Since 1979, the Export Administration Regulations (EAR) have prohibited U.S. persons from participating in unsanctioned boycotts imposed by foreign governments on countries friendly to the U.S. Today, the Arab League’s boycott of Israel is the primary concern. The primary area of legal and compliance risk is foreign subsidiaries of U.S. companies that are doing business in Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, and Yemen.
On October 6, 2022, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) made four enhancements to its antiboycott enforcement strategy:
Renewed focus on foreign subsidiaries. In addition to more aggressively attempting to deter foreign parties from making boycott requests, BIS will focus its enforcement efforts on controlled foreign subsidiaries of U.S. parent companies. A foreign subsidiary is subject to antiboycott requirements when it is “controlled in fact” by a U.S. person (i.e., a U.S. person has “the authority or ability to establish the general policies or to control the day-to-day operations”). Foreign affiliates, partnerships, branches, offices, or other permanent foreign establishments of U.S. parent companies may also be “controlled in fact” and subject to antiboycott requirements.
Increased penalties. BIS will now begin all Category A penalty calculations at the statutory maximum (currently $330,947 or twice the value of the underlying transaction) rather than reserving the maximum penalty for only a small subset of violations. Consequently, the penalties for Category B and Category C violations will also increase. BIS’s goal is to impose sufficient penalties to punish and deter antiboycott violations. The intended increase in the level of antiboycott penalties follows BIS’s announcement earlier this year that it will also impose significantly higher penalties in other administrative enforcement cases.
Re-categorized antiboycott violations. BIS revised its Antiboycott Penalty Guidance (Supplement No. 2 to Part 766 of the EAR) to better reflect BIS’s view on the seriousness of antiboycott violations in Categories A to C. It will now focus its antiboycott enforcement on Category B violations, which most commonly arise in commercial transactions and will be subject to enhanced penalties. Category B now includes the violations of “implementing letters of credit,” “furnishing information about business relationships with boycotted countries or blacklisted persons,” “knowingly agreeing to refuse to do business,” and “requiring, or knowingly agreeing to require, any other person to refuse to do business.” BIS previously categorized these violations under Category A. It also re-categorized the violation of “furnishing information about associations with charitable or fraternal organizations which support a boycotted country” from Category B to Category A. Category A violations are the most serious and can result in the largest penalties, including the maximum monetary penalty; denial of export privileges; or an exclusion order.
Elimination of “no admit, no deny” settlements. Consistent with its new approach in other administrative enforcement cases, BIS will no longer use “no admit, no deny” settlements in antiboycott enforcement cases. Although resolving cases prior to trial will still reduce the penalty, a party must admit to a statement of facts outlining its conduct. BIS intends that a clear admitted statement of facts will help companies learn from others’ mistakes.
The new policies became effective on October 7. U.S. parent companies and their foreign subsidiaries should:
- Conduct an assessment to determine which foreign subsidiaries satisfy the EAR’s definition of “controlled in fact” and are, therefore, subject to the antiboycott regulations.
- Implement a process to ensure transaction documents are carefully reviewed for invitations to participate in unsanctioned boycotts. Boycott language may be found in letters of credit, bill of lading, terms and conditions, draft contracts, correspondence, or other transaction documents. Examples of offending language may be found at bis.doc.gov.
- Train affected employees on how to identify oral or written boycott language.
- Implement an internal process to escalate, track, and report boycott requests.
Overall, the regulations require U.S. companies and their foreign subsidiaries to (1) refuse to comply with any unlawful boycott request and (2) timely report certain boycott requests to BIS’s Office of Antiboycott Compliance. The compliance approach will need to address both aspects, and therefore requires knowledge among affected personnel, new contract review processes, as well as visibility from appropriate contacts in legal and compliance. Also required is a system for identifying, tracking, escalating, and reporting boycott requests to BIS.
Client Alert 2022-349
