U.S. Enforcement Agencies Highlight Non-U.S. Persons’ Obligations to Comply With U.S. Sanctions and Export Control Laws

On March 6, 2024, the U.S. Departments of Commerce, Treasury, and Justice issued a Tri-Seal Compliance Note emphasizing non-U.S. persons’ obligations to comply with U.S. sanctions and export control laws, and the potential enforcement actions that may result from compliance failures. The Tri-Seal Compliance Note follows previous Tri-Seal Compliance Notes issued in March and July 2023, which highlighted potential red flags of diversion and outlined the importance of self-disclosing suspected violations. This new Tri-Seal Compliance Note builds upon that guidance and signals the increased scrutiny foreign companies and individuals may encounter as the U.S. government continues to hold non-U.S. persons accountable for noncompliance.

Office of Foreign Assets Control (OFAC) Sanctions

OFAC can exercise its enforcement authority only over those persons within its jurisdiction. U.S. sanctions laws prohibit non-U.S. persons 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.”¹ This scenario arises most commonly where a non-U.S. person routes a payment that is prohibited through the U.S. financial system, thereby “causing” a U.S. bank to process or clear a financial transaction in violation of U.S. sanctions.² The Tri-Seal Compliance Note cites the following additional scenarios as subject to U.S. sanctions jurisdiction:

• Obscuring or omitting references to the involvement of a sanctioned party or jurisdiction to a financial transaction involving a U.S. person in transaction documentation
• Misleading a U.S. person into exporting goods ultimately destined for a sanctioned jurisdiction

In all those cases, OFAC has jurisdiction to assert its enforcement authority over the non-U.S. person because of the involvement — even if it be unwitting involvement — of the U.S. person.

But OFAC does not need jurisdiction over the non-U.S. person if, instead of its enforcement powers, OFAC employs its designation powers. OFAC does not need a U.S. nexus to add a person to its list of Specially Designated Nationals. While not highlighted by the Tri-Seal Compliance Note, U.S. sanctions also contain secondary sanctions provisions that could impact non-U.S. persons’ activities outside of the United States without any U.S. nexus. For example, many U.S. sanctions regimes permit OFAC to designate persons who provide material support to a person that is already blocked under the applicable regime. Therefore, transactions involving a blocked person may create a potential sanctions risk for non-U.S. persons, without regard to a U.S. nexus. Certain programs have secondary sanctions that target persons who engage in specified activities. The Iran and Russia-related programs demonstrate how OFAC can impose several types of non-blocking sanctions.

OFAC regularly takes action against non-U.S. companies that violate sanctions laws. In one recent example, British American Tobacco p.l.c, a London-headquartered tobacco company, agreed to pay US$508 million in April 2023 to settle civil liability for alleged violations of OFAC sanctions against North Korea and proliferators of weapons of mass destruction.³ OFAC has also designated numerous non-U.S. persons, including those based in U.S. ally/partner countries, under applicable secondary sanctions authorities.

Export Control Restrictions

U.S. export control regulations also have broad extraterritorial reach. 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). If an item is subject to the EAR, then “the law follows the good[,]” and anyone involved in the movement of such items must adhere to the EAR.⁴ This includes the following activities:

• Reexports (or the shipment from one foreign country to another) and in-country transfers (or transfers within a foreign country) of EAR-controlled items
• Exports from abroad, reexports, or in-country transfers of foreign items that incorporate a certain percentage of controlled U.S.-origin content (i.e., de minimis thresholds)
• Exports from abroad, reexports, and in-country transfers of certain foreign items if their production involves certain technology, software, or equipment (i.e., foreign direct product rule)

This means restrictions under the EAR can extend to instances where an item never enters the United States. For example, in April 2023, Seagate Technology LLC and its Singaporean subsidiary agreed to pay US$300 million (the largest standalone administrative penalty in BIS history) to settle alleged violations of the EAR for selling foreign-produced hard disk drives to Huawei Technologies Co. Ltd. in violation of the foreign direct product rule.

Department of Justice

For any willful violations of U.S. sanctions or export control laws, DOJ is authorized to bring criminal prosecutions, which would result in up to 20 years imprisonment and a US$1 million fine. DOJ has brought numerous enforcement actions against non-U.S. persons for violations of U.S. export controls and/or sanctions. For example, in December 2023, DOJ unsealed an indictment charging two individuals in Iran and China for conspiring to purchase and export dual-use microelectronics from the U.S. to Iran in violation of U.S. export control restrictions.⁵ The individuals allegedly caused non-U.S. companies to place orders with U.S. manufacturers in order to route shipments through Canada and France to China before ultimately being reexported to Iran. DOJ was able to assert jurisdiction over the non-U.S. persons by virtue of the U.S. nature of the goods at issue, and by virtue of the nature of the conspiracy — to export the goods illegally from the United States.

Takeaways

Given the intense scrutiny and resources that the United States is currently devoting to enforcing sanctions and export control laws, non-U.S. persons should closely monitor the impact the restrictions have on their operations and take appropriate steps to ensure full compliance. The Tri-Seal Compliance Note identifies several measures companies can employ to mitigate potential liability:

• Develop strong internal controls and procedures, including adopting a risk-based approach to sanctions and export controls compliance.
• Integrate know-your-customer information and data to properly screen suppliers and customers.
• Train all subsidiaries and affiliates about U.S. sanctions and export control restrictions, including how to effectively identify red flags and report potential violations to management.
• Conduct appropriate sanctions and export controls diligence in M&A transactions
• Immediately report any potential violations and ensure appropriate corrective actions and controls are implemented.

For questions about U.S. export controls or sanctions, contact the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations or Export Control & Sanctions practice groups.

*Christina Coleburn contributed to this Advisory. Ms. Coleburn is a graduate of Harvard Law School and is employed at Arnold & Porter's Washington, D.C. office. She is not admitted to the practice of law.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.