The State Department and BIS target Cambodia with more restrictive export controls

On December 9, 2021, the Department of State and the Department of Commerce’s Bureau of Industry and Security (BIS) published Final Rules adding Cambodia to the International Trafficking in Arms Regulations (ITAR) § 126.1 country list, and applying stricter export controls to Cambodia. The State Department and BIS cited the endemic corruption and human rights abuses occurring throughout Cambodia, as well as the Cambodian government’s relationship with the Chinese military as contrary to U.S. national security and foreign policy interests. These Final Rules come just a month after the Department of State, the Department of the Treasury, and the Department of Commerce issued a unique business advisory for U.S. companies operating, or considering operating, in Cambodia. The advisory highlighted the endemic corruption, human rights abuses and conservation crimes occurring throughout Cambodia, often by Cambodian government officials, and how these risks implicated various U.S. regulatory regimes.

Changes Made for Cambodia under the EAR

BIS issued this Final Rule based on a determination that an expanded Chinese military influence in Cambodia, and endemic corruption and human rights abuses committed by Cambodian government actors are contrary to U.S. national security and foreign policy interests. In furtherance of this determination, BIS made the following changes to the EAR for Cambodia:

• Adds Cambodia to the list of countries subject to the more restrictive licensing policy in § 742.4(b)(7) for National Security (NS)-controlled items. Under § 742.4(b)(7), all applications are reviewed to determine the risk of diversion to a military end use or end user. BIS will apply a presumption of denial for license applications to export, reexport, or transfer items to Cambodia that would make a material contribution to the “development,” “production,” maintenance, repair, or operation of weapons systems, subsystems, and assemblies, such as, but not limited to, those described in supplement no. 7 of Cambodia.

• Adds Cambodia to the list of countries subject to military end use and end user controls in § 744.21, which prohibits the export, reexport or transfer of items listed in supplement no. 2 to part 744 without a license. A license is required when the exporter has knowledge that the item is intended for a military end use or end user in Cambodia. These license applications will be reviewed with a presumption of denial. No entities located in Cambodia were added to the Military End Users (MEU) List.

• Adds Cambodia to the list of countries subject to military intelligence end use and end user controls in § 744.22, which prohibits the export, reexport, or transfer of items subject to the EAR to Cambodia without a license. A license is required when the exporter has knowledge that the item is intended for a military-intelligence end use or end user in Cambodia. These license applications will be reviewed with a presumption of denial.

• Adds Cambodia to the list of countries subject to a U.S. arms embargo under Country Group D:5, consistent with the addition of Cambodia to ITAR § 126.1. Countries listed in Country Group D:5 are subject to additional restrictions in the EAR, including on de minimis U.S. content, license exception availability, and licensing policy for certain items.

Changes Made for Cambodia under the ITAR

The State Department issued this Final Rule in response to significant credible evidence of corruption, human rights abuses, and an exclusive agreement with China on military expansion in Cambodia by the Cambodian government. Under the Final Rule, Cambodia is added to the list of ITAR § 126.1 countries, meaning the U.S. will deny all licenses and other approvals to export and temporarily import defence articles and defence services destined for, or originating in, Cambodia. An exception may be made for defence articles and defence services in furtherance of conventional weapons destruction or humanitarian mine action activities.

Additional Business Considerations

In the November 2021 business advisory, the Departments of State, Treasury, and Commerce identified three additional areas in which businesses operating in Cambodia should ensure they are performing due diligence. First, due to widespread corruption, businesses should pay close attention to their anti-money laundering/countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). Second, businesses should ensure they are monitoring their supply chains for identifiers of forced labour or trafficking in persons to avoid criminal liability under the Trafficking Victims Protection Act (TVPA). Finally, businesses should be aware of relevant Office of Foreign Asset Control (OFAC) designations.

AML/CFT Implications

The widespread corruption and rapidly expanding economy in Cambodia facilitates money laundering and other illicit financial activities. Cambodia is vastly underregulated, and many financial transactions are cash-based and conducted without a financial institution.

The advisory identifies the real estate, casino, and infrastructure industries in Cambodia as most at-risk for money laundering due to a lack of regulation and a corrupt government. United States financial institutions considering investing or operating in Cambodia, particularly in the aforementioned industry sectors, should be aware their obligations under the BSA. Financial institutions must, among other things, implement an AML program, file transaction reports, and report suspicious activity. The latter is particularly relevant in Cambodia considering the widespread use of forced labour and human trafficking.

Trafficking in Persons, Wildlife, and Narcotics Due Diligence

Human trafficking and forced labour is rampant in Cambodia, particularly in the tourism, casino, and logging industries. The advisory encourages United States businesses to consider the potential threat of trafficking and forced labour when investing in those industries. Under United States legal authorities like the TVPA and the Federal Acquisition Regulation, Combating Trafficking in Persons, persons who engage in or profit from forced labour can be subject to civil and/or criminal penalties.

In addition to human trafficking, businesses operating in Cambodia should be aware of large-scale conservation and drug crimes occurring throughout the country. In 2020, the State Department named Cambodia a country of concern for major wildlife trafficking. The advisory specifically discusses Cambodia’s illegal logging industry and recent surge in ivory sales.

In order to protect itself from legal ramifications, a U.S. business operating in Cambodia should ensure it conducts due diligence with regard to its supply chains. The advisory lists multiple resources available to businesses in conducting supply chain due diligence, including:

• The Department of Labor’s Comply Chain, which offers information on due diligence measures regarding forced labour in supply chains, and
• The Department of State’s Responsible Sourcing Tool, which provides an examination of 11 key sectors and 43 commodities at risk for human trafficking, and 10 risk-management tools.

OFAC Sanctions and Export Controls

Under Executive Order 13818, which implements the Global Magnitsky Human Rights Accountability Act, the Secretary of the Treasury has the authority to impose economic sanctions on foreign persons in connection with serious human rights abuses and/or public corruption. The Office of Foreign Assets Control (OFAC) enforces these sanctions. A U.S. person is generally prohibited from engaging in any transactions that involve property or property interests of a sanctioned person, subject to a license exemption. U.S. businesses should be aware that OFAC has designated multiple Cambodian entities and individuals for engaging in corruption, including officials with connections to the casino and infrastructure industries.

Next steps

• The State Department and Commerce Department’s Final Rules are effective December 9, 2021

Hogan Lovells would be pleased to answer any questions about how the Final Rules may affect your business, and to further assist in assessing the risk of doing business in Cambodia specific to your business.

Authored by Emily Jenkins.