On this first anniversary of the United States’ withdrawal from the Iran nuclear deal (the Joint Comprehensive Plan of Action, or “JCPOA”), the Trump Administration announced, today, new sanctions targeting Iran’s steel, aluminum, and copper sectors. These sanctions are the latest illustration of the Trump Administration’s increasing willingness to aggressively deploy economic sanctions measures in furtherance of its foreign policy goals. In the intervening months since withdrawal from the JCPOA resulted in the re-imposition of an array of economic sanctions measures on Iran, the Trump Administration has further expanded Iranian sanctions (culminating with today’s measures), and also expanded sanctions targeting Venezuela, Cuba, and Nicaragua -- labeled the “troika of tyranny” by National Security Advisor John Bolton. Additional Russia sanctions measures are also likely as the Trump Administration and Congress respond to a continuing broad range of malign Russian activity in relation to Ukraine, election tampering, cyber hacking, the use of chemical-biological weapons, and divergent interests in Syria.
Parallel to these many new measures, the Office of Foreign Assets Control (“OFAC,” the US Treasury Department’s office charged with administering and enforcing US economic sanctions), has issued a “Framework for OFAC Compliance Commitments,” in which OFAC, for the first time, provides detailed guidance on key elements of a strong sanctions compliance program. In the face of the multi-front expansion of sanctions measures, perhaps the OFAC guidance’s most important point is that companies should adopt mechanisms to calibrate their compliance programs to respond to changes in the sanctions environment.
This alert summarizes key new and recent sanctions measures and OFAC’s new compliance guidance.
The Trump Administration’s stated policy on Iran is to exert maximum pressure, through economic sanctions and other means, to change a range of perceived Iranian Government malign behavior. Consistent with that policy, as discussed in our November 6, 2018 alert, on May 8, 2018, the Trump Administration announced that the United States would withdraw from the JCPOA, resulting in the re-imposition of expansive economic sanctions on Iran. In the intervening months, the Trump Administration has further broadened Iranian sanctions, and committed to aggressive enforcement of existing measures.
Most notably, today, the Trump Administration announced new sanctions targeting Iran’s iron, steel, aluminum, and copper sectors. The sanctions are designed to sanction both Iranian companies operating in those sectors as well as the non-US firms and financial institutions that engage in trade or facilitate trade with those sectors. The May 8, 2019 executive order requires the Treasury Department to designate on OFAC’s Specially Designated Nationals (“SDN”) and Blocked Parties List persons that are determined to operate in those sectors, and persons that have engaged in significant transactions for the sale of goods used in those sectors, or significant transactions for the purchase of goods produced from those sectors, or to otherwise have provided material support to those Iranian sectors. US persons are prohibited from engaging in any activity with SDN-listed persons, even in relation to activities wholly unconnected to Iran.
Separately, the executive order provides that financial institutions that facilitate such significant transactions involving the Iranian iron, steel, aluminum, or copper sectors will lose their ability to engage in corresponding banking in the United States.
The sanctions are effective immediately, but OFAC has announced a 90-day wind-down period for existing businesses.
These new sectoral measures come on the heels of other Iranian sanctions measures. On April 15, the State Department designated the Islamic Revolutionary Guard Corps (“IRGC”), including the Qods Force, as a Foreign Terrorist Organization. This action represents the first time an administration designated a branch of a foreign government as a terrorist organization. This measure is largely symbolic given that the IRGC is already listed as an SDN under various executive orders, including Executive Orders 13382 (relating to weapons proliferation), 13553 (relating to human rights violations), 13606 (relating to human rights violations involving information technology), and 13224 (relating to counterterrorism).
Another stated Trump Administration goal is to stop Iran’s oil exports, and it is deploying sanctions measures in furtherance of that goal. The 2012 National Defense Authorization Act provides for sanctions on foreign financial institutions whose governments import Iranian oil. It also provides that the President may waive such sanctions for countries that pledge significant reductions of Iranian oil imports. The United States agreed to suspend this measure in the JCPOA, and when the Trump Administration withdrew from the JCPOA, it granted temporary waivers to eight countries: China, Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey. On April 22, Secretary Pompeo announced that the United States would not issue any additional sanctions waivers for the import of Iranian oil. These countries are, accordingly, vulnerable to significant US financial sanctions if they continue to import Iranian oil. While certain countries have remained relatively quiet on the announced waiver policy change, China and Turkey issued strong condemnations of the Trump Administration’s decision.
These measures do not have a direct impact on US companies, which are already prohibited from engaging in most activity in Iran. Non-US firms engaging with the Iranian iron, steel, aluminum, and copper sectors also should quickly evaluate their sanctions exposure. As a general matter, they also send a strong signal to non-US firms, however, including non-US financial institutions, that it will become increasingly difficult to engage in activity in both the United States and Iran.
US economic sanctions targeting Venezuela were first imposed in 2017. Those earlier measures narrowly targeted corrupt and anti-democratic government officials and restricted Venezuela’s access to capital. Beginning in 2018, the Trump Administration significantly expanded sanctions as part of its broader effort to force the resignation of President Maduro in favor of Juan Guaido, who is recognized by the United States as the legitimate president of Venezuela.
These new measures include the imposition of blocking orders on Maduro, other high-ranking officials in his government, the state-owned energy company Petroleos de Venezuela, S.A. (PdVSA), many state banks, and other key companies that serve as a source of capital for the Maduro regime. These persons and companies are designated as SDNs. The designation of PdVSA alone has had broad impacts, since its operations touch on many aspects of the Venezuelan and regional economy. Another notable more recent designation is the Central Bank of Venezuela, which also has broad implications, potentially foreclosing any business activity in Venezuela by US firms. OFAC also extended sanctions to non-US companies that support the Maduro regime, including Russian bank Evrofinance and Cuban shipping companies that transport Venezuelan oil.
The Trump Administration will likely continue to calibrate its economic sanctions response to developments in Venezuela. Indeed, just yesterday, OFAC de-listed the Venezuelan Head of Secret Police after he announced his support for Mr. Guaido. As long as the Maduro regime remains in power, additional sanctions measures are likely.
Parallel to its sanctions strategy in Venezuela, the Trump Administration has sought to increase pressure on Cuba, one of Venezuela’s critical allies. Cuba has been subject to a broad US trade embargo for over 50 years. That embargo was eased somewhat during the Obama Administration in an effort to further economic activity directly supporting the Cuban people. As reported in our June 19, 2017 alert, the Trump Administration re-imposed some of the restrictions eased by President Obama, but largely left the more liberal policy in place. In direct response to Cuba’s support for the Maduro regime, however, the Trump Administration has recently taken more dramatic action.
Secretary of State Mike Pompeo recently announced that the United States would no longer waive Title III of the Helms-Burton Act of 1996. This statute allows individuals to sue non-US companies that have “trafficked” in property seized by the Cuban Government when the Communist Party assumed power in 1959. The decision to cease waiving Title III and allow such lawsuits to proceed is a marked departure from a policy that administrations from both parties have followed since the Helms-Burton Act’s enactment.
Many companies and individual claimants have been quick to act on this new authority. Companies that engage in business in Cuba should, accordingly, consider due diligence to determine whether any property used in connection with their activities is the subject of a claim that is now actionable.
The Trump Administration imposed targeted sanctions on Nicaragua in response to the Ortega regime’s corrupt and anti-democratic actions. Although sanctions against Nicaragua are currently narrowly focused on certain individuals and entities (including President Ortega’s family), the Trump Administration’s equating of Ortega’s regime with the current Venezuela and Cuba regimes could portend increased sanctions against Nicaragua in the coming months.
The Trump Administration has been relatively inactive recently in relation to expanding existing Russia sanctions. One set of measures compelled by the 1991 Chemical and Biological Weapons and Warfare Elimination Act (“CBW Act”) are reportedly under White House review. As reported in our August 28, 2018 alert, a UK chemical nerve agent attack against former Russia spy Sergei Skripal and his daughter prompted an initial round of sanctions on Russia under the CBW in August 2018. The CBW Act requires the President to impose progressively more stringent sanctions unless he is able to certify: (1) the country is no longer using chemical or biological weapons in violation of international law or against its own nationals, (2) officials of that country have provided reliable assurances that no such activities will occur in the future, and (3) the country will permit on-site inspections by United Nations observers or other internationally recognized, impartial observers, or that other reliable means exist to ensure that that government is not using chemical or biological weapons in violation of international law and is not using lethal chemical or biological weapons against its own nationals.
It remains to be seen whether Congress will independently take further action in relation to Russia. There have been two bills recently introduced or re-introduced that call for increased sanctions on Russia: the Defending Elections from Threats by Establishing Red Lines (“DETER”) and Defending America’s Security from Kremlin Aggression Act (“DASKA”). Neither has been acted upon to date.
A Framework for OFAC Compliance Commitments
OFAC has issued a Framework for OFAC Compliance Commitments, which describes the key elements of a sanctions compliance program (“SCP”). OFAC advises that each company tailor its SCP to its business model and circumstances, and consider incorporating five critical elements: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. These elements are consistent with compliance program guidance issued by other enforcement agencies in relation to other laws (such as the Foreign Corrupt Practices Act Resource Guide issued jointly by the Securities and Exchange Commission and the Department of Justice).
OFAC’s guidance is particularly valuable for companies assessing the strength of their SCPs because it sets expectations of how to implement an SCP in the context of economic sanctions-specific areas of risk. For example, it states that “given the dynamic nature of US economic and trade sanctions, a successful and effective SCP should be capable of adjusting rapidly to changes published by OFAC.” Other detailed guidance OFAC offers are a series of examples of what it perceives as the “root causes” of SCP “breakdowns or deficiencies” that have ultimately led to enforcement actions. Notable root causes include the failure to employ updated automated tools in sanctions screening, and the failure to conduct appropriate due diligence on customers, clients, vendors, and counterparties.
The OFAC guidance was issued shortly after complementary guidance from the Department of Justice, Evaluation of Corporate Compliance Programs, was issued on April 30. This guidance is discussed in here. Together, these two guidance documents provide a key metric against which companies should measure their compliance programs. OFAC has stated clear incentives for such assessments; a SCP consistent with OFAC’s framework will likely significantly mitigate any penalties arising from an enforcement action.