Managing U.S. and Canadian Economic Sanctions Risks

Managing U.S. and
Canadian Economic
Sanctions Risks
29 January 2014
Ben H. Flowe, Jr.
Wayne H. Rusch
Berliner, Corcoran & Rowe, LLP
Washington DC
Greg Kanargelidis
Blakes
Toronto ON
1
Why Use Sanctions?
Trade or financial restrictions imposed by one
country, or a group of countries, against
another country, government, or individuals
State Dept. Ambassador Daniel Fried,
Coordinator for Sanctions Policy
“The purpose of economic sanctions is
to bring about the conditions necessary
to remove sanctions
Alternative to War
Punish or Prevent Target’s Bad Behavior
•
•
•
•
Weapons of Mass Destruction
Terrorism
Drug Trafficking
Repression of Target’s Population
Make a Moral Statement
Politics within the Country Imposing Sanctions
OFAC Proscribed Countries
Cuba – Complete Embargo
• Policy to License More Telecom Services, Travel
Iran – Complete Embargo
• CISADA, ITRASHRA Added New Sanctions –
Discussed Below
North Korea – Complete Embargo
Sudan – Complete Embargo
• Sanctions Do Not Apply to Southern Sudan
Syria – Complete Embargo
Burma (Myanmar) – Blocking of SDNs
• No Longer Investments, Financial, Most Imports 7/2012
Others Also Limited to Blocking of SDNs
• Afghanistan, Belarus, Congo, Cote d’Ivoire,
Liberia, Yemen, Zimbabwe, SD Terrorists and
Narcotics Traffickers
3
4
Specially Designated Nationals
SDNs of Sanctioned Countries
• Includes Bank Melli, Bank Saderat under NonIran programs, Others in Japan, Europe, etc.
Terrorists
Includes Some Iranian Banks, Logistics
Weapons of Mass Destruction
• Includes Some Iranian Banks, Logistics
Narcotics Traffickers
Applies to U.S. Persons
Applies to Non-U.S. Person Reexports of
U.S.-Origin Items to Gov’t of Iran/Sudan
SDNs, Arguably Others
SDNs are Illustrative – Not Complete;
>50% Owned by SDN = SDN
Thousands –> Screening Software
5
Prohibited Activities
Imports to U.S. of Items/Services Originating
in Target Country
Contracts by “U.S. Persons” in Which Target
Country or National Has an “Interest”
• Even if “Executory” (i.e., Conditional)
Exports/Reexports by Anyone of U.S. Items
Payments (USPs)
Travel (USPs)
Bank Accounts and Other Assets (NYC)
Facilitation by “U.S. Persons” of Otherwise
Lawful Activities
Pressure for More Extraterritoriality – SEC,
Investors, Congress – Led to CISADA,
ITRSHRA
6
Exceptions/Permitted Activities
Humanitarian Donations
Information and Informational Materials
Telecommunications
Personal Travel
Sending Money to Family Members
Educational and Cultural Exchanges
Activities that Promote Goals of Sanctions
Just Like Prohibitions Vary, Exceptions Are
Rarely Identical Between US Sanctions
Programs
Can Seek Licenses if Exemptions or General
Licenses Do Not Fully Apply
Overlap of OFAC and BIS
Cuba – BIS for Exports, OFAC for Reexports by
U.S. Subsidiaries, Imports
Iran – OFAC for Exports/Reexports, Imports;
BIS Overlap for Exports/Reexports
North Korea – OFAC Imports, BIS Exports
Sudan – OFAC for Exports/Reexports, Imports;
BIS Overlap for Exports/Reexports
Syria – OFAC for Imports; BIS for
Exports/Reexports
EAR Part 746 Describes Overlap Best
Export Reform Might Consolidate Authority, but
Not Soon
Can Have Double Penalties or More, VDs to Both
Agencies
8
Canada – Legislation
Canadian economic sanctions are imposed under the
following federal statutes:
United Nations Act
• Regulations made under the UNA implement United Nations
Security Council Resolutions
Special Economic Measures Act
• Regulations made under the SEMA impose unilateral
sanctions against particular countries
Export and Import Permits Act
• The Area Control List sets out countries to which all exports
are prohibited without a valid permit
9
Canada – General Provisions
Canadian sanctions against Iran, Syria and Burma
apply to “any person in Canada” and to “Canadians
outside of Canada”
“person” includes individuals or entities
“Canadian” includes citizens and entities incorporated
in Canada (federally or provincially)
The Minister is authorized to issue a permit or
certificate to carry out a specified activity that is
otherwise restricted or prohibited
Offences under UNA and SEMA punishable by fines
and imprisonment
10
Unilateral U.S. Sanctions Laws
Helms-Burton Act on Cuba
• Right of U.S. Nationals to Recover Compensation for
Expropriation – waived
• Deny U.S. Visas to Nationals of Companies who Traffic in
Such Property
Sherrit International, Grupo Domos, BM Group
2006 Iran Freedom Support Act (“IFSA”)
• Sanctioned Non-U.S. Persons Investing $20 million in Iran
• Includes potential denial of export licenses, imports, ban
on U.S. government contracts
• Codified Executive Sanctions on Proliferation and Money
Laundering, Extended by Congress and Bush for 5 Years.
• Augmented by CISADA, ITRASHRA below.
EU WTO Action
Unclear Suspension
Private/ US States Divestment in Companies Doing
Business
11
Comprehensive Iran Sanctions,
Accountability, and Divestment Act of
2010 (CISADA)
Applies Regardless of Whether Otherwise Subject
to Other Export Controls
President Required to Impose “Going Forward”
Sanctions to
• “Investments” of $20M or more in 12 month period that
directly or significantly contributes to Iran’s ability to
develop its petroleum resources
“Investments” had excluded Exports; Now Includes Exports
• Provides goods, services, technology, information,
support that directly and significantly facilitate Iran’s
refined petroleum production worth $1M (or over $5M in
12 months)
• Sells or provides refined petroleum products or related
items to Iran worth $1M (or over $5M in 12 months)
12
Comprehensive Iran Sanctions, Accountability,
and Divestment Act of 2010 (CISADA)
Sanctions Menu Includes SDN-Type Treatment, Restrictions on USG
Procurement, Other Bad Things
President Must Investigate “Credible Evidence” of Violations
•
Need Not Investigate and May Terminate if President Certifies to Congress that
Person Will No Longer Engage In Activity, Must Be Verifiable
Financial Institution Restrictions, “Enforcers” (OFAC Regs)
Restores Prohibitions on Imports of Iranian Carpets, Pistachios, etc.
U.S. Parents Liable for Acts of Subsidiaries
No U.S. Government Contracts to Exporters of Items Determined to
Specifically Be Used to Restrict Free Flow of Unbiased Information
Requires Director of National Intelligence to Report Countries of
Concern with Respect to Transshipment, Reexportation, or Diversion
•
New license requirement for exports of certain products to countries designated as
“Destinations of Possible Diversion Concern”
Authorizes State or Local Governments to Divest from Companies
that Engage in Certain Energy Sector Investments in Iran
Gray Areas, Lots of Requests for Legal Opinions
13
Iran NDAA, EOs, ITRASHRA
Iran Threat Reduction and Syria Human
Rights Act of 2012 (ITRASHRA, ITRSHRA,
TRA) 8/20/2013, EO 13628 10/9/2012
• Applies Iran Sanctions Prohibitions to Non-U.S.
Entities Owned or Controlled by U.S. Persons,
and Punishes U.S. Parent Also; Cuba +
Over 50%, Control Board, or Otherwise Own or Control
– See EAR 760 “Control in Fact”
Can Divest of Owned or Controlled Entity by 2/9/13
SEC Disclosure Requirement re Iran Activities on
10Ks and 10Qs after 2/9/13
Nov. 2011, EO 13590 Implements NDAA
Sanctions on Persons that Have Provided
Certain Goods, Services, Technology, or
Support that Contributes to Iran’s
Development of Petroleum or Production of
Petrochemicals
14
Iran NDAA, EOs, ITRASHRA
Iran Designated as Money Laundering Concern
Feb 2012 EO 13599 Blocks Iranian Banks,
Central Bank
Apr 2012 EO 13606 (GHRAVITY) Sanctions
Entities Facilitating Computer or Network
Disruption, Monitoring, or Tracking, to
Facilitate or Commit Serious Human Rights
Abuses against People of Iran or Syria
EO 13608 5/2012 on Evading, Attempting,
Conspiring, etc. to Violate Iran or Syria
Sanctions
Iranian Transactions and Sanctions Regulations
Revised and Updated Fall 2012
• New General Licenses for Food, Medicine, Basic
Medical Equipment
15
Canadian Sanctions - Iran
Sanctions exist under the Special Economic Measures (Iran)
Regulations and the Regulations Implementing the United
Nations Resolutions on Iran
Sanctions have been imposed against Iran as a result of
concerns over its nuclear program and its non-compliance
with the Nuclear Non-Proliferation Treaty, among other
things.
The existing SEMA sanctions against Iran, most recently
amended on May 29, 2013, are intended to act as
“complete ban on imports from Iran and exports to Iran,
subject to certain exemptions”
16
Canadian Sanctions - Iran
Selected prohibitions:
Dealings with or in any property, wherever situated, of a
designated person
exporting, selling, supplying or shipping goods, wherever
situated, to Iran or to “a person for the purpose of a
business carried on in or operated from Iran”
the importation, purchase, acquisition, shipment or
transhipment of goods exported, supplied or shipped from
Iran (applies regardless as to whether the goods originate
in Iran)
the provision or acquisition of services to or from any
person in Iran that are In respect of the import, purchase,
acquisition or shipment of natural gas, crude oil, or any
petroleum or petrochemical products from Iran
provision, transfer, or communication of certain technical
data to Iran in certain circumstances, including: oil, gas,
petroleum products, mineral exploration among others.
17
Canadian Sanctions - Iran
On May 29, 2013 the sanctions against Iran under
SEMA were amended as follows:
Implement a complete ban on imports from Iran
and exports to Iran;
add 82 new entities and 30 new individuals to the
list of designated persons
introduce an exemption for the exportation to
Iran of equipment, services and software aimed
at increasing the availability of consumer
communication technologies that contribute to
Internet freedom; and
Introduce an exemption for goods used to purify
water for civilian and public health purposes.
18
6 Month P5+1 Agreement with Iran
November 24, 2013, P5+1 (U.S., UK, France, Russia,
China, and Germany) reached an initial understanding
with Iran on Joint Plan of Action (“JPOA”) to halt
Iran’s nuclear program in exchange for limited,
targeted, and reversible sanctions relief for a six
month period.
No sanctions relief until Iran takes certain affirmative
actions on nuclear program.
JPOA Period – January 20 to July 20, 2014.
Temporary suspension of U.S. sanctions on Iran’s
petrochemical exports and associated services by
non-US persons.
Temporary suspension of U.S. sanctions on Iran’s
auto industry and associated services by non-US
persons.
Temporary suspension of U.S. sanctions on gold and
precious metals and associated services by non-U.S.
persons.
19
6 Month P5+1 Agreement with Iran
Temporary licensing of supply and installation in Iran of
spare parts for safety of flight for Iranian civil aviation and
associated services, including transactions involving Iran
Air.
Sanctions relief related to Iran’s sale of crude oil. China,
India, Japan, South Korea, Taiwan, and Turkey can
maintain their current average level of imports from Iran
during the JPOA Period and release of installments of
payments to Iran.
Facilitation of humanitarian trade for Iran’s domestic needs
using Iranian oil revenue held outside Iran.
All U.S. sanctions, including financial sanctions, remain in
effect. U.S. persons and U.S.-owned or controlled foreign
entities continue to be general prohibited from conducting
transactions with Iran, including any transactions of the
type permitted under the JPOA, unless licensed to do so by
OFAC.
All relief from sanctions pertains only to the conduct and
transactions fully completed during the JPOA Period.
20
Perspective of Jon Stewart on
The Daily Show
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Or http://www.thedailyshow.com/watch/wedjanuary-15-2014/let-s-break-a-deal
21
Global Terrorism Controls
September 13, 2001 EO Listing, followed
by U.N., EU and Others; Patriot Act
Expansion over Earlier Terrorism Sanctions
• Can Block “Pending Investigation” via Patriot Act
Includes those Owned or Controlled by or
“Associated” with SDNs
Treasury Department Operation Green
Quest
• Other Issues Bubbling Up
• More Conservative Attitude
• Less Focus on Countries, More on End-Users
Many Iranian SDNs also SDNGTs or
SDNWMDs
Similar EAR Changes
22
US Trade Embargo
Syria
2004: US Full Trade Embargo in Response to Syrian
Interference in Lebanon, Hosting Iraqi Insurgents & Terrorists
• Exceptions for Humanitarian Assistance, Medicine, Medical Equipment
2011: Response to Syrian Government Internal Repression
U.S. and EU Freeze Assets of Government Officials, Banks,
Companies, Prohibits Dealings in Syrian Oil & Gas Products
2013 and Beyond
• June - US Authorizes Limited Supply of Weapons to Regime
Opponents
• August - Ghouta Chemical Weapons Attack
• September - US & Russia Negotiate Chemical Weapons
Disposal Program with Syria
• October – Syria Begins Destruction of Chemical Weapons
Facilities, Weapons, Precursor Chemicals
• No Changes to US Sanctions as of January 2014
23
Canadian Sanctions - Syria
Sanctions against Syria exist pursuant to the Special Economic
Measures (Syria) Regulations
First introduced on May 24, 2011, the sanctions initially prohibited
certain transactions with the entities on a list of designated
persons. The regulations have subsequently been amended at
least ten times, most recently on November 26, 2012
Sanctions were introduced following the Syrian Government’s
violent crackdown on peaceful protesters who began protesting for
democratic reforms on March 15, 2011. Canada’s objective in
imposing sanctions was to reinforce the message to the Syrian
Government that its blatant disregard for human rights and
fundamental freedoms is unacceptable and condemned by the
international community.
24
Canadian Sanctions - Syria
Amendments to the sanctions include:
• Adding 45 entities and 165 individuals to the list of
designated persons
• Prohibiting first the importation of petroleum
products, and then all importations other than food
for human consumption
• Prohibiting first investments in the Syrian oil
industry, and later the provision or acquisition of
all financial and related services to or from Syria
• Prohibiting the export, sale, supply or shipping of
luxury goods to Syria
25
Canadian Sanctions - Syria
Selected sanctions include:
Dealings with or in any property, wherever
situated, of a “designated person”
Importing, purchasing, acquiring, carrying or
shipping any goods (other than food) that are
exported, supplied or shipped from Syria
Providing or acquiring financial or related services
to facilitate the importation, purchase,
acquisition, carriage or shipment of any
petroleum or petroleum products, excluding
natural gas, from Syria
26
Canadian Sanctions - Syria
Making certain investments in Syria
Providing or acquiring financial or other related services to
or from any person in Syria
Exporting, selling, supplying, or shipping to Syria or any
person in Syria certain goods and/or technical data
Exporting, selling, supplying or shipping to Syria, or any
person in Syria, any luxury goods
• “Luxury goods” are defined as goods such as: Jewelry,
gems, precious metals, watches, cigarettes, alcoholic
beverages, perfume, designer clothing, sporting goods,
private aircraft, gourmet foods and ingredients, lobster,
computers, television and other electronic devices
27
Sudan vs.
Southern Sudan
Exports of All US-Origin Items and Reexports
of CCL Items Prohibited
Reexports of US-Origin EAR99 Items by NonUS Persons from General Inventory Permitted
Government of Southern Sudan Not Subject
to Sanctions
Transactions Involving Southern Sudan
Petroleum Authorized, Even if Involves Sudan,
with Some Exceptions
Transit of Sudan to Southern Sudan
Permitted
28
Other U.S. Trade Embargoes
Cuba
• US Embargo Since 1963
• US Persons/Foreign Affiliates Cannot Participate
in Any Cuba Transactions
• No Imports to United States of Cuban Products
• Asset Blocking of All Cuban Nationals
North Korea
• US Embargo of Some Sort Since 1950
• No US Products Can Be Exported to North Korea
• No Imports to United States of North Korean
Products
• Assets Blocking of Government Institutions,
Officials
29
Other U.S. Trade Embargo Issues
Libya
• U.S., Canada, EU Embargo During 2011 Civil War
• Embargo Removed Late 2011
• Sanctions Against Members of Former Gaddafi
Government
• Have Found a Government Official under an SDGT
Sanction
Burma/Myanmar
• U.S./Canadian Sanctions Relaxed During 2012
• Same Level of Export Control as for China
• Some Government Officials Subject to SDN
Sanctions
• Restrictions on Financial Transactions with US
Banks
30
Canadian Sanctions - Burma
On April 24, 2012 the broad Special Economic Measures (Burma)
Regulations (SEMA) against Burma were amended to remove the
prohibitions on import, export, investment, the docking and
landing of ships and aircraft, and the provision or acquisition of
financial services
The current SEMA sanctions against Burma maintain prohibitions
with respect to arms and related materials, military activities, and
dealing in the property of designated persons
“arms and related materials” means any type of weapon,
ammunition, military vehicle or paramilitary equipment, and
includes their spare parts
31
Canadian Sanctions - Burma
Selected prohibitions:
Dealings with or in any property, wherever situated, of a
designated person
Import, purchase, acquire, ship, transport or otherwise deal in
arms and related materials that are exported from Burma after
December 13, 2007
Transfer, provide, or communicate technical data related to
military activities or to the provision, manufacture, maintenance
or use of arms or related material to Burma or any person in
Burma
Provide or acquire financial or other services related to military
activities or to the provision, manufacture, maintenance or use of
arms and related material to, from or for the benefit of, or on the
direction or order of, Burma or any person in Burma
32
Canadian Sanctions - Other
United Nations Act:
Côte d’Ivoire
Democratic Republic of the
Congo
Sudan
Lebanon
Iraq
Somalia
Eritrea
Liberia
The Democratic People’s
Republic of Korea
Libya
Special Economic Measures
Act:
•
•
Zimbabwe
The Democratic People’s Republic
of Korea
EIPA, Area Control List:
Belarus
The Democratic People’s Republic
of Korea
33
Canada – Trading with Cuba
There are no Canadian sanctions imposed against Cuba
Canada’s Foreign Extraterritorial Measures Act (“FEMA”) imposes
measures to counter U.S. Cuban sanctions which have
extraterritorial effect.
The Foreign Extraterritorial Measures (United States) Order, 1992
was made pursuant to FEMA on October 9, 1992 in order to
prevent the application of U.S. legislation that would otherwise
affect trade or commerce between Canada and Cuba
Further amended in 1996 following the enactment of the HelmsBurton Act
34
Canada – Trading with Cuba
Under the Blocking Order, Canadian corporations and
their directors and officers must give notice to the
Attorney General of any:
• Directive, instruction, intimation of policy or other communication
relating to an extraterritorial measure of the United States in respect
of any trade or commerce between Canada and Cuba that the
Canadian corporation, director or officer has received from a person
who is in a position to direct or influence the policies of the Canadian
corporation in Canada
• Canadian corporations, along with their directors, officers, managers
or employees in a position of authority, are also prohibited from
complying with any such directive, instruction or intimation of policy
• FEMA raises potential for conflict between U.S. and Canadian
legislation in dealings by U.S. parent with its controlled Canadian
subsidiaries or affiliates.
35
OFAC Organization
Adam Szubin
Director
Barbara Hammerle
Deputy Director
Thomas Feddo
Associate Director (Acting)
Office of Investigations
And Enforcement
Virginia Cantor
Associate Director
Office of Resource
Management
Matthew Tuchband
Office of Chief Counsel
John E. Smith
Associate Director
Office of Program Policy
And Implementation
Dale Thompson
Section Chief, Enforcement Division
Andrea Gacki
Assistant Director Licensing
Maura Rezendes
Section Chief, Enforcement Division
Rochelle Stern
Assistant Director Policy
Section Chief, Enforcement Division
Dennis Wood
Assistant Director Compliance
Outreach & Implementation
Anatomy of a License Application
Format and Content for License Applications
– See 31 C.F.R. 501.801 and Website
Guidance for Specific Programs Like TSRA,
Cuba Travel, Now All Online
Submission to OFAC
Acknowledgment
Letter and Case No.
Licensing Staff +1-202-622-2480
Seeking Foreign Policy Guidance from State
Office of Terrorism Finance and Economic
Sanctions, Coordinates within State
Follow up License Through Stages - No
Automation Yet to Track
Respond Quickly to OFAC Inquiries
37
Applying for Licenses
Agriculture/Medicine/Medical Devices Enjoy Limited
Exemptions and Favorable License Policy for
Embargoed Countries
• Most Agricultural Items, Medicine and Listed “Basic
Medical Supplies” Eligible for General Licenses to Iran
• Other Countries, Medical Equipment Requires Specific
License
• Need BIS EAR99 Classification Ruling to Support Most
Specific Licenses
Find or Mimic Other Policies – e.g., Publishing,
Telecommunications, Emergency Relief, Education, or
Where Close to Exemption or Others, See Regulations
and Website, Foreign Policy, Etc.
Document in Application All U.S. Persons and U.S.Origin Items Needing License , Other OFAC
Restrictions and Policies
38
Applying for Licenses
Advise on Facts Applicable to OFAC
Policies
Work with OFAC Personnel on
Processing
Answer Questions Promptly
Don’t Assume They Understand Your
Business Model, Nuances
“Expediting” the License Application
39
Complying with the License
Make Sure All in Company Know
Scope of License, Expiration, Other
Restrictions
• Read the Fine Print
Project Team Members Should
Acknowledge in Writing
Understand Practical Implications –
Can You Get Paid, Transport
Document Compliance with Memos –
Need Not Be Elaborate
40
Seeking Guidance from OFAC
OFAC Hotline 1-800-540-6322 or
202-622-2490
http://www.treas.gov/offices/enforce
ment/ofac/
When to Call Compliance, Licensing,
Chief Counsel, Others?
How Does OFAC Respond to
Requests for Advisories? Slowly.
Timelines – None for Most
41
OFAC Reexport Exemptions
Iran, Sudan, Cuba
Prohibited Reexports by Non-U.S. Persons to
Iran, Sudan Do Not Include EAR99 Item
• But only if in General Inventory
• Beware of U.S. Transshipment (or Partial) to Fill Iranian
or Sudanese Order
Cuba, N. Korea, and Syria Regulations Do Not
Exclude Reexports of EAR99 Items
US Person Facilitation Issues (Cuba, Iran, Sudan)
Blocking if in Dollars, Esp. Recent Iran SDNs
under Non-Iran Programs (SDGT, SDWMD),
CISADA and ITRSHRA
See Form of Trade Transaction Questionnaire to
Obtain All Relevant Facts to Be Sure Exempt from
All U.S. Reexport Controls and Sanctions
42
Exemptions to EAR/OFAC Reexport
Controls
Are U.S. Person Activities Involved, and
if So, Are They Prohibited?
Are All U.S.-Origin Hardware Products,
Including Parts and Components,
Exempt?
Are All U.S.-Origin Technologies and
Software, Including Direct Products,
Exempt?
Do ITAR, NRC, DoE or Other Special
Controls Apply?
OFAC Special Considerations.
43
“U.S. Person”
U.S. Citizens, Permanent Residents, or
Asylees Wherever Located
Non-U.S. Person When Physically in the U.S.
Legal Entity (corporation, partnership, JV)
Organized under U.S. Law, and Their
Representatives Regardless of Nationality
Branch of U.S. Entity, Wherever Located
For Cuba, now Iran, Entities Organized
under Other Laws that Are Owned or
Controlled by a U.S. Person
For Iran, U.S. Parent Also Liable
44
Are “U.S. Persons” Involved?
No "U.S. Person" Can Be Involved in
Transactions with Cuba, Iran, Sudan, Most
Syria Exports (Other than Legal Advice,
Receiving Reports)
• “U.S. Persons” No Longer Prohibited from
Participating in Transactions Involving Iraq, Libya,
or North Korea, Though Other Restrictions Apply
No U.S.-Origin Services for Transactions with
Cuba, Iran, Sudan, Syria
• Includes Financing or Other Activities by Banks in
the United States and Their Non-U.S. Branch
Offices
Be Sure to Check All Companies and Persons
In Supply, Payment, and Supervisory Chains
(Other than Legal Review)
45
EAR (OFAC) Item Exemptions
Two Sets of EAR Reexport Controls
• U.S. Made Goods, Software, and
Technology, including Parts and
Components of Non-U.S. Products
• Direct Products of U.S. Technology or
Software
Must Qualify Under Both to Be Exempt
46
EAR Reexport Exemptions for
U.S.-Origin Products
No License Required
• Classification and No “X” in Applicable Country
Chart Boxes
• Canada (Except Some NP, Firearms, Soon MT?,
“600 Series”)
• EAR99 in General Inventory for Iran and Sudan
License Exceptions
• Responsible for Ensuring Conditions Met
Licensed Exports
• U.S. Exporters Can Seek Authorization at Time
of Export, or Reexporter Can Apply Directly
47
More EAR Reexport Exemptions for
U.S.-Origin Products § 740.16(b)
APR for Reexports to A:1 Countries (former
COCOM) and Cooperating Countries
• Not Applicable to MT, NP, and 600 Series Items
Australia
France
Japan
Norway
U.K.
Ireland
Belgium
Germany
Luxembourg
Portugal
Austria
New Zealand
Canada
Denmark
Greece
Italy
The Netherlands
Spain
Turkey
Finland
Hong Kong
Rep. Korea Sweden
Switzerland
48
Exemption for A:1 or CC Authority
Approved NS Reexports
APR § 740.16(a) Still Surviving
Authorized by A:1 Government Authority or
Regulations
Not Controlled for MT, NP, CB, SI, or CC, or
0A919 or cameras in ECCN 6A003.b.3 or 500 or
600 Series
To Country Group B Destination Not in D:2, D:3,
or D:4
• NS Controlled and Not Controlled to A:1
To D:1 Except North Korea and Controlled for
NS Reasons
Special Rules in (b) or A:1 (Broader) and
6A003.b.3 Cameras
BIS Considering Eliminating, Carving –
Comment!
49
APR for NP Items
740.16(j) Reexports of Items
Controlled by NP Column 1 to and
from Country Group A:4 (Canada,
Japan, Germany +), Except:
(1) Reexports from Countries Not in A:1
of Items Controlled for NS to
Destinations in Country Group D:1; and
(2) Reexports to Country Group E:2 and
Country Group D:2
50
De Minimis Rules 1980s - 2011
Reagan Administration, Congress in EAA, Established the De
Minimis Rules in the 1980s as a Rational Restraint on
Extraterritorial EAR and OFAC Reexport Controls, under Attack
after Siberian Pipeline Sanctions
By Not Asserting U.S. “Control” to the Highest Degree,
Restraint Preserved Allies’ Respect for U.S. Reexport Controls
as a Whole. Reduced Pressure for “Designing Out” U.S.
Products
• See 2009 Comments to BIS on Designing Out
1996 EAR Rewrite Clarified Rule for Software and Technology,
but Required One Time Reports (OTR); HW/HW, SW/SW,
Tech/Tech
Rules Still Confusing, but Applied by Those Who Pay Attention
October 2008 Revision to De Minimis Rule
• Allowed Software Classified as EAR99 or AT Only Controlled to be
Bundled with Hardware; Others Must Still Be Reviewed SW to SW
• OTRs to BIS No Longer Required for SW, Required for Technology
51
• Rule Clarified “Incorporated”, “Bundling”
De Minimis U.S. Content
Not Applicable to
• Computers > 0.002 WT to Tier 4, or > 3 WT
to Tier 3 with U.S. 3A001 Semiconductors
(except memory) or 4A994.j Interconnects;
• Commercial INS with QRS11 Sensors;
• 9E003a.1 through a.8, a.10, .h, .i, and .j;
• Military Commodities that Incorporate ECCN
6A003.b.4.b Cameras that are Subject to
EAR; or
• Encryption Items (unless Authorized as TSU,
MM, ENC-U (b)(1, 3, 4), or ENC-R (b)(2)
Other than to T-5.
“Direct Products” of U.S. Tech or SW Not
U.S.-Origin Parts per 734, Supp. 2
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De Minimis U.S. Content
25% or Less, Except Country Group E
10% or Less to Country Group E
• OFAC same but < 10% for Iran
600 and 500 Series 25% for Most
Countries, 0% to Arms Embargo
Countries (Country Group D:5)
• Classify Item Being Shipped, End-Items May
Not Be 600 Series
Parts Must be “Incorporated” =
“Essential to the Functioning of the
Foreign Equipment; Customarily Included
in Sales of the Foreign equipment; and
Reexported with the Foreign Produced
Item” (Not necessarily inside)
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De Minimis for Hardware
Fair Market Value of Controlled U.S. Content
÷
Fair Market Price of Non-U.S. End Product
Fair Market Value Usually Cost to Manufacturer
“Controlled” Content = Anything Not NLR or GBS
to Destination
Can Include Software as Component if EAR99 or
AT-Only Controlled and “Bundled”
• Bundled = “Reexported Together with the Item and
Configured for the Item, but Not Necessarily Physically
Integrated into the Item”
• Installed Usually = Configured
• Compare OFAC Iran “Complex Product” Rule
Can Calculate Yourself, with Care
• Watch for Changes to Sourcing, Updates
54
De Minimis Software and Technology
Established in 1996; Revised 2008
No Longer Need “One Time Report” to Qualify
SW
• But Use One Time Report Model to Document Own
Conclusion since No Government Backup Now and
Rule Emphasizes Recordkeeping Requirements
Calculate Software to Software if Not Just
EAR99 or AT-Only Controlled (e.g., 5D002
TSU or ENC-U)
Technology Still Requires One Time Report of
De Minimis Calculations to BIS
New Rule also Clarifies Calculation Questions,
Including Parts of Systems, Much Clearer
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Second Incorporation Rule
Company A Ships Foreign Made Product 1,
which Has U.S. Components, to Company B
• Not Subject to the EAR
Incorporate Product 1 into Company B’s
Product 2 => Do Not Count U.S. Content of
Product 1 When Deciding if Product 2 is
below De Minimis Level
2009 Published Advisory Opinion of BIS
No Longer Need a First Export
• But, if Company B Designed Product 1 and
Knows U.S. Content, It Cannot Ignore U.S.
Content in Product 1
OFAC Has No De Minimis Guidance
We Believe They Would Defer to BIS
Approach
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Servicing De Minimis Exports
Don’t Paint Yourself Into a Corner
APR 740.16((h) Allows Reasonable
Accompanying U.S. Spare Parts with De
Minimis Items if < 10% of Value
RPL 740.10 Allows One-for-One
Replacements under Strict Conditions
Licenses Also Might Be Granted
But You Also Need to Fit EAR 746 and
OFAC Rules Which Do Not Cover This for
Iran or Sudan, Just Cuba; So Only Export
Spares as De Minimis to Service
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Exemptions for Direct Products of
U.S. Technology or Software
General Prohibition No. 3, EAR 736.2(b)(3)
• Includes Direct Products of Complete Plant
Restriction Applies to Iran, Syria, Sudan; all
of E:1 plus Cuba and D:1 Countries
U.S. Technology Must Be Subject to TSR
Written Assurance Requirement or Be NS
Controlled Technology
• Technology Makes for Toughest Classification
Restricts Only NS Controlled Direct Products
APR and License Exceptions Exempt
Indirect Products Exempt
Second Incorporation Rule
Public Domain Technology and De Minimis
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The 600 Series and the EAR Incorporation Rule,
De Minimis Rule, and Direct Product Rule
ITAR “See-Through Rule”
• If a Foreign-Made Item Includes U.S.-Origin ITARControlled Components, the U.S. Parts Require an ITAR
License when Reexported or Transferred from Abroad
• Few Exemptions
EAR Incorporation Interpretation (EAR 770.2(b)(2))
• Classification Based on End-Item, Not Incorporated Parts
• If End-Item Does Not Require License, Incorporated
Parts Do Not
• No Need for De Minimis/Foreign Direct Product Analysis
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The 600 Series and the EAR Incorporation Rule,
De Minimis Rule, and Direct Product Rule
EAR “De Minimis Rule”
• Foreign-Made Items with Ear-Controlled U.S.-Origin
Content Are Not “Subject to the EAR” If They Have Only
a De Minimis Percentage or Less of EAR U.S.-Origin
Controlled Content, by Value
EAR Foreign Direct Product Rule
• Foreign-Made Items that are Direct Products of Certain
NS-Controlled U.S.-origin Technology or Software May
Be Reexport Controlled
Beware of Servicing, 600 Series Parts Retain
Classification if Shipped Separately
60
The 600 Series and the De Minimis Rule
De Minimis Rule Applies to Foreign-Made Items with U.S.Origin 600 Series Parts/Components
If Foreign-Made End-Item Requires License to Export from U.S.,
BUT U.S.-Origin 600 Series Parts/Components Less than 25%,
No Reexport License Required UNLESS Destined to Country
Group D:5
If EAR-Controlled U.S. Content Exceeds De Minimis Level, U.S.
Content Is Subject to EAR and BIS Reexport License May Be
Required, Depending on Destination (Normal Rules Apply)
600 Series .y Items Valued at $0 for De Minimis Calculations to
D:5 Countries (except China), Because Not Controlled Content 61
600 Series and the Foreign Direct Product Rule
Example – U.S. Company A Wants to Export 9A619.c Production Technology for Hot
Section Components to Its South African Subsidiary, Company B to Produce Hot Section
Components
Is a U.S. License Required for Company B to Export Hot Section Components from South
Africa?
If You Answered All Three Questions “Yes,” South African Made Hot Section Components
Are Subject to EAR and Require U.S. License for Export from South Africa, As If They Were
U.S. Origin
If Any Question Is “No,” the Foreign Direct Product Rule Does Not Apply
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There Are Other Exceptions
Document Detailed Fact Inquiries
Transactions by Non-U.S. Persons with U.S.
Sanctioned Countries May Be Lawful, but
• A Slight Change in Facts Can Make It Illegal;
Happening More and More Often
Develop Method to Get Facts in Writing
• Self Classifications; De Minimis Analysis
Questionnaires to Ask All Right Questions
Make Sure They Know All Facts Relevant
If the Business Is Complaining about Your
Questions, You Probably Have It Right!
63
Reexport Controls – Precedents
Interagency De Minimis Rule Discussions Raised Question of
Whether Reexport Controls Really Cause Non-U.S. Companies
to Exclude U.S. Content
Confederation of European Businesses, CISTEC, RPTAC, ICOTT,
Others Documented Many Decisions Made as a Result of U.S.
Reexport Controls, and Economic Impact to U.S. Businesses
Whose Products are Excluded
http://efoia.bis.doc.gov/pubcomm/records-ofcomments/record_of_comments_index_for_design_out_of_us_contr
olled_parts.pdf
Comments Very Useful to BIS and NSC in Review of EAR De
Minimis, Export Control Reform and Other Rules and Supported
Common Understanding
Similar Comments on Foreign Direct Product Rule for Encryption
Avoided Expanded Application Beyond D:1 Countries
Similar Comments on Proposal to Remove CCL Category 7A
Commodities from De Minimis Eligibility Resulted in Halting
64
Such a Change
Potential Reexport Control Changes
–
Some U.S. Agencies Concerned that License Exception APR
(Additional Permissive Reexports) Is a Loophole
– Some Newer Rules Restrict APR Use
– E.g., 6A003.b.4.b for Certain Thermal Imaging Cameras
– License Exception STA Has Very Strict Reexport Restrictions,
Certifications
–
Increased BIS Controls on In-Country Retransfers (Iraq, End-Use/r
Catch All Controls of EAR 744, China Military End-Use)
– Part of Focus on End-Use/End-Users Instead of Country
– Deaf to Concerns on Inability to Implement
–
Focus on Reexport Controls for Exports to Be Removed from Control
to EU, Japan, Others per Commerce Secretary Locke Proposal
– Critics Pointed out “Reexport Loophole,” So Implementation Will Focus
on Limiting Reexports Using APR
–
–
Further Exclusions from De Minimis Eligibility for New Items Removed
from ITAR Controls – “Soft Landing”
Tell Administration and Reform Group of Problems with
Reexport Controls, and Tell Them Again and Again
65
Berliner Corcoran & Rowe, LLP
Export Controls Team
Ben Flowe, Jr.
Wayne Rusch
John Ordway
Ray Gold
Michelle Turner
Jason McClurg
Washington DC
202-293-5555
Dan Fisher-Owens
San Francisco, California
415-839-9201
www.bcr.us or www.bcr-dc.com
66
Greg Kanargelidis
Partner
Blake, Cassels & Graydon LLP
199 Bay Street, Suite 4000
Commerce Court West
Toronto ON M5L 1A9
Canada
[email protected]
416.863.4306
67