Navigating the Labyrinth of Global Sanctions and Export Controls

In today's global economy, businesses are often forced to grapple with diverging legal frameworks adopted by different countries, all at the same time. Learning to navigate these rules is an imperative for modern day business, whether your company is expanding internationally or simply trading across borders.

US sanctions and export control laws are the classic (but not only) example of this phenomenon since they often apply – and are enforced – beyond US borders. This reality has been particularly impactful for Israeli high-tech companies, which often are engaged in the most cutting-edge and sensitive technologies and whose supply chains, operations and sales tend to extend to countries all over the world. Many of these companies have found themselves entangled in US (and other) sanctions and export control rules despite having no links to these countries.

?

Against this backdrop, back in early March, the US Department of Commerce, Department of Justice, and Department of Treasury (the Office of Foreign Assets Control, or OFAC) recently issued a “Tri-Seal Notice” clarifying the extraterritorial application of its rules to foreign persons (both individuals and entities) and underscoring the importance of complying with these rules, regardless of nationality or location.

?

The Tri-Seal Notice

?

The Tri-Seal Notice provides crucial insights into how US sanctions and export control rules apply beyond US borders and emphasizes the obligations of non-US persons to comply with these rules. Specifically, it underscores the importance of understanding how one’s activities may trigger US law, even when they are conducted entirely outside of the US and with no apparent nexus to the US. Moreover, it highlights the legal exposure faced by these persons, particularly when they sell to, buy from, or otherwise commercially engage with countries or persons that have been sanctioned by the US or subjected to trade restrictions under its export control regulations.

?

Importantly, the note highlights several common points of legal exposure for non-US persons in this regard, several of which, in my experience, are common pitfalls for Israeli companies. Chief among these are:

• Activities causing US persons to violate US sanctions or export control laws. For example, a foreign bank that routes payments through the US financial system (through US correspondent banks) or a foreign SaaS provider that causes US cloud providers to export goods in violation of either sanctions or export controls can come within the jurisdictional reach of US regulators.
• Exporting or transferring “US origin” goods, software or other technologies to problematic countries or users or for problematic end uses. Additionally, and importantly, it is noteworthy that items which are not traditionally “US origin” can also be caught by US export controls in a variety of ways, regardless of whether they were manufactured or developed in the US. For example, these rules can apply to items containing US origin content (such as open-source software libraries) as well as items that are the direct products of certain US origin hardware, software or other technology (such as IP cores designed using certain versions of Cadence or Synopsis EDA tools). The US has an expansive understanding of its jurisdictional reach and casts a wide net over international transactions involving goods, software and technology with even the slightest US touchpoints – even when the one trading in these items has no personal connection to the US.
• Maintaining adequate compliance measures. In this regard, the Notice recognizes the labyrinth of US regulations that foreign entities are required to navigate, often with limited guidance, to ensure proper compliance. In this regard, the note stresses the importance of employing a risk-based approach to compliance and points to several important best practices, such as establishing robust internal controls, integrating KYC information effectively into ongoing business decision making, and ensuring geolocation data accuracy.

?

Don’t Dismiss adopting Compliance and Mitigation Strategies

?

The Tri-Seal Notice is another kind reminder of why non-US persons must take US sanctions and export controls into consideration, even in the absence of an obvious nexus with the US. However, this imperative is not limited to US law alone. Businesses that operate globally must consider the broader constellation of foreign trade compliance rules that can, and often do, apply on a cross-border basis. Other sanctions and export control regimes, such as those adopted in Canada and by the UK and EU, which purport to be territorial in nature, have trended towards extraterritoriality. For example, the UK Office of Foreign Sanctions Implementation suggests several circumstances which can serve as jurisdictional predicates for enforcement, such as transactions that use clearing services in the UK, actions conducted by local subsidiaries of UK companies depending on the governance structure) or transactions that take place outside the UK after having been directed from within the UK (see the OFSI Enforcement and Monetary Penalties Guidance from 31 August 2023).

?

The bottom line is that approaching the world of global trade controls is best carried out proactively and with a broad view of a company and its operations to pinpoint exposure to specific regulatory regimes. Nevertheless, several considerations can be taken into account on a transaction-by-transaction basis that may shed light on specific points of risk in those deals.

?

Here are a few key issues to consider.

?

Don’t overlook anyone involved in the deal.

Before kicking off any deal, whether a transaction in goods or services, a financing transaction or otherwise, it is critical to conduct thorough due diligence on all parties involved at all stages. This includes both the immediate counterparties as well as intermediaries, agents, consignees, financing institutions, payments processors and or other actors that may play a role. Screening these parties against relevant sanctions lists and conducting background checks can help identify red flags or potential risks associated with the transaction.

?

Are you trading in sensitive goods, technology or services?

The nature of goods, technology and services being traded, whether tangible or intangible, is another crucial factor to consider. Certain items, such as dual-use goods, defense technology, or other items that have national security implications, may be subject to strict controls. It is essential to classify these items accurately and obtain the requisite regulatory registrations and licenses before proceeding with the deal.

?

Contemplate the deal’s geographic reach.

The geographic reach of the transaction is another key determinant of compliance risk. Several countries (and territories) around the world are subject to different types or varying levels of restrictions, which are imposed by different intergovernmental organizations and individual governments. Conducting a comprehensive risk assessment to identify the restrictions that may be associated with the countries involved in your transaction is essential.

?

Importantly, country and territory-based restrictions are dynamic. Businesses should stay apprised of changes in regulatory requirements or geopolitical developments that may lead to changes in regulation that impact their compliance obligations.

?

Finally, follow the money.

The payment structure of your transaction will impact the rules that apply to your deal. Specifically, the involvement of financial institutions in a transaction, such as payment processors or financiers, introduces additional layers of compliance considerations. For example, sanctions considerations may apply directly to your business in its engagement of foreign financial institutions, such as correspondent banks, to process payments in local currencies.

?

Another place where a transaction may meet foreign regulation is in the sphere of anti-money laundering (AML) and counter-terrorism financing (CTF). Banks, fintech companies and other financial institutions are generally subject to stringent AML and CTF regulations and usually find ways of contractually flowing down their compliance requirements to those using their services. For financial institutions, it is crucial to ensure that all parties to the financial transaction, especially counterparty financial institutions, are reputable and have robust compliance programs in place. Furthermore, they should implement effective controls to detect and prevent any attempts to circumvent sanctions or export controls through illicit financial channels.

?

Conclusion: Navigating the Complexities of Extraterritorial Regulation

?

The Tri-Seal Notice is a timely reminder of how different sanctions and export control regulations can have extraterritorial reach. As businesses increasingly operate in the global marketplace, understanding when foreign rules apply, the restrictions they impose and developing strategies to comply with those rules are integral to avoiding significant legal exposure and safeguarding against reputational damage. By adopting a proactive approach to compliance and leveraging robust risk mitigation strategies, companies can navigate the complexities of extraterritorial regulations with confidence and resilience.

?

As the global regulatory landscape continues to evolve, stay abreast of emerging geopolitical trends and how they inform (or are likely to inform) regulatory developments. This is essential for sustainable growth and success in today's interconnected world.