NATIONALLY RECOGNIZED FEDERAL LAWYERS
Last Updated on: 19th September 2023, 03:21 am
OFAC Secondary Sanctions: Extraterritorial Reach of U.S. Sanctions Compliance
The Office of Foreign Assets Control (OFAC) administers U.S. economic and trade sanctions programs. OFAC has increasingly imposed secondary sanctions that threaten penalties against foreign companies that engage in transactions with sanctioned countries, entities and individuals, even if they have no U.S. nexus. Multinational companies must understand these secondary sanctions risks.
What Are OFAC Secondary Sanctions?
OFAC primary sanctions directly prohibit U.S. persons and companies, including foreign subsidiaries, from dealing with targeted countries and parties. Secondary sanctions seek to deter non-U.S. persons and entities from participating in those activities by threatening U.S. market access penalties.For example, a French company trading with Iran may not directly violate U.S. sanctions on Iran. But under secondary sanctions, that French company could be blacklisted from accessing U.S. contracts, financial systems, and investors if it engages in targeted transactions with Iran.Secondary sanctions use the threat of losing access to U.S. markets to deter foreign companies from doing business in sanctioned jurisdictions. This extends U.S. sanctions enforcement beyond U.S. borders.
What Are Some Key OFAC Secondary Sanctions Programs?
OFAC has imposed secondary sanctions through the following programs targeting major global sanctioned parties:
- Iran – Secondary sanctions for conducting transactions with Iran in targeted industries like energy, shipping, shipbuilding, and precious metals.
- Russia – Secondary sanctions related to Russia’s annexation of Crimea, cyberattacks, human rights abuses, and other malign activities.
- Venezuela – Secondary sanctions on transactions with Venezuela’s state oil company and other government entities.
- North Korea – Secondary sanctions prohibiting facilitating North Korean labor/exports and dealing with major North Korean companies.
- Syria – Secondary sanctions focused on Syria’s energy industry, military capabilities, and human rights abuses.
- Cuba – Limited secondary sanctions related to Cuban military, intelligence and security services.
The extraterritorial reach through secondary sanctions gives OFAC global enforcement authority.
What Penalties Do Secondary Sanctions Impose?
Being targeted under secondary sanctions can inflict major penalties on foreign companies:
- No U.S. Export Privileges – Loss of ability to export/re-export U.S. goods, services and technologies.
- U.S. Market Access Bars – Blacklisted from U.S. government contracts, loans, licenses, imports, banking, securities, and other dealings.
- Financial Blocking – Frozen out of the U.S. financial system and transactions with U.S. banks.
- Civil Fines – Direct fines up to $295,141 per violation, which can apply to many transactions.
- Criminal Prosecution – Potential criminal penalties for willful violations.
- Reputational Harm – Public designation as a sanctions violator, which can impair investor and partner confidence globally.
These substantial penalties give OFAC secondary sanctions real teeth and impact.
How Are Companies Added to the SDN List Under Secondary Sanctions?
When OFAC determines secondary sanctions should apply, foreign entities are added to OFAC’s Specially Designated Nationals (SDN) List. This officially cuts them off from the U.S. market and financial system. Typical designation steps include:
- OFAC investigates transactions and dealings with sanctioned parties. Violations can be self-disclosed or identified through OFAC monitoring.
- OFAC sends a non-public pre-penalty notice to the foreign entity identifying the transactions at issue and potential penalties.
- The company can respond with arguments against designation or penalties. Negotiated resolutions are possible.
- If no resolution, OFAC issues a public notice that the company will be added to the SDN List on the SDN List on a specific date unless the dealings cease.
- The company is then added to the SDN List if the prohibited conduct continues, triggering secondary sanctions.
- SDN designation lasts until removed by OFAC, which may only occur years later if policies change.
OFAC closely guards its secondary sanctions designation process. Engaging counsel is essential to navigate it.
How Can Companies Reduce Risks of Secondary Sanctions Violations?
Because secondary sanctions can severely impact global companies, sanctions compliance programs must address these risks, including:
- Transaction Screening – Screen all parties and transactions against OFAC’s SDN List and other restricted party lists to identify any nexus to sanctioned jurisdictions and parties.
- Know Your Customer – Conduct enhanced due diligence on foreign customers, partners and vendors to detect any ties to sanctioned entities and locations.
- Supply Chain Tracking – Closely monitor supply chains and flows of goods/services to avoid dealings with sanctioned jurisdictions.
- Transaction Monitoring – Monitor transactions for any changes that would introduce secondary sanctions risks, like imports from Crimea.
- Training – Educate global personnel on secondary sanctions risks and compliance.
- Local Law Review – Ensure compliance measures adhere to local laws like EU blocking statutes.
- Audits – Conduct internal audits and testing to identify any gaps in secondary sanctions compliance.
With vigilance and care, global companies can limit secondary sanctions risks and avoid devastating U.S. penalties and market exclusion.
Challenges of Complying with OFAC Secondary Sanctions
While seeking to avoid secondary sanctions is prudent, compliance poses many challenges:
- Conflicting Laws – EU blocking statutes prohibit EU companies from complying with U.S. secondary sanctions on Cuba and Iran.
- Extraterritorial Reach – U.S. secondary sanctions are criticized as an overextension of jurisdiction.
- Over-Compliance – Companies may over-comply and avoid lawful business to steer clear of any secondary sanctions risks.
- Blacklisting Without Recourse – OFAC designations can be arbitrary and lack due process. Delisting is extremely rare.
- Asymmetric Penalties – Secondary sanctions impose disproportionate penalties on non-U.S. companies who may have limited U.S. dealings.
- Shifting Rules – Frequent changes in secondary sanctions programs create compliance uncertainties.
While OFAC secondary sanctions have teeth, their unpredictable and expansive nature presents compliance difficulties. Companies should consult sanctions counsel to craft risk-calibrated compliance solutions.
OFAC Secondary Sanctions Are Here to Stay Because:
- They allow the U.S. to pressure foreign companies to comply with U.S. sanctions goals, even if those companies have limited direct contact with the U.S. market. Secondary sanctions greatly expand the scope of U.S. sanctions enforcement.
- They provide leverage over foreign banks and companies that still seek access to the large U.S. market and financial system. The threat of losing this access deters sanctioned dealings.
- They fill gaps when multilateral cooperation on sanctions is limited, allowing the U.S. to act unilaterally against foreign entities.
- They align with aggressive use of economic and financial power as both a national security and foreign policy tool.
- The ability to freeze companies out of the U.S. banking system gives secondary sanctions real force.
- Secondary sanctions allow flexibility to adjust restrictions against foreign entities amid shifting geopolitics.
- They discourage foreign subsidiaries of U.S. companies from dealing with sanctioned parties to avoid parent liability.
Potential Future Uses of Secondary Sanctions:
- Expanding secondary sanctions relating to Russia, Iran, and North Korea in response to geopolitical tensions.
- Pressuring China and Chinese companies over issues like Taiwan, Hong Kong, the South China Sea, and human rights.
- Targeting dealings with Venezuela’s government and oil industry to support opposition groups.
- Leveraging access to U.S. technology markets in secondary sanctions related to cybersecurity threats.
- Penalizing foreign companies that continue to work with sanctioned oligarchs and “corrupt actors.”
- Discouraging participation in Russian-backed energy pipelines and infrastructure projects in Europe.
While controversial, secondary sanctions offer extensive unilateral power to punish foreign dealings with U.S. adversaries and advance foreign policy aims. Companies worldwide must understand this risk.