On May 21, 2024, the Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) jointly published a notice of proposed rulemaking (NPRM) that would require investment advisers registered under the Investment Advisers Act of 1940 (RIAs) and exempt reporting advisers (ERAs) (collectively, “investment advisers”) to maintain customer identification programs (CIPs). Many types of U.S. financial institutions are required to maintain CIPs as part of their anti-money laundering (AML) compliance program and must, as part of the CIP rules, collect, verify, and retain certain identifying information about customers. Importantly, the NPRM does not yet have the force and effect of law, but indicates how FinCEN and the SEC intend to implement more specific AML requirements for investment advisers, subject to written comments from the public before a final rule is promulgated.

The NPRM follows a February 2024 FinCEN proposal to designate RIAs and ERAs as “financial institutions” under the so-called Bank Secrecy Act (BSA), subjecting them to AML and countering the financing of terrorism (CFT) program requirements that are similar to those imposed on other types of U.S. financial institutions, including broker-dealers of securities. Although the February 2024 proposed rule was issued solely by FinCEN, as required by the USA PATRIOT Act of 2001 and the BSA, as amended, for CIPs, FinCEN is publishing this NPRM jointly with the SEC, the federal functional regulator for investment advisers.

These proposals follow a Treasury risk assessment finding that the investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities. They are also part of a broader U.S. agenda to patch up potential gaps in regulations designed to counter illicit finance.

Continue Reading FinCEN Proposes Expansion of CIP Requirements to Investment Advisers

On May 22, 2024, the US Department of Justice’s National Security Division (“NSD”) announced its first-ever corporate declination under the NSD’s Export Control and Sanctions Enforcement Policy for Business Organizations (the “Policy”) in connection with a voluntary self-disclosure by Massachusetts biochemical company Sigma-Aldrich, Inc., doing business as MilliporeSigma. The declination related to allegations of US export control violations that occurred when a former employee and his co-conspirators submitted falsified export documentation for hundreds of shipments of MilliporeSigma products to China. The former MilliporeSigma employee and one coconspirator pleaded guilty to wire fraud conspiracy for their roles in the scheme. 

The NSD’s Export Control and Sanctions Enforcement Policy creates a presumption that a company will receive a non-prosecution agreement (“NPA”), or, where appropriate under the provisions of the Justice Manual, a full declination of any action, including through an NPA, and no fine when it voluntarily self-discloses potentially criminal violations of US export controls and sanctions laws to the NSD’s Counterintelligence and Export Control Section (“CES”), fully cooperates, and timely and appropriately remediates. The presumption of an NPA or declination does not apply where aggravating factors are present. “Potentially” aggravating factors include egregious or pervasive criminal misconduct within the company, concealment or involvement by upper management, repeated administrative and/or criminal violations of national security laws, the export of items that are particularly sensitive or to end users of heightened concern, and a significant profit to the company from the misconduct. Where such aggravating factors are present, NSD has the discretion to seek a different resolution, such as a deferred prosecution agreement or guilty plea.

While NSD has touted the MilliporeSigma declination as an example of the clear benefits companies may receive under the Policy when they commit fully to voluntary self-disclosure of export controls and sanctions violations at the earliest sign of potential criminal wrongdoing, the facts and circumstances of the case, as set forth by the Justice Department, raise significant questions for companies who may uncover similar or more serious conduct within their own operations. Such questions, and the specific facts at issue here, should prompt companies to carefully assess whether the MilliporeSigma declination is a seminal moment representing the new normal under NSD’s VSD Policy or a potential outlier with somewhat limited precedential value.

Continue Reading DOJ’s National Security Division’s First-Ever Declination Under Its Voluntary Self-Disclosure Policy Raises Critical Questions

On May 21, 2024, the UK Department for Business & Trade’s Export Control Joint Unit (“ECJU”) published notice to exporters 2024/11 regarding its new guidance on the sale of oil tankers to countries other than the United Kingdom, Isle of Man, or Russia (“Third Countries”) under the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”) (the “ECJU Guidance”).  The purpose of the ECJU Guidance is to provide information and tools to the maritime sector that will assist in the prevention of sanctions evasion in relation to the sale and brokering of second-hand vessels to Third Countries.  The ECJU Guidance underscores the continued efforts of UK sanctions agencies to clamp down on evasion of the UK’s Russia sanctions, as well the UK government’s recognition of the need to collaborate with the private sector to succeed in those efforts.

Continue Reading UK Issues Guidance on Oil Tanker Sales to Third Countries under the Russia Sanctions Regime

On May 15, 2024, the Sanctions (EU Exit) (Miscellaneous Amendments and Revocations) Regulations 2024 was laid before parliament (“Regulations”).  Among other things, the Regulations included a package of new trade sanctions measures under the UK’s Belarus sanctions regime targeting aluminum, as well as expanding sanctions on electronics (including semiconductors, electronic integrated circuits, and the machinery / apparatus needed for their manufacture), navigational instruments and appliances, aircraft, spacecraft and related parts.  The new trade sanctions came into effect on May 16, 2024.

Continue Reading UK Imposes New Trade Sanctions on Belarus

This month has seen HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) roll out a new FAQ guidance format, as well as update a number of its existing guidance documents. In particular, OFSI has introduced changes to its enforcement and civil monetary penalties guidance, as well as to its general financial sanctions guidance in relation to the assessment of licence applications under the “extraordinary expenses” and “extraordinary situations” licensing grounds. Following the introduction of secondary legislation amending a number of UK sanctions regimes on May 15, 2024, corresponding changes also have been made to a range of OFSI guidance documents and other materials.   

Continue Reading A Round-Up of Recent Changes to OFSI Financial Sanctions Guidance

On May 10, 2024, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an Interim Final Rule, effective August 8, 2024 (the “IFR”), that clarifies the scope of OFAC’s rejected transaction reporting requirement, and introduces other amendments to the Reporting, Procedures and Penalties Regulations (“RPPR”) at 31 CFR Part 501.

While reported enforcement actions under the RPPR are not common, there are past examples, such as one that we reported on in 2016 and a 2022 enforcement action involving Nodus International Bank, Inc. (“Nodus”), an international financial entity located in Puerto Rico, for failure to maintain full and accurate records related to the handling of blocked property and inaccurate reporting of the blocked property to OFAC. Given OFAC’s increasing regulatory focus on the RPPR requirements, such as rejected transaction reporting, one can expect that the agency may increase its enforcement focus in this area as well. Therefore, parties subject to OFAC’s regulatory jurisdiction, including organizations that are not financial institutions, would be well advised to consider how to integrate these changing RPPR requirements into their compliance programs.

Continue Reading OFAC Amends Reporting Requirements – Important Considerations for Compliance

On May 8, 2024, BIS published a correction to the interim final rule, further removing license requirements for certain items under ECCN 0x5zz.

Previously, the interim final rule stated that all 0x5zz ECCNs referenced in footnote 9 to the Commerce Country Chart in supplement no. 1 to part 738 that were previously controlled for NS1 or RS1 reasons for control would continue to require a license for export to Australia and the UK based on the license requirements specified in that footnote.  However, the correction clarifies that only portions of the referenced 0x5zz ECCNs will continue to require a license.

On April 19, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued an interim final rule under the U.S. Export Administration Regulations (“EAR”) that significantly streamlines export controls on certain defense-related technology products to Australia and the United Kingdom (“UK”). Aimed at enhancing technological innovation among the three countries in furtherance of the Australia, United Kingdom, United States (“AUKUS”) Trilateral Security Partnership, the interim final rule removes license requirements, expands the availability of license exceptions, and reduces the scope of end-use and end-user-based license requirements for exports, reexports, and transfers (in-country) to or within Australia and the UK.

In a statement, BIS said that it “anticipates these changes will reduce licensing burdens for trade with Australia and the UK by over 1,800 total licenses valued at over $7.5 billion per year.” BIS also states that the cumulative effect of these export control revisions under the EAR will be to treat Australia and the UK as destinations equivalent to Canada. BIS is soliciting public comments on the impacts of these changes to ensure that the export control revisions implemented advance AUKUS objectives, as well as potential additional revisions to the EAR that would further enhance defense industrial base cooperation and technology innovation with Australia and the UK. Interested parties should consider submitting comments to BIS by the June 3, 2024, deadline.

Notwithstanding this important regulatory development, export control revisions under AUKUS related to the U.S. International Traffic in Arms Regulations (“ITAR”) administered by the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”), have not yet been promulgated. Until that action occurs, industry will not be able to assess the full extent of U.S. export control revisions and continued licensing requirements that will be implemented under AUKUS.

Continue Reading BIS Removes Significant Export Control License Requirements for Australia and the UK under the Strategic AUKUS Partnership

May 1, 2024, saw two major developments under the Australia, United Kingdom, and United States (“AUKUS”) Trilateral Security Partnership.

First, the U.S. Department of State (the “Department”) issued a notice of proposed rulemaking (“NPRM”) that would amend the International Traffic in Arms Regulations (“ITAR”) to create an exemption for certain exports, reexports, retransfers, or temporary imports of defense articles or defense services, or certain brokering activities between or among authorized users within Australia, the United Kingdom, and the United States.

Second, the UK Department for Business and Trade (“DBT”) issued Notice to Exporters 2024/09: update on AUKUS, which was accompanied by publication of a draft Open General Licence to permit the export, transfer, and supply or delivery, of dual-use goods, military goods or technology to, between, and among the AUKUS partners (“Draft AUKUS OGL”).

These developments signal clearly to industry that the AUKUS partners are committed to fostering greater cooperation across defense and critical technologies through reforms of their export controls and licensing regimes. Interested parties may wish to consider submitting comments on one or both proposals. The deadline for comments on the proposed United States ITAR rule is May 31, 2024. The deadline for comments on the UK Draft AUKUS OGL is July 1, 2024. Importantly, the NPRM for the ITAR does not yet have the force and effect of law until a final or interim final rule is promulgated. Similarly, the Draft AUKUS OGL cannot currently be relied upon and will not come into effect until a final version is issued.

United States: ITAR Exemptions

The Department’s proposed exemption would be available for all defense articles or defense services, except for those contained within a limited excluded list. The proposed rule would also introduce a provision to allow for certain transfers of classified defense articles to certain dual nationals (subject to certain requirements described below) and would codify an expedited license review process for Australia, the UK, and Canada.

Continue Reading Trilateral AUKUS Partnership Further Strengthened with Proposed New U.S. ITAR Exemptions and UK Open General Licenses

On April 24, 2024, President Biden signed HR 815, “Making emergency supplemental appropriations for the fiscal year ending September 30, 2024, and for other purposes,” into law (the “National Security Supplemental” or the “NSS”). The National Security Supplemental appropriates funds to provide security assistance to Ukraine, Israel, and US partners in the Indo-Pacific and humanitarian aid for Gaza. Alongside the appropriations measures, the National Security Supplemental includes the “21st Century Peace through Strength Act”, a collection of fourteen sanctions, export controls, and related regulatory measures targeting Iran, Russia, and China, in addition to areas of concern including narcotics trafficking, terrorist financing, and misuse of information and communications technology and services (“ICTS”).

In this post, we assess these new developments and the areas where they will likely have the greatest impact.

Continue Reading President Signs Expansive Sanctions Bill Into Law; Doubling of Limitations Period for IEEPA Violations Likely to Have Major Impact

On April 12, 2024, in a coordinated action the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) in the United States and the Foreign, Commonwealth, and Development Office, HM Treasury, and Department for Business and Trade (“DBT”) in the United Kingdom announced expanded sanctions targeting certain Russian metals, including limiting the use of in-scope metals on the two largest global metal exchanges and in over-the-counter derivatives trading by imposing new regulations on the activities of U.S. persons and persons subject to UK sanctions jurisdiction. The United States also added restrictions related to the importation of certain Russian metals produced after a certain date (but not items made from those metals).

Continue Reading United States and United Kingdom Take Coordinated Action Against Russian Federation Metals