3. Sanctions Evasion: Typologies and Schemes

Question 1

What are the 3 general approaches to US Sanctions?

Answer 1

1) List Based - individuals or entities
2) Country Based - entire country or region in a country
3) Sectoral Sanctions

~ Imposes broad sanctions against several countries: Cuba, Iran, North Korea and Syria.

~ imposes sanctions against a number of different types of individuals and organizations, including terrorists, narcotics dealers, and weapons proliferators.

~ unique in that some of its sanctions programs purport to require compliance by non-U.S. individuals and entities, giving them extraterritorial effect.

~ OFAC is the agency primarily charged with administering and enforcing economic sanctions on behalf of the U.S. government

Question 2

What are some of the main enforcement agencies of US Sanctions?

Answer 2

§ Office of Foreign Assets Control (OFAC): An agency within the Treasury Department, it is primarily charged with administering and enforcing economic sanctions on behalf of the U.S. government

§ Bureau of Industry and Security (“BIS”): This agency within the Department of Commerce administers most U.S. export control laws. (e.g. exports on dual use goods - goods, services, technology in general)

§ The State Department regulates exports of arms. It may also play a role in designating individuals or entities as targets for sanctions.

§ Along with OFAC, the Department of Justice (DOJ) is involved in enforcement of the sanctions laws, especially if a violation rises to the level of a crime.

§ The Federal Reserve to some extent oversees and enforces sanctions compliance by banks.

§ The New York Department of Financial Services (DFS) often uses New York state business records laws with respect to banks located in New York

*OFAC is not a regulator it is a national security agency. Its stated goal is to protect the national security of the United States.

*OFAC handles the Civil Enforcement side of things

Question 3

What is the legal basis/foundation of US Sanctions

Answer 3

~ Article 1 of the U.S. Constitution
~ Gives Congress the power to regulate commerce w/Foreign nations.
~ All US Sanctions Laws are federal
~ Congress passed a number of statues that impose specific sanctions and delegate broad powers to the President to impose and enforce sanctions.

Question 4

What are the two statues that allows the President to impose sanctions?

Answer 4

1) Trading with the Enemy Act (TWEA):
~ Oldest 1917-1977
~ Only Cuba remains
~ After watergate, national emergency should be more limited
~ Sanctions were imposed by Proclamations and not E.O.s
~ Emergencies proclaimed under TWEA are not time limited.

2) International Emergency Economic Powers Act (IEEPA) - Chapter 35:
~ 1977
~ Provides President the authority to deal with any unusual or extraordinary threat which has its source outside the US to the national security, foreign policy, or economy of the United States
~ Can declare a national emergency - where he can Investigate, regulate, or prohibit transactions, including in foreign exchange and property and
Block (freeze) assets.
~ Can confiscate and blocked property - during wars/armed hostilities
~ IEEPA emergencies are reviewed annually.

Question 5

What are the different forms that US Sanctions take?

Answer 5

1) Statues - measures enacted by Congress and signed into law by the President.

2) Statues are the highest level of sanctions

Question 6

What do US Sanctions Statues include?

Answer 6

~ General: Trade Sanctions Reform and Export Enhancement Act of 2000 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001

~ Cuba: Cuban Democracy Act of 1992; Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996
~ Iran: Iran Freedom and Counter-Proliferation Act of 2012; Iran Freedom Support Act; Iran Sanctions Act of 1996; Iran Threat Reduction and Syria Human Rights Act of 2012 ; National Defense Authorization Act For Fiscal Year 2012; Countering America’s Adversaries Through Sanctions Act (CAATSA)

~ Nicaragua: Nicaragua Human Rights and Anticorruption Act of 2018

~ North Korea: North Korean Sanctions and Policy Enhancement Act of 2016; CAATSA

~ Russia: Sergei Magnitsky Rule of Law Accountability Act of 2012; Support For The Sovereignty, Integrity, Democracy, And Economic Stability Of Ukraine Act Of 2014; Ukraine Freedom Support Act Of 2014; CAATSA

~ Syria: Iran Threat Reduction and Syria Human Rights Act of 2012
~
Venezuela: Venezuela Defense of Human Rights and Civil Society Act of 2014

~ Terrorism: Antiterrorism and Effective Death Penalty Act of 1996 (8 U.S.C. § 1189); USA PATRIOT ACT; CAATSA

~ Weapons Proliferation: Sections 2797b-c of the Arms Export Control Act

~ Narcotics Trafficking: Foreign Narcotics Kingpin Designation Act (21 U.S.C. §§ 1901-1908)

~ Democracy, Human Rights, and the Rule of Law: Global Magnitsky Human Rights Accountability Act

Question 7

What’s another way of Issuing Sanctions and having them signed into law?

Answer 7

By Executive Order of the President based on IEEPA

*without the approval of Congress

Question 8

What are the 3 steps involved when sanctions are issued by an E.O.?

Answer 8

1) Executive Order from the President
2) OFAC publishes updates and designates (could be for an existing sanctions or a new program)
3) OFAC implements the order into a Regulations publishes them back to the E.O.

Question 9

What are the 4 main elements of an E.O.?

Answer 9

1) A national emergency is declared by the President
2) the order contain a presidential finding
3) it identifies, foundational targets for the sanctions program
4) It directs cabinet agencies, especially the Treasury to do specific things.

Question 10

What does OFAC do when it receives and E.O.?

Answer 10

1) It will create individual sanction programs (regulations)

2) Draft and publish the regulations via notice in the Federal Register and ultimately in the Code of Federal Regulations (CFR).

3) Code of Federal Regulations can be found in Title 31 - Chapter V, Part 500 - end.

e.g. ~ 536.501

Question 11

What details does the Regulation provide regarding the application of Sanctions?

Answer 11

• Definitions
• Prohibitions
• Interpretations
• Exceptions and licenses
• Penalties
• Reporting

Question 12

How do the statues, executive order and resulting regulations align?

Answer 12

Examples:
~ In 1995 an E.O. was issued by the President regarding blocking assets and prohibiting transactions of significant Narcotics Traffickers. In 1997 OFAC Implemented the regulation (CFR Part 536)

~ In 1999 Congress issued the Foreign Narcotics Kingpin Designation Act - A Statue - which OFAC implemented by regulation - CFR Part 598

Question 13

How is OFAC Organized?

Answer 13

OFAC has 4 Divisions:

1) Compliance - the public fact of OFAC
~ Handles Website content
~ FAQs
~ Hotline
~ Reporting - (e.g. VSDs)
~ Outreach - (can publish guidance)
~ Regulated industry enforcement (Banking, Security & Insurance Industry)

2) Licensing:
~ Tunes the broad prohibitions to meet US foreign policy goals
~ Specific license application review;
issues and maintains specific licenses;
~ provides guidance on licensing matters;
~ reporting

3) Global Targeting:
~ Finds the names to put on the lists (investigates and submits packages for approval to designated targets)
~ Where do designations come from?
* Leads
* All source investigation - US Intelligence (FBI, CIA, DIA, NSA etc…)
* Focus on the network
De-listings – the process can be lengthy:
* See 31 C.F.R. §501.807
* Demonstrate that you changed behavior / severed ties

4) Enforcement:
~ Team that investigates and enforces sanctions involving parties in trade-based, non- financial industries

Question 14

How does OFAC provide information to the public?

Answer 14

The Compliance Dept in OFAC publishes:
~The E.O.
~Targets from the EO and any other designations or relevant information
~Notice can be found in Recent Actions section of the OFAC Website (the most important part of the website)
~ You can sign up for e-mail alerts when OFAC updates recent actions

Question 15

Who must comply with U.S. Sanctions?

Answer 15

~ “U.S. persons” must comply with U.S. sanctions § ~

~ U.S. persons include
§ U.S. citizens and resident aliens, wherever they are located § Entities organized under the laws of the U.S.
§ Foreign branches of U.S. companies
§ U.S. subsidiaries of foreign companies
§ Persons physically present in the U.S., regardless of nationality

~ Foreign subsidiaries of U.S. companies are not U.S. persons, but the sanctions laws regarding Cuba and Iran specify that they apply to foreign subsidiaries of U.S. companies as well. (e.g. of extraterritorial application of US Laws)

~ Any business or foreign entity that does business in the United States must comply with U.S. sanctions, even if it has no physical presence in the United States.

~ U.S. sanctions generally apply to all transactions denominated in U.S. dollars.
§ If any segment of a transaction involves a U.S. person, it is subject to U.S. law.
§ Practically all non-cash U.S. dollar payments are cleared through U.S. banks.
§ Even if no other party to the transaction is a U.S. person, the involvement of a U.S. bank or any other U.S. person in the transaction will result in the potential application of U.S. law.

Question 16

What are the four ways that Non-US Entities can be affected by US Sanctions?

Answer 16

I. FOREIGN PARTY HAS REQUISITE LEVEL OF CONTACT WITH THE US

II. WHERE FOREIGN PARTY IS DESIGNATED ITSELF FOR VIOLATION OF POLICY GOALS

III. SECONDARY SANCTION

IV. ASSISTING OTHERS IN VIOLATING US SANCTIONS LAWS

Question 17

What does it mean when a Foreign Party has requisite level of contact with the US?

Answer 17

As a Non US person you can violate US sanctions when you have certain level of contact with the US:

1. Engaging in transaction involving a US person
2. Engaging in a transaction involving a US-origin product/technology/service
3. Has presence in the US
4. Has contacts with the US (even if there is only limited presence in the US and no US origin
   product/tech/service is involved – “US nexus”:
   a. Engaging in business transactions in US dollars
   b. Export from US
   c. Filed for bankruptcy in US
   d. Originating US dollar wire transfer, causing a US FI to engage in unauthorized export or reexport of financial services to designated party/sanctioned country

*Consequence is potential OFAC civil enforcement action or criminal prosecution by DOJ

Question 18

What does it mean where foreign party is designated itself for violation of policy goals?

Answer 18

1. If a foreign party engages in activities that violate specific US policy goals, the US can designate the party
2. By designation on SDN list, the US extends its influence over foreign parties who have NO contacts with US for simply having engaged in activity that is contrary to US policy goals.
3. Policy goals behind 30 programs are included in various EO, including
   a) Terrorist activity/support to terrorism (e.g. designation of Hezbollah officials)
   b) Repressing democracy (e.g. President of PDVSA for being aligned with President Maduro)
   c) Computer hacking/cyber security (E.g. 2 individuals for exchanging bitcoin related to ransomware scheme)
   d) Ethnic cleansing (e.g. Myanmar officials for actions against Rohingya muslims) e) Weapons proliferation
   f) Human rights violations
   g) Corruption
   h) Narcotrafficking

*Consequence is being listed yourself and being cut off from large portion of international business and banking transactions. Your assets in US are frozen.

Question 19

How does Secondary Sanctions affect Non-US Persons?

Answer 19

1. Requirements on Non US parties that have no contact with the US
2. It is not necessary that there is a US element in the transaction
3. Economic restrictions designed to deter non US parties from supporting target of primary sanctions
4. Are included in sanctions against Iran, North Korea, Syria and Russia
5. Also called extraterritorial sanctions
6. Individuals or entities with whom transactions can give rise to secondary sanctions are identified as such on

*Consequence is being listed yourself and being cut off from large portion of international business and banking transactions. Your assets in US are frozen

Question 20

What does it mean when a Non-US person is assisting others in violating US Sanctions Law?

Answer 20

1. If you provide assistance to a designated party or knowingly facilitate significant transactions with them, you run the risk of being designed yourself
2. Aimed at foreign parties that play a secondary or tertiary role in dealing with designated entity.
3. Often target shipping companies, insurance companies, financial intermediaries or business advisors
4. There is no definition of material assistance and many types of business transactions can theoretically fit within this term
5. Legal authority for imposing sanctions on persons that provide “material support” or ”knowingly facilitate” significant transactions with targets comes from:
   a) CAATSA - Section 228: ”knowingly facilitate a significant transaction”
   b) Specific EO

*Consequence is being listed yourself and being cut off from large portion of international business and banking transactions. Your assets in US are frozen.

Examples:

§ EO 13662 Oligarch sanctions (2018):
Non US persons could face sanctions for knowingly facilitating significant transactions for or on behalf of
the individual/entity blocked today
..To have materially assisted, sponsored or provided financial, material or technological support…

§ EO 13850 (Venezuela):
Contains a “material assistance” provision by which non-US persons may be sanctioned if they are determined to have “materially assisted, sponsored, or provided financial, material, or technological support for” any entity designated to the SDN List pursuant to EO 13850.

Question 21

What types of sanctions does the US apply and who they apply to?

Answer 21

~ OFAC has approx ~ 33 - 35 key ofac sanction programs.

~ Each program has a set of regulations.

Example:
§ 31 CFR Part 515 – Cuban Asset Control Regulations – the Cuba program since 1963
§ 31 CFR Part 536 – Narcotics Trafficking Sanctions Regulations
§ 31 CFR Part 544 – Weapons of Mass Destruction Proliferations Sanctions Regulations § 31 CFR Part 560 – Iranian Transaction and Sanctions Regulations
§ 31 CFR Part 594 – Global Terrorism Sanctions Regulations
§ 31 CFR Part 598 – Foreign Narcotics Kingpin Sanctions Regulations

Question 22

What do all US Sanctions have in common?

Answer 22

31 CFR Part 501 – Reporting, Procedures, and Penalty Regulations:
* This Part applies to ALL of OFAC’s regulations
* Key reporting obligations – reports of blocked or rejected transactions, annual reports of blocked property,
* Requirement to furnish information – so-called “602s” or administrative subpoenas
* Appendix includes OFAC’s Enforcement Guidelines

Question 23

Who are the targets of US Sanctions?

Answer 23

Targets of U.S. sanctions include:
* individuals,
* legal entities,
* informal organizations (such as Al Qaida),
* vessels,
* aircraft,
* governments,
* regions of countries…and even entire countries!

Sanctions targets are potentially subject to a range of different measures, from complete asset freezes to restrictions on the ability to borrow from U.S. persons or to use U.S. government programs.

Question 24

What happens when the US designates a sanctions target?

Answer 24

They are called SDN = Specially Designated National and published in the SDN list.

§OFAC may designate individuals, legal entities,
individual government agencies, vessels, and aircraft
as SDNs.

§ The reasons for designation include:
* Engagement in or support of international terrorism * Narcotics trafficking
* Arms proliferation
* Assistance in the development of WMD
* Suppression of democracy, human rights, and the rule of law

*U.S. persons are generally prohibited from having
any dealings with SDNs, and are required to block any property or interest in property of an SDN.

Question 25

Who else can be designated by US Sanctions?

Answer 25

Entities owned by SDNs can also be subject to U.S. Sanctions laws, even if they have not been separately designated.

RULE: Under U.S. law, any entity that is owned 50 % or more by any combination of SDNs is also considered an SDN by operation of law. (e.g. you could have 50 SDNs owning 1% of a company they would be designated by operation of law though no one goes to the 1% level).

*OFAC does not use the “control” criterium like the EU. - An entity can be controlled by an SDN but unless it is owned 50% or more by an SDN it does not automatically subject to sanctions.

*if you are doing business with an entity control by an SDN be careful if OFAC discovers the control OFAC can designate the entity as well.

Question 26

What are the types of US Sanctions?

Answer 26

~ Blocking of Property
~ Travel Ban
~ Arms Embargo
~ Restrictions on Imports/Exports
~ Prohibition of Trade-related Transactions and Investments
~ Evasion and Facilitation

Question 27

What does Blocking of Property mean?

Answer 27

§ Most sweeping sanction applied by the U.S.

§ “Blocking” = freezing the goods or services.

§ Blocking applies to individuals, entities, or others that have been designated by OFAC as SDN’s

§ Blocking may also be applied to entire governments, as is currently the case with North Korea, Syria, and Venezuela.

§ Blocked property remains under the ownership of the sanctioned person or entity. U.S. persons who
gain control over funds belonging to a sanctioned person are required to place those funds in a separate interest-bearing account, but cannot move the property without permission from OFAC.

Example:
Venezuela. Executive Order 13884, which applied this sanction to the Government of Venezuela, employs typical language:

Section 1. (a) All property and interests in property of the Government of Venezuela that
are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.

Question 28

What is a Travel Ban?

Answer 28

Restrictions or prohibitions on travel to the U.S. by designated individuals

§ All immigration law in the U.S. is federal, so that such a travel ban applies throughout the U.S.

§ U.S. may also ban travel by U.S. nationals to certain countries. Presently, such travel bans apply
to Cuba (with some relatively significant exceptions) and North Korea.

Question 29

What is an Arms Embargo?

Answer 29

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

Basis for Arms Embargo is the U.S. Munitions List:

~ Which designates various goods, services, and technology as being defense articles or services.

~ Covers 20 different categories of articles, services, and technology, including firearms; guns; ammunition; missiles, rockets, bombs, and mines; explosives; naval vehicles; military ground vehicles; aircraft; training equipment; personal protective equipment; electronics; fire control and guidance equipment; various other materials; chemical and biological agents; spacecraft; nuclear weapons; directed energy weapons; gas turbine engines; and submarines.

~ Exports of items require license from the State Department.

~ The Munitions List explicitly includes not just military articles, but the services and technology associated with those articles.

Question 30

What are Restrictions on Imports/Exports?

Answer 30

IMPORTS
~ Legal language prohibiting imports tends to be quite straightforward.
~ There may be exceptions for specific imports.

EXPORTS
~ Legal language prohibiting imports tends to be quite broad.
~ U.S. export sanctions include services and technology as well as goods.
~ Financial services are considered a form of services.
~ Technology includes software, preventing sales over the Internet.
~ These prohibitions commonly contain a de minimis requirement. (something made less 10% of use goods - not considered of US origin).

Question 31

What does Prohibition of Trade-related Transactions and Investments mean?

Answer 31

Trade-related Transactions prohibit the import or export of goods, services, or technology, U.S. sanctions may prohibit U.S. persons from participating in essentially any way in a transaction involving a country subject to sanctions.

The definition of “transaction or dealing” is very broad, and encompasses any role a U.S. person could potentially take in a transaction involving a country subject to sanctions.
o Prohibition on Investment is a less common type of economic sanction.
o Usually, the U.S. will prohibits all investment after a certain date.
o “Investment” in this sense includes a commitment or contribution of funds or other assets, or a loan or other extension of credit.
o Does not technically require a U.S. person to liquidate existing investments, but may prohibits any additional funds or assets.

Question 32

What does Evasion and Facilitation mean?

Answer 32

U.S. sanctions always prohibit evasion and facilitation regarding sanctions.

§ Evasion is any attempt to circumvent sanctions
* Unlike some of the other prohibitions, this is not restricted to U.S. persons only, so that a foreign person who caused a violation of sanctions by, for example, concealing the presence of a sanctioned element in a transaction so that a U.S. bank processed the transaction, could itself violate sanctions.

Facilitation occurs when a U.S. person helps someone perform a transaction that the U.S. person could not take part in directly

Examples of facilitation include providing any type of permission or assistance for a transaction, including
* Approving
* Financing
* Guaranteeing
* Brokering
* Referring an opportunity

Question 33

Are US Sanction directed towards Foreign Financial Institutions?

Answer 33

Yes. Some U.S. sanctions are directed specifically against foreign banks/financial institutions. (Secondary Sanctions)

§ U.S. sanctions against Iran, North Korea, and Russia permit or require the President to impose sanctions against foreign financial institutions that engage in certain types of activities, typically engaging in “significant transactions” involving designated parties

§ The penalties under these sanctions primarily take the form of restrictions or prohibition of the maintenance of correspondent and payable-through accounts by U.S. financial institutions in favor of the foreign bank. (e.g. Foreign bank violates US Sanctions a US bank can not provide it with a correspondent account - cuts the foreign bank from the US financial industry).

§ This would essentially cut sanctioned foreign financial institutions off from access to the U.S. financial system.

Question 34

What are US Sectoral Sanctions?

Answer 34

§ Sectoral sanctions do not involve blocking or broad-based prohibition on transactions or services, but rather target a key industry or market within a certain country.

§ The key prohibitions tend to center on:
* Prohibitions on “dealing in” new debt with a maturity longer than the specified number
of days
* Prohibitions on new equity
* Prohibitions on exports used for certain projects.

§ Why would a policy maker choose country versus list based versus sectoral sanctions? Depends on the issue they are seeking to address and the market integration of the targets

EXAMPLE: The United States imposes sectoral sanctions against certain designated companies in the finance, energy, and defense sectors of the Russian economy.

Question 35

Who is subject to Sectoral Sanctions?

Answer 35

§ Entities designated under sectoral sanctions are placed on the as Sectoral Sanctions Identifications (SSIs) List.

§ As with SDNs, entities that are owned 50 percent or more by SSIs are also subject to sectoral sanctions, even if they are not separately included in the SSI List.

§ U.S. law prohibits U.S. persons from dealing in the debt or equity of SSIs under certain circumstances.

§ SSIs are subject only to the prescribed sanctions; all other transactions with SSIs are legal.

§ There is no requirement (or indeed, legal basis) to block the property of an SSI.

Question 36

What are the two types of US Sanctions Licenses?

Answer 36

1) General Licenses:
§ similar to exceptions.
§ available to all persons; no application is required.

*Often take the form of a provision in a sanction regulation.

2) Specific Licenses:
§ authorizes a designated party to engage in a transaction/ series of transactions for a prescribed period of time.
§ authorization is available only to the licensee.
§ Both U.S. and non-U.S. persons may apply for a license.

Question 37

Does US Sanctions have exceptions?

Answer 37

Yes. Because U.S. prohibitions on imports and exports regarding individual countries tend to be comprehensive, they commonly include a number of exceptions and exemptions. These may be statutory or provided for in regulation. Common exceptions and exemptions include:
* Post and telecommunications;
* Humanitarian donations;
* Information and informational materials (including books, music, photographs, and film);
* Expenses associated with travel (where travel is allowed); and/or
* Official business of the United States - US can always do transaction to carry out its business even if it violates Sanctions laws.