In the latest shoe to drop in the escalation of tensions between the United States and China, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a final rule on December 23, 2020, removing Hong Kong as a separate destination under the Export Administration Regulations (EAR). Rather than adding Hong Kong alongside the People’s Republic of China to Country Group D in the Commerce Country Chart, BIS eliminated references to it in all but a few sections of the EAR.

The removal of Hong Kong as a separate destination is a further step toward implementation of Executive Order (EO) 13936, signed July 14, 2020. (85 FR 43413, 7/17/2020). Steptoe’s prior analysis of EO 13936 is available here. EO 13936 directed relevant agencies to amend their regulations to remove differential and preferential treatment for exports, reexports, or transfers (in-country) to or within Hong Kong of all items subject to the EAR when compared to the treatment for such transactions to or within China. The final rule codifies the BIS rule issued July 31, 2020, which required that Hong Kong be treated the same as China in almost all circumstances; that is, Hong Kong would be subject to the same license requirements, license exceptions, and other applicable provisions as China under the EAR (85 FR 45998).

Specifically, in this new rule, BIS removes the entry for Hong Kong from the Commerce Country Chart at Supplement No. 1 to Part 738, since Hong Kong is now to be governed by the entry for China. Most references to Hong Kong in Part 740 of the EAR governing license exceptions were previously removed, consistent with the July 31 final rule. The Hong Kong entities listed separately on the Unverified List, Supplement No. 6 to Part 744, are now merged, alphabetically under the entries for China.

Continue Reading Hong Kong Removed as a Separate Destination from China Under the EAR

On December 23, 2020, the US Department of Commerce, Bureau of Industry and Security (BIS) added its long-anticipated Military End User (MEU) List to the Military End Use/User Rule (MEU Rule) of the Export Administration Regulations (EAR). The initial tranche of parties included on the MEU List consists of 102 “military end users,” comprising 57 Chinese companies and 45 Russian companies. Exporters are now on notice that a license is required for exports, reexports, or transfers of any item subject to the EAR listed in Supplement No. 2 to Part 744 (MEU Item) if any of these newly-listed companies are the purchaser, intermediate or final consignee, or end user. License exceptions are generally not available for exports, reexports, or transfers of MEU Items to a MEU listed entity (unless authorized under License Exception GOV as specified). License applications for MEU Items will be reviewed with a presumption of denial.

The published MEU List is substantially revised from the draft that was previously leaked, and widely publicized a month earlier, which listed 117 companies (89 Chinese companies and 28 Russian companies).

The MEU List was published as part of a new final rule that amended the EAR’s MEU Rule, which requires licenses for shipments of MEU Items to “military end users” or for “military end uses” in China, Russia, or Venezuela. The MEU Rule places the onus on exporters to determine whether a transaction is to a military end user or for a military end use and therefore, requires a license. After the MEU Rule was amended and broadened in April 2020, exporters had requested further guidance from BIS to assist with determinations as to whether specific shipments would require licenses under the MEU Rule.  BIS subsequently published FAQs that provided some additional guidance.  The MEU List provides further guidance and clarification to exporters, by informing and providing notice to the public when an entity is considered by the US government to be a “military end user” for purposes of the MEU Rule.

Continue Reading Bureau of Industry and Security Issues New Military End User List

On November 30, 2020, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the addition of Chinese company CEIEC to its list of Specially Designated Nationals and Blocked Persons (SDN List), pursuant to Executive Order 13692, for “its role in undermining democracy in Venezuela.”  OFAC also issued General License 38 authorizing certain wind-down activities with CEIEC, as well as an FAQ regarding the designation and general license.

According to Treasury, CEIEC, also known as China National Electronic Import-Export Company, has over 200 offices and subsidiaries worldwide.  CEIEC explains on its website, https://www.ceiec.com/About, that it is a “close partner of many foreign government[s], military and security department[s], to help them fulfill their mission of securing citizen’s confidence to health, safety, economic growth and public governance.”

In the press release announcing CEIEC’s addition to the SDN List, Treasury explained that the designation is due to the company’s involvement in “actions or policies that undermine democratic processes or institutions” in Venezuela.  For example, Treasury stated that CEIEC provided “software, training, and technical expertise to Venezuela[n] government entities, which was then used against the people of Venezuela.”

Continue Reading OFAC Adds Chinese Tech Company CEIEC to SDN List, Issues General License 38 Authorizing Wind-Down Activities

The US executive and legislative branches are ratcheting up pressure on companies to address forced labor in their supply chains. The US Department of Homeland Security’s Customs and Border Protection agency (CBP) has in recent months announced a series of Withhold Release Orders (WROs) and a Finding following investigations into forced labor. Additionally, the US

In this advisory, members of our Sanctions and Export Control team provide a preliminary assessment of the expected policy approach of President-elect Biden’s administration to major US sanctions programs, including China and Hong Kong, Russia, Iran, Cuba, Venezuela, Syria, North Korea, and Sudan sanctions programs.

While specific steps to be taken will be revealed in

On November 17, 2020, OFAC issued Venezuela General License 8G, “Authorizing Transactions Involving Petróleos de Venezuela, S.A. (PdVSA) Necessary for the Limited Maintenance of Essential Operations in Venezuela or the Wind Down of Operations in Venezuela for Certain Entities.”  General License 8G extends the pre-existing authorization for US persons to engage in certain transactions and activities involving the Venezuelan state-owned oil company PdVSA through 12:01 a.m. eastern daylight time, June 3, 2021, for Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford International.  These are some of the most significant petroleum companies with US connections operating in Venezuela.  Aside from extending the expiration date – which had been December 1, 2020 – General License 8G is substantively the same as general License 8F, which it replaces.

Specifically, General License 8G authorizes US persons to engage in transactions and activities “ordinarily incident and necessary to the limited maintenance of essential operations, contracts, or other agreements” for the above-mentioned companies and their subsidiaries that –

  1. are for safety or the preservation of assets in Venezuela;
  2. involve PdVSA or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest; and
  3. were in effect prior to July 26, 2019.


Continue Reading OFAC Issues Updated General License 8G Extending Authorization of Transactions with PdVSA for Five Petroleum Companies

The US Treasury Department, or presumably, its Office of Foreign Assets Control (“OFAC”), is expected to issue a report by mid-December under Section 5(b) of the Hong Kong Autonomy Act (“HKAA”) identifying “foreign financial institutions” (“FFIs”) that have knowingly conducted significant transactions with “foreign persons” previously identified by the US State Department under Section 5(a) of the HKAA on 14 October 2020. FFIs identified in the Section 5(b) Report will face a menu of ten sanctions, ranging from prohibitions on serving as a repository of US government funds to travel bans against corporate officers.

Prior to identification in the Section 5(b) Report and imposition of those sanctions, OFAC “will reach out to an FFI to inquire about its conduct,” according to FAQ 848 issued by OFAC in conjunction with the State Department’s 5(a) report.

While awaiting issuance of the Section 5(b) Report, and in addition to identifying any connection to individuals previously identified by the State Department, FFIs should consider how to respond if they receive an outreach from OFAC. Such an outreach, like any inquiry or request for information from OFAC, must be handled expeditiously and strategically. Inaccuracies or omissions in the response or the failure to respond at all could form the basis of enforcement action separate and apart from the conduct OFAC is reviewing under the HKAA. It will certainly set the tone for interactions with OFAC going forward.

In this note, we provide guidance on how to handle requests from OFAC under the HKAA, and more broadly to other informational outreach, based on our considerable experience in managing similar US government requests for clients in Asia.

Continue Reading Responding to the US Treasury Department’s Information Requests: The Hong Kong Autonomy Act and Beyond

(For more recent information, see our blog post of January 15, 2021, “Updated: Amended Executive Order Makes Clear US Persons Must Divest Securities of Chinese Military Companies as Defense Department Identifies Nine More Entities.”)

On November 12, 2020, the White House issued an Executive Order (“EO”), “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” which will prohibit US persons from purchasing securities of certain “Communist Chinese military companies,” including 31 companies previously identified by the US Department of Defense (“DoD”) in June and August 2020 (available here and here). The prohibitions in the EO will take effect on January 11, 2021.

Background

The EO, which was issued pursuant to the president’s authority under the International Emergency Economic Powers Act (“IEEPA”), declares a national emergency with respect to the “PRC’s military-industrial complex,” which is said to be “directly supporting the efforts of the PRC’s military, intelligence, and other security apparatuses” and threatening the national security, foreign policy, and economy of the United States.

In response to this stated threat, the EO will prohibit US persons from purchasing publicly listed securities of specific “Communist Chinese military companies,” as that term is defined  in Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, as amended (“NDAA 1999”).  Restrictions will go into effect on January 11, 2021 against the 31 companies already identified by DoD, and will take effect 60 days after any subsequent listings by the DoD or the US Department of the Treasury.

Continue Reading Executive Order Prohibits US Persons from Buying Securities of Chinese Military Companies as of January 11, 2021

In its 2019-2020 Annual Report (the Report), the UK’s sanctions office (the UK Office of Financial Sanctions Implementation (OFSI)) revealed that, between April 2019 and March 2020, it had received 140 voluntary disclosures of potential sanctions violations related to transactions worth a total of £982 million.  This represents a record number of reports, and an

On October 14, 2020, the U.S. State Department issued a much-anticipated report pursuant to Section 5(a) of the Hong Kong Autonomy Act (HKAA), identifying ten individuals who were determined by the State Department to be “foreign persons” who “are materially contributing to, have materially contributed to, or attempt to materially contribute to the failure of the PRC to meet its obligations under” the Sino-British Joint Declaration of 1984 or Hong Kong’s Basic Law.

Under Section 5(b) of the HKAA, the U.S. Treasury Department is now given 30 to 60 days to release a report identifying any foreign financial institution (FFI) “that knowingly conducts a significant transaction with a foreign person identified” in the October 14 report. This report could be released by mid-November or December. Within one year of this Section 5(b) report, the Treasury Department could impose secondary sanctions on the FFIs identified therein, based on a menu of 10 sanctions laid out in Section 7 of the HKAA.

In conjunction with the State Department’s report, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued four Frequently Asked Questions (FAQs) providing additional guidance on how the agency intends to implement the secondary sanctions.

For additional background on this issue and a description of the secondary sanctions under the HKAA, see our blog post of July 15, 2020, “U.S. Executive Order Implements, Strengthens Hong Kong Sanctions.”

Continue Reading Update: Hong Kong Financial Institutions Face U.S. Secondary Sanctions after State Department Issues First Report under Hong Kong Autonomy Act