1. Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2015 Baker & McKenzie LLP Compliance With U.S. Antiboycott Laws Sylwia Lis, Partner December 11, 2015

2. © 2015 Baker & McKenzie LLP 2 Agenda  Overview  Examples of Boycott-Related Requests  Annex A: Examples of Analysis of Boycott Language under the Commerce regulations and Treasury rules

3. © 2015 Baker & McKenzie LLP Overview  Two sets of U.S. antiboycott rules administered separately by the Commerce Department and the Treasury Department  Both Commerce and Treasury Departments target foreign boycotts but their approaches differ in terms of the following:  Jurisdiction  What’s Permissible or Impermissible  Reporting requirements  Potential penalties  Differences can result in inconsistent results when companies seek to comply with both sets of U.S. antiboycott rules 3

4. © 2015 Baker & McKenzie LLP Overview Countries Involving Greatest Exposure for Potential Boycott Violations  Iraq*  Kuwait*  Lebanon*  Libya*  Qatar*  Saudi Arabia*  Syria*  Yemen*  United Arab Emirates*  Bahrain**  Oman**  Pakistan**  Bangladesh**  Indonesia** * “Boycotting countries” according to Treasury Department’s formal list (published quarterly) ** Other countries from which boycott requests frequently originate, although this list is not exhaustive 4

5. © 2015 Baker & McKenzie LLP Commerce Department  Part 760 of Export Administration Regulations (“EAR”)  Two-prong test:  “U.S. Person” (as defined for these purposes)  Activities in the “interstate or foreign commerce of the United States”  “U.S. Persons”  Companies in the United States  Foreign “controlled-in-fact” subsidiaries  Individuals (but not those residing outside United States working for non-U.S. company) 5

6. © 2015 Baker & McKenzie LLP Commerce Department  Transactions in U.S. interstate or foreign commerce:  Most activities by U.S. persons located in the United States (including exports from and imports into the United States)  Activities of foreign “controlled-in-fact” subsidiaries if involving:  U.S. goods or  U.S. services (except for “ancillary” services)  Potential civil and criminal penalties  Civil: $250,000 or twice the value of the transaction  Criminal: $1,000,000 fine or 20 years in prison 6

7. © 2015 Baker & McKenzie LLP Commerce Department Prohibitions and Reporting Requirements  Permissibility of an action under Commerce rules must be analyzed separately from whether a boycott request must be reported  In some instances, it may be permissible to accept certain boycott-related language but the request is still reportable  Specific requests exempt from the reporting requirements are set forth in EAR Section 760.5(a)(5)  Quarterly reports with Form BIS-621P – https://www.bis.doc.gov/index.php/enforcement/o ac#howtoreport https://www.bis.doc.gov/index.php/enforcement/o ac#howtoreport 7

8. © 2015 Baker & McKenzie LLP Commerce Department Antiboycott Prohibitions −Refraining from doing business with boycotted countries or blacklisted companies −Agreement to refrain from doing business −Providing discriminatory information (e.g., race, religion, sex, or national origin of another person) −Providing any information related to business relationships with boycotted countries or blacklisted companies 8

9. © 2015 Baker & McKenzie LLP Treasury Department  Section 999 of Internal Revenue Code  Applies to U.S. taxpayers  Reporting requirements cover:  U.S. taxpayer  Foreign subsidiaries (10% ownership threshold)  “Controlled group” of corporations  Reporting in U.S. income tax return (Form 5713) – http://www.irs.gov/instructions/i5713/ch01.html http://www.irs.gov/instructions/i5713/ch01.html 9

10. © 2015 Baker & McKenzie LLP Treasury Department  Potential penalties = adverse tax consequences  Impermissible agreements  Loss of tax deferral and credits  Loss of Foreign Sales Corporation or Interest-Charge DISC benefits  “Willful” failure to report “operations” in boycotting countries  $25,000 fine and/or  1 year in prison 10

11. © 2015 Baker & McKenzie LLP Treasury Department Penalizable Agreements −Agreements to “participate in or cooperate with” an international boycott  Use of blacklisted persons or vessels  Dealings with boycotted country  Discrimination  Must have an “agreement” under Treasury rules  No requirement for transactions to be in U.S. commerce −Primary boycott exception 11

12. © 2015 Baker & McKenzie LLP Commerce vs. Treasury Selected Inconsistencies −Negative certification of origin permissible under Treasury rules but not Commerce −Providing information without a prior agreement to do so permissible under Treasury rules but not Commerce −Agreement to comply with laws generally permissible under Commerce rules but not Treasury (if country on quarterly list) 12

13. © 2015 Baker & McKenzie LLP Examples of Boycott-Related Requests Boycott requests can be difficult to identify and can show up in any of the following:  Purchase orders  Tender documents  Letters of credit  Certificates of Origin  Shipping and insurance documents  Invoices  Contracts  Conversations and correspondence 13

14. © 2015 Baker & McKenzie LLP Examples of Boycott-Related Requests (cont.) The following terms in a document might indicate a boycott issue and should be further reviewed Legal: −“Blacklist” −“Israel” / “Israeli” / “Jew” / “Jewish” / “Enemy” −“Boycott or boycott laws” −“Comply with” boycotting country’s laws or regulations 14

15. © 2015 Baker & McKenzie LLP Contracts  Draft contracts may contain boycott clauses  Boycott clauses must be deleted or revised to neutralize boycott effect  Receipt of request is reportable even if:  the clause is deleted or revised or  the contract is never executed  If language penalizable under the Treasury rules is not neutralized, tax consequences will be suffered every year work is performed under the contract 15

16. © 2015 Baker & McKenzie LLP Contracts: Example 16

17. © 2015 Baker & McKenzie LLP Comments on Contracts Example  This example was in a draft contract from the UAE  One of the most common types of clauses that raises antiboycott issues in the context of draft contracts  General “comply with law” clauses that don’t expressly mention the boycott laws are not prohibited or reportable under the Commerce regulations  However, they are penalizable/reportable under the Treasury rules when from a country on the Treasury Department’s list of boycotting countries because Treasury’s position is that the general laws include the boycott laws  Treasury’s list of boycotting countries is reissued a few times a year and includes many Arab League countries like Iraq, UAE, Saudi Arabia, etc. It does not include Bangladesh, Pakistan, or other countries from which we sometimes see other types of boycott requests 17

18. © 2015 Baker & McKenzie LLP Comments on Contracts Example (cont.)  Must revise the clause - acceptable revisions include:  All APPLICABLE LAWS shall apply to the SERVICE PROVIDER  Except to the extent prohibited or penalized under U.S. law, the SERVICE PROVIDER shall comply with all APPLICABLE LAW  There are many different permutations of these clauses. Watch out for references to “comply” with, “adhere” to, “observe”, act “in accordance with” the laws, regulations, etc.  By contrast, a clause stating that a boycotting country’s laws “shall govern” the contract or that the company shall “be subject to” those laws is not penalizable. These are considered “governing law” clauses that don’t require compliance with the law. 18

19. © 2015 Baker & McKenzie LLP Conclusions  While boycott requests may be found most frequently in the context of L/Cs, purchase orders, or other day-to-day transactional documents, boycott requests are also often found in documents that may come across an employee’s desk with less frequency, such as those highlighted above  It is important to review all incoming documents and correspondence for possible boycott language 19

20. © 2015 Baker & McKenzie LLP 20 Annex A (1 of 6)

21. © 2015 Baker & McKenzie LLP 21 Annex A (2 of 6)

22. © 2015 Baker & McKenzie LLP 22 Annex A (3 of 6)

23. © 2015 Baker & McKenzie LLP 23 Annex A (4 of 6)

24. © 2015 Baker & McKenzie LLP 24 Annex A (5 of 6)

25. © 2015 Baker & McKenzie LLP 25 Annex A (6 of 6)

26. © 2015 Baker & McKenzie LLP Sylwia Lis Speaker – Washington, DC T+ 1 202 835 6147 F+ 1 202 416 7147 sylwia.lis@bakermckenzie.com Contact 26