July was a big month for compliance with a handful of reports and recommendations on due diligence and best practices concerning forced labor, export controls, sanctions from DHS, BIS, and OFAC.

The below updates also include increased forced labor scrutiny of three new sectors by DHS, and increased review by CFIUS of certain transactions involving investment in the U.S. and real estate purchases by foreign persons.

Enforcement in July was robust with a $7.4 million OFAC settlement and a number of DOJ actions concerning export violations.  

Compliance Updates        

BIS Adds to Export Entity List

On July 2nd, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) published a final rule that expands the Entity List by adding six entities in China, South Africa, the United Arab Emirates (UAE), and the United Kingdom.

These additions are designed to prevent entities that threaten U.S. national security and foreign policy interests from accessing items subject to the Export Administration Regulations (EAR).

This final rule also modifies entries for two existing Entity Listed parties – one in China and one in Russia – in order to ensure that restrictions on exports to these entities are more targeted and effective.

DHS Adds Three Sectors to Forced-Labor Scrutiny

On July 9th, the Forced Labor Enforcement Task Force (FLETF), chaired by DHS, identified new high-priority sectors for enforcement – aluminum, polyvinyl chloride (PVC), and seafood – for the first time since 2022.

These industries were identified due to higher risk of forced labor or state labor transfer of Uyghurs and other ethnic minorities from the Xinjiang Uyghur Autonomous Region (XUAR). The FLETF continues to designate apparel, cotton and cotton products, silica-based products including polysilicon, and tomatoes and downstream products as high-priority sectors.

With the designation, entities in these sectors will be prioritized for review by the FLETF for a variety of enforcement actions: inclusion on the UFLPA Entity List, export limitations, economic sanctions, and visa restrictions. 

CBP recommends that importers focus their due diligence efforts on supply chains that intersect with these sectors, supporting compliance and keeping goods from forced labor out of U.S. markets.

BIS Issues Guidance on Export Diversion

On July 10th, BIS published guidance outlining the different actions that BIS takes to inform industry and academia about parties – beyond those identified on public screening lists like the Entity List – that present risks of diversion of items subject to BIS export controls to countries or entities of concern. The guidance also outlines certain due-diligence responsibilities and best practices that companies and universities can undertake to comply with BIS regulations, as well as additional steps they should take to mitigate diversion risks.

One new recommended best practice asks that exporters, re-exporters, and transferors of Common High Priority List (CHPL) items screen transaction parties using new online resources made available by the Trade Integrity Project (TIP). The TIP identifies third-country suppliers with a history of exporting CHPL items to Russia since its invasion of Ukraine. The tool enables companies and universities to identify possible red flags prior to proceeding with an export transaction that risks diversion to Russia.

OFAC Issues Guidance on Extension of Statue of Limitations

On July 22nd, the Office of Foreign Asset Control (OFAC) released guidance on the doubling of the statute of limitations for sanction violations from 5 to 10 years that was included in the April 24, 2024, foreign aid bill (the 21st Century Peace through Strength Act).

OFAC clarified the new 10-year statute of limitations applies to any violation that was not time-barred at the time of its enactment. This means that OFAC may now commence an enforcement action for civil violations of sanctions prohibitions within 10 years of the latest date of the violation if such date was after April 24, 2019.

To match this, OFAC anticipates publishing an interim final rule, with an opportunity to provide comment, extending from five years to 10 years the recordkeeping requirements under 31 C.F.R. § 501.601.

CFIUS Enhances Review of Foreign Transactions

On July 23rd, the Committee on Foreign Investment in the United States (CFIUS), which reviews certain transactions involving foreign investment in the U.S. and certain real estate transactions by foreign persons, released its Annual Report to Congress for calendar year 2023.

The biggest takeaway is that CFIUS issued twice the number of penalties in 2023 as in the rest of its history. In recent years, CFIUS has enhanced its regulations and processes to review a broader scope of transactions and increased efforts to identify transactions that were not submitted but may raise national security considerations. 

Any companies considering foreign mergers or investment should assess whether the transaction would be subject to the jurisdiction of CFIUS and whether a CFIU.S. filing needed.

State Department Proposes Revision to “Defenses Services” under ITAR

On July 29th, the Department of State proposed to revise the definition of defense service and the scope of related controls in the International Traffic in Arms Regulations (ITAR). Comments will be accepted on the proposed revision through September 27, 2024.

Enforcement Actions

OFAC Violations

On July 26th, OFAC announced a $7,452,501 settlement with State Street Bank and Trust Company (State Street), a Massachusetts-based financial institution, on behalf of itself and its subsidiary, Charles River Systems, Inc. (Charles River).

State Street agreed to settle its potential civil liability for 38 apparent violations of OFAC's Ukraine-/Russia-Related sanctions. The apparent violations involved invoices that were redated or reissued by Charles River between 2016 and 2020 for certain customers who were subject to Directive 1 of Executive Order 13662, as well as certain payments outside of the applicable debt tenor accepted by Charles River from these customers.

The settlement amount reflects OFAC's determination that the apparent violations were not voluntarily self-disclosed and were egregious.

Export Violations

• A President of a freight forwarding company was indicted for allegedly smuggling goods from the U.S. into Russia without a license. The Belarus citizen and lawful permanent resident of the U.S. was alleged to have defrauded U.S. government export regulators and smuggled advanced scientific technology to Russian customers. “Freight forwarders play an outsized role in the export of items overseas and, accordingly, are expected to help uphold the law rather than subvert it,” said Assistant Secretary for Export Enforcement Matthew S. Axelrod. 
• A former VP of KanRus Trading Company Inc., pleaded guilty for conspiracy to circumvent U.S. export laws by filing false export forms with the U.S. government and, after Russia’s invasion of Ukraine in February 2022, continuing to sell and export sophisticated and controlled avionics equipment to customers in Russia without the required licenses from the U.S. Department of Commerce.
• An Alabama man pleaded guilty to conspiracy to export U.S.-origin goods to the Islamic Republic of Iran in violation of trade sanctions. Beginning as early as 2015, the individual conspired with two Iranian companies located in Tehran, Iran, to illegally export U.S.-manufactured industrial equipment for use in Iran’s oil, gas and petrochemical industries. He did this through a series of deceptive practices to avoid detection, including using third-party transshipment companies in Turkey and the United Arab Emirates (UAE) and routing payments through UAE banks, as well as lying to shipping companies about the value of his exports to prevent the filing of electronic export information to U.S. authorities.
• Two individuals pleaded guilty to conspiracy to commit export control violations for their roles in a global procurement scheme on behalf of sanctioned Russian companies, including Russian military companies. Some of the electronic components shipped by the defendants were later found in seized Russian weapons platforms and signals intelligence equipment in Ukraine. The individuals purchased the electronic components from U.S. manufacturers and distributors, and then arranged for the items to be shipped from those manufacturers and distributors to various locations in Brooklyn. They then shipped the items to a variety of intermediary front companies located in other countries, including Turkey, Hong Kong, India, China, and the United Arab Emirates, where they were rerouted to Russia.