This Week in Sanctions & Export Controls for the week ending 21 April 2024

Here are the five most important things that happened during the preceding week in sanctions and export controls.

Sign up here if you would like to receive this weekly briefing by email.

1. The United States House of Representatives passed a bill that permits the U.S. government to seize Russian sovereign assets frozen pursuant to U.S. sanctions and use the funds only for the purpose Ukraine reconstruction. (The House separately passed a $60.84 billion Ukraine military support bill, of which $13.8 billon will go directly to Ukraine. The rest will rebuild depleted U.S. military inventories and beef up U.S. operations in Europe, both if which were sorely lacking.) The bill also has several other noteworthy provisions: It allows for TikTok to be banned from the U.S. and imposes additional requirements on the President to more aggressively sanction drug trafficking. The bill also expands Iran sanctions authorities to allow the President to designate ports that knowingly service Iranian petroleum trade and vessels who knowingly engage in ship-to-ship transfers involving Iranian petroleum. (However, both types of designations already can be made under existing secondary sanctions authorities.) Significantly, the bill also codifies a 10-year statute of limitations for both civil and criminal sanctions violations. For both non-lawyers and non-U.S. lawyers: be carefully aware that U.S. statutes of limitations are not firm; there are many complex tolling and related exceptions. Similar, but not identical, bills as those described above are likely to be voted on in the coming week in the Senate. Thereafter, the House and Senate must align on differences, then the agreed bills will be sent to the White House for President Biden to consider signing, which he likely will.
2. After Iran’s unprecedented direct attack on Israel (worthwhile article on the foreign policy implications here in Foreign Affairs), the United States Office of Foreign Assets Control (OFAC) heaped on sanctions against Iran by designating multiple entities and persons involved in Iran’s drone program, companies involved with one one of Iran’s largest steel companies (including one in Germany), and several companies involved with one of Iran’s auto makers — which is linked to the Iranian Revolutionary Guard Corps. The designations were made pursuant to Executive Orders 13382 (weapons of mass destruction), 13871 (Iran sectoral) and 13224 (terrorism). In coordination, the United Kingdom Office of Financial Sanctions Implementation (OFSI) also designated a total of 13 Iranian persons and entities involved in related activity. The European Union is yet to act.
3. In — yet another — example that sanctions are a handy bargaining chip in foreign policy, the Venezuela Maduro regime is about to again feel the pain of United States sanctions that were previously curbed upon Maduro’s promise of democratic reform. Maduro, not surprisingly, has been recalcitrant in his promises; thus, the U.S. is recalling its open-ended general license that permitted the vast majority of Venezuelan oil-related transactions involving its state-controlled oil monopoly, Petróleos de Venezuela, S.A. (PdVSA). The new wind-down general license (General License 44A) reimposes full sanctions against PdVSA as of 31 May 2024. Venezuelan oil will now need to return to the black market to compete with Russian oil sold above the price cap. Query whether the European Union and U.K. will – amid growing coordination generally – (finally) align with the U.S. on Venezuela sanctions.
4. OFAC settled with SCG Plastics, Inc. (SCG), a Thai company, for $20 million arising out of SCG’s use of the U.S. financial system in 2017 and 2018 to sell plastics to Iran in U.S. dollars. The U.A.E. was (as often is the case) a transshipment hub for the shipments, and often intentionally misidentified (along with the “Middle East”) as a final destination of the products. SCG is fortunate it and its relevant employees were not criminally charged. The settlement agreement clearly sets out facts evidencing intentional sanctions evasion. SCG’s successor — Thai Polyethylene Co., Ltd. (“TPE”) — has also agreed as part of the deal to OFAC-mandated sanctions compliance remediation. Any compliance officers looking for a job in Thailand?
5. The European Commission published FAQs relating to Article 5r of Council Regulation 833/2014 (Russia). Article 5r requires that EU-established entities that are 40 percent or more directly or indirectly owned by Russians or entities established in Russia must report each quarter any transfers of EUR 100,000 or more to outside the EU to the competent authority in which they are established. EU banks are also required to report the same if such entities are their clients. The FAQs couch Article 5r in the broadest terms by clarifying that, among other things, transfers of all financial instruments and value is regulated, but notably that transfers from subsidiaries of EU banks located outside the EU are beyond Article 5r’s requirements. The caveat raises yet another in a string of confounding inconsistencies in the EU’s interpretations relating to the extra-territorial application of its sanctions regulations.

Comments

This week’s action by the U.S. House of Representatives to pass legislation allowing the President to seize Russian sovereign assets already frozen pursuant to sanctions authorities is a significant milestone. It will be a watershed moment in U.S. sanctions law if the legislation passes the Senate and is signed by the President.

First, a few legislative details. If the House version survives negotiation with the Senate (whose bill is actually very similar) and is signed by the President, the new law would — albeit only as to any Russian government assets frozen pursuant to sanctions authorities specifically resulting in Russia’s invasion of Ukraine — recast the U.S. sanctions landscape considerably. Importantly, the law would ban the President from unblocking any Russian government assets until Congress agrees that Ukraine has been fully rebuilt after the war ends. In addition to any already-existing reporting requirements on assets frozen pursuant to sanctions, all U.S. financial institutions would be required to seperately report on Russian sovereign assets and hold them apart from other sanctioned frozen assets. The key instrument in the new law would give the President the authority (and the Congress the authority to compel the President) to seize any Russian sovereign assets frozen by sanctions because of its invasion of Ukraine and use the funds to rebuild Ukraine. Funds may not be used for military or any other purposes.

Second, some important policy and legal considerations. The House bill (and its Senate companion) are striking in that each allows for seizure of any Russian government assets beyond the G7’s agreement to target the approximately $300 billion in assets of the Russian Central Bank. Of that amount, about $67 billion is estimated to be held in U.S. banks. Indeed, the European Union’s action on the G7 agreement is limited to only seizing the windfall profits earned by EU banks from their management of the assets of the Russian Central Bank, of which about $200 billion is held in EU banks. Direct seizure of the Russian Central Bank’s assets is not on the table, nor is targeting Russian sovereign assets more generally. The EU is yet to pass legislation allowing for seizure, though this is expected in the coming weeks. Thus far, it has only mandated the accounting and setting aside of profit revenue from frozen Russian Central Bank assets.

Also, the International Emergency Economic Powers Act (IEEPA) and Trading With the Enemy Act (TWEA) — the two statutes upon which many U.S. sanctions are promulgated — currently do not allow for “vesting” (i.e., seizure) of assets frozen pursuant to sanctions (see, e.g., Dames & Moore v. Regan, 453 U.S. 654, 671–674 (1981)), though 2001 amendments to the IEEPA resulted in permitting asset vesting if the assets are of a sovereign (or others) with whom the U.S. is at war. It would be a stretch beyond judicial interpretation of the IEEPA to argue the U.S. is at war with Russia. That said, the U.S. used this authority on one occasion when it seized Iraq’s sovereign assets in U.S. banks and used the funds for reconstruction after the 2003 Iraq War. Thus, the House and Senate bills provide the statutory authority to allow the President to vest frozen assets and dispose of them that does not currently exist — albeit, the new authority is narrow, both as to assets subject to vesting and permitted disposal of those assets. It must be noted, though, that administrative vesting authorities are separate from existing civil and criminal asset seizure and civil attachment and forfeiture authorities, all of which play out within procedural and substantive due process controls in court.

That said, the legislation raises complex Fifth Amendment Due Process Clause and Takings Clause issues that — given the stakes — it would not be surprising if they are litigated. In addition, there are arguments that the legislation cuts against U.S. treaty commitments and common international law doctrines, both likely also to be raised in litigation.

Last, some opponents of the legislation — and of sanctions asset vesting generally — argue such authorities would chill trust in the U.S. financial system by both foreign sovereigns and others. While certainly the likes of the central banks of states who use force by invading other countries in direct violation Article 2(4) of the United Nations Charter should not have faith that the United States will ensure their funds are safely kept while they reek havoc on international peace and order, it is a stretch to presume that U.S. government seizure of such aggressor state funds limited for the purpose of rebuilding a devastated victim state would concurrently also broadly undermine faith in the U.S. financial system. To the contrary, faith in the U.S.’s commitment to leading an international order committed to the illegality of unprovoked use of force and peaceful resolution of conflict within a rule-based order would be buttressed by such authority.

More broadly, the question of what that order’s construct and constituency will become – particularly given the new Axis’s ambition is to leverage chaos to destroy all international institutions created in the peace following World War 2 – is a question begged by this issue, and one I will address to the extent drawn out in coming developments.

Did I miss something? Have suggestions or questions? Feel free to comment below or contact me on LinkedIn or by email.