Mar. 31, 2023
News from Reeves & Dola, LLP
Important Export Controls Updates

During the first quarter of 2023 we have seen U.S. export controls take center stage once again in the U.S. government’s ongoing effort to protect and enhance our national security and foreign policy interests. A series of agency actions, settlement agreements, and joint initiatives have highlighted the increased focus on export controls and sanctions as an important tool when it comes to preventing transfers of critical technologies to our adversaries. The following are some highlights of recent government actions in this arena.
 
I. United States Conventional Arms Transfer Policy

The White House released an updated U.S. Conventional Arms Transfer Policy (CAT Policy) on February 23, 2023. The revised policy outlines the Administration’s priorities when it comes to evaluating proposed defense transfers. Defense sales will continue to be reviewed on a case-by-case basis to determine if the transfer is in the national security and foreign policy interests of the United States. However, new language has been added in a stand-alone section to underscore human rights considerations.
 
Specifically, the new CAT Policy states “…no arms transfer will be authorized where the United States assesses that it is more likely than not that the arms to be transferred will be used by the recipient to commit, facilitate the recipients’ commission of, or to aggravate risks that the recipient will commit: genocide; crimes against humanity; grave breaches of the Geneva Conventions of 1949, including attacks intentionally directed against civilian objects or civilians protected as such; or other serious violations of international humanitarian or human rights law, including serious acts of genderbased violence or serious acts of violence against children.” This is a change from the previous policy requiring actual knowledge at the time of authorization that the transferred arms will be used to commit” the list of abuses.
 
The Administration noted in its published Fact Sheet that the updated policy creates a “holistic approach” to defense transfers, “strengthening U.S. national security by reinforcing respect for human rights, international humanitarian law, democratic governance, and rule of law.” The updated policy also formalizes its application to items on the Commerce Control List such as firearms and other items that have transferred from the U.S. Munitions List. The entirety of the new CAT Policy is available here.
 
II. Disruptive Technology Strike Force Created

On February 16, 2023, the U.S. Departments of Commerce and Justice announced the creation of the “Disruptive Technology Strike Force,” which “will focus on investigating and prosecuting criminal violations of export laws; enhancing administrative enforcement of U.S. export controls; fostering partnerships with the private sector; leveraging international partnerships to coordinate law enforcement actions and disruption strategies; utilizing advanced data analytics and all-source intelligence to develop and build investigations; conducting regular trainings for field offices; and strengthening connectivity between the strike force and the Intelligence Community.”
 
The Strike Force will be co-led by Assistant Attorney General Matthew G. Olsen of DOJ’s National Security Division, and Assistant Secretary for Export Enforcement Matthew Axelrod of the Commerce Department’s Bureau of Industry and Security. The will be supported by officials from designated U.S. Attorneys’ Offices throughout the country, the FBI, and the Department of Homeland Security’s Homeland Security Investigations (HSI). The full Department of Justice press release can be read here.
 
Earlier this month, Deputy Attorney General Lisa Monaco highlighted the Justice Department’s focus on export controls in criminal enforcement cases. Speaking at the American Bar Association's National Institute on White Collar Crime in Miami, Florida, she laid out the National Security Division's plans for restructuring and resource commitments to address the increasing intersection of corporate crime and national security. DOJ plans to add more than 25 new prosecutors, including the National Security Division’s first-ever Chief Counsel for Corporate Enforcement. These new hires will investigate and prosecute sanctions evasion, export control violations, and similar economic crimes. As part of the National Security Division’s new scope, the division will issue joint advisories with the Commerce and Treasury Departments to “inform the private sector about enforcement trends and to convey the department’s expectations as to national security-related compliance.” Deputy AG Monaco's prepared remarks are available here.
 
III. Tri-Seal Compliance Note Issued

On March 3, 2023, the Departments of Commerce, Treasury, and Justice published a joint Compliance Note regarding the “cracking down on third-party intermediaries used to evade Russia-related sanctions and export control.” This Compliance Note is yet another example of how U.S. government agencies are working together to use sanctions and export controls to further the United States’ foreign policy and national security interests. In this note, the agencies provide a new set of “red flags” to assist in identifying when third-party intermediaries may be engaged in activities and efforts to evade U.S. sanctions and export controls. These “red flags” include:

  • Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries involved, particularly sanctioned jurisdictions;

  • A customer’s reluctance to share information about the end use of a product, including reluctance to complete an end-user form;

  • Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration;

  • Declining customary installation, training, or maintenance of the purchased item(s); IP addresses that do not correspond to a customer’s reported location data;

  • Last-minute changes to shipping instructions that appear contrary to customer history or business practices;

  • Payment coming from a third-party country or business not listed on the End-User Statement3 or other applicable end-user form;

  • Use of personal email accounts instead of company email addresses;

  • Operation of complex and/or international businesses using residential addresses or addresses common to multiple closely held corporate entities;

  • Changes to standard letters of engagement that obscure the ultimate customer;

  • Transactions involving a change in shipments or payments that were previously scheduled for Russia or Belarus;

  • Transactions involving entities with little or no web presence; or

  • Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus. Such locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey, and Uzbekistan.

The note also addresses potential civil and criminal enforcement actions that each agency may undertake in the event of a violation of sanctions or export controls. In its own words, “[t]he U.S. government has a variety of tools to crack down on evasion efforts, and the past year has shown that it will not hesitate to pursue criminal prosecutions, administrative enforcement actions, or additional designations where the circumstances so warrant. Businesses of all stripes should act responsibly by implementing rigorous compliance controls, or they or their business partners risk being the targets of regulatory action, administrative enforcement action, or criminal investigation.”
 
IV. 3D Systems Corporation Settlement

On February 27, 2023, the Directorate of Defense Trade Controls Compliance (DTCC) and Bureau of Industry and Security (BIS) published settlements made with 3D Systems Corporation regarding a series of export control violations dating back to 2012, related to the repeated (and at times knowing) export without authorization of ITAR and EAR controlled drawings to entities in a variety of countries, including China, as well as to foreign national employees. Additionally, the U.S. Department of Justice (DOJ) published a civil settlement with the company for violations of the False Claims Act resulting from improperly transmitting export-controlled technical data to China in violation of the export control laws of the United States in connection with certain NASA and DOD contracts. These three settlement agreements resulted in fines totaling around $27 million dollars and the requirement for third party auditing and monitoring for the next 3 years.
 
This case underscores the importance of establishing and maintaining an effective compliance program, including adequate controls within a company’s IT and recordkeeping systems. We encourage you to read both the DDTC Consent Agreement and BIS Order and use the findings to help highlight potential gaps in your own internal compliance programs when it comes to data controls. 

The above alert is for informational purposes only and is not intended to be construed or used as legal advice. Receipt of this alert does not establish an attorney-client relationship.

Questions about this alert may be directed to:

Johanna Reeves: 202-715-9941, jreeves@reevesdola.com
Katherine Heubert: 202-715-9940, kheubert@reevesdola.com
About Reeves & Dola
Reeves & Dola is a Washington, DC law firm that specializes in helping clients navigate the highly regulated and complex world of manufacturing, sales and international trade of defense and commercial products. We have a deep understanding of the Federal regulatory process, and use our expertise in working with a variety of Federal agencies to assist our clients with their transactional and regulatory needs.
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