Sanctions 2024 Comparisons

The field of economic sanctions in the past several years has been characterised by dynamic and rapid growth and development, particularly with respect to the Russia and Iran sanctions programmes, among other countries, industries and policy initiatives, including legislation and regulations directed at China, Venezuela, the fintech/virtual currency, shipping and transportation industries, the area of cybersecurity, and a long-standing commitment to counter global human rights violations.

Domestically, the US has focused on greater co-ordination across government, with a number of joint advisories involving one or more of the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS), together with relevant personnel from the Department of State and the Department of Justice (DOJ). The level of cross-border co-ordination has also advanced substantially, as multiple national and supra-national bodies (notably the UK and the EU, among others) have focused on aligning and harmonising their enforcement efforts.

One of the most notable trends in the field of economic sanctions over the past year is a significant expansion of secondary sanctions authorities in order to counter Russian aggression.

For example, OFAC has advised that foreign financial institutions (FFIs) that conduct or facilitate significant transactions or provide any service involving Russia’s military-industrial base run the risk of being sanctioned by OFAC; as of June 2024, OFAC has revised the definition of “Russia’s military-industrial base” to include all persons blocked under Executive Order 14024, the foundational order establishing the Russian Foreign Harmful Activities Sanctions programme. Accordingly, FFIs that maintain accounts, transfer funds or provide other financial services, such as payment processing, trade finance or insurance-related services, for any persons that are blocked by OFAC or who otherwise support Russia’s military-industrial base would thus be exposed to secondary sanctions risk.

Furthermore, activities deemed to constitute the facilitation of specified critical items to Russian importers or other third-country companies shipping items to Russia, or providing other forms of assistance to persons seeking to evade US sanctions on Russia’s military-industrial base, may also be captured and subject FFIs to sanctions risk. OFAC has provided a series of advisories to FFIs, recommending that affected persons and entities seek to implement compliance controls commensurate with their risk profile and current exposure to Russia’s military-industrial base and its supporters.

OFAC’s imposition of new secondary sanctions authorities – creating designation risks against foreign persons such as FFIs engaged in high-risk business sectors – is in addition to OFAC’s ongoing enforcement actions against FFIs and other foreign persons whose activities have “caused” US persons to violate sanctions, or otherwise engaged in violative conduct. This includes, for example, a circumstance where a person routes a prohibited transaction through the United States or the US financial system, thereby “causing” a US financial institution to process the payment in violation of OFAC sanctions. These enforcement activities continue to expand in intensity and duration, and also with respect to the size of resultant penalties imposed.

Finally, it bears noting that there are also recent legislative efforts to enhance US sanctions authorities, with the passage in April 2024 of a number of new sanctions and national security-related provisions, including:

• an expansion of the statute of limitations (from five to ten years) for the commencement of sanctions enforcement actions under the International Emergency Economic Powers Act (IEEPA) or the Trading with the Enemy Act (TWEA), which form the core legislative vehicles for the enforcement of civil and criminal violations of sanctions programmes in the United States;
• new secondary sanctions authorities with respect to Iran; and
• a number of reporting provisions addressing sanctions priorities and other enforcement efforts.

The economic and trade sanctions programmes administered and enforced by OFAC are driven by US national security and foreign policy goals and objectives. In that respect, it bears noting that all individuals and entities subject to US jurisdiction, as well as foreign persons that conduct business in or with the United States or US persons, or using US-origin goods or services, are impacted by US sanctions laws and regulations.

Organisations would therefore be well advised to conduct a routine and, if appropriate, ongoing or periodic risk assessment to identify potential OFAC issues they may encounter, including by making reference to OFAC’s current or emerging enforcement and compliance priorities. These risks could arise from an organisation’s clients and customers, products, services, supply chain, intermediaries, counterparties, transactions or geographic locations, depending on the nature of the organisation.

That said and as a general matter, sectors that are particularly affected by sanctions regulations and enforcement activity include banking and financial services, energy, technology, shipping and transportation (particularly with respect to the transportation of oil or other petroleum products) and the virtual currency sector.

OFAC is the primary agency responsible for administering and enforcing US sanctions. The DOJ has authority to investigate and prosecute criminal violations of certain US sanctions programmes. BIS administers and enforces the Export Administration Regulations (EAR), which are the primary export control regulations in the US.

The US State Department is also responsible for administering certain economic sanctions and export controls. For example, the State Department’s Directorate of Defense Trade Controls (DDTC) in the Bureau of Political-Military Affairs implements the International Traffic in Arms Regulations (ITAR), pursuant to the Arms Export Control Act.

US persons (and those subject to US jurisdiction) who are in possession or control of blocked property must file a Report on Blocked Property with OFAC within ten business days of the date that the property becomes blocked. Forms for the reporting of blocked property, whether “Financial” or for “Tangible/Real/other Non-Financial Property”, are available on OFAC’s website and commonly used by reporting persons. Persons holding blocked property must also file an Annual Report on Blocked Property by September 30th, reflecting all blocked property held as of June 30th of the current year. US persons (and those subject to US jurisdiction) must also file a Report of Rejected Transactions within ten business days of the rejection of a transaction that was not blocked, but where processing or engaging in the transaction would nonetheless violate applicable US sanctions.

US persons participating in litigation, arbitration or other binding alternative dispute resolution on behalf of or against persons whose property or interests in property are blocked or retained under applicable law, or when the outcome of any proceeding may affect blocked property or retained funds, must provide notice of such proceedings and submit copies of certain documents submitted and orders or opinions rendered by the court or other adjudicatory body, as well as reports of hearings or status conferences where it appears the court may issue an order or judgment or is considering or may decide any pending dispositive motion on the merits of the proceeding or any claim raised therein, as further detailed in OFAC’s regulations.

Persons subject to OFAC record-keeping requirements (ie, by engaging in a transaction pursuant to an OFAC licence) or reporting requirements with respect to blocked property are to retain records of such transactions for five years after the date of such transaction, or for the period of time such property is blocked, and for at least five years after the date such property is unblocked.

The most significant developments related to sanctions in the past three years include the following.

• The rapid expansion and intensification of the Russian Foreign Harmful Activities Sanctions programme, following Russia’s invasion of Ukraine in February 2022, resulting in thousands of designations of individuals and entities, including broad sectoral sanctions targeting an array of actors within key sectors of the Russian Federation economy.
• Enhanced government enforcement against conduct in violation of US sanctions laws and regulations, with a recent focus on secondary sanctions that target third country actors and sanctions evaders. This focus has prompted high-level US officials to communicate at industry conferences that “sanctions are the new FCPA”, referencing that DOJ and other government agencies are now directing additional resources to investigate and enforce against violations of sanctions laws and regulations, mirroring those regulators’ historical focus on international violations of the Foreign Corrupt Practices Act by US persons (or others subject to US jurisdiction).
• The April 2024 passage of the “21st Century Peace Through Strength Act”, which includes a provision extending the statute of limitations for enforcement of sanctions violations under both IEEPA and TWEA, from five to ten years. The lengthened statute of limitations will affect all of the numerous sanctions programmes enacted under IEEPA and TWEA, and gives the government additional breathing room to investigate and enforce against apparent violations of those laws and regulations.

Given that decisions concerning sanctions are often driven primarily by US national security and foreign policy considerations, the US finds itself in a consequential election year that could significantly impact shifts in policy with respect to China, Russia, Iran, Venezuela or other notable sanctions regimes. A change in administration could also affect the tone, tenor or intensity of sanctions designations and lead to new policy initiatives.

One notable administrative change is also rapidly approaching, in that OFAC has issued a final rule amending various reporting, procedures and penalties regulations, which becomes effective on 8 August 2024. In the new rule, filers are generally required to use the electronic OFAC Reporting System (ORS) for submission to OFAC of initial reports of blocked property and Annual Reports of Blocked Property pursuant to § 501.603(d), and reports of rejected transactions pursuant to § 501.604(d), among other changes seeking to streamline reporting requirements and require filings to be made via email rather than mail or facsimile transmission.

OFAC explains that “the power and integrity of” its “sanctions derive not only from [OFAC’s] ability to designate and add persons to sanctions lists, including the [SDN List], but also from [OFAC’s] willingness to remove persons from such lists consistent with the law”. Accordingly, OFAC regularly receives and considers challenges to sanctions designations.

Delisting is possible in a host of circumstances, such as:

• where there is a demonstrable positive change in behaviour;
• if an SDN or listed person dies;
• when the basis for the designation or other sanction no longer exists; or
• when the designation or other sanction was based on mistaken identity.

The delisting petition procedures are set forth at 31 C.F.R. § 501.807.

Persons seeking to challenge a designation must submit a written request for removal (referred to as a “petition” or “request for consideration”). The petition should include:

• the listed person’s name and mailing address (including email address) and, if appropriate, their authorised representative’s name and mailing address (including email address);
• proof of the listed person’s identity (such as a copy of a government-issued identification card);
• the date of the relevant OFAC listing action (such as the designation or identification);
• the SDN listing (or other OFAC listing) as it appears on the SDN List (or other OFAC list);
• a request for the reconsideration of OFAC’s determination, including a detailed description of why the listed person should be removed; and
• if writing on behalf of a petitioner, a signed authorisation from the petitioner indicating that the representative is writing on behalf of the petitioner and identifying their relationship to the petitioner. OFAC encourages petitioners to also include arguments or evidence establishing that the listing has an insufficient basis or that the circumstances resulting in the listing no longer apply.

If a petition is denied by OFAC, the petitioner may challenge that determination under the Administrative Procedure Act (APA) in federal court or file another administrative petition. Under the APA, courts are to “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”. However, because courts are to defer to and to presume the validity of OFAC’s determination, meeting this standard is typically difficult.

Should a petitioner successfully bring a delisting challenge under the Administrative Procedure Act, the available remedy would be the delisting itself. The APA can be enforced only through equitable, injunctive relief, and does not permit plaintiffs to obtain damages against a federal agency, such as OFAC; see 5 U.S.C. § 702 (prohibiting the award of money damages for violations of the APA).

Because each application is considered on a case-by-case basis, there is no fixed time within which OFAC provides delisting determinations. Generally, the review process can be lengthy. OFAC advises that its review timing depends upon a range of factors, including:

• whether OFAC needs additional information;
• the need to engage in interagency consultation;
• how timely and forthcoming the petitioner is in responding to OFAC’s requests; and
• the specific facts of the case.

When more information is needed, OFAC will send the petitioner questionnaires identifying the additional information or clarification needed from the petitioner. OFAC states that it “endeavors to send the first questionnaire within 90 days from the date the petition is received by OFAC”. It is not uncommon for OFAC to send one or more follow-up questionnaires and to engage in additional research to verify claims made by a petitioner.

OFAC implements sanctions that prohibit the export or import of services to or from other countries.

For example, under the Russia sanctions programme, pursuant to Executive Order 14071, the US prohibits the exportation, re-exportation, sale or supply, directly or indirectly, from the United States or by a United States person of a wide array of services, including:

• accounting, trust and corporate formation services;
• management consulting;
• covered metals acquisition services;
• IT support services for enterprise management software and design and manufacturing software;
• cloud-based services for enterprise management software and design and manufacturing software;
• architecture, engineering, IT technology consultancy and design services;
• quantum computing; and
• trading/commodities brokering, financing, shipping, insurance (including reinsurance and protection and indemnity), flagging and customs brokering services as they relate to the maritime transport of crude oil and petroleum products of Russian Federation origin.

OFAC implements sanctions that prohibit the export or import of goods to or from other countries.

For example, under the Russia sanctions programme, pursuant to Executive Order 14066, the US prohibits the importation of the following products of Russian Federation origin into the US:

• crude oil and petroleum;
• petroleum fuels, oils and products of their distillation;
• liquefied natural gas;
• coal; and
• coal products.

Executive Order 14068 likewise prohibits the importation of fish, seafood, alcoholic beverages and non-industrial diamonds of Russian Federation origin into the United States.

In the United States, whether compliance with sanctions will be viewed as a bar to performance of a party’s contractual obligations is a fact-specific inquiry that will largely depend upon the terms of the applicable contract.

Parties will typically raise defences relating to non-performance – namely, impossibility, illegality, force majeure or frustration of purpose. In evaluating these defences, US courts will look to a variety of factors, including:

• the language of the parties’ agreement;
• the specific sanctions at issue;
• the purpose of the applicable contract; and
• the impact of sanctions on the circumstances of the parties.

Where a sanctioned party seeks relief from its contractual obligations, US courts have also considered the foreseeability of such sanctions and the efforts of parties to otherwise comply with the terms of the contract, and have conducted a close review of what the sanctions at issue expressly prohibit in practice.

In dealing with the enforcement of judgments when sanctions issues arise, US courts generally adhere to OFAC’s requirement that the judicial disposition of blocked property is prohibited unless authorised by OFAC through either a specific or general licence.

A narrow exception exists where a party holds a judgment against a “terrorist party” (including foreign states designated as state sponsors of terrorism) within the meaning of the Terrorism Risk Insurance Act of 2002 (TRIA) (28 U.S.C.S. § 1610 note). The TRIA permits such parties to seek the attachment and execution of blocked assets where doing so would otherwise satisfy the requirements of applicable law. Courts have held that, in these circumstances, such attachment and execution may proceed without a separate requirement to obtain a licence from OFAC.

Depending on the underlying authority used to designate a person for sanctions, different US government agencies may have the lead with respect to designation decisions. The US Department of the Treasury is in charge of publishing and administering the SDN list, and is typically the primary authority in charge of designation decisions. That said, many programmes call for designations to be made by Treasury, in consultation with other parts of the US government such as the Department of State and the US Attorney General. Other programmes will give the Department of State or other US agencies (often in consultation with the Department of the Treasury) the authority to designate persons for sanctions.

Pursuant to OFAC’s 50 Percent Rule, the property and interests in property of entities directly or indirectly owned 50% or more, whether individually or in the aggregate, by one or more blocked persons are themselves considered blocked. Therefore, if one or more sanctioned persons owns an entity, and their collective ownership stake is 50% or higher, then that entity and its property will also be sanctioned.