There’s Nork Gold in Them Thar Gadgets!

Posted by at 11:01 pm on March 29, 2016
Category: North Korea SanctionsOFAC

North Korean Commemorative Coin via KCNA at [Fair Use]

A Reuters story is hyperventilating over the new sanctions on North Korea and their impact on the discovery in 2014 reported by the Wall Street Journal that there might be North Korean gold in the U.S. supply chain. In reviewing conflict minerals issues, some companies discovered that electronic components purchased by them might have contained gold refined by the Central Bank of the Democratic People’s Republic of Korea. So do the new sanctions make this problem worse?

To begin with, imports from North Korea have required licenses since Executive Order 13570 in 2011 and are not affected or changed by the new sanctions. But if I purchase an electronic component from China that uses North Korean gold, have I imported that North Korean gold into the United States when I import the electronic component? The WSJ article linked above quotes an “attorney at Nixon Peabody LLP, who specializes in sanctions,” as saying this: “It’s a problem, even if the raw materials are coming very indirectly through suppliers.”

This is far from clear. Neither the Executive Order nor the implementing North Korea Sanctions Regulations define what constitutes an import from North Korea. There is no reverse de minimis rule that covers imports of items with any particular level of North Korean content, say, one atom, one molecule, 10 percent or 25 percent. In the absence of any specific rule, it seems reasonable that if the North Korean gold has been substantially transformed into another product outside the United States, import of the transformed item is not the import of any good from North Korea within the meaning of E.O. 13570.

Perhaps the most relevant provision in the new sanctions imposed by Executive Order 13722 is section 2(a)(i) which permits OFAC to block any person that OFAC determines

to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs.

Although that seems to pose some peril, in my example, for the Chinese company buying Nork gold for its electronic components, it is far from clear that it covers, or would be used to block, a U.S. company that buys the electronic component incorporating the Nork gold. This seems even clearer given that section 1702(a)(1)(B) of the International Emergency Economic Powers Act, under which Executive Order 13722, only provides blocking authority for “property in which any foreign country or a national thereof has any interest” and would not permit the blocking of U.S. company (and all its property) simply because it imported some items incorporating some North Korean content.

Of course, given that the foreign manufacturer using North Korean gold risks blocking, U.S. importers would be well advised to remove Nork gold from their supply chain, both because of the risk to their supply chain and the commercial optics of dealing with a foreign manufacturer that winds up being blocked under the new sanctions.

Photo Credit: KCNA

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Copyright © 2016 Clif Burns. All Rights Reserved.
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OFAC Issues New General License for Some Aircraft Negotiations with Iran

Posted by at 10:58 am on March 25, 2016
Category: Iran SanctionsOFAC

Iran Air Boeing 747SP-86 by Aero Icarus [CC-BY-SA-2.0 (], via Flickr [cropped and processed]Yesterday, the Office of Foreign Assets Control (“OFAC”) published Iran General License I which is designed to permit U.S. persons seeking to sell civil passenger aircraft and parts to Iran to negotiate executory contracts to make such sales provided that all such contracts are expressly contingent upon OFAC approval. Four new FAQs, labelled J.9 through through J.12, were added to explain the general license.

Specifically, the license permits “all transactions ordinarily incident to negotiation of and entry into” contracts for activities eligible for authorization under OFAC’s policy permitting the sale of passenger aircraft and parts to Iran. The general license is needed because the new policy required a license for the sales of those aircraft and parts and, by extension, would require licenses for the negotiations leading to such sales. At least one company had requested and received such licenses, leading OFAC to decide to issue a general license to eliminate the burden of processing such applications.

Not surprisingly, the license excludes any negotiations with “any person whose property and interests in property are blocked pursuant to any part of 31 C.F.R. chapter V other than part 560.” The key language here is “other than part 560.” Some Iranian airlines, and theoretical purchasers of passenger aircraft and parts, are designated under OFAC regulations other than the Iran Transactions and Sanctions Regulations found in part 560. For example, Mahan Air, the éminence noire of Iranian airlines, is sanctioned under part 561 (Iran Financial Sanctions Regulations) and part 594 (Global Terrorism Sanctions Regulations). Iran Air, the great white whale of Iranian airlines, on the other hand, is sanctioned only under part 560 as an entity controlled by the Government of Iran, meaning that negotiations with Iran Air under General License I would be permitted.

The most significant take-away from General License I is less what it specifically permits than what it implies is not permitted.  Many U.S. companies outside the aircraft sector, hoping against hope that all U.S. sanctions against Iran may soon be lifted, are wondering if they can negotiate with potential Iranian customers “just in case” provided any resulting agreement is contingent upon OFAC approval.  The answer now is quite clearly no unless a specific license to do so is obtained from OFAC.

Photo Credit: Iran Air Boeing 747SP-86 by Aero Icarus [CC-BY-SA-2.0 (], via Flickr [cropped and processed]]

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Copyright © 2016 Clif Burns. All Rights Reserved.
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Question of the Day

Posted by at 11:24 pm on March 24, 2016
Category: Iran SanctionsOFAC

Cyan Headquarters via Google Maps [Fair Use]
ABOVE: Cyan Headquarters

Today’s question is this: say you are a UK-based company that manufactures a product with U.S.-origin content which you want to sell to Iran? How do you do it?

According to this article, you sell the stuff to Iran through your subsidiary in India. Yes, seriously, that’s the answer that was given:

Cyan was also required to check if an export license would be required to export its products from both the UK and the US, since there is an element of its product that originates in the US. “UKTI (UK Trade & Investment) was very helpful in assisting us and confirming that no license would be required if we ship our products from our subsidiary in India …,” explains John [Cronin, Chairman of Cyan].

Oh dear. Let’s hope that’s a misquote or a misunderstanding. If you are a foreign person with a product with U.S. origin content, section 560.205 of the Iran Transactions and Sanctions Regulations quite clearly state the circumstances in which that product can be sold to Iran. That export is permissible only if the U.S. content has been “substantially transformed” into a new product or if all such content which would require a license from the United States constitutes less than 10 percent of the total value of the foreign product.

It does not say that the foreign person can, as the article suggests the Cyan chairman says, sell the product with U.S. content to Iran if you simply try to sell it through another non-U.S. subsidiary in India or elsewhere. I suspect that, as European companies rush to exploit the Iran market after Implementation Day, this will not be the first possible misunderstanding of the scope of the remaining U.S. rules and when they apply. (I am, of course, assuming that Cyan, in fact, determined the exceptions in section 560.205 applied and that Cronin was either misquoted or misunderstood the actual reason his exports to Iran passed the test.)

Photo Credit:Cyan Headquarters via Google Maps [Fair Use]

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Copyright © 2016 Clif Burns. All Rights Reserved.
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Easy Come, Easy Go, Easy Return: ZTE Temporary General License Issued

Posted by at 11:28 am on March 22, 2016
Category: BISEntity List

ZTE Stand 6 via [Fair Use]According to the Federal Register public inspection files, BIS will publish on March 24, a temporary general license authorizing exports to ZTE Corporation and ZTE Kangxun under the same terms and conditions as were in place prior to the order placing those two companies on the Entity List. This means that, effective March 24, licenses won’t be required for exports to these two entities unless licenses are otherwise required based on the exported item or the proposed end use. The temporary general license, which expires on June 30, 2016, does not include Beijing 8-Star or ZTE Parsian, which were included in the initial designation of ZTE entities.

The problem with the temporary general license is that there is no assurance that BIS will extend the license beyond that date. If an exporter relying on this license, exports an item to ZTE before June 26 but the license is then revoked, the exporter will be effectively excluded from warranty service on that item. Exporters shipping to ZTE during this regulatory limbo would be well advised to make sure that their contracts with ZTE are modified to prevent warranty claims by ZTE if the general license should, at any time, be revoked.

Photo Credit: ZTE Stand 6 via [Fair Use]

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Fat Man Sanctioned over Little Boy

Posted by at 11:16 pm on March 17, 2016
Category: BISNorth Korea SanctionsOFAC

Fat Man and Little Boy via KCNA [Fair Use]Yesterday, the White House released an Executive Order ramping up U.S. sanctions on North Korea as a result of a recent ballistic missile test by the Norks and, it can be reasonably assumed, as a result of the Fat Man‘s recent claim to have his own Little Boy (or is it vice versa?). The new sanctions impose a complete ban on all exports of goods and services to North Korea, and as usual, with any executive order that gets drafted over at OFAC, the order, whether due to sloppy drafting or purposeful ambiguity, raises more questions than it answers.

Here’s the relevant provision that needs to be parsed:

Sec. 3. (a) The following are prohibited:

(i) the exportation or reexportation, direct or indirect, from the United States, or by a United States person, wherever located, of any goods,
services, or technology to North Korea;

(b) The prohibitions in subsection (a) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order or pursuant to the export control authorities implemented by the Department of Commerce, and notwithstanding any contract entered into or any license or permit granted prior to the effective date of this order.

Prior to this order licenses have been required by the Bureau of Industry and Security for all items subject to the EAR other than food or medicine. BIS would license, on a case-by-case basis, EAR99 items (other than luxury goods) to North Korea. Items on the Commerce Control List subject to NP or MT controls are subject to a presumption of denial.

The new provision, due to the “notwithstanding” clause of subsection (b), appears to invalidate all existing specific licenses for exports to North Korea. Whether this Order changes the existing policy of BIS for future licenses is unclear and depends on what is meant by “export control authorities implemented by the Department of Commerce,” which is anybody’s guess. What is clear is that items not subject to the EAR, which previously could be exported to North Korea, cannot now be exported to the North Korea by U.S. persons unless such items are transshipped through the United States and a license is obtained from BIS or an OFAC license is obtained if the items are not shipped back to the United States first.

At the same time as the Executive Order, OFAC issued nine new general licenses, such as General License No. 7 which authorizes mail and telecommunications services to North Korea. Other general licenses permit most of the usual exceptions to bans on exports of services such as emergency medical services, legal services, intellectual property services, and personal financial remittances. Oddly, the normal exception for services related to Internet-based communications is not included. So, you can send snail mail to the Norks but sending email is not allowed.

One nagging question is whether the travel and information exceptions in the Berman Amendment remain in place. Neither OFAC’s existing North Korea regulations nor the order contain a travel exemption, such as the one contained in section 560.210(d) of the Iranian Transactions and Sanctions Regulations. Nor does the order or those regulations contain an exemption for informational materials such as is found in section 542.211(b) of the Syria Sanctions Regulations.

Both the travel and informational material exceptions in the Berman Amendment may not be applicable because the Berman Amendment only applies to actions taken under the International Emergency Economic Powers Act (“IEEPA”). This latest executive order relies not only on IEEPA but also on the North Korea Sanctions and Policy Enhancement Act of 2016 (Public Law 114-122). Whether or not section 3 of the new order is authorized by the North Korea Sanctions and Policy Enhancement Act is not clear.  If section 3 is authorized under that statute, services related to travel to North Korea and the provision of informational services to North Korea would not be permitted unless OFAC specifically authorizes such services in its regulations or provides for specific licenses which, so far, it has not done.

Photo Credit: KCNA

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