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APPENDIX 2

ARTICLE ON TREASURY REGULATIONS OF FOREIGN ASSETS AND TRADE FROM "A LAWYERS GUIDE TO INTERNATIONAL BUSINESS TRANSACTIONS," VOLUME I, CHAPTER 7*

(By Stanley L. Sommerfield Acting Director, Office of Foreign Assets Control, U.S. Department of the Treasury)

SECTION 7-TREASURY REGULATION OF FOREIGN ASSETS AND TRADE†

.1(a) Introduction

I-7.1 IN GENERAL

The Department of the Treasury has promulgated five sets of Regulations that place restrictions on U.S. citizens, firms, and their foreign subsidiaries in certain transactions with a number of foreign countries. Broadly stated, the Regulations act to control or prohibit import, export, and other financial and commercial transactions with various countries and to restrict the use of the assets of certain foreign countries or their nationals that are located in the United States or under the control of U.S. nationals.

The Regulations now in effect are the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Reglations, the Foreign Funds Control Regulations, and the Rhodesian Sanctions Regulations. The statutory authority for the first four Regulations is Section 5(b) of the Trading With the Enemy Act of 1917, as amended. The Cuban Regulations and also issued under Section 620(a) of the Foreign Assistance Act of 1961.7

*Copyright 1963 by the American Law Institute. Reprinted with permission of the American Law Institute.

The views expressed in this section are those of the author and do not necessarily reflect the views of the United States Government or any agency thereof.

131 C.F.R. pt. 500 (1975).

2 Id. pt. 505 (1975).

3 Id. pt. 515 (1975).

Id. pt. 520 (1975).

Id. pt. 530 (1975).

50 U.S.C. App. § 5 (1970). Section 5(b) provides:

(b) (1) During the time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise, and under such rules and regulations as he may prescribe, by means of instructions, licenses or otherwise

(A) investigate, regulate, or prohibit any transactions in foreign exchange, transfers of credit or payments between, by, through, or to any banking institution, and the importing, exporting, hoarding, melting, or earmarking of gold or silver coin or bullion, currency or securities, and

(B) investigate, regulate, direct and compel, nullify, vold, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in or exercising any right, power or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest, by any person, or with respect to any property, subject to the jurisdiction of the United States

The powers given the President under Section 5(b) were delegated to the Secretary of the Treasury by Exec. Order 8389, 3 C.F.R. 645 (Cum. Supp. 1938-1943) and Exec. Order 9193, 3 C.F.R. 1171 (Cum. Supp. 1938-1943).

Section 5(b) of the Trading with the Enemy Act was used in 1971 as authority to impose a 10 per cent ad valorem supplemental duty on most articles imported into the United States. The duty was imposed to rectify a serious balance of payments problem caused in part by foreign governments manipulating foreign exchange rates in their favor. This use of Section 5(b) of the Trading with Enemy Act was sustained by United States Court of Customs and Patent Appeals, United States v. Yoshida Int'l, Inc., 526 F. 2d 560 (C.C.P.A. 1975).

722 U.S.C. $ 2370 (a) (1970).

(223)

The Statutory authority for the Rhodesian Sanctions Regulations is Section 5 of the United Nations Participation Act of 1945. The various Regulations are administered by the Office of Foreign Assets Control, Department of the Treasury.

.1(b) Objectives of the regulations

The several Regulations have certain general objectives, each designed to impose economic restrictions on specified foreign countries in accordance with U.S. policy considerations. A major goal of the Foreign Assets Control, Cuban Assets Control, and Rhodesian Sanctions Regulation is to prevent the countries specified in the Regulations from earning foreign exchange from the United States. This goal is accomplished by restricting the purchase or importation of goods originating in the designated foreign countries, by denying them access to U.S. commerical and financial facilities, and denying them use of their assets in the United States.

Another objective, common to the Foreign Assets Control, the Cuban Assets Control, and the Foreign Funds Control Regulations, is to keep the U.S.-located assets of the countries specified in these Regulations in the United States pending settlement of U.S. private claims against such countries for uncompensated expropriation of privately owned U.S. assets. This goal is realized by blocking 10 property subject to U.S. jurisdiction that belongs to the designated foreign countries or their nationals, thus denying them the ability to transfer their property without a Treasury license.

Finally, the Foreign Assets Control, the Cuban Assets Control, and the Transaction Control Regulations act to supplement the Commerce Department's Export Control Regulations" by restricting certain offshore transactions not subject to Commerce Department regulation. Generally speaking, the Department of Commerce has authority to restrict all exports from the United States and reexports from abroad of U.S. origin goods and components parts. In practice, Commerce Department restrictions are imposed primarily against exports and reexports to a limited number of countries. The Treasury Regulations also provide authority to limit exports to these countries. However, in some respects the authority of the Treasury Department is broader than that of the Commerce Department, since the Treasury Regulations cover all transactions with these countries-regardless of the origin or place of shipment of the goods involvedentered into by U.S. citizens, firms, or their foreign subsidiaries. The Treasury Department thus has sole jurisdiction over exports by such persons and firms of foreign origin goods and components from third countries to the various countries listed in the Regulations. Accordingly, U.S. subsidiaries or citizens seeking to export foreign goods or components from third countries to any of the designated countries must qualify for, or under, a Treasury Department license.12 .1 (c) Licensing procedures

Each of the several Regulations sets out broad prohibitions against a wide range of property transfers and business and financial transactions with designated foreign countries. The Treasury Department, however, is empowered to authorize transactions that would otherwise be prohibited under the Regulations through the use of licenses. The Treasury Department issues a license in effect granting an exception to the blanket prohibitions set out in the Regulations

8 Id. § 287c (1970). Section 287c(a) provides authority for the President to implement decisions of the Security Council of the United Nations. This authority was delegated to the Secretary of the Treasury in Exec. Order 14419, 3 C.F.R. 737 (Cum. Supp. 1966-1970). See also Exec. Order 11322, 3 C.F.R. 606 (Cum. Supp. 1966-1970). The Secretary delegated his authority to the Office of Foreign Assets Control, 32 Fed. Reg. 3172 (February 27, 1967).

• Office of Foreign Assets Control, Dep't of the Treasury, Washington, D.C. 20220. 10 Blocking (commonly called freezing) means prohibiting any transaction with respect to any property subject to U.S. jurisdiction in which a particular foreign country or its national has any interest, unless the transaction is authorized by the Department of the Treasury. Title to blocked property remains in the designated foreign country or national. and possession is retained by the holder (most often a banking institution) of the assets at the time the blocking regulation went into effect. Blocking vests no interest in the property in the U.S. Government. See 31 C.F.R. §§ 500.201-.202; 515.201-.202; 520.101 (1975). 11 See Part 1. § 5.

12 Treasury Regulations provide that when export transactions are authorized or licensed by the Department of Commerce, no additional Treasury authorization is required. See, e.д., 31 C.F.R. §§ 500.533, .541 (1975). In the case of exports from third countries containing both U.S. and foreign component parts or goods, however, two licenses are required: a Commerce license is required for the U.S. origin portion and a Treasury license needed for the foreign portion of the shipment.

when it determines that a certain category of transactions or a particular transaction may be allowed in accordance with the policy considerations underlying the Regulations. The variety and scope of the licenses now available under certain of the Regulations reduces the number of transactions actually prohibited under those Regulations.

Two types of licenses are employed under the Regulations:

General Licenses. General licenses are incorporated in the text of the Regulations and authorize certain categories of transactions for all persons and particular transactions qualifying under the terms of the license itself. No other approval, procedures, or applications are required to engage in transactions authorized under a general license. For example, the Foreign Assets Control Regulations, which control transactions with the People's Republic of China, North Korea, Vietnam, and Cambodia, now contain a general license authorizing most transactions with the People's Republic of China.

Specific Licenses. Specific licenses are issued on the basis of written applications in individual cases in which the particular transaction is prohibited by the Regulations and has not been authorized under a general license. Although the grant or denial of a specific license is a matter of discretion, as a practical matter certain categories of transactions are routinely approved, and others are uniformly denied. Applications for specific licenses are filed in duplicate with the Federal Reserve Bank of New York, whose Foreign Assets Control Division initially screens applications. In many routine cases the Bank is authorized to approve or deny application for a specific license, under guidelines established by the Washington Office. In other cases, applications are forwarded to the Office of Foreign Assets Control, in Washington, for final disposition.

.1(d) Persons covered by the regulations

The various Regulations apply to certain transactions with designated foreign countries and their nationals that are entered into ". by any person... subject to the jurisdiction of the United States." 14 For purposes of the Foreign Assets Control and the Cuban Assets Control Regulations, the term person subject to the jurisdiction of the United States includes any person, 15 wherever located, who is a citizen or a resident of the United States; a person actually within the United States; a U.S. corporation; and any business, wherever located, that is owned or controlled by U.S. residents or citizens, by a U.S. corporation, or by a person actually in the United States." Hence, a U.S. national or corporate subsidiary operating abroad 1 falls clearly within the ambit of a person subject to the jurisdiction of the United States and thus is subject to the strictures of these Regulations.

1(c) Enforcement

16

Individuals who participate in any transaction covered by the several Regulations must keep a full and accurate record of each such transaction. Records must be kept available for inspection for at least two years after the transaction is completed. In addition to these records, the Secretary of the Treasury may require that any person engaging in such transactions provide a full report of the transaction, including the production of any documents pertaining to the transaction. Currently, such reports are requested on a case-by-case basis, where required.

20

Although records are required to be kept for only two years, it is advantageous to keep permanent records of any transaction involving blocked accounts. The Treasury Department may decide to conduct a "census" of all assets and accounts blocked under the various Regulations. The Department may require holders of blocked accounts to explain any diminution in value or transfer of

13 The Federal Reserve Bank is located at 33 Liberty Street, New York, N.Y. 10015. See Exhibits 1 through 4 following this section for reproductions of the license application forms now required under the various Regulations.

14 31 C.F.R. $$ 500.201; 515.201; 530.201 (1975).

15 Person is defined to include an individual, organization, or business enterprise. 31 C.F.R. $$ 500.308; 515.308; 530.301 (1975).

16 The Rhodesian Sanctions Relations, however, apply to those U.S. subsidiaries or firms Incorporated or having their principal place of business in Rhodesia, but not to U.S. subsidiaries or firms incorporated or operating in third countries. 31 C.F.R. $ 530.307 (a) (4) (1975). See Part I, § 7.6 infra.

17 Id. §§ 500.329; 515.329 (1975).

18 See supra note 16.

19 31 C.F.R. §§ 500.601; 505.10; 515.601: 520.601: 530.601 (1975).

20 Id. $$ 500.602; 505.10; 515.602; 520.602; 530.602 (1975).

funds that is disclosed in the course of a census of blocked accounts. Since a census may be conducted considerably more than two years after any particular transaction has taken place, it is advisable to keep records of transactions involving blocked accounts considerably longer than the two-year minimum. This is particularly important in the case of transactions conducted under a general license. In such cases, the Treasury Department will have no record of the transaction, and accordingly, the burden of proving that the transaction qualified under a general license is placed on the holder of the blocked account.

Any transaction entered into in violation of those Regulations promulgated under the authority of the Trading With the Enemy Act" is void and unenforceable in the United States. But such transactions may be validated under certain circumstances, even after they are completed, if an appropriate license or authorization is issued.24

Section 5(b) of both the Trading With the Enemy Act, as amended, and the United Nations Participation Act provide that persons who knowingly violate the provisions of the Acts or Regulations promulgated thereunder are subject to a fine of up to $10,000. Natural persons may also be imprisoned for up to 10 years.

25

I-7.2 FOREIGN ASSETS CONTROL REGULATIONS

The Foreign Assets Control Regulations 20 were issued on December 17, 1950, as a result of the emergency declared by the President on December 16, 1950, following the entrance of armed forces of the People's Republic of China into the Korean War." They were amended in 1964 to apply to North Vietnam and were further amended in 1975 to include Cambodia and South Vietnam.

31

These Regulations are directed at certain transactions involving the People's Republic of China, North Korea, Vietnam, and Cambodia, the nationals of those countries or the property belonging to such countries or their nationals. Specifically, the Regulations act to block all assets within U.S. jurisdiction in which these countries of their nationals have any interest, to prohibit the purchase or importation of their goods by persons under U.S. jurisdiction, to prevent the export of foreign origin goods or component parts from third countries to any of the listed countries, and to prohibit the use of U.S. financial and commercial facilities in transactions with such countries or their nationals."

A number of important general licenses have been issued that have limited the impact of the Foreign Assets Control Regulations. For example, most transactions with the People's Republic of China are authorized by general licenses that

21 This is so because persons engaging in transactions authorized under a general license need not inform the Treasury Department of any such actual transaction. See Part I, §7.1 (c) supra.

22 50 U.S.C. App. $5 (1970).

23 31 C.F.R. §§ 500.203 (a)-(b), (c); 515.203 (a)-(b), (c) (1975). This provision in the Regulations enables the Treasury Department to require any participant in the illegal transfer of funds from blocked accounts, with or without knowledge of the illegality of the transfer, to reimburse the blocked account for the full amount of the transfer. See Orvis v. Brownell, 345 U.S. 183 (1953); Propper v. Clark, 337 U.S. 442 (1949); Schumacker v. Brownell, 210 F. 2d 14 (3d Cir. 1954). See also United States v. Alcatex, Inc., 328 F. Supp. 129 (S.D.N.Υ. 1971).

24 31 C.F.R. § 500.203 (1975).

25 50 U.S.C. App. §5(b) (1970); 22 U.S.C. $287c(b) (1970). See United States v. Quong, 303 F. 2d 499 (6th Cir. 1962); Woo Nai Chan v. United States, 271 F. 2d 708 (9th Cir. 1960); United States v. China Daily News, 224 F. 2d 670 (2d Cir.), cert. denied, 350 U.S. 885 (1955); United States v. Broverman, 180 F. Supp. 631 (S.D.N.Y. 1959); United States v. Wagman, 168 F. Supp. 248 (S.D.N.Y. 1958); United States v. Weishaupt, 167 F. Supp. 211 (E.D.N.Y. 1958).

26 31 C.F.R. pt. 500 (1975). For recent cases rejecting Constitutional challenges to the Foreign Assets Control Regulations, see Veterans & Reservists for Peace in Vietnam v. Regional Comm'r of Customs, 159 F. 2d 676 (3d Cir.), cert. denied, 109 U.S. 933 (1972); Cheng Yih-Chun v. Federal Reserve Bank, 412 F. 2d 160 (2d Cir. 1971); Teague v. Regional Comm'r of Customs, 404 F. 2d 441 (2d Cir. 1968), cert. denied, 394 U.S. 977 (1969). For a detailed discussion of the Foreign Assets Control Regulations as they relate, in particular, to the People's Republic of China, see Bayar, The Blocked Chinese Assets: Present Status and Future Disposition, 15 Va. J. Int'l. L. 959 (1975).

27 Exec. Proclamation No. 2914, Dec. 16, 1950, 3 C.F.R. 99 (Cum. Supp. 1949–1953), 50 U.S.C. App. notes preceding § 1 (1970).

28 29 Fed. Reg. 6025 (May 5, 1964), amending 31 C.F.R. § 500.201 Schedule (1975). 2940 Fed. Reg. 17262 (April 17, 1975), amending 31 C.F.R. $ 500.201 Schedule (1975). 30 40 Fed. Reg. 19202 (May 2, 1975), amending 31 C.F.R. $ 500.201 Schedule (1975). 31 31 C.F.R. $ 500.201 (1975).

Id. $$ 500.201, .204 (1975).

33 Id. §§ 500.201, 533, .544 (1975). The Regulations thus primarily affect those export transactions outside the jurisdiction of the Dept. of Commerce. See supra note 12, and accompanying text.

34 31 C.F.R.$ 500.201 (1975).

were issued in 1971. However, Chinese property that was frozen as of the effective date of these general licenses continues to be frozen. And strategic exports from foreign affiliates of U.S. firms to the Peoples' Republic of China remain under licensing control.37

As a further example of the general licenses incorporated in the Foreign Assets Control Regulations, a variety of transactions involving blocked assets and accounts are permitted under general license. A banking institution, for example, may purchase and sell securities on behalf of a designated foreign national with the funds deposited in a blocked account. The securities purchased or the proceeds of sale, however, must be redeposited in the blocked account. And most payments and transfers of credit to blocked accounts are authorized provided the payment or transfer does not act to create or transfer an interest in the account to any other country or person.

30

Lastly, most exports and reexports of U.S. origin goods on component parts are permitted under general license, when the particular transaction has been licensed or authorized by the Department of Commerce. Failure in such transactions to obtain or quality under a license issued by the Commerce Department is a violation of the Trading With the Enemy Act as well as the Export Administration Act.

I-7.3 CUBAN ASSETS CONTROL REGULATIONS

The Cuban Assets Control Regulations 1 were issued on July 8, 1963, incorporating and expanding upon a series of economic sanctions imposed against Cuba, beginning in 1960. These Regulations are substantially similar in scope and application to the Foreign Assets Control Regulations as now applied to North Korea, Vietnam, and Cambodia.3

The Cuban Assets Control Regulations are unique in at least one respect, however. Between 1963 and 1975, the Regulations contained a general license" authorizing U.S.-controlled firms in third countries to trade with Cuba. But U.S. citizens who were officers or directors of such firms were prohibited from any paritcipation or involvement in such transactions." This prohibition, coupled with the U.S. policy of dissuading foreign affiliate trade with Cuba, had the practical effect of precluding most, if not all, trade with Cuba by U.S.-controlled firms operating in foreign countries."

In October 1975, the general license authorizing foreign affiliate trade with Cuba was revoked, as was the provision prohibiting the involvement of U.S. officers and directors in such trade. In their place, a new and more liberal section was added, which provides that specific licenses are to be issued for certain categories of transaction between U.S.-owned or controlled firms in third countries and Cuba when such transactions are favored or required by local law or policy in the third country." In order to obtain a specific license to export goods from

35 Id. §§ 500.546-.547 (1975).

36 Id. § 500.546(b) (4) (1975).

37 Id. § 500.546(b) (2) (1975).

38 Id. $ 500.513 (1975).

39 Id. $ 500.508 (1975).

40 Id. §§ 500.533, .544 (1975).

44 Id. pt. 515 (1975). For recent cases upholding various applications of the Cuban Assets Control Regulations. see Nielson v. Secretary of the Treas., 124 F. 2d 833 (D.C. Cir. 1970): Sardino v. Federal Reserve Bank, 364 F. 2d 106 (2d Cir.), cert. denied, 385 U.S. 898 (1965): American Documentary Films, Inc. v. Secretary of the Treas., 311 F. Supp. 703 (S.D.N.Y. 1972).

Economic sanctions were first imposed against Cuba in 1960 when the President. acting under the authority of the Sugar Act of 1918, as amended, 7 U.S.C. § 1158 (a)-(b) (1970), directed a reduction in the Cuba sugar quota, 25 Fed. Reg. 6114 (July 7, 1960); 43 Dep't State Bull. 140 (1960). In October 1960. the United States denied export licenses for most industrial exports to Cuba. 43 Dep't State Bull. 715 (1960), and two months later the Cuban sugar quota was eliminated. 11 Dep't State Bull. 18 (1961). A complete embargo on imports from Cuba was imposed by the Treasury Department in February 1962, 27 Fed. Reg. 1116 (February 7, 1962).

43 See Part I. § 7.2 supra.

431 C.F.R. $ 515.544 (1975).

45 Id. § 515.544(e) (1975).

40 The Treasury Department regulation prohibiting the U.S. officers and directors of U.S. affiliates from participating in transactions with Cuba was the source of some irritation to foreign governments whose law or policy favored trade with Cuba. By observing the Treasury regulation, U.S. officers and directors ran the risk of violating such local law or policy.

4740 Fed. Reg. 17108 (October 8, 1975), revok'g 31 C.F.R. § 515.511 and adding 31 C.F.R. 515.559 (1975).

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