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25 Nov 2020

US sanctions - who do they apply to and what steps can you take?

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Under the Trump administration, the use of sanctions was a key US foreign-policy tool. Following the US presidential election on 3 November 2020, we explore the scope of the US sanctions regime and its applicability to individuals and entities and to what extent this will change under the President-elect Joe Biden.

Introduction to US sanctions

What is their purpose?

The US sanctions regime is administered by the Office of Foreign Assets Control ("OFAC") of the US Department of the Treasury who controls and enforces economic sanctions programs against countries and groups of individuals.

OFAC's stated aim is to use the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

What is the scope of US Sanctions?

The US sanctions are either comprehensive (meaning country-wide) or specific, targeting specific persons, entities or activities.

For example, comprehensive sanctions have historically been introduced against Iran and Cuba, whilst specific sectorial sanctions have recently targeted the Venezuelan gold, and Russian oil, industries.

What is the SDN List?

Sanctioned individuals or entities are placed on OFAC’s Specially Designated Nationals and Blocked Persons ("SDN") List.

What is the effect of being placed on the SDN list?

Generally speaking, OFAC prohibits all transactions between those on the SDN list and US individuals and companies that fall under the scope of a "nexus to US jurisdiction", as explained below.

Further, all property and interests of the SDN listed entity or individual which fall under US jurisdiction are blocked, including companies which are majority owned by the SDN-listed entity or individual.  

If a non-sanctioned entity is found to be transacting with an SDN-listed individual or company in breach of the terms of the sanctions, there is a risk that the non-sanctioned entity will itself be subsequently subject to sanctions and added to the SDN list.

Primary and secondary sanctions

Primary Sanctions

US primary sanctions generally apply to transactions and/or entities which involve a "nexus to US jurisdiction". This includes:

  • All entities organized in the US.
  • US citizens and permanent residents (wherever located).
  • All persons physically located in the US, regardless of nationality.
  • All US incorporated entities and their foreign branches.
  • Transactions through the US financial system (including transactions in US dollars).

If a proposed transaction does not involve any nexus to US jurisdiction and an SDN-listed entity or individual is subject to primary sanctions only, the sanctions will not apply to that transaction or activity and a non-sanctioned entity will be able to carry out the transaction or activity with the SDN-listed entity or individual.

Secondary Sanctions

Secondary sanctions, on the other hand, do not require a US connection and are imposed on non-US persons directly or indirectly engaged in certain significant transactions relating to Iran, Russia, North Korea, and Syria.

The purpose and aim of these types of sanctions is to deter non-US persons from engaging in certain dealings, deemed to be contrary to US national security and foreign policy interests, by restricting their access to US markets.

In the case of Iran, the US has previously used secondary sanctions to demand that non-US financial institutions cease transacting with Iranian banks or otherwise risk losing access to the US financial system.

Key points to consider

When undertaking an assessment of the possible sanctions risks with a proposed transaction or activity, it is important to establish:

  • The entities or individuals which are SDN-listed – including entities which are majority owned by listed entities or individuals.
  • The applicable scope of the sanctions regime – including whether the sanctions restrict all transactions or activities with the SDN-listed entities or individuals, or just specific sector-related transactions or activities.
  • Whether there is a US connection or nexus to the proposed transaction or activity – such as the presence of US individuals, entities or transactions in US dollars.
  • Whether the sanctions are primary or secondary – in the case of secondary sanctions, these would also apply to non-US individuals and entities.

What if sanctions do apply?

Sanctions are often introduced against parties with very little notice and it is therefore important to be aware of the immediate steps you can take in the event that you or a contracting party is subject to sanctions.

For a newly sanctioned party, these steps include:

  • Immediately stopping the sanctioned activities – including taking active measures to cease all activities or transactions caught under the terms of the sanction. Where this is not possible immediately, OFAC will often implement a grace period for the winding down of certain sanctioned activities.
  • Applying to OFAC for a temporary licence – it is common for sanctioned parties to apply for a licence permitting it to conduct certain authorized activities which may otherwise fall under the terms of the sanctions – for shipowners, this would typically include provisions relating to the safe docking or anchoring of a vessel, and the safety and maintenance of its crew.

For a party contracting with a newly sanctioned entity, these steps include:

  • Termination of contracts – if the continuation of contractual obligations, such as the provision of services to a sanctioned entity, risk a party being caught by sanctions, any contracts with the sanctioned entity should be terminated as soon as possible.
  • Ceasing all services – alongside the termination of contracts, any services provided under such terminated agreements must be stopped as soon as is possible.
  • Being aware of continuing obligations at law – depending on the nature of a contract, a party will often have continuing obligations under law which are separate from its contractual obligations and do not cease upon the termination of contracts. For example, managers of vessels have statutory obligations to the vessels' crew under international maritime law.
  • Notifying OFAC of actions taken – it is recommended that OFAC are informed of all steps taken following the issuance of sanctions. A clear and well documented paper trail of implemented actions taken is very helpful in the event that a party is ever accused of non-compliance with sanctions.

Impact of the US election

Since taking office in 2016, US President, Donald Trump, has used economic and trade sanctions as a key foreign-policy tool which has been imposed against many countries, particularly Iran, Russia and Venezuela.

Following Joe Biden's presidential election victory in November 2020, many will be watching with interest to see what approach he takes with regards to the use of sanctions, which has clearly been favoured by the Trump administration, who have imposed penalties at a rate two-thirds higher than that during the Obama administration when President-elect Joe Biden served as vice-president.

Furthermore, should President-elect Joe Biden and his administration seek to take a different approach with regards to sanctions it will not be easy for them to reverse some of their predecessors' policies.  For example, in recent weeks President-elect Joe Biden has stated his desire to re-join the 2015 Iran nuclear deal - the Joint Comprehensive Plan of Action ("JCPOA"), but this may prove difficult because:

  • Since President Trump exited from the JCPOA, Iran also began to withdraw from its own commitments under the JCPOA, which has resulted in the International Atomic Energy Agency ("IAEA") reporting in its last quarterly review that Iran has now stockpiled about 12 times the amount of low-enriched uranium permitted under the JCPOA as well as the enriching uranium being a higher purity than the 3.67% allowed under the deal.
  • With Iranian elections set for June 2021, President Hassan Rouhani may demand more favourable terms in order to return to the JCPOA, including the immediate lifting of the punishing sanctions imposed by the Trump administration and possibly billions of dollars in compensation for the economic losses Iran incurred when President Trump withdrew the US from the JCPOA in 2018, without Iran being required to reduce their large enriched uranium stockpile in the meantime.

As such, whilst there is nothing to technically prevent President-elect Joe Biden from withdrawing any sanctions introduced by Donald Trump, there are clear political obstacles which will first need to be carefully navigated, especially with foreign leaders.

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