EXPERT ANALYSIS CORPORATE OFFICERS & DIRECTORS LIABILITY Westlaw Journal Litigation News and Analysis • Legislation • Regulation • Expert Commentary VOLUME 32, ISSUE 6 / SEPTEMBER 19, 2016 Between a Rock And A Hard Place: Compliance Challenges Raised by International Boycotts By Ginger T. Faulk, Esq., and R.L. Pratt, Esq. Baker Botts LLP U.S. companies are increasingly aware of the restrictions that U.S. export controls and sanctions place on their products and personnel overseas. But what should a U.S. company do when faced with local trade restrictions that conflict with U.S. laws and foreign policy? The U.S. laws addressing this type of conflict-of-laws scenario are set forth in a complex and long-standing set of rules and regulations, collectively referred to as U.S. anti-boycott laws. U.S. anti-boycott laws and their imple-menting regulations prohibit or penalize certain agreements or other activities that support international boycotts that are not sanctioned by the United States. These rules also require companies to report requests that they receive to participate in or cooperate with unsanctioned boycotts. Though the laws were adopted in response to the Arab League boycott of Israel, the anti-boycott rules apply to activities in support of any international boycott that is not sanctioned by the U.S. government. U.S. anti-boycott laws are comprised of two overlapping legal regimes that are separately administered by two different government agencies. The U.S. Department of Commerce, through the Office of Antiboycott Compliance, administers one set of anti-boycott regulations under the Export Administration Regulations, 15 C.F.R. Part 760, while the U.S. Department of the Treasury separately administers another set of anti-boycott regulations through Section 999 of the Internal Revenue Code, 26 U.S.C.A. § 999, and accompanying guidelines. The subtle distinctions between these parallel anti-boycott regimes can make compliance challenging. However, many of the most common scenarios have been addressed in the numerous examples that the Treasury Department and the Office of Antiboycott Compliance have put forward in their respective rules and regulations, in the form of a sort of “regulation by parable.” WHAT IS COVERED BY U.S. ANTI-BOYCOTT RULES? While the overall objectives of Commerce and Treasury anti-boycott regulations are much the same, an activity or agreement that is permissible under one regime may be prohibited or penalized by the other. Indeed, subtle variations in phrasing or words used in bid solicitations, contracts and contract drafts, letters of credit, financial documents, product or shipping specifications, or other customer or 2 | SEPTEMBER 19, 2016 n VOLUME 32 n ISSUE 6 © 2016 Thomson Reuters WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITY govern-ment-issued documents or correspondence can affect whether the document gives rise to liability under either or both sets of laws. Foreign boycotts, much like U.S. sanctions, have primary, secondary and even tertiary components. A primary boycott prohibits direct dealings with the principal target of the boycott. In other words, a primary boycott exists where one country refuses to trade with another. The secondary tier of the boycott restricts business with those entities that conduct business with the primary boycott target (e.g., those who do business with Israel), while a tertiary boycott restricts dealings with the targets of the secondary component, resulting in the creation of so-called boycott “blacklists” and “whitelists.” U.S. anti-boycott law principally deals with secondary or tertiary boycotts, which the U.S. views as going beyond a refusal by one country to trade with another and actually attempting to dictate the conditions under which foreign persons may conduct international business. For example, a U.S. company is generally permitted to agree to comply with import requirements prohibiting the import of Israeli goods into a boycotting country, which is an aspect of the primary boycott.1 However, an agreement not to deal with Israel more generally, not to subcontract to a “blacklisted” party, or to use only suppliers or shippers on a boycott-based “whitelist,” is not permitted under U.S. anti-boycott regulations. Failure to report a reportable boycott request can carry a civil penalty of $284,582 (recently increased due to inflation from $250,000) per violation, or twice the value of the underlying transaction to which the violation relates, whichever is greater. A person who willfully fails to file a report may, upon conviction, be fined up to $1 million or, if a natural person, may be imprisoned for up to 20 years, or both. Under the Internal Revenue Code, boycott participation or cooperation will result in tax penalties, which may be significant depending on the size of the taxpayer’s related international operations. Willful failure to file a boycott report with the IRS or the filing of a deficient boycott report may result in a $25,000 fine, one year of imprisonment or both. WHICH COUNTRIES MAY PRESENT ANTI-BOYCOTT ISSUES? The Treasury Department publishes a list quarterly of countries that are known to participate in an unsanctioned international boycott. As of this writing, the countries on that list are Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the United Arab Emirates and Yemen.2 The Treasury Department rules may also apply to activities in other countries if the taxpayer has reason to know that participation in an international boycott is a requirement for doing business in that country. Other countries that have been known to present anti-boycott compliance risks are Oman, Bahrain, Bangladesh and Malaysia. Note that boycott requests can also arise outside of the Arab League context in relation to other state-imposed boycotts. CONDUCTING BUSINESS IN BOYCOTTING COUNTRIES Though U.S. anti-boycott regulations are quite complex and heavily dependent on specific facts and language, there are a variety of commonly used exceptions and drafting techniques that can effectively overcome many anti-boycott compliance challenges. The proper deployment of these techniques in the right context can help prospective business partners surmount the legal differences of their respective jurisdictions and accomplish their business objectives in full compliance with the laws of both jurisdictions. Anti-boycott concerns in agreements Anti-boycott compliance concerns can arise at any stage in the contracting process, from invitation to tender to final execution. They can also arise in the day-to-day conduct of business in a boycotting country. U.S. anti-boycott laws and their implementing regulations prohibit or penalize certain agreements or other activities that support international boycotts that are not sanctioned by the U.S. SEPTEMBER 19, 2016 n VOLUME 32 n © 2016 Thomson Reuters ISSUE 6 | 3 WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITY Common contractual provisions that may trigger anti-boycott restrictions include provisions requiring compliance with local laws; product or shipment specifications; provisions on selection of suppliers; and local customs requirements. For example, it is extremely common for companies to be presented with a standard agreement requiring the parties to comply generally with all local laws. However, when such provisions arise in a boycotting country, they may be viewed as an agreement to comply with that country’s boycott laws. This marks an area where the two U.S. anti-boycott regimes diverge. While the Commerce antiboycott regulations do not consider agreement to such general language to constitute prohibited participation in the boycott, the Treasury anti-boycott rules will presume that this provision is an agreement to participate in the boycott and is therefore subject to penalty. Other factors indicating that a boycott agreement exists, such as a subsequent refusal to do business with boycotted or blacklisted parties, may nonetheless give rise to a presumption that a boycott agreement has been entered. Often, the parties to an agreement may approach these questions from very different perspectives, with non-U.S. customers viewing the question as one of national sovereignty. Despite these differences, a diplomatic negotiator, armed with knowledge about the scope and requirements of the anti-boycott laws, can usually assuage these concerns and arrive at a mutually acceptable agreement that does not contemplate or countenance a violation of either U.S. or foreign laws. Shipping documents and letters of credit Concerns about compliance with U.S. anti-boycott regulations also often arise in letters of credit, shipping documents (airway bill or bill of lading) or other correspondence. For example, it is quite common to see provisions in letters of credit prohibiting shipments of goods via ports or airports of targeted countries like Israel or Pakistan or on Israeli-flagged vessels. Accession to such provisions is generally presumed to relate not to the boycott but to protection of the goods from war risk or confiscation. Therefore, it is permitted and not generally reportable under either set of laws. However, a requirement to ship on a vessel that is “eligible to enter the ports of” a boycotting country or which has “never called on Israeli ports” may be presumed to be related to the boycott. These points underscore the importance of carefully reviewing the exact language of a request or certification that may be boycott-based and comparing it to the language set forth in the regulatory examples. APPROACHES TO ANTI-BOYCOTT COMPLIANCE The complexity of the Commerce and Treasury anti-boycott regulations and the diverging views these rules take in response to the same conduct can make compliance challenging. In developing such a program, companies should note the following: • Training employees on where to spot boycott requests, how to identify them, and where to report them internally is the first line of defense against noncompliance. • Employees in shipping or accounting functions or who regularly handle shipping or banking documents are often the first to encounter a boycott-related request. • Companies that do business in boycotting countries should build an anti-boycott compliance check into the review process prior to entering into any customer or supplier agreements in boycotting countries. Anti-boycott compliance concerns can arise at any stage in the contracting process — and can also arise in the day-to-day conduct of business in a boycotting country. 4 | SEPTEMBER 19, 2016 n VOLUME 32 n ISSUE 6 © 2016 Thomson Reuters WESTLAW JOURNAL CORPORATE OFFICERS & DIRECTORS LIABILITY • Freight forwarders or other agents of the company may also be asked to make boycottrelated statements on the company’s behalf and should be monitored for anti-boycott compliance. Once boycott requests are identified (and reported to the government where required), a knowledge and appreciation of what the anti-boycott laws are designed to accomplish, along with careful use of drafting techniques and regulatory exceptions, can help U.S. companies and their business partners carry out transactions while remaining in compliance with all applicable laws. NOTES 1 However, any resulting certifications of origin must be stated in positive, non-blacklisting terms (e.g., “Country of Origin is _____.”). 2 81 Fed. Reg. 51967 (Aug. 5, 2016). Ginger T. Faulk (L), a global projects partner at Baker Botts LLP in Washington, advises and represents multinational companies on matters involving U.S. government regulation of foreign trade and investment and international transactions. She has broad experience advising companies in a variety of industries in compliance and enforcement matters involving U.S. export controls, U.S. economic sanctions and the Foreign Corrupt Practices Act. She frequently represents buyers and sellers in U.S. national security reviews conducted by the Committee on Foreign Investment in the United States. R.L. Pratt (R) is an associate in the firm’s global projects group in Washington. His practice focuses on U.S. government regulation of foreign trade and investment and international transactions, including import and export controls, economic sanctions and anti-corruption. ©2016 Thomson Reuters. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit www. West.Thomson.com.