How-to guide: How to identify relevant sanctions regimes and deal with conflicting obligations (USA)

Introduction

This guide will assist in-house counsel, private practice lawyers, and compliance personnel in identifying the relevant sanctions regimes that affect an organization’s activities, and in dealing with the conflicting obligations imposed by those regimes.

This guide is intended to support in-house counsel, private practice lawyers, and compliance personnel in identifying the key issues to address and points to consider regarding various sanctions regimes.

The guide covers the following:

Overview
Office of Foreign Assets Control (OFAC) sanctions
US anti-boycott laws
Export controls
Foreign sanctions
Ensuring sanctions compliance and dealing with conflicting obligations

This guide may be read in conjunction with How-to guide: How to ensure sanctions screening and sanctions due diligence is effective.

Section 1 – Overview

Sanctions are an important tool in foreign policy, allowing countries to intervene in or respond to crises. In an increasingly international world, differences between sanctions regimes represent a regulatory compliance challenge for multinational companies. This is particularly the case where sanctions regimes come into direct conflict. It is therefore important that your organization understands which of its activities will be subject to sanctions regimes and which sanctions regimes might apply.

The focus of this guide is on identifying the various sanctions measures under US law, with a brief look at foreign regimes.

Section 2 – Office of Foreign Assets Control (OFAC) sanctions

The Office of Foreign Assets Control (OFAC) is an office within the US Department of the Treasury. Guided by US foreign policy and national security goals, the OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, terrorists and terrorist groups, transnational narcotics traffickers, parties engaged in activities connected to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy, or the economy of the United States.

2.1 OFAC sanctions

All US entities doing business with foreign entities or exporting goods to foreign countries are responsible for ensuring compliance with US sanctions regulations.

Organizations have a duty to know the end users and destinations of all goods and services in a transaction and to avoid deals that have sanctions implications.

OFAC publishes Civil Penalties and Enforcement Information that provides detail on enforcement actions, by year. This is a valuable resource to evaluate areas where OFAC is focusing enforcement efforts and the settlement amounts or penalties assessed for each of the infractions. Also of interest are the OFAC Enforcement Guidelines that shed light on this sanctioning regime.

2.2 Specially Designated Nationals list

OFAC maintains and publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists parties designated for sanction who are not country-specific individuals, groups, or entities, such as terrorists and narcotics traffickers. These individuals and companies are referred to collectively as being on the Specially Designated Nationals (SDN) list. Their assets are blocked, and US persons are generally prohibited from doing business with them. 'US persons' include all US citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all US incorporated entities and their foreign branches.

2.3 Consolidated Sanctions Lists

The Consolidated Sanctions List (CSL) is a compilation of lists maintained by OFAC containing details about restricted parties that are not covered by the SDN list. This list is provided to make it easier to comply with OFAC’s sanctions regulations by making information available in a central location.

OFAC administers a number of different sanctions programs with criteria that may vary from list to list. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals. Some lists found in the CSL include the Sectoral Sanctions Identification List (SSI), the Non-SDN Iranian Sanctions Act (NS-ISA), and the Foreign Sanctions Evaders List (FSE), amongst others.

2.4 Specific licenses versus general licenses

A license is an authorization granted by the OFAC to engage in a transaction that would otherwise be prohibited. There are two types of licenses: specific licenses and general licenses.

2.4.1 Specific licenses

An applicant for this type of license requests permission from OFAC to engage in a specific prohibited activity. Otherwise there is no way to undertake the activity without violating the law. This is done primarily by filing a license application with OFAC.

2.4.2 General licenses

A general license authorizes any person in the United States to engage in a particular type of transaction without the need to obtain a specific license. For example, if a person in Iran bequeaths money to a US citizen living in the United States, the citizen may move that money from Iran to the United States, following a specified procedure, without having to first apply for a specific license.

2.5 Penalties for breaching OFAC sanctions

Violations of OFAC-imposed sanctions are considered serious threats to national security and foreign relations. Accordingly, there are criminal penalties of fines of up to several million dollars and prison sentences of up to 30 years.

Section 3 – US anti-boycott laws

The United States maintains a policy of opposing restrictive trade practices or boycotts promoted or imposed by foreign countries against nations that are friendly to the United States.

3.1 Anti-Boycott Act of 2018

The Office of Antiboycott Compliance (OAC), a part of the US Department of Commerce’s Bureau of Industry and Security (BIS), is charged with administering and enforcing the Anti-Boycott Act of 2018, Part II of the Export Control Reform Act of 2018 (ECRA) (50 USC sections 4841 – 4843), and the anti-boycott provisions imposed by the Export Administration Regulations (EAR), 15 CFR Part 760.

These authorities discourage, and in some circumstances prohibit, US companies from taking certain actions to support a boycott by a foreign country against a country friendly to the United States (unsanctioned foreign boycott). Prohibited activities include refusing to do business with a boycotted country or specifically listed persons for boycott-related reasons, providing information about any person’s business relationships with a boycotted country or listed person, and implementing (by US banking entities) letters of credit that include prohibited boycott-related terms or conditions.

Receipt of certain boycott-related requests for information, designed to verify compliance with an unsanctioned foreign boycott, must be reported to the OAC. The purpose of anti-boycott laws is to prevent US companies from being used to implement foreign policy that is contrary to US interests.

3.2 Ribicoff Amendment to the Tax Reform Act of 1976

The Ribicoff Amendment to the Tax Reform Act of 1976 requires all US taxpayers and their related persons to report operations in, with, or related to, boycotting countries (ie those countries that require or may require participation in, or cooperation with, an unsanctioned international boycott) or their nationals to the Internal Revenue Service by filing Form 5713, International Boycott Report, with their annual federal income tax return.

The term ‘persons’ includes a controlled group in which the taxpayer is a member, a foreign corporation in which the taxpayer has stock, a trust owned by the taxpayer, or a partner of the taxpayer.

The term ‘operations’ includes any business or commercial transactions, even if they do not generate income.

3.3 State and local anti-boycott, divestment, and sanctions (BDS) laws

The Boycott, Divestment, and Sanctions movement (BDS) advocates boycotts, divestments, and economic sanctions against Israel with the objective of pressuring Israel to meet what the BDS proponents describe as Israel’s obligations under international law. Anti-BDS laws and resolutions oppose these actions by making it difficult for individuals and organizations to participate in boycotts of Israel.

To date, 38 US states have adopted laws, executive orders, or legislative resolutions designed to discourage boycotts against Israel. On January 28, 2019, the Senate passed S.1 which contains anti-boycott provisions. The House of Representatives passed a resolution condemning the boycott of Israel on July 24, 2019.

The specific provisions of the 38 states that have enacted anti-BDS laws vary widely from state to state. In New York, an executive order requires that the state divest itself from any investments in institutions or companies participating in a boycott of Israel, ‘either directly or through a parent or subsidiary.’ The anti-BDS law in Pennsylvania goes further, and prohibits the Commonwealth from entering into any contract with a company or organization that engages in an economic boycott against Israel. Most recently, on February 7, 2024, the Governor of Alaska issued an order forbidding state agencies from conducting business with entities that endorse a boycott of Israel with few exceptions.

Section 4 – Export controls

4.1 Export Administration Regulations

In general, the Export Administration Regulations (EAR), found at 15 CFR section 730.1 et seq, govern whether an item may be exported from the United States, re-exported from a foreign country, or transferred from one person to another in a foreign country. The EAR apply to commodities, technology, and software.

According to the EAR, ‘technology’ may be in any tangible or intangible form, including written or oral communications, blueprints, drawings, photographs, plans, diagrams, models, formulae, tables, engineering designs and specifications, computer-aided design files, manuals or documentation, electronic media, or information revealed through visual inspection.

Exporters must check the Commerce Control List (CCL), which is found in Supplement No. 1 to Part 774 of the EAR, to determine whether the product intended for export has been assigned an Export Control Classification Number (ECCN). If the product is on the CCL, you must obtain a license from the Department of Commerce before it can be exported. Items not listed on the CCL are classified as ‘EAR 99’ and may still be subject to a licensing requirement based upon the intended recipient, destination, or use.

The EAR are also used to implement anti-boycott law provisions.

4.1.1 Prohibitions

The EAR contain the following list of 10 general prohibition categories:

exports and re-exports;
US content re-exports;
foreign-produced ‘Direct Product’ rule;
denial orders;
end-use end-user;
embargo;
‘US person’ activities;
in transit;
orders, terms, and conditions; and
knowledge that a violation will occur.

The above prohibition categories describe exports, re-exports and other conduct that is prohibited under the EAR unless a license from the BIS has been obtained or the exporter qualifies for a License Exception from each applicable general prohibition under EAR part 740. The License Exceptions apply only to General Prohibitions 1 – 3, but selected License Exceptions are specifically referenced and authorized in the EAR concerning embargo destinations (part 746) and nuclear end uses (section 744.2(c)).

4.1.2 Reporting requirements

The EAR contain a multitude of reporting and notification requirements. Each requirement sets out the scope of the requirement as to the countries and items to which it applies, along with any exceptions. The content that must be included in reports, and the procedures for the submission of those reports, also varies from requirement to requirement. Most of these rules can be found in part 743 ‘Special Reporting and Notification,’ but others are sprinkled elsewhere throughout the regulations.

4.1.3. Penalties and enforcement

Under the ECRA, violators of the EAR may be subject to both criminal and administrative penalties.

Criminal penalties may include imprisonment for up to 20 years and a fine of up to $1 million per violation, or a combination of both.
Administrative monetary penalties may be up to $300,000 per violation or twice the value of the transaction, whichever is greater. Maximum administrative monetary penalties are adjusted annually for inflation.

Violators may face a denial of export privileges. Denial will prohibit a violator from having any involvement in transactions subject to the Export Administration Regulations (EAR). It is also illegal for others to engage in such transactions with a denied person.

4.1.4 Administrative Enforcement Cases

Penalty Guidance: in 2018, BIS issued Administrative Enforcement Guidelines to enhance transparency and predictability in the enforcement process. These guidelines align BIS policies with those of the Department of the Treasury’s Office of Foreign Assets Control.
Administrative Case Review Board (ACRB): the ACRB advises the Assistant Secretary for Export Enforcement during critical stages of administrative cases, supporting consistency and fairness in enforcement policy. It collaborates with Export Enforcement officials and attorneys from the Office of Chief Counsel for Industry and Security.
Temporary Denial Orders (TDOs): TDOs are issued by the Assistant Secretary for Export Enforcement to temporarily deny export privileges of a company or individual to prevent violations. These orders restrict the rights of a company or individual to export from the US, and to receive exports to the US. TDOs last for 180 days and are renewable.
Section 1760(e) Denials: under section 1760(e) of ECRA, the Secretary of Commerce can deny export privileges for up to 10 years following a person’s conviction for certain crimes. Such a denial includes revoking licenses held at the time of conviction.

Criminal violations eligible for a denial order include:

violations of ECRA or the International Emergency Economic Powers Act;
violations of section 38 of the Arms Export Control Act;
espionage-related statute violations; and
violations of sections 371 (conspiracy), 554 (smuggling), and 1001 (false statements) of Title 18, US Code.

For details on enforcement actions, see BIS Annual Report.

4.2 Export Administration Act of 1979 (EAA) and Export Control Reform Act of 2018

The EAA (PL 96-72) gave the US president the authority to control US exports when there is short supply, or for foreign policy or national security reasons. The ECRA (50 USC Ch 58) repealed and replaced the EAA. It made the EAR permanent. However, the implementation of certain sanctions authorities, including 50 USC sections 4611, 4612, and 4613 (sections 11A, 11B, and 11C of the EAA (not repealed)) require that the president use the authority granted by the International Emergency Economic Powers Act of 1977 (50 USC Ch 35) to reauthorize sanctions.

4.2.1 Penalties and enforcement

Under the ECRA, violators may be subject to criminal penalties of up to 20 years’ imprisonment and a maximum fine of $1 million for each violation, or a combination of imprisonment and fines. The Commerce Department also has the authority to impose administrative monetary penalties for violations. Such penalties may be up to $300,000 per violation or twice the value of the transaction, whichever is greater. The maximum administrative monetary penalty amount is adjusted for inflation every year.

Violators may also find their export privileges denied. A denial of export privileges will prohibit a person from participating in any transaction subject to the EAR. In addition, it is unlawful for other businesses and individuals to participate with a denied person in an export transaction subject to the EAR.

Section 5 – Foreign sanctions

In addition to US sanctions, there are other sanctions regimes to which organizations might need to have regard (subject to those regimes having jurisdiction over US organizations) such as that of the EU. EU sanctions jurisdiction may arise where:

an activity takes place within the territory of an EU member state;
‘EU persons’ are involved; or
business is done in whole or in part within the EU, or onboard an aircraft or vessel under the jurisdiction of an EU member state.

In addition, individual countries, such as the UK, also have sanctions regimes which might be applicable.

There are circumstances where a number of sanctioning regimes will act in lockstep. For example, the fall of the Assad regime in Syria led to an easing of or, in some cases, termination of sanctions against that country by the US, EU, and UK. Consistent with the explanations of the EU and UK, some of the reasons given by the US are that:

Recent positive changes and actions taken by the Government of Syria demonstrate promise for a stable and peaceful future.
Removing sanctions will support Syria’s efforts to rebuild and counter terrorism without empowering harmful actors.
A unified Syria that protects its people and rejects extremism strengthens security and prosperity in the Middle East.

This policy aligns with US goals to promote peace and stability in the region while holding accountable those responsible for past atrocities or terrorism.

Your organization should have a thorough understanding of the sanctions regimes to which it might be subject and ensure that employees working with international clients are aware of the differences in what conduct is prohibited.

Where the regulatory schemes differ, organizations will need to consider how to address the differences. Organizations may, for example, consider adopting and implementing the more stringent requirements to avoid falling foul of sanctions. However, there are certain issues to consider. Firstly, doing so may place the organization at a competitive disadvantage in the less restrictive jurisdiction. Secondly, you should consider that the existence of measures that would mean compliance with the most restrictive jurisdiction does not assure compliance with all regimes. Such measures include the EU Blocking Regulation. With an appropriate understanding of the relevant regimes, a risk/benefit analysis of the various courses of action can be made.

The EU does not recognize the extraterritorial application of laws adopted by non-EU countries. The EU’s Blocking Regulation (Council Regulation (EC) No 2271/96 of 22 November 1996) was enacted to protect EU operators engaged in lawful international trade or the movement of capital and related commercial activities, from the application of such laws specified in its Annex. The Annex currently specifies US measures concerning Cuba and Iran.

The basic principle of the blocking statute is that EU operators will not have to comply with the extraterritorial legislation listed in the Annex. The EU also will not uphold any decision, ruling, or award based on the legislation listed in the Annex. This is because the EU does not recognize the legislation’s applicability to EU operators.

A ruling from the Court of Justice of the European Union on 21 December 2021 (Case C-124/20 Bank Melli Iran v Telekom Deutschland GmbH) makes clear that complying with the requirements or prohibitions laid down in the US laws listed in the Annex is prohibited, even in the absence of an order directing compliance issued by the administrative or judicial authorities of the United States.

The blocking statute protects EU operators by nullifying the effect of any rulings by foreign authorities based upon foreign laws listed in its Annex, and by allowing for recovery of court-awarded damages caused by the extraterritorial application of foreign laws, regardless of the operator’s size or field of activity. EU operators are obligated to inform the European Commission (either directly or through the competent authorities of the member states) if their economic and financial interests are affected by the application of extraterritorial laws.

There are procedures outlined in the EU blocking statute for persons to apply to the European Commission for authorization when there is a need to fully or partially comply with the listed extraterritorial sanctions in order to avoid serious damage to their interests or those of the EU.

Section 6 – Ensuring sanctions compliance and dealing with conflicting obligations

Whilst the area of sanctions is still very much a developing area of law and, as a result, there is still a lack of clarity around how organizations might deal with conflicting obligations, there are things that organizations can do to try and reduce the risk of potentially violating laws relating to sanctions. Due diligence and the use of appropriate contractual language are both important tools with regard to risk mitigation.

6.1 Due diligence

Appropriate due diligence is required in respect of transactions to understand the nature of the transaction taking place and the various parties involved. This is important because it will help to determine which sanctions regimes apply and whether the transaction can go ahead without breaching any of these. This includes understanding whether there is any conflict between regimes that might be relevant and applicable.

Due diligence is especially important because many export-related laws carry penalties for activities done indirectly, such as through a subsidiary or affiliate. For example, several states have divested from Unilever PLC because its Ben & Jerry’s affiliate refuses to sell its ice cream in the West Bank and East Jerusalem. The divestitures were put in place even though Unilever itself does not support BDS.

6.2 Contractual language

Due to the heavy financial penalties that may be levied on businesses for sanctions violations, banks and other companies are increasingly including sanctions compliance language in their contracts. Although the use of such language does not provide complete insulation from liability, it may provide the contracting parties with a contractual remedy against their counterparties should a violation occur.

6.2.1 Issues to be addressed through contractual language

Contractual language may help to ensure that an organization is in compliance with sanctions laws. Seek specialist legal advice on contractual clauses due to the complexities of sanctions laws and contractual interpretation. As a general matter, some of the sanctions-related issues that may be addressed in contractual language include those listed below.

Sanctions status of each party – a representation that, to the best of the party’s knowledge, neither the party nor any of its subsidiaries or officers are the target of any applicable sanctions laws.
Disclosure of current sanctions investigations of each party – a representation that, to the best of the party’s knowledge, neither the party nor any of its subsidiaries or officers is currently under investigation for any sanctions violation, and is not directly or indirectly owned or controlled by any person who is currently the subject of such an investigation.
End users and destinations – representation that each party has conducted due diligence as to the recipients, any known end users, and all consignees of the goods that are the subject of the transaction and that, to the best of the party’s knowledge, tendering the goods to the intended end users at the intended destination will not constitute a breach or violation of any applicable sanctions regulation nor expose any party to any sanction or penalty imposed by any sanctions authority.
Identity of goods – each party warrants that the transaction does not concern any restricted items, or, alternatively, if the transaction does pertain to restricted items, any and all licenses, approvals, or permits required under the applicable laws and regulations have been obtained from the proper authorities.
Funding sources – representation that monies used to fund the transaction were not directly or indirectly derived from, invested on behalf of, or related in any way to, a person subject to sanctions.
Change of status – what the parties intend to happen if one of the parties or another aspect of the transaction becomes subject to sanctions.

Take particular care when drafting contract clauses relating to compliance with sanctions laws in circumstances where a general compliance with all applicable laws or sanctions law clause might cause a breach of the terms of the EU Blocking Regulation. It may be necessary to add language to the effect that such a compliance obligation does not apply to the extent that doing so would be inconsistent with the terms of the EU Blocking Regulation.

The contractual language should take account of any relevant case law on interpretation and should be drafted as precisely as possible to avoid the risk that disputes arise.