ACSS Chapter 3 PDF - Certified Sanctions Specialist

Certified Sanctions Specialist (CSS) 56 Having regard to the Treaty on the Functioning of the European Union, and in particular Article 215 thereof, Having regard to Council Decision 2014/659/CFSP of 8 September 2014 amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine (1), Having regard to the joint proposal of the High Representative of the Union for Foreign Affairs and Security Policy and of the European Commission, Whereas: (1) Council Regulation (EU) No 833/2014 (2) gives effect to certain measures provided for in Council Decision 2014/512/CFSP (3). Those measures comprise restrictions on exports of dual-use goods and technology, restrictions on the provision of related services and on certain services related to the supply of arms and military equipment, restrictions on the sale, supply, transfer or export, directly or indirectly, of certain technologies for the oil industry in Russia in the form of a prior authorisation requirement, and restrictions on access to the capital market for certain financial institutions. (2) The Heads of State or Government of the European Union called for preparatory work on further targeted measures to be undertaken so that further steps could be taken without delay. (3) In view of the gravity of the situation, the Council considers it appropriate to take further restrictive measures in response to Russia's actions destabilising the situation in Ukraine. (4) In this context, it is appropriate to apply additional restrictions on exports of dual-use goods and technology, as laid down in Council Regulation (EC) No 428/2009 (4). (5) In addition, the provision of services for deep water oil exploration and production, arctic oil exploration and production or shale oil projects should be prohibited. (6) In order to put pressure on the Russian Government, it is also appropriate to apply further restrictions on access to the capital market for certain financial institutions, excluding Russia-based institutions with international status established by intergovernmental agreements with Russia as one of the shareholders; restrictions on legal persons, entities or bodies established in Russia in the defence sector, with the exception of those mainly active in the space and nuclear energy industry; and restrictions on legal persons, entities or bodies established in Russia whose main activities relate to the sale or transportation of crude oil or petroleum products. Financial services other than those referred to in Article 5 of Regulation (EU) No 833/2014, such as deposit services, payment services, insurance services, loans from the www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 57 institutions referred to in Article 5(1) and (2) of that Regulation and derivatives used for hedging purposes in the energy market are not covered by these restrictions. Loans are only to be considered new loans if they are drawn after 12 September 2014. (7) These measures fall within the scope of the Treaty and, therefore, in particular with a view to ensuring its uniform application in all Member States, regulatory action at the level of the Union is necessary. (8) In order to ensure that the measures provided for in this Regulation are effective, it should enter into force immediately, HAS ADOPTED THIS REGULATION: (…)” The regulation can be found here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0960 EU Blocking Statute The European Union tends to cooperate closely with the United States, as well as with its other allies, in imposing sanctions. In certain cases, though, U.S. law purports to prohibit EU subsidiaries of U.S. firms from engaging in certain transactions, such as doing business with Cuba and, in some instances Iran, that are completely legal under EU law. U.S. sanctions also threaten to penalize EU firms that do business with certain U.S. sanctions targets, including persons and entities in Iran and Russia. In response, the EU has enacted a blocking regulation, Council Regulation (EC) No 2271/96 that prohibits EU companies from complying with sanctions that are not imposed by the European Union. The regulation was updated in 2018 in response to U.S. secondary sanctions against Iran. Although the extension of U.S. sanctions to prohibit actions by EU companies is politically controversial, the EU has never actually penalized any company for complying with U.S. sanctions. This may reflect in part the fact that the United States has not yet punished any EU entities for “violating” U.S. sanctions. Some governments, such as that of Netherlands, have stated that, despite the blocking regulation, companies can decide where they will do business. Compliance The EU does not have specific requirements for systems for complying with EU sanctions. Nor do the individual members. The EU has provided draft guidance on best practices for internal compliance programs (“ICPs”) for dual-use regimes (contained in the Appendix or here: https://eur-lex.europa.eu/legal- content/EN/TXT/?uri=uriserv:OJ.L_.2019.205.01.0015.01.ENG&toc=OJ:L:20 19:205:TOC ). While this guidance is technically directed towards export controls rather than sanctions, the guidance references sanctions in several places, and the www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 58 same principles apply. The draft guidance accordingly provides a solid framework for the creation of sanctions compliance programs by EU entities. The guidance states that an internal compliance system “needs to be tailored to the size, the structure and scope of the business, and especially, to the company’s specific business activity.” The starting point for this process is a risk assessment to identify the entity’s sanctions risks. Once those risks have been identified, it is possible to design and create a system that mitigates those risks. The core elements of an effective compliance system, and the principles underlying those elements, include: 1. Top-level management commitment to compliance: “Effective ICPs reflect a top-down process whereby the company’s top-level management gives significance, legitimacy, and organizational, human and technical resources for the corporate compliance commitments and compliance culture.” 2. Organization structure, responsibilities and resources commensurate to the entity’s risk profile: “Sufficient organizational, human and technical resources are essential for effectively developing and implementing compliance procedures. Without a clear organization structure and well-defined responsibilities, an ICP risks suffering from lack of oversight and undefined roles. Having a strong structure helps organisations work out problems when they arise and prevent unauthorized transactions from occurring.” 3. Training and awareness raising: “Training and awareness raising … is essential for staff to duly perform their tasks and take compliance duties seriously. 4. Transaction screening process and procedures: “In terms of operational implementation, transaction screening is the most critical element of an ICP. This element contains the company’s internal measures to ensure that no transaction is made without the required license or against any relevant trade restriction or prohibition. The transaction screening procedures collect and analyze relevant information concerning item classification, transaction risk assessment, license determination and application, and post-licensing. Transaction screening measures also allow the company to develop and maintain a certain standard of care for handling suspicious enquiries or orders.” 5. Performance review, audits, reporting and corrective actions: “An ICP is not a static set of measures and therefore must be reviewed, tested and revised if proven necessary for safeguarding compliance. Performance reviews and audits verify whether the ICP is implemented to operational satisfaction and is consistent with the applicable national and EU export control requirements. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 59 A well-functioning ICP has clear reporting procedures about the notification and escalation actions of employees when a suspected or known incident of non-compliance has occurred. As part of a sound compliance culture, employees must feel confident and reassured when they raise questions or report concerns about compliance in good faith. Performance reviews, audits and reporting procedures are designed to detect inconsistencies to clarify and revise routines if they (risk to) result in non- compliance.” 6. Recordkeeping and documentation: “Proportionate, accurate and traceable recordkeeping … is essential for your company’s compliance efforts. A comprehensive recordkeeping system will help your company with conducting performance reviews and audits, complying with national documentation retention requirements and it will facilitate cooperation with competent authorities ….” The draft guidance provides step-by-step recommendations for each element in the internal compliance program. Enforcement Although the EU has deployed sanctions extensively, it has relatively little experience in enforcing them. As noted above, it is left to the Member States to ensure that their nationals comply with EU sanctions. The enforcing agencies and the penalties for violation are established by Member State laws and regulations, and vary across the EU. Member State Sanctions Regimes It is left to the Member States to actually enforce EU restrictive measures. Member States may also impose their own restrictive measures, primarily through the designation of additional individuals or entities, so long as they are consistent with broader EU regulation. Each Member State therefore has its own sanctions regime. Some of the major ones are discussed below. United Kingdom As of the writing of this guide, the United Kingdom was still in the EU, and was still subject to EU sanctions laws. Now that the U.K. has formally triggered the process of exiting the EU, the future effect of EU laws involving sanctions is unknown. In the meantime, the UK has implemented probably the most independent and far- reaching system of sanctions enforcement in the EU. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 60 As of March 2016, the UK has created the new Office of Financial Sanctions implementation (OFSI) (replacing the HM Treasury’s Asset Freezing Unit), which is responsible for the implementation and administration of international financial sanctions in the UK. The Department for Business, Innovation & Skills (BIS) is responsible for trade sanctions. The OFSI, a part of Her Majesty (HM)’s Treasury Department of the U.K. government, is the authority for the implementation of financial sanctions in the U.K. The OFSI keeps a list of ‘designated persons’, or ‘targets’. A designated person means anyone, whether an individual, company or country, that is subject to financial sanctions and appears on the OFSI’s “consolidated list of targets”. To fall within the OFSI’s enforcement of sanctions, there has to be a U.K. connection to the breach, or so-called “U.K. nexus”. As the breach does not have to occur within U.K. borders, such a nexus is not a difficult one to create. The following situations are just some examples of what can create a U.K. nexus: a U.K. company working overseas; an international transaction clearing or transiting through the U.K.; an action by a local subsidiary of a U.K. parent company; or purchase/sale of financial products or insurance on U.K. markets, even if held or used overseas. This means that a UK company with only one overseas subsidiary or a company clearing just one international transaction through the U.K may be caught by U.K. sanctions requirements and could be liable for violations committed against U.K. financial sanctions. The previous principle that European sanctions do not extend to foreign subsidiaries or non-EU persons is no longer true in this respect. The following article on www.sanctionsassociation.org explains the effect of Brexit on UK sanctions regime. The ‘Brexit’ Effect: What the UK’s Departure from the EU Could Mean for the Global Sanctions Landscape December 9, 2019 By: John McKendrick QC and Alex Haines from Outer Temple Chambers Over three years ago, in the June 23 Referendum, the UK voted to leave the European Union (EU). This departure from the EU, also known as ‘Brexit’, has put the world on stand-by, waiting to see what terms the UK and Europe will decide for their future divorce. One of these terms will be how to treat sanctions policy once the UK leaves. The European sanctions landscape is already vastly complex, partly due to the different – and often opposed – political agendas as well as the ever- www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 61 changing convergence between sanctions law, international law, and the domestic law of sovereign EU states. The numerous permutations – at a time where: (i) the UK is due to depart the EU but has not yet done so; (ii) the US has withdrawn from the Joint Comprehensive Plan of Action (or Iran nuclear deal); and (iii) the EU announced the reactivation of the Blocking Regulation – compound the uncertainty and make it increasingly difficult for businesses to accurately follow and understand the provisions that affect them. Now, as the January 31 deadline for Brexit looms, companies and compliance suites are becoming more and more eager to learn if the split will cause a rift between EU and UK sanctions policy or if it will, in fact, have any significant impact on the UK sanctions landscape at all. UK Sanctions on the World-Stage As a global hub for finance and banking, the UK has always played a powerful role in European sanctions policy and implementation. According to Erica Moret and Fabrice Pothier in their book “Sanctions after Brexit” (Survival, vol. 60 no.2, April-May 2018, pp. 179-180): “As a leading political, economic and soft-power actor, and home to one of the world’s premier financial centres (the City of London), the UK has traditionally played a central role in shaping EU sanctions, contributing to their design and implementation, and participating in intelligence-sharing and consensus-building among member states. It is unlikely, however, that the UK will continue to do so once it withdraws from the EU”. Post-Brexit, the UK’s rather sizeable influence over European sanctions policy will naturally diminish. The UK will also no longer be bound by European law and, without an agreement to the contrary, EU instruments such as EU Council Decisions and Regulations, will lose their legal force in the UK subject to the terms of the EU (Withdrawal) Act 2018. UN sanctions measures, however, will have to be implemented directly by the UK post-Brexit as the UK will continue to be bound by international law. Current Implementation of UN and EU Sanctions in the UK Currently, when sanctions are imposed by the UN or the EU, the UK acts on its international obligations to give effect to the sanctions in UK law. UN sanctions are implemented by the EU and, once implemented through EU regulation, they take direct legal effect in the UK. At a domestic level, the UK makes statutory instruments (UK regulations) to criminalize breaches of financial sanctions and to impose penalties for breaches of EU regulations. Currently, the UK’s domestic sanctions regime (as opposed to the international and regional sanctions regime created by the UN and the EU respectively)is confined to terrorism legislation and the www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 62 UK can only impose its own financial sanctions and restrictions under specific legislation, namely: The Anti-Terrorism Crime and Security Act 2001 (‘ATCSA 2001’), the Counter Terrorism Act 2008 (‘CTA 2008’), and the Terrorist Asset-Freezing Act 2010 (‘TAFA 2010’). Following its departure from the EU, however, the UK will be at risk of breaching its international obligations if a way forward is not agreed. With that in mind, the UK Parliament has passed the Sanctions and Anti-Money Laundering Act 2018 (‘SAMLA’), which received royal assent on 23 May 2018. This piece of legislation, which is anticipated to come into force at the time of the UK’s departure from the EU, will fill the legislative lacuna created by Brexit and will enable the UK to impose sanctions for the first time, independently of the European community. Until SAMLA’s provisions come into force, the UK’s domestic sanctions regimes remain confined to terrorism legislation. Deal or No Deal In the event of a deal between the EU and UK, sanctions regulations will be among the many EU rules that the UK will continue to follow until the end of a so-called ‘transition period’ (even if it will play no part in helping to make them). This transition period will last for at least a year, and after it has run, the UK and EU will have made a decision as to how sanctions will apply. This decision will likely be made well in advance of the deadline so as to give businesses and financial professionals time to prepare for the switch. On the other hand, if the UK departs from the EU without a deal, the majority of EU sanctions designations will be carried over and take effect under the SAMLA provisions in order to replace the existing EU regimes and through the EU Withdrawal Act which converts the EU regulations into domestic law as at the moment of exit. Implementation of UN and EU Sanctions in the UK, Post-Brexit SAMLA provides the UK with a domestic framework of powers to continue to meet its international obligations under the UN Charter by implementing UN sanctions directly in the UK and is designed to fill the legislative gap created by the UK leaving the EU. Among other things, it implements a new sanctions framework for the UK post-Brexit and enables the UK to use sanctions to meet national security and foreign policy objectives. As to EU sanctions, it is likely that EU sanctions measures will also be transposed into UK law. According to the EU Withdrawal Act 2018, the current sanctions regimes in effect on the date of the UK’s departure from the EU will form part of domestic law on and after exit day. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 63 The Broad Scope of SAMLA Though it is uncertain how its power will be used, SAMLA gives UK ministers rather broad powers to impose sanctions. Section 1 of SAMLA gives effect to the very heart of the issue by empowering the Secretary of State and the Treasury to impose sanctions regulations that a minister considers ‘appropriate’ for purposes including: (a) complying with a UN obligation; and (b) to achieve a particular purpose including furthering the prevention of terrorism both in the UK and elsewhere; the interests of national security; furthering a foreign policy objective of the UK government; and promoting respect for democracy, the rule of law and good governance. The contrast between current EU law and the new legislation is marked, not least because making a sanctions regulation on that basis that a Minister feels it is ‘appropriate’ is a lower threshold than the EU’s regime ‘necessity’ test. The government’s reassurances that it does not intend to alter how sanctions are implemented in practice does nothing to change the fact that the framework gives far greater discretion to the Minister, with the result that sanctions may be used more extensively than before. A Change in Due Process Currently, persons designated pursuant to UN sanctions are able to challenge their designations through the EU General Court, which affords them certain rights. Under SAMLA, however, individual rights will be reduced, and those on the UN list will be deprived of the rights they enjoy under EU law. For example, the EU General Court can declare designations unlawful even where they originate from UN Security Council decision. This is not an option under SAMLA. In other words, there is no judicial review process of UN sanctions measures in the UK. SAMLA does provide a mechanism whereby a person designated on a UN sanctions list may request the Secretary of State to use his best endeavours to secure that the person’s name is removed from the relevant UN list (Section25(2)). There remains, nevertheless, a distinction between domestic designations and UN designations, whereby the former are subject to judicial review but the latter are not. The Future of UK Sanctions The UK’s legislative sanctions framework is permeated with uncertainty due to the international forces and obligations at play. The UK has historically played a vital role in the design and implementation of EU sanctions, which is unlikely to continue once it withdraws from the EU. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 64 On the other hand, the UK’s departure from the EU is unlikely to change the UK’s sanctions policy to any great extent, exactly because of its previous leadership role in sanctions proposals within the EU. The government has confirmed that SAMLA, despite its far-reaching provisions, is not intended to alter the UK’s substantive approach to sanctions. Nonetheless, the statute’s provisions represent an overhaul and potential extension of the UK’s sanctions framework. Notwithstanding the criticisms of SAMLA during its first readings, where it was said that it could lead to “a constitutional car crash” or a “bonanza of regulations”, in practice, very little is likely to change. Moreover, a non-aligned approach between the UK and EU would carry significant risks for the UK itself, not least the likely backlash from EU member states who may see any significant divergence as an attempt to gain an unfair competitive advantage. Some commentators have referred to the new institutional formula of EU 27+1 in shaping and co-implementing sanctions. For now, this is the most likely outcome so that the EU can reduce the risk that its weapon of choice be partially disarmed whilst protecting the UK’s credibility as a global player. United States The United States is the most aggressive user of economic sanctions in the world, and the U.S. sanctions regime is especially complex and detailed. The United States utilizes sanctions to achieve a number of objectives, lie preventing certain types of activities, such as terrorism, narcotics trafficking, and weapons proliferation, and punishing violations of human rights, democracy, and the rule of law. It also uses sanctions to achieve foreign policy goals, although those goals are usually described in terms of preventing terrorism, weapons proliferation, etc. Each of the different sets of sanctions is referred to as a “program.” While most programs, including those that appear to address whole countries, are directed only at individuals or entities, several countries, including Cuba, Iran, North Korea, and Syria, are subject to broad embargos. The United States also imposes sanctions against a number of different types of individuals and organizations, including terrorists, narcotics dealers, and weapons proliferators. The United States is unique in that some of its sanctions programs purport to require compliance by non-U.S. individuals and entities, giving them extraterritorial effect. Like the European Union, the United States has three general approaches to sanctions: list based, country based, and sectoral. All individuals, and most (but not all) entities subject to sanctions are identified in specific lists. In addition, the United States imposes sanctions against entire countries in the cases of Cuba, Iran, North Korea, and Syria, and broad but not comprehensive sanctions against Russia and Venezuela. The United States formerly had broad sanctions against Burma (Myanmar) and Sudan, but these have mostly been removed. While www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 65 sanctions against individuals and entities tend to be uniform, sanctions against countries can vary significantly in what they do and do not allow. The sanctions laws are connected to, but legally apart from, the U.S. export control laws. Sanctions laws are administered and enforced primarily by the Office of Foreign Assets Control (“OFAC”). OFAC OFAC is a small agency within the U.S. Department of Treasury. It acts under Presidential wartime and national security authorities as well as authority granted under specific legislation. OFAC administers and enforces U.S. economic sanctions based on U.S. foreign policy and national security goals. OFAC is the agency primarily charged with administering and enforcing economic sanctions on behalf of the government of the United States OFAC administers over 20 sanctions programs, all with a foreign focus / nexus. There has been unprecedented enforcement in recent years following increase of statutory penalties. OFAC targets: Foreign countries and regimes Non-state actors like terrorists, international narcotics traffickers, WMD proliferators, indicted war criminals, or transnational criminal organizations And the support networks affiliated with these targets OFAC is the successor to the Office of Foreign Funds Control (the ``FFC''), which was established at the advent of World War II following the German invasion of Norway in 1940. The FFC program was administered by the Secretary of the Treasury throughout the war. The FFC's initial purpose was to prevent Nazi use of the occupied countries' holdings of foreign exchange and securities and to prevent forced repatriation of funds belonging to nationals of those countries. These controls were later extended to protect assets of other invaded countries. After the United States formally entered World War II, the FFC played a leading role in economic warfare against the Axis powers by blocking enemy assets and prohibiting foreign trade and financial transactions. OFAC itself was formally created in December 1950, following the entry of China into the Korean War, when President Truman declared a national emergency and blocked all Chinese and North Korean assets subject to U.S. jurisdiction. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 66 Treasury has been Office of Foreign involved in sanctions Funds Control: since the War of 1812 1940 – 1947 1800 1900 1920 1940 1960 present Office of Foreign Assets Control: 1950 – present OFAC is inside the Department of the Treasury, in particular inside the Office of Terrorism and Financial Intelligence. Below is a chart that shows where it fits in the organizational structure. Secretary of the Inspector General Treasury Treasury Inspector Deputy Secretary General for Tax of the Treasury Administration Special Inspector Office of the General, Troubled Chief of Staff Asset Relief Program Office of Terrorism Office of the Office of Domestic Office of and Financial Treasurer Finance International Affairs Intelligence Office of Financial Office of Office of Terrorist Institutions International Finance Financing and Office of Financial Office of Financial Crimes Markets International Office of Intelligence Office of Financial Markets and and Analysis Service Development Office of Foreign Office of Financial Asset Control Stability Office of Office of Office of General Counsel Economic Policy Legislative Affairs Management Chief Information Office of Public Office of Chief Risk Officer Affairs Tax Policy Officer www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 67 As you can see, OFAC is inside the Office of Terrorism and Financial Intelligence (TFI). The main goal of TFI is to sever the lines of financial support to international terrorists, WMD proliferators, narcotics traffickers, money launderers, and other threats to the U.S. national security. Below is an org chart of TFI: Under Secretary for Terrorism and Financial Intelligence Financial Crimes Assistant Secretary Assistant Secretary Office of Foreign Enforcement Network for Terrorism for Intelligence Assets Control (FinCEN) Financing and Analysis (OFAC) Deputy Assistant Deputy Assistant Secretary for Secretary for Terrorism Financing Analysis and and Financial Crime Production Treasury Executive Deputy Assistant Office for Asset Secretary for Forfeiture (TEOAF) Security Deputy Assistant Secretary for Intelligence Community Integration As you can see, another agency inside TFI, on the left, is FinCEN, the Financial Crimes Enforcement Network. The Bureau of Industry and Security (“BIS”), an agency within the Department of Commerce, administers most U.S. export control laws. The State Department regulates exports of arms. The State Department may also play a role in designating individuals or entities as targets for sanctions. Along with OFAC, the Department of Justice is involved in enforcement of the sanctions laws, especially if a violation rises to the level of a crime. Finally, the Federal Reserve to some extent oversees and enforces sanctions compliance by banks. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 68 Legal Basis The legal basis for the imposition and enforcement of economic sanctions in the United States is Article I of the U.S. Constitution, which gives Congress the power to regulate commerce with foreign nations. The Constitution reserves this power to Congress, so that practically all U.S. sanctions law is federal in nature. Individual states do have sanctions laws, but these primarily limit the ability of state bodies, such as pension funds, to make certain types of investments. Congress has in turn passed a number of statutes that impose specific sanctions and, more generally, delegates broad powers to the President (and, through him, the agencies of the Executive Branch) to impose and enforce sanctions. The two main statutes that confer on the President the broad ability to impose sanctions include 1. Trading with the Enemy Act (TWEA). TWEA, which dates back to 1917, gives the President the authority to prohibit or regulate trade, investments, remittances, travel and virtually any other economic transactions with any designated country or its nationals. The U.S. sanctions against Cuba were based on TWEA. 2. International Emergency Economic Powers Act (IEEPA). IEEPA authorizes the President to declare national emergencies in response to a specific threat. Having declared an emergency, the President has the power, among other things, to regulate property belonging to foreign persons that is subject to the jurisdiction of the United States. Most country sanctions programs, as well as sanctions against individuals and entities, are imposed under the authority of IEEPA. A number of other statutes impose sanctions on specific countries, as well as against other sanctions targets, including terrorists and drug kingpins. OFAC lists no fewer than 33 such statutes in all. The major statutes imposing sanctions, with their citation in the U.S. Code, include: General: Trade Sanctions Reform and Export Enhancement Act of 2000 (22 U.S.C. §§ 7201-7211); Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 Cuba: Cuban Democracy Act of 1992 (22 U.S.C. §§ 6001-6010); Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (22 U.S.C. §§ 6021-6091) Iran: Iran Freedom and Counter-Proliferation Act of 2012; Iran Freedom Support Act (50 U.S.C. § 1701 note); Iran Sanctions Act of 1996, as Amended (50 U.S.C. § 1701 note); Iran Threat Reduction and Syria Human Rights Act of 2012; National www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 69 Defense Authorization Act For Fiscal Year 2012; Countering America's Adversaries Through Sanctions Act (CAATSA) Nicaragua: Nicaragua Human Rights and Anticorruption Act of 2018 North Korea: North Korean Sanctions and Policy Enhancement Act of 2016; CAATSA Russia: Sergei Magnitsky Rule of Law Accountability Act of 2012; Support For The Sovereignty, Integrity, Democracy, And Economic Stability Of Ukraine Act Of 2014; Ukraine Freedom Support Act Of 2014; CAATSA Syria: Iran Threat Reduction and Syria Human Rights Act of 2012 Venezuela: Venezuela Defense of Human Rights and Civil Society Act of 2014 Terrorism: Antiterrorism and Effective Death Penalty Act of 1996 (8 U.S.C. § 1189); USA PATRIOT ACT; CAATSA Weapons Proliferation: Sections 2797b-c of the Arms Export Control Act Narcotics Trafficking: Foreign Narcotics Kingpin Designation Act (21 U.S.C. §§ 1901-1908) Democracy, Human Rights, and the Rule of Law: Global Magnitsky Human Rights Accountability Act The Process Sanctions can be imposed legally in several different ways. These include statutes, Executive Orders, and regulations. In addition, while they do not have the force of law, agency guidance, including Frequently Asked Questions, can essentially impose sanctions and create requirements for compliance as well. Statutes Statutes are measures enacted by Congress and signed into law by the President. Statutes are superior to all other forms of law except the Constitution. Statutes can impose sanctions directly. Section 103 of Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, for example, directly prohibits U.S. persons 3 from providing indirect financing for certain types of transactions involving Cuba. Such a direct imposition of sanctions by statute is relatively uncommon, though. More common is for the statute to require the President to act in certain circumstances. In such cases, the statutory language will typically state that “the 3 The definition of “U.S. person” is discussed below in the section on who must comply with U.S. sanctions www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 70 President shall impose” sanctions under the designated conditions. Section 228 of CAATSA, for example, states that The President shall impose the sanctions described in subsection (b) with respect to a foreign person if the President determines that the foreign person, based on credible information, on or after the date of the enactment of this section— ‘‘(1) is responsible for, complicit in, or responsible for ordering, controlling, or otherwise directing, the commission of serious human rights abuses in any territory forcibly occupied or otherwise controlled by the Government of the Russian Federation; Under a provision like this, Congress does not itself designate the persons subject to sanctions. However, if the President who determines that a foreign person has engaged in the prescribed conduct and imposes sanctions. This will normally be done by an announcement by OFAC that an identified person has been designated as a Specially Designated National, and is subject to the sanctions set forth in the statute. Even if the imposition of sanctions is mandatory, though, statutes normally include a provision allowing the President to waive action, usually if doing so is necessary for national security. The statute may also include exceptions to the imposition of even mandatory sanctions. A statute may also commit action to the President’s discretion. In such cases, the statute usually provides that “the President may impose” sanctions. Section 232 of CAATSA provides an example: The President, in coordination with allies of the United States, may impose five or more of the sanctions described in section 235 with respect to a person if the President determines that the person knowingly, on or after the date of the enactment of this Act, makes an investment described in subsection (b) or sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information, or support described in subsection (c)—…. In this case, the imposition of sanctions is not mandatory. When confronted with evidence that a person has made an investment described in the statutory section, the President decides whether or not to impose sanctions. In addition, the statute gives the President discretion to determine which sanctions to apply. Consequently, the President has some freedom in deciding whether and how to act. Finally, as discussed above, TWEA and especially IEEPA give the President broad authority to declare a national emergency with respect to a specific threat and to take appropriate measures, including the restriction or prohibition of transactions www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 71 and the freezing of property. Sanctions against many countries, are imposed under the authority of IEEPA and other, more country-specific statutes. Executive Orders The immediate legal authority for the imposition of sanctions usually takes the form of an Executive Order issued by the President. While an Executive Order must be based on power delegated to the President by a statute, Congress does not review or approve Executive Orders (although it can overturn them by statute). As a consequence, the President can interpret, modify, and withdraw Executive Orders without any action by Congress. As a practical matter, most U.S. sanctions are imposed pursuant to an Executive Order. An Executive Order begins with a citation to the statutory authority giving the President the right to act. The order then typically gives the President, the Secretary of the Treasury, or the Secretary of State the power to prohibit transactions and impose sanctions on individuals and entities. In some cases, the imposition of sanctions may be mandatory, in others discretionary. The Executive Order may also authorize the President or the Secretaries to take one or more actions. Often identifies Directs Cabinet the initial, Contains a Declares agencies, foundational Presidential a national especially targets for finding emergency Treasury, to do the sanctions specific things program Executive Order13849 of September 20, 2018 is a typical example. It implements the imposition of sanctions against persons and entities in the Russian Federation under CAATSA: Section 1. (a) When the President, or the Secretary of State or the Secretary of the Treasury pursuant to authority delegated by the President and in accordance with the terms of such delegation, has determined that sanctions shall be imposed on a person pursuant to sections 224(a)(2), 231(a), 232(a), or 233(a) of CAATSA and has selected from section 235 of CAATSA any of the sanctions set forth below to impose on that person, the Secretary of the Treasury, in consultation with the Secretary of State, shall take the following actions where necessary to implement the sanctions selected and maintained by the President, the Secretary of State, or the Secretary of the Treasury: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 72 i. prohibit any United States financial institution from making loans or providing credits to the sanctioned person totaling more than $10,000,000 in any 12-month period, unless the person is engaged in activities to relieve human suffering and the loans or credits are provided for such activities; ii. prohibit any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest; iii. prohibit any transfers of credit or payments between financial institutions, or by, through, or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States and involve any interest of the sanctioned person; iv. block all property and interests in property of the sanctioned person that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in; v. prohibit any United States person from investing in or purchasing significant amounts of equity or debt instruments of the sanctioned person; or vi. impose on the principal executive officer or officers of the sanctioned person, or on persons performing similar functions and with similar authorities as such officer or officers, the sanctions described in subsections (a)(i)–(a)(v) of this section, as selected by the President, the Secretary of State, or the Secretary of the Treasury. Three aspects of an Executive Order like this are noteworthy. First, the President or one of the Secretaries decides whether a person is subject to the sanctions set forth in CAATSA. Although the Order states that the President or the Secretaries “shall” act in such a case, it is left to them to decide what actions are necessary to enforce the sanctions. Finally, they can decide which sanctions to apply. This leaves the President a great deal of flexibility in deciding who to impose sanctions on, and what sanctions to impose. A recent development has been the use of a statute to codify sanctions imposed under Executive Orders by the President. While the President could normally modify or revoke sanctions imposed under Executive Orders, the codification of such sanctions means that Congressional action is required to make any changes. Regulations Both statutes and Executive Orders tend to impose sanctions in fairly broad terms. The actual administration of sanctions, however, usually requires a greater level of detail. This is provided in the form of regulations issued by OFAC. Indeed, www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 73 an Executive Order may direct OFAC to promulgate regulations with respect to a particular sanctions program. A typical regulation, such as the Iranian Transactions and Sanctions Regulations (included in the Appendix) will cover 1. Prohibited transactions (imports, exports, investments, dealing in blocked property, etc.) 2. Definitions 3. Interpretations 4. Licenses and exemptions 5. Reporting requirements 6. Penalties for violations A single program may have multiple sets of regulations, covering different aspects of the program. Regulations do not normally provide the authority to designate persons as being subject to sanctions, though; this is usually done through an Executive Order. Agency Guidance and FAQs Even regulations cannot necessarily provide all of the detail needed to interpret and apply U.S. sanctions. OFAC accordingly publishes guidance (sometimes called interpretive guidance) on a variety of issues. Some are general in nature, such as the ability of U.S. attorneys to provide sanctions advice to non-U.S. persons, while others provide commentary on specific issues with individual sanctions programs. In addition, OFAC has published responses to a number of frequently asked questions (FAQs); at last count, there were 690 of these. These FAQs address everything from the broadest of questions (“what is OFAC and what does it do?”) to the very specific (“what is the definition of the copper sector of Iran?”). These FAQs can be found at https://www.treasury.gov/resource-center/faqs/ Sanctions/Documents/faq_all.html. Guidance, interpretive guidance, and FAQs do not have the force of law. However, they do reflect OFAC’s interpretation of statutes, Executive Orders, and regulations, as well as OFAC’s conclusions regarding the responsibility of U.S. persons and others for compliance with U.S. sanctions laws. In the United States, courts traditionally give great deference to an agency’s interpretation of the laws. Finally, anyone can request advice from OFAC on either broad topics, or on whether a particular transaction would violate U.S. law. While OFAC’s response is not necessarily binding, such a response is again a strong indication of how the agency interprets and applies U.S. sanctions laws. For this reason, proceeding with a transaction that OFAC has indicated it believes is illegal may expose the parties to the transaction to a real risk of violating U.S. law. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 74 United Nations Sanctions The United States does not automatically apply UN sanctions. As a practical matter, however, the United States normally incorporates UN sanctions into domestic law very quickly. U.S. sanctions are much broader than those imposed by the UN, though. Types of Sanctions The types of sanctions used by the United States resemble those utilized by the EU. These sanctions include arms embargoes, trade sanctions, financial sanctions, travel bans, and asset freezes. Unlike the EU, U.S. sanctions tend to be much broader and less targeted, in the sense that several countries are subject to general embargos of trade and finance. The United States evinces less concern for the impact of sanctions on the population of countries subject to embargos, although certain exceptions and general licenses seek to mitigate at least some of the humanitarian damage caused by sanctions. No single document contains all of the U.S. sanctions in force. The OFAC web site, however, contains comprehensive information on the U.S. sanctions under the various programs, including the applicable statutes, Executive Orders, regulations, guidance, and FAQs, as well as on general licenses. In addition, OFAC publishes summaries of the various sanctions programs. While these provide useful overviews, they are not always up-to-date. OFAC does operate an e-mail list whose participants are informed of any changes to U.S. sanction the day they occur. OFAC maintains a comprehensive list of all of its “recent actions” containing updates, changes in laws, and penalty notices, at https://www.treasury.gov/resource-center/sanctions/ofac-enforcement/pages/ ofac-recent-actions.aspx. A subscription to OFAC’s e-mail service for recent actions is available on the same page. Blocking of Property is the most sweeping sanction applied by the United States. In this sense, “blocking” essentially means freezing the goods or services. This sanction is applied to individuals, entities, or others that have been designated by OFAC as “Specially Designated Nationals,” or SDNs. It may also be applied to entire governments, as is currently the case with North Korea, Syria, and Venezuela. Executive Order 13884, which applied this sanction to the Government of Venezuela, employs typical language: Section 1. (a) All property and interests in property of the Government of Venezuela that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in. The terms “property” and “interest in property” encompass practically anything of value, as the definition from the ITSR shows: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 75 The terms property and property interest include, but are not limited to, money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors' sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent. Blocked property remains under the ownership of the sanctioned person or entity; the U.S. government has not seized the property. U.S. persons who gain control over funds belonging to a sanctioned person are required to place those funds in a separate interest-bearing account. The funds cannot be withdrawn or disbursed without the permission of OFAC. Similarly, if physical assets are involved, those assets must be maintained at the expense of the owner (i.e., the sanctioned party), although OFAC can allow their liquidation and the deposit of the resulting funds in an interest-bearing account. Unlike the EU, U.S. sanctions do not contain any fixed exceptions allowing for access to blocked property, although OFAC may always do so by issuing a license. Travel bans consist of restrictions or prohibitions on travel by designated individuals to the United States. Executive Order 13884, which imposed various sanctions on Venezuela, uses fairly standard language to impose a travel ban: The unrestricted immigrant and nonimmigrant entry into the United States of aliens determined to meet one or more of the criteria in section 1(b) of this order would be detrimental to the interests of the United States, and entry of such persons into the United States, as immigrants or nonimmigrants, is hereby suspended, except when the Secretary of State determines that the person’s entry would not be contrary to the interests of the United States. All immigration law in the United States is federal, so that such a travel ban applies throughout the United States. The United States may also ban travel by U.S. nationals to certain countries. Presently, such travel bans apply to Cuba (with some relatively significant exceptions) and to North Korea. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 76 Arms embargoes prohibit the sale weapons and related services to restricted individuals, groups, or states. The U.S. “Munitions List” designates various goods, services, and technology as being defense articles or services. Exports of items on the Munitions List require a license from the State Department, which may act on the advice of the Department of Defense. The Munitions List covers 20 different categories of articles, services, and technology, including firearms; guns; ammunition; missiles, rockets, bombs, and mines; explosives; naval vehicles; military ground vehicles; military aircraft; military training equipment; personal protective equipment; military electronics; fire control and guidance equipment; various other materials; chemical and biological agents; spacecraft; nuclear weapons; directed energy weapons; gas turbine engines; and submarines. Whether a given product is on the Munitions List may depend upon its precise characteristics. The Munitions List explicitly includes not just military articles, but the services and technology associated with those articles. The Munitions List is incorporated into the International Trade in Arms Regulations (“ITAR”). ITAR is administered by the Directorate of Defense Trade Controls (DDTC), an agency within the State Department. DDTC must license all exports of goods, services, or technology on the Munitions List in advance. Exports of defense items to Belarus, Burma (Myanmar), China, Cuba, Iran, North Korea, Syria, and Venezuela are completely. Exports to Afghanistan, Central African Republic, Cyprus, Democratic Republic of Congo, Eritrea, Haiti, Iraq, Lebanon, Libya, Somalia, South Sudan, Sudan, and Zimbabwe, are generally prohibited, but there are narrow exceptions. Exports of defense items to Russia are not prohibited per se, but are subject to very tight controls. Conversely, U.S. law also prohibit imports of defense materials from some countries, such as Russia. Restrictions on imports, exports, and investment. U.S. sanctions directed against countries that go beyond the designation of individuals or entities as SDNs almost always contain some sort of prohibition on imports, exports, and investment. Imports The legal language prohibiting imports tends to be quite straightforward. The Iranian Transactions and Sanctions Regulations (ITSR), for example, contain the following provisions: §560.201 Prohibited importation of goods or services from Iran. Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, the importation into the United States of any goods or services of Iranian origin or owned or controlled by the Government of Iran, other than information and informational www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 77 materials within the meaning of section 203(b)(3) of the International Emergency Economic Powers Act (50 U.S.C. 1702(b)(3)), is prohibited. There may be exceptions for specific imports. The U.S. sanctions against Iran previously allowed the importation of Persian carpets and pistachios from Iran, although these exceptions were removed when the United States reimposed broad sanctions against Iran in 2017. Exports The language of ITSR prohibiting exports is even broader: §560.204 Prohibited exportation, reexportation, sale, or supply of goods, technology, or services to Iran. Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, reexportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that: (a) Such goods, technology, or services are intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran; or (b) Such goods, technology, or services are intended specifically for use in the production of, for commingling with, or for incorporation into goods, technology, or services to be directly or indirectly supplied, transshipped, or reexported exclusively or predominantly to Iran or the Government of Iran. U.S. export sanctions include services and technology as well as goods. Financial services are considered a form of services, so that a ban on the export of services essentially prevents any transactions with the target country, as no U.S. bank can process the transaction. Technology includes software, preventing sales over the Internet as well. Sanctions apply to exports to the government of the target country as well as to the territory of the target country. As well as banning exports from the United States or by U.S. persons, U.S. sanctions may also prohibit the re-exportation of U.S. goods, services, or technology by non-U.S. persons: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 78 §560.205 Prohibited reexportation of goods, technology, or services to Iran or the Government of Iran by persons other than United States persons; exceptions. (a) Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, the reexportation from a third country, directly or indirectly, by a person other than a United States person, of any goods, technology, or services that have been exported from the United States is prohibited, if: (1) Undertaken with knowledge or reason to know that the reexportation is intended specifically for Iran or the Government of Iran; and (2) The exportation of such goods, technology, or services from the United States to Iran was subject to export license application requirements under any United States regulations in effect on May 6, 1995, or thereafter is made subject to such requirements imposed independently of this part (see §560.414). The export prohibition applies to non-U.S. persons if they knew, when they purchased the items, that they were intended for exportation to Iran. The prohibition also includes U.S. -origin articles that are used in the production of or are incorporated into goods, technology, or services where, at the time of their purchase, the intent was to export the finished article to Iran. These prohibitions commonly contain a de minimis requirements, so that the prohibition does not apply if the value of the U.S. content of the finished good, service, or technology is below a specified percentage. The percentage allowed varies by country; in the case of Iran, for example, it is less than 10 percent. The de minimis exception does not apply, however, to U.S.-origin goods that are subject to export controls; no exports of products containing such items are allowed without a license. Finally, trade measures may restrict exports of goods, services, and technology to specific sectors or industries in the target country, while allowing other exports. An example is the prohibition on exports to certain energy projects in Russia, which is discussed below. Trade-related Transactions As well as prohibiting the import or export of goods, services, or technology, U.S. sanctions may prohibit U.S. persons from participating in essentially any way in a transaction involving a country subject to sanctions, as the following provision from the ITSR provides: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 79 §560.206 Prohibited trade-related transactions with Iran; goods, technology, or services. (a) Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, no United States person, wherever located, may engage in any transaction or dealing in or related to: (1) Goods or services of Iranian origin or owned or controlled by the Government of Iran; or (2) Goods, technology, or services for exportation, reexportation, sale or supply, directly or indirectly, to Iran or the Government of Iran. (b) For purposes of paragraph (a) of this section, the term transaction or dealing includes but is not limited to purchasing, selling, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing. As the regulation makes clear, the definition of “transaction or dealing” is very broad, and encompasses any role a U.S. person could potentially take in a transaction involving a country subject to sanctions. Investment A less common type of economic sanction is a prohibition or restriction on investment. Unlike the EU, the United States usually prohibits all investment after a certain date. The following example is from the ITSR: §560.207 Prohibited investment. Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, any new investment by a United States person in Iran or in property (including entities) owned or controlled by the Government of Iran is prohibited. “Investment” in this sense includes a commitment or contribution of funds or other assets, or a loan or other extension of credit. Such a sanction does not technically require a U.S. person to liquidate existing investments, but it may make it impossible for them to provide any additional funds or assets. Sanctions against the export of financial services may also prevent them from receiving dividends or repatriating profits or capital from investments in countries subject to sanctions. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 80 Menu Sanctions Several U.S. sanctions statutes, including the Iran Sanctions Act and CAATSA, prescribe so-called “menu” sanctions as well. These sanctions are directed against persons who knowingly engage in certain types of activities, such as investment in or support for the Iranian petroleum sector. Under these provisions, the President can impose five or more of a number of different measures, including A prohibition on financing from the United States Export-Import Bank for exports to the sanctioned person; Denial of the issuance of licenses for exports from the United States to the sanctioned person; Prohibition on the provision of loans to the sanctioned person by U.S. banks; U.S. opposition to any loans from international financial institutions, such as development banks; Ban on the U.S. government procuring goods, services, or technology from the sanctioned person; Restrictions or prohibition on the acquisition of foreign exchange by the sanctioned person, i.e., a ban on the ability to use U.S. dollars; Restrictions or prohibitions on transactions involving property subject to U.S. jurisdiction; A prohibition on investment by U.S. persons in the debt or equity of the sanctioned person; Exclusion of corporate officers from the United States; Sanctioned against corporate officers. In addition, financial institutions may be denied designation as a primary dealer in U.S. government bonds and use as a repository for U.S. government funds. The United States has in fact been very reluctant to actually apply these sanctions. They remain U.S. law, however, and this situation could change at any time. Sanctions Against Foreign Financial Institutions Some U.S. sanctions are directed specifically against foreign banks and other financial institutions. U.S. sanctions against Iran, North Korea, and Russia permit or require the President to impose sanctions against foreign financial institutions that engage in certain types of activities. These sanctions primarily take the form of restrictions or prohibition of the maintenance of correspondent and payable- through accounts by U.S. financial institutions in favor of the foreign bank. Such measures would essentially cut sanctioned foreign financial institutions off from access to the U.S. financial system. Sectoral Sanctions Like the EU, the United States also imposes sectoral sanctions against certain entities in Russia and Venezuela. There are two main types of sectoral sanctions: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 81 Prohibition on dealing in debt and equity: U.S. persons are prohibited from dealing in debt or equity of a designated entity issued after a specified date. With respect to debt, the prohibition applies only if the debt has a maturity beyond a set limit. The applicable limit varies according to the sector in which the designated entity operates. “Dealing” encompasses virtually all possible actions in connection with debt or equity. Restrictions on exports: U.S. persons are prohibited from exporting goods, services, or technology to designated Russia entities in connection with certain types of petroleum projects. Evasion and Facilitation While not strictly a sanction, U.S. law prohibits any transaction that “evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate” a U.S. sanction. Unlike some of the other prohibitions, this is not restricted to U.S. persons only, so that a foreign person who caused a violation of sanctions by, for example, concealing the presence of a sanctioned element in a transaction so that a U.S. bank processed the transaction, could itself violate sanctions. U.S. sanctions law also prohibits U.S. persons from facilitating transactions if it would be illegal for them to participate in the transaction directly. Section 560.208 of the ITSR provides standard language banning facilitation: {N}o United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States. Facilitation is a poorly-defined concept, and could potentially reach almost any involvement in an otherwise-prohibited transaction at all. Among other actions, the ban on facilitation would prevent a U.S. person from referring a business opportunity or transaction involving a sanctioned person, entity, or country to a non-U.S. person. The prohibition on facilitation does apply only to U.S. persons. Licenses and Exceptions Certain types of transactions are normally exempted from U.S. sanctions. In addition, either a general or a specific license may authorize transactions that would otherwise be prohibited. Exceptions and General Licenses Because U.S. prohibitions on imports and exports regarding individual countries tend to be comprehensive, they commonly include a number of exceptions and www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 82 exemptions. These may be statutory or provided for in regulation. Common exceptions and exemptions include Post and telecommunications Humanitarian donations Information and informational materials (including books, music, photographs, and film) Expenses associated with travel (where travel is allowed) Official business. General licenses are similar to exceptions. Despite the name, they are available to all persons, and no application is required. General licenses may be provided for in a regulation or issued separately by OFAC. They may provide very broad authorizations, allowing exports of whole categories of products, or very specific, such as an authorization to engage in specified types of transactions with a named entity. General licenses may be open-ended or limited to a certain period. Under the various country sanctions programs, general licenses generally authorize exports of agricultural products and medicine and medical products from bans on exports. The regulations regarding what qualify are quite specific. In addition, it may be necessary to follow a set procedure for such exports to qualify. Exports of permitted agricultural products to Cuba, for example, do not require a license as such, but BIS must be notified of the export before it occurs. If a transaction is exempted from sanctions, other transactions necessary to conduct it, such as financing or the processing of payments, are also allowed. Specific Licenses OFAC may also issue specific licenses. A specific license authorizes a designated party to engage in a transaction or series of transactions for a prescribed period of time. The license may also identify the individual entities otherwise subject to sanctions with which transactions can be conducted. The authorization provided by a specific license is available only to the licensee. For this reason, it is common for a license to identify, not just the individual party seeking the license, but any affiliates and subcontractors that may also be involved. Both U.S. and non-U.S. persons may apply for a license; the latter may occur when, for example, a non- U.S. company wishes to re-export U.S. origin products to a sanctioned country. The licensee must comply strictly with the terms of a license. OFAC will consider requests for renewal, but this requires the filing of a new license application. OFAC accepts license applications through its online portal at https://licensing.ofac.treas.gov/Apply/Introduction.aspx. The same process is used to seek guidance regarding a potential transaction. While the online application form requests basic information, it is also possible to attach documents. It is usually best to include a letter providing the full details of the request. The application should identify: www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 83 1. The type of license sought (release of blocked wire transfers, Cuban travel, exports of certain agricultural or medical products to Iran or Sudan, a specific license for a transaction or series of transactions, or interpretive guidance regarding a potential transaction) 2. The applicable sanctions program or programs; 3. The names of any SDNs involved in the transaction; 4. The name and address of the applicant; 5. Why the applicant believes a license is necessary; 6. The purpose of the application; 7. A complete description of the contemplated transactions, including money flows and other related transactions; 8. The names of all potential parties to the transactions, including affiliates and subcontractors; 9. The length of time for which the license is sought; and 10. Include any appropriate documents, such as contracts, sales literature describing the goods involved, and copies of past licenses. Targets of U.S. Sanctions Targets of U.S. sanctions include individuals, legal entities, informal organizations such as Al Qaida, vessels, aircraft, governments, regions of countries, and countries. Sanctions targets are potentially subject to a range of different measures, from complete asset freezes to restrictions on the ability to borrow from U.S. persons or to use U.S. government programs. SDNs The most comprehensive U.S. sanctions apply to Specially Designated Nationals (SDNs)Pursuant to various statutes and Executive Orders, OFAC may designate individuals, legal entities, individual government agencies, vessels, and aircraft as SDNs. The reasons for which a person or entity may be designated an SDN include: Engagement in or support of international terrorism Narcotics trafficking Arms proliferation Assistance in the development of weapons of mass destruction Suppression of democracy, human rights, and the rule of law As discussed above, U.S. persons are generally prohibited from having any dealings with SDNs, and are required to block any property or interest in property of an SDN that comes under their control. The names of SDNs are published on the SDN list, which is available at https://www.treasury.gov/resource-center/ sanctions/SDN-List/Pages/default.aspx in various formats. In addition, OFAC has created a search tool for determining whether a person or entity is on the SDN list. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 84 The entry on the SDN list for each SDN provides the name and alternative names or aliases. For entities, it provides the address, as well as other relevant information, such as the commercial registry number. For individuals, the listing shows the date and place of birth, nationality, passport number, and other passport information. Finally, the SDN listing shows the sanctions programs under which the person or entity was designated, and whether they are potentially subject to secondary sanctions. Interestingly, the SDN list does not show the date of designation or the Executive Order or statute under which the designation was made. As with the EU, entities owned by SDNs are also subject to U.S. sanctions laws, even if they have not been separately designated. Under U.S. law, any entity that is owned 50 percent or more by any combination of SDNs is also considered an SDN by operation of law. OFAC does not apply a control test. However, under its 50 percent rule, OFAC will examine the chain of ownership. If an SDN or combination of SDNs owns 50 percent or more of an entity, that entity is designated as a matter of law. In turn, all entities in which that entity has a 50 percent or greater ownership is also designated. This can continue through several stages. The following example shows how an entity in which an SDN owns a minority share could nonetheless be treated as an SDN as well: 1. SDN Z owns 51 percent of Company A. Company A is also an SDN. 2. Company A owns 51 percent of Company B. Company B is also an SDN because Company A owns 51 percent of it, even though SDN Z owns only 26 percent of it. This chain could continue indefinitely. OFAC’s guidance on the 50 percent rule is included in the Appendix. Regions and Countries Regions and countries can also be the target of OFAC sanctions. At present, Cuba, Iran, North Korea, and Syria are subject to comprehensive or near-comprehensive sanctions that ban most transactions between the United States and U.S persons and these countries. In some cases, the United States has also frozen property belonging either to the governments of these countries, or to individual government agencies or entities. The United States has also imposed an embargo on economic relations with the Crimea region of Ukraine following its purported annexation into the Russian Federation. The United States maintains broad but not comprehensive sanctions against Russia and Venezuela, although sanctions against both have expanded over time. The U.S. sanctions involving the Darfur region of Sudan are directed at persons and entities committing massive human rights violations in Darfur, rather than at the Darfur region itself. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 85 Sectoral Sanctions Identifications The United States imposes sectoral sanctions against certain designated companies in the finance, energy, and defense sectors of the Russian economy. These entities are designated as Sectoral Sanctions Identifications (SSIs). As with SDNs, entities that are owned 50 percent or more by SSIs are also subject to sectoral sanctions, even if they are not separately included in the SSI List. U.S. law prohibits U.S. persons from dealing in the debt or equity of SSIs under certain circumstances, as well as exporting goods, services, or technology to SSIs in connection with certain petroleum projects in Russia. SSIs are subject only to the prescribed sanctions, and all other transactions with SSIs are legal. There is no requirement (or indeed, legal basis) to block their property. The Sectoral Sanctions Identifications List, which can be found at https:// www.treasury.gov/resource-center/sanctions/SDN-List/Pages/ssi_list.aspx. Foreign Sanctions Evaders Executive Order 13608, "Prohibiting Certain Transactions With and Suspending Entry Into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria" gives OFAC the authority to impose sanctions on foreign persons (individuals and entities) who OFAC determines (1) to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions concerning Syria or Iran, or (2) to have facilitated deceptive transactions for or on behalf of persons subject to U.S. sanctions concerning Syria or Iran. U.S. persons are basically prohibited from having any dealings with Foreign Sanctions Evaders. Unlike SDNs, though, there is no requirement to block their property. Foreign Financial Institutions Foreign financial institutions can be subject to U.S. sanctions if they conduct certain types of transactions involving Iran, North Korea, Russia, or Syria. These institutions are identified in the so-called CAPTA (Correspondent Account Payable Through Account List). At present, only one financial institution, the Bank of Kunlun in China, is on this list. Secondary Sanctions U.S. law allows for the imposition of a range of sanctions against foreign persons and entities that engage in certain types of transactions with Iran, North Korea, Russia, and Syria. These sanctions range from the menu sanctions described above to mandatory designation as an SDN. Individuals and entities with whom transactions can give rise to secondary sanctions are identified as such in the SDN list. Potentially any individual or entity in the world, other than U.S. persons, could accordingly be subject to secondary sanctions. Although U.S. law has had www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 86 provisions regarding secondary sanctions in place for some time, the United States has in fact been extremely reluctant to apply them, for political and economic reasons. Nonetheless, their existence means that foreign persons who do business with Iran, North Korea, Russia, or Syria should be aware of these sanctions, and the fact that this business could result in the imposition of sanctions upon them. Below is a chart that highlights the differences between primary and secondary sanctions. Primary Sanctions Secondary Sanctions Since 1812 2010 Seek to regulate behavior Influence the actions of Goal of US persons non US persons They require US persons to Threaten non-US persons with block assets within their becoming OFAC sanctions possession or control or to What they do targets themselves if they prohibit US persons from continue to deal with specific, engaging in transactions existing targets of US sanctions with the targets of sanctions. Who Must Comply with U.S. Sanctions? As a general rule, U.S. sanctions apply to “U.S. persons.” U.S. persons include U.S. citizens and resident aliens, wherever they are located. They also apply to entities organized under the laws of a state, even if they are doing business abroad. Branches of U.S. companies in other countries are considered U.S. persons as well. U.S. subsidiaries of foreign companies are U.S. persons. The below scenario highlights the fact that OFAC’s reach goes beyond financial institutions: You heard about sanctions against Iran, but because You are the owner …to export the You meet a business nail care products of a nail care nail care products person at a local are not financial product company You sign an to their Contacts trade fair on nail services or in New York exclusive in Iran care products. weapons, there should be no distributor They tell you that problem… agreement you product with them… will sell well in Iran www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 87 You may think that this is a hypothetical scenario. It is not. Keep on reading: Scenario with Real Life Lesson The scenario you just saw is adapted from a real life. It turns out that a lot can go wrong! Even innocuous products or services can become involved in OFAC violations if they are exported to a sanctioned country. A New York cosmetics firm learned this the hard way. The company was fined $450,000 by OFAC for exporting nail care products to Iran. ENFORCEMENT INFORMATION FOR (April 10, 2012) ENTITIES – 31 CFR 501.805(d)(1)(i) Essie Cosmetics Ltd. And Individual Corporate Officer Settle Iranian Transactions Regulations Allegations: Essie Cosmetics Ltd. (“Essie”) and a former individual corporate officer (“Individual”), New York City, New York, have agreed to settle OFAC allegations involving Essie and Individual’s unlicensed exports to Iran in violation of the Iranian Transactions Regulations (the “ITR”), promulgated pursuant to, inter alia, the International. Foreign subsidiaries of U.S. companies – i.e., those organized under the law of another country – are not considered U.S. persons. As a consequence, foreign subsidiaries may be able to do some types of business that their U.S. parents could not. However, the sanctions laws regarding Cuba and Iran specify that they apply to foreign subsidiaries of U.S. companies as well. It is this requirement that gave rise to the EU blocking statute. Even if a foreign subsidiary is legally permitted to do business with sanctioned entities or countries, though, any involvement of the U.S. parent in a transaction could expose the U.S. parent to liability. U.S. sanctions also apply to any person who is physically present in the territory of the United States, regardless of their nationality. This remains true as long as they are present in the United States. Similarly, U.S. sanctions laws apply to any business a foreign entity does in the United States, even if it has no physical presence in the United States. U.S. sanctions laws also effectively apply to all transactions denominated in U.S. dollars. If any segment of a transaction involves a U.S. person, it is subject to U.S. law. Practically all non-cash U.S. dollar payments are cleared through U.S. banks, www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 88 which are U.S. persons. Even if no other party to the transaction is a U.S. person, the involvement of a U.S. bank or any other U.S. person in the transaction will result in the potential application of U.S. law. U.S. Sanctions Programs The United States currently has in place 31 different sanctions programs. The scope of these programs vary widely. Most involve the designation of individuals and entities as SDNs in response to actions that undermine the goals of the program. To stress that sanctions are not directed at the country as a whole, many of these programs are described as “Related,” such as the Mali-Related Sanctions. Other of the country-related sanctions, though, are quite extensive, and in the cases of Cuba, Iran, North Korea, and Syria essentially impose an embargo. The programs, their purposes, and the sanctions they apply are summarized below: Balkans-Related These sanctions which were originally implemented in 2001, are directed at individuals and entities whose actions undermined efforts to establish stability in the Western Balkans, and especially in Bosnia-Herzegovina. Targets of these sanctions are designated as SDNs. There are no country-specific sanctions under this program. Belarus U.S. sanctions against Belarus are directed at individuals and entities who undermine Belarus’ democratic processes or institutions, commit human rights abuses related to political repression, and engage in public corruption including by diverting or misusing Belarusian public assets or by misusing public authority. The only sanctions imposed under this program are the designations of various Belarusan government officials, including President Lukashenka, as SDNs. Otherwise, all transactions with Belarus are allowed. OFAC has designated a number of major state-owned companies as SDNs, including Belneftikhim, the state-owned oil and chemical company. Belneftikhim owns a large number of other countries in Belarus. Because of OFAC’s 50 percent rule, these companies are considered SDNs as well. To complicate things, it is not always easy to determine ownership in Belarus. OFAC has repeatedly issued a general license, however, authorizing U.S. persons to engage in transactions with a number of major Belarusan SDNs, including Belneftikhim. These general licenses have had a term of six months. Although they have been regularly renewed, there is always the possibility that OFAC will either decline to renew the license, or even revoke it. www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 89 Burundi Sanctions Under the Burundi sanctions, the United States has designated as SDNs a number of individuals, including present and former government officials, for actions undermining democracy and human rights in Burundi. Otherwise, all transactions with Burundi are allowed. Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA) CAATSA imposes sanctions against a number of countries, including Iran, North Korea, Syria, and Russia. OFAC nonetheless treats certain sanctions provided for under CAATSA as a separate sanctions program. These sanctions will be discussed in the context of the individual countries below. Central African Republic Under these sanctions, OFAC designates as SDNs persons whose actions undermine the peace and security of the Central African Republic. All other transactions with the CAR are allowed. Counter Narcotics Trafficking This program applies sanctions significant foreign narcotics traffickers and their organizations worldwide. Narcotics traffickers may be designated as SDNs. Companies and entities they own or control may also be designated. Counter Terrorism The suppression of terrorism is a major U.S. foreign policy goal. The primary sanction under this program is the designation of individuals and entities who commit terrorist acts or support terrorism as SDNs. Cuba Cuba is the oldest sanctions program of the United States. The United States imposed a general embargo against Cuba in 1960. Although there have been some changes, the United States continues to maintain a comprehensive embargo on trade, financial, and travel transactions with Cuba. Coverage: Unlike other U.S. sanctions programs, the Cuban program does not use the term “U.S. person.” Rather, it covers “persons subject to U.S. jurisdiction,” which is defined as a. Any individual, wherever located, who is a citizen or resident of the United States; b. Any person within the United States as defined in §515.330; www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 90 c. Any corporation, partnership, association, or other organization organized under the laws of the United States or of any State, territory, possession, or district of the United States; and d. Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by persons specified in paragraphs (a) or (c) of this section. Consequently, foreign subsidiaries of U.S. companies are subject to U.S. sanctions laws regarding Cuba as well. This means that these subsidiaries are banned by U.S. law from doing business that is completely legal under the laws of their country of organization. The United States does not, however, apply any secondary sanctions with respect to Cuba. Asset freeze: In the past, all assets belonging to the Cuban government and to any Cuban national or entity, wherever located (except in the United States itself) were blocked. This no longer applies to Cuban nationals who are located in the United States, or who have taken up permanent residence outside of Cuba and can prove this through documentation. This exception does not apply, though, to prohibited officials of the Cuban government or the Cuban Communist Party. In addition, assets belonging to entities are unblocked if they were blocked solely because they were owned by a Cuban national whose assets have also been unblocked. Exports: Exports of U.S. origin products and exports from the United States to Cuba are prohibited without a license. Such a license can cover only exports of U.S. origin goods or services. There are exceptions for informational materials, for donations of food, and for agricultural products. The exception for agricultural commodities applies only to specified products. Although they do not require a license per se, these exports must be reported to BIS in advance, and BIS can refuse to allow the exportation. In addition, agricultural exports can be sold only for cash in advance or with financing by a financial institution outside the United States or Cuba. Imports: All imports from Cuba are prohibited without a license. There is an exception for imports of goods and services produced by independent Cuban entrepreneurs who have been designated as such by the State Department. Financial transactions: Financial transactions involving a Cuban element are prohibited unless performed in connection with a licensed transaction. In a recent change, U.S. banks are prohibited from processing transactions involving a Cuban element, even if none of the other parties to the transaction is a U.S. person. There are limited exceptions to this rule, including financial transactions involving Remittances from “persons subject to U.S. jurisdiction” to Cuban nationals who are close relatives Remittances from Cuban nationals to persons subject to U.S. jurisdiction Cuban official missions in the United States www.sanctionsassociation.org Certified Sanctions Specialist (CSS) 91 Official business of the U.S. government, other foreign governments, and certain intergovernmental agencies Operating expenses or other official business in Cuba of third-country official missions or any intergovernmental organization in which the United States is a member Travel: Travel by U.S. persons to Cuba is banned unless the travel falls under one of several specific categories provided for under a general license, or unless a specific license is issued. Normal “tourism” as such is not allowed without a specific license. Banking: Despite the general embargo on trade and financial transactions with Cuba, some banking relationships with Cuba are allowed. U.S. banks can open correspondent accounts for Cuban banks. They can also process payments on credit and debit cards for travel expenses incurred during authorized travel to Cuba. Shipping: U.S. ships are not allowed to call on Cuban ports, and Cuban ships cannot enter U.S. waters. Third-country ships that call on Cuban ports are banned from loading or unloading cargo in the United States for 180 days after the date of departure from Cuba. Claims against Third Parties: At the time of the Cuban Revolution, the new government seized a great deal of property belonging to persons w

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