Sanctions and export controls expand further

In October, the U.S. Commerce Department unveiled new rules to tighten further a sweeping set of export controls first introduced a year previously, reducing the types of semiconductor manufacturing equipment and advanced computing that companies can sell to China.

In particular, the new rules expand the export restrictions beyond mainland China and Macau to include 21 other countries on which the United States maintains an arms embargo, including Iran and Russia. Because U.S. export controls follow the item, both U.S. persons and non-U.S. persons can incur liability for violations of the rules.

This year, we continue to see an expansion of the export controls regime. At the end of January, the U.S. government proposed to expand the scope of controls on American cloud computing companies, requiring them to determine whether foreign entities are accessing U.S. data centres to train AI models. These rules will require both U.S. and non-U.S. providers of certain infrastructure as a-service to maintain records on the end-users of their services and in some circumstances, file reports to the U.S. Government. While this rule is not yet effective, it shows the U.S. government is comfortable with imposing compliance obligations not only on U.S. persons but non-U.S. resellers and providers as well. We are keeping a close eye on these developments.

Reverse CFIUS

Another big development in 2023 was the signing in August of the highly anticipated Executive Order addressing outbound U.S. investments in critical technologies in so-called ‘countries of concern’. That order marked the first official step in the lengthy process to introduce what has been dubbed a ‘reverse CFIUS’ process, doing for outbound investments what the Committee on Foreign Investment in the United States (CFIUS) does through its inbound foreign transaction reviews.

In early 2024, we are so far yet to see the support implementing regulations that will be needed to action the President’s order, with the Department of Treasury working on those in a process that could yet take several months. Once the rules are effective, U.S. persons will need to notify the government about specific transactions involving covered foreign entities, with the focus being on deals for semiconductors, microelectronics, quantum information technologies, and certain AI systems. 

The only countries of concern so far identified are China, Hong Kong and Macau, but the final list remains to be seen.

While the regulations are still being developed, we can expect them to have a significant impact on capital flows, adding an additional layer of compliance that will affect transaction timelines and even potentially shift investment strategies.

Sanctions updates

In January 2024, the U.S. implemented additional sanctions measures and trade restrictions on Russia and Belarus as a result of the ongoing war in Ukraine. Those restrictions identified additional sanctions targets, expanding the scope of industry sector sanctions and refining some existing export controls on the two countries.

Suggestions of a comprehensive embargo on all dealings with Russia have so far failed to achieve unanimous agreement and as a result, companies continue to do business with Russia while navigating the fast-changing sanctions landscape.

Addressing trade restrictions

With sanctions and export control regimes continuing to expand in scale and scope, organizations need to pay close attention to developing requirements. We recommend businesses build compliance provisions into sales agreements to ensure customers are aware that items may become subject to restrictions and that suppliers will not risk being in breach of the latest rules.

In addition to contractual protections, which may include termination clauses with respect of breaches, companies should conduct enhanced due diligence on potential customers, factor in additional time for compliance and maintain active lines of communication with counterparties around these issues.