A recent anti-boycott investigation of the Shanghai branch of a major U.S. bank (the Bank) serves as an alert to branches and subsidiaries of U.S. companies located in China. Foreign branches of U.S. banks may be unaware that complying with boycotts that are not sanctioned by the United States may violate U.S. law. Such unsanctioned boycotts not only include the Arab League boycott of Israel, but may also include boycotts of Taiwan and Japan.
In this case, the Bank paid a $30,000 civil fine for furnishing information about its business relationships with Israel – a violation of the anti-boycott provisions of the Export Administration Regulations (EAR).
On Aug. 19, 2011, the Bank entered into a settlement agreement with the Department of Commerce, Bureau of Industry & Security (BIS). The Bank sought to resolve allegations that it violated the EAR section prohibiting U.S. persons from furnishing information about business relationships with boycotted countries.
According to the BIS Proposed Charging Letter, during June and July of 2007, the Bank furnished to persons in the U.A.E. information concerning the Bank’s “past, present or proposed business relationships with or in a boycotted country, with a business concern organized under the laws of a boycotted country, or with a national or resident of a boycotted country.” The Bank provided the information in connection with the sale and/or transfer of goods or services (including information) from the United States to Oman.
While neither the settlement agreement nor the proposed charging letter mention which boycott the Bank supported, it was likely the Arab League boycott of Israel. However, compliance with any boycott not sanctioned by the United States could give rise to penalties.
The anti-boycott compliance provisions of the EAR, set forth in Part 760, apply to “United States persons,” defined as “any person who is a United States resident or national, including individuals, domestic concerns, and ‘controlled in fact’ foreign subsidiaries, affiliates, or other permanent foreign establishments of domestic concerns.” The Shanghai branch was a controlled-in-fact foreign branch of the U.S. bank, which is a “domestic concern.” Thus, the Bank, although based in Shanghai, fell under the jurisdiction of the EAR.
In order to fall within the definition of a controlled-in-fact entity, the domestic concern must have the “authority or ability…to establish the general policies or to control day-to-day operations of its foreign subsidiary, partnership, affiliate, branch, office, or other permanent foreign establishment.”
The anti-boycott regulations not only prohibit furnishing information about business relationships with boycotted countries, as seen in the case against the Bank, but also:
In the event that a U.S. company is asked to take any of the actions above, the EAR requires the U.S. company report any such requests to BIS on a quarterly basis.
Failure to report boycott requests or comply with the prohibitions listed above may result in criminal or administrative penalties, or both. Criminal penalties, which are imposed for “knowing” violations, can result in fines of up to $1 million and imprisonment of up to 20 years per violation. Administrative penalties may include fines of up to the greater of $250,000 per violation or twice the value of the transaction.
BIS gives several examples of actual boycott requests, a few of which originated from companies in the U.A.E., including the following:
“1. Do you have or ever have had a branch or main company, factory or assembly plant in Israel or have sold to an Israeli?
2. Do you have or ever have had general agencies or offices in Israel for your Middle Eastern or international operations?
3. Have you ever granted the right of using your name, trademarks royalty, patent, copyright or that of any of your subsidiaries to Israeli persons or firms?
4. Do you participate or ever participated or owned shares in an Israeli firm or business?
5. Do you render now or ever have rendered any consultative service or technical assistance to any Israeli firm or business?
6. Do you represent now or ever have represented any Israeli firm or business or abroad?
7. What companies in whose capital are your shareholders? Please state the name and nationality of each company and the percentage of share of their total capital.
8. What companies or shareholders in your capital? Please state the name and nationality of each company and the percentage of share of their total capital.
N.B. The above questions should be answered on behalf of the company itself and all of its branch companies, if any.”
Branches and subsidiaries of U.S. companies may not have a full understanding of which boycotts are not sanctioned by the United States. Of particular concern in China are the relationships it has with Taiwan and Japan and the possibility that U.S. controlled-in-fact companies operating in China may be asked to boycott Taiwan and/or Japan.
While the focus of U.S. anti-boycott laws has been on the Arab League boycott of Israel, the laws and regulations are not limited to the Israeli boycott and encompass all unsanctioned foreign boycotts. Further, while companies may understand U.S. anti-boycott laws well enough to refuse to comply with the requests, companies also need to be aware that the mere fact that they received a request is reportable under the EAR, the failure of which could result in substantial penalties.
Erica Dillon, founder of ELD Consulting LLC, co-authored this article.
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Wendy L. Wysong, a litigation partner with Clifford Chance, maintains offices in Hong Kong and Washington D.C. She offers clients advice and representation on compliance and enforcement under the Foreign Corrupt Practices Act, the Arms Export Control Act, International Traffic in Arms Regulations, Export Administration Regulations, and OFAC Economic Sanctions. She was appointed by the State Department as the ITAR Special Compliance Official for Xe Services (formerly Blackwater) in 2010.
Ms. Wysong combines her experience as a former federal prosecutor with the United States Attorney for the District of Columbia for 16 years with her regulatory background as the former Deputy Assistant Secretary for Export Enforcement at the Bureau of Industry and Security, U.S. Department of Commerce. She managed its enforcement program and was involved in the development and implementation of foreign policy through export controls across the administration, including the Departments of Justice, State, Treasury, and Homeland Security, as well as the intelligence community.]
Ms. Wysong received her law degree in 1984 from the University of Virginia School of Law, where she was a member of the University of Virginia Law Review.
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