Improved Muslim-Israel Relations & U.S. Antiboycott Compliance
In the midst of the U.S. Presidential campaign, came positive economic and diplomatic news as members of the Trump administration brokered deals this summer and fall between Israel, Serbia and Kosovo; Israel and Bahrain; Israel and UAE; and Israel and Sudan. One practical question arising from these arrangements is what is the impact on U.S. companies’ antiboycott compliance?
While scholars will likely write lengthy articles if not books on this chapter of Middle East relations, my goal is to give a few basic facts to provide context to the antiboycott compliance question.
Serbia & Kosovo
Serbia and Kosovo were part of the former Yugoslavia. In 2008, majority ethnic Albanian and Muslim Kosovo declared its independence from Serbia. While most Western countries have recognized Kosovo’s independence, Serbia has not. Additionally, Kosovo and Israel have not recognized each other.
Results of the new arrangements include:
Serbia and Kosovo normalized economic ties but did not agree to mutual recognition.
Israel and Kosovo agreed to mutual recognition and will establish diplomatic relations.
Located in the Persian Gulf, Bahrain declared independence from the UK in 1971. Bahrain signed a “Declaration of Peace, Cooperation, and Constructive Diplomatic and Friendly Relations” and several memoranda of understanding with Israel in September 2020. Through the declaration and MOUs, Bahrain and Israel established full diplomatic relations and expanded economic potential in trade, air services, telecommunications, finance, banking, and agriculture.
United Arab Emirates
The UAE is a federal elective constitutional monarchy formed from a federation of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain. In September 2020, the UAE and Israel signed an agreement normalizing relations between their two nations which opens the door to develop commercial, diplomatic and security ties.
The Republic of the Sudan is located in Northeast Africa. In October 2020, the Sudan agreed to put $335 million in an escrow account for compensating U.S. victims of terror attacks. President Trump subsequently signed an executive order to remove Sudan from the terrorism list. Israel and the Sudan normalized relations and agreed to discuss cooperation in agriculture, trade, and other areas.
U.S. Antiboycott Law
Certain individuals and companies are required to report to the U.S. Internal Revenue Service (IRS) boycott requests and operations in boycott countries. Failure to report can result in administrative and/or criminal penalties. The U.S. boycott reporting regime extends beyond U.S. borders and can include foreign organizations. The boycott of greatest concern to U.S. organizations is the Arab League Boycott of Israel which was established pre-Israel statehood in 1945 and continued when Israel was established in 1948.
What Does the U.S. Mean by Boycott?
A relevant boycott involves entering into an agreement as a condition of doing business in a country where the agreement requires a person to refrain from:
doing business in or hiring employees from another country or
doing business with other persons that do business in or hire employees from the other country.
Boycotts in this context do not include those boycotts sanctioned by the U.S.
The IRS reporting requirement extends to three levels of boycotting:
Primary: This type of boycott is imposed by a country on individuals, entities, property, and transactions in the targeted country.
Secondary: This level of boycott extends the boycott beyond the targeted country to blacklisted persons (i.e., those doing business with the boycotted country’s government or one of its companies or nationals).
Tertiary: This is the most attenuated boycott level. It extends the boycott to countries or individuals doing business with the blacklisted persons affected by the secondary boycott.
Examples of Boycott Agreement Requests
Boycott requests can range from blatant to subtle. There is no cookie cutter approach taken by those trying to get you and/or your company to agree to engage in a boycott.
You should be alert to the below types of requests:
Agreements to refuse or actual refusal to do business with or in Israel or with blacklisted companies.
Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies.
Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin, or nationality.
Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person.
Implementing letters of credit containing prohibited boycott terms or conditions.
Who Is Covered by the U.S. Antiboycott Laws?
It is necessary to review your structure to determine which individuals or organizations may be covered by the U.S. antiboycott laws. Coverage includes U.S. corporations, individuals, partnerships, and trusts. The antiboycott regime also includes certain foreign corporations, individuals, partnerships, and trusts.
The reporting regime requires more than just the reporting of boycott requests. It also includes reporting (among other things) the existence of operations in countries implementing an international boycott.
Violations of the U.S. antiboycotting program can result in administrative and/or criminal penalties.
If there is a criminal judgement then each knowing offense can result in a fine of up to $50,000 or five times the value of the exports involved, whichever is greater, and imprisonment of up to five years.
Administrative penalties can result in:
A general denial of export privileges;
The imposition of fines of up to $11,000 per violation; and/or
Denial of all or part of certain foreign tax benefits.
Boycott requests must be reported quarterly. Boycott requests and the existence of operations in boycott countries must be reported annually.
If you believe you may have violated the antiboycott provisions, the Office of Antiboycott Compliance has a process of self-disclosure.
The U.S. Department of Treasury (“Treasury”) released its quarterly List of Countries Requiring Cooperation with an International Boycott during October 2020:
United Arab Emirates
While it has not yet removed the UAE from its list, Treasury noted it is “monitoring the situation of the United Arab Emirates, which has announced the issuance of a decree repealing its boycott law.”
Once the UAE is removed from the list, you will no longer be required to report the existence of your operations located in the UAE. You can update your compliance manual at that point.
Kosovo, Bahrain, and Sudan were not previously on Treasury’s list. As a result, there was no requirement to report operations located in these countries under U.S. antiboycott law.
The agreements that Kosovo, Bahrain, UAE, and Sudan entered into with Israel are not universally welcomed by their citizens. And even if a company in one of these nations previously included boycott language in its documents in solidarity with the Arab League boycott but chooses to embrace the change, the company still faces the task of employees updating standardized contracts, etc. Thus, it is important for you to remain vigilant in document review.