On December 9, 2024, the U.S. District Court for the Eastern District of Arkansas (the Court) issued a preliminary injunction enjoining Arkansas’s enforcement of Acts 636 and 174 (the Acts), which impose certain restrictions on foreign ownership of land and digital asset mining businesses in Arkansas. The Court’s decision addresses concerns a crypto mining company (the Company) raised about the Acts’ constitutionality and their preemption by other federal regulations.

We provide an overview of the decision below:

  • Arkansas prohibits certain foreign entities and individuals from owning or acquiring interests in land or digital asset mining businesses under Acts 636 and 174, respectively. The Acts target “prohibited foreign parties,” including entities and individuals from certain countries listed in the International Traffic in Arms Regulations (ITAR) and those owned or controlled by such parties.
  • The Company is owned by a naturalized U.S. citizen from China and has digital asset or crypto mining operations in Arkansas. China is currently a country listed in the ITAR and subject to the Acts’ restrictions.
  • In December 2023, the Arkansas Governor’s Office directed the Arkansas attorney general to investigate the Company and another entity that may have had significant ties to China for violations of Act 636.
  • In response, the Company filed suit challenging the investigation and potential enforcement of the Acts on federal preemption grounds. The Company asserted that the Acts conflicted with federal regulations governing foreign investment – specifically, the Committee on Foreign Investment in the United States, as statutorily codified by the Foreign Investment Risk Review Modernization Act, and the ITAR.
  • The Court held that the Company was likely to succeed on the merits of its claims because the Acts (1) clearly conflict with the federal government’s cautious, transaction-specific approach to foreign investment, (2) use broader and inconsistent definitions of foreign ownership, and (3) intrude on foreign affairs, which should be exclusively within the federal government’s domain.
  • The Court also determined that the Company would suffer irreparable harm in the absence of a preliminary injunction because the ongoing investigation and potential enforcement actions were causing significant damage to the Company’s reputation and goodwill, which could not be adequately compensated through monetary damages.

Approximately half of U.S. states currently have laws restricting foreign ownership of land, and many others are seeking to enact similar laws following broader federal and state trends to regulate foreign ownership of U.S. real estate. The Court’s decision to halt the Acts’ enforcement may have significant implications by setting a precedent for others to bring constitutional challenges to other state or local foreign ownership laws. All investors and businesses should be vigilant in conducting thorough due diligence on proposed transactions to ensure compliance with the expanding and changing regulatory landscape.

On December 2, the Bureau of Industry and Security (BIS) announced two companion rules to impede China’s ability to procure and produce advanced-node semiconductors that can be used in advanced weapons systems, artificial intelligence (AI), and advanced computing.

In response, China announced that it will in principle ban exports of gallium, germanium, antimony, and superhard materials to the United States. China also plans to conduct stricter reviews of graphite exports to the U.S. and ban the export of dual-use items for U.S. military end uses.

BIS’s first rule will add 140 entities to the Entity List. These additions primarily target entities involved in advanced-node integrated circuit and semiconductor manufacturing. The majority of the additions are in China.

The second rule makes the following changes to Export Administration Regulations (EAR):

  • Adds a new semiconductor manufacturing equipment (SME) foreign direct product (FDP) rule that will expand the EAR’s jurisdiction to certain foreign-produced commodities if there is knowledge that the commodity is destined to Macau or a destination in Country Group D:5, which includes China.[1]
  • Adds a new Footnote 5 designation to the Entity List, which imposes license requirements on foreign-produced commodities to or within any destination or to any end user or party when any of the following conditions are met:
    • Exports from abroad or reexports of commodities specified in ECCN 3B993 by an entity whose ultimate parent is headquartered in Macau or a destination in Country Group D:5.
    • Exports from abroad or reexports of items specified in ECCN 3B993 from countries in Country Group A:5[2] that are not subject to equivalent controls by the relevant country.
    • Exports from abroad or reexports of certain Category 3 commodities from any country not listed in Country Group A:5.
    • Certain transfers (in-country) involving Category 3 commodities.
  • Adds new controls on advanced memory chips—known as high bandwidth memory (HBM)—used in advanced AI and supercomputing.
  • Revises certain Category 3 ECCNs.
  • Adds License Exception Restricted Fabrication Facility (RFF) that will allow certain items, including SME, to be exported, reexported or transferred (in-country) to certain fabrication facilities on the Entity List that are not currently producing advanced node integrated circuits. The Entity List entry for eligible fabrication facilities will specifically reference the section of the EAR that contains License Exception RFF (Section 740.226).
  • Adds License Exception HBM to authorize the export, reexport, or transfer (in-country) of some HBM items affected by the new controls. License Exception HBM is limited to circumstances where:
    • The export, reexport, or transfer (in-country) is completed by and to packaging sites owned or operated by U.S.- or allied-headquartered companies; and
    • The U.S.- or allied-headquartered company carefully tracks the HBM items sent and returned to that site and either resolves any discrepancies or reports them to BIS.
  • Revises Section 734.19 (transfer of access information) to clarify that software keys (i.e., keys that allows users to use software or hardware or renew existing licenses) are classified and controlled under the same ECCNs as the corresponding software or hardware to which they provide access.
  • Adds eight new “red flags” to the BIS Know Your Customer guidance in Supplement No. 3 to Part 732, including:
    • Technology mismatch at non-advanced fabrication facilities: A non-advanced fabrication facility orders equipment designed for advanced-node integrated circuit production that it would not need given its technology level.
    • Uncertain ultimate owner or user: An exporter, reexporter, or transferor receives an order for which the ultimate owner or user of the items is uncertain, such as a request to ship equipment for developing or producing integrated circuits to a distributor without a manufacturing operation, when the item is ordinarily customized for the end user or installed by the supplier.
    • Uncertain license history: An exporter, reexporter, or transferor receives an order or request related to an item that would require an export, reexport, or in-country transfer license from BIS or another jurisdiction that maintains controls on the item, and there is uncertainty about the license history for the item.
    • Altered items for advanced end use: An exporter, reexporter, or transferor receives a request to service, install, upgrade, or otherwise maintain an item that was altered after export, reexport, or transfer by a third party for a more advanced end use that would normally require a license for the destination.
    • Overlapping management with Entity List entities: An exporter, reexporter, or transferor receives a request for an item or service from a new customer. The new customer’s senior management or technical leadership (e.g., process engineers who are team leaders or otherwise leading development or production activities) overlaps with an entity on the Entity List, particularly if the supplier previously provided the same or substantially similar item or service to the Entity List entity, most likely prior to the listed entity being added to the Entity List.
    • Request for items designed for Entity List entities: An exporter, reexporter, or transferor receives a request from a new customer for an item or service that was designed or modified for an existing or former customer that is now designated on the Entity List.
    • Integrated circuits in certain foreign-produced items: For purposes of analyzing the scope of the Entity List FDP rule for Footnote 5 entities and the SME FDP rule, if a foreign-produced item is described in the relevant Category 3B ECCN and contains at least one integrated circuit, then there is a red flag that the foreign-produced item meets the product scope of the applicable FDP rule. The exporter, reexporter, or transferor must resolve this red flag before proceeding.
    • Physically connected facilities: The end user is a facility that is physically connected to a facility where production of advanced-node integrated circuits occurs. Unless the red flag is resolved through an Advisory Opinion, the two buildings are treated as a single “facility” for purposes of Section 744.23 of the EAR.

BIS is accepting public comments on these changes to the EAR. Comments must be received by January 31, 2025.

[1] Country Group D:5 consists of countries subject to a U.S. arms embargo: Afghanistan, Belarus, Burma, Cambodia, the Central African Republic, China, Cuba, the Democratic Republic of Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Libya, Nicaragua, North Korea, the Republic of South Sudan, Russia, Somalia, Sudan, Syria, Venezuela, and Zimbabwe.

[2] Country Group A:5 includes Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden Switzerland, Turkey, and the United Kingdom.

On November 1, 2024, the U.S. Department of the Treasury issued a final rule to expand the Committee on Foreign Investment in the United States’ (CFIUS) jurisdiction over certain transactions by foreign persons involving real estate in the United States (Final Rule). The Final Rule introduces significant changes, including:

1. Expansion of CFIUS’s jurisdiction over real estate transactions

  • One-mile radius: CFIUS’s jurisdiction will cover real estate transactions within a one-mile radius of 40 additional military installations.
  • 100-mile radius: CFIUS’s jurisdiction will also include transactions within a 100-mile radius of 19 additional military installations.
  • In total, the Final Rule adds 59 military installations across 30 states, vastly expanding the reach of CFIUS’s real estate jurisdiction.

2. Reclassification of military installations—Part 1 to Part 2 shift:

The Final Rule moves the following eight military installations from Part 1 to Part 2, expanding CFIUS’s jurisdiction over transactions between a one-mile and 100-mile radius:

  • Arnold Air Force Base, Coffee County and Franklin County, Tennessee
  • Joint Base San Antonio, San Antonio, Texas
  • Malmstrom Air Force Base, Great Falls, Montana
  • Moody Air Force Base, Valdosta, Georgia
  • Redstone Arsenal, Huntsville, Alabama
  • Schriever Air Force Base, Colorado Springs, Colorado
  • Tinker Air Force Base, Midwest City, Oklahoma
  • Wright-Patterson Air Force Base, Dayton, Ohio

3. Administrative updates

  • Installation names and locations: The Final Rule updates the names of 14 military installations and the locations of seven military installations, to improve public identification.

  • Removal of installations: The Final Rule removes three military installations from the regulations as they are located within other listed military installations.

  • Terminology revision: The Final Rule revises the definition of a “military installation” to align with these changes, include certain Space Force locations, and broaden the scope of certain categories.

The Final Rule is effective 30 days from the date of publication in the Federal Register. The Final Rule will not apply retroactively to transactions closed before the effective date or where the parties have executed binding documents establishing the transaction’s material terms before the effective date.

The Final Rule significantly impacts foreign persons by expanding CFIUS’s authority to review and potentially block real estate transactions near military installations. Although foreign acquisitions of covered real estate are not subject to mandatory filing requirements, CFIUS retains the discretion to review such transactions under its jurisdiction at any time, including post-completion. In 2023, only two notices and three declarations were filed under CFIUS’s real estate jurisdiction. We expect the Final Rule and increasing concerns about foreign land ownership will lead to an increase in filings.

CFIUS’s expanded jurisdiction aligns with a broader federal and state trend to regulate foreign ownership of U.S. real estate. Examples of recent actions include the following:

  1. In May 2024, President Biden ordered a Chinese-owned crypto mining company to vacate and sell certain real property and remove equipment from land within a one-mile radius of Warren Air Force Base in Cheyenne, Wyoming.
  2. In March 2024, the Consolidated Appropriations Act, 2024 was enacted, providing that the Secretary of Agriculture will be included in CFIUS deliberations on a case-by-case basis, particularly for transactions involving agricultural land, biotechnology, or the agriculture industry.
  3. The Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA) mandates reporting for foreign persons acquiring agricultural land. Under AFIDA, the U.S. Department of Agriculture has the express right to notify CFIUS of transactions that might pose a risk to national security and has received increased funding to assist with foreign investment reviews.
  4. More than 20 states have laws restricting or prohibiting foreign ownership of real property and the majority of states are considering pending legislation.
  5. Recent state and local legislative changes and ongoing federal bills reflect increasing regulatory scrutiny over foreign real estate investments in the United States.

There has also been an increase in the general public’s concerns surrounding foreign ownership of land. Given the heightened concerns, all investors and businesses should be vigilant in conducting thorough due diligence on proposed transactions. Due diligence should ensure compliance with the expanding regulatory landscape and include an assessment of national security risk.

On Wednesday, former President Donald Trump was projected to retake the White House and become the United States’ 47th president. The Senate is also projected to be Republican controlled; the House of Representatives remains too close to call.

Based on insights from his first administration and his campaign promises, the following are a few key areas where U.S. trade policy may change substantively:

  • Increased tariffs: On the campaign trail, Trump pledged to impose a 10–20% baseline tariff on all foreign-made products and tariffs of 60% or more on Chinese-origin imports. He also suggested additional tariffs on companies that move manufacturing from the U.S. to Mexico. Insiders indicate new tariffs will likely be a key priority for the first 100 days of Trump’s second term. At the center of these policies will be former U.S. Trade Representative Robert Lighthizer who oversaw the retaliatory tariffs imposed in Trump’s first administration. If Republicans takes control of the House, they may also attempt to pass the Trump Reciprocal Trade Act, which would impose reciprocal, equivalent tariffs on goods from any country that tariffs U.S.-origin products. Consistent with the USTR’s report on the existing Section 301 tariffs on Chinese-origin goods, U.S. importers will likely bear the entire cost of any new tariffs.
  • Increased duties on Chinese imports: In addition to tariffs, the Republican party platform calls for revoking China’s Normal Trade Relations (NTR) status (also known as Most Favored Nation status). Trump could suspend China’s NTR status through executive action, which would trigger import duties on Chinese-origin products that are two to 10 times higher than imports from other countries. Currently, only imports from Belarus, Cuba, North Korea, and Russia are subject to these higher duty rates.
  • Renegotiation of the U.S.–Mexico–Canada Agreement (USMCA): Despite negotiating the USMCA during his first administration, Trump signaled last month that, upon taking office, he would formally notify Mexico and Canada of his intention to invoke the USMCA’s six-year review provision. The joint review would occur in July 2026, and a report will be due to Congress at least 180 days in advance.

A new Trump administration is also likely to continue or increase the government focus on the following U.S. trade policy areas:

  • Continued use of economic sanctions as a key foreign policy tool: Sanctions were a significant tool for both the Trump and Biden administrations. Trump used sanctions as a tool to exert maximum pressure against U.S. adversaries, including China, Iran, and Venezuela. The Biden administration took a similar approach, with a focus on Russia and coordinating global actions to maximize impact. Trump is expected to continue using economic sanctions as a key foreign policy tool.
  • Increased scrutiny of foreign investments: Under Trump’s first administration, the Committee on Foreign Investment in the United States (CFIUS) gained broader authority with the Foreign Investment Risk Review Modernization Act of 2018. Both the Trump and Biden administrations have emphasized heightened scrutiny of foreign investments, particularly from China. Biden expanded the CFIUS framework with increased enforcement, higher penalties, expanded real estate jurisdiction, and a focus on emphasizing economic security, critical supply chains, sensitive data, and sectors such as semiconductors and artificial intelligence (AI). A renewed Trump administration would likely intensify these measures and concentrate on critical infrastructure and limiting Chinese investment in U.S. real estate and businesses.
  • Continued focus on outbound investment: Biden issued an executive order banning U.S. investment in China for certain “national security technologies,” including certain semiconductors, microelectronics, quantum information, and AI. On October 28, 2024, the U.S. Department of the Treasury issued its long-awaited final rule, implementing the outbound investment security program, effective January 2, 2025. Trump is expected to continue and possibly expand this focus.
  • Expanded export controls on China: During Trump’s first term, the Bureau of Industry and Security (BIS) was aggressive in restricting exports to China, placing several high-profile Chinese companies and affiliates on the Entity List to limit their access to critical U.S. technology. Under Biden, BIS expanded these restrictions, with a particular focus on semiconductors, AI, and biotechnology. BIS’s enforcement efforts were also increased to ensure compliance. In a new Trump administration, BIS would likely intensify these measures, expanding export controls on emerging technologies, particularly in fields such as quantum computing and cybersecurity. The focus would likely be on further restricting access to sensitive U.S. technologies by foreign adversaries, with a continued emphasis on China and other national security threats.
  • Increased focus on cybersecurity: During Trump’s first administration, the Department of Defense (DoD) implemented restrictions on companies linked to foreign adversaries to safeguard the defense supply chain, including limits on DoD contracts with firms using equipment from entities deemed national security risks. The administration also increased cross-agency coordination, prioritized the establishment of the Space Force, and strengthened cybersecurity measures. A new Trump administration is likely to continue emphasizing restrictions on foreign influence in the defense sector, with a likely renewed focus on cybersecurity, critical infrastructure, space, and advanced technologies such as AI and 5G.
  • Continued focus on emerging technology: Under Trump, the Department of State Directorate of the Defense Trade Controls (DDTC) tightened defense export controls, particularly to China and other adversaries, while streamlining licensing processes. The administration emphasized protecting sensitive technology and enhancing oversight of end-users. Under Biden, DDTC continued these policies with a greater focus on human rights, international coordination, and increased scrutiny of exports to China and Russia. Under a new Trump administration, DDTC would likely continue its focus on tightening defense exports to adversaries, particularly in emerging technologies such as AI and quantum computing, while aiming to reduce regulatory barriers for U.S. defense contractors.
  • Continued prioritization of export control enforcement: Since U.S. export control laws are premised on national security, enforcement for non-compliance is typically a priority for any administration. The first Trump administration entered into several settlement agreements related to the unauthorized export of controlled items, technology, and services. Enforcement of these laws will likely continue to be a priority. The Biden administration also relied on foreign direct product rules and the Entity List to restrict access to U.S. export-controlled products and technology by parties believed to pose a risk to U.S. national security and foreign policy. While not used as frequently during the first Trump administration, the Entity List was used to designate Chinese entities and it will likely be used again to advance U.S. foreign policy interests during the upcoming administration.

If Republicans regain control of both houses of Congress, Trump will have latitude to pass new laws that align with his trade and foreign policy agendas. Two key legislative proposals to monitor include:

  • The Countering Communist China Act (CCCA), which was introduced by Republican members of Congress in February 2024. The CCCA is a wide-ranging bill that would, among other things, introduce restrictions on outbound investments in Chinese technology companies and trade restrictions on Chinese military and surveillance companies.  
  • Senate Bill 3945, which Senator Vance introduced in March 2024 to restrict the Chinese government’s access to U.S. capital markets and exchanges if it fails to comply with certain international laws.

On October 28, 2024, the U.S. Department of the Treasury issued its long-awaited final rule (Final Rule) implementing an outbound investment security program. Stemming from Executive Order 14105 (Outbound Order), the new program targets U.S. investment in China, Hong Kong, and Macau related to a defined set of technologies and products that pose an acute national security threat to the United States.

The Final Rule identifies both prohibited transactions and transactions that require a U.S. person to notify Treasury. The Final Rule will become effective on January 2, 2025. The newly created Office of Global Transactions within Treasury’s Office of Investment Security will administer the outbound investment program.

Background on the Outbound Order

The Outbound Order declared a national emergency to address the threat posed to the United States by China, Hong Kong, and Macau’s advancement in “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors” that are critical for military, intelligence, surveillance, or cyber-enabled capabilities, which is being further exacerbated by U.S. investments. The Outbound Order further directed the Treasury Secretary to issue regulations creating an outbound investment security program.

Overview of Final Rule

The Final Rule builds on Treasury’s August 2023 Advance Notice of Proposed Rulemaking and July 2024 Notice of Proposed Rulemaking.

Key elements of the Final Rule are outlined below:

  • Requirements for U.S. Persons. The Final Rule creates requirements for U.S. persons, which include U.S. citizen; lawful permanent resident; entity organized under the laws of the United States or any jurisdiction within the U.S., including any foreign branch of any such entity; or any person in the U.S.
  • Knowledge Standard. These obligations apply if the U.S. person has knowledge of relevant facts or circumstances about a transaction. Knowledge includes (1) actual knowledge that a fact or circumstance exists or is substantially certain to occur; (2) an awareness of a high probability of a fact or circumstance’s existence or future occurrence; or (3) reason to know of a fact or circumstance’s existence. In assessing whether a U.S. person had knowledge, Treasury will consider information a U.S. person had or could have had through a reasonable and diligent inquiry.
  • Covered Foreign Persons. The term covered foreign person means a person of a country of concern that engages in a covered activity; or a person that has a board seat, voting or equity interest, or certain contractual powers with respect to such a person of a country of concern where more than 50% of one of a few important financial metrics of the person is attributable to one or more such persons of a country of concern.[1]
  • Covered Transactions. The Final Rule covers transactions where a U.S. person directly or indirectly:[2]
    • Acquires an equity interest[3] or contingent equity interest in a covered foreign person.
    • Provides certain loan or similar debt financing arrangements to a covered foreign person.
    • Converts a contingent equity interest acquired on or after January 2, 2025, into an equity interest in a covered foreign person.
    • Acquires, leases, or develops operations, land, property, or other assets in China, Hong Kong, or Macau that the U.S. person knows will result in, or the U.S. person plans to result in (1) the establishment of a foreign covered person or (2) the engagement of a person of a country of concern in a covered activity.[4]
    • Enters into a joint venture anywhere in the world that is formed with a person of a country of concern if the U.S. person knows the joint venture will engage, or plans to engage, in a covered activity.
    • Acquires a limited partner or equivalent interest in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund (where the fund is not a U.S. person) that the U.S. person knows likely will invest in a person of a country of concern that is in the semiconductor and microelectronics, quantum information technology, or artificial intelligence sectors, and such fund undertakes a transaction that would be a covered transaction if undertaken by a U.S. person.
  • Prohibited Transactions. A covered transaction is prohibited if the relevant foreign person or joint venture:
    • Develops or produces any electronic design automation software for the design of integrated circuits or advanced packaging.
    • Develops or produces certain (1) front-end semiconductor fabrication equipment; (2) equipment for performing volume advanced packaging; or (3) certain items designed exclusively for use in or with extreme ultraviolet lithography fabrication equipment.
    • Designs any integrated circuit that meets or exceeds certain performance or operational parameters.
    • Fabricates (1) certain logic integrated circuits; (2) certain NOT-AND (NAND) memory integrated circuits; (3) certain dynamic random-access memory (DRAM) integrated circuits; (4) integrated circuits manufactured from a gallium-based compound semiconductor; (5) integrated circuits using graphene transistors or carbon nanotubes; or (6) certain integrated circuits designed to meet specific operational parameters.
    • Packages any integrated circuits using advanced packaging techniques.
    • Develops, installs, sells, or produces certain supercomputers.
    • Develops a quantum computer or produces any of the critical components required to produce a quantum computer.
    • Develops or produces any quantum sensing platform designed for, or which the relevant covered foreign person intends to be used for, any military, government intelligence, or mass-surveillance end use.
    • Develops or produces any quantum network or quantum communication system designed for, or which the relevant covered foreign person intends to be used for certain end uses, including any military, government intelligence, or mass-surveillance end use.
    • Develops any AI system that is designed to be exclusively used for, or which the relevant covered foreign person intends to be used for, any (1) military end use or (2) government intelligence or mass-surveillance end use.
    • Develops any AI system that is trained using certain quantities of computing power.
    • Meets certain conditions because of its relationship to one or more covered foreign persons engaged in any covered activity described in the preceding bullets.
    • Engages in a covered activity and (1) is included on the Entity List; (2) is included on the Military End User List; (3) meets the definition of a “Military Intelligence End-User” under the Export Administration Regulations; (4) is included on the Specially Designated Nationals and Blocked Persons (SDN List), or is an entity in which one or more individuals or entities included on the SDN List, individually or in the aggregate, directly or indirectly, own a 50 percent or greater interest; (5) is included on the Non-SDN Chinese Military-Industrial Complex Companies (NS–CMIC List); or (6) is designated as a foreign terrorist organization.
  • Notifiable Transactions. A covered transaction that is not otherwise prohibited requires notification to Treasury if the relevant covered foreign person or joint venture:
    • Designs, fabricates, or packages integrated circuits that are not covered by the corresponding prohibition above.
    • Develops certain AI systems that are not otherwise covered by the corresponding prohibition above and that are (1) designed to be used for any military or government intelligence or mass-surveillance end use; (2) intended to be used for (a) cybersecurity applications, (b) digital forensics tools, (c) penetration testing tools, or (d) the control of robotic systems; or (3) trained using a certain quantity of computing power.

A U.S. person subject to the notification requirement must file a notification form with Treasury that includes information related to the transaction (e.g., details about the U.S. person, the covered foreign person, the covered transaction, and the national security technologies and products). This must be filed no later than 30 days after the relevant covered transaction is completed or, where a U.S. person acquires actual knowledge after the completion date of a transaction.

  • Exceptions. The Final Rule outlines certain excepted transactions, including certain (1) investments in securities, derivatives, or funds; (2) buyouts; (3) intracompany transactions; (4) transactions pursuant to binding commitments entered into ahead of the Final Rule; (5) syndicated debt financing arrangements; (6) equity-based compensation; and (6) transactions involving certain third countries.
  • Exemptions. The Final Rule also allows for a U.S. person to seek an exemption based on the national interest of the United States. Such exemptions will be determined based on the consideration of the totality of the relevant facts and circumstances.
  • Violations and Penalties. Violations are subject to civil and criminal penalties under the International Emergency Economic Powers Act (IEEPA). Currently, the maximum civil penalty for a violation is the greater of $368,136 (adjusted annually for inflation) or twice the value of the transaction that is the basis for the violation. Under IEEPA, Treasury can also take any authorized action to nullify, void, or otherwise require divestment of any prohibited transaction. Self-disclosure will also be taken into consideration in Treasury’s determination of the appropriate resolution.

[1] “Person of a country of concern” means “(a) Any individual that: (1) Is a citizen or permanent resident of a country of concern; (2) Is not a U.S. citizen; and (3) Is not a permanent resident of the United States; (b) An entity with a principal place of business in, headquartered in, or incorporated in or otherwise organized under the laws of, a country of concern; (c) The government of a country of concern, including any political subdivision, political party, agency, or instrumentality thereof; any person acting for or on behalf of the government of a country of concern; or any entity with respect to which the government of a country of concern holds individually or in the aggregate, directly or indirectly, 50 percent or more of the entity’s outstanding voting interest, voting power of the board, or equity interest, or otherwise possesses the power to direct or cause the direction of the management and policies of such entity (whether through the ownership of voting securities, by contract, or otherwise); (d) Any entity in which one or more persons identified in paragraph (a), (b), or (c) of this section, individually or in the aggregate, directly or indirectly, holds at least 50 percent of any of the following interests of such entity: outstanding voting interest, voting power of the board, or equity interest; or (e) Any entity in which one or more persons identified in paragraph (d) of this section, individually or in the aggregate, directly or indirectly, holds at least 50 percent of any of the following interests of such entity: outstanding voting interest, voting power of the board, or equity interest. See § 850.221.

[2] Note 1 to § 850.210: An indirect covered transaction includes a U.S. person’s use of an intermediary to engage in a transaction that would be a covered transaction if engaged in directly by a U.S. person. However, for purposes of § 850.210(a)(1), a U.S. person is not considered to have acquired an indirect equity interest or contingent equity interest in a covered foreign person when the U.S. person acquires a limited partner or equivalent interest in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund and that fund then acquires an equity interest or contingent equity interest in a covered foreign person. (A U.S. person’s acquisition of a limited partner or equivalent interest in a non-U.S. person venture capital fund, private equity fund, fund of funds, or other pooled investment fund may, however, be a covered transaction under § 850.210(a)(6).)

[3] Note 2 to § 850.210: Neither the issuance of a secured loan or similar debt financing for which equity is pledged as collateral, nor the acquisition of such secured debt on the secondary market, is an acquisition of an equity interest. However, foreclosure on collateral where the debtholder takes possession of the pledged equity is an acquisition of an equity interest; provided that such an acquisition is not a covered transaction where the equity was pledged prior to January 2, 2025, or where the U.S. person did not know at the time of issuing or acquiring the debt that the pledged equity was in a covered foreign person.

[4] “Covered activity” means, in the context of a particular transaction, any of the activities referred to in the definition of notifiable transaction in § 850.217 or prohibited transaction in § 850.224. See § 850.208.

The Bureau of Industry and Security (BIS) is seeking comments on a proposed rule that would prohibit transactions involving Vehicle Connectivity System (VCS)[1] hardware and covered software designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction of China (including Hong Kong) or Russia. Comments will be due by October 24.

Under the proposed rule:

  • U.S. persons importing VCS hardware[2] for further manufacturing, integration, resale, or distribution (known as “VCS hardware importers”) may not knowingly import VCS hardware that is designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia.
  • Connected vehicle manufacturers[3] may not knowingly import or sell into the U.S. completed connected vehicles that incorporate covered software[4] designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia.
  • Connected vehicle manufacturers who are persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia may not knowingly sell in the U.S. completed connected vehicles that incorporate VCS hardware or covered software.
  • A Declaration of Conformity must be submitted to BIS before importing the following items:
    • VCS hardware that is not otherwise prohibited under the proposed rule; or
    • Completed connected vehicles containing covered software as part of a transaction that is not otherwise prohibited under the proposed rule.
  • A Declaration is also required to sell completed connected vehicles manufactured or assembled in the U.S. that incorporate covered software as part of a transaction that is not otherwise prohibited under the proposed rule.
  • A Declaration must include a hardware or software bill of materials and evidence of the importer or manufacturer’s due diligence efforts (e.g., independent or hired third-party research) to verify compliance.
  • Specific licenses will be available on a case-by-case basis for otherwise prohibited transactions. License applications will be processed within 90 days of submission.

Persons owned by, controlled by, or subject to the jurisdiction or direction of a specific country means:

  • Any person who acts as an agent, representative, or employee, or any person who acts in any other capacity at the order, request, or under the direction or control, of that country or a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by that country.
  • Any person who is a citizen or resident of that country or a country controlled by that country, and is not a U.S. citizen or permanent U.S. resident.
  • Any corporation, partnership, association, or other organization with a principal place of business in, headquartered in, incorporated in, or otherwise organized under the laws of that country or a country controlled by that country.
  • Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by that country, to include circumstances in which any persons identified in the previous three bullets possess the direct or indirect power, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in any entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting the entity.

Persons would not be considered owned by, controlled by, or subject to the jurisdiction or direction of China or Russia solely based on the country of citizenship of natural persons who are employed, contracted, or otherwise similarly engaged to participate in the design, development, manufacture, or supply of VCS hardware or covered software.

If adopted, the proposed rule would take effect 60 days after publication in the Federal Register.

The proposed rule includes the following exemptions to the license and Declaration requirements:

  • For VCS hardware that is not associated with a vehicle model year, importation will be permitted through December 31, 2028.
  • For VCS hardware associated with a vehicle model year before 2030 or imported as part of a connected vehicle with a model year before 2023, importation will be permitted.
  • For completed connected vehicles, importation or sale will be permitted if the VCS hardware or covered software was manufactured before Model Year 2027.

[1] “Vehicle Connectivity System” means a hardware or software item for a completed connected vehicle that has the function of enabling the transmission, receipt, conversion, or processing of radio frequency communications at a frequency over 450 megahertz.

[2] “VCS hardware” means the following software-enabled or programmable components and subcomponents that support the functions of VCSs or are part of an item that supports the function of VCSs: microcontroller, microcomputers or modules, systems on a chip, networking or telematics units, cellular modem/modules, Wi-Fi microcontrollers or modules, Bluetooth microcontrollers or modules, satellite navigation systems, satellite communication systems, other wireless communication microcontrollers or modules, and external antennas. VCS hardware does not include component parts that do not contribute to the communication function of VCS hardware (e.g., brackets, fasteners, plastics, and passive electronics).

[3] “Connected vehicle manufacturers” means U.S. persons (1) manufacturing or assembling completed connected vehicles in the U.S.; or (2) importing completed connected vehicles for sale in the U.S. A “connected vehicle” is a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, that integrates onboard networked hardware with automotive software systems to communicate via dedicated short-range communication, cellular telecommunications connectivity, satellite communication, or other wireless spectrum connectivity with any other network or device. A “completed connected vehicle” is a connected vehicle that requires no further manufacturing operations to perform its intended function.

[4] “Covered software” means software-based components, in which there is a foreign interest,[4] executed by the primary processing unit of the respective systems that are part of an item that supports the function of Vehicle Connectivity Systems or Automated Driving Systems at the vehicle level.  Covered software does not include firmware, which is characterized as software specifically programmed for a hardware device with a primary purpose of controlling, configuring, and communicating with that hardware device. Covered software also does not include open-source software that can be freely used, modified, and distributed by anyone, with both access to the source code and the ability to contribute to the software’s development and improvement unless that open-source software has been modified for proprietary purposes and not redistributed or shared.

Key takeaways

  • In October 2024 the UK government will launch the Office of Trade Sanctions Implementation (OTSI) to bolster the enforcement of UK trade sanctions.
  • On 12 September 2024 the UK government laid before Parliament the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the Regulations). They were accompanied by new statutory guidance – see here and here.
  • The Regulations outlines OTSI’s civil enforcement powers, including the power to impose monetary penalties for breaches of aircraft, shipping and trade sanctions.
  • This is a significant development in the UK’s sanctions framework, particularly for those subject to the Regulations’ new reporting requirements.

Evolution of UK sanctions regime

The enforcement and management of UK trade sanctions has historically been overseen by two bodies within the Department for Business and Trade: the Export Control Joint Unit (ECJU) and the Import Licensing Branch (ILB). The ECJU’s primary responsibility is the administration of export licensing, and the ILB’s, import licensing for certain industrial goods subject to import sanctions.

Separately, His Majesty’s Treasury operates the Office of Financial Sanctions Implementation (OFSI), responsible for the implementation and enforcement of financial sanctions in the UK.

The creation of OTSI is aimed at bolstering the enforcement of aircraft, shipping and trade sanctions, against the backdrop of the UK’s extensive sanctions introduced against Russia. This is consistent with the UK government’s foreign policy focus on broadening and tightening its Russian sanctions regime.

OTSI’s enforcement powers

The Regulations introduce new civil enforcement powers to support the enforcement of aircraft, shipping and certain trade sanctions. Relevant trade sanctions include the export, supply, delivery, making available, transfer or acquisition of restricted goods, as well as related ancillary services (e.g. financial assistance and brokering).

Notably, a carve-out has been included to the effect that OFSI remains responsible for the enforcement of Russian Oil Price Cap restrictions.

OTSI’s powers include the power to:

  • Impose monetary penalties for violations, with a maximum penalty up to the greater of £1 million or 50% of the estimated value of the breach (or in the case of aircraft and shipping sanctions, 50% of the estimated value of the aircraft or ship)
  • Make information requests
  • Issue warning letters and publish reports on sanctions breaches

Consistent with UK financial sanctions, civil penalties for breaches or failures to comply with trade sanctions will be assessed on a ‘strict liability’ basis. Further, liability for failure to comply may extend to corporate officers, such as directors or managers, if a breach is committed with their consent, connivance or neglect.

Reporting requirements

The new regime also imposes reporting obligations in relation to suspected breaches. Failure to comply with reporting obligations (or information requests) is a criminal offence, punishable by a fine and/or imprisonment not exceeding six months.

Ongoing reporting obligations apply to ‘relevant persons’, the definition of which varies, depending on the underlying restriction:

For the purposes of the trade sanctions, it includes:

  • Any person that has permission under Part 4A of the Financial Services and Markets Act 2000 to carry on one or more regulated activities (permission to carry on a regulated activity)
  • Legal and notarial services providers, although reporting obligations and requests for information do not apply to privileged information
  • Any business that operates a currency exchange office, transmits money or cashes cheques that are payable to customers

This replicates (in part) the categories of persons subject to reporting requirements in relation to asset-freeze restrictions.

With respect to aircraft and shipping sanctions, it includes:

  • Aircraft: airport operators, aircraft operators, pilots in command or any person that charters an aircraft for business
  • Shipping: harbour authorities, masters or pilots, or any person that charters a ship for business

Mitigating factors

In instances of a suspected breach, voluntary disclosure is encouraged, which may be considered as a mitigating factor when evaluating a case, including the decision whether to impose a monetary penalty or reduce the penalty.

Other mitigating factors stated in the guidance include:

  • Compliance with requests for information that OTSI may send out to reporters of suspected breaches during its investigations
  • Compliance with any relevant recordkeeping obligations under sanctions regulations
  • No record of previously having breached sanctions legislation
  • Good knowledge of trade sanctions and relevant compliance systems proportionate to the size, exposure to sanctions and resources of the business

Conclusion

These developments align with the UK’s broader sanctions strategy, intensifying pressure on companies to ensure comprehensive compliance. Companies engaged in trade or shipping activities are encouraged to strengthen internal compliance frameworks to manage the heightened enforcement risk. This includes monitoring trade routes, aircraft and shipping operations closely to avoid inadvertent violations of UK sanctions. In particular, parties falling within the newly established reporting requirements should put in place internal procedures to ensure compliance with these new measures.


A UK Court of Appeal decision in June 2024 has heightened the UK’s focus on the potential for money laundering offences within global supply chains. There is now a greater risk that UK law enforcement may recover assets from companies that fail to perform adequate due diligence on their supply chain, even if adequate consideration was paid for goods.

This increased risk also means that businesses could face prosecution for criminality within their supply chain and associated money laundering offences, which could have significant repercussions for many companies, particularly those in the clothing and retail sectors.
It is crucial for businesses to assess their existing compliance procedures to ensure they are not inadvertently committing money laundering offences.

Our lawyers offer insights on how companies can mitigate these risks in their latest alert.

On Tuesday 23rd July, energy and natural resources partners Sachin Kerur and James Willn, along with international trade partner Leigh Hansson, hosted the highly anticipated webinar “Sanction Strategies: Focus on India, China, and the Middle East.” During this insightful session, the team delved into the latest sanctions decisions, explored the implications for companies in these regions and discussed the future direction of sanctions activity.

To access the webinar recording and the slides used during the session, please click this link.

On July 10, BIS released new guidance strongly encouraging companies involved in exporting, reexporting, or transferring (in-country) Common High Priority List (CHPL) items to screen transaction parties against the list maintained by the Trade Integrity Project (TIP) (in addition to the Consolidated Screening List).

TIP is an initiative of the UK-based Open-Source Centre that monitors military and dual-use trade with Russia. The TIP website displays entities that have shipped CHPL items to Russia since 2023, according to publicly available trade data.

The guidance also outlines the different actions that BIS takes to inform industry and academia about parties—beyond those identified on public screening lists like the Entity List—that present diversion risks.