On October 12, 2017, the United States lifted its general commercial embargo on Sudan. Because Sudan has played a role in international terrorism, the U.S. has maintained a comprehensive embargo against Sudan since 1997. These sanctions were contained in executive orders and the Sudanese Sanctions Regulations (SSR).

Following a 16-month diplomatic effort, the United States removed sanctions that had prohibited U.S. persons from engaging in or facilitating most transactions that involved Sudan or its government. U.S. persons may now engage in most transactions without the need for a general or specific license from the Office of Foreign Assets Control (OFAC).

On January 17, 2017, the U.S. temporarily lifted sanctions with respect to Sudan and its government. OFAC issued a general license that temporarily authorized transactions prohibited by the SSR, which was contingent on the U.S. government’s determination regarding Sudan’s developments in key areas. Earlier this month, the Secretary of State provided a determination to President Trump that the government of Sudan has made positive development in the cessation of hostilities in conflict areas, improving humanitarian access throughout Sudan, and addressing regional conflicts and threats of terrorism.

Effective October 12, 2017, the temporary general license is no longer operable and OFAC authorization is not required for proposed transactions that were previously prohibited by the SSR, unless the proposed transaction implicates the Darfur Sanctions Regulations or other OFAC-administered sanctions regulations.

While most sanctions were lifted, significant restrictions remain in place for those seeking to trade with Sudan, primarily with respect to export controls and individuals and entities listed on the Specially Designated Nationals List (SDN List). OFAC sanctions related to the conflict in Darfur still remain in place, and the revocation does not affect OFAC’s designations of any Sudanese persons pursuant to other sanctions authorities.

Additionally, this does not impact Sudan’s status as a state sponsor of terrorism. Pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), an OFAC license is still required for certain exports and reexports to Sudan of agricultural commodities, medicine, and medical devices as a result of Sudan’s inclusion on the State Sponsors of Terrorism List (SST List).

General License A, which went into effect on October 12, 2017, authorizes exports and reexports of certain TSRA items to Sudan. General License A is available for review here. General License A replaces the need for any existing general or specific licenses currently issued to authorize conduct that was otherwise prohibited under the Sudan sanctions program.

U.S. persons are still required to comply with the export and reexport controls of the Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security (BIS). These requirements include restrictions that are maintained as a consequence of Sudan’s inclusion on the SST List and apply to certain exports and reexports of items on the Commerce Control List. BIS also maintains end-use and end-user controls on the export and reexport to Sudan of EAR99 items by U.S. persons and non-U.S. persons.

Despite lifting the general commercial embargo on Sudan, the sanctions revocation does not affect past, present or future OFAC enforcement actions related to violations of the SSR that occurred prior to January 17, 2017. Additionally, the revocation does not mean that sanctions cannot be quickly reimposed by the U.S.

In recent decision, the Court of International Trade entered a $1.6 million award against shoe importer, Sterling Footwear, Inc. (“Sterling”), for what it found to be grossly negligent product misclassification.  Granting the U.S. Government’s motion for summary judgment in part, the Court left open the possibility of additional penalties of up to $20.8 million once the liability of Sterling’s owner and a related company  are determined at trial.

The Court found that in 337 entries between 2007 and 2009, Sterling had misclassified footwear as “rubber tennis shoes” under subheading 6402.91.40 of the Harmonized Tariff Schedule of the United States (“HTSUS”) which covers footwear for which 90% of the exterior of the shoe or boot is covered with rubber or plastic.  When U.S. Customs and Border Protection (“CBP”) examined samples from the entries, it found that the shoes had rubber soles but that the upper part of the shoes were made of fabric and connected by a foxing band (a strip of material that covers and secures the joint between the upper and lower part of the shoe).  Therefore, the shoes were not properly classified under subheading 6402.91.40 and were subject to a higher duty.

CBP sent several notices to Sterling regarding the misclassification.  CBP also met with Sterling leadership and their broker to explain the basis of their conclusions with regard to classification.  Despite these communications with CBP, Sterling took no action to amend their entries or defend its classification, prompting CBP to undertake a comprehensive investigation of Sterling’s voluminous entries. The Court found that — despite their assertions to the contrary — Sterling’s leadership had instructed its brokers as to how the shoes should be classified and disregarded the broker’s input.  Significantly, Sterling took no efforts to change the classification of its products after CBP’s notices of misclassification.

In light of the Court’s finding that the misclassification was the result of gross negligence, Sterling and the other defendants face a potential penalty totaling four times the actual and potential losses to the government.  In this case, $1.6 million in actual loss (mitigated down from $2 million through protests and surety payments) has already been awarded; however, $3.2 million in potential losses from misclassified entries have been identified by the government.  The $5.2 million penalties for actual and potential losses, which can be quadrupled in light of the grossly negligent conduct, leaves a potential penalty of $20.8 million still to be determined.

While proper classification of goods is every importer’s goal, this case illustrates that one must heed the instructions of CBP with regard to classification.  If you dispute CBP’s position there are avenues to challenge classifications both retrospectively and prospectively.  Doing nothing in response to CBP notices, however, is simply not an option.  Proper counsel can help you navigate classification issues before entries arrive in the U.S. and are essential if you receive a notice from CBP.

In a recent opinion, the Court of International Trade upheld the determination by U.S. Customs and Border Protection (CBP) that certain doorknobs imported by home-improvement retailer Home Depot are properly classified as locks and subject to a higher duty than other doorknobs.

In essence, the dispute came down to a question of whether a doorknob that locks is (i) a doorknob or (ii) a lock.

Doorknobs are classified heading 8302 of the Harmonized Tariff Schedule of the United States (HTSUS) which covers “[b]ase metal mountings, fittings and similar articles suitable for . . . doors . . . .”  The relevant Explanatory Notes clarify that heading 8302  “covers general purpose classes of base metal accessory fittings and mountings, such as are used on furniture, doors, windows, coachwork, etc”  and that the term “[m]ountings, fittings and similar articles suitable for buildings” includes “handles and knobs for doors, including those for locks and latches.” Doorknobs classified under heading 8302 are subject to 3.9% duty.

Locks, on the other hand, are classified under HTSUS heading 8301 which covers “[p]adlocks and locks (key, combination or electrically operated), of base metal.” Locks classified under heading 8301 are subject to a 5.7% duty.

Home Depot argued that its products, doorknob sets consisting of exterior and interior doorknobs with trim, a latch component, strike plate, keys, and installation hardware, were plainly doorknobs under heading 8302.  Home Depot argued that the products were an “improved” doorknob with a lock function. CBP argued that products were, first and foremost, locks to secure an exterior door, as evidenced by the “key-operated” nature of the products.  The Court agreed with CBP, finding that the doorknobs were part of the lock, specifically, they were the lever used to open the lock.  The Court also cited Home Depot’s testing and advertising of the knobs as locks.  The Court clarified that doorknobs without this locking function are still properly classified under heading 8302.

One take away from the Court’s decision was its rejection of Home Depot’s argument that the products at issue were similar to other knobs that had been classified under heading 8302.  The Court reiterated that HTSUS does not call for a comparison of articles under a giving heading, but rather that each article is to be compared to the wording of the tariff provisions.  As advocacy to CBP and the Court is often by done by analogy to similar articles, it is important to always remain focused on the language of the tariff provision itself.

In a recent post, we discussed the lawsuit brought by battery behemoth Duracell against a company that it was importing “gray market” versions of its copper-topped products. In that action, Duracell has argued that the warranty that comes with its U.S. batteries is ten times longer than the warranty that comes with the batteries that Duracell sells to electronic manufacturers and which the defendant sought to import.  Accordingly, Duracell argued that this material difference in the warranty should permit it to block the importation of the unauthorized batteries under the Lever-rule which permits the restriction of gray market imports which are materially different from those generally offered to U.S. consumers.

Duracell’s battle to control gray market goods, however, is one fought on many fronts.

In the recently amended complaint in a separate action before the Court of International Trade, an Milecrest Corp., an importer and distributor of gray market Duracell batteries, challenged U.S. Customs and Boarder Protection’s grant of Lever-rule protection to Duracell.  Specifically, the Milecrest alleges that CBP failed to comply with the Administrative Procedure Act, 5 U.S.C. 551 et seq., when it granted Duracell Lever-rule protection in March 2017 based purported material differences in “label warnings, consumer assistance information, product guarantees, and warrant coverage.”  Milecrest alleges that CBP did not take required public comment before issuing the grant notice and, if it had done so, it would have been made aware that many of Duracell’s own products are not sold with label warnings, customer assistance information, guarantees, or warranty information on the batteries themselves, which would have undercut Duracell’s claim for Lever-rule protection.  In addition, Milecrest argues that the grant is arbitrary and capricious because CBP should have considered Duracell’s own non-conforming batteries and denied the request for protection.  Finally, Milecrest argues that the grant is vague because it fails to specifically identify the products to which it applies or what warnings, etc. will trigger Lever-rule protection and which products will be permitted to be imported.

An interesting aside, the Court recently rejected Milecrest’s efforts to proceed anonymously, holding that potential infringement lawsuits by Duracell were not a sufficient reason to warrant concealing the company’s identity in connection with this matter.

Duracell’s ongoing efforts to control gray market goods demonstrates how producers and importers must be constantly vigilant and take appropriate offensive as well as defensive positions regarding the same goods and the same core legal issues.  Proper counsel can help companies navigate when offensive legal action are advantageous and when defensive advocacy becomes required to protect ones’ business.

 

On Wednesday, the U.S. Department of Commerce began its preliminary phase antidumping and countervailing duty investigations pursuant to the Tariff Act of 1930. The Department of Commerce is looking into whether the imports of stainless steel flanges from China and India, which are alleged to be sold in the U.S. at less than fair value and alleged to be subsidized by the Chinese and Indian governments, are materially injuring the U.S. industry.

The U.S. antidumping law imposes special tariffs to counteract imports that are sold in the U.S. at less than fair value. The U.S. countervailing duty law imposes special tariffs to counteract imports that are sold in the U.S. with the benefit of foreign government subsidies. For these duties to be imposed, the U.S. government must determine that there is material injury, or a threat of material injury, by reason of the dumped and/or subsidized imports.

The probe by the Department of Commerce comes after two privately held companies filed petitions. The two petitioners are the individual members of the Coalition of American Flange Producers: Core Pipe Products, Inc. and Maass Flange Corporation. The petitioners alleged dumping margins in China ranging from 99.23% to 257.11%, and for India margins ranging from 78.49% to 145.25%.

The products covered by these investigations are certain forged stainless steel flanges, whether unfinished, semi-finished or finished. The term “stainless steel” refers to an alloy steel containing, by actual weight, 1.2% or less of carbon and 10.5% or more of chromium, with or without other elements.

It is the job of the Department of Commerce to determine whether the alleged dumping or subsidizing is occurring, and if so, the margin of dumping or the amount of the subsidy. The United States International Trade Commission (“USITC”) will determine whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation. If both the Department of Commerce and the USITC reach affirmative final determinations, then the Department of Commerce will issue an antidumping or a countervailing duty order to offset the subsidy.

The USITC is scheduled to make its preliminary determination regarding the injury on or before October 2, 2017. If the USITC determines that there is injury, the investigations will continue, and the Department of Commerce will makes its preliminary countervailing duty determination in November 2017, and its antidumping determination in January 2018, though these dates may be extended.

The results of the investigation could impact both importers and purchasers. Importers will be liable for any potential duties that are imposed by the U.S. government. Purchases could be impacted because the determination could result in increased prices and/or decreased supply of stainless steel flanges.

In its recent decision in United States v. Allen, 16-cr-898, the Second Circuit Court of Appeals held that testimony which is compelled pursuant to laws of foreign jurisdictions violates the Fifth Amendment right against self-incrimination when used as part of a U.S. prosecution.  The ruling may have a far-reaching impact on the U.S. Department of Justice’s (DOJ) enforcement of the Foreign Corrupt Practices Act, which often rely on evidence obtained by foreign investigators.

In US v. Allen, the defendants were accused of being part of a conspiracy to manipulate the London Interbank Offered Rate (LIBOR), a benchmark interest rate underlying financial instruments around the world. The LIBOR scheme and the defendants, U.K. nationals, were originally investigated by U.K. authorities.  As part of that investigation, the defendants were compelled to give testimony to the U.K.’s Financial Conduct Authority (FCA). The FCA is duly authorized to compel the testimony of those under investigation and there is no allegation that the circumstances under which the defendants’ testimony was compelled violated of U.K. law.  The defendants’ testimony before the FCA became the centerpiece of charges in the United States for wire fraud and conspiracy to commit wire fraud.

The Second Circuit voiced its concern that, even though the statements were obtained in accordance with U.K. law, the statements still constituted compelled statements under the Fifth Amendment to the United States Constitution.  Therefore, the Court found that the use of any such compelled statement  against the defendants in a criminal matter was a facial violation of the Fifth Amendment.  Accordingly, the Court overturned the defendants’ convictions and dismissed the indictment

The Court was unmoved by the DOJ’s arguments that their FCPA investigations and prosecutions, many of which rely on evidence obtained from foreign governments and compelled statements, would be undermined by an adverse ruling from the Court.  While it appears clear that FCPA prosecutions cannot rely on the contents of compelled statements as the basis for a U.S. prosecution, it remains to be seen how extensively Courts may apply the fruit of the poisonous tree doctrine.  Indeed, while confronting a defendant with compelled statement may run afoul of the Fifth Amendment, Court’s could question the admissibility other evidence collected by foreign authorities following or as a direct result of a defendant’s compelled statements.  While Constitutional Law scholars could likely fill volumes regarding such a debate, the practical effect on FCPA may unfold quickly as prosecutors will need to sure up their ongoing cases with admissible evidence if compelled statements are no long permissible.

On Thursday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced a $415,350 settlement agreement with COSL Singapore Ltd. (“COSL”). The parties settled a potential civil liability claim for 55 apparent violation of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR), which took place between October 2011 and February 2013.

COSL is a Singapore-based subsidiary of a Chinese oil field service company. It has several offshore drilling oil rigs and enters into charter agreements with third-party drilling companies to allow those parties to use its oil rigs.

Between October 2011 and February 2013, the procurement specialists for COSL purchased at least 55 orders of supplies from vendors located in the U.S. that were specifically intended for export or re-export to oil rigs located in Iranian territory. These purchases were made despite some warning from U.S. vendors that the goods should not be shipped or re-exported to countries subject to U.S. sanctions, including Iran.

OFAC determined that COSL used its own subsidiary companies, COSL Drilling Pan Pacific (Lbuan) Ltd. and COSL Drilling Pan Pacific Ltd., to export or attempt to export the oil rig supplies from the U.S. to Singapore and the United Arab Emirates before re-exporting or attempting to re-export the supplies to oil rigs located in Iranian territory.

COSL has agreed to pay $415,350 to settle potential civil liability, which is a lot less than what the potential liability could have been for COSL. The statutory maximum penalty amount for the apparent violations is $13,750,000, and the base penalty amount is $923,000.

OFAC considered aggravating and mitigating factors in determining the settlement amount. Some of the aggravating factors included: (1) COSL is a large sophisticated company doing business throughout the world; (2) COSL did not have an OFAC compliance program in place at the time of the transactions; and (3) OFAC determined that the exportation or re-exportation aided in the development of Iran’s energy resources.

The mitigating factors included: (1) COSL did not have any prior sanctions history; (2) COSL took remedial action by instituting an OFAC sanctions compliance program; and (3) COSL displayed substantial cooperation throughout the investigation process.

Companies that are involved in international trade and conduct business in the U.S. or with U.S. companies should have an OFAC compliance program in place. If companies are in a situation where they may have violated Iranian sanctions programs (or other U.S. sanctions programs), full cooperation with OFAC is essential.

President Trump can officially begin renegotiating NAFTA tomorrow, August 16th. The negotiation process can only start 90 days after President Trump officially notified Congress of this intention, which took place on May 18th.

The North American Free Trade Agreement (NAFTA) became law in 1994. NAFTA is a comprehensive trade agreement that sets the rules of trade and investment between the U.S., Canada, and Mexico. NAFTA created one of the world’s largest free trade zones. Pursuant to the deal, each NAFTA country forgoes tariffs on imported goods originating in the other NAFTA countries.

Supporters of NAFTA believe the agreement has helped boost the economies of the NAFTA countries. According to the U.S. Chamber of Commerce, 14 million U.S. jobs depend on trade with Canada and Mexico. Others believe NAFTA has hurt the economy by creating incentives for companies to relocate manufacturing and other jobs offshore.

President Trump has called NAFTA the worst trade deal in history, and he believes NAFTA is responsible for sending millions of U.S. manufacturing jobs to Mexico. Instead of leaving the trade pact and scrapping it entirely, the Trump administration will renegotiate the agreement.

Since announcing the decision to renegotiate the trade deal, the United States Trade Representative (USTR), Robert Lighthizer, has been consulting with and receiving input from members of Congress, the public, and various trade associations and special interest groups. For example, members of Congress have supported the inclusion of a competition chapter in NAFTA as a way to demonstrate the U.S.’s leadership in promoting competition and fairness in trade.

The public has also been responsive to the USTR’s request for public comment, which resulted in more than 12,000 responses and testimony from over 140 witnesses during three days of public hearings. See our earlier post here regarding the public comments on matters relevant to the modernization of NAFTA.

The USTR released a detailed summary of the negotiating objectives related to the NAFTA renegotiation. The USTR has included deficit reduction as a key objective of the renegotiation. Another major goal is to improve market access in Canada and Mexico for U.S. manufacturing, agriculture and services.

We will be following the negotiations in the coming weeks and months to see how the renegotiation will impact trade policies and practices moving forward.

On the firm’s Energy Law Today blog, Fox Partner Mark V. Santo discusses the renegotiation of the North American Free Trade Agreement (NAFTA) and its potential impact on the natural gas trade between the U.S. and Mexico.

North America from space
Copyright: antartis / 123RF Stock Photo

“Mexico imports nearly all of its natural gas from the U.S. and exports to Mexico are expected to double by 2019, with Texas fields being the primary source. At least 17 pipelines currently carry four billion cubic feet of natural gas a day from Texas to Mexico, with four additional cross-border pipelines in the works. Mexico’s demand for U.S.-sourced natural gas has been a boon to domestic producers as it has greatly offset the oversupply of natural gas production. Without this outlet to Mexico, natural gas producers in the U.S. will face a severe downturn with wells shut, job losses and investment curtailed.

The U.S.-Mexico natural gas symbiotic relationship is just one example of the tri-nation supply chain intricacies and complexities forged under NAFTA. There are countless others, such as deep supply chains in agriculture, construction materials and autos to name a few….”

Mark notes the key provisions of the agreement that the Trump Administration will seek to alter. These provisions relate to the remedies available should a NAFTA nation’s exports injure the domestic market of another NAFTA member.

To read Mark’s full post, please visit the Energy Law Today blog.

Co-Author, Santos Ramos

On June 16, 2017, President Trump announced changes to United States’ Cuban sanctions regime which will stem the tide of liberalization that Obama Administration set in motion 2014. While the regulatory changes have not yet taken effect, the Department of Treasury’s Office of Foreign Assets Control (OFAC) released updated its online resources to reflect the Trump Administration’s forthcoming changes.  Most notably, under the announced changes, individual “people-to-people” travel will no longer be permitted and any trade or business ventures involving Cuba’s military, intelligence and security services is strictly prohibited.

Travel

Trump Administration’s new Cuban travel policies crack down on the potential for individual ‘vacation’ travel to Cuba. Under the Obama Administration’s reforms to the Cuban sanctions, individuals could travel to Cuba as long as they affirmed that they were engaged in permitted activities, such as educational and artistic study, news reporting, or other endeavors designed to promote and aid the Cuban people.  Under the newly announced changes, individuals will no longer be able to travel to Cuba on their own for “people-to-people travel” (i.e., educational travel that does not involve any academic study towards the pursuit of a degree and is not under the auspices of an organization). Group people-to-people travel will still be permitted as long as the group is led by a U.S.-based organization and maintains a full-time schedule of educational or other permitted activities. Unfortunately for those who may have already booked their tickets to Havana, the new regulation will not be prospective, meaning that any travel that does not conform with the new regulations (even if previously planned) will be prohibited.

Trade and Business

Companies seeking to do business in Cuba will also have to navigate stricter regulations. While trade and business ventures with the Cuban government remained restricted under the Obama Administration’s revised sanctions, the new rules will more clearly delineate entities which are associated with Cuban military conglomerate Grupo de Administración Empresarial SA (GAESA). GAESA, which is comprised of Cuban military, intelligence, and security services, has an extensive web of subsidiaries and ownership interests which some estimate touch as much as 60 percent of the Cuban economy. OFAC and Department of Commerce, Bureau of Industry and Security (BIS) will publish an extensive list of prohibited entities when the new regulations are completed. The new trade policy will be prospective, however, meaning that any contracts and licenses executed and issued prior to effective date of the new regulations will not be terminated.

What Should U.S. Companies Do?

U.S. companies which have already entered into contracts with a GAESA-related companies will be able to continue operating without any change. Any U.S. company seeking to begin or expand business in Cuba after the new policy takes effect, however, must heed the warning that any transaction with GAESA-related entities is prohibited. Moreover, while OFAC and BIS will strive to produce a comprehensive list of GAESA-related entities, it may prove to be a difficult and ever-evolving challenge.  Accordingly, despite any published list of entities, it will almost certainly remain the responsibility – and potential liability – of U.S. companies to know with whom they are conducting business. In addition, U.S. companies must be vigilant about any renewals of contracts or licenses with GAESA-related entities, as there has been little guidance as to whether renewing an existing contract will be considered continued operation or a new, prohibited engagement.