New Tri-Seal Compliance Note Issued To Non-U.S. Persons - Export Controls & Trade & Investment Sanctions

Highlights

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), U.S. Department of Commerce's Bureau of Industry and Security (BIS) and U.S. Department of Justice (DOJ) issued a Tri-Seal Compliance Note (Compliance Note) outlining the obligations of non-U.S. persons to comply with U.S. sanctions and export control laws.
Though the Compliance Note does not impose any new legal requirements, it highlights the importance for non-U.S. persons to comply with U.S. sanctions and export control laws and serves as a reminder of the costly ramifications of noncompliance with such laws.
The Compliance Note appears to be part of the coordinated and sustained effort by the agencies to prevent bad actors from obtaining access to U.S. commercial and financial markets and diverting controlled technology and goods to Russia, China and Iran.

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), U.S. Department of Commerce's Bureau of Industry and Security (BIS) and U.S. Department of Justice (DOJ) on March 6, 2024, issued a Tri-Seal Compliance Note (Compliance Note) exclusively directed at non-U.S. persons and entities. The Compliance Note underscores non-U.S. persons' compliance obligations with U.S. sanctions and export control laws, in light of continuing risks of misuse of U.S. commercial and financial channels.

Background

The Compliance Note is the third Tri-Seal Compliance Note issued in the past year and appears to be part of the coordinated and sustained effort by the agencies to prevent controlled technology and goods from being diverted to Russia, China and Iran.

A prior Tri-Seal Compliance Note issued in July 2023 focused on outlining policy memoranda and regulations on voluntary self-disclosures for violations of sanctions, export controls, and other national security laws. (See Holland & Knight's previous alert, "Tri-Seal Compliance Note Issued on Export Controls, Sanctions Violations Self-Disclosures," Aug. 1, 2023.) Another prior Tri-Seal Compliance Note issued in March 2023 focused on identifying red flags of diversion (e.g., the use of third-party intermediaries or transshipment points). Further, in May 2023, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) and BIS issued a joint alert identifying specific classes of goods and technology that Russia is seeking to acquire through deceptive means.

Similar to these previous publications, with this Compliance Note, the three agencies are warning non-U.S. persons that they should be mindful of the broad reach of U.S. sanctions and export control laws.

Extraterritorial Reach of U.S. Sanctions and Export Control Laws

U.S. Sanctions

OFAC is the agency responsible for administering and enforcing economic sanctions, which include, for example, blocking property of certain individuals and entities, restricting dealings with designated actors and prohibiting transactions involving an entire country or region (in the case of Cuba, Iran, North Korea and Syria, along with the Crimea, Luhansk and Donetsk regions of Ukraine). Generally, U.S. sanctions apply only to U.S. persons (i.e., U.S. citizens, lawful permanent residents, entities organized under the laws of the U.S. and their foreign branches or any person physically located in the U.S.); however, the Compliance Note emphasizes the broad effect of U.S. sanctions – even to non-U.S. persons.

For example, when non-U.S. persons "cause" U.S. persons to violate sanctions, they can become subject to sanctions themselves. In particular, U.S. persons cannot facilitate transactions by non-U.S. persons that U.S. persons could not enter into directly, and a non-U.S. person who causes a U.S. person to violate sanctions, such as obscuring or omitting the involvement of a sanctioned person or jurisdiction, can result in the non-U.S. person being subject to enforcement actions by OFAC. Another potential scenario: A non-U.S. person routes a prohibited transaction through the U.S. financial system, thereby creating a U.S. nexus and causing a U.S. financial institution to process the payment in violation of OFAC sanctions. Further, certain sanctions regimes authorize OFAC to impose sanctions on non-U.S. persons, even when there is no U.S. nexus to the transaction (referred to as "secondary sanctions").

Violations may result in civil or criminal penalties. The Compliance Note highlights recent OFAC enforcement actions targeting non-U.S. persons, including an Australian freight forwarding and logistics company that paid a penalty of more than $6 million for receiving payments through the U.S. financial system in connection with shipments involving North Korea, Iran and Syria and a Swedish bank that paid a penalty of more than $3 million for processing transactions through U.S. correspondent banks from a customer using an IP address in the Crimea region of Ukraine.

U.S. Export Controls

BIS, the agency that administers the Export Administration Regulations (EAR), emphasized that U.S. export controls extend to products subject to the EAR anywhere in the world, in addition to non-U.S. persons in possession of such products. The Compliance Note highlights that BIS actively enforces U.S. export control laws in a broad range of instances, regardless of where the offending party is located. Enforcement actions may be triggered not only with respect to exports from the U.S., but also to reexports (the shipment of EAR-regulated products from one foreign country to another), in-country transfers, goods that incorporate above de minimis percentage of controlled U.S. content and foreign direct products (i.e., foreign products produced using controlled U.S. software, technology or production equipment).

The extensive reach of U.S. export control laws means that parties to an international transaction cannot bypass the EAR by shipping items through a third country, by changing the end use or end user of an item within a foreign country or by reexporting a product that otherwise requires a license to a third-country destination. Moreover, the EAR may also apply to non-U.S. companies that manufacture products incorporating U.S.-origin components or software and to certain products located outside of the U.S. that are produced using controlled U.S.-origin technology, software or production equipment.

BIS also highlighted its recent enforcement actions against non-U.S. persons, including issuing Temporary Denial Orders to suspend the export privileges of Dutch and Greek defense-related companies for procuring products for Russian intelligence services and certain Russian airlines for operating aircraft in violation of the EAR.

Criminal Enforcement

The DOJ's National Security Division (NSD), which is tasked with prosecuting criminal violations of sanctions and export control laws, has ramped up its enforcement efforts against non-U.S. persons, including imposing penalties against individuals for attempting to smuggle export-controlled items to Russia or Iran.

Key Takeaways

U.S. Enforcement Agencies Construe Their Jurisdiction Broadly. Non-U.S. persons face enforcement risk, and U.S. enforcement agencies have imposed sizable penalties or export and other restrictions on non-U.S. persons for violations of U.S. export and sanctions controls.
Understanding Risk. Global business organizations and others who participate in international trade should take appropriate steps to understand how these laws may apply to them, what risks are posed by their business operations and how they can mitigate these risks.
Robust Compliance Programs Are Essential. Non-U.S. companies should implement robust trade compliance programs and policies that address compliance with U.S. sanctions and export control laws.
Adequate Diligence of Transactions Is Critical. Companies that trade internationally face a difficult risk environment with sanctioned countries using increasingly sophisticated methods to evade sanctions and export controls, whether through false documentation, spoofing the Automatic Identification System (AIS) or use of intermediaries.
When a Potential Violation Is Suspected, Engage Experienced Outside Trade Counsel. When a potential violation comes to the attention of management, its investigation and resolution should be given high priority, and experienced outside counsel should be consulted.

Conclusion

The issuance of the Compliance Note underscores the U.S. government's commitment to aggressively investigating and pursuing foreign activities that violate U.S. sanctions and export control laws and undermine U.S. foreign policy objectives. Non-U.S. persons engaging in actions contrary to U.S. national security or foreign policy interests risk being subjected to U.S. sanctions and enforcement measures, including criminal prosecution. Overall, the series of actions over recent years demonstrate an increasingly expansive approach by the U.S. to administering and enforcing sanctions and export control laws extending far beyond the territory of the U.S.

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