Whats the difference between US primary and secondary sanctions and how do I
Whats the difference between US primary and secondary sanctions and how do I recognise whether am I encompassed by which one?
It seems that what is preventing international companies from trading with Iranian partners, is the notion of "secondary sanctions". However, there is a sort of primary sanctions, through which Iranian persons are also being imposed to the US sanctions.
What is the difference between primary and secondary sanctions and which limitations to international business entities are imposed by which one?
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Another OFAC enforcement action against a foreign company (Hong Kong-based) that had no U.S. nexus in its dealings with a sanctioned jurisdiction (Iranian-origin goods purchased from Thailand), other than payments for the goods being made in U.S. dollars. Non-U.S. companies risk violating U.S. sanctions when the U.S. financial system is used (even indirectly) for transactions that may involve sanctioned persons or jurisdictions. One interesting remedial measure here was the company revising its sanctions screening procedures to require ALL COUNTER-PARTIES in its transactions to be subject to mandatory screening. However, the root cause of the violations was limited to certain employees actively circumventing company-wide sanctions compliance policies, including not being able to make U.S. dollar payments in connection with Iran-related business transactions. The company did terminate them all, and also enhanced its sanctions compliance unit by housing it inside its Legal Department and hiring more expertise. It makes one wonder whether casting such a wide screening net would have ever prevented such violations? Is there a better compliance solution to intercept rogue employees?
Another OFAC enforcement action against a foreign company (Hong Kong-based) that had no U.S. nexus in its dealings with a sanctioned jurisdiction (Iranian-origin goods purchased from Thailand), other than payments for the goods being made in U.S. dollars. Non-U.S. companies risk violating U.S. sanctions when the U.S. financial system is used (even indirectly) for transactions that may involve sanctioned persons or jurisdictions. One interesting remedial measure here was the company revising its sanctions screening procedures to require ALL COUNTER-PARTIES in its transactions to be subject to mandatory screening. However, the root cause of the violations was limited to certain employees actively circumventing company-wide sanctions compliance policies, including not being able to make U.S. dollar payments in connection with Iran-related business transactions. The company did terminate them all, and also enhanced its sanctions compliance unit by housing it inside its Legal Department and hiring more expertise. It makes one wonder whether casting such a wide screening net would have ever prevented such violations? Is there a better compliance solution to intercept rogue employees?
Another OFAC enforcement action against a foreign company (Hong Kong-based) that had no U.S. nexus in its dealings with a sanctioned jurisdiction (Iranian-origin goods purchased from Thailand), other than payments for the goods being made in U.S. dollars. Non-U.S. companies risk violating U.S. sanctions when the U.S. financial system is used (even indirectly) for transactions that may involve sanctioned persons or jurisdictions. One interesting remedial measure here was the company revising its sanctions screening procedures to require ALL COUNTER-PARTIES in its transactions to be subject to mandatory screening. However, the root cause of the violations was limited to certain employees actively circumventing company-wide sanctions compliance policies, including not being able to make U.S. dollar payments in connection with Iran-related business transactions. The company did terminate them all, and also enhanced its sanctions compliance unit by housing it inside its Legal Department and hiring more expertise. It makes one wonder whether casting such a wide screening net would have ever prevented such violations? Is there a better compliance solution to intercept rogue employees?
Another OFAC enforcement action against a foreign company (Hong Kong-based) that had no U.S. nexus in its dealings with a sanctioned jurisdiction (Iranian-origin goods purchased from Thailand), other than payments for the goods being made in U.S. dollars. Non-U.S. companies risk violating U.S. sanctions when the U.S. financial system is used (even indirectly) for transactions that may involve sanctioned persons or jurisdictions. One interesting remedial measure here was the company revising its sanctions screening procedures to require ALL COUNTER-PARTIES in its transactions to be subject to mandatory screening. However, the root cause of the violations was limited to certain employees actively circumventing company-wide sanctions compliance policies, including not being able to make U.S. dollar payments in connection with Iran-related business transactions. The company did terminate them all, and also enhanced its sanctions compliance unit by housing it inside its Legal Department and hiring more expertise. It makes one wonder whether casting such a wide screening net would have ever prevented such violations? Is there a better compliance solution to intercept rogue employees?
OFAC recently has announced that the sanctions banning the financial transactions regarding Iranian cases brought to the ICC have been removed. From this month, Iranian nationals who have chosen ICC as the Arbitral Tribunal in their international business affairs, won’t face difficulties in transmitting the arbitral fees to the ICC. It's great news for businessmen in Iran to have access to the ICC’s reliable dispute resolution services. The question remains: what will be the fate of those breached contracts by international companies taking advantage of the inability of Iranian parties to bring their cases before the ICC?
Primary Sanctions
Us primary sanctions are applied by blocking or freezing the country’s assets (the Specially Designated National (SDN)). By doing so, the SDN’s assets in the US cannot be retrieved without OFAC’s (Office of Foreign Assets Control) permission. Based on this type of sanction, US persons’ transactions with NDA’s are generally forbidden. In some cases, the primary sanctions target entire countries or geographic regions. Therefore, US persons cannot have any economic relation with these countries.
Here the US person includes (i) US citizen (ii) US permanent residence (iii) US based entity (including foreign branches) and, (iv) anyone in the US (which generally includes US branches of foreign entities, as well as any individuals who are physically in the US).
While the primary sanctions are only regarded US persons transactions with SDNs, by considering the “facilitation” element, the scope of such sanctions will be applied broadly. This rule means that a US person cannot use a non-US person to make a transaction which itself is prohibited to conduct under the sanctions. The facilitation factor is mostly related to the US dollar transactions.
Secondary Sanctions
Secondary sanctions target non-US persons by threatening them that if they get involved in transactions with SDNs, they will be excluded from the US market. Secondary sanctions have been existed for many years. However, since 2010 (by using such sanctions against Iran), they have been more considered. Secondary sanctions also target countries such as North Korea, Russia, Venezuela and, Syria.
For tracking the US sanction’s regulation which may affect your business, there are some factors you may want to consider:
• 50% Rule: If an SDN owns 50% or more of an entity, that entity is itself treated as an SDN. Based on this rule, the ownership is the criterion not the controlling factor of the entity.
• The SDN list regularly changes.
• OFAC has an updated SDN list. You can see the latest list and changes here https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists
When the US State imposes sanctions on a person, state, or polity, it could be done in two different ways. Sometimes the US forbids its nationals from trading with specific people or states. This is a direct sanction and the US citizens may face punishment, as a result of breaching sanctions. This is often known as "primary sanction". But, outside of the US, where the US state has less influence and no jurisdiction, it could be the case of "secondary sanction". In such sanctions, the US state restricts the access of foreign persons to its market, if they trade with sanctioned entities. So they sould make a decision, whether to trade with sanctioned persons, or with Americans.
Outside of the United States, all economic sanctions imposed by a country are primary sanctions. In contrast, secondary sanctions impose penalties on persons and organizations not subject to the sanctioning country’s legal jurisdiction and are applied against entities engaged in the same dealings prohibited under primary sanctions. For example, because the Islamic Revolutionary Guard Corps, or IRGC, is subject to secondary sanctions imposed by the Office of Foreign Assets Control (OFAC), a person who is not a “U.S. person” who deals in assets linked to the IRGC (e.g., donating to the IRGC’s charitable organization) may be penalized by OFAC. This is true even when there is nothing in the dealings that involve the U.S., such as the use of its currency or the export or import of its goods.
Outside of the United States, all economic sanctions imposed by a country are primary sanctions. In contrast, secondary sanctions impose penalties on persons and organizations not subject to the sanctioning country’s legal jurisdiction and are applied against entities engaged in the same dealings prohibited under primary sanctions. For example, because the Islamic Revolutionary Guard Corps, or IRGC, is subject to secondary sanctions imposed by the Office of Foreign Assets Control (OFAC), a person who is not a “U.S. person” who deals in assets linked to the IRGC (e.g., donating to the IRGC’s charitable organization) may be penalized by OFAC. This is true even when there is nothing in the dealings that involve the U.S., such as the use of its currency or the export or import of its goods.