Causing a Sanctions Violation With U.s. Dollars: Differences in Regulatory Language Across Ofac Sanctions Programs

• Publication year: 2019

Causing a Sanctions Violation with U.S. Dollars: Differences in Regulatory Language Across OFAC Sanctions Programs

Christine Abely^*

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Table of Contents

I. Introduction..................................................................................31

II. Background and Applicable Legal Provisions.......................32

A. Prohibitions Against "Causing a Violation"........................33

i. Statutory Language...........................................................33
ii. Regulatory Language......................................................34
iii. Analysis of Regulatory Language...................................41

III. OFAC Enforcement: Causation Provisions and Other Mechanisms.....................................................................................44

A. Enforcement Actions..............................................................45

i. TransTel............................................................................45
ii. Lloyds...............................................................................46
iii. Credit Suisse...................................................................47
iv. BNP Paribas...................................................................48
v. Barclays...........................................................................50
vi. UniCredit........................................................................51
vii. Standard Chartered .......................................................52

B. Analysis..................................................................................53

i. Causation vs. Export of Financial Services as a Basis for Liability ............................................................................53
ii. Prohibitions on the Direct or Indirect Export of Financial Services and Practical Effect on Differences in Causation Provisions.......................................................................55

IV. U.S. Dollar Clearing and Settlement......................................56

A. Methods of U.S. Dollar Clearing..........................................57

i. Fedwire.............................................................................57

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ii. CHIPS..............................................................................59
iii. Offshore Clearing Systems.............................................60

B. Does Using U.S. Dollars Necessarily "Cause a Violation" of the Sanctions Regulations Through Dollar Clearing?........63

i. U.S. Dollar Clearing Systems...........................................63
ii. Offshore Dollar Clearing Systems...................................63

V. Current Issues Related to Differing Causation Provisions 66

A. Notice.....................................................................................66

i. OFAC Publications...........................................................66
ii. Notice Issues Concerning Definition of "U.S. Person" ..69
iii. The 50% Rule.................................................................70
iv. Notice and Effect on Compliance Efforts........................72
v. Criminal Charges Based on Causation and Export of Financial Services.........................................................74

B. Considerations of Extraterritorial Application.....................75
C. Potential Effects on the Use of the U.S. Dollar.....................76
D. Cash ......................................................................................78

VI. Recommendations and Potential Alternatives.....................79

A. Policy Goals Related to Restricting the Use of U.S. Dollars in Transactions with Sanctioned Parties.................................79
B. Making All "Causing a Violation" Provisions Expansive.... 80
C. Making All "Causing a Violation" Provisions Limited........81

VII. Conclusion......................................................................................82

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I. Introduction

Since 2007, the International Emergency Economic Powers Act (IEEPA), one of the principal statutes enabling U.S. economic sanctions, has prohibited any party from causing a violation of any license, order, regulation, or prohibition issued under its authority.¹ When this statutory requirement appears in regulatory text, however, it does so in two different forms. More commonly, this prohibition is framed in general terms applicable to "[a]ny transaction," but sometimes this same restriction is phrased as applicable only to "[a]ny transaction by a U.S. person or within the United States."² This difference in phrasing may appear minor and indeed, the U.S. Department of the Treasury does not seem to have intended to create two versions of the causation language having distinct meanings. The broader form of this language, however, has been used on at least one occasion as the basis for government enforcement against non-U.S. parties based solely on the use of U.S. dollars in transactions with a sanctioned party that would be prohibited if performed by a U.S. party.³ Where the broad causation provision has been used in this way, the Office of Foreign Assets Control (OFAC) within the U.S. Department of the Treasury based its theory of liability on the foreign party having caused a U.S. entity to violate the sanctions regulations by way of the U.S. entity participating in the dollar clearing process.⁴

Part I of this Article discusses the different versions of the causation provisions found within the sanctions regulations and examines their relationship to relevant statutes and Executive Orders. Part II reviews how a broad causation provision was used as the basis for the government enforcement action brought by OFAC against CSE Global Limited and its subsidiary CSE TransTel Pte Ltd. (TransTel). It also examines how OFAC has also brought enforcement actions in the past based on similar facts but based instead on a theory of export of financial services from the United States, either directly or indirectly. This Article argues that the government's use of the causation provisions therefore does not constitute an entirely new area of enforcement, even though different regulatory provisions are used as the stated basis. Part III explores the nature of U.S. dollar clearing and settlement, both in U.S. and

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offshore payment systems, and concludes that U.S. dollar-denominated transactions generally do require the involvement of a U.S. party and thus necessarily cause a sanctions violation where the broad version of the causation language is present or where a theory of indirect export of financial services is used. Part IV analyzes how OFAC has publicized prohibitions concerning the use of U.S. dollars in transactions with sanctioned entities and discusses how those legal requirements might be made clearer and more broadly understandable in the future. Finally, Part V recommends that the causation provisions be made consistent and standardized into the more expansive form in order to create transparency around the applicability of U.S. sanctions to transactions involving U.S. dollars.

II. Background and Applicable Legal Provisions

The Office of Foreign Assets Control (OFAC) within the U.S. Department of the Treasury was created in 1950 and administers U.S. economic and trade sanctions.⁵ Previously, asset controls were administered by the Office of Foreign Funds Control, created in 1940.⁶ OFAC's authority to control assets is based on several statutes, including among others the International Emergency Economic Powers Act (IEEPA); the Trading With the Enemy Act (TWEA); the Foreign Narcotics Kingpin Designation Act (FNKDA); and the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA).⁷

IEEPA was enacted in 1977.⁸ The statute "grants the President extensive power to regulate a variety of economic transactions during a state of emergency."⁹ Pursuant to IEEPA, the President may declare a national emergency to exercise powers under IEEPA "to deal with any unusual or extraordinary threat, which has its source in whole or in substantial part outside of the United States, to the national security, foreign policy, or economy of the United States."¹⁰ A list of Executive Orders (mainly issued under the authority of IEEPA) relevant to the scope of this Article is detailed in the table found in Part I.A.ii.

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A. Prohibitions Against "Causing a Violation"

The laws, regulations, and orders governing U.S. sanctions may prohibit not only certain types of conduct, but also, as described below, actions which cause a violation of any of the terms of particular U.S. sanctions programs. Such language is the subject of this Article and is referred to herein as "causation provisions" or "causation language." Causation language appears within the IEEPA statute itself (within the section describing penalties), as well as in two different forms of regulatory prohibitions and in the penalties sections of certain sanctions regulations.¹¹ The different forms of the causation language are described in Section I.A.ii. of this Article.

i. Statutory Language

Currently, 50 U.S.C. § 1705 ("Penalties") states under paragraph (a) that "[i]t shall be unlawful for a person to violate, attempt to violate, conspire to violate, or cause a violation of any license order, regulation, or prohibition issued under" Chapter 35 of Title 50 of the U.S. Code, namely IEEPA. This specific language was added to the statute through the IEEPA Enhancement Act, enacted in 2007.¹² Paragraph (c) allows for a fine or imprisonment for any person "who willfully commits, willfully attempts to commit, or willfully conspires to commit, or aids and abets in the commission of, an unlawful act described in subsection (a)." The IEEPA Enhancement Act also increased the maximum civil penalty for violations of IEEPA, from $50,000 to $250,000 per violation, and also raised the maximum criminal penalty from $50,000 to $1,000,000 per violation.¹³ The 2007...