In an earlier post on Unfolding.co.il, we discussed recent reforms to Israel’s trade sanctions regimes. These reforms show an invigorated Israeli government that appears to be preparing to enforce its sanctions laws. At the same time, the post echoed the frustrations of companies who are facing complex legal questions but have yet to receive any regulatory guidance from these authorities.
This post will elaborate on some of these frustrations, first and foremost, for the purpose of consoling you and your company in the spirit of “a sorrow shared is a sorrow halved”. Furthermore, the post hopes to inspire confidence and optimism, as many companies and individuals have confronted and have overcome these compliance hurdles.
The following are some major sanctions-compliance challenges faced by Israeli businesses as well as by foreign business with Israeli operations:
Diffuse Lists – Despite the formation of the Sanctions Bureau within the Ministry of Finance, there is still no centralized entity responsible for publishing lists of “proscribed entities”. Unlike the U.S. “SDN List” and the consolidated lists of the E.U. and the U.N. Security Council, there is no user-friendly resource in Israel through which to access a full list of sanctioned or unlawful entities. In fact, the Sanctions Bureau makes this point abundantly clear through a caveat on its website, according to which lists related to terrorist financing or money laundering are excluded from its purview. As a consequence, the average individual would have a prohibitively difficult time trying to identify the hundreds of “unlawful associations” and “terrorist entities” so designated under dispersed terrorism and anti-money laundering legislation. As a recent example, “Al-Shabaab” was just designated by the Israeli Government’s Cabinet Secretary as a terrorist organization, pursuant to the Prohibition of Financing Terrorism Law, 5765 – 2005. The designation is not published as part of any consolidated list, and locating the particular designation in Israel’s Official Gazette, even with the aid of computerized search tools, is like finding a needle in a haystack.
No Licensing Regime – Another daunting feature of Israel’s sanctions laws is their lack of statutory exemptions or licensing processes. The 1939 Trading with the Enemy Ordinance, adopted by Israel from British WWII legislation, provides none of the exemptions that are typical of more modern sanctions laws (such as exemptions for export of medicines, religious articles, humanitarian aid, etc.). Instead, the law categorically and comprehensively bans all forms of trade, while simultaneously assigning the Israeli Minister of Finance broad powers to administer the law. What has developed in practice is a highly informal process of requesting ad hoc exemptions for transactions that would otherwise be unlawful under the Ordinance. While the Minister of Finance is prepared to issue such exemptions in appropriate cases, exporters are justifiably frustrated by this process’s complete lack of procedure, transparency, or certainty.
Liability for Third Parties – The Ordinance fails to provide clarity as to what liability an Israeli entity would have if products are inadvertently exported to an enemy country through an innocent third party. Moreover, to date, no guidance has been offered by Israeli authorities as to what measures are expected to be undertaken by businesses to ensure that their entire incoming and outgoing supply chains are free from products or services from sanctioned countries or entities.
Vague Reporting Obligations – The Ordinance now requires a company or individual to report to the Israeli Police any requests received for trade that can reasonably be expected to have directly or indirectly come from enemies or enemy states. Similarly, if suspicion arises that any past transaction directly or indirectly involved an enemy or enemy state, one must similarly report such event, provided they became aware of the suspicion within six months of the suspected transaction. Failure to comply with these reporting obligations can lead to imprisonment or fines. To its credit, the Ordinance establishes “whistle blowing” measures to preserve the anonymity of reporters and to prevent the reported materials from serving as evidence in criminal proceedings. However, there is no designated unit within the Israeli Police responsible for receiving these reports and there are no established mechanisms to ensure that the statutory protections for the reporters are preserved in practice.
Corporate Structures and Indirect Trade – The outdated Trading with the Enemy Ordinance broadly prohibits both direct and indirect trade, but fails to adequately address a number of questions related to corporate structures and ownership. For example, there is no clarity regarding whether the Ordinance applies to conduct of foreign subsidiaries of Israeli companies. To what extent are Israeli ultimate beneficial owners liable for the activities of foreign entities? Conversely, tough questions arise when sanctioned persons purchase securities of Israeli companies, a likely occurrence for Israeli companies listed on foreign stock exchanges. In such cases, can the Israeli companies make capital distributions knowing that funds may ultimately arrive in the hands of residents of enemy states? In the private equity context, one can expect authorities to adopt a more stringent approach, and yet no such position has been articulated. These and other questions frequently arise especially with respect to Lebanon, a country subject to a complete Israeli trade ban, but with which trade is entirely permitted under U.S. and E.U. laws.
The Online Market Place – The number and reach of Israeli e-commerce companies has grown exponentially in recent years; in contrast, Israeli sanctions laws have remained stagnant. As a result, internet companies have received no guidance as to what is expected of them by way of preventing sanctioned entities from accessing their websites or from utilizing their online products or services. Are companies expected to install automated identification systems on their servers and deny access from sanctioned regions? Are know-your-customer procedures under anti-money laundering regulations sufficient for sanctions purposes? In short, the advent and proliferation of e-commerce has given rise to novel questions of sanctions compliance.
The above challenges, and many others like them, have greatly dismayed exporters. Lacking regulatory guidance, and with no “quick fixes” available, companies have begun developing robust trade policies and have armed themselves with legal memoranda, opinions and sometimes even with “pre-rulings” or “quasi-licenses” from the relevant Israeli government ministries. It is the hope that such measures will adequately help companies navigate the ambiguities of Israel’s trade sanctions system and prevent (or at least mitigate) costly compliance violations.