The web of U.S. sanctions across the globe is dynamic and complex, and it can affect companies doing business in any corner of the world, even those with limited ties to the United States. Through the Office of Foreign Assets Control (OFAC), which administers and enforces civil violations of those sanctions, and the Department of Justice (DOJ), which enforces willful sanctions violations under U.S. criminal law, the U.S. government extends its reach to economic activity around the world. Companies and individuals can unexpectedly find themselves facing significant penalties, including fines, restrictions on conducting business with the United States, seizure of their assets, and criminal process, as recent enforcement efforts demonstrate.
Even inadvertent sanctions violations that are voluntarily disclosed to the U.S. government can be considered “egregious” and subject violators to significant fines. In this climate, counsel for companies that do business with, and in close proximity to, sanctioned individuals, corporate entities, and countries should be aware of the global reach of U.S. sanctions.
Keep your distance from Specially Designated Nationals and Sanctioned Countries. In addition to barring most transactions with countries like Iran, Cuba, and North Korea, OFAC publishes a list of individuals and companies who are either closely affiliated with those countries or designated under regulations specific to, for example, nuclear proliferation, terrorism, narcotics trafficking, and human rights. These names are published in OFAC’s massive list of Specially Designated Nationals and Blocked Persons (known as SDNs). U.S. sanctions regulations prohibit any transactions with SDNs wherever they are located, but OFAC also prohibits certain transactions even indirectly associated with an SDN. OFAC also prohibits transacting with entities who are majority-owned by the combined interests of one or more SDNs, even if those SDNs were designated under different regulatory authorities. These prohibitions extend to structures in which one or more SDNs own an entity indirectly via one or more intermediate corporate layers. Even where one or more SDNs have less than a majority stake, OFAC has warned that entities in which SDNs have significant ownership “may become the subject of future designations or enforcement actions.” OFAC also prohibits transactions with any entity, regardless of ownership, that is controlled by or acts for or on behalf of the Government of Iran or any Iranian financial institution, as well any transactions in which Cuba or a Cuban national has “any interest of any nature whatsoever.” In enforcing its regulations prohibiting transactions with SDNs, OFAC has even found that a transaction with a company that is not under U.S. sanctions can nonetheless violate U.S. law if legal documents related to the transaction are signed by a corporate officer who is individually designated as an SDN.
Understand the impact of U.S. dollar transactions. OFAC has consistently taken an expansive view of its authority and jurisdiction. The latest front in that expansion has been the agency’s aggressive use of U.S. dollar transactions outside of the United States as a jurisdictional hook. Last year, OFAC fined two Singapore-based companies on the theory that they caused a non-U.S. financial institution to process certain U.S. dollar transactions, which in turn caused a U.S. financial institution to provide financial services to Iran in violation of U.S. sanctions. Notably, previous enforcement actions for “causing” sanctions violations focused on the execution of U.S. dollar transactions through correspondent accounts at banks in the United States, but the two Singaporean companies had engaged in offshore dollar clearing transactions via U.S. dollar accounts in banks located in Singapore. OFAC’s enforcement posture suggests that the agency will continue to expansively interpret its mandate to regulate increasingly “indirect” sanctions violations and may consider the mere presence of U.S. dollars in any transaction anywhere in the world to be sufficient to establish U.S. jurisdiction.
Know who is a “U.S. person.” OFAC’s regulations generally prohibit U.S. persons from directly or indirectly transacting with a sanctioned country, government, individual, or company. “U.S. person” is defined broadly to include all U.S. citizens and permanent resident aliens wherever located, all persons and entities within the United States, and entities incorporated under U.S. law and their foreign branches. Enforcement actions are common for inadvertent sanctions violations by non-U.S. nationals who temporarily become a U.S. person by entering or traveling through the United States. In addition, U.S. persons—wherever they are located around the world—are prohibited from facilitating any transactions by non-U.S. persons if the U.S. person would be prohibited from conducting the transaction directly. OFAC defines facilitation to include, for example, approving, insuring, financing, or guaranteeing a transaction; altering the policies or procedures of a U.S. company or foreign affiliate to permit a transaction; rendering legal services in support; or referring a business opportunity to a non-U.S. person.
Secondary sanctions often pose hidden risks. In addition to bringing enforcement actions for direct sanctions violations, OFAC also imposes so-called secondary sanctions by designating non-U.S. individuals and companies that trade with sanctioned countries and individuals as SDNs or as Foreign Sanctions Evaders (FSEs). Because persons subject to U.S. jurisdiction, in turn, are prohibited from transacting with SDNs or FSEs, those designations can severely cripple any business. Secondary sanctions designations can occur for a variety of reasons related to U.S. national security concerns, including activities allegedly linked to drug trafficking, terrorism, or human rights violations, or transactions with specific individuals and entities. A 2017 law, for example, requires the imposition of secondary sanctions on any person who knowingly engages in a “significant transaction” with a member of the Russian defense or intelligence sectors.
Avoiding sanctions may not help avoid prosecution. U.S. enforcement efforts have targeted persons who have purposefully sought to avoid the reach of U.S. sanctions altogether. In a recent criminal prosecution brought by the DOJ, an individual defendant was convicted of entering into a conspiracy to design transactions expressly to avoid potential secondary sanctions that could have been imposed based on his employer’s facilitation of transactions that benefited the Iranian government. Notably, the DOJ stated in a public court filing that OFAC’s position had previously been that the prohibitions contemplated by secondary sanctions “attach only after a foreign financial institution has been sanctioned” by OFAC. Underscoring the DOJ’s recent aggressive enforcement stance, the case also represented the first time a non-U.S. person has been prosecuted for evading or avoiding secondary sanctions—the defendant was a Turkish national who resided in Turkey, worked at a Turkish-owned bank, and engaged in transactions wholly outside the United States. These transactions implicated U.S. jurisdiction because they passed through dollar-denominated, U.S.-based correspondent accounts.
U.S. government enforcement mechanisms are diverse. OFAC’s regulatory enforcement actions and the DOJ’s criminal prosecutions are not the U.S. government’s only means to enforce sanctions regulations. If a U.S. person has contracts or grants with any U.S. government agency and violates U.S. sanctions, the DOJ can bring civil enforcement actions under the False Claims Act. Last year, for example, federal prosecutors in New York reached a settlement with the American University in Beirut for violating the False Claims Act by providing material support to three SDNs while at the same time receiving funding from the U.S. Agency for International Development. In addition, if sanctions violations occur outside of the U.S. and the perpetrators cannot be reached by U.S. law, the DOJ can use civil forfeiture mechanisms to seize illicit funds based on in rem jurisdiction over the property itself. This involves a civil complaint, often filed under seal, to freeze assets allegedly derived from sanctions violations held in bank accounts in the United States. In August 2017, in addition to designating various entities as SDNs, the DOJ seized over $11 million from U.S. bank accounts belonging to companies based in Singapore and China based on their participation in an alleged money laundering scheme on behalf of North Korean banks subject to U.S. sanctions.
Economic sanctions play an increasingly prominent role in U.S. foreign policy and questions about where and when they apply are critical considerations when doing business in the global economy. Today, most international banking is done via U.S. dollar transactions and the United States remains the center of the global financial markets. In light of the U.S. government’s increasingly aggressive assertions of jurisdiction around the world, non-U.S. individuals and companies operating outside of the United States must be aware that even a tenuous nexus to the United States may be sufficient to draw the attention of the various agencies that enforce U.S. sanctions.
Wade Weems and Beau Barnes are government enforcement defense lawyers at Kobre & Kim. Mr. Weems previously served as a prosecutor in the National Security Division of the U.S. Department of Justice.