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Recently, the U.S. Senate overwhelmingly passed the 2019 National Defense Authorization Act, H.R. 5515 (NDAA). The Senate version contains several differences from the NDAA as passed by the House, and these discrepancies must now be resolved through a joint conference committee. Notably, the Senate attached to the NDAA its proposed Foreign Investment Risk Review Modernization Act (FIRRMA), which would update and alter the CFIUS review process. The House had not attached its CFIUS reform bill, H.R. 5841, but recently passed this bill as a standalone piece of legislation. Both bills would expand CFIUS jurisdiction to include certain types of non-controlling investments, affecting foreign investors in U.S. businesses. However, impacts would vary depending on whether the investor is from a country of special concern or an allied nation.

While there are also commonalities, important differences between the Senate and House proposed CFIUS reform legislation are described below.

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Following President Trump’s direction in connection with the Section 301 investigation into China’s acts, policies and practices related to intellectual property (discussed here), on June 15, 2018, the Office of U.S. Trade Representative (USTR) announced a 25% tariff increase on Chinese products valued at approximately $34 billion in 2018 trade values, with more tariff increases to come. Below, we describe USTR’s action and China’s response.

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On 23 May 2018, the Sanctions and Anti-Money Laundering Act became law in the United Kingdom. Its aim is to provide a legal framework to allow the UK to impose sanctions and implement its own sanctions regime once the UK leaves the EU on 29 March 2019. However, the Bill goes well beyond any current EU sanctions regime and provides scope for the Government to shape an autonomous UK sanctions policy.

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On May 23, 2018, as directed by President Trump, the Secretary of Commerce initiated a Section 232 investigation into whether imports of automobiles, including SUVs, vans, light trucks and automotive parts, threaten to impair national security. President Trump reportedly is contemplating tariffs as high as 25% on automobile imports, similar to the tariff imposed a result of its recent 232 action on steel imports.

The statute authorizes the President to “adjust imports” so that “such imports will not threaten to impair the national security.” The Trump Administration has interpreted “national security” very broadly to include effects on the general economy. For example, in the steel and aluminum investigations, the Administration found that U.S. producers must be commercially viable (i.e. attract sufficient commercial business) in order to supply defense needs.

Although the main target of the investigation appears to be automobiles, imports of parts are also covered. The Federal Register Notice published on May 30 does not define “automotive parts” and the term could be interpreted to cover any part incorporated into an automobile. For example, the Commerce Department’s press release referred to threats of imports “to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, [and] electric motors and storage.” Thus, the Section 232 investigation and any subsequent trade action potentially could extend beyond traditional car parts.

Per the Federal Register Notice, companies have an opportunity to submit comments and participate in a hearing.

In particular, the Commerce Department has asked for comments on the following factors:

  • The quantity and nature of imports of automobiles, including cars, SUVs, vans and light trucks, and automotive parts and other circumstances related to the importation of automobiles and automotive parts;
  • Domestic production needed for projected national defense requirements;
  • Domestic production and productive capacity needed for automobiles and automotive parts to meet projected national defense requirements;
  • The existing and anticipated availability of human resources, products, raw materials, production equipment, and facilities to produce automobiles and automotive parts;
  • The growth requirements of the automobiles and automotive parts industry to meet national defense requirements and/or requirements to assure such growth, particularly with respect to investment and research and development;
  • The impact of foreign competition on the economic welfare of the U.S. automobiles and automotive parts industry;
  • The displacement of any domestic automobiles and automotive parts causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects;
  • Relevant factors that are causing or will cause a weakening of the national economy;
  • The extent to which innovation in new automotive technologies is necessary to meet projected national defense requirements;
  • Whether and, if so, how the analysis of the above factors changes when U.S. production by majority U.S.-owned firms is considered separately from U.S. production by majority foreign-owned firms; and
  • Any other relevant factors.

The due date for filing comments, for requests to appear at the public hearing, and for submissions of a summary of expected testimony at the public hearing is June 22, 2018. Rebuttal comments are due July 6, 2018. There are also public hearings scheduled for July 19 and 20, 2018.

The Commerce Department is required to submit a report to the President with findings and recommendations within 270 days of initiating the investigation, which means the due date for the report is in February 2019. However, it is possible that the Commerce Department could act sooner. The President is required to determine whether to concur with the recommendation, and determine whether and how to respond, within 90 days of receiving the report.

The Section 232 investigation potentially will establish a basis for the imposition of new tariffs on automobiles and automobile parts from all countries, including the EU, Canada, China, Mexico, Japan, and South Korea. The EU, China, and the UK have expressed concerns about the newly initiated investigation and questioned the national security justification for tariffs. As demonstrated by the prior Section 232 actions on aluminum and steel, imports from allied countries will not necessarily be exempt.

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Long awaited rules for “Customer Due Diligence Requirements for Financial Institutions” (the CDD Rules) went into effect on May 11, 2018. FinCEN has taken steps to clarify and refine implementation of the CDD Rules, issuing (1) FAQs on April 3, 2018 and (2) a ruling on May 16, 2018 providing covered financial institutions with a limited 90-day exceptive relief from the obligations for financial products and services that are subject to automatic renewals, provided such products were established before May 11, 2018.

Covered financial institutions include banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The CDD Rules require financial institutions to identify and verify the identity of natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts. Covered financial institutions are now required to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and at least one individual who controls the legal entity. As part of the identification and verification requirement covered financial institutions are required to adopt risk-based procedures that contain, at a minimum, the same elements financial institutions are required to use to verify the identity of individual customers under applicable Customer Identification Program (CIP) requirements. These requirements are applicable every time a legal entity opens a new account. There also are certain ongoing monitoring responsibilities. For an expanded discussion of the CDD Rule, please see our previously published client alert.

FinCEN issued extensive FAQs on April 3, 2018 to offer clarifications on the CDD Rule. Among the FAQ guidance points, FinCEN clarified that covered financial institutions are required to collect information on a legal entity’s beneficial owners even in situations where the financial product in question was one that was subject to renewals, such as a loan or a certificate of deposit. FinCEN clarified that, consistent with the definition of “account” in the CIP rules and subsequent interagency guidance, loan renewals or roll-overs of certificates of deposit essentially lead to the establishment of a new account. Therefore, for financial products established before May 11, 2018, covered financial institutions are required to obtain certified beneficial ownership information at the time of the first renewal following that date. For subsequent renewals, financial institutions would not be required to collect beneficial ownership information so long as the legal entity customer and the financial product remained the same, and the customer certified as to the accuracy and current status of information pertaining to the beneficial owner. The FAQs further stated that if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or certificate of deposit is outstanding.

On May 16, 2018, FinCEN offered a period of limited relief as noted above. Financial institutions had expressed concern regarding their ability to comply with the CDD Rules, particularly in the context of financial products that automatically renew. Financial institutions often do not treat such products as new accounts. By virtue of FinCEN’s 90-day limited relief, which is being applied retroactively from May 11, 2018 and expires on August 9, 2018, financial institutions will not be obligated to collect beneficial ownership information on loans and certificates of deposit which are subject to automatic renewals. During this time, FinCEN is expected to review these rules and provide additional guidance.

Financial institutions should continue to monitor FinCEN guidance as the industry implements the CDD Rule. Even with the long delay between the final rule and effective date, industry and regulators will likely continue to be in a feedback and adjustment period for the near future.

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There are several legislative proposals pending in Congress targeting trade and investment involving China. If enacted, the proposals would prevent Chinese entities from acquiring certain U.S. technologies, prohibit U.S. government procurement from ZTE and Huawei, and limit U.S. issuers from receiving investments from Chinese parties.

Fair Trade with China Enforcement Act

Sen. Marco Rubio (R-FL) has introduced the Fair Trade with China Enforcement Act (Fair Trade Act), which would impose significant restrictions on Chinese investment in U.S. companies producing certain categories of products as well as prohibit the outbound transfer of intellectual property (IP) and sensitive technologies to China. The bill would further institute a U.S. Government procurement ban on products/services from both Huawei and ZTE.

The Fair Trade Act focuses on the ten strategic sectors cited by China’s Made in 2025 initiative. The bill would require the U.S. Trade Representative (USTR) to create a list of products that receive support from the Chinese government pursuant to the Made in China 2025 policy, as well as any product receiving Chinese government support that has displaced U.S. exports of like products. At a minimum, the list would include products in the following industries:

(1) Civil aircraft; (2) Motor car and vehicle; (3) Advanced medical equipment; (4) Advanced construction equipment; (5) Agricultural machinery; (6) Railway equipment; (7) Diesel locomotive; (8) Moving freight; (9) Semiconductor; (10) Lithium battery manufacturing; (11) Artificial intelligence; (12) High-capacity computing; (13) Quantum computing; (14) Robotics; and (15) Biotechnology.

The Fair Trade Act would amend Section 13(d) of the Securities Exchange Act of 1934 to prohibit issuers participating in the above sectors from being majority-owned by a Chinese investor. In addition, the law would create a presumption that imports from China of products included in USTR’s list benefit from countervailable subsidies under the U.S. trade remedy law.

The legislation would also call for the U.S. Commerce Department to impose a blanket prohibition on the export of any sensitive technology or intellectual property to China. This likely would restrict licensing agreements with Chinese companies and could have significant effects on U.S. companies with Chinese subsidiaries or affiliates.

Finally, the Fair Trade Act would target ZTE and Huawei by prohibiting the U.S. Government from entering into any contract with an entity that uses, or contracts with any other entity that uses, any telecommunications equipment or services provided by ZTE or Huawei.

Foreign Investment Risk Review Modernization Act

The proposed Foreign Investment Risk Review Modernization Act (FIRRMA) would alter the Committee on Foreign Investment in the United States (CFIUS) review process. See our prior posting on FIRRMA here.

The Senate Banking Committee will mark up a FIRRMA draft on May 22, though the discussion draft does not include prior language that would have authorized CFIUS to review outbound investments for technology transfers that could harm U.S. national security. The discussion draft would still define a covered transaction to include any “non-passive” investment by a foreign person in critical technology or a critical infrastructure company, among other types of transactions.

Trade Authority Protection Act

The Trade Authority Protection (TAP) Act would require the President to submit a report to Congress prior to taking any “congressionally delegated trade action,” which is a defined list of actions under certain provisions of law (e.g., Section 232 of the 1962 Trade Expansion Act, Section 301 of the Trade Act of 1974, the International Emergency Economic Powers Act (IEEPA), etc.). The list is as follows:

  • A prohibition on importation of the article.
  • The imposition of or an increase in a duty applicable to the article.
  • The imposition or tightening of a tariff-rate quota applicable to the article.
  • The imposition or tightening of a quantitative restriction on the importation of the article.
  • The suspension, withdrawal, or prevention of the application of trade agreement concessions with respect to the article.
  • Any other restriction on importation of the article.

Congress would then be able to pass a joint resolution prohibiting the action.  The prospects for enactment of any of these proposed laws remains uncertain.

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Today, President Trump announced his intention to withdraw the United States from the Joint Comprehensive Plan of Action (JCPOA) and to impose the “highest level of economic sanctions” on Iran. The Office of Foreign Assets Control quickly thereafter published FAQs that discuss how the sanctions will be implemented.

Importantly, the President’s announcement was not only limited to a decision not to renew a waiver under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA) that was to expire on May 12, but also applies to all waivers covered by the JCPOA under other statutory provisions as well. The effect will be to “snap back” all of the sanctions that were previously in place prior to implementation of the JCPOA.

There will, however, be a delayed implementation of the snap-back, with a 90-day wind down period for some activities, and a 180-day wind down for others.

By August 6, 2018, the following sanctions will be fully reinstated:

  • Sanctions on the purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
  • Sanctions on Iran’s trade in gold or precious metals;
  • Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
  • Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  • Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  • Sanctions on Iran’s automotive sector.

Following the 90-day wind down period, OFAC will revoke the specific licenses it has issued authorizing activities undertaken in connection with the Statement of Licensing Policy for Commercial Aircraft. OFAC indicated it would consider resubmission of license requests related to safety of flight and did not revoke General License J, which allows for temporary sojourn of commercial aircraft on scheduled flights by non-U.S. carriers into Iran.

By November 5, 2018, the following sanctions will be reinstated:

  • Sanctions on Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  • Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • Sanctions on transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 NDAA;
  • Sanctions on the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 104(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA);
  • Sanctions on the provision of underwriting services, insurance, or reinsurance; and
  • Sanctions on Iran’s energy sector.

Also effective November 5, OFAC will revoke General License H, which has authorized foreign subsidiaries of US companies to engage in transactions with Iran under limited conditions.

Finally, effective November 5, the US government will re-impose sanctions that applied to persons removed from the List of Specially Designated Nationals and Blocked Persons (SDN List) and/or other lists maintained by the US government on January 16, 2016.

Additional details on how the snap back will be implemented likely will be published in the coming weeks.

Today’s announcement significantly changes the landscape regarding Iran. It is possible the wind down periods will be used as a tactic to press for European support of the US position, as European companies will be exposed when the sanctions are re-imposed. If so, it is possible there could be further extensions of the wind down periods to accommodate specific situations, but this should not be considered likely. The EU has taken the position that it will continue to observe the JCPOA as long as Iran remains compliant.

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On April 12, 2018 the United States Trade Representative (USTR) announced it was self-initiating a review to assess India’s eligibility to continue to be treated as a beneficiary country under the U.S. Generalized System of Preferences program (GSP).

The GSP is a trade preference program that allows duty free access to about 5,000 tariff categories from a range of developing and least developed countries, which are designated as beneficiary developing countries (BDCs) and least-developed beneficiary developing countries (LDBDCs). About 3,500 of these categories are available to all GSP countries, while about 1,500 are reserved for LDBDCs.

India is by far the largest beneficiary of the U.S. GSP program. It exported about $5.6 billion in GSP eligible articles in 2017, constituting about 26 percent of the value of total GSP imports for that year. The Indian sectors benefitting from the U.S. GSP program include organic chemicals, articles of iron and steel, plastics, vehicles and parts thereof and machinery and equipment for the electronics industry.

Under the Trade Act of 1974, a developing country is assessed against a host of factors which determine its eligibility to be a beneficiary country. These factors include respecting workers’ rights, eliminating the worst forms of child labor, respecting arbitral awards in favor of U.S. citizens or legal persons, not granting sanctuary to those involved in international terrorism, not engaging in nationalization or expropriation of assets of U.S. persons, providing reasonable and equitable market access, providing adequate and effective protection for intellectual property rights, and reducing barriers to investment and trade in services. Any person may file a request for USTR to review the GSP status of any eligible beneficiary developing country reviewed with respect to any of the designation criteria listed in the statue. In addition, USTR has implemented a new triennial process, under which it will assess each developing country’s compliance with the eligibility criteria every three years. The focus of the first year is on countries in Asia, and assessments of countries in other parts of the world will take place in the second and third years. If an assessment raises concerns about a country’s compliance with the eligibility criteria, USTR may self-initiate a full review.

In the review of India, USTR will examine whether India is in compliance with the market access criterion of the program which requires that a beneficiary country provide the United States with equitable and reasonable market access. The U.S. dairy industry has alleged that India denies market access for U.S. dairy exports on unjustified health and safety grounds. Likewise, the medical devices industry has alleged that India has failed to provide equitable and reasonable access to the Indian market because it maintains stringent price controls on coronary stents and knee replacement implants that are forcing U.S. companies to sell in India only after reducing prices by almost 85 percent

Stakeholders will want to take note of the public hearing and comment period for the India review, which USTR is expected to announce in the coming days.

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Recent reports suggest that the Administration may declare an emergency under the International Emergency Economic Powers Act (IEEPA) to grant the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions involving the transfer of U.S. technology and intellectual property (IP) to foreign entities, even where there is no transfer of “control” as currently required under existing CFIUS regulations.  This executive action would follow a memorandum issued by President Trump directing the U.S. Government to propose possible restrictions on Chinese investment in U.S. companies due to concerns outlined by the Office of the United States Trade Representative (USTR) in connection with its Section 301 investigation.  The potential CFIUS review of U.S. technology transfers to foreign entities would mirror one aspect of the pending Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA).

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  • The Treasury Department has placed several prominent Russian individuals and companies on the Specially Designated Nationals and Blocked Persons lists (SDN list). Several of these parties are Russian billionaires previously identified in the Treasury Department’s so-called “Oligarch List” reported to Congress on January 29, 2018. 
  • Under the general licenses issued with the new listings, U.S. persons have until June 5, 2018 to wind down operations with specified listed companies and their subsidiaries, and until May 7, 2018 to divest debt, equity, or holdings owned by EN+ Group PLC, GAZ Group and United Company RUSAL PLC. 
  • General License 12, which allows wind down operations with several newly designated SDN companies, instructs that payments to the SDNs must be made into blocked accounts with U.S. banks. This deviates from previous general licenses which did not place conditions on how SDNs must be paid. 

On April 6, 2018, the Treasury Department’s Office of Foreign Assets Control (OFAC), in consultation with the State Department, designated 7 Russian oligarchs, 12 companies that they own or control, 17 senior Russian government officials, and 1 state-owned Russian weapons trading company and its subsidiary, a Russian bank. (The list may be found here.)

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