1. Sanctions Regime Types, Goals, Prohibitions and Effects

Question 1

What are Sanctions?

Answer 1

Sanctions are non-military legal measures intended to prevent certain types of activities or to influence the behavior of countries, groups or individuals.

They are “deliberate”.
They have a “moral” found - against conduct that is wrong.

*Allow countries to take action without resorting to military force

Question 2

What do Sanctions do?

Answer 2

Typically restrict or prohibit trade and financial transactions with specified targets, and may even require the freezing of property belonging to those targets.

Question 3

Who does Sanctions apply to?

Answer 3

They apply to the actions of private persons and companies up to gov’ts.

Question 4

What do Sanctions have?

Answer 4

They have legal effect, the “Force of Law”. Failure to comply can give rise to severe legal penalties, as well as to reputational & commercial damage.

Question 5

What are the 4 objectives of Sanction?

Answer 5

1. Making certain activities difficult or impossible. Deny sanction targets resources and access to funds.
2. Persuade or compel targets to change its practices (either at the entity, individual our country level).
3. Penalize the target for it’s practice. (e.g. it’s going to cost them if they continue in those activities).
4. Political dimension - “A political or symbolic statement” either domestically or globally.

Question 6

How are Sanctions Divided?

Answer 6

In two ways:

Unilateral: Individual Countries
~ They are imposed by individual countries e.g. US, Canada & Japan.

Multilateral: Imposed by International organizations or by countries working together.
~ UN
~ EU (hybrid - they have local by member states and can do more)
~ Coordinated between Individual Countries (US & EU together)

Question 7

Who are the Targets of Sanctions?

Answer 7

1. Countries or Regions
   ~ Entire Countries
   ~ Regions w/in a country
   ~ Governments
2. Individuals and Groups
   ~ Individuals
   ~ Entities
   ~ Vessels
   ~ Planes

Question 8

What are the 3 main categories of sanctions?

Answer 8

1. Comprehensive Sanctions - broad extensive measures (trade embargoes) - bans on trade, diplomatic relations, or other relationships between target and sender. E.g. - sanctions that prohibit the import or export of goods and services that benefit a country or region (e.g. Cuba, Iran, Syria, North Korea)
2. Targeted or list-based sanctions - impose specific measures on individuals or identities.
3. Sectoral sanctions - target specific industry/actions of a country or region (e.g. Russia)

Question 9

What type of Sanctions does the US have?

Answer 9

Primary Sanctions - Prohibitions in which a US person may not engage. Also called “Direct Sanctions”

Question 10

Who must comply with US Primary Sanctions?

Answer 10

~ Nationals of the country, no matter where they are located.

~ Persons physically present in the country

~ Entities such as Corporations, organized under the laws of the country - to include their foreign branches as well (and sometimes foreign subsidiaries)

*If a US Person is in the EU, EU Sanctions also apply to that US Person.

Question 11

When would a transaction be subject to US Primary Sanctions?

Answer 11

When there is a US Nexus.
~ Involvement of a US Person or
~ US origin product/software/
technology or
~ if it causes or involves activity within US territory.

Note: Non-US Persons can engage in US nexus transactions and violate primary sanctions.

Question 12

When is a transaction prohibited when there is a US Nexus?

Answer 12

Generally when it involves a US Nexus and a sanctioned person, entity or jurisdiction.

e.g. Chinese computer that has windows & winzip installed (US software) or a Chinese computer built with US parts - can be subject to primary sanctions.

Question 13

What are some examples of Primary Sanctions?

Answer 13

SDN List - prohibits US nexus transactions with individuals, companies, vessels, planes and other entities found on the SDN list.

Sectoral Sanctions - prohibit certain categories involving US Persons or US Territory w/parties named on the SSI list. (e.g. Russian Financial Industries).

• Certain categories (new debt, exportation or re-exportation, direct or indirect good, services (except for Financial Services), or technology in support of exploration or production for deep water of dealings arctic offshore or shell oil projects)

Question 14

What are Secondary Sanctions?

Answer 14

Also called “Extraterritorial” Sanctions. They amplify the impact of primary sanctions. They may impose duties or penalize conduct by “Non-Nationals”. Including citizens of other countries or foreign companies operating outside the sanctions country.

Question 15

What risk areas does US Secondary Sanctions create for Non-US Persons?

Answer 15

~ Extends coverage of US law indirectly to non-us persons

~ May directly prohibit foreign subsidiaries of US companies from engaging in certain types of activity

~ May indirectly target non-U.S. persons by potentially restricting their access to the US Market

*Currently US is the only country that extensively applies Secondary Sanctions.

**Secondary sanctions tend to be somewhat more focused than Primary Sanctions

*Determine if the sanctions apply or not depending on the directive.

Question 16

What is the basic idea behind Secondary Sanctions?

Answer 16

If you conduct business with an enemy of the United States then you are also an enemy of the United States.

• Political/Legal Issues - There is an EU anti-blocking statue - prohibiting anyone subject to EU sanctions to comply with US Primary and Secondary Sanctions.

Question 17

When was the first time secondary sanctions was used in the US?

Answer 17

It was used by congress in legislation in the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 - CISADA

Later it was followed by the Countering America’s Adversaries Through Sanctions Act of 2017 - CAATSA - Imposed sanctions on Iran, Russia & North Korea and includes mandatory secondary sanctions on a foreign entities the President determines facilitates “Significant” transactions with sanction actors.

*These are examples of secondary sanctions.

** “Significant” means whatever the US Gov’t says is means - its vague on purpose to discourage people from undertaking any sort of transaction.

Question 18

Does the SDN list clearly identify who is subject to Secondary Sanctions?

Answer 18

Yes, it clearly identifies them, there is an extra entry that says “Subject to Secondary Sanctions”

Question 19

Is there an example of Secondary Sanctions in Use?

Answer 19

Yes, when a Chinese oil company brought oil from Iran.

August 2018 - EO13846 - it included secondary sanctions for companies buying oil from Iran after May 2, 2019.

In July 2019, US State Dept announced Secondary Sanctions against Zhuhai Zhenrong Company Limited - for buying “significant” crude oil from Iran - OFAC listed both the company and the CEO Li as SDNs under Iranian Sanctions and barred from engaging in FX, Banking in the US and Li was banned from entering the US.

Question 20

What is the difference between Primary & Secondary Sanctions?

Answer 20

Primary Sanctions have been existing way longer (1812) then Secondary Sanction (2010).

Primary Sanctions are called Direct Sanctions while secondary sanctions are called Extraterritorial sanctions

Difference in Goals - Primary Sanctions are targeted at the bad actors to cease their activity/action while Secondary Sanctions targets anyone else who tries to help the bad actors to conduct or continue to conduct their business especially when the US is not involved.

Primary Sanctions influence the behavior of US Persons and bad actors while Secondary Sanctions influence non-us persons and not the bad actor.

Primary Sanctions require the US Persons to take certain actions (e.g. block assets or engaging in transactions w/Bad actors. While Secondary Sanctions threaten Non US person with becoming sanction target themselves if they deal with targets of US primary sanctions

Primary Sanctions apply to US Persons, Secondary Sanctions apply to Non-US Persons.

Question 21

What are some of the common Prohibitions of Sanctions?

Answer 21

~ Prohibitions on Imports
~ Prohibitions or restrictions on exports
~ Arms Embargoes
~ Prohibitions or Restrictions Financial Transactions
~ Product-Specific Embargoes
~ Asset Freeze
~ Prohibitions or Restrictions on Investment
~ Sectoral Sanctions
~ Travel and Transit Restrictions
~ Reporting Requirements
~ Facilitation

Question 22

What are the types of Prohibitions on Imports?

Answer 22

Imports of goods, services and technology prohibited from the target country or region. (e.g. from North Korea)

*The prohibition may only apply to selected products, or to all imports from the country in question.

Question 23

What are the two common approaches to Prohibitions or Restriction on Exports?

Answer 23

1) Prohibit all exports*

2) Specify what products are subject to the export ban, with all other exports being permissible.

*There may be exceptions (e.g. agricultural products, medicines & medical products)

**Export controls are not necessarily sanctions and may be administered by different agencies.

Question 24

What are we talking bout when we say Prohibitions or Restrictions on exports?

Answer 24

~ Goods - Many countries including EU impose controls on exports of at least some products. Typically products with military uses.

~ Services - Including Financial Services (Banking, Insurance, Investment Services).

~ Technology - Including software and transmission of software or information over the Internet as well as the disclosure of information to nationals of a target country.

Question 25

What is Arms Embargos?

Answer 25

~ Prohibit exports on military items

~ Prohibit the sale of weapons and related services to individuals, groups or states

~ Normally cover both arms and items that are used for military purposes.

~ Can be divided in two ways:
1. May cover either specified items (e.g. weapons, weapon systems, certain technology) or

2. All goods, services or technology used by the military.*

*May be legal to export a product for civilian use but not for use by the military.

**Frequently this the first type of sanction imposed against countries.

Question 26

What are Product Specific Embargos?

Answer 26

Its a general prohibition on any trade in a specified product (e.g. bullion, precious metals, luxury goods & petroleum)

*Luxury goods can be used to exchange/barter or corruption - only high gov’t officials will have access to the luxury goods who taken money out of the economy and put it in their own pockets.

Question 27

What are the Prohibitions or Restrictions on Investments?

Answer 27

~ A country may prohibit or limit investment in another country.

~ This takes the form of a prohibition on a new investment

~ Prohibition may be general or apply only to investment in designated sectors.

~ Prohibition normally does not require liquidation of existing investments

~ Other restrictions like (export of financial services or on financial transactions ) may severely affect the value of investments in sanctioned countries by limiting the ability to repatriate (restore or return to the country of origin) profits from such investments or to provide funds for repairs or expansion of the investment.

Question 28

What are Prohibitions or Restrictions Financial Transactions?

Answer 28

Prohibitions on Financial Transactions such as processing payments, making loans, or providing any kind of banking, insurance or investment service.

*Prohibitions on Financial Transactions can apply to individuals and organizations as well as to entire countries.

Question 29

What are Prohibitions on Providing Economic Resources?

Answer 29

This is the most sweeping. Sanctions may prohibit providing any economic resources to sanctions targets. Such as Funds, Financial Assets, Physical Property, Anything of economic value.

*This sanctions is usually applied to individuals or organizations rather than entire countries.

Question 30

What is meant by Asset Freezes/Blocking?

Answer 30

Most used type of sanctions requires that nationals (includes banks) freeze funds, financial instruments, other assets and any property belonging to a sanctions target that come under their control.

The national that freezes the assets must hold them in a separate designated account until directed by the gov’t to release them.

The ownership of the assets theoretically belongs to the sanctions target they just cant access them.*

Asset Freezes/Blocking are most commonly directed against individuals and organizations but may apply to all property owned by a gov’t. (e.g. Iran or Russia)

• There may be exceptions for living expenses and legal fees.

Question 31

How does blocking works?

Answer 31

1. Once you determine the funds needs to be blocked. You must place them into an interest-bearing account and only OFAC-authorized debits can be made.
2. Blocking must be reported to OFAC within 10 business days.
3. Some banks can opt to open separate account for ea. blocked transaction while other banks can opt for an omnibus account.

• Either method is satisfactory, as long as there’s an audit trail which will allow specific funds to be unblocked with interest at any point in the future.

*Note though it hasn’t happened yet the President can seize assets during time of war per legislation. Hasn’t been done since WWII.

Question 32

What are Sectoral Sanctions?

Answer 32

~ Fairly New

~ Have been applied to Russia & Venezuela

~ Directed against specific sectors of the economy of a country (e.g. banking, energy or defense).

~ Usually only applies to identified companies

~ Normally prohibit some, but not all transactions involving those countries or sectors.

Question 33

How can you find out who are the targets or objects Sectoral Sanctions?

Answer 33

OFAC publishes the Sectoral Sanctions Identification List (SSI) that OFAC publishes.

It lists persons, companies and entities in sectors of the Russian economy (especially energy, finance and armaments),
prohibiting certain types of activity with these individuals or entities by US Persons, wherever located.

*If a company is owned 50% or more by an SSI then it is considered an SSI as well even if it’s name isn’t on the list.

Question 34

When did the Sectoral Sanctions start?

Answer 34

Feb/March 2014 - with the annexation of Crimea by Russia.

In July 16, 2014 - 1st round of US Sectorial Sanctions hit Russia

In July 17, 2014 - Malaysia Airlines (MH17) was shout down by a missile supplied by the Russian Military.

End of July 14 - EU joined the US in imposing Sectoral sanctions on selected companies in Russia’s financial, defense & energy sector

Sept 2014: Applied Additional EU and US Sectoral Sanctions

Question 35

What are the differences between US & EU Sectorial Sanctions?

Answer 35

The restrictions against lending/investments with entities in specific sectors mostly overlap

They target a handful of key companies and their subsidiaries in the Financial, Defense & Energy Sector

The employment of the Sectoral Sanctions differ somewhat for example:

As of Jan 2020, US identified 13 Russian companies and 276 of their subsidiaries and affiliates. EU Identified 11 entities (and majority owned subsidiaries outside the EU)

Arms trade with and dual use exports to Russia are mostly restricted by US & EU but the EU allows existing arms sales and service contracts.

Question 36

What are Travel Ban and Transit Restrictions?

Answer 36

A Travel Ban - Prohibit sanctioned named persons or gov’t officials from entering the country applying the sanctions. *

*Exception travel by prohibited gov’t official for UN Mtgs or other international organizations

*In EU tavel bans are done by member states so someone can have a travel ban but be a citizen of Cyprus and they would allow them to go (e.g. Putin)

Transit Restrictions - prohibit the transit of goods from a sanctioned country from passing through the territory of the country imposting the sanctions (Cuban Sugar from Cuba passing through NY to get to to Canada) or goods from the country imposing sanctions from passing through the territory of the target country, even if they are destined for a non-sanctioned country. (e.g. US origin goods through the territory of Iran going to Uzbekistan)**

**Prohibitions may include goods being carried on ships or planes that stop in a sanctioned country, even if they are not unloaded, but rather continue on their way to a non-sanctioned destination. (e.g. Docking at a Cuban or North Korean Port)

Question 37

What are Reporting Requirements?

Answer 37

Sanctions may not prohibit transactions with a target country, but require they be reported/disclosed.

The theory behind this type of sanctions: adverse publicity will convince companies (e.g. foreign companies) not to do business with target countries, even if such business is not technically prohibited.

Example - US requires that companies with publicly-traded stock include a statement as to whether they do business with Iran. (e.g. French bank doing business w/Iran you may not want to bank with them because of ties to Iran)

Question 38

What is Facilitation?

Answer 38

Certain US Sanctions regulations state it is illegal for any US person to approve, facilitate, guarantee or finance any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by the US person.

Facilitation includes referring an opportunity to someone else.

The scope of “facilitation” is vague and basically covers anything OFAC says is facilitation.

*You as a US Person can’t help another person you couldn’t do yourself or refer something to someone else.

Question 39

In what regulation is the Facilitation provision included?

Answer 39

Subpart B, Prohibitions 560.208 - Iranian Transaction and Sanctions Regulations - which prohibited facilitation by US persons of transactions by foreign persons.

*No US 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.

*Note: While not every US set of regulation contains the facilitation provision - however the concept applies to all US Sanctions no matter what country or sanctions program whether it’s specifically in there or not.

** EU is starting to apply the same sort of concept.

Question 40

What are some examples of Facilitation?

Answer 40

1. Approving, directing, assisting, supporting, financing or insuring transactions in or with a U.S. sanctioned country;
2. Making any purchase for the benefit of a prohibited transaction;
3. Negotiating with customers/potential customers in U.S. sanctioned countries;
4. Participating in meetings or on calls with nationals of sanctioned countries for the purpose of furthering a prohibited transaction;
5. Approving expenses or providing financing related to a prohibited transaction;
6. Arranging freight forwarding, customs
   brokerage services or similar support services related to a prohibited transaction; and
7. Negotiating, drafting or reviewing commercial terms/contracts related to a prohibited transaction. Types of activities unlikely to be considered by OFAC to constitute unlawful “facilitation” include the following:
8. Seeking legal advice regarding the application of U.S. sanctions law to proposed transactions (but beware certain actions taken in furtherance of such advice);

10.Transactions carried out independently by a foreign subsidiary, with no involvement by U.S. persons, wherever located, or non-U.S. persons located in the U.S.; or

11.Providing back office shared functions by U.S. persons, wherever located, or non-U.S. persons located in the U.S., as long as these activities are purely clerical and do not specifically relate to a prohibited transaction.

Question 41

What are the Common Exceptions in Sanctions?

Answer 41

1. Post and telecommunications
2. Humanitarian donations
3. Family remittances
4. Informational Materials
5. Travel and travel expenses
6. Overflight payments
7. Agricultural products
8. Medicine and medical products
9. Licenses

Question 42

What are the unintended consequences with Sanctions?

Answer 42

1. Can hurt the population of the target country. Sanctions can make it more difficult for the target country to pay for imports of food and medicine, causing real suffering, especially among the poorest segments of the population.
2. Can provide the gov’t of the target country with an excuse for the country’s problems, allowing it to whip up resentment and even hatred against the sanctioning country.
3. Paradoxically, sanctions can strengthen the economy of the target country in some ways, as it develops domestic industries and supplies to replace imports.
4. Can have a negative effect on the sanctioning country.
   ~ Companies in sanctioning countries can lose export markets and sources of supply
   ~ May drive target country into amore extreme position
   ~ May create friction between allies if one imposes sanctions and the other does not.