By Devin Sefton, Senior Associate, Braumiller Law Group
The regulatory landscape for U.S. sanctions and export controls is complex and ever shifting. Because we are constantly keeping an eye on this moving target, it can be easy to overlook certain fundamental considerations with respect to these restrictions. For instance, businesses often do not appreciate the distinction between sanctions and export controls, or how these restrictions might apply in different scenarios. Without this basic framework, it can be difficult to understand developments in sanctions and export controls. This article focuses on providing a basic overview of U.S. sanctions and export controls, the distinction between these regimes, and how they apply in various contexts. In our next newsletter publication, we aim to provide a follow-up article discussing the current status of U.S. sanctions and export controls, including a discussion of specific measures implemented in the past year.
What are U.S. sanctions and export controls, and what is the difference?
U.S. sanctions are administered by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and are essentially restrictions on conducting transactions involving certain destinations or persons (i.e., individuals or entities). Meanwhile, export controls are restrictions on exports of U.S. goods, software, and technology to certain destinations, persons, or for certain end uses. There are various agencies involved in regulating exports, but the Department of Commerce’s Bureau of Industry and Security (“BIS”), is the primary agency overseeing export controls. BIS’s jurisdiction extends to all exports of “dual-use” goods (i.e., goods with a dual commercial and military purpose). Other agencies with a role in regulating exports are the Department of State’s, Directorate of Defense Trade Controls (“DDTC”) (for exports of defense articles) and the Department of Energy’s Nuclear Regulatory Commission (“NRC”) (for exports of nuclear materials and certain nuclear equipment).
The primary distinction between U.S. sanctions and export controls is that sanctions generally prohibit a broader range of transactions with the restricted party or destination. For instance, under U.S. sanctions, it is not only prohibited to export to a sanctioned destination such as Iran, but it would be prohibited to import from Iran or to offer services to persons located in Iran. Export controls do not generally prohibit importations of goods or exports of services. As discussed further below, understanding this distinction has important implications for assessing the risks of these regulatory regimes for your business and developing an effective compliance program.
Primer on U.S. Sanctions
U.S. sanctions are often understood to encompass two categories of sanctions: 1) “Comprehensive Sanctions;” and 2) “List-Based Sanctions.”
“Comprehensive Sanctions” are sanctions that broadly prohibit U.S. persons from engaging in transactions with a particular destination. As noted above, these restrictions broadly apply to most transactions with the sanctioned destination, including exports and imports of goods and services. The following destinations are subject to comprehensive sanctions:
2) Crimea Region of Ukraine;
4) North Korea; and
Thus, virtually all transactions involving the destinations above are prohibited without authorization from OFAC (note: in certain cases, authorization from BIS may be required).
“List-Based Sanctions” (also referred to as “Targeted Sanctions”) are sanctions that prohibit U.S. persons from engaging in transactions with certain designated individuals or entities. Generally, sanctioned individuals or entities are documented on the List of Specially Designated Nationals (“SDNs”) or the Sectoral Sanctions Identifications List (“SSI”). U.S. persons are broadly prohibited from engaging in transactions with any individual or entity listed on the SDN List without authorization in the form of a license from OFAC. Meanwhile, for persons listed on the SSI List, U.S. persons are prohibited from engaging in certain debt-related transactions with the listed person. The specific restrictions that apply will depend on the program under which the person was designated.
OFAC administers dozens of List-Based Sanctions programs that target foreign persons for engaging in certain activities that run counter to U.S. national security and foreign policy concerns. For instance, there are List-Based sanctions relating to cyber security whereby OFAC is authorized to designate as SDNs persons involved in certain malicious cyber-enabled activities. Many of these List-Based Sanctions programs are associated with certain countries or regions, but do not broadly prohibit transactions with the country or region. For instance, the Belarus Sanctions target persons involved in human rights abuses, among other activities, in relation to Belarus, but do not broadly prohibit U.S. persons from engaging in transactions with Belarus.
Finally, foreign persons face potential exposure under “Secondary Sanctions,” whereby the U.S. government can essentially penalize foreign persons for engaging in activities that undermine U.S. national security or foreign policy concerns. Foreign persons that engage in the proscribed activity can be added to the SDN or SSI Lists, cut off from the U.S. financial system, and/or prohibited from participating in U.S. government contracts, among other things. Most Secondary Sanctions programs target egregious conduct such as human rights abuses, terrorism, nuclear proliferation, etc. However, there are also certain Secondary Sanctions provisions that target activities that may seem benign to a foreign person with limited awareness of U.S. sanctions. For instance, the U.S. has imposed Secondary Sanctions on Iran’s automotive industry. Thus, foreign persons that engage in certain transactions with Iran’s automotive industry could be added to the SDN List or face other penalties, even if the transaction is legal in the foreign person’s home country and has no apparent nexus to the United States. There are a host of disparate statutes and executive orders that collectively account for U.S.’s Secondary Sanctions and it’s very difficult to distill down the list of activities that can trigger Secondary Sanctions exposure into a simplified list of “dos and don’ts.” Nonetheless, there are certain “hot spot” countries that are strongly associated with aggressive Secondary Sanctions programs, including Iran, Russia, and Venezuela. Thus, non-U.S. businesses that engage in transactions involving these countries should consider their exposure under Secondary Sanctions.
Primer on U.S. Export Controls
Unlike U.S. sanctions, U.S. export controls are focused on regulating exports of U.S. goods, software, and technology. “Dual-use” goods with both a commercial and military purpose are regulated by BIS. Meanwhile, defense articles are regulated by DDTC. Under the Export Administration Regulations (“EAR”), which are administered by BIS, any goods manufactured in, or exported from the U.S., are subject to U.S. export restrictions. Further, certain goods manufactured outside of the U.S. are subject to U.S. export restrictions if they incorporate a certain amount of “controlled” U.S. origin content. While all U.S. goods are subject to some level of restrictions, certain goods are subject to varying degrees of enhanced restrictions. These goods are listed on the Commerce Control List (“CCL”) and have an associated “Export Control Classification Number” (“ECCN”). To determine what export restrictions apply to a given “dual use” item, one must first determine if the item is listed on the CCL. The applicable ECCN determines the specific restrictions that apply to that item.
Some important considerations for U.S. export controls are that U.S. export controls do not just apply to exports from the U.S., they also apply to U.S. goods “reexported” from foreign countries. This means that persons located outside of the U.S. must comply with U.S. export restrictions when reexporting U.S.-origin goods. Furthermore, certain goods manufactured outside of the U.S. may be subject to BIS’s jurisdiction if they incorporate a certain amount of U.S.-origin content. As a result, a foreign manufacturer that uses U.S.-origin content to manufacturer its products should assess whether the foreign-produced commodity is subject to U.S. export controls. Finally, U.S. export controls do not just apply to hardware, but also apply to software and “technology” (e.g., technical know-how) relating to U.S. goods. Under U.S export controls, sharing “technology” with a foreign national is often treated as an export to the foreign national’s country of nationality. This means, that both U.S. and non-U.S. business must exercise caution when sharing U.S.-origin technology with customers, vendors, employees, contractors, and others.
How these restrictions might apply to your business
We recommend that all businesses, even those located outside of the U.S., consider the relevance of U.S. sanctions and export controls to their operations. There are a number of variables to assess in analyzing the impact and risk of these restrictions to your business. The following are some key considerations for both U.S. and non-U.S.-based businesses.
For U.S.-based businesses
- Do you conduct transactions internationally? If you sell to foreign customers or purchase from foreign vendors, you could be liable under U.S. sanctions and export controls if the counterparty is a restricted party (e.g., an SDN). Therefore, we recommend implementing a program to screen foreign counterparties and to ensure goods or services are not diverted to prohibited destinations, end user, or end uses.
- Are you an exporter of goods, software, or technology? If so, we recommend determining whether the goods, software, or technology are listed on the CCL or USML and what restrictions apply to those items. This is particularly true for high-risk exporters, such as those involved in defense-related industries or that export to destinations such as Russia.
- Do you employ foreign nationals? If so, there is a risk that technology viewed by those foreign nationals could result in a prohibited “deemed export.” For this reason, we recommend reviewing the technology to which the foreign national will have access to determine what, if any, restrictions might apply to that technology.
- Do you have a foreign subsidiary? Under U.S. sanctions on Iran, foreign subsidiaries of U.S. companies are subject to essentially the same restrictions as would apply to the U.S. parent company. Thus, a foreign subsidiary and its U.S. parent could have exposure under the Iranian sanctions even if the transaction is legal in the country where the foreign subsidiary is located. Furthermore, U.S. persons are often prohibited from “facilitating” transactions by non-U.S. persons with sanctioned persons or destinations. Thus, to the extent affiliated entities share resources, such as a shared IT or administrative function, there is a risk that a U.S. person could become involved in a prohibited transaction.
For non-U.S.-based businesses
- Do you conduct business with or in the U.S.? Non-U.S. persons become subject to U.S. restrictions while they are physically present in the U.S. Thus, if for instance, a French executive traveling in the U.S. conducts a transaction via email with a person in Iran, the French executive would be committing a violation of U.S. sanctions.
- Do you distribute or resell U.S.-origin goods? U.S. origin goods “reexported” (i.e., exported from a foreign destination) remain subject to U.S. jurisdiction and to any applicable export controls. Thus, if a German distributor resells U.S.-origin electronics to Cuba, this could result in a violation of U.S. export controls and expose the German distributor, as well as its U.S. supplier, to penalties under the EAR.
- Do you use U.S.-origin technology? If so, there are limits on whom outside or within the company this technology may be shared with, depending on the nationality of the person in question.
- If you are a manufacturer, do you use U.S.-origin content in your goods? If so, your goods could potentially be subject to U.S. jurisdiction depending on how much U.S.-origin content is used and the nature of the U.S.-origin content.
We cannot provide an exhaustive list of the factors that should be analyzed in determining one’s exposure under U.S. sanctions and export controls, but the list above provides some of the basic questions that should be considered. Given the complexity of these restrictions, determining precisely what restrictions apply to your business often requires the assistance of specialized legal counsel. Given the extensive extraterritorial reach of U.S. sanctions and export controls, and its relevance to a broad range of industries, manufacturers, and service providers, we recommend all businesses (both U.S. and non-U.S.-based) take stock of their potential exposure under U.S. sanctions and export controls.