Category Archives: Export Controls

It May Not Be Worth the Paper (or Pixel) It’s Written On (Part 2): A Fresh Look at Common Responses to Bolster Export Controls Compliance Programs as BIS Primes the Corporate Enforcement Engine

by Brent Carlson and Michael Huneke

Photos of the authors

Brent Carlson and Michael Huneke (photos courtesy of authors)

Amid reports of continued export controls diversion[1] to entities in locations including China, Russia, Iran, and North Korea, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) has been priming the corporate enforcement engine.[2] This dynamic increases challenges for in-house legal and compliance teams to respond to BIS’ latest moves and bolster compliance program effectiveness. In this new environment, the greatest compliance risks revolve around explaining and defending relationships with distributors and resellers in the face of allegations and reports of product diversion or other “red flags” indicating the same—a task made more nuanced under the “high probability” standard of “knowledge” recently highlighted by BIS in new guidance issued on July 10, 2024 (the “July 10 BIS Guidance”).[3]

In Part 1 we previously discussed the practice of using letters of assurance—and the problems of relying solely upon them without resolving related red flags—to bolster export controls compliance programs in response to the new BIS enforcement playbook.[4] In Part 2 we now examine other common responses based on legacy approaches to export controls and why they are ineffective—and even detrimental—in today’s new and evolving enforcement environment.

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It May Not Be Worth the Paper (or Pixel) It’s Written On (Part 1): A Fresh Look at Letters of Assurance Used to Bolster Sanctions and Export Controls Compliance

by Brent Carlson and Michael Huneke

photos of the authors

Left to right: Brent Carlson and Michael Huneke (Photos courtesy of the authors)

“The world has changed. And we must change with it.” So stated Assistant Secretary of Commerce for Export Enforcement Matt Axelrod at a recent summit in California.[1] This simple statement reflects the increasingly complex challenges companies now face in navigating export controls and sanctions in a world driven by new geopolitical realities.

These challenges call into questions past assumptions about compliance programs. The foundation of a robust compliance program starts with the reliability of the inputs relied upon to make informed, risk-based decisions. In the halcyon days of the post-Cold War era, export controls took on an administrative character. In that environment, certifications from counterparties—themselves the targets of the due diligence—were taken largely at face value. Yet today passive reliance, without more, carries profound risks because export controls and sanctions enforcement has already become more of a white-collar corporate enforcement environment driven by Russia’s continued ability to secure U.S.-brand microelectronics (both legacy and new production). Certifications alone accordingly may not be worth the paper they are written on—or the pixels of which they are made—especially when other data includes “red flags” that cast doubt on certifications’ veracity.

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Biden Administration Releases Proposed Rule on Outbound Investments in China

by Paul D. Marquardt and Kendall Howell

Photos of authors

From left to right: Paul D. Marquardt and Kendall Howell (Photos courtesy of Davis Polk & Wardwell LLP)

The Biden administration released its proposed rule that would establish a regulatory framework for outbound investments in China, following its advanced notice of proposed rulemaking released last August.

On June 21, 2024, the U.S. Department of the Treasury (Treasury) released its long-awaited notice of proposed rulemaking that would impose controls on outbound investments in China (the Proposed Rule). The Proposed Rule follows Treasury’s advanced notice of proposed rulemaking (the ANPRM) released in August 2023 (discussed in this client update) and implements the Biden administration’s Executive Order 14105 (the Executive Order), which proposed a high-level framework to mitigate the risks to U.S. national security interests stemming from U.S. outbound investments in “countries of concern” (currently only China). Like the Executive Order and ANPRM, the Proposed Rule reflects an effort by the Biden administration to adopt a “narrow and targeted” program and is in large part directed at the “intangible benefits” of U.S. investment (e.g., management expertise, prestige, and know-how), rather than capital alone.[1]

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DOJ National Security Division Issues First-Ever Declination Under Enforcement Policy

by Satish M. Kini, David A. O’Neil, Jane Shvets, Rick Sofield, Douglas S. Zolkind, Carter Burwell, Connor R. Crowley, and Hillary Hubley

Photos of the authors

Top left to right: Satish M. Kini, David A. O’Neil, Jane Shvets, and Rick Sofield. Bottom left to right: Douglas S. Zolkind, Carter Burwell, Connor R. Crowley, and Hillary Hubley. (Photos courtesy of Debevoise & Plimpton LLP)

Key Takeaways

  • Even in criminal national security matters, early self-reporting, remediation and cooperation can enable companies to avoid prosecution and penalties.
  • Federal enforcement agencies are continuing to collaborate in investigating and prosecuting criminal cases at the intersection of national security and corporate crime.
  • Multinational corporations and academic institutions should be aware of the risk of outsiders fraudulently affiliating themselves with legitimate institutions to skirt export control laws.

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BIS Primes the Corporate Enforcement Engine: A Fresh Look at What Recent BIS Actions & Statements Mean and a Proposed Framework for How U.S. Companies Can Best Prepare

by Brent Carlson and Michael Huneke 

Photos of the authors.

From left to right: Brent Carlson and Michael Huneke (Photos courtesy of authors)

The risk of corporate criminal enforcement actions for export controls evasion or diversion is significantly increasing. Recent actions and statements by the Department of Commerce’s Bureau of Industry & Security (“BIS”) suggest that, beyond saber-rattling, BIS is deliberately priming the corporate enforcement engine with the fuel for an enforcement wave that will follow the Foreign Corrupt Practices Act (“FCPA”) “playbook” that the U.S. Department of Justice (“DOJ”) has successfully deployed for the last two decades.

The fuel comes in the form of official, multiagency guidance documents and other actions that describe circumstances indicating a “high probability” of misconduct, which as we have previously written is a freestanding basis for enforcement actions under both the FCPA and the Export Administration Regulations (“EAR”).[1] Such agency actions by BIS notably include the issuance to U.S. companies of lists of counterparties under cover of what BIS officials describe as “red flag” letters. Since our prior analysis,[2] BIS has reemphasized the significance of such letters and underscored the importance of how U.S. companies respond.

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New U.S. Law Extends Statute of Limitations for Sanctions Violations and Enhances Regulatory and Enforcement Focus on National Security Priorities

by Anthony Lewis, Eric Kadel Jr., Sharon Cohen Levin, Craig Jones, Adam Szubin, Amanda Houle, and Bailey Springer

Photos of the authors

Top: Anthony Lewis, Eric Kadel Jr., and Sharon Cohen Levin
Bottom: Craig Jones, Adam Szubin, and Amanda Houle
(Photos courtesy of Sullivan & Cromwell LLP)

Statute Doubles the Statute of Limitations for Sanctions Violations, Expands the Scope of Sanctions Programs, and Focuses on China’s Technology Procurement, Iranian Petroleum Trafficking, and Fentanyl Production

Summary

On April 24, President Biden signed into law H.R. 815, a sweeping national security legislative package that—in addition to providing foreign aid funding for Ukraine, Israel, and Taiwan—includes the 21st Century Peace Through Strength Act, which contains a number of provisions implementing the Biden administration’s national security priorities. As summarized below, provisions of the Act align with U.S. authorities’ continued focus on China and emphasis on sanctions enforcement. In particular, the Act:

  • Doubles the statute of limitations for civil and criminal violations of U.S. sanctions programs from five to 10 years—raising questions about retroactive application of the statute and whether authorities will amend current rules on corporate record-keeping practices;
  • Requires additional agency reports to Congress, reflecting a focus on U.S. investments in, and supply-chain contributions to, the development of sensitive technologies used by China—a topic that has likewise been the recent focus of the Department of Justice and the Department of Commerce;
  • Targets the Chinese government’s alleged evasion of U.S. sanctions on Iranian petroleum products and involvement in related financial transactions by directing the imposition of sanctions; and
  • Directs the President to impose sanctions aimed at curbing China’s alleged involvement in fentanyl trafficking and calls for forthcoming guidance for financial institutions in filing related SARs.

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A Whole New National Security Ballgame: Key Practical Takeaways for Export Control Compliance from the 2024 BIS Update Conference

by Brent Carlson and Michael Huneke

Photos of the authors.

From left to right: Brent Carlson and Michael Huneke (Photos courtesy of authors)

On March 27–29, 2024, the U.S. Department of Commerce’s Bureau of Industry & Security (“BIS”) hosted an Update Conference on Export Controls & Policy. The event was a major outreach effort by the U.S. government. Nearly 100 BIS and other U.S. agency officials engaged with 1,200 attendees over three days.

As was appropriate for an event coinciding with Opening Day of the U.S. Major League Baseball season, BIS officials emphasized that they—and those they regulate—are playing a whole new national security ballgame. This theme ran through every topic. It also drives the key practical takeaways that we highlight below for in-house compliance professionals assessing evasion and diversion risks and responding to reports of the same—particularly reports that some U.S. companies recently received directly from the U.S. government. Continue reading →

Monitoring What Matters: A Fresh Look Proposal to Government and Industry for How Post-Resolution Oversight Can Best Deny Hostile Actors the Means to Cause Deadly Harm

by Brent Carlson and Michael Huneke

Photos of the authors.

From left to right: Brent Carlson and Michael Huneke (Photos courtesy of authors)

U.S. economic sanctions and export controls serve a wide range of national security interests. When hostile actors rely on U.S.-designed or -manufactured components in weapons used in fatal attacks on U.S. and coalition military personnel and civilian populations, there is an acute need to quickly identify the illicit trade flows and stop those components from reaching the battlefield. Continue reading →

Department of Commerce, Department of the Treasury, and Department of Justice Tri-Seal Compliance Note: Obligations of foreign-based persons to comply with U.S. sanctions and export control laws

by the Department of Commerce, Department of the Treasury, and Department of Justice

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OVERVIEW

Today’s increasingly interconnected global marketplace offers unprecedented opportunities for companies around the world to trade with the United States and one another, contributing to economic growth. At the same time, malign regimes and other bad actors may attempt to misuse the commercial and financial channels that facilitate foreign trade to acquire goods, technology, and services that risk undermining U.S. national security and foreign policy and that challenge global peace and prosperity. In response to such risks, the United States has put in place robust sanctions and export controls to restrict the ability of sanctioned actors to misuse the U.S. financial and commercial system in advance of malign activities.

These measures can create legal exposure not only for U.S. persons, but also for non-U.S. companies who continue to engage with sanctioned jurisdictions or persons in violation of applicable laws. To mitigate the risks of non-compliance, companies outside of the United States should be aware of how their activities may implicate U.S. sanctions and export control laws. This Note highlights the applicability of U.S. sanctions and export control laws to persons and entities located abroad, as well as the enforcement mechanisms that are available for the U.S. government to hold non-U.S. persons accountable for violations of such laws, including criminal prosecution. It further provides an overview of compliance considerations for non-U.S. companies and compliance measures to help mitigate their risk.

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“Expect Some Illumination”: A Fresh Look at U.S. Congressional Hearings in the Era of Sanctions and Export Controls as the New FCPA

by Brent Carlson and Michael Huneke

Photos of the authors.

From left to right: Brent Carlson and Michael Huneke (Photos courtesy of authors)

The 118th U.S. Congress has taken an active and bipartisan interest in U.S. sanctions and export controls. With reports that U.S. executives have been asked to testify before the U.S. House Select Committee on the Chinese Communist Party[1] and recent hearings before a U.S. Senate subcommittee previewing further questions for both companies and regulators,[2] U.S. companies whose products might require a license for export to China or that might be found in Russian or Iranian weapons should prepare for congressional scrutiny—and congressional pressure on the U.S. Executive Branch departments to deliver enforcement results. Continue reading →