US Secondary Sanctions and Implications for Israeli Companies
As we have discussed in our previous publication, (link to the article on sanctions compliance)sanctions compliance is becoming as relevant as FCPA anti-bribery and corruption compliance, in light of recent geopolitical developments and trends in international enforcement actions.  US jurisdictional powers are very broad and any link to the US (for example, by having a subsidiary, use of the US financial system, reliance on US-originated technology) means that any Israeli company with such nexus to the US should pay close attention to US sanctions enforcement.   

In addition, even companies that do not have any connection to the US, should still be aware of the implications of “secondary sanctions” under US law.  Secondary sanctions is a tool used by the US authorities to increase the effectiveness of its primary sanctions program.  It is focused on transactions that do not have nexus to the US and may be legal in other jurisdictions, relevant to the parties involved in such transactions.  US enforces secondary sanctions to deter non-US persons from circumventing the effect of primary sanctions and engaging in activities that are deemed contrary to the US national security interests.    

The Office of Foreign Assets Control (OFAC) applies secondary sanctions to non-US persons that lack US nexus for participating in a transaction with an individual included on OFAC’s Specially Designated National (SDN) list.  OFAC enforces secondary sanctions not through criminal or civil penalties, like in the case of primary sanctions, but through denial of export licenses or access to the US financial system.  In the most severe cases, a foreign person can itself be designated as an SDN.   

Recently, US has been enforcing secondary sanctions in connection with activities related to Russia. Israeli companies should pay attention to those developments and assess potential implications of those sanctions for their business.  Some of the sanctionable activities include facilitation of a significant transaction on behalf of SDNs.  For Israeli financial institutions that also means, knowingly facilitating significant financial transaction on behalf of SDNs. A critical aspect of evaluating potential implications of secondary sanctions is that in most cases the restrictions apply not only to SDNs, but also to any entity that is majority owned by SDNs.

Companies need to ensure that their third-party due diligence or “know your customer” procedures include a thorough review of ultimate beneficial ownership and control of non-sanctioned entities, to eliminate the risk of them being affiliated with SDNs. The companies are expected to have an appropriate risk-based program that includes appropriate checks for avoiding a breach of sanctions legislation, both primary and secondary.
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