Dear Friend of Snell & Wilmer:
The past year brought significant changes across a variety of political, legal, and policy spheres, and the world of U.S. international trade law was no exception. This edition of the revitalized Global Connection highlights developments in this arena, ranging from continuing NAFTA negotiations to updated supply chain security requirements. We also delve into greater detail on three particular developments from the last quarter of 2017, including the next steps in Russia sanctions and Cuba policies, and the early expiration of certain defense services agreements (MLAs and TAAs). These developments are sure to have lasting effects for U.S. businesses, consumers, and travelers in the years to come.
We hope that this Global Connection proves useful as businesses and individuals work through these recent changes and their impacts. Further developments are inevitable, and we will continue to highlight them here. If you have any particular suggestions for future editions of Global Connection, or would like to be included in future international events hosted by the firm, please feel free to contact us.
Best regards,
Sarah E. Delaney and Lindsay Short
Co-Editors
International Trade Law Trends from 2017:
Learning from the Past for 2018
by Brett W. Johnson, Sarah E. Delaney and Lindsay Short[1]
U.S. international trade law policies saw major changes in 2017, largely spurred by the first year of President Donald Trump’s administration. Developments included continued uncertainty over NAFTA negotiations, an increased emphasis on anti-boycott regulations, new Department of Justice corporate compliance guidance, strengthened economic sanctions programs, and updated supply chain security requirements. U.S. companies should be aware of these international trade law policy developments and the implications they may have for years to come.
NAFTA Negotiations and an Uncertain Future
2017 saw multiple rounds of North American Free Trade Agreement (NAFTA) negotiations among the United States, Canada, and Mexico. While all three countries officially maintain that progress has been made through negotiations, the year ended in uncertainty with respect to NAFTA’s future and, by some accounts, growing “pessimism” about the likelihood of reaching consensus.[2] Significant areas of contention among the three countries include changes related to rules of origin, as well as the Chapter 19 dispute settlement mechanism (the authority under which binational panels make binding decisions on complaints regarding illegal subsidies and dumping).
Specific complications include recent U.S. proposals dealing with seasonal safeguards for American agriculture, which would block Mexican produce imports during certain times of the year. Mexican trade groups unsurprisingly view this safeguard as a quota system and “categorically reject” it.[3]
The U.S. International Trade Commission (USITC) also recently levied a preliminary 220 percent tariff on planes made by Bombardier Inc., one of Canada’s biggest industrial companies. Commentators believe that Canada will now be “more determined than ever” to keep NAFTA’s Chapter 19 dispute settlement mechanism, as it would allow a company like Bombardier to challenge U.S. tariffs like these before an independent panel.[4] And, of course, President Trump has been vocal with respect to this as the “worst deal ever made.”[5] Negotiations are expected to continue through early 2018.
Increased Emphasis on Anti-Boycott Regulations
The year also included increased focus on anti-boycott regulations. The Bureau of Industry and Security (BIS), an arm of the U.S. Department of Commerce, administers and enforces U.S. anti-boycott regulations, which prohibit U.S. entities from participating in international boycotts created by foreign countries. When first drafted, these regulations largely targeted the Arab League boycott of Israel. Today, though, these laws are more broadly applied “to all boycotts imposed by foreign countries that are unsanctioned by the United States.”[6]
This year, the U.S. Senate attempted to pass legislation that would have extended boycott prohibitions to include those imposed by international organizations (particularly the United Nations). The bill never passed the Senate, and anti-boycott regulations remain confined to those imposed by foreign countries. That said, 2017 saw increased BIS emphasis on and monitoring of anti-boycott regulations. U.S. companies should anticipate additional focus in the years ahead.
“New” Department of Justice Guidance
Earlier this year, the U.S. Department of Justice’s (DOJ) Criminal Division Fraud Section issued guidance for companies regarding its evaluation of corporate compliance programs.[7] The guidance outlines how the DOJ intends to enforce corporate compliance laws, such as the Foreign Corrupt Practices Act (FCPA) and the False Claims Act (FCA). Though much of the guidance’s content was simply an extension of existing policy, it signaled the DOJ’s continued commitment to vigorously investigating and enforcing FCPA cases.
On November 29, 2017, the DOJ made permanent its FCPA Pilot Program, which was designed to encourage companies to voluntary disclose, cooperate, and remediate FCPA-related misconduct.[8] As part of this new permanent policy, there is now a presumption that, if a company satisfies the DOJ’s standards for voluntary self-disclosure, fully cooperates in any investigation, and timely and appropriate remediates its behavior, the matter will be resolved through a declination. Additionally, even if a matter requires enforcement action, in most voluntary disclosure cases, the DOJ will recommend a 50 percent reduction from the U.S. Sentencing Guidelines fine range and not require an appointed monitor if the company has implemented an effective anti-bribery compliance program.
These shifts signal that, moving forward, the DOJ will be increasingly concerned with monitoring and evaluating corporate compliance programs, including international trade compliance. To help with compliance, companies can use guidance checklists to better understand the DOJ’s expectations when designing and implementing their compliance programs. However, the “standards,” although objective and identified, are still based on a subjective perspective applied by DOJ. Therefore, a company should understand that full cooperation is expected.
Embargoes and Economic Sanctions Programs
The year also saw changes to several important sanctions-related policies involving Russia, Cuba, and Iran.
The U.S. State Department issued a list of 39 Russia-connected defense and intelligence sector entities on October 27, 2017.[9] This list includes many sizable Russian arms manufacturers and well-known intelligence organizations like the Federal Security Service (a.k.a., the FSB), and will be used to assess future U.S. sanctions to rebuke Russia for its actions in Eastern Europe, Syria, and the 2016 U.S. presidential election. The State Department created the list pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), signed into law by President Trump on August 2, 2017.
Section 231 requires that sanctions be imposed on any individual or entity that, on or after August 2, 2017, knowingly engages in a “significant transaction” with a person in or working on behalf of the Russian defense or intelligence sectors. The State Department must then impose at least five of the measures described in Section 235 of CAATSA on the violating party, which include prohibiting certain property transactions, restricting export licenses, visa ramifications for corporate officers, and prohibitions for U.S. government procurement opportunities.
The list itself does not impose any new sanctions, nor does it prohibit all transactions with the named companies. Section 231 will generally not be triggered when a transaction for goods or services has purely civilian end-uses or end-users and does not involve intelligence-sector entities, or is necessary to comply with Russian rules administered by the FSB.
Additionally, on November 9, 2017, the Trump Administration enacted significant rollbacks of changes to the Cuban embargo made under the Obama Administration. Following public comments made by President Trump about his proposed changes in June, the implemented policies fundamentally change the rules for American businesses and individuals doing business with, and traveling to, Cuba. The policy changes involve combined revisions from the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), BIS, and the U.S. State Department.
Perhaps most significantly, the new regulations significantly limit commercial transactions with Cuban entities published on the State Department’s “List of Restricted Entities Associated with Cuba” (also called the “Cuba Restricted List”).[10] Americans are now prohibited from engaging in direct financial transactions with these listed 180 entities, which are “under the control of, or acting for or on behalf of, the Cuban military, intelligence, or security services or personnel.” With respect to travel, most Americans will now be required to travel with an organized tour group run by certain approved U.S. companies. There are exceptions for academic and business travel.
2017 also included activity with respect to Iran, though the year largely ended with uncertainty on this front. In June, the U.S. Senate passed a sanctions bill, the Countering Iran’s Destabilizing Activities Act of 2017, which proposed the imposition of sanctions on any person contributing to Iran’s ballistic missile program. The Act did not pass the U.S. House, however. President Trump also announced on October 13, 2017, that his Administration would closely review the 2015 Iran nuclear agreement and refused to recertify it, but stopped short of scrapping the agreement all together.
President Trump expressed willingness to completely walk away from the agreement if it is not strengthened from a U.S. perspective. At that same time, the President also urged Congress to consider re-imposing sanctions if Iran takes certain actions, including firing ballistic missiles or financing terrorism. 2018 will likely involve continued development of U.S.-Iran trade law policies.
Supply Chain Security Requirements
The U.S. House of Representatives also passed a bill to enhance supply chain security, which may become law in 2018. The Customs-Trade Partnership Against Terrorism (C-TPAT) Reauthorization Act of 2017 passed the U.S. House by a 402-1 vote on October 23, 2017. The C-TPAT is administered by the U.S. Customs and Board Protection (CBP). Implemented following September 11, 2001, C-TPAT aims to encourage the U.S. trade community to take an active role in security measures for shipments made into the country. It is a voluntary program in which companies that join agree to implement specific security measures; in exchange they receive numerous benefits, including a reduced likelihood of examination at U.S. ports of entry, shorter border wait times, and front of the line inspections.
The House bill specifically reauthorizes C-TPAT and expands the number of entities that are eligible for C-TPAT participation. It also established a partnership with pre-screened carriers aimed at smoothing trade by reducing redundant inspections, while also maintaining strong supply chain security. The bill has not passed the U.S. Senate to date. U.S. importers should be aware that, while the focus on port security remains strong, there may be potential for more streamlined import processes in the years to come.
Looking Ahead
If anything, the year ahead will involve uncertainty in the international trade law context. The future of NAFTA continues to be unclear entering 2018, and the ultimate resolution—if and when one is made in 2018—will have significant impacts for all three countries. The year to come will also provide more insight into actual implementation of U.S. sanctions programs, particularly with respect to Cuba and Iran. International trade policies will also surely continue to be influenced by domestic events (with updates to the Russian sanctions program as one example). If 2018 follows a similar course as 2017, precise future international trade law changes will continue to be in flux.
Regardless of specific future changes, U.S. companies should continue to apply the same best practices in this arena moving forward. These include conducting international trade law compliance training, knowing their customers, reporting suspicious activity internally and externally, maintaining all international documentation, understanding the countries in which the company operates, and completing regular audits. In fact, based on current guidelines, the audit function is key. Having a best in industry international transaction policy is only part of the effort; testing the policy and its application in real world scenarios is essential. The future of U.S. international trade law remains uncertain, but these practices should assist with the transition to whatever changes may come.
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Note:
[1] The authors would also like to thank Summer Associate Jenny Schorgl for her invaluable initial research for this article.
[2] See Paul Vieira and Sara Schaefer Muñoz, Trade Officials Make Progress at Latest Nafta Talks, but Uncertainty Remains, Wall Street Journal (Sept. 27, 2017).
[3] See id.
[4] See id.
[5] See Steven Mufson, Joshua Partlow and Alan Freeman, Trump Twitter bombs and a negotiation standoff: How NAFTA talks could fail, Washington Post (Oct. 6, 2017).
[6] Office of Antiboycott Compliance, Bureau of Industry and Security.
[7] See U.S. Department of Justice, Criminal Division Fraud Section, “Evaluation of Corporate Compliance Programs.”
[8] See Remarks by Deputy Attorney General Rod Rosenstein at the 34th International Conference on the Foreign Corrupt Practices Act, Nov. 29, 2017.
[9] See U.S. Department of State, CAATSA Section 231(d) Defense and Intelligence Sectors of the Government of the Russian Federation.
[10] See U.S. Department of State, List of Restricted Entities and Subentities Associated with Cuba as of November 9, 2017.
Section 231 Sanctions: The Next Step in U.S. Sanctions of Russia
by Brett W. Johnson, Sarah E. Delaney and Lindsay Short
After months of debate between Congress and the White House, the U.S. Department of State finally issued a belated list of 39 Russia-connected defense and intelligence sector entities on October 27, 2017, nearly a month after the statutorily imposed deadline.[1] This list, naming many sizable Russian arms manufacturers and well-known intelligence organizations like the Federal Security Service (a.k.a., the FSB), will be used to assess future U.S. sanctions to rebuke Russia for its actions in Eastern Europe, Syria, and the 2016 U.S. presidential election.
This list was created pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), signed into law by President Trump on August 2, 2017. Section 231 requires that sanctions be imposed on any individual or entity that, on or after August 2, 2017, knowingly engages in a “significant transaction” with a person in or working on behalf of the Russian defense or intelligence sectors. These sanctions apply equally to U.S. and non-U.S. entities, and can include measures against both a company and its principal executive officer(s) engaged in these prohibited transactions. When Section 231 sanctions are triggered, the State Department must impose at least five of the measures described in Section 235 of CAATSA on the violating party, which include prohibiting certain property transactions, restricting export licenses, visa ramifications for corporate officers, and prohibitions for U.S. government procurement opportunities.
Despite some media portrayals, the list itself does not impose any new sanctions, nor does it prohibit all transactions with the named entities. Instead, as explained in the State Department’s Section 231 Guidance, sanctions may be imposed beginning January 29, 2018, for “significant transactions” with these entities.[2] Whether a transaction is “significant” will be determined on a case-by-case basis by evaluating, among other factors, the transaction’s impact on U.S. national security and foreign policy interests, the nature and size of the transaction, and the significance of the transaction to the Russian defense and intelligence sectors.
The Guidance further explains that when a transaction for goods or services has purely civilian end-uses or end-users and does not involve intelligence-sector entities, or is necessary to comply with Russian rules administered by the FSB (such as licenses or permit fees to import or distribute information technology products), these factors will weigh heavily against finding the transaction to be “significant.” The State Department has also promised to work with persons considering transactions with the named entities to help them identify and avoid potentially sanctionable activities.
Given the intense bipartisan interest for these new Russian sanctions, companies working in or with Russian business partners should anticipate significant scrutiny of any transactions addressed in Section 231. If a company is currently involved with Russian defense companies or intelligence sector agencies, it should carefully evaluate whether its partners are named or affiliated with the listed entities, and review any Russia-related transactions occurring on or after August 2, 2017. Additional due diligence may be required before engaging in any Russian activities. In addition, employees and agents handling potential transactions involving Russian interests should undergo training as to applicable company export control policies.
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Note:
[1] See U.S. Department of State, “CAATSA Section 231(d) Defense and Intelligence Sectors of the Government of the Russian Federation,” October 27, 2017, available at https://www.state.gov/t/isn/caatsa/275116.htm.
[2] See U.S. Department of State, “Public Guidance on Sanctions with Respect to Russia’s Defense and Intelligence Sectors Under Section 231 of the Countering America’s Adversaries Through Sanctions Act of 2017,” October 27, 2017, available at https://www.state.gov/t/isn/caatsa/275118.htm.
U.S. Government Implements Changes to U.S.-Cuba Policies Affecting Businesses and Travelers
by Brett W. Johnson, Sarah E. Delaney and Lindsay Short
On November 9, 2017, the Trump Administration enacted significant reforms to the U.S.-Cuba relationship, rolling back certain changes made under the Obama Administration. The new regulations follow upon similar policy proposals made by President Trump in June, as discussed in our prior legal alert, and fundamentally change the rules for American businesses and individuals doing business with, and traveling to, Cuba.
The U.S. Department of Treasury has explained these reforms aim to “channel economic activity away from the Cuban military and to encourage the government to move toward greater political and economic freedom for the Cuban people.”[1] They include combined changes from the Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry and Security (BIS), and the State Department.
The new regulations significantly limit commercial transactions with Cuban entities. The State Department has published a “List of Restricted Entities Associated with Cuba” (also called the “Cuba Restricted List”), naming 180 entities that are “under the control of, or acting for or on behalf of, the Cuban military, intelligence, or security services or personnel.” Americans are now prohibited from engaging in most direct financial transactions with these entities. The list currently includes hotels, stores, and tour companies, among other businesses, and is subject to change. Additionally, BIS will generally deny all future license applications to export items to the entities on this Cuba Restricted List.
The reforms also limit travel to the island. Most Americans will now need to travel with an organized tour group run by U.S. companies. Travelers will be required to engage in a full-time schedule of activities that “enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities.”[2] Exceptions remain for certain academic and business travel. Individual travelers are also prohibited from engaging in financial transactions with entities on the Cuba Restricted List. There are, however, no spending limits for Americans in Cuba.
For those with already-existing business relationships or travel plans, the reforms include significant “grandfather” provisions that allow certain plans and arrangements to remain in place. Most commercial arrangements with prohibited entities in place before the regulations will remain permitted. And travel arrangements made prior to President Trump’s June 16, 2017 announcement will remain unaffected.
While significant, the changes are not a complete rollback of the Obama Administration’s changes. As we noted following the President’s June proposals, under the new regulations the Washington, D.C. and Havana embassies will remain open, U.S. direct commercial flights and cruise ship visits to the island remain permitted, and individuals in the United States generally remain free to make remittances to those in Cuba.
These new rules will likely continue to curtail and complicate activity with Cuba. U.S. companies either currently or potentially conducting business in Cuba may wish to conduct due diligence, training, and planning to ensure that they remain compliant with these newly-implemented regulations. Furthermore, companies with foreign subsidiaries or business divisions should ensure compliance of all international trade laws and regulations by foreign business units and agents. This includes knowing your customer and ultimate end-users, potential licensing procedures for business opportunities, and including proper contractual terms in all international business transactions.
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Note:
[1] See See U.S. Department of the Treasury, Treasury, Commerce, and State Implement Changes to the Cuba Sanctions Rules (Nov. 8, 2017), available at https://www.treasury.gov/press-center/press-releases/Pages/sm0209.aspx.
[2] See id.
Many TAAs and MLAs Expired Early on December 30, 2017
by Brett W. Johnson, Sarah E. Delaney and Lindsay Short
U.S. exporters should take note that certain Technical Assistance Agreements (TAAs) and Manufacturing License Agreements (MLAs) approved by the U.S. Department of State’s Directorate of Defense Trade Controls may have expired on December 30, 2017 – potentially before the agreement’s listed expiration date. Specifically at issue are TAAs and MLAs that, when drafted, included items classified under United States Munitions List (USML) Category XI (Military Electronics).
The expiration was spurred by the U.S. Export Control Reform (ECR), in which the U.S. State Department re-categorized certain items from USML Category XI to the Commerce Control List (CCL) of the Export Administration Regulations (EAR). These changes went into effect December 30, 2014. Re-categorized items included “products in the electronics, computer, telecom and avionics industries, including many parts, components, attachments and software.”[1]
The Category XI amendments have significant impacts for those TAAs and MLAs implemented pre-ECR. Those agreements containing any items that transitioned out of USML Category XI are valid for three years, unless the agreement expires earlier[2] — meaning that they expired on December 30, 2017, at the latest. This includes any TAAs and MLAs that contained other defense services in addition to those previously classified under USML Category XI.
As a result, any active TAA or MLA approved before December 30, 2014, with at least one USML Category XI item likely expired on December 30, 2017. If the agreement includes any non-transitioning items (i.e., outside of USML Category XI), it can be amended to extend the expiration date, but note that full execution of any amendment must have been finalized before December 30 for the agreement to remain in effect. If the expiration date has past and the agreement was not amended, a company may consider seeking amendment and potentially voluntarily disclosing any technical data transfers that have occurred post-expiration. Companies should also consider whether the temporarily halt export control transfers subject to an agreement until a full review of existing agreements occurs,
U.S. exporters should review their TAAs and MLAs in the near future to determine whether they may contain USML Category XI items, and if these agreements expired, take action to enter into new agreements. Companies should also consider taking this opportunity to review export control policies and procedures, screening requirements, and audit of past activities to ensure compliance with applicable regulations and best practices.
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Note:
[1] U.S. Department of Commerce, Export Control Reform News, State and Commerce Final Rules for Category XI Take Effect (December 30, 2014), available at https://2016.export.gov/ecr/eg_main_043652.asp.
[2] U.S. State Department, Bureau of Political Military Affairs, Guidelines for Preparing Agreements (Oct. 26, 2016), available at https://www.pmddtc.state.gov/licensing/documents/AgreementGuidelinesRev44b.pdf.
