[co-author: Alex Cotoia]
Alex Cotoia, Regulatory Manager and Compliance Consultant at the Volkov Law Group, re-joins us for a posting on U.S. Antiboycott Laws.
An often overlooked, but potentially substantial risk factor in a company’s export compliance strategy is the degree to which the company is both familiar with—and adheres to—U.S. Departments of Treasury and Commerce regulations governing the participation of covered persons and entities in unsanctioned foreign boycotts. Known collectively as the “antiboycott laws,” these regulations (and corresponding statutes) generally prohibit United States persons and companies from participating in activities at odds with broader U.S. foreign policy objectives. While the primary target of these laws is the Arab League’s long-standing controversial boycott of the State of Israel, participation in any unsanctioned boycott activity is generally prohibited.
The Commerce Department’s antiboycott rules are contained in the Export Administration Regulations (“EAR”). These regulations apply broadly to activities of United States persons, (defined as U.S. citizens and residents, U.S. companies, and their controlled foreign branches, affiliates and subsidiaries) in connection with U.S. commerce. Prohibited activities under the EAR include: (1) furnishing information about dealings or business relations with boycotted countries (e.g., Israel) or parties (or conversely, the absence of such dealings or business relations); (2) refusing or agreeing to refuse to do business with boycotted parties (persons and firms who are “blacklisted” by boycotting country); (3) paying, honoring, confirming or otherwise implementing letters of credit containing prohibited conditions; (4) discriminating in employment or assignment of U.S. citizens or residents on the basis of race, religion, sex, or national origin; (5) furnishing information in support of a boycott requirement or request about the race, religion, sex, or national origin of a U.S. citizen or resident; and (6) furnishing information about any person’s association with a charitable or fraternal organization supporting a boycotted country.
Under Section 760.5 of the EAR, U.S. persons have an affirmative duty to report all requests to further or support a restrictive trade practice or unsanctioned boycott to the Commerce Department on a quarterly basis. The Export Control Reform Act of 2018 (“ECRA”) provides for the imposition of substantial administrative and criminal penalties. In the case of violations occurring on or after August 13, 2018, the ECRA authorizes the imposition of administrative sanctions per violation of the greater of $300,000 or twice the value of the underlying transaction, in addition to the denial of export privileges and the revocation of existing Bureau of Industry and Security (BIS) licenses. Criminal violations of the antiboycott laws carry the potential for the imposition of a fine in an amount up to $1 million and/or up to twenty years of imprisonment.
In contrast, the Treasury’s antiboycott laws apply to the activities of U.S. taxpayers and members of a U.S. taxpayer’s “controlled group” as defined by the Internal Revenue Code, as well as foreign affiliates in which the U.S. taxpayer has an interest of 10-percent or more. Notably—unlike the EAR—no nexus to U.S. commerce is required for a violation of the Treasury laws to occur. Thus, even boycott activity conducted by a foreign affiliate of a U.S. taxpayer in foreign commerce is subject to penalization. Generally speaking, the Treasury’s antiboycott laws forbid covered persons and firms from participating in or cooperating with an unsanctioned international boycott. Penalizable activities include instances where a covered person, as a condition of doing business directly or indirectly within a country (or with the government, a company or national of a country) refrains from: (1) doing business with or in a country that is the object of the boycott or with the government, companies or nationals of that country; (2) doing business with any United States person who conducts business in a boycotted country; (3) doing business with any company whose ownership or management is comprised of individuals of a boycotted nationality, race or religion; (4) employing individuals of a boycotted nationality, race or religion; or (5) insuring or shipping a product on a carrier owned, leased or operated by a blacklisted individual or entity. Violations of the antiboycott laws administered by the Treasury can result in significant financial repercussions for U.S. taxpayers, including a reduction in (or outright loss of) foreign tax credits and the accelerated taxation of foreign income that would otherwise be deferred. All requests to participate in unsanctioned boycott activities must be reported by the U.S. taxpayer to the IRS on an annual basis utilizing Form 5713.
As part of their periodic risk assessment, companies with operations in the Middle East and other global hotspots should identify and prioritize antiboycott compliance as a potential material risk factor separate and apart from general export issues. Given the fact that application of the antiboycott laws is fact-specific, employees assigned to sales, procurement, contracts, business development, and other frontline functions should also undergo thorough, scenario-based training that pairs definitions from the actual text of the regulations with tangible real-world examples. Finally, effective antiboycott compliance requires collaboration across company functions. A company can rely on its legal team, for example, to thoroughly vet all agreements with companies located in a particular region to ensure that no impermissible representations or warranties are incorporated. The legal team can also draft standard contractual covenants that require counterparties to a transaction to specifically abide by all applicable antiboycott laws. By taking a proactive and holistic approach to antiboycott compliance, companies of all shapes and sizes can substantially mitigate the potential for costly violations of these important—yet routinely overlooked—export controls.