A number of significant new U.S. laws, regulatory changes, and government guidance documents affecting international trade compliance programs have been issued in recent months. If your organization’s import, export, and sanctions compliance programs have not been reviewed and updated in light of these changes, it’s time for a tune-up. A sampling of the new legal developments includes:
- Forced Labor and Modern Slavery Laws in the U.S. and many foreign countries, including the UK, France, Australia, and the Netherlands, among many others, that particularly impact U.S. importers;
- Publication a new denied parties list, the Military End User (MEU) List, by the Bureau of Industry and Security (BIS);
- The Uyghur Human Rights Policy Act of 2020 that impacts, in particular, U.S. companies sourcing from and selling to China; and
- Numerous other legal changes impacting trade and dealings with China, Hong Kong, Turkey, Russia, Sudan, Venezuela and more.
In addition to the new compliance areas and legal changes, the standards today’s compliance programs are expected to meet have evolved in recent months and years. There is typically not a specific statutory requirement to have a certain type of compliance program in place with certain notable exceptions such as those that apply to U.S. government suppliers. Nevertheless, governmental expectations and norms have solidified in recent years to a point where companies face greater risk of exposure to criminal and civil penalties, and to brand and reputational harm, by not having mature compliance programs that meet certain threshold standards or expectations and that have been operationalized in the organization. A few of the more recent governmental guidance and advisory documents relevant to effective international trade compliance programs include:
- July 1, 2020 Xinjiang Supply Chain Business Advisory, Risks and Considerations for Businesses with Supply Chain Exposure to Entities Engaged in Forced Labor and other Human Rights Abuses in Xinjiang published jointly by OFAC, the U.S. Department of State, the U.S. Department of Commerce, and the Department of Homeland Security;
- S. Department of Justice (DOJ) Guidelines on Evaluation of Corporate Compliance Programs updated in June 2020;
- May 14, 2020 Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities, Guidance to Address Illicit Shipping and Sanctions Evasion Practices published jointly by OFAC, the U.S. Department of State, and the Coast Guard;
- Sanctions compliance programs guidance published for the first time by the Office of Foreign Assets Control (OFAC) in May 2019;
- July 23, 2018 North Korea Sanctions & Enforcement Actions Advisory, Risks for Businesses with Supply Chain Links to North Korea published jointly by OFAC, the U.S. Department of State, and the Department of Homeland Security; and
- Forced Labor compliance guidance added to the September 2017S. Customs and Border Protection (CBP) Informed Compliance publication on the duty to exercise Reasonable Care in import transactions, and many other CBP guidance documents on effectively managing supply chains and value chains to ensure compliance with forced labor laws.
Compliance with forced labor and modern slavery laws has emerged as an important new sub-topic within the area of international trade compliance. These new laws are often viewed as part of Corporate Social Responsibility (CSR) initiatives that may be handled outside international trade compliance departments but organizations need to incorporate these new requirements and restrictions into their import, sanctions, and export compliance programs.
The need to update sanctions compliance programs to address this issue is illustrated by a recent OFAC enforcement action involving Oakland, California-based e.l.f. Cosmetics, Inc. (“ELF”). The settlement illustrates the importance of supply chain due diligence and the risk of forced labor with links to North Korea, when sourcing from China and elsewhere outside of North Korea. ELF sourced false eyelash kits from two Chinese suppliers. ELF’s sanctions compliance program failed to detect that the kits contained materials sourced by these suppliers from North Korea. OFAC stated that the company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported and failed to discover that approximately 80 percent of the false eyelash kits supplied by two of ELF’s China-based suppliers contained materials from North Korea. This case highlights the necessity for U.S.-based companies to implement supply chain audits and other efforts to verify the country of origin of goods and services used in their products.
Several additional restrictions involving China have been imposed in recent months due to heighted tensions between the U.S. and China. In April 2020, BIS expanded restrictions on exports, reexports, and in-country transfers of certain items to China, Russia, or Venezuela where the exporter, reexporter, or transferor has “knowledge” that the item is intended entirely or in part for a “military end use” or a “military end user” in China, Russia, or Venezuela. In August 2020, BIS added several Chinese companies to its Entity List for their role in helping the Chinese military construct and militarize the internationally condemned artificial islands in the South China Sea. In addition, the China National Offshore Oil Corporation (CNOOC), along with several other Chinese entities, was added to the Entity List in January 2021. Compliance programs need to be updated to reflect these significant changes.
In addition to the many changes in U.S. import, export, and sanctions laws and regulations, U.S. Government guidelines on recommendations for corporate international compliance programs have either been published for the first time or have changed or been updated in recent months. If your organization has not yet vetted its compliance program against the new DOJ Guidelines on Evaluation of Corporate Compliance Programs updated in June 2020, this should be done. These Guidelines will guide prosecutors in the event of any potential criminal case and the existence of a robust compliance program can substantially mitigate the ultimate penalties assessed and harm suffered due to a breach.
Other existing and recent Government guidelines should also be reviewed to determine if your organization’s compliance program meets the standards and expectations that regulators will use in civil proceedings. When OFAC published its Framework for OFAC Compliance Commitments in May 2019, this provided, for the first time, a roadmap for organizations as to OFAC’s expectations. It is a valuable resource and any organization that is subject to OFAC regulations should review its sanctions compliance program against the guidance and information contained in this document.
Finally, OFAC and other U.S. government agencies have produced a trove of new “Advisories” that may place increasing compliance and vetting obligations on U.S.-based companies. It is important to be aware of the updated governmental guidelines, recommendations and advisories to benchmark your organization’s international compliance program against these published standards and expectations.
We regularly advise and assist organizations with evaluating and making improvements to their export, import, and sanctions compliance programs. Please contact us for more information.
For more information on how these could impact your business, contact:
- Martin Lutz, Partner (email@example.com, 512-495-6024),
- Jamie Joiner, Special Counsel (firstname.lastname@example.org, 713-615-8530),
- Lindsey Roskopf, Partner (email@example.com, 713-615-8534),
- Justin Cawley, Senior Counsel (firstname.lastname@example.org, 202-812-2644), or
- Another member of the McGinnis Lochridge International Trade and Transactions Practice Group