Sanctions are a powerful tool of foreign policy, used to limit the economic activity of certain countries, companies, or individuals. The primary body that regulates sanctions in the USA is the Office of Foreign Assets Control (OFAC). It establishes and ensures compliance with sanction programs aimed at protecting national security. OFAC implements primary and secondary sanctions, which have different impacts on business. Primary sanctions prohibit American companies from interacting with specific individuals or countries, while secondary sanctions can affect foreign companies doing business with entities under sanctions. Whether dealing with primary or secondary sanctions it is critically important to have OFAC sanctions solicitors to ensure compliance with sanctions regime and sanctions regulations.
What are Primary Sanctions?
Primary sanctions are economic restrictions aimed at enforcing compliance with certain norms and international standards. They are imposed by the United States Office of Foreign Assets Control (OFAC) and apply to American legal entities and individuals. In this case, any commercial activity with countries, organizations, or individuals on the sanctions list is prohibited. Economic sanctions include asset freezes, trade sanctions, and other measures that effectively isolate sanctioned parties and hinder their economic activities.
The primary sanctions are distinguished by their focus on direct interaction between American entities and sanctioned individuals. That is, any organisation or person located in the USA, or any transaction conducted in US dollars, falls under the jurisdiction of OFAC. Primary sanctions also include a prohibition on transactions with organisations and individuals listed on the Specially Designated Nationals and Blocked Persons (SDN) list.
Who Must Comply with Primary Sanctions?
Primary sanctions generally apply to:
- US citizens or permanent US residents, regardless of their location around the world.
- Entities organised in the US
- Residents of the US, regardless of their nationality.
- Entities registered in the US (including overseas branches)
- Any transaction conducted in US dollars or any transaction processed through the US financial institutions.
In particular, any transactions conducted in US dollars or passing through the US financial institutions are also subject. This means that violations of the restrictions set for primary sanctions can lead to fines of up to 1 million dollars, asset confiscation, or even criminal liability. Such control by OFAC ensures the protection of national security and allows the US to restrict economic ties with dangerous or hostile jurisdictions.
What are Secondary Sanctions?
Secondary sanctions are used by countries to reinforce the impact of primary sanctions. Secondary sanctions impose penalties on persons and organizations that conduct business with countries subject to primary sanctions. This means that even if an individual or company is not a citizen of the country imposing the sanctions, they can still be penalised for trading with sanctioned states. Such sanctions aim to limit the economic capabilities of countries that violate international norms and prevent their access to global financial institutions.
Secondary sanctions can manifest in various forms, such as prohibiting financial transactions with individuals who are under economic sanctions, or restricting access to markets controlled by the country implementing the sanctions. For example, if a company in Europe has business ties with Iran, it is prohibited from participating in tenders with US companies. This creates financial pressure on third parties, forcing them to choose between trading with sanctioned countries and the possibility of doing business with the US.
The key provisions of secondary sanctions include:
- Targeted Focus: Secondary sanctions are typically aimed at specific economic sectors, such as energy or financial services, in order to concentrate pressure on key players within the target country’s economy.
- Due Diligence on Business Partners: Companies are required to conduct due diligence on their business partners to check for any connections with individuals subject to sanctions, in order to avoid complications with regulatory bodies. This includes taking into account the OFAC 50% rule, which stipulates that companies owned 50% or more by sanctioned individuals are automatically subject to sanctions themselves.
- Global impact: Given that the USA controls a vast portion of the global financial system, secondary sanctions have a significant impact on international trade. This typically compels foreign companies to comply with the sanctions, even if they are not US citizens.
- Special List: The Office of Foreign Assets Control (OFAC) maintains a list of Specially Designated Nationals (SDN), which includes individuals and organisations subject to sanctions. Companies must regularly check this list to avoid fines or business restrictions.
Who Must Comply with Secondary Sanctions?
Secondary sanctions are applied not only to individuals and organisations within the United States but also to foreign companies and individuals who have business relations with American entities. This means that any organisation interacting with the US or having interests in the American market must comply with secondary sanctions, even if it is not a citizen or resident of the US itself.
Violating secondary sanctions can lead to serious consequences. For example, organisations may be cut off from accessing US financial institutions, complicating or rendering impossible the execution of international transactions. This is particularly critical for companies that rely on the US dollar for international trade.
Moreover, individuals who violate these sanctions can be added to the list of Specially Designated Nationals and Blocked Persons (SDN). This can not only freeze their assets but also restrict their ability to do business with any American companies. Therefore, compliance with secondary sanctions is an important aspect for any organisation looking to successfully operate in the international market.
How to Comply with Primary and Secondary Sanctions?
Adhering to primary and secondary sanctions is critically important for companies operating in an international environment. Companies must regularly check sanction lists, such as the SDN list published by OFAC, to identify risks associated with business transactions. Implementing software for automated checks can help reduce the number of false positives and increase efficiency.
All employees must be aware of the requirements of sanction legislation. Regular training enhances the level of knowledge about new rules and procedures. Internal documents and policies should describe actions in case risks are identified.
Companies must also consider national blocking laws that may prohibit the enforcement of certain economic sanctions. Engagement Solicitor Specialising in OFAC Compliance Understanding OFAC primary and secondary sanctions will help protect business interests and avoid negative consequences. Proper comprehension allows organisations to effectively adapt their strategies and ensure compliance with requirements.
OFAC Licensing Options
Despite the fact that OFAC imposes primary and secondary sanctions, the organisation has the ability to issue licences that permit business dealings with individuals and companies under sanctions. This allows for a certain level of communication and trade to be maintained without violating existing restrictions related to primary and secondary sanctions.
- General licences
These licences are issued by OFAC for specific categories of business, services, or activities and allow transactions to be carried out without the need for individual applications. For example, they may cover trade in certain goods with sanctioned countries under clearly defined conditions. General licences operate automatically for all entities that meet their criteria.
- Special licences
Special licenses are issued on an individual basis, allowing for actions that would normally fall under sanctions, given specific circumstances. This type of license can only be granted when the activity is considered vital to the foreign policy of the USA. As special licenses are rare, companies must clearly justify their application to gain the opportunity to operate within the bounds of sanctions.
Contact OFAC Sanctions Solicitors
If you’re encountering issues related to primary sanctions programs, our OFAC Sanctions Lawyers are ready to assist you. Our team specialises in providing legal assistance with compliance matters, licensing, and other aspects concerning OFAC. We offer consultations, develop strategies to avoid sanction risks, and represent your interests in complex legal situations.
Don’t leave your problems unattended. Write to us to receive expert assistance and support from professionals who understand the nuances of sanctions legislation. Your success in business depends on making the right decisions, and we’re here to help you with that. Our sanctions lawyers are ready to provide an expert assessment and help you understand OFAC Sanctions to ensure compliance with the requirements.
