The expansive scope of United States economic sanctions programs—comprised of the laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)—can have a considerable impact on legal disputes involving a sovereign state or instrumentality targeted by U.S. sanctions, irrespective of the dispute’s location or forum. When a U.S. sanctioned target is involved in a dispute, failure to adequately assess relevant sanctions risks, prohibitions, and available OFAC license authorizations related to your involvement can result in potential violations of applicable laws or invoke certain sanctions-related retaliatory measures. For example, legal counsel intending to represent the sanctioned target, or the party seeking to enforce a judgment entered in their favor, may be prohibited from doing so unless authorized by OFAC. Even a contractually stipulated arbitral tribunal can be targeted by OFAC sanctions, as illustrated by the August 11, 2023 designation of the Russian Union of Industrialists and Entrepreneurs, known as RSPP, that operates a Russia-based arbitration center.
This article provides a high-level overview on the intersection of U.S. sanctions and sovereign disputes.
U.S. Sanctioned Sovereigns and Instrumentalities
First, it is important to understand at the outset of a dispute whether any sanctioned target is involved in the dispute (as a party or otherwise). OFAC’s sanctions programs impose full blocking sanctions not just on the governments of Iran, Venezuela, Cuba, North Korea, and Syria, but also any entity or individual that meets the corresponding regulations’ broad definition of the “blocked government.” In addition, certain countries/regions have been targeted by less comprehensive sanctions programs—e.g., Russia, Belarus, Crimea, Burma, and Afghanistan—where many state-owned/controlled entities and government officials are sanctioned and have been identified on OFAC’s sanctions lists. Furthermore, in accordance with the so-called OFAC “50 Percent Rule,” entities owned 50% or more, whether individually or in the aggregate, by a sanctioned person(s), can also be subject to the same sanctions authorities as the corresponding sanctioned person(s).
U.S. Sanctions Prohibitions and Risks
Second, all relevant U.S. legal implications stemming from the sanctioned targets involvement should be assessed. In general, OFAC sanctions programs’ prohibitions and/or blocking requirements apply to U.S. persons, which include any U.S. citizen, permanent resident alien, entity organized under the laws of the U.S. (including foreign branches), or any person in the U.S. Full blocking sanctions require all property interests of the target that are within the possession or control of U.S. persons to be blocked, and U.S. persons are prohibited from engaging in virtually any transactions with them. Furthermore, as the statutory basis for nearly all such programs is the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. § 1705, in most instances these prohibitions also extend to non-U.S. persons whose conduct “causes” a U.S. person to violate the relevant order or regulation, even indirectly. Numerous IEEPA-related enforcement actions have penalized non-U.S. businesses where their transaction with a sanctioned target caused such violations through an otherwise minimal nexus with the U.S. (i.e., “U.S. nexus”). In many instances, this occurs where the underlying payments made between two foreign banks for a commercial transaction involving a sanctioned target is processed by a U.S. financial institution.
There are also so-called “secondary” sanctions considerations for non-U.S. persons who intend on dealing with a sanctioned target, even where the underlying conduct isn’t prohibited (i.e., no U.S. nexus is present). Numerous U.S. sanctions laws authorize the imposition of full blocking sanctions and/or less restrictive measures by the U.S. government on persons who engage in certain specified conduct, based on an evaluation of a range of factors consistent with U.S. foreign policy and national security interests. For example, Section 1(a)(vii) of E.O. 14024 authorizes the U.S. government to impose full blocking sanctions on any person determined “…to have acted or purported to act for or on behalf of, directly or indirectly, the Government of the Russian Federation or any persons [blocked under that Order]…”
OFAC License Authorization
Finally, where OFAC sanctions programs’ prohibitions or so-called “secondary” sanctions risks would be invoked, the next step prior to proceeding is determining whether any applicable OFAC licenses are available. OFAC issues “general” and “specific” licenses, where the former is publicly available and self-executing for specified transactions that would otherwise be prohibited. For prohibited transactions with no available general license or statutory exemptions, concerned parties will need to submit a written application to OFAC requesting a specific license, which the agency may grant at its discretion. If there is no U.S. nexus in the intended transaction involving a sanctioned target (i.e., it wouldn’t be legally prohibited), but “secondary” sanctions risks are present, historically speaking OFAC’s published guidance has indicated that non-U.S. persons do not risk such sanctions exposure where the transaction would be generally licensed or exempt if engaged in by a U.S. person. See e.g., OFAC’s FAQ #980.
Examples of instances where OFAC license authorization may be required in disputes involving sanctioned sovereigns or their instrumentalities include:
- Legal representation by counsel of a sanctioned target, and receipt of payment for legal services; or
- Entering into a settlement agreement or enforcement of a judgment/ arbitral award.
Legal and Other Dispute Related Services
Legal counsel and other third-party service providers for sovereign disputes should resolve any OFAC licensing issues prior to being engaged. Many OFAC sanctions programs provide a general license for the provision of certain categories of legal services to, and payment from, sanctioned targets, including but not limited to representation of persons named as defendants in legal, arbitration, or administrative proceedings before any U.S. federal court or agency. See e.g., 31 C.F.R. § 591.506. To a lesser extent, the scope of such available general licenses also specifically covers related services such as private investigators or expert witnesses.
Settlement Agreements and Judgment Enforcement
OFAC regulations generally prohibit entering into a settlement agreement or the enforcement of any judgments or arbitral awards through execution, garnishment, or other judicial process, against blocked property. See e.g., 31 C.F.R. § 515.203(e). This would include settlement agreements involving a blocked sovereign, or attempts to remove its sovereign immunity from attachment or execution before U.S. courts pursuant to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1605 (e.g., the FSIA’s commercial activity). However, even in several cases where the Government of Venezuela attempted to use such regulations to its advantage, arguing that the entry or enforcement of a judgment would be in violation of applicable OFAC prohibitions, it has been unsuccessful. See e.g., Koch Minerals Sàrl v. Venezuela., 514 F. Supp. 3d 20 (D.D.C. 2020). Instead, courts have interpreted their ability to determine the parties’ rights and obligations with regard to blocked property under OFAC regulations to be unencumbered, while noting that the plaintiff would still have to obtain an OFAC license prior to satisfying any judgment that a court may issue.
This article was first published with ThoughtLeaders4 Disputes Magazine for their special edition issue on Sovereign and States Disputes and Enforcement.
The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at meshkat@meshkatlaw.com.
