The International Business Transactions Blog

The European Green Deal and Transnational Sustainability Regulation of Business Firms

By Kelsey McGillis
Law Student Editor

The European Green Deal, a landmark initiative approved by the EU Commission in 2020, is an ongoing commitment by the EU toward environmental sustainability, with its ultimate objective being net-zero European emissions by 2050. Its policies aim to position the EU as a global leader in sustainable practices, emphasizing green technologies, circular business models, energy efficiency, and sustainable finance practices.

Within this larger policy framework, the EU mandates all large companies (generally, having 250 employees or more, or worth at least €20 million), and companies specifically listed on the EU regulated market by the Commission, to routinely disclose the social and environmental impacts of their activities, and the associated sustainability risks they face. The pre-existing reporting framework, instituted in 2017, is known as the Non-Financial Reporting Directive (NFRD). The NFRD is being expanded by the introduction of the Corporate Sustainability Reporting Directive (“CSRD”), in an effort to strengthen corporate transparency and accountability in addressing environmental, social, and governance issues.

Implemented on January 5th, 2023, the CSRD mandates that companies falling under its purview comply with the specified rules throughout the 2024 financial year, and reports are scheduled for publication in 2025. Until the CSRD is fully enforced, companies remain subject to the existing NFRD rules, necessitating disclosure of various factors including environmental impact, employee treatment, human rights compliance, anti-corruption and diversity. Currently covering around 11,700 companies, the CSRD will require around 49,000 European companies to submit reports.  

One of the pivotal changes included in the CSRD is its expanded scope. While the NFRD applies to large public-interest companies with over 500 employees, the CSRD expands reporting requirements to include listed Small and Medium-Sized Enterprises (SMEs). The addition of listed SMEs ensures that even smaller publicly traded entities actively contribute to the overarching goals of environmental and social disclosure. In addition to the increased company coverage, the CSRD standardizes the reporting process with the introduction of European Sustainability Reporting Standards (ESRS). Developed by the independent organization, the European Financial Reporting Advisory Group, the ESRS creates a structured, uniform system for reporting sustainability-related information.

Additionally, the CSRD mandates the development and implementation of a digital taxonomy for sustainability information. This aims to enhance interorganizational transparency and consistency. Assurance on disclosed sustainability information is mandated by the CSRD, ensuring the reliability of the data provided.

The implementation of CSRD has notable implications for non-EU companies as well.  Business organizations with EU subsidiaries or other operations within the EU will need to comply with the requirements as well. Moreover, international companies that are part of the supply chain for EU-based businesses may also be influenced indirectly by the CSRD, because EU companies may seek more comprehensive sustainability information from their global partners to meet their reporting obligations.

Congress Considering Narrowing the De Minimis Customs Duty Exemption

By Kelsey McGillis
Law Student Editor

The original 1930 Tariff Act imposed customs duties on almost all imports. However, with the expansion of global trade, the de minimis rule was introduced to establish a threshold for duty-free imports. This threshold progressively increased over the years, reaching $200 in 1994 under the Customs Modernization Act.  In 2015, the Obama Administration further raised the de minimis threshold to $800, aligning it with the NAFTA agreement (now the USMCA). This adjustment aimed to improve efficiency and reduce costs by allowing customs authorities to focus on high-value imports, expediting the processing of low-value packages and reducing congestion at U.S. entry points.

On June 15, 2023, Senators Sherrod Brown and Marco Rubio, and Representatives Neal Dunn and Earl Blumenauer, reintroduced the Import Security and Fairness Act (H.R. 4818), which had died in Congress in 2022.  The reintroduced bill proposes amendments to Section 231 of the US Tariff Act. These legislators joined groups like the American Apparel & Footwear Association and the Ship Safe Coalition in criticizing Section 231’s de minimis exemption for imports from countries whose trade practices have met with criticism from U.S. industries.  In 2021, $771 million of imports entered the United States without customs duties under the de minimis exemption, up from $220 million in 2016.

The exponential growth of Chinese e-commerce companies like Shein and Temu has especially raised concerns about the de minimis provision being used as a loophole, providing an unfair advantage for foreign imports.  Critics argue that this places American companies, especially those importing products in bulk for warehousing and subsequent shipment to customers, at a disadvantage. Additionally, shipments falling under the de minimis rule are perceived as potential channels for goods produced through forced labor to enter the United States.

While previous modifications aimed to foster economic growth, recent legislative proposals, like the Import Security and Fairness Act, focus on security concerns and trade reciprocity.  The proposed Import Security and Fairness Act targets goods from states identified on the United States Trade Representative’s Special 301 Priority Watch List as failing to protect U.S. intellectual property adequately.  As of June 2023, only China and Russia met these criteria.  If enacted, the Act would eliminate the de minimis exemption for small goods from these countries, requiring a formal importation process.  In addition, U.S. Customs & Border Protection would be required to collect more detailed information on small value import shipments.

Export Control Agencies Issue New Guidelines on Voluntary Self-Disclosure

By Kelsey McGillis
Law Student Editor

On July 26, 2023, the U.S. Department of Commerce’s Bureau of Security (BIS), the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. Department of Justice’s National Security Division (NSD) jointly issued a compliance note outlining their procedures for reporting potential U.S. sanction and export law violations. The note identifies voluntary self-disclosure (VSD) as an alert mechanism for the national security and foreign policy interests of the United States, that can also reduce companies’ civil and criminal liability.

The Department of Justice’s National Security Division (NSD) revised its VSD policy on March 1, 2023, to address unlawful exports by sanctioned individuals, encouraging timely reporting of potential U.S. sanctions and export control violations. Voluntary self-disclosure, cooperation, and effective remediation may lead to non-prosecution agreements and waived fines, while severe misconduct or concealment can result in harsher treatment. Timely, exclusive disclosure to the NSD, along with full cooperation, is essential to obtaining the benefits of waived or mitigated penalties.  So is timely and adequate remediation, effective compliance programs, and appropriate disciplinary measures. The NSD has strengthened its policy by appointing a Chief Counsel for Corporate Enforcement and adding twenty-five prosecutors to handle sanctions evasion, export control violations, and related economic crimes.

BIS strongly encourages the voluntary disclosure of potential violations of the Export Administration Regulations (EAR) and related laws. It has announced that timely and comprehensive VSD, coupled with full cooperation, significantly reduce potential civil penalties under its new guidelines. In June 2023, BIS revised its policy, introducing the Office of Export Enforcement (OEE)’s dual-track system by which minor or technical infractions are expedited, resulting in warnings or no-action letters issued within 60 days, while more serious potential violations trigger deeper investigations. OEE clarified that deliberate non-reporting of EAR violations is considered an aggravating factor, while reporting another party’s potential EAR violation is considered a mitigating factor. The effectiveness of a company’s compliance program is also appraised under BIS’s settlement guidelines.

OFAC maintains a policy that promotes disclosure from U.S. companies by treating VSDs as mitigating factors in enforcement actions. When civil monetary penalties are required, VSDs may reduce proposed penalties by up to 50 percent. OFAC evaluates the complete context of the apparent violation, including the nature of the compliance program at the time and the corrective actions taken. To qualify as a VSD, the disclosure must precede OFAC’s discovery of the violation, and disclosures to other agencies may or may not qualify as VSDs on an individual basis.  Under the new guidelines, disclosing companies must submit a detailed report along with the VSD to provide a comprehensive view of the violation’s context. OFAC anticipates that those making disclosures will promptly and fully respond to any follow-up inquiries from them in exchange for penalty mitigation.