On January 19, 2021, the US State Department announced the imposition of sanctions on Russia-based entity KVT-RUS and Russian-flagged vessel FORTUNA pursuant to Section 232 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), for “knowingly selling, leasing, or providing to the Russian Federation goods, services, technology, information, or support for the construction of Russian energy export pipelines.” Accordingly, KVT-RUS and the vessel FORTUNA have been added to OFAC’s SDN list. The State Department also announced, without further details, that “the United States will consider further actions in the near term, under CAATSA, and the Protecting European Energy Security Act (PEESA), as amended.”

This action follows recent changes in US law and policy targeting Nord Stream 2 in particular, as discussed in our prior blog posts here and here. It is notable, however, that this action was taken under the 2017 CAATSA statute, and not under the more recent US laws.

Non-US persons should be aware that US secondary sanctions may apply to activity involving the recently sanctioned Russian party and vessel.

We will continue to monitor these developments.

On 12 January 2021, UK Foreign Secretary, Dominic Raab, announced a package of measures intended to ensure that British organisations in the public and private sector are not complicit in – or profiting from – human rights violations against Uyghur Muslims in China’s Xinjiang region.

The UK has worked in coordination with the Canadian government on the new measures, which were introduced in response to growing evidence of gross human rights violations, including extra-judicial detention and forced labour, in the Xinjiang region of China.

Announcing the measures in a statement to the House of Commons, the UK foreign Secretary stated that the aim of the measures is to ensure that “no company that profits from forced labour in Xinjiang can do business in the UK, and no UK business is involved in their supply chains.”

The measures reflect a number of recommendations the Conservative Human Rights Commission  made to the UK government in its report on human rights in China, The Darkness Deepens: The Crackdown on Human Rights in China 2016 – 2020, which was published on 13 January 2021. The measures also build on a raft of US actions introduced to combat forced labour in China, which we discussed in greater detail in previous client alerts (here, here, here and here).

Continue Reading UK Government Announces New Measures to Combat Forced Labour and Human Rights Abuses in Xinjiang

On January 14, 2021, the White House issued an Executive Order (EO) to amend EO 13959 of November 12, 2020, which prohibits US persons from transacting in securities related to so-called “Communist Chinese military companies” (CCMCs).

The amended EO 13959 makes clear that US persons must divest their holdings in such securities within designated wind-down periods, after which possessing the securities will also be prohibited. For CCMCs identified in the Annex to EO 13959, on November 12, 2020, the wind-down period will end on November 11, 2021. The amended EO also clarifies that prohibited transactions include both “purchase for value” and “sales” of covered securities.

Meanwhile, the US Department of Defense (DoD) identified an additional nine entities as CCMCs, bringing the total number to 44. Restrictions under EO 13959 will take effect with respect to the newly named CCMCs after 60 days, on March 15, 2021.

Shortly thereafter, the US Treasury Department’s Office of Foreign Assets Control (OFAC) published four new Frequently Asked Questions (FAQs) and General License No. 2 (GL-2) authorizing securities exchanges operated by US persons to engage in transactions involving covered securities through the relevant wind-down periods.

Continue Reading Updated: Amended Executive Order Makes Clear US Persons Must Divest Securities of Chinese Military Companies as Defense Department Identifies Nine More Entities

OFAC’s January 4, 2021 civil settlement with France-based Union de Banques Arabes et Françaises (“UBAF”) provides another case study of the agency’s expansive view of its jurisdiction over transactions occurring outside the United States, when the US financial system is involved even indirectly.  This case is particularly noteworthy coming after OFAC’s recent settlement with British Arab Commercial Bank, which we previously analyzed.  A key lesson from the UBAF settlement is that OFAC’s jurisdiction may extend to transactions conducted outside the United States – including internal transfers on the books of a non-US bank – that are “closely correlated” with subsequent transactions involving the US financial system.  In light of this case, non-US persons operating outside the United States should consider reviewing their OFAC risk if their activity may rely on the US financial system even indirectly.

This case focused on UBAF’s trade finance business, and specifically its business with Syrian financial institutions.  Between August 2011 and April 2013, OFAC determined that UBAF operated accounts in USD and other currencies for US-sanctioned Syrian financial institutions, “and indirectly conducted USD business on behalf of these institutions through the US financial system.”  The key word is “indirectly.”   Below is a brief discussion of each of the types of transactions that OFAC focused on in this settlement and how OFAC asserted jurisdiction over these transactions that relied on the US financial system “indirectly.”

Continue Reading OFAC Asserts Jurisdiction over French Bank’s Internal Transfers and Foreign Exchange Transactions

Following the adoption of the EU Global Human Rights Sanctions Regime, which is set out in Council Regulation (EU) 2020/1998 and Council Decision (CFSP) 2020/1999 (see our previous client alert), the European Commission published a Guidance Note on the implementation of certain provisions under Council Regulation (EU) 2020/1998. The stated aim of the Guidance Note is to address the questions most likely to arise in the application of the new restrictions and to ensure their uniform implementation by EU operators and EU Member States competent authorities. Upon its issuance, Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, explained that this was the first time that a new EU sanctions framework is accompanied by such Note.

The Guidance Note provides guidance on the scope of financial restrictions, including the freezing of funds and economic resources and the prohibition to make funds and economic resources available to sanctioned persons, entities and organizations. It also addresses compliance obligations and specific notions, such as “ownership” and “control” of entities by listed persons. Further, the Guidance contains information on exceptions and derogations, including for the provision of humanitarian aid.

Continue Reading European Commission issues Guidance Note on the EU Global Human Rights Sanctions Regime

In late December, the United States Court of Appeals for the Second Circuit affirmed the conviction of Chi Ping Patrick Ho on seven counts alleging multiple FCPA and money laundering (and related conspiracy) violations.[1] The decision is notable for its construction of various FCPA provisions, and further demonstrates the expansive jurisdictional reach of anti-money laundering laws to dollar-denominated transfers.

Ho, a citizen of Hong Kong, served as an officer and director of the Hong Kong-based non-governmental organization China Energy Fund Committee (CEFC-NGO), which was funded by Shanghai-based energy conglomerate China CEFC Energy Company Limited (CEFC).[2] Ho also served as an officer and director of a CEFC-affiliated US non-profit (US NGO), funded by CEFC NGO.[3]

Ho’s conviction, for which he was sentenced to 36 months imprisonment and a US$400,000 fine,[4] stemmed from two alleged bribery schemes involving (1) an attempted US$2 million cash delivery to the President of Chad (which was purportedly rejected by the President) and (2) a US$500,000 wire transfer to a charity associated with the foreign minister of Uganda.[5] Notably, the US dollar-denominated wire originated from a bank in Hong Kong, which was transmitted through its operating unit in the United States as a correspondent to another bank in New York, which in turn was acting as a correspondent for a beneficiary bank in Uganda for final credit to an ultimate beneficiary NGO. Both acts were allegedly made for the benefit of CEFC’s commercial interests in Africa.[6]

On appeal, Ho challenged his 2018 conviction on a number of grounds.[7]

Continue Reading United States v. Ho

On January 1, 2021, the United States enacted the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) after the US House of Representatives and US Senate voted to override a presidential veto of the law.  Included within the NDAA are a significant number of provisions related to anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”), including provisions reforming the Bank Secrecy Act (“BSA”), a collection of statutes underpinning most of the current AML regulatory framework.  These amendments, many of which have been under consideration for years, represent the most substantial AML-related reforms enacted since at least the USA PATRIOT Act of 2001.  Below, we outline ten of the most significant AML provisions contained in the NDAA.  Given the breadth of the reforms, it is particularly important for US “financial institutions” – including money services businesses (“MSBs”) and other non-traditional financial institutions subject to the BSA – to carefully review the Act to understand how their compliance obligations may have changed or may change in the future as the Act is implemented via regulation.

  1. Amendments to BSA to Explicitly Cover Digital Assets

The NDAA includes several changes to make clear that cryptocurrency and other digital assets are within the scope of the regulatory requirements of the BSA.  For example, the NDAA amends the BSA in several provisions to clarify that the BSA also may apply to “value that substitutes for currency.”  For example, Section 6201(d) of the NDAA amends 31 USC § 5312 to include “value that substitutes for currency” in the definitions of a financial agency, currency exchanger, and licensed sender of money, types of US financial institutions subject to the BSA’s AML obligations.  It also amends the definition of “monetary instrument” to include “value that substitutes for any monetary instrument.”  Section 6102(a)(3) of the NDAA, expressing the sense of Congress, explains that “although the use and trading of virtual currencies are legal practices, some terrorists and criminals, including transnational criminal organizations, seek to exploit vulnerabilities in the global financial system and increasingly rely on substitutes for currency, including emerging payment methods (such as virtual currencies), to move illicit funds.”

Some of this reflects useful codification of existing guidance from the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).  For example, FinCEN has long taken the position that “administrators” and “exchangers” of so-called “convertible virtual currency” are subject to FinCEN’s BSA regulations, and, in 2011, the agency amended the regulatory definition of “money transmission” to include the transmission of “other value that substitutes for currency.” 31 CFR § 1010.100(ff)(5)(i)(A).  (Money transmitters are a type of MSB subject to FinCEN regulation).  While FinCEN has held this position for several years, industry has raised questions regarding the scope of FinCEN’s statutory authority with respect to digital assets.  The amendments contained in the NDAA appear intended, at least in part, to resolve any doubts regarding Congress’s delegation of authority to regulate this space under the BSA.

Continue Reading Ten Key Takeaways from the NDAA’s AML Reforms

In a little-noticed provision of the annual US military authorization law, which took effect on January 1, 2021, the US Congress issued yet another push for the US Commerce Department to grant eligibility to Israel for a key authorization under US export controls.  Israeli companies in the tech, aerospace/defense, and other sectors that are regulated under military and “dual-use” (i.e., military/commercial) export controls should watch these developments closely and consider engaging with the US government and/or the Israeli government regarding the implementation of this regulatory change.  The same is true for US and other global companies in these sectors that trade with Israel, maintain facilities in Israel, cooperate with Israeli partners on R&D, or employ or contract with Israelis who are not US citizens or green card holders.  The export controls authorization in question applies to a broad array of dual-use products/technologies, and even certain military products/technologies, and allows companies to operate without the need to obtain specific licenses from the US Commerce Department in certain instances and thereby may help avoid the added costs, delays and uncertainties that can result from the licensing process.  In short, if the Commerce Department granted this regulatory authorization to Israel, trade and technology cooperation in these sectors with Israel and Israelis would be much simpler.

Looking at the details, Section 1276 of the National Defense Authorization Act for Fiscal Year 2021 (the “NDAA”) requires the State Department to brief Congress during the first few months of the Biden administration “by describing the steps taken to include Israel in the list of countries eligible for” a key authorization under US export controls, License Exception Strategic Trade Authorization (“STA”), which is administered by the US Commerce Department under the Export Administration Regulations (“EAR”).   Specifically, this congressional mandate relates to so-called “STA-37,” or paragraph (c)(1) of STA, which is by far the broadest and most relevant part of STA that currently applies to 37 countries (as listed in “Country Group A:5” of the EAR).  That includes many European countries, the UK, Canada, Japan, S. Korea, Australia, and New Zealand, along with India (which was recently added), Argentina and Turkey.  Israel is already eligible for a much narrower STA provision (applicable to “Country Group A:6” of the EAR), along with Albania, Cyprus, Malta, Mexico, Singapore, South Africa, and Taiwan.  Congress is pushing Commerce to include Israel in the former group that benefits from the much broader regulatory authorization.

Continue Reading Congress Continues to Push for Key US Export Controls Authorization for Israel

In another attempt to impose restrictions on Chinese technology companies in the final days of his presidency, on January 5, 2021, Trump issued a new Executive Order (EO) “Addressing the Threat Posed By Applications and Other Software Developed or Controlled By Chinese Companies.”  The EO, which was issued pursuant to the International Emergency Economic Powers Act, authorizes the imposition of restrictions, on or after February 19, 2021, against eight popular Chinese connected software applications.

The new EO declares that “additional steps must be taken to deal with the national emergency with respect to the information and communications technology and services supply chain declared in [EO 13873].”  The new EO alleges that “a number of Chinese connected software applications automatically capture vast amounts of information from millions of users in the United States,” including sensitive “personally identifiable information.”  It cites to “the continuing activity” of China and the Chinese Communist Party “to steal or otherwise obtain United States persons’ data” as “mak[ing] clear that there is an intent to use bulk data collection to advance China’s economic and national security agenda.”  The new EO states that the United States “must take aggressive action against those who develop or control Chinese connected software applications to protect our national security.”

Continue Reading New Executive Order targets Chinese connected software applications

On January 1, 2021, the U.S. Senate passed – over President Trump’s veto – the National Defense Authorization Act, or NDAA, for Fiscal Year 2021 (H.R. 6395), a massive annual Department of Defense spending bill, which this year includes a section expanding sanctions on the Nord Stream 2 and TurkStream pipeline projects.  The Senate action follows House passage of the bill over the President’s veto on December 28, 2020.

Section 1242 of the 2021 NDAA broadens the scope of the sanctions provisions contained in the 2020 NDAA in the following principal ways:

  • For Nord Stream 2 only, it targets foreign persons that provide “services for the testing, inspection, or certification necessary or essential for the completion or operation of the … pipeline[.]”
  • For both Nord Stream 2 and TurkStream, it –
    • expands the scope of sanctionable activities in support of pipe-laying for these projects to include activities that “facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe[;]”
    • includes, in addition to selling, leasing or providing the covered pipe-laying vessels, “facilitat[ing]” that activity (even if not involving “deceptive or structured transactions,” language that had been included in the 2020 NDAA); and
    • clarifies that the scope of sanctionable activity includes providing underwriting services for covered vessels or insurance or reinsurance necessary or essential for the completion of the project; and providing services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, covered vessels that are necessary or essential for the completion of the project.

Continue Reading U.S. Tightens Sanctions on Nord Stream 2, TurkStream Pipeline Projects