On September 14, 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the Department of State, and the Department of Commerce’s Bureau of Industry and Security (“BIS”) announced new sanctions designations and export control guidance related to Russia. These developments are the latest updates in the U.S. government’s ever-evolving response to Russia’s war in Ukraine through economic sanctions and export controls.
Critical Tornado Cash Developments Have Significant Implications for DeFi AML and Sanctions Compliance
After months of anticipation, a federal judge has finally ruled in the closely watched case of Joseph Van Loon, et al. v. Department of Treasury, et al. This important case addressed challenges to the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) decision to impose sanctions on Tornado Cash as a Specially Designated National and Blocked Person (SDN). The judge granted summary judgement in favor of OFAC, finding it had sufficient legal authority to designate Tornado Cash, and denied summary judgement on the plaintiffs’ claims. Shortly after that ruling, OFAC announced the SDN designation of Roman Semenov, one of three alleged co-founders of Tornado Cash, and the Department of Justice (DOJ) charged Semenov and Roman Storm, another Tornado Cash founder, with multiple alleged criminal violations related to anti-money laundering (AML) and economic sanctions laws.
All three actions are critical developments that contain key insights on how the US government views the AML and sanctions obligations of decentralized protocols and individuals associated with those protocols. The developments make clear that, at least in certain scenarios, individuals involved in the creation of a DeFi platform can be held responsible for the activities conducted on that platform where such conduct violates US economic sanctions or AML laws, or constitutes sanctionable activity under applicable executive orders.
BIS Promulgates CCL Changes Based on Nuclear Supplier Group Commitments
Effective August 18, 2023, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued amendments to the Commerce Control List (CCL) (15 CFR Part 774) of the Export Administration Regulations (EAR) to formalize changes based on Nuclear Supplier Group (NSG) commitments to prevent nuclear proliferation and the development of nuclear-related weapons of mass destruction.
Continue Reading BIS Promulgates CCL Changes Based on Nuclear Supplier Group Commitments
OFAC Sanctions Former Governor of Lebanon Central Bank and Associates
On August 10, 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), in coordination in the United Kingdom and Canada, designated the former governor of Lebanon’s central bank, Riad Salameh (“Salameh”) and four close associates, pursuant to Executive Order (“E.O.”) 13441. According to OFAC’s press release, Salameh was designated for alleged “corrupt and unlawful actions [that] have contributed to the breakdown of the rule of law in Lebanon” and his close associates were designated for “having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, Salameh.” The designations are noteworthy in that they were undertaken pursuant to OFAC’s determinations under sections 1(a)(i)(A) and (B) of E.O. 13441 – which provide authority for OFAC designations in response to actions “contribut[ing] to the deliberate breakdown in the rule of law in Lebanon”, among other sanctionable activities – rather than E.O. 13818 (the “Global Magnitsky Act E.O.”), which authorizes the imposition of sanctions against individuals and entities involved in serious human rights abuses, corruption, or other malign activities, including any person determined to “degrade the rule of law,” on a worldwide basis.
Continue Reading OFAC Sanctions Former Governor of Lebanon Central Bank and Associates
U.S. Government Revises Export Controls Regarding Commercial Nuclear Commerce with China
On August 11, 2023, the U.S. Nuclear Regulatory Commission (“NRC”) and the U.S. Department of Commerce, Bureau of Industry & Security (“BIS”) announced amendments to their existing regulations concerning exports of nuclear materials and related equipment destined for China and Macau. (BIS extends its export controls policies and regulations applicable to China to the territory of Hong Kong.) Although the notice from the NRC provided little explanation, the notice issued by BIS explained that the change in the Export Administration Regulations (15 CFR Parts 730-774 or EAR) is based on an increased concern with China’s military-civil fusion policy and efforts to expand its military nuclear capability. The changes implemented by the NRC are effective as of August 8, 2023, and the changes implemented by BIS are effective as of August 11, 2023.
Biden Administration Announces New Outbound Investment Regime Targeting China
Overview
On August 9, 2023, the White House issued a long-awaited Executive Order, entitled Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (“EO 14105”). The EO establishes a new national security regulatory regime, implemented principally by the US Department of the Treasury (“Treasury”), in consultation with other federal agencies including the US Department of Commerce, that will require the notification of, as well as prohibit, certain investment activity by US persons in named “countries of concern,” currently China.
EO 14105 does not restrict all US person investment activity regarding China, and is tailored to focus on specific products, technologies, and capabilities involving: (1) semiconductors and microelectronics (including advanced integrated circuits and supercomputers); (2) quantum information technologies (e.g., computers, sensors, networking, and systems); and (3) certain artificial intelligence systems (e.g., with certain military, intelligence, or surveillance end uses).
Continue Reading Biden Administration Announces New Outbound Investment Regime Targeting China
Assistant Secretary for Export Enforcement Matthew Axelrod Addresses Recent Developments in Export Controls and Antiboycott Regulations
On July 26, 2023, Assistant Secretary for Export Enforcement Matthew Axelrod of the US Department of Commerce’s Bureau of Industry and Security (“BIS”) spoke at the Society for International Affairs “Back to Basics” conference about BIS’s recent efforts to build partnerships in export controls regulation and enforcement and developments in antiboycott rules. In his address, Assistant Secretary Axelrod likened the Marvel cinematic universe—the blockbuster superhero films that feature intertwined characters and storylines—with the current export control landscape. By way of this analogy, Assistant Secretary Axelrod articulated BIS’s view that an ensemble cast of its interagency colleagues, international partners, private industry, and academia is central to a successful export control strategy.
Commerce, Treasury, and Justice Issue Joint Compliance Note on Voluntary Self-Disclosure
On July 26, 2023, the US Department of Commerce’s Bureau of Industry and Security (BIS), the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the US Department of Justice (DOJ) issued a joint compliance note (the Note) focusing on the voluntary self-disclosure (VSD) policies that apply to US sanctions, export controls, and other national security laws. The Note is the second collective effort by the three agencies to inform the private sector about civil and criminal enforcement trends, as well as to provide guidance to the business community and all persons regarding compliance with US sanctions and export laws. The first joint note, which focused on combatting third-party intermediaries used to evade Russia-related US sanctions and divert export-controlled items that are contributing to Russia’s foreign harmful activities, was issued on March 2, 2023.
The Note does not change the existing VSD policies of the three agencies, but highlights the benefits of their existing VSD policies to incentivize companies to promptly disclose and remediate. Likewise, the Note highlights the risks companies face, in at least some instances, should they choose not to disclose.
The Note also encourages whistleblowers to report suspected violations of sanctions and anti-money laundering laws to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), for which persons that submit whistleblower tips may be awarded up to 10% to 30% of the monetary penalty collected for successful US government enforcement actions.
Commerce Issues Final Rule Targeting Connected Software Applications
On June 16, 2023, the US Department of Commerce published a final rule (the “June 16 rule”) to implement Executive Order (EO) 14034, Protecting Americans’ Sensitive Data From Foreign Adversaries, by amending Commerce’s previously-issued Securing the Information and Communications Technology Supply Chain regulations (the “ICTS rule”). Among other requirements, EO 14034 directed the Secretary of Commerce to consider the risks posed by “connected software applications” and take “appropriate action” in accordance with the previously issued ICTS rule and EO 13873, Securing the Information and Communications Technology and Services Supply Chain, pursuant to which the ICTS rule was issued.
The ICTS rule authorizes Commerce to prohibit or otherwise regulate certain transactions involving information and communications technology or services (“ICTS”) with a nexus to “foreign adversaries” that pose an “undue or unacceptable risk” to US national security. (For additional detail on the ICTS rule, see our prior blog post.) The June 16 rule amends the ICTS rule to clarify Commerce’s ability to regulate transactions involving software, including so-called “connected software applications,” and to further enumerate the criteria that Commerce will consider when reviewing such transactions. The changes are effective July 17, 2023.
Continue Reading Commerce Issues Final Rule Targeting Connected Software Applications
New US Interagency Guidance Targets Iranian UAVs and Compliance Risks
On June 9, 2023, the US Departments of Commerce, Justice, State, and the Treasury published a joint advisory and guidance (the “Guidance”) related to Iran’s procurement, development, and proliferation of unmanned aerial vehicles (“UAVs”). Notably, the agencies warned industry participants that key components of Iranian UAVs are US-origin technologies, some of which are “low-technology items” that are designated as EAR99, i.e., not included on the Commerce Control List (“CCL”), Supplement No. 1 to part 774 of the EAR. The Guidance provides specific Harmonized System (HS) codes that exporters/reexporters may use to identify items that are of diversion/transshipment concern.
Further, the agencies provided clear guidance on the US government’s expectations for private industry compliance programs, identified numerous red flags for industry participants, and highlighted several best practices for how to address a red flag.
This Guidance is the most recent activity in a series of measures implemented by US government agencies to disrupt Iran’s UAV program. The Guidance may signal an increased focus on both US and non-US manufacturers and suppliers of commodities that can be used in the production of UAVs.
Continue Reading New US Interagency Guidance Targets Iranian UAVs and Compliance Risks