Are You Subject To US Economic Sanctions?

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The Times of Israel - March 30, 2021

What you need to know:

  • Online companies that engage in sales, technology transfers, or other seemingly innocuous transactions with countries on the U.S. sanctions list may be subject to costly and unexpected violations and penalties.
  • The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has jurisdiction over transactions by foreign persons to the extent they involve the United States or have a U.S. nexus, such as the use of U.S. dollars or products with U.S.-origin technology.
  • Noncompliance can result in exorbitant penalties, damage to a company’s reputation, and can affect its ability to secure future investment and acquisition prospects.

Israel’s global reputation as ‘Start-up Nation’ and the country’s increasingly warm relationships with countries subject to U.S. economic sanctions may be headed for a collision course with the U.S. government. While these developments offer enticing opportunities for both startups and established businesses to extend partnerships and collaboration into new markets, they may also jeopardize existing and future transactions and commerce with the massive U.S. market.

Online companies engaging in sales, technology transfers, or other seemingly innocuous transactions with countries on the U.S. sanctions list may be subject to costly and unexpected violations and penalties. Even if a company’s physical presence is solely within Israel, an international online presence requires strict compliance with global sanctions law.

U.S. sanctions programs prohibit business transactions with individuals and entities in certain embargoed countries, such as Cuba, Iran, North Korea, the Crimea region of Ukraine, and Syria, in addition to certain identified individuals, groups, and prohibited practices, in order to protect U.S. national security interests. Many online businesses — especially providers of financial or technology services — may mistakenly make their products or services available to these restricted parties or locations. For online businesses, the lack of in-person contacts and the near-immediate nature of online transactions make it difficult to identify sanctioned customers. Relying on third parties such as payment processors can also increase compliance risk, even for nonpaying customers who access an internet website.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces these sanctions programs. In addition to its jurisdiction over U.S. citizens, lawful permanent residents, U.S. companies, and foreign branches of U.S. companies, it has jurisdiction over transactions by foreign persons that involve the United States or have a U.S. nexus, such as the use of U.S. dollars or products with U.S.-origin technology.

Online businesses with a connection to the United States must mitigate the risk of sanctions violations. Israeli companies may adopt tactics such as:

  • Verifying identities through credit card authentication to ensure that the business is not transacting with sanctioned entities
  • Gathering purpose-of-payment information on each transaction
  • Using address blocks based on geographic location
  • Removing embargoed countries from drop-down menus indicating shipping destination or payment currency

Right now OFAC is focused on finding sanctions violations occurring through online transactions. Failure to comply can result in considerable expense. For example, the Société Internationale de Télécommunications Aéronautiques SCRL (SITA), a Swiss company that provides telecommunications services to the airline industry, provided electronic messaging services and software applications — identified as U.S.-origin technology, or technology that is routed through the United States — globally to airline customers that included airlines identified as Specially Designated Global Terrorists. OFAC determined that the base penalty amounted to approximately $13,384,000, with a maximum applicable penalty available of nearly $2.5 billion. After taking into account aggravating and mitigating factors, OFAC negotiated a settlement in which SITA agreed to pay approximately $7,830,000.

A company’s failure to have a compliance program can also affect its ability to secure future investment and acquisition prospects. Investors are wary of companies carrying enforcement risks, and conduct extensive due diligence to ensure that their investment or purchase does not come with liability for sanctions violations. That due diligence can include extensive employee, partner, customer, and co-investor screenings, as well as audits of company records for documentary evidence of compliance controls, policies, and procedures.

Effective compliance begins with understanding your company’s obligations and online risk exposure. Creative counsel can help you develop a compliance system that protects your company and investors without overly restricting business operations.

Reprinted with permission from the March 30, 2021, issue of The Times of Israel. © 2021 The Times of Israel. All Rights Reserved.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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