Dear Clients and Friends,
Over the second quarter of 2024, there have been many developments in global trade controls. We have compiled highlights of regulatory updates, publications, and global and local enforcement events in the field of international trade regulation in the second quarter of 2024 that may affect compliance requirements for companies in Israel and abroad.
GLOBAL REGULATORY UPDATES
Expanded US, UK, and EU Sanctions against Russia
The US, UK, and EU continued expanding their sanctions regime and export controls related to Russia. Key developments include:
- Expanded US Sanctions against Russia: In the past quarter, the US Treasury Department’s Office of Foreign Assets Control (OFAC), together with the US State Department, has continued to intensify its sanctions against Russia and those aiding in sanctions evasion by adding hundreds of entities to OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). Similarly, the US Department of Commerce Bureau of Industry and Security (BIS) has increased the items it restricts from trade with Russia and Belarus and added more entities to its Entity List.
- US Restrictions on Financial Institutions: On June 12, 2024, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced an expansion of its efforts against Russian Financial Infrastructure and an increased risk of secondary sanctions against financial institutions that engage with Russia’s war economy. As part of these restrictions, OFAC has published updated guidance for Foreign Financial Institutions. As the risk of secondary sanctions rises for foreign financial institutions, financial institutions may increase the compliance requirements they place on their customers as they seek to remain compliant with growing restrictions.
- US Restrictions on Software and IT-Related Services: On June 12, 2024, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced further restrictions intended to restrict the “Russian military-industrial base’s access to certain software and IT-related services”. The new determination restricts the supply to any person in the Russian Federation of (1) IT consultancy and design services, (2) IT support services, and cloud-based services for enterprise management software and design and manufacturing software. The prohibition goes into effect September 12, 2024. In coordination with OFAC’s announcement, the US Department of Commerce Bureau of Industry and Security (BIS) similarly announced additional restrictions on the export, reexport, or transfer of certain types of software to Russia and Belarus. The restrictions apply to EAR99 software, including enterprise management and design software, as well as updates to previously provided “covered” software.
- US and UK Restrictions on Imports and Services for the Acquisition of Russian Metals: On April 12, 2024, the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced restrictions relating to the import and certain services for the acquisition of aluminum, copper, and nickel of Russian Federation Origin. In May, the UK similarly issued guidance related to Russian iron and steel.
- BIS Sends US Companies “Red Flag” Letters regarding Customers Identified as Continuing to Export to Russia: in recent months the US Department of Commerce’s Bureau of Industry and Security (BIS) provided US companies with “red flag” letters identifying specific customers who had been identified as continuing to export to Russia. Companies who received such letters were encouraged to use heightened due diligence for those identified customers and bolster export screening efforts by purchasing commercially available datasets of Russian imports and screening against them as well. In some cases, BIS requested that US companies voluntarily stop shipping to parties due to the high risk of transshipment to Russia. BIS has also reached out to US manufacturers and distributors who make and sell products that continue to be found in Russian missiles and drones.
As part of this effort, on July 10, 2024, BIS published guidance on its “Actions Identifying Transaction Parties of Diversion Risk”. The guidance contains recommended best practices for additional screening of parties to Common High Priority List (CHPL) exports, reexports, or transfers to prevent the diversion of EAR items to Russia through third countries. As part of the guidance, BIS notes the Trade Integrity Project (TIP) which has launched a website identifying entities that have shipped CHPL items to Russia. - EU 14th Sanctions Package against Russia: On June 24, 2024, the EU adopted its 14th sanctions package against Russia. An explanation regarding the additional restrictions can be found here. The sanctions package includes the following additions:
- Sanctioned Individuals and Entities: Restrictive measures on an additional 116 individuals and entities, including adopting measures targeting 27 vessels and subjecting them to a port access ban and ban on the provision of services. Among other things, the measures targeted vessels used to circumvent the price cap placed on Russian-origin commodities from the energy sector.Export Restrictions: Further restrictions on exports of goods, in particular those that contribute to Russia’s industrial capabilities, as well as further import restrictions. As part of the package, the Common High Priority List (CHPL) has been further updated, exports are restricted to nine additional dual-use and advanced technology items (including certain All-Terrain Vehicles), and export bans have been extended to certain types of industrial products including chemicals, plastics, vehicle parts, and machinery.“Best Efforts Obligations” concerning Foreign Subsidiaries:Requirements on EU parent companies to undertake “best efforts” to ensure their third-country subsidiaries do not engage in activities undermining EU sanctions.Due Diligence and Contractual Requirements on EU Companies and their Foreign Subsidiaries: Requirements on EU operators selling Common High Priority (CHP) items to third countries to implement due diligence mechanisms to identify, assess, and mitigate the risk of reexportation to Russia and ensure their foreign subsidiaries do the same. In the same vein, the sanctions package requires contractual provisions (“No Russia” clause) for EU operators transferring “Industrial know-how”/Intellectual Property Rights for the production of certain restricted goods to third countries ensuring that knowledge will not be used to manufacture CHP goods intended to Russia. Moreover, circumvention prohibitions have been strengthened, to capture “participating in such activities without deliberately seeking that object or effect but being aware that the participation may have that object or effect and accepting that possibility”.Financial Institutions and Transactions Restrictions: A ban on the use of the Russian Specialized Financial Messaging Service (SPFS), i.e. the Russian equivalent of SWIFT, or other equivalent specialized financial messaging services. In addition, the sanctions package bans transactions with third-country banks using SPFS and transactions with banks and crypto assets providers that facilitate transactions supporting Russia’s defense industrial base.
- LNG Restrictions: Restrictions intended to reduce Russia’s revenues from the sale and transport of Liquified Natural Gas (LNG). This includes a prohibition on reloading services of Russian LNG in EU territory for the purpose of transshipment operations to third countries, as well as a prohibition on new investments and the provision of goods, technology, and services for the completion of LNG projects under construction.
- Updated FAQs: the US, EU, and UK have provided clarifications on Russia-related sanctions through the FAQs published on their respective website.
- Export Control Agency of Israel’s Ministry Of Economy and Industry Notice regarding the impact of US sanctions against Russia on Israeli exporters: On June 1, the Export Control Agency of Israel’s Ministry of Economy and Industry released a notice regarding the impact US sanctions against Russia may have on Israeli exporters, primarily in the security and energy sectors. The notice recommends that Israeli exporters follow developments in sanctions, and notes that the new US sanctions will likely impact exporters in markets in the UAE, Azerbaijan, Belgium, Turkiye, and China, and exporters in these regions will likely face greater compliance requirements.
US Anti-Boycott Advisory on Turkiye
On May 14, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued an advisory in response to Turkiye’s boycott of exports and imports from Israel. The advisory reminds all US persons that the US Export Administration Regulations (EAR) prohibits furthering or supporting an unsanctioned foreign boycott against Israel and requires reporting to BIS a receipt of a boycott-related request.
BIS updates Export Enforcement Guidance Publication
On July 1, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) published an updated version of their publication, “Don’t Let This Happen to You”; a compendium of case examples highlighting BIS criminal and administrative enforcement efforts. The publication provides useful and practical examples of conduct that can result in penalties and enforcement events, stressing areas where businesses must exercise caution. The document emphasizes the importance of internal compliance programs, due diligence, and regular training to prevent violations, and advocates proactive measures to ensure adherence to regulations.
US Extends the Statute of Limitations on Sanctions Violations
On April 24, 2024, a new national security bill was signed into law which includes multiple US sanctions-related provisions. The law, now effective, doubles the statute of limitations for civil and criminal violations of economic sanctions managed by OFAC from five to ten years. This change will notably affect US sanctions compliance, record-keeping requirements, internal investigations, voluntary self-disclosures, due diligence, and sanctions-related negotiations, particularly in mergers and acquisitions, including private equity deals.
EU Introduces Criminal Offences and Penalties for EU Sanctions’ Violations
On April 12, 2024, the EU adopted a law creating rules for prosecuting violations of EU sanctions in member states. The penalties include prison sentences ranging from one to five years, fines of 1% to 5% of their total worldwide turnover or €8 or €40 million, as well as other punitive measures such as exclusion from public funding and withdrawal of permits and authorizations to pursue activities.
US DOJ Criminal Division Offers Non-Prosecution Agreements to Individuals Who Voluntarily Report Corporate Wrongdoing
On April 15, 2024, the DOJ Criminal Division announced a “Pilot Program on Voluntary Self-Disclosures for Individuals”, providing guidance in which prosecutors will offer Non-Prosecution Agreements (NPAs) to individuals who voluntarily provide information about certain types of corporate criminal conduct, cooperate, and pay any applicable victim compensation, restitution, forfeiture, etc. The program hopes to also encourage companies to create effective compliance programs.
PROPOSED REGULATION
US Announces Inquiry into Connected Vehicles
On March 1, 2024, the US Department of Commerce issued an advance notice of proposed rulemaking (ANPRM) requesting public comment regarding potential regulations for connected vehicles (CVs). The US cited national security and privacy concerns implicit in foreign government access to connected vehicles as the need behind the ANPRM aimed at investigating the risks of CVs.
The Export Control Agency of Israel’s Ministry Of Economy released a notice regarding the U.S. inquiry on May 1, 2024, highlighting the potential impact of these regulations on Israeli exporters.
US Releases Draft of Regulation Limiting Investments in China and Other Countries of Concern:
On June 21, 2024, the US Department of Treasury issued a Notice of Proposed Rulemaking (NPRM) releasing draft regulations and explanatory notes for the future proposed rule. The regulation seeks to prevent US investments from being exploited by countries of concern to develop sensitive technologies and products for military, intelligence, surveillance, cyber-enabled capabilities, or other uses that pose national security risks to the US. The regulation would prohibit US persons from engaging in certain transactions involving certain technologies and products that pose a particularly acute national security threat to the United States and require US persons to notify Treasury of certain other transactions involving certain technologies and products that may contribute to the threat to the national security of the United States. The categories of technologies covered by the program include semiconductors, microelectronics, quantum information technologies, and artificial intelligence.
ENFORCEMENT UPDATES
Prompt Disclosure and Cooperation Results in US DOJ Declining Prosecution against Company:
On May 22, 2024, The US Department of Justice (DOJ) announced it would decline prosecution against a US biochemical company whose employees were involved in diverting products to an unauthorized purchaser in China. The DOJ’s decision found the company’s response consistent with the presumption of non-prosecution for companies that voluntarily self-disclose, fully cooperate, and remediate, as set out in the National Security Division Enforcement Policy for Business Organizations (NSD Enforcement Policy). This case marks the first corporate declination under the NSD Enforcement Policy and underscores the critical importance of maintaining robust internal compliance programs and promptly cooperating with regulatory authorities to mitigate legal risks.
Israeli Supreme Court upholds Mizrahi Tefahot’s decision not to transfer Roman Abramovich’s donation to ZAKA:
On December 19, 2023, Israeli bank, Mizrahi Tefahot, refused a request to transfer a donation of 8 million NIS from Mr. Roman Abramovich to Israeli humanitarian organization, ZAKA, due to the bank’s exposure to risks stemming from Abramovich being designated on EU and UK sanction lists. In January, the Tel Aviv District Court ruled in favor of Abramovich and ordered transferring the funds noting the humanitarian need and requiring the bank to adopt a more nuanced approach to sanctions compliance. On April 2, 2024, the Israeli Supreme Court overturned the district court’s decision. The Supreme Court took a more conservative approach to sanctions compliance and pointed to the guidelines issued by the Bank of Israel, including guidelines issued after the invasion of Ukraine, requiring banks to manage international sanctions risks. The court noted the potential damage to the bank in acting contrary to EU and UK sanctions regimes, especially as no clear exemption exists for the humanitarian donation.
DECA enforcement event against Israeli Exporter:
In June 2024, the Israeli Defense Export Controls Agency (DECA) announced an enforcement event against a licensed exporter who sold systems with capabilities not listed in the system’s Product I.D. and funded by IMOD. The exporter has received an export license for the sale, but the license had been based on a Product I.D. of an earlier version of the system which had not included the additional new capabilities. DECA highlights that exporters are responsible for ensuring that a product’s registration (Product I.D.) is updated in line with the product’s capabilities and classifications. The announcement also notes, as a mitigating factor, that the exporter updated their internal compliance efforts and presented to its staff an investigation into the matter. Due to the exporter’s stellar compliance record and performance of remedial activities, DECA decided not to give the company a penalty.
This client update highlights certain developments in the field of international trade that can assist in meeting compliance requirements. It does not review all the updates that took effect in 2024 and is not intended to provide a comprehensive summary. This client update provides general information, and may not be relied upon in any particular situation without additional legal advice.
