US Agencies Issue Tri-Seal Compliance Note Regarding Obligations of Foreign-Based Persons to Comply with US Sanctions and Export Control Laws

On March 6, 2023 the US Department of Justice (“DOJ”), the US Department of Commerce (“Commerce Department”), and the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), issued a Tri-Seal Compliance Note, Obligations of foreign-based persons to comply with US sanctions and export control laws (the “Note”), addressing the compliance issues for non-US companies in light of  the robust sanctions and export controls the US has put in place and tightened in recent years, including with respect to the Russian Federation and the People’s Republic of China. The Note emphasizes that these sanctions and export controls can create legal exposure not only for US persons and companies, but also for foreign persons and companies that continue to engage with sanctioned jurisdictions or persons in violation of applicable laws. The Note further states that to “mitigate the risks of non-compliance, companies outside of the United States should be aware of how their activities may implicate US sanctions and export control laws,” highlighting the applicability of US sanctions and export control laws to such foreign actors.

The Note outlines actions taken by OFAC and the Department of Commerce’s Bureau of Industry and Security (“BIS”) before delving into criminal enforcement by the DOJ of US sanctions and export control laws against foreign persons and entities.

Overview of US Export Control Laws and Corresponding BIS Action

The Note details how the BIS administers and enforces export controls on dual-use, and certain munitions items, through the Export Administration Regulations (“EAR”) under the authority of the Export Control Reform Act of 2018 (“ECRA”). The Note also details how US export control laws “follow the goods,” in that they extend to items subject to the EAR anywhere in the world and to related foreign persons who deal with those items. The Note then lists how the EAR also applies to reexports, goods that incorporate certain percentage of controlled US content, and other certain exports from abroad produced using US-controlled equipment, IP or software.

Next, the Note highlights how the BIS actively enforces US export control laws, regardless of where the offending party is located. As a result, anyone involved in the movement of items subject to the EAR must adhere to export control laws regardless of whether items are shipped through a third country, the item is located outside the US and was not shipped directly to a foreign party recipient, or the items are manufactured by a non-US company but contain US origin components and software. The Note further mentions how the EAR also encompasses certain foreign-produced items located outside of the United States that are produced using certain U.S.-controlled technology, software, or production equipment even when exported, reexported, or transferred in-country to certain countries/parties on the “Entity List.” As a result, foreign-produced items, even if they never enter the US stream of commerce and no US person is involved, may still be subject to US export control jurisdiction under the right conditions.

The Note also lists several BIS actions against foreign financial companies and companies involving foreign produced items, this list includes details on the following:

• On June 9, 2023, BIS issued a Temporary Denial Order (“TDO”) suspending the export privileges of a network of defense-related companies and its president, located in the Netherlands and Greece, for acting as a procurement network for Russian intelligence services. The TDO is related to a May 22, 2023, criminal indictment issued in the Eastern District of New York and is the result of coordination by the Disruptive Technology Strike Force co-led by the DOJ and Commerce Department. The implications of this action are severe, cutting off not only the right to export items subject to the EAR from the United States, but also the right to receive or participate in exports from the United States or reexports of items subject to the EAR.
• As part of its response to the Russian invasion of Ukraine, BIS imposed expansive controls on the export of aviation-related items to Russia. As a result, any US origin aircraft or foreign aircraft is subject to a license requirement to fly into Russia if it includes more than 25% controlled U.S.-origin content and is registered in, owned by, controlled by, or under charter or lease by Russia or a national of Russia. Since February 2022, BIS has issued multiple TDOs against foreign airlines for operating US and foreign aircraft subject to the EAR on flights into and out of Russia. Further, BIS has listed on its website the actual aircrafts that have violated the Russia controls, including specific Airbus planes that contain more than a “de minimis” amount of US origin-controlled content.
• On April 20, 2023, BIS announced a record breaking $300 million penalty against an international company to resolve allegations that the company shipped millions of hard disk drives to Chinese entity without a license after the issuance of a foreign direct product rule restriction.

Overview of US Sanctions Laws and Corresponding OFAC Actions

The Note also details how OFAC administers and enforces economic and trade sanctions, which are primarily targeted against foreign jurisdictions and regimes, along with other bad actors including: terrorists, international narcotics traffickers, weapons of mass destruction proliferators, and other malign actors. The Note then highlights how OFAC sanctions can take various forms including the following:

• Blocking of property of specific individuals and entities.[1]
• Restricting a narrower range of dealings with specified actors.
• Prohibiting transactions with entire jurisdictions and countries through trade embargoes or sanctions on specific economic sectors.

Further, the Note states that OFAC may impose sanctions on persons engaging in specified conduct, such as deceptive trade practices, dealings that circumvent sanctions program, or materially assisting or providing support to sanctioned persons or sanctionable activities. Additionally, the Note clarifies that OFAC’s authority to impose sanctions is distinct from its enforcement authorities. Specifically, US persons, US incorporated entities (along with their foreign branches), and even foreign entities controlled by US persons in certain circumstances, must comply with OFAC restrictions.

Next, the Note shifts focus to foreign persons, who are also subject to certain OFAC restrictions including prohibitions from causing, or conspiring to cause, US persons to wittingly or unwittingly violate US sanctions. Additionally, the Note states a prohibition on engaging in conduct that evades US sanctions. The Note also emphasizes that the violations of OFAC regulations can result in civil or criminal penalties. These civil penalties can be imposed on the basis of strict liability, meaning that a person subject to US jurisdiction may be held civilly liable even if such a person did not know, or have a reason to know, that they were engaging in conduct that was prohibited by OFAC.

The Note then lists a number of OFAC actions against foreign financial institutions and other foreign persons that caused, or conspired to cause, US persons to violate OFAC sanctions. In addition, the Note also lists actions where a foreign financial institution indirectly exported services from the US, or otherwise engaged in violative conduct. Recent OFAC enforcement actions targeting such conduct include:

• In April 2022, an international freight forwarding and logistics company headquartered in Australia, agreed to pay $6,131,855 to settle its potential civil liability for 2,958 apparent violations of multiple OFAC sanctions programs. The company’s liability arose when it originated or received payments through the US financial system in connection with shipments made by the freight forwarder involving North Korea, Iran, and Syria, all which are broadly subject to OFAC sanctions.
• In July 2021, a UAE-based subsidiary of a foreign parent, settled with OFAC for $415,695 arising from two apparent violations. The violations arose when the subsidiary conspired with Dubai- and Iran-based companies to export storage tank cleaning units from a US company to Iran by falsely listing a Dubai-based company as the end-user on its export documentation.
• In June 2023, a subsidiary of a Sweden-based international financial institution, agreed to pay $3,430,900 to settle its potential civil liability for 386 apparent violations of OFAC sanctions on Crimea. A customer of the parent bank used the subsidiary’s electronic banking platform from an internet protocol address located in a sanctioned jurisdiction to send payments to persons within that sanctioned jurisdiction through US correspondent banks.

DOJ Criminal Enforcement of US Sanctions and Export Control Laws Against Foreign Persons and Entities

The Note also highlights how the DOJ is authorized to bring criminal prosecutions pursuant to IEEPA and ECRA for willful violations of US sanctions and export control laws. The Note lists a number of charges against multiple foreign-based actors for allegedly seeking to unlawfully transfer US manufactured technology to prohibited jurisdictions:

• In October 2022, DOJ unsealed an indictment charging three Latvian nationals, one Ukrainian national living in Estonia, one Latvian company, and one Estonian company with violating US export laws and regulations by trying to smuggle from the United States to Russia a dual-use, high-precision computer-controlled grinding machine. The defendants conspired to have the Latvian company act as the purported purchaser of the device, and then seek to reexport it from Latvia to a Russian company without first acquiring the requisite license, by making false representations to both US and Latvian officials about the destination of the device.
• In December 2023, DOJ unsealed an indictment charging one Iran-based person and an individual based in China and Hong Kong for conspiring to illegally purchase and export from the United States to Iran dual-use microelectronics commonly used in UAV production. The defendants allegedly caused Canadian and French companies to place orders with US manufacturers, causing the items to be shipped first to either Canada and France and then to Hong Kong and China, where they were later reexported to Iran. In the course of this conduct, the defendants provided false and misleading information regarding the end destination of the microelectronics.
• In November 2023, DOJ announced a guilty plea by an entity that operated one of the world’s largest cryptocurrency exchanges, for various offenses, including violations of US sanctions laws. The entity admitted to knowing it had a significant number of users from comprehensively sanctioned jurisdictions, such as Iran, as well as a significant number of US users, and the entity further knew that its system would cause US users to transact with users in sanctions jurisdictions. Despite this the entity failed to institute adequate programs to ensure compliance.

Key Takeaways

The Note emphasizes that the US government is aggressively cracking down on sanctions and export controls evasion across the board. While there has been a general focus on Russia related sanctions and export controls considering the invasion of Ukraine, this Note highlights US efforts combating evasion in several other jurisdictions including China, North Korea, Syria and Iran. The Note makes clear that the US government will not hesitate to pursue administrative enforcement actions, criminal prosecution, additional designations, and other action in response to sanctions and export control evasion. Following the advice in the Note, we advise clients engaging in international business to be vigilant by implementing rigorous compliance controls so that they, or their related business partners, remain compliant with all applicable US sanctions and export controls.

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[1] “Blocking” is a term coined for OFAC’s abilities to freeze assets or other property subject to US jurisdiction and immediately impose an across-the-board prohibition against transfer and dealings of such property.