TriSeal Note for Foreign Persons on Sanctions & Export Controls

OFAC, BIS & Justice summary published


U.S. sanctions and export control laws can create legal exposure not only for U.S. persons, but also for non-U.S. companies who continue to engage with sanctioned jurisdictions or persons in violation of applicable laws.

To mitigate the risks of non-compliance, companies outside of the United States should be aware of how their activities may implicate U.S. sanctions and export control laws.

The Departments of Justice, Commerce, and Treasury’s Office of Foreign Assets Control, have issued a Tri-Seal Compliance Note: Obligations of foreign-based persons to comply with U.S. sanctions and export control laws.

The Note highlights the applicability of U.S. sanctions and export control laws to persons and entities located abroad, as well as the enforcement mechanisms that are available for the U.S. government to hold non-U.S. persons accountable for violations of such laws, including criminal prosecution.

It further provides an overview of compliance considerations for non-U.S. companies and compliance measures to help mitigate their risk.

U.S. Sanctions 

Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions, primarily against targeted foreign jurisdictions and regimes, as well as individuals and entities such as terrorists, international narcotics traffickers, weapons of mass destruction proliferators, and other malign actors.

OFAC’s authority to impose sanctions is distinct from its enforcement authorities. U.S. persons mustcomply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons within the United States, and all U.S.- incorporated entities and their foreign branches. In certain sanctions programs, foreign entities owned or controlled by U.S. persons also must complywith applicable restrictions. Certain sanctions programs also require foreign persons in possession of U.S.-origin goods to comply.

Non-U.S. persons are also subject to certain OFAC prohibitions. For example, non-U.S. persons areprohibited 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.

Violations of OFAC regulations may result in civil or criminal penalties. OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person subject to U.S. jurisdiction may be held civilly liable even if such person did not know or have reason to know that it was engaging in a transaction that was prohibited under sanctions laws and regulations administered by OFAC.  OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. economic sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

OFAC Enforcement 

OFAC has actively employed its enforcement authorities against foreign financial institutions and otherforeign persons who have, among other things, caused U.S. persons to violate OFAC sanctions, conspired to do so, indirectly exported services from the United States, or otherwise engaged in violative conduct. Examples ofthis conduct include when a non-U.S. person:

  • Obscures or omits reference to the involvement of a sanctioned party or jurisdiction to a financialtransaction involving a S. person in transaction documentation;
  • Misleads a U.S. person into exporting goods ultimately destined for a sanctioned jurisdiction; or
  • Routes a prohibited transaction through the United States or the S. financial system, thereby causing aU.S. financial institution to process the payment in violation of OFAC sanctions.

U.S. Export Control Laws

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) administers and enforces export controls on dual-use and certain munitions items through the Export Administration Regulations (EAR) under the authority of the Export Control Reform Act of 2018 (ECRA). Unlike many other countries, where export-related authorities are limited to direct exports, U.S. export control laws may extend to items subject to the EAR anywhere in the world and to foreign persons who deal with them. To put it simply, the law follows thegoods.

In addition to the initial export, the EAR also applies to the following:

  • Reexports, or the shipment of the EAR item from one foreign country to another foreign country and in-country transfers (the transfer of an item subject to the EAR within a foreign country);
  • Goods that incorporate a certain percentage of controlled S. content (also known as the de minimis thresholds); and
  • Exports from abroad, reexports, and in-country transfers of certain foreign-made items produced using, technology, or production equipment (thus subject to a foreign direct product rule, or FDPR).

BIS actively enforces U.S. export control laws, regardless of where the offending party is located. Anyone involved in the movement of items subject to the EAR must adhere to U.S. export control laws.

The reach of U.S. export control laws means that parties to an export transaction cannot bypass the EAR by shipping items through a third country. For example, an exporter cannot bypass the U.S. embargo against Iran by shipping an item to a distributor in the United Arab Emirates (UAE) andasking the distributor to transship the item to a customer in Iran. Under U.S. law, this would be considered areexport to Iran, even though it does not go directly to that country, and both the U.S. exporter and the UAEdistributor could be liable for violating U.S. law. Additionally, parties cannot bypass the EAR by changing theend use or end user of an item within a foreign country.

Similarly, foreign parties to an export transaction cannot bypass EAR requirements because the item islocated outside the United States and was not shipped directly to the foreign party recipient. For example, a foreign party that has placed an EAR item into inventory that otherwise requires a license to a thirdcountry destination if directly exported from the United States generally still must obtain a BIS reexport license prior to shipping to that third country destination.

The EAR may also apply to non-U.S. companies that manufacture items containing U.S.-origin components orsoftware. The factor that determines EAR applicability is the value of the controlled content (e.g., U.S.-origin components, software) within the overall item: If the value exceeds the applicable de minimis threshold, it issubject to the EAR. In most situations, a non- U.S.-made item is subject to the EAR if the value of the U.S.-origincontrolled content exceeds 25% of the total value of the finished item. For certain destinations (i.e., Cuba, Iran, North Korea, and Syria), the threshold is 10%.

In addition, under the EAR, certain foreign-produced items located outside of the United States that are produced using certain U.S.-controlled technology, software, or production equipment are subject to the EAR when exported from abroad, reexported, or transferred in-country to certain countries or parties on the Entity List.

That is, foreign-produced items – even if they never enter the U.S. stream of commerce and no U.S.person is involved in the transaction – may still be subject to U.S. export control jurisdiction if they meet certain conditions.

 For example, in May 2020 (as subsequently amended in August 2020), BIS imposed a license requirementthrough a FDPR for Huawei and its subsidiaries on the Entity List on items that are the direct product of certain U.S.-origin software or technology or produced by a specified plant or major equipment of a plant. BIS also hasimposed FDPR controls on certain Chinese entities associated with advanced semiconductors. Similarly, BIS has imposed multiple FDPR controls on certain defense-related entities in Russia and Belarus and certain items destined to Russia, Belarus, and Iran.

Given the ubiquity of U.S. semiconductor manufacturing equipment in foreign semiconductor fabricationfacilities, these controls generally result in a license requirement for any semiconductor destined to specific entities or locations subject to one of these FDPRs. This means that any semiconductor—no matter where itis produced in the world—may be subject to the FDPR and thus restricted from going to Russia.

Criminal Enforcement

The Department of Justice (DOJ) is authorized to bring criminal prosecutions pursuant to IEEPA and ECRAfor willful violations of U.S. sanctions and export control laws. Conduct prohibited under these statutes includes “caus[ing] a violation of any license, order, regulation, or prohibition issued” pursuant to IEEPA as well as “caus[ing]” or “induc[ing]” the doing of any act. prohibited, or the omission of any act required by ECRA or the EAR. Willful violations of either statute arepunishable by imprisonment of up to 20 years and a $1 million fine.

The complete note, as released, has numerous case illustrations and references to the code, as well as a list of best practices for foreign entities to ensure compliance.

[Link to Entire Note]


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