On June 9, 2021, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued a final rule, effective June 8, amending the Export Administration Regulations (EAR) to reflect the formal termination by the United Arab Emirates (UAE) of its participation in the Arab League Boycott of Israel (the “Amendment”). This means that certain requests for information, action or agreement from the UAE will no longer be presumed to be boycott-related if made after August 16, 2020. The Commerce Department has also issued a press release.

Background

On August 13, 2020, the UAE and Israel announced the historic peace agreement between the two countries (known as the UAE-Israel Abraham Accords), thereby establishing full diplomatic and commercial relations between the two countries. On August 16, 2020, the UAE issued Federal Decree-Law No. 4 of 2020, which repealed Federal Law No. 15 of 1972 Concerning the Arab League Boycott of Israel and formally terminated the UAE’s participation in the Arab League Boycott of Israel. In response to these actions, on April 8, 2021, the US Treasury Department removed the UAE from Treasury’s List of Countries Requiring Cooperation With An International Boycott. Our prior blog posts regarding the UAE’s repeal of the boycott law and Treasury’s action can be found here and here. On April 22, 2021, the US State Department certified to Congress that the UAE had formally ended its participation in the Arab League Boycott of Israel.

The Effect of the EAR Amendment

Part 760 of the EAR prohibits US persons from taking certain actions in furtherance or support of boycotts by foreign countries against countries friendly to the United States, in particular Israel, and imposes a quarterly reporting requirement on the receipt of certain boycott-related requests.  Through the addition of a new Supplement No. 17 to part 760 of the EAR, the Amendment confirms that certain requests for information, action or agreement from the UAE that were presumed to be boycott-related prior to August 16, 2020 will no longer be presumed to be boycott-related if made after August 16, 2020. Accordingly, such requests will no longer be subject to the prohibitions or reporting requirements of part 760 of the EAR. For example, a request from the UAE for a certification that a vessel is eligible to enter UAE ports, or a request by UAE government officials requiring a US company to provide the place of birth of employees traveling to the UAE, will no longer be presumed to be boycott-related if made after August 16, 2020.

Notwithstanding the Amendment, US persons are still required to adhere to the prohibitions and reporting requirements under part 760 of the EAR with respect to requests from the UAE that are overtly boycott-related. Therefore, US companies should remain vigilant for requests from the UAE containing references to “blacklisted,” “Israel,” “boycott,” “non-Israeli goods,” “six-pointed star,” and other phrases and words indicating a boycott purpose. 

The authors acknowledge the assistance of Rob O’Brien in the preparation of this blog post.

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In brief

President Biden released his Administration’s budget proposal for fiscal year 2022 on 28 May 2021. A copy of the Budget can be found here. To accompany the Administration’s Budget, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals.” Known generally as the “Green Book,” the document includes detailed descriptions of the tax provisions in President Biden’s economic proposals under the American Jobs Plan and American Families Plan, as well as accompanying revenue estimates. Though useful for planning purposes, the proposals have varying likelihoods of passage. As the familiar adage goes, “The President proposes; Congress disposes.”


Contents

  1. American Jobs Plan
    1. Corporate Tax Proposals
    2. Effective Dates
    3. Housing and Infrastructure
    4. Incentivize Clean Energy Investments

American Jobs Plan

In the first section of the Green Book, Treasury described tax proposals intended to further three key policy goals identified by the Biden Administration: (1) “reform corporate taxation,” (2) “support housing and infrastructure,” and (3) “prioritize clean energy.”

Corporate Tax Proposals

The corporate tax proposals described in the Green Book are very similar to the proposals described in the American Jobs Plan (Fact Sheet), which was released by the Biden Administration on 31 March 2021.

These proposals include increasing the corporate income tax rate to 28% (from 21%), substantially revising the Global Intangible Low-Taxed Income (GILTI) regime, repealing the Base Erosion and Anti-Abuse Tax (BEAT) and replacing it with a new regime, entitled “Stopping Harmful Inversions and Ending Low-Tax Developments” (SHIELD), imposing a new 15% minimum tax on corporations with worldwide pre-tax book income in excess of USD 2 billion, and repealing the current deduction available to domestic corporations with respect to 37.5% of any foreign-derived intangible income (FDII).

The increased corporate income tax rate is estimated to raise USD 51 billion in fiscal year 2022 (USD 857 billion over the 2022-31 period). Reforms to the GILTI regime, in conjunction with the disallowance of deductions attributable to exempt income and tightened anti-inversion rules, are estimated to raise USD 29 billion in fiscal year 2022 (USD 533 billion over the 2022-31 period). Meanwhile, the repeal of the FDII deduction is estimated to raise USD 8 billion in fiscal year 2022 (USD 129 billion over the 2022-31 period). However, because the Green Book proposes to use the additional revenue that results from repealing FDII to expand more effective R&D investment incentives, this proposal ultimately is projected to have no revenue impact.

The proposed plan would also revise the current GILTI regime by eliminating the qualified business asset investment (QBAI) 10% exemption, reducing the Code Section 250 deduction for GILTI income to 25% (from 50% currently), repealing the high-tax exemption (under GILTI and subpart F income), and mandating a “jurisdiction-by-jurisdiction” calculation requiring a separate foreign tax credit limitation for each foreign jurisdiction. These changes would increase the effective GILTI tax rate to 21% (under the proposed 28% corporate tax rate) and prevent cross-crediting of taxes from high-tax jurisdictions to low-tax jurisdictions. Foreign oil and gas extraction income would no longer be exempt from the GILTI rules. Additionally, the amount of a dual-capacity taxpayer’s foreign levy that would qualify as creditable foreign tax would be limited to the generally applicable rate of income tax in the foreign jurisdiction.

The proposal further limits the use of foreign tax credits by extending the stock sale treatment for deemed asset sales under section 338 to hybrid entities such that the source and character of any item resulting from the sale of an interest in a hybrid entity would be determined based on the source and character the seller would have taken into account upon the sale or exchange of a stock transaction (rather than a deemed asset sale).

The proposal would replace the “BEAT” with “SHIELD.” Under the SHIELD, US group members that make payments to “low-taxed members” of the same financial reporting group would be subject to a disallowance of their deductions. The SHIELD applies when the financial reporting group has more than USD 500 million in global annual revenues. A member of the group is a “low-taxed” member if the member’s income is subject to an effective tax rate that is lower than a designated minimum tax rate. The designated minimum tax rate would be determined by reference to either the OECD’s ongoing “Pillar Two” negotiations or, in the absence of any consensus, at the proposed GILTI rate of 21%.

Notably, on 5 June 2021, Finance Ministers from the G7 (consisting of Canada, France, Germany, Italy, Japan, the UK, and the US) committed to the principal design elements for the OECD’s two pillar approach for international tax reform, including a global minimum tax of at least 15% on a country-by-country basis under Pillar Two.

To further discourage base-erosion, the Green Book resurrects the worldwide interest expense limitations that were originally considered, but ultimately eliminated from, the Tax Cuts and Jobs Act. The Green Book proposes to disallow interest expense deductions by a member of a multinational group to the extent its net interest expenses for US tax purposes exceeds the entity’s proportionate share of the group’s net interest expense (the “excess financial statement net interest expense”). Any disallowed interest expense could be carried forward indefinitely.
In response to Treasury’s concerns that some companies report significant profits to shareholders without paying federal income taxes, the Green Book proposes a 15% minimum tax on worldwide book income for corporations whose book income exceeds USD 2 billion. While the old alternative minimum tax enacted in 1986 (P.L. 99–514, section 701–702 (1986)), was in effect, AMTI for tax years 1987 through 1989 was increased by one half of the excess of adjusted net book income over AMTI before the adjustment and before deduction of any AMT NOL. Former IRC Section 56(f). Adjusted book income was generally the net income or loss on the corporation’s applicable financial statement. Former IRC Section 56(f)(3). The book income adjustment was repealed by section 11801(a)(3) of the Revenue Reconciliation Act of 1990. Perhaps these provisions will be dusted off in crafting the new 15% add-on minimum tax.

To limit the ability or incentive for domestic corporations to invert, the Green Book proposes to further tighten the existing section 7874 anti-inversion rule by reducing the continuing ownership threshold above which a non-US acquiring corporation is treated as a US corporation from 80% to 50%, and imposing a “managed and controlled” test by expanding the rule to acquisitions which don’t meet the threshold requirement but otherwise evidence continuing US control. Commenters have already expressed concern that these proposals would have a negative impact on US-based companies’ ability to compete with foreign-based multinationals in acquisitions.

Finally, to encourage the on-shoring of businesses, taxpayers would be eligible for a new general business credit equal to 10% of certain expenses paid or incurred in connection with moving a trade or business into the US, whereas deductions for expenses paid or incurred to move a business offshore would be correspondingly disallowed.

Effective Dates

The various proposals generally would be effective for taxable years beginning after 31 December 2021, with the exception of the increased corporate income tax rate, limit on foreign tax credits for sales of hybrid entities, and tightened section 7874 anti-inversion rule.

The 28% corporate income tax rate will be effective for taxable years beginning after 31 December 2021. However, for taxable years beginning after 1 January 2021 and before 1 January 2022, the 7-percentage point increase would be multiplied by a fraction, the numerator of which is the number of days of the portion of such taxable year falling within calendar 2022, and the denominator of which is the total number of days in such taxable year. Both the changes to section 338 and the changes to section 7874 will be effective for transactions completed after the date of enactment.

Housing and Infrastructure

To support housing and infrastructure initiatives, the Green Book proposes to expand the low-income housing tax credit, create a new tax credit program (the Neighborhood Homes Investment Credit to support construction and rehabilitation of single family homes), make permanent the New Markets Tax Credit (which provides a tax credit for investments in qualified community development entities and is scheduled to expire in 2025), and provide federally subsidized state and local bonds for infrastructure development (such as educational facilities, public transit, passenger rail and infrastructure for zero emissions vehicles).

Incentivize Clean Energy Investments

The Green Book proposes to repeal several fossil fuel subsidies including: (1) the 15% enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project; (2) the credit for oil and gas produced from marginal wells; (3) the expensing of intangible drilling costs paid or incurred in the development of an oil or natural gas property located in the US; (4) the deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method; (5) the exception to passive loss limitations provided to working interests in oil and natural gas properties; (6) the use of percentage depletion with respect to oil and gas wells; (7) two-year amortization of independent producers’ geological and geophysical expenditures, instead allowing amortization over the seven-year period used by integrated oil and gas producers; (8) expensing of exploration and development costs; (9) the use of percentage depletion for hard mineral fossil fuels; (10) capital gains treatment for royalties received on the disposition of coal or lignite; (11) the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels; (12) the Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and (13) accelerated amortization for air pollution control facilities.

To incentivize clean energy, the Green Book proposes to extend and enhance the Renewable Electricity Production Credit (for wind facilities), the Renewable Energy Investment Credit (for solar energy facilities), and the Residential Energy Efficiency Credit; establish a credit for taxpayer investment in electric power transmission property; create an allocated production credit for electricity generation from eligible existing nuclear power facilities that submit a bid; expand the advanced energy manufacturing tax credit in section 48C; establish tax credits for heavy and medium-duty zero emission vehicles; provide tax incentives for renewable aviation fuel; extend and enhance energy efficiency and electrification incentives; provide a disaster mitigation tax credit; expand and enhance the carbon oxide sequestration credit; and extend and enhance the electric vehicle charging station credit.

Click here to download the full alert.

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There are several circumstances in which the same facts or transactions at issue in a civil litigation will also give rise to multiple proceedings that will all occur in parallel. These can include a government investigation and subsequent criminal prosecution, civil injunctive relief action, and potentially sanctions proceedings, in addition to the civil action by a private plaintiff.

In fact, this confluence of parallel actions can occur somewhat frequently in trade secrets misappropriation cases. “It has been estimated that intellectual property in the United States is valued at nearly half the entire economy.” It is no surprise, then, that the United States government has thrown itself into taking action against the perceived large-scale theft of American trade secrets, especially by foreign actors. In recent years, the DOJ has placed particular emphasis on vindicating the interests of large corporations that have been victims of trade secret theft. It is thus becoming more common for alleged perpetrators of trade secrets theft to face not only civil litigation from a victim corporation, but also a criminal indictment, and parallel criminal and civil regulatory litigation, on the same facts.

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Shelter-in-place or stay-at-home orders have been prevalent throughout the United States since March 2020 as state and local governments have sought to protect their citizens from the spread of the COVID-19 virus while at the same time reopen their economies in accordance with phased reopening plans. Keeping abreast of the evolving nature of these orders and plans as the spread of the virus continues to evolve is critical to the functioning of all businesses throughout the country.

Baker McKenzie has a team in place that has been advising clients real-time on these most critical issues since the first orders were enacted. We are pleased to provide this tracker, which identifies the relevant state-wide shelter-in-place orders and their related expiration dates, as well as the applicable state-wide reopening plans, in each of the 50 United States plus Washington, D.C. The “What’s Open” table on each page highlights the reopening status of four major sectors (office, manufacturing, retail and bars/restaurants).

In addition, the tracker includes links to the relevant quarantine requirements or recommendations for incoming travelers in each state plus Washington, D.C.

Key developments reflected in this week’s update to the tracker include the following:

  • The following jurisdictions extended their state-wide orders and/or the duration of the current phase of their reopening plans: Georgia and Illinois.
  • The following jurisdictions eased restrictions, mask requirements and/or advanced to the next phase of their reopening plan: Michigan, Oregon, New York and Pennsylvania.

You can also view our brochure which highlights key areas of expertise where we can support your business’s tracking and reopening plans. Please call or email your regular Baker McKenzie contact if you require additional analysis regarding these matters.

Last updated 25 June 2021

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On June 8, 2021, the White House published a set of reports on the 100-day interagency reviews (“Reports”) conducted pursuant to Executive Order 14017 (“Supply Chain EO”), which assessed supply chain risks and vulnerabilities for several supply chains, including those relating to semiconductor manufacturing and advanced packaging, and made policy recommendations to address those risks.

The Reports suggest that export controls on semiconductor-related equipment and technology can help protect the technological advantage of the United States in semiconductors by limiting the export of items that would contribute to the development of advanced semiconductor capabilities in countries of concern.  In particular, the Reports recommend that the US government:

  • Target and implement export controls that can support policy actions to identify and address vulnerabilities in the semiconductor manufacturing and advanced packaging supply chain;
  • Target and implement export controls on critical semiconductor equipment and technologies to address supply chain vulnerabilities; and
  • Collaborate and coordinate with key supplier allies and partners on effective multilateral controls.

The recommendations are broadly scoped, and the Reports do not recommend or preview more specific export controls that the US government might implement itself, or develop with its allies or partners.  However, the Reports are suggestive of several categories of items that might be targeted with enhanced export controls (e.g., additional export licensing requirements based on particular export control classification numbers).  In particular, the Reports identify significant competitive advantages enjoyed by US-based providers of electronic design automation tools and semiconductor intellectual property cores at the semiconductor design stage.  At the manufacturing stage, the Reports identify US strengths in the production of front-end semiconductor manufacturing equipment (e.g., etching, doping, deposition, and polishing or chemical mechanical planarization) and back-end testing equipment.  Companies that export such items will want to closely monitor any potential export control-related developments.

Key Takeaways

  1. The Reports recommend that the US government target and implement export controls on semiconductor-related equipment and technologies.
  2. Companies that export semiconductor-related equipment and technologies from the United States should monitor any potential export control-related development that follow from the Reports.
  3. Non-US companies that transfer semiconductor-related equipment and technologies to China may need to consider the potential impact of heightened multilateral controls on their business.

*          *          *

Related Blog Posts

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On June 9, 2021, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued a final rule, effective June 8, amending the Export Administration Regulations (EAR) to reflect the formal termination by the United Arab Emirates (UAE) of its participation in the Arab League Boycott of Israel (the “Amendment”). This means that certain requests for information, action or agreement from the UAE will no longer be presumed to be boycott-related if made after August 16, 2020. The Commerce Department has also issued a press release.

Background

On August 13, 2020, the UAE and Israel announced the historic peace agreement between the two countries (known as the UAE-Israel Abraham Accords), thereby establishing full diplomatic and commercial relations between the two countries. On August 16, 2020, the UAE issued Federal Decree-Law No. 4 of 2020, which repealed Federal Law No. 15 of 1972 Concerning the Arab League Boycott of Israel and formally terminated the UAE’s participation in the Arab League Boycott of Israel. In response to these actions, on April 8, 2021, the US Treasury Department removed the UAE from Treasury’s List of Countries Requiring Cooperation With An International Boycott. Our prior blog posts regarding the UAE’s repeal of the boycott law and Treasury’s action can be found here and here. On April 22, 2021, the US State Department certified to Congress that the UAE had formally ended its participation in the Arab League Boycott of Israel.

The Effect of the EAR Amendment

Part 760 of the EAR prohibits US persons from taking certain actions in furtherance or support of boycotts by foreign countries against countries friendly to the United States, in particular Israel, and imposes a quarterly reporting requirement on the receipt of certain boycott-related requests.  Through the addition of a new Supplement No. 17 to part 760 of the EAR, the Amendment confirms that certain requests for information, action or agreement from the UAE that were presumed to be boycott-related prior to August 16, 2020 will no longer be presumed to be boycott-related if made after August 16, 2020. Accordingly, such requests will no longer be subject to the prohibitions or reporting requirements of part 760 of the EAR. For example, a request from the UAE for a certification that a vessel is eligible to enter UAE ports, or a request by UAE government officials requiring a US company to provide the place of birth of employees traveling to the UAE, will no longer be presumed to be boycott-related if made after August 16, 2020.

Notwithstanding the Amendment, US persons are still required to adhere to the prohibitions and reporting requirements under part 760 of the EAR with respect to requests from the UAE that are overtly boycott-related. Therefore, US companies should remain vigilant for requests from the UAE containing references to “blacklisted,” “Israel,” “boycott,” “non-Israeli goods,” “six-pointed star,” and other phrases and words indicating a boycott purpose. 

The authors acknowledge the assistance of Rob O’Brien in the preparation of this blog post.

The post US: BIS amends the EAR to reflect the UAE’s termination of Its participation in the Arab League Boycott of Israel appeared first on Global Compliance News.

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Shelter-in-place or stay-at-home orders have been prevalent throughout the United States since March 2020 as state and local governments have sought to protect their citizens from the spread of the COVID-19 virus while at the same time reopen their economies in accordance with phased reopening plans. Keeping abreast of the evolving nature of these orders and plans as the spread of the virus continues to evolve is critical to the functioning of all businesses throughout the country.

Baker McKenzie has a team in place that has been advising clients real-time on these most critical issues since the first orders were enacted. We are pleased to provide this tracker, which identifies the relevant state-wide shelter-in-place orders and their related expiration dates, as well as the applicable state-wide reopening plans, in each of the 50 United States plus Washington, D.C. The “What’s Open” table on each page highlights the reopening status of four major sectors (office, manufacturing, retail and bars/restaurants).

In addition, the tracker includes links to the relevant quarantine requirements or recommendations for incoming travelers in each state plus Washington, D.C.

Key developments reflected in this week’s update to the tracker include the following:

  • The following jurisdictions extended their state-wide orders and/or the duration of the current phase of their reopening plans: Georgia and Illinois.
  • The following jurisdictions eased restrictions, mask requirements and/or advanced to the next phase of their reopening plan: Michigan, Oregon, New York and Pennsylvania.

You can also view our brochure which highlights key areas of expertise where we can support your business’s tracking and reopening plans. Please call or email your regular Baker McKenzie contact if you require additional analysis regarding these matters.

Last updated 25 June 2021

DOWNLOAD US SHELTER-IN-PLACE/REOPENING TRACKER

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By Leslie Weinstein, Solutions Director, HITRUST

With many years of experience in cybersecurity, I can say with confidence that health information security is not easy. HITRUST has supported thousands of Covered Entities and Business Associates with its Health Insurance Portability and Accountability Act (HIPAA) compliance programs since the first release of the HITRUST CSF in 2009. More than 80% of U.S. hospitals, 85% of U.S. health insurers, and many other Covered Entities and Business Associates leverage the HITRUST Approach today to support their HIPAA compliance initiatives and HIPAA-related audits in addition to their information risk management programs.

We continually look at ways to aid organizations in complying with HIPAA through innovations to the HITRUST Approach, which make it easier for our customers to manage risk and compliance. I discuss one of these innovations below in the context of HIPAA compliance and audits—the HITRUST MyCSF Compliance and Reporting Pack for HIPAA.

What is HIPAA?

As most of you know, HIPAA includes rules for organizations regarding privacy and security, as well as reporting breaches of unsecured Protected Health Information (PHI). The HIPAA Privacy Rule requires appropriate safeguards to protect the privacy of personal health information and sets limits and conditions on the uses and disclosures of such information without patient authorization. The Security Rule requires appropriate administrative, physical, and technical safeguards to ensure the confidentiality, integrity, and security of electronic PHI. Those that must comply are called Covered Entities and Business Associates, which are organizations such as healthcare providers, health plans, pharmacies, healthcare clearinghouses, and vendors who have access to PHI, to name a few. The tricky part about HIPAA is that it is a regulation and not a standard, which introduces certain nuances in what is required to comply and how to demonstrate compliance that will be able to be relied upon by others, including those in government who are responsible for enforcement.

What is a HIPAA Audit and Audit Process?

The Office for Civil Rights (OCR) at the U.S. Department of Health and Human Services (HHS) is charged with auditing Covered Entities and Business Associates for their compliance with the HIPAA Rules, as well as investigating complaints filed against Covered Entities. Additional information about the specifics of the audit process can be found in OCR materials and many articles found on the HHS and OCR websites.

For those audits relating to demonstrating compliance and responding to evidence requests, the OCR will notify an organization of its intent to audit and expects they submit requested information within a reasonable amount of time. All documents are required in digital form and must be submitted electronically. Entities must provide only the specified documents, not compendiums of all entity policies or procedures. The evidentiary documentation must be clear and pertinent—the auditor will not search for relevant documentation that may be contained within such compilations.

This is where having performed an appropriate risk analysis and assessment pays off, as having already organized the evidence and associated documentation makes responding to audit requests much less resource- and time-intensive. Another big benefit is that it makes passing audits much more likely.

MyCSF Compliance and Reporting Pack for HIPAA

The HITRUST CSF Assessment is the gold standard for information assurance reports. It is commonly used by organizations that need to comply with HIPAA and has been successfully used to demonstrate compliance during OCR audits. It also provides many advantages over other assessment reports as it offers Rely-Ability, something most other assurance reports can’t deliver, yet is so important for a report to be relied upon—including during an OCR audit. That’s not the topic of this blog, but something worth understanding, and more information can be found here.

In the HITRUST MyCSF, our innovative SaaS platform, the Compliance and Reporting Pack for HIPAA collects specific information during the HITRUST CSF Assessment process that is needed to comply with HIPAA and regularly requested during audits or investigations. The information is already collected as part of the HITRUST CSF Assessment, and MyCSF automatically compiles evidence from your assessment and streamlines your audit by:

  • Generating a report, formatted by HIPAA control, that maps the applicable HIPAA requirements to your HITRUST CSF Assessment,
  • Providing only the evidence that the OCR is requesting, and
  • Mapping each requirement to your corresponding policies and evidence for submission to the OCR.

This feature is a game-changer because it saves countless hours in gathering information and preparing reports associated with an OCR audit. The MyCSF Compliance and Reporting Pack for HIPAA will be available in the next release of MyCSF, scheduled for mid-August 2021.

HITRUST Can Help!

We encourage existing MyCSF subscribers to take advantage of HITRUST resources to address HIPAA compliance requirements by reaching out to their HITRUST Customer Success Manager. For more information:

MyCSF – Our SaaS Platform – HITRUST Alliance

Schedule a Demo – HITRUST Alliance

HITRUST for HIPAA – Leveraging HITRUST to Demonstrate HIPAA Compliance

Make sure to visit HITRUST Booth #7401 at the HIMSS Global Health Conference & Exhibition in Las Vegas, August 9-13, 2021!

The post HIPAA Compliance, Audits, and the MyCSF Compliance and Reporting Pack for HIPAA appeared first on HITRUST Alliance.

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On June 8, 2021, the White House published a set of reports on the 100-day interagency reviews conducted pursuant to Executive Order 14017 “America’s Supply Chains” (“the Reports”). The Reports were accompanied by a White House Fact Sheet summarizing the key findings, expressing support for some of the policy recommendations, and announcing additional Biden Administration measures directed at strengthening the resilience of the country’s supply chains. Our prior blog post summarizing high-level key compliance-related aspects of the Reports is available here. This post provides a deeper dive into the compliance-related measures and policy recommendations specifically authorized by the Defense Production Act (“DPA”) to incentivize onshore or nearshore production in critical supply chains.

DPA Key Authorities

The DPA allows the president to direct private companies to prioritize orders from the federal government, to allocate materials, services, and facilities for national defense purposes, and to restrict hoarding of necessary supplies. Key DPA authorities include:

  • Title I: Priorities and Allocations, which allows the president to require persons and corporations to prioritize and accept contracts for goods and services necessary for national defense.
  • Title III: Expansion of Productive Capacity and Supply, which allows the president to incentivize domestic production and supply of critical goods and materials. This occurs through financial measures (e.g., loans, loan guarantees, direct purchases, purchase commitments) and the authority to procure and install equipment in industrial facilities owned by the Federal Government or private persons.
  • Title VII: General Provisions, which allows the president to establish voluntary agreements with private industry, to block proposed or pending foreign corporate mergers, acquisitions, and takeovers that threaten national security, and to establish a volunteer group of industry executives to be called to government service if needed.

In response to the COVID-19 pandemic, the Trump and Biden Administrations invoked the DPA to restrict exports of personal protective equipment (“PPE”). Our sister blog, the Baker McKenzie Sanctions & Export Controls Update, has been publishing updates on the PPE export restrictions and their various changes and extensions. Our most recent blog post on this topic is available here.

The Reports

The Reports’ White House Executive Summary establishes a new interagency DPA Action Group to recommend ways to leverage the authorities of the DPA to strengthen supply chain resilience. The Reports state that the DPA can support investment in other critical sectors to enable more effective collaboration between industry and government, citing how the DPA expanded production of necessary supplies to combat the COVID-19 pandemic.

The Departments of Commerce (“Commerce”), Defense (“DoD”), Energy (“DOE”), and Health and Human Services (“HHS”) each offered recommendations that leverage the DPA.

Commerce: Review of Semiconductor Manufacturing and Advanced Packaging

Commerce made seven recommendations to expand and secure the US semiconductor supply chain. This includes a recommendation to leverage the DPA to protect the US technological advantage and to ensure foreign investment reviews are conducted for national security considerations in the semiconductor manufacturing and advanced packaging supply chain.

Commerce recommends that the Committee on Foreign Investment in the United States (“CFIUS”) continue to conduct robust outreach as appropriate with foreign partners to share information related to industry and acquisition trends and to implement robust national security-based investment screening regimes, as authorized by the DPA. Commerce believes these recommended interagency efforts will allow the United States and its partners to better address transnational risks and foreign investments that threaten national security.

DOE: Review of Large Capacity Batteries

DOE recommends leveraging the DPA to establish a sustainable domestic lithium supply chain. Lithium resources exist in North Carolina (ore), Arkansas (brine), Nevada (brine, clay), and California (brine), however lithium project development can be costly and poses high future costs to producers that hamper project initiation. DOE recommends using DPA Title III and VII authorities to support these extraction efforts and develop new public financing streams, such as through purchase price and quantity guarantees for a stockpile serving as a backstop. Additionally, DOE recommends using the DPA as part of a mix of purchasing guarantees to invest in domestic refinement of ore, brine, or clay into lithium chemicals. DOE notes China’s domestic investment in this field, which made them a global leader despite limited domestic lithium supply.

DoD: Review of Critical Minerals and Materials

DoD recommends deploying the DPA to incentivize production across the supply chain, including downstream, high value-added manufacturing such as new magnet capabilities, and advanced electric motor designs. Specifically, DoD suggests the use of DPA Title III to support proven research and development (“R&D”) capacities and emerging technologies, especially those developed by small businesses through the Small Business Innovation Research program. DoD argues that DPA Title III should also be used to support domestic production in sustainable processing operations, such as greenhouse gas reduction, financial, and end-use requirements of DOE’s loan program.

Additionally, DoD recommends using DPA Title VII authorities to convene industry stakeholders to expand production. Under VII authority, the Federal Government could convene a government-industry working group to identify opportunities to expand sustainable domestic production, and explore additional opportunities to create public-private partnerships for sustainable domestic processing of key strategic and critical materials. DoD argues that agencies with information collection requirements should engage Commerce to improve the availability of data, which currently remains a significant constraint to effective mitigation programs in the strategic and critical materials sector.

In modeling strategic and critical materials under national emergency conditions, DoD assumes that the Federal Government will maximize its allocation and prioritization authorities pursuant to DPA Title I. The model assumes that if a certain supply chain were threatened that such materials would be diverted from civilian markets to the defense industrial base, similar to the recent diversion of health resources from the private sector to the Federal Government during the COVID-19 pandemic response. Under DPA Title I, DoD currently has the necessary authority to place priority ratings on strategic and critical materials through the Defense Priorities and Allocations System regulation administered by Commerce.

HHS: Review of Pharmaceuticals and Active Pharmaceuticals Ingredients

HHS recommends boosting US production with a blended approach of targeted investments and financial incentives, R&D to create new manufacturing technologies, greater supply chain transparency, and better data collection. Specifically, HHS recommends leveraging the DPA and current public-private partnerships to establish a consortium for advanced manufacturing and onshoring of domestic essential medicines production. Under DPA Title VII authority, the consortium will be headed by HHS and will include the Environmental Protection Agency, Commerce (including the National Institute of Standards and Technology), DoD, Department of Labor, Federal Trade Commission, U.S. International Development Finance Corporation, U.S. EXIM Bank, Department of Homeland Security, Department of Justice, and Small Business Administration, as well as relevant private sector stakeholders. HHS tasks the consortium with evaluating the merits of a successor financing program to the DPA Loan Program to boost private sector willingness to develop domestic production capacity. As indicated in the White House Fact Sheet, their first task is to select 50-100 critical drugs, among the Food and Drug Administration’s essential medicines list, to be the focus of an enhanced onshoring effort.

Additionally, HHS recommends R&D investment to establish novel platform production technologies as mainstream. Under DPA Title III, HHS has broad authority to commercialize novel platform technologies through traditional development programs. HHS recommends utilizing these funding opportunities to pursue commercialization.

Key Takeaways

  1. Companies operating in the above sectors should be mindful of possible forthcoming directives under the DPA’s priorities and allocations authority. Although the Reports largely invoke positive incentives, the Biden Administration may continue to use the DPA’s priorities and allocations authority, as occurred during the pandemic by both the Trump and Biden Administrations.
  2. Based on the prospect of potentially more rigorous CFIUS reviews, companies operating in these sectors should consider the impact of policy or regulatory changes as they relate to joint ventures or co-investments with non-US parties.
  3. Lastly, the Administration indicates a consistent theme of sustainability/ESG across the Reports, including a sustainable domestic lithium supply chain and sustainable production and processing operations.  Companies should continue to ensure ESG considerations are integrated into their supplier management and oversight efforts.

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Related Blog Posts

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Background on Lawsuit

In a 8-1 decision issued last week, the U.S. Supreme Court seemingly brought an end to a 15-year lawsuit brought against Nestlé and Cargill by Malian citizens who claim to have been enslaved as children on the companies’ cocoa plantations located in the Ivory Coast.  Specifically, the plaintiffs alleged that Nestlé and Cargill knew the cocoa plantations used child labor, and aided and abetted the human rights abuses that they and other child laborers endured by providing financial and operational support to the plantation farmers. 

The plaintiffs brought their claims under the Alien Tort Statute (ATS)—an 18th century law that allows non-U.S. citizens to file a lawsuit in federal court for torts committed in violation of international law.  The lawsuit was initially filed in federal court in California, but was dismissed on grounds that the alleged injuries lacked a sufficient nexus to the U.S. because they occurred overseas, and because the only domestic conduct alleged by the plaintiffs amounted to general corporate activity.  The Ninth Circuit reversed the district court’s dismissal of the lawsuit and allowed it to go forward, finding that plaintiffs sufficiently pleaded a domestic application of the ATS because Nestlé’s and Cargill’s “major operational decisions” originated in the United States.  The companies then appealed to the Supreme Court, which agreed to hear the case in July 2020.

The Supreme Court’s Decision

In a brief opinion delivered by Justice Clarence Thomas, the Court explained that although the ATS does not apply extraterritorially (i.e., to conduct that occurred abroad), it may be applied in cases involving overseas conduct if the conduct relevant to the statute’s “focus” occurred in the United States.  The Court noted that while the parties disagree on what conduct is actually relevant to the “focus” of the ATS, this issue is moot here because nearly all of the conduct that plaintiffs allege aided and abetted forced labor occurred abroad in the Ivory Coast.  The Court further explained that while Nestlé and Cargill made financing and operational decisions in the U.S., such activity is common to most corporations and is insufficient to support a domestic application of the ATS. Eight of the nine Justices joined in this part of the opinion.

Apart from the issue of extraterritoriality, Justice Thomas (in a section of his opinion joined by Justices Gorsuch and Kavanaugh) wrote that a private right of action under the ATS has historically been reserved for three specific violations of international law: (1) violation of safe conducts; (2) infringement of the rights of ambassadors; and (3) piracy.  Justice Thomas reasoned that because none of these violations were alleged or at issue in plaintiffs’ lawsuit, they do not have a private right to sue under the ATS and the Court cannot create a cause of action that would allow them to do so—a job that belongs to Congress, not the courts.

Implications of Supreme Court Decision for Corporations

The Supreme Court’s decision in the Nestlé/Cargill case is a victory for the chocolate companies. But a question that remains unanswered is whether domestic corporations like Nestlé and Cargill can be held liable under the ATS at all—the very question upon which the Court initially granted cert. to hear the case.  Companies with global supply chains that rely on third party business partners should therefore continue to monitor and oversee compliance with applicable laws and regulations, including those which prohibit human rights abuses.  This is especially true in light of the increasing litigation brought by activist groups against large corporations, and recent Congressional bills that broadly require companies to disclose certain Environmental, Social and Governance (ESG) metrics—two developments that signal a push to hold companies accountable for labor abuses and other violations of law committed by their supply chain partners.

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