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Banks face stiffer penalties for US anti-boycott violations

The US government has signalled stricter enforcement of its anti-boycott rules, a relatively overlooked area of Washington’s trade controls which has been known to ensnare banks providing trade finance.

The anti-boycott regime is designed to punish businesses which aid “unsanctioned foreign boycotts” of US allies by other countries, but in practice it is targeted solely at the Arab League’s boycott of Israel.

Despite the boycott being at a low ebb as ties between Israel and key Arab states rapidly thaw, the US Bureau of Industry Security (BIS) announced earlier this month that it had hiked the maximum penalty for violations of the antiboycott measures to US$300,000 or twice the amount of the underlying transaction, whichever is greater.

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BIS will also end the practice of allowing companies not to admit or deny misconduct during the settlement process. Instead companies will now be required to admit to a statement of facts about their conduct, which authorities hope will help other companies better understand cases and improve compliance.

Other changes include a “renewed focus” on foreign subsidiaries of US firms and a reshuffle of which types of violations are deemed most serious.

“Discrimination will not be tolerated regardless of whether it impacts people or trade,” assistant secretary of commerce for export enforcement Matthew Axelrod said in an October 6 statement announcing that the changes would go into effect the following day.

“Today’s actions will further strengthen our Office of Antiboycott Compliance’s [OAC’s] work to combat discrimination by aggressively enforcing our antiboycott rules.”

All recent enforcement actions against banks involved their handling of trade finance documents such as letters of credit, and shipping documents such as bills of lading.

In the most recent action, in 2018, Citi settled with the OAC – a division of the BIS – for allegedly furnishing letter of credit-issuing banks with information which helped the parties in the transactions participate in the boycott of Israel.

The letters of credit included clauses such as “this vessel is permitted to enter Arab ports”, which in practice means the vessel in question has not entered any Israeli ports. Under the boycott, ships are denied entry to Arab ports if they have previously docked in Israel.

In practice, that provision has eroded in recent years as countries such as the UAE, Bahrain and Morocco have permitted direct trade with Israel.

Other banks which have settled with the OAC in recent years over similar alleged violations include Bank of America, Bank of New York Mellon and the Miami branch of Banco Sabadell.

In each case the fine was a five digit amount, with Citi paying a relatively modest US$60,000 to settle allegations of 20 violations between 2012 and 2016.

However the changes to penalty calculations introduced this month could make the most severe violations very expensive for offenders, bringing the OAC into line with its sanctions enforcement counterpart, the Office of Foreign Assets Control, which regularly slaps alleged violators with fines in the tens of millions of dollars.

“That changes the risk calculus,” says David Wolff, a partner with law firm Crowell & Moring.

He tells GTR that anti-boycott rules had become “a lower area of focus for many companies” over the years. “You focus on your sanctions risk, you focus on your export control risk, then there was always the residual controls for anti-boycott compliance.”

If authorities start imposing much greater fines for antiboycott breaches, he says, “that will have an effect across the industry and people will start to sit up a little straighter and pay more attention”.

Enforcement actions have tapered off slightly since 2018, according to publicly available statistics, with none so far this year. Last year the OAC took two enforcement actions, three apiece in 2020 and 2019 and two in 2018.

Trade finance banks are most at risk of violating two provisions in the rules. The first is “furnishing information about business relationships with boycotted countries or blacklisted persons”. Wolff says that “in the trade finance context often the bank is in the business of passing on the underlying documents, so if those documents contain boycott-related language, they’re running the risk of furnishing that boycott-related language in a way that would be prohibited”.

“The second is the more substantive prohibition on actually implementing an LC that contains a boycott-related clause; then they would be engaging in an active advancement of the boycott.”

However, the new changes downgrade implementing an LC that contains a boycott clause to a so-called category B violation, meaning breaches are subject to lower penalties. Furnishing information is also a category B offence.

Wolff says the impact of the change is unclear, because while it presents less financial risk, the new policy of requiring an admission of guilt means the reputational damage for a violation may be more severe.

In a recent client alert following the changes, law firm Akin Gump wrote that “while these actions will not change the fundamental compliance requirements of the US antiboycott regulations, they will increase the risks associated with non-compliance, due to both the increased financial cost associated with higher penalties and the heightened reputational cost associated with the requirement to admit misconduct during the settlement process”.

The impact of the changes may be slow to appear because enforcement cases tend to take many months, and often years, to be concluded.

The BIS, which sits within the Department of Commerce, did not respond to written questions from GTR about the changes.

 

The post Banks face stiffer penalties for US anti-boycott violations appeared first on Global Trade Review (GTR).

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