Navigating the Complex World of US Sanctions and OFAC Rules
Nobel Ilac A.S., Compliance Executive
In this article, we will discuss US sanctions (specifically OFAC), the concepts of US Persons-US Nexus, sanction risks, and our recommendations. The aim is to create a general awareness and provide guidance about these sanctions. However, it should be noted that not all rules or regulations related to OFAC are included in this article. For up-to-date information, we recommend reviewing OFAC's website. We hope you enjoy reading.
1. What Does “Sanctions” Mean?
Sanctions are penalties imposed by other countries or global organizations against a government, individual, or institution that violates international legal regulations or exhibits aggressive behavior and does not comply with laws and regulations. They are among the toughest measures that can be taken between states without going to war. Sanctions between countries are generally politically and economically based.
US Sanction Regulations Sanction programs regulated by OFAC (Office of Foreign Assets Control), a sub-department of the US Treasury Department, are implemented to take economic measures against reasons that threaten US national interests and to protect national interests. There are financial sanction programs that are applied based on multiple reasons, including the protection of human rights, diplomatic and economic issues, terrorism, racism, drug trafficking, prevention of the spread of weapons of mass destruction, and national security, in addition to the sanction programs with direct political reasons in the background.
Economic sanctions applied by OFAC generally aim to prohibit US persons (including US individuals and legal entities, foreign subsidiaries of US legal entities, US branches of foreign companies, and individual US citizens wherever they are located) from doing business with certain individuals, organizations, or geographies without any authorization or license.
2. US Sanction Regulations "US Persons" and "US-Related" Concepts
US regulations are primarily binding for individuals defined as "US Persons". The scope of US persons is broadly covered in the regulations:
- US citizens (regardless of their place of residence),
- Citizens of other countries with permanent (legal) residence permits in the US,
- Legal entities established under US laws (US companies),
- All individuals and legal entities located in the US,
- Legal entities owned or controlled by US citizens,
- US green card holders.
US sanction regulations are binding for all transactions in which "US Nexus" can be established. Even if the parties to any transaction are not US Persons, the transactions must be carried out in compliance with OFAC sanctions if a US Nexus can be established. This connection can be established, for example, in the following ways:
- US institutions, branches, and representatives may be involved at any stage of the transaction,
- The counterparty or financier may be US-based (e.g., transactions made with credit and resources provided by US financial institutions).
- Transactions may have been made on US-origin goods and services (e.g., transactions on goods and services originating in the US).
- The transaction may have been carried out from or through the United States (e.g., money transfers between US-based banks, delivery that is carried out via the US from a logistical point of view),
- The transaction may have been made in US dollars.
3. Secondary Sanctions
US sanctions pose a risk even in situations where there is no US person or US relationship. The US aims to apply sanction regulations “extraterritorially” and, in order to achieve this, threatens the country and/or individuals who act in the interests of countries targeted by its sanctions with “secondary sanctions” to prevent circumvention of sanction regulations. The target of secondary sanctions is to prevent persons, institutions, and other country citizens domiciled in third countries outside the US from transacting with persons, institutions, organizations, and countries that the US has included in its sanctions (to a significant and determinable level). Generally, secondary sanctions are regulated in a limited way with certain sanction programs and sectors. Even if there is no US connection in the parties and transactions covered by these sanctions, a foreign person or institution may be subject to US secondary sanctions. This is because secondary sanctions are primarily directed at persons domiciled in third countries outside the US in terms of compliance obligations. In summary, secondary sanctions are applied to the completely extraterritorial behavior of non-US Persons.
4. Types of Sanctions
OFAC has many sanction programs that target countries, individuals, and organizations. With the inclusion of secondary sanctions, which affect third-country citizens and institutions that do business with persons, institutions, and organizations sanctioned by the US, list-based sanction programs targeting specific persons, institutions, and organizations have been implemented. Three basic types of sanctions can be discussed in the context of OFAC:
4.1. Country-Based Comprehensive Sanctions
In general, the following types of transactions with countries where sanctions are applied are prohibited:
- Trade in goods and services
- Technology transfer
- Financial transactions.
Cuba, Iran, and North Korea can be given as examples of the US’s broadest country-based sanctions. Under General License programs that provide exceptions to these country-based sanctions, general licenses published by OFAC for each country can be used to exempt certain transactions with that country from sanctions. These transactions generally include exceptions for personal communication, humanitarian aid, and information services provided to these countries through websites on the internet.
4.2. List-Based Sanctions
Certain individuals and institutions can be added to lists (Specially Designated Persons Lists - "SDN") of those banned for reasons such as threatening US national security, US foreign policy, and US economic interests by the US government.
What are the consequences of being included in the OFAC SDN List?
The assets of individuals and legal entities included in the list can be blocked in all fields located in the US, their acquisitions can be restricted, and their access to financial institutions can be prohibited.
US individuals cannot conduct transactions with legal entities that are directly or indirectly controlled by individuals on the OFAC list or own more than 50% of the shares. According to OFAC sanction rules, joint ventures in which individuals and companies included in the OFAC SDN list directly or indirectly own more than 50% of the shares are also considered to be on these lists, even if they are not on the SDN list themselves, and these legal entities are also subject to the same sanction rules (blocking program) as those on the OFAC list ("shadow blocked entities").
4.3. Sectoral Sanctions
A country, person or institution is not directly targeted, but certain commercial relationships, activities, services, products or technology supplies are restricted for a particular sector in the targeted country.
5. In Summary
US sanction regulations are not only applicable to US Persons and US Nexus persons, but also to all persons who engage or intend to engage in business with them. In this context, companies operating at an international scale in third countries and international or local financial institutions may avoid doing business with persons on OFAC lists due to compliance requirements as well as commitments in their external relations. To comply with sanction regulations, we recommend asking the following three questions for each transaction:
- What are we exporting? The products and services subject to export must be recognized.
- Who is the end user? All parties involved in the process until the product reaches the end user (even temporarily harboring, possessing, storing, using) and the final user of the product must be identified.
- What is the purpose? The purpose for which the product is exported, the intended use, and the potential uses must be known.
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