US sanctions: Sanctions without borders

Author: | Published: 1 Jul 2013
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Ronald Meltzer and David Ross of WilmerHale discuss the risks and complexities of the increasing extraterritoriality of US sanctions laws


For many years, the United States has imposed economic sanctions against certain designated countries, entities and individuals for critical foreign policy and national security reasons, such as combating terrorism, the proliferation of weapons of mass destruction, and narcotics trafficking. These measures have been authorised under statutes granting Presidential wartime and national emergency powers and implemented by the US Department of the Treasury's Office of Foreign Assets Control (Ofac), which has has broad discretionary authority to impose transaction prohibitions and asset-blocking requirements that vary in scope depending on the purpose and target of the sanctions. In some cases, Ofac sanctions comprise embargoes on almost all commercial and financial dealings with certain countries (in the case of Cuba, Iran and Sudan, for example); in other instances, Ofac sanctions only apply to specific dealings with designated entities and individuals.

Until recently, US sanctions focused primarily on transactions by so-called US persons, a term that includes all US citizens and permanent residents located anywhere in the world, companies organised in the United States, foreign branches of US companies, and individuals, entities, and property located in the United States. Ofac requirements also reach any company directors, officers or employees who are US persons, even if they are located outside of the United States or work for entities that are non-US companies. Notably, such US persons may not engage in any activity that facilitates, approves, or supports any transactions by others with designated countries, individuals or groups. With limited exceptions (such as Ofac sanctions involving Cuba), the sanctions did not apply extraterritorially: they did not reach transactions undertaken by foreign subsidiaries of US entities, and their only real applicability to unaffiliated non-US persons comprised re-exports of controlled, US-origin items from third countries to certain embargoed destinations (such as Iran or Sudan).

Moreover, in the past Ofac sanctions that did have extraterritorial reach – primarily provisions relating to Cuba – were controversial internationally. Several foreign jurisdictionsmaintain blocking statutes that prohibit nationals from complying with such US sanctions laws (in particular Canada, Mexico, and the European Union), and in 1996, the European Union challenged the Cuba-focused Helms Burton law at the Geneva-based World Trade Organization (the United States and the EU settled the dispute at a preliminary stage, before the WTO issued any findings on the law's compatibility with its rules). These conflict-of-law issues concerning Ofac sanctions have subsided in recent years at the same time that US sanctions involving Iran have become increasingly extraterritorial in scope and effect. This is largely due to the evolving multilateralisation of sanctions against Iran in connection with international efforts to address threats posed by the Iranian nuclear programme.

The growing extraterritoriality of US sanctions

In 1996, Congress enacted the Iran and Libya Sanctions Act to provide for the imposition of sanctions on persons engaging in certain specified conduct relating to the Iranian and Libyan petroleum sectors. (In 2006 Congress amended the Act to eliminate the statute's applicability to Libya and renamed it the Iran Sanctions Act of 1996 (ISA).) The statute was openly extraterritorial in effect; its focus on the conduct of persons – as opposed to US persons – was intentional and reflected Congress' desire to discourage foreign companies from engaging in targeted activities. This statutory paradigm – sanctions arising from conduct by any person engaging in targeted activities, regardless of nationality – has become the basis for recent US sanctions involving Iran. Indeed, US law in this area has undergone a significant shift: it effectively creates an expanding regime of secondary sanctions that are triggered by transactions that do not require a nexus to the United States.


"Foreign financial institutions have taken action to incorporate US sanctions requirements into their risk-management analyses"


This trend took firm root with the 2010 enactment of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (Cisada). The law stemmed from Congressional discontent with the enforcement of the ISA, and it sought to increase pressure on Iran to cease its pursuit of weapons of mass destruction by targeting the source of financing for that activity – Iran's energy sector – and by seeking to reduce Iran's access to the global financial system. Congress also sought to address a more general concern raised by existing US sanctions involving Iran: while they prohibited US companies from doing business with Iran, the sanctions could not reach foreign competitors, affiliates or business partners. This not only placed many American companies at a competitive disadvantage globally, but also undermined the effectiveness of US sanctions and allowed Iran to pursue its goals, including developing its nuclear capabilities, with impunity.

Accordingly, a core feature of Cisada was a significant expansion in the extraterritoriality of the ISA. The primary focus of the Cisada sanctions was third-party activitycontributing to Iran's ability to develop its petroleum resources and refined petroleum products, as well as to Iran's ability to import refined petroleum products. Of particular interest to financial services firms, section 104(c) of Cisada authorised Ofac to prohibit or impose strict conditions on the opening or maintaining of correspondent or payable-through accounts in the United States by foreign financial institutions found to have knowingly facilitated Iran's efforts to acquire weapons of mass destruction or provide support for international terrorism; facilitated the activities of a person subject to UN financial sanctions; engaged in money laundering in connection with the above activities; facilitated efforts by the Central Bank of Iran or another Iranian financial institution to carry out any of the above activities; or facilitated a "significant transaction" with Iran's Revolutionary Guard Corps, any of its agents or affiliates that are "blocked" pursuant to the International Emergency Economic Powers Enhancement Act, or any financial institutions that are "blocked" pursuant to that Act in connection with Iran's pursuit of weapons of mass destruction or its support for international terrorism.

Notably, Ofac does not view its section 104(c) authority as necessarily extraterritorial because, strictly speaking, the prohibitions arising from this authority apply to US banks – the provisions restrict them from opening or maintaining certain accounts with foreign financial institutions found to have engaged in sanctionable conduct – and not to their foreign bank customers.

Following the enactment of Cisada, Congress and the Executive Branch have continued to increase pressure on Iran through a series of additional measures targeting other types of Iran-related transactions by foreign entities deemed to be sanctionable conduct.

In November 2011, for example, the Obama Administration expanded Cisada with Executive Order 13590, which authorises the Department of State to impose sanctions against firms found to have knowingly entered into certain transactions that could contribute to the maintenance or enhancement of Iran's ability to develop petroleum resources or petrochemical products.

In that same month, the Treasury Department identified Iran as a "jurisdiction of primary money laundering concern," thus declaring, in effect, that any bank doing business with the Iranian financial system was at risk of supporting Iran's pursuit of nuclear weapons and its support for international terrorism.


"Sanctions are promulgated under a strict liability regime"


In December 2011, the President signed the National Defense Authorization Act for Fiscal Year 2012, which is similar to Cisada but primarily targets Iran's Central Bank. This Act limits access to the US financial system by non-US financial institutions found to have knowingly conducted or facilitated any significant financial transaction with the Central Bank or other blocked Iranian financial institutions.

In July 2012, the President signed Executive Order 13622, which provides for the imposition of sanctions on foreign financial institutions that knowingly conduct or facilitate significant transactions with the National Iranian Oil Company or Naftiran Intertrade Company or for the purchase or acquisition of Iranian petroleum, petroleum products, or petrochemical products. The Executive Order also provides for sanctions on persons that materially assist or provide financial support for those entities or the Central Bank, or for the Iranian government's purchase of US bank notes or precious metals.

In August 2012, the President signed the Iran Threat Reduction and Syria Human Rights Act of 2012, which significantly expanded the scope of the US Iran sanctions by making US firms liable for their foreign subsidiaries' involvement in sanctionable activities in Iran, even where there is no facilitation, approval or support by any US person in the sanctioned transaction. This expansion addressed strong concerns during recent years about loopholes in Ofac sanctions that permitted foreign subsidiaries and other entities owned or controlled by US companies to continue engaging in business with Iran. The 2012 Act also expanded the scope of section 104 of Cisada to target, among other things, foreign financial institutions that knowingly facilitate or participate in various proscribed activities or act on behalf of another person with respect to those activities. In addition to these types of extraterritorial sanctions involving Iran, the United States has also taken steps to broaden sanctions against Syria in response to the ongoing conflict in that country.

In January 2013, the President signed the Iran Freedom and Counter-Proliferation Act of 2012, which imposed additional restrictions on foreign businesses and banks involved in Iran's energy, ports, shipping and shipbuilding sectors, as well as metals trade with Iran. This Act further expanded the Cisada-style sanctions framework for financial institutions that knowingly conduct or facilitate significant financial transactions involving the targeted sectors or products or on behalf of a blocked Iranian person. It also provides for the imposition of sanctions on entities providing underwriting, insurance, or reinsurance services relating to other sanctioned activities.

In June 2013, the President signed Executive Order 13645, which provides for the imposition of sanctions on foreign financial institutions that knowingly conduct or facilitate significant transactions for the purchase or sale of the Iranian rial, or that maintain significant rial accounts outside Iran. The Executive Order also targets certain transactions and other activity related to Iran's automotive sector, and persons that materially assist blocked Iranian persons.

Predating these broadened sanctions involving Iran and Syria, the International Emergency Economic Powers Enhancement Act of 2007 constituted another underlying expansion of the extraterritorial reach of Ofac sanctions. This statute made it unlawful for any person to cause a violation of Ofac's regulations. Thus, non-US entities could be in violation of this Act, even if they were not otherwise subject to Ofac regulations, by taking action that caused US personsto breach Ofac requirements. This type of liability came into play in major enforcement actions recently taken against non-US financial institutions. For example, in the Standard Chartered Bank case, the Settlement Agreement between Ofac and SCB described "the risk [that a lack of controls at Standard Chartered Bank Dubai] caused the bank's New York branch" when processing payments (see paragraph 14 of the agreement, which is accessible at http:// www.treasury.gov/resource-center/sanctions/CivPen/Documents/ 121210_SCB_Settlement.pdf). In May 2012, the Obama Administration further incorporated such causation as a ground for sanctions with the issuance of Executive Order 13608, which explicitly authorises sanctions against foreign persons found to have violated US sanctions against Iran or Syria, caused a violation of such sanctions, or "facilitated deceptive transactions" with respect to such sanctions.

Recent trends in enforcement

Recent US sanctions enforcement activity has given effect to Cisada and the subsequent Executive Orders and laws discussed above by targeting foreign entities that are relevant to Iran's energy and financial services sectors, such as petroleum suppliers, financial services firms, and shipping companies. In May 2011, for example, the State Department announced the imposition of sanctions on companies located in Jersey, the UAE, Singapore, Venezuela and Monaco for their alleged activities involving Iran's imports of refined petroleum. In January 2012, the Department sanctioned three additional companies in Singapore, China and the UAE for similar activities. In August 2012, it sanctioned a Syrian company for selling gasoline to Iran.

Ofac has also imposed sanctions on foreign companies and individuals for their involvement in activities that support Iran's nuclear programme. On July 31 2012, Ofac imposed sanctions on China's Bank of Kunlun for knowingly engaging in activities that are sanctionable under Cisada. On March 14 2013, Ofac announced the imposition of sanctions on a Greek businessman for allegedly helping Iran evade US sanctions targeting Iran's petroleum sector. On May 23 2013, Ofac announced the imposition of sanctions on 20 foreign individuals and entities for their involvement in Iran's nuclear and missile proliferation networks and Iran's efforts to circumvent US sanctions. And on May 31 2013, Ofac announced the imposition of sanctions on a Cyprus and Ukraine-based company for facilitating deceptive transactions for the National Iranian Tanker Company and on companies and individuals located in Kyrgyzstan, Ukraine and the UAE for leasing and selling aircraft to Mahan Air and Iran Air.

Compliance

Ofac sanctions are promulgated under a strict liability regime, and thus the onus is on individual companies to assess their own areas of risk and then take reasonable steps to prevent transactions (direct or indirect) that violate US sanctions laws. Ofac expects companies to develop their own risk-based compliance programmes to ensure that they have identified and addressed the areas of their business operations that present the most likely instances of possible violations.


"Ofac requirements reach any company directors, officers or employees who are US persons"


The recent promulgation of new Iran-related sanctions laws and Executive Orders with differing terms and targets has made compliance a continuing challenge for US companies; the growing extraterritoriality of US sanctions has effectively exported that same compliance challenge to foreign companies. Indeed, for non-US entities and individuals, the degree of difficulty is heightened because US-defined grounds for sanctionable conduct may not be fully understood by transaction parties from other jurisdictions or consistent with legal requirements and compliance responsibilities established under local laws.

In some ways, US sanctions based on the Cisada paradigm accommodate these concerns by including a knowledge qualifier for sanctionable conduct, specifying certain transaction-value thresholds and otherwise limiting the conduct at issue to significant transactions. These terms effectively create higher "trigger-points" for incurring liability than exist in other US sanctions laws mainly applicable to US persons. However, many of the extraterritorial provisions also include sanctions arising from "facilitation," which is not defined in the relevant statutes or Executive Orders and which has long been a thorny compliance issue, even under prior Ofac regulations applicable to US persons. The uncertain parameters of action that constitutes "facilitation" in the new laws only complicate and extend to non-US entities a compliance dilemma that already troubles many financial institutions.

The new Iran sanctions laws also could be said to take the specific circumstances and interests of foreign countries into account by including different types of exceptions, waivers and special rules that enable non-US entities to escape sanctions, even if they have engaged in otherwise sanctionable conduct. For example, section 102(g) of Cisada includes a special rule that authorises the President not to impose sanctions on firms found to be no longer engaging in the sanctionable activity and that provide reliable assurances that they will not knowingly do so in the future. In addition, many of the provisions involving conduct by foreign financial institutions are subject to a "significant reduction" exception concerning reduced consumption of Iranian crude oil by their respective countries. However, the availability and scope of this exception have been limited by recent legislation.


"Foreign financial institutions have strong incentive to simply de-risk possible dealings with Iran"


Another factor impacting the extraterritorial application of new US laws involving Iran is the significant discretionary authority of the State Department and Ofac in pursuing these matters. Such discretion affects whether to investigate sanctionable conduct or to impose different types of sanctions in any given case. Surely, concerns about the compliance challenges of foreign entities – and broader bilateral foreign policy interests – in specific circumstances figure into deliberations at the State Department and Ofac in determining whether and how to proceed with such sanctions.

Ofac has increasingly advocated that US financial services firms implement risk-based policies and procedures to properly monitor and mitigate their sanctions risks. In light of the growing extraterritoriality of US sanctions laws, foreign financial institutions would be well advised to heed this same advice.

Many large foreign financial institutions have already taken significant action to incorporate US sanctions requirements into their risk-management analyses and operations. Such inclusion can be difficult, however, due to differences that exist with respect to foreign compliance cultures, languages, and business customs involving relationships with counterparties. In many instances these differences present such challenges to compliance with applicable US sanctions requirements that foreign financial institutions have strong incentive to simply de-risk possible dealings with Iran – in other words to establish broad mandates to exit all business with that country, even if the transactions may not be sanctionable. Many leading foreign financial services firms have already adopted this approach in response to the severe risks and compliance challenges presented by US sanctions laws. Paradoxically, this may mean that only those with weak internal compliance capabilities or priorities are left to engage in dealings with Iran. This could increase the likelihood and extent of sanctionable conduct – certainly an unintended collateral consequence of recent US laws and policies involving Iran.

About the author
 

Ronald I. Meltzer
Partner, WilmerHale

Washington D.C, US
T: +1 202 663 6389
E: ronald.meltzer@wilmerhale.com
W: www.wilmerhale.com

Ronald I. Meltzer is a partner in WilmerHale's Washington, DC office. Meltzer's practice focuses on transaction advice, licensing, compliance and enforcement matters relating to US export controls and economic sanctions.

He is recognised as a leading practitioner in this area of law by Chambers Global, Chambers USA and The Best Lawyers in America.


About the author
 

David J. Ross
Counsel, WilmerHale

Washington D.C, US
T: +1 202 663 6515
E: david.ross@wilmerhale.com
W: www.wilmerhale.com

David J. Ross is a counsel in WilmerHale's Washington, DC office. Ross's practice focuses on sanctions law and the removal of market access barriers and other impediments to exporting goods and services and investing around the world.

He previously served as associate general counsel in the Office of the US Trade Representative and as international trade counsel to the Senate Finance Committee.


 

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