By Robert L. Williams III, CAMS, Consultant
January 22, 2022
In October 2021, the Biden Administration, the US State Department and OFAC published The Treasury 2021 Sanctions Review. They aimed to show the effectiveness of sanctions as a tool of US national security and foreign policy, incorporating “highlights from stakeholder perspectives as well as data and recommendations for improving Treasury’s implementation of sanctions.”
The document details steps to “modernize sanctions” for current policy priorities and keep “the tool sufficiently nimble” for future use. The steps are:
- Adopting a structured policy that links sanctions to clear policy objectives.
- Incorporating multilateralism co-ordination where possible – in other words, work with allies and partners.
- Calibrating sanctions to mitigate unintended economic, political, and humanitarian impact.
- Ensuring sanctions are easily understood, enforceable and adoptable.
- Investing in modernizing Treasury’s sanctions technology, workforce and infrastructure.
The plan is to use new resources such as beneficial ownership data to help implement the review’s recommendations and enhance the targeting and efficacy of the US sanctions actions.
So far, President Biden has maintained former President Trump’s direction, despite their parties’ major differences. But the new plan contrasts with the Trump Administration’s, which made decisions without consulting US allies. This was mostly evidenced by Trump’s decision to quit the Joint Comprehensive Plan of Action (JCPOA) in May 2018 – a deal he scorned from the start of his presidency. The P5+1 (the five permanent members of the United Nations Security Council: China Russia, UK, US, and France + Germany) and the EU honored the original deal.
Afghanistan is not an OFAC-sanctioned country. Sanctions were implemented by the UN in November 1999 and were aimed at terrorists, specifically Osama Bin Laden and members of Al-Qaeda.
The Doha Agreement, signed during the Trump Administration, set the stage for removing US forces in Afghanistan in February 2020. Secretary of State Mike Pompeo asserted: “We think it will be successful in the end.”
After the exit of US troops in September 2021, the Afghanistan Counterterrorism, Oversight, and Accountability Act was introduced in the Senate, calling for assessments and imposition of sanctions on the Taliban and countries assisting it in Afghanistan. But following controversy about the impact of the sanctions on Afghan civilians, the Treasury Department issued several general licenses to facilitate the movement of US humanitarian aid and financial assistance to the people of Afghanistan. However, these general licenses lack clarity. OFAC and OFSI have yet to publish formal guidance on Afghanistan-related transactions.
The knock-on effect is that many financial institutions are de-risking and refusing or delaying financial flows to humanitarian agencies. This practice is not without critics, with concerns that include the risk of breaching sanctions, facilitating money laundering, reputational damage, and invasive investigations by regulators. Simply blacklisting Afghanistan-linked businesses is an obvious risk management approach for many organizations.
NGOs and charities will also be affected. Despite assurances from OFAC that the Biden Administration will work with financial institutions, NGOs and international organizations to facilitate humanitarian aid, too many financial institutions have had bad experiences and are unlikely to respond positively.
Friction has increased over issues such as alleged unfair trade practices, cyber-hacking and critical infrastructure security, the erosion of democratic norms in Hong Kong, and abuses against Uighur and other minority groups in the Xinjiang region and elsewhere. In recent years, the China and the US have been locked in a tariff war.
The US has implemented sanctions against the Chinese tech giants ZTE and Huawei, authorized the delisting of Chinese companies from US stock exchanges unless they meet US auditing standards, and added Chinese companies to its “entity list,” thereby subjecting them to additional trade restrictions. Outside of trade and technology, Chinese student enrolment in US universities has plummeted. The US has also announced a diplomatic boycott of the 2022 Winter Olympics in Beijing, prompting condemnation from China.
Biden began his administration with a straightforward plan on how to treat Iran. He campaigned on restoring the Iran nuclear deal that had been negotiated when he was vice president under Barack Obama, which Trump abandoned in 2018. Iran responded to the US exit by ceasing its cooperation with the international monitoring regime that had been keeping tabs on its nuclear infrastructure and by ramping up its enrichment efforts.
The lack of cooperation continued throughout 2021. The position now is that the Iranian government has demanded the West to rescind all extant sanctions – including those unrelated to its nuclear program — while refusing to negotiate with the US.
Western diplomats have indicated they are hoping to have a breakthrough soon. Sharp differences remain, and the toughest issues are still unresolved. Iran has rejected any deadline imposed by Western powers. Looking ahead, policymakers need a clear framework for using sanctions more effectively.
Russia supplies almost half of the EU’s natural gas imports and a quarter of its external oil supplies, according to the statistical body Eurostat. The US is investigating how to sanction Russia without disrupting its immediate oil and gas exports and creating turmoil in world markets.
That could involve efforts to limit Russian use of US currency or long-term investments in the Russian oil and gas industry and its supply chain. But this comes with a price, as Energy Department analysts have advised the Biden Administration that the market effects of sanctions are likely to be limited.
Other proposals include disconnecting Russia from the SWIFT international banking system and preventing Russian institutions from using the US dollar. Biden and European leaders are unlikely to go that far, as such a measure – typically reserved for pariah states – would affect Wall Street debt markets and hurt European banks that do business in Russia.
Russia will not make concessions under US pressure, sending a warning that talks on the Ukraine crisis might end early. Washington has said no breakthroughs were expected and progress depended on Russian de-escalation. Changes in the sanctions program against Russia depend largely on events in Ukraine.
While US individuals and entities must adhere to primary sanctions as a matter of US law or face potential criminal/civil penalties, secondary sanctions present non-US targets with a choice: do business with the US or with the sanctioned target, but not both. OFAC applies secondary sanctions to non-US persons and entities who lack a US nexus.
During the Trump Administration, Europe was broadly of the opinion that Trump had weaponized secondary sanctions. They became a critical challenge, owing to Trump’s maximalist policy on Iran and his aggressive economic statecraft. In response, the EU has revisited its Blocking Statute, calling on EU companies and individuals for input on how to contend with US secondary sanctions.
As the US is one of Europe’s largest trade and financial partners, most European businesses have direct or indirect exposure. The US Treasury’s influence prevails when US and EU regulations and foreign policy diverge, given its extensive power to investigate and fine European actors, and to cut them off from the US market. The mere threat of US secondary sanctions on European entities has led to an exodus of EU companies from Iran and undercut a nuclear deal.
The Biden administration has demonstrated its intent to continue using sanctions within its foreign policy toolkit to combat illicit activity that threatens both national security and the security of US allies and partners.
In 2021, the Treasury issued 765 new designations with the majority (51%) under country-specific sanctions programs – mainly Belarus, Burma, China, and Russia – and 787 delistings, with roughly 92% under thematic sanctions programs, mainly addressing drug trafficking.
Coordination to address human rights abuses abroad with allies – especially the EU, UK and Canada – was a recurring theme in many sanctions designations for both country-specific and thematic sanctions programs. In early December in conjunction with allies, during the Summit for Democracy and International Human Rights Day, the US levied 45 new designations to address human rights abuses and their facilitators in numerous countries, including China, Burma, Russia, North Korea and Bangladesh.
These multilateral efforts contrast with the previous administration, which mainly used unilateral sanctions to support its “maximum pressure” sanctions campaign against key country targets such as Venezuela, North Korea and Iran. This suggests the Biden administration seeks to take a more cautious approach toward leading foreign policy strategy with sanctions.
On Top of the Job
So how did compliance officers keep on top of all the actions by Trump during his tenure and now during the Biden Administration? It wasn’t an easy task and looks likely to continue that way.
You still need to pay extra close attention to all entities and individuals with even the slightest Iran connection. You also have to keep an eye on secondary sanctions, Russia, and virtual currency – the newest product on both Fincen’s and OFAC’s radar.
Going forward, you must maintain an adequate AML, BSA, and especially OFAC risk-based program and up-to-date, robust KYC/EDD files on all clients. Expect the Biden Administration to keep you busy.
Robert L. Williams III, CAMS, is a financial crimes prevention professional with nearly 20 years of expertise in the sectors of banking, including the USAPA, BSA, AML, KYC, and OFAC, at three different foreign banks. He began his Financial Crime prevention career at Credit Lyonnais/CALYON, which eventually became Credit Agricole in 2002. He then moved on to BNP Paribas where he was the designated OFAC Compliance Officer, from 2006-2015 Finally, he was employed at Standard Chartered Bank in a Sanctions Advisory from 2015-2020, role working with the Account Opening/KYC teams and Relationship Managers to mitigate internal and external sanctions concerns.