On December 29, 2021, the PRC State Council’s Information Office (the Information Office) published a white paper on export controls, providing a comprehensive picture of China’s current legal and regulatory regime for export controls and potential future changes in export control governance. The document is China’s first white paper on export controls and comes approximately one year after the implementation of the PRC Export Control Law in December 2020.

On the same day, the PRC Ministry of Commerce (MOFCOM), which plays a central role in administering China’s export control regime for non-military items, issued a statement giving more information about the White Paper, while an unnamed MOFCOM official gave an interview to Chinese state-owned media discussing the White Paper in the context of PRC government policy with respect to multilateral export controls as well as China’s national security and development interests.

Continue Reading China’s First White Paper on Export Controls Summarizes Legal Developments, Opposes “Abuse” of Export Controls

The US Department of State has expanded the exceptions to in-person visa interview requirements for certain temporary visa applicants. The visa categories which benefit from these changes, effective December 23, 2021, include: H-1, H-3, H-4, L, O, P, and Q visas as well as F, M and academic J applicants.

As set forth below, the consular officers have discretion to waive standard interview requirements in these categories for individuals who have previously been issued visas in any category or traveled under the Visa Waiver Program (VWP) Electronic System for Travel Authorization (ESTA) approval. These changes, valid through December 31, 2022, are aimed at conserving limited consular resources and alleviating backlogs.

Continue Reading Exceptions to In-Person Visa Interview Requirements at US Consulates Expanded for Temporary Visa Categories

On December 22, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued three general licenses (GLs) to authorize additional activities involving the Taliban and the Haqqani Network in Afghanistan that would otherwise be prohibited under the Global Terrorism Sanctions Regulations, 31 CFR part 594 (GTSR), the Foreign Terrorist Organizations Sanctions Regulations, 31 CFR part 597 (FTOSR), and Executive Order (EO) 13224. In comparison to earlier authorizations, the new GLs significantly expand the permissible activities that can be undertaken in Afghanistan by the US government, the United Nations (UN), nongovernmental organizations, and various other international organizations named in the GLs.

According to an accompanying Treasury Department news release, the new GLs build on GLs issued in September 2021, after the fall of the Afghan government, and are intended “to facilitate the continued flow of humanitarian assistance and other support for the Afghan people.” The GLs coincide with the adoption of UN Security Council Resolution (UNSCR) 2615 (2021), also on December 22, 2021, which establishes several humanitarian exemptions to the UN Afghanistan-related sanctions regime under USCR 1988 (2011).

OFAC also issued a Fact Sheet on humanitarian support to Afghanistan, stating that the Treasury Department seeks to ensure that humanitarian assistance and other support to the Afghan people “can continue to flow directly to Afghanistan through transparent and legitimate channels.”  The Fact Sheet also explains that the Treasury Department seeks to enable Afghans and Afghan-Americans to support their families through personal remittances.

The new GLs are:

  • GL No. 17—authorizing transactions and activities that are for the conduct of the official business of the US government by its employees, grantees, or contractors;
  • GL No. 18—authorizing transactions and activities that are for the conduct of the official business of (i) the UN (including its Programmes, Funds, and Other Entities and Bodies, as well as its Specialized Agencies and Related Organizations); (ii) the International Centre for Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA); (iii) the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group (IDB Group), including any fund entity administered or established by any of the foregoing; (iv) the International Committee of the Red Cross and the International Federation of Red Cross and Red Crescent Societies; and (v) the Islamic Development Bank, by those organizations’ employees, grantees, or contractors.
  • GL No. 19—authorizing transactions and activities that are ordinarily incident and necessary to the activities of nongovernmental organizations (NGOs) related to (i) humanitarian projects to meet basic human needs in Afghanistan; (ii) rule of law, citizen participation, government accountability and transparency, human rights and fundamental freedoms, access to information, and civil society development projects, in Afghanistan; (iii) education in Afghanistan; (iv) non-commercial development projects directly benefitting the Afghan people; and (v) environmental and natural resource protection in Afghanistan.

Like earlier GLs, the new GLs apply to transactions involving the Taliban or the Haqqani Network, which are designated by the US government as Specially Designated Global Terrorist (SDGTs), as well as legal entities that are owned 50 percent or more by them. However, as noted in newly issued FAQ 951, there are numerous other individuals and entities operating in Afghanistan that are designated as SDGTs or Specially Designated Nationals (SDNs) that are not covered by any OFAC GLs and with whom activities are still prohibited under OFAC regulations when subject to US jurisdiction.

Additionally, the GLs do not apply to financial transfers involving the Taliban or the Haqqani Network other than for the purpose of effecting the payment of taxes, fees, or import duties, or the purchase or receipt of permits, licenses, or public utility services. The GLs also do not authorize debits from blocked accounts held by US financial institutions or activities that would otherwise be prohibited under OFAC regulations (e.g., transactions involving specific Taliban members who are individually designated as SDGTs or SDNs).

Practically speaking, the new GLs build on GL No. 14 of September 24, 2021, which is limited to activities of the above organizations “that are ordinarily incident and necessary to the provision of humanitarian assistance to Afghanistan or other activities that support basic human needs in Afghanistan.” The new GLs should enable NGOs and other organizations to undertake a wider range of activities that are not clearly authorized under GL No. 14.

In conjunction with the new GLs, OFAC updated three FAQs and issued six new FAQs (950, 951, 952, 953, 954, and 955). Of note, FAQ 951 clarifies that Afghanistan is not subject to comprehensive sanctions. FAQ 952 provides guidance on identifying the involvement of SDNs who are members of the Taliban and the Haqqani Network (with whom transactions remain prohibited, since those individual SDNs are outside the scope of the new GLs) using OFAC’s SDN List and all information at a user’s disposal. FAQ 953 clarifies that it is not generally prohibited to send money in or out of Afghanistan, regardless of the form of payment. FAQ 954 clarifies that purchase of fuel, telecommunications fees, rents, and other routine transactions may be covered by one or more GLs if they are ordinarily incident and necessary to a licensed activity by an NGO or other authorized person.

For more information about GL No. 14, as well as GL No. 15 authorizing exports and reexports of agricultural commodities, medicine, and medical devices to Afghanistan, see this article by Steptoe lawyers published in the November 2021 issue of WorldECR.

Prior to the new GLs, OFAC issued GL No. 16, on December 10, 2021, which authorizes noncommercial, personal remittances to Afghanistan involving the Taliban or the Haqqani Network that would otherwise be prohibited under the GTSR, the FTOSR, or EO 13224.  The authorization in GL No. 16 extends to transfers through Afghan depository institutions but has limitations similar to those in the other Afghanistan-related GLs: financial transfers to the Taliban or the Haqqani Network (or to any entity owned 50 percent or more by them) are only authorized for the payment of reasonable and customary taxes, fees, or other duties.

For more information on how these authorizations may impact your organization, contact a member of Steptoe’s Economic Sanctions team.

On 21 December 2021, the Court of Justice of the European Union (“CJEU”) delivered its judgment in Case C-124/20 Bank Melli Iran v Telekom Deutschland GmbH, which is the first case before the EU courts on the interpretation of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom (“EU Blocking Statute”).

The CJEU’s judgment follows, in broad terms, the Opinion delivered by Advocate-General Hogan (“AG”) in May 2021 (see our previous post here), but is more nuanced than the latter and does not replicate some of the more far-reaching statements made by the AG regarding the obligations that the EU Blocking Statute creates for EU companies. The CJEU’s findings will still have important implications for EU companies who, in light of this judgment, may face legal challenges over their business decisions (e.g. the termination of certain contracts) brought by third party undertakings. Importantly, following the CJEU’s reasoning, EU operators may be required in such cases to establish that these decisions were not taken in violation of the EU Blocking Statute – or otherwise face serious consequences, including the annulment of the termination of their contracts.

Background

The case before the German courts that led to the reference for a preliminary ruling concerned Telekom Deutschland GmbH’s termination of its contractual relationship with Bank Melli Iran (“BMI”). In 2018, following the US’s withdrawal from the Iranian nuclear deal, BMI – among other Iranian entities – was (again) designated on the US Specially Designated Nationals and Blocked Persons (“SDN”) List, and also became subject to US secondary sanctions. Under those US secondary sanctions, non-US persons may themselves become subject to US sanctions for engaging in certain dealings with Iranian entities on the SDN List.

Soon after BMI re-appeared on the SDN List and became subject to US secondary sanctions, Telekom Deutschland GmbH decided to terminate its contract with the bank on 16 November 2018. BMI challenged this termination in the German courts, claiming that Telekom’s decision was motivated solely by the desire to comply with the US sanctions, which would be in violation of the EU Blocking Statute. Specifically, Article 5 of the EU Blocking Statute prohibits EU operators from adhering to the requirements or prohibitions of certain US sanctions that the EU deems to have extraterritorial application – including the sanctions at issue against Iran – as listed in the Annex to the EU Blocking Statute.

The preliminary ruling reference to the CJEU consisted of several questions regarding the interpretation of this provision. In answering these questions, the CJEU offers important guidance and clarifications about the scope of the EU Blocking Statute and the (quite strict) requirements that EU companies have to observe to comply with it.

Right of action and scope of the prohibition

At the outset, the CJEU clarified that the prohibition set out in Article 5 of the EU Blocking Statute may be relied on in civil proceedings, such as those that were at issue, brought by a third country entity that is subject to US sanctions, against EU persons to whom that prohibition is addressed. This is an important point as it confirms that third country undertakings have a right to challenge before the national courts of EU Member States commercial decisions made by EU companies that are potentially in violation of the EU Blocking Statute.

Unsurprisingly, the CJEU found that the prohibition laid down in Article 5 of the EU Blocking Statute applies even in the absence of an order or instruction directing compliance with foreign sanctions issued by an administrative or judicial authority. According to the CJEU, this interpretation is supported by the broad wording of the provision as well as the overall objectives of the EU Blocking Statute, which include achieving, to the greatest extent possible, the free movement of capital between EU Member States and third countries. The CJEU observed in this respect that the sanctions laws listed in the Annex to the EU Blocking Statute are capable of producing their effects by the mere threat of legal consequences; thus, the EU Blocking Statute would not be capable of counteracting these effects if its application was subject to the adoption of orders by a foreign administrative or judicial authority.

Burden of proof

The termination of contracts does not infringe Article 5 of the EU Blocking Statute if it is based on purely economic considerations rather than aiming to comply with US sanctions listed in the Annex to the EU Blocking Statute. However, the CJEU found that EU operators may have an obligation to justify their business decisions when these are challenged in civil proceedings before national courts. As regards the allocation of the burden of proof, the CJEU stated that where all the evidence available to a national court tends to indicate prima facie that, by terminating a contract, the EU person in question sought to comply with foreign sanctions, the burden of proof would shift to it to establish “to the requisite legal standard” that his or her conduct did not seek to comply with those laws.

Unfortunately, the CJEU’s judgment does not offer more guidance as to what would constitute such “prima facie” evidence, nor as to what evidence EU operators would have to provide to prove “to the requisite legal standard” that their decisions were motivated by reasons other than compliance with US sanctions. On the latter point, the AG had suggested, for instance, that EU persons could demonstrate for this purpose that they are actively engaged in a coherent and systematic corporate social responsibility (CSR) policy leading them to have ethical qualms and reservations about dealing with companies having links with the Iranian regime.

Of note, the CJEU did not entirely follow the AG’s conclusions in relation to the burden of proof. One of the most important conclusions that was reached by the AG was that Article 5 of the EU Blocking Statute should be understood as entailing an obligation for EU persons to give reasons justifying the termination of a commercial relationship with a person subject to foreign sanctions. Additionally, in the AG’s view, once the claimant had provided prima facie evidence that (i) the EU operator may feel concerned by the blocked sanctions; and (ii) the claimant fulfilled the expected conditions for becoming or remaining a customer of that EU operator, the burden would turn to the EU operator to justify its business decision. The CJEU, by contrast, did not conclude that Article 5 of the EU Blocking Statute lays down a general obligation for EU operators to provide reasons each time they decide to terminate a commercial contract with a person included in the SDN list, noting simply that no such requirement can be derived from the text of Article 5.

Consequences of breach: annulment of termination of the contractual relationship

The CJEU lastly considered whether, in light of Articles 16 and Article 52(1) of the EU Charter of Fundamental Rights, a termination of the contractual relationship in violation of Article 5 can be annulled even if the EU operator is threatened with substantial economic losses by maintaining the business relationship with the US sanctioned contractual partner.

The CJEU concluded that a breach of Article 5 of the EU Blocking Statute may lead to the annulment of the termination of contracts, provided however that this annulment does not entail disproportionate effects for the EU person concerned. In this context, the CJEU observed the freedom to conduct a business guaranteed under Article 16 is not absolute but must be weighed in the balance with other interests protected by the EU legal order. Accordingly, the CJEU instructed that national courts must in each case weigh in the balance, on the one hand, the pursuit of the objectives of the EU Blocking Statute served by the annulment and, on the other hand, the probability that the EU company in question would be exposed to severe economic losses if it would be unable to terminate its commercial relationship. Importantly, the CJEU also highlighted that in this assessment, it would be relevant for the national court to consider whether the EU company in question sought to apply to the Commission for an exemption from the prohibition laid down in Article 5; suggesting that, if it did not, this would probably weigh against it in the context of the proportionality assessment.

The CJEU’s description of US secondary sanctions

The CJEU asserts that under the US sanctions at issue, “it is prohibited for any person to trade, outside the territory of the United States, with” BMI. This is unfortunately not an accurate description of the relevant US law: US secondary sanctions laws – including the laws at issue in this case – do not establish any prohibitions for non-US persons. Instead these laws establish categories of sanctionable activities, and present non-US persons with a choice: if they choose to engage in a sanctionable activity (such as knowingly providing significant financial or other support to an Iranian entity on the SDN List), then US law provides a basis for the US government to impose sanctions affecting their US business interests. This important distinction between satisfying the legal criteria to be named a target of sanctions, on the one hand, and breaching a sanctions prohibition, on the other hand, is overlooked in the CJEU opinion.  The risk Telekom faced was that it might be named a US sanctions target, not that it might breach a requirement or prohibition of US law. From a business perspective, the outcome is not that different; but from the perspective of Article 5 of the Blocking Statute, a proper understanding of US secondary sanctions would call into question whether Telekom can be said to have “complied” with a “requirement or prohibition” of US law.

It is, however, unlikely that the CJEU would have reached a different conclusion about the scope of Article 5 even if it had taken into account this distinction. While the language of Article 5 could have been drafted more carefully given the nature of US secondary sanctions, it is clear that the intention of the Blocking Statute is to also cover behavior influenced by such secondary sanctions. Therefore, the CJEU would in all likelihood have in any event considered that Article 5 also encompasses choices influenced by the threat of a US sanctions listing.

Key take-aways

The key findings and implications stemming from the CJEU’s judgment in Bank Melli Iran v Telekom are as follows:

  • The prohibition to comply with certain US sanctions under Article 5 of the EU Blocking Statute may be relied on in civil proceedings before a national court.
  • The prohibition laid down in Article 5 of the EU Blocking Statute applies even in the absence of an order or instruction directing compliance with foreign sanctions issued by an administrative or judicial authority.
  • EU persons are not obliged under Article 5 to provide reasons ab initio for the termination of a contract with a sanctioned entity. However, in civil proceedings relating to the alleged breach of that provision, where there is prima facie evidence that the EU person terminated the contract in order to comply with certain US sanctions, it would be for that person to establish that his or her conduct was not intended to comply with those laws.
  • A breach of Article 5 of the EU Blocking Statute can lead to the annulment of the termination of a contract by an EU person, on the condition, however, that this annulment does not entail disproportionate effects for the EU person concerned.

These findings have significant implications for EU companies. Most notably, they effectively confirm that certain commercial decisions that EU companies might take to avoid serious losses for their business may be subject to legal scrutiny, and may even be overturned by EU Member States’ courts.

It remains to be seen how the US Government would approach a situation whereby an EU court were to invalidate a EU company’s termination of contracts with an Iranian SDN. Specifically, that EU company would probably claim that it should not risk being sanctioned, because it had attempted to extricate itself from the SDN but is now legally compelled to reinstate the contract and perform. Of note, in the case underlying the Bank Melli Iran case, the relevant national legislation was the German legislation which provides explicitly (paragraph 134 of the German Civil Code) that “[a]ny legal act contrary to a statutory prohibition shall be void except as otherwise provided by law.” As stressed by the CJEU, in the absence of harmonisation at EU level in the field of applicable penalties, the Member States retain the power to choose the penalties which seem to them to be appropriate. It is thus not excluded that we may see courts in other EU Member States declaring a breach of the contract (because the termination was not justified due to Article 5) by the EU company and order damages as opposed to invalidating the termination and ordering specific performance.

Looking ahead, the Commission intends to issue a proposal to amend the EU Blocking Statute in the second quarter of 2022. The objective of the amendment would be twofold: i) it would aim at further deterring and counteracting the extra-territorial application of sanctions to EU operators by countries outside the EU; and ii) it would also aim at streamlining the application of the current EU rules, including by reducing compliance costs for EU citizens and businesses. The Bank Melli Iran judgment will doubtless be read very attentively by those drafting this revision.

On December 15, 2021, the White House issued Executive Order (EO) 14059, “Imposing Sanctions on Foreign Persons Involved in the Global Illicit Drug Trade.”  The new EO, which implements aspects of the Fentanyl Sanctions Act of 2019 (21 U.S.C. § 2301 et seq.), could bring a significant expansion in the US government’s use of sanctions to combat narcotics trafficking.  It also builds on more than 25 years of efforts including Clinton-era sanctions against Colombian drug trafficking networks and the identification of drug trafficking organizations under the Foreign Narcotics Kingpin Designation Act.  The new EO includes innovative designation criteria geared toward the Biden administration’s goal “to modernize and update our response to drug trafficking,” as stated in the EO’s preamble.

Continue Reading US Government Expands Counter-Narcotics Sanctions with New Executive Order on Global Illicit Drug Trade

On December 7, 2021, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), published a proposed rule to implement the Corporate Transparency Act (CTA), which was enacted as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021.  The proposed rule is intended to implement the CTA’s beneficial ownership reporting provisions, but does not yet have the force and effect of law. In short, the proposed rule would require certain business organizations and entities to report affirmatively information to FinCEN about the beneficial owners and controllers of such organizations and the individuals who have filed an application with state or tribal authorities to form the entity or register it to do business.  Below we summarize a number of the proposed rule’s key provisions, for which interested persons may submit public comments before February 7, 2022.

Continue Reading FinCEN Issues Proposed Rule on Reporting of Corporate Ownership

On December 9, 2021, the US government announced an arms embargo on Cambodia, driven by a litany of issues, including concerns about the country’s military cooperation with China and human rights abuses.  The arms embargo is implemented through the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR), under amendments made by the Department of State’s Directorate of Defense Trade Controls (DDTC) and the Department of Commerce’s Bureau of Industry and Security (BIS), respectively.

The State Department final rule adds Cambodia to Section 126.1 of the ITAR, which imposes a unilateral US arms embargo. The BIS final rule similarly adds Cambodia to EAR Country Group D:5 (US arms-embargoed countries).  The BIS rule also imposes a more restrictive review policy for license applications for dual-use items controlled for national security reasons and subjects Cambodia to the EAR’s broad military and military-intelligence end-use and end-user restrictions.

Continue Reading US Imposes Arms Embargo on Cambodia Over China Concerns

On December 8, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $133,860 settlement with an unnamed individual for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR). According to OFAC’s settlement notice, the individual, who was located in the United States, received four payments in his personal bank account on behalf of an Iranian company for the sale of Iranian-origin cement clinker to a company in a third country.

OFAC also found that the individual coordinated the payment and the shipment of goods with a family member at the Iranian company. The settlement notice remarks that, although the payments involved a family member, they fell outside of the general license for personal remittances, at 31 CFR § 560.550, which only applies to “noncommercial” activity.

Continue Reading OFAC Enters into Rare Settlement with Individual over Iranian Payments and Facilitation

On December 8, 2021, the UK government announced a package of measures to revise certain aspects of the UK’s export control regime following the completion of a regime review by the government.  The measures include revisions to the licensing criteria for strategic export controls, an expansion in the scope of the military end-use control and a tightening of controls on exports to China.  Taken together, the measures represent a significant reworking of the UK export control regime.  Affected businesses should carefully analyze the new requirements to ensure that they remain compliant, particularly given substantial revisions to the licensing criteria for strategic export controls, which have been applied with immediate effect.

Continue Reading UK Announces Measures To Rework Export Control Regime

On December 6, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) named one individual and 12 entities in the Democratic Republic of the Congo and Gibraltar as Specially Designated Nationals (SDNs) pursuant to the Global Magnitsky Sanctions program under Executive Order (EO) 13818.

The newly designated SDNs are part of a network of individuals and companies alleged to have provided material “support to sanctioned billionaire Dan Gertler,” who was designated under EO 13818, in December 2017, for allegedly engaging in significant corruption in the DRC mining and oil sectors. There are now 46 persons designated under EO 13813 in connection with Gertler.

Continue Reading OFAC Sanctions DRC Associates of Sanctioned Billionaire in Conjunction with New Strategy on Countering Corruption and Global Magnitsky Designations