Category: Export Controls, Economic Sanctions, and National Security

10 Key Takeaways: Biden Administration Sets the Stage for Regulation of U.S. Investments in China

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Anthony Rapa, George T. Boggs, and Alan G. Kashdan ●


President Biden recently issued an executive order (“EO”) establishing a framework to regulate certain U.S. investments with a nexus to China, taking initial steps towards what eventually could be unprecedented regulation of outbound U.S. investment. Specifically, the order directs the U.S. Department of the Treasury (“Treasury”) to issue regulations requiring notification of, and in some cases outright prohibition of, certain U.S. investments in Chinese and Chinese-owned companies relating to semiconductors, quantum technology, and artificial intelligence. The EO also covers investments in Hong Kong and Macau.

Concurrent with the August 9, 2023, executive order, Treasury unveiled an “Outbound Investment Program” website, along with a fact sheet and an Advance Notice of Proposed Rulemaking (“ANPRM”).

In the months ahead, it will be critical for observers to keep apprised of Congress’s reaction to President Biden’s EO and Treasury’s ANPRM, especially among members who have been particularly involved in advancing legislation on outbound investment. Congress may yet legislate on the issue, and such legislation could differ in scope from the Biden Administration’s executive action.

This alert provides background regarding the Biden Administration’s executive action, along with 10 key takeaways.

Background

Geopolitical risk commentators have anticipated an EO relating to U.S. outbound investment for some time, based on policymakers’ stated concerns around the role of U.S. investment capital in developing sensitive technologies in China. Proposals in this context have tended to focus on the establishment of a multi-agency body (akin to the Committee on Foreign Investment in the United States) to review outbound investment in sensitive technologies or “critical capabilities” with a nexus to certain countries of concern, including China.

To read the full client alert, please visit our website. 

Proposed Bill Would Amend the Arms Export Control Act and Establish AUKUS Advisor and Task Force: 3 Highlights

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Anthony Rapa and Patrick F. Collins ●

On July 19, 2023, Rep. Michael McCaul (R-TX), chair of the House of Representatives Foreign Affairs Committee, introduced a bill to ease trade restrictions among parties to the AUKUS agreement—a trilateral security partnership between Australia, the United Kingdom, and the United States. House Republicans separately have proposed granting the UK and Australia blanket exemptions from requirements under the International Traffic in Arms Regulations (“ITAR”), while a proposed amendment to the National Defense Authorization Action for Fiscal Year 2024 from Senate Democrats stops short of blanket exemptions. The McCaul bill offers a compromise—it amends the Arms Export Control Act (“AECA”) to allow the President to exempt select exports of defense items from licensing requirements for countries that meet certain conditions, and requires the U.S. State Department to appoint a senior AUKUS advisor and establish an AUKUS task force.

Background

The AUKUS agreement, initially announced in September 2021, aims to provide Australia with nuclear-powered submarines and deepen cooperation in the Indo-Pacific region with the United States and UK. A White House fact sheet highlights the agreement’s other goals, including cooperation on cyber capabilities, quantum technologies, artificial intelligence, hypersonic and counter-hypersonic capabilities, electronic warfare, and undersea capabilities.

Continue reading “Proposed Bill Would Amend the Arms Export Control Act and Establish AUKUS Advisor and Task Force: 3 Highlights”

6 Key Takeaways from the CFIUS 2022 Annual Report

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Anthony Rapa, George T. Boggs, and Alan G. Kashdan ●


The Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) recently released the unclassified version of its statutorily mandated annual report to Congress, covering calendar year 2022. Viewed in the context of prior CFIUS reports to Congress, the report, released July 31, 2023, highlights key trends in the U.S. government’s review of inbound foreign investment, including a record number of filings, increased investigations, and the emergence of Singapore as a top investor domicile. Overall, the report makes clear that CFIUS continues to play an active and robust role in reviewing proposed investments in U.S. businesses, and dealmakers should account for this from the outset of deal planning.

Here are six key takeaways from the CFIUS annual report:

  1. CFIUS Reviewed a Record Number of Filings, Even as M&A Activity Slowed

CFIUS reviewed 440 filings (154 short-form declarations and 286 full joint voluntary notices) in 2022, a slight increase over the prior record of 436 filings that CFIUS reviewed in 2021. This is particularly notable given the slowdown in M&A deals in the second half of 2022.

The record number of filings is reflective of robust engagement with the CFIUS process by foreign investors, as investors become more familiar with the process and as CFIUS makes clear that it will vigorously safeguard U.S. national security in reviewing investments. Notably, the record-high filings came in the midst of intensified public engagement regarding CFIUS review in 2022, including a presidential executive order, issuance of the first-ever CFIUS enforcement guidelines, and the inaugural Treasury Department CFIUS conference.

To read the full client alert, please visit our website. 

And No Longer Trending: 7 FAQs Regarding the Federal Contractor TikTok Ban

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Justin A. Chiarodo, Luke W. Meier, and Robyn N. Burrows ●


Building on recent and ongoing efforts to limit Chinese government access to government contractor supply chains, the FAR Councils published an interim rule effective June 2, 2023, that will broadly ban TikTok on contractor and contractor employee electronic devices used in the performance of federal contracts. The ban will be implemented through a new contract clause at FAR 52.204-27. Expect to see the clause added in all future solicitations (including commercially available off-the-shelf (“COTS”) acquisitions and micro-purchases) and added to existing contracts over the next month. We answer seven common questions on this new interim rule and offer several compliance tips.

What’s banned?

The new TikTok ban broadly prohibits contractors from having or using a “covered application” (e.g., TikTok or other successor applications by ByteDance Limited, a privately held company headquartered in Beijing, China) on any “information technology” used in the performance of a government contract. The ban applies regardless of whether the technology is owned by the government, the contractor, or the contractor’s employees. Bottom line, the rule has a (very) broad reach—it applies to contracts below the micro-purchase threshold, contracts for commercial products and services, and COTS items.

Continue reading “And No Longer Trending: 7 FAQs Regarding the Federal Contractor TikTok Ban”

DDTC Extends Open General Licenses for the UK, Canada, and Australia: 3 Takeaways

Anthony Rapa and Patrick F. Collins ●

On June 1, 2023, the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”) published under the International Traffic in Arms Regulations (“ITAR”) updated Open General License (“OGL”) Nos. 1 & 2, extending a pilot program facilitating certain defense trade within and among the United Kingdom, Canada, and Australia through July 31, 2026. OGLs 1 & 2 were initially set to expire on July 31, 2023.

The updated OGLs signify further enhanced defense cooperation between the United States, the United Kingdom, Canada, and Australia.

Background

On July 20, 2022, DDTC published OGL Nos. 1 & 2, authorizing retransfers within, and reexports among, the United Kingdom, Canada, and Australia of certain ITAR-controlled defense articles, services, and technical data. The initial OGLs, issued as part of a pilot program, were to be effective from August 1, 2022, through July 31, 2023.

The OGLs authorized retransfers and reexports of certain unclassified defense articles to the governments and DDTC-authorized export communities (as described at Sections 126.17(d) and 126.5(b) of the ITAR) of the United Kingdom, Canada, and Australia. The OGLs applied only to unclassified defense articles previously exported pursuant to a DDTC-issued license or other approval, and imposed certain exclusions and limitations with respect to: items exported pursuant to the Foreign Military Sales program; certain defense articles relating to missiles and certain missile technology, UAVs, and space launch vehicles; certain ITAR-controlled technical data; and certain “major defense equipment.”

Three Key Takeaways

  1. Three-year extension of OGL pilot program. DDTC’s new rule extends the validity period of OGL Nos. 1 and 2 through July 31, 2026.
  2. DDTC objectives: industry certainty and data collection. DDTC states that it is extending the OGLs for three years (a) to provide industry with comfort that it can use the OGLs without fear that they will expire more quickly than a specific license, and (b) to collect sufficient data on the usefulness of the OGL pilot program.
  3. Clarification. DDTC made what it described as “non-substantive” revisions to the OGLs clarifying that the OGLs can be used to retransfer or reexport a single defense article, and that multiple defense articles need not be retransferred or reexported simultaneously.

TechCrunch: Western Sanctions against Russia: Tips for Tech Companies Managing Compliance Risk

Anthony Rapa ● TechCrunch ● May 8, 2023 ●

As the war in Ukraine rages on, authorities are cracking down on the smuggling of U.S. technology in support of Russia’s war effort, an initiative with implications for the tech industry. One significant example of this is Russia’s drone program, with a December 2022 expose describing U.S. chips, circuit boards, and amplifiers found in downed Russian drones, and mapping part of the supply chain trafficking such items to Russia in spite of Western sanctions.

This has prompted broader concerns regarding the diversion of Western technology to Russia in support of illicit end-uses, such as, for example, the Russian government’s use of facial recognition technology to crack down on dissidents.

In response to this, the United States and its partners recently imposed new sanctions against Russia to coincide with the one-year anniversary of the invasion of Ukraine, including expanded export controls over drone components, electronics, industrial equipment, and other items. The U.S. government followed this up with an advisory warning companies of the risk of third parties diverting their products to Russia.

Suppliers of electronics, drone components, and other sanctioned items face the risk that third parties will divert their products to Russia’s defense industrial base or to the battlefield in Ukraine, given the Russian military’s continued demand for battlefield equipment. Companies can mitigate this risk by conducting due diligence on counterparties and by auditing sales channels.

Read more on our website.

Exporters Take Note: The Commerce Department Really, Really Wants You to Disclose Suspected Violations of the EAR—Both Yours, and Your Competitors’ Too

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Justin A. Chiarodo and Anthony Rapa ●

We wrote earlier this year about the growing web of regulation and enforcement attention around export controls. In another key development in this area, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) issued a memo to all of its export enforcement employees on April 18,2023, both reemphasizing the importance of corporate export control compliance, and clarifying its enforcement policies in two key areas. These two developments—one a stick and one a carrot—are designed to promote more (and more significant) disclosures to BIS with respect to violations of the Export Administration Regulations (“EAR”).

The first item in the memo addresses what happens when a company discovers, but does not report, a “significant possible violation” of the EAR. This marks a major policy change. Going forward, the deliberate non-disclosure of such “significant” possible violations of the EAR will be treated as an aggravating factor when BIS considers penalties. The memo explains that “significant” violations are those that “reflect potential national security harm” as compared to more technical violations. This policy emphasizes the BIS settlement guidelines that focus on the adequacy of a company’s export control program. BIS cautions companies that they face sharply increased risks if they do not make a voluntary disclosure after discovering a “significant” suspected violation.

Continue reading “Exporters Take Note: The Commerce Department Really, Really Wants You to Disclose Suspected Violations of the EAR—Both Yours, and Your Competitors’ Too”

Four Tools of Modern Economic Statecraft

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The Impact of Modern Economic Statecraft on Cross-Border Trade and Investment: Sanctions, Export Controls, Investment Screening, and Supply Chain Rules

 ● PLI Chronicle: Insights and Perspectives for the Legal Community, March 10, 2023 ●

Anthony Rapa ●

Geopolitical risk is top of mind for companies these days, and it seems that every week brings a new proposed sanction, trade control, or investment restriction. Increasingly, companies and investors are discovering that their cross-border movement of goods, technology, and capital implicates regulatory restrictions of some kind and is subject to governmental scrutiny.

In modern parlance, such measures fall under the rubric of “economic statecraft.” The pace of change is dizzying, and the stakes are high, with each new economic statecraft tool holding the power to cut off business with targeted markets, trigger regulatory scrutiny of transactions, and impact business planning.

Economic statecraft is not new. The earliest recorded example dates back to the 5th century BC, when the Athenian Empire banned the people of Megara, a town allied with Sparta, from trading in harbors and marketplaces controlled by the empire. Another notable example is Napoleon’s Continental System, in which the French emperor sought to prohibit trade between the European continent and Great Britain. A further historical instance, with modern-day implications, is the U.S. embargo of Cuba, which dates back to the early 1960s.

While economic statecraft is not new, what is new is the power of the U.S. government and, increasingly, other governments, to respond swiftly to geopolitical events with economic countermeasures. In the modern landscape, such measures are often multilateral and reinforced through governmental bodies and market gatekeepers such as financial institutions.

Given the prevalence of economic statecraft tools and the geopolitical trends prompting their promulgation, it is important for economic operators engaged in cross-border trade and investment, and those advising them, to understand the nature and scope of the tools at governments’ disposal.

Read more on our website.

Russia Sanctions: 5 Key Points for Companies

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Anthony Rapa ●

The United States, the European Union, and the United Kingdom recently imposed new sanctions on Russia to coincide with the one-year anniversary of Russia’s invasion of Ukraine, a measure that the European Union described as its “10th package of sanctions against Russia” to date.

So, one year in, after 10 rounds of sanctions against Russia, where do things stand? Here are five key points for companies to consider:

1. For any remaining business with or involving Russia, it is imperative to manage compliance carefully.

Although Russia has been described as “the most sanctioned country in the world,” this is not exactly accurate, as there remains a range (arguably, a substantial range) of business with Russia that is permissible. For companies engaged in such business, it is of paramount importance to manage the various vectors of Russia-related risk, including sweeping export controls, sanctions on Russia’s financial system, and the web of multijurisdictional restrictions.

Continue reading “Russia Sanctions: 5 Key Points for Companies”

Executive Briefing: U.S. Government Imposes New Round of Sanctions on Russia

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Anthony Rapa ●

On February 24, 2023, the Biden Administration issued a package of sanctions, export controls, and tariffs against Russia, an action timed to coincide with the one-year anniversary of Russia’s invasion of Ukraine. The U.S. measures, which also target Belarus and Iran in certain respects, were implemented in concert with related UK and EU actions.

Sanctions

The U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) designated 22 individuals and 83 entities for asset freeze sanctions, and issued a determination that the Russian metals and mining sector is subject to sanctions under Executive Order 14024. As a result, U.S. persons are prohibited from engaging in transactions and dealings with the 105 newly sanctioned parties and are required to freeze their assets. Furthermore, individuals and entities that OFAC determines are “operating” in the Russian metals and mining sector are subject to potential designation for asset freeze sanctions.

Moreover, OFAC issued FAQ guidance indicating that U.S. persons seeking to divest from Russian investments may need a license from OFAC before paying any recently required “exit tax” to the Russian government under Russian law, potentially complicating divestment efforts.

Continue reading “Executive Briefing: U.S. Government Imposes New Round of Sanctions on Russia”
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