DDTC Offering Industry Testing for New Registration and Advisory Opinion Applications

2018/11/26

DDTC’s test versions for their new Registration and Advisory Opinion applications, which are housed on the cloud-based Defense Export Control and Compliance System (DECCS), are available for industry and testing and feedback. DDTC is encouraging testing and there will be additional applications for testing in the coming weeks. You must have a test account and a complete test registration in order to access any of the applications.

If you are interested in participating in the testing contact the DDTC Test Support Team below:

DDTC Test Support Team:

Email: PM-DDTC-DECCS@state.gov

Phone: (202) 663-1282 / (202) 663-2838

The DDTC Test Support Team will be available during the week from 10am to 4pm EST.

Full Details: https://www.pmddtc.state.gov/?id=ddtc_public_portal_news_and_events


Commerce Gives Industry 30 Days to Provide Comments Regarding Possible Export Controls over Emerging Technologies

2018/11/26

By: Kevin J. Wolf, Christian C. Davis, and Nicole M. D’Avanzo of Akin Gump

Key Points

  • The Bureau of Industry and Security published a notice today seeking public comments on how it should define and identify a wide variety of emerging technologies that are not now controlled for export, but should be because they are essential to the national security of the United States.
  • This request for comments is the public start to the most complex, intellectually challenging and economically significant effort to identify simultaneously multiple disparate categories of undefined emerging technologies for non-specific national security concerns that warrant (i) unilateral controls on their export to foreign countries, (ii) limitations on their release to foreign persons in the United States and (iii) additional mandatory filing requirements with CFIUS for non-controlling foreign investments of any size in U.S. businesses in a wide variety of sectors.
  • Comments are due on or before December 19, 2018—i.e., in 30 days.
  • “Representative general categories” of emerging technologies on which Commerce seeks comments “include” (i) “biotechnology”; (ii) “artificial intelligence”; (iii) “Position, Navigation, and Timing (PNT) technology”; (iv) “microprocessor technology”; (v) “advanced computing technology”; (vi) “data analytics technology”; (vii) “quantum information and sensing technology”; (viii) “logistics technology”; (ix) “additive manufacturing”; (x) “robotics”; (xi) “brain-computer interfaces”; (xii) “hypersonics”; (xiii) “advanced materials”; and (xiv) “advanced surveillance technologies.” The notice leaves open the possibility that other categories of technology will be captured in this process.
  1. The Request for Comments Is the Start of the Public Process to Address Concerns About Uncontrolled Transfers of Emerging Technologies

The Commerce Department’s Bureau of Industry and Security (BIS) notice is the administration’s first public step to comply with the requirements of Section 1758 of the Export Control Reform Act (ECRA), which became law on August 13, 2018. As described in previous alerts, Congress created the section to address concerns about a provision in the bills introduced in late 2017 that would have expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) over investments by U.S. companies in foreign countries that could result in the release to foreign persons of uncontrolled critical technology, including emerging and foundational technologies. Section 1758 addresses the policy concerns of the original CFIUS outbound control provision, but through an ongoing, regular-order, interagency export control process that includes public notice and comment.

Commerce has not proposed in the notice any new export controls or amendments to existing regulations. Rather, it seeks the public’s assistance in creating criteria for identifying specific emerging technologies that are “essential to the national security of the United States,” which is the statutory standard for imposing controls on emerging and foundational technologies. “National security” is not defined in the law or the notice. The notice’s examples of concerns to be addressed do not include the domestic economic policy concerns identified as national security issues in other administration actions, such as those pertaining to the importation of steel and aluminum. Rather, the examples provided are those with “potential conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications or could provide the United States with a qualitative military or intelligence advantage.”

The administration will review the public comments, along with its own analyses, as part of its plan to prepare a proposed rule to add emerging technologies to the Commerce Control List (CCL) of the Export Administration Regulations (EAR). The proposed rule will identify the countries, end uses or end users to which exports of the newly identified technologies would require a license. After interagency review of the comments on the proposed rule, Commerce plans to publish a final rule implementing the new controls. (If the final rule is consistent with the EAR’s “deemed export” rule, releases of the technology to foreign persons in the United States would require a license if a license was required to export the technology to that person’s home country.) The notice does not contain a schedule for when these events will occur. ECRA requires the administration to ask the relevant multilateral export control regimes to add the newly controlled emerging technologies to the multilateral export control lists. Until and unless that happens, however, the controls will be unilateral, meaning that only the United States will impose them.

The implications of this emerging technology effort are not just with respect to potentially new export controls. Any technologies identified in the export control regulations as “emerging” will also be “critical technologies” under the new CFIUS law, the Foreign Investment Risk Review Modernization Act (FIRRMA). As described in our earlier alert, this means that U.S. businesses that produce, design, test, manufacture, fabricate or develop such technologies and use them in or design them for targeted sectors would be subject to a CFIUS pilot program implementing FIRRMA. Consequently, controlling foreign investments, along with certain non-controlling foreign investments, would be subject to a mandatory filing requirement with CFIUS 45 days before closing.

  1. Standards for Determining What Emerging Technologies Should Become Controlled

In deciding whether to identify a technology as “emerging” and impose controls on its export, ECRA Section 1758 requires the administration to take into account:

  • the development of the technology in foreign countries
  • the effect that export controls imposed pursuant to this section may have on the development of the technology in the United States
  • whether export controls would be effective in limiting the technology’s proliferation to, or development in, foreign countries.

Section 1758 is an element of the broader ECRA statement of policy for export controls, which is that the United States should “use export controls only after full consideration of the impact on the economy of the United States and only to the extent necessary — (A) to restrict the export of items which would make a significant contribution to the military potential of any other country or combination of countries which would prove detrimental to the national security of the United States; and (B) to restrict the export of items if necessary to further significantly the foreign policy of the United States or to fulfill its declared international obligations.”

III. The Representative Emerging Technologies Identified

Neither the notice nor ECRA defines the term “emerging” technologies. To help inform the administration’s development of a proposed rule, the notice lists several broad categories of technologies that may meet the standard of “emerging” for public comment. The listed technologies are “representative” of only the types of technologies that might be considered “emerging” and warranting control. They include:

  • “Biotechnology, such as (i) nanobiology; (ii) synthetic biology; (iii) genomic and genetic editing; (iv) or neurotech”
  • “Artificial intelligence (AI) and machine learning technology, such as (i) neural networks and deep learning (e.g., brain modeling, time series prediction, classification); (ii) evolution and genetic computation (e.g., genetic algorithms, genetic programming); (iii) reinforcement learning; (iv) computer vision (e.g., object recognition, image understanding); (v) expert systems (e.g., decision support systems, teaching systems); (vi) speech and audio processing (e.g., speech recognition and production); (vii) natural language processing (e.g., machine translation); (viii) planning (e.g., scheduling, game playing); (ix) audio and video manipulation technologies (e.g., voice cloning, deepfakes); (x) AI cloud technologies; or (xi) AI chipsets”
  • “Position, Navigation, and Timing (PNT) technology”
  • “Microprocessor technology, such as (i) Systems-on-Chip (SoC) or (ii) Stacked Memory on Chip”
  • “Advanced computing technology, such as (i) “memory-centric logic”
  • “Data analytics technology, such as (i) visualization; (ii) automated analysis algorithms; or (iii) context-aware computing”
  • “Quantum information and sensing technology, such as (i) quantum computing; (ii) quantum encryption; or (iii) quantum sensing”
  • “Logistics technology, such as (i) mobile electric power; (ii) modeling and simulation; (iii) total asset visibility; or (iv) distribution-based logistics systems (DBLS)”
  • “Additive manufacturing (e.g. 3D printing)”
  • “Robotics such as (i) micro-drone and micro-robotic systems; (ii) swarming technology; (iii) self-assembling robots; (iv) molecular robotics; (v) robot compilers; or (vi) Smart Dust”
  • “Brain-computer interfaces, such as (i) neural-controlled interfaces; (ii) mind-machine interfaces; (iii) direct neural interfaces; or (iv) brain-machine interfaces”
  • “Hypersonics, such as (i) flight control algorithms; (ii) propulsion technologies; (iii) thermal protection systems; or (iv) specialized materials (for structures, sensors, etc.)”
  • “Advanced Materials, such as (i) adaptive camouflage; (ii) functional textiles (e.g., advanced fiber and fabric technology); or (iii) biomaterials”
  • “Advanced surveillance technologies, such as faceprint and voiceprint technologies.”

These are not the headings in the notice; they are the entirety of the topics listed for public comment. No additional details or definitions are provided about the meaning of these terms. The notice also does not contain any commentary or guidance on what the potential national security concerns are, or could be, with respect to such technologies, or why Commerce identified these technologies as examples.

  1. The Comments That Commerce Seeks

Commerce asks industry for comments—within the next 30 days—on:

  • how the administration should define emerging technologies
  • what the criteria should be for determining whether there are specific technologies within these general categories that are important to U.S. national security
  • what sources the administration can refer to in order to identify emerging technologies
  • what other general technology categories might be important to U.S. national security and warrant control
  • information about the status of development of the listed technologies in the United States and other countries
  • information about what impact the specific emerging technology controls would have on U.S. technological leadership
  • suggestions for other approaches to identifying emerging technologies warranting controls.

BIS’s first request for comment is about how the administration should define emerging technologies. Because this request is not for advice about abstract or generally applicable definitions, but rather about how the term should be defined in the context of export controls to address the policy concerns that motivated ECRA, a logical approach would be to bind the definition by the statements of policy in ECRA for why the export control system exists and what it is designed to accomplish. Also, given that ECRA Section 1758 is focused on identifying both emerging and foundational technologies, a definition should not include foundational technologies. Thus, an example of a definition that would be consistent with the ECRA standards could be something along the lines of:

“Emerging technologies” are specific, non-mature (i.e., developmental) core technologies essential to the national security of the United States that:

  1. are required for the development, production, use, operation, installation, maintenance, repair, overhaul or refurbishing of specific and identifiable potential conventional weapons, intelligence collection, weapons of mass destruction or terrorist applications;
    ii. could provide the United States with a specific and identifiable qualitative military or intelligence advantage;
    iii. are not available in or otherwise being developed in foreign countries; and
    iv. are not within the scope of any existing multilateral controls.

Note: A technology must not be identified or controlled as “emerging” unless it is within the scope of policy statements in ECRA for which technologies should be controlled for export. In particular, a technology must not be so identified if a unilateral export control over it would:

  1. harm domestic research into the identified technology;
    ii. not be effective at preventing countries of concern from developing it indigenously or otherwise acquiring comparable technology from third countries;
    iii. be imposed without full consideration of the impact on the economy of the United States of such a control; or
    iv. is of a type that is not likely to be considered acceptable by the multilateral regime allies, or that is inconsistent with the standards for the types of controls that are subject to the multilateral regimes.

Each commenter will likely have its own take on how to approach BIS’s first question. Nonetheless, this is an example of a definition that would be consistent with the standards in ECRA.

  1. Items to Which the Notice Does Not Apply

Both ECRA and the notice refer to only possible additional controls on emerging “technology.” ECRA defines “technology” as including “information, in tangible or intangible form, necessary for the development, production, or use of an item.” Thus, the scope of the notice is limited to possible new controls on information that is within the scope of the term “technology” and does not include possible new controls on commodities (i.e., physical items) or software.

The notice also does not apply to “foundational” technologies, which will be the subject of a similar process beginning in 2019. It also does not apply to technology the EAR already exempts from being “subject to the EAR,” such as information that results from “fundamental research” or that is “published” information. This does not mean that EAR99 technologies— technologies that are “subject to the EAR” but not identified on the EAR’s CCL—are exempt from the notice’s scope. To the contrary, the entire purpose of the effort is to identify EAR99 technologies that should be added to the CCL and controlled.

Finally, the notice does not apply to technology already identified on the CCL, the U.S. Munitions List (USML), or another of the U.S. government’s export control lists. Thus, for example, the notice does not seek comment on technology or technical data directly related to or required for the development or production of military items because they are already controlled on the CCL or the USML in specific and broad catch-all categories. Herein lies one of the significantly challenging aspects of the effort. The administration is asking industry to provide advice on which non-mature technologies not directly related to or required for military items are “essential to the national security of the United States.” This is, of course, better than not asking for comments and is an important effort required by ECRA, but it is nonetheless an inherently difficult one for those experts in the referenced technologies who have no national security experience.

  1. Who Should Prepare and File Comments, and What Should They Include?

The notice is open for comments from the public. In particular, any company that develops or produces the types of technologies described on the representative list, or individuals who are experts in the listed or other potentially emerging technologies, should consider submitting comments. Industry will often have more information than the government about their own technologies, including whether they qualify under the statutory standards, and how to describe most accurately the technologies at issue.

Industry will also generally have more information than the government on which technologies are already being developed outside the United States. If a technology is already available outside the United States, ECRA makes clear that it would generally not be a good candidate for a unilateral (i.e., U.S.-only) control because the United States will have no ability to curtail its transfer to destinations, end uses and end users of concern. For comments on foreign availability to be effective, they must be supported with evidence. Companies will, of course, not have proprietary information of their competitors. They will, however, often have a sense for comparable technologies that competitors and academics are already developing through sources such as academic publications, web sites, trade shows, customer comments and government reports.

Industry is also generally in a better position to describe whether, as both a legal and a psychological matter, the imposition of a unilateral export control (and increased foreign investment controls) on a particular technology would be harmful or helpful to domestic research into the identified technology, such as through loss or gain of investments, foreign markets or the availability of qualified professionals necessary to develop it. In particular, commenters should provide estimates in their comments on what the economic implications would be—good or bad—of a unilateral control on the technology and economic sector they know best. Similarly, if a company or individual has reason to believe that an uncontrolled emerging technology has specific application to a conventional weapon, intelligence collection capability, weapon of mass destruction or terrorist activities, or would help or harm a qualitative military or intelligence advantage for the United States, then the notice asks for such information.

All comments filed are made public. Some companies and individuals, however, may not want to publicly disclose what a particularly sensitive military application for their technology could be. Others may not want to describe publicly, and thus to their competitors, what novel commercially sensitive technologies they are developing. If one has such concerns, a common next step is to contact Commerce to discuss how or whether it would be possible for the government to nonetheless get the benefit of the insight.

VII. 30 Days Over the Holidays

Commerce is asking for a massive amount of difficult-to-assemble information on a wide variety of non-mature, hard-to-define technologies, and subsets thereof, and commentary on national security concerns known to only a few people outside of government within 30 days. This period is not only over the holiday season, but also in the heart of the fourth quarter when company engineers, researchers, sales staff, management and other professionals are focused on completing annual sales, shipments and other goals. Although responses to most BIS notices can be primarily handled by trade compliance professionals, quality responses to this notice largely depend upon time-consuming and thoughtful input from professionals not normally involved in export control issues.

BIS requests for information involving far less complex issues have had far longer comment periods. For example, BIS gave industry 60 days to submit comment on (i) possible changes to controls on a small number of specific infrared detection items, (ii) possible controls over spraying and fogging systems, and (iii) whether requirements should be imposed on the export of electronic waste.

ECRA does not impose a 30-day, or any other, time limit on this process or require that all emerging technologies of potential national security concern are of equal significance. Moreover, a core element of ECRA Section 1758 is that the identification process be informed by “multiple sources of information.” There will indeed be a proposed rule on which industry will have an opportunity to provide comments before any final controls are imposed. If, however, you do not believe that 30 days is sufficient to provide comments commensurate with the national and economic security significance, and technological complexity, of such a proposed rule, then you should make that comment, too, and ask for additional time, ideally before Thanksgiving.

Contact Information

For more information, please contact your Akin Gump lawyer, or:

Kevin J. Wolf
Email
Washington, D.C.
+1 202.887.4051

Christian C. Davis
Email
Washington, D.C.
+1 202.887.4529

Nicole M. D’Avanzo
Email
Washington, D.C.
+1 202.887.4557


A Crude Awakening: U.S. Sanctions on the Russian Oil Sector

2018/11/26

By: Olga Torres, Esq. and Derrick Kyle, Esq. All of Torres Trade Law.

Introduction
This article will discuss U.S. economic sanctions on Russia as enforced by the Office of Foreign Assets Control (“OFAC”), a government agency within the U.S. Department of the Treasury. Specifically, we will provide an overview of Directive 4 to Executive Order 13662 (“Directive 4”), which prohibits certain transactions related to the Russian oil sector.1 While Directive 4 does not prohibit all oil sector transactions with companies in Russia, it does create many potential obstacles for U.S. businesses. We will also briefly discuss Russian oil sector prohibitions administered by the Department of Commerce Bureau of Industry and Security (“BIS”).2 Russia and Texas are two of the largest producers of oil and gas in the world, and, because many companies involved in the petroleum industry in Texas have dealings with Russian entities or individuals, they are likely to be faced with sanctions issues. Below we describe some of the issues that need to be addressed prior to the commencement of transactions involving Russian parties in the context of certain oil exploration and production activities.

Background
U.S. economic sanctions are a tool of foreign policy that target countries as well as activities related to national security and other foreign policy-based concerns, such as terrorism, narcotics trafficking, human rights, and cybersecurity. In 2014, the Obama Administration implemented various economic sanctions against Russia in response to Russia’s occupation of the Crimea region of Ukraine. These sanctions programs included: 1) a trade embargo against Crimea; 2) blocking sanctions against persons listed on the Specially Designated Nationals and Blocked Persons (“SDN”) List; and 3) sectoral sanctions prohibiting certain transactions with persons identified on the Sectoral Sanctions Identification (“SSI”) List.3 President Obama’s sanctions were implemented primarily through a series of Executive Orders.

In August 2017, President Trump signed the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). This comprehensive, bipartisan sanctions regime targeted Russia, North Korea, and Iran. The part of CAATSA that focuses on Russia, the Countering Russian Influence in Europe and Eurasia Act of 2017 (“CRIEEA”), codified many of the Executive Orders implemented during the Obama Administration.4 Additionally, CRIEEA expanded the existing scope of sanctions on Russia as well as implemented new secondary sanctions (sanctions that apply to activities by non-U.S. individuals and entities).5 The sanctions on Russia were passed in response to Russia’s cyber meddling in the 2016 elections as well as their continued occupation of the Crimea region of Ukraine.

Specifically, the relevant Russian sectoral sanctions are implemented through four directives. Directives 1 through 3 prohibit and impose restrictions on various kinds of financial transactions between U.S. persons and individuals or entities identified on the SSI List. Directive 4 is slightly different from the other Directives in that it provides more tangible restrictions on exports of goods and non-financial services related to the Russian oil industry.

Directive 4
Directive 4 prohibits:
The provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that:

(1) have the potential to produce oil in the Russian Federation, or in a maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to this Directive […]; or

(2) are initiated on or after January 29, 2018, that have the potential to produce oil in any location, and in which any person determined to be subject to this Directive… has (a) a 33% or greater ownership interest, or (b) ownership of a majority of the voting interests.

There is a lot to unpack in Directive 4. To start, “persons subject to this Directive” means persons that are listed on the SSI List and specifically identified as subject to Directive 4. The list of parties subject to Directive 4 includes several prominent Russian energy companies, such as Gazprom, Lukoil, and Rosneft. Notably, OFAC’s 50% rule applies for purposes of the SSI List. The 50% rule states that an entity that is owned 50% or more by an individual or entity on the SSI List will also be treated as being on the SSI List. So, if Company A is listed on the SSI List and owns 80% of Company B, then Company B will also be considered to be on the SSI List. OFAC also applies the 50% Rule in conjunction with aggregation rules when determining which transactions are prohibited. For example, Company A and Company B are both listed on the SSI List. Company A owns 30% of Company C, while Company B owns 25% of Company C. Company C would be considered to be on the SSI List, because it is owned 55% by entities on the SSI List.7

Further, Directive 4 was amended by CAATSA in October 2017 to add the second section of the directive related to oil produced in any location. This updated prohibition is interesting for a couple of reasons. First, the prohibition potentially now applies to oil projects anywhere in the world. Second, this part of the prohibition focuses on ownership of or voting interests in the project by a Directive 4-subject person, rather than just the involvement of a Directive 4-subject person. Importantly, this portion of the Directive 4 prohibition applies to listed persons having only a 33% ownership interest in the specified projects. Therefore, a project with a Russian company as a minority owner in a country other than Russia could be subject to the prohibitions of Directive 4.

Another important aspect of Directive 4 is the meaning of the terms used in the directive. As with many other sanctions regimes, the terms used do not necessarily carry their ordinary meanings. OFAC provided the definitions of some important terms in the Frequently Asked Questions (“FAQs”) section of its website:

  • Initiated. Part of Directive 4 applies only to projects initiated on or after January 29, 2018. According to OFAC, a project is initiated when, “a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party.”
  • Services. OFAC defines services to include, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. Importantly, for purposes of Directive 4, services does not include the provision of financial services, clearing transactions or providing insurance related to such activities.
  • Deepwater. OFAC defines deepwater as underwater activities at depths of 500 feet or more.
  • Shale projects. The term “shale projects” applies to projects that have the potential to produce oil from resources located in shale formations.
  • Artic offshore projects. This phrase applies to projects that have the potential to produce oil in areas that (1) involve operations originating offshore, and (2) are located above the Arctic Circle.

While the above focuses on primary sanctions, CAATSA also implements secondary sanctions. Under Section 225 of CAATSA, the President is required to impose sanctions on non-U.S. persons that knowingly make a significant investment in a “special Russian crude oil project,” which is a deepwater, Arctic offshore, or shale oil project in Russia.13 The Department of State (“State”) is tasked with administering Section 225 and has stated it will determine what is “significant” on a case-bycase basis. In published guidance,14 State has explained that it will not consider an investment significant if a U.S. person would not require specific licenses from OFAC to participate in the same conduct.15 Section 226 of CAATSA, administered by OFAC, also now requires the imposition of secondary sanctions on Russian or other foreign financial institutions that knowingly engage in or facilitate significant transactions involving Russian deepwater, Arctic offshore, or shale oil projects.

The penalties for violations of Directive 4 can be steep. Civil penalties can be up to $295,141 per violation, or up to twice the value of the transaction that was the basis for the violation. Criminal, willful or knowing violations, can lead to penalties of up to $1 million per violation and imprisonment up to 20 years for individuals.

Screening of Parties
Because the Directive 4 prohibitions hinge on the involvement of a party on the SSI List, it is important that companies engage in the screening of all parties involved in potential transactions. Various government agencies maintain lists of entities and individuals with whom U.S. (and sometimes non-U.S.) persons are restricted or prohibited from transacting. These lists include, but are not limited to, OFAC’s SSI and SDN Lists, and the BIS Entity List. Entering into a transaction with a party on a denied party list can have grave consequences, such as sanctions, fines, or the denial of export privileges.

As such, companies should ensure that all parties to a transaction are screened. The U.S. Government provides a free screening search function that consolidates multiple government screening lists, aptly named the Consolidated Screening List (“CSL”).17 By searching for the name and address of an individual or company on the CSL, parties are able to screen against multiple government lists at once.

Example
Because the minutia of the above can be complex, the following example aims to highlight the issues encountered during a Directive 4 analysis. Suppose Company A (a Texas company) plans to enter into an agreement to sell fracking fluid to Company B (a Russian company). Based on the sales agreement, Company A knows the fracking fluid will be used in a hydraulic fracturing project in Russia, and hydraulic fracturing is most often associated with shale projects. Company B is a subsidiary of Company C, which is on the SSI List and owns an unknown percentage of Company B. Finally, assume it is not clear from the sales agreement who the owner of the specific fracking project is. Company A should resolve several questions before exporting any fracking fluid to Company B in Russia. These questions include:

  • Is Company B subject to Directive 4 based on Company C’s listing on the SSI List?
  • When was this project initiated?
  • Who are the owners of the specific project, and how is this ownership structured? Is a 33% or greater owner listed on the SSI List?
  • Is this project a shale project? Even if not, how can Company A be sure the fracking fluid will not be used in a shale project?

End-use statements and other assurances from Company B stating that the project is not a shale project or subject to any U.S. sanctions would be helpful to show due diligence on the part of Company A. But OFAC sanctions violations are viewed under a strict liability standard, so if OFAC determines the fracking fluid has been used in activities prohibited by Directive 4, Company A could face an enforcement action. Additionally, it is notoriously difficult to determine the ownership structure of some Russian companies and oil projects, so Company A may not be able to obtain a verifiable answer regarding the applicability of Directive 4 to Company B or the proposed transaction. Ultimately, companies working in this space must conduct a cost-benefit analysis with regards to each proposed transaction and determine the level of risk with which they are comfortable. A legal opinion from international trade counsel can be helpful in deciding whether or not a transaction is permissible.

BIS Rule
As if the above was not complicated enough, the Department of Commerce’s export control agency, BIS, has its own prohibitions on exports to the Russian oil industry. Section 746.5 of the Export Administration Regulations (“EAR”) imposes specific licensing requirements for certain parts identified in Supplement No. 2 to part 746 of the EAR as well as specific parts identified in the regulation. These parts cannot be exported, reexported, or transferred without a license if the party knows the item will be used directly or indirectly in the exploration for, or production of, oil or gas in Russian deepwater or Arctic offshore locations or shale formations in Russia.

Additionally, if the party is unable to determine whether the item will be used in such projects, then a BIS license is required for export. Parties should also be aware that BIS may inform persons individually or through amendment to the EAR that a license is required for a specific end-use or end-user because there is a high risk of use in the activities specified above. Any request for such a license will likely be denied as BIS maintains a general policy of denial for such license requests.

Latest Developments
In the latest string of Russian sanctions related developments, the State Department announced on August 8, 2018 that it would be imposing new sanctions on Russia pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act (CBWA), as a result of Russia’s attempted assassination of former Russian intelligence officer Sergei Skripal and his daughter. A Federal Register notice was published on August 27, 2018 and more significant sanctions must be imposed in the next three months if the U.S. government finds that Russia does not meet certain conditions, absent a waiver by the President of the United States.20 These potential additional sanctions should be closely monitored because there is an option for a very punitive track of sanctions depending on how the Russian government responds.

Conclusion
Overall, Directive 4, CAATSA sanctions, and other U.S. Government regulations impose a complex network of restrictions on U.S. parties seeking to do business with the Russian oil industry. Even when OFAC and other relevant agencies provide guidance, few bright line rules exist. Whether a transaction is covered by the specific authority is determined by the facts of the specific case.

As such, it is important that parties who want to engage in transactions with the Russian oil industry conduct their due diligence. All parties to the transaction should be screened against the SSI and SDN Lists, as well as any other denied party lists maintained by U.S. government agencies. The ownership of these parties and the interests held in oil projects must also be investigated to determine the potential involvement of sanctioned parties. Additionally, although this article focuses on Russian sanctions, other oil-producing nations, including Iran and Venezuela, among others, are subject to OFAC-administered sanctions. This means that any company engaged in oil and gas transactions with foreign companies or countries should make sure that there are no prohibitions on the transaction and conduct a review of any applicable sanctions programs.

Full Article: http://www.torrestradelaw.com/blog_images/4%20Article-ILS_%20Torres%20Law_%20A%20Crude%20Awakening%20U.S.%20Sanctions%20on%20%20Russias%20Oil%20Sector.pdf


BIS Amends EAR & CCL to Implement Changes Made to the WA List

2018/11/26

The Bureau of Industry and Security (BIS) has implemented changes to the Export Administration Regulations (EAR) and the Commerce Control List (CCL) to implement changes made to the Wasaenaar Arrangement List of Dual-Use Goods and Technologies (WA List) which were agreed upon by all the governments participating in the Wassenaar Arrangement at the December 2017 Plenary meeting. This ruling also includes associated changes to the EAR and a few corrections. The rule became effective on October 24, 2018.

Relevant CCL Changes (final rule revised 50 ECCNS, ECCNs with editorial changes excluded below):

  • Category 0—Nuclear Materials, Facilities, and Equipment [and Miscellaneous Items] 0A617 Miscellaneous ‘‘Equipment’’, Materials, and Related Commodities
    • 0A617 paragraph y.3, containers for shipping or packing defense articles or items controlled by ‘‘600 series’’ ECCNs, is amended by narrowing the scope to International Organization for Standardization (ISO) intermodal containers or demountable vehicle bodies (i.e., swap bodies), but also expands the scope beyond ‘‘specially designed’’ by adding ‘‘or modified’’. As the term ‘modified’ is in single quotes, BIS is also adding the technical note that defines ‘modified,’ which was already existing text in Wassenaar Arrangement Military List of 2017 (WAML 17).
  • Category 1—Special Materials and Related Equipment, Chemicals, ‘‘Microorganisms’’, and ‘‘Toxins’’
    • 1C001: Subparagraph b is amended by moving the phrase ‘‘not transparent to visible light’’ to the beginning and adding more descriptive text ‘‘near-infrared radiation having a wavelength’’ to clarify the scope of the control. Also, the parameters are changed from ‘‘1.5 × 1014 Hz’’ to ‘‘810 nm’’ and ‘‘3.7 × 1014 Hz’’ to ‘‘2,000 nm (frequencies exceeding 150 THz but less than 370 THz)’’. (The frequency band is changed to the equivalent wavelength band to make the parameter easier to understand and not to change the scope of control.)
    • 1C608: WA agreed to add a Note specifying that WAML 8.c.1 does not apply to aircraft fuels—JP–4, JP–5 and JP–8. This rule adds this Note below 1C608.n ‘‘Any explosives, ‘propellants,’ oxidizers, ‘‘pyrotechnics’’, fuels, binders, or additives . . .’’ as well as bringing forth another Note from WAML 8.c.1 that specifies that aircraft fuels specified by WAML 8.c.1 are finished products, not their constituents.
  • Category 2—Materials Processing
    • 2A001 Note 2 at the beginning of the Items paragraph is amended by adding ‘‘(or national equivalents)’’, in order to help efficiently classify bearings using national standards that are equivalent to ISO 3290 as grade 5. 2B001 Machine Tools.
    • 2B006 heading is revised to add ‘‘position feedback units’’ and ‘‘electronic assemblies’’ to more accurately describe the scope of controls in Items paragraph .b.
      • Linear Variable Differential Transformer (LVDT) systems formerly in 2B006.b.1.b are moved to 2B206.d and no longer have a national security control.
    • 2B007 paragraph .a ‘‘[Robots] capable in real-time of full three-dimensional image processing or full three dimensional ‘‘scene analysis’’ to generate or modify ‘‘programs’’ or to generate or modify numerical program data’’ is removed and reserved because of insufficient connection to military capabilities. Robots of national security concern are controlled under 2B007.b, .c and .d.
    • 2B008 heading is amended by replacing ‘‘assemblies or units’’ with ‘compound rotary tables’ and ‘‘tilting spindles’’, as well as removing ‘‘or dimensional inspection or measuring systems and equipment’’ to align with revisions made to the List of Items Controlled in this ECCN.
      • Item paragraphs .a (linear position feedback units) and .b (rotary position feedback units) are removed and reserved, because this rule moves these items to 2B006.b.2 and .c, respectively.
      • Item paragraph .c is amended by replacing and cascading the parameter paragraphs, as well as moving the definition for ‘compound rotary table’ from part 772 to a Technical Note under this Item paragraph.
    • 2B206 is amended by adding Linear Variable Differential Transformer (LVDT) systems to Item paragraph .d, because this item is removed from 2B006.b.1.b. While LVDT systems are no longer controlled for national security reasons, they are still on the Nuclear Supplier’s Group (NSG) list under 1.B.3.b.2 and remain controlled for nuclear nonproliferation reasons on the CCL.
    • 2E003 paragraph .a (‘‘technology’’ for the ‘‘development’’ of interactive graphics as an integrated part in ‘‘numerical control’’ units for preparation or modification of part programs) is removed and reserved because of the advancement of technology.
      • Item paragraph .a is removed from License Exception TSR.
    • Category 3—Electronics Product Group A. ‘‘End Items’’, ‘‘Equipment’’, ‘‘Accessories’’, ‘‘Attachments’’, ‘‘Parts’’, ‘‘Components’’, and ‘‘Systems’’
      • 3A001 is amended by replacing ‘‘Electrical Erasable Programmable Read-Only Memories (EEPROMS), flash memories, and MRAMs’’ with ‘non-volatile memories’ and adding a Technical Note to define ‘non-volatile memories,’ to provide a more generic term for these types of memory integrated circuits.
        • Paragraph a.5.a ‘‘ADCs’’ and the Technical Note below a.5.a are amended by replacing the term ‘‘output rate’’ with the ‘‘sample rate’’ as measured points at the input, except for oversampling (defined as output sample rate), and the Technical Note identifies common ways manufacturers specify ‘sample rate.’ The definition for ‘‘sample rate’’ is added to part 772 ‘‘Definition of Terms. . . .’’
        • Item paragraph a.5.b.2.a, ‘‘settling time’’ parameter, is amended by adding ‘‘arrive at or within’’ to clarify the potentially ambiguous parameter with common usage and understanding of DAC specifications, so that it will not be misinterpreted to mean the time to deviate by the specific amount from the original level.
        • Intensity, amplitude, or phase electrooptic modulators, designed for analog signals, including electro-optic modulators having optical input and output connectors are added to new paragraph 3A001.i to address photonic components for analog Radio Frequency (RF) over fiber antenna remoting, and analog RF distribution of signals. One of the parameters for these items is ‘halfwave voltage’ (‘Vp’), which is defined in a Technical Note below the new paragraph. These items will be eligible for License Exception GBS; therefore, the GBS paragraph is revised to add Item paragraph .i.
      • 3A002 frequency parameter is raised from ‘‘exceeding 10 MHz’’ to ‘‘exceeding 40 MHz’’ for signal analyzers having a 3 dB resolution bandwidth (RBW) in Item paragraph c.1
      • 3B001 Mask ‘‘substrate blanks’’ with multilayer reflector structure consisting of molybdenum and silicon being ‘‘specially designed’’ for ‘Extreme Ultraviolet (EUV)’ lithography and being compliant with SEMI Standard P37 are added to new paragraph 3B001.j, because mask ‘‘substrate blanks’’ and the subsequent substrate blank with multilayer reflector structure are critical materials for EUV lithography 7. EUV lithography opens up integrated circuit fabrication at the most advanced state-of-the-art technology node. The definition for ‘Extreme Ultraviolet (EUV)’ is added to a Technical Note below Item paragraph j.2.
      • 3B002 Test Equipment ‘‘Specially Designed’’ for Testing Finished or Unfinished Semiconductor Devices Item paragraph .a is revised from ‘‘For testing S-parameters of transistor device at frequencies exceeding 31.8 GHz’’ to read ‘‘For testing S-parameters of items specified by 3A001.b.3’’ to remove potential overlapping controls for network analyzers (which measure Sparameters) described in 3A002.e, to harmonize the control text of equipment for testing S-parameters of transistors specified in paragraphs 3A001.b.3.a and 3A001.b.3.b (i.e., transistors that are below 31.8 GHz), and to remove ambiguity regarding the meaning of the phrase ‘‘transistor devices’’ by substituting the unambiguous reference to transistors specified by 3A001.b.3.
      • 3C002 wavelength for positive resists in Item paragraph a.1 is revised from ‘‘wavelengths less than 245 nm . . . .’’ to ‘‘wavelengths less than 193 nm . . . .’’ in order to match the material control with the lithography equipment parameters in 3B001.f.1.a.
      • 3C005 heading revised to move the items that were in the Heading to Items paragraph .a. Polycrystalline ‘‘substrates’’ or polycrystalline ceramic ‘‘substrates’’ are added to Item paragraph .b, because there are both military and commercial applications for microwave transistors fabricated on the engineered substrates. These newly added substrates will be controlled for NS:2 and AT:1 and have License Exception LVS ($3,000), GBS and CIV eligibility.
      • 3C006 heading is amended by adding ‘‘Materials, not specified by 3C001, consisting of a’’ at the beginning of the Heading in order to clarify the scope of the control.
        • The former language of 3C001, 3C005 and 3C006 has common elements that have led to some confusion around the control of silicon carbide wafers.
        • 3C992 heading is amended by replacing the wavelength range from ‘‘370 and 245 nm’’ to ‘‘370 and 193 nm.’’
      • 3E001 Note 3 is added to exclude from 3E001 ‘Process Design Kits’ (‘PDKs’) unless they include libraries implementing functions or technologies for items specified by 3A001. A Technical Note is added below Note 3 to define ‘Process Design Kit’ (‘PDK’). PDKs do not provide knowledge about production tools.
    • Category 4—Computers
      • 4A003 Adjusted Peak Performance (APP) is raised from ‘‘exceeding 16 WT’’ to ‘‘exceeding 29 WT’’ in Item paragraph .b and in accordance with this revision the APP is raised to 29 in the AT control text in the License Requirements table and in two places in the Note to the table.
      • 4D001 Adjusted Peak Performance (APP) is raised from 16 Weighted TeraFLOPs (WT) to 29 WT in License Exceptions TSR and STA in accordance with the new APP level in 4A003.b. The APP control level is raised from ‘‘exceeding 8 WT’’ to ‘‘exceeding 15 WT’’ in Item paragraph b.1. These revisions continue to address the need to track incremental (e.g., ‘‘Moore’s Law’’) improvements in microprocessor technology.
    • Category 5—Part 1— ‘‘Telecommunications’’
      • 5A001 In the NS Column 1 paragraph of the License Requirements table, the order of the referenced Item paragraphs is corrected. For telecommunications equipment specially designed to withstand transitory electronic effects or electromagnetic pulse effects, the temperature range parameters is changed from ‘‘to operate outside the temperature range from 218K (-55 °C) to 397 K (124 °C)’’ to ‘‘below 218K (-55°C)’’ in Item paragraph a.3 or ‘‘above 397 K (124 °C)’’ in new Item paragraph a.4, which does not change the scope of control, but seeks to make the text easier to understand.
        • Because of technology advances, phased array antennae are increasingly being developed for civil telecommunications applications, including cellular, WLAN, 802.15, and wireless HDMI. Exclusion Note 2 is added in order to remove from control phased array antennae specially designed for those purposes.
      • Category 5—Part 2
        • 5A002 Paragraph .a is amended by replacing the phrase ‘‘where that cryptographic capability is usable without ‘‘cryptographic activation’’ or has been activated’’ with the phrase ‘‘where that cryptographic capability is usable, has been activated, or can be activated by means of ‘‘cryptographic activation’’ not employing a secure mechanism’’. The revision clarified that an item is controlled if (1) the ‘cryptography for data confidentially’ is usable from the beginning regardless of ‘‘cryptographic activation’’ (i.e., not dormant), (2) the cryptographic capability was previously dormant but is now usable (whether by ‘‘cryptographic activation’’ or by other means; or (3) the ‘‘cryptographic activation’’ mechanism is not secure (i.e., the cryptographic capability is not securely kept dormant). Items paragraph .b is amended by replacing ‘‘to enable’’ an item with ‘‘for converting’’ an item and replacing ‘‘to achieve or exceed the controlled performance levels for functionality specified by 5A002.a that would not otherwise be enabled’’ with ‘‘not specified by Category 5 —Part 2 into an item specified by 5A002.a or 5D002.c.1, and not released by the Cryptography Note (Note 3 in Category 5—Part 2), or for enabling, by means of ‘‘cryptographic activation’’, additional functionality specified by 5A002.a of an item already specified by Category 5— Part 2’’. This clarifies that a ‘‘cryptographic activation’’ mechanism is controlled by 5A002.b in two situations: (1) It converts an item classified outside of Category 5—Part 2 into a 5A002.a item (e.g., by activating ‘cryptography for data confidentiality’ capability in an item that was previously limited to performing ‘‘authentication,’’ or by activating encryption capability which disqualifies a product from the Cryptography Note exclusion (Note 3 in Category 5—Part 2)); or (2) it enables additional functionality specified in 5A002.a in an item that was already classified in Category 5—Part 2 (e.g., making additional encryption algorithms usable by the item, or that would change the item from being eligible or described under § 740.17(b)(1) into an item described under § 740.17(b)(2) or (3)).
        • 5D002 Paragraph .b of ECCNs 5D002 and 5E002 is amended by replacing ‘‘enable’’ with ‘‘for converting’’ and replacing ‘‘to meet the criteria for functionality specified by 5A002.a, that would not otherwise be met’’ with ‘‘not specified by Category 5—Part 2 into an item specified by 5A002.a or 5D002.c.1, and not released by the Cryptography Note (Note 3 in Category 5—Part 2), or for enabling, by means of ‘‘cryptographic activation’’, additional functionality specified by 5A002.a of an item already specified by Category 5— Part 2’’. These revisions are made to create mirroring entries consistent with the changes being made to 5A002.b.
      • Category 6—Sensors and Lasers
        • 6A002 Paragraph .f is added to establish a control for Read-Out Integrated Circuits (ROICs) to ensure that certain ROICs not controlled on the Munitions List, but that provide night vision capability, are controlled. In order to maintain consistent paragraph placement with the WA List this rule adds and reserves Items paragraph .e, so that ROICs can be added to Item paragraph .f. For consistency, Items paragraph .f is added to the Regional Stability controls (RS Column 1) in the License Requirements section, because 6A990, where ROICs were formerly controlled, was controlled for RS Column 1.
        • 6A003 paragraphs a.1 (high-speed cinema recording cameras) and a.2 (mechanical high speed cameras) are removed and reserved because of the advancement of technology. Item paragraph a.3.a (mechanical streak cameras) is also removed because of the advancement of technology. As a result of this change, electronic streak cameras are moved from Item paragraph a.3.b to a.3.
        • 6A004 Dynamic wavefront measuring equipment is added to Item paragraph .f, with parameters in subparagraphs and a Technical Note at the end to define ‘‘frame rate’’. The purpose of wavefront sensing is to measure the level of the wavefront aberration as it is transferred through an optical system, regardless if the source of that aberration is the optical system itself or something external to that system. Wavefront sensors are principally used as one of the main components of adaptive optics systems where they serve to close the control loop and feed the information about the required correction to deformable mirrors and beam steering mirrors in real-time, which are also controlled in this ECCN.
        • 6A005 Item paragraph f.1 (dynamic wavefront (phase) measuring equipment) is removed and reserved, because this item is moved to ECCN 6A004.f, because of its close association to the mirrors controlled in 6A004. A Nota Bene is added to point to the new Item paragraph where this item is controlled. Item paragraph f.2 (‘‘Laser’’ diagnostic equipment) is amended by replacing ‘‘capable of measuring’’ with ‘‘specially designed for dynamic measurement of’’ and replacing ‘‘equal to or less than’’ with ‘‘and having an angular ‘‘accuracy’’ of’’ to refine the scope of the entry. The phrase ‘‘(microradians) or less (better)’’ is added after ‘‘10 mrad’’ to clarify the unit. Item paragraph f.3 (Optical equipment and components) is amended by moving the phrase ‘‘coherent beam combination’’ for better readability. The ‘‘accuracy’’ parameter is cascaded down to Item paragraph f.3.b and a new ‘‘accuracy’’ parameter is added to f.3.a, so that the equipment is controlled if it meets either of the ‘‘accuracy’’ parameters.
      • Category 9—Aerospace and Propulsion
        • 9A002 Heading is amended by revising and moving the parameter ‘‘with an ISO standard continuous power rating of 24,245 kW or more and a specific fuel consumption not exceeding 0.219 kg/ kWh in the power range from 35 to 100%’’ to the Items paragraph and adding ‘‘designed to use liquid fuel and having all of the following (see List of Items Controlled),’’ to the Heading. Two parameters are added for this ECCN: Maximum continuous power and ‘corrected specific fuel consumption’. (These revisions therefore do not change the scope of the existing control text, but rather clarify it by making it clear that the specific fuel consumption of concern applies at the ‘‘turndown performance’’ of 35%.)
        • 9A004 The scope of Item paragraph f.1 (Telemetry and telecommand equipment) is clarified by adding ‘‘specially designed’’ and two specific end uses in order to eliminate data processing equipment for mission data, such as GPS, science data, communication and broadcasting, since this data is not meant to be controlled under 9A004.f.1. The scope of Item paragraph f.2 (Simulators) is narrowed by adding ‘‘specially designed for ‘verification of operational procedures’ of ‘‘spacecraft’’.
        • 9D004 Paragraph .b (‘‘Software’’ for testing aero gas turbine engines, assemblies, ‘‘parts’’ or ‘‘components’’) is amended by removing the parameter and cascading subparagraphs with specific features or functions, such as ‘‘specially designed’’ for testing aero gas turbine engines . . . , to clarify and focus (narrow) the scope of control. A Note is added above Item paragraph .c to exclude software for operation of the test facility or operator safety, or production, repair or maintenance acceptance-testing . . .’’

Relevant EAR (Relevant changes listed below with editorial changes excluded):

  • Part 772: This rule removes 37 definitions from § 772.1 and adds them to the ECCNs where they are used. According to the WA drafting guidelines, if a term is only used in a single ECCN, then the definition must be in a Technical Note close to where that term is used.
  • Supplement No. 6 to Part 774: Sensitive List Paragraph (1)(i), ECCN 1A002, is amended by narrowing the scope from all of ECCN 1A002 to only subparagraph a.1 ‘‘ ‘‘Composite’’ structures or laminates made from an organic ‘‘matrix’’ and ‘‘fibrous or filamentary materials’’ specified by 1C010.c or 1C010.d’’, because the rest of the items in ECCN 1A002 do not warrant control on the Sensitive List as they are not key technologies.
  • Supplement No. 7 to Part 774: Very Sensitive List Paragraph (1)(i), ECCN 1A002, is amended by narrowing the scope from subparagraph .a to subparagraph a.1 (‘‘Composite’’ structures or laminates made from an organic ‘‘matrix’’ and ‘‘fibrous or filamentary materials’’ specified by 1C010.c or 1C0010.d), because the rest of the items in ECCN 1A002.a do not warrant control on the Sensitive List as they are not key technologies.
  • Section 740.16: License Exception APR is amended to remove a reference to ECCN 6A990 in paragraphs (a)(2) and (b)(2)(v), because ECCN 6A990 is removed from the CCL by this rule. ROICs are now specified in 6A002.f.
  • Section 740.20 License Exception STA is amended to remove reference to ECCNs 6A990 and 6E990 from paragraph (b)(2)(x), because these ECCNs are removed from the CCL. ROICs are now specified in 6A002.f and ROIC technology is specified in ECCNs 6E001 and 6E002.
  • Section 742.6: Regional Stability Paragraph (b)(1)(ii) is amended by removing reference to ECCN 6E990, because this ECCN is removed by this rule. ROIC technology is now controlled under ECCNs 6E001 and 6E002.
  • Section 744.9: Restrictions on Exports, Reexports, and Transfers (In-Country) of Certain Cameras, Systems, or Related Components Section 744.9 is amended by removing reference to ECCN 6A990 from paragraphs (a) and (b), because this ECCN is removed from the CCL. ROICs are now controlled under ECCN 6A002.f.

Federal Register Notice: https://www.govinfo.gov/content/pkg/FR-2018-10-24/pdf/2018-22163.pdf


OFAC Releases Changes to Iranian Transactions and Sanctions Regulations

2018/11/26

The Office of Foreign Assets Control (OFAC) published a final rule effective November 5, 2018 which makes changes to the Iranian Transactions and Sanctions Regulations (ITSR) to further implement President Trump’s decision to end the United State’s participation in the Join Comprehensive Plan of Action (JCPA) back in May of this year. These changes basically reimpose certain sanctions as well as change an existing general license to ITSR to allow US person to sell personal property in Iran and transfer the proceeds to the US.

Changes:

  • 560.211 by revising paragraph (c), adding a note to paragraph (c)(2), and revising notes 1 and 2 to paragraphs (a) through (c) to read as follows:
  • 560.211 Prohibited transactions involving blocked property.

(c)(1) All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any foreign branch, of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:

  • Any person determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to paragraphs (a) through (c)(1)(i) of this section; or
  • Any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

(A) To have, on or after August 7, 2018, materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran; or

(B) To have, on or after November 5, 2018, materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the National Iranian Oil Company (NIOC); the Naftiran Intertrade Company (NICO); any entity owned or controlled by, or operating for or on behalf of, NIOC or NICO; or the Central Bank of Iran.

(2) Paragraph (c)(1)(ii) of this section shall not apply with respect to any person for conducting or facilitating a transaction involving a project—

(i) For the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe;

(ii) That provides to Turkey and countries in Europe energy security and energy independence from the Government of the Russian Federation and the Government of Iran; and

(iii) That was initiated before August 10, 2012 pursuant to a production sharing agreement, or an ancillary agreement necessary to further a production-sharing agreement, entered into with, or a license granted by, the government of a country other than Iran before August 10, 2012.

  • Revise Note 1 to § 560.304 to read as follows:
  • 560.304 Government of Iran.
    Note 1 to § 560.304: The names of persons that the Office of Foreign Assets Control (OFAC) has identified as meeting this definition are published in the Federal Register and incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) with the identifier ‘‘[IRAN].’’ The SDN List is accessible through the following page on OFAC’s website: www.treasury.gov/sdn. However, the property and interests in property of any persons meeting the definition of the term Government of Iran are blocked pursuant to § 560.211 regardless of whether the names of such persons are published in the Federal Register or incorporated into the SDN List.
  • Revise Note 1 to § 560.324 to read as follows:
  • 560.324 Iranian financial institution.
    Note 1 to § 560.324: The names of persons that the Office of Foreign Assets Control (OFAC) has identified as meeting this definition are published in the Federal Register and incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) with the identifier ‘‘[IRAN].’’ The SDN List is accessible through the following page on OFAC’s website: www.treasury.gov/sdn. However, the property and interests in property of any persons meeting the definition of the term Iranian financial institution are blocked pursuant to § 560.211 regardless of whether the names of such persons are published in the Federal Register or incorporated into the SDN List.
  • Add a Note to § 560.518 to read as follows:
  • 560.518 Transactions in Iranian-origin and Iranian government property.

Note to § 560.518: See § 560.543 for an authorization to engage in all transactions necessary and ordinarily incident to the sale of certain real and personal property located in Iran.

  • Amend § 560.543 by revising the section heading, paragraph (a), and paragraph (b)(2) to read as follows:
  • 560.543 Sale of certain real and personal property in Iran and transfer of related funds to the United States.
    (a) Individuals who are U.S. persons are authorized to engage in transactions necessary and ordinarily incident to the sale of real and personal property in Iran and to transfer the proceeds to the United States, provided that such real and personal property was acquired before the individual became a U.S. person or inherited from persons in Iran. Authorized transactions include engaging the services of any persons in Iran necessary for the sale, such as an attorney, funds agent, or broker.

(b) * * *

(1) * * *

(2) The re-investment in Iran of the proceeds from the real or personal property sales authorized in paragraph (a) of this section; or

Federal Register Notice: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/fr83_55269.pdf


JPMorgan OFAC Sanctions Violations: Why Proactive Due Diligence Matters

2018/11/26

Written by Staff Restricted Party Screening Specialist

On October 5, 2018, JPMorgan Chase Bank (JPMC) reached a $5.26M settlement with the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) for apparent OFAC violations dating between January 2008 and February 2012.

Included in the announcement was notification of separate OFAC violations related to the Foreign Narcotics Kingpin and Syrian Sanctions Regulations that took place between August 2011 and April 2014.

Details about the earlier violations suggest that there were gaps in JPMC’s reporting and escalation processes (and that despite red flags, staff members allowed transactions to proceed). What’s noteworthy about second case, however, is not that JPMC staff allowed 85 prohibited transactions from six customers (and Specially Designated Nationals) to occur. Rather, it was the following:

  1. That the institution’s screening system failed to “identify customer names with hyphens, initials, or additional middle or last names as potential matches to similar or identical names on the SDN List,” and
  2. That JPMC employees did not further vet results despite similarities in name, addresses and dates of birth.

On the positive side, JPMorgan Chase self-identified the weakness in its screening tool and took remedial actions to correct—ultimately moving to a new screening system in 2013. Once implemented, they rescreened close to 200 million customer records, discovered the transactions in question, and ultimately reported the violations to OFAC.

DUE DILIGENCE WHEN IT COMES TO RISK IS WORTH IT

For an organization the size of JPMorgan Chase, a $5M financial settlement probably isn’t going to break the bank (no pun intended!). But the same may not be true for businesses without a similar bottom line to fall back on.

The later violation could have been avoided altogether if JPMC had set procedures in place—a match resolution workflow, for example. And some education that staff had a responsibility to take extra steps to further vet information in the event one or more search terms came back positive.

Despite the screening tool lacking the ability to recognize hyphens, initials, and additional middle or last names—though a good restricted and denied party screening solution should be able to account for this information—there was still enough readily-available data (e.g., matching dates of birth, etc.) that, upon review, would have indicated that the six account holders, and those on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List, were potentially one and the same.

ONE SENTENCE LESSON

Screening everyone and every transaction isn’t enough to be compliant with OFAC and other U.S. export, trade and financial compliance laws—positive matches should always be fully vetted and cleared before a transaction can take place, ideally in an environment with set procedures and systems in place.

Full Article: https://www.ecustoms.com/blog/?p=1626&p=1626


Texas Man Sentenced to 6 years in Prison for Cuba Embargo Violations

2018/10/30

By: Danielle Hatch

Bryan Evan Singer, 46, of Bryan Texas was sentenced to 6.5 years in prison on September 27, 2018 for attempting to export electronic devices to Cuba. On May 2, 2017 Singer was traveling from Stock Island, Florida to Havana, Cuba via his boat “La Mala” when law enforcement stopped him to conduct an outbound inspection of the boat. During the inspection, Singer explained that he was only taking items to Cuba that were on the deck of his boat and that the value of the items was less than $2,500 (possibly suspicious or a red flag). Law enforcement continued to search the boat and found a hidden compartment under a bolted down bed in the cabin where they discovered over $30,000 worth of electronic devices. Of those devices, there were 300 Ubiquiti Nanostation Network devices which allow for highly encrypted connections between computer networks over long distances, making a license required to export them to Cuba.

Singer did not apply for a license for the items…in case you didn’t already guess that.

Justice: https://www.justice.gov/usao-sdfl/pr/texas-resident-sentenced-south-florida-more-6-years-prison-violations-cuban-embargo


OFAC Reaches $5 Million Settlement with JPMorgan Chase Bank

2018/10/30

By: Danielle Hatch

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced this month that it had reached a $5,263,171 settlement with JPMorgan Chase Bank, N.A. for 87 violations of the Cuban Assets Control Regulations, the Iranian Transactions and Sanctions Regulations, and the Weapons of Mass Destruction Proliferators Sanctions Regulations.

The transactions were net settlement payments with a very small portion being provided to the interests of airlines that were on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), blocked pursuant to OFAC sanctions, or located in countries subject to OFAC sanctions. The transactions included airline freight charges which are not exempt from the prohibitions of the International Emergency Economic Powers Act (IEEPA).

On a separate issue, OFAC issued a Finding of Violation to JPMC for violations of the Foreign Narcotics Kingpin Sanctions Regulations and the Syrian Sanctions Regulations. Between 2011 and 2014 JPMC processed 85 transactions worth $46,127.04 held accounts on behalf of six customers who were on the SDN list.

In both situations JPMC voluntarily disclosed the violations and they were considered to be non-egregious violations by OFAC.

Settlement Agreement: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181005.aspx


Do You Attend BIS Update (Annual Conference)?

2018/10/30

The Bureau of Industry and Security has created a form on their website asking for topic, content, or format suggestions for the upcoming 2019 annual conference. You can do so at: https://bis.doc.gov/index.php/component/rsform/form/41-bis-annual-conference-2019-suggestion-form


Export Controls & ECR Report

2018/10/30

The Congressional Research Service (CRS) released “The U.S. Export Control System and the Export Control Reform Initiative” providing a full report on several aspects of the US export control system. The report provides background on policies and the possible future systems but with very few details (Congress will debate on whether the regulations should eventually have only one licensing agency).

Full Report: https://crsreports.congress.gov/product/pdf/R/R41916