China Trade and OFAC Sanctions

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) enforces U.S. economic and trade sanctions. OFAC has featured prominently in recent headlines as the U.S. agency responsible for implementing U.S. sanctions against Russian and Ukrainian entities and individuals to address current unrest in the Ukraine.

OFAC sanctions generally block all U.S. individuals and entities – including in some cases U.S. companies’ foreign subsidiaries – from transacting business with sanctioned countries, such as Cuba and Iran, or sanctioned individuals designated by OFAC as “Specially Designated Nationals” or “SDNs.” SDNs include individuals or entities that the United States has determined are terrorists, involved in illegal activities such as narcotics trafficking, or acting on behalf of sanctioned countries.

U.S. entities and individuals are generally prohibited from exporting goods to, importing goods from, paying, or otherwise dealing with goods with prohibited countries or SDNs. OFAC sanctions may apply to non-U.S. individuals and entities in that the sanctions prohibit exporting goods currently in or that subsequently arrive in the United States to prohibited entities or SDNs.  These sanctions may also apply to U.S. companies’ foreign branches and subsidiaries.

Though China is not a sanctioned country under OFAC, companies operating in China may still be subject to OFAC sanctions. As referenced above, U.S. companies’ foreign branches and subsidiaries in China may be subject to specific OFAC sanctions and U.S. individuals in China, or in any country, are subject to OFAC sanctions. Moreover, U.S. companies must not violate OFAC sanctions by undertaking activities that contribute to evading or avoiding the sanctions.

For U.S. exporters, OFAC sanctions prohibit shipments to China with the knowledge that the goods will be re-exported from China to a sanctioned country or SDN. Similarly, for U.S. importers, OFAC generally prohibits importing into the United States goods from a Chinese company that the importer knows or should know originated from a sanctioned country or were purchased from an SDN.

By way of an example, assume that a U.S. company manufactures Product ABC and exports Product ABC to a company in China. At the time of export, the U.S. company either knows that Product ABC will be re-exported from China to a sanctioned country or, based on the specific packaging or shipping instructions requested by the Chinese customer, is reasonably certain that the product will be re- exported to the sanctioned country. Under these facts, OFAC would most likely determine that the U.S. company violated the OFAC sanction regulations.

There is no gray area with OFAC sanctions – they are either followed or violated. OFAC violations may subject U.S. companies and individuals to serious civil and criminal penalties, not to mention the adverse publicity.

Just this week, OFAC announced two enforcement actions. In one case, an individual from Washington State agreed to pay $29,340 to settle alleged violations of OFAC’s Iran Sanctions. In the other case, a Delaware company headquartered in Buenos Aires (Decolar.com, Inc.) violations of the Cuba Sanctions for $2,809,800. One factor in the high penalty against Decolar.com was Decolar’s lack of any OFAC compliance program.

U.S. companies and individuals trading with China should take appropriate actions to ensure that their commercial transactions comply with OFAC sanctions. Chinese counterparts should be informed and educated about U.S. OFAC sanctions and any contemplated transaction that raises OFAC concerns or “red flags” should be carefully analyzed. Additionally, it will often make sense for your contracts with Chinese suppliers or customers to include language documenting these parties’ understanding of, and acknowledged compliance with, U.S. OFAC sanctions.

Bottom Line: Just because China itself is not under OFAC sanctions does not mean you should ignore those sanctions when doing business with China.