On Thursday, November 12, 2020, President Trump signed an Executive Order (the “Order”) that, beginning on January 11, 2021, will prohibit U.S. persons from transacting in the publicly traded securities of 31 companies that the Department of Defense has identified as “Communist Chinese military companies.” The requirement for the Department of Defense to create a
Peter Flanagan counsels clients on a broad range of compliance requirements affecting international trade and investment. These include most notably export controls, economic sanctions constraints, defense trade limitations, and the implications of related non-U.S. requirements. He also has experience in financial services regulation.
Mr. Flanagan has advised leading companies in the oil and gas sector, pharmaceutical and medical technology companies, defense contractors, manufacturing entities, financial institutions and private equity firms, software and high-technology concerns, and university-affiliated laboratories. Consistently ranked as a top-tier practitioner, Mr. Flanagan has deep experience in assisting multinational clients with complex compliance, enforcement, and licensing matters before the key U.S. trade controls agencies, including the U.S. Departments of Treasury, Commerce, and State.
On October 14, 2019, President Trump issued an Executive Order Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Syria. This Order provides authority for the imposition of sanctions (including secondary sanctions) on certain entities and individuals in response to Turkey’s military operations in Syria, which the Order states endanger innocent civilians, destabilize the region, and undermine the campaign to defeat the Islamic State.
The Executive Order provides authority to impose sanctions on parts of the Government of Turkey, current and former officials of the Government of Turkey, sectors of Turkey’s economy, and persons who are otherwise determined to be involved in actions or policies that threaten the peace, security, stability, or territorial integrity of Syria. The Executive Order provides additional authority to impose sanctions on foreign persons engaged in a range of activities that disrupt or prevent a ceasefire in northern Syria, the voluntary return to Syria of displaced persons, or efforts to promote a political solution to the conflict in Syria, or involve the commission of serious human rights abuses in relation to Syria. It further authorizes various secondary sanctions (a) for certain dealings in support of persons whose property is blocked pursuant to the Executive Order, and (b) against foreign financial institutions that knowingly conduct or facilitate any significant financial transaction on behalf of such a blocked party.
Relying on the Executive Order, the Administration blocked all property and interests in property of the Government of Turkey’s Ministry of National Defense and Ministry of Energy and Natural Resources, as well as the property and interests in property of the Minister of National Defense, Minister of Energy and Natural Resources, and Minister of the Interior.
On February 15, 2018, House Foreign Affairs Committee Chairman Ed Royce (R-CA) introduced bipartisan legislation—the Export Control Reform Act of 2018 (“ECRA”)⸺to modernize U.S. export control regulation of commercial and dual-use items. The bill is co-sponsored by the committee’s ranking Democratic member, Eliot Engel (D-NY). The proposed legislation seeks to establish a permanent statutory basis for export control of commercial, dual-use, and less sensitive defense items.
Introducing the ECRA, Chairman Royce emphasized that the need for export control reform is dictated by aggressive Chinese government policies that have increasingly forced U.S. companies to hand over sensitive technology as a cost of doing business in China. In response, the ECRA establishes a framework to protect critical and emerging U.S. technology and know-how. The same issue also has been taken up through the Foreign Investment Risk Review Modernization Act (“FIRRMA”), a bipartisan effort to control outbound technology transfers (among other issues) through the expansion of the authority and operation of the Committee on Foreign Investment in the United States (“CFIUS”). It remains to be seen whether Congress will proceed with the ECRA or FIRRMA, or potentially combine the two efforts.
Key Aspects of the Export Control Reform Act
If enacted as introduced, the potential impact of the ECRA on export controls would be far- reaching:
- The ECRA on its face would significantly expand U.S. jurisdiction to regulate the transfer abroad by U.S. and foreign persons of commodities, software, or technology regardless of any U.S. content.
- The ECRA would for the first time apply U.S. deemed export controls to transfers of controlled technology to U.S. companies unless they are majority-owned by U.S. natural persons.
- The ECRA would establish control over release of technology that includes information at any stage of its creation, such as “foundational information” and “know-how,” in order to protect emerging technology and sensitive intellectual property. To that extent, the bill would require the president to establish an interagency process to identify emerging technologies that are not identified in any U.S. or multilateral control list, but nonetheless could be essential to U.S. national security.
During the past two weeks, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of State have taken a number of steps toward implementing aspects of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), a major piece of sanctions legislation passed by the U.S. Congress in July and signed by President Trump in early August. These steps are in addition to those described in our client alert last month.
Specifically, as called for by CAATSA, OFAC on October 31 issued a revised Russia sectoral sanctions Directive 4 that expands the restrictions on U.S. person support for certain unconventional oil projects to reach new such projects being undertaken anywhere in the world where a sectorally sanctioned Russian energy company has a majority voting or 33 percent or greater ownership interest in the project. OFAC also issued related guidance on this expanded sanction. In addition, OFAC issued guidance on the application of secondary sanctions to foreign financial institutions and on the implementation of other measures in CAATSA.
Also with respect to CAATSA, the U.S. Department of State has issued guidance on the imposition of secondary sanctions relating to Russia’s energy export pipelines, investments in special Russian crude oil projects, and a CAATSA provision that requires the President to sanction persons who knowingly engage in significant transactions with parties affiliated with Russia’s defense and intelligence sectors.
With respect to Iran, OFAC issued amended regulations on October 31 implementing CAATSA’s requirement to impose terrorism-related sanctions with respect to officials, agents, or affiliates of Iran’s Islamic Revolutionary Guard Corps (“IRGC”).
Primary Sectoral Sanctions Targeting Russia’s Energy Sector
Since September 12, 2014, OFAC Directive 4 has prohibited U.S. persons from providing goods, services (except for financial services), or technology in support of exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia or its territorial waters and that involve a sectorally sanctioned Russian energy company or an entity owned 50 percent or more, directly or indirectly, individually or in the aggregate, by one or more such companies. “U.S. persons” are legal entities organized under U.S. law and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), wherever located or employed; and any persons when physically present in the United States.
Administration Also Revises Russia Sanctions, Terminates Most Sudan Sanctions
On October 13, President Trump announced that he would no longer certify to Congress that the suspension of U.S. sanctions against Iran pursuant to the Joint Comprehensive Plan of Action (“JCPOA”) is “appropriate and proportionate” to the steps that Iran has taken to terminate its illicit nuclear program. The President’s much-anticipated announcement does not mean that the United States is withdrawing from the JCPOA, nor does it automatically result in the re- imposition of any U.S. sanctions against Iran. Rather, the President’s announcement gives the Congress 60 days to introduce legislation to re-impose U.S. sanctions that could be considered under expedited procedures. Importantly, although President Trump did not call on Congress to re-impose the pre-JCPOA U.S. nuclear-related sanctions, he did threaten to terminate U.S. participation in the JCPOA in the future if Congress and U.S. allies do not take action to address perceived flaws in the agreement.
At the same time, the Trump Administration expanded sanctions against Iran’s Islamic Revolutionary Guard Corps (“IRGC”), and designated four additional entities for sanctions for their support of Iran’s weapons proliferation activities. Further, Senators Bob Corker and Tom Cotton announced that they would be introducing legislation to address perceived shortcomings in the JCPOA, consistent with President Trump’s request.
The developments of late last week follow several other recent changes in U.S. sanctions involving Russia and Sudan.
On September 29, the Trump Administration, as expected, revised key aspects of the U.S. sectoral sanctions against Russia relating to dealings in debt of certain parties operating in Russia’s financial services and energy sectors. The move was required by the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) discussed in our alert of July 28, 2017.
Finally, on October 12, the Trump Administration terminated most U.S. sanctions against Sudan, which had been substantially suspended since January 2017 pursuant to an Executive Order that President Obama issued in the waning days of his Administration.
Failure to Make INARA Certification
The Iran Nuclear Agreement Review Act of 2015 (“INARA”) requires that the President certify to Congress every 90 days that: (1) “Iran is transparently, verifiably, and fully implementing” the JCPOA; (2) Iran has not committed a material breach with respect to the JCPOA, or if it has committed a material breach, then it has cured that breach; (3) Iran has not taken any action that could significantly advance its nuclear weapons program; and (4) suspension of U.S. sanctions against Iran in connection with the JCPOA is “appropriate and proportionate” to the specific and verifiable measures taken by Iran with respect to terminating its illicit nuclear program and is “vital to the national security interests of the United States.”