Restrictive regulations are known “territorial sanctions” when they impose obligations on entities within territorial jurisdiction of the sanctioning state, and “extraterritorial sanctions” when they are applied beyond territorial borders, complying with the latter by another state can conflict with that state’s obligations in bilateral investment treaties and may result in imposition of damage to foreign investors. The investor, however, faces two main challenges in claiming damages; first, the host state may consider the violation of the extraterritorial sanctions by the investor as a factor for excluding the investor from the treaty’s protection and competence of arbitral tribunal of the treaty, and second, the host state may justifies its measures with the “National Security Exception”. This article examines these important challenges and arbitral tribunals’ approach through studying the parties’ arguments and the tribunal’s analysis in the first challenge, and the conditions for invoking the “National Security Exception” and the possibility of realization in the context of extraterritorial sanctions in the second challenge. The article concludes that the arbitral tribunal will accept the host state’s position regarding the lack of tribunal's competence due to the violation of extraterritorial sanctions by the investor only when the violation was occurred at the time of the investment establishment and was “serious” and “related” to the investor’s claim. Regarding the second challenge, the findings show that compliance with extraterritorial sanctions is mainly for political purposes and cannot be considered a necessary, proportionate and good faith measure to preserve the national security of the host state.