Introduction
Sanctions are political, diplomatic, or economic measures under International law, deployed by an International organisation or States against a State or States either to protect national security interests, or to protect international law, and defend against threats to international peace and security. Sanctions can be economic, targeting specific commodities, trades, etc., military, diplomatic, and also include travel bans, asset freezes, or arms embargoes.
Economic sanctions are essentially foreign policy tools deployed by governments and international organisations or trade regulation bodies to govern or alter the strategic decisions of state and non-state actors that threaten their interests or violate international norms of behaviour. Economic sanctions often constitute a withdrawal from customary trade and financial relations, for foreign policy and national security purposes. Sanctions may be comprehensive and non-comprehensive. Comprehensive sanctions prohibit commercial activity with regard to an entire country, for instance the US embargo against Cuba, or they may be targeted, blocking transactions by and with particular businesses, groups, or individuals. Whereas non-comprehensive sanctions target specific activities or areas, but do not generally target an entire geographic region. Non-comprehensive sanctions programmes also target activities that are not confined to a country or area, such as drug trafficking and terrorism.
UN Sanctions and Enforcement
The United Nations (“UN”) Charter empowers the UNSC to take measures to maintain peace, allowing the Council to “determine the existence of any threat to the peace, breach of the peace, or act of aggression” and to take military and nonmilitary action to “restore international peace and security”.[1]
Under Article 41, only the UN Security Council has mandate by the international community to apply sanctions that must be complied with by all UN member states (Article 2,2). Besides the UN, unilateral sanctions may be imposed by individual countries in furtherance of their strategic and diplomatic interests; these sanctions are typically in the form of measures restricting the flow of trade and commerce. UNSC sanctions are then adopted by the signatory member states by means of inclusion into legislation and by appropriate Government notification.
Understanding the US Sanctions
The United States Treasury Department is empowered to gather intelligence, regulate and enforce policy, with the objective of defending the US and the global financial systems against any threats and potential abuse by sources that pose a threat to national security. The Office of Foreign Assets Control (“OFAC”) administers and enforces financial sanctions in furtherance of the International Emergency Economic Powers Act (“IEEPA”) and other legislations, which provide the President with the authority to deploy and enforce financial sanctions under an Executive Order, in response to national emergencies that call for prohibition or restriction on businesses or freezing of property.[2]
US sanctions or primary sanctions are applied by ‘blocking’ or ‘freezing’ assets (sometimes referred to as “primary sanctions”), applied by “blocking” or “freezing” the assets of a “specially designated national” (“SDN”). This means that the SDN’s assets in the US are frozen, and cannot be retrieved without permission from OFAC, and that US persons are generally not permitted to transact with SDNs. Also, certain sanctions target entire countries or geographic regions, so US persons generally cannot deal with these countries, e.g. North Korea Sanctions Program.
In contrast, comprehensive sanctions prohibit all US persons from entering into (most) transactions with a specified territory or state, whether or not an SDN is involved. Currently, there are four countries and one territory that is subject to comprehensive sanctions: Cuba, Iran, North Korea, Syria and Russia, further to the 2014 annexation of Crimea.
Applicability of the US Sanctions Program
US sanctions or ‘primary sanctions’ apply only to “US persons,” i.e. a US citizen, or an entity incorporated in the US (including any subsidiary foreign branches), or anyone in the US, i.e. subsidiaries of foreign companies operating in the US or any foreign nationals in the US. However, some primary sanctions may also apply to non-US subsidiaries of US entities/ persons.[3]
Whereas, secondary sanctions are specifically targeted towards non-US actors and primarily include business and trade related restrictions that may be imposed if the non-US actor were to engage in specified targeted activities. It may pose the risk of inclusion of the non-US person to the SDN list. However, non-US persons may continue to operate and do business in countries, subject to secondary sanctions, provided they do not carry out business with any prohibited parties or sector. It is important to note that secondary sanctions usually focus on economy or key industries of the targeted country. At present, secondary sanctions programs target Iran, North Korea, Venezuela, Russia, Syria, and the most recent addition being the sanctions program for Hong Kong.
Even though the application of sanctions appears limited, due to ‘facilitation’, the scope increases substantially. The facilitation rule states that a US person cannot ‘facilitate’ a transaction by a non-US person because of the sanctions prohibiting such operations. This rule implies that the non-US individual/ entity may be liable for sanctions violation. This rule is most relevant in terms of usage of US dollars for transactions, as US dollar payments are cleared through US banks, a US dollar payment to or from an SDN or a sanctioned country will constitute facilitation, therefore, bringing non-US related transactions within the scope of sanctions.
The authorities responsible for enforcing US sanctions are primarily OFAC (responsible for civil enforcement) and the DOJ (responsible for criminal enforcement). Furthermore, financial regulators, including the New York State Department of Financial Services and the Federal Reserve Board, among others, may impose fines for compliance failures associated with insufficient sanctions compliance programs.
Ukraine/ Russia Sanctions[4]
The Executive Order 13660 (“EO 13660”) dated March 6, 2014, declared a national emergency to deal with the threat posed by the actions and policies of certain persons who had undermined democratic processes and institutions in Ukraine; threatened the peace, security, stability, sovereignty, and territorial integrity of Ukraine; and contributed to the misappropriation of Ukraine’s assets; subsequent to which the Ukraine/ Russia related sanctions program were implemented by the OFAC.
In response to the purported annexation of the Crimea region of Ukraine, as well as the actions and the policies of the Russian Government, the US Government issued three more Executive Orders, expanding the scope of the EO 13660. Collectively, these Executive Orders authorise the imposition of sanctions against persons responsible for or complicit in certain activities with respect to Ukraine; against officials of the Government of the Russian Federation; against persons operating in the arms or related materiel sector of the Russian Federation; and against individuals and entities operating in the Crimea region of Ukraine, among other things.
Furthermore, the EO 13662 authorises the imposition of sanctions, targeting certain entities operating in specified sectors of the Russian Federation economy; whereas, E.O. 13685 also prohibits the importation or exportation of goods, services, or technology to or from the Crimea region of Ukraine, as well as new investments in the Crimea region of Ukraine by a United States person, wherever located. The measures stipulated with respect to the Ukraine/ Russia-related sanctions program fall into the following three broad categories, as set forth in greater detail below:
- Blocking sanctions against specific individuals and entities designated listed on the List of Specially Designated Nationals and Blocked Persons (SDN List);
- Sectoral sanctions against entities operating in sectors of the Russian economy, identified by the Secretary of the Treasury pursuant listed on the Sectoral Sanctions Identification List (SSI List);
- Investment ban and prohibition on exportation, re-exportation or importation of any goods, technology, or services to or from the Crimea region of Ukraine, directly or indirectly by a US person, wherever located, including any approval, financing, facilitation, or guarantee by a US person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited, if performed by a US person, or within the US.
Penalties
Penalties for violation of the sanctions program include civil monetary penalties of up to $250,000 or twice the amount of the underlying transaction, whichever is higher. It may be imposed administratively against any person who violates, attempts to violate, conspires to violate, or causes a violation of the Executive Orders or the Regulations. Criminal penalties of up to $1,000,000, imprisonment for up to 20 years, or both, may be imposed upon conviction on any person who willfully commits or attempts to commit, or willfully conspires to commit, or aids or abets in the commission of a violation of the Executive Orders, or the Regulations.
[1] Chapter VII, UN Charter.
[2] The funds or relevant property of the designated person stay in the hands of the bank, company, or individual that reported them to the Treasury but must be strictly maintained consistent with OFAC regulations.
[3] Please note the Cyril Amarchand Mangaldas is qualified to practice law in India and the above legal position does not construe a legal advice or create an attorney-client relationship. In case you require legal assistance, please consult a qualified attorney in your jurisdiction.
[4]https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/ukraine-russia-related-sanctions
