Secondary Sanctions Can Prove Tricky for Both U.S. and Non-U.S. Companies

What are secondary sanctions?

Secondary sanctions apply to non-U.S. persons for wholly non-U.S. conduct that occurs entirely outside U.S. jurisdiction. Compare this to primary sanctions, which prohibit U.S. persons from engaging in specified activities with certain countries, entities, and persons.

Why do they matter?

Under secondary sanctions, the U.S. government can place the offending non-U.S. person on either the Specially Designated National (SDN) List or on the Foreign Sanctions Evaders (FSE) List. In either case, once listed, U.S. persons are prohibited from doing business with the sanctioned non-U.S. person.  Secondary sanctions are a large part of U.S. sanctions against Iran and are becoming a larger part of U.S. sanctions against North Korea.

Bottom line:

U.S. persons should ensure that their activities do not facilitate the activities of  non-U.S. persons dealing with Iran or North Korea and that they are not dealing with a non-U.S. person on one of the restricted parties lists.

North Korea

Pursuant to the North Korea Sanctions and Policy Enhancement Act and two executive orders promulgated early this year, the Treasury Department, in coordination with the State Department, now has the authority to add non-U.S. persons to a restricted parties list if they engage in, contribute to, assist, or provide support to any Specially Designated National (SDN).

Further, the Treasury Department’s Office of Foreign Assets Control (OFAC) now has the authority to designate and block the property of non-U.S. persons who operate in North Korea’s transportation, mining, energy, or financial services sector or who are held to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or service to or in support of, any person who is on the SDN List.

Signaling the expansion of its North Korea sanctions program, on July 6 OFAC added multiple North Korean officials and entities to the SDN List. OFAC regulations implementing the North Korea Sanctions and Policy Enhancement Act are likely to be announced in the coming months.

U.S. and non-U.S. companies alike should be sure that they maintain a healthy distance from the North Korean transportation, mining, energy, and financial sector. In addition, they should make sure that they know their customers and supply chains to ensure that they are not using intermediate sellers that will ultimately sell prohibited goods to North Korea.

Iran

In contrast to North Korea where secondary sanctions are tightening, secondary sanction against Iran are easing. In June, OFAC provided additional guidance on General License H, which authorizes the foreign subsidiaries of U.S. companies to participate in transactions with Iranians and the Iranian government that had previously been prohibited. Before the introduction of General License H, U.S.-owned or -controlled foreign entities were subject to many of the same prohibitions as their U.S. parents.

However, U.S. parents should still be careful when operating under General License H since U.S. persons are still largely prohibited from transacting business with Iran. Because participation by U.S. persons in the activities of foreign-owned subsidiaries could be seen as facilitation or providing material support, any transactions between foreign subsidiaries of U.S. companies and Iranian entities should be walled off from the U.S. parent and directors and senior management who are U.S. persons. Although the U.S. parent company and U.S. person directors and senior management may be involved in initial determinations to engage in activities related to Iran, General License H does not allow U.S. person involvement in ongoing Iran-related operations or U.S. parent involvement in the decision making of its foreign subsidiary. As a result, U.S. persons should recuse themselves from participation in all Iran-related business.

And, while General License H allows U.S.-owned or -controlled subsidiaries to transact with most Iranians and the Government of Iran, it does not allow these subsidiaries to transact with individuals or entities on the SDN List.

Secondary sanctions can make for difficult waters to navigate. As with so many sanctions questions, answers often depend on detailed facts and require thorough analysis.