In part, the report reflects concerns that the United States has become over-reliant on sanctions in recent years, encouraging adversaries and others to build alternative payment systems using digital currencies and other mechanisms that do not involve U.S. dollars or the U.S. financial system. Such developments threaten to reduce the effectiveness of U.S. sanctions in the long run, as more payments occur outside of U.S. regulatory jurisdiction.

Below are the key recommendations from the report, which may reduce the number of sanctions actions by the United States, but will also likely increase complexity for the companies and financial institutions that must comply with these rules:

• Crypto, digital currencies, and digital payments: The report makes clear that Treasury will continue to focus on digital currencies and alternative payment platforms, which adversaries and others can use to avoid the U.S. financial system and blunt the impact of U.S. sanctions policy. The report follows the recent designation of a cryptocurrency exchange for facilitating ransomware payments and the issuance of guidance for the virtual currency industry on sanctions compliance.
• Multilateral approach: Reflecting a marked shift in strategy from the last administration, the report indicates that the Biden Administration should seek to continue to coordinate with allies and other international partners to impose multilateral sanctions to increase the effectiveness of sanctions as a policy tool and retain the “credibility of U.S. international leadership.” Recent U.S. sanctions actions targeting Belarus and others are examples of a renewed U.S. focus on collaboration with allies on the deployment of multilateral sanctions.
• Avoiding unintended harm: Treasury intends to further tailor sanctions to limit unintended economic, humanitarian, and political impacts on U.S. businesses, allies, and non-sanctioned populations abroad. One potential outcome of this approach may be the continued development of bespoke sanctions restrictions, such as Russia-related sectoral sanctions and Chinese Military-Industrial Complex Company securities sanctions, and a reduced reliance on traditional blocking sanctions. While these more tailored measures are intended to limit unintended harm, they also increase complexity for companies and compliance programs. The report also highlights a renewed focus on expanding sanctions exceptions related to the flow of legitimate humanitarian goods and services that support basic human needs, which are often restricted due to sanctions compliance concerns.
• Investment in Treasury resources: As anyone who interacts with U.S. sanctions officials know, the agencies responsible for implementing and enforcing U.S. sanctions face resource constraints, including staffing and technology limitations. The report calls for investing in the modernization of Treasury’s workforce and operational capabilities, particularly in the digital assets and services space, and updating OFAC’s website and guidance documents to make them easier to navigate and understand.
• Increased industry coordination: Treasury intends to increase coordination and reach out to industry, including companies operating in the digital currency and payments space, to encourage effective implementation of sanctions restrictions.
• Structured framework for new sanctions: The report indicates that Treasury should adopt a more structured framework to assess the potential impact of new sanctions, akin to the vetting process used to authorize military force. The new five-point framework should be designed to ensure that sanctions support a clear policy objective within a broader foreign policy objective and consider the factors noted above when crafting new sanctions restrictions.

Interestingly, OFAC cautions that the “informational materials” exemptions to its regulations do not apply to transactions involving artwork where the artwork functions primarily as an investment asset or medium of exchange, including transactions where artwork is exchanged for financial assets like gold, cash, or crypto-currency.[1] It appears that this narrowed interpretation of the informational materials exemptions is designed to close a perceived loophole in the regulations that would otherwise allow sanctioned parties to utilize the art market to gain access to the U.S. financial system.

Accordingly, OFAC advises participants in the art market, including art galleries, museums, private collectors, auction companies, agents, brokers, and others to conduct appropriate due diligence to identify high-value transactions ($100,000 or more) involving potentially sanctioned parties. OFAC also cautions that U.S. persons considering such transactions should seek guidance or an OFAC license prior to acting.

Please contact our economic sanctions team if you have any questions about the Advisory or your sanctions risk profile.

[1] Congress passed the Berman Amendment to the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) to generally prohibit OFAC from regulating exchanges of informational materials, including artwork. See The Foreign Relations Authorization Act, Fiscal Years 1994 and 1995, Pub. L. No. 103-236 § 525, 108 Stat. 382, 474 (1994) (codified, as amended, at 12 U.S.C. § 95a, 50 U.S.C. § 1702 (2000); 50 U.S.C. § 4305(b)(4)).

The case documents are worth a full read, but there are a number of key takeaways for exporters:

• Liability for foreign subsidiaries: This case is a reminder that U.S. parent companies are liable for violations of the Iran embargo committed by their foreign subsidiaries and other overseas operations that are owned or controlled by U.S. parent. This is somewhat unusual under OFAC’s regulations, which generally treat foreign subsidiaries as non-U.S. persons.*
• Intercompany orders can present risk: Many multinationals apply less trade due diligence to intercompany orders than to third party sales. This can make sense for some companies, because doing so often eliminates duplicative compliance steps and because the business unit that is closest to a customer is often the best positioned to conduct the necessary due diligence steps. But this case also illustrates the danger of failing to identify red flags of non-compliance in intercompany orders. OFAC noted that several Berkshire Hathaway foreign subsidiaries received emails from the Turkish subsidiary containing red flags of non-compliance, including an email address from Iran and the name of a company known to be located in Iran. Only one of the intercompany orders from the Turkish subsidiary was flagged and stopped. Employees involved in export transactions should be trained on how to spot red flags of non-compliance, even in intercompany orders, and know how to report potential compliance issues up the ladder.
• Distributor danger: Companies remain liable for indirect sales through intermediaries when they know or should know that the intermediary will ship the items to sanctioned territories or sanctioned parties. The presence of the third party intermediaries in this case counted against the company since they were used to hide the true end use of the products. Even in less egregious cases, proper distributor due diligence and follow-up can help reduce the chances that your products end up in problematic jurisdictions.
• The power and peril of an “egregious” determination: OFAC has the authority to obtain substantial penalties in “egregious” cases that involve, among other things, willful conduct, management knowledge or involvement, or harm to U.S. sanctions objectives. Here, OFAC obtained a penalty of over $4.1 million, and could have imposed a penalty of over $18 million, for sales that were collectively worth only $383,443. Absent a voluntary self-disclosure (VSD) by the company, OFAC could have sought penalties of over $36 million. If the VSD had involved less serious, “non-egregious” conduct, the maximum penalty would have been only around $192,000, and the ultimate penalty assigned to the company would likely have been significantly less than that. Companies that discover potentially egregious violations need to immediately remediate the issue and then carefully consider their options, including whether to pursue a VSD, which can substantially reduce penalty exposure.
• Importance of auditing and monitoring: In this case, the U.S. parent company sent repeated reminders to its overseas operations that business with Iran was prohibited. Those types of compliance reminders and directives are critical, but they cannot replace a solid auditing or monitoring program, which can catch and address bad actions before they become systemic issues. Site visits, remote monitoring of data, and local compliance personnel are all important tools that can help to spot this type of activity and the more common inadvertent errors that can also generate liability for companies.

*Foreign subsidiaries are fully subject to the Cuba embargo, but not to other OFAC programs.

Please contact our export and sanctions team with any questions about the new law and its implications.

Lesson One: Don’t launder money for North Korean SDNs engaged in proliferation schemes. If you want to know more about how North Korea attempts to launder funds, check out this detailed and fascinating report on the topic.

Lesson Two: If you conduct a transaction in U.S. dollars, even if all other aspects of the transaction occur outside of the United States, the U.S. government will likely claim jurisdiction over the transaction.

In the Mingzheng case, the U.S. government asserted jurisdiction because the Chinese companies used U.S. dollars, which triggered indirect dollar clearing transactions in the United States:

Although North Korean financial facilitators engage in U.S. dollar transactions overseas, funds are still cleared through a U.S. correspondent bank account, thereby triggering the U.S. economic sanctions. . . These U.S. dollar payments, which cleared through U.S. correspondent banking accounts, violated U.S. law, because Mingzheng was surreptitiously making them on behalf of FTB, whose designation [as an SDN] precluded such transactions.

In other words, the U.S. government is claiming that the Chinese companies caused U.S. banks to conduct dollar clearing transactions for the ultimate benefit of a blacklisted SDN, an activity that is prohibited under U.S. law. Most international trade transactions denominated in U.S. dollars will generate this type of activity in the United States, potentially triggering U.S. jurisdiction over the underlying transactions.

Conducting transactions denominated in U.S. dollars is only one way that non-U.S. companies can become subject to U.S. sanctions laws. Non-U.S. companies can also get in trouble if they conduct a transaction with an SDN or embargoed territory (currently the Crimea region of Ukraine, Cuba, Iran, North Korea, and Syria) that involves U.S. companies, products, or persons. The classic example here is of a non-U.S. company ordering products from the United States in order to resell them to an SDN or embargoed territory. A similar and common issue arises when a non-U.S. company has employees who are U.S. citizens. Such employees must be fully recused from any business related to SDNs or embargoed territories. ‘Secondary’ sanctions are another way that non-U.S. companies can become subject to U.S. sanctions, but that’s a complex story for another blog post.

The takeaway: If you conduct a transaction that is or may become subject to U.S. law, you need to ensure that all aspects of the transaction complies with U.S. sanctions rules. A basic and important due diligence step is to screen all such transactions against the U.S. SDN List and identify any transactions that might involve sanctioned countries or territories.