Economic Sanctions and Export Controls: A Q1 Update

In this article for Law360, Kirkland attorneys Mario Mancuso, Anthony Rapa, Abigail Cotterill and Sanjay Mullick discuss first-quarter developments in U.S. export controls and economic sanctions and what they may indicate about the Biden administration's national security and foreign policy agenda.

The first quarter of 2021 brought meaningful developments in U.S. export controls and economic sanctions as the Biden administration took office. This article discusses these developments and what they may indicate about the administration's national security and foreign policy agenda going forward. 

The View from Washington

The presidential transition saw a flurry of substantial export control and sanctions policy measures by the outgoing Trump administration — particularly regarding China — and the incoming Biden administration.

With respect to China, while the Biden administration continues to review the sanctions imposed by the Trump administration in its final month, bipartisan concerns related to China's civil-military fusion and related human rights abuses in the Xinjiang region suggest that certain policies may have durability.

For example, in March, the Biden administration issued rules to continue implementation of a new U.S. Department of Commerce regime regarding review of information and communication technology and services supply chain transactions involving foreign adversaries, such as China.

At the same time, the reestablishment of sanctions on Myanmar in response to the Feb. 1 military coup, and targeted sanctions on Russia in response to the poisoning of opposition figure Alexei Navalny, reinvigorated a program that was formerly rescinded and a program that had been subject to more limited enforcement, respectively.

Indirect discussions in Vienna between the U.S. and Iran, which may lead to a reinstatement in some fashion of the 2015 nuclear deal from which the Trump administration withdrew in 2018, also suggest the potential for further policy changes going forward. 

China

Several China-focused initiatives continued to move forward in the first quarter, in addition to new developments.

Chinese Software Applications and Communist Chinese Military Companies

On Jan. 5, the Trump administration issued an executive order to prohibit transactions involving persons or property subject to U.S. jurisdiction and entities that control or develop specified Chinese software applications, including Alipay, QQ Wallet, CamScanner, SHAREit, Tencent QQ, VMate, WPS Office and WeChat Pay.[1]

Though the restrictions were set to take effect within 45 days of Jan. 5, the implementation of the software executive order has been subject to a soft hold and regulatory review similar to that imposed under the Biden administration's regulatory freeze as of Jan. 20.[2]

The software executive order was the last of several Trump administration actions issued in August 2020 that focused on Chinese software applications — including WeChat and TikTok — and are currently subject to court-ordered injunctions based on arguments that they unduly restrict protected speech.[3]

On Jan. 11, in an additional step to restrict Chinese government access to funds from U.S. investors, the novel restrictions on investment in publicly traded securities of designated Communist Chinese military companies, established under Executive Order No. 13959 of Nov. 20, 2020, took effect.[4]

The designations, which included technology companies China Mobile Ltd., Hangzhou Hikvision Digital Technology Co. Ltd. and
Huawei Technologies Co. Ltd., were seen as responsive to concerns that China raises capital to support its ongoing civil-military fusion through companies' access to U.S. securities exchanges.

Information and Communications Technology and Services

The Commerce Department also made significant progress in implementing the nascent information and communications technology and services, or ICTS, supply chain review regime authorized under Executive Order No. 13873 of May 15, 2019.

On Jan. 19, 2021, Commerce published an interim final rule authorizing the secretary of Commerce to prohibit, or require mitigation of, certain transactions involving the ICTS supply chain and designated foreign adversaries, including China and Hong Kong, Cuba, Iran, North Korea, Russia and Venezuela.[5]

The ICTS rule, which took effect on March 22, expands upon Commerce's traditional export controls jurisdiction in response to concerns regarding cybersecurity and industrial espionage threats posed through foreign involvement in those supply chains.

Though the list of foreign adversaries is not limited to China, the policy considerations underlying the focus on ICTS transactions appear largely targeted at concerns specific to China, such as that U.S. persons' sensitive personal data may be compromised.

In order to be subject to Commerce review under the ICTS rule, a transaction must involve persons or property subject to U.S. jurisdiction; property in which a foreign country or foreign national has an interest; and certain types of specified ICTS.

The specified categories of ICTS that may trigger transactional review include ICTS relating to critical infrastructure, network infrastructure and satellites, sensitive personal data, surveillance, monitoring, home networking, drones, communications software, and emerging technologies such as artificial intelligence and machine learning.

Under the ICTS rule, Commerce may perform case-by-case transactional reviews similar to those conducted by the Committee on Foreign Investment in the United States, and prohibit or require mitigation of transactions that pose an undue or unacceptable risk to U.S. national security.

The ICTS rule also included a commitment to establish a preapproval process by which parties could seek advance authorization for covered ICTS transactions.

On March 29, Commerce published an advanced notice of proposed rulemaking seeking comments on the licensing and preapproval process described in the ICTS rule, evidencing the Biden administration's plan to carry the new ICTS review regime forward in full.[6]

Xinjiang 

The Biden administration likewise continued to levy sanctions responsive to the ongoing human rights abuses in China's Xinjiang Uyghur Autonomous Region, or XUAR.

On March 22, the U.S. Department of the Treasury imposed sanctions on the secretary of the Xinjiang Production and Construction Corps and the director of the Xinjiang Public Security Bureau, in coordination with EU, U.K. and Canadian authorities, and in response to their leadership roles in organizations involved in mass detention and surveillance of XUAR ethnic minority populations.[7]

The designations, which occurred under Executive Order No. 13818 of Dec. 26, 2017, and referenced the Global Magnitsky Sanctions program targeting human rights abuse, represent a continuation of the Trump administration's 2020 actions against the Chinese Communist Party's activities in XUAR, such as U.S. restrictions on imports from that region.

Myanmar

In response to the Feb. 1 military coup in Myanmar, on Feb. 11, President Joe Biden issued an executive order that authorized targeted sanctions on parties responsible for the overthrow of the democratically-elected government.[8]

More particularly, the Myanmar executive order authorized asset-freezing sanctions against designated Myanmar military and security officials, agencies and instrumentalities of the Myanmar government, and those determined to operate in the Myanmar defense sector, which could more broadly implicate parties that supply the defense sector.

It further authorized sanctions on persons determined to engage in certain specified activities, including undermining democratic processes and stability in Myanmar, and established secondary sanctions on persons determined to provide material support for designated persons, including through the provision of financial or technical support.

Pursuant to the Myanmar executive order, the Treasury designated 10 individuals and three entities involved in the coup determined to be acting for or on behalf of the Myanmar military.[9] These included Myanmar Ruby Enterprise, Myanmar Imperial Jade Co. Ltd. and Cancri Gems & Jewelry Co. Ltd., three entities operating in the country's precious gemstone markets.

Subsequent designations subjected additional individuals and businesses with close connections to the Myanmar military to similar U.S. asset freezes. In particular, the sanctioning of two military holding companies, Myanmar Timber Enterprise and Myanmar Pearl Enterprise, could be impactful, given the prominent role they play in the country, which could cause companies they own to become sanctioned as well.

In parallel, Commerce imposed a policy of denial for licenses to export certain items to Myanmar government entities, including its Ministry of Defense and military and security services, and removed or narrowed certain license exceptions for Myanmar.[10]

Thereafter, Commerce removed Myanmar from Commerce's Country Group B and added it to Country Group D:1, further restricting exports of national-security controlled items and the availability of license exceptions.[11] It also added Myanmar to the list of countries subject to military end use and end-user restrictions, similar to China, Russia and Venezuela.

Russia

Signaling a change in policy from the Trump administration, the Biden administration also imposed a suite of additional sanctions and export controls responsive to Russian actions abroad. On March 2, the Biden administration imposed sanctions on Russia for the poisoning and imprisonment of opposition leader Alexei Navalny.[12]

The sanctions included Treasury actions to impose U.S. asset freezes against several senior Russian government officials, including the director of its Federal Security Service. They also include a variety of export control measures taken in coordination with the U.S. Department of State and Commerce.

State Department

The State Department issued sanctions under the U.S. Chemical and Biological Weapons Control and Warfare Elimination Act, pursuant to which the Biden administration is reinforcing certain sanctions related to financial assistance and exports imposed by the Trump administration.[13] The additional sanctions also withdraw certain key waivers that the previous administration had issued, which could impact exports including those related to commercial space flight.

The State Department also designated six entities — ERA Technopolis, Pasit AO, Federal State Autonomous Scientific Establishment Scientific Research Institute Specialized Security Computing Devices and Automation, Neobit OOO, Advanced System Technology AO and Pozitiv Teknolodzhiz AO — as affiliated with Russia's defense or intelligence sectors under the Countering America's Adversaries Through Sanctions Act, subjecting to its mandatory sanctions non-U.S. persons who knowingly engage in a significant transaction with any of those entities.

Furthermore, under authority of Executive Order No. 13382 regarding proliferation of weapons of mass destruction, the State Department levied U.S. asset-freezing sanctions against Russian organizations considered to operate in its chemical and biological weapons sectors, such as the Federal Security Service itself, the Main Intelligence Directorate and certain scientific research institutes.[14]

Under a new OFAC cyber-related General License 1B, however, U.S. companies retained the ability to deal with Russia's Federal Security Service in its capacity as the regulator for encryption products for use in Russia.[15]

Commerce Department

Commerce designated 14 Russian, German and Swiss parties involved in biological and chemical weapons production on the Entity List, cutting off their access to U.S. technology.[16]

On March 17, Commerce announced an expansion on export control restrictions specific to Russia, including suspension of license exceptions for Technology and Software Unrestricted and for exports and reexports of items controlled for national security reasons to commercial end-users in Russia for civil end-uses.[17] 

Coordinated Sanctions and Possible Future Developments

In imposing these new restrictions, Biden administration officials stressed that the sanctions were being imposed in concert with EU allies, reflective of its intention to undertake a multilateral approach to sanctions. They also indicated that this is only the opening act of additional sanctions on Russia that could be forthcoming in retaliation for a variety of actions attributed to Russia, including a recent major cyberattack, interference in the 2020 election and the placement of bounties on U.S. soldiers in Afghanistan.

Key Takeaways

• The continued implementation of the ICTS transaction review regime under the Biden administration signals that parties with supply chain exposure to China or other foreign adversary jurisdictions should prepare for potential Commerce scrutiny going forward.
• Sanctions on officials for human rights abuses in the XUAR signal the Biden administration's willingness to use national security and foreign policy tools to maintain pressure on China, and in particular to seek to do so multilaterally in concert with U.S. allies.
• While currently of a targeted nature, the new Myanmar sanctions leave open the authority for additional sectoral designations and further asset-freezing actions, which particularly if combined with additional dual-use export controls, could start to restore a sanctions program similar to the one that had existed under the Bush and Obama administrations.
• The Biden administration's willingness to sanction Russian parties, and to tighten related export controls on Russia, portends the potential for further restrictions on dealing with Russia going forward.

Mario Mancuso and Anthony Rapa are partners, and Abigail Cotterill is of counsel, at Kirkland & Ellis LLP. 

Kirkland partner Sanjay Mullick contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Executive Order 13971, Addressing the Threat Posed by Applications and Other Software Developed or Controlled by Chinese Companies, 86 Fed. Reg. 1249 (Jan. 5, 2021), available at https://www.federalregister.gov/documents/2021/01/08/2021-00305/addressing-the-threat-posed-by-applications-and-other-software-developed-or-controlled-by-chinese.

[2] Press Release, Regulatory Freeze Pending Review, The White House (Jan. 20, 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/regulatory-freeze-pending-review/.

[3] Tiktok Inc. v. Trump , Case No. 1:20-cv-02658-CJN, Mem. Opinion (D.D.C. filed Sept. 27, 2020); U.S. WeChat Users Alliance v. Trump , Case No. 20-cv-05910-LB, Order Granting Motion for Preliminary Injunction (N.D.Ca filed Sept. 19, 2020).

[4] Executive Order 13959, Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies, 85 Fed. Reg. 222 (Nov. 17, 2020), available at https://home.treasury.gov/system/files/126/13959.pdf.

[5] Dep't of Com. Interim Final Rule, Securing the Information and Communications Technology and Services Supply Chain, 86 Fed. Reg. 11 (Jan. 19, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-01-19/pdf/2021-01234.pdf.

[6] Dep't of Com. Advance Notice of Proposed Rulemaking, Securing the Information and Communications Technology and Services Supply Chain: Licensing Procedures, 86 Fed. Reg. 58 (Mar. 29, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-03-29/pdf/2021-06529.pdf.

[7] Press Release, Treasury Sanctions Chinese Government Officials in Connection with Serious Human Rights Abuse in Xinjiang, Dep't of Treas. (Mar. 22, 2021), available at https://home.treasury.gov/news/press-releases/jy0070.

[8] Press Release, Executive Order on Blocking Property with Respect to the Situation in Burma, The White House (Feb. 11, 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/11/executive-order-on-blocking-property-with-respect-to-the-situation-in-burma/.

[9] Press Release, United States Targets Leaders of Burma's Military Coup Under New Executive Order, Dep't of Treas. (Feb. 11, 2021), (two of the individuals were already designated on the SDN List pursuant to the Global Magnitsky Sanctions regime) available at https://home.treasury.gov/news/press-releases/jy0024.

[10] Press Release, U.S. Commerce Department Restricts Licensing of Sensitive Exports to Burma's Military and Security Services in Response to the Recent Military Coup, Dep't of Com. (Feb. 11, 2021), available at https://www.commerce.gov/news/press-releases/2021/02/us-commerce-department-restricts-licensing-sensitive-exports-burmas.

[11] Dep't of Com. Final Rule, Burma: Implementation of Sanctions, 86 Fed. Reg. 43 (Mar. 8, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-03-08/pdf/2021-04745.pdf.

[12] Press Release, Imposing Sanctions on Russia for the Poisoning and Imprisonment of Aleksey Navalny, Dep't of State (Mar. 2, 2021), available at https://www.state.gov/imposing-sanctions-on-russia-for-the-poisoning-and-imprisonment-of-aleksey-navalny/.

[13] Id.

[14] Fact Sheet, U.S. Sanctions and Other Measures Imposed on Russia in Response to Russia's Use of Chemical Weapons; Dep't of State (Mar. 2, 2021), (scientific institutions include GosNIIOKhT, the 33rd TsNIII, and the 27th Scientific Center) available at https://www.state.gov/u-s-sanctions-and-other-measures-imposed-on-russia-in-response-to-russias-use-of-chemical-weapons/.

[15] OFAC Recent Actions, Issuance of Cyber-related General License and related FAQs; Cyber-related Designations Updates; Yemen-related Designations; Ukraine-/Russia-related Designations; Non-Proliferation Designations and Designations Updates, Dep't of Treas. (Mar. 2, 2021), available at https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions/20210302.

[16] Press Release, U.S. Department of Commerce Adds 14 Parties to the Entity List for Support of Russian Weapons of Mass Destruction Programs and Chemical Weapons Activities, Dep't of Com. (Mar. 2, 2021), available at https://www.commerce.gov/news/press-releases/2021/03/us-department-commerce-adds-14-parties-entity-list-support-russian.

[17] Press Release, U.S. Department of Commerce to Expand Restrictions on Exports to Russia in Response to Chemical Weapons Poisoning, Dep't of Com. (Mar. 17, 2021), available at https://www.commerce.gov/news/press-releases/2021/03/us-department-commerce-expand-restrictions-exports-russia-response.