The United States has used sanctions programs for decades to exert influence over state and non-state actors that threaten their interests, the national security or violate international norms. Since 1984 when the United States enacted sanctions against Cuba they have continued to expand and enforce their sanctions programs. In 2017, the United States had comprehensive sanctions regimes on Cuba, Iran, Sudan, and Syria, along with more than a dozen other programs targeting individuals and entities. The Treasury’s Office of Foreign Assets Control (“OFAC”) routinely adds individuals, businesses and groups (“Specially Designated Nationals” or “SDN”) to its’ blacklist of more than 6,000 entries.
The question of the legitimacy and legality of U.S. sanctions has been ongoing for the decades since the first sanctions were enacted. In fact, the use of extraterritorial sanctions on Iran is itself a controversial topic that dates back to 1984 when Iran sanctions began. U.S. sanctions generally prohibit U.S. persons (United States citizens and lawful permanent residents, entities organized under United States law, and others physically located in the United States) from engaging in transactions with SDNs or countries. When the U.S. imposes so-called “extraterritorial” or “secondary” sanctions, however, it extend its jurisdiction, or at least the power of its law indirectly, to non-U.S. businesses or persons. The U.S. extraterritorial sanctions that have generated the most controversy in recent decades have directly prohibited foreign subsidiaries of U.S. companies from engaging in certain types of activity, or have indirectly targeted non-U.S. entities that are not U.S.-owned by trying to restrict their access to the U.S. market.
Currently, most U.S. sanctions programs do not apply directly to foreign subsidiaries of U.S. firms. Cuba and Iran are notable exceptions, although regulations and licenses issued by OFAC currently authorize foreign subsidiaries of U.S. firms to engage in a limited set of transactions related to Cuba and Iran that would otherwise be prohibited under U.S. law.
Currently, most U.S. sanctions programs do not apply directly to foreign subsidiaries of U.S. firms. Cuba and Iran are notable exceptions, although regulations and licenses issued by OFAC currently authorize foreign subsidiaries of U.S. firms to engage in a limited set of transactions related to Cuba and Iran that would otherwise be prohibited under U.S. law. Secondary sanctions – measures that would impose sanctions on designated foreign persons who contribute to the problem that led to the imposition of sanctions – differ from sanctions that would directly regulate behavior by a foreign firm. Secondary sanctions do not purport to regulate foreign firms directly, but rather cut off access to certain aspects of the U.S. economy by imposing prohibitions on U.S. persons that would deal with the foreign firm. Hence the “secondary” label, because these sanctions essentially work through a back door by targeting U.S. persons and thereby impacting the foreign firm indirectly (but often severely).
Secondary sanctions are common features of virtually all sanctions programs administered by OFAC. Virtually all of the sanctions programs administered by OFAC broadly allow for sanctions to be imposed against foreign persons who are owned or controlled by, or who work for or on behalf of, or provide material support to, other DSN’s.
These sanctions programs typically do not mandate sanctions against everyone who meets the relevant criteria. Instead, they typically authorize the imposition of sanctions, subject to the discretion of the Secretary of the Treasury, acting in consultation with the Secretary of State, to decide whether sanctions should be imposed. The Executive Branch argues that this discretion is essential to ensuring that secondary sanctions can be administered in an appropriate fashion.
Historical Extraterritoriality
In 1996, Congress enacted the Iran and Libya Sanctions Act. It imposes sanctions on persons engaging in certain specified conduct relating to the Iranian and Libyan petroleum sectors. (In 2006 Congress amended the Act to eliminate the statute’s applicability to Libya and renamed it the Iran Sanctions Act of 1996 (ISA).) The statute was openly extraterritorial in effect; its focus on the conduct of persons generally – as opposed to U.S. persons – was intentional and reflected Congress’ desire to discourage foreign companies from engaging in targeted activities. This statutory paradigm – sanctions arising from conduct by any person engaging in targeted activities, regardless of nationality – has become the basis for recent U.S. sanctions involving Iran. Sanctions law in this area has steadily expanded the regime of secondary sanctions that are triggered by transactions that do not require a nexus to the United States.
Extraterritoriality, as we recognize it today, began with the 2010 enactment of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA). The law was Congress’s reaction to their discontent with the enforcement of the ISA. Congress specifically sought to increase pressure on Iran to cease its pursuit of weapons of mass destruction by targeting the source of financing for that activity – Iran’s energy sector – and by seeking to reduce Iran’s access to the global financial system. Congress also sought to address a more general concern raised by existing U.S. sanctions involving Iran: the sanctions could not reach foreign competitors, affiliates or business partners. This undermined the effectiveness of U.S. sanctions and allowed Iran to pursue its goals, including developing its nuclear capabilities, with impunity.
A core feature of CISADA was a significant expansion in the extraterritoriality of the ISA. The primary focus of the CISADA sanctions was third-party activity contributing to Iran’s ability to develop its petroleum resources and refined petroleum products, as well as to Iran’s ability to import refined petroleum products. Of particular interest to financial services firms, section 104(c) of CISADA authorized OFAC to prohibit or impose strict conditions on the opening or maintaining of correspondent or payable-through accounts in the United States by foreign financial institutions found to have knowingly facilitated Iran’s efforts to acquire weapons of mass destruction or provide support for international terrorism; facilitated the activities of a person subject to UN financial sanctions; engaged in money laundering in connection with the above activities; facilitated efforts by the Central Bank of Iran or another Iranian financial institution to carry out any of the above activities; or facilitated a “significant transaction” with Iran’s Revolutionary Guard Corps, any of its agents or affiliates that are “blocked” pursuant to the International Emergency Economic Powers Enhancement Act, or any financial institutions that are “blocked” pursuant to that Act in connection with Iran’s pursuit of weapons of mass destruction or its support for international terrorism.
Notably, OFAC does not view its section 104(c) authority as necessarily extraterritorial because, strictly speaking, the prohibitions arising from this authority apply to U.S. banks – the provisions restrict them from opening or maintaining certain accounts with foreign financial institutions found to have engaged in sanctionable conduct – and not to their foreign bank customers.
After CISADA was enacted, Congress and the Executive have continued to expand extraterritoriality, including:
November 2011: Executive Order 13590 expands CISADA authorizing the Department of State to impose sanctions against firms found to have knowingly entered into certain transactions that could contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources or petrochemical products. And, the Treasury Department identified Iran as a “jurisdiction of primary money laundering concern,” thus declaring, in effect, that any bank doing business with the Iranian financial system was at risk of supporting Iran’s pursuit of nuclear weapons and its support for international terrorism.
December 2011: National Defense Authorization Act for Fiscal Year 2012 enacted targeting Iran’s Central Bank by limiting access to the U.S. financial system by non-U.S. financial institutions found to have knowingly conducted or facilitated any significant financial transaction with the Central Bank or other blocked Iranian financial institutions.
July 2012: Executive Order 13622 provides for the imposition of sanctions on foreign financial institutions that knowingly conduct or facilitate significant transactions with the National Iranian Oil Company or Naftiran Intertrade Company or for the purchase or acquisition of Iranian petroleum, petroleum products, or petrochemical products, and provides for sanctions on persons that materially assist or provide financial support for those entities or the Central Bank, or for the Iranian government’s purchase of U.S. bank notes or precious metals.
August 2012: Iran Threat Reduction and Syria Human Rights Act of 2012, significantly expands the scope of the US Iran sanctions by broadening the scope of section 104 of CISADA to target, among other things, foreign financial institutions that knowingly facilitate or participate in various proscribed activities or act on behalf of another person with respect to those activities.
January 2013: Iran Freedom and Counter-Proliferation Act of 2012 imposes additional restrictions on foreign businesses and banks involved in Iran’s energy, ports, shipping and shipbuilding sectors, as well as metals trade with Iran. This Act further expanded the CISADA-style sanctions framework for financial institutions that knowingly conduct or facilitate significant financial transactions involving the targeted sectors or products or on behalf of a blocked Iranian person.
June 2013: Executive Order 13645 provides for the imposition of sanctions on foreign financial institutions that knowingly conduct or facilitate significant transactions for the purchase or sale of the Iranian rial, or that maintain significant rial accounts outside Iran.
Prior to the ongoing expansion of Iran sanctions, the International Emergency Economic Powers Enhancement Act of 2007 constituted another underlying expansion of the extraterritorial reach of OFAC sanctions making it unlawful for any person to cause a violation of OFAC’s regulations. Thus, non-U.S. entities could be in violation of this Act, even if they were not otherwise subject to OFAC regulations, by taking action that caused U.S. persons to breach OFAC requirements.
In recent years, despite some volatility, The U.S. has lifted or suspended a number of sanctions pursuant to the Joint Comprehensive Plan of Action (“JCPOA”). However, the viability of JCPOA is in question and historical and ongoing risk of sanctions against foreign firms is significant.
Compliance
OFAC sanctions are promulgated under a strict liability regime, and thus the burden is on individual companies to assess their own areas of risk and then take reasonable steps to prevent transactions (direct or indirect) that violate US sanctions laws. OFAC expects companies to develop their own risk-based compliance programs to ensure that they have identified and addressed the areas of their business operations that present the most likely instances of possible violations.
The recent promulgation of new Iran-related sanctions laws and Executive Orders with differing terms and targets has made compliance a continuing challenge for US companies; the growing extraterritoriality of US sanctions has effectively exported that same compliance challenge to foreign companies, especially to foreign financial institutions that transact in U.S. Dollars. Indeed, for non-US entities and individuals, the degree of difficulty is heightened because US-defined grounds for sanctionable conduct may not be fully understood by transaction parties from other jurisdictions or consistent with legal requirements and compliance responsibilities established under local laws.
Sanctions Penalties
A foreign financial institution that is determined to facilitate these categories of transactions would be subject to one of two types of sanction. First, secretary of the treasury may prohibit the opening – or impose strict conditions on the maintenance – of correspondent or payable-through accounts in the United States for the financial institution, effectively denying it access to the U.S. financial system. Second, the treasury secretary may impose a blocking on the financial institution, resulting not only in the financial institution’s loss of U.S. market access but wide-ranging prohibitions on U.S. persons with respect to any dealings with the financial institution and the freezing of any assets the institution has subject to U.S. jurisdiction. This effectively bars foreign financial institutions from engaging in the global economy.
Conclusion
It is clear that secondary sanctions and other extraterritorial sanctions are here to stay. The many secondary sanctions on Iran imposed by the President and the Congress during the Obama administration received little criticism – in part because of the multilateral nature of many of the Iran sanctions efforts. The tenor of current administration’s rhetoric on Iran sanctions and the willingness of the U.S. government to sanction individuals and entities – irrespective of nationality – in the recent past signals that the enforcement of Iran sanctions will be ongoing and potentially aggressive.
At Breeding Carter we represent companies and individuals who are at risk of enforcement actions by the United States government. Our team of attorneys and professionals can advise and assist in avoiding or reducing potential exposure to sanctions enforcement actions. If you have been contacted by a U.S. enforcement agency or believe you have exposure to sanctions evasion actions, contact us to learn how we can assist.