On-Demand: CFIUS Risks, Export Controls & Economic Sanctions
- Nov 10, 2020
EisnerAmper and Lowenstein Sandler discussed what technology companies and investors need to know about CFIUS.
Michael Rosenberg:Welcome, everyone. My name is Michael Rosenberg. I'm a director in the process, risk, and technology solutions group at EisnerAmper, and I will be the host for today's webinar. The purpose of today's session is to provide you with an understanding on how export controls and economic sanctions are an integral part of determining CFIUS's involvement in a transaction with a foreign entity or individual. At EisnerAmper, we provide independent third party audit monitoring and risk assessments with respect to your CFIUS obligations. Our proactive services are designed to be clearly orderable and measurable, and to effectively address potential risks.
Michael Rosenberg:At the end of each topical session, there will be polling questions that need to be responded to in order for you to receive your CPE or CLE as previously mentioned. I am pleased to be joined today by Doreen Edelman and Christian Contardo of the law firm Lowenstein Sandler LLP, who will be leading the session. Doreen Edelman is a partner and chair of Lowenstein Sandler's global trade and policy practice, works across practice industries ranging from PE to technology and manufacturing. She advises on the evolving regulatory and compliance aspects of supply chains and transactions, including savings on import duties, implementing compliance programs, and negotiating with OFAC, CFIUS, and other agencies.
Christian Contardo, associate and a former Treasury Department official, has over 15 years of legal experience, including more than a decade serving as a national security attorney in the federal government. He advises on CFIUS reviews, import and export controls, and economic sanctions. Welcome to both of you. I will now turn it over to Doreen and Christian, who will take us through the materials.
Doreen Edelman:All the prep, and you still can't get it right. I apologize, everyone. You missed me giving a big heartfelt thanks to Michael and his whole team and staff who put this together for this afternoon. So we're going to cover a lot of topics, high level review. We encourage you to ask questions. We will make it as relevant as possible every step of the way, so you can constantly be asking yourself, "Why are they telling me this? Why do I need to understand this?" And we're going to cover four issues that I would argue do affect your portfolio companies, and any businesses that you are investing in or working with. They are CFIUS, export controls, sanctions, which includes restricted party and country restrictions, and then we are going to add in customs, duties, and imports because it is a hot topic, and it directly affects your portfolio company's bottom line. There's risk associated with it, but there is actually an opportunity for some savings, and that's a unique position, at least that we find ourselves in being able to help companies get money back from the federal government.
So why are you here? As I just said, buyers, sellers, and investors need to understand trade compliance. It all started in financial services. They got the memo pretty quickly and began to understand trade compliance when you saw duties and penalties in the amount of thousands to millions of dollars from the US government. Then you saw pharmaceutical companies. You saw retail. And at this point, every company needs to be concerned with trade compliance issues, particularly companies with technology, software, healthcare, companies that you may not think have anything to do with trade compliance or national security, like owning real estate.
So we're going to talk about the risks. We're going to talk about the compliance obligations. Another trend we're seeing is that deal insurers, deal insurers are requiring us as a deal lawyer to get on the phone with them and actually validate and make them feel comfortable that particular companies have their ducks in a row regarding compliance. And if not, they may exempt out some of these trade risks in their deal insurance. And some of these issues we're going to talk about are strict liability. So the government doesn't care if the owners didn't know these issues existed, or didn't understand what the problems were, or what was happening at a global subsidiary of a portfolio company.
There's also, of course, the PR effect that can be embarrassing. It can be embarrassing on several levels. And then there are also actual penalties the government will impose in addition to the actual duties that are due, or general compliance requirements for a particular violation. As we talk, you'll see that there are different ways to handle violations. You can self disclose violations. Hopefully that will remove the penalty aspect. Or you can find out that with regard to sanctions, that the government is already aware of ongoing violations, and they come to you. And then it's very important that you have your ducks in a row so that you can raise mitigating factors.
We recently had client that was in the blockchain world, was setting up a business, hadn't even begun a business, had some testing being done at the beta level on a platform, cloud based platform. They had no idea that it had gone live. And Iranian individuals had gone through the platform to participate in our client's program, and the government found out about it. And they were facing fines, pretty aggressive fines. And through a mitigation with the US government and crafting a story, a true story, but a real story, we were able to not only get rid of the fines, penalties, whatever you want to call them, we were able to keep the government from publishing the information on their website like they normally do, so that's a big deal.
And then finally, as I said, I want to talk to you about import duties because there may be some savings you're unaware of.
Doreen Edelman:CFIUS seemed to affect them more. Not CFIUS. COVID seemed to affect them more. But the point is, as the recovery picks up, I guarantee what's coming with the Biden administration is increased regulations. We know there are pending regulations on both import and export. And we're going to tell you how those are going to affect you doing business, and the first area is CFIUS, and I'm going to turn it over to Christian, who is now in the private sector, but he still recently came out of the government, and he is allowed to wear that former government service hat. And it puts him in a very unique perspective to give us guidance on what's happening with CFIUS.
Christian Contardo:Thanks, Doreen. I will give you my perspective as best I can. At this point, I would be guessing what the government's doing. But based on my experience, I have some thoughts. So we'll start with CFIUS. CFIUS, for those of you who don't know, and I guess let me back up and add to, in addition to what Doreen was saying about increase in deals, one of the themes throughout this presentation is we are also seeing an increase on the government side in enforcement across all of these areas that we're going to talk about. They're dedicating resources to it. They are putting out warnings and advisories to different industries that they are watching and that they are expecting certain measures to be taken to adhere to their regulations and laws.
So between the two of those, there's definitely, it's an active environment. CFIUS is an inter-agency committee composed of a number of cabinet level departments, including Homeland Security, Justice, State, Energy, Defense. It's chaired by Treasury. And they'll bring in other agencies if those agencies have equities. And of course, the national security and intelligence communities will weigh in with national security concerns that arise when there's foreign investment in a US business, so that's a pretty broad jurisdiction. Pretty much any foreign investment in a US business could be subject to CFIUS jurisdiction if there's a national security concern.
And as Doreen mentioned, that now includes just straight real estate transactions. And it includes non-controlling investments, where foreign investment is not acquiring the entire company. In some situations, they've made it mandatory that the parties to a deal have to file. Those situations are where a foreign government is going to acquire what treasury calls a TID US business. It's an acronym for businesses that work in critical technologies, critical infrastructure, or sensitive personal data. And those three categories, the government has singled out as a particular concern, where they want to make sure that any foreign investment into those areas is either mitigated or prevented because of the sensitivity of what critical technology can do, how you can affect our life, in some cases, with critical infrastructure, and then the vast amounts of personal data that are being held by US companies through various commercial businesses.
The second category, which is much broader, is any foreign investment in a TID US business that could result in control if that TID business is involved in critical technologies. There's no government, foreign government requirement here. It's any foreign investment. And a recent change in October 2015 is that critical technologies are now tied to export controls. So if you need a license to export something to the foreign investor, then you're going to potentially be filing a mandatory declaration with CFIUS as well. And what this means is companies and investors need to know if a target company's technology or products are export controlled from the beginning of the negotiations, or as soon as possible, so that they can determine if they need to file that declaration with CFIUS. Doreen, did you have anything more on that one?
Doreen Edelman:You just were looking at October 15th, and you said 2015. And I wanted to make sure that everyone knew it was-
Christian Contardo:Oh, yeah. 2020. I'm losing track of time these days.
Doreen Edelman:2020. Okay, sorry. Sorry to interrupt you.
Christian Contardo:That's okay. So what is critical technology? Critical technology, this is what it means, according to the regulations. And sometimes that's easy. If it's on the US munitions list, or if it's on the commerce control list, or any of these lists that are identified on the slide, and you are making that technology, or working with it, you could be subject to mandatory declaration. Where it's getting a little fuzzy, and the government is starting to come out with regulations clarifying this is: What are emerging and foundational technologies? These can be things like hypersonic technology, quantum computing, artificial intelligence, machine learning, biotech, and a variety of other categories that the government's identified, but they are just now starting to issue rules on what those technologies more specifically look like.
Sensitive personal data is, we've had some internal debates about this, but it's two categories of data used to identify individuals. If it's collected on more than a million individuals by a US business in any of the categories listed on the slides, financial consumer reports, geolocation, biometric information, or if that data is collected by a US business that's targeting its products or services to US executive branch agencies with national security functions. And what that means is there's no new in person requirement. If you're doing targeting your business and collecting information on US military or national security personnel, that's sensitive personal data and subject to CFIUS.
And then the final category is the results of genetic tests. And the concern here again is a national security one, where in a lot of these contexts, when you're talking about personal data and data security, you're talking about privacy issues. And CFIUS is not concerned about people's individual privacy. There's other regulations for that. What they're concerned about is if this data gets into the wrong hands and how it can be misused. And so that's why you see these categories. Some of them are pretty clear, the military and national security connection, and some of the other ones that might give a lot of information about individuals that US adversaries could use against the US government.
So even if you don't have a requirement to file a declaration, say you don't have critical technology, or your sensitive personal data doesn't quite meet that standard, you still might want to consider filing what's called a voluntary filing. And we put voluntary in quotes because there's some pressure to file. If you think that there's a national security concern around your business, and you could attract CFIUS's attention, filing voluntarily gives you an opportunity to put your transaction before CFIUS. They will review it, identify any national security concerns, and ideally, work with you to mitigate those concerns by putting in necessary controls, making sure the foreign investor doesn't have board seat or access to technical information. There's a variety of ways that can be done.
But by filing voluntarily, you give CFIUS the opportunity to review the transaction. And if they clear it, you are guaranteed that they won't come back later and try to undo that transaction and force the foreign investment to divest, which we've seen them doing a lot recently. And I can talk about that a little bit.
So the consequences if you don't file. CFIUS is unilaterally coming back. They're going and looking at past transactions that have been closed for years, and ordering the foreign investor to divest from the company, in the worst case scenario. Or they will require the company to put mitigation controls in place to address whatever the national security concern might be. In the news a lot lately, we have seen just this year obviously, the Tik Tok deal was in the papers quite a bit. And it was unusually public for a CFIUS matter. And that involved data. Grindr, a data app that was acquired by a Chinese company, also ordered to divest in the last year or so, also about data.
There was a hotel StayNTouch, which collected data on people's hotel stays was bought by a Chinese company and the Chinese investment was forced to be divested from the company. So what we've seen is companies that haven't made these filings are now finding that the government's looking at them closely. They're particularly concerned about data. They're particularly concerned about foreign and Chinese investment in data. And in some of these cases, they're undoing the deal and forcing the foreign investor to divest. And it sometimes puts the US company in a hard spot, and it certainly puts the foreign investor in a hard spot.
Christian Contardo:Doreen, I wanted to, before we moved on really quick, there was a question that I think is a good sort of broad, applies broadly to what we're talking about. And it's specific to, as the US is normalizing Middle Eastern and Asian, normalizing relations with Middle Eastern and Asian countries, where direct investment has not been commonplace, how organizations can improve the transparency of those dollars coming in. That is something that we're seeing is of increasing interest to the US government generally, is that companies know who they're doing business with, whether it's their suppliers overseas, who they're importing from, or their customer that they're exporting from, or the investment dollars that they're bringing in, and putting together compliance programs that address and verify the identities of those individuals who are involved in whatever the transaction may be is an important thing to put together.
Doreen Edelman:Yeah, so that actually ties in [crosstalk 00:24:49]. Well, this ties into the next slide. I mean, there's really no way around it. Even though, as I'm sure you all know in the PE world, the know your customer requirements come out of, The Patriot Act requirements come out of the Bank Secrecy Act, and they technically only apply to financial institutions, companies that meet that definition. But what we're seeing is best practices, compliant companies are going much further than that, and they're applying those know your customer theories to their full global supply chain, their global customer chain, everyone, who you're doing business with on the vendor side, who you're buying from, who's invested in your company. I mean, that's the first thing we do. It is shocking to find the number of owners that didn't know that they already had Chinese investment somewhere in their ownership structure.
So the point is, it's becoming a global world. We are seeing more and more that the government is requiring supply chain transparency as well as ownership and transparency in your deal structure. It's not enough when we say, "You have to know ownership," that you go to the Delaware LLC. We mean you have to know ownership, meaning you've got to go through that Delaware holding company to the offshore holding company, to the ultimate trust in India. And through that, actual individual beneficial owners. I know it is a pain in the neck. I know it is time consuming. I know it is expensive. But I think it goes back to this whole have a due diligence plan and a compliance program, so it becomes routine, and it's tailored to work right into each company's system, so it is a no brainer. And we'll talk more about that as we go on. Christian, do you have anything else on the mitigation slide?
Christian Contardo:Nope. I think that's it.
Doreen Edelman:We can go into the specifics, but I want to make sure we get through everything. And what I want to move to was export controls. You may be thinking, our companies are all in software. They're all in technology. And we don't export anything. But I'm going to tie it together for you. This picture is literally worth 1000 words. You see that an iPad is launching rocket grenades. This is an old photo. This is not high tech. But this is showing you, the worst thing is when our guys are doing clean up somewhere around the world, and they find in the rubble, some little electrical piece that has etched in the side, made in the USA. And the reason this is relevant to you today is because it's export controls that are going to determine if there is critical technology, which feeds right into the CFIUS analysis.
So I need you to understand these basic principles because what we see in transactions, when the deal lawyers or the business people determine that there could be a foreign investment issues, and they come talk to us, 99% of the time they don't know if they have critical tech, or critical infrastructure, or related technology. And if you don't know that, you're already starting as a disadvantage because you can rule out the foreign investment issues very quickly if you do.
So in a nutshell, this is how export controls work. There are three agencies that control exports because this is a historic methodology. It was not set up, we don't have an export agency. You've got the Department of State, which controls, this is very confusing because it's the State Department, and then the agency is called The Director of Defense Trade Controls, but it's actually at the State Department. This handles the military articles and it handles military services, and that's important because we don't control commercial services, at least not yet.
The Commerce Department, they have what used to be the Bureau of Exports. It's now Bureau of Industry and Security, goes by BIS. And this is where you've got technology, software, and encryption. And then we have Treasury Department. It's the third spoke on this wheel, which is The Office of Foreign Assets Controls, and this gets into the sanctions and economic embargo. So it's these three agencies that control exports.
What is an export? Obviously, you all know that it's when you send something out. But what everyone needs to remember is it's more than that. If you're on an airplane, and you've got your laptop, and whatever technology you have on that laptop is being exported with you. And we guarantee if it's going to China, copy is being made as you go into the country. Exports are in the cloud. Exports are in the United States. That same technology is in the US, so if you have a company that has controlled technology, and it is shared with an Indian national in Palo Alto, the government sees that transfer, calls it a deemed export, and it says, "If you sent that technology or technical data," if it's military, it's called technical data, to India, and this is irrelevant because it means that it should be controlled and it could need a license.
And if we had time, I could tell you all about the university cases dealing with this. But the bottom line for your purposes, this is why, whether or not you are actually, physically sending technology or items outside of the US, you do need to be concerned with technology in the US because of the deemed export issues. And there are a lot of licenses that apply. It does not mean you've got an automatic violation, but it's another reason that it's very important for companies, no matter what stage, if they're still in the venture capital stage, that they have to take just a minute and determine if they have controlled technology.
Doreen Edelman: And with that, I'm going to turn it to Christian, who's going to explain sanctions. Remember, there are three prongs for these export controls. There's the State Department, there's the Commerce Department, and there's the Treasury Department. And this is going to get into the Treasury Department controls.
Christian Contardo:All right. So the OFAC, the Office of Foreign Assets Control within treasury enforces and administers US economic sanctions programs. And those are geared toward influencing US foreign policy. It's really in the last 10 years, maybe even more, I've seen it ramping up increasingly as the foreign policy tool of choice by the US government, as it's relatively easy to implement, and it doesn't cost US lives. And it can be effective when it's done properly. So we have a lot of sanctions programs that are administered by OFAC. Some are very comprehensive during, called embargoes, others that are more targeted, some that are specific to individuals or to specific activities, like cyber, or weapons of mass destruction, and others that are targeted more broadly at governments, but not to an entire country, such that they're embargoed.
So here is a list of countries. The circled ones are the ones that are currently embargoed, and you pretty much can't do business with them, or even touch transactions related to them unless you have a license from OFAC to do so. But it's important to note that the country list does change. These embargoed ones have been on here for a while. And within the broader list, there are some interesting pieces going on. Sudan, you may have read recently, is the US government's considering removing from the state sponsor of terror list, and so that could lead to them being no longer sanctioned. Those sanctions are still in place, however, so you need to be mindful of that.
Russia is another really interesting one. There's the Crimea region of Ukraine, which is fully embargoed, but a lot of Russia claims it, and so if you have an address in Russia for a customer or a supplier, you need to know is that address located in Crimea? And make sure you're conducting some due diligence on that interesting piece about Russian sanctions. And this applies a little bit to Venezuela too, is that they have sectoral related sanctions, where they're targeted against specific industries and specific activities within those industries, such that you can generally do business with them, but there's certain business that you can't do. And being able to navigate that can get a little bit tricky sometimes. So the sanctions programs can have a little bit of nuance and some complexity that requires digging into what you're trying to do and where you're trying to do it.
All right. Here's our recent case study. This just happened a couple weeks ago. Well, the settlement happened a couple weeks ago. Berkshire Hathaway agreed to pay around $4 million to OFAC to settle allegations that it violated Iranian sanction programs. And there's a couple reasons that I like this case. One is it's really egregious. Berkshire had a Turkish subsidiary that with intent, sought to do business with Iran, took a number of complicated steps to evade detection from both Berkshire and authorities. They used cash payments. They used private emails so that they weren't on the company servers. They made fraudulent documents. They worked really hard to keep it a secret. And when it came out, Berkshire identified it, and had repeatedly warned them not to do business with Iran, so it was even more egregious that they had been warned and were still doing it.
When Berkshire found out that they were actually in fact doing it, Berkshire took action, disclosed it to OFAC, worked very closely with OFAC to fix the problem and put in stronger remedial measures to prevent it from happening again. And as a result, they only have to pay $4 million, but more importantly, the settlement agreement, I'm blanking on the wording. But basically, OFAC assigned them no fault. And usually, that doesn't happen. Usually, it's they settle it. They agree that they did something wrong, and they pay a fine. Here, OFAC decided because of the level of Berkshire Hathaway's cooperation and instituting strong remedial measures, that they explicitly said in the settlement agreement that this is not Berkshire Hathaway's fault. Even though they're paying this not small fee, it's a good example of how a company can manage to protect its reputation because when these come out, they can be pretty damning. They're published on OFEC's website, as Doreen mentioned earlier, in most cases. So this is a good case of how being proactive and being cooperative with the government when you find the problem can go a long way towards helping the company.
The other thing it illustrates is companies need to take a close eye on their subsidiaries and their partners, and make sure that those partners are on notice of what they can and can't do, and to check up on them and make sure that they're actually doing what they say they're supposed to be doing.
Doreen Edelman:Yeah. That was my comment. Good for Berkshire Hathaway that they found out about it. But why didn't they find out about it earlier, so that they could've prevented it? Christian, do you remember? How much could the fines have been in this case?
Christian Contardo:I don't remember off the top of my head. But usually, the statutory maximum is an exorbitant number. And for them to have settled for $4 million it was likely pretty high, given the sort of malicious intent that you see here from the bad actors, and that it went on for a little bit, and the fraud involved in concealing it. I think it was probably pretty high. I would have to look it up to get the exact number.
And this kind of goes back to what we were talking about a little earlier. These really, in terms of sanction, but also export controls, you need to know where goods are going, who the end user is, and to have some sort of screening process to know. Do your due diligence on your customers, on your suppliers, on pretty much anyone that you're doing business with, who's outside the United States.
Doreen Edelman:Yeah. In the old days, you only had to worry about destination and end user. End use was never really an issue. I mean, airplanes were never an issue. Now you need a checklist. And it has to be destination, end user, and end use. And on the end users, everyone has to be checking for restricted parties because I can tell you when we get into these diligence questions, particularly it's really hard for us to be able to vouch for a company if they don't do the restricted party screenings. And there's several ways they can do that, ways that cost money and ways that don't cost money. But they need it in their procedures because without that, I mean, again, it's strict liability. We can't fudge diligence when you've got a representation about this, or when you have to talk to an insurance company, have to talk about whether the company's compliant.
Christian Contardo:Interesting. So I have a confession to make. Just as we were getting that started, I realized that I made a mistake in this poll question. 22.8 million is the total amount so far in 2020, not for an individual case. The largest amount, so I guess it's good that people guessed that as at least it's in the ball park, even though I asked the question wrong. The largest one so far this year was around eight million, and it was a French company that provides, called SITA, that provides a number of services to the airline industry globally, one of which is electronic messaging. And they intentionally provided electronic messaging services to Iranian airlines that are designated by treasury as restricted parties. They did it intentionally. But unlike in the last case, they weren't trying to hide it. They just didn't realize that what they were doing was wrong.
But it turned out that the technology used came from the United States, and some of the messages were routed through servers in the United States. And those two points gave OFAC jurisdiction over the case, and led to this pretty large penalty against SITA. In previous years, there have been penalties usually against financial institutions because of the amounts of money involved. They reach into the hundreds of millions of dollars. So the penalties certainly can get high. And as we've been saying, if a company is in a spot where it's got a violation, cooperation, disclosure, putting in place significant mitigation controls can go a long way towards lowering that. And OFAC is willing to negotiate on those if you've got some mitigating factors that might apply.
Doreen Edelman:And this is really important because it also highlights for you if you have foreign subsidiaries, or foreign companies as portfolio clients. If they touch US technology or the US banking system, they may have no idea they're even subject to OFAC sanctions, but the US government is very well aware of it. And they're being hit with these penalties. Okay, with that, we are going to go on to the last section, which has to do with import duties. Import and customs are the same thing. Notwithstanding what the president did with these Chinese duties, the foreign party doesn't pay the duties. The US importer pays the duties. And that has resulted in millions and millions and millions of dollars that US companies have to pay.
So anything that can be done to help importers, retail companies, parts manufacturers, even we've got clients that make machines to make parts, any product that can come in with a lesser duty is a savings. And along with that, we hear that there will be new regulations coming out on tracking components because of the national security implications and because of the quality issues, and trying to minimize forced labor and child labor and all those other things. There's going to be a bigger push for supply chain methodologies and understanding of where your products and components have come from and where they're going.
So with that said, there's three important factors here that affect the duties. The first is the classification. And what this means is there's a classification number just like there's an export number. But of course, there's no consistency in the system. So on the import side, it's HTSUS, Harmonized Tariff Schedule of the United States. It's a 10 digit code. There is whole science in determining where your product fits. There's a whole methodology, whether you classify products, or how they're used, or what their intent was, or by how they're made, if they're more metal or more plastic. And the point is that classification determines the duty rate. So if you're bringing in products from a country like China, where we do not have a trade agreement, and if or since the administration now has these 301 duties placed on imports from China, you could be paying even more than the China duties of 45% because if there was an existing 10% duty, you now could be paying 35% to bring a product in.
So the classification you pick is key. Most companies rely on their brokers to do classification. There's a couple problems with that. One is your contract with the US government, with CBP, requires that the importer of record, I'm putting that in quotes, it's the importer of record responsible for the HTSUS classification, so the broker has no risk or no liability, and very limited risk because brokers have more risk. They're your agent or the company's agent. So the bottom line is US importers are responsible for knowing their classification, and that classification is going to determine how much they pay.
Obviously, if you haven't done any type of an internal review, you have no idea if your classifications are correct. You could be paying duties that you don't need to pay because there are ways to legitimately argue. There's only one right classification, but in many cases, the way the system has developed over its lifetime, there's inconsistencies because customs was handled at a local level, and there's different customs regions. And until recently, you could bring a product in, at four different ports, under four different classifications, and it may not have caught up with the government yet. So classification review is an important thing.
Second is country of origin. So if you have a plastic pet fountain that's made in China, so country of origin issues have not been up in the C suite until recently. So you've got a middle level manager who's not paying any attention to the list of components in that plastic drinking fountain. But let's just say they did take a look at it. And if they took a look at it, they would see that the motor in that fountain happens to be from Japan. And if you understood how classification is done in that particular segment of the harmonized tariff code, you would think that it's classified not by what it's made of, plastic in China, it's classified based on its purpose and its essential character. And that plastic in that pet fountain is nothing without the motor. It's a long way of getting to the fact that this product, even though it may have been assembled in China, it should be coming in boxes that are labeled made in Japan. That product then comes in without the Chines duties and these extra 301 duties.
So it's very important that these issues get raised to a level inside of a company that you know if you've got these things correct. And there's an added reason, of course, because you've got the FTC labeling requirements. You've got that CBT labeling requirements that you have to have the correct label on a product. So that's the second area. The third area is the section 301 duties. And all companies need to be looking at their supply chain for other reasons, even before we had these section 301 duties. It's all about supply continuity. We've seen a lot of industries or products you can't get because products have been stuck because factories had to go offline because of COVID. So COVID and 301 has created this environment where companies need to know where their products are coming from. And if they haven't, if they didn't apply for an exclusion on 301 duties, but yet, they still are paying 301 duties, it is possible exclusions apply because they're not company specific. They're HTSUS number specific.
So there could be companies sitting out there that don't know that exclusions apply to them. And they could immediately be saving 7.5 to 25%. In addition to that, there's currently a case pending at the CIT, the Court of International Trade, where companies are alleging that these section 301 duties were wrongfully put in place by the Trump administration. And it may take years for that case to be resolved, but it may result in the actual refund of all those duties. So we are suggesting that companies hedge their bets. About 4000 companies, importers have filed to get into that suit. We have no idea if this will end up like the harbor maintenance tax, and there are a lot of ifs here.
But if the court agrees with the plaintiffs, and they're going to throw out these duties, did you have to be a plaintiff in this case to benefit? Or will it be opened up to any importer? The case has just started. Like I said, it's going to be a long haul. But most prudent companies are spending the few thousand dollars to become a plaintiff in order to hedge their bets in case that happens. So as I just mentioned to you, and I know we need to wrap it up here, but we are hearing from DHS, which oversees CBP, and members of Congress, that you're going to see an increased focus, particularly with the change with the Biden administration here, on child labor, forced labor. And that is going to percolate all through the supply chain.
And you're going to start needing certifications like you need if you take advantage of the US Mexico free trade agreement. So this is going to add more burdens on companies, and if they don't have their ducks in a row about customs, it's just going to lead to problems. As Christian mentioned, OFAC's sanctions is an easy way to target companies that we're unhappy, or countries, well, both, actually companies that we don't like their practices. So you're seeing more OFAC sanctions of companies or individuals in the forced labor region of China. And we're seeing broad legislation that's requiring a prohibition of any items coming from this region unless you've got a certification proving that forced labor was not used. And we're hearing from companies that they're now getting their customers in the US that are requiring certifications that goods are not even coming from China. So there's nothing but more of this coming.
So what I would do if I was in a PE firm, and I had portfolio clients that import, I would ask them questions. See if they're paying attention to these issues. Have they looked at alternative classifications? Do they know the full supply chain, where the parts are coming from? Do they have alternative sources? Are they paying 301 duties? Have they looked at that and if there are any alternatives? And how are they documenting their compliance? Because that's going to become a bigger issue. So with that, I want to ask if anyone has any questions. You can always reach out to us and ask, if you have questions at any time, there's no charge for asking questions. Or if you want more information, we've barely touched the surface here on these topics.
But my goal is just to make you all aware of these issues, so you can spot check them for your portfolio companies and for future investments. I'll turn it over to Christian, if he has any final words, and then back to Michael and Lexi.
Christian Contardo:I would just say because we didn't really touch on it in sanctions, but most of the sanctions tools are for national security purposes, counter terrorism, counter WMDs, things like that. What we're really seeing now is they're using what's called the Magnitsky Act sanctions, which was a human rights sanctions tool to designate Chinese officials. Previously, there had been some Russians designated under it. But now they're using this Magnitsky Act sanctions against Chinese entities and government individuals who are supporting forced labor in Xinjiang, and I think that's an area where you could see further growth of sanctions, is to use as a human rights tool.
Doreen Edelman:Good point. Michael?
Michael Rosenberg:I just wanted to make sure people consider really spending time on their initial due diligence because that's where a lot of issues can come up and can be resolved before the regulators get involved because when CFIUS gets involved, it does take time for their review. And just that amount of time that it can take, 45 days, by statute, it could be longer if there's issues, could cost additional funding depending on how the transaction is being financed. So it's important to get all the due diligence done upfront. The more information you have for your transaction to be able to provide quicker is probably the best way to go.
With that, Christian, Doreen, I want to thank you both very, very much for giving us all of this information. I think everyone's learned a lot from it, including myself, especially myself. I do want to thank everyone for attending.
Transcribed by Rev.com
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Michael Rosenberg is a Director in the firm's Risk and Compliance Services (RCS) Group, and co-leads the CFIUS Advisory Services.
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