Archive for June, 2018


Jun

27

US to China: No Robots for You!


Posted by at 11:23 am on June 27, 2018
Category: BISChinaExport Control Proposals

Robot by Johnson Cameraface [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/87B4de [cropped]The Wall Street Journal reports that the White House is cooking up new export controls on China. The idea is to restrict exports to China of technologies that could assist in China’s Made in China 2025 manufacturing upgrade initiative. That initiative focuses on 10 priority industries, which include new advanced information technology; automated machine tools and robotics; aerospace and aeronautical equipment; maritime equipment and high-tech shipping; modern rail transport equipment; new-energy vehicles and equipment; power equipment; agricultural equipment; new materials; and biopharma and advanced medical products.

Some of these items and technology might on the Commerce Control List and may already be controlled for export to China. Others clearly are not. Politico reports that the National Security Council is drawing up a list of technologies to be controlled for export to China targeting the priority sectors for Made in China 2025. It is not clear whether “technology” here includes the common usage which would cover goods or only the more technical use of that term by BIS which covers information only. The NSC List is scheduled to be released on Friday, so we should know more then.

How this new list will play out in relation to foreign availability determinations under Part 768 of the EAR is also anyone’s guess. Certainly technologies in many of the targeted sectors will remain available to China from other foreign countries, none of which can reasonably be expected to adopt these controls.

Another issue, not to suppose that the White House cares about complying with the General Agreement on Tariffs and Trade (“GATT”), is the extent to which these new export restrictions comply with the prohibition on quantitative export restrictions in Article XI of GATT. Certainly, these restrictions will not fit within the stated exceptions to the prohibitions on such restrictions in Article XI — namely, protection of domestic supply of “foodstuffs or other products essential to” the exporting country. Nor do they have any relation to “classification, grading or marketing of commodities in international trade.”

Instead, the restrictions can only be justified on the basis of Article XXI’s national security exception which provides the basis in GATT for most export control regimes. The national security exception in Article XII is related to “fissionable materials,” “traffic in arms,” or “war or other emergency in international relations.” Obviously the reference to war in Article XII is not a reference to a trade war, so it seems unlikely that the new export restrictions could survive a WTO challenge.

Photo Credit: Robot by Johnson Cameraface [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/87B4de [cropped]. Copyright 2010 Johnson Cameraface

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Copyright © 2018 Clif Burns. All Rights Reserved.
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Jun

15

DOJ Limits What Lawyers Can Say to OFAC without Registering as a Foreign Agent


Posted by at 5:37 pm on June 15, 2018
Category: FARAOFAC

By Another Believer [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], via https://commons.wikimedia.org/wiki/File:Department_of_Justice,_Washington,_D.C._2012.JPG [cropped and processed]Now that DOJ has started more actively prosecuting FARA violations, it decided to upload to its website a bunch of advisory opinions that apparently had been languishing in a file cabinet somewhere in the depths of Main Justice. Whether or not this is good news remains to be seen, but at least one of the advisory opinions given to a law firm handling a matter before the Office of Foreign Assets Control (“OFAC”) is more than a little troubling.

The advisory opinion responded to a request by an unnamed law firm that was representing an unnamed foreign company and an unnamed foreign individual in connection with the potential designation and blocking of the company and individual by OFAC. The opinion notes, rightly, that a law firm acting on behalf of a foreign company or a foreign individual would be an “agent of a foreign principal” (or as some newspaper reporters like to say, a “spy”) under section 1(c) of the Foreign Agents Registration Act of 1938, 22 U.S.C. § 611(c) and would be required to register under that act unless an exemption applies.

The discussion in the opinion then turns to the exemption in section 613(g) for “persons qualified to practice law.” That exemption expressly excludes, as the advisory opinion notes,

attempts to influence or persuade agency personnel or officials other than in the course of judicial proceedings, criminal or civil law enforcement inquiries, investigations, or proceedings, or agency proceedings required by statute or regulation to be conducted on the record.

The advisory opinion notes the further qualifications on this exclusion contained in section 5.306 of the FARA regulations, which limits such exclusion of activity outside the described proceedings to “only such attempts to influence or persuade with reference to formulating, adopting, or changing the domestic or foreign policies of the United States.” (Emphasis added.)

Now the ordinary, indeed the only, reading of this is that contacts with agencies outside of the proceedings, inquiries and investigations described in the exemption require registration only if they are designed to influence formulating, adopting or changing the domestic or foreign policies of the United States. But that’s not how DOJ reads it.  Instead, the opinion states that attempts to influence policy will require registration even if those attempts occur during the types proceedings described in the exemption.

[T]he two primary activities you described in your letter, first [US law firm]’s representation with respect to any investigation or enforcement proceedings undertaken by the Department of Justice or another U.S. government agency involving [foreign person] or [foreign bank], and second, [US law firm]’s December 8, 2017, request to OFAC on behalf of [foreign person] and [foreign bank], that OFAC stay designation of [US law firm]’s clients until [US law firm] could present facts to OFAC, fall within the definitions set out within Section [61]3(g) FARA and its implementing regulations. In particular, the limited scope of [US law firm]’s December 8, 2017, letter to OFAC, appears to stop short of an attempt to influence OFAC’s policies regarding its sanctions regime beyond its specific application to [US law firm]’s representation of [foreign person and foreign bank]. If at any point in the future, [US law firm] engages in a discussion or exchange with OFAC that implicates wider policy or political considerations, then it would not be able to avail itself of the exemption and could be required to register.

It is significant here that DOJ starts by saying explicitly that the activities before OFAC by the law firm on behalf of the foreign company and individual are the types proceedings covered by the exemption for lawyers set forth in section 613(g). Even so, it applies the restriction on attempts to influence policy even though section 5.306 only refers to lawyers contacts with agencies outside of the types of proceedings described in section 613(g). It isn’t hard to see the difficulty here. If a law firm argues that its client has not violated any rules that require designation by OFAC, no FARA registration is required. But if the law firm argues, as might often be the case, that even if the client has violated those rules there are policy reasons that the agency should consider in exercising its administrative discretion not to designate the client, FARA registration is required. Even if that is what the act and the regulations say (and they do not), that would be stupid policy. Oops. Wait, do I have to register now???

My guess is that the law firm had an entirely different concern than whatever it was that caused DOJ to jump down the rabbit hole of limiting policy arguments. Although DOJ readily conceded that the proceeding in front of OFAC was one of the types of proceedings described in section 613(g), that really is a rather difficult question. The language in 613(g) could be read to cover agency proceedings only if they are required to be “on the record.”

Nothing in the International Emergency Economic Powers Act or OFAC regulations require the determination to designate a foreign company or individual to be conducted “on the record.” Not even the rules in section 501.807 for setting aside a designation require these proceedings to be “on the record.” This is probably what prompted the law firm’s inquiry in the first place since it was attempting to influence the agency’s determination to designate its clients. a proceeding that was not arguably required to be “on the record.”  It seems DOJ here says, albeit indirectly, that the proceedings to designate were one of the type of proceedings described in the exemption for lawyers representing foreign clients and that, by implication, the exemption for lawyers covers agency proceedings that are not on the record.  But having said that, DOJ went on and, in violation of both the statute and the rules, imposed a troublesome limitation on what lawyers can do in those proceedings without registering as a foreign agent.

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Copyright © 2018 Clif Burns. All Rights Reserved.
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Jun

8

EU Commission Menacingly Threatens Toothless Blocking Regulation


Posted by at 7:34 pm on June 8, 2018
Category: Foreign CountermeasuresIran SanctionsOFAC

Louis XIVOn June 6, the European Union Commission adopted a delegated regulation amending the Annex to Council Regulation (EC) No. 2271/96 of 22 November 1996.  Council Regulation (EC) No. 2271/96 is the notorious EU blocking regulation which forbids individuals and companies in EU member states from complying with the U.S. embargo on Cuba.   The Annex to that Regulation specifies the laws and regulations that are blocked.  The delegated regulation will add U.S. sanctions on Iran to the Annex, and it will go into force on August 6 unless, between now and then, the EU Council or Parliament objects.

As you might imagine, I think that this is a misguided, if not preposterous, response to the U.S. withdrawal from the Iran nuclear deal.  The blocking regulation, as currently applied to Cuba, has had no effect on the U.S. embargo on Cuba and has instead put businesses in the untenable position of having to decide whether to break U.S. law or EU law.  And, of course, we all know what decision businesses in this position have invariably made in the past and will continue to do so even in the face of the expanded scope of the blocking regulation.

And the reason for that is clear:  OFAC has imposed significant penalties for violating the Cuba sanctions even where the Company was required by the EU blocking regulation to violate those sanctions.  OFAC has ignored the existence of the statute and not even considered it a mitigating factor.  In fact, it could be argued that in at least one case it has considered it an aggravating factor if the European company was attempting to comply with the blocking regulation.  Companies measure the risk of the wrath of OFAC against the toothless enforcement of the EU blocking regulation and decide to bow down to their OFAC overlords, not their European ones.

The U.S. sanctions on Iran can apply to European companies in three situations.  First, the sanctions apply if the European company is a foreign subsidiary of a U.S. company.   Second, they apply if the European company causes the export of goods or services from the United States to Iran.  Third, there are “secondary” sanctions that will apply to certain activities unconnected to the US, like engaging in significant transactions with the Iranian shipping, ship-building and energy sectors.  The laws and regulations added to the blocking regulation would prohibit compliance with the U.S. sanctions in all three instances.

On the other hand, the Annex does not reach all instances of U.S. sanctions on Iran.  Many Iranian entities, such as Bank Saderat, Mahan Air and the Islamic Revolutionary Guard Corps are designated under the Global Terrorism Sanctions Regulations which are not mentioned in the amended Annex. Tidewater Middle East, which operates the port at Bandar Abbas, is designated under the Weapons of Mass Destruction Proliferators Sanctions Regulations, also not added to the amended Annex.

As with all blocking statutes, enforcing this will be a headache.  Article 5 provides that “no person referred to in Article 11 shall comply, … actively or by deliberate omission, with any requirement or prohibition … based on … the laws specified in the Annex.” So let’s say that an EU company decides not to invest in an Iranian oil field project. Was that because of the sanctions or because the company thought it was a bad investment for reasons unrelated to the sanctions, say fear of corruption or geopolitical risks? Suppose an EU company complies with a request from a US customer to provide a certificate that the goods being sold originate from an EU Member State. Is providing that certificate complying with the US law prohibiting U.S. companies from acquiring goods of Iranian origin or just accommodating a US customer’s desire for EU-origin goods?

Of course, the group of companies that the amendment really puts in a pickle are EU subsidiaries of U.S. companies. Article 11 states that the regulation applies to any “legal person incorporated within the Community.” Section 560.215 of the Iranian Transactions and Sanctions Regulations, now added to the Annex, makes it illegal for such EU subsidiary to engage in a transaction with Iran if it would be illegal for a U.S. person to engage in that same transaction.  These two provisions mean that sooner or later these companies will be in the unenviable position of deciding which law to break. And we know which law they will chose to break already, don’t we?

So what exactly does the EU think it’s accomplishing here? The blocking regulation has been in effect with respect to Cuba for 22 years with no appreciable effect on the Cuba embargo. Do the wise men and sages of the European Commission expect that Trump, when he hears of their bold amendment of the Annex, will burst into tears and beg to rejoin the Iran nuclear deal? Do they think this Amendment will cause OFAC to tear the Iranian Transactions and Sanctions Regulations into tiny pieces and scatter them over the Potomac River? Because none of these things is going to happen. You know what will happen? Sanctions lawyers will have a lot more work. That’s it.

Morale of the story (from Louis XIV): “C’est toujours l’impatience de gagner qui fait perdre.”

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)