2019 Year-End Sanctions Update

Author:Gibson, Dunn & Crutcher
Profession:Gibson, Dunn & Crutcher
 
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Between claims of "financial carpet bombing" and dire warnings regarding the "weaponization" of the U.S. dollar, it was difficult to avoid hyperbole when describing the use of economic sanctions in 2019. Sanctions promulgated by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") have become an increasingly prominent part of U.S. foreign policy under the Trump administration. For the third year in a row, OFAC blacklisted more entities than it had under any previous administration, adding an average of 1,000 names to the Specially Designated Nationals and Blocked Persons ("SDN") List each year—more than twice the annual average increase seen under either President Barack Obama or President George W. Bush. Targets included major state-owned oil companies such as Petróleos de Venezuela, S.A. ("PdVSA"), ostensible U.S. allies such as Turkey (and—almost—Iraq), major shipping lines, foreign officials implicated in allegations of corruption and abuse, drug traffickers, sanctions evaders, and more. As if one blacklisting was not enough, some entities had the misfortune of being designated multiple times under different regulatory authorities—each new announcement resulting in widespread media coverage if little practical impact. At last count, Iran's Islamic Revolutionary Guard Corps ("IRGC") has been sanctioned under seven separate sanctions authorities. Eager to exert its own authorities in what has traditionally been a solely presidential prerogative, in 2019 the U.S. Congress proposed dozens of bills to increase the use of sanctions. Compounding the impact of expansive new sanctions, OFAC's enforcement penalties hit a record of more than U.S. $1.2 billion.

While President Obama described his sanctions team as his favorite "combatant command" (likening it to the traditional military forces employed by the United States), President Trump has truly unleashed the power of OFAC sanctions—employing them frequently, quickly, and unilaterally. The Trump administration announced new sanctions 82 times in 2019—eclipsing the previous record set in 2018. Much to the chagrin of the regulated community, more than one-quarter of the announcements in 2019 were made on a Friday. Under prior administrations, U.S. officials tried to avoid such late-week announcements to ensure that new designations were implemented consistently within the business week on both sides of the Atlantic. The willingness to impose Friday measures is an underappreciated indication of the breakdown in multilateral support for the use of U.S. sanctions, as well as the United States' increasing willingness to go it alone.

This lack of multilateral sanctions engagement, however, should not be read as an indication that other jurisdictions are cooling to the idea of sanctions—quite the opposite. The United Kingdom, as a part of its Brexit process, announced that it would adopt existing European Union sanctions into its own domestic law in addition to promulgating independent, domestic measures that, at least initially, will target human rights abusers. The remainder of the European Union continued to threaten new measures against the regime of Venezuela's Nicolás Maduro, paved the way for new sanctions against Iran by initiating the dispute resolution process allowed for under the Joint Comprehensive Plan of Action ("JCPOA"), and is considering sanctions targeting gross human rights violations. Meanwhile, companies began turning to the EU Blocking Statute—which aims to prohibit EU actors from complying with certain extraterritorial aspects of U.S. sanctions—to strengthen their position in contractual negotiations, disputes, and litigation.

Both China and Russia also proposed counter-sanctions in 2019 against parties who comply with U.S. measures. While China's "unreliable suppliers" list has yet to be formalized and its sole counter-sanctions have thus far focused on non-economic actors (principally non-government organizations supportive of the Hong Kong democracy movement), and as of this writing Russian counter-sanctions remain un-enacted by the Duma, we expect the use of such counter-sanctions to increase in 2020.

Though it is hard to predict how sanctions will develop going forward, we feel it is safe to assume that sanctions will remain a centerpiece of the current U.S. administration's approach to the world in 2020. We expect other world powers—both established and emerging—to respond in kind.

As the following charts illustrate, the two-decades-long trend toward increasing use of U.S. sanctions continued apace in 2019 and shows no signs of stopping during the year ahead.

OFAC Designations

OFAC Sanctions Actions

OFAC Monetary Penalties

  1. Major U.S. Program Developments

    1. Iran

      When the United States abandoned the JCPOA and fully re-imposed nuclear sanctions on Iran in November 2018, the Trump administration warned that the United States would exert "maximum economic pressure" on all facets of the Iranian economy to both deter Iran's "malign activities"—including its support for terrorism, missile proliferation, and regional disruption—and drive Iran back to the negotiating table. True to its word, the Trump administration continued to increase sanctions pressure on Iran and its trading partners in 2019 and expanded its enforcement efforts to new industries and institutions. Iran responded by pulling back from its commitments under the JCPOA, seeking alternative paths to avoid U.S. jurisdiction, and ramping up its provocative use of force. Hostilities with Iran escalated sharply by the end of the year—U.S. and Iranian-backed militias exchanged airstrikes and rocket attacks in late December, culminating in a militia-led breach of the U.S. embassy compound in Baghdad on December 31. When a U.S. airstrike killed Iranian General Qassem Soleimani on January 3, 2020, Iran vowed to retaliate, later carrying out a missile strike on two Iraqi military bases hosting U.S. troops. President Trump responded to this latest Iranian missile strike by promising the imposition of "additional punishing economic sanctions on the Iranian regime," a promise that left many observers questioning whether anything in Iran was left to be sanctioned.

      In pursuing "maximum economic pressure," the United States has not only targeted new industries and entities but also has ramped up pressure on previously sanctioned persons. On April 8, 2019, as we described here, the United States designated the already-sanctioned IRGC as a foreign terrorist organization ("FTO"). Until this designation, the FTO label had been exclusively used on non-state actors, such as Al-Qaeda or the Islamic State of Iraq and Syria ("ISIS"). The FTO designation has limited practical impact, as the IRGC was already designated under several OFAC sanctions programs—including those related to counterterrorism.

      As we discussed here, Iranian President Hassan Rouhani announced on May 8, 2019 that Iran would stop complying with the JCPOA's limitations on Iran's domestic build-up of enriched uranium and heavy water, and that same day President Trump signed an executive order authorizing new sanctions relating to the iron, steel, aluminum, and copper sectors of the Iranian economy.

      Notably, Iran has responded to increasing economic pressure—particularly on Iranian banks—by seeking alternative tools to finance its operations. Specifically, U.S. sanctions effectively cut off Iran's access to dollars and euros and contributed to a sharp drop in the value of the Iranian rial, making Iran's foreign reserve currencies an increasingly important tool for the support of Iran's activities in Iraq, Lebanon, Syria, and Yemen. According to OFAC, Iran used a network of Turkish and Emirati foreign exchange houses and front companies to exchange rials for foreign currencies used by a designated Iranian bank to support the IRGC's Qods Force ("IRGC-QF") and Iran's Ministry of Defense and Armed Forces Logistics ("MODAFL")—both of which have been designated to the SDN List. The United States responded to this workaround by designating 25 Iranian, Turkish, and Emirati exchange houses, trading companies, and officials on May 26, 2019. Rather than relying on its Iran sanctions authorities, OFAC used its counterterrorism sanctions—as it would later against Iran's central bank—to ensure maximum impact. Entities designated under that program are not only subject to the broad sanctions restrictions typically imposed on SDNs but also may not participate in humanitarian trade with Iran—a category of activity generally exempt from sanctions restrictions. The designations also underscored OFAC's willingness to extend its maximum economic pressure campaign to Iran's international supporters, a possible harbinger of things to come in 2020.

      In 2019, the United States continued to roll back sanctions relief that it had previously provided to other countries, including waivers that allowed certain jurisdictions to continue importing Iranian oil. In particular, waivers granted to China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey allowed those jurisdictions to continue importing Iranian oil without being sanctioned by the United States, provided that those jurisdictions significantly reduced their Iranian oil imports. Our analyses of these temporary waivers, also known as Significant Reduction Exceptions ("SREs"), can be found here and here. The Trump administration also announced that, as part of its maximum pressure campaign, no further SREs would be issued and warned that those who continued to trade in Iranian crude would be sanctioned. The expiration of the SREs had relatively little effect on Taiwan, Italy, and Greece, which reportedly ceased importing oil from Iran long before the announcement.

      By contrast, China increased its purchases of Iranian oil, cementing its status as Iran's biggest customer. According to the U.S. State Department, China continued to purchase oil from Iran following the...

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