Sanctions, sanctions everywhere: forging a path through complex transnational sanctions laws.

Author:Rathbone, Meredith
Position:IV. Compliance Challenges Confronting Both U.S.-based and Foreign Multinational Companies in Relation to the U.S. Economic Sanctions Regimes through VI. Conclusion, with footnotes, p. 1095-1126

    The economic sanctions administered by OFAC and the Department of State subject both U.S. and non-U.S, multinational companies to a broad range of penalties for violating U.S. sanctions laws and regulations, but the core compliance challenges facing these categories of companies are largely different. Accordingly, this Part will first address the primary compliance challenges for U.S.-based companies, and then look at those confronting foreign companies. The Part will conclude by addressing the conflicts of law issues that arise by virtue of the extraterritorial application of the U.S. sanctions laws, which have implications for U.S.-based and foreign companies alike.

    1. U.S.-Based Companies

      1. Introduction

        For U.S.-based companies, compliance with the Cuba, Iran, Sudan, and Syria sanctions regimes may seem straightforward at first glance, because almost nothing is permissible. As discussed below, the export to these countries of virtually all goods, services, software or technology from the United States or by a U.S. person is prohibited. Accordingly, most U.S. companies know that they cannot themselves ship goods or provide services to these sanctioned destinations.

        Where the sanctions regimes frequently become more complicated for U.S. companies is when these companies engage in transactions with third-country entities or persons, who in turn engage in dealings with sanctioned destinations. For example, in addition to prohibiting U.S. companies from directly exporting goods to sanctioned destinations, the regulations also prohibit U.S. companies from exporting goods to a third country if they have "reason to know" that the items are intended for a sanctioned destination (so-called transshipment).

        Similarly, in relation to the Cuba and Iran sanctions regimes, U.S. companies are potentially liable not only for their own transactions, but also for the prohibited transactions of their non-U.S. subsidiaries. And U.S. companies are liable under all of the comprehensive sanctions regimes if they "facilitate" activity by any foreign person, if that activity is prohibited in relation to U.S. persons. While liability for transshipment requires at least "reason to know" of the prohibited transaction, liability for facilitation may be imposed, at least in theory, even if the U.S. company does not know that what it is facilitating is unlawful.

        The compliance challenges that arise in relation to transshipment, foreign subsidiaries, and facilitation are discussed in further detail below, because these are some of the biggest sources of confusion for U.S. companies trying to comply with the comprehensive sanctions regimes. This is not to suggest, however, that the issues identified below are the only issues that are potentially hazardous for U.S. companies when it comes to sanctions compliance. For example, U.S. companies' making investments in which sanctioned countries or entities have an interest is an area fraught with potential compliance challenges. What if a sanctioned company or entity is a small shareholder in such an investment? What if it is a larger shareholder? What if a sanctioned country or entity will benefit from an investment, even if it is not a shareholder? Addressing these, and all of the other issues confronting U.S. companies in relation to sanctions compliance, would require far more time and space than we have here. Accordingly, this Article will focus on the issues identified below as a way of highlighting some of the larger compliance challenges for U.S. companies.

      2. Transshipment of U.S.-Origin Goods

        The export of almost all goods, services, software, or technology from the United States or by a U.S. person to Cuba, Iran, Sudan, or Syria is prohibited by the applicable sanctions regimes. (317) The Iranian and Sudanese sanctions regulations also specifically prohibit exports from the United States or by a U.S. person to a third country with knowledge or reason to know that the items are intended specifically for Iran or Sudan, or for incorporation into items intended specifically for Iran or Sudan. (318) OFAC has read this prohibition into the Cuba and Syria regulations, even though it is not explicitly found in the text. (319)

        From a compliance standpoint, the "reason to know" standard in the transshipment context is apt to give U.S. companies heartburn. In 2002, OFAC provided limited guidance on this standard in response to an inquiry from a U.S. company whose non-U.S, person distributor in a third country had sold a small quantity of the U.S. company's products to Iran. (320) The factual summary included in OFAC's guidance noted that the products were supplied from the non-U.S, person distributor's general inventory, and were not purchased from the U.S. company for the specific purpose of filling an Iranian order. (321) The summary also stated that the U.S. company held a minority interest in the foreign parent of the distributor, and was knowledgeable about the general nature of the distributor's business activities. (322)

        While providing no definitive answers, OFAC's guidance in relation to the U.S. company's inquiry did provide useful information with respect to the concept of "reason to know." OFAC suggested in the guidance that if a third party dealt exclusively or predominately with Iran or the government of Iran, a seller would have "reason to know" that the goods were specifically intended for Iran. (323) The guidance also noted that circumstantial evidence would be relevant to determining whether a U.S. person had "reason to know" that its goods were intended for Iran, including: "course of dealing, general knowledge of the industry or customer preferences, working relationships between the parties, or other criteria far too numerous to enumerate." (324) Finally, OFAC said that minority ownership by the seller in a third party distributor, per the factual circumstances of the inquiry, might also be relevant to a seller's knowledge of the goods' intended destination, but would not be controlling. (325)

        OFAC's guidance makes clear that a company could have "reason to know" that its products were intended for a sanctioned destination in circumstances that go well beyond explicit statements to that effect from the relevant third country entity. OFAC puts the onus on U.S. companies to know their customers, and know who their customers are doing business with outside of any specific transaction.

        Notably, OFAC's 2002 guidance and subsequent industry practice have been interpreted as creating what is commonly referred to as the "general inventory exception" (also called the distributor exception) to the broad prohibition on transshipment. (326) Pursuant to this so-called "exception," it is not transshipment for a U.S. company to sell items to a foreign person (e.g., a distributor) who resells those items to a sanctions target if two conditions are met: (1) the items are for the foreign person's general inventory, and not to fill a specific order to a sanctions target, and (2) the foreign person's sales are not predominantly to a sanctions target. (327)

        There are some caveats to this so-called general inventory exception, however. First, it is unclear exactly what constitutes "predominant" sales to a sanctions target, and OFAC has declined to provide a specific threshold. In the authors' experience, "predominant" can potentially mean well below fifty percent, though OFAC has declined to provide clear guidance on this point. Second, while such a sale might not constitute transshipment from the perspective of the U.S. person exporter, the reexport controls discussed in the next Part might well apply to the third country entity, depending on the destination and the goods at issue. (328) In light of these caveats, the general inventory exception may not provide much comfort to U.S. person exporters who are nervous about the potential breadth of the "reason to know" standard. (329)

        From an enforcement perspective, however, U.S. companies can take some comfort in the fact that when OFAC penalizes companies in the transshipment context, the cases generally seem to involve actual knowledge, or fact patterns suggesting that the U.S. company undoubtedly had "reason to know" of the destination of the goods. The 2011 settlement between OFAC and Sunrise Technologies and Trading Corporation (Sunrise) provides a good example.

        In 2011, Sunrise reached a $1.6 million settlement with OFAC regarding the export of computer-related goods from the United States to Iran through another company located in Dubai, United Arab Emirates (UAE). (330) According to the Statement of Offense, the company in the UAE, so-called Company X, was primarily engaged in the purchase of U.S.-origin computer-related goods from suppliers in the United States, like Sunrise, for shipment from the United States to Iran. (331) Company X employed Individual B as its point of contact in Iran. (332) Sunrise knew that Individual B lived in Iran, and was facilitating Company X's business with Sunrise from Iran. (333) Sunrise communicated directly with Individual B on a weekly basis in relation to its sales of computer goods to Company X. (334) OFAC concluded that Sunrise knew or had reason to know that the computer goods were destined not for the UAE, but for Iran. (335)

        In sum, while U.S. companies cannot be complacent about the restrictions on transshipment, a review of the relevant cases suggests that OFAC is targeting bad actors. Companies must make an effort to know who they are selling to, and they cannot turn a blind eye to indicators that their goods are ultimately going to sanctioned destinations. That being said, companies that act in good faith and do not ignore red flags are unlikely to find themselves on the wrong side of OFAC's limited enforcement actions.

      3. Foreign Subsidiaries of...

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