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Sandler, Travis & Rosenberg

Doing Business in or with the Middle East? The Consequences of Anti-Boycott Non-Compliance Can Pack a Wallop

Melissa Miller Proctor, Esq., Sandler, Travis & Rosenberg, P.A.

Odds are that many (if not most) importers, exporters, manufacturers and retailers have never heard of the U.S. anti-boycott laws and regulations. Yet, it is reported that U.S. companies receive, on average, roughly 10,000 boycott-related requests from their foreign suppliers, distributors, business partners and customers each year. Thus far in 2013, the Commerce Department's Office of Antiboycott Compliance ("OAC") has imposed almost $250,000 in civil penalties against unwary U.S. companies who have run afoul of the complex anti-boycott requirements.

Generally, the anti-boycott laws and regulations prohibit U.S. companies and their controlled-in-fact foreign affiliates from participating in or supporting foreign boycotts that are not sanctioned by the United States. The current boycott that is of primary concern is the Arab League's Boycott of Israel. By way of background, the Arab League Council approved the economic boycott of Israel after its creation in 1948 and the Office of the Arab Boycott of Israel was established in Syria in 1951. Since that time, members of the Arab League have sought to block trade with Israel by: (1) prohibiting the importation of Israeli-origin goods and services into boycotting countries; (2) prohibiting companies in member countries from dealing entities that do business in Israel; and, (3) prohibiting companies in member countries from dealing with any blacklisted entities.

 

As a supporter of Israel, and with many U.S. companies finding themselves blacklisted, the United States enacted two sets of laws in the 1970's to respond the boycott. The first law was the Ribicoff Amendment to the 1976 Tax Reform Act (Section 999 of the Internal Revenue Code). The second law was the 1977 Antiboycott Amendments to the Export Administration Act (implemented in Part 760 of the EAR). These laws prohibit companies from:

  • Refusing to do business with Israel or with blacklisted companies
  • Discriminating against other persons based on race, religion, sex, national origin or nationality
  • Furnishing information about business relationships with Israel or blacklisted companies
  • Furnishing information about the race, religion, sex, or national origin of another person
  • Implementing letters of credit containing prohibited boycott terms or conditions

Under the EAR, and except in limited circumstances, companies that receive a request from a foreign entity to take any of the actions described above are required to timely report them to the OAC. In addition, they are prohibited from taking the requested actions. The IRS rules, on the other hand, require U.S. taxpayers to report their operations in boycotting countries as well as their receipt of certain types of boycott-related requests.

Every quarter, the Treasury Department publishes a list of countries known to participate in the Arab League's Boycott of Israel. The most recent list, which was published in late May 2013, identified the following countries: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Yemen. However, boycott-related requests from other countries, such as Algeria, Egypt, Iraq, Jordan, Pakistan, Tunisia, India, and Bangladesh are not uncommon.

What does a boycott-related request look like? Recent requests that were received by U.S. companies include: (1) requests to provide information on the religion and nationality of the U.S. company's officers, board members, employees; (2) requests to provide negative certificates of origin stating that exported goods are not of Israeli origin; and, (3) requests involving purchase order terms and conditions requiring a signed statement from the shipping company or agent stating the carrying vessel is permitted to enter Arab ports.

But, not all suspected boycott-related requests violate U.S. law or require formal reporting. In order to properly analyze companies' obligations in this regard, the following questions must be answered:

  1. Is the underlying sale or transaction in U.S. commerce?
  2. Does the suspected request involve any of the above described prohibitions?
  3. Is there an exception that may apply?

If the request is determined to be reportable under the EAR, companies must ensure that they timely file the necessary reports on Form 621-P with the OAC quarterly per the specified deadlines in Part 760.5(b). If required, the IRS Form 5713 must also be submitted to the IRS with the taxpayer's annual tax return.

Civil or criminal penalties can be imposed for violating the anti-boycott regulations. Currently, the maximum civil penalty that the OAC can assess per violation is the greater of $250,000 or twice the value of the underlying transaction, and criminal penalties of up to $1 million and/or imprisonment for 20 years for willful anti-boycott violations. Although rare, the BIS can also deny a company's export privileges. The IRS may impose certain tax-related penalties against violators. For example, U.S. taxpayers who engaged in any boycott-related agreements may lose their right to claim certain tax benefits. In addition, willful failures to file the Form 5713 can lead to a fine up to $25,000 and imprisonment for not more than a year.

So, how should companies approach this very complex area? Formal anti-boycott processes should be incorporated into existing compliance programs and company personnel on the front lines with foreign suppliers, distributors, business partners and customers in at-risk regions should be trained to identify and escalate suspected requests. They should vigilantly look for key words or phrases in communications and letters of credit that may help to reveal a potentially reportable, boycott-related request (e.g., blacklist, Jewish, religion, eligibility of ships to enter Arab ports, negative certificate, etc.). Companies should also plan out the mechanics of timely reporting boycott-related requests to the OAC and the IRS. Because this is one of the most complex legal issues that companies need to get their hands around, attempting to plow through the excruciatingly complex sets of regulation may be a good first step, though it may be quite daunting as well. Seeking guidance from outside legal counsel is also never a bad idea when it comes to addressing anti-boycott concerns – especially given the fact that the consequences of non-compliance can certainly pack a wallop.


Melissa Miller Proctor is a Member of Sandler, Travis and Rosenberg, P.A. and the Firm's Export Practice Leader, resident in the Scottsdale, Arizona office. With significant experience in export controls, customs laws and regulations, and international trade, Melissa works closely with clients to expand their markets while ensuring their regulatory compliance. She may be reached at (480) 305-2110 or via e-mail at mproctor@strtrade.com.

 
 
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