International Compliance Digest – July 2024 | Adams and Reese LLP

July was an important month for compliance with several due diligence and best practices reports and recommendations regarding forced labor, export controls, sanctions imposed by DHS, BIS, and OFAC.

The updates below also include increased scrutiny of forced labor in three new sectors by DHS and increased scrutiny by CFIUS of certain transactions involving U.S. investments and real estate purchases by foreign persons.

Enforcement continued to progress in July, with OFAC reaching a $7.4 million settlement and the Department of Justice taking a number of actions for export control violations.

Compatibility Updates

BIS adds to the list of export entities

On July 2, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published final regulations that expand the Entity List to include six entities from China, South Africa, the United Arab Emirates (UAE), and the United Kingdom.

These additions are intended to prevent entities that threaten U.S. national security or foreign policy interests from gaining access to goods subject to the Export Administration Regulations (EAR).

This final rule also modifies the entries for two existing entities on the Entity List – one in China and one in Russia – to ensure that export restrictions to these entities are more targeted and effective.

DHS adds three sectors to control forced labor

On July 9, the Forced Labor Law Enforcement Task Force (FLETF), chaired by DHS, identified for the first time since 2022 new sectors with the highest enforcement priority – aluminum, polyvinyl chloride (PVC), and seafood.

These industries were identified due to the higher risk of forced labor or state labor transfer of Uyghurs and other ethnic minorities in the Xinjiang Uyghur Autonomous Region (XUAR). FLETF continues to designate garments, cotton and cotton products, silica-based products including polysilicon, and tomatoes and downstream products as high priority sectors.

With this designation, entities in these sectors will be prioritized for consideration by FLETF for a variety of enforcement actions: UFLPA Entity Listing, export restrictions, economic sanctions, and visa restrictions.

CBP recommends that importers focus their due diligence on supply chains that intersect with these sectors, supporting compliance and preventing goods derived from forced labor from entering the U.S. market..

BIS issues guidance on export redirection

On July 10, BIS published guidance describing various actions BIS is taking to inform industry and academia about sites—beyond those identified on public control lists such as the Entity List—that pose a risk of diversion of items subject to BIS export controls to countries or entities of concern. The guidance also outlines certain due diligence obligations and best practices that companies and universities can take to comply with BIS regulations, as well as additional steps they should take to mitigate the risk of diversion.

One new recommended best practice requires exporters, re-exporters, and transferors of Common High Priority List (CHPL) items to screen the parties to the transaction using a new online resource from the Trade Integrity Project (TIP). TIP identifies third-country suppliers who have a history of exporting CHPL items to Russia since its invasion of Ukraine. The tool enables companies and universities to identify potential red flags before engaging in an export transaction that risks being redirected to Russia.

OFAC Issues Guidance on Extending Statute of Limitations

On July 22, the Office of Foreign Assets Control (OFAC) published guidance to double the statute of limitations for sanctions violations from 5 to 10 years, which was included in the Foreign Assistance Act of April 24, 2024 (the 21st Century Peace Through Strength Act).

OFAC clarified that the new 10-year statute of limitations applies to any violation that had not already expired at the time of its enactment. This means that OFAC can now initiate enforcement proceedings for civil violations of sanctions prohibitions within 10 years of the last date of the violation, if that date was after April 24, 2019.

Accordingly, OFAC anticipates publishing an interim final rule, subject to comment, that extends the recordkeeping requirements at 31 CFR § 501.601 from five to ten years.

CFIUS Strengthens Oversight of Foreign Transactions

On July 23, the Committee on Foreign Investment in the United States (CFIUS), which examines certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons, released its Annual Report to Congress for calendar year 2023.

The biggest takeaway is that CFIUS issued twice as many penalties in 2023 as it did in its entire history. In recent years, CFIUS has refined its regulations and processes to review a broader range of transactions and has increased its efforts to identify transactions that have not been submitted but may raise national security concerns.

Any company considering a merger or foreign investment should assess whether the transaction will be subject to CFIUS jurisdiction and whether it will be necessary to file a CFIU.S.

State Department Proposes ITAR Revision for “Defense Services”

On July 29, the Department of State proposed a revision to the definition of defense service and related controls in the International Traffic in Arms Regulations (ITAR). Comments on the proposed revision will be accepted until September 27, 2024.

Enforcement actions

OFAC Violations

On July 26, OFAC announced a settlement with State Street Bank and Trust Company (State Street), a Massachusetts-based financial institution, for $7,452,501 on behalf of itself and its subsidiary Charles River Systems, Inc. (Charles River).

State Street has agreed to settle its potential civil liability for 38 apparent violations of OFAC sanctions related to Ukraine/Russia. The apparent violations involved invoices that were altered or reissued by Charles River between 2016 and 2020 to certain customers that were subject to Directive 1 of Executive Order 13662, as well as certain payments outside the applicable maturity date accepted by Charles River from those customers.

The settlement amount reflects OFAC’s finding that the alleged violations were not voluntarily disclosed and were egregious.

Export violations

• The CEO of a shipping company has been charged with allegedly smuggling goods from the U.S. to Russia without a license. A Belarusian citizen and lawful permanent resident of the U.S. has been charged with defrauding U.S. government export regulators and smuggling advanced scientific technology to Russian customers. “Freight forwarders play a disproportionately large role in exporting goods abroad and, as such, are expected to help enforce the law, not undermine it,” said Matthew S. Axelrod, assistant secretary for export enforcement.
• The former vice president of KanRus Trading Company Inc. has pleaded guilty to conspiracy to circumvent U.S. export laws by submitting false export forms to the U.S. government. Following Russia’s invasion of Ukraine in February 2022, he continued to sell and export advanced and controlled avionics equipment to customers in Russia without the required licenses issued by the U.S. Department of Commerce.
• An Alabama man has pleaded guilty to conspiring to export U.S.-origin goods to the Islamic Republic of Iran in violation of trade sanctions. Beginning in 2015, the individual conspired with two Iranian companies based in Tehran, Iran, to illegally export U.S.-made industrial equipment for use in Iran’s oil, gas, and petrochemical industries. He did so by using a series of deceptive practices to avoid detection, including using third-party transshipment companies in Turkey and the United Arab Emirates (UAE) and routing payments through UAE banks, and lying to shipping companies about the value of his exports to prevent them from filing electronic export information with U.S. authorities.
• Two individuals pleaded guilty to conspiracy to violate export controls for their roles in a global procurement scheme on behalf of sanctioned Russian companies, including Russian defense contractors. Some of the electronic components shipped by the defendants were later found on confiscated Russian weapons platforms and signals intelligence equipment in Ukraine. The individuals purchased the electronic components from U.S. manufacturers and distributors, then arranged for the items to be shipped from those manufacturers and distributors to various locations in Brooklyn. They then shipped the items to various front companies located in other countries, including Turkey, Hong Kong, India, China, and the United Arab Emirates, from where they were redirected to Russia.