On August 2, 2022, the Treasury Department, as the lead agency of the Committee on Foreign Investment in the United States (CFIUS), released a public version of its annual report to Congress regarding foreign direct investment in the United States.  Assistant Secretary for Investment Security Paul Rosen stated, “This year’s Annual Report demonstrates that CFIUS is reviewing a record number of transactions and taking important and necessary measures to safeguard national security, while also quickly clearing benign investments.”  Key highlights from the 2021 report include:

  • CFIUS reviewed a record number of covered transactions, including 272 full notices and 164 declarations.
    • Regarding full notices, of the 272 filings, 130 moved into the second phase investigation after the initial 30 day review period.  Nine transactions were withdrawn by the parties after CFIUS informed the parties that it could not identify mitigation measures that would resolve its national security concerns, or it proposed mitigation measures that the parties chose not to accept.
    • Regarding the declarations, CFIUS cleared 120 with no action, while the parties to 30 transactions were directed to file full notices; for 12 of the declarations CFIUS was unable to conclude actions, and CFIUS rejected two declarations.
  • CFIUS cleared nearly 60 percent of cases in either the 30-day assessment period for a declaration or the initial 45-day review period for a notice.
  • On average, CFIUS provided comments on draft notices within 6.2 business days and accepted formal notices within 6 business days, down from 9.1 days in 2020.
  • CFIUS continued to complete action on a majority of cases without conditions, and in 2021 only ten percent (26 transactions out of 272 filed) involved mitigation measures.
  • There were no presidential reviews or actions taken on 2021 transactions.
  • Of the filings CFIUS received in 2021, approximately 55% involved the financial, information and services sectors, 28% involved the manufacturing sector, 12% involved the mining, utilizes and construction sector, and the remaining 4% involved wholesale and retail sales and transportation.
  • In 2021, the highest number of files involved Chinese investors accounting for 16.5% (44 notices), followed by Canada at 10.3% (28 filings) and Japan at 9.6% (26 filings).
  • CFIUS reviewed 184 covered transactions involving acquisitions of U.S. critical technology companies in 2021.  Of these critical technology reviews, major allied countries accounted for many of the transactions:  Germany (16); United Kingdom (16); Japan (15); South Korea (13), the Cayman Islands (12); Israel (11); and Canada (10).  China and Russia accounted for 10 and 5 critical technology reviews, respectively.

The report also indicates that in 2021, CFIUS staff identified numerous potential non-notified transactions.  Sources for such information on non-notified transactions were interagency referrals, tips from the public, media reports, commercial databases, and congressional notifications. Ultimately, 135 transactions were identified in this manner; from these transactions, eight resulted in a CFIUS request for filing.

On August 2, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) added further Russian individuals, entities and vessels to its Specially Designated Nationals (SDN) List.  The designations include numerous Russian individuals connected to Russia President Vladimir Putin, as well as multinational companies Investitsionnaya Kompaniya MMK-FINANS (an investment and financial copany) and MMK Metalurji Sanayi Ticaret Ve Liman Isletmeciligi Anonim Sirketi (aka MMK Metalurji; a steel products manufacturer).  OFAC also designated Joint Stock Company Promising Industrial and Infrastructure Technologies for reportedly attempting to facility and evade U.S. sanctions on the Russian Direct Investment Fund.

Additional identifying information on these individuals and entities sanctioned is available here. All property and interests in property of these newly designated SDN List entities that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.

In connection with these sanctions, OFAC has issued several revised and new Russia-related General Licenses (GL):

  • GL 40B authorizes transactions ordinarily incident and necessary to the provision, exportation, or reexportation of goods, technology, or services to ensure the safety of civil aviation for certain blocked entities listed in an annex to the GL and including UAC, Irkut and other related companies.  Use of this GL is restricted to aircraft registered in a jurisdiction solely outside of Russia and for goods, technology, or services for use on aircraft operated solely for civil aviation purposes.  This revised GL modifies the list of entities in an attached Annex.
  • GL 43A authorizes, until August 31, 2022, transactions that are ordinarily incident and necessary for the divestment or transfer of debt or equity purchased prior to June 2, 2022, and wind down of derivative contracts entered into before June 2, 2022, involving, Public Joint Stock Company Severstal or Nord Gold PLC.  This revised GL allows U.S. financial institutions to unblock covered debt or equity that was blocked on or after June 2, 2022 but before June 28, 2022, provided that the unblocked covered debt or equity is solely used to effect transactions authorized by this GL.
  • GL 47A authorizes transactions ordinarily incident and necessary to wind down any transaction involving six of the newly designated Russian entities, or any entities owned, directly or indirectly, by 50 percent or greater interest, until September 1, 2022.
  • GL 48A authorizes the divestment or transfer of debt or equity and the wind down of related derivative contracts in two designated entities, or any entities owned, directly or indirectly, by 50 percent or greater interest, until October 3, 2022.
  • GL 49 authorizes transactions ordinarily incident and necessary to wind down any transaction involving MMK Metalurji or any entity in which it owns, directly or indirectly, a 50 percent or greater interest, until January 31, 2023.

 

On August 1, 2022, and as directed by the U.S. Court of International Trade (CIT) in its April 2022 decision (see Update of April 6, 2022), the Office of the U.S. Trade Representative (USTR) filed a 90-page explanation in support of its rationale for imposing List 3 and List 4A tariff determinations to show that it satisfied its Administrative Procedure Act (APA) obligations. In noting the CIT’s acknowledgement that the APA does not require a comment-by-comment response, the USTR stated in its remand explanation that, with over 9,000 total comments submitted, “approximately 95 percent of the comments addressed ‘tariff subheadings to be covered’ by the proposed lists or specific products to be covered” by the determinations. As to more general, non-product-specific comments, the USTR stated that only approximately 440 such comments were submitted. Based on that analysis, the USTR focused much of its remand results explanation on product-specific comments for List 3 and 4 modifications, including: (i) the removal of rare earth critical minerals; (ii) the removal of certain seafood products; (iii) the removal of Chinese antiques and works of art; (iv) the removal of certain consumer electronics; (v) the removal of certain health and safety products; (vi) the removal of certain chemicals and other inputs; (vii) the removal of certain product critical to U.S. port operations; and (viii) details as to why certain products were not removed from Lists 3 and 4A. The USTR concludes in its explanation that “each aspect of the determination [was] made in consideration of the public comments and testimony, as well as statutory considerations, including the direction of the President.”

To further buttress the submission, the government defendants also filed a Motion for Leave to Correct the Record to add nine documents and a declaration to the underlying administrative record. In support of allowing these documents to be added to the record, the Department of Justice notes in the motion that, (1) while the USTR was drafting the remand results explanation, it was “determined that [these] additional documents either were indirectly considered in the process of issuing the contested determinations, or they were issued in conjunction with the contested determinations” and, (2) since the USTR was aware of the facts contained in these documents, they should be part of the administrative record. According to the motion, the plaintiff group took no position on the motion “on the understanding that the Government has forfeited reliance on documents not cited in its previous merits briefing to this Court.”

Both the Senate and House this week passed the Chips Act of 2022 (H.R. 4346) by comfortable bipartisan margins, sending it to the desk of President Joseph Biden for signature and enactment. The Act seeks to address that fact that only about 12% of semiconductor chips are currently manufactured in the United States and provides appropriations to develop domestic manufacturing critical to U.S. competitiveness and national security interests.

The Act provides $52.4 billion in funding under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Fund authorizing activities by the Departments of Commerce, Defense and State to develop onshore domestic manufacturing of semiconductors. It also provides funding to accelerate development of an open-architecture model (known as OpenRAN) to shore up the global telecommunications supply chain and advance the U.S. mobile broadband market. To ensure that these manufacturing incentives advance U.S. technology and supply chain security, the Act requires that any recipient of federal financial assistance join an agreement prohibiting certain material expansions of semiconductor manufacturing in China or in other countries of concern.

The Act offers advanced manufacturing investment tax credit (ITC) to companies of 25% of their qualified investment for each taxable year in semiconductor manufacturing. The credit will cover manufacturing equipment, the construction of semiconductor manufacturing facilities, and incentives for the production of specialized tooling equipment required in the semiconductor manufacturing process. Further, the Act includes safeguards to ensure that recipients of an ITC do not build such semiconductor production facilities in countries that present a national security concern.

In addition, the Act provides significantly increased funding for scientific research and development for the National Science Foundation, Department of Commerce, National Institute of Standards and Technology, National Aeronautics and Space Administration (NASA) and the Department of Energy, in the amount of nearly $170 billion. This increase in research funding includes efforts to build new technology hubs across the United States and efforts to protect U.S. investment in these sectors by identifying and combatting illegal foreign efforts to compromise or obtain U.S. research products.

On July 14, 2022, the Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License (GL) 44 authorizing transactions ordinarily incident and necessary to the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of tax preparation or filing services to any individual who is a United States person located in the Russian Federation, which are otherwise prohibited by a May 8, 2022 OFAC determination under section 1(a)(ii) of Executive Order 14071, which prohibits U.S. persons from providing any accounting, trust and corporate formation, or management consulting services to any person located in Russia. GL 44 does not otherwise authorize transactions prohibited by the Russian Harmful Foreign Activities Sanctions Regulations, 31 C.F.R. part 587.

On July 14, 2022, the Department of Treasury’s Office of Foreign Assets Control (OFAC) issued General License (GL) 30A authorizing transactions through December 16, 2022 involving SEFE Securing Energy for Europe GmbH (formerly known as Gazprom Germania GmbH) or any entity in which SEFE Securing Energy for Europe GmbH owns, directly or indirectly, a 50 percent or greater interest, that are otherwise prohibited by Directive 3 under Executive Order 14024, which prohibits dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity or new equity where such new debt or equity is issued after March 26, 2022. Directive 3 applies to certain Gazprom entities.  In early April 2022, Gazprom announced that it was relinquishing its business interests and assets in Gazprom Germania GmbH. German regulatory authorities subsequently took control of the company to ensure its continued operations. Gazprom Germania GmbH has operated under its new name “SEFE Securing Energy for Europe GmbH” since June 20, 2022.

For prior details on this topic, see Update of May 13, 2022.

On July 14, 2022, the Department of Treasury’s Office of Foreign Assets Control (OFAC) released a food security fact sheet on Russian sanctions and agricultural trade and an amended General License (GL) 6B to broaden the scope of the authorizations relating to transactions involving agricultural and medical products. The Department’s press release emphasized that “[a]gricultural and medical trade are not targets of the sanctions imposed by the United States on Russia for its unjustified war against Ukraine.”

General License 6B replaced and superseded GL 6A effective July 14, 2022. GL 6A originally authorized all transactions otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations, 31 C.F.R. part 587 (“RuHSR”), that are ordinarily incident and necessary to the exportation or reexportation of agricultural commodities, medicine and medical devices to/from or transiting the Russian Federation. With GL 6B, OFAC expanded the scope of this authorization to include transactions related to agricultural equipment.

GL 6B also expands the scope of authorized activity permitted related to medical research or clinical trials. Previous GL 6A limited the authorization to “ongoing clinical trials and other medical research activities that were in effect prior to March 24, 2022.” GL 6B removes the requirement that the medical research or clinical trials be already in effect on March 24.

GL 6B notes that the authorization does not encompass the opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity subject to Directive 2 under Executive Order (EO) 14024, and any transaction prohibited by EO 14066, EO 14068, and EO 14071, including new investments in Russia and the importation into the United States of certain Russian-origin products, such as alcoholic beverages and fish, seafood, or preparations thereof.

On the same day, the Department of Treasury also released a fact sheet to further clarify that agricultural commodities (including fertilizer), agricultural equipment, or medicine relating to Russia are not the target of U.S. sanctions. The fact sheet describes in detail the authorization granted with GL 6B, including the transactions involving exportation of agricultural commodities and fertilizers to/from or transiting Russia. This authorization includes exportation of agricultural and medical products from the Port of Novorossiysk.

Further, the fact sheet explains that insurance and reinsurance services related to these transactions are also permitted, and U.S. financial institutions are authorized to process these transactions. Nevertheless, the fact sheet warns that the prohibition against importation of Russian-origin fish, seafood, and preparations thereof, alcoholic beverages, and non-industrial diamonds into the United States remains in effect. Importation of these goods into jurisdictions outside the United States does not expose non-U.S. persons to sanctions.

Finally, the fact sheet clarifies that Joint Stock Company Russian Agricultural Bank is not subject to U.S. blocking sanctions under any U.S. authority. That said, the Russian Agricultural Bank is subject to Directive 1 under EO 13662, which prohibits certain dealings in new debt or equity of the Russian Agricultural Bank, and Directive 3 under EO 14024, which prohibits dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity or new equity where such new debt or equity is issued after March 26, 2022. U.S. persons are authorized to engage in transactions involving agricultural commodities and equipment otherwise prohibited by Directive 3 under EO 14024 under GL 6B.

On July 7, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Venezuela-related General License 40A, “Authorizing Certain Transactions Involving the Exportation or Reexportation of Liquefied Petroleum Gas to Venezuela.”  This general license continues authorization of all transactions and activities related to the exportation or reexportation, directly or indirectly, of liquefied petroleum (LP) gas to Venezuela, involving: (i) the Government of Venezuela, (ii) Petróleos de Venezuela, S.A. (PdVSA), or (iii) any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest, that are prohibited by E.O. 13850, as amended by E.O. 13857, or E.O. 13884.  The general license is effective through  July 12, 2023.

OFAC has made clear that for its purposes, the term LP gas means – “a group of hydrocarbon gases, primarily propane, normal butane, and isobutane, derived from crude oil refining or natural gas processing. These gases may be marketed individually or mixed. They can be liquefied through pressurization (without requiring cryogenic refrigeration) for convenience of transportation or storage. The definition excludes ethane and olefins.”

General License 40A does not authorize any payment-in-kind of petroleum or petroleum products, and continues to prohibit any other activities otherwise prohibited by OFAC’s Venezuela Sanctions Regulations.  This license replaces and supersedes General License 40 (see Update of July 13, 2021).

On July 6, 2022, the Office of the U.S. Trade Representative (USTR) issued a notice seeking public comments to assist in the development of a forced labor trade strategy. The notice indicates that the strategy “will identify priorities and establish an action plan for utilizing existing and potential new trade tools to combat forced labor in traded goods and services.” In submitting comments, parties are invited to consider the following questions:

  • What actions could the U.S. government pursue with like-minded trade partners and allies to combat forced labor as an unfair trade practice?
  • How can the U.S. government bolster the forced labor components of trade agreements and trade preference programs to have greater effect?
  • What new and innovative trade tools can the U.S. government develop and utilize to advance efforts to combat forced labor in traded goods and services?
  • How can the U.S. government make the development of trade policy on forced labor a more inclusive process?
  • Do you have additional recommendations for monitoring, tracing or eliminating forced labor in traded goods and services in supply chains?

The deadline for submitting comments is August 5, 2022. USTR requests that comments be submitted electronically via the Federal eRulemaking Portal at https://www.regulations.gov, using Docket Number USTR–2022–0006.

On June 28, 2022, The Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 70 entities and 29 individuals involved in Russia’s defense industrial base.  In addition, the Department of State impose visa restrictions on 511 Russian military officers, and sanctioned an additional 45 entities and 29 individuals.  The designations and placement of these entities and person on OFAC’s Specially Designated Nationals (SDN) List were taken pursuant to Executive Orders (EOs) 14024 and 14065, and are intended to diminish Russia’s development and deployment of weapons and technology in the war against Ukraine.  The Department of the Treasury issued a press statement and the Department of State released a fact sheet detailing these actions.

The sanctions focus on the following sectors and certain key Russian entities:

  • Russia’s defense-industrial base, including the designation of State Corporation Rostec and numerous of its subsidiaries.  Rostec had only previously been designated and placed on OFAC’s Sectoral Sanctions List and subject to certain directives.  Rostec is now sanctioned by the United States, Australia, Canada, the European Union (EU), New Zealand, Switzerland, and the United Kingdom.
  • Russia’s Aerospace sector, including Rostec subsidiary Public Joint Stock Company United Aircraft Corporation (UAC), Tupolev Public Joint Stock Company, Irkut Corporation Joint Stock Company, and various subsidiaries of these entities.
  • Russia’s defense technology sector, including numerous companies that are, again, subsidiaries or Rostec and engage in information technology, information security and radio-electronics systems.
  • Russia’s industrial exporting sector, including Kamaz Publicly Traded Company (aka Kamaz PJSC), Russia’s largest truck manufacturer, and many of its subsidiaries.
  • Russian management entities that are related to Rostec and manage aeronautical, real estate, procurement, asset management and investments for Rostec.

OFAC also sanctioned and designated numerous other entities for participating in Russia’s war against Ukraine and many individuals who have acted to undermine Ukraine’s democratic form of government and sovereignty.

Detailed identifying information on each of these entities and individuals can be found here. All property and interests in property of these newly designated SDN List entities that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.

Given the extent and scope of these sanctions, OFAC also issued several Russia-related General Licenses (GL):

  • GL No. 39 – authorizes transactions ordinarily incident and necessary to the wind down of any transaction involving State Corporation Rostec, and its subsidiaries, until August 11, 2022.
  • GL No. 40 – authorizes transactions ordinarily incident and necessary to the provision, exportation, or reexportation of goods, technology, or services to ensure the safety of civil aviation for blocked entities list in an annex to the GL and including UAC, Irkut and other related companies.  Use of this GL is restricted to aircraft registered in a jurisdiction solely outside of Russia; and for goods, technology, or services that are provided, exported, or reexported for use on aircraft operated solely for civil aviation purposes.
  • GL No. 41 – authorizes transactions ordinarily incident and necessary to the manufacture, sale, and maintenance, including the provision and receipt of warranty and maintenance services, of agricultural equipment, components, and spare parts produced by Nefaz Publicly Traded Company or Public Joint Stock Company Tutaev Motor Plant until December 22, 2022.
  • GL No. 42 – authorizes certain and limited transactions involving Russia’s Federal Security Service (a.k.a. Federalnaya Sluzhba Bezopasnosti) (a.k.a. FSB).
  • GL No. 43 – authorizes until August 31, 2022, transactions that are ordinarily incident and necessary for the divestment or transfer of debt or equity purchased prior to June 2, 2022, and wind down of derivative contracts entered into before June 2, 2022, involving, Public Joint Stock Company Severstal or Nord Gold PLC.