U.S. antiboycott laws U.S. antiboycott laws

U.S. antiboycott laws: overview and compliance strategies

U.S. and non-U.S. companies falling foul of complex and often- overlooked U.S. antiboycott regulations may face civil and criminal penalties and the loss of certain U.S. tax benefits. Kim Strosnider and Christine Minarich examine these controls and provide practical guidance on appropriate compliance measures.

ecent efforts to overhaul U.S. The law was amended in the 1970s to United Arab Emirates, and Yemen. export controls have received extend these reporting requirements to While Iraq currently is not included on R widespread attention. all entities controlled by U.S. firms and, the list, its status remains under However, a related area of U.S. for the first time, prohibited certain review, meaning that it could be added regulation has been little changed in boycott-related conduct. In addition, a back onto the list in the future. more than 40 years and appears 1976 law created a separate tax return unlikely to be revamped any time soon: reporting requirement and imposed U.S. Commerce Department U.S. antiboycott laws and regulations, tax burdens on U.S. taxpayers if they or antiboycott program which target compliance with the Arab members of their controlled groups The U.S. Commerce Department’s League boycott of Israel. participate in certain international antiboycott regulations are found in the Despite the lack of attention these economic boycotts. Export Administration Regulations laws and regulations receive, they can (‘EAR’), 15 C.F.R. Part 760. These substantially impact both U.S. and U.S. antiboycott laws regulations apply to the conduct of non-U.S. companies. Moreover, as ‘domestic concerns’ and non-U.S. tensions in the Middle East continue, and regulations are entities that are ‘controlled in fact’ by a U.S. officials have reported receiving designed to prohibit or ‘domestic concern’ if the conduct is in increased reports of boycott requests ‘U.S. commerce’. Domestic concerns from that region and North Africa. penalize cooperation include (1) any partnership, corp - The United States actually has two with international oration, company, association, or other separate and distinct antiboycott economic boycotts in entity of, or organized under the laws regimes, one administered by the U.S. of, any U.S. jurisdiction and (2) any Department of Commerce, the other by which the United States permanent U.S. establishment of a the U.S. Department of the Treasury. does not participate. non-U.S. concern. A non-U.S. entity is These regimes are complex and ‘controlled in fact’ by a domestic sometimes inconsistent. Further, the concern if the domestic concern has the problematic boycott language targeted The primary (but not the only) authority to establish the general by these two schemes can be buried in target of U.S. antiboycott programmes policies or to control the day-to-day the fine print of purchase orders or is the Arab League boycott of Israel. operations of the non-U.S. entity. letters of credit and can be difficult to This boycott has a primary aspect, Certain factors – e.g. , direct or indirect spot, making compliance a challenge. which bars the import of Israeli goods beneficial ownership or control of a This article provides background and services into the boycotting certain percentage of outstanding and an overview on these laws and countries and bars the export of goods voting securities; the existence of an regulations, and discusses compliance and services from those countries to exclusive management contract; the strategies. Israel. However, U.S. antiboycott laws authority to appoint members of the generally do not target such board of directors or chief operating Background prohibitions. Rather, they are directed officer; etc. – give rise to a rebuttable U.S. antiboycott laws and regulations against the secondary and tertiary presumption of control in fact. are designed to prohibit or penalize aspects of the boycott. The secondary Below, we discuss the jurisdictional cooperation with international boycott precludes dealings with requirement that a transaction be in economic boycotts in which the United companies and individuals that do ‘U.S. commerce’ for these regulations States does not participate. business with Israel. The tertiary to apply. Then, we describe the type of U.S. antiboycott legislation adopted boycott bans entities from doing conduct these regulations prohibit. in 1965 required persons exporting business with companies or individuals from the United States to report to the who have been ‘blacklisted’ because of U.S. commerce connection Commerce Department the receipt of their relationships with Israel. In order to trigger the Commerce any request to take action or provide Currently, the U.S. government has Department’s antiboycott regulations, information supportive of an listed eight countries as supporting the the individual transaction in which the international boycott directed against a boycott of Israel: Kuwait, Lebanon, boycott request was made must be in country friendly to the United States. Libya, Qatar, Saudi Arabia, Syria, the ‘U.S. commerce’.

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As a threshold matter, any transaction between a controlled in fact Penalties for non-compliance with U.S. antiboycott laws foreign affiliate of a domestic concern and regulations and recent enforcement actions by the and a person located in the United U.S. Department of Commerce States is an activity in U.S. commerce. For example, if a wholly owned foreign Companies ignore U.S. antiboycott laws and regulations at their peril. Maximum affiliate of a domestic concern penalties for violations of the Commerce antiboycott regulations include civil purchases goods or services from the penalties per violation of $250,000 or twice the value of the transaction, United States in order to fill an order whichever is greater, and criminal penalties of $1 million per violation or 20 for a customer, that transaction will be years’ imprisonment. in U.S. commerce and the Commerce Companies and operations outside the United States are not beyond the Department antiboycott provisions reach of these regulations. In fact, one-quarter of the settlement agreements would apply if the transaction involves entered into by the Commerce Department’s Office of Antiboycott Compliance a prohibited boycott request. in 2010 and 2011 involved non-U.S. branches or affiliates of U.S. companies or Determining when the non-U.S. the U.S. branches of non-U.S. companies. sales activities of non-U.S. affiliates of While the Treasury Department’s antiboycott measures do not carry civil or a U.S. company are in U.S. commerce criminal penalties for non-compliance, they can result in adverse U.S. tax requires a careful transaction-by- consequences, such as a loss of foreign tax credits and the inability to defer transaction inquiry. Generally, foreign-source income. The manner and degree to which U.S. taxes are affected non-U.S. sales activities are considered by boycott participation are complex and depend upon the circumstances of to be in U.S. commerce if they involve: the particular taxpayer. In addition, willful failure to file a required boycott report with the Treasury Department may result in a $25,000 fine and/or l Goods or services (including imprisonment for up to one year. information and ingredients or Following are summaries of several recent antiboycott enforcement actions component parts) specifically pursued by the Commerce Department. acquired from the United States in order to engage in the transaction; l Rexnord Industries LLC, a U.S. company dealing in engineered mechanical or components and other products used in water management, paid a civil l Transactional services provided to penalty for, among other things, allegedly providing a commercial invoice or for the benefit of the customer by containing the following statement: ‘We certify that the goods are neither of a person in the United States ( e.g. , Israeli origin nor do they contain any Israeli materials.’ U.S. guarantees of performance or l Weiss-Rohlig USA, a logistics provider and freight forwarder, paid a civil technical services provided to the penalty for allegedly providing a certification from an agent stating: ‘The non-U.S. affiliate’s customer). carrying vessel is allowed to enter Kuwaiti ports’ and for failing to report the However, this does not include U.S. receipt of a request for a similar certification. accounting, legal, or other support l Smith International Inc., a major supplier of drilling tools and services doing to the foreign affiliate itself. business in Texas, paid a civil penalty for, among other things, allegedly agreeing to a condition in a UAE subcontract which provided: Boycott requests – six categories of prohibited conduct ‘[S]ubcontractor acknowledges that the laws of Abu Dhabi and the U.A.E. The Commerce Department defines the include, inter alia , laws regarding the boycott of “Israel” especially those term ‘boycott request’ broadly to related to blacklisted companies, ships and persons.’ include virtually any requirement to The company also allegedly provided a freight forwarder with a commercial participate in or cooperate with a invoice addressed to an entity in Libya that contained the following boycott. In some countries, statement: ‘We further certify that no materials charged herein are of Israeli registrations or renewals of trademarks origin, nor do they have Israeli content.’ and other intellectual property rights may give rise to boycott requests. In addition, boycott requests may appear an Israeli company) or a boycotted religion, sex, or national origin; in questionnaires, purchase orders, person ( e.g. , a ‘blacklisted’ party). l Furnishing information, in tender invitations, contracts, and This includes, among other things, response to a boycott request, about letters of credit. Boycott requests also agreeing to comply with a country’s the race, religion, sex, or national may be received from customs or boycott laws; ship goods on a carrier origin of a U.S. person or any consular officials in the course of that is eligible to enter the ports of a owner, officer, director, or employee clearing goods for import. boycotting country (other than of a domestic concern or controlled There are six categories of Saudi Arabia); or provide a in fact non-U.S. affiliate; prohibited boycott-related conduct certificate stating that products are l Furnishing information about any under the EAR: not of Israeli origin (a ‘negative person’s past, ongoing, or proposed certification’); future relationships (or the absence l Refusing or agreeing to refuse to do l Refusing to employ or otherwise of relationships) with other parties, business with or in a boycotted discriminating against a U.S. if that information is sought for country ( e.g. , Israel) or with a person, in deference to a boycott boycott-related reasons; national of a boycotted country ( e.g. , request, on the basis of race, l Furnishing information about any

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person’s association with or support rather can result in adverse U.S. tax ComplianCE StRatEgiES for any charitable or fraternal consequences for the taxpayer. organization supporting a boycotted Responding to boycott requests country; and Boycott participation under Receiving a boycott request in the l Paying, honouring, confirming or the iRC course of a proposed transaction does otherwise implementing a letter of The definition of ‘boycott participation’ not necessarily require companies to credit that contains any prohibited under the IRC does not align exactly walk away from the business. Rather, boycott requirement or request. with prohibited boycott activities under companies can negotiate amendments the EAR. Under the IRC, the term and changes to problematic boycott There are several narrowly drawn includes any agreement – as a language so as to ensure that such exceptions to these prohibitions. For condition of doing business within a language is not prohibited or penalized example, it is permissible to agree not boycotting country or with the by U.S. antiboycott laws. Often, small to ship goods to a boycotting country government, a company, or a national changes that may appear subtle to on Israeli vessels or airlines or on a of a boycotting country – to refrain business partners can successfully ship or aircraft that will call at an from any of the following: neutralize problematic boycott Israeli port en route to a boycotting requests. The likelihood of successfully cou ntry. These requirements are l Doing business with or in a negotiating the necessary changes will treated as reasonable security measures boycotted country ( e.g. , Israel) or depend on the customer, country, and of a boycotting country rather than with the government, companies, or goods involved in each transaction. prohibited boycott requests . nationals of a boycotted country; However, many customers in Commerce Department statistics l Doing business with a boycotted or boycotting countries are aware of U.S. indicate that traditional boycotting blacklisted person or undertaking, antiboycott laws and accept that U.S. countries propagate most prohibited as a condition of sale, not to ship companies and their affiliates must boycott requests, with the UAE, Libya, goods on a blacklisted carrier or comply with these laws or risk and Syria among the leading insure goods with a blacklisted penalties or the loss of tax benefits. propagators of boycott requests in insurer; recent years. However, companies also l Doing business with a company by Recommended compliance must be alert for requests that may reason of the nationality, race, or measures come from other countries, such as religion of its owners or individuals Given the complex and nuanced nature Bahrain, Bangladesh, Malaysia, Oman, in its management, or removing of these regulations, implementing practical and effective compliance One-quarter of the settlement agreements entered strategies can be a challenge. At a into by the Commerce Department’s Office of minimum, companies that are subject to U.S. antiboycott regulations should Antiboycott Compliance in 2010 and 2011 involved consider the following compliance non-U.S. branches or affiliates of U.S. companies strategies: or the U.S. branches of non-U.S. companies. Review Train responsible employees to Pakistan, and Tunisia. In addition, corporate directors or individuals carefully review all oral and written companies may receive boycott from management for such reasons; communications including, but not requests from distributors or other or limited to, e-mails, contracts, purchase intermediaries working for customers l Employing individuals of a orders, letters of credit, import in boycotting countries. For example, a particular nationality, race, or documents, invoices, and requests for distributor in the European Union with religion. information, to determine whether any a Lebanese customer may propagate a boycott language is present. Special boycott request in order to satisfy the Some of the most common types of attention should be paid to documents requirements of its customer. On some boycott participation agreements are emanating from the traditional occasions, though rare, boycott undertakings to comply generally with boycotting countries. All transaction requests may relate to boycotts other the laws of a boycotting country documents should be reviewed, even if than the boycott of Israel. (deemed to include that country’s the company does not intend to pursue boycott laws). In addition, Treasury the business. Problematic boycott U.S. treasury Department considers an agreement to provide language might include: antiboycott program certain information in the future, such The U.S. Treasury Department’s as a commitment to provide a l References to ‘Israel’ or ‘Israeli’ antiboycott measures are codified in the certification of non-blacklist status, to when the transaction does not Internal Revenue Code (‘IRC’). These be boycott participation. otherwise involve any apparent measures penalize U.S. taxpayers if Perhaps most importantly, unlike connection to Israel; they or members of their controlled the EAR provisions, the IRC provisions l References to a vessel or aircraft groups agree to participate in or reach the conduct of non-U.S. affiliates being eligible to enter the ports or cooperate with a boycott that is not who are members of a U.S. taxpayer’s airports of a boycotting country; sanctioned by the United States. Such controlled group under the IRC, even if l References to ‘negative’ certificates agreements are not prohibited and do that conduct is not associated with an of product origin ( e.g. , goods are not carry civil or criminal penalties but activity in U.S. commerce. ‘not of Israeli origin’);

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l References to an insurance elect a centralized review rather than programmes can substantially impact company having a qualified agent or training employees extensively on the both U.S. and non-U.S. companies and, representative in a boycotting nuances of this area. in some situations, lead to civil or country; criminal penalties or the loss of tax l Requests to comply with the laws or Respond/report benefits. As a result, companies should regulations of a boycotting country The export compliance or legal ensure that compliance staff are generally or boycott laws department should provide adequately trained on this often- specifically; or instructions on how to proceed. This overlooked area of U.S. law. In l Boycott questionnaires seeking may involve amending or striking the addition, compliance policies for U.S. information about relationships problematic language. It also could and covered non-U.S. entities should with Israel, including data about the involve collecting information include procedures for reviewing company’s ownership, manage - necessary to ensure proper and timely transaction materials, referring ment, subsidiaries, licensees, or reporting of any boycott requests to the problematic boycott-related language affiliated firms. Commerce and/or Treasury for appropriate review, and reporting Departments. Commerce Department boycott requests as required. This list is not exhaustive. Whether reports are filed within 30 days after a boycott request is problematic from a the end of the calendar quarter in U.S. legal standpoint will depend on which a reportable boycott request is In the Washington D.C. office of jurisdictional factors and how the received (or 60 days if the request is Covington & Burling LLP, Kim request is framed. received outside of the United States). Strosnider is a partner and vice- Treasury Department boycott reports chair of the firm’s International Refer are filed annually with the U.S. practice group, focusing on trade If any problematic boycott language is taxpayer’s tax returns. Boycott requests controls, and Christine Minarich identified, place the transaction on must be reported (unless an exception is an associate in the hold and promptly forward a copy of applies), even if the prohibited or International and Government the exact language received to the penalized action was not taken. Contracts practice groups. export compliance or legal department [email protected] for further evaluation. Given the Conclusion complexities involved in applying this The complex and sometimes [email protected] area of the law, companies frequently inconsistent nature of U.S. antiboycott

This article is reprinted from the April 2012 issue of WorldECR, the journal of export controls and compliance. Visit www.worldecr.com for further details.

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