Israel Blacklists Foreign Company Over Breach of Reciprocal Procurement Obligations

The Industrial Cooperation Authority at Israel’s Ministry of Economy recently announced that it had blacklisted the Chinese company DAQO, which won a tender for the supply of components to the Israel Electric Corporation, because it failed to fulfill its reciprocal procurement obligation with Israel.

What Is Reciprocal Procurement?

When an Israeli government entity engages in a contract with a foreign supplier (manufacturer, supplier, or importer of imported goods, or a supplier of work not performed in Israel) at a volume exceeding USD 5 million, the foreign supplier is contractually obligated to engage in industrial cooperation through purchases from Israel at a particular ratio of the contract value.

• For defense purchases by the Ministry of Defense, the foreign supplier must invest 50% of the contract value.
• For civil contracts with suppliers from countries that are signatories of the World Trade Organization’s Government Procurement Agreement, the foreign supplier must invest 18% of the contract value.
• For other transactions, the foreign supplier must invest 35% of the contract value.

Foreign suppliers’ reciprocal procurement obligation is anchored in the Mandatory Tender Regulations (Mandatory Industrial Cooperation), 2007, which were enacted by virtue of the Mandatory Tenders Law. As a rule, foreign suppliers can fulfill their contractual reciprocal procurement obligation (industrial cooperation) by engaging with local subcontractors, investing in Israeli companies, conducting R&D collaborations, transferring know-how, or purchasing Israeli goods or services during the contract period. (For further elaboration, see here.)

Industrial Cooperation Authority (ICA)

The ICA is the statutory authority responsible for managing the State of Israel’s reciprocal procurement. The ICA operates by virtue of the Mandatory Tenders Law and is empowered to obligate foreign suppliers that won government tenders to engage in industrial cooperation with Israel. The ICA’s main functions include overseeing, monitoring, and ensuring that foreign suppliers fulfill their reciprocal procurement obligations in various fields, such as the defense, aviation, energy, electronics, medical devices, and automobile sectors.

The ICA recently published a report summarizing its activities in 2023-2024. The report shows that 200 foreign companies fulfilled their reciprocal procurement obligation during this period at a volume totaling about USD 11.8 billion. The report also shows that international companies have executed several reciprocal procurements with Israel in recent years, including:

• Thyssenkrupp (Germany) and Cyclone (Israel) – construction of a submarine component manufacturing plant in the Galilee
• Boeing (USA) and the Technion Institute of Technology – research collaboration on low-carbon aviation fuel
• Vossloh (Germany) and Cervello (Israel) – marketing of cybersecurity systems for railways
• Leonardo (Italy) and Stratasys (Israel) – acquisition of advanced 3D printers

Imposition of Sanctions on DAQO

The ICA imposed sanctions on a foreign company for the first time for failing to fulfill its contractual reciprocal procurement obligations with Israel. The ICA banned the Chinese company DAQO from participating in government tenders in Israel for two years, out of the maximum statutory ban of five years.

The ICA reached its decision against DAQO after consulting with the Ministry of Finance’s Accountant-General. DAQO’s reciprocal procurement obligation derives from the sales contract it signed nearly a decade ago to supply various electronic components to the Israel Electric Corporation. Accordingly, the contract obligated it to carry out reciprocal procurement in Israel, albeit at the relatively low volume of a few million dollars.

DAQO refused to respond to the ICA’s repeated requests to fulfill its reciprocal procurement obligation. The Israeli Embassy and its commercial attachés in China also did not respond to the ICA’s requests. The ICA’s proposals to facilitate various connections with Israeli companies were also unsuccessful. In fact, DAQO severed contact and disappeared, and the ICA was unsuccessful in compelling DAQO to rectify its breach of contract and its reciprocal procurement obligation. This is apparently an exceptional case since, in most instances, foreign companies comply with the ICA’s demand to rectify breaches of contract.

Previous ICA Enforcement Proceedings

Like most administrative authorities, the ICA employs strict enforcement procedures, including hearings, demands for guarantees, and warning letters. The ICA has handled several cases in recent years of foreign suppliers that either had difficulties fulfilling their reciprocal procurement obligations or attempted to evade them. Over the past year, the ICA sent about 20 warning letters and held several hearings. Hearings may result in the ICA blacklisting breaching foreign companies, which bans them from participating in government tenders (for up to a maximum of five years).

For example, the ICA opened enforcement proceedings against the German company Thyssenkrupp, which sold warships to the Ministry of Defense to protect natural gas drilling sites. In 2017, the ICA announced it was blacklisting Thyssenkrupp because it failed to fulfill its contractual reciprocal procurement obligation (totaling ILS 700 million). That dispute was settled in 2021, and Thyssenkrupp is now fulfilling its reciprocal procurement obligation in conformity with a multiyear outline in effect until 2040, which includes, inter alia, the construction of a submarine component manufacturing plant for the Israeli Navy.

Recommendations and Future Expectations

These facts emphasize that Israeli companies should obtain a thorough understanding of the legal aspects of reciprocal procurement and their implications. Israeli companies should also keep in mind that the ICA is an administrative authority with enforcement powers and they must handle any interactions with it accordingly. Therefore, Israeli companies should analyze potential legal and business implications before engaging in any contract with a foreign supplier that may involve a contractual reciprocal procurement obligation, and before any interaction with the ICA.

Moreover, given that reciprocal procurement is steadily increasing, Israeli companies should keep abreast of foreign and external suppliers’ existing reciprocal procurement obligations, and analyze opportunities for various connections with those foreign suppliers under reciprocal procurement obligations, also in projects around the world.

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Professor Amichai Cohen is a special counsel on international law at the firm.

Dr. Ran Karmi is an associate in the firm’s Antitrust and Competition Department.