Strategy & Operations » Legal » What you don’t know can hurt you: US export controls and trade sanctions laws

Failing to ensure that your business is compliant with US export controls and trade sanctions can result in severe consequences. These laws have become some of the most dynamic tools by which the US government implements its global policy. They have extraterritorial reach and can extend to transactions outside of the US involving both Americans and non-Americans.

US trade sanctions target more than 20 jurisdictions, including complete embargoes on Cuba, Iran, North Korea, Syria and Crimea. In addition, the US Treasury Department’s Office of Foreign Assets Control (OFAC) maintains several screening lists, including a list of persons and entities known as Specially Designated Nationals (SDN List) whose assets are blocked and with whom transactions are generally prohibited (SDNs).

“Primary sanctions” restrict the activities of US businesses with respect to the embargoed jurisdictions and SDNs, while “secondary sanctions” are intended to restrict similar activities by non-US companies (including non-US subsidiaries of US companies). Secondary sanctions may include loss of access to the US financial system, denial of export licenses or approvals, loss of US government procurement contracts, denial of US visas and/or designation as an SDN. In 2018, OFAC enforcement actions resulted in civil penalties totaling $71.5m, and already in 2019, over $1.3bn.  OFAC is also empowered to assess criminal penalties, including additional fines and prison time.

By contrast, US export controls apply to the exportation of commodities, technology, software and services subject to US law. The item to be exported, not the identity of the exporter, is the critical factor. Even products manufactured outside of the U.S. can be subject to US export control laws if they contain more than a “de minimis” amount of US content or controlled technology.

Iran

In May 2018, the US withdrew from the Joint Comprehensive Plan of Action (JCPOA), triggering a return to the pre-2016 sanctions regime. As a result, general licenses were revoked and secondary sanctions were reimposed on non-US. companies for their Iran-related activities.

Global bank Standard Chartered, for example, recently reached a $657m settlement with OFAC after being assessed a $1.1bn base penalty because its Dubai branch processed dollar-denominated transactions through its New York branch on behalf of Iranian customers. Similarly, Italian bank UniCredit reached a $611m settlement with OFAC after being assessed a $1.3bn base penalty because it opened an account on behalf of the Italian government for handling blocked funds from Bank Sepah, an Iranian bank on the SDN List.

Iran remains a main target of US sanctions, and both US and non-US companies can become caught in the crossfire. Though non-US companies may bristle at the thought of being subject to US law, the gravity of the US economy may nonetheless pull them in. OFAC essentially takes a “with us or against us” approach to most activity with Iran, and it has already imposed or threatened to impose secondary sanctions on a number of non-US companies.

Russia

In April 2018, OFAC designated several Russian officials, oligarchs and entities they own as SDNs. On January 27, 2019, OFAC lifted sanctions against three of those entities after they provided evidence that Oleg Deripaska had divested his majority ownership in them: RUSAL, En+ Group and JSC EuroSibEnergo.

Although those entities were removed from the SDN List, Deripaska himself was not. Pursuant to OFAC’s “50% Rule,” any entity that is owned 50% or more, directly or indirectly, by an SDN remains blocked. This means companies which are majority-owned by Deripaska or other Russian SDNs remain off-limits to US businesses.

US sanctions on Russia generally did not apply to non-US companies until the Countering America’s Adversaries Through Sanctions Act (CAATSA) was signed into law in August 2017. CAATSA requires the president to designate as SDNs any non-U.S. companies which knowingly facilitate transactions with Russian SDNs.

In addition, secondary sanctions can be imposed on non-US. companies involved in the crude oil and financial services industries in Russia or those acquiring Russian state-owned assets. This significant development pulls non-US companies into the Russian sanctions program and can result in punitive measures if the company does business both in Russia and the US.

North Korea

Although North Korea has been and remains embargoed with respect to transactions by US persons, OFAC has recently become more aggressive in sanctioning non-US entities for their business activities with North Korea.  This is in part a consequence of the adoption of CAATSA.

OFAC has recently designated as SDNs shipping, oil and other transportation companies based in China, Hong Kong and Singapore known to facilitate trade with North Korea. OFAC has also targeted financial intermediaries based in these countries that knowingly finance North Korean transactions, including several Chinese banks.

Non-US businesses that conduct any business with North Korea risk becoming SDNs themselves. Even if they don’t transact with North Korea, non-US companies should screen their financial institutions against the SDN List. Knowingly conducting business with North Korea or a bank designated as an SDN due to its North Korean activity could cause the non-US company to be designated as an SDN itself.

Export controls

The Export Control Reform Act of 2018 (ECRA) was signed into law in August 2018 as part of the National Defense Authorization Act of 2019 (NDAA). ECRA created an interagency review process to identify “emerging and foundational technologies” that will become subject to US export controls.

To date, what constitutes “emerging and foundational technologies” has not been specifically identified. However, while seeking public comment, the US Commerce Department did specify the following categories of technology as potentially containing “emerging and foundational technologies”:

  • Biotechnology
  • Artificial intelligence
  • Position, navigation and timing technology
  • Microprocessor technology
  • Advanced computing technology
  • Data analytics technology
  • Quantum information and sensing technology
  • Additive manufacturing
  • Robotics
  • Brain-computer interfaces
  • Advanced materials
  • Advanced surveillance technologies

“Emerging and foundational technologies” in these industries are likely to be added to the Commerce Control List and will require licenses to be exported, re-exported or transferred in country to destinations like China and other countries subject to US embargo.

Compliance tips

Penalties can be severe for violations of trade sanctions and/or US export controls. To reduce the risk of a violation, US. and non-US businesses should undertake the following:

  1. For non-US companies, assess your company’s ties to the US:
    1. Are you owned or controlled by a US person?
    2. Do you transact with US persons or trade in US products, software or technology?
    3. Does your company maintain any accounts with US financial institutions or route transactions through the US financial system?
    4. Does your company use US. dollars to pay for transactions involving companies or persons in countries subject to US embargoes?
    5. Do you have any US citizens or permanent residents in positions of management or supervision or will US citizens or permanent residents be involved in a transaction prohibited by US law?

 

  1. Check counterparties, their owners and all financial institutions involved in a transaction against the Consolidated US Screening List (CSL), located at https://sanctionssearch.ofac.treas.gov/. The CSL combines the SDN List as well as several other prohibited parties lists maintained by OFAC and the US Commerce and State Departments. Also, confirm whether you do business in any of the jurisdictions subject to US embargo.

 

  1. Stay apprised of any updates on “emerging and foundational technologies,” especially if you operate in one of the sectors identified by the US Commerce Department. Those technologies will likely become the subject of new export control restrictions, meaning US companies may have new licensing requirements and non-US companies may have more difficulty acquiring those technologies from the US or acquiring US businesses in those industries.

 

Download our Whitepapers
Accounting Software
Finance Process
Finance Process
FD Surveys
Finance Process
Read more
Legal

ENRC's challenge to the Serious Fraud Office

By Alistair Graham | Mayer Brown
Legal
Legal

How best to get to the facts in litigation

By Julian Acratopulo | Clifford Chance
Legal