On Wednesday, March 6, 2024, the Department of Commerce, Department of the Treasury and Department of Justice issued another Tri-seal Compliance Note, focusing this time on the obligations of foreign based persons complying with U.S. sanctions and export control laws as well as recent enforcement actions. This may signal more scrutiny on the compliance of foreign companies which we have discussed here.
While understanding how sanctions and export control laws impact U.S. companies is straightforward (or not!), how these laws affect non-U.S. persons and entities is often more confusing.
The Note summarizes the myriad ways that non-U.S. persons and entities can run afoul of these complicated regulations.
Office of Foreign Assets Control (OFAC) Sanctions
While it makes sense that U.S. persons and all persons within the United States must comply with U.S. law (including OFAC regulations), non-U.S. persons are also subject to certain OFAC prohibitions.
Importantly, sanctions prohibit non-U.S. persons from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions as well as engaging in conduct that evades U.S. sanctions.
Some examples include obscuring or omitting references to the involvement of sanctioned parties which involve a U.S. person in the transaction or causing a U.S. bank to route a prohibited transaction through the United States or U.S. financial system (including the use of correspondent banks).
Running afoul of these laws can leave non-U.S. persons liable to civil and criminal penalties.
Export Control Laws
U.S. export control laws can also capture non U.S. person activity because U.S. export control laws may extend to items subject to the Export Administration Regulations (EAR) anywhere in the world. As the Note succinctly states, “the law follows the goods” (otherwise known as quasi in rem jurisdiction).
Reexport and In-Country Transfers
One instance of how export control laws follow the goods is through reexports. After an item subject to the EAR is exported to a foreign country, the EAR still applies to that item when it is shipped to another foreign country. So an EAR-controlled item that is transshipped through another country (perhaps through a foreign distributor) to eventually a prohibited destination is a violation. Here, the foreign distributor could be liable. This applies even for in country transfers where an EAR item is transferred within a foreign country.
De Minimis
The EAR may also apply to non-U.S. companies that produce items containing U.S.-origin components or software depending on destination of the foreign produced item and the value of the U.S. -origin controlled content.
Foreign Direct Product Rule (FDPR)
Lastly, the EAR could also apply to foreign produced items that were produced using certain U.S.-controlled technology, software, or production equipment when exported, reexported, or transferred in country, depending on the destination or if any of the parties are on the Entity List. The FDPR applies to the item even if it never enters the U.S. stream of commerce and no U.S. persons were involved.
Thus, for example, a foreign produced integrated circuit design that was produced using Electronic Design Automation software (which is of U.S. origin) may not be exported or shared with Huawei.
We discuss examples of some of the FDPRs here and here.
Takeaways
Given how complicated U.S. sanctions and export control laws can be, especially concerning non U.S. companies, there a few compliance takeaways for them to consider:
- Establish strong internal controls and procedures on payments and the movement of goods that involve multiple parties such as affiliates, subsidiaries, or agents
- Conduct and integrated know-your customer due diligence into screening protocols
- Ensure that subsidiaries and affiliates are trained on U.S. sanctions and export control requirements and are able to identify any red flags