The economic sanctions administered and enforced by the US. Department of the Treasury’s Office of Foreign Assets Control (OFAC) are key foreign policy tools of the United States. OFAC sanctions draw their strength and extensive global influence from the US Dollar being the dominant currency in the cross-border world economy. The force and authority of US economic sanctions are frequently misinterpreted as the US exercising extraterritorial law. This is not the case.

The US’s use economic sanctions today is not a blunt instrument. Long gone are the days when OFAC implemented a sanction regime and let it run its course with only infrequent updates, if any[1]. In the last decade OFAC has undergone a transformation, expanding and refining the immense influence of US sanction tools. The advent of secondary and sectoral sanctions during the Obama Administration substantially changed the utilization, results and consequences of US sanction programs globally.

OFAC’s primary sanction programs are against targeted foreign countries and regimes, terrorists, international narcotics traffickers and those engaged in other threats to US national security. Secondary sanctions target entities that evade or circumvent the sanction programs. Secondary sanctions originated in 2010 with the passage of the Comprehensive Iranian Sanctions Accountability and Divestment Act (CISADA).

Sectoral sanctions target specific sectors of the sanctioned country or regime’s economy. Sectoral sanctions were established in March 2014 when President Obama issued Executive Orders; 13660, 13661 and 13662, related to “Persons Contributing to the Situation in Ukraine”. Russia had invaded the eastern Ukraine and annexed the Crimean Peninsula. The three Executive Orders are principally a Russian sanction program.

Use of Secondary Sanctions

Secondary sanctions were originally contained in the Consolidated Sanctions List Foreign Sanctions Evaders (FSE List)[2], and the List of Foreign Financial Institutions Subject to Part 561 (Part 561 List)[3].  

The FSE List targets “…foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions[4]…”. The focus of the FSE List program is evaders of the Iranian, Syrian, WMD Proliferations and Specially Designated Global Terrorist sanction programs.

The Part 561 List originated from CISADA. This program is principally a list, which originally contained two entities and now, just one (Bank of Kunlun Co. LTD). The Part 561 List was a more significant program for originating the concept of secondary sanctions because it was enforcing of a multi-lateral (UN, EU and US) sanction programs, not just focusing exclusively on the circumvention of a US sanction program.

CISADA, and the UN and EU sanctions against Iran, were the catalyst for the Iranian nuclear talks and the signing of the Joint Comprehensive Plan of Action, July 14 2015 (JCPOA). The JCPOA provided Iran with substantial sanction relief. This was an economic win for all countries, except for the United States, because the majority of the US sanctions against Iran remained in force (contrary to numerous US media reports).

Why are secondary sanctions so much more significant today than when they were instituted in 2012? In May 2018 President Trump elected to “not renew” the US participation in the JCPOA and instructed OFAC to reinstate all previous sanctions against Iran, allowing for a 180-day snapback period before full enforcement took effect. After the 180-day period expired, President Trump announced the US’s intent to apply and enforce secondary sanctions against all non-US entities that engaged in business with Iran. In affect this has forced all non-US companies to decide what is more important to them; business with Iran or business with the United States. Many major players immediately announced the termination of projects in Iran. The threat of secondary sanctions by OFAC related to Iran has made the world acutely aware of OFAC’s sanctions. Secondary sanctions have subsequently been levied against entities engaging in business with other sanctioned counties including North Korea, and Venezuela. The power and enforcement of secondary sanctions is clear, abide by OFAC’s sanctions or risk being sanctioned as well.

Use of Sectoral Sanctions

Unlike secondary sanctions that broaden the scope of sanctions by applying more restrictions, sectoral sanctions do the opposite. Sectoral sanctions have been referred to as “surgical or smart” sanctions in that they are applied against very focused targets to reduce subsequent collateral economic damage. Sectoral sanctions were developed to respond (short of going to war) to Russia’s aggression against Ukraine. The dilemma of the Russian/Ukrainian situation was that the traditional remedy of applying broad economic sanctions against an economy as large as Russia’s (8th largest in the world) following the global financial crisis of 2008, could have undone the previous six years of economic recovery and triggered another global recession. The solution was to apply very limited sanctions that targeted certain Russian economic sectors: energy, financial, defense and the Deepwater Artic Oil Project. These sectoral sanctions were not all-inclusive; they only applied to transactions involving new or renewed debt or equity financing (loans, issuance of stocks or bonds, etc.). This surgical application of financial sanctions had three objectives;

      1. Create rapid deflation of the Ruble (the Russian currency)
      2. Make Russia question their ability to grow without access to new or renewed capital
      3. Minimize any subsequent collateral economic damage to the very fragile global economy.

An OFAC official described the new sectoral sanction as “…narrow prohibitions, incredibly hard and complicated to apply[5]…”. Time has since borne out that the Russian sectoral sanctions were successful. The Russian sectoral sanctions were multi-lateral sanctions, imposed by both the EU and the US. The EU and US sectoral programs against Russia were very similar in their application and their selective targets. OFAC officials have acknowledged that the multi-lateral sectoral sanctions imposed on Russia are one of the best examples of global sanction diplomacy.

Sectoral sanctions have been referred to as the “the next generation of sanctions.” This model has been part of sanctions involving Venezuela, Iran and Foreign Interference in United States Elections Sanctions.

OFAC sanctions have expanded significantly with the addition of secondary and sectoral sanctions. And, as long as the US Dollar is the primary currency utilized in cross-border business contracts economic sanctions will continues to have a significant influence on international commercial activity, they will be effective elements of US diplomatic leverage.

 

[1] E.g. Cuba [CACR] 1963 and Federal Republic of Yugoslavia (Serbia & Montenegro) [FRY(S&M)] 1997

[2] Executive Order 13608.

[3] The Part 561 List was absorbed or merged into the List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List) that is a product of Countering America's Adversaries Through Sanctions Act (CATSA) and 6 other OFAC sanction programs.

[4] U.S Department of Treasury – OFAC Website.

[5] U.S Department of Treasury - OFAC Symposium Washington D.C. Fall of 2014.