Reforms to trade regulations invite compliance challenges.
BNP Paribas, France’s largest bank, was fined $9 billion in 2014 for violating U.S. sanctions laws. As the competent Israeli authorities are on the prowl for their own “BNP Paribas” case, it is worth reviewing Israeli sanctions laws and being apprised of important sanctions-related legal developments.
Iran Springboards Sanctions Reform
Israel’s stern foreign policies on Iran have been attracting increasing world attention. One mostly underpublicized manifestation of these policies lies within Israel’s recently reformed trade sanctions regimes. Specifically, the Law on the Struggle Against Iran’s Nuclear Program has significantly broadened Israel’s sanctions programs. Moreover, a few months ago, following new Iranian-sanctions regulations passed in March 2014, the nascent “Sanctions Bureau” within the Israeli Ministry of Finance sprung into action. As described by its leadership, the Sanctions Bureau is meant to serve as a focal point for all sanctions related matters, from the listing and delisting of proscribed entities to spearheading interdepartmental information exchange. What this means for businesses is that there is now a centralized Israeli governmental body responsible for coordinating enforcement activities and for actuating criminal prosecutions and convictions.
The Amended Ordinance
The legislation and formation of the Sanctions Bureau are all a part of Israel’s bolstering of its Iranian sanctions program. However, the reforms reach far beyond trade with Iran. Thus, the Iranian-sanctions laws have brought about critical amendments to the 1939 Trading with the Enemy Ordinance – Israel’s central sanctions legislation that bans trade with all enemy states and entities (and not just those related to Iran). Accordingly, the Ordinance has been amended so that prison sentences for violations are increased from 7 to 10 years; harsh monetary penalties have been established; select U.N. Security Council sanctions have been adopted; violations of the Ordinance have been classified as “Original Offenses” under Israel’s anti-money laundering laws; and strict new reporting obligations have been instituted (specifically, reports must now be filed with the Israeli police every time a request is received for a transaction that could violate the Ordinance).
Foreign Sanctions Law in Israel
Interestingly enough, the topic of Iranian sanctions has given Israeli authorities context to direct businesses to adopt risk-based compliance mechanisms that go far beyond domestic laws. Thus, banks, credit institutions, and companies subject to Israeli securities regulations have been issued directives by the Supervisor of Banks and by the Chairman of the Israeli Stock Exchange mandating risk analyses and reporting mechanisms that incorporate U.S., E.U. andU.N. Security Council sanctions programs. These programs ban trade with hundreds of individuals and entities that are otherwise not subject to Israeli sanctions.
Unfortunately, despite the recent sanctions reforms, anddespite the clear motivations of Israeli authorities towards enforcement, the entire sanctions system remains difficult to navigate. The confusion stems first and foremost from a systemic lack of guidance by the relevant Israeli regulatory authorities. To further confound exporters, Lebanon, a country subject to a comprehensive Israeli trade ban, is a perfectly valid trading partner under U.S. and E.U. laws (this inconsistency often raises difficulties for companies with nexuses to both Israel and the U.S. or E.U.). As a result of these factors, unanswered questions abound that consistently aggravate compliance efforts. For example, what is the liability for an Israeli entity whose products are inadvertently exported to a sanctioned country through an innocent third party? What compliance measures are expected from businesses to prevent this from happening? To what extent are Israeli parent companies or beneficiaries liable for activities of their foreign entities (especially when the foreign entity is acting in compliance with its applicable law)? Must websites block access and deny service to residents of sanctioned states? Are KYC (know your customer) procedures for anti-money laundering compliance sufficient for sanctions purposes? How do foreign-listed Israeli companies remain compliant with Israeli sanctions laws, and to what extent are these measures more demanding for private equity funds? What protections exist for those required to report suspicious sanctions-related transactions or for “whistle blowers”? How does one go about obtaining an exemption for exports of medicines, religious articles, or humanitarian aid? And what if one intends to export praiseworthy online tools that facilitate access to information and freedom of expression?
Particular compliance traps, such as the one’s listed above, will be discussed in greater detail in a follow-up Unfolding.co.il post. What is clear is that the many unanswered questions lead to a perplexing export system under Israeli sanctions laws. While it is true that we cannot reasonably expect Israeli legislation and regulators to address the endless questions that arise with respect to sanctions laws, the complete lack of regulatory guidance has profoundly frustrated Israeli exporting efforts. At the same time, and in spite of the endless uncertainties, the recent reforms indicate that authorities are preparing to investigate and penalize sanctions evaders. The combination of these two factors – a lack of regulatory guidance coupled with increased enforcement activities – has lead to a precarious trade landscape in Israel.
Hedging & Risk Management
To mitigate risks in the face of such confusion, companies with an Israeli nexus have increasingly adopted stricter and more robust trade policies and procedures. They have similarly armed themselves with legal memoranda and opinions and, sometimes, even with semiformal “pre-rulings” or “quasi-licenses” from the relevant Israeli government ministries. It is the hope that such measures will both help prevent compliance breakdowns as well as insulate companies and senior management in the event that these breakdowns nevertheless occur.
While the $9 Billion BNP Paribas fine is significantly higher than what we can expect from any Israeli action, the recent amendments to sanctions legislation, the newly operational Sanctions Bureau, and the country’s increasingly resolute policies towards Iran and other embargoed countries all warrant enhanced and more sophisticated compliance efforts.