Export Controls and OFACSanctions UpdateDecember 19, 2017Nate Bolin Mollie Sitkowski

Agenda Major changes under the Countering America’s Adversaries Through Sanctions Act

(CAATSA): Russia, Iran and North Korea

The latest on the Russia Sectoral Sanctions and end-user/end-use controls

Re-designation of North Korea as a state sponsor of terrorism

New Customs and Border Protection (CBP) enforcement policies on imports made with North Korea labor and inputs

Tightened sanctions on Cuba and Venezuela

The status of Sudan under U.S. export controls and sanctions

OFAC enforcement trends

Export Control Reform Update- Changes on the horizon for the International Traffic in Arms Regulations (ITAR)

- The future of export controls on encryption technology

China’s new export control regime

India joins the Wassenaar Arrangement

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Legal Framework for U.S. Sanctions and Export Controls

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Agencies and RegulationsU.S. Department of State, Directorate of Defense Trade Controls (DDTC)

- International Traffic in Arms Regulations (ITAR)- Defense/military items and services on the U.S. Munitions List (USML)

U.S. Department of Commerce, Bureau of Industry and Security (BIS)- Export Administration Regulations (EAR)- Commercial/dual-use items on the Commerce Control List (CCL)

U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC)- Sanctions programs- Embargoed destinations/parties

U.S. Department of Commerce, Census Bureau- Foreign Trade Regulations (FTR)- Statistical and compliance data collection

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PenaltiesSignificant civil penalties:

- EAR and OFAC sanctions: up to ~$300,000 or twice the value of a transaction (whichever is higher) per violation; multiple shipments, payments, or invoice line items can each count as a separate violation

- ITAR: over $1.1 million per violation

Criminal penalties: up to $1 million and 20 years imprisonmentActive, multi-agency enforcement

- DOJ, Customs, Census, Commerce, Homeland Security, etc.

Successor liability: regardless of transaction form- Equity, purchase out of bankruptcy; asset transfer, etc.

5 year statute of limitations

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Changes to OFAC Sanctions under CAATSA

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Countering America’s Adversaries Through Sanctions Act (CAATSA)

Signed into law on August 2, 2017

Agency implementation continuing

Major expansion of U.S. sanctions on Russia

Increased sanctions and secondary sanctions against North Korea

Modest increase in sanctions on Iran

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CAATSA Changes to Sanctions on Russia

Overview of Russia Sanctions (Pre-CAATSA)Implemented through a series of Executive Orders beginning in 2014:

“Traditional” sanctions (E.O. 13660, 13661, 13685)

Asset freezes on designated persons and the entities they own

Many Russian businessmen with large international holdings who are part of Putin’s “inner circle” have been designated

Sectoral sanctions (E.O. 13662)

More limited sanctions on identified companies in Russia’s financial, energy, and defense sectors.

Directives 1, 2, 3, and 4

Sanctions generally target these companies’ access to U.S. oil and gas technology and debt and equity markets

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Overview of Russia Sanctions (Pre-CAATSA) (cont’d)

EAR Section 746.5 restrictions on certain exports, reexports, and transfers to the Russian oil and gas sector

Section 744.21 restrictions on military end uses and end users in Russia.

EAR Entity List restrictions on persons, entities, locations in Russia

Comprehensive embargo on the Crimea region (E.O. 13685)

Prohibits new US investment in Crimea and import or export of goods, services or technology to or from Crimea

OFAC and Commerce (BIS) may identify and block persons operating in or leading/owning entities in Crimea

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CAATSA Changes to Russia SanctionsCodifies the prior Executive Orders into lawLimits the president’s authority to reduce sanctions or issue licensesOFAC Directives 1, 2, and 4 enhancedRequires the president to impose “secondary” sanctions on:

- Foreign persons who make “significant” investments in special Russia crude oil projects (Section 225)

- Foreign financial institutions that engage in “significant transactions” involving special Russia crude oil projects (Section 226)

- Foreign persons conspiring to violate or facilitating prohibited transactions with sanctioned Russian entities (Section 228)

- Any person who engages in significant transactions with the Russian defense or intelligence sectors (identified by the U.S. State Department) (Section 231)

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State Department List of Russian Defense Entities

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https://www.state.gov/t/isn/caatsa/275116.htm

CAATSA Changes to Russia Sanctions (cont’d)

Gives the president discretion to sanction any person that:- Makes an investment that “directly and significantly contributes to the

enhancement of the ability of the Russian Federation to construct energy export pipelines”; or

- Sells, leases or provides to the Russian Federation for the construction of Russian energy export pipelines” certain goods, services, or technology (valued at $1 million in any single instance or greater than $5 million during a 12 month period) (Section 232)

- Applies only to projects initiated on or after August 2, 2017

Requires the president to impose sanctions on Russian hackers (Section 224) and persons “ordering, controlling, or otherwise directing, acts of significant corruption” in Russia (Section 227)

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OFAC Directive 1 – Russian Financial SectorProhibits transacting in, providing financing for, or otherwise dealing in certain new debt or equity for the benefit of designated persons operating in Russia’s financial sector

CAATSA reduced the length of debt to 14 days

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Date of debt issuance Length of debt prohibited

On or after July 16, 2014 and before September 12, 2014

Longer than 90 days maturity

On or after September 12, 2014 and before November 28, 2017

Longer than 30 days maturity

On or after November 28, 2017 Longer than 14 days maturity

OFAC Directive 2 – Russian Energy SectorProhibits transacting in, providing financing for, or otherwise dealing in certain new debt or equity for the benefit of designated persons operating in Russia’s energy sector

CAATSA reduced the length of debt to 60 days

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Date of debt issuance Length of debt prohibited

On or after July 16, 2014 and before November 28, 2017

Longer than 90 days maturity

On or after November 28, 2017 Longer than 60 days maturity

OFAC Directive 3 – Russian Defense SectorProhibits all transactions involving new debt (on or after September 14, 2014) in certain entities where the debt has a maturity of longer than 30 days; all financing in support of such new debt; and any dealing in, including provision of services in support of, such new debt

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OFAC Directive 4 – Russian Energy Projects

Prohibits the provision, exportation, or reexportation of goods, services, or technology for named persons and oil and gas projects

Covered services include drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. They do not include financial services or insurance

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OFAC Directive 4 – Russian Energy Projects (cont’d)

CAATSA amended the EO to prohibit:- U.S. companies from selling products to Directive 4 SSIL entities for any

deepwater (greater than 500 feet) or Arctic offshore or shale formation projects “initiated” on or after January 29, 2018 and located in any country (no longer limited to Russian territory), if the direct or indirect ownership share of a Directive 4 SSIL entity, either individually or in the aggregate exceeds 33 percent or more in interest or owns a majority of the voting interests of the project in question.

It broadened the scope of Directive 4 to the specified oil projects wherever located and decreased the amount of a Directive 4 listed entity’s ownership in the project to 33 percent

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OFAC Directives 1 through 4 – rules of interpretationAll the prohibitions in these Directives extend to the rollover of

existing debt

The prohibitions apply to the named persons, their property, and their interests in property, which includes entities owned 50 percent or more by one or more persons identified as subject to the Directives

- CAATSA decreased the ownership/control requirement for Directive 4 prohibitions to 33 percent or more by persons/entities identified in Directive 4

Projects that have the “potential to produce oil” have been broadly defined by OFAC and BIS

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Russia Military End Use and End User Restrictions Since April 28, 2014, DDTC has had a policy to deny ITAR licenses for exports of high technology defense articles and defense services to Russia and Crimea

Licenses are also required for all CCL and EAR99 items to Crimea (with exceptions for food, medicine, and EAR99 communications devices and mass market software)

Restrictions on military end uses and military end users in Russia under Section 744.21 of the EAR

Other end user and end use controls in EAR Part 744

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Changes to Sanctions and Export Controls on North Korea

Changes to the Sanctions on North KoreaSection 3 of CAATSA (Korean Interdiction and Modernization of

Sanctions Act (KIMS Act))Requires the president to impose secondary sanctions on persons

engaging in certain transactions with North KoreaRequires CBP to investigate and seize imported merchandise

believed to have been produced in whole or in part from North Korean labor or inputs

- Importers must show non-involvement of NK labor/inputs by “clear and convincing evidence”

Adds secondary sanctions against persons found to be facilitating trade with North KoreaE.O. 13810 (Sept. 20, 2017) imposes additional sanctions on DPRK

entities and third-country actors doing business with the DPRK

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Changes to Sanctions & Export Controls on Iran

Iran – CAATSA Changes and JCPOA UpdateCAATSA requires the president to impose sanctions on persons

contributing to Iran’s ballistic missile or WMD programs (codifying E.O. 13382) Imposes blocking sanctions on persons supporting Iran’s armed

forces, including sales of weapons and provision of training and financial supportCodifies the designation of the Islamic Revolutionary Guard Corps

(IRGC) as a sanctioned entity In October 2017, the president declined to certify that Iran was

complying with the Joint Comprehensive Plan of Action (JCPOA), signaling a potential return to secondary sanctions on foreign companies doing business with Iran and the possible end of OFAC General License H

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Iran General License H Issued by OFAC as part of JCPOA agreement

Permits foreign subsidiaries of U.S. companies to engage in transactions with Iran that lack a U.S. nexus and that do not involve certain sanctioned Iranian entities

Transactions can have a U.S. nexus where they:

- Involve U.S. services (including financial services), U.S. persons, or U.S. dollars;

- Originate from the United States;

- Involve a foreign branch of a U.S. financial institution; or

- Involve goods, technology or software subject to ITAR or EAR jurisdiction

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Future direction of Iran Sanctions in 2018On December 12, 2017, a 60-day window for Congress to vote to

re-impose secondary sanctions on Iran passed without Congress taking action

- Instead, Senate Foreign Relations Committee Chairman Bob Corker (R –TN) proposed new amendments to the Iran Nuclear Agreement Review Act (INARA) to tighten sanctions

- Some in Congress have said they would oppose the amendments as not consistent with the JCPOA

President Trump has said the deal with Iran is “under continuous review” and could be cancelled by him “at any time”The president must issue a renewed waiver on January 12, 2018

or some or all the pre-JCPOA sanctions will snap-back

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Uncertainty over the JCPOAhas significant effect on Iran’s economy, as suggested by depreciation of the rial since January 2017

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Other Recent Changes to the OFAC Sanctions

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New Sanctions on Venezuela

Venezuela Certain Venezuelan government entities have been subject to

sanctions since 2015

E.O. 13808 (Aug. 24, 2017) increases these sanctions by prohibiting U.S. persons from dealing in:

- New debt of Petroleos de Venezuela, S.A. (PdVSA) with a maturity greater than 90 days

- New debt of the Government of Venezuela (GoV) (other than PdVSA) with a maturity greater than 30 days

- Bonds issued by the GoV prior to August 24, 2017

- Dividend payments or other distributions of profits to the GoV from any entity owned/controlled by the GoV

• Includes entities owned 50% or more, individually or in the aggregate, by the GoV

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Venezuela (cont’d)

OFAC General License 2 authorizes debt transactions with CITGO Holding Inc. and its subsidiaries

General License 3 authorizes transactions with the OFAC “List of Authorized Venezuela-Related Bonds”

General License 4 authorizes financing for transactions involving certain agricultural and medical products

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Changes to Sanctions & Export Controls on Sudan

SudanComprehensive U.S. economic sanctions on Sudan were lifted on October 12, 2017

Certain EAR99 and AT-only controlled items may be exported to Sudan without a license

Be sure to check the requirements of EAR Section 742.10

Controls remain on certain Sudanese persons and entities and for EAR and ITAR items subject to higher-level controls

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Changes to Sanctions & Export Controls on Cuba

Cuba Sanctions – November 9, 2017 ChangesProhibit transactions with entities listed on the State Department’s “Cuba Restricted List” (over 175 entities, including government-owned companies, manufacturers, and hotels)

Individual person-to-person “educational” travel no longer authorized, but authorized group travel still allowed

License Exceptions SCP remains in place, but consolidates various categories of permissible items into one group

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State Department List of Cuban Restricted Entities

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https://www.state.gov/e/eb/tfs/spi/cuba/cubarestrictedlist/275331.htm

Recent OFACEnforcement Actions

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OFAC Enforcement CasesRecent OFAC civil penalty cases have targeted a mix of financial

institutions and exporters and reexporters of goods and services

Landmark settlement with ZTE regarding reexports of EAR items to Iran and North Korea

Settlements with Dentsply, B Whale Corporation and Dominica Maritime Registry Inc. illustrate continued enforcement focus on third-country transactions with Iran that involve U.S. goods, U.S. dollars, or another U.S. nexus

Settlements with BD White Birch Investment and International Services illustrate increased focus on “facilitation”

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Export Control Reform Update

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ITAR/EAR – Export Control Reform Status

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https://www.bis.doc.gov/index.php/documents/pdfs/1566-ecr-dashboard-10-12-16

ITAR / EAR – ECR Regulatory Review On-going review of the U.S. Munitions List (USML) and Commerce Control

List (CCL) categories “to ensure they are clear, do not inadvertently control items in normal commercial use, account for technological developments, and properly implement [U.S.] national security and foreign policy objectives”

Revisions to ITAR USML Categories VIII (military aircraft) and XIX (turbine engines) and EAR CCL Category 9 and “600 series” items effective December 31, 2016

The Directorate of Defense Trade Controls (DDTC) and Bureau of Industry and Security (BIS) are reviewing responses to October 2015 Notice of Inquiry on USML Categories VI (warships), VII (ground vehicles), XIII (materials & misc.), and XX (submersibles)

Notice of Inquiry requesting comments on USML Categories V (explosives), X (personal protective equipment), and XI (military electronics) expected soon

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ITAR / EAR – Order of Review

USML

USML “Specially Designed”

9x515 & 600 Series CCL Items

“Specially designed” for 9x515 & 600 Series CCL Items

Remainder of CCL

EAR99

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ITAR – Commodity Jurisdiction Determinations Commodity Jurisdiction requests now submitted electronically through Defense Export

Control and Compliance System DECCS (https://cj.pmddtc.state.gov/cj/ )

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Changes to AESMost U.S. exporters must file Electronic Export Information (EEI) in the Automated Export System (AES) in conjunction with exports

BIS frequently encounters misclassifications of items and incorrect “no license required” and license exception claims in AES

BIS, CBP and Census are piloting a program that will issue an alert if a NLR or license exception appears to be a mismatch to the country of export and Export Control Classification Number (ECCN)

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ITAR – Changes on the HorizonRevisions to USML Categories I through III

A revised ITAR- Consolidated “field manual” approach

- Eliminates most/all of the ITAR Agreement Guidelines for TAAs, MLAs

- Unclear how new order/renumbering will affect licensing and internal systems

DTrade replacement: Defense Export Control and Compliance System (DECCS)

- Real-time monitoring of license and agreement status

- Simplified process for registrations, licenses, and agreements45

ITAR – Changes on the HorizonClarification of definitions and rules governing non-U.S. person employees

New definition of “manufacturing”

New definition of “defense service”

Expand scope of Section 126.4 license exemption

TAAs, MLAs, WDAs no longer subject to a 10-year maximum period

Changes to the company visit program

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Agency Leadership: On-going Changes at DDTCRetirements of key senior staff

Reorganization of internal teams and functions

Focus on team-based approach to staffing licensing, agreements, policy, and compliance issues

Slow pace of nominations and approvals of key political appointees

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Agency Leadership: OFAC and BISNew political appointees in place at OFAC, BIS

OFAC: - Sigal Mandelker (Undersecretary) – former law clerk to Justice Thomas,

AUSA with DOJ

- Marshall Billingslea (Assistant Secretary) – formerly with Deloitte Advisory

- John Smith (Director) – long-time OFAC official

BIS:- Mira Ricardel (Under Secretary) – formerly with Boeing Defense

- Richard Ashooh (Assistant Secretary) – formerly with Univ. of NH, Lockheed Martin, BAE Systems

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Encryption UpdatesReorganization and refresh of EAR provisions governing

encryption and information security items went into place on September 20, 2016

The United States and EU are working with other WassenaarArrangement members to update the 2013 Wassenaar rules on “cyber intrusion” software

Changes at the December 2017 Wassenaar plenary would exclude software updates and vulnerability disclosures (e.g., reveal of “zero day” flaws) and cyber incident responses from these controls

More changes on the way for 2018

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Developments Outside The United States

China Issues Draft of New Export Control LawOn June 16, 2017, the Government of China issued a new proposed export control law

The legislation would implement a new legal regime with many features similar to the EAR, including:

- Use of sanctioned party and denied party lists

- Extraterritorial jurisdiction based on the Chinese origin of an item or technology

- End user and end use verification by Chinese enforcement agents

The legislation is expected to go into effect in 2018

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India Joins the Wassenaar Arrangement India was admitted as a member of the Wassenaar Arrangement at the December 2017 plenary

This plus the designation of India as a “Major Defense Partner” in December 2016 have expanded the range of potential U.S. exports to India

- Fewer EAR controls

- A more flexible ITAR and EAR licensing policy

- Indian companies may be eligible for “Validated End User” status under the EAR

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QUESTIONS

Nate BolinDrinker Biddle & Reath LLP(202) 230-5888Nate.Bolin@dbr.com

Mollie SitkowskiDrinker Biddle & Reath LLP(312) 569-1502Mollie.Sitkowski@dbr.com

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