U.S. Sanctions, Export Control and Foreign Investment Regulations –
Who's on First, What's on Second

U.S. sanctions, export control and foreign investment regulations have recently been in the center of media and legal departments’ attention internationally.  They are focused on promoting the US national security and foreign policy objectives, but do so utilizing different tools.  Doing business in China or getting involved with counterparts having nexus to Russia raises red flags and questions about possible exposure. The scope, applicability and potential impact of those regulations are not easy to understand and may lead to confusion.  As we believe these regulations will become increasingly relevant, below is a brief summary that should clarify some of the questions we are receiving from our clients:

Administered by: 
The Office of Foreign Assets Control (OFAC) of the US Department of Treasury.
Applies to: US persons and, in certain instances also non-US persons, engaging in transactions with sanctioned countries, regions and persons.
Relevance to Israeli companies: “US person” definition is very broad and involves US citizens, permanent residents, entities organized in the US and their foreign branches, or any person in the US.
US person employees, officers, directors or contractors of an Israeli company would be subject to OFAC enforcement actions, if they are engaging in, approving or otherwise facilitating any transaction that is prohibited under the US sanctions regulations.
In addition, an Israeli company may be subject to OFAC enforcement action, if it is using the US financial system or transacting in US dollars.
Fields of particular focus: Trade-based money laundering; transactions that may involve dual use and prohibited goods, or sanctioned ports and vessels.
What to do:   - Incorporate sanctions compliance into the overall compliance framework
- Upgrade due diligence or “know your customer” procedures to encompass thorough review of ownership and control of non-sanctioned entities
- Perform due diligence on high-risk suppliers and distributors to ensure there are no indirect ties to sanctioned entities    
Liability: Violation without intent or proof of fault results in civil liability, but OFAC considers fault and intent when deciding on penalties.  Willful       violation of sanctions regime may result in criminal liability for individuals and companies, with potential penalties including imprisonment and monetary fines.
 Export Controls
Administered by: The Bureau of Industry and Security of the US Department of Commerce though the Export Administration Regulations.
Applies to: Export, reexport and transfer of US-origin technology, commodities and software subject to the Export Administration Regulations.
Relevance to Israeli companies: The Export Administration Regulations apply to a non-US product if:
- It contains sensitive US-origin content
- Is the “direct product” or specific US technology or software
- It is produced using equipment that is the “direct product” of certain specified US technology        
Fields of particular focus: Areas that the Department of Commerce deems strategic or posing national security threat, such as dual-use technology.  In addition to semiconductors, that recently fell within the scope of the new regulations, other areas, such as, biotechnology or artificial intelligence, may follow.
What to do: Introduce and follow clear “know your supplier” procedures, to know whether there is any exposure to the US regulations.
Liability: Violations of the Export Administration Regulations may be subject to both criminal and administrative penalties. Criminal penalties can include up to 20 years of imprisonment and up to $1 million in fines per violation, or both. Administrative monetary penalties can reach up to $300,000 per violation or twice the value of the transaction, whichever is greater.

Foreign Investment
Administered by: The Committee on Foreign Investment in the United States (CFIUS)
Applies to: Foreign investment in the US (CFIUS reviews investment transactions and not day-to-day commercial transactions).
Relevance to Israeli companies: CFIUS has jurisdiction over a foreign entity’s acquisition of a US business.  US business is broadly defined as an entity, regardless of the nationality of the person controlling the entity, that engages in interstate commerce in the US.  For example, if an Israeli company with a subsidiary incorporated in the US, or other operations or assets in the US, is being acquired by or is receiving a major investment from a Chinese company, this transaction may fall within CFIUS review if such transaction raises a possible national security concern.  CFIUS may block such deal with respect to the US business.
Fields of particular focus: Chinese investment in companies that develop sensitive technologies. Israeli companies that have accepted funding and maintained affiliations with Chinese entities, some of them also government-related, should be aware of CFIUS review and it’s potential to affect their ability to conduct business in the US through subsidiaries or the ability to attract funding or go public in the US.
What to do:  - To the extent an Israeli company is contemplating an investment or acquisition by a Chinese company, it may want to carefully review its presence in the US to ensure it does not fall under CFIUS jurisdiction
- When evaluating a potential transaction, an Israeli company with any US nexus should consider whether any of its activities, even if conducted outside of the US, may potentially be considered sensitive from the perspective of the US national security interests.        
Liability: Civil monetary penalties or other remedies for individuals or entities, amounting up to $250,000 or the value of the transaction, whichever is greater.

       *Who's on First – Abbott & Costello (1953): https://www.youtube.com/watch?v=2ZksQd2fC6Y                                         
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