Following the deadly terrorist attacks on Israel by Hamas and the ensuing conflict in the region, companies with a presence in Israel and the broader Middle East are responding to the immediate needs of impacted personnel and their families, while also making difficult decisions on how to safely maintain their operations.
This client alert highlights several relevant U.S. trade control risks for companies with personnel and operations in the region to consider as they navigate these challenging circumstances. Companies with a U.S. nexus must be alert to requests to comply with the Arab League Boycott of Israel (ALB); attempts to evade sanctions on Iran, Syria and terrorist organizations – including Hamas and Hezbollah; and offers to supply personal protective equipment (PPE) and defensive equipment without required authorization.
Prohibition on Compliance with the Arab League Boycott of Israel
Since 1977, U.S. federal law has prohibited U.S. persons, including U.S. companies and their foreign entities, from cooperating with any boycott of Israel, including the ALB, which was imposed at the creation of the State of Israel. The U.S. Commerce Department, Bureau of Industry and Security (BIS) and the Internal Revenue Service (IRS) each administer antiboycott rules that prohibit compliance with the boycott of Israel and impose reporting requirements on companies that receive boycott-related requests.
Generally, the federal antiboycott rules prohibit:
- Refusals or agreements to refuse to do business with or in a boycotted country or with blacklisted companies;
- Discrimination or agreements to discriminate against a U.S. person based on race, religion, sex or national origin;
- Furnishing information or agreements to furnish information about business relationships with or in a boycotted country or with blacklisted companies, or about the race, religion, sex or national origin of a U.S. person;
- Implementation of letters of credit containing prohibited boycott terms or conditions; and
- Evasion of the above prohibitions.
The IRS publishes a list of countries that participate in the ALB. When dealing with parties in those countries, an information request or transaction term referencing local boycott compliance or blacklisted countries presumptively relates to a boycott of Israel. According to the latest IRS list, the following countries may require participation or cooperation in the boycott of Israel: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria and Yemen. These are not the only countries that present risk, and the list changes. Companies must be vigilant since boycott requests can arise anywhere and may be passed along through third parties in countries that are friendly to Israel.
Moreover, 37 U.S. states have adopted laws, executive orders or resolutions designed to discourage the boycott of, divestment from or sanction of Israel. State laws tend to have two areas of focus: (1) requirements on government contractors to certify that they are not boycotting Israel; and (2) mandates on public investment funds (such as pension funds) to avoid investment in entities boycotting Israel.
As companies around the world evaluate their supply chain and other risk exposure related to the war in Israel, companies are likely to see requests for more information on ties to Israel.
Caution is warranted, as boycott requests can be embedded in a wide variety of business and trade documents, making it easy to overlook prohibited and reportable requests. Prohibited and reportable requests often appear in diligence forms with questions regarding the nature or extent of operations or assets in Israel, procurement inquiries about whether goods are Israeli in origin or requests to confirm the goods do not originate in Israel, contractual requirements to obey the laws of a boycotting country, export documentation requirements that vessels or aircraft not pass through an Israeli port, or statements in commercial documents that a transaction party does not have offices or economic interests in Israel.
The antiboycott prohibitions, anti-divestment and sanction prohibitions, and related reporting requirements are complex. In addition to consulting with counsel, it can be helpful to maintain a commercial transaction playbook on how to deal with boycott terms or requests for information, particularly for operations or sales related to the Middle East region.
Addressing Sanctions Diversion Risks
The United States already maintains significant sanctions against terrorist organizations and their sponsors, including Iran and Syria. Companies should expect increasing enforcement efforts from the United States and its allies aimed at preventing the evasion of sanctions, financing of terrorist organizations, and supply of goods to sanctioned parties and countries.
Iran and Syria are subject to comprehensive embargoes and have been designated as state sponsors of terror. Likewise, Hamas and Hezbollah are both designated as terrorist organizations and as Specially Designated Nationals (SDNs). The sanctions against Hamas and Hezbollah are not territory-based. Care must be taken when dealing with regions, organizations and institutions where the SDNs may have influence, given the heightened risk of dealing with a sanctioned party. Efforts to donate or deliver humanitarian aid and charitable contributions should be reviewed to screen parties involved and ensure compliance with applicable laws.
Companies that have a U.S. nexus to their operations, such as through U.S. domiciles, transactions in U.S. dollars, use of U.S. back-office support or financing, use of U.S. servers or IT systems, or employment of U.S. nationals, need to ensure their operations strictly comply with U.S. sanctions laws, even when operating abroad. The U.S. sanctions regime is one of strict liability with severe civil and criminal penalties. Non-U.S. companies also risk secondary sanctions for certain transactions, particularly with respect to Iran.
The U.S. government is increasing its focus on enforcement, noting that sanctioned countries and parties are using increasingly sophisticated and aggressive tactics to evade restrictions and obtain funds and other material support. The U.S. Departments of Commerce, Justice and Treasury have recently issued guidance concerning diversion to Russia following its invasion of Ukraine (here, here, here). The guidance is also relevant in the context of the Iran and Syria embargoes and sanctions on terrorist organizations and other persons in the Middle East.
Companies conducting business in the Middle East should be alert to the use of third-party intermediaries and transshipment points to conceal the identities of ultimate end-users. Red flags of potentially illicit transactions include:
- Shell companies to obscure ownership and source of funds
- Shipping instructions inconsistent with business practices or purchase history
- Third parties providing payment for items
- Residential addresses (rather than corporate addresses)
- Minimal or no web presence, and general lack of visibility into the purchaser
- Requesting the shipping of goods to common transshipment points either in geographic proximity to or allied with a sanctioned country or entity
- Obscure end use or end users
- Internet Protocol (IP) address that does not match the purchaser’s stated location
Payment flows also may indicate diversion to sanctioned parties, including in the virtual currency context, such as:
- Accounts in jurisdictions or with financial institutions that are experiencing a sudden rise in value transfers, without a clear economic or business rationale
- Newly established accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from SWIFT
- A customer’s transactions are initiated from or sent to suspicious IP addresses
- Multiple rapid and unrelated transactions involving convertible virtual currency (CVC) that may indicate attempts to break the chain of custody on a blockchain
Relatedly, U.S. companies should test and calibrate sanctions and anti-money-laundering controls to ensure that they are effective.
PPE and Other Defense-Related Support to Israel
Companies exporting defense articles to Israel for the protection of their personnel and operations must also be mindful of export restrictions under U.S. and other laws, as well as Israeli import controls.
Under U.S. law, the International Traffic in Arms Regulations (ITAR) regulate the export of defense articles and services controlled on the United States Munitions List (USML). The Export Administration Regulations (EAR) control items on the Commerce Control List (CCL), including “600 series” military-related items. Defense articles are highly regulated, often requiring authorization for export, re-export, in-country transfer and brokering of sales, even to allied countries. The following types of PPE typically require authorization for commercial sales as well as for companies’ and individuals’ own internal use:
- Body armor, armored plates and helmets
- Radar- and infrared-concealing clothing and equipment
- Shields, non-lethal weapons and flash/smoke devices
- Gas masks and chemical weapons suits
- Armored vehicles, armoring kits, ballistic glass and run-flat tires
- Firearms and ammunition
- Night vision goggles and weapons optical sights
- Electronic signal jammers
Similar to export control requirements, foreign countries similarly impose restrictions on the import and use of defense articles. To the extent companies, nonprofits or individuals are seeking to deliver such items abroad, including to Israel, one should engage with local counsel or otherwise determine the necessary steps to lawfully deal with defense articles in compliance with Israeli law.
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Fenwick’s Israel Practice can assist with issues clients may have as they navigate these complex issues. Contact your Fenwick relationship attorneys to discuss any concerns regarding transactions and operations in the Middle East during this difficult period.
*Law clerk Trevor Coval also contributed to the preparation of this alert.