Treasury releases 2021 Sanctions Review: Its key recommendations and their implications for the private sector

The Department of the Treasury recently released its 2021 Sanctions Review (the Report). The Report begins by providing a few examples of the successes of certain sanctions programs administered by the Office of Foreign Assets Control (OFAC), then concludes by suggesting potential areas for reform.  In this alert, we highlight key recommendations of the Report and analyze its implications for the private sector. 

According to the Report, sanctions have effectively prevented Iran from accessing oil revenue to finance nuclear and ballistic missile proliferation and terrorist activities; seized billions of dollars from the Cali Cartel which culminated in its 2014 dismantling; and protected tens of billions of dollars in Libyan assets from misappropriation by former government officials after the fall of the Qadhafi regime.

The Report also notes that sanctions designations over the last 20 years increased by over 933 percent.  It points to the problem of overuse of sanctions, observing that such overuse had the unintended effect of leading adversaries, and some allies, to reduce their use of the dollar and their exposure to the US financial system. Financial and technological innovations (such as digital currencies), the Report noted, also provide opportunities to evade US sanctions.

The Report then provides a framework of principles guiding the imposition of economic and financial sanctions to ensure sanctions remain an effective tool of US foreign policy. The Report proposes a five-point plan:

1. Adopting a structured policy framework that links sanctions to a clear policy objective, which could include countering forces that fuel regional conflict and/or illicit activities, and the persecution of a minority group
2. Incorporating multilateral coordination, where possible
3. Calibrating sanctions to mitigate unintended economic, political and humanitarian impact
4. Ensuring sanctions are easily understood, enforceable and adaptable, including greater cooperation with the private sector and
5. Investing in modernizing Treasury’s sanctions technology, workforce and infrastructure.

A look at the Report

The Report puts into perspective Biden Administration sanctions over the last ten months within the context of its foreign policy objectives and priorities.  It also helps forecast what will come.

I.  Top-level takeaways

A.  Reduce the volume of sanctions designations

While Treasury’s plans are not new – most of these principles have been part of the deliberative process for decades—the Report suggests that, going forward, sanctions will be used more deliberately to ensure they are the right tool, with the full range of economic, political and humanitarian consequences taken into account.  That is, we may expect to see fewer designations on OFAC’s Specially Designated Nationals and Blocked Persons List (the SDN List) and other sanctions lists.

Congress has advocated for sanctions much more frequently over the last two decades and has attempted to translate its advocacy into policy through passing mandatory sanctions legislation and even delaying confirmation of presidential appointees to force executive branch sanctions designations.  The Report pushes back against what some describe as “foreign policy on the cheap” – reflexive calls for sanctions on complex foreign policy matters designed to signal strength without addressing the complexities of what the Report calls a “larger strategy” that incorporates other policy tools.

B.  State Department’s role

Notably missing from the Report was the participation of the Department of State.  Indeed, the Chairman of the Senate Foreign Relations Committee, Senator Bob Menendez (D-NJ), asked in hearings on sanctions policy this month why so much time was spent on the review when sanctions are a tool of foreign policy largely driven by the State Department.  State’s traditional role is to design sanctions policy to meet foreign policy objectives.  To the extent that a Treasury designation or license has foreign policy implications, State concurrence is required. 

State also implements its own important sanctions designations.  In 2019, under the Trump Administration, State created an in-house economic sanctions targeting team to provide it with more resources to implement sanctions – a kind of internal OFAC.  This team has undertaken significant designations, and under the Biden Administration we have seen more sanctions authorities granted to the State Department, particularly in respect to Executive Order 14024 of April 15, 2021 targeting Russia. 

C.  Sanctions must be the “right tool” to achieve clear policy objectives

Sanctions have been justified as a means to deprive America’s adversaries of funds used for malign activities, pressure rogue regimes to change behavior or face crippling economic consequences, and to preserve assets from corrupt regimes.  The Report recognizes that sanctions should be the “right tool” to support specific policy objectives.  This was a consideration from the Reagan to George W. Bush presidencies as well as in the Trump Administration of which we have direct knowledge (and also likely in the Obama Administration), but different administrations reach different conclusions on how effective the tool is for their own (often different) policy priorities. 

The Biden Administration has particularly used sanctions as a key tool against human rights abuses and corruption, even while those targets may not be consequential to their host country economies and may not have any US touchpoints.  Secretary of State Antony Blinken and Secretary of the Treasury Janet Yellen issued a joint statement on July 22, 2021 praising the United Kingdom’s designation of five individuals for corruption, while sanctions targeting hundreds of millions in Iranian oil shipments to China, Syria, and Venezuela have gone largely unenforced. The State Department has publicly revealed it is relying on diplomacy, not sanctions enforcement, to coax China to stop Iranian oil imports.

In another example, the Biden Administration resisted Congressional pressure to sanction the company behind the Russian Nord Stream 2 gas pipeline on the grounds that the project was essentially complete, correctly assessing that sanctions would not achieve the goal of stopping the project.  In keeping with the use of sanctions to display American protest (while avoiding unintended consequences – another principle set forth in the Report), the Administration resorted to sanctioning ships and companies that were not of significant consequence to the pipeline or Russia’s economy.  The importance of Russian gas to the EU has become more apparent in the last several weeks, and some sanctions could have the unintended consequence of disrupting energy deliveries to key US allies.  The Biden-Putin summit of June 2021 attempted to establish guard-rails for the relationship and focus on progress in areas of mutual interest. 

The Report also focuses on an operational challenge:  the introduction of digital currencies and blockchain technology that can be used as a means to evade US sanctions.  In addition to US-centric efforts, the US is working with partner countries in the Financial Action Task Force to implement regulatory mechanisms to account for money laundering, illicit finance, and sanctions evasion through digital currencies. 

D.  Sanctions should mitigate unintended harms

The Report recognizes long-standing US policy that sanctions should mitigate unintended humanitarian, economic, and political harm.  This has been a consideration for decades and different administrations have weighed these factors differently.  The Biden Administration’s reluctance to implement crippling sanctions suggests it believes harm to civilian populations, fissures with allies, economic disruptions, and jeopardizing diplomatic off-ramps outweigh the benefits of sanctions, even with adversaries with small economies and weak militaries such as Venezuela or Iran. Unintended consequences of particular concern today include further disruptions to the supply chain and further upward pressure on inflation indicators.

E.  Multilateral sanctions are more powerful 

The Report recognizes that using sanctions multilaterally can have a powerful force-multiplying effect, something recognized as far back as the Reagan Administration.  Except in rare circumstances, the Biden Administration prefers multilateral agreement before the deployment of sanctions, reasoning that voicing American displeasure against malign actors is more legitimate when done in conjunction with the international community.  Narrowly tailored sanctions may perhaps also have a greater diplomatic effect when deployed multilaterally. 

It is important to note that the multilateral approach can be undertaken before or after the deployment of US sanctions.  The Biden Administration prefers the former;  the Trump Administration’s approach to Iran and Venezuela, for example, favored the latter.  During the Trump Administration, the US unilaterally deployed sanctions but later successfully convinced many nations and private sector multinationals around the world (among them Chinese enterprises) to cooperate and in some cases to proactively collaborate with the US to implement secondary sanctions, giving them a multilateral force-multiplying effect.

II.  Assessing current and future risks: Investment implications for the private sector

The policy implications of the Report can help multinationals as they assess current risks and forecast future risks of exposure to US sanctions. 

For countries subject to comprehensive countrywide sanctions, like Iran and Cuba, humanitarian-based transactions such as agricultural, pharmaceutical, and medical supply exports or investments in water and sanitation infrastructure are likely to be viewed favorably and may present investment opportunities. 

Similarly, the provision of media and entertainment programing or the export of certain technological products that facilitate the delivery of information to civilian populations may be favorably considered.  The Report, combined with Biden Administration foreign policy signals, suggests OFAC may take a favorable licensing position and State may take a favorable waiver position on energy-humanitarian swaps that may otherwise be subject to primary and secondary sanctions.  

The Report – interpreted within the context of US foreign policy priorities and objectives under the Biden Administration – informs sanctions risk for particular transactions in certain jurisdictions, particularly Russia and China.  Of course, any transaction must be assessed on its own merits, on advice of counsel and with consideration of US statutes and executive orders. 

III.  How the private sector can mitigate risk and add value

The Report emphasizes the need to engage and “coordinate” with the private sector and recognizes the immense costs the private sector bears in complying with sanctions.  For instance, private-public cooperation was largely responsible for the effectiveness of the maximum pressure campaign under the Trump Administration which deprived Iran of funds used for terrorist financing and malign behavior; it was also responsible for the effectiveness of sanctions against Iran under the Reagan and Obama Administrations. 

Yet the emphasis on these operational principles has important implications for how the private sector can mitigate risk through government engagement. 

For companies with exposure to high-risk sectors, experience indicates that creating close working operational relationships with Treasury and State sanctions enforcement and compliance teams yields tremendous benefits.  For example, companies in maritime may consider how to cooperate with the US Treasury and State Department targeting teams monitoring maritime sanctions evasion. 

Operational relationships have been, and can continue to be, translated into relationships with policy makers to address business concerns, such as unexpected future sanctions exposure in countries like China and Russia, or devising creative strategies to address the untenable position of complying with US sanctions laws in the face of Chinese laws designed to punish such compliance, and other “blocking statutes” enacted by the UK, EU and Canada.    

There is also strategic benefit to be gained for the private sector beyond sanctions.  Some companies have various equities with different US departments and agencies, from CFIUS to the US Trade Representative to Commerce to Treasury and Homeland Security.  A number of proven strategies may help private-sector actors make effective progress through private-public partnerships on sanctions and anti-money laundering compliance.

Finally, financial institutions and responsible digital currency and blockchain entities can build meaningful partnerships with government to inform the creation of central bank digital currencies (CBDCs). 

Going forward

We will continue to monitor future developments as the recommendations of the Report are implemented.  The Report can be found here.  Please contact any of the authors to find out more about the implications of the Report for your business.