Jon Yormick is a friend of Barclay Damon’s Canada-US Cross-Border Team and has assisted Barclay Damon clients in need of legal representation in logistics matters.
For more than a year, much of US export controls and economic sanctions have focused on actions taken relating to Russia’s invasion of Ukraine and efforts to deny China advanced items, technologies, and production equipment relating to its semiconductor sector. Many of these efforts are in close coordination with NATO and other allied countries. Despite this focus, other areas of export controls and economic sanctions cannot be overlooked, including by Canadian, European, Middle Eastern, and other non-US parties, including parents and subsidiaries of US companies operating outside the United States. Two recent actions taken by US regulators highlight the risk of the long arm of US export controls and economic sanctions.
Dubai Subsidiary Settles Violations of US Antiboycott Regulations With BIS
In May 2023, the US Department of Commerce’s Bureau of Industry and Security (BIS) announced a US$283,500 penalty against Regal Beloit FZE (Dubai), a controlled-in-fact foreign subsidiary of Beloit America, Inc., to settle 84 violations of the antiboycott provisions of the Export Administration Regulations (EAR). BIS reported that Regal (Dubai), located in the Jebel Ali Free Zone, voluntarily self-disclosed the violations, cooperated in the investigation conducted by BIS’s Office of Antiboycott Compliance (OAC), and took corrective actions after identifying the violations, all of which significantly mitigated the potential penalty that could have been assessed. Possibly signaling increased enforcement of the antiboycott regulations, this was the first antiboycott penalty since September 2021.
The Anti-Boycott Act of 2018, which is part of the broader Export Control Reform Act of 2018 (ECRA), and the EAR prohibit US persons—including subsidiaries, affiliates, branches, or offices of non-US parties that operate in the United States as well as foreign controlled-in-fact subsidiaries, affiliates, branches, partnerships, joint ventures, and offices of US entities—from taking actions in furtherance or support of or participating in an unsanctioned boycott maintained by a foreign country against a country friendly to the United States. As a practical matter, the antiboycott provisions of the EAR relate to the Arab League boycott of Israel. Prohibited activities include agreeing to refuse to do business with a boycotted country; furnishing information about a business relationship with a boycotted country; and accepting terms and conditions in purchase orders, contracts, RFQs, tenders, letters of credit, certification documents, and the like. In accordance with the EAR, requests to comply with these terms must be reported to the OAC.
Under a new policy announced in October 2022, Regal (Dubai) was required to admit to its conduct, specifically that between February 2017 and September 2021, it received 84 requests from a Saudi Arabian customer to not import any Israeli-origin goods into Saudi Arabia when fulfilling the customer’s purchase orders. Regal (Dubai) did not report these requests as required by the EAR.
US Sanctions Toronto Company and Owner Over Links to Supplying UAV Parts to Russia
Just one day after BIS announced its settlement with Regal (Dubai), the US Department of Treasury’s Office of Foreign Assets Control (OFAC) issued another wave of Russia-related sanctions, targeting Russia’s circumvention and evasion, military-industrial supply chains, and future energy revenues. Effective May 19, 2023, an additional 22 individuals and 104 entities, in more than 20 countries or jurisdictions, were sanctioned, including a Canadian numbered corporation—10219452 Canada Incorporated—located in Toronto and two Hong Kong companies—Asia Pacific Links Limited and IPS Pacific Company Limited—and the owner of these companies, Anton Sergeyevich Trofimov, a Russian national with residences in Hong Kong and Toronto.
In December 2022, it was reported by Reutersi that Reuters and iStories, a Russian media outlet, collaborated with a London-based defense think tank to uncover a supply chain trail spanning across the globe ending at an unmanned aerial vehicle (UAV) production facility in St. Petersburg, Russia. Based on reviews of Russian customs filings and other publicly available records, investigative reporters determined that through using indirect methods, Asia Pacific Links Limited provided millions of dollars in parts to Special Technology Centre, the manufacturer of the Orlan-10 reconnaissance UAVs that Russia has used in Ukraine for targeting artillery and rocket strikes. Limited Liability Company SMT-iLogic, an import company that reportedly shares an address with Special Technology Centre and has other ties to that company, and Chinese companies associated with SMT-iLogic were also sanctioned by OFAC the same day. Reuters reported that many of the parts that were ultimately received by Special Technology Centre were microchips from US manufacturers.
As a result of the OFAC sanctions, “US persons” are prohibited from engaging in business activities with Trofimov and his companies whether directly or through intermediaries. This action should be a stark reminder that parties subject to US sanctions are not only located in countries and regions that are subject to comprehensive sanctions or embargoes, namely Cuba, Iran, North Korea, Syria, and the Crimea and so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine. There have been numerous public statements and guidance documents issued in the United States and other countries warning of efforts to evade or circumvent sanctions against Russia as well as press releases announcing indictments, arrests, and civil penalties against those that are alleged to have done so.
When doing business across any border, proper restricted-party screening and due diligence efforts must be taken to avoid even unwitting violations of US export controls and sanctions most of which are strict liability offenses for which hefty penalties can be assessed. If you learn of an apparent or actual violation, submitting a voluntary self-disclosure to the relevant agencies not only is encouraged but under new enforcement policies, the failure to do so will be considered an aggravating factor when the agencies consider the penalty level.
iStephen Grey, Maurice Tamman, and Maria Zholobova, “The global supply trail that leads to Russia’s killer drones,” Reuters, December 15, 2022, https://www.reuters.com/world/europe/global-supply-trail-that-leads-russias-killer-drones-2022-12-15/.