This is part 1 of a five-part series with Tom Fox and the FCPA Compliance Report on navigating an increasingly complex sanctions landscape. The series will consider the current sanctions landscape, discuss how to build a sanctions compliance program, walk listeners through what happens when a sanctions breach or potential breach is discovered, consider new sanctions exposure, and conclude with a look in that veiled land of the future by considering issues on the horizon.
To understand the implications of the broader sanctions landscape, it is first important to know there are different types of sanctions that work in different ways.
- The first type are generally the best known, comprehensive jurisdictional sanctions: U.S. business and persons cannot do business with individuals or entities who are ordinarily resident in certain jurisdictions, such as Iran, North Korea, or Syria.
- The second set is more generally list-based or conduct based sanctions. The sanctions restrictions apply specifically to individuals or companies who are engaged in bad activity, such as narcotics trafficking, nuclear proliferation, or human trafficking. The key is they are specific list-based programs.
- The third set are regime-based sanctions programs. These are still list-based programs, but targeted at specific regimes. An example of this sanctions program is Zimbabwe, where individuals and officers of a government were targeted because of their affiliation with that government.
- The fourth type of sanctions are sectorial sanctions. This type began or were developed in a context of the Ukraine sanctions program in 2014 developed to forcefully respond to Russia’s effort to annex Crimea and Ukraine, as well as destabilize Eastern Ukraine.
In addition to the sanctions types noted above, there is one additional type, and perhaps the most controversial of sanctions: secondary sanctions. Secondary sanctions, like sectoral sanctions, were also developed to solve a policy problem: the U.S. could impose substantial jurisdictional sanctions, for example, on Iran. However, if there is no U.S. jurisdiction, then third-party companies in third-party countries could continue to do business with Iran. This would substantially undermine the economic impact of the U.S. sanctions program against Iran. This led to the idea of secondary sanctions that are sanctions restrictions that apply even when there’s no U.S. jurisdiction. Essentially, the U.S. says, an entity can do business with Iran but if they do, then they will lose access to U.S. markets and most importantly the U.S. banking system.
There are several reasons sanctions have become such a favored economic tool. Short of declaring war, it is hard to punish a country, person, or group or try to stop untoward behavior. This makes sanctions an appealing option. They can be written quickly and implemented in short order. As such, sanctions have become a tool that can be implemented in an expedited and an expeditious manner.
Yet perhaps most interestingly, sanctions in the compliance ecosystem have a feedback loop, which builds on itself. Over the last two decades, financial institutions have particularly been subject to enforcement activity by OFAC. This has led most large financial institutions to invest quite a bit of money and resources into enhancing sanctions compliance programs. As a result, when new sanctions designations come out or new Executive Orders are issued, these financial institutions are in many ways better able to detect and disrupt any illicit activity associated with any new action that may occur.
Sanctions apply to nearly every sector. While financial services may be high on the enforcement list, commercial corporations should not assume that sanctions do not apply to them. Recently there has been a push for sanctions in a much broader set of industries such as energy, agriculture, technology, and others.
Sanctions are not a new tool and not one that will disappear. As a result, entities of all stripes should understand how they may impact their business.
To listen to the next podcast in the series, please click here.