50 USC 58 II, also known as the War and National Defense, Export Control Reform and Anti Boycott Act of 2018 has key rulings related to boycotts. Buried deep in the law lies the 2018 John S. McCain National Defense Authorization Act – Anti-Boycott Act of 2018 which gives the little-known Office of Anti-Boycott Compliance its license to ensure you do not participate in any boycott of Israel or any Israeli settlement.
A Practical Understanding of U.S. Anti-Boycott Compliance:
The United States anti-boycott laws are an often-overlooked part of export compliance. In response to the Israeli war with Hamas in Palestine, this is a good time to remind businesses of the basics for U.S. anti-boycott compliance and its practical application in day-to-day operations. These rules are significant for all U.S. interests, whether manufacturers, distributors, freight forwarders or even the foreign subsidiaries of domestic interests.
What are Anti-Boycott Regulations?
Anti-Boycott regulations address how companies can and should respond when receiving requests from foreign parties to effectively boycott certain countries or businesses from those countries that are friendly to the United States (e.g., Israel). The anti-boycott rules are found at 15 CFR Part 760 and at 26 USC § 999. Typical boycott requests that can trigger these provisions include requirements to refuse business to another country, or a company domiciled in that country, and agreement to otherwise discriminate against businesses or persons based on their race, sex, national origin or nationality. The Dept. of the Treasury publishes a list on a periodic basis identifying frequent boycotting countries. Boycott-related requests are actionable regardless of whether the issuing country or entity is on such a list. In general, boycott requests must be reported to the federal government regardless of whether or not they are acted upon.
Who must report boycott requests?
United States persons must report boycott requests received in connection with transactions or activities in the interstate or foreign commerce of the United States. [15 CFR § 760.1] The term “United States person” refers to any person who is a United States resident or national, including individuals, domestic concerns and “controlled in fact” foreign subsidiaries, affiliates or other permanent foreign establishments of domestic concerns. This includes any foreign concern’s subsidiary, partnership, affiliate, branch, office or establishments in the U.S. as well as any domestic concern’s foreign subsidiary, partnership, affiliate, branch office or establishments controlled in fact by such domestic concern. [15 CFR § 760.1(b)(1)] Also, foreign “controlled groups” that hold a parent-subsidiary relationship in which a parent holds a majority interest in one or more chains of corporations are included in the category of companies subject to these provisions. [IRC § 999] A request received by a U.S. person located outside the United States (that is, a foreign subsidiary, partnership, affiliate, branch, office or other permanent foreign establishment that is controlled in fact by any domestic concern, as determined under § 760.1(c)), is reportable if it is received in connection with a transaction or activity in the interstate or foreign commerce of the United States. [15 CFR § 760.5]
What are the reporting requirements?
The mere receipt of a boycott request triggers compliance obligations. Any United States person that receives a boycott request is required to report that receipt to the Department of Commerce. [15 CFR § 760.5] Importantly, boycott-related requests are generally reportable regardless of whether the recipient complies with the request or not. If the request was received in the United States, the report must be filed with the Department of Commerce within one month following the end of the quarter during which the request was received. If received outside the United States, the United States person receiving the request has one additional month to report. Additional reporting requirements exist under the Internal Revenue Code, which requires taxpayers to report whether it or any member of its controlled group has participated in or cooperated with a boycott at any time during the taxable year.
What do companies with a U.S. Nexus need to know?
If your business is subject to complying with the anti-boycott requirements, you should:
- Screen for boycott-related terms and phrases: A key starting point for ensuring compliance with U.S. Anti-boycott Laws is to screen all transactional and non-transactional documents involving customers in, or shipments to, Arab League countries participating in the boycott of Israel as well as the other countries where boycott-related requests typically occur.
Transactions involving banks based in these countries should also be scrutinized for potential boycott-related language. It is important to recall that boycott-related requests can also be oral, for example, transmitted over the phone or during a meeting.
- Train your employees on how to spot boycott-related language: It is critical that your employees are adequately trained on U.S. Anti-boycott Laws and the various permutations that boycott-related requests make take. Employee education is necessary to ensure that your employees have the skillset and tools to properly screen for problematic and reportable requests.
- Establish a process for reporting: Establish a process to ensure that all reportable boycott-related requests are reported fully and on a timely basis to the Commerce and Treasury Departments. This process should capture all company locations, including those outside the United States, which are subject to the reporting requirements. This may be best achieved by funneling the requests to a centralized reporting unit (for example, the business’ headquarters) who will handle the reporting for the entire business. This process should also include an internal procedure for those having direct contact with your counterparties and other third parties to know how to spot potential boycott-related language and the next steps they should follow if they receive such boycott-related requests.
- Audits: Periodically audit the firm’s transactions to ensure that the anti-boycott processes and procedures are effective and implemented properly.
- Record keeping: Ensure that records of boycott-related transactions and reports submitted to the U.S. Government are kept for the period of time required under the relevant set of rules. Under the Commerce Regulations, this period is five years after the completion of a transaction or the receipt of a boycott-related request; under the Treasury Rules, records should be kept for at least the period during which the firm’s tax return is subject to audit.
Do U.S. states use the Anti-Boycott Laws to penalize companies that cut ties with Israel?
There is much controversy surrounding individual states penalizing companies who participate in a boycott. The controversy stems from an individual right to freedom of speech and expression. The U.S. Supreme Court will likely be tied up in this case for a time to come. Thus, it is incumbent on you, a U.S. person subject to U.S. laws, to recognize when you’ve been asked to support a boycott and to report that request to the government. It is also incumbent upon you to not support a boycott nor engage in your own boycott.
What is the global context for this?
U.S. Anti-boycott Laws and regulations prohibit or penalize U.S. companies, including in some instances their non-U.S. affiliates, from participating in or supporting international boycotts against countries friendly to the United States. There are also reporting requirements under these laws that require U.S. companies (and in some cases, their non-U.S. affiliates) to report the ‘receipt’ of requests to participate in such boycotts, even if the company does not respond to or comply with the request.
The primary target of U.S. Anti-boycott Laws is the Arab League’s boycott of Israel, a set of rules adopted by the Arab League to hinder and, in some cases, fully prohibit trade with Israel. There are three ‘levels’ of the Arab League boycott of Israel that form the basis of U.S. Anti-boycott Laws:
- Primary boycott – Some Arab League countries refuse to deal with Israel or in any goods or services from Israel or of Israeli origin. U.S. Anti-boycott Laws generally permit compliance with primary boycotts, subject to certain conditions.
- Secondary boycott – Some Arab League countries refuse to deal with companies that conduct business with or in Israel. The Arab League maintains a blacklist of such companies against which the secondary boycott is enforced. U.S. Anti-boycott Laws generally prohibit or penalize the participation of U.S. companies in secondary boycotts, subject to certain carveouts and exceptions.
- Tertiary boycott – Some Arab League countries refuse to deal with companies that conduct business with blacklisted or boycotted entities. U.S. Anti-boycott Laws generally prohibit or penalize the participation of U.S. companies in tertiary boycotts, subject to certain carveouts and exceptions.
It is important to keep in mind, however, that while the principal focus of U.S. Anti-boycott Laws is the Arab League’s boycott of Israel, U.S. Anti-boycott Laws apply to all boycotts imposed by foreign governments against countries friendly to the United States. In fact, boycott-related requests may originate from any country.
U.S. Anti-boycott Laws can be difficult to navigate for a variety of reasons:
- They are administered and enforced by two different U.S. agencies that sometimes take different approaches to the same boycott-related requests.
- Boycott-related requests are often nestled into long transactional documents without any signpost or warning; language that appears to have nothing to do with boycotts on its face may in fact be a disguise for a boycott-related request.
- Certain boycott-related requests are reportable even if complying with the requests themselves is permissible.
Understanding these complicated rules is critical, given their potential impact on U.S. and (in some cases) non-U.S. companies and the potential penalties and loss of tax benefits that may result from non-compliance.
If your business is subject to the U.S. Anti-boycott Laws, the best way to face the challenges posed is to develop a sound anti-boycott compliance program that covers screening of transactional and non-transactional documents, training your employees on these rules, establishing a process for reporting, auditing your controls in this space and ensuring proper record keeping.