The Committee on Foreign Investment in the United States (CFIUS or the “Committee”), an inter-agency committee headed by the Department of the Treasury, has released its 2020 Annual Report to Congress (Report). CFIUS is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies, as well as non-controlling investments by foreign persons or companies in certain U.S. businesses which are involved in critical technology, critical infrastructure, or the gathering of sensitive personal data, in order to determine the effect of such transactions on the national security of the United States. CFIUS is required to provide an annual report to Congress containing various cumulative and summary information related to transaction filings. This 2020 Report covers transactions filed with CFIUS in calendar year 2020, and is the first Report to describe the CFIUS process after full implementation of Foreign Investment Risk Review Modernization Act (FIRRMA).

The Report notes that in 2020, CFIUS conducted assessments of 126 “short-form” declarations of covered transactions. These assessments resulted in CFIUS directing 34 parties to file mandatory notices with the Committee, requesting 28 parties to file a full notice, and notifying 81 parties that CFIUS had completed all action thus, essentially, clearing the transaction. In 16 instances, CFIUS staff were unable to complete any actions, and in one instance the parties withdrew their filing. With the Pilot Program for filing declarations implemented in 2018 becoming a formal process as of February 2020, the number of such declarations has increased rapidly – in 2018, 20 declarations were filed; in 2020, 126 declarations were filed. The majority of these filings were in the (i) electric power and transmission, (ii) software, (iii) computer systems, (iv) aerospace, (v) semiconductor, and (vi) data processing industries. It is notable that more than 60% of the declarations resulted in clearance, as there had been some uncertainty over whether the declaration process was likely to lead to definitive decisions.

For full notices of covered transactions, the Report indicates that 187 reviews were conducted in 2020. Of these reviews, CFIUS conducted 88 second-stage investigations and concluded its review of 16 transactions after the adoption of various mitigation measures to address national security concerns. Twenty-nine notices were withdrawn by the involved parties and the Committee rejected one notice due a material change in the transaction.

Notably, in 2020, former President Donald Trump issued an order prohibiting the acquisition of Musical.ly by ByteDance, Ltd., a rare CFIUS occurrence. The majority of the 2020 notices involved the Finance, Information, and Services sector, accounting for 43% of covered transactions, and 36% of these filings pertaining the manufacturing sector. The remaining filings involved the manufacturing, mining, utilities, construction wholesale trade, retail trade, and transportation sectors.

For the first time in several years, China was not the top country involving the foreign investor. The Report notes that in 2020, the top five foreign investor countries were: (i) 19 notices for covered transactions involved Japan, (ii) 17 involved China, (iii) 14 were related to the United Kingdom, (iv) 11 involved foreign investment from Canada, and (v) 11 notices involved France.

In 2020, the Report notes that CFIUS approved the withdrawal of 29 notices. In 15 of these instances, the parties filed a new notice in 2020 and CFIUS concluded action in three of those cases. In seven reviews, the parties withdrew their notice and abandoned their transaction after either CFIUS informed them that it was unable to identify mitigation measures that would resolve the national security concerns or after the Committee proposed mitigation measures that the parties did not accept.

Finally, the 2020 Report provided information from the Committee regarding its efforts to identify and review “non-notified transactions” (i.e., where the involved parties moved forward with a covered transaction without notifying CFIUS). CFIUS staff identified 117 such transactions that were subsequently brought to the attention of the Committee for consideration. As a result, the parties in 17 of these transactions were requested to file post-transaction notices.

Key Notes:

  • On July 13, the U.S. government released an updated version of the Xinjiang Supply Chain Business Advisory advising U.S. companies of the widespread, PRC-government sponsored forced labor and intrusive surveillance practices targeting ethnic and religious minorities in Xinjiang.
  • The Advisory urges U.S. companies with supply chains, ventures or investments connected to Xinjiang to undertake heightened due diligence efforts.
  • S. companies that do not exit supply chains or ventures connected to Xinjiang are at high risk of violating U.S. law.

On July 13, 2021, the U.S. government released an updated version of the Xinjiang Supply Chain Business Advisory (“Advisory”), originally released in July 2020. The Advisory warns U.S. companies that the People’s Republic of China (PRC) government continues to engage in “horrific abuses in the Xinjiang Uyghur Autonomous Region (Xinjiang) and elsewhere in China, targeting Uyghurs, ethnic Kazakhs, and ethnic Kyrgyzin,” including state-sponsored forced labor and other human rights abuses amidst ongoing genocide and crimes against humanity. Importantly, it highlights the high risk to businesses with supply chain or investment links to Xinjiang, which include risk of U.S. customs violations and seizure of goods and U.S. export control and sanctions violations. The U.S. Department of Labor and the Office of the U.S. Trade Representative have now joined as co-signatories to the Advisory, along with the U.S. Departments of State, Treasury, Commerce and Homeland Security. Companies should note that, although the Advisory highlights risks under U.S. law, the same activity may also violate non-U.S. laws targeting modern slavery or human rights abuses in various jurisdictions.

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On July 23, 2021, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement agreement with Payoneer Inc. (“Payoneer”), a publicly traded New York-based online money transmitter and provider of prepaid access.  Payoneer agreed to pay a civil penalty of approximately $1.4 million to settle its potential liability for 2,260 apparent violations of multiple sanctions programs.   According to OFAC, Payoneer “processed payments for parties located in the Crimea region of Ukraine, Iran, Sudan, and Syria, and also processed payments on behalf of sanctioned persons” on OFAC’s List of Specially Designated Nationals (“SDN”) List.

OFAC indicated that between February 2013 and February 2018, Payoneer processed 2,260 transactions totaling just over $800,000 to prohibited parties, and that most of the violations were not reported to OFAC via the voluntary self-disclosure process.  The apparent violations were the result of “multiple sanctions compliance control breakdowns”, including (i) weak algorithms that allowed close matches to SDN List entries not to be flagged, (ii) failure to screen for Business Identifier Codes (BICs) even when SDN List entries contained them, (iii) during backlog periods, allowing flagged and pended payments to be automatically released without review, and (iv) lack of focus on sanctioned locations because the company was not monitoring IP addresses or flagging addresses in sanctioned locations.

As a result, there were apparent violations of OFAC’s sanctions regulations pertaining to the Crimea region of Ukraine, Zimbabwe, Iran, Sudan, Syria and Weapons of Mass Destruction proliferators.  While OFAC determined that the violations were non-egregious, the fact that only 19 were voluntarily disclosed led to several aggravating factors and a determination that resulted in the higher civil penalty.  The aggravating factors were: (1) that Payoneer failed to exercise “a minimal degree of caution or care for its sanctions compliance obligations” when it allowed sanctioned and listed persons to open accounts and conduct transactions “as a result of deficient sanctions compliance processes that persisted for a number of years”; and, (2) Payoneer had “reason to know” the location of the users as being located in jurisdictions and regions subject to sanctions based on information in its possession, “including billing, shipping, or IP addresses, or copies of identification issued in jurisdictions and regions subject to sanctions”.  The fact that six different sanctions programs were involved was also considered an aggravating factor.

As noted by OFAC, “this action highlights that money services businesses—like all financial service providers—are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions.”  OFAC continues to highlight that risks can be mitigated by developing “a tailored, risk-based sanctions compliance program” as suggests in its “Framework for OFAC Compliance Commitments” guidance.

On July 20, 2021,  the U.S. Court of International Trade (CIT) issued an order revising certain deadlines established in its July 6 decision and order granting the plaintiff group’s motion for a preliminary injunction in the ongoing Section 301 tariff refund litigation involving imports of certain Chinese products. The preliminary injunction suspended liquidation of unliquidated entries subject to List 3 and List 4A Section 301 duties, which, the plaintiff group alleges, are not authorized under the original investigation of the U.S. Trade Representative (USTR) into China’s actions adversely affecting U.S. intellectual property rights, innovation, or technology development.  Because the plaintiff group and the U.S. government defendants have been unsuccessful so far in establishing the process for suspending liquidation of unliquidated entries, the CIT has adjusted the following deadlines:

  • The U.S. government defendants now have until August 6, 2021 to establish a repository for the funds;
  • Both the plaintiff group and the U.S. government defendants have until August 6, 2021 to submit additional proposed modifications to the July 6 preliminary injunction order;
  • The parties will appear before the CIT on July 23, 2021 and on August 2, 2021 for status conferences, where both parties must “bring an individual authorized to make decisions for the respective Party”; and
  • The temporary restraining order deadline on CBP liquidations of unliquidated entries has been extended from August 3, 2021 until September 2, 2021.

On July 20, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it has issued General License (GL) 5G, “Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After October 21, 2021,” which continues to delay U.S. persons’ ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA) 2020 8.5% bond until on or after October 21, 2021 – the previous deadline had been July 21, 2021. Effective July 20, 2021, this GL 5G replaces GL 5F. Additionally, OFAC modified frequently asked question #595 to address the scope of GL 5G.

With this new General License, U.S. persons remain prohibited until October 21, 2021 from engaging in any transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5% Bond, unless specifically authorized by OFAC. In the modified FAQ 595, OFAC notes a favorable licensing policy toward those seeking to apply for a specific license in an effort to reach an agreement on proposals to “restructure or refinance payments due to the holders of the PdVSA 2020 8.5% bond.” See Update of December 23, 2020 for prior OFAC activity on this issue.

On July 14, 2021, the Federal Trade Commission (FTC) published in the Federal Register (86 Fed. Reg. 37022-35) its final rule for “Made in USA” and other “unqualified U.S.-origin claims” on product labels. The final rule is effective on August 13, 2021.

The final rule codifies a longstanding FTC policy and practice that a product or service with an unqualified U.S.-origin claim, whether express or implied, on its label cannot contain more than a de minimis amount of foreign origin. The final rule also addresses mail order catalogs or mail order promotional material that include a seal, mark, tag, or stamp that identifies a product with an unqualified U.S.-origin claim.

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On July 19, 2021, the U.S. Department of the Treasury (Treasury) and the State Bank of Vietnam (SBV) reached an agreement to address concerns raised by the United States about Vietnam’s currency practices that were found actionable in an investigation under Section 301 of the Trade Act of 1974 by the Office of the U.S. Trade Representative (USTR). See Update of January 15, 2021. Under the agreement, the USTR stated that the SBV has agreed to allow Vietnam’s currency “to move in line with the development of Vietnam’s financial and foreign exchange market and with Vietnam’s economic fundamentals.” In the joint statement released by the Treasury and the SBV, the SBV underscored that “the focus of its monetary policy framework is to promote macroeconomic stability and to control inflation” and that the country is “bound under the Articles of Agreement of the IMF [International Monetary Fund] to avoid manipulating its exchange rate in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain from any competitive devaluation of the Vietnamese dong.” In its ongoing efforts to modernize its financial system, the SBV will “continue to improve exchange rate flexibility over time, allowing the Vietnamese dong to move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals, while maintaining macroeconomic and financial market stability.” Under the agreement, the SBV will provide necessary information for the Treasury to conduct analysis and reporting on the SBV’s activities in the foreign exchange market.

Ambassador Katherine Tai, the USTR, stated that “[c]ountries should not be able to manipulate their exchange rates to gain an unfair competitive advantage in international trade, and I commend Vietnam for its commitment to addressing our concerns.” As a result of this agreement, the “USTR, in coordination with the Treasury, will monitor Vietnam’s implementation of its commitments and work with Vietnam to ensure that it addresses the acts, policies and practices related to the valuation of its currency that were found actionable in the Section 301 investigation.” No further action by the USTR is expected in the Section 301 investigation.

On July 16, 2021, the U.S. Departments of State, Commerce, Homeland Security and the Treasury issued a Hong Kong Business Advisory highlighting growing risks for U.S. companies operating in the Hong Kong Special Administrative Region (SAR) due to ongoing actions taken by the Government of the People’s Republic of China (China). The advisory states that these risks fall into four categories: (1) risks for businesses following the imposition of the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (NSL); (2) data privacy risks; (3) risks regarding transparency and access to critical business information; and (4) risks for businesses with exposure to sanctioned Hong Kong or China entities or individuals.

Regarding risks under the NSL, which was implemented in June 2020 and under which China significantly reduced Hong Kong’s autonomy and undermined protected rights and freedom, the advisory notes that potential offenses include secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security. The NSL states that “an incorporated or unincorporated body, such as a company or organization which commits an offense” may be subject to a criminal fine and to having its operations suspended or its license or business application revoked. Certain provisions may also apply to offenses committed from outside the SAR and apply to these same “incorporated or unincorporated” companies or organizations. The advisory notes that Hong Kong authorities have arrested foreign nationals under the NSL, including one U.S. citizen.

Concerning data privacy, the business advisory notes that China and Hong Kong authorities are using expanded legal authorities to collect data from businesses and individuals in Hong Kong for actions that may violate “national security.” To date, this has included collecting data on participating in primary elections, calling for political steps specifically protected by the Basic Law, posting opinions on social media, and meeting with members of the diplomatic community. Further, the NSL grants Hong Kong law enforcement broad authorities to conduct wiretaps or electronic surveillance. Similarly, with respect to transparency and access to information, the NSL has allowed Hong Kong authorities to increase pressure on freedom of expression and freedom of the press by, ostensibly, allowing authorities to “stamp out fake news” as a matter of “national security.” Since passage of the NSL, journalists have been harassed and arrested for allegedly making false statements, “colluding with a foreign country” or conspiring with foreign institutions.

For U.S. businesses with exposure to sanctioned Hong Kong or China entities or individuals, the business advisory reminds these companies that the United States has implemented several export control and sanctions regulations and orders targeting specific China and Hong Kong persons or entities without a license from the appropriate U.S. government agency. The advisory notes that Hong Kong has been removed as a separate destination and that “all items subject to the EAR that are destined for export, reexport or transfer (in-country) to or from Hong Kong will be treated as exports, reexports or transfers (in-country) to or from [China].” Failure to comply with these U.S. sanctions and current export restrictions can result in civil and criminal penalties under U.S. law. Importantly, the business advisory notes China’s response to these sanctions and export restrictions with its recent passage of a law to “counter foreign sanctions.” The business advisory provided a detailed background of China’s new law on this matter and the countermeasures China may take against such foreign sanctions. As a result, U.S. businesses operating in Hong Kong may face heightened risk and uncertainty in connection with U.S. sanctions and export compliance efforts.

The business advisory “strongly encourages organizations subject to U.S. jurisdiction, as well as foreign entities, including foreign financial institutions, that conduct business in or with the United States or U.S. persons, or deal in U.S.-origin goods or services, to employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance programs” as they relate to Hong Kong and continuing efforts by China reduce Hong Kong’s autonomy and restrict rights and freedoms.

For past important SmarTrade Updates on Hong Kong, see:

On July 19, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule adding six Russian entities to the Entity List after having been determined to be “acting contrary to the foreign policy interests of the United States.” The entities are:

  • Aktsionernoe Obshchestvo AST;
  • Aktsionernoe Obshchestvo Pasit;
  • Aktsionernoe Obshchestvo Pozitiv Teknolodzhiz;
  • Federal State Autonomous Institution Military Innovative Technopolis Era;
  • Federal State Autonomous Scientific Establishment Scientific Research Institute Specialized Security Computing Devices and Automation; and
  • Obshchestvo S Ogranichennoi Otvetstvennostyu NEOBIT.

These designations are related to President Biden’s April 15, 2021, Executive Order 14024 (“E.O.”) on “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.” This E.O. established a new national emergency under which sanctions may be imposed against individuals and entities furthering specified harmful foreign activities of Russia against the United States and others, including: undermining free and fair elections; malicious cyber-enabled activities; transnational corruption; extraterritorial activities targeting dissidents or journalists; undermining security, international law and the territorial integrity of states. Shortly after the issuance of this E.O., the Department of the Treasury’s Office of Foreign Assets Control (OFAC) placed these six entities on its Specially Designated Nationals (SDN) List. See Update of April 19, 2021. In also placing them on the Entity List, BIS stated that it is seeking to “ensure the efficacy of existing sanctions on Russia that target aggressive and harmful activities by the Russian government.”

Placement on the Entity List ensures that U.S. sanctions on these entities will apply to all items subject to the Export Administration Regulations (EAR) regardless of whether a U.S. person is involved in the transaction or whether the transaction involves the U.S. financial system. BIS has imposed a license review policy of a “presumption of denial” for these six entities. In addition, no license exceptions are available for exports, reexports, or transfers (in-country) to these six Russian entities. This final rule is effective as of July 19, 2021. However, shipments that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on July 19, 2021, pursuant to actual orders for export or reexport to a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR).

On July 12, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule adding thirty-four (34) entities to the Entity List for the following destinations:  Canada; People’s Republic of China (China); Iran; Lebanon; Netherlands; Pakistan; Russia; Singapore; South Korea; Taiwan; Turkey; the United Arab Emirates (UAE); and the United Kingdom.  In addition, this final rule adds one entity to the Military End-User (MEU) List for Russia.  Each of these entities has been deemed as “acting contrary to the foreign policy interests of the United States.”

The factual basis for these listing vary based upon each entity.  Overall, these entities were either determined to have: (i) facilitated the export of U.S. items to Iran; (ii) been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass detention, and high-technology surveillance against Uyghurs, Kazakhs, and other members of Muslim minority groups in the Xinjiang Uyghur Autonomous Region (XUAR); (iii) to have acquired and are attempting to acquire U.S.-origin items in support of military modernization for the People’s Liberation Army (China); (iv) been involved in the procurement of U.S.-origin items for unauthorized military end-use; (v) exported and attempted to export items subject to the EAR to an entity on the U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC) Specially-Designated Nationals (SDN) List without the necessary licenses; (v) been involved in the procurement of U.S.-origin electronic components likely in furtherance of Russian military program; or, (vi) been involved in proliferation to unsafeguarded nuclear activities.

The entities are:

Canada

  • Karim Daadaa
  • Modern Agropharmaceuticals & Trade Establishment.

China

  • Armyfly
  • Beijing E-science Co., Ltd.
  • Beijing Geling Shentong Information Technology Co., Ltd.
  • Beijing Hileed Solutions Co., Ltd.
  • Beijing Sinonet Science & Technology Co., Ltd.
  • Chengdu Xiwu Security System Alliance Co., Ltd.
  • China Academy of Electronics and Information Technology
  • Hangzhou Hualan Microelectronics Co., Ltd.
  • Info Rank Technologies
  • Kindroid
  • Kyland Technology Co., Ltd.
  • Leon Technology Co., Ltd.
  • Shenzhen Cobber Information Technology Co., Ltd.
  • Shenzhen Hua’antai Intelligent Technology Co., Ltd.
  • Suzhou Keda Technology Co., Ltd.
  • Tongfang R.I.A. Co., Ltd.
  • Urumqi Tianyao Weiye Information Technology Service Co., Ltd.
  • Wingel Zhang
  • Wuhan Raycus Fiber Laser Technologies Co., Ltd.
  • Xinjiang Beidou Tongchuang Information Technology Co., Ltd.
  • Xinjiang Lianhai Chuangzhi Information Technology Co., Ltd.
  • Xinjiang Sailing Information Technology Co., Ltd.
  • Xinjiang Tangli Technology Co., Ltd.

Iran

  • Payam Nabavi
  • Sina Biomedical Chemistry Company

Lebanon

  • Karim Daadaa
  • Modern Agropharmaceuticals & Trade Establishment

Netherlands

  • Suzhou Keda Technology Co., Ltd.

Pakistan

  • Suzhou Keda Technology Co., Ltd.

Russia

  • Andrey Leonidovich Kuznetsov
  • Dmitry Alexandrovich Kravchenko
  • Margarita Vasilyevna Kuznetsova
  • OOO Teson
  • OOO Trade-Component
  • Radiant Group of Companies
  • JSC Kazan Helicopter Plant Repair (added to BIS’ MEU List)

Singapore

  • Suzhou Keda Technology Co., Ltd.

South Korea

  • Suzhou Keda Technology Co., Ltd.

Taiwan

  • Hangzhou Hualan Microelectronics Co., Ltd.

Turkey

  • Suzhou Keda Technology Co., Ltd.

United Arab Emirates

  • TEM International FZC

United Kingdom

  • China Academy of Electronics and Information Technology

For most of the China-related entity, BIS has imposed a license review policy of case-by-case review depending upon the applicable Export Control Classification Numbers (ECCNs).  In most other instances, BIS has imposed a license requirement for all items subject to the EAR and a license review policy of “presumption of denial”. For all thirty-four entities, the license requirements apply to any transaction in which items are to be exported, reexported, or transferred (in country) to any of the entities or in which such entities act as purchaser, intermediate consignee, ultimate consignee, or end user. In addition, no license exceptions are available for exports, reexports, or transfers (in-country) to the entities being added to the Entity List.

This final rule was effective as of July 12, 2021.  However, shipments that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on July 12, 2021, pursuant to actual orders for export or reexport to a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR).