2019 heading to be a record year for penalties for U.S. economic sanctions
The U.S. Department of Treasury’s Office of Foreign Assets Controls (OFAC) is on track for another record year of civil penalties, with U.S. sanctions increasingly relevant to non-U.S. persons. Economic sanctions, one of the United States' preferred foreign policy tools, have never been more complicated, or more controversial outside the United States. Global institutions and their management need to ensure they assess the relevance of U.S. economic sanction triggers when executing cross-border transactions.
Maintaining a monopoly on penalties (staggeringly large, and small)
Staggering monetary penalties are the most public sign of so-called "primary sanctions" enforcement, which are focused on U.S. persons or U.S.-connected activities. The United States has consistently pursued significant enforcement actions based on the use of the U.S. financial system to process transactions with sanctions targets, particularly with comprehensively sanctioned countries such as Cuba, Iran and Syria that are almost entirely isolated from the U.S. financial system.
Regardless of the magnitude of the violation, OFAC remains focused on sending the message that the United States takes its economic sanctions very seriously. Hence the recent announcement by OFAC of a finding of violation, albeit with no monetary penalty, against a U.S. financial institution for allegedly processing 45 pension payments benefitting a U.S. citizen who was resident in Iran.
Primary sanctions will continue to have a significant impact on sanctions targets as long as U.S. incorporated entities operate throughout the global financial system; the U.S. dollar remains a leading reserve currency; and U.S. dollar transactions continue (as a matter of common practice) to involve banks located in the United States at some stage of the payment process. In addition, OFAC is taking a more active role as a compliance counsellor. Its general guidance has become more detailed in recent years, as sanctions programs have themselves become more complex. We recently blogged about OFAC’s formal compliance guidance, "A Framework for OFAC Compliance Commitments", which has created a benchmark that global institutions should take into account, if compliance programs are to have their intended mitigating impact on enforcement consequences.
Targeting non-U.S. persons
While primary sanctions are commonly viewed as restrictions on the activities of U.S. persons, OFAC and U.S. politicians are increasingly focused on the conduct of non-U.S. persons – individuals who are not citizens or permanent residents of the United States, and entities that are not organized under the laws of the United States or a U.S. jurisdiction.
A high-profile $12 million settlement in July 2017 — reached with CSE Global Limited, a Singapore based supplier of telecommunications systems to the energy sector that apparently originated 104 Iran-related funds transfers from a U.S. dollar account that passed through the United States — increased awareness amongst non-U.S. persons of the potential liability for causing a sanctions violation.
Opposing the opposition to secondary sanctions
Far more controversial (largely from the perspective of non-U.S. parties) is the United States' use of so-called "secondary sanctions" to target the activities of non-U.S. persons, even when those activities lack any U.S. nexus. Secondary sanctions, unlike primary sanctions, lack the threat of U.S. regulatory civil and criminal penalties, but instead restrict targets who engage in activities that are counter to U.S. foreign policy from receiving certain U.S. benefits, and also restrict the way that U.S. persons are permitted to transact with the target.
They are most prominently featured in the Iran and Russia related sanctions programs and have been employed against entities dealing with Iran's energy sector. Secondary sanctions also form the backbone of the United States opposition to Nord Stream 2 and other Russian energy export pipelines.
Despite the European Union's efforts to insulate European entities from the Iran secondary sanctions (and the impact of the Cuba sanctions program) through the recently amended EU Blocking Regulation, the United States is showing no signs of abandoning its efforts to influence behaviour of non-U.S. persons.
Indeed, Europe's most significant effort to curb the United States' sanction on Iran has met with stiff opposition. In January 2019, France, Germany and the United Kingdom created the Instrument in Support of Trade Exchanges (INSTEX), a special purpose vehicle with the long-term goal of supporting non-U.S. dollar trade with Iran. INSTEX's only reported dealings to date have been to support humanitarian transactions, but in May the U.S. Treasury Department's Undersecretary for Terrorism and Financial Intelligence, Sigal Mandelker, reportedly wrote to proponents of INSTEX to urge them "to carefully consider the potential sanctions exposure of Instex." The letter delivered a threat of secondary sanctions restrictions. "Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system."
Whether United States opposition to INSTEX, motivated by the hope of maintaining as strong a sanctions front against Iran as possible, would ever result in secondary sanctions impacting significant European allies is impossible to predict. It is telling, though, that the United States answer to concerted European opposition to secondary sanctions is the threat of secondary sanctions.
We expect the trend of U.S. sanction enforcement and related political activity to continue unabated in the near-team. Parties transacting internationally in this dynamic atmosphere should pay careful attention to potential applicability of these restrictions and the significant risk they may pose.
A longer version of this article was first published on Thomson Reuters Regulatory Intelligence on 11 June 2019