#TBT: US Trade Sanctions Are a Trap for the Unwary

With this installment, we turn to a transcript that was published in the April 2007 issue of the Project Finance NewsWire featuring Christopher Man, counsel in Chadbourne's Litigation group and Keith Martin, a partner in Chadbourne's Project Finance group. 

US Trade Sanctions Are a Trap for the Unwary

The United States maintains trade sanctions of varying severity  against dozens of countries. Anyone doing business with  sanctioned countries must be careful not to violate them.The  sanctions not only vary from country to country, but they also  change periodically.


They can have extra-territorial reach.

For example, sanctions usually apply to US citizens  working abroad, even if they work for foreign companies over  which the United States has no direct legal jurisdiction. Many  of the sanctions also either expressly cover foreign  subsidiaries of US companies or apply in any situation where  a US company is found to have provided “approval or other  facilitation” to a foreign company. Even where foreign  subsidiaries are not expressly covered, a US parent can be  charged with a violation if it is found to have conspired with  or otherwise helped its subsidiary circumvent the sanctions.

The extra-territorial reach can put companies in an  awkward position. Some countries have enacted “blocking”  legislation designed to thwart compliance with controversial  US measures, like the continuing US embargo against Cuba.

The most stringent US measures are import-export restrictions  against seven countries: Cuba, Iran, Iraq,Myanmar, North  Korea, Sudan and Syria. US presidents have issued executive  orders blocking property and other transactions with persons  affiliated with the governments of another six countries or  regions: the Balkans, Belarus, Ivory Coast, Democratic Republic  of the Congo, Liberia and Zimbabwe.

Import-Export Restrictions

Import-export restrictions bar US persons from exporting US  goods to a sanctioned country absent a license or other  authorization and, in some cases, they also bar re-exports of  US goods by persons or entities in foreign countries. There is  no single definition of “US person”; it varies by sanction.

Cuba:Virtually all exports and imports between the  United States and Cuba are banned. Transactions between  Cuba or Cuban nationals by US citizens, wherever located, are  prohibited, including “dealing in or assisting the sale of goods  or commodities to or from Cuba, even if done entirely  offshore.” Some exemptions apply — for example, goods  licensed for export or re-export by the US Department of  Commerce, like medicine, food and agricultural commodities.  Criminal penalties for violating the sanctions range up to 10  years in prison, $1 million in corporate fines and $250,000 in  individual fines. Civil penalties of up to $55,000 per violation  also may be imposed. Persons who traffic in property confiscated  by the Cuban government that is subject to a legal  claim by a US person can be denied admission into the United  States. The Helms-Burton Act also provides for a private civil  right of action against persons who traffic in such property,  but Presidents Clinton and Bush have exercised their authority  under the statute to suspend this private cause of action.

Iran: No goods, technology or services may be exported to  Iran or sold to the Iranian government by US persons wherever located, unless licensed by the office of foreign  assets control, called “OFAC,” in the US Treasury Department.  The prohibition extends to re-exports to Iran by intermediaries  in foreign countries and it also blocks offshore transactions  by US persons that benefit Iran or the Iranian  government. US persons are restricted from exporting goods  that are “intended specifically for use in the production of, for  commingling with, or for incorporation into goods, technology  or services to be directly or indirectly supplied, transshipped  or re-exported exclusively or predominantly to Iran or  the Government of Iran.”Certain exemptions apply. In  addition, the sanctions bar “[n]ew investments by US persons,  including commitments of funds or other assets, loans or any  other extensions of credit, in Iran or in property (including  entities) owned or controlled by the Government of Iran.”  With only minor exceptions, imports from Iran are also  prohibited. Criminal penalties are up to $500,000 for corporations  and $250,000 for individuals, up to 20 years in jail, or  both. Civil penalties of up to  $50,000 may also be imposed.  The United States is trying to  broaden the reach of US  sanctions in the face of deteriorating  relations with Iran over  its nuclear ambitions. (See  related article in this issue.)

Iraq: All exports or reexports  to Iraq must be  licensed by the office of foreign  assets control in the US  Treasury Department or otherwise authorized by the US  Department of Commerce. All financial transactions with Iraq  are allowed except for those involving individuals and entities  appearing on a “specially designated nationals” list  maintained by the office of foreign assets control. Criminal  penalties range up to 12 years in jail and $1 million in fines.  Civil penalties of up to $325,000 per violation may also be  imposed.Violation of Iraq-related presidential orders can also  result in 10 years in prison, $500,000 in corporate fines and  $250,000 in individual fines. Civil penalties are up to $11,000  per violation.

Myanmar: No US person may make a “new investment” in  Myanmar or “facilitate” such an investment by a foreign  person. Nearly all imports fromMyanmar are banned.  Exports to Myanmar are generally permitted, but not exports  of financial services. Criminal penalties for willful violations  can be up to $500,000 in fines for a corporation or up to  $250,000 for an individual, or up to 10 years in jail. Civil penalties  of up to $11,000 per violation also may be imposed  administratively.

North Korea: A ban on exports to North Korea was lifted in  2000; however, in April 2006, the office of foreign assets  control issued an order prohibiting US persons from owning,  leasing, operating or insuring any vessel that operates under  a North Korean flag. Imports from North Korea must be  approved by OFAC, and exports to North Korea must still clear  a number of regulatory hurdles. Criminal penalties range up  to 10 years in prison, $1 million in corporate fines, and  $250,000 in individual fines. Civil penalties of up to $65,000  per violation also may be imposed.

Sudan: Exports of “any goods” to Sudan by US persons  “wherever located” are prohibited. The sanctions also block  transfers of property of certain persons connected with the  conflict in Darfur and restrict US persons from transacting  business with these individuals and entities. In addition, the  sanctions prohibit US persons from “facilitating” the direct or  indirect export or re-export of goods, technology or services  to or from Sudan. Financial dealings with Sudan are generally  prohibited,“including the performance by any US person of  any contract, including a finance contract, in support of an  industrial, commercial, public utility or governmental project  in Sudan.” Imports from Sudan, with few exceptions, are  banned. Criminal penalties range from up to 20 years in  prison, up to a $50,000 penalty, or both. In addition, civil  penalties of up to $50,000 per violation may be imposed.

Syria: Goods on a US munitions list and a separate list of  controlled products maintained by the US Department of  Commerce, as well as certain other items, may not be exported or re-exported to Syria. Criminal penalties  range up to 10 years in prison, $500,000 in corporate fines  and $250,000 in individual fines. In addition, civil penalties of  up to $11,000 per violation may be imposed.

Executive Orders

Presidents have issued executive orders freezing bank  accounts and other property and prohibiting transactions  with persons considered threats to US interests.

Balkans: One order blocks property of, and prohibits transactions  by, US persons with certain persons believed to be or  to have been destabilizing forces in the Balkan region.

Belarus: A separate order blocks property of, and prohibits  transactions by, US persons with certain persons affiliated  with the Belarus government.

Democratic Republic of the Congo: A similar order applies  to property and transactions with certain persons affiliated  with the conflict in the Democratic Republic of the Congo.

Ivory Coast:Property of persons linked to the conflict in the Ivory  Coast has been frozen, and US person are barred from engaging  in financial transactions with persons named in the order.

Liberia: The sanctions block property and transactions  with restricted persons affiliated with conflict in Liberia. It  also prohibits dealing in rough diamonds not controlled by  “Kimberley process certification scheme.”

Zimbabwe: US persons, wherever located, are barred from  engaging in transactions with certain persons who are  believed to have undermined the democratic process in  Zimbabwe.

Additional Sanctions

The United States has imposed other sanctions that limit the  sale of arms, nuclear technology and other equipment with  military uses.These apply to the following countries: Albania,  Bulgaria,Cambodia, the Czech Republic, Estonia, Latvia,  Lithuania,North Korea, Mongolia, China, Poland,Romania, the  Slovak Republic,Vietnam and all former Soviet Republics.An  additional executive order prohibits transactions with certain  persons or entities believed to  be involved in the proliferation  of weapons of mass destruction.  There also are significant limits  on importing diamonds into the  US that have not complied with  the Kimberley process to prevent  trade in “conflict diamonds.”

The United States also  blocks property and transactions  with a long list of persons  or entities suspected of being  involved with illicit trafficking  of narcotics and terrorism.Many of the named persons or  entities may sound and even appear to be legitimate  businesses or even charities, and persons involved with terrorism  or narcotics trafficking may even have otherwise legitimate  business interests. US companies should not assume  their business partners cannot be on such a list simply  because they do not fit the image of a terrorist or drug dealer.

Tax Penalties

Separate tax penalties apply to US taxpayers doing business in  Middle Eastern countries that participate in the Arab boycott  against Israel. These are Bahrain, Iraq, Kuwait, Lebanon, Libya,  Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and  Yemen.The US taxes American companies on their worldwide  incomes. However, US multinationals often find ways to structure  foreign business operations so that US taxes can be  deferred until income is repatriated to the United States.

A US multinational doing business in an Arab boycott  country may find itself unable to defer US taxes on a portion of  its income from foreign operations, and not necessarily solely  from operations in the Middle East. For example, it may lose the  ability to defer US taxes on a portion of its income from a project  in Peru. In addition, it will suffer a haircut on foreign tax credits.  This has the potential to reduce returns from foreign operations after taxes.However, US multinationals are only subject to these  penalties if they “cooperate with or participate in the boycott.”

The key to avoiding penalties is to avoid signing any  document that says the US multinational or a member of its  “controlled group”will participate in the boycott. For example, the  US Treasury Department said in a notice in 1978 that it is not  cooperation with or participation in the boycott merely to  acknowledge in incorporation papers when setting up a local  subsidiary to conduct business that the subsidiary is subject to  local laws and regulations.However, one goes too far if one signs  a contract that requires the subsidiary to comply with local law.