Incoterms_® and Commercial Contracts

Executive Summary

States impose export controls on products that may have military uses, and they apply economic sanctions against other states, entities and individuals. These regimes are extremely complex. For example, US export controls fall under two separate sets of regulations administered by different government agencies, and sanctions are administered by a third agency.

In the United States, the Commerce Department controls export of dual-use items (products such as trucks, which can be used for civilian as well as military purposes) and less sensitive military items (such as trainer and cargo military aircraft). The Department’s Export Administration Regulations indicate on a product-by-product and country-by-country basis whether or not an export requires a license. Sensitive military items, on the other hand, are controlled by the Department of State. Licenses generally are required for the export of such items, and the Department maintains a list of countries to which exports are generally prohibited.

The EU controls the export of dual-use items through the Dual-Use Regulation, though Member States can impose additional controls if they wish. Exports of military items are controlled by individual states rather than by the EU as a whole.

US anti-boycott regulations are designed to discourage US entities from participating in boycott programmes that the United States opposes, such as the Arab boycott of Israel.

The United Nations Charter requires UN Members to implement sanctions imposed by the Security Council. Since 1966 the UN has imposed 26 sanctions regimes. Members can impose other sanctions if they choose to do so. The United States Treasury Department regulates US sanctions, which can take the form of: (a) embargoes, restricting virtually all trade with designated countries; (b) targeted country programmes, aimed at particular government officials or agencies in particular countries; (c) targeted person programmes, directed at individuals and entities engaged in certain illicit activity; and (d) secondary sanctions, aimed at restricting non-US actors from engaging in activity that is contrary to US foreign policy.

The EU administers sanctions programmes, most of which resemble the US targeted country programmes. They are approved by unanimous vote of the Member States and implemented by the individual states.

Companies that are active internationally are well-advised to maintain export control and sanctions compliance programmes. Not only will they reduce the chances of a[Page214:]violation, but in the event of a violation they may be viewed by the authorities as a mitigating factor in deciding what penalty to impose. When a company discovers that it has committed a violation, it should consider whether it should make a voluntary disclosure to the authorities, as this will be treated as a mitigating factor, although it obviously makes some kind of penalty more likely.

Export controls and sanctions would in principle contravene the GATT Article XI ban on export quotas. However, Article XXI of the GATT allows a Member to take action that it considers “necessary for protection of its national security interest”, which would probably protect export controls and sanctions regimes. Article XXI also authorises action taken in accordance with UN obligations, which would include UN-required sanctions.

* Stewart Baker is a Partner and Anthony Rapa Of Counsel at the law firm of Steptoe & Johnson, Washington, DC.

1.0 Introduction

Many states impose export controls in the form of licensing requirements or outright bans on items that can have military applications, and they also apply economic sanctions to various countries, entities, and individuals. These regimes are promulgated in furtherance of foreign policy and national security objectives.

Companies in the business of exporting should keep abreast of the export control and sanctions regimes of their countries, which change frequently. The regimes are complex, and failure to comply can carry heavy penalties, including large fines and prison sentences.

This chapter focuses on the regimes in place in the United States and the EU, which are extremely complex – the US export control regimes, for example, are administered by two separate agencies, the Department of Commerce and the Department of State, under completely different sets of regulations, and the sanctions regime is controlled by the Department of the Treasury. Separate anti-boycott regulations are administered by the Department of Commerce and the Internal Revenue Service. Section 2 of the chapter discusses export controls, while Section 3 discusses sanctions. Section 4 covers anti-boycott provisions. Section 5 provides advice on compliance with export control and sanctions regimes, and on what exporters should do when they become aware of a possible violation. The last section of the chapter discusses the relationship between these regimes and international trade agreements.

2.0 Export Controls

Export controls consist of national laws and regulations that control the export, re-export, and in-country transfer of military items and dual-use items (i.e., products that can be used for both civilian and military purposes, such as trucks). Export control regulations typically cover hardware, software, and technical information, and can also control the provision of certain types of services, such as defence services, or the application of certain technical knowledge abroad (which may not be a service per se, but is closely related to the concept of a service).

2.1 Wassenaar Arrangement

The export control frameworks of many states are based on the Wassenaar Arrangement, while also reflecting foreign policy and national security interests.¹Forty-one states participate in the Arrangement: Argentina, Australia, Canada, the EU Member States (except Cyprus), Japan, Mexico, New Zealand, Norway, the Republic of Korea, Russia, South Africa, Switzerland, Turkey, Ukraine and the United States. China[Page215:]and Israel are not participants, but they have aligned their export control policies with the Arrangement.

The main features of the US and EU export control regimes are based primarily on the Wassenaar Arrangement. However, each regime has unique attributes and is tailored to meet specific foreign policy and national security interests.

2.2 US Export Controls

The United States controls the export of dual-use items and less sensitive military commodities, software, and technology through the Export Administration Regulations (EAR),²which are administered by the Bureau of Industry and Security (BIS) in the Department of Commerce.³Sensitive military exports are governed by the International Traffic in Arms Regulations (ITAR),⁴ which are administered by the Directorate of Defense Trade Controls (DDTC) in the US Department of State.⁵ Pursuant to the President’s Export Control Reform initiative,⁶ in recent years certain less sensitive defence articles have transitioned from ITAR control to EAR control in order to promote more flexible licensing for export of such items to US allies. For example, trainer, cargo, and unarmed military aircraft now are controlled under the EAR, while bombers, fighter aircraft, and attack helicopters remain subject to ITAR control.⁷Generally speaking, the EAR are significantly more permissive than the ITAR in terms of licensing, such as availability of license exceptions, license review policy, and broader application of case-by-case review of license applications. (For example, under the EAR, license applications for export to China are reviewed on a case-bycase basis, while under the ITAR, they are reviewed with a presumption of denial.) Most items that have transitioned from the ITAR to the EAR are eligible for License Exception “STA”, which authorises export without a license to 36 countries, subject to certain conditions.⁸

Exporters should be aware of certain “red flags” that US regulatory agencies have identified as warranting concern when present in an export transaction. US Commerce Department and State Department “red flags” are set forth in the Appendix.

Through its export control regime, the United States seeks to bolster national security by limiting access to sensitive US technology and weapons, promoting regional stability and human rights, preventing proliferation of weapons of mass destruction and technologies to supporters of terrorism and other problem end-users, and honouring the United States’ international commitments.⁹

When it is not clear whether an export license is required, both formal and informal guidance from authorities may be available. In the United States, exporters can submit requests to BIS and DDTC to provide the export classification of an item (i.e., the item’s Export Control Classification Number or US Munitions List category). For licensing questions, exporters can request an advisory opinion from the appropriate agency. Additionally, it may be possible to obtain informal advice from the agency (such as by telephone), but such advice will be non-binding.

2.2.1 Export Administration Regulations

The Export Administration Regulations apply to: (i) US-origin items (i.e., items produced or manufactured in the United States) wherever located; (ii) items located in the United States; (iii) foreign-made items incorporating greater than a minimal[Page216:]amount of US content; and (iv) certain foreign-made items that are the “direct product” of US technology or software.¹⁰

Controlled items (i.e., commodities, software and technology) are listed on the Commerce Control List (CCL), which consists of both positively listed items and broad catch-all categories of items “specially designed” for certain uses.¹¹Items listed on the CCL are subject to certain destination-based controls described below. The specific items subject to EAR restrictions are divided into ten categories.¹²All items that are not listed are designated as “EAR99” and in principle remain subject to regulation under the EAR, but generally are not controlled for export, except for exports to embargoed territories or for restricted end-users or end-uses, as described below.

There are several bases for control, as follows:

1. Destination Country: Each entry on the CCL is designated a unique alphanumeric code known as an Export Control Classification Number (ECCN). For each entry on the CCL, a “reason for control” is associated with the controlled item, such as “Anti-Terrorism”, “National Security,” “Regional Stability”, and “Crime Control.” An item could be controlled for multiple purposes. For example, flight control systems used in military drones are designated by ECCN 9A610.w and are controlled for Regional Stability, Anti- Terrorism, and United Nations Embargo reasons.
   Whether a license is required is determined by checking an item’s “reason for control” against the destination country on the EAR Country Chart.¹³For example, a license is required to export all “National Security” controlled items to Russia. On the other hand, no license is required to export “Nuclear Non-Proliferation” controlled items to Mexico.

2. End-uses and end-users:¹⁴Exports to any country of any item “subject to” the EAR need a license if the exporter knows at the time of export that the item will be used in the production of chemical or biological weapons.¹⁵Similarly, certain computers designated as ECCN 4A994 may not be exported to Russia or Venezuela if the exporter knows at the time of export that the item is intended for military end-users in Russia or Venezuela.¹⁶Furthermore, exports to certain listed end-users are restricted, such as endusers set out on the BIS Entity List.¹⁷Notably, such end-use and end-user restrictions can even apply to items not specifically listed on the CCL but “subject to” the EAR under the catchall “EAR99”.

3. Embargoed territories: Exports, re-exports and transfers to certain countries of items subject to the EAR are subject to strict licensing requirements. As of October 2016, the list of embargoed territories included: Cuba, Iran, North Korea, Syria and the Crimea region.¹⁸Certain of these regimes authorise the donation of humanitarian items,¹⁹while others provide for case-by-case or favourable review of license applications for the export of agricultural commodities,²⁰medicine,²¹and medical devices.²²Notably, Iran is the only embargoed territory to which exports of EAR99 items are not controlled.

License exceptions may be available. A license exception is an authorisation that allows export or re-exports under stated conditions of items subject to the EAR that would otherwise require a license. For example, the license exception applicable to Civil End-Users (CIV) authorises exports and re-exports without a license of certain items on the CCL that have a license requirement, provided the items are destined for civilian end-users for civilian end-uses in certain countries.²³

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Where a company determines that a license is necessary, it can submit a license application electronically through the relevant agency’s online portal. Agencies review license applications on a case-by-case basis, unless a favourable licensing policy (such as for certain humanitarian exports) or a policy of denial (such as for export to an embargoed country) applies. Agency review of a license application often is a collaborative process involving several agencies, including the Commerce, Defence, State, Energy, and Justice Departments. In reviewing a license application, an agency will consider the national security and foreign policy interests of the United States. An exporter, when submitting its application, can provide a transmittal letter in which it explains how the proposed export will promote such interests. In the event that a license application is denied, an exporter can appeal through an agency appeals process. Judicial review is quite limited.²⁴

2.3 International Traffic in Arms Regulations

The International Traffic in Arms Regulations (ITAR) regulate the export, temporary import, and brokering of “defence articles” and “defence services”. The ITAR define “defence articles” as items and technical data designated on the US Munitions List (USML), which enumerates articles specially designated for a military purpose.25 “Defence service” is defined as the furnishing of certain assistance (such as, for example, design, production, or repair) to non-US persons with regard to defence articles; the furnishing to non-US persons of technical data; and military training of non-US forces.

The ITAR require manufacturers and exporters of defence articles and defence services to register with the US Department of State, Directorate of Defence Controls (DDTC). Registration by itself does not confer any authorisation to engage in export activity, but rather is a prerequisite to applying for export authorisation. Registrants are required to notify DDTC of material changes to the information set out in their registration statement, such as changes in ownership, directors or senior officers.

The USML consists of 21 categories of controlled articles. For example, Category I sets out a list of controlled firearms; Category VIII sets out a list of controlled aircraft; Category XIV sets out a list of controlled toxicological agents; and so forth. One notable aspect of the USML is that it controls both specifically enumerated items and catchall categories of items “specially designed” (or, for certain categories, “specifically designed”) for a certain use. For example, Category IV(a) and (b) controls certain enumerated types of rockets, space launch vehicles, missiles, and launchers, while Category IV(c) controls devices “specially designed” for the handling and control of such items.

The ITAR require a license for the export and temporary import of defence articles and for the export of defence services. For defence service exports, exporters can enter into Manufacturing License Agreements or Technical Assistance Agreements, subject to DDTC approval, that permit the transfer of technical data and furnishing of defence services to non-US parties. Exemptions from licensing requirements are available, including exemptions related to intra-company transfers, and exports to certain favoured countries, including Canada, Australia, Japan, New Zealand, Switzerland, NATO Member States and EU Member States. It is important to note that the exemptions are highly complex and narrowly tailored.

Like the EAR embargo regime, the ITAR set out a list of proscribed countries for which exports and imports are subject to a policy of licensing denial. These include[Page218:]countries subject to UN arms embargoes and other countries with which defence trade has been determined to be contrary to the national security interest of the United States. As of April 2017 the list of proscribed countries consisted of: Afghanistan, Belarus, Burma, Central African Republic, China (PR), Cuba, Cyprus, Democratic Republic of Congo, Eritrea, Haiti, Iran, Iraq, Lebanon, Libya, North Korea, Somalia, Sudan, Syria, Venezuela and Zimbabwe. For certain types of exports to certain countries, DDTC will consider license applications on a case-by-case basis, such as for exports to coalition forces in Afghanistan.

2.4 EU Export Controls

The European Union controls the export and brokering of dual-use items under authority of the EU Dual-Use Regulation.²⁶The Annexes to the Dual-Use Regulation set out lists of items that are subject to control. The Dual-Use Regulation is automatically binding on Member States, and establishes a baseline level of control. Member States are free to impose additional controls as they see fit.

There is no EU-wide regime for military export controls. Rather, each Member State controls military exports individually, which is reflective of the particularly sensitive national security concerns related to defence articles. The European Union does promulgate a Common Military List of controlled items,²⁷which is designed to enhance cooperation between the Member States, but is not binding. Additionally, under Common Position 2003/468/CFSP, Member States are required to regulate arms brokering activities carried out in their territory or by their nationals.

The European External Action Service (EEAS), through its Division for Disarmament, Non-Proliferation and Arms Export Control, is active in monitoring EU arms export control and promoting transparency. The EU Code of Conduct on Arms Exports establishes eight criteria for Member States to consider in reviewing arms export license applications:

1. Respect for Member States’ international obligations and commitments, in particular the sanctions adopted by the UN Security Council or the European Union, and agreements on non-proliferation and other subjects;
2. Respect for human rights in the country of final destination as well as respect by that country of international humanitarian law;
3. The internal situation in the country of final destination – Member States will not allow exports that would provoke or prolong armed conflicts or aggravate existing tensions or conflicts in the country of final destination;
4. Preservation of regional peace, security and stability;
5. Security of Member States and of territories whose external relations are the responsibility of a Member State, as well as that of friendly and allied countries;
6. Behaviour of the buyer country with regard to the international community, as regards in particular its attitude to terrorism, the nature of its alliances and respect for international law;
7. Existence of a risk that the military technology or equipment will be diverted within the buyer country or re-exported under undesirable conditions; and
8. Compatibility of the exports with the technical and economic capacity of the recipient country, taking into account the desirability that states should meet their legitimate security and defence needs with minimal diversion of human and economic resources for armaments.²⁸

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2.5 Recent Developments

2.5.1 Intrusion Software

One notable recent export control development has been the ongoing effort to implement controls over “intrusion software” as called for by a 2013 plenary session of the Wassenaar Arrangement.²⁹The policy aims of the new measure are to protect activists and opposition figures from monitoring by authoritarian governments, and to keep software and technology out of the hands of malicious hackers. The European Union implemented these controls in December 2014 by adding such software to the list of controlled items set out under the EU Dual-Use Regulation.³⁰

In the United States, BIS issued a proposed rule in May 2015 that would add intrusion software items to the CCL, resulting in new licensing and reporting requirements.³¹As proposed, the rule would have imposed a worldwide licensing requirement (with the exception only of Canada) for any transfer across borders or to non-US nationals of 1) items that generate, operate, deliver or communicate with “intrusion software”; and 2) “carrier class” IP network communications surveillance items.

Public comments in response to the proposed BIS rule were generally quite negative, and the controversy has led to criticism of the Wassenaar effort to control “intrusion software,” because the term as defined poses a significant risk of capturing not only malicious items, but also a broad range of more benign items designed to detect and counter such malicious intrusion software. In light of these difficulties, the United States may seek to rework the Wassenaar rule. This effort could create transatlantic discord, however; in late 2016, the European Commission moved in the opposite direction, proposing new and more stringent controls on “cyber-surveillance technology.”³²

2.5.2 Cuba

In December 2014, President Obama announced that the United States would pursue normalised diplomatic relations with Cuba and would begin to ease restrictions on narrow types of Cuba-related activity undertaken by US persons. Beginning on 15 January 2015 and through several subsequent announcements, the Obama administration began easing aspects of the embargo that are subject to Executive Branch discretion.

In particular, BIS and OFAC have eased certain restrictions related to banking and finance, travel and related expenses, insurance, telecommunications, remittances, information exchange (e.g., journalism, publishing and conferences), NGOs and humanitarian activities, education, and the nascent Cuban private sector. Some of the most prominent changes include new authorisations for US financial institutions to open and maintain correspondent accounts at Cuban banks, process authorised Cuba-related credit and debit card transactions, and conduct wire transfers. These liberalisations reinforce key changes to the US-Cuba commercial relationship, which include authorising certain US exporters to license and market their services in Cuba, engage in transactions necessary to establish and maintain a “physical presence” in Cuba (e.g., maintaining a warehouse or assembling authorised US-origin goods), and establish a “business presence” in Cuba (i.e., business organisation or legal entity). Although tourist and personal travel remains prohibited, twelve other areas of travel – including business-related travel – are now authorised by general license, meaning that travellers can self-classify their mode of travel and do not need to first receive approval from OFAC.

It is important to note that most aspects of the embargo remain in effect, and cannot be altered until Congress votes to terminate the underlying statutes.

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3.0 Anti-Boycott Regulations

The US Department of Commerce, Office of Antiboycott Compliance (OAC), and the US Department of the Treasury, Internal Revenue Service (IRS), administer separate anti-boycott regimes. The regulations are drafted broadly to discourage participation by US entities in any foreign boycotts or restrictive trade practices that the United States does not support, such as the Arab boycott of Israel. The anti-boycott regulations make it illegal or penalisable in some cases for a US person to support another country’s foreign boycott of a third country which the United States does not sanction.

3.1 OAC Regulations

The OAC’s anti-boycott regulations apply to all “US persons”, including individuals and companies located in the United States, and any foreign affiliate “controlled in fact” by a US company, conducting business in the “interstate or foreign commerce of the United States.”

According to the US Department of the Treasury, the countries that may require participation in, or cooperation with, boycotts include Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen. The OAC does not publish such a list, but US Congressional Research Service reports over the past several years have indicated boycott-related requests arising from Algeria, Bahrain, Bangladesh, India, Indonesia, Iran, Jordan, Oman, Malaysia, Mauritania, Nigeria, Pakistan, Sudan and Tunisia, among others. US persons should report certain “requests” to participate in a boycott to OAC, and certain conduct (including evasion) may be prohibited, unless an exception applies.

3.2 IRS Guidelines

Section 999 of the Internal Revenue Code of 1986, as amended (the “Code”), sets forth the statutory tax rules applicable to boycott activities. The Code does not prohibit any boycott activity. It does, however, impose substantial penalties on certain cooperation with or participation in an international boycott not sanctioned by the United States. In addition to the loss of tax benefits, the Code requires that a taxpayer report annually to the Internal Revenue Service (IRS) if the taxpayer “has operations in, or related to” countries that engage in boycotts not sanctioned by the United States.

The Treasury Department has published a series of guidelines that interpret Section 999 (“the Boycott Guidelines”). As noted above, the US Department of the Treasury publishes a list of countries that it has determined require participation in an unsanctioned boycott. However, where a taxpayer knows, or has reason to know, that a country that is not on the list requires participation in an unsanctioned boycott, then the taxpayer is required to apply the Section 999 rules to operations in or related to that country.

4.0 Sanctions

States impose sanctions on other states, entities and individuals in order to further foreign policy and national security interests. Sanctions are used by states – either unilaterally or jointly in conjunction with other states – to curb state activities that are contrary to international norms, or to express disapproval of certain policies or acts of other states. Sanctions are also used to hinder the ability of designated individuals and entities that support terrorism, engage in human rights abuses, promote WMD proliferation, or other similar unwanted behaviours.

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4.1 UN Sanctions

Chapter VII of the UN Charter requires UN members to implement multilateral sanctions imposed by the UN Security Council. Under the United Nations Charter, the Security Council has the authority to implement a broad set of sanction measures that do not involve the use of armed forces against a state, a group of states, individuals or other entities.³³Since 1966, the Security Council has established 26 sanctions regimes.³⁴ States, however, can impose sanctions that go beyond what is required by the Security Council.

4.2 US Sanctions

The President has broad authority under US law to impose sanctions as he or she sees fit. In particular, the International Emergency Economic Powers Act (IEEPA) authorises the President to impose economic sanctions by declaring a “national emergency” with regard to a targeted country or circumstance, and impose a broad array of restrictions involving the targeted country, entity or individual.³⁵ The President can also impose sanctions – such as those targeting Cuba – under the Trading with the Enemy Act (TWEA).³⁶ Other relevant statutes include the International Security and Development Cooperation Act (ISDCA),³⁷ which the President has used to restrict trade with targeted countries (Iran), and the United Nations Participation Act (UNPA),³⁸which authorises the President to implement into US law those sanctions measures required by resolution of the U.N. Security Council. The US Congress has also enacted specialised sanctions legislation requiring the imposition of economic sanctions on particular countries or sub-governmental organisations (such as terrorist groups).³⁹ Congress has passed other statutes authorising the President to impose sanctions in particular circumstances.⁴⁰In addition, state and local governments also have become active in the area of economic sanctions.⁴¹

In recent years, there has been an upsurge in the imposition of sanctions in response to matters deemed contrary to US foreign policy. Notably, the United States has increasingly employed sanctions as an alternative to the use of force in responding to conflicts or crises, as in the case of Russia’s annexation of Crimea and intervention in eastern Ukraine.⁴² The United States has also used sanctions in conjunction with the use of force, as in the case of the NATO campaign in Libya.⁴³

There are four main types of US sanctions programme, which are administered by the Office of Foreign Assets Control (OFAC) in the Department of the Treasury:

• Embargoes restricting virtually all trade between the United States and certain designated countries;
• Targeted country programmes that target certain actors, such as government officials, government agencies, and state-owned enterprises, in certain countries;
• Targeted individual/entity sanctions that are not specific to any country, but rather target particular individuals and entities based on their participation in activities that are contrary to US foreign policy; and
• Secondary sanctions that seek to restrict non-US individuals and entities from engaging in certain types of business or other activity that is outside US jurisdiction, but that the United States deems contrary to its foreign policy, such as business with certain economic sectors of a country subject to US sanctions (notably, Iran).

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The first three categories, “primary” sanctions, are generally applicable to “US persons,” defined to include persons located within the United States; US citizens, wherever located; US lawful permanent residents, wherever located; and entities organised under the laws of the United States, including their foreign branches. For the most part, US primary sanctions are not applicable to non-US-incorporated subsidiaries of US companies, with the exception of the Cuba and Iran sanctions programmes.

4.2.1 Embargoes

US embargo programmes restrict most trade between US persons and the embargoed country. Restricted trade can include imports from the embargoed country, exports and re-exports to the embargoed country, new investment in the embargoed country, and transactions in goods originating in the embargoed country. As of April 2017, the following countries/regions were subject to a US embargo: Cuba, Iran, North Korea, Sudan, Syria and the Crimean region of Ukraine.⁴⁴Strict controls on trade notwithstanding, certain embargo regimes permit exports of certain food, medicine and medical devices, among other narrow categories of authorised trade.⁴⁵

4.2.2 Targeted Country Programmes

The United States maintains sanctions against certain targeted actors in certain countries based on their participation in activity determined to be contrary to US foreign policy. Typically, the sanctioned persons are involved in activity such as human rights or electoral abuses, or occupy a significant position in a regime that is hostile to US interests.

As of April 2017, individuals in the following countries were subject to targeted sanctions: Belarus, Burundi, Central African Republic, Democratic Republic of Congo, Iraq, Lebanon, Libya, Russia, Somalia, South Sudan, Ukraine, Venezuela, Yemen and Zimbabwe.

Where an individual or entity is sanctioned, the person is designated on OFAC’s List of Specially Designated Nationals (SDN List), and the person is “blocked”. As a “blocked” person, the person’s assets in the United States or in the possession or control of a US person (such as a US bank) are frozen, and all US persons worldwide are prohibited from engaging in any transactions or dealings with the sanctioned person. These restrictions also apply to any entity owned 50 % or more by an SDN or any combination of SDNs.

RUSSIAN SANCTIONS

US sanctions targeted at Russia are worthy of particular mention. The Russia sanctions programme can be described as an “enhanced” targeted country programme, but is not an embargo programme. Under the Russia sanctions programme, the US Government can designate SDNs for “blocking,” and further can designate sectors of the Russian economy for targeted trade and financial restrictions. To date, the US Government has targeted the Russian financial, energy, and defence sectors for such “sectoral” sanctions.

4.2.3 Targeted Individual/Entity Sanctions

The United States administers certain sanctions programmes by which it targets individuals and entities engaged in activities such as support for terrorism, WMD and nuclear proliferation, human rights abuses, narcotics trafficking, transnational crime and cyber attacks. These programmes are not targeted at particular countries, but[Page223:]rather focus on persons involved in the foregoing types of activity, wherever located. Thousands of sanctioned persons are listed on the SDN List, and are subject to the “blocking” restrictions described above.

Consolidated screening against the SDN List and several other restricted lists (including the BIS Entity List) is available online at http://export.gov/ecr/eg_main_023148.asp

4.2.4 Secondary Sanctions

The United States maintains “secondary” sanctions intended to dissuade non-US persons from engaging in certain types of business with Iran. Until January 2016, these secondary sanctions sought to restrict non-US persons from dealing with the Iranian energy, shipping, shipbuilding, and auto sectors, as well as dealing with Iranian SDNs and the Islamic Revolutionary Guard Corps (IRGC) and its affiliates. Many of these restrictions were lifted when the United States implemented sanctions relief under the Joint Comprehensive Plan of Action (JCPOA) agreement related to Iran’s nuclear programme, although the restrictions related to Iranian SDNs and the IRGC remain in place.⁴⁶ Where a non-US person is determined to have engaged in activity restricted under secondary sanctions, that person is subject to a range of potential sanctions, including blocking, trade restrictions, and loss of access to the US financial system.

It should be noted that the US Congress has enacted certain secondary sanctions applicable to Russia, though President Obama indicated at the time of signing that he did not intend to enforce such sanctions.⁴⁷ The Trump administration has not made any comment regarding these secondary sanctions.

4.3 EU Sanctions

Like the United States, the European Union administers various trade sanctions programmes in furtherance of EU policy regarding terrorism, human rights, proliferation and respect for countries’ territorial integrity. The European Council imposes economic sanctions based on the unanimous vote of EU Member States. After the Council imposes sanctions, Member States are responsible for implementation, administration and enforcement of the sanctions.

Most EU sanctions programmes are similar to US “targeted country programmes” described above, and target individuals and entities involved in human rights abuses, undermining of democratic processes, and misappropriation of state funds. As of April 2017, the following countries were subject to targeted EU sanctions programmes: Afghanistan, Belarus, Burundi, Central African Republic, Democratic Republic of the Congo, Egypt, Iran, Iraq, Libya, North Korea, Republic of Guinea, Republic of Guinea- Bissau, Russia, Somalia, South Sudan, Sudan, Syria, Tunisia, Ukraine, Yemen and Zimbabwe. Additionally, like US sanctions, EU sanctions target designated transnational terrorists.

When the EU Council designates a person for sanctions, that person is subject to having its assets frozen by the EU, and an EU person is prohibited from making any “economic resources” available to that person.⁴⁸This is the EU equivalent of a US “blocking” order.

Certain EU sanctions programmes also restrict trade with a sanctioned country or region. These programmes include the Iran, Russia and Crimea programmes. The trade restrictions targeting these countries, while in general not as severe as those imposed under the US embargo programmes, are nonetheless significant.

4.4 Recent Developments

One of the most significant sanctions-related developments in recent history took place in January 2016, when the United States and the European Union implemented sanctions relief as part of the JCPOA nuclear agreement with Iran. As noted above, the United States lifted most secondary sanctions targeting Iran,⁴⁹ while the European Union lifted most Iran-related sanctions.⁵⁰Additionally, the United States issued a general license authorising non-US subsidiaries of US companies to engage in most trade with Iran, subject to certain conditions.⁵¹As of April 2017, the JCPOA remains in effect, although the Trump administration has initiated a review of sanctions relief under the deal. In addition to Iran, the United States and the European Union recently eased sanctions targeting other countries. As explained in Section 2.5.2 above, the Obama administration eased sanctions against Cuba, a move the Trump administration had not disturbed as of 6 July 2017, although in June 2017 the Administration announced a limited rollback of sanctions relief that it will implement eventually through regulation. Furthermore, the United States has issued and repeatedly renewed a series of six-month general licenses partially suspending sanctions agains Belarus,⁵²while the European Union has terminated most (but not all) sanctions against Belarus.⁵³Moreover, in October 2016, President Obama issued an Executive Order terminating most sanctions against Burma.⁵⁴Also, in January 2017, the Obama administration issued a general license suspending most aspects of the US embargo against Sudan.⁵⁵

Additionally, nations continue to expand the scope and targets of sanctions. In December 2015, the UN Security Council adopted Resolution 2253, which builds on previous resolutions targeting terrorist financing, with a particular focus on the Islamic State terrorist organisation. The resolution calls on states to describe what steps they are taking to cut off terrorist organisations’ access to financing, such as by interdicting oil sales. The resolution follows previous resolutions targeting the Islamic State, including measures intended to cut off the group’s profits from oil sales and antiquities trading.

In April 2015, President Obama issued Executive Order 13694,⁵⁶which for the first time imposes US sanctions on persons engaged in “significant malicious cyberenabled activities” that harm US interests. The order authorises OFAC, in consultation with the Attorney General and the Secretary of State, to sanction any person that engages in “cyber-enabled activities” that pose a significant threat to US national security, foreign policy, economic health, or financial stability where the purpose or effect of those activities is to:

• Harm computers or computer networks that support the “critical infrastructure sector”;
• Significantly compromise the provision of service in the “critical infrastructure sector”;
• Cause a significant disruption to the availability of a computer or computer network; or
• Cause a significant misappropriation of funds, trade secrets, personal identifiers or financial information for commercial advantage or private financial gain.

In October 2015, the European Union imposed sanctions on persons in Burundi involved in the violent repression of dissidents,⁵⁷and the United States followed suit in November 2015.⁵⁸Furthermore, in December 2015, President Obama signed into law the Hizballah International Financing Prevention Act of 2015, which authorised new sanctions targeting Hizballah (also known as Hezbollah), its media arm al-Manar, and non-US persons who support and finance Hizballah’s operations.⁵⁹

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5.0 Compliance With Export Control and Sanctions Regimes

It is good practice for exporters and other companies active internationally to maintain export control and sanctions compliance programmes. This is true of companies of all sizes, from large multinationals to small entities, although compliance programmes should be tailored to the resources and level of export activity of the company.

Compliance programmes typically include a statement of management’s commitment to compliance, set out the key legal restrictions at issue, and prescribe specific processes and procedures to ensure compliance. Compliance programmes can be effective in helping to prevent violations, and authorities may treat the existence of a compliance programme as a mitigating factor in an enforcement action. The Appendix consists of lists put out by the State Department and the Commerce Department of “red flags” that should alert exporters to possible concerns about particular transactions.

In the event of a possible violation of export or sanctions regulations, a company should take steps to investigate the key facts relating to the potential violation, identify the root cause of the violation, and implement corrective actions to prevent future violations. Additionally, the company should consider submitting a voluntary disclosure to the agency with jurisdiction over the potential violation. Often, agencies will accord a company mitigation credit for submitting such a voluntary disclosure, although companies should weigh this against the governmental scrutiny and negative publicity that a disclosure could invite.

In the United States, procedures for disclosures to BIS, DDTC, and OFAC are welldefined, and disclosures are fairly common. Voluntary disclosures appear to be less common in Europe, although the process may be beginning to mature somewhat in the United Kingdom, which seems to be moving closer to the United States in terms of export and sanctions enforcement procedures.

6.0 Export Controls and Sanctions in the Trade Agreement Context

Unless covered by one of the GATT exceptions, restrictions on exports imposed by export controls or sanctions would run afoul of Article XI of the GATT, which prohibits restrictions on exports as well as on imports. Article XXI of the GATT, the National Security Exception, provides an exception for actions taken in accordance with UN obligations, which would apply to UN-imposed sanctions.

Article XXI also allows a WTO Member to implement measures it considers “necessary for the protection of its essential security interests” relating to, among other, traffic in arms or ammunitions or “taken in time of war or other emergency in international relations”. Free trade agreements contain similar “national security” or “essential security” exceptions.⁶⁰Export control and sanctions measures implemented to protect national security may fall within the scope of such exceptions, although the exact extent of the exceptions is not clear as the WTO has not ruled on the issue.

It looked as though some light might be shed on this issue in 1996, when the European Communities (EC) instituted proceedings in the WTO against the United States regarding the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act, which the EC claimed violated several articles of GATT and GATS. However, the[Page226:]proceedings were withdrawn in 1997 before the panel proceedings began, after the parties agreed to work towards a mutually agreeable policy regarding confiscation of property in Cuba.⁶¹Most significantly, the United States had indicated after the filing of the case that it would not take part in the proceeding on the ground that its position that the Act was covered by Article XXI as “necessary for the protection of its essential security interests” was entirely within its discretion and could not be adjudicated by the WTO.⁶²A ruling in favour of the United States would have opened the way for any Member to justify a trade restraint on the ground of national security without fear of challenge.

In the absence of further guidance from the WTO or other trade bodies, it is prudent for a company to assume that, even after implementation of a trade agreement, export control and sanctions restrictions remain in effect and operate independently of the trade agreement. Individuals and companies relying on a trade agreement to conduct business in a new country or sector should ensure that their business is compliant with applicable export and sanctions laws.

Appendix: Red Flags Identified by US Regulatory Agencies

Exporters should be aware of certain “red flags” that US regulatory agencies have identified as warranting concern when present in an export transaction. This “red flag” guidance, while not exhaustive, can help exporters in avoiding violations or participating in unlawful diversion activity.

The US Commerce Department guidance, which is available at: www.bis.doc.gov/ index.php/enforcement/oee/compliance/23-compliance-a-training/51-red-flagindicators, identifies the following circumstances as red flags:

• The customer or its address is similar to one of the parties found on the Commerce Department’s [BIS] list of denied persons;
• The customer or purchasing agent is reluctant to offer information about the end-use of the item;
• The product’s capabilities do not fit the buyer’s line of business, such as an order for sophisticated computers for a small bakery;
• The item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment being shipped to a country that has no electronics industry;
• The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing;
• The customer has little or no business background;
• The customer is unfamiliar with the product’s performance characteristics but still wants the product; Routine installation, training, or maintenance services are declined by the customer;
• Delivery dates are vague, or deliveries are planned for out-of-the-way destinations;
• A freight-forwarding firm is listed as the product’s final destination; [Page227:]
• The shipping route is abnormal for the product and destination;
• Packaging is inconsistent with the stated method of shipment or destination; or
• When questioned, the buyer is evasive and especially unclear about whether the purchased product is for domestic use, for export, or for re-export.

The State Department guidance, which is available at: www.state.gov/strategictrade/ overview/, identifies the following circumstances as potential red flags:

A customer or agent:

• Is reluctant to provide end-use/user information
• ; Is willing to pay cash for high-value shipments;
• Has little background or history in the relevant business;
• Appears unfamiliar with the product or its use;
• Declines normal warranty/service/installation;
• Orders products/quantities incompatible with the relevant business; or
• Provides vague delivery dates or locations.

A shipment involves:

• Private intermediary in major weapons sale;
• Freight forwarder designated as consignee/end-user;
• Intermediate consignee’s business or location incompatible with end-user’s;
• Shipments directed to trading companies, freight forwarders, or companies with no connection to buyer;
• Requests for packing inconsistent with normal mode of shipping; or
• Choice of circuitous or economically illogical routing, or through multiple countries.

The end-user requests:

• Equipment inconsistent with inventory;
• Spare parts in excess of projected needs;
• Performance/design specs incompatible with resources or environment; Technical capability/end-use incompatible with consignee’s line of business;
• End-use at variance with standard practices;
• Middleman from third country to place order; or
• Refuses to state whether goods are for domestic use, export, or re-export.

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