Part of what I hope to get at in contributing here to Groupblawg is to talk about legal issues that affect businesses internationally. Especially interesting to me, either because I’m a geek or a Greek, are the decisions and events that have unexpected and far-reaching side effects– let’s call them legal “butterflies”.
The US sanctioning strategy is one such butterfly. The International Bar Association’s (IBA) Annual Conference is here in Dubai this year. It afforded many of us the great opportunity to hear some terrific speeches. Adam M. Smith of the Treasury Department’s Office of Foreign Assets Control (OFAC) gave a talk mainly focused on sanctions on Iran, but that also provided a general overview of sanction regimes generally. Since the IBA is clearly focused on this, it seemed like a perfect topic for my first post here at Groupblawg.
A brief overview for the uninitiated: The executive branch has control over foreign policy matters under the Constitution and for at least 200 years it has initiated economic sanctions against foreign governments. Normally, sanctions are just one of a host of other diplomatic tools used to influence individuals and governments hostile to the US. Notice I didn’t use the words “punish” or “force”: these sanctions are not meant to do either, otherwise, certain due process requirements would attach. Instead, they are just meant to influence. The executive branch still has this authority, but now it is largely under the International Emergency Economic Powers Act (IEEPA) (50 USC s. 1701-1706) in which Congress gave the President fairly broad authority in declaring an international emergency that had to be dealt with by sanctioning people and governments. Today, over 5,000 individuals, banks, and governments are on the sanctions list, aka the Specifically Designated Nationals (SDN) list, that also includes banks and companies.
In essence, OFAC prevents companies from trading with SDNs without a license from OFAC for specific purposes, like medical or humanitarian efforts. Also, if you are listed on OFAC’s list, you are essentially black-listed from conducting financial transactions globally because of a particular quirk in the global financial system: the Federal Reserve Bank of New York clears all international trades that require US dollars and the US dollar is by far the most widely held foreign currency reserve in the world at over 60%. What this effectively means is don’t use the US dollar in “cash” to pay for things like commodities or to clear international financial transaction. Any time such a trade is made, it must cross into the US, if ever so briefly, to be cleared by the Federal Reserve Bank of New York. This dynamic gives the sanctions tremendous reach and power.
But why do sanctions against Iran, Syria, Cuba, drug traffickers, terrorists affect U.S. businesses, especially those doing only minor trade abroad? Well, the US government can and does punish companies for violating its sanction regime, even for relatively minor amounts of trade. Just last week, Wilson Tool of Minnesota was fined $15,000 by OFAC for conducting selling its punch presses without an OFAC license to a company in Iran. The deal itself was only worth $10,304.33.
So what’s the take away for businesses? Make sure that you know who you are doing business with and have a process for checking those people against sanction lists. There are a variety of computer programs that can help you do this, but, in general, your bank will do this as part of its standard operating procedure. If you’re a US company, make sure that your US bank is somehow involved in the money transfer so that they can pre-screen the deal. If the company or individual that you’re negotiating with doesn’t want to be paid through your US bank (or another international bank that will run similar checks), think twice about the deal and who you’re sitting across the table from.
And, as always, CALL YOUR LAWYER.
John E. Katsos is Assistant Professor of Business Ethics and Law at the American University in Dubai School of Business Administration. He has his JD and MBA from the George Washington University and his BA from Haverford College. Follow him on twitter: @jekatsos.
Photo Credit: Pablo Garcia