U.S. Sanctions: Looking Ahead, Compliance Best Practices

Like many other countries, the United States uses economic sanctions and embargoes to promote its interests. Most U.S. sanctions are administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).

U.S. sanctions vary from comprehensive—such as sanctions on Syria, pursuant to which nearly all transactions with Syria are prohibited—to selective—such as current sanctions on Sudan, under which only certain transactions with designated Sudanese individuals are prohibited. In addition to targeting countries, the U.S. government maintains sanctions on specific governments and other entities, individuals, and even vessels. Sanctions may be imposed because of a party’s perceived role in terrorism, weapons proliferation, narcotics trafficking, cybercrime, human rights abuses, corruption, election interference, and other reasons. (Many of these parties are designated as Specially Designated Nationals (SDNs), and are essentially radioactive for U.S. legal purposes—almost no transactions are permitted with SDNs.)

Penalties for violating U.S. sanctions can be severe.

Any U.S. company that conducts business internationally, from the proverbial widget manufacturer to the most sophisticated technology company, needs to recognize that it is subject to U.S. sanctions jurisdiction. Many non-U.S. companies are also subject to U.S. sanctions jurisdiction if they employ U.S. persons, sell or deal in U.S.-origin goods, or even (in some cases) transact in U.S. dollars.

It is therefore important to understand what restrictions are in place. Moreover, it is important to think about what restrictions could be imposed in the future. While it is difficult to predict how U.S. sanctions will evolve, here are three areas to watch:

1. Russia / Ukraine

The existing sanctions with respect to Ukraine and—particularly—Russia present significant compliance challenges. When U.S. sanctions on Russia were introduced in 2014, it marked an unusual occasion where the U.S. government imposed sanctions on a significant trading partner. As a result, virtually overnight, many ongoing transactions and business relationships were up-ended.

Since sanctions were initially imposed, the U.S. government has slowly, steadily ratcheted up restrictions on Russia. The result is a patchwork of restricted conduct and downright prohibited conduct. Determining what is and is not permissible depends on evaluating which entities, individuals, goods, services, and/or financial arrangements are involved in a transaction.

Ironically, the compliance landscape could be clarified if Russia invades Ukraine, at which point the U.S. government might expand sanctions. Though this would further limit U.S. business with Russia, it could also make it easier to assess potential Russian business, because much of that business would likely be prohibited. In any event, U.S. sanctions (and export controls) on Russia will for the foreseeable future create substantial compliance challenges for companies seeking to do business with Russian parties.

2. China

Until recently, the primary trade restrictions on China were U.S. export controls. An embargo on exports to China of defense articles has been in place for decades. Tight licensing requirements on exports to China of sensitive commercial items have also long been in place.

However, over the past several years, the U.S. government has introduced sanctions authorities targeting China or, more often, the OFAC has used sanctions to target Chinese actors. Most directly, OFAC has gone after individuals and entities operating in the Xinjiang region of China and parties that the agency has designated under the Chinese Military Company Sanctions. The United States has also introduced sanctions on individuals and entities involved in repression of democracy in Hong Kong and Chinese parties involved in cybercrime.

Notwithstanding this recent flurry of activity, to date only a limited number of Chinese entities and individuals have been designated under U.S. sanctions. (Chinese parties have long been designated under U.S. sanctions for involvement in weapons proliferation, support of Iran or North Korea, or for other foreign policy reasons.) But there seems to be a new emphasis on selectively targeting Chinese actors, and thereby making it that much harder for U.S. companies to conduct business in and with China. We expect this to continue.

3. Iran

In some ways, it is hard to get too interested in U.S. sanctions with respect to Iran. Despite a brief thaw under the Joint Comprehensive Plan of Action (JCPOA) that the United States (and others) entered into with Iran in 2015, since the United States withdrew from the JCPOA, the United States now maintains even tighter restrictions on Iran than at virtually any time in the past 40 years.

Yet negotiations with Iran have begun again. It is thus possible that, if some sort of agreement is reached, the U.S. government could ease sanctions on the country. This is worth watching, even if it may ultimately lead nowhere, given Iran’s substantial natural resources and large and well-educated population. Even a slight easing of sanctions could lead to meaningful business opportunities for U.S. companies long cut off from the Iranian market.

Best Practices and Compliance Recommendations

Any company that conducts business internationally needs to recognize how broadly U.S. sanctions are enforced. There are SDNs all over the world, not just in countries otherwise subject to U.S. sanctions. It is thus essential to screen transaction parties against the applicable U.S. government prohibited and restricted parties lists.

The diligence requirement is even more pronounced when pursuing business in China or Russia. As noted above, the U.S. government does not prohibit business with either country; in fact, most business with both countries is permitted. In that regard, it is far easier to address questions about potential business in Iran, since the answer is almost always a straight “No.”

The targeted nature of sanctions related to China and Russia—and, similarly, related to countries such Belarus, Burma, and Venezuela—means that every transaction should be reviewed on a case-by-case basis. All parties to the transaction, including customers, freight forwarders, customs brokers, marketing agents, financial institutions, and all other representatives, need to be identified and screened. Whether a particular transaction in Russia is permissible can depend on which Russian bank is involved, what financial terms have been offered, and the end use of the good or service to be provided.

To ensure that appropriate due diligence is done, it is important to have clear policies in place so that personnel understand the obligation to appropriately review international transactions and transaction partners. It is also important that policies be supple, since changes to sanctions can occur quickly and with little warning. Lines of communication need to be open, too, so that personnel are made aware of changes on a timely basis. More generally, personnel need to be trained so that they understand their obligations and the importance of compliance with U.S. sanctions.

OFAC has made resources available to help companies develop and implement sanctions compliance measures. Perhaps most useful is the Framework for Compliance that OFAC issued in May 2019, which details the key components of an effective OFAC compliance program. Critically, companies need to spend the time to conduct a risk assessment so that compliance resources are directed to the areas of most risk. For many companies, the risks may involve China and Russia.

Thad McBride is a member at Bass, Berry & Sims PLC in the firm’s Washington, D.C. office. He heads the firm’s international trade practice and counsels clients on compliance with and investigations involving economic sanctions and embargoes, export and import controls, the Foreign Corrupt Practices Act, the Committee on Foreign Investment in the United States, and other U.S. trade laws.

From: Corporate Counsel