US secondary sanctions are sanctions that the United States can apply to wholly non-US actors in wholly non-US transactions of which the US administration disapproves. Numerous statutory and executive orders provide authority to impose secondary sanctions for transactions involving multiple countries (primarily Iran, Russia, North Korea and Venezuela) and a wide range of activities, including violating human rights. Many of these authorities include the 'nuclear option' of placing the sanctioned individual or entity on the Specially Designated Nationals (SDN) list. None of these authorities include a well-defined numerical threshold for imposing sanctions, with many requiring sanctions for significant transactions or providing material support. The US administration has identified many persons and entities for sanctions or placed them on the SDN list under these authorities.
This article identifies some of the problems with the application of secondary sanctions and offers some potential solutions.
Triggers for secondary sanctions are unclear
What is a 'significant transaction'? The Office of Foreign Assets Control's (OFAC's) FAQ 542 states that the:
OFAC will consider the following list of seven broad factors that can assist in the determination of whether a transaction is 'significant': (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.
There is no one to ask
Non-US persons who are not subject to US jurisdiction cannot apply to the OFAC for a licence. While the OFAC tries to answer questions posed to its compliance hotline, it is a small department and there are understandably a lot of people asking questions. In addition, the guidance from one OFAC representative is not generally binding on the OFAC itself.
Secondary sanctions imposed in a discriminatory fashion
This is not intended as a criticism: it takes time and money to build a file supporting the imposition of secondary sanctions. Even a fully funded sanctioning authority cannot possibly keep up to date so decisions on whom to target must be made.
Placement on SDN list is a nuclear option
Being placed on the SDN list is not merely a question of doing business with Iran or the United States. Indeed, an entity on the SDN list will have problems doing business in its own country due to the risk-averse positions taken by banks and other companies, which have only been exacerbated by the risk of secondary sanctions. For example, one company was almost bankrupt by the time it was removed from the SDN list, and that company had minimal US business.
In many cases, the US government has reportedly reached out to a non-US company or government and warned that its activity could lead to secondary sanctions. For example, the US government has warned the Turkish and Indian governments not to purchase the Russian S400 missile system. But SDN blocking sanctions are effective only if imposed with no warning at all. Thus, the individuals and companies that are placed on the SDN list often suddenly discover that their assets have been blocked.
Difficult to be removed from SDN list
In some cases, parties cannot be removed from the list for a particular period. Thus, parties often end up hiring US counsel in order to facilitate their removal from the SDN list.
Secondary sanctions do not usually trigger standard force majeure clauses
Non-US companies cannot tell customers that they cannot perform binding contracts because the United States has imposed secondary sanctions – they are not legally compelled to comply with US secondary sanctions laws.
Secondary sanctions commercially favour the non-compliant
When companies that do not wish to trigger secondary sanctions find some means to step aside, the companies that step in are those that are indifferent to US foreign policy or the US market.
The following solutions may help to resolve some of the abovementioned problems:
- Adopt clear and high thresholds for investments and transactions, as well as clear descriptions of conduct.
- Provide clearer guidance to non-US parties. If the Department of Commerce can develop a decision tree for 'specially designed' why can something similar not be done in the sanctions area?
- Require secondary sanctions be applied to investments and transactions above a certain amount, no matter the actor.
- Do not require the secondary sanctions to be SDN sanctions. There are many sanction options that punish but do not put a company or individual out of business.
- Provide fair warning to the target and allow it to change its course. If the purpose of the sanctions is to change conduct, this is key.
- Provide a clear path for the removal of secondary sanctions (ie, if an entity agrees to X, it is removed from the SDN list).
- Provide a written warning of impending sanctions that the target can use to try to get out of the problematic contract, if applicable. Having a written statement from a government authority can help companies to exit contracts.
Doing so will ensure that less compliant companies do not benefit from the discriminatory application of secondary sanctions by engaging in the very conduct that the United States wishes to discourage.
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