U.S. Sanctions Changes – New Opportunities and Risks with More Enforcement
By Alan M. Dunn & Jennifer M. Smith
Posted: 3rd March 2016 10:27
There have been dramatic changes in U.S. economic sanctions programs over the past six months. In some cases the U.S. government has lifted restrictions, allowing transactions that had long been prohibited – notably Iran, Cuba, Liberia, and Myanmar. In other cases, new sanctions have been added that are more restrictive, such as U.S. sanctions on Russia, Syria, and Sudan. In addition to numerous changes to the substance of U.S. sanctions programs, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which administers the programs, frequently adds new persons and organizations to the lists of blocked persons, specially designated nationals (SDNs), and non-SDN persons and organizations, subjecting them to sanctions of one type or another.
Importantly, the U.S. government has greatly expanded its enforcement capabilities and efforts across the board, adding staff and upgrading electronic tracking of transactions. This has increased the likelihood that violations, whether intentional or accidental, will be detected and enforcement proceedings launched.
The greatest difficulty for U.S. businesses engaged in international markets is keeping up with changes to the sanctions rules, which sometimes come by surprise and often are so complicated that the boundaries between what is allowed and what is prohibited can be unclear. The burden is on U.S. persons and businesses engaged in international trade to keep current and comply with OFAC’s frequently changing rules and guidance. This requires increasingly sophisticated compliance policies and active engagement by management to avoid potentially large penalties as well as the significant costs of undergoing government investigations of suspect transactions. Penalties for violations of OFAC administered sanctions are severe:
- Criminal penalties: Fines of up to $1 million per transaction and natural persons may be imprisoned for up to 20 years for knowing or willful violations
- Civil penalties: Fines up to the greater of $250,000 per transaction or an amount that is twice the amount of the transaction that is the basis of the violation can be imposed on a strict liability basis
Three examples of significant recent changes to U.S. economic sanctions programs are described below. In each, Cuba, Iran, and Russia, important new amendments were introduced, expanding business opportunities in the cases of Cuba and Iran, and further restricting business in the case of Russia.
Cuba – Related U.S. Sanctions
Three times in the past year President Obama has made surprise announcements of substantial changes to the U.S. Cuban Assets Control Regulations (CACR), all aimed at easing long-standing U.S. sanctions against Cuba. These amendments were intended to expand opportunities for U.S. persons to travel to Cuba, allow more U.S. businesses to export their goods and services to Cuba, and increase the permissible trade financing options for certain types of authorized exports to Cuba.
The U.S. President has a narrow range of discretion with respect to Cuba sanctions because very restrictive laws have been passed by the U.S. Congress limiting what changes can be made. As a result, the President took an indirect approach toward easing restrictions on Cuba by having OFAC issue new“general licenses” authorizing U.S. persons to engage in certain types of transactions.
For example, new general licenses authorized travel to Cuba under twelve categories of travel without the need to file for a “specific license” from OFAC. In that same vein, OFAC has continued to augment the new “generally licensed” categories of travel, expanding the range of who is authorized, what they can do while in Cuba, and what travel related services can be provided to them. The general licenses allowtravel-related transactions directly related to market research, commercial marketing, sales or contract negotiation, and accompanied delivery, installation and service of any items authorized for sale. Another example of how the President used general licenses for the broader purpose expanding foreign relations with Cuba is the new general license authorizing travel related and other transactions for U.S. persons to set up amateur or semi-professional sports competitions and to arrange public performances, workshops, and other demonstrations in Cuba.
However, because statutes passed by the Congress still forbid general tourism travel to Cuba, all of the recent CACR general licenses still prohibit tourism-type travel.
The U.S. significantly eased sanctions against Iran in early 2016 pursuant to the implementation of the Joint Comprehensive Plan of Action (JCPOA - generally referred to as the “Iran nuclear deal”). Despite the lifting of many restrictions upon implementation of the JCPOA on January 16, 2016, Iran paradoxically remains subject to comprehensive U.S. sanctions prohibiting most transactions with Iran including reexports of U.S. goods, software, and technology to Iran. Furthermore, even as sanctions were being eased under the Iran nuclear deal, the U.S. government stressed that it will continue to aggressively enforce the sanctions against Iran that remain in effect, which includes all the terrorism related sanctions as well as some of the financial sanctions.
Among the important restrictions lifted in January 2016 when the nuclear deal was implemented, the United States:
- unblocked the assets of large number of Iranian persons,
- lifted restrictions on transactions regarding non-U.S. goods or services with Iran by U.S.-owned or -controlled foreign entities, and allowed U.S. advisors establish or alter policies and procedures and make available to those foreign entities certain automated and globally integrated business support systems as necessary for those transactions,
- authorized imports into the U.S. of Iranian-origin carpets and foodstuffs,
- permitted specific licenses for Iranian commercial passenger aircraft and related parts and services, and
- removed a variety of “secondary sanctions” (i.e., sanctions that had been applied to the activities of non-U.S. entities doing business with Iran) imposed on non-U.S. entities dealing with certain Iranian industries such as: banking and financial services, energy, petrochemicals, shipping, shipbuilding, port operations, gold, precious metals, software, and automotive.
The Ukraine/Russia-related sanctions are a third example of a recently amended sanctions regime, one which has imposed new restrictions on U.S. businesses.
As is typical of U.S. sanctions programs, the U.S.’s Ukraine/Russia-related sanctions block the assets of, and prohibit transactions with, certain designated individuals and companies. However, the United States also grafted a new layer of complexity on top of this sanctions regime by inventing a whole new type of sanctions, called “Sectoral Sanctions”.
Companies subject to Sectoral Sanctions are not completely blocked, but certain types of transactions with those companies are prohibited. In their current form, the Sectoral Sanctions generally prohibit all transactions involving new debt of designated oil and gas companies with more than 90 days maturity or new equity or debt longer than 30 days maturity of designated banks and defense companies. The Sectoral Sanctions also generally prohibit transactions in support of exploration or production for deepwater, Arctic offshore, or shale projects in Russia that involve companies designated on the Sectoral Sanctions Identification (SSI) List.
OFAC considers the property and interests in property of entities directly or indirectly owned 50% or more in the aggregate by one or more persons designated under its sanctions programs to be subject to the same sanctions, even if such entities are not themselves listed on the SDN or SSI lists or otherwise designated. One effect of this rule is that a sanctions program targeting one country sometimes applies to entities in other countries. We have seen a number of situations where sanctions on the Russian private equity sector are extended to third-country hotels and entertainment venues. A thorough knowledge of foreign business partners is essential to avoid this type of exposure to liability under the U.S. sanctions laws.
While there is a trend toward more carefully targeted U.S. sanctions and the lifting of U.S. sanctions when the need has passed, greater vigilance than ever is demanded to steer clear of the growing number of tripwires under U.S. sanctions laws.
Alan Dunn is a partner in the Washington based international trade law firm Stewart & Stewart. His practice focuses on a wide range of international trade, transactional, regulatory, and governance issues, including import and export controls, sanctions, due diligence on acquisitions and internal investigations, as well as customs and trade remedies. He is a former U.S. Assistant Secretary of Commerce and was among the senior U.S. officials responsible for forming and implementing U.S. trade-related policy. He earned his law degree at the University of Virginia.
Alan can be contacted on (202) 466-1243 or by email at firstname.lastname@example.org
Jennifer Smith is an associate at Stewart & Stewart and has experience in antidumping and countervailing duty proceedings, customs, export controls, economic sanctions and embargoes, anti-boycott, trade adjustment assistance, and international and bilateral trade agreements and dispute resolution processes. She is a graduate of Georgetown University Law Center.
Jennifer can be contact on (202) 466-1278 or by email at email@example.com