U.S. National Security Focus Drives Enforcement Actions and International Cooperation
Driven by shared attention toward Russia and China, U.S. federal agencies are increasingly looking to coordinate with counterparts in countries the United States views as its allies and partners on national security priorities. An emerging nexus between economic, technological, and security policy, in addition to human rights concerns, has led to a patchwork of mutually reinforcing sanctions, export controls, and anti-corruption regimes. This recent multilateral cooperation could provide a roadmap for future coordinated action and coalition-based responses to other major geopolitical developments.
Interagency and Multilateral Coordination
Russia’s war in Ukraine led to unprecedented multilateral action to cut off Russian oligarchs, allies of the regime, and third-country facilitators from global markets and prevent Russia from acquiring sensitive dual-use technologies and other weapons. As an October 2022 joint U.S. interagency alert indicates, the United States worked swiftly with its allies and partners to impose costs on the Russian regime through economic sanctions and export controls. It has continued to do so in recent months, and plans to implement a joint price cap on Russian oil beginning December 5 along with a coalition of countries that includes the G7, the EU, and Australia.
Interagency Activity: The need to address issues that cut across traditional distinctions between economics, technology, and national security has led to a new level of interagency coordination within the U.S. federal government. A recent parallel action by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network finding violations of sanctions programs and anti-money laundering laws by a cryptocurrency platform is one such example. In addition, OFAC has been closely coordinating with the Department of State in targeting networks supporting Russia’s activities in Ukraine.
Multilateral Efforts: Recent developments suggest that such multilateral coordination will not be limited to the war in Ukraine. OFAC recently announced that it intends to coordinate with the UK’s Office of Financial Sanctions Implementation on sanctions policy, possibly even through the creation of joint products or regulatory guidance. The Department of Commerce’s Bureau of Industry and Security (“BIS”) also recently met with its South Korean counterpart to launch a dual-use export controls working group to advance cooperation on export controls, mirroring an existing bilateral group within the U.S.-EU Trade & Technology Council framework.
Human Rights in Focus
In addition to furthering traditional national security priorities, the U.S. government has increasingly turned to trade sanctions to address human rights concerns, particularly in relation to allegations of widespread forced labor in certain countries or regions. Although the Treasury Department has previously employed financial sanctions to target human rights offenders under the Global Magnitsky Act of 2016, the United States is now utilizing import and export restrictions for the same purpose and some U.S. allies appear to be following suit.
Supply Chains: U.S. agencies have increasingly come under pressure from the Congress to address the alleged human rights abuses in China’s Xinjiang-Uyghur Autonomous Region (“XUAR”). In October 2019, BIS for the first time added several Chinese entities to its Entity List—which subjects certain exports to listed entities to license requirements—for their involvement in alleged human rights abuses in XUAR and has continued to do so in the following years.1
In terms of import restrictions, President Biden signed the Uyghur Forced Labor Protection Act (“UFLPA”) into law in December 2021. The law builds upon the existing mandate of the U.S. Customs and Border Protection (“CBP”) agency, under the Tariff Act of 1930, to bar the importation into the United States of goods allegedly using forced labor, and establishes a rebuttable presumption that goods mined, produced, or manufactured wholly or in part in XUAR, or by certain listed entities, were made using forced labor and are thus barred from entering the United States. Importers must now meet a high evidentiary burden to successfully overcome this presumption. Even prior to passage of the UFLPA, the CBP starting in 2020 had significantly stepped up enforcement against imported goods allegedly made using forced labor, issuing a number of Withhold Release Orders targeting goods and industries with supply chains linked to the XUAR. U.S. officials have also engaged with EU and Canadian counterparts to discuss the implementation of similar measures in their jurisdictions, with the European Commission proposing such a measure in September of this year.
The Tech-Security Nexus
U.S. regulators have increasingly viewed national security priorities through the lens of technology and, as a result, have increasingly coordinated multilateral polices with a tech-oriented focus. Export controls, which have historically been employed to prevent the transfer of dual-use technologies with military applications, are now focused on safeguarding a wider range of critical technologies, including semiconductors and advanced computing. In addition, the U.S. Congress has introduced a bill that could result in the creation of an outbound investment regime that would prevent U.S. persons from investing in certain sectors of identified “countries of concern.”
Export Controls: In October 2022, BIS published a sweeping set of export controls targeting China’s semiconductor and advanced computing industries. The new rule significantly expands the jurisdiction of the Export Administration Regulations to cover both U.S.- and non-U.S.-origin products that are produced using certain U.S. technology or software. BIS officials have cited China’s “military-civil fusion development strategy” and emphasized the national security goals of this rule, which reflects the emergent nexus between technology and security policy. BIS is also reportedly working with counterparts to have similar export controls implemented on a multilateral basis.
Investment Controls: In addition to preventing the export of technologies that it views as having the potential to undermine U.S. national interests, the United States has considered the creation of a new outbound investment regime that would prohibit investment by U.S. persons in certain industries abroad. First introduced in the Senate in 2021, the bipartisan bill would establish a new interagency committee to review outbound investments that pose an “unacceptable risk to national critical capabilities,” namely in high-technology sectors. The Biden Administration has also signaled its support for such an outbound review mechanism, which would complement the work of the existing inbound investment regime in the Committee on Foreign Investment in the United States (“CFIUS”). This ‘reverse CFIUS’ proposal was notably omitted from the version of the legislation that was ultimately passed; a number of former government officials criticized its uncertain scope and mechanics, and there were also objections from the business community. For the proposal to take effect, new legislation will have to be reintroduced in 2023 by the next U.S. Congress. The European Commission recently issued a communication indicating its own efforts at exploring “outbound strategic investments controls” with Member States and international partners, demonstrating how this could be another potential area of legal and policy coordination.
Looking Ahead: New Congress Brings Heightened Scrutiny on China
The newly elected U.S. Congress will likely bring heightened scrutiny of China through congressional investigations and oversight. Congressional leadership has already signaled that it expects robust enforcement from BIS on export controls related to China, and representatives in the House of Representatives have also introduced a bill that would transfer export control authorities from BIS to the Department of Defense. Certain members also have plans to create a select committee to address economic and national security issues specifically related to China.
Alignment on a more aggressive China policy may be ripe for bipartisan consensus in the upcoming Congress. Leadership from both parties in the Senate have already called on the House of Representatives to provide funding for more robust enforcement of UFLPA. The Biden Administration also appears to be in support of certain bipartisan legislative proposals, including the ‘reverse CFIUS’ mechanism. Time will tell whether this results in more coordinated multilateral action or more of a ‘go it alone’ approach in U.S. China policy.
Going forward, multinational financial institutions and corporate entities will face a complex patchwork of regulatory regimes focused on national security issues. Multi-jurisdictional analysis of transactions will be increasingly necessary to account for the convergence in policy priorities among the various regulators. Compliance programs should also anticipate the implications of shared enforcement priorities and new regulatory frameworks across different jurisdictions.
