Expanded sanctions and export control regimes have re-emerged as a key component of U.S. national security and foreign policy reflecting a current era of increased global interconnectedness and federal regulators promising "big-ticket" enforcement actions. Federal agencies have recently begun imposing sanctions and export controls of unprecedented scope and scale, and the U.S. Department of Justice is actively prosecuting those entities and individuals who violate the same. Therefore, U.S. and multinational companies must be vigilant in their compliance efforts.

ECONOMIC SANCTIONS: THE BASICS

U.S. Sanctions Regimes

Economic sanctions, primarily administered and enforced by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC), play a vital role in U.S. national security policy. Generally, OFAC sanctions prohibit individuals/entities from doing business with or engaging in financial transactions involving, directly or indirectly, a sanctioned (or "blocked") person/entity.

This prohibition applies, even if such person is acting on behalf of an organization which is not the subject of sanctions, unless authorized by OFAC or expressly exempted by statute.

OFAC's prohibitions are broad and include imports as well as exports of goods, technology, or services, and attempts to facilitate any of the same – such as approving or "clearing" a transaction involving a sanctioned party.

Categories of Sanctions

U.S. sanctions generally fall into four categories: (1) country-based or comprehensive sanctions (also known as "embargoes"); (2) targeted sanctions against identified individuals and/or entities (also known as "smart sanctions"); (3) sectoral sanctions; and (4) secondary sanctions.

  • Comprehensive Sanctions: Comprehensive sanctions programs, or embargoes, generally prohibit all trade by individuals and/or entities subject to U.S. jurisdiction with specific countries or regions. Currently, the United States levies country-based sanctions against: Cuba, Iran, North Korea, Syria and the Crimea Region of Ukraine. As such, individuals and entities subject to U.S. jurisdiction are prohibited from doing business with organizations and/or individuals within these countries/regions, as well as the countries themselves, unless authorized by OFAC, either via a license or exemption.
  • Targeted Sanctions: Also known as "smart" sanctions, OFAC maintains targeted sanctions against individuals and entities owned or controlled by, or acting for or on behalf of, countries subject to the various U.S. sanctions regimes or who have been judged to be engaged in actions that endanger or undermine U.S. foreign policy or national security objectives. Individuals and entities subject to targeted sanctions are identified on OFAC's Specially Designated Nationals and Blocked Persons List (SDN List).
  • Sectoral Sanctions: OFAC also administers certain sectoral sanctions, which target specific sectors of a sanctioned country or regime's economy. For example, OFAC identifies persons operating in sectors of the Russian economy, identified by the Secretary of Treasury as being subject to sanctions in its publication the Sectoral Sanctions Identifications (SSI) List. Directives found within the SSI describe specific prohibitions on dealings with the persons/entities identified. Other countries, such as Burma (Myanmar) and Yemen, are subject to OFAC sanctions for transactions related to activities of specific political/social parties operating within these countries.
  • Secondary Sanctions: Secondary sanctions, a relatively new regime, target non-U.S. persons, primarily foreign financial institutions and sanctions evaders, who do business with entities subject to other U.S. sanctions regimes. Secondary sanctions are designed to prevent third parties from doing business with countries subject to separate sanctions regimes and rely heavily on the significance of the U.S. financial system and U.S. dollar.

OFAC Jurisdiction

OFAC's jurisdiction extends to all U.S. persons, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all U.S. incorporated entities and their foreign branches.

Additionally, OFAC can assert jurisdiction over foreign individuals, entities and categories of transactions, including correspondent banks which utilize the U.S. central banking system, transactions with a denominated in U.S. dollars and foreign persons in possession of U.S-origin products.

Further broadening its jurisdiction, OFAC utilizes a "50 Percent Rule." The Rule imposes sanctions on entities that have one or more blocked persons owning 50% or more of the entity (directly or indirectly) in the aggregate. OFAC urges organizations considering a potential transaction to conduct appropriate due diligence on entities that are party to or involved with the contemplated transaction or with which account relationships are maintained in order to determine relevant ownership stakes. Certain actors are now turning to third-party intermediaries and transshipment points to circumvent restrictions, adding even more complexity to the sanctions regulatory regime.

OFAC Licenses

OFAC licenses are, generally, authorizations to engage in a transaction that otherwise be prohibited pursuant to OFAC sanctions regimes. Persons engaging in transactions pursuant to general or specific licenses must ensure that all conditions of the license(s) are strictly observed.

  • General Licenses: General licenses from OFAC authorize a particular type of transaction for a class of persons which would otherwise be prohibited under the relevant sanctions regime. Where a general license is applicable, the individual/entity looking to participate in such a transaction is not required to seek a specific license.
  • Specific Licenses: A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application. In order to obtain a specific license, individuals/entities may submit a written license application to OFAC providing the details of the contemplated transaction and requesting authorization to engage in the same.

Exceptions to OFAC Sanctions

While each OFAC sanctions regime provides exceptions to its general prohibitions, the contours of each specific exception/exemption are nuanced and fact specific. As such, it is vitally important for individuals and organizations, if they seek to take advantage of an exception, to thoroughly review its requirements, often with the assistance of outside counsel, and to document its applicability to the specific factual circumstances at issue. Included in the various sanctions programs, are certain important humanitarian exceptions of which non-profit organizations and others should be aware. These include exceptions for: (1) official business of the U.S. government; (2) official business of certain international organizations and entities, such as the United Nations or International Red Cross; (3) certain humanitarian transactions in support of nongovernmental organizations' activities, such as disaster relief and health services; and (4) the provision of agricultural commodities, medicine, and medical devices, including replacement parts, components, and software updates for medical devices, for personal, non-commercial use.

Voluntary Self-Disclosure

OFAC encourages individuals/entities to make voluntary self-disclosures of a potential violation of a sanctions regime When disclosures are made, individuals/entities need to provide for the possibility of a mitigated penalty if/when a violation is found. Self-disclosing potential violations can provide significant mitigation of civil or criminal liability, the extent of which depends on the agency, including potential non-prosecution agreements or a reduction in the base penalty amount for civil or criminal penalties. Thus, companies or individuals that suspect a potential violation of an OFAC sanctions program should engage with outside counsel to consider voluntary self-disclosure as soon as possible.

Potential Penalties for Non-Compliance with OFAC Sanctions

OFAC sanctions are a "strict liability" regime, meaning individuals and entities may be subject to civil liability for sanctions violations regardless of whether they intended to violate any specific statute or regulation. Civil penalties for violations of OFAC's sanctions regulations may include but shall not exceed: (1) $350,000 per violation, or (2) an amount which is twice the amount of the transaction that is the basis of the violation which led to the imposition of the penalty.

Where individuals and/or entities "willfully" commit sanctions violations, criminal penalties, upon conviction, may include, but shall not exceed: (1) $1,000,000 per violation, (2) if a natural person, imprisonment for not more than twenty (20) years, or (3) both (1) and (2).

In addition to civil and criminal penalties for violations of sanctions regulations, OFAC utilized various regulatory enforcement/compliance mechanisms, including:

  • Request(s) for Additional Information: Pursuant to regulatory authority, OFAC may request additional information from individuals/ entities to determine whether a violation of sanctions regulations has occurred. Like administrative subpoenas from other federal agencies, OFAC's requests for additional information may become the subject of judicial enforcement.
  • Cautionary Letter: A cautionary letter indicates that OFAC has not found sufficient evidence to establish a violation of sanctions regulations or has determined that a penalty is unwarranted under the specific circumstances.
  • Finding of Violation: OFAC may issue a finding of violation where it determines that a violation of sanctions regulations has occurred but that a civil or criminal penalty is not the most appropriate response. Findings of violations often increase the possibility that the subject of the violation could face civil or criminal penalties for continued violations.
  • Administrative Action: In certain circumstances, OFAC, rather than seeking civil or criminal enforcement, will take administrative action in the form of a ceaseand-desist letter. OFAC may also take action against an individual/entity's license or license application, including denial, suspension, modification or revocation.

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