Date: July 26, 2016
By: Anna Sayre, Legal Content Writer SanctionsAlert.com
In the last 20 years, the United States has exponentially increased its use of economic sanctions against foreign states. It has imposed comprehensive, or countrywide, economic sanctions, against Iran, Cuba, North Korea Syria, Sudan, as well as many targeted sanctions against individuals, firms and financial transactions of certain nations. Presently, the US has 28 sanctions regimes in place, reflecting a large increase since the 1990s.
This rise in the use of sanctions by the US as an instrument of foreign policy has made compliance challenging for the thousands of financial institutions and non-financial businesses and charitable organizations that must comply. Adding to the challenge is the number of government agencies, laws and regulations that may play a role in determining and adjudicating sanctions violations. The advent of economic sanctions as a common way to punish nations makes knowledge of the power, role and jurisdiction of US agencies crucial.
A business that is active in international trade that makes errors in trade controls can accumulate violations and penalties and find itself facing agents from the FBI, Immigration and Customs Enforcement, the Commerce Department’s Bureau of Industry and Security (BIS), Defense Criminal Investigative Services (DCIS) and others.
Businesses involved in international trade and commerce and financial institutions must understand the US agencies that impose and enforce sanctions regimes and strategic trade controls and their powers to investigate and bring enforcement actions.
Types of US sanctions
US sanctions or embargoes take various forms. Some may be diplomatic in nature, such as removal of embassies, travel bans, or refusal to participate in an international sports or business event. Economic sanctions include asset freezing, arms embargoes, foreign aid reduction and trade restrictions such as defense articles, including weapons systems, components, training or services.
Economic sanctions may prohibit commercial activity with a country, like the now-softening US embargo of Cuba, or they may be targeted, such as to block transactions with specific businesses or individuals, like the sanctions against members of Al Qaeda. The Departments of State, Commerce, and Treasury produce lists of debarred, denied, or prohibited parties. Unless one has a specific license from these departments, trade with these parties is not allowed.
How US sanctions are implemented
Economic sanctions are imposed either under a law or by Executive Order (EO) of the President, who is acting under the power extended by law.
Sanctions that originate with a law include the International Economic Emergency Powers Act (IEEPA), which authorizes the President to declare a national emergency in response to an extraordinary foreign threat to the US. The IEEPA empowers agencies, such as the Commerce Department’s Export Administration Regulations (EAR), to promulgate implementing regulations. The President has broad powers to implement, change or remove sanctions under IEEPA if Congress does not restrict them.
How are US sanctions enforced?
Several US federal agencies enforce sanctions. The agency that regulates a particular transaction depends largely on the type of activity or item that the sanctions program prohibits. Often, one transaction may be subject to regulatory action by more than one agency that jointly investigates the matter, thus exposing a business to possible investigations by multiple agencies.
Each agency issues a different “Do Not Touch” list, which identifies either whole countries (comprehensive) or individual companies or persons against whom the sanction is applied. As is the case with transactions, the organizations and individuals on these lists may overlap and the penalties imposed by sanctions agencies may vary widely depending on the applicable statute and purpose of the sanction.
OFAC, BIS and DDTC
Among the many US government agencies that play a role in sanctions enforcement, three play a pivotal role.
The Department of State’s Directorate of Defense Trade Controls (DDTC) monitors and regulates export of defense trade. It administers the International Traffic in Arms Regulations (ITAR). The ITAR is the US Munitions List, a comprehensive list of all defense articles and services that are subject to ITAR and control by DDTC. These articles include hardware items, software and technology, and services for use in a military setting, as well as certain space-related items and technology. The Arms Export Control Act is the enabling legislation for ITAR and also governs US trade in military items.
The Department of Commerce’s Bureau of Industry and Security (BIS) enforces the export controls applicable to so-called “dual-use” items and less sensitive military items. The BIS derives its power from the Export Administration Regulations (EAR). BIS primarily regulates items designed for commercial purposes, such as computers or software, including hardware and technology, which could have military applications. BIS keeps a list of regulated items called the Commercial Control List (CCL). BIS also regulates civilian items, not identified on the CCL, called “EAR99” items.
The Treasury Department’s Office of Foreign Assets Control (OFAC) arguably plays the most important role in administering and enforcing US sanctions programs. The International Emergency Economic Powers Act (IEEPA), which was enacted October 28, 1977, is the primary source of OFAC’s powers. IEEPA makes it a crime to willfully violate, or attempt to violate, any regulation under IEEPA, and institutions facing criminal enforcement action by the Department of Justice. OFAC publishes a list of lists of ‘Specially Designated Nationals’ (SDNs), which indicates individuals and companies to which sanctions and restrictions apply.
It is important to note that OFAC has a wide investigative mandate. Both BIS “dual use” items under the EAR as well as items falling under the ITAR subject to action by the DDTC involving sanctioned countries or persons may fall under the OFAC regulations.
The role of state agencies
Although sanctions enforcement is usually associated with US federal agencies, transactions may also be subject to state financial regulation, as well. State financial regulators, notably the New York Department of Financial Services (NYDFS), have recently begun to bring actions for sanctions violations and state governments have been assessing large penalties in enforcement actions against large banks since the mid-2000s. This makes it increasingly important to assess potential violations at the state level, as well.