Trade finance banks risk higher penalties under revised US antiboycott rules

Trade finance banks operating in the US risk higher penalties under a policy issued by Washington aimed at strengthening and enhancing enforcement of the antiboycott rules administered by the US department of commerce. The rules prohibit US support for unsanctioned foreign boycotts against countries friendly to the US, notably – but not exclusively – the Arab League boycott of Israel.

Letters of credit (L/Cs) that breach antiboycott rules are specifically contemplated in the policy which came into effect on 8 October. Trade finance banks are also at risk of breaching the rules by passing on underlying documents such as bills of lading that may provide information on business relationships with boycotted countries or blacklisted persons.

Several banks have entered into relatively moderate settlement agreements and paid a reduced penalty without having admitted to a violation of the rules under the now redundant policy.

Higher penalties

Under the new policy, the department says it will seek higher penalties for violations that most commonly and currently arise in commercial transactions in a boycott context, including those related to L/Cs and the provision of information on boycotted entities.

It has also said that these violations will be the focus of its antiboycott enforcement and subject to enhanced penalties, but provided no further detail regarding the increase in penalties.

Categories and non-US subsidiaries

Some violations have been recategorised in the new policy. Category A violations are the most serious; those related to L/Cs and the provision of information on boycotted entities are amongst those in Category B (downgraded from Category A in the previous policy), while Category C violations are the least serious.

The department has also said it will increasingly focus on bringing enforcement actions against non-US subsidiaries of US parent companies that violate the antiboycott provisions.

Admissions of misconduct

Entities that reach a settlement agreement related to antiboycott violations will now be required to admit to a statement of facts regarding the company’s misconduct.

Previous settlements for violations have been modest. Citibank agreed in 2018 to settle for US$60,000 after it was accused of 20 violations in supplying information about business relationships with boycotted countries or blacklisted individuals. The Miami branch of Banco Sabadell settled in 2012 for just US$14,000 for providing similar information in two transactions.

The department says the minimum penalty for Category A violations will be US$300,000 or twice the amount of the underlying transaction, whichever is the greater. Fines in the other categories will be tougher, but the department has not said how they will be calculated.

Geopolitical uncertainty

Citibank’s violations related to transactions with Kuwait, Oman, Lebanon, Qatar and the UAE as well as Pakistan, which is not a member of the Arab League and therefore not party to its boycott of Israel. Banco Sabadell’s breaches of antiboycott rules related to Syria.

The threat of tougher penalties and tougher enforcement for violations mainly involving transactions with Arab states that boycott Israel has come as a surprise to some commentators in the wake of some countries, including the UAE, Bahrain and Morocco establishing ties or permitting trade with Israel in the last three years.

But Saudi Arabia and Kuwait are amongst those countries that have never established diplomatic relations with Israel, neither has Pakistan.

Saudi-US relations

Saudi Arabia has enormous gravitational pull amongst Arab League states. Unless it signs up to the US-mediated Abraham Accords to establish relations between Arab states and Israel  – which is less likely to happen any time soon under US President Joe Biden than it was under the Trump administration that mediated the accords – the momentum created by the signing of the accords by the UAE, Bahrain and Morocco three years ago has at least been slowed down.

Foreign policy drivers

Besides, the US has two clear foreign policy reasons for higher penalties and tougher enforcement as stated in the announcement of the enhanced antiboycott policy.

Antiboycott laws preserve US foreign policy interests by preventing US businesses from implementing the foreign policy prerogatives of other countries.

They also prevent unlawful discrimination by US companies participating in unsanctioned foreign boycotts that would require them to implement discriminatory business or employment practices.

The department of commerce announcement of the enhanced antiboycott policy effective 8 October 2022 can be found here.

Examples of refusals and agreements to refuse to do business under the rules, including several examples of violation typologies related to L/Cs and the provision of information on business relationships with boycotted countries or blacklisted persons can be found here.

A complete list of violations in Categories A, B, and C can be found here.


Categories: Trade Based Financial crimes News

Tags: , , , , , , ,

%d bloggers like this: