submitted.

Parties Added to Entity List and Licensing Requirements

As a result of today's BIS action, which takes effect immediately, BIS will impose a license requirement for all persons and companies, wherever located, to export, reexport or transfer to "all items subject to the EAR" to the following four companies:

1. Zhongxing Telecommunications Equipment (ZTE) Corporation (also referred to as ZTEC)
Address: ZTE Plaza, Keji Road South, Hi-Tech Industrial Park, Nanshan District, Shenzhen, China;

2. Beijing 8 Star International Co.
Address: Unit 601, 6thFloor, Tower 1, Prosper Center, No. 5, Guanghua Road, Chaoyang District, Beijing, China;

2. ZTE Kangxun Telecommunications Ltd.
Address: 2/3 Floor, Suite A, Zte Communication Mansion Keji (S) Road, Hi-New Shenzhen, 518057 China

4. ZTE Parsian.
Address No. 100, Africa Ave., Mirdamad Entersection [sic], Tehran, Iran.

The license review policy for all four entities is "presumption of denial", meaning that is not likely that BIS will approve any license applications to these four parties.   

Because the license requirement for all four companies applies to all "items subject to the EAR", as defined in section 734.3 of the EAR, a license will be required to export, reexport or transfer all US-origin goods, software or technology, wherever located, whether classified as EAR99 or listed on the Commerce Control list (i.e., identified with an ECCN number, such as ECCN 3A001). 

This will also have an impact on non-US companies because the license requirement will also apply to any item produced outside the US and sold to the four ZTE entities that incorporates US-origin parts, components, software if the total value of the controlled US content exceeds the de minimis level in section 734.4 of the EAR (e.g., 25% for reexports to China).

Impact on ZTE and US and non-US companies

This action will have a major impact on ZTE and many US companies as it has been estimated that ZTE sources more than 40% of its parts and components from US suppliers. As a result of  ZTE's size and international footprint, US and non-US companies should immediately screen their customer databases to make sure that ZTE is flagged as a party subject to Entity List restrictions and that any shipments be stopped. While the BIS notice contains a "savings clause" for certain items that were already en route aboard a carrier to ZTE, there is no "grandfathering" of items that had been ordered but have not been shipped.

Unlike parties included on OFAC's SDN List, the addition of ZTE to the Entity List does not prohibit US or non-US persons from engaging in financial transactions with ZTE or require that any of the listed companies' assets be frozen. Rather, BIS is restricting the export, reexport or transfer of any goods, technology, or software to these ZTE companies. Also, unlike OFAC, BIS does not control the export of services to a listed party. However, the term “technology” is broadly defined in the EAR to include certain types of information, including specific information necessary for operation, maintenance, repair, overhaul and refurbishing of items subject to the EAR.

In addition, BIS does not have a 50% rule that applies to companies owned by the four ZTE companies listed. BIS has stated that the licensing requirements imposed on a listed entity by virtue of its being listed do not per se apply to its subsidiaries, sister companies, or other legally distinct affiliates that are not listed on the Entity List. However, BIS has also stated that if affiliates of the listed company act as an agent, a front, or a shell company for the listed entity in order to facilitate transactions that would not otherwise be permissible with the listed entity, then the company is likely violating General Prohibition 10 and other provisions of the EAR. Therefore, exporters are encouraged to take extra steps in an effort to make sure that items are not ultimately destined for the listed entities.

Reasons for Adding ZTE to Entity List

The Federal Register notice specifies that ZTE was added to the BIS Entity List because it reexported controlled US origin items to Iran in violation of US law. In addition, BIS noted that the company created an internal document entitled: “Proposal for Import and Export Control Risk Avoidance” describing how ZTE planned and organized a scheme to use a series of shell companies to reexport controlled items to Iran in violation of US export control laws.

In an unusual move, BIS published on its website documents obtained during its investigation of ZTE to support its findings. These documents, which are published below, are very thorough and read like a playbook on how to circumvent US export controls.


These documents, which were posted by BIS in their original Mandarin and translated English versions, provide detailed information on ZTE's understanding of how US export control laws applied to them and the repercussions if they were unable to continue with their work in the US sanctions countries, including Iran, Sudan, North Korea, Cuba and Syria. The documents even included a summary of the enforcement actions that could be taken against the company, including listing the US supply chain, and provided examples of prior export control issues the company had faced, and recent enforcement cases brought against other Chines companies. The documents show that ZTE tried to attract members to its export control team by paying a bonus.

For example, the "Proposal for Import and Export Control Risk Avoidance" describes how ZTE planned to establish and use "detached" (i.e., shell) companies and other measures to avoid "risks of import and export control". The document suggests that the company use the Jebel Ali Free Zone in Dubai as the "primary choice" to locate one of the companies. The document also describes ways to properly handle and pack the goods to minimize the risks to ZTE.

Repercussions

Because ZTE is a major telecommunications company the addition of ZTE to the Entity List has already had ripple effects. ZTE's stock has been suspended from trading on the Hong Kong and Shenzhen Stock Exchanges and China's Ministry of Foreign Affairs denounced the BIS actions in the following statement:
"The Chinese side is firmly opposed to the US using domestic laws to place sanctions on Chinese companies. The Chinese side urges the US side to call off the wrong action lest it should jeopardize economic cooperation and relationship between China and the US."
Representative Eliot L. Engel (D-NY), Ranking Member of the House Committee on Foreign Affairs, called for further restrictions on ZTE in the following statement:
"Today's action to impose a virtual embargo on exports to China's number-two telecom company, ZTE, reveals publicly for the first time that this company has systematically violated U.S. sanctions on Iran, North Korea, and other proscribed countries. ZTE bought U.S. telecom equipment and illegally incorporated it into communications systems for the Iranian and North Korean security, military, and intelligence agencies. I commend the federal agents at the Commerce Department, FBI, and Homeland Security Department for carrying out this four-year investigation. Additional criminal charges are likely to be brought. I believe that the U.S. sanctions should be extended to cut off all ZTE commercial activity and investment in the United States.”
It has been widely reported that BIS and the FBI commenced an investigation on ZTE's compliance with US export control laws in 2012. It has also been reported that senior ZTE executives have not traveled to the US over the past few years for fear of being arrested. 

Given the activities described in the ZTE documents and in the BIS Entity List notice, it appears likely that ZTE will remain in the crosshairs of the US Government for some time to come. 

January 31, 2016 

The Impact of the Third Round of Regulatory Changes to the US Embargo on Cuba: Licenses Now Available for Products to Support Construction Projects in Cuba

By Doug Jacobson, Glen Kelley and Michael Burton, Jacobson Burton Kelley, PLLC

On January 27, 2016, the Office of Foreign Assets Control (“OFAC”) and the Bureau of Industry and Security (“BIS”) published a third round of coordinated amendments to the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR). The Federal Register notices published by the agencies can be found here (OFAC) and here (BIS).  


These regulatory changes are intended to further implement President Obama’s policy of seeking to thaw the longtime stalemate in political and economic relations between the US and Cuba. However, because most aspects of the US travel, trade and financial embargo of Cuba is governed by US law, the Obama Administration remains limited in the regulatory "tweaks" to the embargo, absent further action by the US Congress. 


The recent changes, described below, build on the amendments to the U.S. regulations implementing the Cuban embargo that were made in 2015, including:

  • The January 2015 amendments to the CACR and EAR regulations expanding the scope of the 12 authorized categories of travel to Cuba and authorizing certain trade and financial transactions  between the US and Cuba; 
  • The July 2015 removal by the State Department of Cuba from the list of State Sponsors of Terrorism and the corresponding increase by in the de minimis threshold for reexports to Cuba of "items subject to the EAR" from 10% to 25%; and       
  • The September 21, 2015 amendments to the CACR and EAR authorizing certain business activities and physical presence by US companies in Cuba, expanding the scope of EAR License Exceptions SCP (Support for the Cuban People) and AVS (Aircraft, Vessels and Spacecraft). 

Our summary of the impact of these prior regulatory changes can be found here.  

Major Changes to the US Embargo on Cuba Resulting from the January 27, 2016 BIS and OFAC Amendments


The OFAC and BIS regulations issued on January 27, 2016 made a number of changes to the restrictions on traveling to and doing business in Cuba. While some of the changes have a very limited scope some of the changes are more much more significant and could open up a wide range of new business with Cuba, assuming a counterparty in Cuba can be found. 


The following is an overview of the major changes made by OFAC and BIS to the regulations implementing the US embargo on Cuba. 


A. Exports and Reexports Involving Cuban Infrastructure and Other Projects Now Subject to Case-By-Case Licensing Policy


The most significant change made by the January 27, 2016 amendments was the amendment by BIS of section 746.2 of the EAR in order to establish a case-by-case review policy for exports and reexports of "items" for use in construction of various infrastructure products in Cuba, such as facilities for treating public water supplies, facilities for supplying electricity or other energy to the Cuban people, public transportation projects, food processing, public health and sanitation, sports and recreation facilities, and other infrastructure that directly benefits the Cuban people. This is particularly important given Cuba's infrastructure needs. The fact that BIS may issue licenses for transactions with Cuban state-owned enterprises is significant given the Cuban Government's pervasive role in the Cuban economy. 

This new case-by-case licensing policy also now authorizes exports and reexports to wholesalers and retailers of items for domestic consumption by the Cuban people. While the term "item" is not defined, this should allow a wide range of consumer and other products to be exported from the US to Cuba as long as a BIS license is obtained in advance. 


It is important to note that these changes only authorize the export of goods and software associated with these infrastructure projects. The provision of services by US companies and persons involving such projects in Cuba, such as engineering and architectural services, remain prohibited by OFAC.  


In addition, a general policy of denial continues to apply to exports and reexports of items from the US for use by Cuban state-owned enterprises, the Cuban military, agencies, or other organizations of the Cuban government that primarily generate revenue for the state, including those engaged in tourism and those engaged in the extraction or production of minerals or other raw materials. 

B. Exports and Reexports Now Subject to General Policy of License Approval


BIS also amended section 746.2 of the EAR to add a general policy of approval for certain exports and reexports previously subject to case-by-case review and a policy of case-by-case review for exports and reexports of items not eligible for license exception to meet the needs of the Cuban people. 


Specifically, the January 27, 2016 rule revises the licensing policy from possible approval on a case-by- case basis to a general policy of approval for exports and reexports of the following items to Cuba:


  • Telecommunications-related items that would improve communications to, from, and among the Cuban people (to the extent not eligible for license exception SCP); 
  • Parts and components necessary to ensure the safety of civil aviation and the safe operation of commercial aircraft engaged in international air travel, including the export or reexport of such aircraft leased to state-owned enterprises (this includes cargo aircraft); and
  • Agricultural products that are outside the scope of “agricultural commodities” as defined in Part 772 of the EAR, such as insecticides, pesticides and herbicides, as well as agricultural commodities not eligible for License Exception Agricultural Commodities (AGR).

C. Changes Made to Financing of Certain Export Transactions Involving Cuba


OFAC's amendments to the CACR remove the long-standing cash in advance payment requirement and therefore US banks are now authorized to finance authorized exports and reexports to Cuba, except for agricultural commodities. As a result, US banks are now authorized to issue, advise, negotiate, pay or confirm letters of credit, including those issued by a Cuban bank. 

OFAC remains prohibited by US law to authorize payment and financing terms for the export and reexport to Cuba of agricultural commodities and agricultural items, which remain subject to the cash in advance payment terms. 

D. Limited Expansion of Certain Authorized Travel Activities to Cuba


OFAC made a number of "tweaks" to the existing 12 categories of authorized travel to Cuba, including changes made to eliminate some of the unintended consequences resulting from the September 21, 2015 amendments. 


  • Temporary Sojourn in Cuba by Aircraft and Vessel Crew Members. OFAC has authorized by general license personnel, such as crew members, who are operating vessels or aircraft to engage in travel-related and other transactions in Cuba in order to facilitate the temporary sojourn of aircraft and vessels authorized by BIS in connection with the transportation of OFAC authorized travelers between the US and Cuba.
  • Movies and Television Programs. OFAC has authorized travel-related and other transactions directly incident to professional media or artistic productions for exportation, importation, or transmission, including the filming or production of media programs (such as movies and television programs); music recordings; and the creation of artworks in Cuba by persons that are regularly employed in or have demonstrated professional experience in a field relevant to such professional media or artistic productions.        
  • Organizing Professional meetings in Cuba. OFAC authorized by general license travel-related and other transactions to organize professional meetings or conferences in Cuba. The existing general license authorizes only attendance at such meetings or conferences.
  • Scope of Humanitarian Projects Expanded. OFAC expanded the list of authorized humanitarian projects to include disaster preparedness and response.

E. Air Carrier Services to Cuba 

In anticipation of the operation of commercial flights to Cuba later this year, OFAC authorized by general license the entry into blocked space, code-sharing, and leasing arrangements to facilitate the provision of air carrier services including the entry into such arrangements with Cuban nationals. 


Conclusion


While some of the changes to US licensing policy on transactions with Cuba that went into effect on January 27, 2016 are significant in scope, many challenges remain in doing "normal" business with Cuba. Despite early enthusiasm many US companies have been frustrated by the extremely limited business possibilities in Cuba given that much of Cuba's economy is owned and controlled by the Cuban Government and individuals in Cuba face significant obstacles on engaging in business transactions directly with US companies, let alone having access to US financing or other authorized credit facilities.


January 22, 2016 

A View From the Trenches: The Practical Impact of the Iran JCPOA on US and Non-US Companies

By Doug Jacobson, Michael Burton and Glen Kelley, Jacobson Burton Kelley PLLC

We have spent the last few days on the ground in Europe and in the US advising clients on the impact of the January 16, 2016 Implementation Day sanctions relief under the Joint Comprehensive Plan of Action (JCPOA) with Iran.


Now that Executive Order 13716 and the regulatory changes to the US Treasury Department's Office of Foreign Assets Control's (OFAC) Iranian Transactions and Sanctions Regulations have been published in the Federal Register, and we have had the benefit of initial discussions with the regulators and our clients, we wanted to provide you a summary of the lessons learned and practical impact of these changes on US and non-US persons and companies.


As discussed below, the best way to describe this week's actions in terms of sanctions relief is that the calendar has been rolled back to mid-2010 and most dealing with Iran that were prohibited then involving US financial transactions and US products are still prohibited today.


1.  Despite Various Reports Most US Primary Sanctions on Iran Remain and Changes Were Limited to Application of Secondary Sanctions Affecting Non-US Companies and Non-US Financial Institutions


During the past few days we have seen the following headlines in major newspapers in the US and around the world:



International Sanctions on Iran Canceled

US, Europe Remove Sanctions as Iran Nuclear Deal Takes Effect

US Lifts Sanctions on Iran

These headlines are inaccurate and misleading, particularly as they relate to most aspects of the US sanctions on Iran.


Despite the various media reports to the contrary nearly all US sanctions and export controls on Iran that have been effect since the mid-1980s remain in place. The only sanctions relief offered by the US government was to scale back the "secondary" (or extraterritorial) sanctions on non-US persons, companies and banks that were greatly expanded since 2012. However, most of the other aspects of the long-standing US sanctions program on Iran (referred to as primary sanctions) remains in place. In addition, the export and reexport controls on Iran administered by the Commerce Department's Bureau of Industry and Security (BIS) have not been modified in any way.


We have confirmed that most reports suggesting specific non-US companies were rushing back into Iran or had already signed contracts with the Government of Iran (GOI) are not accurate. In addition, we are already seeing evidence that many US persons and companies have been misled into overestimating the scope of sanctions relief offered by the US under the JCPOA.


Given the extensive restrictions remaining on the export and reexport of US product to Iran, the significant financial restrictions remaining in place, and the potential risks of non-compliance, even non-US companies should proceed cautiously and only after identifying all remaining prohibitions that are relevant.


2.  Scope of Sanctions and Export Controls Remaining in Effect on US Persons, US-Based Companies and US Origin Goods, Software and Technology


The following is a summary of the current restrictions on US persons, US-based companies and US goods, software and technology.


As has been the case since the Clinton Administration, US persons, meaning US citizens, green card holders (permanent resident aliens), entities formed under US law and any person located within the United States,
 remain broadly prohibited from involvement in activity involving Iran, the GOI or persons on any US list of sanctioned or prohibited parties (i.e, OFAC's SDN List and BIS Entity List).

US-origin goods, software and technology cannot be exported or reexported to Iran in most cases. General and specific licenses (authorizations) can be used for humanitarian items to Iran, such as US origin agricultural products, medical devices and medicines.


Non-US subsidiaries that are owned or controlled by a US individual or company are now authorized by OFAC General License H to engage in certain activities with Iran. However several significant restrictions remain, and any business with Iran could create direct legal risk for the US investor. See sections 4 and 5 below.


It remains generally prohibited for US banks to process payments relating to Iran, the GOI, Iranian banks or sanctioned persons, including US dollar payments related to authorized activities by non-US entities owned or controlled by a US person or related to activities no longer covered by US secondary sanctions. While several hundred Iranian banks and companies were removed from OFAC's SDN List, more than 200 Iranian and Iran-related parties remain on the list and remain subject to secondary sanctions.


3.  Significant Restrictions Remain for Non-US Companies in Dealing With Iran


While most of the US secondary (extraterritorial) sanctions have been lifted on Iran (see section 7 below), a number of US sanctions applicable to non-US persons remain (see section 8 below).


Not all EU sanctions on Iran have been lifted and the EU continues to imposed export controls on many products to Iran. In addition, many countries continue to prohibit activities relating to Iran, or require prior authorization from the appropriate regulator. As of this writing, Canada has not made any changes to its very broad sanctions program on Iran.


4.  Impact on Non-US Companies Owned or Controlled by US Persons


General License H issued on January 16, 2016 authorizes entities formed under the law of a non-US country that are owned or controlled by a US individual or entity to engage in transactions involving Iran, subject to several limitations. Note that this does not apply to offices or branches outside the United States that are part of an entity formed under US law. See also the helpful OFAC guidance in FAQs K1 – K13.


Since October 2012, such non-US entities had been generally prohibited from dealing with Iran under the OFAC regulations (31 C.F.R. § 560.215), which provides that:


"Except as otherwise authorized pursuant to this part, an entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States."


Thus, non-US subsidiaries owned or controlled by a US company were treated as if they were US persons, and their actions in violation of the Iran sanctions regulations could be imputed to their parent companies. General License H effectively rolls the regulatory clock back to before October 2012, providing that:


"Except as provided in paragraph (c), an entity owned or controlled by a United States person and established or maintained outside the United States (a “U.S.-owned or -controlled foreign entity”) is authorized to engage in transactions, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would otherwise be prohibited by 31 C.F.R. § 560.215."


This may create a meaningful opportunity for some non-US subsidiaries of US companies to (re)enter the Iranian market. This will depend on case-by-case analysis of a number of factors.


Covered non-US entities must continue to comply, as if they were US persons, with certain US sanctions relating to Iran:


-  general prohibitions on exports from the United States (31 C.F.R. § 560.204), reexports from another country (31 C.F.R. § 560.205), transfers of funds through US banks or broker-dealers, and transactions with persons that remain on the SDN List or Foreign Sanctions Evaders List maintained by OFAC;


-  the end-use restrictions under Part 744 of the Export Administration Regulations (EAR) or prohibitions on dealing with denied parties under Parts 764 or 766 of the EAR; and


-  other OFAC sanctions as they relate to Iran, the GOI, Iranian banks and other persons targeted under Iran sanctions, including Executive Orders 12938 and 13382 (relating to weapons of mass destruction (WMD) and missiles), 13224 (international terrorism), 13572 and 13582 (Syria); 13611 (Yemen), 13553 and 13606, and sections 2 and 3 of Executive Order 13628 (human rights abuses in Iran).


In addition, covered non-US entities cannot engage in transactions that must go through the Iranian civil nuclear procurement channel established by the JCPOA that have not been approved through that channel, or transactions with any “military, paramilitary, intelligence, or law enforcement entity” of the GOI, or any official, agent, or affiliate thereof.


5.  Rules for US Parent Companies With Non-US Subsidiaries That Deal With Iran


To OFAC and the State Department's credit, General License H addresses certain “facilitation” issues inherent in the relationship between a US parent company and a non-US subsidiary. This occurred after these issues were brought to the attention of the senior OFAC and State Department staff involved in implementing the JCPOA


A.  Operating policies and procedures


General License H authorizes a US parent to establish or alter its operating policies and procedures, or those of the non-US entity it owns or controls, to the extent necessary to allow the non-US entity to engage in authorized transactions involving Iran. Absent this authorization, such changes in policies or procedures would fall expressly within the definition of prohibited “facilitation” in the OFAC regulations (31 C.F.R. § 560.417). The OFAC guidance clarifies that:


-  US persons, including senior management of a US parent company or its owned or controlled non-US entities, can be involved in the initial determination whether to engage in activities with Iran authorized by General License H.


- US person board members, senior management, and employees of either a US parent company or an owned or controlled non-US entity can be involved in the establishment or alteration of operating policies and procedures of the parent or non-US entity, to the extent necessary to allow the non-US entity to engage in transactions authorized by General License H.


- US persons can act as outside legal counsel or consultants to draft, alter, advise, or consult on such operating policies and procedures.


General License H does not authorize US person involvement in ongoing Iran-related operations or decision-making of its owned or controlled non-US entity after the determination to enter Iran has been made and policies / procedures are established. To be clear, US persons may not be involved in the Iran-related day-to-day operations of a US-owned or controlled non-US entity, including by brokering, referring, approving, financing, facilitating, or guaranteeing any Iran-related transaction by the non-US entity.

B.  Automated global business support systems


The US parent may make available to an owned or controlled non-US subsidiary any “automated and globally integrated” computer, accounting, email, telecommunications, or other business support system, platform, database, application, or server necessary to store, collect, transmit, generate, or otherwise process documents or information related to transactions authorized by General License H.


The OFAC guidance explains that the term “automated” refers to any of the aforementioned systems that operate “passively and without human intervention to facilitate the flow of data between and among the United States person and its owned or controlled foreign entities.” It goes on to explain that “globally integrated” includes those systems that are “available to, and in general use by, the United States person’s global organization, including the United States person and its owned or controlled foreign entities.”


General License H expressly excludes from its authorization the use of business systems in connection with any transfer of funds to, from, or through a United States bank or broker-dealer.



All other prohibitions set forth in the OFAC regulations – including the prohibition against facilitation set forth in 31 C.F.R. § 560.208 – continue to apply to US parent companies, except as otherwise authorized.

6.  Practical Impact of US Sanctions Changes on Trade with Iran

Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions. Very broad US primary sanctions remain in place unchanged, except for two specific changes made pursuant to the JCPOA. These two changes are a new general license for imports to the US of Iranian carpets and foodstuffs, and an expanded specific licensing program for exports to Iran of aircraft and related equipment and services.

Under the aircraft licensing program, US and non-US companies may now apply to OFAC for a specific license (authorization) to export to Iran commercial passenger aircraft for exclusively civil aviation end-use, and spare parts, components and services for such aircraft. This specific licensing program might not result in significant exports for some time, as potential exporters seek clarity on how it will function. Also OFAC could take several months to process license applications, as was the case under the narrower aviation licensing program initiated in January 2014 under the interim agreement with Iran known as the Joint Plan of Action (JPOA).

With the January 16 sanctions relief, we could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List and from secondary sanctions could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).

In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions.

Much of the sanctions relief may have limited practical impact on trade with Iran, as exporters, importers, banks, insurers and shippers consider how to navigate the remaining restrictions.

We could see expanded exports of agricultural products, medicine and certain medical products. While such humanitarian trade was already authorized, the removal of certain Iranian banks from the SDN List could make it easier for US companies to use European banks for such payments (since Iran and the US will not resume direct banking operations for exports to Iran).


In addition, it appears that container shipments through Iran's Bandar Abbas port will no longer trigger US secondary sanctions. And non-US banks may now be able to engage in payments with most (but not all) major Iranian banks.


Many non-US companies considering exports to Iran of items with US content, or to the US of items with Iranian content, are working through the complex provisions of the OFAC regulations and the EAR administered by BIS related to incorporation, de minimis levels, and substantial transformation of such content. These rules remain unchanged, but the new OFAC guidance reconfirms some key points:

  • Non-US persons remain prohibited from directly or indirectly reexporting to Iran from a third country items originating in the US or containing 10 percent or more by value of US-controlled content (meaning US content classified under an ECCN other than EAR99).
  • However, the OFAC guidance also confirms that it is not generally prohibited for non-US persons or companies to reexport EAR99 items from a third country to Iran, if no US person is involved, the items have come to rest outside the US, were not procured from the US in order to be sent to Iran, and no prohibited end-uses or end-users are involved.
7.  Many US Secondary Sanctions on Iran Have Been Lifted

Non-US persons will no longer be penalized under US secondary sanctions for engaging in the following activities, unless their conduct involves any of the other activities or persons that remain sanctioned (see #8 below):


-  investing $20 million or more in the development of the Iranian upstream or downstream oil, gas or petrochemical sectors;


-  providing to Iran goods, services, technology, information or support for the development of Iranian petroleum resources or Iranian production of gasoline, diesel or jet fuel;


-  providing to Iran gasoline, diesel or jet fuel, or assisting with Iran’s import of such fuel;


-  selling, leasing or providing to Iran or the GOI goods, technology or services for Iran’s production of petrochemicals;


-  transactions involving crude oil, petroleum or petrochemicals from Iran, or involving the National Iranian Oil Company (NIOC) or its subsidiaries, though certain such sanctions were suspended in January 2014 under the Joint Plan of Action (JPOA);


-  providing insurance or reinsurance for NIOC or the National Iranian Tanker Company (such sanctions were suspended under the JPOA);


-  assisting GOI acquisition of US bank notes or precious metals, or purchasing or facilitating the issuance of GOI debt;


-  entering into a joint venture with the GOI regarding petroleum or uranium resources outside of Iran;


-  owning, operating or insuring a vessel transporting crude oil from Iran (except pursuant to the JPOA sanctions suspension) or concealing its transportation of crude, gasoline, diesel or jet fuel from Iran, or transporting to or from Iran goods related to terrorism or WMD;


-  selling or supplying to Iran significant goods or services used in the Iranian automotive sector (such sanctions were suspended under the JPOA), or the Iranian energy, shipping, or shipbuilding sectors;


-  selling or supplying to or from Iran precious metals (such sanctions were suspended under the JPOA);


-  a significant transaction involving Iranian rials, a derivative based on the rial, or funds or accounts outside Iran denominated in the rial; and


-  insurance or reinsurance of activities listed above, or paying a claim arising from any such activity prior to Implementation Day if no person on the SDN list is involved.


8.  Remaining US Sanctions and Export Controls Applicable to Non-US Persons


As noted below, most US sanctions and export controls relating to Iran remain in place. Many can have direct or indirect application to non-US persons seeking to re-engage in business with Iran:


A.  Secondary sanctions can still be imposed for any of the following activities.


-  Materially assisting, sponsoring or supporting any of the more than 200 Iranian persons remaining on the SDN list, or for a financial institution, engaging in a significant transaction involving any such person. These sanctions are broad - for example, the Iranian Revolutionary Guard Corps (IRGC) and its affiliates, which play an important role in several sectors of the Iranian economy, are still covered on the SDN list.


-  For a non-US bank, (i) a significant transaction involving any person on the SDN list for reasons related to Iran’s proliferation of WMD or terrorism, or (ii) any transaction involving WMD, terrorism or money laundering activities by the GOI.


-  The provision of financial messaging services (eg SWIFT) to Iranian banks that remain on the SDN List, which include Ansar Bank, Bank Saderat, Mehr Bank


-  Sales of goods or services to Iran or other transactions subject to the Iranian nuclear procurement channel established by the JCPOA, without approval under that channel.


-  Selling or supplying to or from Iran graphite, raw or semi-finished metals, coal or software for industrial processes, if the transaction supports the military or missile program of Iran.


-  Exporting or providing goods, services or technology to Iran or a third country knowing they would contribute to Iranian WMD or advanced conventional weapons capabilities.


-  Supplying or operating telecoms equipment, technology or services that could be used to commit human rights abuses or for censorship, surveillance or network disruption.


B.  US primary sanctions remain on Iran, meaning US persons are generally prohibited from transactions or dealings involving Iran, the GOI, an Iranian bank, or any person on an OFAC sanctions list. A non-US person could be penalized under the primary sanctions for taking action within the United States or causing another person to do so, in a transaction involving Iran, the GOI or a sanctioned person.


C.  US and non-US persons can be added to a US sanctions list if they engage in deceptive transactions for sanctioned persons, support activities related to terrorism, proliferation of WMD or missiles, undermine the peace, security or stability of Yemen or certain other countries, or engage in activities covered by other OFAC sanctions programs.


D.  Any US or non-US company listed on a US stock exchange must disclose in its quarterly and annual reports a range of activities that the company or its affiliates engage in involving the GOI (unless authorized by the US), the Iranian energy sector or certain sanctioned persons.


E.  US and non-US persons are required to certify, at the time of any US government contracting or US Export-Import Bank financing, that neither it nor any entity it owns or controls engages in certain activities relating to Iran.


F.  Public pension and retirement funds may be restricted under US state or local laws from investing in or purchasing goods or services from companies doing business with Iran.


G.  In December 2015 Congress modified the US Visa Waiver Program to require individuals in the 38 participating countries to go through a full US visa application process if, since March 2011, they have been in Iran, Iraq, Syria or Sudan for any reason. This could have an impact on executives and other staff that travel between the US and these countries and require these individuals to obtain visas to enter the US for business or personal travel.


9.  Next Steps, Snap-Back Risk and Iran Sanctions Enforcement and Compliance Considerations

We expect there will be a great deal of Iran-related interest and activity in the coming weeks as companies, investors and financial institutions assess what they can and cannot do in Iran. In addition, there are already a number of unanswered questions on various aspects of the changes that have been made and we will continue to engage with OFAC, BIS and the State Department to seek clarification on these questions.


US and non-US companies that decide to engage in authorized business in Iran must also weigh the potential of the so-called "snap-back" or reimposition of sanctions on Iran. While the risk of the reimposition of sanctions on Iran if they fail to uphold their end of the JCPOA is unclear, OFAC has said that if sanctions are reimposed there will be no “grandfather clause” for pending transactions. In addition, the US has also made clear that any transactions conducted after the snap-back occurs are sanctionable and there is no provision in the JCPOA that protects contracts signed prior to snap-back. In addition, given that there will be a new US president in less than one year, it remains to be seen whether the next Administration will choose to uphold the US commitments made in the JCPOA.


With respect to enforcement, the Treasury Department has previously stressed that it will continue to “vigorously enforce" all US sanctions on Iran that have not been suspended. Given that the US Congress will be closely monitoring the JCPOA and the significant sanctions and export controls that remain, we expect that OFAC, BIS and other US law enforcement agencies will remain vigilant in combating conduct that remains prohibited by US law. We expect that Iran will remain the primary target of US sanctions and export control enforcement.

As a result, US and non US companies must remain vigilant in complying with the existing US primary and secondary sanctions on Iran, particularly given the significant facilitation risks that remain.

December 29, 2015 

BIS Proposes New Export Enforcement Guidelines Drawing on OFAC’s Approach

By Michael Burton, Glen Kelley and Doug Jacobson, Jacobson Burton Kelley PLLC

On December 28, 2015, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published the long-awaited proposed rule to revise its guidance on administrative enforcement actions under the U.S. Export Administration Regulations (“EAR”) ("BIS Guidelines"). If adopted in final form, the proposed rule would significantly revise BIS's longstanding "Guidance on Charging and Penalty Determinations in Settlement of Administrative Enforcement Cases" (currently found in Supplement No. 1 to part 766 of the EAR) and would make them substantially similar to the Economic Enforcement Guidelines that have been used by the Treasury Department's Office of Foreign Assets Control (OFAC) since 2009.   

Background
BIS's Assistant Secretary of Export Enforcement, David Mills, served in many senior roles at OFAC for many years before being confirmed in his current position in January 2010. In 2013, Assistant Secretary Mills announced that BIS was considering updating the agency's enforcement guidelines for administrative cases to better align them with the guidelines published by OFAC. In 2014 he noted that: 
OFAC's Guidelines - premised upon the statutory criteria set forth in IEEPA, the statutory authority pursuant to which both agencies now administer and enforce their respective regulations - uses the transaction value to determine the baseline for assessing a civil penalty. The OFAC Guidelines also provide greater transparency and predictability for the exporting community, an important objective of ECR [Export Control Reform].
Consistent with these goals, the preamble to the proposed rule notes that BIS is proposing to update its penalty guidelines "to make civil penalty determinations more predictable and transparent to the public and aligned with those promulgated by [OFAC]."

Public comments on the proposed changes to the BIS Guidelines are due on February 26, 2016.


Determining the Base Penalty Amount

The proposed BIS Guidelines largely mirror OFAC’s Economic Sanctions Enforcement Guidelines (“OFAC Guidelines”), which have been in force since November 9, 2009.

Like the OFAC Guidelines, the proposed BIS Guidelines would as a first step categorize an enforcement case as “egregious” or “non-egregious.” A different base penalty amount would apply depending on this characterization and whether the case resulted from a valid voluntary self-disclosure. Egregious cases would be those deemed to constitute the “most serious violations” following an analysis of all applicable enforcement factors (discussed below). In making this determination, BIS would accord particular weight to considerations of willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, and harm to the regulatory program objectives (Factors A-C), in light of the individual characteristics of the parties involved.  

If BIS intends to impose an administrative penalty, BIS would next make a determination as to how many violations of the EAR had occurred. As noted below, BIS has some discretion and for many commonly recurring fact patterns it may be difficult to predict how many violations BIS will find to have occurred. 

Next, BIS would set the “base penalty amount” for each violation based on one of three values -- the applicable statutory maximum ($250,000), the “transaction value,” or the “applicable schedule amount.”

As with the OFAC Guidelines, the concept most critical to the base penalty amount besides “egregiousness” is “transaction value,” a concept that is not precisely defined. The BIS Guidelines provide that transaction value “means the U.S. dollar value of a subject transaction, as demonstrated by commercial invoices, bills of lading, signed Customs declarations, or similar documents. Where the transaction value is not otherwise ascertainable, BIS may consider the market value of the items that were the subject of the transaction and/or the economic benefit derived by the Respondent from the transaction, in determining transaction value. In situations involving a lease of U.S.-origin items, the transaction value will generally be the value of the lease. For purposes of these Guidelines, ‘transaction value’ will not necessarily have the same meaning, nor be applied in the same manner, as that term is used for import valuation purposes at 19 CFR 152.103.” This begs the critical questions: what is the “subject transaction,” and how is it to be valued in a given case?


Again mirroring the OFAC Guidelines, the BIS Guidelines would define the “applicable schedule amount” by reference to a table that lists several different amounts, and provides a range of transaction values corresponding to each of these applicable schedule amounts. For example, the applicable schedule amount is $1,000 if the transaction value is less than $1,000, it is $10,000 if the transaction value is at least $1,000 and less than $10,000, and so on. The maximum applicable schedule amount is $250,000 if the transaction value is $170,000 or more. This approach would assign a great deal of weight to transaction value. 

Based on our experience with the similar OFAC approach to penalty calculations, this can become a point of contention in settlement negotiations.
 
Enforcement Factors

After the base penalty amount has been determined, BIS would then consider numerousfactors to adjust the base penalty amount for each violation downward or upward, up to the statutory cap ($250,000 per violation under the International Emergency Economic Powers Act, which is the current statutory authority for the EAR). Many of the factors are the same as under the current BIS penalty guidelines, and there is some degree of overlap among the factors themselves. The proposed rule organizes the factors into four categories – aggravating factors, general factors (which can either increase or decrease penalty), mitigating factors, and other factors that may be considered on a case-by-case basis.  

1.  Aggravating Factors

A.  Willful or Reckless Violation of Law. This factor involves an evaluation by BIS of the willfulness, recklessness/gross negligence, concealment, pattern of conduct, prior notice, and management involvement for the company involved in the enforcement action. The degree to which these actions are present would determine the degree of aggravation factored into any administrative penalty calculation.

B.  Awareness of Conduct at Issue. This factor would consider actual knowledge, reason to know, and management involvement. According to the Guidelines, “Generally, the greater a Respondent's actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the BIS enforcement response will be. In the case of a corporation, awareness will focus on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers.”  

C.  Harm to Regulatory Program Objectives. This factor would take into account U.S. national security and foreign policy implications with reference to the destination involved, the end-use and end-user, and the sensitivity and control level of the item(s) involved in the transaction, as well as the licensing policy. These three aggravating factors would be particularly important in determining the egregiousness of a violation.

2. General Factors

D.  Individual Characteristics. This factor would evaluate the Respondent’s commercial sophistication, exporting experience, regulatory history (prior enforcement actions), related illegal conduct and criminal convictions, among other issues. Interestingly with regard to regulatory history, the BIS Guidelines note that “[w]hen an acquiring firm takes reasonable steps to uncover, correct, and voluntarily disclose or cause the voluntary self-disclosure to [the BIS Office of Export Enforcement] of conduct that gave rise to violations by an acquired business before the acquisition, BIS typically will not take such violations into account in applying these Factors in settling other violations by the acquiring firm.” For purposes of calculating the base penalty amount, first offenses could result in a reduction of that amount by up to 25​%. Generally, an apparent violation would be considered a “first violation” if the Respondent has not been convicted of an export-related criminal violation or been subject to a BIS final order in five years, or a warning letter in three years.  

E.   Compliance Program. This would involve a determination of whether the Respondent had an effective risk-based BIS compliance program in place at the time of the apparent violation, including an assessment of the extent to which it complied with BIS’s Export Management System (EMS) Guidelines. “In this context, BIS will also consider whether a Respondent’s export compliance program uncovered a problem…and whether the Respondent has taken steps to address compliance concerns raised by the violation.” These general factors may be considered either aggravating or mitigating depending on the circumstances.  

3.  Mitigating Factors

F.   Remedial Response. This factor would consider whether the Respondent took appropriate corrective actions in response to the apparent violation.

G.  Exceptional Cooperation with OEE. This factor could result in a 25​% to 40​%​ reduction of the base penalty amount. It is noteworthy that to gain mitigation credit under this factor, the level of cooperation is expected to go beyond what would be considered minimally necessary to address a violation and take corrective measures.  

H.  License Was Likely To Be Approved. Transactions that would likely have received a license had one been sought also may result in a reduction of up to 25​% of the base penalty amount. Although mitigating factors could be combined for a greater reduction in penalty, BIS indicates that mitigation generally would not exceed 75​% of the base penalty. Although no longer an express mitigating factor in its own right, voluntary self-disclosure would continue to weigh heavily in the base penalty amount, with a deduction of 50% of the transaction value in non-egregious cases or the applicable schedule amount in egregious cases.  

4.    Other Relevant Factors Considered on a Case-by-Case Basis  

I.    Related Violations. If a single export transaction might give rise to multiple violations, (e.g., one unlicensed export resulting in multiple violations of the EAR and the Foreign Trade Regulations), BIS has discretion to charge one or more violations. For example, a single export could give rise to one or more violations of the EAR, and BIS has expressly retained the discretion to consider each separate incorrect statement made in an Automated Export System (“AES”) filing as a separate violation. In many commonly recurring fact patterns, it could be difficult to predict how many violations BIS might find to have occurred.

J.    Multiple Unrelated Violations. Under the proposed​ BIS Guidelines, BIS would be more likely to seek a denial of export privileges and/or a greater monetary penalty in cases of multiple unrelated violations where the pattern of violations might indicate serious compliance problems and a resulting greater risk of future violations. In deciding whether such heightened penalties / denial order are warranted BIS also may consider whether a Respondent has taken effective steps to address compliance concerns.  

K.  Other Enforcement Action. Enforcement action taken by federal, state, or local agencies in response to the apparent violation or similar apparent violations could be considered, particularly with regard to global settlements or criminal convictions and/or plea agreements. BIS retains discretion as to whether such related enforcement actions will result in increased or decreased penalty levels and collateral sanctions.  

L. Future Compliance/Deterrence Effect. This Factor would address the impact that the administrative action may have with regard to promoting future compliance and deterring such conduct by other similar parties, particularly in the same industry sector. In other words, BIS would consider what message the case would send to the regulated industry.  

M.  Other Factors That BIS Deems Relevant. According to BIS, this factor would “serve as a ‘catch-all’ category to retain flexibility to consider factors not already specifically addressed in the ​proposed BIS Guidelines, whether proposed by the Respondent or BIS.” The proposed BIS Guidelines articulate this as more of a proportionality principle and state that: “On a case-by-case basis, in determining the appropriate enforcement response and/or the amount of any civil monetary penalty, BIS will consider the totality of the circumstances to ensure that its enforcement response is proportionate to the nature of the violation.” According to BIS, “Consideration of these Factors would not dictate a particular outcome in any particular case, but rather is intended to identify those Factors most relevant to BIS’s decision and to guide the agency’s exercise of its discretion. 

The proposed BIS Guidelines would provide sufficient flexibility to allow for the consideration of the Factors most relevant to a particular case. Penalties for settlements reached after the initiation of an enforcement proceeding and litigation through the filing of a charging letter will usually be higher than those described by these Guidelines.”

A Few Thoughts on the Proposed BIS Guidelines

While a more transparent and predictable approach by BIS certainly is welcome, the proposed BIS Guidelines largely seem to formalize what has been BIS policy and practice for the past several years rather than pave new ground. Moreover, based on experience with the similar approach OFAC has had for over six years, in the relatively small percentage of cases that result in administrative penalties, there are a number of ways in which the seemingly mechanical penalty calculations can yield unpredictable results, for better or worse. Three examples illustrate this point.

First, most penalty calculations start with transaction value, a difficult concept to pin down, all the more so with the open-ended definition BIS has proposed. It ​would be preferable for  BIS ​to start with the transaction value (or half of that for VSD cases) but use a more precise definition of that term.

Second, many cases will involve several mitigating factors, with cumulative reductions in any otherwise applicable penalty. Mathematically it is unclear how these add up. If there is 25% mitigation of a base penalty of $100 because a license would likely have been approved, plus 40% mitigation for cooperation, is the proposed penalty reduced to $35 (a 65% reduction) or $45 (a 25% reduction from $100 to $75, and then a 40% reduction from $75 to $45)? In addition, what is the cumulative mitigating effect of all the other factors without specified percentages of reduction?

Third, while BIS indicates that cumulative penalty mitigation will not exceed 75%, in our experience many OFAC administrative penalty cases, other than simple ones involving few violations, appear to involve a higher cumulative mitigation. In many cases, OFAC often appears to apply an additional discretionary mitigation after taking into account any mechanical penalty reductions such as for cooperation. 

Thus, an OFAC administrative penalty may be reduced much more than 75% from the base penalty. It may be more realistic, and more favorable for exporters, if BIS would expressly reserve the discretion to do the same. Indeed, a review of BIS enforcement actions suggests that mitigation of greater than 25% is not uncommon, although the role of transaction value in those determinations is less clear.

In sum, any increased predictability in enforcement outcomes as a result of the proposed BIS Guidelines is balanced with enforcement flexibility, and the ​proposed BIS Guidelines arguably provide the appearance of greater objectivity to enforcement and penalty decisions that are and will remain a largely subjective exercise. That said, the goal is laudable and BIS’s efforts should be appreciated.

Deadline and Importance of Public Comments
 
Public comments on the proposed BIS Guidelines are due on February 26, 2016. Given the importance of this proposed changes we expect that bar associations and trade associations will and should take the lead in drafting the comments to BIS. 


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