On November 30, 2018, the United States, Canada and Mexico took the first steps toward a renegotiated North American Free Trade Agreement (NAFTA)—now dubbed the United States-Mexico-Canada Agreement (USMCA). However, the USMCA still faces the hurdles of ratification by the respective governments. In the United States, that means Congressional approval in accordance with the Trade Promotion Authority (TPA).

Pursuant to the TPA timeline, the final text of the USMCA was published and a Statement of Administrative Action was submitted by US Trade Representative Robert Lighthizer on May 30, thereby permitting the Administration to formally submit the deal to Congress as soon as July 1. Whether or not the deal will be submitted this soon remains to be seen, particularly in light of pushback from Democratic leaders. Once the implementing bill is introduced, the House must vote on the bill within sixty (60) days. If successful before the House, the bill then moves to the Senate where it must be voted on within thirty (30) days.

Now that the Section 232 steel and aluminum tariff issue has been resolved and the threat of additional tariffs on Mexico have been sidelined—at least for the moment—the chances of USMCA’s submission to Congress seems much improved. Nevertheless, House approval of the USMCA in its current form remains a lofty hurdle for the Administration.

The full text of the agreement is available at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between

In OFAC’s guidance document that was released last week, OFAC made it clear that it will consider using its enforcement authority against the individuals involved in a sanctions violation, not just the entities. OFAC recognized that individual employees, particularly those in supervisory, managerial or executive level positions, have played a crucial role in facilitating or concealing violations of OFAC’s sanctions programs. The executives subject to OFAC’s jurisdiction are individuals at a company with a U.S. parent, or an entity that conducts transactions in the U.S., with the U.S. or a third party that is based in the U.S. 

OFAC generally administers and enforces economic and trade sanctions based on U.S.-foreign policies and national security goals against individuals, groups and entities engaged in activities that threaten the national security, foreign policy or economy of the U.S. The recent guidance makes it clear that executives are not beyond the reach of OFAC, and that individuals are subject to personal liability for violating OFAC’s sanctions program.

Although this is not a new right granted to OFAC, the guidance indicates that OFAC is more inclined to bring civil actions against individuals. In the past ten years, we have seen only a few cases where civil enforcement actions were brought against individuals. Although there has been a significant dip in the number of cases, the value of the fines has increased significantly.

Executives should make sure that the company’s sanctions compliance program incorporates at least five essential components of compliance: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. The commitment of executives to the success of the sanctions program is key, and it is covered by the first of the five components.

OFAC stated in its guidance that “Senior Management’s commitment to, and support of, an organization’s risk-based [sanctions compliance program] is one of the most important factors in determining its success.” Senior management must recognize the seriousness of apparent violations of the laws and regulations administered by OFAC, and implement measures to reduce apparent violations and address root causes of past violations.

OFAC has identified scenarios where supervisory, managerial or executive employees of an entity have conducted or facilitated transactions with OFAC-sanctioned persons, regions or countries even though the entity itself had a strong compliance program in place. It is the personal responsibility of each of these individuals to take their senior management role seriously, help their organization comply with its sanctions compliance program, and make sure it is not concealing activities from its organization or regulators and law enforcement.

You can read OFAC’s guidance here.  The guidance deals broadly with OFAC’s perspective on the essential components of a proper sanctions compliance program that should be implemented by companies, as well as outlining how OFAC incorporates these components in its evaluation of apparent violations.

In a recent opinion, the United States Court of Appeals for the Federal Circuit affirmed the US Court of International Trade’s (CIT) determination of the classification of certain hand tools imported by Irwin Industrial Tool Company (“Irwin”) as “pliers” over US Customs and Border Protection’s (“Customs”) classification of the tools as “wrenches.”

The tools at issue were  variations of locking pliers, that is, two handled tools with two jaws that could grasp — and lock — on a variety of fasteners or other materials.  Customs classified the tools as wrenches under subheading 8204.12.00 of the HTSUS (subject to a 9% duty).  In defense of its classification, Customs relied on dictionary definitions of wrenches which described a “tool used to grasp an object and then turn or twist it.”  In response, Irwin asserted that such a definition would sweep in tools such as crowbars which are clearly not wrenches but are used to turn and twist objects.  Customs also asserted that a hallmark of pliers is the need to maintain continuous hand pressure to keep the tool engaged with an object and that “locking” tools, such as the tools at issue, permit the maximum application of torque, a key feature of a wrench.

The Federal Circuit was unpersuaded and affirmed the CIT’s classification of the tools as pliers under subheading 8203.20.6030 (subject to a 5.5% duty plus 12 cents per dozen) because the tools “1) are versatile hand tools, 2) have two handles, and 3) have two jaws, that are flat or serrated and are on a pivot, which can be squeezed together to enable the tools to grasp an object.”  The Court referenced  definitions from the America Standards for Mechanical Engineering (ASME) which shared the two handle-two jaw design hallmarks.  The Federal Circuit noted that all pliers described in the ASME —  including locking varieties — shared the two handle-two jaw design. The Federal Circuit contrasted the ASME definition of a wrench which consisted “essentially of a frame (fixed jaw and handle), a movable jaw, and a jaw opening adjustment mechanism.”  The Court held these design hallmarks, not the use or potential use of the tools, supported the resulting classification of the tools at issue as pliers.

Tariff classifications can have a significant impact on a company’s bottom line; therefore, proper legal guidance through classification determination — and litigation, if necessary — are essential whenever dealing with imported products.

On April 24, 2019, the U.S. Department of State published an update to its List of Restricted Entities and Subentities Associated with Cuba (Cuba Restricted List) adding five additional entities to the list.

On June 16, 2017, the President signed the National Security Presidential Memorandum-5 on Strengthening the Policy of the United States Toward Cuba (NSPM-5). Soon after, on November 9, 2017, pursuant to NSPM-5, both the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) published final rules amending the rules relating to Cuba.

Direct financial transactions with entities on the Cuba Restricted List are generally prohibited under the Cuban Assets Control Regulations (CACR), because the financial transactions would disproportionately benefit the Cuban military, intelligence, and security services at the expense of the Cuban people and private enterprise in Cuba. BIS also generally denies applications to export or re-export items for use by entities identified on the Cuba Restricted List.

The new update is the third update to the Cuba Restricted List, and it adds five additional subentities: (1) Hotel Santa Isabel (in Havana), (2) Hotel El Caney Varadero (in Varadero), (3) Melia Marina Varadero Apartamentos (in Varadero), (4) Aerogaviota (subentity of the Armed Forces Business Enterprises Group (GAESA)), and (5) Diving Center — Marina Gaviota (subentity of the Gaviota tourism group). The State Department will continue to update the list as needed.

A Chinese company was recently forced to sell California-based Grindr, the world’s largest gay dating app, after the Committee on Foreign Investment in the United States (CFIUS) determined that its ownership constituted a national security risk.

To explain the issue to readers, Bloomberg Law featured an article by Partner Nevena Simidjiyska, co-chair of the International Trade Practice Group, on the significance of the determination and what it means for foreign ownership of U.S. social media companies. In her piece, Nevena examines the impact of the Foreign Investment Risk Review Modernization Act of 2018 and the signals the Grindr decision sends about scrutiny of companies that hold U.S. citizens’ personal data.

Read her piece, “INSIGHT: U.S. Swipes Left on Chinese Acquisition of Grindr Over National Security Concerns,” in Bloomberg Law.

In recent weeks, the United Stated Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) expanded the scope of sanctions against current and former Venezuelan government officials who have supported controversial President Nicholas Maduro and his regime of corruption and human rights abuses.

The first sanctions implemented against Venezuelan individuals and entities were authorized by President Barrack Obama in March 2015 (Executive Order 13692).  Following President Maduro’s re-election to a second six-year term on May 20, 2018, President Donald Trump has expanded the scope of both the prohibited conduct and the designated individuals and entities subject to sanctions.

On November 1, 2018, President Trump issued Executive Order 13850 broadly prohibiting transactions with individuals directly or indirectly involved in the deceptive and corrupt practices of the Government of Venezuela.  President Trump has subsequently issued Executive Orders designating specific individuals and entities subject to the sanctions regime.  On January 28, 2019, Executive Order 13857 revised the definition of “Government of Venezuela” (which is subject to sanctions) to specifically include, among others, the Central Bank of Venezuela and state-run oil company Petroleos de Venezuela, S.A. (“PdVSA”)  Further, in press releases on February 15, 2019 and February 25, 2019, OFAC announced additional individuals and entities with whom transactions are prohibited. Among those named in the recent press releases are Venezuelan military and intelligence officers, the head of the Special Action Force of Venezuela’s police, the President of PdVSA, and, most recently, the Governors of four Venezuelan states that have aligned themselves with President Maduro.

The recent press releases note that sanctions “need not be permanent” and that removal of sanctions is possible for individuals who “take concrete and meaningful actions to restore democratic order, refuse to take part in human rights abuses, speak out against abuses committed by the former Maduro regime, and combat corruption in Venezuela.”

For US companies transacting across borders, it always essential to verify that their business partners are not subject to US sanctions.  With the rapidly changing scope of sanctions relating to Venezula, the need to consult with experienced counsel is even greater and must continue on an ongoing basis throughout the life of a transaction of business venture.

A complaint filed in the United States Court of International Trade (“CIT”) late last week highlights the practical challenges and frustration that come from delayed resolutions and parallel proceedings between federal courts and agencies, such as US Customs and Border Protection (“CBP”). In the Complaint, One World Technologies, Inc. (“One World”), a manufacturer of garage door openers sought injunctive relief and declaratory judgment against CBP for its continued detention of One World’s products contrary to the CIT’s prior order.

This dispute originally began in July 2016, when another garage door manufacturer filed a complaint alleging that One World’s wireless garage door model infringed on their patents.  As part of the litigation that ensued, One World changed redesigned its garage door openers to resolve the infringement claims.  One World sent shipments of the redesigned products which CBP detained in light of the ongoing infringement dispute.

On December 14, 2018, the CIT entered an order in which it found that One World’s redesigned products did not infringe the patent at issue.  The CIT, however, declined to exercise jurisdiction over the pending protest before CBP in which One World sought approval to import the products. This left One World in a position where the CIT had determined that the products were not infringing, but the CBP proceedings had not yet progressed to their own determination.  The practical reality being that One World’s non-infringing products remain in CBP detention.  Accordingly, One World filed its new complaint urging the Court to intervene and direct CBP to release the products.

While the Court’s reluctance to interfere with administrative proceedings is certainly reasonable, the practical effect for companies can be frustrating.  Here, a federal court had made a determination as to the question of infringement, but the parallel proceeding before CBP rendered the CIT’s order all but ineffective. There is no simple resolution when these unfortunate systemic inefficiencies arise, but experienced counsel can help anticipate potential periods of delay and find the most efficient path forward – even if the path is fraught with frustration.

The government shutdown, which is now in its fourth week, is causing a backlog of cases that will need to be reviewed by the Committee on Foreign Investments (“CFIUS”) once the government reopens.

CFIUS is an interagency committee chaired by the Secretary of the Treasury, which reviews certain transactions involving foreign investment in the Unites States in order to determine the effect of such transactions on national security. The shutdown will ultimately cause a delay in the ability of foreign acquirers to finalize transactions involving investments in the United States.

 

Since the government shutdown that began on December 22, 2018, CFIUS activities have been suspended. CFIUS has only been able to perform “caretaker functions” related to cases filed before the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which was signed into law in August 2018.

In addition, the deadlines for all other cases that were not initiated prior to the enactment of FIRRMA are “tolled” during the shutdown. Although CFIUS filings can continue to be made during the shutdown, the Committee will not officially accept the filings for review.

The clock will not start running on any cases that are “tolled,” meaning the review or investigation process will not start until after the shutdown ends and CFIUS is able to officially acknowledge receipt of the case. CFIUS members will not be able to examine these transactions in order to identify and address any national security concerns that may arise as a result of the proposed transactions.

A link to the Department of Treasury’s contingency plan can be found here.

The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), signed into law in August, authorizes the Committee on Foreign Investment in the United States (CFIUS) to conduct pilot programs to implement provisions of the legislation that did not become effective immediately upon enactment.

On October 10,, 2018, a FIRRMA pilot program was enacted that expands the scope of transactions subject to review by CFIUS to include certain noncontrolling investments made by foreign persons in U.S. businesses involved in critical technologies related to specific industries and mandates the filing of mandatory declarations for transactions that fall within the scope of the pilot program.

Type of investments covered: The pilot program expands CFIUS’s jurisdiction to allow review of certain investments by foreign persons that do not constitute an acquisition of control of a U.S. business (referred to in FIRRMA as “other investments”).

For an investment to be covered under the pilot program, it must give the foreign investor:

  • Access to any material nonpublic technical information in the possession of the target U.S. business;
  • Membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the U.S. business; or
  • Any involvement, other than through voting of shares, in substantive decisionmaking of the U.S. business regarding the use, development, acquisition, or release of critical technology.

Foreign persons covered: The pilot program covers all foreign persons and is not country-specific.

U.S. businesses covered: The pilot program covers any U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is: (1) utilized in connection with the U.S. business’s activity in one or more Pilot Program Industries (discussed below); or (2) designed by the U.S. business specifically for use in one or more Pilot Program Industries (“Pilot Program U.S. Businesses”).

The pilot program covers all critical technologies, as defined by FIRRMA, of Pilot Program U.S. Businesses, including emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.

Industries covered: The pilot program covers 27 industries, identified by their respective North American Industry Classification System (NAICS) code (“Pilot Program Industries”).

Mandatory declarations: The pilot program establishes mandatory declarations (i.e., abbreviated notices that generally should not exceed five pages in length) for foreign transactions involving Pilot Program U.S. Businesses that are within the purview of CFIUS (i.e., both controlling investments and “other investments”).

  • Declarations must be filed at least 45 days prior to a transaction’s expected completion date. The Committee will have 30 days to take action.
  • Parties may choose to file a notice under CFIUS’s standard procedures rather than a declaration.
  • Parties that are required to file with CFIUS and do not do so can be assessed a civil monetary penalty up to the value of the transaction.

The pilot program commenced on November 10, 2018. It will end no later than the date on which the final FIRRMA regulations are implemented.

This post is authored by Fox Rothschild associate Rocky Rogers:

As a result of the new Section 232 and Section 301 tariffs on steel, aluminum, and goods imported from China, United States importers and customs brokers relying upon continuous bonds should review their bond amount to ensure it is sufficient to account for these new tariffs.  The continuous bond should be in the amount of 10% of estimated duties, taxes, and fees to be paid on goods imported over a twelve month period.  The new tariffs directly increase the amount of duties owed for these types of shipments and accordingly require an increase in the bond amount.

On November 8th, the United States Customs and Border Protection issued Cargo Systems Messaging Service Update 18-000664 reminding those holding continuous bonds that sufficiency reviews are conducted on a monthly basis.  The agency recommended importers forecast their import activities for the next twelve months and determine if a bond increase is appropriate.  The bonding formula utilized to conduct sufficiency reviews may be found at https://www.cbp.gov/sites/default/files/documents/bond_form_7.pdf.

Importers are already reporting an increase in bond insufficiency determinations since the announcement of the tariffs.  Update 18-000664 is further evidence of the agency’s increased attention to this issue.

If the Revenue Division of CBP determines a continuous bond is insufficient, any imported goods covered by that bond will not be released upon entry to the United States.  This will result in accruing demurrage charges and disruption of the supply chain.  Additionally, the agency can inactivate the bond, thereby requiring importers to obtain Single Transaction Bonds for future imports, which are far more costly and burdensome than maintaining a continuous bond.  For any imports of goods subject to anti-dumping or countervailing duties, the bond requirements can be “stacked” because often determinations by the Department of Commerce on those types of goods take longer than twelve months, so multiple bond periods remain exposed.

The impact of the new tariffs continue to affect importers and custom brokers in a variety of different ways.  Those importing goods subject to the new tariffs should immediately contact their surety to determine whether an increase in the bond amount is required.