American Trade & Manufacturing Blog

State and Commerce: Harmonizing Their Way Through Export Control Reform

Posted in Export Controls

Last week, the State Department’s Directorate of Defense Trade Controls (DDTC) and the Commerce Department’s Bureau of Industry and Security (BIS) harmonized the destination control statements (DCS) required for exports of certain items from the United States.  The new rules, which took more than one year to finalize, ease the burden on exporters by requiring the same DCS language for shipments subject to the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR).

Effective November 15, 2016, both sets of regulations will require that the following language be included as an integral part of the commercial invoice when items are shipped abroad in tangible form:

“These items are controlled by the U.S. government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations.’’

Of course, although BIS and DDTC are only requiring that the language be included on one document (the commercial invoice) and are explicitly limiting this requirement to physical shipments, the agencies did not make everything easier.  Companies exporting “600 series” or 9×515 items under the EAR still must include the Export Control Classification Number (ECCN) on the commercial invoice.  And, DDTC’s companion rule continues to require:

  1. incorporation of the DCS for ITAR-controlled exports, reexports, and retransfers;
  2. inclusion of the country of ultimate destination, end-user, and license or approval number or exemption citation on the commercial invoice; and
  3. provision of the ECCN or EAR99 designation for any EAR-controlled items exported pursuant to a DDTC license or approval to the end-user and consignees.

So what’s next?  Companies should start planning to change the language pre-printed on their commercial invoices so that they are ready on November 15, when the new DCS requirements go into effect.

Still Going: BIS Relief Continues for Chinese Telecom Giant ZTE

Posted in Export Controls

On Friday, the Department of Commerce’s Bureau of Industry and Security (BIS) published a notice extending the relief it granted earlier this year to ZTE Corporation and ZTE Kangxun, which had been placed on BIS’s Entity List in early March of this year.

As noted in prior posts, on March 8, 2016, BIS imposed broad export restrictions on ZTE Corporation, ZTE Kangxun Telecommunications Ltd. (China), Beijing 8-Star International Co. (China), and ZTE Parsian (Iran). BIS’s action was a response to ZTE’s alleged execution of a scheme to violate U.S. export controls through its creation and use of “detached” shell or front companies. The scheme facilitated the reexport of items subject to the Export Administration Regulations (EAR) to countries sanctioned by the United States. The restrictions were significant: they prohibited the provision of even common, off-the-shelf EAR99 and other low-technology electronic components, commercial software, and technology to ZTE without a license. The imposition of such restrictions caused an uproar amongst industry members across the United States and China, which was not surprising given ZTE’s position as a leading provider of telecommunications and other technology equipment to markets worldwide.

Likely in response to the industry’s reaction and ZTE’s agreement to cooperate with the U.S. government in resolving this matter, just two weeks later, BIS created a temporary general license suspending the export restrictions on ZTE Corporation and ZTE Kangxun and generally permitting parties to engage in business as usual with the two ZTE entities. The privileges under the temporary general license, while originally available only through June 30, were then extended until August 30, 2016.

Friday’s action marks the second such extension of the temporary general license applicable to ZTE Corporation and ZTE Kangxun. Parties may now take advantage of the relief granted via the temporary general license through November 28, 2016. Whether further extensions will follow the expiration of this period remains to be seen – BIS will have to grapple with what, ultimately, to do with ZTE at some point or another. In the meantime, we recommend that companies continue to conduct heightened due diligence, remain sensitive to any potential “red flags,” and maintain vigilance in transactions involving exports to ZTE to ensure that such exports are not diverted to ZTE’s restricted affiliates or any other sanctioned entities/countries.

CBP to Publish New Regulations on Evasion of Antidumping and Countervailing Duties

Posted in Announcements, Antidumping, Customs Law, Dumping and Subsidies, Trade Remedies

New Regulations Allow for Investigation of Duty Evasion

U.S. Customs and Border Protection (CBP) released interim final regulations setting up a new procedure for investigating evasion of antidumping (AD) and countervailing duties (CVD).  The interim regulations, which are subject to public comment, put into place important provisions of the “Enforce and Protect Act of 2015,” signed into law by President Obama in February 2016.

The regulations will be published Monday, August 22, 2016 in the Federal Register, and will take effect immediately.

As a result, U.S. manufacturers, producers, importers and unions, among other parties, now have an important new tool to address parties who evade payment of AD and CVD duties.   Evasion can include misrepresentation of country of origin, false shipping or entry documentation, or misreporting of the products themselves.  Domestic industries have sought to strengthen the trade laws on duty evasion for more than five years.

The new regulations, which will be set forth in 19 C.F.R. Part 165:

  • Allow interested parties to file evasion allegations;
  • Require CBP to decide to initiate an investigation within 15 days of an allegation, and to notify all parties within 95 days of that decision.
  • Set forth investigation procedures for CBP, including the potential use of questionnaires and in-country verification;
  • Allow CBP to make adverse inferences against a party that fails to cooperate with the investigation;
  • Provide greater transparency through public versions of any filings made by interested parties; and
  • Require CBP to make an evasion determination within 300 days of initiation.

Because they are interim regulations, they will be subject to further comment and potential amendment before becoming final.  The public will have 60 days following the publication of the interim regulations to submit comments to CBP.

State and Commerce Issue Final Rules for Toxicological Items and Directed Energy Weapons

Posted in Export Controls

Today, the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) and the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published final rules to amend U.S. export controls on toxicological agents and associated equipment, along with directed energy weapons and related items.  Effective December 31, 2016, the final rules revise Categories XIV and XVIII of the International Traffic in Arms Regulations’ (ITAR) U.S. Munitions List (USML) and move several currently ITAR-controlled items to the Export Administration Regulations’ (EAR) Commerce Control List (CCL).

Overall, and consistent with one of the primary objectives of the President’s Export Control Reform (ECR) Initiative, Categories XIV and XVIII of the ITAR’s USML are much more narrowly crafted such that they now will generally control a limited, positive list of items.  At the same time, BIS has created ECCNs 1×607 and 6×619 to cover those toxicological items and items related to directed energy weapons shifting from control under the ITAR to control under the EAR.

DDTC and BIS also made several clarifications to their proposed rules, which were published more than one year ago, on June 17, 2015.  For example, BIS added a reference in new Export Control Classification Number (ECCN) 1A607.f to “protective coatings” to make clear that this category covers Chemical Agent Resistant Coatings (CARC), except CARC qualified to the following four military specifications, which remain controlled by the ITAR: MIL-PRF-32348, MIL-DTL-64159, MIL-C-46168, or MIL-DTL-53039.

Additionally, BIS amended License Exceptions BAG and TMP to authorize exports of chemical and biological protective gear so that such exceptions would be consistent with the ITAR exemption for Personal Protective Equipment.  This amendment is particularly important for U.S. government contractors, which often are issued chemical and biological protective gear prior to being deployed abroad to work in active theaters of operations or other dangerous environments.

With only a few USML categories yet to be revised, the Administration is fast approaching the finish line for one key element of the President’s ECR Initiative.

LATAM Airlines Pays $22 Million to Settle FCPA Allegations

Posted in FCPA

On Monday, Chile-based airline LAN Airlines SA (now operating at LATAM Airlines Group) entered into a $22 million agreement with the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), to settle allegations that it violated the Foreign Corrupt Practices Act (FCPA).  The alleged violations involved the facilitation of bribes to Argentinian government officials in connection with a labor dispute in 2006.  Under the settlement agreement, LAN will pay $9.4 million in disgorgement and interest to the SEC and a $12.75 million fine to the DOJ.

According to the SEC:

[W]hen LAN encountered problems negotiating labor agreements with the unions, it was contacted by a consultant from Argentina who offered to negotiate on the company’s behalf.  The consultant made clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions.  LAN’s CEO approved $1.15 million in payments to the consultant through a sham contract for a purported study of existing air routes in Argentina.

Reportedly, LAN executives were aware that no study would be performed, and that payments would instead be passed on to the labor unions.  The bribe payments convinced the labor unions to abandon their positions and accept a lower wage increase, to LAN’s benefit.  LAN’s payments to the consultant under the sham agreement went through and to U.S. bank accounts.

The company’s settlement agreement follows the SEC’s individual enforcement action against LAN’s CEO, Ignacio Cueto Plaza, which he settled by agreeing to pay a $75,000 civil fine and attend anti-corruption training in February of this year.

According to DOJ, the airline did not voluntarily disclose the violations.  Instead, it only began cooperating after the Argentinian media reported on the conduct.  Because it did not come forward to disclose, LAN was ineligible for a discount off of the bottom of the sentencing guidelines range.  In addition to payment of the penalty and disgorgement, LAN also agreed to retain an independent compliance monitor.

The criminal case is USA v. Latam Airlines Group SA, case number 0:16-cr-60195, in the U.S. District Court for the Southern District of Florida.  The SEC resolved the FCPA violations through an internal administrative order: In the Matter of LAN Airlines SA, case number 3-17357.

Proposed Electronic Waste Export Legislation Aims to Reduce Counterfeiting

Posted in Uncategorized

In June, the Secure E-Waste Export and Recycling Act, H.R. 5579 (SEERA), was introduced in the House of Representatives amid increased concerns regarding counterfeiting in the global electronics industry, particularly with respect to electronics used in the military. The bill was introduced, in part, in response to a 2012 Senate Armed Services Committee report that concluded that counterfeit electronics were showing up in military technology and that they posed a risk to national security and military readiness. The report also stated that “[m]uch of the material used to make counterfeit electronic parts is electronic waste or ‘e-waste’ shipped from the United States and the rest of the world to China.” Continue Reading

China Formalizes Political Control Over State Enterprises

Posted in State-owned Enterprises

Last year, we noted that the Chinese government’s reform proposals for state-owned enterprises (SOEs) reflected conflicting objectives.  On the one hand, they appeared to propose limitations on traditional means of state control, primarily ownership, by encouraging more SOEs to undertake “mixed ownership” reforms, through which they would operate more like non-state corporations, at least in theory.  On the other hand, the proposals sought to enhance state control by formalizing and expanding the authority of China’s political leadership, the Chinese Communist Party, within SOE management.

While progress on ownership reform objectives has been halting at best, the expansion of Party authority in SOEs is becoming a reality.  In May, the State-Owned Assets Supervision and Administration Commission – the state shareholder of China’s large, central SOEs – published an article in the authoritative Party journal Seeking Truth, explaining that major corporate decisions would need to be approved first by the firm’s Party committee.  Only then would these decisions be forwarded to the board and management for approval.  Bloomberg reports that Chinese SOEs have in fact begun amending their articles of incorporation to clarify Party authority over major operational decisions.

At least with respect to China, then, using state ownership or the absence thereof as a convenient indicator of likely state interference in the commercial operations of firms, or in certain sectors of the economy, is increasingly insufficient.  Whether the objective is to identify “public bodies” in a countervailing duty investigation, or to measure broader economic distortions in antidumping “market economy” discussions, authorities should be wary of the evolving means of government interference in market competition and international trade.

Recent ITAR Changes: Some Good News and Some Bad News

Posted in Export Controls

The Department of State’s Directorate of Defense Trade Controls (DDTC) recently announced several changes to the U.S. International Traffic in Arms Regulations (ITAR), including to its country policies and embargoes and its civil penalties.  These new policies may require corresponding changes to your company’s export compliance program and ITAR risk assessment analyses.

First let’s start with the changes that are favorable for U.S. exporters.  In accordance with U.S. and United Nations (UN) arms embargoes, as well as U.S. national security and foreign policy interests, most license applications for exports of munitions items to countries identified in section 126.1 of the ITAR (i.e., ITAR-prohibited countries) are subject to a policy of denial.  Over the past few weeks, DDTC has announced several changes to its policy on exports of munitions items to four of these ITAR-prohibited countries, as follows:

  • Vietnam: The United States terminated DDTC’s policy prohibiting the sale or transfer of lethal weapons to Vietnam. The lifting of this decades-long ban is part of an effort by the Administration to normalize relations with Vietnam.  As such, DDTC will now review licenses for exports or temporary imports of ITAR-controlled items to Vietnam on a case-by-case basis.
  • Liberia: In light of the fact that the UN Security Council sanctions against Liberia were lifted in May, DDTC announced that it will review all ITAR license applications for the country on a case-by-case basis, rather than the former general policy of denial for most applications.
  • Cote d’Ivoire: Similarly, and consistent with the recent UN Security Council Resolution terminating UN sanctions, DDTC will review all licenses for exports and temporary imports of ITAR-controlled items to Cote d’Ivoire on a case-by-case basis going forward.
  • Sri Lanka: DDTC also will now review all ITAR license applications for Sri Lanka on a case-by-case basis. Previously, and as a result of provisions in the Consolidated Appropriations Act that were not carried forward this year, it was the policy of the United States to deny all ITAR licenses and approvals involving Sri Lanka, except for those related to humanitarian demining and aerial or maritime surveillance.

These changes open up several new avenues for U.S. defense trade.  On the flip side, however, DDTC also announced hikes to its civil penalties for ITAR violations.  Characterizing the changes as a “catch-up” inflation adjustment mandated by Congress, DDTC increased its maximum civil penalties for violations of the Arms Export Control Act (the statutory authority for the ITAR) from $500,000 per violation to between $795,445 and $1,094,010 per violation, depending on the nature of the transgression.  While DDTC can and does issue penalties lower than the maximum amounts, this change nonetheless is not welcome news to the U.S. export community.

China Absent from Statement on Steel Overcapacity

Posted in Manufacturing, Trade Negotiations, Trade Policy, Trade Remedies

On April 18th and 19th, leaders from some of the world’s major steel producing countries met in Brussels to discuss the overcapacity problem that is wreaking havoc on the global steel industry. Last night, the governments of Canada, the European Union, Japan, Mexico, Korea, Switzerland, Turkey, and the United States issued a statement agreeing, among other points, that:

  • Restructuring in the global steel industry “should be market-driven, with production and trade flows reflecting the market-based competitive positions of steel producers (i.e., absent the effects of government measures that distort markets)”;
  • “Government support measures have contributed to significant excess capacity, unfair trade, and distortions in steel trade flows”; and
  • Government plans and subsidies should not encourage investment in steel capacity that would not otherwise exist, should not distort competition, and should not prevent loss-making capacity from exiting the market or otherwise encourage the net expansion of steelmaking capacity.

Continue Reading

Wiley Rein Releases Updated Report on Global Steel Industry Overcapacity

Posted in Announcements, Antidumping, Compliance, Customs Law, Dumping and Subsidies

Today our International Trade Group published a report—the second edition of its kind—on the unprecedented level of overcapacity in the global steel industry, which is severely distorting the world market and threatening the viability of many steel producers worldwide. Since the first edition of Government Intervention and Overcapacity was released in July 2013, excess capacity has continued to grow. Today’s update is necessary, almost three years later, because the overcapacity crisis has reached alarming new heights.  Much of this capacity growth has resulted from government plans and policies in China, which holds nearly two-thirds of global overcapacity.  While purportedly intended to reduce capacity, Chinese government plans and policies actually have the opposite effect, encouraging the continued upgrading and expanding of unnecessary steel capacity. Continue Reading

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