WorldECR issue 80

WorldECR
Huawei and 68 affiliates placed on Entity List
EU: New sanctions for malicious external
cyber-attacks
2
13
US announces new secondary sanctions on
15
Iran’s iron, steel, aluminium, and copper sectors
Recent developments in Germany
19
Cuba policy in flux: Seven unanswered questions 20
ICPs: Industry as a responsible stakeholder
in international trade
22
Global Magnitsky Sanctions: raising the
human rights and anti-corruption bar
25
Strategic trade and the darknet markets
30
ISSUE 80. June 2019
www.WorldECR.com
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President and BIS target Huawei for
‘activities that are contrary to US national
security or foreign policy interest’
The dust has yet to settle
after the US president and
agencies announced that
they were taking action to
prevent certain actors, but
particularly the Chinese
telecoms company Huawei,
privileges related to trade in
the United States – a series
of moves that has already
had widespread repercussions within the global
telecoms industry.
The following charts the
developments.
16 May 2019
On 16 May, the US
Department of Commerce
(‘Commerce’) announced1
that it was issuing a
regulatory rule adding
Huawei and 68 of its
affiliates, located in 26
countries, to the Entity List.
It published an advance rule2
which it stated to be effective
as at that date.
Commerce’s
stated
reason for its action was that
‘Huawei is engaged in
activities that are contrary to
US national security or
foreign policy interest’,
including alleged violations
of US sanctions on Iran set
out in an indictment released
in January 2019.
The action appeared to
preempt a bipartisan bill
introduced in Congress in
January 2019 calling for the
addition to the Entity List of
any Chinese telecoms firm
that violates US export
controls
or
sanctions.
Restrictions thus placed on
Huawei were as follows:
Links and notes
1
2
3
4
See: https://bit.ly/2HtVbLi
See: https://bit.ly/2HwhBLS
See: https://bit.ly/2vYJmY1
See: https://bit.ly/2Hu5fFh
2 WorldECR
the date of the EO is subject
to US jurisdiction and which
involves property in which a
non-US person has an
interest can be prohibited, if
Commerce has first issued a
determination that:
Designation of Huawei and its affiliates to the Entity List has already
had widespread repercussions within the global telecoms industry.
l As of 21 May, both US
and non-US companies
will be broadly prohibited
from
exporting
or
transferring to these 68
Huawei entities any
product, software or
technology that is of US
origin, or that contains
more than a de minimis
level
of
US-origin
content, without a prior
licence (authorisation)
from the US Bureau of
Industry and Security
(‘BIS’) in Commerce.
Such products, software
and ‘technology’ (as defined
in the Export Administration
Regulations,
‘EAR’) are
referred to in the regulations
as ‘items subject to the EAR’.
Items that have already been
shipped to Huawei and are
en route are exempted from
the prohibition, so long as
they did not previously
require a BIS licence.
Also
on
16
May,
reportedly after several
months
of
indecision,
President Trump issued an
Executive Order on ‘Securing
the
Information
and
Communications
Technology and Services Supply
Chain’ (‘the EO’).3 The EO
does not mention China or
Huawei but clearly was
crafted in a manner to
support restrictions on
imports of Huawei products
and services to the United
States.
Background to the EO
The EO defines the term
‘Foreign Adversaries’ as any
non-US
person
or
government ‘engaged in a
long-term pattern or serious
instances
of
conduct
significantly adverse to’ US
national security or the
safety of US persons. The EO
finds
that
Foreign
Adversaries are ‘creating and
exploiting vulnerabilities in’
information
and
communications technology
or services (‘ICTS’) to
commit malicious cyberenabled actions, including
industrial espionage, against
the US and its people.
Scope of the EO
Accordingly, the EO gives
Commerce the authority to
make a determination that
certain types of transactions
involving ICTS and non-US
entities will be prohibited.
Any transaction that is
initiated or completed after
l any of the ICTS involved
in the transaction was
manufactured or supplied
by a person subject to the
jurisdiction of a Foreign
Adversary, AND
l the transaction poses an
undue risk of ‘sabotage to
or subversion of’ ICTS’ in
the US, an ‘undue risk of
catastrophic effects on
the security’ of US
infrastructure or the US
digital
economy
or
‘otherwise poses an
unacceptable risk to’ US
national security or the
safety of US persons.
Temporary general
licence
On 20 May, BIS issued a
temporary general licence
(‘TGL’)4 authorising the
following four types of
transactions for a 90-day
period through 19 August
2019:
l Transactions necessary to
maintain and support
networks and equipment
‘currently
fully
operational’, pursuant to
agreements in place with
any of the 68 Huawei
entities on or before 16
May 2019.
l Transactions necessary
for service or support,
including
software
updates and patches, to
‘existing
Huawei
handsets’, which appears
to mean existing models
of Huawei devices that
were
already
being
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manufactured and sold to
the public as of 16 May
2019.
l Disclosure of information
regarding
security
vulnerabilities in items
owned or controlled by
any of the 68 Huawei
entities, as part of
‘ongoing
security
research
critical
to
maintaining the integrity
and reliability of’ fully
operational networks and
equipment, as well as
handsets’.
l Engagement with the 68
Huawei
entities
‘necessary
for
the
development
of
5G
standards as part of duly
recognized international
standards bodies’ such as
the IEEE, ISO, ITU and
GSMA.’
In a client briefing,
lawyers at Jacobson, Burton,
Kelley
PLLC
(‘JBK’)
commented: ‘It should be
noted that the authorization
provided by the TGL only
covers
the
restrictions
imposed by the Entity List
action. It does not lift any
other restriction on a
transaction imposed by
other provisions of the
regulations,
including
general BIS export licensing
requirements applicable to
the Huawei entities before
they were added to the
Entity List.
‘We recommend that
companies relying upon the
TGL review it closely and
take appropriate care to
ensure that any products,
software or technology they
provide to Huawei going
forward either (i) fall outside
the scope of the Entity List
restrictions completely, or
(ii) fall squarely within the
terms of the TGL.
‘Being
confident
regarding the analysis of
transactions covered by the
TGL
is
particularly
important because the TGL
requires that a company
complete and maintain in its
own
files
a
written
3 WorldECR
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“certification
statement”
before engaging in a
transaction with Huawei in
reliance on the TGL. The
statement must “specify”
how the relevant export,
reexport or transfer to
export control measures
while making “national
security” a catch-all phrase.
‘We urge the US to stop
its wrong practices, create
conditions for Chinese and
American companies to
was reported to have
reversed its decision.
On 22 May, the BBC
reported that UK company
ARM (part of the Softbank
Group) had instructed
employees to halt ‘all active
‘We oppose the act of any country to
impose unilateral sanctions on Chinese
entities based on its domestic laws, and
to abuse export control measures while
making “national security” a catch-all
phrase.’
China’s foreign ministry
Huawei “meets the scope of”
the TGL.
‘We also recommend
being alert for changes in the
TGL. It is likely that before
the end of its 90 day period
on August 19 the TGL will be
modified (either broadened
or cut back), and it could be
extended or even terminated
early.’
According
to
JBK,
companies exporting US
products or technologies to
China should ‘take care to
review their customers for
any of the covered Huawei
affiliates. Attempted and
actual shipments to parties
on the Entity List without a
BIS license have accounted
for a large number of BIS
enforcement cases over the
past few years.’
The fall-out
China has responded tersely
to the move. At a 16 May
press conference, foreign
ministry spokesman Lu
Kang said, ‘We ask our
companies to follow the laws
and regulations on export
control and fulfill our due
international obligations.
We ask our companies to
observe local laws and
policies when doing business
overseas. But at the same
time, we oppose the act of
any country to impose
unilateral sanctions on
Chinese entities based on its
domestic laws, and to abuse
carry out normal trade and
cooperation, and avoid
causing more damage to
bilateral economic and trade
ties. The Chinese side will
take necessary measures to
safeguard the legitimate
rights and interests of our
companies.’
Huawei itself has called
the restriction ‘unreasonable’ but said it was willing to
work with the US government to arrive at ‘measures
to ensure product security’.
It added: ‘Restricting
Huawei from doing business
in the US will not make the
US more secure or stronger;
instead, this will only serve
to limit the US to inferior yet
more expensive alternatives,
leaving the US lagging
behind in 5G deployment,
and eventually harming the
interests of US companies
and consumers .... In
addition,
unreasonable
restrictions will infringe
upon Huawei’s rights and
raise other serious legal
issues.’
One of the first of
Huawei’s
partners
to
announce a response to the
Entity List designation was
Google, which is responsible
for the Android operating
system used in Huawei
handsets. The company said
that it would be immediately
cutting ties with Huawei.
Following the publication of
the TGL, however, Google
contracts, support entitlements, and any pending
engagements’ with Huawei.
ARM licenses technology
that lies at the heart of global
mobile phone processors.
Being denied access to
such technology, it’s been
reported,
could
cause
significant problems for
Huawei. Indeed, a slew of
companies have announced
that they’re terminating
agreements with Huawei, or
at least taking a ‘wait and
see’ position.
Mobile operator EE told
WorldECR, ‘We’re currently
holding back our launch of
the new Huawei 5G
smartphones coming to
market. We’re working with
Huawei and Google to make
sure we can carry out the
right level of testing and
quality assurance so our
customers have a great
experience
with
any
smartphones we range in the
future. We’ll provide updates
on any future smartphones
in due course.’
Telecoms giant Ericsson
says that it’s exploring the
implications of the EO:
‘Ericsson is aware of the
Executive Order signed by
the President of the United
States and that one of our
competitors has been placed
on the so-called Entity list.
As a global company with
business in 180 countries, we
always analyse the potential
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effects of new national
legislation or administration
orders
targeting
our
industry. If required, we will
take measures to comply
with the Executive Order
and the conditions which
apply for companies on the
Entity List.’
Wonks wildly
speculating
Beside the compliance
implications, there are
emerging discussions as to
whether the designation is
justified, or the latest
instalment of the Trump
administration’s muscular
but over-enthusiastic use of
the tools at its disposal with
which to make a mark on the
world stage. As one adviser
told WorldECR: ‘The true
motive behind the move
remains unclear, leaving all
us hacks and wonks wildly
speculating…’
Helsinki-based consultant Aleksi Pursainen, former
global head of trade
compliance
at
Nokia
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Corporation
and
chief
sanctions counsel at the
Finnish Ministry for Foreign
Affairs, observed: ‘Some are
saying that the move is
clearly and purely politically
motivated, intended as a
show of strength towards
China, one more piece of
leverage employed by the
“Artist of the Deal”. But
these
commentators
overlook the fact that the
charges that have been
brought against Huawei
indicate that there is
reasonable cause to believe
that it has engaged in
behaviour that amounts to
intentional, sustained, and
systematic violations of
several US export control
and sanctions regulations.
While the company and its
executives have not been
proven guilty of anything,
and of course deserve the
presumption of innocence
under criminal law, smaller
companies have ended up on
the Entity List for much,
much less.’
Pursainen suggested it
would be ‘naive to say that
this is just BIS business as
usual’ given the timing of the
measure, and the size of
company targeted which
were ‘eye-brow raising,’ as
was the lack of moderation:
‘For instance, the US could
have tailored the export
restrictions to primarily
target Huawei’s telecom
infrastructure
business,
where the most egregious
violations are alleged to have
taken place. To do so, they
could have exempted items
such
as
mass-market
software products used in
mobile phones and even
hardware components for
such devices, and still
prohibited sales of powerful
high-tech components used
in infrastructure. But instead
they decided to cover all
items subject to the EAR,
which includes any old
innocent consumer app as
long as it is developed in the
US, or even just downloaded
from a US server – causing
heavy damage to the
strategically much less
significant
smartphone
business. All this suggests
that Commerce wanted to hit
Huawei as hard and as
indiscriminately
as
it
possibly could.’
Pursainen noted the wry
(tweeted) observation of a
Finnish
MP-turned
commentator that, perhaps,
Europeans ‘should also avoid
dependence
on
US
technology, given that the
US can prohibit its use
without notice whenever its
economy’s competitiveness
is threatened’. But he said
this belies the truth that US
allies will accept the United
States’ vigorous use of trade
controls up to the point that
the US starts to exploit its
export control and sanctions
powers for domestic or trade
policy purposes, at which
point ‘the measures and
their extraterritorial effects
lose whatever legitimacy or
grudging acceptance they
have enjoyed.’
New cybersanctions regimes for European Union
On 17 May 2019, the
Council of the European
Union
established
a
framework which allows
the EU to ‘impose targeted
restrictive measures to
deter and respond to cyberattacks which constitute an
external threat to the EU or
its
Member
States,
including
cyber-attacks
against third States or
international organisations
where restricted measures
are considered necessary to
achieve the objectives of the
Common Foreign and
Security Policy (CFSP).’
The Council says that
the kinds of attacks that fall
within the scope of the
regime are those which
‘have significant impact’
and
l originate or are carried
4 WorldECR
out from outside the EU,
or
l use infrastructure outside
the EU, or
l are carried out by persons
or entities established or
operating outside the EU,
or
l are carried out with the
support of persons or
entities operating outside
the EU.
The framework allows the
EU to impose sanctions on
‘persons or entities that are
responsible for cyber-attacks
or attempted cyber-attacks,
who
provide
financial,
technical or material support
for such attacks or who are
involved in other ways.
Sanctions may also be
imposed on persons or
entities associated with
them.’
UK Foreign Secretary
Jeremy Hunt said: ‘Over the
last two years, we have seen
a significant increase in the
scale and severity of
malicious cyber activity
globally. The UK has been
clear that it will not tolerate
malicious cyber activity of
this nature.’
Persistent threat
Export control/sanctions
consultant
Richard
Tauwhare told WorldECR
that the measures resulted
‘from a diplomatic push by
Britain and the Netherlands
after they reportedly found
hard evidence of cyberattacks last year by Russia’s
military intelligence service,
the GRU, and by a Chinese
state-linked
group,
Advanced Persistent Threat
10. These fit a broader
pattern of sophisticated
computer attacks against
Western democracy, critical
infrastructure
and
commercial
interests,
believed
to
originate
primarily in Russia, China
and North Korea.’ The
measures, said Tauwhare,
are designed to enable the
EU to respond quickly to
future attacks, rather than
rely on the existing system
based on country lists that
are complex to negotiate.
The timing, he pointed
out, was not accidental: ‘It is
no coincidence that the
measures were adopted only
days before the European
Parliament elections to be
held on May 23-26, to deter
any attempts to undermine
the vote, for example with
disinformation campaigns,’
he said.
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US withdrawal from ATT ‘will make it
harder to convince others to join’
In a speech delivered to the
National Rifle Association
(‘America’s longest-standing
civil rights organisation’)
and published 26 April,
President Trump said that
the United States would not
ratify the ‘misguided’ Arms
Trade Treaty, telling the US
Senate on 29 April: ‘I have
concluded that it is not in
the interest of the United
States to become a party to
the Arms Trade Treaty. I
have, therefore, decided to
withdraw
the
aforementioned treaty from the
Senate and accordingly
request that it be returned to
me.’
An accompanying ‘fact
sheet’ published by the
White House explained:
‘President
Trump
has
pledged to defend America’s
sovereignty and always put
America first and this
decision follows through on
that pledge. The President
has repeatedly acted to
protect and preserve our
sovereignty, including by
taking strong action to head
off possible investigation of
United States military and
intelligence personnel by the
International
Criminal
Court.
‘There is a track record of
the ATT being used by
President Trump: ‘[I]t is not in the interest of the United States to
become a party to the Arms Trade Treaty.’
groups to try and overturn
sovereign national decisions
on arms exports. For
example, organizations sued
the United Kingdom under
the treaty to try and prevent
a legal transfer of arms to
Saudi Arabia.
‘By announcing the
United States will not join
the ATT, President Trump is
ensuring this agreement will
not become a platform to
threaten Americans’ Second
Amendment rights.
‘The United States export
controls have long been
considered
the
gold
standard for engaging in
responsible arms trading
and we will continue to use
them under our own laws.
The ATT is simply not
needed for the United States
to engage in responsible
arms trade.’
In a statement, the UK
Foreign Office said it
‘regretted’ the US decision:
‘The ATT is the only legally
binding treaty, regulating
and promoting legitimate
and responsible trade in
conventional
arms.
It
remains a unique and
valuable instrument.
‘We will continue to work
with the US, as responsible
arms trade partners, on
tackling illicit arms transfers
and ensuring the right
conditions for a responsible,
legitimate arms trade. We
continue to encourage other
states to join the Treaty, this
is important for the ATT to
function effectively, and we
continue to support and
encourage implementation
of the ATT by existing and
new States Parties.’
Mark Bromley, Director
Dual-Use and Arms Trade
Control Programme at The
Stockholm
International
Peace Research Institute
(‘SIPRI’), told WorldECR
that there was a degree of
irony in that ‘…a lot of effort
was made to craft a treaty
that the US could live with
and abide by, and it seems
like that was a bit of a waste
of effort now. It’s nothing
really about the content of
the treaty, it’s just the idea of
there being any kind of
treaty that the US is party to
that references military
equipment that they seem to
be objecting to.’
The decision, he said,
would make it harder to
convince
other
major
powers like India, Russia,
and China, to join the treaty.
‘Those types of states are
often looking to see what the
US is doing and are
responding based on which
way the US is leaning. The
US clearly indicating that
they’re withdrawing from
the treaty now is probably
going to make their
signature and accession
processes
even
more
challenging.’
Jobs – not Iranian government – hardest hit by metals sanctions
On 8 May, President Trump issued an
executive order authorising secondary
sanctions against non-US companies and
financial institutions who engage in or
facilitate ‘significant’ transactions related to
the iron, steel, aluminium and copper
sectors of Iran’s economy.
Individuals and entities thus
sanctionable were granted a nine-day grace
period in which to wind down their dealings.
The impact of the move on the Iran
government is moot, say analysts. Writing
for Bourse & Bazaar, Esfandyar
Batmanghelidj (founder of the Europe-Iran
5 WorldECR
Forum) notes that Iran’s finished metals
industry accounts for the same share of
exports as Iran’s vegetable industry:
‘The largest product group in metals
exports, semi-finished iron (USD 503
million), earns Iran less than the largest
product group in the food industry, nuts
(USD 649 million).’
Moreover, he adds, Iran is already
struggling to repatriate foreign exchange
revenues because of the sanctions-related
constraints on banking, and that, had
cutting access to foreign exchange been an
aim of the legislation, ‘a waiver system like
that formerly in place for oil exports, in
which Iran’s earnings would accrue in tightly
controlled escrow accounts, would have
sufficed.’
Batmanghelidj suggested that the
underlying logic of the move is that it
reaches more Iranian citizens: the metals
and mining industry is one of the country’s
most important providers of jobs, directly
employing 600,000, while the automotive
sector, the largest consumer of Iranian
steel, employs a further 1 million workers –
a combined total of just over 6% of the total
workforce.
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Europe divergent on Saudi arms exports
The High Court of England
& Wales heard an appeal in
April, brought by the
Campaign Against Arms
Trade (‘CAAT’), which seeks
to overturn a 2017 High
Court judgment allowing the
UK government to continue
to export arms to Saudi
Arabia for use in Yemen.
The appellants argued that
the decision to grant export
licences ‘was against UK
arms export policy, which
clearly states that the
government must deny such
licences if there is a “clear
risk” that the arms “might”
be used in ‘a serious
violation of International
Humanitarian Law’.
On 7 April, the United
Nations
humanitarian
coordinator for Yemen said
there had been reports that
‘as many as eleven civilians,
including five students, were
killed and scores of civilians
injured in Shu’aub District
in Sana’a City,’ in an
incident that Houthi rebels
have attributed to a Saudi
airstrike.
On 24 April, UK foreign
office minister Mark Field
told parliament: ‘British
officials have raised this
incident with Saudi officials,
who have denied publicly
that an airstrike took place,
and British officials are
urgently seeking information from all credible
sources. We…continue to
existing joint projects with
European partners will be
exempt via general licences
provided they meet strict
conditions. These conditions
include:
Saudi Arabia’s airstrikes in Yemen have resulted in protests and the
cancellation of defence exports in some European countries.
call on all parties to the
conflict in Yemen to exercise
restraint, comply fully with
international humanitarian
law and implement the
Stockholm
Agreement
without delay in order to
improve the humanitarian
situation in Yemen.’
It is known that EU
Member States are taking
different approaches to
licencing exports to Saudi –
interrupting some defence
supply chains.
In a client briefing
published earlier this year,
lawyers at Hogan Lovells
noted that the arms embargo
imposed
by
Germany
following the murder of the
journalist Jamal Khashoggi
‘strained ties with allies such
as France and the UK,
because it stopped them
selling military equipment to
Saudi Arabia that was
developed jointly, or shipping arms that contained
German components.’
The briefing further
noted: ‘On 28 March 2019,
the German government
extended its arms embargo
against Saudi Arabia for a
further six months, to 30
September 2019. During this
time, no new export
applications
will
be
approved. However, following extensive discussions
with France and the UK, the
German government has
now agreed that the ban will
no longer apply to existing
joint projects with European
partners.
‘Under the compromise,
the ban will be extended for
another six months but
Turkey ‘preparing’ for US sanctions
Turkey's defence minister has told reporters that
the country is ‘preparing for potential US
sanctions over its purchase of Russian S-400
missile defence systems, even while he said
there was some improvement in talks with the
United States over buying F-35 fighter jets.’
The United States has warned Turkey that it
may face secondary sanctions under the
Countering America’s Adversaries Through
Sanctions Act (‘CAATSA’) if it presses on with the
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deal. Turkey has said it expected US President
Donald Trump to protect it.
Lebanon News reported Turkish Defence
Minister Hulusi Akar as saying: ‘We are doing
whatever normal bilateral agreements mandate.
Though there are some issues from time to time,
we are pleased that there has been no sharp turn
until now... Turkey is also making preparations for
the potential implementation of CAATSA
sanctions.’
1. no finished weapons
systems may be shipped
to Saudi Arabia or the
UAE until the end of the
year, and
2. jointly
produced
weapons delivered to
Saudi Arabia or the UAE
must not be used in the
war in Yemen.
‘Internal debates of the
German government on the
export ban have been going
on over the course of the
past months and so far only
shorter, preliminary extensions were agreed.’
Cruel rhetoric
Andrew Smith of the UKbased Campaign Against the
Arms Trade told WorldECR:
‘The war in Yemen would
not have been possible
without the political and
military support of Western
governments such as the US
and UK. Some European
governments have taken
action to reduce the arms
sales, but others, such as
France and Italy have
continued arming the Saudi
regime.’
He added: ‘The rhetoric
of a lot of European
governments is significantly
better than the reality. It
wasn’t the humanitarian
crisis in Yemen that forced
the German government to
withhold weapons, it was the
murder of Jamal Khashoggi
[which was] an appalling
crime, but it should not have
taken
that
to
make
European
governments
question if it is right or
wrong to arm one of the
most brutal and repressive
dictatorships in the world.’
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Canadian companies fear consequences
of withdrawal of Title III waiver
The
US
government’s
decision to withdraw the
Title III waiver of the
Helms-Burton Act could
have ‘massive’ consequences for Canadian companies
doing business directly or
indirectly
with
Cuba,
Toronto-based trade lawyer
John Boscariol has told
WorldECR.
Title III of the HelmsBurton Act authorises US
nationals with claims to
confiscated property in
Cuba to file suit against
persons that may be
‘trafficking’ in that property
but has been waived by
every US president since the
Act came into force in 1996.
As reported in last month’s
issue, in April, US Secretary
of State Mike Pompeo
announced that the waiver
would be ending with
immediate effect. Boscariol
told WorldECR that three
factors
in
particular
combine to potentially hit
Canadian companies hard:
l ‘extraterritorial reach —
it can apply to companies
who have no operations
in the US, whose
activities occur entirely
outside the US, who have
no US ownership, who
don’t employ any US
citizens/residents and
who don’t handle any
US-origin goods or
technology;
is
very
l trafficking
broadly
defined
to
include not only direct
dealings in confiscated
property, but also the
conduct of business with
the owners of such
property – for example,
indirect activities, such
as purchasing from or
selling to traffickers,
could be considered to be
either “engaging in a
commercial activity ...
otherwise
benefiting
7 WorldECR
Canada has a blocking regulation which prohibits Canadian companies
from complying with the US trade embargo of Cuba.
from
confiscated
property” or “profiting
from trafficking”;
l the availability of treble
damages that can be
awarded to Title III
plaintiffs suing Canadian
companies.’
While Boscariol said that
‘Some complacency had set
in around potential exposure
of the Canadian business
community
to
these
measures,’ he pointed out
that in 1997 Canada
implemented a number of
counter-measures, still in
force today, which provide
that: Helms-Burton Title III
judgments shall not be
recognised or enforced in
Canadian courts; Canadian
companies who have had
damages awarded against
them in the United States
may claim an equivalent
amount of damages from the
US Title III plaintiff in
Canada (i.e., a ‘clawback’);
and that Canadian Title III
defendants may recover
their costs from US plaintiffs
even before a judgment has
been issued in the US.
Boscariol suggested also
that Canadian companies
subject to Helms-Burton
remedies may ‘think about
challenging such action
under NAFTA Chapter 11 –
at least while NAFTA
remains in force (as USMCA
[the United States-MexicoCanada Agreement], its
proposed
replacement,
eliminates the investor-state
dispute settlement mechanism as between Canada and
the United States).’
Boscariol suggested also
that Canadian companies
need to be mindful of
Canada’s blocking order
(under
the
Foreign
Extraterritorial Measures
Act)
which
prohibits
Canadian companies from
complying with the US trade
embargo of Cuba and
requires ‘any directions
received by the Canadian
company in respect of the
embargo to be notified
immediately to Canada’s
Attorney General’.
Canada has issued a joint
statement with the EU
declaring that Canada and
the EU are ‘determined to
work together to protect the
interests of our companies in
the context of the WTO’, but,
said Boscariol, ‘A WTO
challenge will likely be met
with an attempt by the US to
rely on the GATT Article XXI
national security exception –
an exception that has
recently been clarified (and
narrowly interpreted I would
argue) in the WTO panel
decision in
Russia —
Measures Concerning Traffic
in Transit.’
For the latter case, see:
https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds512_e.htm)
Nord Stream 2 sanctions ‘on their way’
The US government will shortly be imposing sanctions on
companies involved in the Nord Stream 2 gas project, Reuters
reports US energy secretary Rick Perry as having told journalists
during his trip to Ukraine for the inauguration ceremony of
comedian-turned-president Volodymyr Zelensky.
Critics of Nord Stream 2 argue that it will make the European
Union reliant on Russian gas to meet its energy demands.
According to Reuters, Perry said: ‘The opposition to Nord
Stream 2 is still very much alive and well in the United States.
The United States Senate is going to pass a bill, the House is
going to approve it, and it’s going to go to the President and he’s
going to sign it, that is going to put sanctions on Nord Stream 2.’
The news agency also reported a spokeswoman for the
German Economy Ministry as saying that it had ‘taken note of the
threat of U.S. sanctions being placed on the Nord Stream 2 gas
pipeline project [but that] that Berlin rejected sanctions that have
extraterritorial effect.’
Nord Stream 2 AG describes itself as a ‘project company
established for planning, construction and subsequent operation
of the Nord Stream 2 Pipeline. The company is based in Zug,
Switzerland and owned by Public Joint Stock Company (PJSC)
Gazprom. PJSC Gazprom is the largest supplier of natural gas in
the world, accounting for approximately 15 percent of world gas
production.’
www.worldecr.com
News and alerts
News and alerts
‘Integrate compliance into M&A’ – OFAC
‘Compliance
functions
should also be integrated
into the merger, acquisition,
and integration process.
Whether in an advisory
capacity or as a participant,
the organization engages in
appropriate due diligence to
ensure that sanctionsrelated issues are identified,
escalated to the relevant
senior levels, addressed
prior to the conclusion of
any
transaction,
and
incorporated
into
the
organization’s risk assessment process.’
So
says
a
recent
document published by the
Office of Foreign Assets
Control
(‘OFAC’),
the
purpose of which, says
OFAC, is to ‘provide
organizations subject to U.S.
jurisdiction, as well as
foreign entities that conduct
business in or with the
United States or U.S.
persons, or that use U.S.origin goods or services,
with a framework on the
essential components of a
sanctions
compliance
program.’
Risk-based approach
The
document,
‘A
Framework
for
OFAC
Compliance Commitments’,
says that OFAC ‘strongly
encourages’ entities subject
to its jurisdiction ‘to employ
a risk-based approach to
sanctions compliance by
developing, implementing,
and routinely updating a
sanctions
compliance
program (SCP)…
‘While each risk-based
SCP will vary depending on
a variety of factors –
including the company’s size
and sophistication, products
and services, customers and
counterparties,
and
geographic locations – each
program
should
be
predicated
on
and
incorporate at least five
essential components of
compliance: (1) management commitment; (2) risk
assessment; (3) internal
controls; (4) testing and
auditing; and (5) training.’
Further
guidance
includes: ‘If after conducting
an
investigation
and
determining that a civil
monetary penalty (CMP) is
the appropriate administrative action in response to an
apparent violation, the
Office of Compliance and
Enforcement (OCE) will
determine which of the
following or other elements
should be incorporated into
the subject person’s SCP as
part of any accompanying
settlement agreement, as
appropriate…When applying the Guidelines to a given
factual situation, OFAC will
consider favorably subject
persons that had effective
SCPs at the time of an
apparent violation.’
https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf
UK exporter fined for unlicensed brokering
The United Kingdom’s
Export Control Joint Unit
has announced that Her
Majesty’s
Revenue
&
Customs (‘HMRC’) ‘has
recently issued a compound
penalty of £10,234.26 to a
UK exporter/trader.’
The penalty, it says, was
in relation to unlicensed
trading of body armour, and
while the goods were not
exported from the UK, ‘the
transaction involved a UK
national.’
UK government guidance
states that it regards
‘brokering
services’
as
constituting ‘the selling or
buying of dual-use items or
https://www.gov.uk/government/publications/notice-to-exporters-201906uk-exporter-punished-for-brokering-goods-without-a-licence/notice-to-exporters-201906-uk-exporter-punished-for-brokering-goods-without-a-licence
the deal, negotiation or
transaction for purchasing
or supplying dual-use items
from a third country to any
other third country.
‘In practice, brokering
could include the following
activities – this list is not
exhaustive:
l arranging supply from
overseas
factories/
warehouses;
l arranging intra-company
transfers;
The CFIUS Book
l drop shipping;
l acting as a “project
manager” for a project in
one third country who
sources supplies for that
project in other third
countries.
‘Brokering, under the
regulation, does not include
ancillary services (defined as
“transportation, financial
services, insurance or reinsurance
or
general
advertising or promotion”).’
CFIUS䩛ⱃ
A guide on how to navigate an investment or
acquisition in sensitive industries or companies
in the United States.
English and Chinese language versions available
www.worldecr.com/books
8 WorldECR
綘鳓罏Reid Whitten
〄䋒罏WorldECR
www.worldecr.com
News feature: Japan
News feature: Japan
Eastern approaches
Japan’s export control system is shaped by its war and post-war experiences – but shifts to the
geopolitical landscape augur subtle change, as WorldECR discovers.
I
t is for good reason that the USChina trade war – escalated in early
May by President Trump’s
announcement of a 25% tariff on
thousands of Chinese goods – is being
closely monitored by Japan. Trade with
China and the United States accounted
for 19.5% and 19% respectively of
Japan’s total exports in 2018,
compared to 7.1% from its third-largest
trading partner, South Korea.
Interdependence
cuts
across
industries: electronics manufacturers
use factories in China to assemble
components, whilst China is the largest
supplier of the mineral mica to
Japanese cosmetic companies. Japan
also uses US-origin components in its
cars, electronic goods and other
technologies. ‘Currently what is
happening with China is perhaps
getting more attention than export
controls or sanctions on North Korea,’
says Crystal Pryor, programme director
and research fellow focused on USJapan relations and strategic trade
controls at research institute Pacific
Forum.
Pacific origins
Japan has exercised strict export
controls for more than 70 years, under
the precepts of the Foreign Exchange
and Foreign Trade Act 1949, the
equivalents of the US Export
Administration Act (‘EAA’) and Arms
Export
Control
Act
(‘AECA’),
respectively.
Emerging as a pacifist society in the
aftermath of World War II, Japan
eschewed military exports, but allowed
a substantial defence industry to
flourish, producing sophisticated arms
and equipment for the domestic SelfDefense Forces (‘SDF’). It also built up
a considerable trade in dual-use goods.
In 2014 the principles upon which
exports were based were revised to
allow
defence
equipment
and
technologies to be exported under
strict conditions: as a contribution to
peace, and in Japan’s national interest.
These rules, the ‘Three Principles on
Defense Equipment Transfers’, were
designed to enable the Japanese
9 WorldECR
defence industry to enter global
markets. In the same vein a new
defence procurement agency was
formed, The Acquisition, Technology
and Logistics Agency (‘ATLA’), to assist
with defence exports.
According to figures from Japan’s
Ministry of Economy, Trade and
In 2014 the principles
upon which exports
were based were revised
to allow defence
equipment and
technologies to be
exported under strict
conditions.
Industry (‘METI’), there were 15
exports under the new principles in
2015, rising to 25 in 2017, which
included the transfer to the United
States of software and parts related to
the Aegis Combat System, and the
transfer of Patriot PAC-2 parts –
seeker gyro, warning and control
radars. But the sealing of multi-billiondollar defence deals has remained
generally elusive: in 2016 Japan lost
out to France in a lucrative deal to
supply a fleet of submarines to
Australia despite being tipped as the
frontrunner. To date, no major defence
deals have been secured.
‘Despite the new guidelines, the
detailed rules and procedures on
exporting defence equipment and
technology were not clear to Japanese
companies,’ says Kazuho Nakajima,
from Tokyo-based law firm Nishimura
& Asahi. ‘For instance, it was not clear
to what extent Japanese companies
could disclose technical information to
potential customers.’ This ambiguity
has made Japanese suppliers less
competitive than their global rivals.
‘These issues have gradually been
resolved, but the number of exports by
Japanese companies is limited,’ he
says.
www.worldecr.com
News feature: Japan
More use of external counsel?
Exporters with business in Japan will
notice the limited role that external
counsel plays in the export control
process. Contrary to common practice
in the US and Europe, where in-house
counsel draw on the expertise of law
firms or consultancies on tricky issues,
the influence of external counsel and
other advisers is marginal. This is due
to the proactive stance on interpreting
export control policy taken by two
influential Japanese institutions: METI
and the Center for Information on
Security Trade Control (‘CISTEC’).
CISTEC and METI co-operate closely
(CISTEC was initially established by
METI, becoming a private organisation
after 2010) but the two are not interlinked.
‘Many corporations here have
export control divisions, sometimes
within their legal departments or
outside their legal departments,
depending on the corporation,’ says Go
Hashimoto, partner at Atsumi & Sakai.
‘Professionals trained on the job in
these divisions and departments draw
on the vast resources made available by
METI, functioning without external
assistance or advice.’
That said, Hashimoto reports a
gradual shift towards the use of external
counsel as trade issues become more
politicised, ‘which is beyond the
expertise possessed by traditional
Japanese in-house export control
professionals,’ he says. Japanese
companies are wary of entangling
themselves with US national security
concerns and referrals to private
practice are on the rise as a result.
CISTEC is a unique concept in the
export control world. It was founded in
1989 after ‘the Toshiba incident’ –
when the electronics manufacturer was
found to have exported state-of-the-art
machinery tools to Cold War Russia –
a revelation that prompted a shake-up
of the existing Japanese export control
system. With membership of around
500 companies and research institutes,
CISTEC aims to serve as a ‘linkage
channel’ between industry, government and exporters on trade controls,
providing seminars, training and
consultation
services
explaining
Japan’s complex export control laws
and ordinances. Its guidance is
necessary.
Although
Japan
seeks
to
incorporate the multilateral export
control regimes, such as the Wassenaar
10 WorldECR
News feature: Japan
Recent strategic trade developments in Japan
l The Ministry of Economy, Trade and Industry (‘METI’) announced on 9 April
2019 that the Japanese Cabinet had approved a revision to Appended Table
3-2 of the Export Trade Control Order (Cabinet Order No.378 of 1949; the
‘Export Order’) and added South Sudan to the list of the areas subject to
strict export control (areas against which arms and other embargoes have
been imposed by the UN Security Council) in accordance with UN Security
Council Resolution 2428. If an export destination is a target area specified
in Appended Table 3-2 of the Export Order, exports are more strictly
controlled than those for other areas (Article 4 (1) (iii)-(iv) under the Export
Trade Control Order). Enforcement of the Revised Export Order took effect
12 April 2019
l In April, Japan updated the Foreign Users List (equivalent to the United
States SDN list), adding five entities.
l METI has extended the ban on all exports destined for North Korea, and all
imports originating in or shipped from North Korea, in line with the
‘Measures against North Korea Pursuant to the Foreign Exchange and
Foreign Trade Act’ (decided by the Cabinet on April 9, 2019). The law holds
that: ‘
1. The ban on all exports of goods destined for North Korea will be extended
by imposing the requirement that exporters obtain export approval from
the Minister of Economy, Trade and Industry (related article: Article 48,
Paragraph 3 of the Foreign Exchange and Foreign Trade Act; hereinafter
referred to as the ‘Act’).
2. The ban on all imports of goods originating in or shipped from North
Korea will be extended by imposing the requirement that importers obtain
import approval from the Minister of Economy, Trade and Industry (related
article: Article 52 of the Act).
3. To ensure the enforcement of these restrictions, the following transactions
shall be banned:
i. Transactions involving buying/selling, loaning/borrowing, or giving of
goods that involve the movement of the goods between North Korea
and third countries (intermediate trade) (related article: Article 25,
Paragraph 6 of the Act); and
ii. Payments of import bills for goods originating in or shipped from North
Korea which are imported without import approval (related article:
Article 16, Paragraph 5 of the Act).
4. Goods exported for humanitarian purposes are exempt from the above
restrictions.’
These restrictions entered into effect on 14 April 2019 and end on 13 April
2021.
Arrangement, there is still uncertainty
for
exporters
arising
from
inconsistencies with export practice in
the US and EU.
CISTEC provides copies of up-todate regulations and tools such as
parameter sheets and item-by-item
comparison tables. To bridge the gap
between the EU classification
numbering system and that of Japan –
currently being harmonised – CISTEC
maintains a detailed correlation table
of Japan’s classification numbers and
their EU counterparts. ‘CISTEC is very
good at dealing with issues at the
customs level, but companies are
increasingly looking to private practice
to help them interpret international
trade policy,’ says one Japanese export
control professional.
www.worldecr.com
News feature: Japan
Looking west
Japanese businesses are outwardfacing and conscious of the need to
keep up to date with changes to
external export control regimes.
‘Companies are very much interested
in non-Japanese export control
developments, both in the US and in
the EU,’ says Junko Suetomi at Baker
McKenzie’s Tokyo affiliate, Gaikokuho
Joint Enterprise. ‘We regularly provide
EU export control seminars to certain
clients for example, as many
international companies have activities
in the EU and are concerned with EU
regulations.’
Rapidly evolving US export control
requirements
are
also
closely
scrutinised, especially the re-export
regulations, as many Japanese
businesses export goods, services or
technologies that incorporate USorigin components. The extraterritorial
nature of US sanctions is a
fundamental concern: ‘Almost all
Japanese companies were forced to
terminate or suspend business with or
in Iran as a result of the re-imposition
of sanctions by the US,’ says Nakajima.
The US’s punitive stance towards
ZTE and Huawei has also posed a
dilemma for Japanese businesses
trading with these technology
companies. Japan’s status as an Asian
supply-chain superpower means its
industries are closely entwined with
China: ‘Although Japanese companies
do not directly trade with North Korea,
they sometimes find that their Chinese
trading partners may have a
connection with North Korea, such as
exporting goods to North Korea, or
employing labourers from there,’ says
Nakajima. ‘In these cases, Japanese
companies suspend business with such
Chinese companies until they are able
to verify that they have no connection
with North Korea.’
Like other major exporting
countries, Japan is closely following
the progress of the US Bureau of
Industry and Security (‘BIS’) review on
imposing new export controls on
emerging technologies.
In March, Japan’s Minister for
Industry expressed concern in the
Japanese national press that the
inclusion of artificial intelligence (‘AI’)
and biotechnology in the definition of
advanced technology that will be
subject to export controls will have a
negative impact on Japanese industry
– as Japanese companies export
products to China that use technology
11 WorldECR
News feature: Japan
developed in the US, such as cars
equipped with AI driver aids.
‘The US seems to target armsembargoed countries mainly, but with
the new export controls, we have
concerns over potential problematic
cases such as re-export regulations
from Japan to China, deemed export
regulations within US companies, and
deemed export regulations within
‘The government and
private sectors are
becoming more attuned
to US and European
export control
compliance and
regulations.’
Japanese companies, e.g., how to work
with Chinese employees,’ says Moe
Kato, assistant senior researcher in the
exporter services department at
CISTEC.
If the US goes ahead with greater
control on emerging tech, it is likely
that Japan will follow: ‘METI’s official
in charge of export control has
indicated the possibility of expanding
the scope of technologies subject to
export control in response to the US
Export Control Reform Act (‘ECRA’),
while noting that the government
should not excessively hinder crossborder activities that would advance
future innovations,’ says Nakajima.
The Japanese government has
demonstrated that it is prepared to
address regulatory gaps that put Japan
at a competitive disadvantage. In
March it responded to concerns that
Japanese universities could fall foul of
increased US and Chinese regulation of
projects
involving
controlled
technology by announcing the
formation of new guidelines, in line
with its Comprehensive Strategy on
Science, Technology and Innovation,
released by the Cabinet in June 2018.
The move aims to extend the culture of
export control compliance found in
government bodies and companies to
universities focused on joint study
projects with foreign enterprises.
Looking east
CISTEC has expressed reservations
about China’s proposed new export
control law, which includes provisions
for deemed export and re-export
regulation. CISTEC’s response to the
proposed legislation, published in
January 2018, notes that the concept of
‘re-export controls as a whole’ is
‘questionable from the perspective of
international law’.
If a licence is required to re-export
products containing goods imported
from China, ‘using Chinese products
will become a risk and it will create a
strong incentive in industrial sectors in
foreign countries to avoid using them.’
CISTEC also has concerns over the
wide definition of a ‘foreign country’ in
China’s proposed deemed export
regulation. ‘We are watching the
coming new law closely to see if it will
include deemed export regulation and
re-export regulation because they will
affect business response significantly,’
says Kato. That said, private
practitioners report that clients are
currently more concerned with the
wider ramifications of US-China
relations than the niceties of specific
export control regimes.
The future
Following the 2014 reform of export
control policy, it is possible that the
established focus on dual-use goods
will widen to encourage the export of
defence equipment and technological
information, albeit under the strictures
of the revised Three Principles. This is
despite developments in Japan moving
at ‘a glacial speed’, according to one
market commentator. ‘It is fair to say
that the relaxation of the Three
Principles
regarding
defence
equipment exportation, coupled with
the shift in the country’s defence policy
per se, is affecting the sentiment here
resulting in public statements
reflecting these changes,’ says
Hashimoto. ‘The government and
private sectors are becoming more
attuned to US and European export
control compliance and regulations.
New standards are still in the making
and change is in the air, it feels,’ he
says.
www.worldecr.com
News and alerts
News and alerts
Tank Talk
News and research from the export control,
non-proliferation and policy world
Tit for tat terror designation ‘not good for Centcom’
Writing for the Royal United
Services Institute (‘RUSI’),
fellow Christopher Galvin
writes that the decision of
the US government to
designate Iran’s Islamic
Revolutionary Guard Corps
(‘IRGC’) as a terrorist
organisation, and Iran’s
corresponding threat of
retaliation in kind towards
the United States Central
Command (‘CENTCOM’)
and its affiliate and allied
troops, could have profound
consequences for the latter
in the event of a US-Iran
war.
Galvin writes that the
‘exchange’ of designations
‘could have an impact on the
proper application jus in
bello, the cumulative body of
laws which govern the
conduct of combatants in
warfare’: ‘While a potential
retaliatory
move
was
envisioned by Pentagon
officials,
the
Iranian
Supreme National Security
Council’s
decision
to
designate CENTCOM as a
terrorist organisation …
effectively means that in the
event of armed conflict,
Tehran has provided itself
with room for a legal
justification
to
deny
appropriate protection to
combatants as required
under
international
humanitarian law, and that
could have a severe impact
on the potential treatment of
CENTCOM personnel which
may fall into Iranian
captivity.
‘Such
an
Iranian
manoeuvre would clearly be
disregarding of the fact that
CENTCOM
–
as
an
established
military
command of a regular armed
force or an established state
– is evidently not a terrorist
organisation.’
https://rusi.org/commentary/threat-jus-bello-legal-implications-irans-designation-us-central-command-terrorist
Arms Control: What went wrong?
Depending on their extent,
the introduction of export
control restrictions on
emerging technologies by
US lawmakers could deeply
impact US exports, find
Stephen Ezell and Caleb
Foote, in a report written for
the Washington DC-based
Information Technology &
Innovation
Foundation
(‘ITIF’).
The
report,
which
includes a state-by-state
evaluation of the potential
economic harm of new
controls argues:
‘Although
the
U.S.
government is right to act to
12 WorldECR
prevent
defense-related
technologies from being
adopted
by
potential
adversaries, BIS should be
cautious in its application of
export controls to emerging
technologies. Moreover, the
export
control
regime
should be established in
order to protect U.S.
national security interests
without
placing
U.S.
competitiveness in emerging
technologies at risk.
‘Broad export controls
would reduce the revenues
domestic firms rely on to
invest in the technologies
that allow them to stay
competitive in the long term
while providing employment, thereby threatening
jobs across the United
States. Instead, restrictions
should be constructed to
target specific military
technologies as narrowly as
possible while BIS evaluates
the potential of coordinated
international action, which
is necessary for any export
control regime to be
effective.’
https://www.itif.org/publications/2019/05/20/how-stringent-export-controls-emerging-technologies-would-harm-us-economy
Response needed fast to threat posed by hypersonic
weapons
In December 2018, writes
Torben Schütz of Berlin’s
DGAP thinktank, Russia
tested a new weapon system,
‘a nuclear-capable hypersonic glide vehicle named
Avangard, which President
Putin described as a
“wonderful, perfect New
Year’s gift for the country”.’
The test, he said, ‘was
only the latest step in a
dynamic [that possesses the]
serious characteristics of an
arms race; a situation where
two or more actors are
developing specific weapons
with
reference
to
developments of the other.’
When operational, says
Schütz, hypersonic weapon
systems will alter the global
strategic landscape. ‘They
will compress reaction times,
increase
ambiguity
of
military actions, and may
lead to the weaponization of
space. With no effective
defenses
against
such
systems in sight, all actors
will face less stability –
regardless of whether or not
they field hypersonic weapon
systems
themselves.
Germany and Europe should
explore options to mitigate
these risks through arms
control, export controls,
and
confidence-building
measures.’
The real conundrum
posed by such weapons, he
argues, is that they ‘could be
used to conduct decapitation
strikes or first-strikes on
strategic [targets] that would
endanger
the
delicate
equilibrium between the
nuclear powers that evolved
with the conception of
second-strike capabilities
and doctrines such as
Mutual Assured Destruction
(MAD).’
Widespread interest in
the technology – currently
being developed by Russia,
the United States and China,
but with others such as
France and Japan looking at
civilian applications – makes
proliferation ‘likely’. But how
best should it be controlled?
‘Arms control instruments,
non-proliferation
treaties, confidence and
security-building measures
(CSBMs) and the build-up of
advanced defense systems
are the primary options for
Germany and Europe to
react to the emerging
hypersonic weapon systems,
[but
most]
existing
structures in these categories
are
insufficient
for
hypersonic weapon systems
and require adaptation or
the introduction of new
structures.’
This, he says, is especially
true when it comes to the
actors: China, for example,
‘is not part of any of the
major regimes capable of
reining
in
hypersonic
weapon systems and their
proliferation.’
https://dgap.org/en/think-tank/publications/dgapanalyse-compact/technology-and-strategy
www.worldecr.com
Bulletins
Bulletins
CANADA
Canada appoints
Ombudsperson For
Responsible Enterprise
By Cyndee Todgham Cherniak, LexSage
www.lexsage.com
On 8 April 2019, Canada’s International
Trade Diversification Minister finally
announced the appointment of
Ms. Sheri Meyerhoffer as Canada’s first
Ombudsman
for
Responsible
Enterprise (‘CORE’).
On 17 January 2018, the government
of Canada announced that it would
create an Office of the CORE. This is
one of Canada’s progressive Corporate
Social Responsibility initiatives to
export Canada’s values abroad.
What is the mandate of
Canada’s CORE?
The Ombudsperson for Responsible
Enterprise has the mandate to review
alleged human rights abuses arising
from a Canadian company’s operations
abroad, make recommendations,
monitor those recommendations,
recommend trade measures for
companies that do not co-operate in
good faith, and report publicly
throughout the process. The CORE’s
scope will focus on the mining, oil and
gas and garment sectors. There is an
expectation that the scope will expand
to other business sectors. This means
that other business sectors should also
get ready.
The CORE is one of Canada’s two
voluntary
dispute
resolution
mechanisms, complementing Canada’s
National Contact Point for the OECD
Guidelines
for
Multinational
Enterprises (‘NCP’).
The Ombudsperson is charged with
investigating Canadian companies
operating in foreign markets rather
than investigating the activities of
Canadian government officials. The
Canadian Ombudsman for Responsible
Enterprise will receive complaints
about Canadian companies from
Canadians,
competitors,
foreign
governments, foreign citizens, not-forprofit organisations, activists and
others. These complaints will be
investigated.
Submitting a complaint
When the CORE office is officially fully
operational, a web portal will accept
public submissions. There will also be
an option to make submissions by mail
for those who do not have access to a
computer or the internet.
If there is an issue that needs to be
addressed now it can be made through
Canada’s current dispute resolution
mechanism. Notification can be
submitted directly to NCP, depending
on the grounds for the complaint.
Consequences?
Should parties ignore requests for
information from CORE or refuse to
cooperate or act in good faith, CORE
will have the power to impose trade
sanctions, such as recommending the
withdrawal of consular services or
cutting access to Export Development
Canada trade financing or insurance
products and services. The Corporate
Responsibility Ombudsman may also
make non-binding recommendations
concerning payment of compensation,
which cannot be ordered by Canadian
courts under Canada’s export controls,
economic sanctions, anti-bribery and
other international laws.
https://www.international.gc.ca/trade-agreementsaccords-commerciaux/ncp-pcn/index.aspx?lang=eng
EU
New sanctions for malicious
external cyber-attacks
By James Killick, Genevra Forwood, Jacquelyn MacLennan,
Sara Nordin, Fabienne Vermeeren and Charlotte Van Haute,
White & Case
www.whitecase.com
On 17 May 2019, the EU put in place a
new legal framework for sanctions
targeting malicious cyber activities
from outside the EU that threaten the
Union or its Member States.1 The aim is
13 WorldECR
to enhance the EU’s cyber resilience
and address cyber-attacks that
undermine the ‘EU’s integrity, security
and
economic
competitiveness,
including increasing acts of cyber-
enabled theft of intellectual property’.2
This is the first time that EU
sanctions
have
targeted
those
responsible for actual or attempted
cyber-attacks. Similar to the recent EU
www.worldecr.com
Bulletins
Bulletins
sanctions targeting chemical weapons,3
these sanctions are country neutral, and
do not mention any specific third
country. It is reported that these
sanctions were advocated by the UK
and the Netherlands after an
investigation uncovered cyber-attacks
reportedly originating from the GRU,
the Russia military intelligence service,
targeting the Organisation for the
Prohibition of Chemical Weapons in
The Hague.
These new sanctions target actual
and attempted cyber-attacks having a
(potentially) ‘significant effect’, in light
of the scope and scale of disruption, the
number of persons affected, the
number of Member States concerned,
the extent of economic loss or economic
gain to the perpetrator, the extent of
any data breaches and the loss of
commercially sensitive data.4 In
addition, such cyber-attacks must
represent an ‘external threat’ to the
Union and its Members, meaning they
must have originated outside the EU,
used infrastructure outside the Union,
or the persons instrumental to the
cyber-attack’s
operations
are
established abroad.5 Importantly, these
sanctions also cover malicious cyber
activities towards third States and
international organisations.6
The new EU sanctions would impose
an ‘asset freeze’ on (i) natural or legal
persons, entities or bodies who are
responsible for cyber-attacks or
attempted cyber-attacks; (ii) natural
persons or legal persons, entities or
bodies that provide financial, technical
or material support for or are otherwise
involved in cyber-attacks or attempted
cyber-attacks; (iii) natural or legal
persons, entities or bodies associated
with the natural or legal persons,
entities or bodies described above.7 So
far, no-one has yet been listed, and the
This is the first time
that EU sanctions have
targeted those
responsible for actual
or attempted
cyber-attacks.
Council would require unanimity to
designate individuals and entities.
As a result of the asset freeze, all
funds and economic resources
belonging to, or controlled by, the listed
persons and that fall under EU
jurisdiction (e.g., held by EU banks) will
be frozen. Furthermore, no funds or
economic resources may be made
available – directly or indirectly – to or
for the benefit of the listed persons by
parties falling under EU jurisdiction.
The asset freeze sanctions apply to
the EU territory (including its airspace),
to nationals of EU Member States
(including those located outside the
EU), and on board vessels and aircraft
under Member State jurisdiction.
Sanctions also apply to companies
incorporated or registered under the
law of an EU Member State and to other
non-EU companies in respect of
business done in whole or in part in the
EU. This means that non-EU
companies may also be affected by the
measures once specific parties are
listed, depending on the particular
circumstances in which business
activities are performed in the EU.
In addition, EU Member States will
impose a travel ban on the persons
listed under these sanctions.8 In order
to maximise the impact of these EU
sanctions, the EU will also encourage
third States to adopt similar restrictive
measures.9
Links and notes
1
2
3
4
5
6
7
8
9
See Council Decision 2019/797 of 17 May 2019
concerning restrictive measures against cyberattacks threatening the Union or its Member States,
and Council Regulation 2019/796 of 17 May 2019
concerning restrictive measures against cyberattacks threatening the Union or its Member States.
For the Declaration by the High Representative on
behalf of the EU on respect for the rules-based
order in cyberspace, 12 April 2019, see
https://www.consilium.europa.eu/en/press/pressreleases/2019/04/12/declaration-by-the-high-repr
esentative-on-behalf-of-the-eu-on-respect-for-therules-based-order-in-cyberspace/.
See: https://www.whitecase.com/publications/
alert/eu-lays-ground-sanctions-against-use-andproliferation-chemical-weapons?s=sanctions and
https://www.whitecase.com/publications/alert/eusanctions-syrian-and-russian-parties-involved-use-an
d-proliferation-chemical?s=eu%20sanctions%
20chemical%20weapons.
See Article 2 of Council Regulation 2019/796 and
Article 3 of Council Decision 2019/797.
See Article 1 of Council Regulation 2019/796 and
Council Decision 2019/797.
Ibid.
See Article 3 of Council Regulation 2019/796.
See Article 4 Council Decision 2019/797.
See Article 9 Council Decision 2019/797.
INDIA
Recent changes to India’s
SCOMET list
By Sanjay Notani, Economic Laws Partnership
https://elplaw.in/
As per notifications issued on 24 April
2019, a number of amendments have
been introduced in the list of SCOMET
items (Appendix 3 to Schedule 2 of
ITC(HS)), export of which is generally
permitted only under a specific
authorisation issued by the Director
General of Foreign Trade (‘DGFT’).
14 WorldECR
SCOMET updates to align with
2018 updates of WA and NSG
lists effective from 23 July 20191
The amendments have been introduced
in the Commodity Identification Notes,
definitions, SCOMET entries, etc. of the
SCOMET list to incorporate 2018
updates of the Wassenaar Arrangement
(‘WA’) and Nuclear Supply Group
(‘NSG’) control lists.
Apart from amendments to
definitions, a number of Entry or
Category specific amendments have
been introduced in respect of SCOMET
Categories 1 (Toxic chemical agents and
other chemicals), 4 (Nuclear related
www.worldecr.com
Bulletins
Bulletins
other equipment, etc.), 6 (Munitions
list), 8 (Special materials, Electronics,
Computers, Telecommunications, etc.).
Under Category 8, various amendments have been introduced in the
Category 8A502 covering cryptographic
controls, the key ones being:
l The scope of covered encryption
Links and notes
1
2
See: https://dgft.gov.in/sites/default/files/
Noti%203%20dt%2024.04.2019_0.pdf
See: https://dgft.gov.in/sites/default/files/
Noti%2002%20dt.%2024.04.2019%20Eng._0.pdf
algorithms has been widened to
include post-quantum/quantumsafe/quantum-resistant asymmetric
algorithms;
l A new exclusion has been
introduced for specified end-point
devices or associated networking
equipment
with
limited
information security functionality
for securing non-arbitrary data
such as temperature, pressure,
voltage, etc.;
l The scope and coverage for
cryptographic activation tokens as
well as associated software and
technologies has been widened and
restructured.
The above amendments would come
into effect from 23 July 2019 (i.e., 90
days after the date of issuance of the
Notification).
Addition of Entry 1E under
Category 1 to amend export
policy for specified chemicals –
effective from 24 April 20192
Exports of specified chemicals
(Chloropicrin: Trichloronitro Methane
and Methyldiethanolamine) are now
permitted to be made to States Parties
to the Chemicals Weapons Convention
(‘CWC’)
without
an
export
authorisation, but subject to post-facto
reporting in the manner prescribed.
USA
US announces new secondary
sanctions on Iran’s iron, steel,
aluminium, and copper sectors
By Miller & Chevalier
www.millerchevalier.com
On 8 May 2019, President Trump
issued a new executive order ‘Imposing
Sanctions with Respect to the Iron,
Steel, Aluminum, and Copper Sectors of
Iran’. The ‘Iran Metals EO’ is the first
round of new sanctions imposed on
Iran since the full re-imposition of
sanctions in November 2018 and the
first Iran sanctions targeting a new
sector of the Iranian economy since
before the Joint Comprehensive Plan of
Action (‘JCPOA’, aka the Iran Nuclear
Deal).
The new sanctions apply not only to
Iranian persons operating in the iron,
steel, aluminium, and copper sectors of
Iran (the ‘covered metals sectors’) but
potentially to any person – either
Iranian or non-Iranian – who (i)
knowingly engages in a ‘significant
transaction’ for the sale, supply, or
transfer of significant goods or services
used in connection with the covered
metals sectors; (ii) knowingly engages
in a ‘significant transaction’ for the
purchase, acquisition, sale, transport,
or marketing of the covered metals of
Iran or products made from them; or
(iii) materially assists, sponsors, or
provides financial, material, or
technological support for, or goods or
services in support of, persons
15 WorldECR
sanctioned under the Iran Metals EO.
The Iran Metals EO also targets foreign
financial institutions (‘FFIs’) that
conduct or facilitate ‘significant
financial transactions’ in connection
with such activities.
Like previous secondary sanctions
targeting the Iranian oil, natural gas,
petrochemicals, shipping, shipbuilding,
and automotive sectors, the Iran Metals
EO authorises the Office of Foreign
Assets Control (‘OFAC’) to impose
‘blocking’ sanctions that target
individuals and companies, as
well as correspondent/payable-through
account sanctions that apply only to
FFIs. Both blocking sanctions
and correspondent/payable-through
account sanctions serve to cut off nonUS individuals, companies, and FFIs
from the US economy and financial
system.
Guidance
issued
by
OFAC
establishes a 90-day wind-down period
that will allow non-US persons to avoid
sanctions exposure by winding down
potentially covered transactions by 6
August 2019. Importantly, the guidance
makes clear that any new business
entered into during this 90-day window
that would be sanctionable under the
Iran Metals EO will not be considered
wind-down activity and could be
sanctionable, including during the
wind-down period itself.
The Iran Metals EO represents
another attempt by the US to stifle an
important source of revenue for the
government of Iran and marks an
expansion of sanctions that could have
a tremendous impact on remaining
non-US business in or connected to
Iran. The US government has
previously targeted precious metals and
raw or semi-finished metals, including
aluminium and steel. The Iran Metals
EO expands upon those prior sanctions
by targeting iron and copper, as well.
From this point forward, any non-US
business in or connected to the covered
metals sectors has a significantly
increased sanctions risk profile. The
relevant provisions of the EO and our
analysis of noteworthy points follows.
Blocking sanctions targeting
non-US companies in connection
with covered metals sectors
Section 1 of the Iran Metals EO sets
forth the ‘blocking’ sanctions that target
both Iranian individuals and entities
operating in the covered metals sectors,
but also non-US, non-Iranian entities
that do business in those sectors.
www.worldecr.com
Bulletins
Bulletins
Specifically, section 1 authorises OFAC
to impose blocking sanctions on any
person who:
1. Operates in the iron, steel,
aluminium, and copper sectors in
Iran, as well as anyone that owns,
controls, or operates an entity that is
part of the covered metals sectors;
2. Knowingly engages in a ‘significant
transaction’ for the ‘sale, supply, or
transfer’ to Iran of significant goods
or services used in connection with
the covered metals sectors;
3. Knowingly engages in a ‘significant
transaction’ for the ‘purchase,
acquisition, sale, transport, or
marketing’ of covered metals or
products made from such metals
from Iran;
4. Materially ‘assists, sponsors or
provides financial, material, or
technological support’ for, or goods
or services in support of, any person
blocked under section 1 of the Iran
Metals EO;
5. That is owned or controlled by, or
acting or purporting to act for or on
behalf of, directly or indirectly, any
person blocked under section 1 of
the Iran Metals EO.
These provisions are substantially
similar to past sanctions targeting the
Iranian oil, natural gas, and
petrochemicals sectors, notably the
provisions targeting significant transactions for the ‘purchase, acquisition,
sale, transport, or marketing’ of covered
metals and provisions targeting
material assistance, sponsorship,
financial/material/technical support,
or goods and services to or in support
of sanctioned persons.
However, the new metals sanctions
cover a slightly broader set of actors
than prior sector-specific blocking
sanctions – i.e., persons that own,
control, or operate an entity in one of
the targeted sectors. That language
suggests that foreign investment firms,
for example, with ownership interests
in companies operating in any of the
covered metals sectors may now be at
risk of being sanctioned themselves.
Correspondent and payablethrough sanctions targeting FFIs
in connection with the covered
metals sectors
Section 2 of the Iran Metals EO sets
forth correspondent or payablethrough account sanctions that target
FFIs that knowingly conduct or
facilitate a ‘significant financial
transaction’ in connection with the
covered metals sectors. Specifically,
section 2 authorises OFAC to impose
such sanctions on any FFI that
conducts or facilitates a significant
financial transaction:
1. For the sale, supply, or transfer to
Iran of significant goods or services
used in connection with the iron,
steel, aluminium, or copper sectors
of Iran;
2. For the purchase acquisition, sale,
transport, or marketing of these
metals or products of these metals
from Iran; or
3. For or on behalf of any person
blocked under the EO.
Again, these sanctions on significant
transactions conducted or facilitated by
FFIs are substantially similar to several
prior sanctions targeting, for example,
Iranian SDNs, the Iranian state-owned
oil company, National Iranian Oil
Company (‘NIOC’), and its Switzerlandbased trading company Naftiran
Intertrade Company Sàrl (‘NICO’), or
the purchase, acquisition, sale,
www.LearnExportCompliance.com
³86([SRUW&RQWUROVRQ1RQ867UDQVDFWLRQV´
SPEAKER PANEL
NEW EAR & ITAR Definitions and all Reform Changes
EAR, ITAR & OFAC COMPLIANCE FOR NON-US COMPANIES
Greg Creeser
ITC Strategies
LONDON
WASHINGTON DC
SINGAPORE
AMSTERDAM
APRIL 2019
MAY 2019
MAY 2019
OCTOBER 2019
Scott Gearity
BSG Consulting
Persons and Items Subject to US Jurisdiction (ITAR, OFAC & EAR)
United States De Minimis Content Calculation
Trump Administration Regulation and Enforcement Priorities
Technical Data Considerations
Enforcement Issues, Practical Advice...and MUCH MORE
Visit www.LearnExportCompliance.com/schedule
or call +1 540 433 3977 (USA) for details or registration
16 WorldECR
Melissa Proctor
Miller Proctor Law
John Black
BSG Consulting
www.worldecr.com
Bulletins
Bulletins
transport, or marketing of petroleum,
petroleum products, or petrochemicals
from Iran.
Noteworthy aspects
The Iran Metals EO is noteworthy in
several respects:
Connection between targeted sectors
and financing for malign activity
The Iran Metals EO continues a pattern
of targeting sectors of Iran’s economy
that are export-focused and generate
significant revenue for the government
of Iran. The best examples of such
targeted sectors are petroleum, natural
gas, and petrochemicals, which have
traditionally provided a sizable portion
of the government of Iran’s revenue and
thus, in the eyes of the US government,
the funding for malign activity such as
weapons of mass destruction or
international terrorism. However, as
the United States has focused intensely
on the aforementioned sectors of the
Iranian economy, the government of
Iran appears to be seeking to generate
revenue from alternate sources, such as
iron, steel, aluminium, and copper.
Sanctions on additional export-focused,
high-revenue sectors may be on the
horizon in the near future.
Clock is ticking for safe wind-down
As noted above, the issuance of the Iran
Metals EO started the clock on the 90day wind-down period, after which
companies, individuals, and FFIs could
face sanctions for certain business
dealings in the covered metals sectors.
This 90-day wind-down period ends on
6 August 2019. Even well-planned
wind-downs can go awry in connection
with Iran, as multiple non-Iranian
partners may be seeking to wrap up
transactions within a compressed time
period, creating serious logistical,
operational, and financial challenges.
Non-U.S. companies and FFIs seeking
to minimise sanctions risk in winding
down business potentially covered by
the new EO should consider doing so as
expeditiously as possible and factor in
likely delays.
No designations as of yet
Finally, OFAC did not take the step of
adding any entities or individuals to the
SDN List in connection with the Iran
Metals EO. Notably, OFAC has not yet
designated any Iranian entities for
‘operating’ in the iron, steel, aluminium,
and copper sectors in Iran. As such, it is
not possible, at least for now, to either
(i) materially assist, sponsor, or provide
financial, material, or technological
support for, or goods or services in
support of any person blocked under
section 1 of the Iran Metals EO or (ii) be
owned or controlled by, or act or
purport to act for or on behalf of,
directly or indirectly, such a person.
Foreign companies operating in this
space should monitor the SDN List
closely in the coming months, as an
initial wave of designations seems likely
at or near the end of the wind-down
period.
INDIA
The end of the oil waiver:
consequences for India
By Ameeta V. Duggal, DGS Associates
https://dgsassociates.in
The world’s third-biggest oil consumer,
India meets more than 80% of its oil
needs through imports. Iran is its thirdlargest supplier after Iraq and Saudi
Arabia and meets about 10% of its total
needs. With the end of the waivers of
the application of its sanctions, India
has had to halt all oil imports from Iran
effective 2 May.
The Ministry of External Affairs has
announced that India is ‘adequately
prepared to deal with the impact of this
decision…. Government will continue to
work with partner nations, including
with the US, to find all possible ways to
protect India’s legitimate energy and
economic security interests.’
The Ministry of Petroleum and
Natural Gas has made the following
statement: ‘The Government of India
has put in place a robust plan to ensure
that there is adequate supply of crude
17 WorldECR
oil to Indian oil refineries from May
2019 onwards. There will be additional
supplies from other major oil producing
countries from different parts of the
world. The Indian refineries are fully
prepared without any problem to meet
the national demand for petrol, diesel
and other petroleum products in the
country.’
India has been working on a barter
system with Iran. India already has a
bilateral agreement with the National
Iranian Oil Company to settle oil trades
in the Indian currency (which is not
freely traded on international markets)
through an Indian government-owned
bank. India has also exempted these
rupee payments from taxes. The rupee
payments will be used by Iran to pay for
imports from India, invest in Indian
businesses, pay for Iranian missions
and students in India and so on.
European nations looking to bypass
US sanctions on Iran oil purchases are
working on a non-dollar, barter payment channel – INSTEX or the
Instrument in Support of Trade
Exchanges – to continue trade with
Iran. Iran has suggested that India join
INSTEX, however, India is yet to take a
decision in this regard. India’s position
will be clearer once the new government
is formed in the coming days.
Links and notes
http://dgft.gov.in/sites/default/files/Monthly%20B
ulletin%20FTS%20January%202019%20Final.pdf
https://mea.gov.in/mediabriefings.htm?dtl/31225/Official_Spokespersons_r
esponse_to_queries_on_Indias__to_the_announce
ment_by_US_to_discontinue_the_Significant_Reduc
tion_Exemption_to_all_purchasers_o
http://pib.nic.in/newsite/pmreleases.aspx?mincode
=20
www.worldecr.com
Editorial
Editorial
Once upon a time in the West
I
n a sense, I’m off the hook from
opining on the giddying, and in
some
respects
terrifying,
developments of recent weeks: save to
say that in answer to the question,
‘War! What is war good for?’ It’s a cold
person that doesn’t agree with Edwin
Starr’s
conclusion:
‘Absolutely
nothing!’ There are, of course, many
whose analysis is vastly more
calculated and strategic. (But look
where that got us last time…)
Of course, the Huawei designation
can’t go unmentioned: the day after the
Chinese telecoms company was placed
on the Entity List markets around the
world were dented, with one fund that
tracks semiconductors losing 4% of its
value,
and
global
electronics
companies in their droves announcing
a severing of ties with Huawei.
Further proof of the extra-territorial
jurisdiction of the United States is
scarcely needed. Larger questions
linger: Do these developments confirm
the political unipolarity of the planet?
And what might be the kickback?
Further proof of the
extra-territorial
jurisdiction of the
United States is scarcely
needed.
But – as I say – I’m relieved of my
editorial duty to ponder these things
for the reason that it is my duty to
announce that the programmes for the
WorldECR Forums in London and DC
are now live – and I invite you to take a
look. The programmes for both the
London and DC events can be
downloaded at www.worldecr.com/
conference-2019/
As ever, we have a stellar round-up
of speakers from all corners of
compliance, law and policy, and a lineup of presentations that includes: the
US-China trade relationship and its
repercussions for industry, responding
to wind-down notices, managing
investigations, intangible technology
transfers, ICPs, detecting proliferation
finance…
Can I suggest (modestly) that
whichever event you choose to attend
will provide invaluable opportunities
for exchange of ideas and best practice,
learning and sharing knowledge, and
even disagreement (which can be
fruitful and stimulating, so long as noone loses their life).
Tom Blass, May 2019
[email protected]
The WorldeCr ForUm 2019
london
3-4 oCToBer
WaShIngTon, dC:
15-16 oCToBer
download the programmes today at
www.worldecr.com/conference-2019/
official sponsors
18 WorldECR
www.worldecr.com
Germany
Germany
Bulletin from Berlin: recent
developments in Germany
New export control guidelines for research
organisations have been published by BAFA,
writes Fabian Jahn.
R
ecent measures taken by the
German export control and
sanctions regulator, BAFA,
include the following:
Publication of guidelines relating
to research organisations
A new section of the BAFA website
specifically pertains to academic
institutions and their responsibilities –
and features two recent sets of
guidelines which can be found at:
https://www.bafa.de/DE/Aussenwirtschaft/A
usfuhrkontrolle/Academia/academia_node.h
tml
The guidelines are currently only
available in German but are scheduled
for translation this year. They were
compiled with input from research
organisations including HelmholtzZentrum für Material und Energie
GmbH, Fraunhofer Gesellschaft, TU
Berlin (University of Technology,
Berlin), and Robert-Koch-Institut
(authority for bacteriology science and
security).
Key points of the guidelines are:
l While the German constitution
guarantees ‘freedom of research’,
that’s not to say that export controls
do not apply to academic
institutions or that there’s a general
exemption. (While there are a small
number of narrow exemptions, the
application of their scope is
unclear.)
l Research organisations are obliged
(by law) to take measures to prevent
violation of German/EU export
controls.
l There are no defences for negligence
in the field of export control
compliance.
l It is important for research
organisations to monitor dual-use
research, sponsorship by third
parties, research partners and
scientific staff.
19 WorldECR
l Violations of export controls have
negative consequences.
l Research findings can be subject to
export controls.
l Researchers have a responsibility to
comply with export controls; to
meet interests of national/EU
security
interests
(including
protecting human rights).
Sanctions compliance ‘not a
boycott statement’
Germany has altered article 7 of its
foreign trade regulation to clarify that:
The issuing of a declaration in foreign
trade and payments transactions
whereby a resident participates in a
boycott against another country
(boycott
declaration)
shall
be
prohibited. Sentence 1 shall not apply
to a declaration that is made in order to
Research organisations
are obliged (by law) to
take measures to
prevent violation of
German/EU export
controls.
fulfil the requirements of an economic
sanction by one state against another
state against which
1. the Security Council of the United
Nations in accordance with Chapter
VII of the United Nations Charter,
2. the Council of the European Union
in the context of Chapter 2 of the
Treaty on European Union or
3. the Federal Republic of Germany
has also imposed economic
sanctions.
For further information, see:
http://www.gesetze-iminternet.de/englisch_awv/englisch_awv.html#
p0059
BAFA appoints new vicepresident
BAFA has announced that it has
appointed Dr Andrea Vater to the post of
Vice-President. It said that Dr Vater
succeeds Mr Bernd Enders, who retired
at the end of last year.
Dr Vater, it said, ‘has been a
member of the BAFA since 1992 and
has been involved in various areas of
responsibility of the BAFA, such as
export control and energy. In 2014, Dr
Vater took over as head of the central
division of the BAFA.’
It says that one of the tasks awaiting
her in her new role ‘is the strategic
management and stabilization of the
Office’s IT infrastructure in the context
of IT consolidation and the progressive
digitization of the federal government.’
Alterations to export licences
BAFA has amended a number of
general export licences:
l In the case of Eritrea, to clarify that
despite the lifting of the arms
embargo against Eritrea by the
United Nations and the European
Union, general licences should NOT
be used for exports to Eritrea.
See (in German only):
https://www.bafa.de/DE/Aussenwirtschaft/
Ausfuhrkontrolle/Antragsarten/Allgemeine_
Genehmigungen/allgemeine_genehmigunge
n_node.html)
l In the case of the United Kingdom,
to the effect that, in the case of the
UK’s departure from the European
Union, the UK will have the same
export control status as the US.
See a new, dedicated section of the
BAFA website at:
https://www.bafa.de/DE/Aussenwirtschaft/
Ausfuhrkontrolle/Brexit/brexit_node.html)
Fabian A. Jahn is a Munichbased Rechtsanswalt specialising
in customs and foreign trade/
export control law.
www.der-rechtsanwalt.eu
www.worldecr.com
Cuba
Cuba
Cuba policy in flux: Seven
unanswered questions
Unresolved issues remain regarding the Trump administration’s announcement not to
continue the 22 years of waivers on Title III of Helms-Burton Act. By Ronald A Oleynik,
Andres Fernandez, Jonathan M Epstein, Aymee D Valdivia Granda and Barbara Efraim.
U
S Secretary of State Mike
Pompeo has announced that,
effective on 2 May 2019, the
Trump administration will not
continue the waiver against lawsuits
under Title III of the Cuban Liberty and
Democratic Solidarity (LIBERTAD)
Act of 1996 (‘the Act’), also known as
the Helms-Burton Act. Title III
provides a cause of action in which US
nationals may sue any person who
‘traffics in confiscated property’. That
is, US nationals, including individual
citizens and corporations, with title to
a claim on Cuban confiscated property
may bring claims in US federal court
against persons (individuals or
entities) that traffic – derive any
economic benefit from – property that
has been expropriated by the Cuban
government since 1959.
Regarding
the
Trump
administration’s decision, Pompeo
stated on 17 April 2019, that ‘the right
to bring an action under Title III of the
Act will be implemented in full’. A State
Department official clarified that ‘the
Secretary has made very clear that this
is a decision not to waive, that has no
exceptions’. On the same day, National
Security Advisor John Bolton spoke in
Miami at a gathering of the Bay of Pigs
veterans. Bolton stated that, ‘We have
decided to end the Helms-Burton Title
20 WorldECR
III Waivers, once and for all,’ and ‘We
are
enforcing
all
sanctions
transparently,
aggressively,
and
effectively.’ These statements leave a
The end of the Title III
waiver will allow
claimants to bring
claims against anyone
trafficking in
confiscated property.
number of questions unanswered as to
how such lawsuits might work. A few of
the most pressing questions include the
following:
1) Will lawsuits be allowed
against US companies doing
authorised business in Cuba?
The end of the Title III waiver will
allow claimants to bring claims against
anyone trafficking in confiscated
property. The US government has not
yet provided any clarifications as to
whether this includes US companies
currently doing business in Cuba
authorised by the US government
under general licences under the
Cuban Asset Control Regulations, 31
C.F.R. Part 515, or under specific
licences issued by the US Department
of the Treasury’s Office of Foreign
Assets Control (‘OFAC’). Both as a
matter of legislative interpretation and
foreign policy, it is counterintuitive
that the US government would allow
suits against US companies for
activities in Cuba that were authorised
by the US government to undertake.
On the other hand, allowing Title III
lawsuits
only
against
non-US
companies may amount to unfair
treatment toward foreign investors and
could violate bilateral or multilateral
treaties to which the United States is
signatory.
2) What are the parameters of
the travel and telecommunications exceptions enumerated in
the law?
The LIBERTAD Act excludes certain
activities related to travel and
telecommunications
from
the
definition of ‘trafficking’. Thus,
providing international telecommunication signals to Cuba and the use
of confiscated property that is incident
and necessary to lawful travel to Cuba
are exceptions under the Act and
cannot be raised in a Title III claim.
Even going back to the 1990s when the
Act was enacted, certain travel, trade,
carrier
services
and
telecom-
www.worldecr.com
Cuba
munications were authorised. Leaving
to the courts the job of defining the
bounds of these exceptions, without at
least providing the executive branch’s
interpretation, may create unnecessary
litigation and chill activities that are in
US foreign policy interests.
3) Will there be an exception for
US companies providing
agricultural goods to Cuba
under the humanitarian policies
set out in the Cuba Sanctions
Regulations?
The US government has had a policy of
permitting US companies to export
agricultural goods and equipment to
Cuba. Whether the courts will construe
an exception for these companies to
continue providing agricultural goods
to Cuba remains to be determined.
Unlike the travel and telecommunications exceptions listed in the
Act, there is no such exception for
agricultural goods or humanitarian
projects. Even if a US agriculture
exporter isn’t sued directly for having
its agricultural produce pass through or
be unloaded on or by Cuban
confiscated property, the possibility
that wire transfers made through the
US financial system may be subject to
a garnishment proceeding may be
enough to stifle these humanitarianbased transactions.
4) Will the Canadian and EU
blocking statutes have any real
bite?
The European Union and Canada have
blocking statutes that they have stated
they intend to invoke in response to the
lifting of the Title III waiver. These
blocking statutes prohibit Canadian
and EU companies from complying
with US sanctions, ban the
enforcement of US judgments against
Canadian and EU persons, and allow
damages counterclaims to be filed in
Canada or the EU courts against the US
Title III plaintiffs. Blocking statutes
have historically served as rhetorical
tools and have rarely been enforced, so
their success is unclear.
Additionally, the EU and Canada
have signaled they are willing to initiate
a World Trade Organization (‘WTO’)
action to defend the interests of their
nations’ companies in Cuba. The EU
had initiated WTO proceedings in
1996, following the enactment of the
Act, but the case was withdrawn when
the US and the EU reached a series of
agreements, including the waiver of
21 WorldECR
Cuba
Title III. Although a WTO action would
undoubtedly put pressure on the US, it
would be long and costly, and proving
Lifting the waiver of
Title III would appear to
open the floodgates of
litigation in courts
across the country.
that Title III is in violation of specific
provisions of the WTO agreements
might prove challenging.
5) Will there be an executive
order, interim regulations or a
set of frequently asked questions
(FAQs) issued by the State
Department, the National
Security Council or OFAC to
provide guidance?
Without providing parameters or
requirements, lifting the waiver of Title
III would appear to open the floodgates
of litigation in courts across the
country. While the US judicial system
will eventually work out the
inconsistencies in judicial approaches
to this issue, it will take years and
millions of dollars in legal fees before
the US Supreme Court can provide
guidance. In the meantime, all parties
to Title III lawsuits will be left with
legal bills and substantial uncertainty
as the executive branch cedes its
foreign policy mandate to the judicial
branch.
6) When and how will Title IV of
the Act be enforced?
Bolton also announced on 17 April that
the US government ‘will be taking
actions to implement Title IV of
Helms-Burton’. Title IV mandates the
denial of visas to – and the exclusion
from the United States of – foreign
individuals who (as determined by the
Secretary of State) traffic in confiscated
property, including officers or
controlling shareholders of an entity
that traffics in such confiscated
property, as well as spouses, minor
children, and agents of the foregoing
persons. Although Title IV has never
been suspended, it has been rarely
applied. According to the Act, no final
decision of a court on the ‘trafficking’
activities seems to be required for Title
IV to be enforced; therefore, the mere
filing of a Title III claim could prompt
the Secretary of State to determine that
the defendant individual and his family
or an officer of the defendant
corporation should be excluded from
the US territory.
7) When will other Cuba
sanctions changes mentioned by
Bolton take effect?
During his speech on 17 April, Bolton
announced that the Department of the
Treasury will implement further
regulatory changes – e.g., amendments
to the Cuban Assets Control
Regulations (‘CACR’) – in order to
a) restrict non-family travel to Cuba
(e.g., 11 out of the 12 authorised travel
categories may be impacted); b) limit
money remittances to Cuba (which are
currently unrestricted) to $1,000 per
person per quarter; and c) end the use
of ‘U-turn transactions’. (The CACR's
general licence identified as ‘U-turn
transactions’ authorises US financial
institutions to process, as intermediary
banks, Cuba-related transactions –
even if such transactions are not
authorised under the CACR – provided
that the transaction originates and
ends outside of the US and that neither
the originator nor the beneficiary are
US persons.) Many in Washington, DC,
suggest that these changes may be
months away, which would not be
inconsistent with the implementation
of the changes that President Trump
announced in June 2018 (i.e., the
elimination of the individual people-topeople travel category), which did not
get implemented until October of that
year.
Bolton also announced that new
entities would be added to the Cuba
Restricted List, published by the
Department of State. This list identifies
Cuban entities under the structure or
control of the Cuban military,
intelligence, and security services and
personnel, with which direct financial
transactions are prohibited. The
updated Cuba Restricted List was
published in the Federal Register on 24
April 2019.
Ronald A Oleynik, Andres
Fernandez, Jonathan M Epstein
and Aymee D Valdivia Granda
are partners at Holland &
Knight, where Barbara Efraim is
an associate.
www.hklaw.com
www.worldecr.com
ICPs
ICPs
Internal compliance programmes:
Industry as a responsible stakeholder
in international trade
Though the use of ICPs is well established in the United States, in Europe debate
continues as to whether they should be compulsory for exporters of dual-use
products. But, writes Rosa Rosanelli, a strong but flexible ICP can help both
business – and government regulatory authorities – meet their aims.
W
ithout active and consistent
implementation
from
companies in the private
sector, export control measures cannot
succeed. Where they do so, companies
can – through diligent screening,
understanding of end-users, and the
application of risk-mitigation strategies
as part of their internal compliance
programmes (‘ICPs’) – provide such
value as to constitute, in effect, a ‘first
line of defence’ against proliferation
and diversion.
In the era of transparency and
confidence-building, ICPs have become
a standard tool by which companies
trading sensitive items can signal their
willingness to conduct their affairs
ethically and responsibly. But while
there has been an increase in the
number of guidelines and best practice
recommendations
related
to
establishing ICPs, there is still some
confusion as to whether ICPs are really
a requirement, and what criteria
should be used when it comes to
putting them into practice.
This article looks at current trends
around ICPs, and highlight principles
that should be taken into account when
setting up internal controls –
corresponding to different levels of
risk, size and the complexity of the
company involved.
society, including non-governmental
organisations, and industry, can play in
raising awareness of the object and
Clearly, industry is in a
prime position to gather
information about endusers and identify ‘red
flags’ and other risk
indicators.
purpose of this Treaty, and in
supporting its implementation.’
As ASD (the Aerospace and Defence
Industries Association of Europe)
highlighted in its press release on that
occasion, ‘Industry’s expertise can play
[an important role] in developing
awareness on the need to implement
effective export control processes and
internal compliance programmes.
Industry is also uniquely able to reach
out to its business partners and
customers in other countries.’1
Clearly, industry is in a prime
position to gather information about
end-users and identify ‘red flags’ and
other risk indicators, given its
understanding of technical matters and
markets. And it is well placed to
encourage the broad adoption of
common standards (including the use
of ICPs) through business-to-business
dialogue and general sharing of best
practice and experience.
Many companies have, of course,
been
gradually
incorporating
export compliance risk-management
strategies into their overall riskmanagement processes – recognising
that this particular type of risk is
heightened by the threat of legal or
administrative sanctions presented by
enforcement
actions,
potential
criminal, civil and contractual
liabilities, the risk of denial of export
licences and supply chain disruption,
Industry as a responsible
stakeholder in international
trade
The Arms Trade Treaty (‘ATT’),
adopted by the UN General Assembly
on April 2013 and which entered into
force in December 2014, is the first
legally
binding
international
agreement to regulate international
arms trade.
In its preamble, the ATT recognises
‘the voluntary and active role that civil
22 WorldECR
www.worldecr.com
ICPs
but also, financial losses or reputation
deterioration for failing to comply with
laws, regulations and legislation.2
In fact, ethical concerns and fear of
reputational damage are often strong
arguments in favour of investing in the
export compliance function.
The trend: transparency and
confidence-building
In an era of transparency and
confidence-building, ICPs have become
a badge of ethical conduct and
corporate responsibility within the
controlled goods sector, especially for
those companies threatened by the
reputational fall-out that equipment
diversion might bring.
In the United States, ICPs have long
been part regarded as part of the
culture of compliance, and actively
recommended by regulators including
the Bureau of Industry and Security
and the Office of Foreign Assets
Control in their guidelines.
Only more recently has there been
significant take-up within the EU
business community.3 But since 2011
and the publication of the Green Paper,
‘The dual-use export control system of
the European Union: ensuring security
and competitiveness in a changing
world’, the European Commission has
been urging companies to make better
use of the potential benefits conferred
by Authorised Economic Operator
(‘AEO’) – a clear indication of the
regard with which it holds the status of
‘certified companies’ and ‘trusted
traders’ and their audited internal
compliance programmes.
In 2013, the report from the
Commission to the Council and the
parliament on the implementation of
the Dual-Use Regulation called for
‘more transparency and dialogue with
the private sector and academia in
Links and notes
1
‘ASD Supports the Role of Industry in the U.N. Arms
Trade Treaty Process’, 12 September 2017.
https://www.asd-europe.org/asd-supports-the-roleof-industry-in-the-un-arms-trade-treaty-process
2
The draft recast EU Dual-Use Regulation proposes to
formally introduce standardised operational ICPs as
part of the assessment destined to decide on the
granting of global and general export authorisations.
3
The draft EU recast Dual-Use Regulation also states:
‘[T]he requirement for companies to implement an
effective Internal Compliance Program (ICP) – a set
of formal measures and procedures ensuring
compliance with export controls – mainly applies in
relation to global licences, while small companies
that cannot afford to develop a formal ICP can
export under most general authorisations and/or
individual licences.’
23 WorldECR
ICPs
order to enhance both legal certainty
and the effectiveness of controls – e.g.,
through the recognition of Internal
Compliance Programmes (ICPs) and
the provision of guidelines.’
While the EU Dual-Use Regulation
428/2009 does not explicitly require
companies to establish an ICP, it does
encourage Member States to consider
whether
a
company
employs
proportionate and adequate means and
procedures to ensure compliance; and
identifies, manages and complies with
the regulations in force (at national and
European level). And while the ‘seven
building blocks of an effective ICP’ to
which it refers do not extend beyond
what has already been published in the
United States (for example on the
websites of key export control
regulators including BIS and the
Directorate of Defense Trade Controls)
it does clarify some important
principles; namely
EU national competent
authorities have
increasingly been using
ICPs as tools by which to
measure and assess
compliance.
l that industry plays a key active role
in the establishment of effective
controls;
l that ICPs must be ‘flexible’, i.e.,
effective,
appropriate
and
proportionate;
l that a company’s ICP should reflect
its own characteristics, and that
before applying an ICP, companies
should undertake a risk assessment
that includes in its scope its size,
nature and complexity of activities,
products, customers and potential
end-users (and that this should be
periodically undertaken to reflect
internal, regulatory, and other
change);
l that the person entrusted with
overall
responsibility
for
compliance must be free from
conflicts of interest, should have the
power to stop transactions where
necessary, and their duties should
be clearly distinct from, for
example, sales-related functions;
l that training is an indispensable
aspect of awareness-raising and
needs to go beyond being a mere
‘paper exercise’. Where possible it
should be tailored to function, and
utilise company ‘lessons learnt’
from within the company; and
l that recordkeeping is an essential
element of compliance and should
include all documents ‘that it may
be in the company’s best interest to
maintain’.
as a result, some Member States do
require companies to implement ICPs
if they are to benefit from simplified
export procedures.
At the same time, the EU national
competent
authorities
have
increasingly been using ICPs as tools
by which to measure and assess
compliance. Some require companies
to have ICPs in place before
authorising exports, while others use
them in enforcement investigations as
an indicator of the robustness of a
company’s compliance processes.
Meanwhile, outreach activities have
largely been focused on improving
understanding of the elements of an
ICP and establishing ‘private sector
partnerships’.
Criteria for a robust internal
compliance programme
European Commission Guidelines
Key Takeaways
In September 2018, the European
Commission issued non-binding
guidance on ICPs for public
consultation prior to the official
publication of a review by an expert
technical committee.
While the guidelines are part of the
effort to modernise the EU dual-use
export control regime, they also
provide a useful reference for
companies’ military export control and
sanctions compliance functions.
The draft guidelines focus on the
core
elements
that
European
companies should take into account
when establishing an ICP, which
While these elements are all of
themselves important, it is regrettable
that – unlike otherwise similar
documents published by US regulators
– the guidelines lack greater
clarification regarding intangible
technology transfers (‘ITT’), which
raises questions as to the importance
with which EU authorities actually
regard ITT.
The guidelines do, however,
emphasise the benefits of leveraging
AEO status, which highlights the trend
www.worldecr.com
ICPs
noted above – i.e., that of steering
enforcement
actions
towards
companies that present a higher level
of risk such as those that have not won
‘trusted trader’ or ‘certified company’
status.
Because
AEO
requires
an
assessment of a company’s regulatory
compliance, an approach that finds
synergy with the AEO programme but
takes both customs and export controls
into account is seen as contributing
strongly toward improved overall
security and facilitating the detection of
potentially ‘bad’ transactions.
Conclusion
In recent years there has been a
growing focus on outreach and
confidence-building by the export
control
and
non-proliferation
authorities, alongside emphasis on
establishing
‘private
sector
partnerships’, as shown by the growing
use of ICPs for measuring the
compliance capabilities of ‘trusted
traders’ and ‘certified companies’.
This is an indication of the extent to
which higher-risk companies are being
targeted for enforcement, but also
ICPs
private sector concern with reputation
risk and corporate social responsibility.
Public interest in export control
issues – particularly in the defence
Public interest in export
control issues –
particularly in the
defence space – and in
compliance in general,
has also contributed to a
trend towards greater
transparency.
space – and in compliance in general,
has also contributed to a trend towards
greater transparency.
Corporate social responsibility
strategies and explicitly ethical
decision-making that demands that
companies go beyond mere legal
compliance, are now part of a
company’s
value
proposition,
especially in sectors particularly
sensitive to reputational damage. But
while the question remains unanswered
as to whether ICPs are indispensable
(or should be regarded as optional) and
how best they should be structured, it is
clear that having in place clearly
understood
standard
operating
procedures (‘SOPs’) is certainly
positive, and may help establish that
appropriate efforts have been deployed
to attempt to prevent violations, thus
reducing potential liabilities.
And while it may not suit smaller
companies with limited available
resources to invest in comprehensive
compliance strategies, some measure
of investment may pay dividends not
only in terms of meeting compliance
and reputational goals, but also in
providing better protection against
negative
audit and investigation
findings and enhance non-proliferation
objectives.
Rosa Rosanelli is the Chief Export
Compliance Officer and
General Counsel at Belgium
Engine Center.
[email protected]
Embargos and Sanctions
„Leading foreign trade law practice in Germany“
(JUVE Handbook 2015/2016)
Graf von Westphalen
Attorneys-at-law and Tax Advisors
Berlin Düsseldorf Frankfurt Hamburg Munich
Brussels Istanbul Shanghai
Contact:
Dr Lothar Harings, [email protected]
Marian Niestedt, M.E.S., [email protected]
24 WorldECR
gvw.com
www.worldecr.com
GloMag
GloMag
Global Magnitsky Sanctions:
raising the human rights and
anti-corruption bar
With its focus on global human rights and anti-corruption standards,
Global Magnitsky Sanctions create the need for businesses to shift to a
proactive corporate risk and due diligence strategy so as to avoid the risk
of future entanglements or violations, writes Samantha Sultoon.
T
he murder of Jamal Khashoggi
thrust an otherwise little-known
sanctions programme into the
spotlight, and cast overdue attention
on this important authority – the
Global Magnitsky Human Rights
Accountability Act (or ‘GloMag’ in
sanctions parlance).1 The Trump
administration’s 15 November decision
to use the GloMag authority to
designate 17 Saudi nationals in
response to Khashoggi’s killing
exemplified precisely what that
authority was created for – it is a
calibrated tool intended to target
specific individuals and entities
without broader negative implications.2
However, the merits of GloMag should
be considered far more broadly than in
the shadow of the Khashoggi murder.
GloMag has the potential to help
raise the bar on global human rights
and
anti-corruption
standards,
provided it continues to be used
effectively and is capitalised on
appropriately. This sanctions authority
has far-reaching implications for
international businesses, as it warrants
a paradigm shift in their risk
calculations. GloMag sanctions create
the need for businesses to shift to a
proactive corporate risk and due
diligence strategy that takes into
account both human rights and
corruption issues. For allies, partners,
and the array of international human
rights groups seeking to raise
awareness of human rights violations
and corruption, this sanctions
authority creates an opportunity for
partnership and multilateral sanctions
actions.
Rights Accountability Act to limited
fanfare.3 This was the second law
named for Russian whistleblower
This sanctions authority
has far-reaching
implications for
international
businesses, as it
warrants a paradigm
shift in their risk
calculations.
Sergei Magnitsky, who died while in
Russian prison after being tortured and
denied medical care.4 The newer law
builds upon the original Magnitsky Act
(The Sergei Magnitsky Rule of Law
Accountability Act of 2012) by
expanding the scope of the authority
for economic sanctions and visa bans
related to human rights abuse and
corruption to global actors.5 This is a
significant broadening, since the
original Magnitsky Act was focused
solely on Russia.
The Global Magnitsky legislation
was signed into law in 2016. However,
it was not used until one year later
when the Trump administration built
on this legislation to launch a new
sanctions regime targeting human
rights abusers and corrupt actors
globally through Executive Order
(‘EO’) 13818, Blocking the Property of
Persons Involved in Serious Human
Rights Abuse or Corruption.6 To
improve upon Congress’ laudable
intentions, the sanctions technocrats in
the executive branch drafted EO 13818
to include broadened criteria for
designation to more fully and flexibly
target the human rights abuse and
corruption policy concerns, and
What is the Global Magnitsky
Sanctions authority?
In late December 2016, Congress
passed the Global Magnitsky Human
25 WorldECR
www.worldecr.com
GloMag
updated definitions beyond those used potential additional GloMag targets,
by Congress in the legislation. Unlike the decision-making authority as it
under most other economic sanctions pertains to any GloMag sanctions
programmes, this new EO does not action rests with the executive – and
require the declaration of a national not the legislative – branch.11 Since the
emergency with respect to a specific technical sanctions expertise lies with
country, thereby allowing for more OFAC, this structure is prudent.
calibrated – and perhaps more
politically palatable – sanctions. In Business implications: Shifting
fact, it is due to the dynamic nature of the sanctions risk paradigm
this EO that the US Treasury Given the broad designation criteria
Department’s Office of Foreign Assets under
GloMag,
international
Control (‘OFAC’) was able to designate
more than 100 individuals and entities International businesses
pursuant to the GloMag authority in
would do well to adjust
less than one year. While the malign
activity of these targets was sufficiently
their corporate risk and
abhorrent to warrant targeted
due diligence practices
sanctions, in many cases the United
States
continues
to
maintain
to take human rights
diplomatic, economic, security, or
and kleptocracy issues
other relationships with the host
nations where these targets are located.
into account.
The targeted nature of the GloMag
sanctions authority renders it dynamic businesses would do well to adjust their
enough to impact the individuals and corporate risk and due diligence
entities involved in human rights abuse practices to take human rights and
and corruption without disproportion- kleptocracy issues into account.
ately impacting foreign governments, Businesses have historically taken a
allies, or their domestic populations. reactive stance regarding individual,
For example, given the need for list-based sanctions that are similar in
continued cooperation with the Saudi structure to GloMag, as the regulatory
government on counter-terrorism, oil requirements to freeze accounts and
production, and a host of other cease business with sanctioned targets
sensitive issues, GloMag was a strategic only take effect once a name is added
tool to use as part of a response to the to a list. This approach is insufficient in
Khashoggi murder.7
the
GloMag
context.
Instead,
Since the issuance of EO 13818, businesses should take a proactive
Congress has increasingly called on the approach to avoid the risk of future
Trump administration to use GloMag entanglements or violations. For
sanctions. In response to the example, the inaugural GloMag
Khashoggi murder, a bipartisan group sanctions included international
of senators called on the Trump businessman and billionaire Dan
administration to apply the GloMag Gertler for his corrupt business
authority on the culprits.8 However, practices.
Gertler amassed an extensive
there is seemingly less support among
Congress for halting the $110-billion fortune through corrupt mining and oil
arms package to Saudi Arabia or the deals in the Democratic Republic of the
suspension of negotiations with Saudi Congo (‘DRC’) worth hundreds of
Arabia on a nuclear technology
sharing agreement, neither of
which President Trump has
indicated any interest in
stopping.9
Members of Congress have
also
called
on
the
administration to use GloMag
sanctions in response to
atrocities
in
Nicaragua,
Burma, and China, among
others.10 While the Trump
administration may take
feedback from Congress into
Sergei Magnitsky and Jamal Khashoggi
account when considering
26 WorldECR
GloMag
millions of dollars, in large part due to
his close friendship with DRC
President Joseph Kabila.12 The people
of the DRC lost more than $1.36 billion
in revenue from the underpricing of
mining assets that were sold to
Gertler’s offshore companies.13 Those
same deals contributed substantially to
the International Monetary Fund’s
decision to withhold a $225 million
loan disbursement to the DRC
government.14 They did not, however,
dissuade companies such as US hedge
fund
Och-Ziff,
Anglo-Swiss
multinational commodity trader
Glencore, or South African miner
Randgold from doing business with
Gertler.15
The December 2017 sanctions on
Gertler put those business decisions in
sharp contrast. By that point, Glencore
owed Gertler nearly $200 million in
royalties over the next two years, but
GloMag sanctions on Gertler made
such payments difficult to execute, and
could put Glencore at risk of being
sanctioned itself for its dealings with
Gertler.16 Glencore has reportedly been
cautiously seeking to make the
outstanding payments in other
currencies, but faces great risk even if
it does.17 Because the US dollar is the
main currency used in the DRC and in
the global raw materials trade, the
sanctions will likely add transactions
costs as well as risks. Randgold has
reportedly taken a more cautious
approach than Glencore and is seeking
to cut ties with Gertler.18 This will
surely hurt Randgold’s investments in
the projects and may dampen future
revenues.
There are a few key takeaways from
the Gertler sanctions, and other
designations made pursuant to the
GloMag authority: First, international
businesses need to proactively
investigate their partners and clients,
and can no longer assume that corrupt
businessmen close to ruling
governments can operate with
impunity. Businesses should
proactively
adopt
due
diligence standards to better
research how prospective
partners or clients amassed
their status and/or fortune,
and in what type of business
practices they previously
engaged. Accusations of
untoward behaviour cannot be
discounted based on potential
revenue or other benefits from
a contract.
www.worldecr.com
GloMag
GloMag
Second, beyond the prospective
direct partner, businesses should
consider the partner’s network in any
business calculation. Due to OFAC’s
50% rule, any company owned 50% or
more by a designated individual or
entity, such as Gertler, is also
considered blocked irrespective of
whether the company is specifically
included
on
OFAC’s
Specially
Designated Nationals and Blocked
Persons (‘SDN’) List.19 As such, a
transparent understanding of a
company’s ownership structure should
be a requirement prior to any
investment or purchase. Anyone who
continues business with an SDN, like
Gertler, despite sanctions risks being
the subject of an OFAC enforcement
investigation or sanctioned themselves.
As the Gertler sanctions illustrate, the
United States may use the GloMag
sanctions tool at any time with
immediate repercussions, including
significant reputational risk.
Finally, corruption internationally
should concern reputable US and
global businesses before it directly
affects them. While sanctions on Dan
Gertler, and now 33 companies and
one associate, may seem entirely
detached from the West, the cobalt,
gold, iron ore, and copper that Gertler’s
companies mine are not.20 For
example, demand for cobalt is surging,
due to growing global interest in
electric vehicles and increasing
government restrictions on pollution
Businesses should
proactively adopt due
diligence standards to
better research how
prospective partners or
clients amassed their
status and/or fortune.
and engine standards, particularly in
Europe. To accommodate this growing
demand, Gertler’s companies invested
in the mining infrastructure in the
DRC, which holds the world’s largest
cobalt resources. The overwhelming
reliance on the DRC exposes the entire
cobalt supply chain to disruption,
according to energy consultancy Wood
Mackenzie.21 This disruption may
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27 WorldECR
reverberate back across the Atlantic
Ocean to impact the price of new
electric vehicles and batteries in the
United States. If the reputational risk
of supporting corruption does not
increase businesses’ attention to this
issue, the potential financial costs and
supply chain disruptions should.
While reputable international
companies were likely engaging in
basic due diligence prior to the
introduction of GloMag sanctions, this
sanctions authority should prompt a
significantly higher bar by which
prospective business deals and client
relationships are measured. The cost of
such increased due diligence is
certainly less than that of the economic
and reputational impacts of GloMag
sanctions.
Expanding the impact
It is ironic that an administration that
chose to withdraw from the United
Nations Human Rights Council
(‘UNHRC’) and has sharply criticised
the International Criminal Court
(‘ICC’) is trumpeting human rights in
the GloMag context.22 The Trump
administration’s use of GloMag to
advocate for human rights and the
need to root out corruption, even if it is
entirely on US terms, has made
GloMag sanctions an increasingly
attractive tool. In fact, some of the
same human rights organisations that
criticised the administration for its
UNHRC withdrawal are advocating for
the use of GloMag sanctions.23
On the diplomatic side, the GloMag
authority presents an opportunity for
allies to take bilateral actions against
targets involved in human rights abuse
or corruption. In fact, in February, the
Canadian government followed the US
lead and imposed sanctions on
Burmese military leader Maung Maung
Soe for his role in atrocities against the
Rohingya in Burma.24 (Maung Maung
Soe was designated by the United
States in the inaugural GloMag
designations in December 2017.25) The
European Union followed suit in June
and expanded the sanctions to include
six additional targets, most of whom
were also designated by the United
States under the GloMag authority a
few weeks later.26 These coordinated
actions magnified the plight on the
Rohingya far more effectively than a
unilateral measure could.
While a number of other OFACadministered sanctions programmes –
such as the Iran and Russia
www.worldecr.com
GloMag
GloMag
Links and notes
1
Vick, Karl, ‘How the Murder of Jamal Khashoggi Could
Upend the Middle East’, Time, 18 October 2018,
http://time.com/5428159/jamal-khashoggi-murder/
2
Press release: ‘Treasury Sanctions 17 Individuals for Their
Roles in the Killing of Jamal Khashoggi’, US Treasury, 15
November 2018. https://home.treasury.gov/news/pressreleases/sm547
3
‘National Defense Authorization Act for Fiscal Year 2017’
Public Law 114-328. 130 STAT. 2000 (2016).
https://www.congress.gov/bill/114thcongress/senatebill/2943/text
4
Lally, Kathy, ‘U.N.-Appointed Human Rights Experts to
Probe Death of Russian Lawyer Magnitsky’, Washington
Post Foreign Service, 20 January 2011.
http://www.washingtonpost.com/wpdyn/content/article/2011/01/20/AR2011012003237.ht
ml?nav=emailpage
5
6
7
8
‘Russia and Moldova Jackson-Vanik Repeal and Sergei
Magnitsky Rule of Law Accountability Act of 2012’, Public
Law 112-208. 126 STAT. 1496 (2012).
https://www.congress.gov/bill/112th-congress/housebill/6156/ text?q=%257B%2522search%2522%253A%
255B%2522sergei+magnitsky+rule+of+law+accountabilit
y+act%2522%255D%257D&r=3
Global Magnitsky Human Rights Accountability Act, Public
Law 114-328, Subtitle F) 130 Stat.2533 (2016).
https://www.treasury.gov/ resourcecenter/sanctions/Programs/Documents/glomag_pl_114-3
28.pdf ; press release: ‘United States Sanctions Human
Rights Abusers and Corrupt Actors Across the Globe’, US
Treasury, 21 December 2017. https://home.treasury.gov/
news/press-releases/sm0243 ; Exec. Order No. 13818, 3
C.F.R. 1 (2017). https://www.treasury.gov/resourcecenter/sanctions/Programs/ Documents/glomag_eo.pdf
Kheel, Rebecca, ‘US to Revoke Visas for Saudi Officials
Over Khashoggi Killing’, The Hill, 23 October 2018.
https://thehill.com/homenews/ administration/412819us-to-revoke-visas-for-saudi-officials-over-khashoggi-killing
Chairman’s Press, ‘Corker, Menendez, Graham, Leahy
Letter Triggers Global Magitsky Act Investigation into
Disappearance of Jamal Khashoggi’, United States Senate
Committee on Foreign Relations, 10 October 2018.
https://www.foreign.senate.gov/press/chair/release/
corker-menendez-graham-leahy-letter-triggers-globalmagnitsky-investigation-into-disappearance-of-jamal-khash
oggi
9 Hayes, Christal, ‘Trump Doesn’t Want to Stop Arms Sales
Deal with Saudi Arabia Over Missing Journalist’, USA
Today, 13 October 2018.
https://www.usatoday.com/story/news/world/2018/10/1
3/jamal-khashoggi-trump-saudi-arms-deal/1630693002/
and Mohsin, Saleha, ‘Trump Says He’s Forming ‘Very
Strong Opinion’ on Khashoggi Death’ Bloomberg, 7
November 2018. https://www.bloomberg.com/news/
articles/2018-11-07/trump-says-he-s-forming-very-strongopinion-on-khashoggi-death
10
Congress of the United States to the President of the
United States, 24 August 2018. https://roslehtinen.house.gov/sites/ros-lehtinen.
house.gov/files/08.24.18%20-%20Nicaragua%20Global%
20Magnitsky%20Letter%20to%20POTUS.PDF;
Burma Unified through Rigorous Military Accountability Act
of 2018, H.R. 5819, 115th Cong.(2018)
https://www.congress.gov/bill/115th-congress/housebill/5819/text ; Tiezzi, Shannon, ‘US Congress Members
Want Sanctions on China Over Xinjiang Crackdown’ The
Diplomat, 20 August 2018. https://thediplomat.
com/2018/08/us-congress-members-want-sanctions-onchina-over-xinjiang-crackdown ; and press release: ‘Chairs
Urge Robust Use of Global Magnitsky Tools to Punish
programmes – carry significant
political sensitivities with allies,
combatting human rights abuse and
corruption are two areas of general
policy consensus. That consensus is
even stronger when the focus is on
28 WorldECR
11
12
13
Human Rights Violators in China’, Congressional- Executive
Commission on China, 29 November 2017.
https://www.cecc.gov/media-center/pressreleases/chairs-urge-robust-use-of-global-magnitsky-tools-t
o-punish-human-rights
22
Owen Bowcott, Oliver Holmes, and Erin Durkin, ‘John
Bolton Threatens War Crimes Court with Sanctions in
Virulent Attack’, The Guardian, 10 September 2018.
https://www.theguardian.com/us-news/2018/
sep/10/john-bolton-castigate-icc-washington-speech
Office of the Press Secretary, ‘Statement by the President
on Signing the National Defense Authorization Act for
Fiscal Year 2017’, The White House of President Barack
Obama, 23 December 2016.
https://obamawhitehouse.archives.gov/the-pressoffice/2016/12/23/statementpresident-signing-national-d
efense-authorization-act-fiscal
23
‘NGOs Identify Human Rights Abusers, Corrupt Actors for
Sanctions Under US Bill’, Human Rights First, 13
September 2017. https://www.
humanrightsfirst.org/press-release/ngos-identify-humanrights-abusers-corrupt-actors-sanctions-under-us-bill
24
Sevunts, Levon, ‘Canada Imposes Sanctions on Myanmar
General Over Rohinga Abuses’, CBC, 16 February 2018.
https://www.cbc.ca/news/ politics/myanmar-generalsanctions-canada-1.4539003
25
‘United States Sanctions Human Rights Abusers and
Corrupt Actors Across the Globe’, US Treasury, 21
December 2017. https://home.treasury.gov/news/pressreleases/sm0243
26
Press Office General Secretariat of the Council,
‘Myanmar/Burma: EU Sanctions 7 Senior Military, Border
Guard and Police Officials Responsible For or Associated
With Serious Human Rights Violations Against Rohingya
Population’, Council of the EU, 25 June 2018. https://
www.consilium.europa.eu/en/press/pressreleases/2018/06/25/myanmar-burma-eu-sanctions-7-se
nior-military-border-guard-and-policeofficials-responsiblefor-or-associated-with-serious-human-rights-violations-agai
nst-rohingya-population/pdf; and ‘Treasury Sanctions
Commanders and Units of the Burmese Security Forces for
Serious Human Rights Abuses’, US Treasury, 17 August
2018. https://home.treasury.gov/news/pressreleases/sm460
27
‘Canada Imposes Targeted Sanctions in Response to
Human Rights Violations in Myanmar’, Global Affais
Canada, 16 February 2018.
https://www.canada.ca/en/globalaffairs/news/2018/02/canada_imposes_
targetedsanctionsinresponsetohumanrightsviolation.html
28
Alexandra Oliviera and Alison Spann, ‘Human Rights
Groups Withdraw Government Complaint Against Ukrainian
Oligarch After its Accuracy is Challenged’, The Hill, 21
December 2017. https://thehill.com/365943-humanrights-groups-withdraw-government-complaintagainst-russi
an-oligarch-after-its-accuracy
29
Lysove, Ekaterina, ‘Private Sector Participation in the
Global Magnitsky Act’, Center for International Private
Enterprise, 16 May 2018. https://
www.cipe.org/blog/2018/05/16/private-sectorparticipation-in-the-global-magnitsky-act/
30
United States Department of the Treasury, ‘Glossary’
Financial Crimes Enforcement Network.
https://www.fincen.gov/sites/default/files/
advisory/2018-07-03/PEP%2520Facilitator%2520
Advisory_FINAL%2520508%2520updated.pdf
31
National Archives, ‘Global Magnitsky Act Human Rights
Accountability Act Report’, Federal Register, 20 June 2017.
https://www. federalregister.gov/documents/2017/
06/20/2017-12791/global-magnitsky-human-rightsaccountability-act-report
32
United States Department of the Treasury, ‘Global
Magnitsky Designations Removals’, Office of Foreign
Assets Control, 2 November 2018.
https://www.treasury.gov/resourcecenter/sanctions/OFAC-Enforcement/Pages/20181102.as
px and United States Department of the Treasury, ‘Treasury
Sanctions Turkish Officials with Leading Roles in Unjust
Detention of U.S. Pastor Andrew Brunson’ US Treasury, 1
August 2018. https://home.treasury.gov/news/pressreleases/sm453
United States Department of the Treasury, ‘United States
Sanctions Human Rights Abusers and Corrupt Actors
Across the Globe’, 21 December 2017.
https://home.treasury.gov/news/press-releases/sm0243
Press release: ‘United States Sanctions Human Rights
Abusers and Corrupt Actors Across the Globe’, US Treasury,
21 December 2017.
https://home.treasury.gov/news/press-releases/sm0243
14
Wild, Fraz, Micheal Kavanagh, and Jonathan Ferziger, ‘Dan
Gertler Earns Billions as Mine Deals Fail to Enrich Congo’,
Washington Post, 29 December 2012.
https://www.washingtonpost.com/business/dan-gertlerearns-billions-as-mine-deals-fail-to-enrich-congo/2012/12/
27/ c37d0100-4e31-11e2-8b4964675006147f_story.html?utm_term=.817f46975ce7
15
‘Gertler Received and Distributed Millions in Bribes in
Connection to DRC Mining Deals, Court Papers Allege’,
Global Witness, 10 August 2018.
https://www.globalwitness.org/en/blog/gertler-receivedand-distributed-millions-bribes-connection-drc-mining-deals
-court-papersallege/ and Doherty, Ben. ‘Everything You
Need to Know About Glencore, Dan Gertler and Their
Interest in DRC’, The Guardian, 5 November 2017.
https://www.theguardian.com/business/2017/nov/05/wh
at-is-glencore-who-is-dan-gertler-drc-mining
16
17
18
19
20
21
‘The Global Magnitsky Effect’, Resource Matters, February
2018. https://resourcematters.org/wpcontent/uploads/2018/02/ResourceMatters-Magnitsky-in
-Congo-Impact-of-Gertler-sanctions-16-Feb-2018-FINAL.pdf
Lewis, Barbara, ‘Glencore Settles with Gertler Over Congo
Royalties’, Reuters, 15 June 2018.
https://www.reuters.com/article/usglencorecongo/glencore-settles-with-gertler-over-congo-roy
alties-idUSKBN1JB0JM
Wilson, Tom, ‘Randgold Moves to Cut Ties With Dan Gertler
After U.S. Sanctions’, Bloomberg, 5 February 2018.
https://www.bloomberg. com/news/articles/2018-0205/randgold-moves-to-cut-ties-with-dan-gertler-after-u-s-sa
nctions
‘OFAC FAQ: Entities Owned by Persons Whose Property and
Interest in Property are Blocked (50% Rule)’, US Treasury,
https://www.treasury.gov/resource-center/faqs/
Sanctions/Pages/faq_general.aspx#50_percent
See Washington Post,
https://www.washingtonpost.com/business/dan-gertlerearns-billions-as-mine-deals-fail-to-enrich-congo/2012/12/
27/ c37d0100-4e31-11e2-8b4964675006147f_story.html?utm_term=.817f46975ce7;
and United States Department of the Treasury, ‘Treasury
Sanctions Fourteen Entities Affiliated with Corrupt
Businessman Dan Gertler Under Global Magnitsky’ US
Treasury, 15 June 2018. https://
home.treasury.gov/news/press-releases/sm0417
Montgomery, Gavin, ‘The Rise of Electric Vehicles and the
Cobalt Conundrum’, Wood Mackenzie, 25 September
2018. https://www. woodmac.com/news/editorial/thecobalt-conundrum/
human rights abuse alone; this is one
area of sanctions policy in which US
allies and partners can generally
identify shared objectives and agree on
targets. It is ripe for replication in
allies’ domestic legislation, particularly
in countries like Australia, Japan, and
New Zealand, as well as within the
European Union and across Europe.
(The Canadian government already has
the Justice for Victims of Corrupt
Foreign Officials Act, which is a good
www.worldecr.com
GloMag
GloMag
first step.27) Creating a global human
rights sanctions authority would allow
for bilateral and multilateral sanctions
actions that would strengthen the
impact of any GloMag sanctions.
International non-governmental
organisations (‘NGOs’) and human
rights groups are also helping to
magnify the impact of GloMag
sanctions. A group of more than 20
NGOs joined together to streamline
submissions for consideration by
OFAC under the GloMag authority.28
Additional
NGOs
continue
to
individually submit suggested names
and supporting information.29 The
partnership with the NGOs, many of
which are on the ground in places
around the world that are ripe for a US
Creating a global
human rights sanctions
authority would allow
for bilateral and
multilateral sanctions
actions that would
strengthen the impact of
any GloMag sanctions.
government response or engagement,
provides the US government with an
additional source of reporting on
potentially sanctionable activity. Thus
far, the administration appears to be
using this information and its
international partnerships to bolster
the
GloMag
authority
with
consequential actions.
Maintaining the meaningful
balance
GloMag sanctions stand to be a
powerful sanctions tool, provided the
tool continues to be wielded in a
thoughtful and effective manner. A few
considerations will help maintain the
integrity and value of the GloMag
authority, namely:
l Maintain the global footprint
The first tranche of GloMag
sanctions reflected the global
challenge of human rights abuse
and corruption. The subsequent
designations
have
generally
maintained this global scope. A shift
toward one country or region risks
undermining the global nature of
the authority and minimising the
deterrent
effect
previous
designations have had, particularly
in any underrepresented regions.
l Use as part of a broader policy
strategy
Sanctions are a favoured tool of the
Trump administration, but they
cannot be the only tool used. A
broader,
whole-of-government
strategy that includes GloMag
sanctions is most likely to achieve
policy objectives. Relying on
GloMag sanctions to deliver too
much will render the tool more
likely to achieve less.
l Do not overuse the tool
GloMag sanctions are not the only
tool in the US government’s toolbox
to combat human rights abuse and
corruption, and are unlikely to be
the most appropriate tool for every
scenario.30
The
thoughtful,
calibrated application of GloMag
sanctions will avoid overuse and
mitigate against ineffective use. The
bar for sanctions targets must
continue to be held high with each
target thoughtfully chosen to avoid
perceived bias toward a specific
group.
l Support compliance
Sanctions are only as effective as
their
implementation
and
compliance. Increasing efforts to
ensure that both US and
international companies respect the
GloMag sanctions will make the tool
that much more effective.
l GloMag sanctions should not be a
replacement for a targeted
sanctions programme
When the situation in a specific
country warrants a targeted
response,
a
country-specific
sanctions programme should be
considered. In addition to the
GloMag authority, at least a dozen
other OFAC sanctions programmes
include designation criteria for
human rights abuse, corruption, or
both.31 These country-specific
authorities are tailored to the
situation in the country, both in
policy messaging and in additional
criteria for designation. The GloMag
authority is robust, but its stature
will decline if it becomes the default
replacement for a thoughtful
country-specific programme.
l Stay responsive
To its credit, following the release of
US pastor Andrew Brunsun from
detention in Turkey, OFAC delisted
the two members of the Turkish
cabinet who were sanctioned under
GloMag authorities for their role in
his detention.32 In order for GloMag
sanctions to incentivise behavioural
change, timely delistings must
continue when appropriate.
Conclusion
The increased attention to the GloMag
sanctions authority as a strategic tool
for responding to the Khashoggi
murder is timely. This targeted
authority
arms
the
Trump
administration with a calibrated tool to
respond to complex political situations,
such as the current situation with Saudi
Arabia, provided sufficient evidence is
available. The evidentiary threshold for
GloMag sanctions – as with all other
OFAC-administered
sanctions
–
demands that corroborated evidence
be available to support any action.
Fortunately,
with
increased
coordination with allies, partners, and
NGOs,
there
is
increasing
supplemental evidence available to
support worthwhile GloMag actions.
While the threat of GloMag
sanctions
exists,
international
businesses should adjust their risk
calculus accordingly. As allies,
partners, and NGOs increasingly draw
on this authority, the tolerance for
serious human rights abuse and
corruption will hopefully decline in
parallel.
Samantha Sultoon is a visiting
senior fellow with the Atlantic
Council’s Global Business and
Economics Program and the
Scowcroft Center for Strategy
and Security.
WorldECR welcomes your contributions
Email the editor: [email protected]
29 WorldECR
www.worldecr.com
Darknet
Darknet
Strategic trade and the darknet
markets
Dr Grant Christopher looks at the potential for proliferation of
controlled goods on the ‘darknet’ – and finds light at the end of
the tunnel. But for whom?
I
f
ecommerce
enables
new
opportunities for illicit strategic
trade, what risk is posed by the
darknet markets? Analyses, such as a
2014 Financial Times article, have
shown that strategic goods – those
controlled by the multilateral export
control regimes – are freely available
on surface web ecommerce sites.
The concern is that ecommerce
provides new opportunities for
proliferators to procure controlled
items while obfuscating their identity.
This article examines the potential role
of darknet markets to facilitate trade in
strategic goods, in particular for
nuclear-related items.
The darknet, in the common
imagination, is a place where the
unprepared user can stumble onto
unspeakable
criminal
activity:
assassination
websites,
child
pornography and the drugs trade. The
reality is more complex. The darknet is
‘dark’ not as a comment on the
morality of the content that appears on
it but because it demands its users be
anonymous. This facilitates content
and interactions that would not be
possible on other parts of the Internet.
On the darknet, webpages can be set up
far from the reach of government. For
better or for worse, the darknet is dualuse. It can be used in oppressive states
to host criticism of government, but it
can also facilitate crime. This freedom
from the state comes at a price. The
government cannot protect users from
what they encounter. This leaves users
of darknet markets without consumer
protection
or
product
quality
assurance, a problem for any potential
proliferator.
friendly as those on surface web. On
the surface web the name of a website
typically appears in the URL, such as
www.worldecr.com. On the darknet,
The darknet, in the
common imagination, is
a place where the
unprepared user can
stumble onto
unspeakable criminal
activity.
the name of a website will appear, but
the full IP address includes a random
string of characters that do not convey
information about the site and typically
completed with the .onion suffix (e.g.,
DeepDotWeb35Wvey5.onion).
Yet, the darknet markets are easy to
find. They are well advertised on sites
across the surface web. The popular
markets even have their own section on
Reddit, a community messageboard
website, where users can discuss the
quality of the service and the reliability
of particular vendors. The website
DeepDotWeb monitors all aspects of
the markets, aggregates news on the
darknet, and provides service updates
to inform users of any disruption to
websites’ service.
To access darknet sites with the
.onion extension, a suitable browser
must be used. This browser will
anonymise the user with respect to the
site, breaking the usual rules that
govern Internet communications. The
most popular for this is the Tor (The
Onion Router) browser, initially
developed by the United States Office
of Naval Research. Tor does not
provide sufficient operational security
for those wanting to remain truly
anonymous, as law enforcement can
monitor those who use it carelessly.
With these tools in place, a user can
go to their market of choice. A unique
username and password followed by a
Captcha is often enough to gain access
to a site. This won’t allow you to buy
Navigating the darknet
The darknet has a reputation as an
intimidating place. The first thing a
new user will notice is that even the
URLs on the darknet are not as user-
30 WorldECR
www.worldecr.com
Darknet
anything or communicate with the
vendors. A cryptocurrency, such as
Bitcoin, is required to make purchases,
while an encrypted messaging
application known as PGP (pretty good
privacy) is required to chat with
vendors across most markets.
But what to buy? The markets are a
digital Wild West. If you give over your
money and don’t get what you want,
what protection is there for the
consumer? How do you know the
person you are buying from is legit?
Buying and selling
Darknet markets, a priori, may seem
like a good place for selling strategic
trade goods. But industrial goods are
quite different to artisanally produced
illegal drugs and other products found
on the darknet markets. The
manufacturing base for nuclear-grade
products is limited to a small number
of advanced manufacturing centres. If
particular brands were available
through the darknet markets they
would be easy to trace back to the
original manufacturer. What would a
legitimate business be doing on a
darknet market? Via a legitimate
ecommerce portal or their own
website, an unscrupulous vendor can
maintain that they are only seeking
legitimate customers. This is a harder
claim to make if your product appeared
on the darknet markets.
How items are bought and delivered
will help us understand how darknet
markets differ from surface web
ecommerce. As both the buyer and
vendor are anonymous, and the buyer
lacks basic assurances on product
quality and that law enforcement is not
on the other end of the transaction.
How does this affect interactions?
Scams can also occur in surface web
ecommerce. In one instance, a man
from Nottingham bought an Xbox on
eBay for £450 to only receive a
photograph through the mail. The
vendor in question had positive
reviews, which is the best protection
against fraud. In this instance, eBay’s
customer protection policy protected
the unfortunate user and he got his
refund. Buyers on the darknet have no
such protections.
The buyer must trust the vendor. On
the surface web, even when buying a
branded product that should retain its
quality independent of the vendor, the
vendor must be trusted to deliver an
undamaged, functional good. On the
darknet markets, credibility is
31 WorldECR
Darknet
established through vendor reviews. To
become established, a vendor must
have a track-record of selling and
shipping expected quality goods. There
must also be trust in financial
transactions. Beyond the use of a
cryptocurrency,
surface-web
ecommerce sites use an escrow system,
with payment on delivery. Both the
vendor and the buyer must trust the
ecommerce site itself, which acts as the
third party in the escrow system. For
surface-web ecommerce, this is as
simple as trusting the website will
transfer the funds to the vendor after
the transaction is complete and settle
any disputes that arise between buyer
and vendor.
On the darknet, the equivalent
transactions are more complicated.
After a buyer pays the site, the vendor
will be notified and ship the good.
During this time, the site holds the
cryptocurrency until the buyer notifies
the site that they have their item. On
darknet markets, the site facilitates
disputes between vendors and buyers.
A vendor could lie about delivery of
goods, demand payment, then take all
money from pending transactions and
run. However, it is an acknowledged
risk that some shipments, especially of
drugs, will be intercepted for reasons
outside of the vendor’s control.
Equally, a buyer could lie about having
received the item. The site must decide
to trust the vendor or the buyer in these
instances. The darknet also exposes
users to a new risk: it is also possible
for entire sites to disappear, taking all
money from pending transactions.
Newer markets have added ‘multisig’
escrow, where the cryptocurrency is
placed in a virtual wallet not hosted by
the market. The funds are only realised
The manufacturing base
for nuclear-grade
products is limited to a
small number of
advanced
manufacturing centres.
if two of the vendor, buyer and market
agree, protecting both the vendor and
the buyer from each other and the
market.
What is on the markets
Typical darknet market studies use a
single data-gathering period to conduct
their analysis. We have the luxury of
Law enforcement
Law enforcement has not been idle in
confronting this threat. A series of
takedowns and arrests have taken place
since the shutdown of Silk Road in
2013. In 2016, Operation Hyperion
resulted in coordinated arrests from the
law enforcement of the Fives Eyes (USA,
UK, Canada, New Zealand, Australia).
WMD-related arrests in Liverpool and
New York caught buyers attempting to
buy ricin from the FBI. Successful
takedowns have also been performed
on the two biggest markets to appear
after Silk Road: Hansa and Alpha Bay. In
a clever move, in 2017, Dutch police
took over both Alpha Bay and Hansa,
the largest darknet markets by volume
of sales at the time. When users found
Alpha Bay had been closed, they flocked
to Hansa only to be caught there.
Despite these high-profile
successes, the police are still playing a
game of whack-a-mole in darknet trade.
Mass arrests and site takedowns have
not caused users to continue to run the
risks associated with buying and selling
from the markets.
four separate periods of data collection
from 2015-2018 to analyse how the
darknet markets have evolved over
time. Our study accessed all available
markets and assesed each market for
types and relative quantities of
products available. It is the only
publicly known study specifically
targeted to seek items relevant to
manufacturing or acquisition of WMD.
Since the beginning of the Silk
Road, which began in 2011 but closed
in 2013, drugs have taken up the vast
majority of goods traded on the
darknet markets. Roughly nine in ten
listings on any given market will be
drugs. The types of drugs sold have
changed considerably, with sales of the
opioid Fentanyl increasing in recent
years.
Weapons have only ever been a
niche item on the markets. Indeed, an
arms-focused spinout from the original
Silk Road, called ‘The Armory’, closed
down due to lack of business. Little has
changed since these early days in terms
of demand for small arms. Our data
indicates that while small arms are
available, they do not appear to have
been traded in large quantities. This
concurs with a Rand study conducted
into the sale of small arms in 2017.
How-to guides on making weapons,
homebrewing chemicals and explosives
are available in limited quantities from
www.worldecr.com
Darknet
some sites. Some guides are more
dangerous than others and have been
corroborated by law enforcement as
credible. Not every how-to guide on the
darknet is illegal. The Anarchist’s
Cookbook, which includes guides on
making bombs, is available on Amazon.
Police attempted to use possession of
the guide as evidence in a failed
attempt to prosecute Joshua Walker
using terrorism legislation in 2017.
Shipping
Items sold on the darknet markets –
credit card details, hacked database
information, how-to guides – can all be
traded digitally. However, physical
items such as drugs and counterfeit
goods must be shipped. Darknet
market shipments use postal services,
so the buyer must use an address.
Much trade is intra-state, particularly
in the US, but a significant portion of
trade on the darknet markets crosses
state borders. How and why these
items evade detection by export control
offices is multicausal.
The most common shipped items,
small quantities of drugs, are hidden
from the authorities with ‘stealth’. This
can be unusual packaging or air-tight
packing to confuse sniffer dogs. No
bills of lading or export control
compliance is submitted for these
items. This is in contrast to tactics used
when evading export controls for
industrial goods. In these cases,
common methods are to mislabel the
end-user for dual-use items, mislabel
the item so that it no longer requires
export control and to transship
through weak enforcement areas.
Outright
smuggling,
where
commercial shipping networks are
bypassed, standard in the drugs trade,
is not reported as occurring in darknet
markets.
The key to the growth in darknet
markets is a steady demand. This
demand has not been interrupted by
law enforcement action, including
closing down the markets, disrupting
cryptocurrency, disrupting the darknet
itself, or intercepting shipping.
Why no WMD on the darknet
markets?
In summary, there are three reasons
why we don’t see trade in nuclear
strategic goods on the darknet
markets.
First, the markets evolved to trade
in illegal goods free from government
interference, so we do not observe
32 WorldECR
Darknet
Links and notes
Financial Times: Weapons of mass ecommerce
https://www.ft.com/content/2a19e07c-43ef-11e48abd-00144feabdc0
FBI Primer on Darknet Marketplaces and Operation
Hyperion
https://www.fbi.gov/news/stories/a-primer-on-darknetmarketplaces
RAND report: International arms trade on the dark
web
https://www.rand.org/randeurope/research/projects/i
nternational-arms-trade-on-the-hidden-web.html
BBC News: Anarchist Cookbook trial ‘waste of time
and money’
https://www.bbc.co.uk/news/uk-england-bristol41802493
trade
in
legitimate
advanced
manufactured goods. Our study of the
markets shows that trade on the
markets is dominated by drugs, how-to
guides for fraud, counterfeit items, and
only small quantities of weapons.
Moreover, if an opportunist had a large
quantity of nuclear-grade pressure
sensors, a flow forming machine, or
other such item to sell, surface web
ecommerce would be a less risky option
than the darknet markets to evade
suspicion. Moreover, a vendor must
build up a track record to be trusted on
darknet markets. It would be difficult
for a vendor of dual-use items to
operate without interference from law
enforcement while building up their
track record.
Second, nuclear fuel cycle facilities
require large quantities of goods, but
darknet markets deal with only small
quantities of items. This restriction
comes from difficulties in successful
undetected shipping. A very large item
could be listed and sold on the darknet
and then delivered without the use of
postal services. However, this would go
against the current shipping practices
of the market and would require the
same evasion tactics as traditional
illicit exports when crossing state
borders.
Third, ecommerce through business
to business (B2B), business to
consumer (B2C), or consumer to
consumer (C2C) surface web sites
markets items which are, at worst,
dual-use. Straight-up illegal goods are
hard to find on surface web ecommerce
platforms – Amazon does not sell guns
for instance. Ecommerce sites flourish
in trade of dual-use items because they
have legitimate uses. Nuclear-grade
manufacturing is distinctive and
provides a link back to the
manufacturer. What manufacturer
would advertise that they were
prepared to operate outside of the law
by displaying their goods on the
darknet?
Remaining questions
The darknet markets specialise in
connecting buyers and sellers of small
quantities of illegal goods. From a
strategic trade perspective, there are
still some items of interest: particularly
for development of chemical, biological
and radiological devices in smaller
quantities. Our dataset contains
instances of sub-kg quantities of
natural uranium (that can also be
bought legitimately on Amazon), and
radioactive sources of polonium-210
and
cobalt-60
designed
for
experimental laboratory use, as well as
(unconfirmed) recipes available for
some chemical weapons. At least for
the former, it is probable that these
listings
were
placed
by
law
enforcement designed to entice
malicious actors.
An opportunist, or insider, who
gained access to strategic trade goods
would not evade detection by selling
through the darknet markets. The
markets are actively tracked by law
enforcement. As discussed in the
previous section, industrial goods can
be traced back to the original
manufacturer. Given the reputational
damage to a company that was
identified with goods on the darknet, a
company would have a strong incentive
to avoid darknet markets in the first
place. Given how unusual a strategic
good would be if listed on the darknet
markets, it would be quickly picked up
by law enforcement and traced back to
the manufacturer. The manufacturer
would be expected to identify the
source of the item and identify the
vendor.
The darknet markets are not needed
to perform illicit trade. Encrypted
communication,
transfer
of
cryptocurrency and shipping can be
www.worldecr.com
Darknet
Darknet
performed independently of the
markets.
End-to-end
encrypted
communications are available to
anybody
with
a
smartphone.
Cryptocurrencies can be used outside
the markets if they are thought to be
less risky than bank transfers. The only
unique service the darknet markets
provide is connecting buyers and
sellers. However, distributors and
manufacturers of strategic goods can
be contacted directly or through
legitimate ecommerce portals.
Nuclear materials, radioisotopes,
and chemicals should be considered
distinctly from other forms of strategic
trade items, and should be monitored
appropriately. However, a vendor of
these items may hold only a limited
quantity of material so may have
difficulty establishing credibility.
In later periods of data collection,
Fentanyl, an opioid that has caused a
public health crisis in the United
States, became more prevalent on the
markets. Fentanyl derivatives can be
used to make chemical weapons. In
2002, 40 Chechen separatists took 912
hostages in a Moscow theatre. The
hostage crisis was tackled by Russian
special forces by pumping a suspected
Fentanyl derivative into the theatre.
Throughout our
monitoring of the
darknet markets no
strategic industrial
goods were identified.
This gas was suspected to have caused
the deaths of 130 hostages.
Conclusion
We have offered an explanation for the
lack of strategic trade goods on the
darknet markets. We note an absence
of goods on the market due to a lack of
existing trade in industrial goods, a
lack of trade in large quantities of
material, and a lack of appetite for
legitimate companies to use the
darknet. Any opportunist or insider
that obtained access to strategic trade
goods could use the darknet markets to
sell them. However, the darknet
markets only connect vendors and
buyers. The infrastructure that keeps
the
transaction
anonymous
–
encrypted communications, cryptocurrency and clandestine shipping –
can be used without the markets. A
proliferator can also simply contact a
supplier directly or through a
legitimate ecommerce site.
Throughout our monitoring of the
darknet markets no strategic industrial
goods were identified. Notable items
identified over the period of our study
– radioisotope sources for laboratory
work and sub-kg quantities of natural
uranium – are not indicators of
significant activity but any future
listings of such items should be
monitored by security services.
Dr. Grant Christopher is
Programme director for
Nonproliferation at Ridgeway
Information in London, UK.
[email protected] /
[email protected]
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33 WorldECR
www.worldecr.com
Solutions
Solutions
Smart with sanctions lists
WorldECR talks to Pascal Ditté about his new platform, sanctions-intelligence.com, which helps
make sense of burgeoning sanctions lists and their implications.
S
creening, we know, means very
much more than mere ‘listchecking’. Beneficial ownership
must be ascertained, ‘white lists’
created, entries double-checked, and
decisions made as to which ‘list’ it’s
necessary to check against, given the
nuances of a specific transaction,
whether a loan agreement, investment
or sale.
As sanctions lists continue to
multiply, so also do the number of
associated tools designed with the
object of helping organisations –
banks,
businesses,
government
departments, charities – navigate their
way around the lists with the aim of
ensuring that their business is
compliant with relevant laws.
Typically, the first step is to enter
the name of a person or entity into
whichever your company has chosen to
purchase/do business with and to
proceed from there. Pascal Ditté’s
sanctions-intelligence.com platform is
rather different: its starting point is
that the gathering of meta data – the
list characteristics – is interesting of
itself. What is available in terms of
published sanctions lists? Where and
how can they be accessed? What do the
lists contain and how are the entries
structured? When did the lists last
change? Are there strategic trends in
terms of listing? What are the available
data formats? Which of the lists are
online searchable? Which relevant
tools or services are available to help?
Data-driven
Ditté is not new to digital resources.
Between 2008 and 2011 he was
responsible for the German Business
Intelligence practice of Deloitte’s
Forensic & Dispute Services team, a
role, which, he says, entailed a lot of
background research.
‘It is always a challenge working out
beneficial ownership,’ he says, ‘but if
you understood public registries it was
much easier.’ This realisation led him
to the idea of the Global Compliance
Records Directory (‘GCRD’), which he
describes as ‘a country-by-country
overview on where to find relevant
34 WorldECR
Overview table: Shows sanctions programmes with basic information about entry volume,
country affiliations, data formats, search options and date of last change/update. By
clicking on a list entry, a detailed sanctions profile opens, with further in-depth
information.
The classification of entries is based on the methodology of the releasing authorities.
For example, on the EU list, there are the categories ‘enterprise’ and ‘person’, although it
also includes vessels which are filed under ‘enterprise’ as well.
The number of primary names and additional identities of a sanctioned party (‘AKAs’)
can be important for the assessment of high-volume transaction-monitoring operations.
Country affiliations of listed parties can be important in order to conduct risk
assessments. The information provided here is based on address information in the
respective datasets. More analysis can be found in the single sanctions profiles
Daily List Updates: The user can see at a glance, which lists have changed and which
regimes/programmes are affected. The user can open source documents such as press
releases, open the sanctions list directly from the regulator website and search online for
a name (where the regulator offers an online search option).
When an entry has been amended, the user can also check what has changed in
detail.
www.worldecr.com
Solutions
information in the local public records
or other open sources,’ containing data
‘from corporate register information to
bankruptcy information and publicly
available court records,’ – i.e., the kind
of information essential in due
diligence
under
compliance
regulations.
‘sanctions-intelligence.com emerged
out of that,’ he explains. ‘The idea was
to provide an overview of the sanctions
lists that are out there, their
characteristics, accessibility and trends.
And where to find help if needed. Of
course, it sounds easy [to gather that
information and keep it up to date] but
it isn’t. For one thing, the content
frequently changes. And for another,
the characteristics are very different.
Each list has its own structure, format
and means of accessing the content…’
sanctions-intelligence.com includes
all the ‘obvious’ lists: United Nations
Consolidated, OFAC SDN, UK Office of
Financial Sanctions Implementation
(‘OFSI’), EU External Action Service,
which are automatically analysed on a
daily basis. At a glance, subscribers can
see the number of entries each has, the
focus of its programmes (e.g., what
country it targets), whether there have
been recent additions or removals, with
breakdown on sanctions regime/
programme level.
But there are also other list profiles,
such as that compiled by the Monetary
Authority of Singapore, Canada’s Office
of the Superintendent of Financial
Institutions, Japan’s Ministry of
sanctions-intelligence.com is a
freemium model. Selected parts of
the database are accessible
without login. Full access requires a
subscription.
www.sanctions-intelligence.com
Solutions
Economy, Trade and Industry and
others. Indeed, at the moment there
are around 130 list profiles. Further
lists, which are already included in the
GCRD will be added in the future.
Ditté explains the thinking:
‘Imagine, for example, a company or
bank that needs to make sure that all its
sanctions lists are on focus and
source/sanctions list for names. But it
is not intended to be a “screening
software” tool. Nor is sanctionsintelligence.com a list vendor. It delivers
background info and the “how-to”, and
shows where to find help in dealing
with this complex issue if required .’
According to Ditté, the tool also
provides a means by which you can
‘The idea was to provide an
overview of the sanctions lists that
are out there, their characteristics,
accessibility and trends. And where
to find help if needed.’
Pascal Ditté
implemented internally. Have they got
all the relevant lists covered? Are they
up to date? Where can they access the
remaining lists?
‘Or you need information on
strategic trends in listing for your risk
assessment. Or, you’re tracking a
particular sanctions programme, and
need to keep track of when it changes.
Or perhaps you’ve introduced a new
screening tool, but need a means by
which you can differentiate between
certain products. These are all
sanctionsscenarios
where
intelligence.com can help.’
One of the most obviously
noticeable aspects about sanctionsintelligence.com is that the site links to
an A-Z of commercial list vendors,
software solutions and advisory
services. The competition, potentially?
Not so, says Ditté: ‘Mine is a completely
different business model. It is an
additional tool that offers information
about lists, changes and trends. And
yes, it also enables users for example to
search directly in the primary
read the temperature of international
compliance lists and spot trends. So,
for example, in 2018, the volume of the
OFAC SDN List grew by 1,405 entries,
which is an increase of more than 23%.
In comparison, the EU Consolidated
List grew by 102 entries – a
comparatively mere 5%.
‘Currently, the OFAC SDN List is
three times the size of the EU list,’ says
Ditté. ‘And in the last 18 months this
has grown considerably. The OFAC list
alone contains seven times more
entries than the United Nations
consolidated list…’
So, what’s next for the platform?
Ditté says he has a lot of plans for the
coming months, among them, the
integration of further list profiles
(many of which are already included in
the ‘legacy format’, the GCRD
database) and improvements in
usability, for example for the mobile
version of the website.
In an increasingly watchful space of
trade compliance, it would seem only
the intelligent thing to do.
The WorldECR Archive at www.worldecr.com
includes all past journal and website news PLUS
every article that has ever appeared in WorldECR.
If you would like to find out more about Archive
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35 WorldECR
www.worldecr.com
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The Gooderham “Flatiron” Building
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37 WorldECR
www.worldecr.com
THE DIRECTORy
Jacobson Burton Kelley PLLC is an international trade law firm with offices in Washington DC and New York, focused on economic sanctions
(OFAC), export controls (EAR & ITAR), anti-corruption (FCPA), customs and trade remedies, foreign investment in the US (CFIUS), international
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Jacobson Burton Kelley comprises: Douglas N. Jacobson, Michael L. Burton, Glen N. Kelley, David J. Brummond, and Heather Sears. Our
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Having more than a few of the proverbial “balls in the air” (regardless of how much
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38 WorldECR
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WorldECR
The journal of export controls and sanctions
Contributors in this issue
WorldECR Editorial Board
Fabian A. Jahn
www.der-rechtsanwalt.eu
Michael Burton, Jacobson Burton Kelley PLLC
[email protected]
Ronald A Oleynik, Andres Fernandez, Jonathan M
Epstein, Aymee D Valdivia Granda and Barbara Efraim,
Holland & Knight
www.hklaw.com
Jay Nash, Nash Global Trade Services
[email protected]
Rosa Rosanelli, Belgium Engine Center
www.bec.eu.com
George Tan, Global Trade Security Consulting, Singapore
[email protected]
Samantha Sultoon, Atlantic Council
www.atlanticcouncil.org
Richard Tauwhare, Dechert
[email protected]
Dr. Grant Christopher, Ridgeway Information
www.ridgeway-information.com
Stacey Winters, Deloitte, London
[email protected]
Dr. Bärbel Sachs, Noerr, Berlin
bä[email protected]
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