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Legal Capsule by Economic Law Practice

Sanctions, Exports Controls, CFIUS and ICTS

As an important foreign policy tool to tackle geopolitical challenges, the United States (US) continues to impose economic sanctions on various countries including Iran, Russia, North Korea and Syria (sanctioned countries), individuals and companies (sanctioned persons). Further, to increase national security, advance its foreign policy interests and economy, the US maintains various regulations (including export controls and foreign investment related laws and regulations) against US and non-US
based companies.

Given the constantly changing nature of these regulations,  their  extraterritorial  applicability and more critically, the impact of these  regulations on businesses, it is important for international companies to keep abreast with any latest developments.

This article provides an insight on key regulations of the US which have a significant bearing on businesses globally.

Administered by: The Office of Foreign Assets Control, Department of Treasury, Department of State, Department of Commerce’s Bureau of Industry and Security, Department of Defense and Department of Justice.30

Primary Sanctions
Applicable to: Companies organized in the US, US citizens and permanent residents, and all persons located in the US, regardless of nationality.

Prohibition: Imposed by the US to prohibit the above from transacting with sanctioned countries or sanctioned persons. These US primary  sanctions are generally in the form of  asset  freezes or trade embargoes.

Secondary Sanctions
Applicable to: Non-US individuals and companies to deter them from entering into certain transactions that are contrary to US national security and policy interests.

Prohibition/Restriction: More specifically, secondary sanctions (which are generally in the form  of  restriction/limitation  to   the   US   market   or   financial   system)   are    imposed    on  non-US  individuals   and   companies   for   their significant transactions with sanctioned countries or sanctioned persons.

Case Studies
Case Study 1: In the past, the US imposed secondary sanctions (such as denial of export licenses, prohibition of foreign exchange transactions with the US financial system, blocking of all property and interest in property within US, visa ban) on a Chinese company and its Director for engaging in significant transactions with a Russian sanctioned company. According to the US Department of State, the significant transactions between the Chinese company and Russian sanctioned company involved delivery of Su-35 combat aircraft in 2017 and S-400 surface-to-air missile  related  equipment in 2018 by the Russian company to the Chinese company.31

Case Study 2: An Indian company 32, its subsidiaries and individuals were recently sanctioned for its involvement with an Iranian network that supplied oil to Syria in breach of US Sanctions laws33. Consequently, all the property and interests of these Indian companies in the US or in control or  possession of US persons were blocked. As a result, individuals or companies that engage in certain transactions with these designated companies may themselves be exposed to US sanctions laws.

Administered by: The US Bureau of Industry and Security (BIS), US Department of Commerce.

Applicable to: Non-US companies for acting contrary to US national security and  foreign  policy interests.

Prohibition/Restriction: The US maintains various lists/entity lists, whereby the US identifies certain foreign companies and its affiliates as posing a significant risk of involvement in activities contrary to US national security interests. Consequently, the exporters in the US and foreign re-exporters are required to apply for license for exporting, re-exporting or transferring any commodity, software or technology (collectively referred to as “items”) subject to the US Export Administration Regulations 34(EAR) to these listed companies.

Administered by: The US Department of Treasury, Committee on Foreign Investment  in  the United States (CFIUS) under the Defense Production Act of 195937 (Act of 1959) has the power to review certain transactions involving foreign investments in the US (“covered transactions”38) to determine the effect of such transactions on the national security of the US.

Applicable to: The US Department of Treasury has provided an illustrative list of transactions that have presented national security considerations for the US, whereby it has conducted a unilateral review of the covered transaction:

  • A business - based out of the US which has government contracts/operations relevant  to US national security or deals in certain  advanced technologies or goods and services controlled for export
  • Track record of the foreign person acquiring control of the US business, or the record of person’s country of origin
  • Foreign government-controlled transaction

Besides the power to review  covered  transactions, the CFIUS (pursuant to Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)) also has the power to review certain non-controlling investments made by foreign persons in US businesses involved in technologies related to specific industries.

Further, the proposed CFIUS regulations to implement FIRRMA (which were recently published for comments) seeks to broaden the powers of the CFIUS to review certain foreign non-controlling investments (for example,  supplies critical infrastructure or  collects  sensitive personal data of US citizens) and real estate transactions that previously fell outside CFIUS’s jurisdiction. Further, the proposed CFIUS regulations provides for exclusion of certain investors from its jurisdiction provided they qualify certain criteria including that the foreign investor is a national of an excepted foreign state and is in compliance with certain law and regulations.43

Consequently, companies that intend to invest in the US should keep themselves abreast with the key developments in this area – as their investments may be subject to mandatory review by the CFIUS. If faced with non-compliance, they may also face penalties for any violations of the   US laws or national security considerations.

Administered by: The US Department of Commerce, on November 26, 2019, issued “Securing the Information and Communications Technology and Services Supply  Chain”  - proposed rules that can potentially block or restrict transactions involving “information and communications technology and services” (ICTS) from a “foreign adversary”.

Applicable to: Under the proposed rules, the Secretary of Commerce has been given the power to evaluate the effect – of any transaction i.e. acquisition, importation, transfer, installation, dealing in, or use of ICTS that has been developed, manufactured or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of “foreign adversary” – on the national security, foreign policy, and economy of  the  United States.44 However, the following three conditions are required to exist for the Secretary  of Commerce to exercise the aforesaid power of evaluation:
  • Transaction is conducted by any person subject to US jurisdiction or involves property subject  to US jurisdiction;
  • Transaction involves any property in which any foreign country or foreign national has an interest; and
  • Transaction was initiated, is pending, or will be completed after May 15, 2019.
Further, the power to determine who is a foreign adversary has also been vested with  the Secretary of Commerce in consultation with other relevant authorities under the proposed rules.

While the Department of Commerce has not identified any list of individuals or countries or countries that are foreign adversaries, various stakeholders opine that these proposed rules have been issued to target Chinese ICTS companies.

In any event, considering that the criteria  to review a transaction under the proposed rules is open-ended, a wide range of transactions involving US and foreign companies operating in the ICTS sectors may be impacted.

The current international business environment is getting increasingly  unpredictable  with geo-politics playing a far greater role. Businesses are vulnerable to far greater risks – risks of geopolitical changes, sanctions and protectionism.
It is important for international companies to understand the impact of the above challenges to remain sustainable and competitive. Companies must have robust compliance  programs  – including – monitoring investors, customers and procurement and supply backgrounds. For companies wanting to do business with the US, vigilance will be the new normal.

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