This alert has been updated to address the May 2024 announcement by Turkey of its suspension of exports and imports with Israel and the impact for United States antiboycott compliance.
This client alert highlights several relevant U.S. trade control risks for companies with personnel and operations in the region to consider as they navigate the challenging circumstances presented by the Israel-Hamas conflict. Companies with a U.S. nexus must be alert to requests to comply with the Arab League Boycott of Israel (ALB); attempts to evade sanctions on Iran, Syria, and terrorist organizations—including Hamas and Hezbollah; and offers to supply personal protective equipment (PPE) and defensive equipment without required authorization.
Since 1977, U.S. federal law has prohibited U.S. persons, including U.S. companies and their foreign entities, from cooperating with any boycott of Israel, including the ALB, which was imposed at the creation of the State of Israel. The U.S. Department of Commerce Bureau of Industry and Security (BIS) and the Internal Revenue Service (IRS) each administer antiboycott rules that prohibit compliance with the boycott of Israel and impose reporting requirements on companies that receive boycott-related requests.
Generally, the federal antiboycott rules prohibit:
The IRS publishes a list of countries that officially participate in the ALB, and companies with operations in those countries are required to report their activities in IRS Form 5713 as a condition of receiving certain foreign tax credits. When dealing with parties in those countries, an information request or transaction term referencing local boycott compliance or blacklisted countries, as well as broad agreement to comply with all local laws (absent a stated carve-out to the extent compliance is inconsistent with U.S. law), presumptively relates to a boycott of Israel. According to the latest IRS list, the following countries may require participation or cooperation in the boycott of Israel: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, and Yemen. These are not the only countries that present risk, and the list changes. Companies must be vigilant since boycott requests can arise anywhere and may be passed along through third parties in countries that are friendly to Israel. Impermissible participation or cooperation in the boycott of Israel, as well as failure to report such activities, arising in any country, can jeopardize companies’ abilities to benefit from foreign tax credits with the IRS.
Moreover, 37 U.S. states have adopted laws, executive orders, or resolutions designed to discourage the boycott of, divestment from, or sanction of Israel. State laws tend to have two areas of focus: (1) requirements on government contractors to certify that they are not boycotting Israel and (2) mandates on public investment funds (such as pension funds) to avoid investment in entities boycotting Israel.
As companies around the world evaluate their supply chain and other risk exposure related to the war in Israel, companies are likely to see requests for more information on ties to Israel.
Caution is warranted, as boycott requests can be embedded in a wide variety of business and trade documents, making it easy to overlook prohibited and reportable requests. Prohibited and reportable requests often appear in diligence forms with questions regarding the nature or extent of operations or assets in Israel, procurement inquiries about whether goods are Israeli in origin or requests to confirm the goods do not originate in Israel, contractual requirements to obey the laws of a boycotting country, export documentation requirements that vessels or aircraft not pass through an Israeli port, or statements in commercial documents that a transaction party does not have offices or economic interests in Israel.
The antiboycott prohibitions, anti-divestment and sanction prohibitions, and related reporting requirements are complex. In addition to consulting with counsel, it can be helpful to maintain a commercial transaction playbook on how to deal with boycott terms or requests for information, particularly for operations or sales related to the Middle East region.
On May 2, 2024, Turkey announced that it was suspending all exports and imports to and from Israel, citing the ongoing Israel-Hamas conflict. The Turkish government indicated that these trade restrictions will remain in effect until the Israeli government permits the unrestricted flow of humanitarian aid into Gaza.
In response, BIS published an advisory on May 14, 2024, reminding U.S. persons (and their controlled-in-fact subsidiaries and affiliates) of their U.S. legal compliance and reporting obligations when operating in Turkey. Turkey is not presently on the Treasury’s published boycott list; thus, there is not an automatic reporting requirement for U.S. persons and their foreign tax group affiliates operating in Turkey. However, the receipt of requests to participate in or cooperate with Turkey’s trade restrictions against Israel may trigger reporting requirements under each of the BIS and IRS rules, depending on the nature of the activity and the request.
In light of this recent development, companies operating in Turkey should proceed with heightened awareness of requests to participate in the Turkish export and import ban on Israel.
The U.S. already maintains significant sanctions against terrorist organizations and their sponsors, including Iran and Syria. Companies should expect increasing enforcement efforts from the U.S. and its allies aimed at preventing the evasion of sanctions, financing of terrorist organizations, and supply of goods to sanctioned parties and countries.
Iran and Syria are subject to comprehensive embargoes and have been designated as state sponsors of terror. Likewise, Hamas and Hezbollah are both designated as terrorist organizations and as Specially Designated Nationals (SDNs). The sanctions against Hamas and Hezbollah are not territory based. Care must be taken when dealing with regions, organizations, and institutions where the SDNs may have influence, given the heightened risk of dealing with a sanctioned party. Efforts to donate or deliver humanitarian aid and charitable contributions should be reviewed to screen parties involved and ensure compliance with applicable laws.
Companies that have a U.S. nexus to their operations, such as through U.S. domiciles, transactions in U.S. dollars, use of U.S. back-office support or financing, use of U.S. servers or IT systems, or employment of U.S. nationals, need to ensure their operations strictly comply with U.S. sanctions laws, even when operating abroad. The U.S. sanctions regime is one of strict liability with severe civil and criminal penalties. Non-U.S. companies also risk secondary sanctions for certain transactions, particularly with respect to Iran.
The U.S. government is increasing its focus on enforcement, noting that sanctioned countries and parties are using increasingly sophisticated and aggressive tactics to evade restrictions and obtain funds and other material support. The U.S. Departments of Commerce, Justice, and Treasury have recently issued guidance concerning diversion to Russia following its invasion of Ukraine (here, here, here). The guidance is also relevant in the context of the Iran and Syria embargoes and sanctions on terrorist organizations and other persons in the Middle East.
Companies conducting business in the Middle East should be alert to the use of third-party intermediaries and transshipment points to conceal the identities of ultimate end users. Red flags of potentially illicit transactions include:
Payment flows also may indicate diversion to sanctioned parties, including in the virtual currency context, such as:
Relatedly, U.S. companies should test and calibrate sanctions and anti-money-laundering controls to ensure that they are effective.
Companies exporting defense articles to Israel for the protection of their personnel and operations must also be mindful of export restrictions under U.S. and other laws, as well as of Israeli import controls.
Under U.S. law, the International Traffic in Arms Regulations regulate the export of defense articles and services controlled on the United States Munitions List. The Export Administration Regulations control items on the Commerce Control List, including “600 series” military-related items. Defense articles are highly regulated, often requiring authorization for export, re-export, in-country transfer, and brokering of sales, even to allied countries. The following types of PPE typically require authorization for commercial sales as well as for companies’ and individuals’ own internal use:
Similar to export control requirements, foreign countries impose restrictions on the import and use of defense articles. To the extent companies, nonprofits, or individuals are seeking to deliver such items abroad, including to Israel, they should engage with local counsel or otherwise determine the necessary steps to lawfully deal with defense articles in compliance with Israeli law.
Fenwick’s Israel Practice can assist with issues clients may have as they navigate these complex issues. Contact your Fenwick relationship attorneys to discuss any concerns regarding transactions and operations in the Middle East during this difficult period.
Also published by the Global Trade Law Journal.