Sanctions, Export Controls Actions Offer Road Map to Enforcement Trends

In this article for Bloomberg Law, Kirkland partners Mario Mancuso, Sanjay Mullick and Anthony Rapa, and of counsel Abigail Cotterill, discuss significant economic sanctions and export controls developments out of the Departments of Commerce and Treasury in the second quarter of 2020, and what they may indicate for the remainder of the year.

Several key developments regarding economic sanctions and export controls involving China, Russia, Venezuela, and Iran occurred during the second quarter, including:

• Tightening military end use and end user restrictions on exports to China, Russia, and Venezuela suggest further focus on limiting their access to sensitive technologies.
• Additional export controls targeting Huawei, and ongoing efforts to establish controls for “emerging technologies,” confirm a continued focus on restricting trade with China, which may escalate as the U.S. election season approaches.
• Financial institutions increasingly may scrutinize payments for shipping-related transactions, as OFAC focuses on the shipping industry’s support for sanctioned sectors of the Venezuelan and Iranian economies.
• Continued imposition of secondary sanctions may create heightened exposure for non-U.S. financial institutions and companies involved in Iran- or Syria-related business.

Military End Use Controls for China, Russia, and Venezuela

On April 28, the Department of Commerce, Bureau of Industry and Security (BIS) published two rules (collectively, the rules) that further restrict the export of items in support of military end uses and end users in China, Russia, and Venezuela. Effective June 29, the rules expanded the scope of items subject to such restrictions (including, e.g., consumer communications devices), expand the definition of “military end use,” and for the first time impose a licensing requirement related to “military end users” in China.

The rules further eliminated license exception “CIV,” authorizing exports of certain export-controlled items for civil end users engaged in civil end uses. This reflects an increased concern regarding the integration of military and civil end use activities in China, Russia, and Venezuela, and product diversion after initial export from the U.S.

China and Emerging Technologies

On May 15, BIS issued an interim final rule (interim rule) to restrict the supply to Chinese telecommunications company Huawei Technologies Co., Ltd. (Huawei), of certain non-U.S. items that are derived from U.S. technology or software.

Expanding upon the existing “direct product” rule, the interim rule extends U.S. export controls to a broader range of non-U.S. items that are the “direct product” of certain U.S. technology or software, or non-U.S. plant equipment that is based on certain U.S. technology or software, where such non-U.S. items are developed or produced by Huawei. These changes significantly expand U.S. export controls over items intended for supply to Huawei, including items used in the manufacturing of semiconductor chips.

On June 17, BIS published a final rule (the rule) adding 24 precursors to chemical weapons, Middle East respiratory syndrome-related coronavirus (MERS), and certain cultivation chambers to the Commerce Control List. Notably, the rule stated that these chemical precursors are “emerging technologies” for purposes of the Export Control Reform Act.

As the first formal “emerging technologies” designations following creation of the BIS Emerging Technology Technical Advisory Committee in March, they are likely to portend additional designations, with artificial intelligence and machine learning capabilities potentially up for designation in the near future.

Focus on the Maritime Shipping Industry

The Department of the Treasury, Office of Foreign Assets Control (OFAC), has sharpened its focus on maritime shipping risks, with special attention on non-U.S. actors engaged in efforts to evade or contravene U.S. sanctions on Venezuela and Iran.

On June 2 and June 18, OFAC designated individuals, vessels, and shipping companies determined to be operating in or associated with the Venezuelan oil sector. Regarding Iran, on June 8, OFAC announced secondary sanctions on certain vessels associated with the Islamic Republic of Iran Shipping Lines (IRISL), the same day that the designation of IRISL under the non-proliferation sanctions took effect.

These actions followed OFAC’s May 14 maritime advisory, which outlined compliance recommendations for parties engaged in maritime trade, including that financial institutions incorporate risk factors related to vessel acquisition and shipping routes into existing customer due diligence protocols.

Secondary Sanctions on Iran

On June 5, OFAC issued frequently asked questions guidance regarding secondary sanctions against Iran’s manufacturing, construction, mining, and textiles sectors (which notably included favorable treatment with respect to manufacturing of certain medical-related items).

On June 25, OFAC imposed sanctions on four companies operating in the Iranian metals sector, including one German and two United Arab Emirates-based sales agents owned or controlled by Iran’s largest steel manufacturer, emphasizing the potential reach of the sectoral sanctions to parties operating outside of Iran.

Secondary Sanctions on Syria

On June 4, OFAC published the Syria-Related Sanctions Regulations, providing for primary and secondary sanctions in response to Turkey’s actions contributing to unrest in northeast Syria.

While the October 2019 designations of Turkish government officials and ministries under this order were rescinded nine days after taking effect, OFAC designated 24 Syrian individuals and entities on June 17 that were found to be actively supporting the Assad regime’s corrupt reconstruction efforts, pursuant to authority including the Caesar Syria Civilian Protection Act, which came into effect on the same day.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Mario Mancuso is a partner at Kirkland & Ellis and leads the firm’s International Trade and National Security practice. A former member of the president’s national security team, he specializes in guiding private equity sponsors and companies through the CFIUS process and resolving crises involving economic sanctions and export control-related investigations by the U.S. government.

Sanjay Mullick, a partner in Kirkland’s Washington, D.C., office, regularly represents clients on investigative, regulatory and transactional matters related to economic sanctions, export and import controls, anti-money laundering, and anticorruption.

Anthony Rapa, a partner in Kirkland’s Washington, D.C., office, counsels companies, financial institutions, and private equity sponsors worldwide regarding U.S., U.K., and EU economic sanctions and export control issues.

Abigail Cotterill, of counsel in Kirkland’s Washington, D.C., office, regularly provides legal advice to companies, financial institutions, and private equity sponsors on the regulatory and other risks of operating or investing across international borders, with a focus on economic sanctions, export controls, and anticorruption.