|Date||January 15, 2009|
|Speaker||Dr. Harald HOHMANN(Atttorney / Senior Partner, Hohmann & Partner Attorneys)|
|Moderator||Dr. TAIRA Satoru(Professor of Law, Graduate School of Law, Osaka City University)|
An increasing number of German - and also of Japanese - companies fear the extraterritorial implications of the U.S. total Iran embargo, a situation which has lead to this study. This is a hypothetical case study that proposes that possibly affected companies take three steps in order to minimize their legal risks.
The study is based on an actual case, but uses fictionalized names. It concerns a Japanese export company named Domo Corp. that is 100%-owned by Domo International, Ltd., which is based in the UK and listed on the New York Stock Exchange (NYSE). Domo International has several CEOs, including a U.S. citizen named Mr. America, who conducts the company's daily business operations and is the only CEO functioning as a managing director. Mr. America is also active in the Japanese companies and can give instructions regarding export activities to Domo Corp., which wants to send several machines to Iran via China. Do any legal issues arise from the U.S. Iran embargo?
While discussions in the literature regarding extraterritorial applications of U.S. embargoes have been ongoing since the 1960s, recent extensions of applications have been seen, particularly with respect to the U.S. Iran embargo. Fears that Iran had been engaging in an increasing amount of trade with U.S. allies led the United States to implement measures to curb this trade. These measures included extending the definition of "U.S. Person," extending the use of the terms "related person" and "aiding and abetting," and possibly applying political pressure by the U.S. Treasury and Commerce Department, though this cannot be proven.
There are only two cases in which the U.S. Iranian Transaction Regulations (ITR) clearly prohibit foreign companies from exporting to Iran. The "export clause" (§ 560.204 ITR) prohibits exporting goods by a U.S. Person if undertaken with reasonable knowledge that such goods are intended specifically for supply or re-export to Iran. The "re-export clause" (§ 560.205 ITR) prohibits non-U.S. persons in third-countries from exporting any product containing listed U.S. components that account for 10% or more of the product's total value, if undertaken with reasonable knowledge that the product is intended for re-export to Iran. Given these conditions, Domo Corp. must strictly comply with the re-export clause.
The question then arises as to whether this Japanese company could also be regarded as a U.S. Person. While the term has been slightly modified at times, a "U.S. Person" may be any one of the following: individuals with residence rights in the U.S. (citizens, green card holders, permanent/temporary residents, etc.); companies established under the laws of the U.S. or any jurisdiction within the U.S.; foreign branches of U.S. companies; and "any person in the U.S."
One potential gray area includes foreign subsidiaries (not foreign branches) of U.S. companies. In this situation, a precise legal analysis is necessary to determine how independent the foreign subsidiary is from its U.S. parent company: In case of broad influence of the U.S. company, the Japanese company may be regarded legally more as a "foreign branch" of this U.S. company. A second gray area would involve the CEO of a foreign company who gives export instructions while he is physically present in the U.S. In this situation the CEO's personal status could affect the whole company. Other gray areas include foreign companies that are under heavy financial or management influence of U.S. companies, and situations where a U.S. Person is the main supplier for a foreign company.
To conduct a clear legal analysis of this case, we must analyze the pertinent circumstances of Domo Corp. (and Domo International) carefully. Regarding the company's NYSE listing, it is not enough to define the company as a U.S. Person. There are four concepts, under which the personal status of Mr. America, being a "U.S. Person," affects the legal status of the company: (1) deviation, (2) control, (3) "aiding and abetting" and (4) "related person."
Concerning concept 1, Mr. America as a U.S. Person is prohibited from authorizing Domo Corp. to export products to Iran (in order to avoid a crime for "deviation" of this U.S. embargo). The concept of control analyzes how much effective control Mr. America has over the day-to-day business (especially of export activities) of Domo Corp.: If he is able to influence the daily business operations of Domo Corp., then the whole company Domo Corp. should be regarded as a "U.S. Person" under the concept of control.
Concerning concept 3, It could be argued that Domo Corp. risks facing prosecution by "aiding and abetting" an embargo violation committed by Mr. America. Concerning concept 4, Domo Corp. could very likely be regarded as a "related person" to Mr. America, thus it would risk being placed on the Denied Persons List (DPL) along with Mr. America. All four concepts come to the same result: Mr. America's individual status as a U.S. Person has a legal impact on Domo Corp.'s legal status that would prohibit it from exporting to Iran.
Two open cases were up to now not included in this analysis. The first holds that while Domo Corp. is neither a branch nor a subsidiary of a U.S. company, it may be heavily influenced by U.S. companies, even though financial influence alone is not always sufficient. If management influence also becomes a factor, then Domo Corp. may be treated as a "U.S. Person," since it is now in a similar legal situation as a foreign branch of an U.S. company. The second case involves Domo Corp. finding out that its main supplier is a "U.S. Person" who is prohibited from doing business with Iran via a Japanese company (Domo Corp.). In this case there is a risk that Domo Corp. may be prosecuted for "aiding and abetting" the embargo violation committed by the main supplier.
Given the analyses of the case presented, three steps are recommended for Japanese companies which may be affected (i. e. companies in a position similar to that of Domo Corp). First, there should be a very clear understanding of new and heightened legal risks. Sanctions for non-compliance like fines (up to $1 million), imprisonment (up to 20 years), and denied export privileges for several years are too serious to be ignored. Legal analysis must be undertaken to find out exactly how high the risk factor may be for such prosecution. If the risk is high enough, the company must take action to mitigate the risk, e.g., by reorganization of the company.
Second, Japanese companies should voluntarily comply with only a few aspects of such U.S. embargoes to avoid bad press, i.e., the "New York Times effect." It must be determined whether the company is legally required to take any measures under the embargo stipulations. If the company is under no legal obligation, then voluntary compliance with some aspects of the embargo that do not hurt the company should be considered in order to minimize tensions. That may also prevent nongovernmental organizations (NGOs) from taking the initiative to publicly denounce a company even if it is not breaking U.S. laws. This bad press, warranted or not, could have an adverse effect on the company and may outweigh the benefit of conducting business with Iran.
Third, in addition, either protection should be afforded by the Ministry of Economy, Trade and Industry (METI) or cooperative measures - like diplomatic talks - should be continued. The first aspect of this approach is to find out whether METI is willing to protect Japanese companies in these types of cases, as the EC did in 1996 (with Regulation 2271/96), or with a World Trade Organization (WTO) panel procedure. More promising currently seems to be the second strategy, namely to engage in cooperation rather than confrontation, especially after the Commerce Department, on Jan. 5, 2009, asked for public comments on extra-territorial application of U.S. embargo measures. Diplomatic talks such as those undertaken by Japan through the Center for Information on Security Trade Control (CISTEC) committees have been very helpful for this purpose.
Given current economic conditions, the U.S. Commerce Department Bureau of Industry and Security's mentioned recent request for public comments and the Obama presidency, it is a very good time to take a diplomatic approach to such issues. Finally, partial voluntary compliance by Japanese companies may possibly increase the likelihood of voluntary concessions from the U.S. government.
Dr. Hohmann's presentation is concerned primarily with how to manage the risk caused by extraterritorial application of U.S. export control laws. The very broad extraterritorial application of law has long been considered a potential violation of international law by the governments of Japan and various other countries.
State jurisdiction can be divided into two categories: prescriptive (or legislative) jurisdiction, meaning the state's authority to apply its laws; and enforcement jurisdiction, meaning the state's authority to physically enforce its laws. Enforcement jurisdiction is based on the premise that prescriptive jurisdiction exists but can be exercised only within state territory.
Extraterritorial application of law is concerned with the problem of how far prescriptive jurisdiction of a state can be exercised beyond state territory. There are at least four grounds for prescriptive jurisdiction. They are the principles of territoriality, nationality, protection, and universality. Historically, extraterritorial prescriptive jurisdiction has been justified based on one of these principles or on their expansive concepts.
Such expansive concepts known as the objective or subjective territoriality principles have been around since the time people first began using rifles instead of archery. Antitrust law has been applied to the foreign conduct of foreign companies because of their anti-competitive effect on the territory of the state. Foreign subsidiaries have been subject to the jurisdiction of the states of their parent companies under the expansive concept of the nationality principle. The protective principle is applicable to behavior threatening the security of the state. Universal jurisdiction has been expanding and will continue to do so through the expansive concepts of universal crime, which include not only piracy and the slave trade, but terrorism as well. And recently, also proliferation of weapons of mass destruction or massive environmental pollution (under the concept of common concern of mankind) may trigger the universal jurisdiction.
It is difficult to say whether the extraterritorial application of U.S. export control laws is absolutely legal or illegal under current general international law. It may be said that there are concurrent jurisdictions of several states against one person or one thing. The real problem is then determining which state has priority. This priority problem may be serious when the policies of related states oppose one another. When the policies of related states are the same or similar, the priority problem may not be as serious. If the assertion of jurisdiction by each state is based on a policy of preventing terrorism, then the priority problem is not so important, since the exercise of jurisdiction of any one state will contribute to the attainment of such a policy. In relation to this point, extraterritorial prescriptive jurisdiction will be more justifiable when the policy behind it is more objective. For example, during the Cold War the U.S. asserted extraterritorial jurisdiction based upon subjective national security concepts, but the U.S. is now doing so based more upon objective international security.
On the other hand, unilateral U.S. embargoes can conflict with multilateral law, like WTO law. Regarding WTO law, our focus should be on whether Japan can engage in a WTO dispute settlement procedure with the U.S. The main issue would be whether or not the U.S. could invoke the security exception under Article XXI of the General Agreement on Tariffs and Trade. If the WTO panel tries to examine this problem, it would be placed in the awkward position of passing judgment on the security interests of a sovereign nation.
If the panel chooses to reject the U.S. invocation of Article XXI, it could conceivably escalate matters to the point where Congress reconsiders continuing U.S. participation in the WTO altogether. If the panel opts for blind deference to the U.S. allegation on Article XXI however, the resulting precedent could open the door for future abuses of the security exception. Such abuse could seriously undermine the effectiveness of the WTO dispute resolution mechanism in the long term. The problem can be viewed as a political question, and it is highly doubtful whether such a question is suitable for judicial review before a WTO panel. It would be in the best interests of the Japanese government to avoid moving in such a direction.
In conclusion, it is not so fruitful to discuss the legality or illegality of U.S. behavior under current international law. Therefore, it is more important for companies to undertake the risk management measures that Dr. Hohmann has proposed today.
Questions and Answers
Q: Should all U.S. employees be fired from non-U.S. companies? What would happen if Mr. America is fired in the middle of an export transaction with Iran? Would Domo Corp. still be punished?
This question implies that this regulation is not well thought out. Such an expansive regulation cannot really be expected to be effective. Regarding bilateral talks as cooperative measures, what is the situation with bilateral talks between the EU and the U.S.?
I am not sure of the current position of the EC. It may or may not have raised this issue in recent times. In the past, the approach was that the EC regulation 2271/96 would be a suitable instrument. This regulation prohibited all EC companies from complying with extraterritorial U.S. embargoes (at least with those U.S. embargoes explicitly mentioned in its annex). European companies that comply with an U.S. embargo can be fined. In addition, it is provided that an EC company could ask the EC member state of its residence to pay compensation for damage this company was suffering, be this due to loss or rupture of U.S. business or due to fines to be paid to the U.S. authorities, and this EC member state could try to re-finance this by seizure of assets of responsible U.S. companies in the EC. Up to now, this EC Regulation has not been applied by the EC, but it shall instead be implemented by some national legislation of EC member states (cf. in Germany sect. 70 para.5 f of the Export Trade Ordinance providing for high fines for violating this EC Regulation)
Not all U.S. employees need to be fired under the concept of control: We should focus on CEOs, members of the board and the top management. There have been cases in which there was a large U.S. influence on foreign companies, yet it was deemed legally unnecessary for those companies to comply with U.S. embargoes. In these cases, the influence of the persons in question on the company's daily business was not significant. The U.S. citizens, who should be removed, if you want to avoid compliance with U.S. embargoes, are especially managing directors who are able to control the company's day-to-day business, especially to control the export activities of foreign companies.
If this were to happen in the middle of an export transaction, the situation would fall into a gray area. It should be possible to resolve this by an attorney's legal opinion.
Q: Regarding U.S. citizens in managerial positions, does the U.S. embargo make any provisions for such citizens to recuse themselves from that particular part of the business? If not, would that provision be a useful defense against penalties under the U.S. embargo?
Are there provisions in the U.S. embargoes for cases where exceptions can be granted when a company would be in violation of its state's laws if it were to comply with extraterritorial application of the U.S. embargo?
There is no provision in U.S. law for distinguishing U.S. citizens from other U.S. Persons or for the case where a U.S. Person could have a legal impact on the company he is controlling. Instead, more general instruments like advisory opinions are available from the U.S. Commerce Department, in order to answer legally unclear issues. The only critical point is that the Commerce Department often does not accept anonymous advisory opinions.
Q: Could a business create a firewall between the offending parts of the business in order to shield itself from prosecution?
Yes. A company could reorganize and appoint a new managing partner who is not a U.S. Person. That would solve the issue. There is a more sophisticated solution: It often happens that the U.S. citizen or permanent resident of the U.S. holds several positions and no other person is capable of replacing him. In order to retain that executive in this case, several committees could be formed in relation to his positions that would work to limit the influence of his management on export cases to U.S.-embargoed countries. This, however, would be difficult to implement; it would require a complex combination of company law, control instruments and other regulations, which must also comply with U.S. export law. The best solution is, if the concrete form of reorganization of the company is legally evaluated by a specialized attorney.
Q: How do these regulations relate to the trade of financial services offered to Iranian banks?
Similar rules apply to financial services. There are sections in the embargo that deal with trade in goods, trade in services and trade in financial services; and the restrictions are very similar.
Q: Regarding the EC's countermeasures, the U.S. extraterritorial application is meaningful if a certain company has a branch in U.S. territory. In other words, if some assets of a Japanese company are in the U.S., U.S. authorities can charge the Japanese company regardless of whether it is an extraterritorial application or not. In this context, the EC regulations may be something of a relief for companies if the U.S. recognizes, in its own legal system, the effect of EC regulations. Can U.S. authorities exempt extraterritorial application of U.S. law for companies that are also subject to such EC regulations?
Yes, the risk of U.S. reprisals is more likely if a Japanese company has U.S. assets or a U.S.-based subsidiary. The law must be closely analyzed in order to answer this question correctly. There are limited chances for relief, namely for claiming of damages under EC Regulation 2271/96 to be directed against the EC member state (see answer to the first question, supra). However, the fact that companies under EC law were subject to EC Regulation 2271/96 did not exempt them under U.S. law from complying with U.S. embargoes. Thus, the affected EC companies had to comply with contradictory law: complying with U.S. embargoes and being prohibited from complying with U.S. embargoes at the same time.
Q: In Japan, Japanese companies are treated the same as U.S. subsidiaries and Japanese companies with U.S. CEOs. Do governmental export credit companies like Euler-Hermes in Germany treat U.S. subsidiaries differently from German companies due to the extraterritorial application of U.S. export laws?
It is possible that under export insurance programs, which are sponsored by the German government to encourage trade with foreign nations, German and other EC companies get more chances to obtain export insurance than do companies outside the EU. Such preference for EC companies vis-à-vis companies from third countries are the only differences concerning nationality that are accepted under EC Law. Any further differences drawn between domestic and foreign companies would be a violation of the WTO regulations of discrimination.
Q: There are many U.S. subsidiaries in Japan that are engaged in the export business. The Japanese government covers their exports in the same way as Japanese companies. Does Hermes act in the same way?
It is possible for EC export insurance companies, even state-owned export insurance companies, to differentiate on the following grounds. Applicable EC export law must always be complied with, including U.S. re-export law. The insurers can deny export insurance because of the high risk that their exports could violate U.S. re-export or embargo laws. Government-sponsored insurance companies must act carefully, making sure they do not support any possible embargo violations. It is the company's responsibility to determine that there are not any violations. It may also be possible for a government of an EC member state to enact sanctions against an insurer residing in this member state that openly violates EC (or U.S.) embargoes.
Q: Is the Domo case an actual case regarding a Japanese company? If not, could you please elaborate on a similar case that dealt with a Japanese company?
It is an actual case with fictionalized names, though the true nationalities must be kept secret. It is clear that when it comes to enforcement, the U.S. Commerce Department normally insists that cases be published on its websites. The Commerce Department's website will have information on enforcement. There have been Japanese companies involved in some of these cases. The last one that involved a Japanese company was an export of listed goods without export license, and the goods were wrongly declared "no export licenses required." There are more and more cases involving Japanese companies, compared to earlier in the decade when there were not many cases of export violations with Japanese companies.
*This summary was compiled by RIETI Editorial staff.