When a foreign company seeks to enter the U.S. market, is already doing business in the United States, or employs U.S. persons, it needs to consider how U.S. economic sanctions may impact the business. An important, yet many times overlooked, consideration is the political risk of engaging in business with countries sanctioned by the United States, even when such trade is permitted under U.S. law, or is consistent with the laws of the home country of the parent corporation. The following overview also applies to restrictions imposed through U.S. export control laws and regulations.
The United States imposes economic sanctions on only 13 of the worlds’ 194 independent states; it also targets thousands of foreign persons and entities for activities such as gross human rights violations, terrorism, illegal drug smuggling, or non-proliferation issues. With export controls, these same issues become somewhat more nuanced on a case-by-case basis, but the same advice applies. The intersection of law and public policy in this complex web of regulations is an increasing concern for foreign companies that do business in countries sanctioned by the United States. The political and business risk in the United States can be as critical to the business as are the more traditional legal problems that may arise from complex global business organizations.
In cases where the extraterritorial application of U.S. law may not be clear, the U.S. Congress will probe suspicious activities in sanctioned countries by foreign companies. Members of the U.S. Congress can, and routinely will, issue letters and other less formal communications to federal agencies, other Congressional Committees, or the White House, asking for additional information about activities in sanctioned countries. These inquiries are not limited to those companies located in a foreign nation. Foreign corporations and individuals are fair game. In some cases, these communications can form the basis for Congressional oversight hearings, or a referral to the Departments of Justice, Treasury, Commerce, or State, or a combination of these and other agencies, that could result in more formal investigations, as well as prosecutions.
As a recent example, during the past few months, several Congressional Committees have been investigating the whether U.S. national security interests are threatened by foreign participation in sovereign wealth funds that invested in the United States. “Sovereign Wealth Funds have been around for decades, but China’s recent entry into this field, together with investments in large Wall Street firms by the funds of Middle Eastern countries, have raised questions about the power that these massive funds may have over U.S. national security interests,” a senior member of Congress said during a May 2008 Congressional hearing. The Committee on Foreign Investments in the United States (“CFIUS”) is empowered to review these forms of foreign investments in the United States, and the Congress has the authority to raise specific concerns about a given fund or activity. Additional hearings are planned on this matter for later this year.
During the past few years, members of Congress have also publicly called for investigations of foreign companies, including foreign petroleum and energy companies for alleged investments in Iran, pension funds that had allegedly invested in the Sudan, and several global insurance companies accused of failing to compensate World War II Holocaust survivors. Late last year, several members of Congress wrote letters to the U.S. Export-Import Bank (“Ex-Im Bank”) requesting that the Ex-Im Bank cease granting a $900 million loan guarantee to Reliance Industries Limited (“Reliance”), an Indian company, until the company ceased selling to Iran. According to news reports published in early January 2009, Reliance appears to have stopped sales of gasoline to Iran in response to very public Congressional pressure.
Public statements in the form of letters and press releases, Congressional hearings, or unpublished requests for information from the U.S. Congress can form the basis for a more formal investigation by the U.S. Government. Even if the matter does not rise to a formal investigation, it still presents special challenges for companies. Working and managing such an issue is not the same as managing and executing a trial. The rules and culture are very different. In addition, many times these processes will also be, sometimes quite purposely, made public knowledge through the media.
What can foreign companies do to prevent, or mitigate, the chances of Congressional interest in your company for alleged economic sanctions or export control violations?
First, the most crucial step any company must take is to ensure that it has implemented a robust regulatory enforcement regime consistent with its business activities. There is no one-size-fits-all approach. Even if the parent company is foreign, if it has U.S. subsidiaries, it may be exposed to some legal liability. Any contact with U.S. persons, transactions with U.S. entities, or purchasing of certain U.S. goods or services, can potentially expose a foreign company to legal risk in the United States. A good compliance program should include personnel training as well as frequent notification about the new rules, regulations, and corporate best practices. A good culture of regulatory compliance goes a long way in keeping a business out of trouble and out of Congressional crosshairs.
Second, know your customer and asses your legal risk, as well as the potential political exposure in the United States. In the case of the county-based sanctions, since there are just 13 countries to review, the process may not take as long as most companies think. No matter, review each transaction on a case-bycase basis and, if there is any doubt about a potential transaction or person, you should probably seek legal counsel for further review. This is an especially sensitive area for foreign companies that conduct business in the United States. A foreign company with U.S. connections is an especially high-priority target for Congressional investigators. Iran, Cuba, North Korea, and Burma are very closely monitored by Capitol Hill.
Why bother with foreign companies? The usual Congressional rationale is that if foreign companies are availing themselves of the U.S. market and tax laws, then they should abide by, or pay some deference to, U.S. sanctions, even if they are abiding by U.S. laws and regulations in this area. By and large, U.S. companies are also closely monitored by oversight committees. All companies should conduct a risk assessment of their businesses, but foreign companies should always be aware that foreign companies make easy political targets for the U.S. Congress. A business and political risk assessment goes hand-in-hand with a robust corporate regulatory regime.
Third, if your company is contacted by the U.S. Congress, or is the target of a Congressional inquiry, take affirmative steps and develop a plan before engaging in any formal discussions or formal responses. While preferable to maintaining relations on an ongoing basis with key Congressional offices that may impact your business, this may not always be a cost-effective or necessary option for your business. Take note that any information shared with the Congress could form the basis for a more formal oversight committee investigation or referral to an agency of the federal government. You need a plan.
Unlike traditional litigation that includes formal discovery and timelines, this is not the case with the Congress. Quite the opposite. It is a blend of rules, procedures, traditions, and politics. Unfortunately, these matters have a way of usually ending up in the media as well. It is not uncommon for a company to first learn of Congressional interest in its business activities from a media source or an actual story. If your company is initially contacted by the media, not the Congress, about a matter involving your company, fight the urge to respond immediately. Consult Washington, D.C. counsel.