An introduction to sanctions and trade controls
Sanctions and trade controls are vital tools in the foreign policy arsenal of the United States and its allies worldwide. As the world grapples with the Russian Federation’s ongoing illegal annexation of Ukraine, sanctions and trade controls have grown in terms of both volume and significance. In the United States and Europe especially, sanctions activity has increased precipitously as Moscow has shown little signs of abandoning its Ukraine incursion or relinquishing control over areas seized during its conquest.
Broadly speaking, the term sanctions refers to the set of legislative and regulatory measures adopted by governments on a global scale to influence the behavior of the intended target (often a foreign government) in an effort to avoid recourse to military force. Sanctions are leveled by individual nations (like the United States) and international organizations (like the European Union) against individuals, entities, institutions, regions, and entire countries to punish the target for behavior that is often in contravention of international law. The two primary forms of sanctions are: (1) financial or economic sanctions; and (2) trade restrictions.
Understanding financial sanctions
Arguably the most ubiquitous form of contemporary sanctions activity, financial sanctions refer to any set of laws or regulations that either completely prohibit or severely restrict covered individuals from conducting otherwise lawful transactions with designated persons. In the United States, financial sanctions are primarily administered by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)—an agency that promulgates sanctions regulations pursuant to laws enacted by the Congress and Executive Orders issued by the President. The nature and extent of financial sanctions administered by OFAC vary significantly by program. Generally speaking, OFAC administers dozens of specific sanctions programs that range from a complete ban on transactions with individuals or entities located in specific countries (e.g., Iran and Cuba) to more specific designations of entities and individuals with whom U.S. Persons are restricted from dealing with in some capacity. For the purposes of OFAC sanctions regulations, U.S. Persons are generally considered to include (1) United States citizens; (2) permanent resident aliens; (3) any entities organized under the laws of the United States or any jurisdiction within the United States (including foreign branches); or (4) any person physically present in the United States, irrespective of country of origin.
Perhaps the most visible sign of OFAC’s presence in the contemporary sanctions landscape is the List of Specially Designated Nationals and Blocked Persons (“SDNs”) that OFAC maintains across its sanctions programs. OFAC regulations forbid any U.S. Person from dealing with any entities or individuals designated as SDNs by OFAC in any practically any manner whatsoever without first seeking specific authorization in the form of a license from that agency. The SDN List includes a myriad of individuals associated with adversary foreign governments, entities that are owned by such governments, and institutions with purposes that are inimical to U.S. foreign policy. In February 2022, for instance, OFAC added Russian Federation President Vladimir Putin to the SDN List for precipitating the current Ukraine crisis. For much of the year thereafter, OFAC continued to add specific government officials, financial institutions, state-owned and operated enterprises, and particular Putin allies to the SDN List. The consequences attendant to designation by OFAC as an SDN are dire. In addition to all U.S. assets being frozen, current regulations require institutions that come into possession of any property or interest in property intended to benefit an SDN to “block” the transaction and report the information to OFAC within ten business days. As a practical matter, designation as an SDN renders the individual or institution a pariah for purposes of any personal or business dealings and largely impedes their ability to access the financial and material resources needed to continue their activities.
In an effort to prevent circumvention of the SDN restrictions, OFAC also enforces the so-called “Fifty Percent Rule,” pursuant to which any entity owned fifty percent or more in the aggregate by one or more blocked persons is itself blocked, even if the entity is not specifically designated by OFAC. This commonly occurs when an organization is so large that the specific designation of its affiliates and subsidiaries as SDNs would be nearly impossible to accomplish. The adoption and implementation of an effective sanctions compliance program requires organizations to collect detailed beneficial ownership information and to scrupulously screen their customers and contractual counterparties for any connections to any SDN that might trigger the Fifty Percent Rule.
In addition to the SDN List, OFAC also maintains a multitude of other lists of individuals and entities with whom U.S. Persons may be restricted from dealing with in some capacity. While these prohibitions generally fall short of a complete ban, they operate to prevent U.S. Persons from participating in certain designated activities that might implicate the sanctions target. Collectively, these lists are generally referred to as “non-SDN” sanctions lists. Among the more prominent non-SDN sanctions lists is the Sectoral Sanctions Identifications (“SSI”) List, maintained by OFAC with respect to economic activity in relation to certain designated sectors of the Russian Federation economy.
International financial sanctions are also administered by individual nations as well as coalition organizations. For example, the European Union (“EU”) maintains its own sanctions regimes (known as “restrictive measures”) that are binding with respect to the activity of EU Member States. Conversely, as newly independent from the EU, the United Kingdom (“UK”) maintains its own set of financial sanctions that largely align with those adopted by the broader international community. Nonetheless, businesses with international operations are charged with knowledge of each specific sanctions regime applicable to the markets in which they operate as differences can and do exist.
Understanding trade restrictions
In contrast to financial sanctions, trade restrictions refer to that set of measures specifically adopted by global governments to impede both the import and export of designated goods to, and from, particular jurisdictions. In the United States, administration and enforcement of export controls is divided between the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”). BIS is statutorily charged with overseeing exports made under the aegis of the Export Administration Regulations (“EAR”) for dual-use (commercial and military) articles designated on the Commerce Control List (“CCL”). DDTC is responsible for the enforcement of the International Traffic in Arms Regulations (“ITAR”) for defense articles (weapons and other military equipment) controlled by the U.S. Munitions List (“USML”). Under both the EAR and ITAR, it is illegal for any U.S. Person to export, reexport, or transfer a controlled item abroad to a foreign national without a license from the relevant agency (or utilization of an exemption or exception). Most popular consumer exports in the United States are controlled by the CCL and lack a specific Export Control Classification Number (“ECCN”), rendering them eligible for export without a license to virtually any location in the world (with the exception of nations that are comprehensively embargoed). However, the proper classification of an item is required by experienced trade compliance professionals before a company intends to make any exports of U.S.-origin products to other countries. Following classification, consideration must also be given to country-based restrictions on exports pertaining to the item in question, its proposed end-user, and ultimate end-use.
In a sanctions context, export-specific restrictions operate to forbid U.S. Persons from providing goods, materiel, support and assistance often utilized by actual and potential adversaries to enhance their own military capabilities. In the context of Russian Federation-based sanctions, for instance, virtually all items subject to control under the CCL and bound for the Russian Federation now require a license for export and are subject to additional scrutiny by BIS. The imposition of these sweeping new restrictions is largely intended to diminish the Russian Federation’s capacity to wage offensive military operations in the Ukraine by depriving critical industries with the technology needed to sustain those operations. Thus, even seemingly innocuous items like computer chips, which could be utilized to develop more advanced technological capabilities, are subject to strict control by BIS when intended for export to Russia.
Another crucial component of trade sanctions is import-based restrictions. While export restrictions are intended to prevent actual or potential adversaries from acquiring goods and technology from certain countries, the primary aim of import-based restrictions is to deprive the sanctions target of financial assets associated with the acquisition of items from a specific country or region. A prime example of import restrictions is a complete ban on the importation of Russian Federation origin crude oil and petroleum products into the United States by virtue of President Joseph R. Biden, Jr.’s issuance of Executive Order 14066 on March 8, 2022. Other import-based restrictions include a ban on U.S. Persons acquiring luxury goods in the form of fish, seafood, diamonds, and alcohol from the Russian Federation.
Finally, like their financial counterpart, trade-based restrictions—pertaining to both exports and imports—are maintained globally by other nations and international organizations; however, the specifics of such restrictions vary considerably by jurisdiction.
The significance of sanctions and trade controls for compliance professionals
Both sanctions and trade controls can frustrate the ability of organizations to conduct business with counterparties based in other countries. Familiarity with applicable sanctions and trade control regulations is a must for compliance professionals whose organizations are engaged in the provision of goods or services on an international basis. Violations of sanctions regulations or trade controls can result in a host of undesirable consequences for the offending organization, including the temporary suspension or outright revocation of export privileges, and the imposition of significant monetary penalties. In the most egregious cases, individuals and organizations may even be criminally prosecuted for sanctions or trade controls evasion.