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Doreen Edelman is a partner at Lowenstein Sandler and chair of the firm鈥檚 Global Trade & Policy practice. Abbey Baker is a Counsel in the Global Trade and & Policy practice at Lowenstein Sandler. Additionally, they counsel clients on U.S. sanctions, export controls, customs regulations, CFIUS rules, and anti-corruption requirements. Both are based in Washington D.C.

The U.S. Department of the Treasury鈥檚 Office of Foreign Assets Control (OFAC) doesn鈥檛 care whether a company means to violate the law or is unaware of U.S. sanctions. The regulatory organization鈥檚 role is to dole out significant penalties and even jail time for violations and it鈥檚 turning its sights on the tech world.

Many startups reason that since they aren鈥檛 technically financial institutions or operating off of open source code, they aren鈥檛 subject to stifling and irritating regulations.

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However, when it comes to U.S. sanctions, these companies are wrong, and that ignorance can lead to significant consequences. Recent headline-making OFAC cases such as Chinese telecom giant ZTE being fined $1.2 billion or the high-drama Canadian arrest of Huawei CFO Meng Wanzhou have underscored the impact of violating U.S. sanctions laws.

The costs are so palpable that Slack, the American cloud-based collaboration hub, recently banned all users with ties to embargoed locations including Cuba, Iran, North Korea, Syria and the Crimea region of Ukraine, even if those users have no negative history or connection to the embargoed area and now reside in friendly countries like Canada and Germany.

Although industry watchers might consider this overkill on Slack鈥檚 part since the company isn鈥檛 exporting physical products, Slack had every right to be concerned. The company is exporting services, and so had good reason to take the actions it took.

More On Sanctions

Sanctions are a legal requirement prohibiting U.S. persons from directly or indirectly dealing or trading with certain countries, regions, people, or entities around the world. Sanctions are the reasons that, for a long time, consumers couldn鈥檛 get a Cuban cigar, and now can鈥檛 get a new Persian rug.

Sanctions are also the reason many Chinese companies won鈥檛 conduct business with North Korea or that consumers can鈥檛 buy goods from someone in Crimea, take investments from Russian oligarchs, go on a beach vacation to Cuba, send pencils to Iran, or provide services to someone in Syria.

The U.S. president issues these sanctions to support U.S. foreign policy positions and address national security concerns – meaning that when the government doesn鈥檛 like what a person, entity, region or country is doing and it wants the activity to stop, the president puts sanctions on that target to limit U.S. parties from doing business with them.

If that happens, almost no one anywhere in the world will give the sanctioned party money, work or trade. Targeted entities will also have trouble simply opening bank accounts at banks around the world. Why is this the case? Because many of the world鈥檚 financial transactions go through the U.S. financial system and banks won鈥檛 risk getting shut out or facing large U.S.-imposed penalties for dealing with blacklisted parties.

OFAC Eyes Tech Market

If OFAC is so concerned about national security, why is it looking at the tech world? Simply, it鈥檚 worried about the movement of money and services that funds the 鈥渂ad guys.鈥�

Right now, cryptocurrencies make it possible for sanctioned entities previously shut out of financial markets to move money with little to no oversight. To some, this anonymity might be the point. But to the U.S. Government, it鈥檚 a national security problem. Similarly, providing sanctioned entities with online services that help them run their organizations and money-making businesses also compromises key U.S. security and policy objectives.

This problem trickles down to the global tech industry when U.S.-owned or controlled businesses provide support services to sanctioned entities, oftentimes unknowingly. Comprehensive programs like the Iran, Cuban, Syrian, North Korean and Crimean sanctions prohibit U.S. persons from directly or indirectly providing many services to those regions.

This means that if someone creates an account on your platform from Tehran or Sevastopol鈥� and starts using your product/service 鈥� your company has probably violated U.S. sanctions law without ever taking any action. Exceptions do exist, but companies better check to make sure one applies to their situation before relying on it.

Sanctions violations are 鈥渟trict liability,” which means violators don鈥檛 need to exhibit bad intent to break the law and as a result they can face serious penalties and damaging publicity if they do. On the other hand, if someone does know exactly what they were doing and did it anyway 鈥� they can face criminal charges and jail time.

OFAC has not only been investigating accounts originating from sanctioned locations, but it has even gone so far as to add two bitcoin addresses to its Specially Designated Nationals (SDN) List. The SDN is a list of individuals, governments, and entities with whom U.S. persons are banned from transacting. Some may argue that banning a digital currency address is ineffective. Effectiveness aside, this novel enforcement move is an undeniable example that OFAC is changing with the times and looking to keep its targets from utilizing new technology to subvert its regulatory reach.

Protecting Your Company

If tech is a new target area for enforcement, it鈥檚 critical that companies don鈥檛 assume they aren鈥檛 exposed just because they are a startup.

Part of getting entities to comply with the law is a strong show of public enforcement to scare players into compliance, meaning that it鈥檚 likely OFAC will want to make it clear that everyone is responsible. Smaller tech firms are already hearing from OFAC, and this is likely to continue.

Additionally, small enterprises allowing users to move millions of dollars undetected can be just as much of a threat to national security as larger operations. Further, don鈥檛 assume that just because a company isn鈥檛 located in the United States, that these rules don鈥檛 apply to them. If there are U.S. persons or U.S. ownership involved somewhere in a corporate chain, its transacting in U.S. dollars, or it uses or trades in U.S.-originated goods or technology 鈥� chances are U.S. sanctions rules apply.

Bottomline: To avoid being involved in OFAC鈥檚 next iteration of tech related enforcement measures, it鈥檚 time to take sanctions compliance seriously.

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