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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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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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Yesterday, President Trump issued a memorandum (“Memorandum”) directing his Administration to take several actions related to the investigation by the Office of U.S. Trade Representative (“USTR”) into China’s acts, policies, and practices (“APPs”) related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974 (“Section 301”). The actions include restrictions on Chinese investment in the United States and the imposition of higher customs duties on imports from China. At the signing ceremony, President Trump called this action “the first of many” against Chinese practices. USTR Ambassador Lighthizer echoed the President at a hearing before the Senate Finance Committee today, noting that the Administration “expects to bring additional [actions] in other areas where the [United States does not] have reciprocal response.”

Below we describe these actions and USTR’s findings in the Section 301 investigation.

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Pursuant to President’s Trump’s March 8, 2018 proclamations issued under authority of Section 232 of the Trade Expansion Act of 1962, added customs tariffs on imports of a wide variety of steel and aluminum imports from all countries except Canada and Mexico will enter into effect on March 23. On March 16, 2018, the Department of Commerce’s (“DOC”) Bureau of Industry and Security (“BIS”) issued an interim rule that specifies the requirements and process for parties to submit product-exclusion requests from the Section 232 tariffs. Under the new rule, DOC is authorized to exclude from the tariffs aluminum and steel articles that are determined to lack sufficient U.S. production capacity of comparable products, or for which there are “specific national security-based considerations.”

BIS determined that it has good cause to waive the prior notice and opportunity for comment procedures due to impracticability and public interest considerations, and therefore the new rule is immediately effective, although subject to being amended. Comments on the interim rule are due by May 18. BIS specifically advised that commenters “may submit comments regarding how and whether or not the country of origin of a proposed product should be considered … as part of the process for reviewing product-based exclusion requests,” therefore implying that it is considering whether imports from certain countries will be given more favorable treatment than imports from others.

In short, the process provides for parties that use steel or aluminum in business activities in the United States to submit company-specific exclusion requests, and for domestic industry participants to object to such requests. Parties filing exclusion requests and objections must fill out the applicable forms provided on BIS’s website. The forms for steel are available here and forms for aluminum are available here. If an exclusion is granted, it will take effect five days after approval and will be valid for one year.

Below we outline the key aspects of the product-exclusion information collection procedure set forth in the interim rule.

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On March 8, 2018, President Trump signed proclamations authorizing the imposition of a 25 percent customs duty on certain steel products and a 10 percent customs duty on certain aluminum products. The duties were imposed pursuant to Section 232 (“Section 232”) of the Trade Expansion Act of 1962, a rarely-used national security provision that authorizes the Department of Commerce (DOC) to investigate the effect of imports on national security.  The new customs duties are scheduled to enter into effect on March 23, 2018.  Below we discuss the Presidential Proclamations and reactions from Capitol Hill and other countries.

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On December 5, 2017, the Securities and Exchange Commission (SEC) awarded more than $4.1 million to a whistleblower for alerting the SEC to a multi-year securities fraud engaged in by his employer. The award is significant in that the recipient, a company insider who alerted the SEC to the securities fraud, is a non-U.S. national working overseas. This is not the first time that the SEC has awarded a large sum to a foreign whistleblower. The distinction for the largest award ever awarded goes to an award of $30 million awarded in 2014 to a whistleblower living in a foreign country. In that case the whistleblower provided the SEC with information about an on-going fraud that the SEC claimed was hard to detect.

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On November 8, 2017, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”) announced amendments to the Cuban Assets Control Regulations (“CACR”) and Export Administration Regulations (“EAR”). In addition, the State Department published a list of entities and subentities deemed to be under the control or to act on behalf of the Cuban military, intelligence, or security services or personnel. These steps implement the changes to the Cuba sanctions program announced by the President in his June “National Security Presidential Memorandum on Strengthening the Policy of the United States Toward Cuba” (“NSPM”). The changes reflect adjustments to the broader Cuba reform initiated by former President Obama in January 2015. A majority of the general license and guidance issued since that time remain in effect.

The key changes to the Cuba sanctions program are as follows:

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On November 1, 2017, the Department of Commerce’s Bureau of Industry and Security (BIS) introduced clarifications to the Export Administrative Regulations (EAR) for the use of license exception “Governments, International Organizations, International Inspections under Chemical Weapons Convention, and the International Space Station” (GOV), and license exception “Strategic Trade Authorization” (STA). BIS explained that the agency is not changing the requirements for the use of these exceptions, instead it is only providing guidance to answer questions frequently received from the public.

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On June 16, 2017, President Trump issued a National Security Presidential Memorandum on Strengthening the Policy of the United States Toward Cuba, which began the process to alter some aspects of U.S. policy toward Cuba. [See prior blog post here].  On July 25, 2017, OFAC updated its Cuba FAQs to address upcoming changes to its Cuba sanctions rules as they relate to pre-existing contracts, licenses, and travel arrangements.

Some of the more important points in the new OFAC guidance include the following:

  • Treatment of existing contracts and companies engaged in the Cuban market

OFAC states that companies already engaged in the Cuban market with entities related to the Cuban military, intelligence, or security services that may be affected by the new Cuba sanctions regime will be allowed to continue after issuance of the new regulations.  In the updated FAQs, OFAC further clarifies that “businesses will be permitted to continue with transactions outlined in contingent or other types of contractual arrangements agreed to prior to the issuance of the new regulations, consistent with other [Cuban Assets Control Regulations] authorization.”

  • Addition of “subentities”

OFAC indicated that the State Department will be publishing a list not only of “entities with which direct transactions generally will not be permitted,” but also a list of “subentities.”  This suggests that the Administration plans to assemble its own list of entities that are considered to be owned or controlled by the Cuban military, intelligence, and security services, which may be useful to U.S. companies by lessening their burdens to investigate the ownership of some Cuban entities.

  • Travel

OFAC explains that for travel after issuance of the forthcoming regulations, as long as a traveler has already completed at least one travel-related transaction prior to June 16, 2017, such as purchasing a flight, the trip and any meetings with listed entities/subentities will be permitted.

  • People-to-People Travel. The latest FAQs reiterate that the general license allowing individual people-to-people travel will end once Treasury issues the upcoming regulations. Nevertheless, group people-to-people travel will remain available subject to the rules in 31 CFR § 515.565(b).
  • Persons Organizing or Sponsoring people-to-people or educational travel. OFAC clarifies in new FAQs that such parties are covered by the general licenses and do not need to apply for a specific license.
  • Remittances

The latest Cuba FAQs explain that remittances to Cuba will still be permitted under the new regulations. However, “changes will be made to the definition of prohibited members of Government of Cuba that may exclude certain persons from receipt of such remittances.”

The June 16, 2017 Cuba FAQs may be found here.

The July 25, 2017 Cuba FAQs may be found here.

 

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On April 19, 2017, the Department of Commerce (DOC), through its Bureau of Industry and Security, self-initiated an investigation into the effects that steel imports may be having on U.S. national security interests. The investigation was initiated under a rarely-used statutory authority, Section 232 of the Trade Expansion Act 1962 (19 U.S.C. § 1862).

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