November 3, 2016
By Anna Sayre, Legal Content Writer, SanctionsAlert.com
The US has one of the most complex national systems of sanctions enforcement in the world. This system derives from the number of agencies that are empowered to initiate actions against violators of US sanctions. Because each US agency maintains a different “Do Not Touch” list, organizations and individuals on the various lists may differ. Furthermore, the regulations issued by these various agencies often have areas of overlap. It is not uncommon for three or four US agencies to take action jointly, thus exposing a business to multiple investigations and varying penalties.
This article is the sixth in a series of articles on the role US agencies play in sanctions enforcement. The series focuses on the role departments and agencies have in the enforcement, administration and investigation of sanctions violations.
Article six of the series deals with the role of state agencies and regulators in enforcing sanctions against both foreign and domestic violators and how that role may conflict with regulators at the federal level.
Although sanctions are usually associated with federal agencies, such as the Department of Treasury’s Office of Foreign Assets Control (OFAC), state governments or regulators have begun to be more active in both implementation and enforcement of sanctions laws over the past several years.
State imposed sanctions
State governments have the power to impose their own sanctions against named countries or entities. These state restrictions can be more or less extensive in scope than US federal sanctions.
State and local sanctions generally take the form of either: (1) selective purchasing or contracting laws, which generally prohibit state or local agencies from contracting with or procuring goods and services from companies that do business in a named country; or (2) selective investment laws, which prohibit state or local agencies from investing public funds in such companies.
In the 1990s, a number of state laws focused on conditions in Burma (Myanmar), while others targeted Nigeria, Tibet, Cuba, Indonesia, Switzerland, and Northern Ireland.
After Congress specifically authorized state sanctions laws in the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of 2010, numerous states enacted selective purchasing and selective investment laws targeting Iran, including Texas, California, New York, New Jersey, Florida and many others. The Florida restrictions are particularly broad, because they automatically attach to the parent of the company who engages in certain Iran activities.
The important 2015 ‘Joint Comprehensive Plan of Action,’ which prevents Iran from developing a nuclear weapon while offering it relief from -some- sanctions, mentions sanctions imposed by US state governments. It basically ‘encourages’ state and local level officials to avoid making laws that are inconsistent with the nuclear agreement.
Specifically, it says in point 25 under “Sanctions”:
“If a law at the state or local level in the United States is preventing the implementation of the sanctions lifting as specified in this JCPOA, the United States will take appropriate steps, taking into account all available authorities, with a view to achieving such implementation. The United States will actively encourage officials at the state or local level to take into account the changes in the U.S. policy reflected in the lifting of sanctions under this JCPOA and to refrain from actions inconsistent with this change in policy.”
Further, laws in many states provide for the lifting of Iran sanctions when the President removes Iran as a state sponsor of terrorism; but the JCPOA did not do that.
As a result, Iran sanction laws in most states remain intact. (According to the Watson Institute for International and Public Affairs of Brown University, as of May 31, 2016 31 US states had sanctions against Iran.)
Therefore, companies considering engaging in business with Iran, while relying on US federal sanctions relief under the JCPOA, need to make sure there are no state-issued sanctions laws that prohibit the activity.
The 2007 Sudan Accountability and Divestment Act allows state and local governments to adopt restrictive measures involving investments in Sudan.
In a 2010 report, the US Government Accountability Office, a congressional watchdog, said that 35 states had enacted legislation or adopted policies affecting their investments related to Sudan, primarily in response to the Darfur crisis, as well as in response to Sudan’s designation by the US government as a state sponsor of terrorism.
The constitutionality of state-issued sanctions laws remains uncertain. While state and sub-federal entities may enact sanctions laws and bring actions for sanctions violations, these laws may be pre-empted, invalidated, or limited in application, by the so-called Supremacy Clause of Article VI of the US Constitution.
This clause states that laws of the United States ”shall be the supreme law of the land.” This means that federal law is supreme in certain areas unless Congress has enacted a statute like one of those discussed above.
In fact, there have been a series of recent cases challenging the validity of state laws. In 2007, a federal district court held that an Illinois law, which imposed sanctions upon Sudan, was unconstitutional.
In contrast, enforcement actions by state regulators under applicable state business laws are generally not viewed as being pre-empted by federal law. New York has been the most aggressive in this area, prosecuting businesses under state laws related to false statements, business records and the like when they remove references to sanctioned countries in financial and other documents.
Enforcement actions by state regulators
In the past decade, state regulators have taken part in numerous cases that have also been pursued on a federal level. One of the most famous took place in 2014 against BNP Paribas. Federal and state regulators cracked down on the French banking giant, and the case culminated with the guilty plea of the bank, which admitted to doing billions of dollars in deals with Iran and other sanctioned countries and agreed to pay a record $8.9 billion penalty to state and federal agencies.
In addition to the case brought by the DOJ’s Criminal Division, the New York State Department of Financial Services (NYDFS), New York State’s financial regulator, announced that the bank agreed to, among other things, terminate or separate from the bank 13 employees, suspend US dollar clearing operations through its New York Branch and other affiliates for one year, and pay a monetary penalty to NYDFS of $2.2 billion.
Another $2.2 billion went to the Manhattan district attorney’s office to satisfy state charges of conspiracy and falsifying business records.
NYDFS – moving towards more state enforcement
Since the mid-2000s, the NYDFS has become a major player in the sanctions field and assesses large penalties against foreign financial institutions. As such, understanding the policies and enforcement activities of appropriate state agencies is becoming increasingly important on an international scale.
The NYDFS is the New York State agency with licensing, supervisory, and enforcement authority over, among others, New York branches of foreign banks. In 2012, the NYDFS made headlines when it, reportedly without coordinating with federal authorities, sharply enforced New York law against a New York branch of Standard Chartered, one of London’s most reputable banks. Standard Chartered agreed to pay the large fine of $340 million, which is a huge sum for a state regulator. The money reportedly went entirely to the New York State’s financial regulator fund, and then into the state government’s general fund.
This and other NYDFS sanctions enforcement actions have generated ample commentary, much of it focused on case facts, law as applied by the NYDFS, and enforcement style.