A New Normal for Foreign Military Sales? Total Sales for FY 2019 Nearly Matches FY 2018

On October 15, 2019, the Defense Security Cooperation Agency (DSCA) announced that foreign arm sales for Fiscal Year (FY) 2019 totaled $55.4 billion.

This amount nearly matches the total from FY 2018 of $55.7 billion, continuing the significant increase in foreign arm sales under the Trump Administration and potentially signaling that the enormous 33 percent jump in sales from FY 2017 to FY 2018 may have established a new normal for U.S. arms exports.Every October, DSCA announces the total sales arms sales of the U.S. These totals include government-to-government sales under the Foreign Military Sales program as well as sales funded through the Foreign Military Financing program and other security cooperation and assistance agreements with partner nations. These totals do not include direct sales from U.S. companies to foreign militaries that do not rely on U.S. government assistance.

The total foreign arms sales for the past six years are:

The large spike in sales in FY 2015 was attributed in large part to ramping up efforts to combat ISIS. That isolated spike aside, the increase in arm sales in the past four years has been dramatic, with the increase in sales attributable primarily to increased foreign government spending (as opposed to U.S. assistance funding).

DSCA prefers to rely on three-year rolling averages, as annual sales figures can be skewed by specific geo-political events (such as the fight against ISIS in FY 2015) or a few high-value transactions (such as the sale of F-15s to Qatar and F/A-18s to Kuwait during FY 2012). With two consecutive years of sales around $55 billion, we may now be seeing a new normal for foreign arms sales. Of course, many factors could impact foreign arms sales moving forward, including fluctuations in energy prices and increased scrutiny by Congress, but it appears for now that robust U.S. arms exports will continue.

New Changes to Foreign Agents Registration Act Forms and E-File System

By Robert Kelner, Brian D. Smith, Derek Lawlor and Alex Langton on October 29, 2019 Posted in Compliance Issues, Uncategorized

Following the Department of Justice’s announcement in March of an initiative to increase enforcement of the Foreign Agents Registration Act (“FARA”), the Department has rolled out a new e-file system for FARA registrations. Notably, the new system only applies to new registrants, although the Department indicated that it will transition existing registrants to the new system in “the coming months.”

The changes were announced in a notice to existing registrants. The new system, the Department said, “will allow registrants to submit data though a self-guided, web-based questionnaire, rather than uploading PDFs.” Previously, registrants submitted FARA filings by completing PDF forms and uploading the completed forms to the Department’s filing system.

There are several notable differences regarding this new system.

The system now requires that registrants complete an online web-based form. Previously, filers could complete filings and later upload them. The Department has promised to provide templates that can be completed offline, but they are not yet available.
Registrants must now answer each question on the form. The prior PDF forms permitted registrants to leave answers blank or insert clarifying text. Answering complex questions in the new form may be challenging. For example, the forms offer only yes/no answers to questions concerning a foreign entity’s relationship with a government.
Filers must scan a document containing an actual signature. The PDF forms formerly permitted a filer to click a box that indicated an electronic signature. This new requirement will strengthen the accountability of filers for the submissions, for electronic signatures were sometimes executed by counsel or other authorized party. This may facilitate false statements prosecutions in certain situations, 18 U.S.C. § 1001.

Importantly, the new web-based forms contain new questions. For example, Exhibit B, where registrants provide information about their contracts with foreign principals now asks whether the registrant has engaged in any political activities prior to the date of registration, as well as the previous query on information about prospective political activities on behalf of a foreign principal. Because the Department has not yet provided templates for the new web-based forms, the new questions are only visible once a filer begins the registration process and there is not an opportunity to prepare responses prior to accessing the filing system.

Covington will continue to monitor developments and post updates regarding this new system.

Supreme Court Grants Certiorari in Seila Law v. Consumer Financial Protection Bureau

By Sam Adriance on October 24, 2019 Posted in Bank Regulation, Uncategorized

On October 18, the Supreme Court granted certiorari in Seila Law v. Consumer Financial Protection Bureau (CFPB). The question presented before the Court is “whether the substantial executive authority yielded by the CFPB, an independent agency led by a single director, violates the separation of powers.” In addition, the Court requested that the parties brief and argue an additional question: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?”

The Dodd-Frank Act established the CFPB as an independent bureau within the Federal Reserve System in 2010. The Bureau has the power to implement and enforce nineteen enumerated federal consumer protection statues. The Director of the CFPB is appointed by the President with the advice and consent of the Senate. However, under 12 U.S.C. 5491(c)(3), the Director may not be removed by the President absent “inefficiency, neglect of duty, or malfeasance in office.” In its petition for certiorari from the Court of Appeals for the Ninth Circuit, the petitioner argues that this restriction on removal unconstitutionally insulates the Director from the President’s control and therefore interferes with his executive power of removal. CFPB Director Kathleen Kraninger has publicly announced the CFPB’s determination that the for-cause removal provision is unconstitutional, which is contrary to the position the CFPB has previously taken in litigation.

If the Court determines that the CFPB’s current structure is unconstitutional, it will have to fashion the appropriate remedy and therefore determine whether the entire CFPB must be struck down or whether the “for cause” removal provision is severable from other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, CFPB’s enabling statute. As noted above, the Court has ordered the parties to brief the question of whether the removal provision may be severed from the Dodd-Frank Act. Notably, in October 2016, then-Judge, now Justice, Brett Kavanaugh, declared that the structure of the CFPB violated Article II’s Vesting and Take Care Clauses but could be cured by severing the “for cause” removal provision in deciding a similar challenge to the CFPB’s constitutionality in PHH Corp. v. Consumer Financial Protection Bureau. In January 2018, the D.C. Circuit en banc reversed this portion of then-Judge Kavanaugh’s decision and upheld the constitutionality of the CFPB’s structure.

Articulating the Business Case for Investing in Compliance Programs

By Benjamin Haley, Mark Finucane and Sarah Crowder on October 23, 2019 Posted in Africa

In our experience, compliance professionals spend a significant amount of time and resources focusing on the “how” – designing, implementing, sustaining, and improving effective compliance programs. This focus is no doubt warranted given recent emphasis by enforcement authorities on the need for corporates to test the effectiveness of their compliance programs. However, we believe it is critical for compliance professionals and their business clients not to lose sight of the “why” behind their compliance agendas, including how to best articulate the business case for investing in a robust compliance program.

When asked why a particular compliance initiative or resource is necessary, compliance professionals may have the urge to rely on guidance from enforcement authorities, framing their response under the rubric of “the regulators’ expectations.” While pronouncements from enforcement authorities can, and should, be a part of such a conversation, relying solely on such pronouncements may not be fully satisfactory to business stakeholders who are not experts in compliance. Worse, it can give business stakeholders the impression that the compliance professional’s response to the “why” question is effectively “because I said so.”

Regardless of the maturity of a company’s compliance program, the ability to effectively articulate the business case for the program can be a vitally important item in a compliance professional’s toolkit, and critical to the overall effectiveness of the program. Among other things, achieving buy-in and support from employees, executives, and directors, as well as external stakeholders, such as business partners, will depend in large part on whether they believe that compliance initiatives are ultimately actually worth the time, resources, and effort.

With this in mind, we briefly outline below some of the key aspects of the business case for investing in a compliance program. As the business case will vary depending on the risk profile, operations, and culture of the organization, there is no “one size fits all” solution here.

The Insurance Policy

A number of international legal regimes provide powerful incentives for the development and implementation of effective compliance programs by offering the prospect of more favorable resolutions in enforcement actions. Most notably for companies with potential exposure to U.S. law are the U.S. Sentencing Guidelines, under which a company can receive substantial discounts to criminal fines where it can demonstrate the maintenance of an effective compliance program. Along similar lines, under the U.S. Department of Justice’s (“DOJ”) Foreign Corrupt Practices Act Corporate Enforcement Policy, a company may be entitled to the presumption of a declination of prosecution altogether, or considerable discounts on applicable fines, if, in addition to voluntarily disclosing misconduct and cooperating in DOJ’s investigation, it demonstrates the “[i]mplementation of an effective compliance and ethics program.” In both cases, the ability to put a dollar amount on the value of an effective compliance program, at least as regards the costs of resolving an enforcement action, can be quite powerful in making the case for additional compliance resources.

The UK Bribery Act takes a different approach, providing an affirmative defense for the corporate offense of failure to prevent bribery where a company can demonstrate that it has put in place “adequate procedures.” And even in legal regimes where such incentives are not hard-wired into the enforcement framework, enforcement authorities may consider the strength of a company’s compliance program as a matter of prosecutorial discretion, e.g., as a mitigating factor in the assessment of penalties, or a reason to decline to bring an enforcement action altogether.

The Security System

While the potential for more favorable resolution of enforcement actions is, in our experience, one of the most compelling aspects of the business case for investment in a compliance program, compliance officers should also focus on the potential for effective programs to detect and prevent potential fraud, corruption, and other compliance breaches either before they happen, or soon enough for companies to take meaningful mitigation actions. In this sense, a company’s compliance program functions as an early warning detection system.

The potential cost savings in this regard can be substantial. In its 2018 Report to the Nations, after analyzing over 2,600 cases of corporate fraud, the Association of Certified Fraud Examiners estimated median direct losses of USD 130,000 per case, with more than 20% of cases involving losses of USD 1 million or more. Moreover, given that these estimates do not include indirect downstream losses such as loss of business, legal fees, or costs from personnel turnover, they likely understate the true cost of compliance breaches, and, correspondingly, the true value of effective compliance programs in avoiding or reducing such losses.

Avoiding Bad Deals

Along similar lines, when it comes to investment transactions or other transactions with business partners, a robust compliance program can help companies avoid bad deals. For example, robust integrity due diligence on potential business partners and investments can help a company identify significant fraud and corruption risks before the ink is dry and deals are consummated, thereby reducing the risk of follow-on investigations and/or enforcement actions. Additionally, robust pre-investment compliance measures can reduce the risk of adverse operational and financial consequences, such as overpayment for assets, the need to unwind problematic relationships with business partners, or exiting markets or business lines altogether due to compliance concerns.

Enabling Business and Creating a Competitive Advantage

While much of the foregoing discussion focuses on avoiding losses, compliance professionals should also make the case for compliance efforts as activities that affirmatively create value for a business enterprise.

At the highest level, an effective compliance program provides guardrails that help a company to achieve business objectives while mitigating compliance risks. Good compliance officers are “business enablers” who do not say “no” reflexively, but instead work with the business to fully understand risks and business objectives and devise tailored, fit-for-purpose mitigation measures.

A company with an effective risk-based compliance program may be able to function successfully in a high-risk market, whereas a company with a weaker compliance program may decide that it is not up to the challenge of operating in such a market, or worse, may go into the market unprepared for the compliance challenges it will face. This dynamic is particularly noteworthy in Africa, where we sometimes encounter companies who perceive the compliance risks of certain markets as too high, leading them to pass on opportunities that could be realized if they had sufficiently robust compliance programs. Realization of efficiencies from well-run compliance programs, e.g., streamlining vendor diligence and on-boarding processes with the use of technology, can also impact the bottom line by freeing up valuable resources.

The ability to operate efficiently in higher-risk environments can give companies a significant competitive advantage, but they are by no means the only competitive advantages that companies can realize from maintaining robust compliance programs. In the procurement context, for example, many of our clients evaluate the strength of their suppliers’ compliance programs alongside traditional commercial criteria such as price and quality of services. In addition, lenders and investors are increasingly factoring compliance considerations into their decision-making processes. Finally, in an environment where issues such as sustainability and human rights are driving consumer and employee choices, companies should be prepared for integrity issues to become increasingly relevant to consumers and employees, who may vote with their feet if they are unsatisfied with a company’s commitment to compliance.

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The factors outlined here are by no means exhaustive, and the framing of a business case will be informed by the information available to a company. It may go without saying that companies that are better able to capture and analyze information that quantifies the return on investment from their compliance programs are better able to articulate a compelling business case. This provides additional reason for companies to focus on the use of metrics in designing, implementing, and evaluating the effectiveness of their programs.

This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.

Five Key Considerations For Handling Internal Corporate Investigations

By Benjamin Haley, Mark Finucane, Sarah Crowder and Ahmed Mokdad on October 23, 2019 Posted in Africa, Uncategorized

Companies today face increasingly complex regulatory frameworks globally and intense levels of corporate scrutiny from government enforcement agencies around the world. As government agencies embrace sophisticated crime-busting technology and the world shrinks through greater inter-agency cooperation, there are more ways than ever for governments to identify misconduct and hold companies to account through criminal prosecutions and steep fines. Accordingly, companies faced with a potential compliance issue need to be prepared to respond to these issues with an effective internal investigation.
An effective internal corporate investigation can benefit a company in a number of ways. Not only does it assist a company in uncovering compliance failures and putting remedial measures in place, it also assists the company, when faced with evidence or allegations of potential wrongdoing, to respond deliberately and thoughtfully, ensuring that it understands all the facts. Effective internal investigations can also benefit the company by influencing the amount of a criminal fine, the type of government resolution potentially available, and protecting the company’s reputation. To maximize these benefits, corporate defendants need to be able to show prosecutors that the internal investigation was independent, reliable, and credible.

In a previous article, we have outlined the unique challenges of conducting effective internal investigations in Africa. Here, we revisit some of the lessons learned from our investigations practice (in Africa and elsewhere), outlining five universal considerations for effectively handling sensitive internal corporate investigations.

Define the Scope of the Investigation

Investigations can be initiated for a multitude of reasons, from allegations of wrongdoing by the media, civil litigation, whistleblower complaints, regulatory inquiries, or even findings in an unrelated investigation. The potential issues to probe can be just as varied. Defining the scope of the investigation is therefore a crucial step to be taken at the outset of the inquiry. Among the questions to ask in order to ensure that the investigation is appropriately scoped are the following:

What are the specific allegations?
What is the company’s potential legal exposure?
Who are the potential perpetrators?
What are the relevant timeframes?
Who are the potential witnesses?
Who may possess documentary evidence relevant to the inquiry and where can these documents be found?

A written investigation plan is a useful tool to outline the goals of the investigation and the investigative steps, and more generally to keep the investigation on track. The contents of the investigation plan and the proposed investigative steps will of course have to be determined on a case-by-case basis, but it should generally include at least a review of documents and interviews with key individuals and witnesses. Bearing in mind that it is never possible to predict the entire course of an investigation, from the outset, with mathematical precision, it is important to ensure that the investigation plan allows for a degree of flexibility, providing the investigation team the ability to adapt the plan as the investigation progresses and evidence is reviewed.

Preserve All Potentially Relevant Data – Documents, Devices and Testimony

Document and data preservation is a vital consideration in any investigation. Generally, companies should consider issuing a document hold (sometimes called litigation hold) to all individuals who potentially have relevant documents. There are, however, sometimes strategic reasons for not publicizing an investigation through a document hold, such as where there are concerns that notice of the investigation may raise the risk that employees will make efforts to destroy relevant documents and data. In such cases, companies can mitigate this risk of spoliation through advanced imaging of employee devices, disabling deletion functionality on company platforms, and other preservation measures as may be appropriate.

To the extent that preserving witness accounts by interviews is concerned, there may be instances in which the investigation team is faced with the imminent departure of an employee from the company. In those instances, it will be important that the employee’s account is obtained as quickly as possible. If a government agency is or becomes involved in the investigation, the company is likely to be called upon to explain what steps it took to preserve potentially relevant data, and it is therefore essential that all steps taken to do so are well documented.

Interview Witness At The Right Time

Companies need to be thoughtful about the appropriate timing of witness interviews. In an ideal world, interviews would not take place until a company has been able to review and digest all of the relevant documents necessary to have a full picture of the written record. Documents not only provide the interviewer with context to ask targeted questions, they also serve as a vital tool to jog forgetful interviewees’ memories, or to confront witnesses with facts they may be reluctant to acknowledge.

But investigations are often fast-moving, with real-time implications for the company and unique circumstances that merit accelerating certain witness interviews before a full document review can be completed. These situations include instances where an employee is imminently departing the company, where misconduct may be ongoing, or where they are necessary to meet the demands of government agencies.

Additionally, to account for circumstances where witnesses may speak to one another regarding the substance of the interviews (despite instructions not to do so), the company should consider the order and timing of interviews, including potentially conducting simultaneous interviews.

Consider Whether To Voluntarily Disclose

Deciding whether or not to make a voluntary disclosure to prosecutors is often a vexing question for the company, with the potential for significant ramifications. Depending on the laws of the relevant jurisdiction, there may be significant incentives to making a voluntary disclosure in the form of a more favorable resolution of an enforcement action, or a declination from prosecution altogether.

While there is no magic formula to make these decisions, some of the factors a company should take into consideration include the likelihood that enforcement authorities will come to learn of the investigation findings in the absence of voluntary disclosure, the seriousness of the alleged conduct, and the risk posed to the company should the allegations come to light.

Remediate

With the benefit of a credible and reliable investigation, a company will be well positioned to make effective decisions about how to remediate any issues identified.

The critical element of any remediation plan is that the actions taken be appropriate and proportional to the conduct identified. The appropriateness of the remedial steps taken by a company, including initiating disciplinary action against the responsible employees and potentially terminating their employment, and implementing and/or enhancing existing practices, policies and procedures, are critical factors taken into account by government agencies when assessing an appropriate resolution of potential civil or criminal charges.

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Conducting an effective corporate internal investigation that is well-designed, with a specific work plan that addresses key elements such as document preservation, witness interviews, and prompt remediation, can yield many benefits for a company facing allegations of misconduct.

While no two investigations will ever be the same, building an investigation with these five building blocks in mind will provide companies with a solid foundation from which to move their organizations forward while minimizing disruption to the extent possible.

This post can also be found on Cov Africa, the firm’s blog on legal, regulatory, political and economic developments in Africa.

ITC Issues Notice for Petitions for the 2019 Miscellaneous Tariff Bill Cycle”

By Shara Aranoff on October 22, 2019 Posted in Tax Reform, Trade Agreements, Uncategorized

With the recent plethora of new tariff measures aimed at imports of steel, aluminum, solar panels, aircraft, and a wide array of products from China, tariffs are affecting the bottom lines of American companies in a way not seen in decades. For importers seeking tariff mitigation options, a window of opportunity has just opened. In a notice published in October 11’s Federal Register, the U.S. International Trade Commission (“ITC” or “Commission”) has issued its triennial notice soliciting petitions for duty suspensions and reductions for consideration during its Miscellaneous Tariff Bill (“MTB”) 2019 petition cycle. Through this process, mandated by the American Manufacturing Competitiveness Act of 2016 (the “Act”), an individual product may receive a reduced or suspended duty if that product does not directly compete with a product made in the United States and the lost tariff revenue is less than $500,000 per year.

The MTB addresses normal most-favored-nation (“MFN”) tariffs, not antidumping, countervailing duty, Section 301, or other trade remedy tariffs. Although the average U.S. MFN import tariff rate is quite low (under 2%), the United States maintains MFN duty rates on a number of products that either are not made in the U.S. or are made in only small quantities insufficient to meet demand. From a policy standpoint, the United States can use these tariffs as bargaining chips in multilateral and bilateral trade negotiations, where they can be offered in exchange for tariff reductions that benefit U.S. exporters. As long as the tariffs remain in effect, however, they impose a cost on U.S. manufacturers and consumers with little or no benefit to U.S. economic interests. Suspending them can provide importers with some modest relief in the current trade environment.

For many years, Congress offered temporary relief to U.S. importers from such tariffs through the MTB. After 2010, the MTB process ground to a halt—a victim of the House of Representatives’ move to ban earmarks. Because individual MTBs tend to benefit only one or a handful of U.S. producers, they were swept up in the general definition of earmarks, making it impossible for Congress to take up new MTBs. In passing the Act, Congress solved the earmark problem by delegating responsibility for assembling MTBs to the ITC.

Under the new procedures, interested parties have an opportunity every 3 years to submit to the ITC petitions for duty suspensions or reductions. The ITC undertook its new MTB process in October 2016, and as a result Congress enacted the Miscellaneous Tariff Bill Act of 2018. Congress authorized duty suspensions and reductions on 1,655 products. All duty suspensions and reductions under the Miscellaneous Tariff Bill Act of 2018 will expire on December 31, 2021.

Parties seeking a duty suspension or reduction in the 2019 MTB cycle—including a renewal of a suspension or reduction from the 2016 MTB cycle—must file a petition through the Miscellaneous Tariff Bill Petition System available on the ITC’s MTB website. All duty suspensions and reductions from the 2016 MTB cycle must be renewed or otherwise will expire. Parties may request renewal of a provision even if they were not the original petitioner in 2016. Petitions in this cycle must be filed by December 10, 2019.

Petitions must include detailed descriptions of the product, its tariff classification, its uses in the United States, the identity of any U.S. producers and all known importers, and an estimate of the likely total value of imports of the product by the petitioning party for the next 5 calendar years. The ITC will publish all petitions on its website and provide for public comments. The ITC will then submit a preliminary report to the Ways & Means and Finance Committees, indicating for each proposed duty suspension or reduction whether there is domestic production of the article (and, if so, whether any domestic producer objects to the duty suspension) and providing an estimate of the loss of revenue.

The ITC will advise the Committees which petitions meet the requirements of the Act, which may be modified to comply with the Act or to overcome domestic objections, and which it does not recommend for inclusion in the MTB. A final report will follow, including revenue loss projections. The Congressional Committees retain the right to exclude from an MTB any duty suspension request that is the subject of an objection from a Member of Congress, that is for an article where there is domestic production, or that the Committees oppose for other reasons. All suspensions recommended for inclusion by the ITC and not excluded by the Committees will be included in MTB legislation, which will then be submitted for approval by Congress at the end of 2020 or early 2021.

How Much Is Enough? Federal Circuit Appeal May Decide Level of U.S. Manufacturing Required Under the TAA

By Jennifer Plitsch, Alexander Hastings and Sarah Shepson* on October 22, 2019 Posted in Trade Agreements

A long-standing dispute over the approach to country of origin determinations under the Trade Agreements Act (“TAA”) may soon be resolved, as the Federal Circuit recently heard oral argument in one of two cases presently examining key aspects of this statute. Among other questions presented, the court may decide the standard for determining whether a product may be considered a U.S.-made end product — a question that could have far reaching implications for product manufacturers across all industries.

Statutory Background – The BAA and TAA

Acetris Health, LLC, v. United States, 2018-2399 (Fed. Cir. 2019) centers around two key supply-chain statutes: the Buy-American Act (“BAA”) and the TAA. The BAA implements a preference for the procurement of American-made goods by effectively imposing a penalty in the form of a price increase on offerors who propose goods that are not “domestic end products.” FAR 25.101(a). A domestic end product “(1) must be manufactured in the U.S.; and (2) the cost of its domestic components must exceed 50% of the cost of all components.” Id. The BAA generally applies to federal procurements in excess of $2,500, but there are a number of exceptions. Important here, the TAA has traditionally been treated as a waiver of all BAA requirements for procurements valued above a certain threshold, currently set at $180,000 for most non-construction procurements. FAR 25.402(b).

The TAA seeks to support free-trade agreements and initiatives by placing U.S. and designated countries’ products on equal procurement footing. If the TAA applies, it generally prohibits procurement from non-designated countries — such as China, India, and Indonesia — and opens procurement to end products that are “wholly the growth, product, or manufacture of” or substantially transformed in the U.S. or designated countries. 19 U.S.C. § 2518(4)(B). Because the TAA waives the BAA’s requirements in certain procurements, many have contended that when the TAA applies, its country of origin test allows for procurement of only those products that are either (1) wholly manufactured or (2) substantially transformed in the U.S. or a designated country. Id.

Litigation Background

Acetris, a manufacturer of generic pharmaceutical products, challenges the position that the TAA fully supplants the BAA and argues that the BAA’s definition of manufacturing still applies to products manufactured in the U.S. Accordingly, for products manufactured in the U.S. there is no need to demonstrate under the TAA that the product is “wholly” manufactured in the U.S. Acetris first presented this argument in a country of origin determination request before U.S. Customs and Border Protection (“CBP”). However, CBP concluded that under the TAA, “manufactured in the United States” means that the product must be “wholly the growth, product, or manufacture of that country.” 19 C.F.R. § 177.22(a). Thus, because Acetris’ drug products were not “wholly” manufactured in the U.S., the drug products could not be considered U.S.-made end products.

Acetris also argued before CBP that its drug products had a U.S. country of origin because the drug product components were substantially transformed there. A product has been substantially transformed when it is “a new and different article of commerce with a name, character, or use distinct from that of the article[s] from which it was so transformed.” 19 U.S.C. § 2518(4)(B). Relying on its prior decisions that focus on a product’s active pharmaceutical ingredient (“API”), CBP rejected Acetris’ position that “extensive additional processing” in the U.S. substantially transformed the India-sourced API into a stable drug product safe for public consumption, because the API retained its chemical and physical properties during U.S. processing, and the API’s medicinal use was unaffected. See 83 Fed. Reg. 5133 (Feb. 5, 2018). As a result, CBP ruled that India was the country of origin for those drug products because the API was manufactured there.

Acetris challenged CBP’s determinations in two lines of litigation. Most relevant here, Acetris filed a bid protest in the Court of Federal Claims (“CFC”) challenging the terms of a Department of Veterans Affairs (“VA”) solicitation that required prospective bidders to certify its products were TAA compliant using only the country of origin test. See Acetris Health, LLC v. United States, 138 Fed. Cl. 579 (2018). The VA determined that Acetris’ drug product was non-TAA compliant based on the prior CBP ruling that the drug product’s country of origin was India. Acetris disagreed with both the VA’s reliance on CBP’s ruling and the VA’s interpretation of the TAA, arguing that the TAA’s statutory country of origin test is not the only means to comply with the TAA. Rather, the VA should consider drug products TAA-compliant if they would otherwise comply with the BAA’s U.S.-made end product test by virtue of being manufactured in the U.S.

As a basis for this position, Acetris’ asserts that the TAA was not intended to increase the manufacturing threshold for those products that already meet the domestic end product definition under the BAA. Rather, under FAR Part 25.4, offers of designated country end products should expressly “receive equal consideration with domestic offers.” As a result, in Acetris’ view, if a product is already a domestic end product under the BAA—i.e., it is manufactured in the U.S.—it is unnecessary then to apply the TAA’s wholly manufactured or substantially transformed requirements that are used to determine the country of origin for non-domestic end products. By contrast, DOJ argues that the TAA fully supplants the BAA and, therefore, TAA compliance requires a showing that a product is either wholly manufactured or substantially transformed in the U.S. or a designated country, regardless of the BAA’s standards.

The CFC agreed with Acetris, concluding that the VA improperly construed the TAA as excluding the purchase of products that qualify as domestic end products under the BAA. Acetris, 138 Fed. Cl. at 599-601. Additionally, the CFC stated that the VA erred when it solely relied on CBP’s ruling, rather than conducting its own assessment of whether the product was a U.S.-made or domestic end product. Id. at 603. DOJ appealed the CFC’s determination to the Federal Circuit on both procedural and substantive grounds.

In a second line of litigation and concurrent with the CFC proceeding, Acetris filed suit in the Court of International Trade (“CIT”) directly challenging CBP’s ruling that Acetris’ U.S.-based processing of the API sourced from India was insufficient to meet the substantial transformation test required by the TAA. Acetris Health, LLC v. United States, 1:18-cv-00047-RWG (CIT). The CIT stayed this case pending resolution of DOJ’s appeal in the Federal Circuit, but our summary of the CIT proceeding is available here.

Parties’ Arguments on Appeal

On appeal to the Federal Circuit, the DOJ argued that Acetris’ protest at the CFC should have failed for jurisdictional reasons. In DOJ’s view, Acetris lacked standing because Acetris offered the highest-priced solicitation response[1] of three offers in a lowest-price, technically-acceptable (“LPTA”) procuremet and would not have won the award regardless of the proper interpretation of TAA compliance. Additionally, DOJ argued that the CFC’s jurisdiction had been usurped by the CIT proceeding. On the merits, DOJ and Acetris reiterated their arguments at the lower court: DOJ asserted that the TAA’s country of origin test—whether a product is wholly manufactured or substantially transformed—is the only test that applies for a TAA-subject procurement. In contrast, Acetris contended that in addition to the country of origin test, if a product is manufactured in the U.S., whether wholly or not, it is a TAA compliant product.

Federal Circuit Focus at Oral Argument

At oral argument, the Federal Circuit seemed less focused on the intersection of the BAA and TAA and instead zeroed in on procedural questions, as well as the proper application of the substantial transformation test. The panel pressed Acetris on its standing to protest, questioning whether Acetris was prejudiced by the VA’s interpretation of the TAA when it had no chance to win the solicitation as the highest priced of three bids in a LPTA competition. Acetris alleged that if the VA interpretation is correct — that the drug product is non-TAA compliant and thus ineligible to bid — then it would not be able to participate in any future solicitations for the product. Acetris sought to draw a parallel to Veterans Contracting Group v. United States, 133 Fed. Cl. 613, 618 (2017), where the CFC determined that a small business contractor was improperly removed from a VA database specifically for small business set-asides, impeding its ability to compete in future procurements. DOJ pushed back on this attempted parallel in rebuttal, by distinguishing review of a SBA decision, where the Federal Circuit clearly would have jurisdiction, from the instant case where, in DOJ’s view, the mootness of the issue precluded jurisdiction.

Additionally, the panel challenged Acetris to distinguish the operative facts of the proceedings before the Federal Circuit from those before the CIT to determine whether jurisdiction before the Federal Circuit is proper. Acetris argued that before the Federal Circuit is the issue of whether the VA applied the proper interpretation of the TAA in its solicitation, whereas the focus of the CIT litigation is the technical and scientific process of substantial transformation. Finally, with respect to substantial transformation, the Federal Circuit seemed persuaded by the idea that the processing that takes place in the U.S. is necessary for the product to be safe for consumers to consume, and therefore, the product should be considered a U.S.-made end product.

Key Takeaways

The Federal Circuit panel declared that that the TAA and BAA statutes and their implementing regulations are “not clear at all,” but did not tip its hand on the complex issue of statutory interpretation. Going forward, although the court could resolve this matter on procedural grounds, a decision on the merits could lend further support to the view that TAA compliance can be demonstrated by meeting the BAA’s test for a U.S.-manufactured product or satisfying a more lenient substantial transformation standard. Although the particular facts presented by Acetris involve drug products, a decision from the Federal Circuit on the merits of this case could have the potential to impact supply chains across all industries — either by clarifying that TAA compliance allows for only partial manufacturing in the U.S. or by ushering in a lower standard for demonstrating substantial transformation of a product in a designated country. Therefore, contractors selling to the U.S. government, including those offering commercial items, would be well advised to keep apprised of the court’s decision in this matter.

[1] Acetris submitted its bid to the VA after it filed suit challenging the solicitation terms and was later disqualified from the competition. The VA relied on the CBP’s ruling that Acetris’ product was not TAA-compliant to support its disqualification. Acetris, 138 Fed. Cl. at 601-02. After the contract was awarded, Acetris maintained its preaward suit in the CFC challenging the solicitation terms and the VA’s interpretation of TAA compliance. Acetris alleged its ability to compete in future solicitations would be severely diminished based on the VA’s improper interpretation that its products were not TAA compliant.

The Week Ahead in the European Parliament – October 18, 2019

By Sebastian Vos on October 18, 2019 Posted in EU Law and Regulatory

Summary

Next week, Members of the European Parliament (“MEPs”) will gather in Strasbourg for plenary sessions. Important debates and votes are scheduled to take place.

What won’t take place next week is a vote to confirm the next European Commission. A spokesman of the Parliament indicated that the vote will be delayed after three Commissioners-designate were rejected by the Parliament as no alternative candidates have yet been approved. This means that the new European Commission will assume office on December 1, 2019, at the earliest, instead of November 1, 2019, as planned.

On Tuesday, MEPs will debate the outcomes of the EU summit that took place on October 17 and 18. While the outcomes are still uncertain, they will include a position of the European Council on the new Brexit preliminary deal that was struck between the European Commission and the United Kingdom after an intense few days of negotiations. The deal includes a complicated customs arrangement between Great Britain and Northern Ireland to keep an open border between Northern Ireland and Ireland, while placing Northern Ireland formally outside the EU’s customs union. UK authorities will apply EU tariffs if goods are at risk of entering the single market. The risk-factor would be determined by a Joint Committee that is to be set up under the Withdrawal Agreement. It remains uncertain whether the British House of Commons will accept this deal on Saturday, October 19. If they do not, the UK will likely as for an extension and the European Council will meet to decide whether to grant this. Also, Bernd Lange, Chair of the Parliament’s Committee on International Trade, has criticized the latest deal because it could create loopholes. Nevertheless, he suggested that these concerns should be dealt with in a future trade agreement. An EU press release, including the revised protocol and political declaration, can be found here.

On Wednesday, MEPs will debate on the Turkish military operations in north-east Syria. They may put forward a resolution for a vote on Thursday. The Member States of the EU have already condemned Turkey’s military actions in Syria and have committed themselves to stop exporting arms to Turkey. This falls short of an EU-wide embargo because it will not be implemented at the EU level. The EU is also preparing sanctions. An opinion or condemnation of the European Parliament could put political pressure tool on Member States to adopt or support effective actions against Turkey. The statement of the Council of the EU can be found here.

Meetings and Agenda

Monday, October 21, 2019

Plenary Session

17:00 – 21:00

Debates

Joint meeting: Economic and Monetary Affairs & Environment, Public Health and Food Safety Committees

19:30 – 19:45

Votes

Establishment of a framework to facilitate sustainable investment – Vote on the decision to enter into interinstitutional negotiations
Co-rapporteurs: Bas EICKHOUT (Greens/EFA, NL), Sirpa PIETIKÄINEN (EPP, FI)

Committee on Regional Development

19:00 – 20:00

Votes

Financial assistance to Member States to cover serious financial burden inflicted on them following a withdrawal of the United Kingdom from the Union without an agreement (COD)
Rapporteur: Younous Omarjee (GUE/NGL, FR)

Committee on Civil Liberties, Justice and Home Affairs

19:00 – 21:30

Votes

Election of the third Vice-Chair
Search and rescue in the Mediterranean (SAR) (RSP) – adoption of motion for a resolution
Rapporteur: Juan Fernando LÓPEZ AGUILAR (S&D, ES)

Debate (19.30-20.30)

Exchange of views with Dunja MIJATOVIĆ, Commissioner for Human Rights, Council of Europe

Tuesday, October 22, 2019

Plenary Session

9:00 – 12:20

Debates

(possibly) Votes on requests for urgent procedure (Rule 163)

Conclusions of the European Council meeting of 17 and 18 October 2019
Review of the Juncker Commission

12:30 – 14:30

Votes followed by explanations of votes

Implementation and financing of the EU general budget in 2020 in relation to the UK’s withdrawal from the EU
Rapporteur: Johan Van Overtveldt (ECR, BE)
Periods of application of Regulation (EU) 2019/501 and Regulation (EU) 2019/502
Rapporteur: Karima Delli (Greens/EFA, FR)
European Globalisation Adjustment Fund (2014-2020)
Rapporteur: Vilija Blinkevičiūtė (S&D, LT)
Financial assistance to Member States to cover serious financial burden inflicted on them following a UK’s withdrawal from the EU without an agreement
Rapporteur: Younous Omarjee (GUE/NGL, FR)
Fishing authorisations for Union fishing vessels in United Kingdom waters and fishing operations of United Kingdom fishing vessels in Union waters
Rapporteur: Chris DAVIES (RE, UK)
Texts on which debate is closed

15:00 – 21:00

Debate

Debates on foreign affairs issues in the presence of the Vice-President of the Commission/High Representative of the Union for Foreign Affairs and Security Policy (to be defined)
General budget of the European Union for 2020 – all sections
Co-rapporteurs: Monika Hohlmeier (EPP, GE), Eider Gardiazabal Rubial (S&D, ES)
Discharge 2017: European Asylum Support Office (EASO)
Rapporteur: Petri Sarvamaa (EPP, FI)
Discharge 2017: EU general budget – European Council and Council
Rapporteur: Isabel García Muñoz (S&D, ES)

Wednesday, October 23, 2019

Plenary session

09:00 – 11:45

Debates

11:45 – 12:15

Vote (preceded by a round of political group speakers in reverse order)

Election of the Commission

12:30 – 14:30

Votes followed by explanations of votes

Draft general budget of the European Union for 2020 – all sections
General budget of the European Union for 2020 – all sections
Co-rapporteurs: Monika Hohlmeier (EPP, GE), Eider Gardiazabal Rubial (S&D, ES)

15:00 – 21:00

Debates

Topical debate (Rule 162)
Presentation of the Court of Auditors’ annual report – 2018

Thursday, October 24, 2019

Plenary session

09:00 – 11:50

Debates

Debates on cases of breaches of human rights, democracy and the rule of law (Rule 144)

12:00 – 14:00

VOTES followed by explanations of votes

Motions for resolutions concerning debates on cases of breaches of human rights, democracy and the rule of law (Rule 144)

15:00 – 16:00

Debates

Major interpellations (Rule 139)

Friday, October 25, 2019

No meetings of notes

U.S. and U.K. Sign CLOUD Act Agreement

By Trisha Anderson, Alexander Berengaut, Jim Garland, Marty Hansen and Lisa Peets on October 17, 2019 Posted in Compliance Issues, EU Law and Regulatory, International Strategy, Trade Agreements

On October 3, 2019, the United States and United Kingdom signed an agreement on cross-border law enforcement demands for data from service providers (“Agreement”). The Agreement is the first bilateral agreement to be entered under the Clarifying Lawful Overseas Use of Data (CLOUD) Act. It obligates each Party to remove barriers in their domestic laws so that U.S. and U.K. national security and law enforcement agencies may obtain certain electronic data directly from Communications Service Providers (“CSPs”) located in the jurisdiction of the other Party. The Agreement will go into effect 180 days after its transmission to Congress by the Attorney General, unless Congress disapproves by joint resolution.

Under the CLOUD Act, once the Agreement goes into effect, CSPs subject to jurisdiction in the United States will be excepted from a statutory prohibition that would otherwise preclude them from producing stored communications content directly to U.K. authorities. Similarly, under U.K. law, CSPs subject to jurisdiction in the United Kingdom will not be prohibited from disclosing stored content to U.S. authorities. Neither the CLOUD Act nor the Agreement establishes jurisdiction over a CSP if jurisdiction does not otherwise exist, nor do they compel a provider to produce data if the domestic law of the Party issuing the data demand does not require such production. As a general matter, the domestic law of the United States and United Kingdom largely will continue to govern demands for data issued by government agencies under the Agreement. However, in accordance with the requirements of the CLOUD Act, the Agreement imposes some important limitations on those demands, which we summarize below.

Restrictions on Law Enforcement Demands

Targeting Restrictions. The Agreement imposes restrictions on the accounts that may be subject to demands for data under the Agreement. Specifically, the United Kingdom may not issue demands for data of U.S. citizens, nationals, or lawful permanent residents (“U.S. persons”), nor may it demand the data of persons located inside the United States. Similarly, the United States may not demand the data of any person located in the United Kingdom. (According to the U.K. Home Office’s explanatory memorandum, the distinction between these targeting limitations for the respective countries arises from EU rules prohibiting discriminatory treatment between citizens of different member states.) (Articles 1.12, 4.3).
Targeting Procedures. Each Party must implement “targeting procedures” to guide decisions about which accounts may be targeted by data demands under the Agreement. (Article 7.1).
Serious Crime Limitation. Any law enforcement demand for data covered by the Agreement must be “for the purpose of obtaining information relating to the prevention, detection, investigation, or prosecution” of a “Serious Crime, including terrorist activity.” While the CLOUD Act does not define “serious crime,” the Agreement specifies that serious crime is an offense punishable by a maximum term of imprisonment of at least three years. (Articles 1.5, 1.14, 4.1).
Specific Account Limitation. Consistent with the CLOUD Act, the Agreement also provides that the order must target specific user accounts and identify a “specific person, account, address, personal device, or any other specific identifier.” In other words, the Agreement cannot be used to acquire data in bulk. (Article 4.5).

Procedures for Issuance and Enforcement of Law Enforcement Demands

Application of the Agreement. The Agreement is not the exclusive means by which government authorities of a Party may obtain data from CSPs subject to the other Party’s jurisdiction. Each Party may still use other legal authorities and mechanisms, such as mutual legal assistance requests, to obtain data from CSPs subject to the jurisdiction of the other Party. The Agreement provides that it “shall apply” to any demands for data as to which the Party issuing the demand “invokes” the Agreement with notice to the relevant CSP. Notice to the other Party is not required. (Articles 3.2, 11.1).
Certification by Designated Authority. The Agreement provides for a “designated authority”—a governmental entity designated, for the United Kingdom, by the Secretary of State for the Home Department, and for the United States, by the Attorney General. These designated authorities must review demands for data under the Agreement and certify in writing that the demand is lawful and complies with the Agreement before it may be transmitted to a CSP under the Agreement. (Article 5.7).
Third-Party Country Notification. If either Party issues a demand for the data of a person reasonably believed to be located in a third-party country (i.e., not in the United States or United Kingdom), the designated authority of the Party issuing the demand must notify the appropriate authorities in that third country. The Agreement excepts from this notification requirement circumstances where notice would be “detrimental to operational or national security, impede the conduct of an investigation, or imperil human rights.” (Article 5.10).
Appeal to Designated Authority. If a CSP has a “reasonable belief” that the Agreement may not properly be invoked with regard to the order, it can make an objection to the designated authority of the Party that issued the order. If the objections are not resolved, the CSP can also make the objection to its own designated authority. That designated authority may determine that the Agreement does not apply to the demand if it concludes the Agreement was not properly invoked. (Articles 5.11, 5.12)

Data Handling and Use Restrictions

Minimization Procedures. The United Kingdom is obligated to implement and apply “minimization” procedures to data received pursuant to demands under the Agreement. These procedures must “minimize the acquisition, retention, and dissemination” of information concerning U.S. persons that is inadvertently acquired under the Agreement. (Article 7.2).
Restrictions on Data Transfer to the United States. The minimization procedures must prohibit the United Kingdom from disseminating to the United States the content of a communication involving a U.S. person unless it relates to a “significant harm, or threat thereof, to the United States or U.S. person, including crimes involving national security such as terrorism, significant violent crime, child exploitation, transnational organized crime, or significant financial fraud.” (Article 7.5).
Transfer to Third Countries. As a general matter, a Party receiving data under the Agreement may not transfer it to a third country or international organization without first obtaining consent of the Party from which the data was received. (Article 8.2).
Death Penalty and Free Speech Limits on Data Use. The United States must obtain approval from the United Kingdom before using evidence obtained from an order in cases for which the death penalty is sought. Similarly, the United Kingdom must obtain the approval of the United States in order to use evidence obtained from an order in a case that raises free speech concerns. (Article 8.4).

Oversight and Reporting

Compliance Review. Within a year of the Agreement’s entry into force and periodically thereafter, each Party must engage in a review of the other Party’s compliance with the Agreement, including a review of both its issuance of orders and handling of data received under the Agreement. (Article 12.1).
Annual Reports. The designated authorities of the United States and United Kingdom must issue and exchange annual reports containing aggregate data on their use of the Agreement. (Article 12.4).

United States and European Union Impose Additional Sanctions in Response to Actions by Turkish Government

By Stephen Rademaker, Peter Flanagan, Corinne Goldstein, David Lorello and Alexandra Francis on October 17, 2019 Posted in Asia, Defense Issues, EU Law and Regulatory, International Strategy, Uncategorized

Introduction

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.