Transactions that cross international borders demand that businesses increase their due diligence of national security issues. The current U.S. national security strategy promotes the use of economic tools against geopolitical adversaries, elevating the importance of national security concerns in international trade and investment review processes.
Sanctions Proliferate in Asia and the Middle East
Imposing new economic sanctions has been a key element of the Trump administration’s actions in response to geopolitical rivalry with China and conflicts in the Middle East.
Chinese technology companies became potential targets of sanctions under an Executive Order issued on May 15. It declared a national emergency over the exploitation of vulnerabilities in information and communications technology and services by foreign adversaries and gave the Secretary of Commerce authority to determine when import restrictions are required. “Foreign adversaries” went unnamed but clearly primarily meant China, and “sanction” appeared nowhere but describes the authorized import restrictions.
Iran sanctions have expanded to additional industries and financial institutions, with new sanctions against Iran’s iron, steel, aluminum and copper industries, and its central bank and sovereign wealth fund. These new sanctions broaden the range of industries and transactions requiring scrutiny for potential Iran sanctions issues.
The short-lived sanctions against Turkey in October showed the Trump administration’s eagerness to announce sanctions but also its unsteadiness in applying them. Sanctions against Turkish government ministries and officials announced on Oct. 14 lasted just over a week before their removal on Oct. 23. Accompanied by the tweeted threat to “totally destroy and obliterate the Economy of Turkey”, this use of sanctions may signal a more unpredictable future for them.
Anti-Money Laundering and Sanctions Enforcement Actions
U.S. and European investigations of AML compliance failures may ultimately result in monetary penalties against Danske Bank, Swedbank, and their correspondent banks. Money laundering from Russia and other former Soviet states that passed through Baltic branches of Danske Bank and Swedbank, which came to light between 2017 and 2019, may lead to findings of AML regulatory compliance failures and the imposition of large monetary penalties on them and their correspondent banks that moved the funds through the international financial system.
Sanctions enforcement, which heavily penalized European banks for handling transactions that violated sanctions against Iran in 2009-2016, may penalize Chinese banks and their correspondents in 2020 and beyond. Treasury has designated Chinese companies and their executives for continuing imports of oil from Iran , and reports that three leading Chinese banks are part of an FBI investigation into North Korea sanctions violations in Hong Kong raises the possibility of enforcement action against those institutions.
Extensive proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)—expanding the reach of the Committee on Foreign Investment in the United States—are due to become effective no later than Feb. 13, 2020. Increasing news coverage of CFIUS developments, including greater attention being drawn to individual deals reportedly being reviewed by CFIUS, have been coupled with buzz in the legal community about law firms creating and expanding CFIUS practice groups. Legal practitioners and their clients are still trying to interpret the full impact of a modernized CFIUS on cross-border deal-making and the extent of questions left underdetermined by legislation and proposed regulations. For instance, which countries will be “white listed” as “excepted foreign states”? And how will the process leading up to a super-majority vote to place a country on the list by CFIUS member agencies be run?
The U.S. Department of the Treasury’s FAQs on the proposed regulations state that “CFIUS continues to evaluate the pilot program on critical technologies, and the Department of the Treasury welcomes comments on the retention of the mandatory declarations for certain transactions involving critical technologies.”
Separate proposed rules for real estate transactions—a key expansion in jurisdiction for FIRRMA—have spurred a detailed seven-page comment by the Real Estate Roundtable’s board of directors, which includes Citigroup’s Vice Chairman and Global Head of Real Estate and the Abu Dhabi Investment Authority’s Global Head of Real Estate. And an International Air Transport Association (IATA) comment raises concern that there may be a conflict between proposed real estate rules and existing international treaties regarding airport facility leasing. Will there be any amendments in response to comments received?
Recent areas of interest to U.S. lawmakers include foreign investment in the food supply (e.g., by Brazillian meat producer JBS SA) and censorship of content “in line with China’s communist government directives,” with Bytedance Inc.’s TikTok receiving much attention. Subsequent to calls for scrutiny by lawmakers, CFIUS has reportedly begun a review of TikTok’s acquisition of Musical.ly as of Nov. 1, 2019.
The Commerce Department undertook major actions in 2019 to restrict the export to China of items subject to the Export Administration Regulations (EAR), for the purpose of protecting U.S. national security and foreign policy interests.
Commerce’s Bureau of Industry and Security (BIS) put Huawei on the Entity List, which has the effect of prohibiting exports to them of U.S. technology and other items subject to the EAR. BIS cited activities including Iran sanctions violations on May 15, the same day as the communications technology-based Executive Order. BIS added 28 Chinese governmental and business organizations to the Entity List on October 7, for involvement in human rights violations against Uighurs and others minorities in the country’s Xinjiang region. More additions to the Entity List are likely in 2020.
Follow the Trade and Financial Networks
These U.S. actions, directed toward specific countries and companies initially, are likely to be multinational in their ultimate effects. AML and sanctions enforcement actions have a long history of punishing banks and other businesses for trade and financial transactions occurring outside their home jurisdictions. Diversion of trade through Vietnam and other countries in Southeast Asia to hide the Chinese origins of goods became an issue in the U.S.-China trade war in the summer of 2019, and the diversion of imports and exports involving national security issues is likely to be an issue as well.
Businesses involved in cross-border transactions must exercise appropriate due diligence toward their trade and financial networks to avoid problems with national security issues applying to their lines of business.
Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.