Navigating U.s. Economic and Trade Sanctions: a Compliance Lesson for International Banking and Trade Finance

• Publication year: 2016
• Author: By Hera U. Smith

Navigating U.S. Economic and Trade Sanctions: A Compliance Lesson for International Banking and Trade Finance

By Hera U. Smith^*

I. INTRODUCTION

The United States imposes sanctions and embargoes on countries, entities or individuals that have been deemed to pose a threat to its national security and foreign policy. These sanctions are primarily enforced by the U.S. Treasury Office of Foreign Assets Control ("OFAC"), which has the power to impose significant monetary penalties on those who violate the sanctions. The sanctions imposed by the United States usually have extraterritorial application; hence, international corporations must be vigilant about keeping up to date and not engaging in any transaction that would violate United States sanctions.

Economic sanctions come at a huge cost for international corporations. The price of compliance has been steadily climbing and the penalties for non-compliance are rising even faster, with international banks being fined up to billions of dollars for violations. Economic sanctions have also harmed United States corporations. For example, these corporations have had to forgo doing business with prohibited countries, such as Cuba and Iran, as well as certain entities or individuals, which has resulted in significant actual costs due to the withdrawal from pre-existing commerce and lost prospective business opportunities.

Recently, the Obama administration's landmark decision to lift certain sanctions against Cuba and Iran, which had been in place for decades, created significant new opportunities for international trade. Several corporations are already are taking advantage of these opportunities. However, those venturing into these new markets must understand the nuances of the remaining Cuban and Iranian sanctions to minimize compliance risks.

This article analyzes the recent changes in the OFAC sanctions imposed by the United States government and the economic ramifications of those changes in the areas of international banking and trade finance.

II. BACKGROUND

The United States Treasury administers and enforces economic sanctions programs through OFAC. This low-profile agency is endowed with enormous oversight power and has the authority to compel United States persons,¹ and in certain cases, even non-United States persons, to block or reject transactions with sanctioned persons, entities or countries.

OFAC's authority stems from the International Emergency Economic Powers Act ("IEEPA") and the Trading With the Enemy Act ("TWEA"). OFAC-enforced sanctions generally target countries/regimes whose actions or policies have been determined to constitute an unusual and extraordinary threat to the national security, foreign policy or economy of the United States or specific individuals or entities involved in or contributing to activity determined to constitute such a threat (such as narcotics trafficking, weapons proliferation and/or terrorism), regardless of geographic location.²

Currently, OFAC administers almost thirty sanctions programs. Although each program is unique, the programs all generally involve cutting off sanctions targets' access to United States institutions. This is done by prohibiting transactions in certain property or disallowing interests in certain property within the United States or involving United States persons, and/or requiring United States persons to block (i.e. freeze) the property of sanctioned persons who are listed on OFAC's list of Specially Designated Nationals and Blocked Persons ("SDN List") and entities that are 50 percent or more owned, directly or indirectly, by such persons. Any person listed as blocked on the SDN List or any entity 50 percent or more owned by a person whose property is blocked is considered a "blocked person."³

III. OFAC SANCTIONS

OFAC sanctions permeate all aspects of United States business and financial transactions. All transactions that go through banks subject to United States jurisdiction must be screened for OFAC violations before payment is released. If the transaction involves a blocked person, banks freeze the money without prior notice to customers. This procedure has the potential to cause major liability for the person or entity initiating the transaction, especially for those engaged in international trade or finance. It is therefore imperative that United States and multinational corporations understand a general overview of OFAC and its current sanctions programs.

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A number of OFAC sanctions and embargoes target entire geographic regions and governments. Some programs, such as those imposed on Cuba, Iran, Sudan and the Crimea region of Ukraine, are comprehensive in nature. Those sanctions include broad-based trade restrictions: virtually all exports, imports and financial transactions involving those regions are prohibited.

There also are non-comprehensive OFAC sanction programs that are more limited. Non-comprehensive programs may include broad prohibitions on specific kinds of transactions with countries and/or specific individuals and entities. For example, sanctions against North Korea and Syria are limited in that they restrict most but not all imports and/or exports and prohibit dealings with designated individuals or entities.

Non-comprehensive programs can also include targeted sanctions. Targeted United States sanctions currently exist against some African,⁴ Middle Eastern⁵ and other countries.⁶ The sanctions also can be targeted against specific industries or designated individuals or entities. Targeted individuals/entities' names are incorporated into OFAC's SDN List, which currently contains around 6,000 names of companies or individuals. OFAC also maintains other sanctions lists ("Non-SDN" Lists) that may have different prohibitions associated with them.

A smaller number of non-comprehensive sanctions are not country-based and are primarily enforced via the SDN List. These sanctions seek to counter narcotics trafficking, terrorism, malicious cyber-enabled activities, disregard for the rule of law, proliferation of weapons of mass destruction, rough diamond trade and/or transnational criminal organizations.

Recently, OFAC made significant changes in its sanctions programs. The lifting of some of the sanctions against Iran and Cuba has sparked the interest of the international business, legal and financial communities. New opportunities abound; however, there are considerable risks involved since not all sanctions against these countries have been lifted.

A. Sanctions Against Iran

Iranian sanctions were first imposed by President Carter in 1979. From that time on, the Iranian crisis continued to escalate, resulting in tighter and tighter trade restrictions against Iran, thereby isolating the country from the United States and global economy.⁷ United States persons could not export goods or services to Iran, import Iranian-origin goods or services to the United States or conduct commercial activities in or relating to Iran. Moreover, United States persons could not deal with the government of Iran or other individuals or entities on the SDN List. Actions facilitating the prohibited activities are also prohibited.⁸

Secondary and/or extraterritorial sanctions were later imposed, prohibiting companies and/or individuals not based in the United States, who would not normally fall under United States jurisdiction, from engaging in restricted activities.⁹ Those who tried to evade the United States' Iranian sanctions could lose their access to the United States market or face even more severe consequences. In the same vein, the United Nations and the European Union also imposed sanctions and/or embargoes against Iran in an effort to curb its nuclear and ballistic missiles program.

In 2015, Iran reached a Joint Comprehensive Plan of Action ("JCPOA") with the United States and several other countries whereby it agreed to dismantle its nuclear program. Iran fulfilled its initial key concessions on January 16, 2016, thereby ushering in Implementation Day. The United States, the European Union and the United Nations granted it relief from the existing economic sanctions.

The United States' new regulation provides only limited relief from Iranian sanctions. Primary sanctions are still in place but secondary or extraterritorial sanctions have mostly been lifted.

1. Current Sanctions Against Iran

(a) Primary Sanctions

The United States' domestic trade embargo on Iran remains in place.¹⁰ United States persons¹¹ continue to be prohibited from engaging in transactions or dealing with Iranian persons or entities and the Iranian government. United States financial institutions still cannot engage in dollar clearing on behalf of Iranian entities or approve transactions that involve Iran.¹² OFAC, however, provides for three exceptions to these primary sanctions:

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• A Statement of Licensing Policy allowing for the case-by-case licensing of individuals and entities seeking to export, re-export, sell, lease, or transfer to Iran commercial passenger aircraft and related parts and services, for exclusively commercial passenger aviation;
• A general license authorizing United States-owned or -controlled foreign entities to engage in certain activities involving Iran; and
• The granting of a general license authorizing the importation into the United States of Iranian-origin carpets and foodstuffs, including pistachios and caviar.¹³

(b) Secondary Sanctions

As referenced above, secondary sanctions, also known as extraterritorial sanctions, prohibit companies and/or individuals not based in the United States that would not normally fall under United States jurisdiction, from engaging in the proscribed activities. The repercussions of violating these sanctions are debilitating; those violating the Iranian sanctions may be blocked and denied access to United States trade and financial systems.

After Implementation Day, nuclear-related secondary sanctions were lifted. Non-United States persons may deal with Iran's financial and...