Insights
A Loophole for E-commerce?
A Loophole for E-commerce? De Minimis Customs Entries Are Getting a Bad Rap Despite Compliance Requirements. Let Us Explain.
Written by T. James Min II and Chelsea Ellis
March 20, 2024
I. Introduction
The growth of e-commerce has been undeniable over the past decade, steadily increasing from $1.3 trillion in retail sales in 2013 to $5.8 trillion in 2023 – a 346% increase. This growth is not only attributed to the ubiquitous platforms, e.g., Amazon’s and Alibaba’s of the world, but also to the emergence of new innovative players who are reshaping the e-commerce industry. Predominantly originating from China, new companies such as Shein, Temu, and TikTok (through its TikTok Shop feature) are tapping into the American penchant for fast fashion and more, while navigating anti-China sentiments. Yet, they share a common regulatory approach: utilizing the U.S. de minimis rule, Section 321(a)(2)(C) of the Tariff Act of 1930, 19 U.S.C. § 1321, (the “De Minimis Rule” or “Section 321”) to benefit from the streamlined customs clearance processes exempt from customs duties.
a. De Minimis Entries
Recent data reported by the Wall Street Journal indicates a significant surge in the use of the De Minimis Rule, particularly by e-commerce platforms such as Temu and Shein. The De Minimis Rule allows for the duty-free and less scrutinized entry of packages valued under $800. So far, in fiscal year 2024, at least 485 million shipments entered the U.S. under this provision, marking a notable increase from years prior – 685 million shipments in all fiscal year 2022. The De Minimis Rule has helped facilitate the rapid growth of e-commerce platforms by allowing them to benefit from duty free treatment and less stringent import procedures for lower value goods.
Companies like Temu and Shein have recently drawn attention from lawmakers and regulators for strategically utilizing Section 321. Critics center on the potential to undermine U.S. economic interests, evade tariffs, and possibly circumvent bans on goods allegedly produced with forced labor. However, criticism of the use of the De Minimis Rule is not limited to these recent Chinese targets of political scrutiny nor was the rule established recently just to accommodate cross border e-commerce.
b. Shein And Temu
Shein, which began as a small online apparel company, has evolved into a major global fast fashion enterprise in just a few short years by leveraging aggressive social media campaigning and an innovative supply chain model to offer a massive clothing inventory at competitive prices. Similarly, Temu, owned by PDD Holdings, has recently entered the e-commerce market and has quickly become a formidable competitor for other platforms – boasting over $16 billion in revenue in 2022. Compared with Shein, Temu, which is more akin to Amazon and AliExpress, focuses not only on fast fashion products but also on an array of affordable home goods, amongst many other items.
c. TikTok: Integrating E-Commerce And Social Media
TikTok has integrated e-commerce into its social media platform by creating a digital marketplace that leverages its vast user base (currently over one billion and counting) and engagement metrics. In September 2023, TikTok opened its TikTok Shop feature in the U.S., which allows TikTok users to click and shop as they consume content. Using its new feature, TikTok aims to bring in $17.5 billion in merchandise volume in 2024.
d. The Anti-China Undercurrent
While Shein, Temu, and TikTok have all taken the e-commerce industry by storm, they have not gone unnoticed by U.S. politicians and regulators. An undercurrent of anti-China sentiments which has gripped U.S. history periodically, has seemingly re-emerged, stirring debates over data privacy, intellectual property rights, and broader geopolitical tensions. This sentiment, reflected in the public discourse and legislative actions, highlights the complex interplay between global e-commerce growth and the geopolitical landscape, underscoring the need to understand the challenges and opportunities presented by the rise of Chinese and other e-commerce platforms in the global market.
II. History Of De Minimis Entries
While the growth of e-commerce has highlighted the De Minimis Rule, it is not a new phenomenon. In fact, it has a long history that is part of the era of encouraging free trade and trade facilitation at the global, regional, and bilateral levels.
a. Statutory
The current De Minimis Rule sets the threshold at $800 per day per person, however, the rule originated long ago in 1938 when the de minimis threshold was set at $5. It was raised to $200 by the Customs Modernization Act in 1994 coinciding with the completion of the WTO Uruguay Round. In 2016, Congress raised the de minimis threshold to $800 through the Trade Facilitation and Trade Enforcement Act. The logic behind the De Minimis Rule is that for low-value goods, the customs procedures are overly burdensome for both the importer and Customs, which outweighs potential benefits to the government of revenue collection. It was also meant to streamline the importation process so that Customs can focus on other higher-risk imports.
b. FTAs
In many of the Free Trade Agreements that the U.S. entered into, a de minimis provision was integral to the Customs Chapters of these bilateral trade agreements. For instance, the U.S-Korea Free Trade Agreement, adopted in 2007, contains a de minimis provision under the Customs Chapter at Article 7.7(g) to provide for duty-free clearance for express shipments valued at $200 or less. Other FTAs include similar provisions.
c. WTO Trade Facilitation
More globally, the World Trade Organization (“WTO”), after failing to muster support for the Doha Round, pivoted to completing a Trade Facilitation Agreement (“TFA”), which entered into force in 2017. The WTO supporters of the TFA argued that the implementation of the TFA, which includes de minimis customs clearance, could reduce trade costs by an average of 14.3% and boost global trade by up to $1 trillion per year, with the most significant gains in the poorest countries. The TFA, in Article 8.2(d), provides global rules for customs clearance, including the provision, where possible by WTO members, of a de minimis rule for expedited shipments.
d. Trade Facilitation And Trade Enforcement Act (Increase To $800)
In 2016, with years of lobbying by business interest groups and with momentum building in support of the WTO TFA, Congress passed the Trade Facilitation and Trade Enforcement Act which included a provision to increase the de minimis threshold to $800. Soon after the passage of the law, however, many interest groups with the political wind beginning to turn against e-commerce giants pressured Customs and Border Protection (“CBP”) and others to question the benefits of the De Minimis Rule. However, because Congress had raised the limit by statute, only Congress could reverse the increase of the threshold. Instead, what resulted from this momentum was greater enforcement of the De Minimis Rule’s conditions by CBP. And now, with the headwind growing against Chinese imports into the U.S., compliance with the conditions of the De Minimis Rule is more important than ever for e-commerce companies, logistics companies, and importers.
III. Compliance Requirements For E-Commerce Companies
With the burgeoning growth of e-commerce, CBP also implemented certain pilot projects to receive more data on Section 321 entries while at the same time making it possible to accommodate the e-commerce flow.
a. Test Pilots
In July 2019, CBP announced a voluntary pilot program to collect certain advanced data related to shipments under Section 321. Under the program, participants transmit certain data elements pertaining to these shipments to CBP prior to arrival. Such data can then be used by CBP to better enforce its regulations as well as study what types of data generally not collected previously may be effective in enforcing customs laws. Separately, CBP rolled out a test entry type called Entry Type 86, which allows for Section 321 entries to be filed via the Automated Broker Interface (“ABI”) that customs brokers normally used for formal entries. Type 86 entries also allow for the filing of imports regulated also by other agencies, such as the FDA or Fish & Wildlife Service (“FWS”), that normally could not be done with a manifest clearance.
b. Privileges
Section 321 affords several privileges that benefit e-commerce platforms, logistics companies, and others. These privileges streamline the import process and provide competitive advantages and duty-free treatment to entities utilizing this rule.
Manifest Clearance
The De Minimis Rule allows for manifest clearance, a streamlined customs procedure that permits the clearance of shipments based on the information provided in the shipping manifest, without the need for submitting customs entry documents for each package. This expedited process reduces administrative burdens and accelerates the delivery of goods to consumers, enhancing the efficiency of e-commerce platforms, customs brokers, and logistics service providers that manage high volumes of international shipments.No Duties
One of the most direct benefits of the De Minimis Rule is the exemption from customs duties for eligible shipments. This exemption reduces the cost for both cross border e-commerce platforms and consumers, enabling competitive pricing and broader market access for a wide range of products. This privilege plays a crucial role in fostering a diverse and dynamic e-commerce ecosystem by lowering the financial barriers to entry for small and medium-sized enterprises.Nominal Consignees/IOR
The De Minimis Rule permits shipments to be addressed to nominal consignees (e.g., carriers, freight forwarders, and express consignment operators), thus allowing them to be the importer of record (“IOR”). Nominal consignees can make customs entries (declarations) on their behalf. In contrast, for formal entries (declarations), U.S. customs law generally allows only a party with a financial interest or legal title to the goods to qualify as an IOR. This flexibility is particularly advantageous for B2C platforms that facilitate direct-to-consumer shipping from international suppliers, simplifying the import process and reducing compliance complexities for individual buyers. Under the test Type 86 Entries, a license customs broker can also serve as the IOR if authorized with a power of attorney by the owner, importer or consignee.
IV. Compliance Requirements/Needs
Section 321 entries offer significant advantages for e-commerce and other imports valued under $800, but they come with specific compliance requirements and considerations. These rules are essential for entities looking to benefit from Section 321 treatment while ensuring adherence to U.S. customs regulations.
a. Discretion Of The CBP Port Director
The application of the De Minimis Rule is subject to the discretion of the CBP Port Director at the point of entry. This means that the Port Director has the authority to deny de minimis status to shipments if there are concerns about compliance with U.S. laws and regulations or if the shipments are suspected of evading duties and taxes. Entities must be prepared for the possibility that their shipments could be subject to additional scrutiny or denied the benefits of the de minimis provision based on the judgment of the CBP officials or if the rules are not followed.
b. One Person/One Day
Currently, Section 321 treatment is available for aggregate shipments collectively valued at or below $800. Under the De Minimis Rule, one person may import multiple shipments on one day so long as the aggregate fair market value of the shipments does not exceed $800. If any single shipment imported that day exceeds the $800 ceiling, then none of the shipments imported that day may be entered under Section 321. This rule applies regardless of the port of arrival. Compliance with this rule requires careful planning and coordination of shipments to ensure that the total value of goods imported by one person does not surpass the set limit within a single day. It is also important that importers do not undervalue shipments to qualify for the De Minimis Rule as it is not only a violation of Section 321, but can also incur penalties for violating customs valuation regulations.
c. IPR Still Enforceable
Intellectual Property Rights (“IPR”) enforcement remains a critical aspect of customs regulation, regardless of if the goods entered the U.S. using the De Minimis Rule. Shipments that violate IPR laws, such as counterfeit goods, are subject to seizure and penalties, even if they fall below the $800 threshold. In Fiscal Year 2023, CBP and Homeland Security Investigations (“HSI”) seized 19,522 shipments containing counterfeit goods, totaling nearly 23 million items, with an estimated genuine value of over $2.41 billion. Additionally, in 2023, ICE-HSI made 434 arrests, secured 327 indictments, and received 206 convictions for IPR-related crimes. CBP alleged that goods from China remained the primary source economy for counterfeit and pirated goods seized, accounting for a total estimated MSRP value of over $1.48 billion. Accordingly, Chinese companies may need to anticipate increased scrutiny of their entries, potentially more so than those from other countries.
A recent seizure by CBP at the Port of Louisville exemplifies the risks associated with the misuse of the De Minimis Rule to introduce illicit goods into the United States. In March 2024, CBP intercepted a shipment valued under the de minimis threshold, ostensibly to benefit from duty-free treatment. The shipments, originating from Hong Kong, contained 35 Richard Mille counterfeit designer watches and was destined for a residence in Puerto Rico. Despite its low declared value, the items were inauthentic and would have had a combined MSRP of over $11.7 million had they been genuine. This incident serves as a stark reminder that the De Minimis Rule does not exempt shipments from compliance with IPR.
d. Other Government Agencies’ Rules Still Enforceable
The De Minimis Rule does not exempt certain imported goods from other agencies’ regulatory authority and requirements, such as for tobacco products, alcohol, and goods subject to import quotas. Enforcement against goods subject to Withhold Release Orders (“WRO”) for forced labor or those subject to the Uyghur Forced Labor Prevention Action (“UFLPA”) would not be exempt just because of the value of the goods. Data transmission requirements for other government agencies, such as FDA or FWS, are still required.
e. Section 301, But Not AD/CVD
While Section 321 entries can be utilized for goods subject to Section 301 tariffs (also known as China tariffs), they cannot be used for goods subject to anti-dumping/countervailing duties. This is an important point because the IOR is legally responsible for AD/CVD duties, but due to the significant financial exposure, it can often lead to litigation by IORs seeking to recoup the AD/CVD duties from other parties involved in the importation, including e-commerce platforms.
f. Ultimate Consignees
An additional compliance requirement for Section 301 imports is the issue of who qualifies as and is listed as the ultimate consignee, which is not always the same as the IOR. This requirement has been a cause of enforcement actions by CBP against e-commerce companies. Customs provided guidance on who can qualify as the ultimate consignee in a Customs Directive that can be complex and fact-based. Generally, the ultimate consignee is the party in the U.S. that the goods were sold to by the overseas shipper. However, if the imported goods have not been sold at the time of importation, the consignee in the U.S. where the goods will be delivered can be listed as the ultimate consignee. In any case, it is important to review the guidance and ensure compliance with it.
V. Conclusion
In the post-Covid world, where online orders and e-commerce have become almost a daily necessity for many, the business opportunities for B2C and B2B sellers and service providers will likely not decrease. The convergence of technological advancements and enhanced logistics capabilities are providing great opportunities for businesses and consumers alike. With the increase of the U.S. de minimis threshold to $800 (which is higher than allowed by most countries) and given Americans’ voracious consumerism, the business opportunities for cross border e-commerce will likely continue to increase. However, given political and regulatory pressures, it is important for e-commerce and logistics service providers to know the rules surrounding Section 321 entries and to implement strong regulatory compliance measures to reduce their business and operational risks.
This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with LMD Trade Law, PLLC. or its affiliates.
The U.S. Government Publishes An Updated List of Critical and Emerging Technologies (CETs): Impact on CFIUS and Export Controls?
Insight by: T. James Min II
March 5, 2024
In February 2024, the U.S. National Science and Technology Council (“NSTC”) and its Fast Track Action Subcommittee on Critical Emerging Technologies updated the previous 2022 Critical and Emerging Technologies (CETs) List. The first update in two years is instructive in identifying the CETs that the U.S. Government is focused on for national security concerns.
The NSTC established the Fast Track Action Subcommittee in 2020 to identify critical and emerging technologies to inform national security-related activities across the U.S. Government. This updated list expands upon the original CET list and the February 2022 update by identifying subfields for each CET.
The updated list identifies 18 CET areas listed below. Though not a strategy document, this updated CET list informs government-wide and agency-specific efforts concerning U.S. technological competitiveness and national security. While the list does not have direct regulatory impact on the Committee on Foreign Investment in the United States (CFIUS) or the Export Administration Regulations (“EAR”), the list is still instructive in what areas of technology CFIUS or BIS may focus on in the future or in current enforcement efforts. For example, we may see more activity by CFIUS in terms of non-notification investigations in these CET areas. We may also see more placement of certain technologies on the below list in future updates to the Commerce Control List.
Regardless, as one contemplates receiving foreign investments in U.S. businesses, the list may serve as a useful reference. The updated 2024 CET List includes these 18 areas:
Advanced Computing
Advanced Engineering Materials
Advanced Gas Turbine Engine Technologies
Advanced and Networked Sensing and Signature Management
Advanced Manufacturing
Artificial Intelligence
Biotechnologies
Clean Energy Generation and Storage
Data Privacy, Data Security, and Cybersecurity Technologies
Directed Energy
Highly Automated, Autonomous, and Uncrewed Systems (UxS), and Robotics
Human-Machine Interfaces
Hypersonics
Integrated Communication and Networking Technologies
Positioning, Navigation, and Timing (PNT) Technologies
Quantum Information and Enabling Technologies
Semiconductors and Microelectronics
Space Technologies and Systems
To generate this updated CET list, it was stated that the Office of Science and Technology Policy (OSTP) facilitated an extensive interagency deliberative process through the National Science and Technology Council (NSTC) and in coordination with the National Security Council (NSC). The responsible NSTC subcommittee included subject matter experts from 18 departments, agencies, and offices in the Executive Office of the President, who identified CET subfields that their organizations determined may be critical to U.S. national security. As such, this updated CET list reflects an interagency consensus.
Each identified CET area includes a set of key subfields that describe its scope in more detail:
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Advanced supercomputing, including for AI applications
Edge computing and devices
Advanced cloud services
High-performance data storage and data centers
Advanced computing architectures
Advanced modeling and simulation
Data processing and analysis techniques
Spatial computing
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Materials by design and material genomics
Materials with novel properties to include substantial improvements to existing properties
Novel and emerging techniques for material property characterization and lifecycle assessment
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Aerospace, maritime, and industrial development and production technologies
Full-authority digital engine control, hot-section manufacturing, and associated technologies
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ItePayloads, sensors, and instruments
Sensor processing and data fusion
Adaptive optics
Remote sensing of the Earth
Geophysical sensing
Signature management
Detection and characterization of pathogens and of chemical, biological, radiological and nuclear weapons and materials
Transportation-sector sensing
Security-sector sensing
Health-sector sensing
Energy-sector sensing
Manufacturing-sector sensing
Building-sector sensing
Environmental-sector sensing
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Advanced additive manufacturing
Advanced manufacturing technologies and techniques including those supporting clean, sustainable, and smart manufacturing, nanomanufacturing, lightweight metal manufacturing, and product and material recovery
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Machine learning
Deep learning
Reinforcement learning
Sensory perception and recognition
AI assurance and assessment techniques
Foundation models
Generative AI systems, multimodal and large language models
Synthetic data approaches for training, tuning, and testing
Planning, reasoning, and decision making
Technologies for improving AI safety, trust, security, and responsible use
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Novel synthetic biology including nucleic acid, genome, epigenome, and protein synthesis and engineering, including design tools
Multi-omics and other biometrology, bioinformatics, computational biology, predictive modeling, and analytical tools for functional phenotypes
Engineering of sub-cellular, multicellular, and multi-scale systems
Cell-free systems and technologies
Engineering of viral and viral delivery systems
Biotic/abiotic interfaces
Biomanufacturing and bioprocessing technologies
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Renewable generation
Renewable and sustainable chemistries, fuels, and feedstocks
Nuclear energy systems
Fusion energy
Energy storage
Electric and hybrid engines
Batteries
Grid integration technologies
Energy-efficiency technologies
Carbon management technologies
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Distributed ledger technologies
Digital assets
Digital payment technologies
Digital identity technologies, biometrics, and associated infrastructure
Communications and network security
Privacy-enhancing technologies
Technologies for data fusion and improving data interoperability, privacy, and security
Distributed confidential computing
Computing supply chain security
Security and privacy technologies in augmented reality/virtual reality
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Lasers
High-power microwaves
Particle beams
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Surface
Air
Maritime
Space
Supporting digital infrastructure, including High Definition (HD) maps
Autonomous command and control
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Augmented reality
Virtual reality
Human-machine teaming
Neurotechnologies
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Propulsion
Aerodynamics and control
Materials, structures, and manufacturing
Detection, tracking, characterization, and defense
Testing
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Radio-frequency (RF) and mixed-signal circuits, antennas, filters, and components
Spectrum management and sensing technologies
Future generation wireless networks
Optical links and fiber technologies
Terrestrial/undersea cables
Satellite-based and stratospheric communications
Delay-tolerant networking
Mesh networks/infrastructure independent communication technologies
Software-defined networking and radios
Modern data exchange techniques
Adaptive network controls
Resilient and adaptive waveforms
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Diversified PNT-enabling technologies for users and systems in airborne, space-based, terrestrial, subterranean, and underwater settings
Interference, jamming, and spoofing detection technologies, algorithms, analytics, and networked monitoring systems
Disruption/denial-resisting and hardening technologies
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Quantum computing
Materials, isotopes, and fabrication techniques for quantum devices
Quantum sensing
Quantum communications and networking
Supporting systems
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Design and electronic design automation tools
Manufacturing process technologies and manufacturing equipment
Beyond complementary metal-oxide-semiconductor (CMOS) technology
Heterogeneous integration and advanced packaging
Specialized/tailored hardware components for artificial intelligence, natural and hostile radiation environments, RF and optical components, high-power devices, and other critical applications
Novel materials for advanced microelectronics
Microelectromechanical systems (MEMS) and Nanoelectromechanical systems (NEMS)
Novel architectures for non-Von Neumann computing
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In-space servicing, assembly, and manufacturing as well as enabling technologies
Technology enablers for cost-effective on-demand, and reusable space launch systems
Technologies that enable access to and use of cislunar space and/or novel orbits
Sensors and data analysis tools for space-based observations
Space propulsion
Advanced space vehicle power generation
Novel space vehicle thermal management
Crewed spaceflight enablers
Resilient and path-diverse space communication systems, networks, and ground stations
Space launch, range, and safety technologies
The sensitivities of foreign investment in the U.S. technology and other sectors do not appear to be dissipating. It will be important for investors, businesses, and legal counsels to continue to be diligent in considering national security concerns in their transactions that deal with critical and emerging technologies.
This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with LMD Trade Law PLLC or its affiliates.
The U.S. Announces New Sanctions and Export Controls on Russia
Following Alexei Navalny’s Death and on the Second Anniversary of the Russia-Ukraine Conflict
Insight by: T. James Min II and Chelsea Ellis
February 23, 2024
On February 23, 2024, the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury, imposed new sanctions on Russia targeting nearly 300 individuals and entities on the SDN list (now totaling over 2,000) and the Bureau of Industry and Security, U.S. Department of Commerce, designated additional 93 entities to the Entity List (which now include over 900 Russia related entities). While sanctions on Russia have been ongoing in some form since 2014, these new designations are symbolically significant in terms of its timing: second anniversary of the Ukraine-Russia military conflict and the recent death of Alexey Navalny. These new U.S. measures also coincide with the U.K. and the EU who also announced new measures this week.
Given that sanctions on Russia are already quite expansive, what is the significance of these new designations of entities and persons who include many non-Russian companies and persons from China, Germany, Serbia, UAE, and elsewhere?
Focus on cutting off Russia’s military industrial complex from funds, technology services, and goods. Many of the new designations to target the Russian military industrial complex include companies in Russia and elsewhere involved with the UAV industry, electronics, software, metals manufacturing, power supply, IT, and logistics. The BIS Entity List designations also include designation of over 50 entities as Military End Users, which has very strict U.S. export control restrictions.
Focus on Russia’s manufacturing base. Many of the new designations include Russian and other companies in the additive manufacturing (3D printing); machine tools, lubricants and industrial chemicals, semiconductor and electronics, industrial automation, optics, navigational instruments, aerospace, etc.
Focus on limiting the Russian financial infrastructure. New measures include many regional banks that are not top banks in Russia as well as venture capital and investment funds. However, OFAC did issue several new General Licenses (General Licenses 88, 89, 90, and 91) authorizing transactions related to the divestment and winding-down of transactions involving certain blocked entities, including new Russian banks that were newly designated.
Focus on third country companies and persons who are working with targeted Russia sectors or entities. New OFAC sanctions designations include companies in China, Serbia, UAE, Kyrgyzstan, Iran, Germany, and Liechtenstein. New Entity List additions include eight companies in the People’s Republic of China, sixteen in Turkiye, four in the United Arab Emirates (UAE), two in the Kyrgyz Republic, and one each in India and South Korea who will now be cut off from U.S. origin goods, software and technologies.
Designation of additional vessels and their owners alleged to have violated the Russian oil price cap policy, although General Licenses related to these blocked parties were also issued.
What do all these new measures mean from a practical standpoint?
The new measures of adding hundreds of new SDNs and over 90 on the Entity List widens the preexisting restrictions on Russia but it did not create any new material change to the Russia sanctions or export controls regime. In fact, so many companies have de-risked from Russia that in many cases, these designations are symbolic in nature.
However, it does mean that U.S. persons and now more than ever, non-US companies, need to continue to conduct effective due diligence to ensure that they are not transacting with entities outside of Russia that may be owned at least 50% or more by sanctioned persons or entities (which by operation of law means they are also sanctioned).
Persons exporting goods and technology to third countries other than Russia need to have strong and robust export control compliance programs and measures to ensure that their goods and technologies will not be diverted to Russia for use in sanctioned sectors or by sanctioned entities.
Robust due diligence, KYC, end use statements, etc. will continue to be important but there is no one single solution that will be fail safe.
Even if you are not a U.S. person or business, now it is clear that non-US persons and entities are exposed to secondary sanctions if transacting with targeted Russian sectors and entities.
The highest risk area appears to those related to Russia’s military-industrial base.
OFAC has also published in the new SDN designations that many of the new SDNs are explicitly subject to U.S. secondary sanctions.
Non-U.S. companies need to adopt compliance measures that will protect it from U.S. secondary sanctions risks as well as not violating U.S. export control laws. This means that non-US companies need to incorporate U.S. standard compliance measures when it comes to Russia sanctions, export controls, and the oil price cap policy.
While these new designations do not materially or substantively alter the preexisting Russia sanctions and export controls regimes it does widen the net of persons and entities that are restricted for U.S. persons and now even for non-US persons. Companies will need to continue to strengthen their due diligence, KYC and compliance measures to mitigate their risks in international business so that their products and services do not unintentionally end up in the sanctions targeted sectors of the Russian economy as well.
Law360 have covered this alert. Read the Law360 article here.
The U.S. Broadens and Clarifies Sanctions Regulations for Humanitarian Work in North Korea
Insight by: T. James Min II
February 16, 2024
On February 15, 2024, the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury published revisions to the North Korea Sanctions Regulations (“NKSR”, 31 CFR Part 510), which were long overdue to assist humanitarian organizations, non-governmental organizations (“NGOs”) and news media to utilize the appropriate sanctions exemptions. Before North Korea closed its borders in response to the Covid-19 pandemic, many NGO’s expressed frustration at the regulatory ambiguity as well as the administrative cost of complying with the NKSR.
The new revisions, in particular, to 31 CFR §. 510.512, provide greater clarity and maneuverability for humanitarian groups and other NGOs. So, what are the major changes to NKSR from the previous version? Below are the major highlights:
Unlike the previous 31 CFR 510.512 which only authorized the export of services by the NGOs, the new section authorizes “all transactions…that are ordinarily incident and necessary to the activities” listed in the NGO section of the NKSR.
The NGO activities authorized under the NKSR were enlarged to now include educational activities at the primary and secondary schools as long as they do not involve math, science, technology, engineering, and computer programming. Thus, arguably, certain medical, business or English training may be authorized.
The NGO activities authorized under the NKSR now includes “activities to support disarmament, demobilization, and reintegration (DDR) programs and peacebuilding, conflict prevention, and conflict resolution programs.” These are what many know as Track 2 engagement between North Koreans and U.S. scholars and policy analysts. One no longer needs to get a license from OFAC for such programs as long as the reporting requirements discussed later and any other legal requirements are fulfilled.
Previously, any partnership or partnership agreement with the Government of North Korea, the Korean Workers Party or instrumentalities thereof required NGOs to obtain a specific license from OFAC. After years of complaints by the NGO community, it appears OFAC has narrowed this requirement by only prohibiting partnerships with any military, intelligence or law enforcement entities, although partnership with such entities is also authorized to the extent necessary to export or import items to or from North Korea that are licensed or authorized under the NKSR or EAR. So now, partnership with, for example, the Ministry of Public Health would not require an OFAC license to dispense medical aid.
Another significant change is that unlike the previous NKSR, U.S. NGOs can procure beyond just food and medicine in third countries to export to North Korea. It now permits NGOs to procure agricultural commodities, medicine, medical devices and spare parts that would be classifiable as EAR99 (in other words, not dual-use goods) and not a luxury good. In the past only food and medicine could be purchased in third countries and sent to North Korea without an OFAC license, but now the categories are broader. Unlike the past NKSR, OFAC also defined agricultural commodities, medicine, medical devices and spare parts in the NKSR.
While NKSR is broader and clearer in its authorizations, it does add a new reporting mechanism that shifts some regulatory oversight to the U.S. State Department. Any NGO relying on the NGO regulatory authorizations must submit a report to the State Department at least 30 days prior to the activity by emailing a copy of the UN Security Council (“UNSC”) 1718 Committee exemption or why the activity does not fall under the UNSC sanctions restrictions. If the UN exemption is pending or is not needed, additional information must be provided to the State Department. The State Department will have 2 weeks to notify a NGO that 31 CFR 510.512(a) authorization for NGOs does not apply and thus cannot proceed with the activity.
Lastly, the new NKSR adds a general license for journalistic activities which exist in other U.S. sanctions programs such as for Cuba, Syria, or Russia.
With these welcomed changes, what are the key takeaways for NGOs and others active with North Korea?
NGOs can now procure from a broader list of non-US origin commodities in third countries that fall within the definition of agricultural commodities, medicine, medical devices and spare parts to be shipped to North Korea without needing an OFAC license. However, NGOs will need to ensure that the items fall within those definitions and would be classifiable as EAR99 if U.S. origin. Beyond those commodities, an OFAC license would still be required. Furthermore, just because OFAC exempts them does not mean that you do not have to obtain the UNSC 1718 Committee Humanitarian Exemption for items such as machinery that may also be a medical device subject to UNSC sanctions or a water drilling machine made of steel.
NGOs no longer need an OFAC license to partner with the Government of North Korea or the Korean Workers Party to conduct humanitarian activities unless they are part of the military, intelligence or law enforcement entities. Even with those entities, partnering with them only for exporting or importing items that are authorized by the regulations or licenses do not require an OFAC license. This still avoids OFAC providing a regulatory definition of a “partnership” in the context of NKSR, but practically reduces the need for such a definition by the NGOs.
Generally, NGOs also no longer need an OFAC license to hold Track 2 meetings with North Koreans on authorized topics such as DDR as long as other conditions are met, such as reporting to the State Department at least 30 days prior.
NKSR exemption for NGOs now authorizes more than just the export of services, but includes all transactions ordinarily incident and necessary to the authorized NGO activities. This presumably could include transacting with Air Koryo which is a SDN to get to Pyongyang, which was not clear in the past.
Luxury goods ban and the need to obtain BIS licenses for U.S. origin goods (other than for food and medicine) still apply.
While the new regulatory revisions appear to lock in development projects as authorized (and not just for basic human needs), it is unclear what statutory authority the State Department has in interpreting OFAC regulations as it relates to whether an NGO’s activity qualifies for the 31 CFR 510.512(b) list of activities in the reporting process. Hopefully, objections will occur only in blatant cases and it will confer with OFAC. Regardless, it raises interesting legal questions and gives the State Department a more prominent role in the sanctions compliance process.
The restriction on the use of U.S. passports to travel to North Korea and the need to obtain a Special Validated Passport (SVP) for humanitarian assistance activities still remain.
De-risking by financial institutions, logistics providers, and other service providers will probably not be impacted by these changes because commercial realities often override regulatory authorizations.
In conclusion, these changes to the NKSR are helpful for NGOs to be able to carry out their activities in or with North Korea. It provides more flexibility, greater clarity, and a broader scope of authorized activities. However, there is now more reporting requirements and submission of information to the U.S. Government for NGO activities. News agencies also will not need to obtain specific licenses from OFAC. Better late than never, but we will have to see the practical impact or benefits of these changes given North Korea’s pivot away from the U.S. humanitarian community in recent years and with its continued border restrictions.
This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with LMD Trade Law PLLC or its affiliates.