Risk to Israeli Entities Posed by International Sanctions – What Is the Exposure and What Are the Dangers?

Barnea Jaffa Lande & Co.

The executive order signed by United States President Joseph Biden in February 2024 states that the violence being committed by Israeli settlers has reached intolerable levels; poses a serious threat to peace, security, and stability in the West Bank, Israel, and the broader Middle East region; and undermines the foreign policy objectives of the United States.

This order has a wide potential scope of application. It is also evident that it is only the first batch of restrictions and sanctions from various countries.

President Biden stated that the violence Israeli settlers are committing has reached the point of declaring a national emergency. He clarified that the US Secretary of State and the Secretary of the Treasury have the authority to impose various economic and visa restrictions on whomever they believe has participated in this violence.

Expansion of Sanctions

The imposition of sanctions was not limited to the United States. A few days after President Biden issued his executive order, the British Foreign Secretary announced the imposition of economic sanctions on four extremist Israeli settlers. These settlers, only one of whom was included in the US sanctions, allegedly committed violent attacks against Palestinians in the West Bank.

On February 13, 2024, France imposed sanctions on 28 Israeli settlers, whose names have not yet been released. Canada’s Foreign Minister also announced that Canada will impose sanctions on Israeli settlers accused of violence in the West Bank. According to media reports, EU institutions are also trying to impose sanctions on some Israeli settlers.

However, these efforts are being blocked by the Czech Republic and Hungary, Israel’s allies in the European Union.

International Sanctions

International institutions, most notably, the United Nations Security Council, have been imposing economic sanctions for decades. Such sanctions include the freezing of assets (of terrorists, for example), prohibitions on trade relations with countries like Iran or North Korea, such as for oil or weapons sales, or general restrictions on transfers of particular chemical substances between countries.

Over the past decade, the sanctions regime has evolved in the direction of some Western countries imposing economic sanctions.

Economic sanctions have emerged as a vital enforcement tool against countries, individuals, and corporations. They target those perceived as responsible for persistent violations of the world order, threatening global stability and peace, or violating human rights.

The international economic sanctions regime has received considerable international attention over the past two years. This is due to various Western countries imposing sanctions on a considerable number of Russian citizens and corporations on the grounds they provided substantial financial support for the war that Russia launched against Ukraine in February 2022.

The sanctions imposed on an individual or corporation may consist of any of the prohibitions specified above on a case-by-case basis. 

Red Flags

Biden’s order, applied so far to only four Israeli settlers, has wide potential application beyond its current scope.

In the order, President Biden authorizes the Secretary of State and the Secretary of the Treasury to impose sanctions on anyone who jeopardizes stability in the West Bank and on anyone who commits violence targeting civilians or property, or who seizes private property. The order also applies to organizations, including government organizations, which support such actions.

The backdrop to President Biden’s executive order was numerous reports by human rights organizations of increasing incidents of Israeli settlers attacking Palestinian residents of the West Bank and seizing Palestinian property. Some of these incidents occurred while the IDF or Israeli government authorities, at the very least, turned a blind eye to the violence.

To date, there has been no further news about any intention to significantly expand the scope of the sanctions imposed by the United States beyond those imposed so far. However, FinCEN (the Financial Crimes Enforcement Network, the agency in the US Treasury Department that provides information about financial crimes, money laundering, etc.) has already issued an alert about the imposition of sanctions. This alert includes “red flags,” i.e., a series of warnings against ties with entities operating in the West Bank that engage in extremist activity against Palestinians, purchase weapons, etc.

Implications of the Sanctions

The developments regarding the sanctions raise a series of questions about their characteristics and their possible implications for Israeli corporations and individuals. It is important to examine the impact of the sanctions on Israeli corporations in order to avoid possible exposures resulting from business activities with sanctioned entities or entities that may be subject to sanctions.

What are the implications for Israeli entities, such as banks, institutional entities, and corporations?

As reported in the media, several Israeli banks have closed the accounts of sanctioned individuals. In an announcement by the Supervisor of Banks in June 2022, the Bank of Israel expressed its position, which supports the banks’ actions in accordance with the sanctions regimes.

A Bank of Israel directive prescribes fundamental principles for risk management and control. It states, inter alia, that risk management should be carried out using a forward-looking approach that combines ongoing monitoring of existing risks and identifying new or emerging risks. As part of their risk management processes, banking corporations must establish relevant policies and procedures. These policies should cover the banks’ use of international sanctions lists and foreign countries’ national sanctions lists, as well as engagements or transactions with entities listed. The directive essentially stipulates that banks must monitor the entities appearing in the sanctions lists and act in conformity with the sanctions imposed

What about non-banking corporations? Should private corporations also address the issue? And what about reporting corporations, such as publicly traded companies? Should they also be concerned about sanctions?

The answer to this may very well be yes.

The US sanctions regime applies to every American individual (citizen or permanent resident), even in relation to actions outside of the US. But the regime also applies to any person or entity physically present in the United States. Namely, it also applies to companies operating in the United States. This includes any American company and possibly groups of companies that include either an American company or a foreign company operating in the US. Furthermore, the sanctions regime could also apply in instances of a foreign company providing services that involve the use of US dollars or US systems and/or technologies.

The sanctions regimes of other countries (the UK, the EU, etc.) have narrower application than the American sanctions. They apply in principle only to property and persons located within the borders of the sanctioning country, or to its own citizens.

If a company has business relations with an entity, what are the potential consequences of ignoring that entity’s inclusion in the sanctions lists?

Violation of the US sanctions regime by a company directly subject to US law could expose it to very high fines and, in extreme cases, even to criminal prosecution.

Foreign (non-American) companies that allow sanctioned entities to circumvent the sanctions could also be subject to secondary sanctions, i.e., sanctions imposed on foreign companies having no connection to the United States, solely because they provided assistance in circumventing the sanctions.

Recommended Courses of Action

As long as the scope of the US sanctions is relatively narrow, companies should comply with them. Companies with ties to one of the countries that imposed the sanctions should check if they have transactions with any of the sanctioned entities. In any case, we recommend that companies with an international presence, especially financial institutions, examine their customers, for example by using one of the commercial tools available in the market.

Israeli business companies, particularly financial institutions, should incorporate FinCEN’s “red flags” list into their protocols. They must ensure they avoid any business dealings with customers linked to extremist activities in the West Bank, such as seizing Palestinian private property or supplying weapons to groups there.

As previously mentioned, the international sanctions regime mandates that every business entity adopt a sanctions policy. This is crucial, especially for entities involved in financial services, to ensure internal enforcement and protect against the potential negative consequences of violating the sanctions. Furthermore, if the number of individuals and organizations subject to sanctions increases significantly, it may be necessary to adopt a comprehensive policy regarding business activities with entities operating in the West Bank.

American and other investors and business partners are also likely to take action to verify that a company is not carrying out activities in violation of the sanctions.

If an organization has any such exposure, our recommendation is to draft a policy document and procedures customized for the organization. This is in order to ensure the implementation of principles and measures to minimize exposures pertaining to the sanctions.

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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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