Recent Trends in Secondary Sanctions

In recent years, OFAC has increasingly used secondary sanctions – the threat of being placed on a US sanctions list on the basis of dealings with US-sanctioned persons or jurisdictions – to attempt to regulate the conduct of non US persons. First utilized on a broad basis under OFAC’s Iran sanctions programs, secondary sanctions have seen broader use recently under the Russia and Venezuela sanctions programs. This article analyzes trends in OFAC’s secondary sanctions designation practices over the last year.

Designations by Sanctions Program

First, we compared the designations of secondary sanctions by country program. By far, OFAC made secondary sanctions designations pursuant to the Iran program most frequently. Second, OFAC also designated individuals and entities pursuant to the Russia/ Ukraine program fairly frequently. Finally, OFAC appeared to designate secondary sanctions pursuant to the Venezuela program least frequently.

Within these three country programs, we compared the specific executive order that OFAC cited in its designation announcement.  The top three most frequently cited executive orders were Iran [E.O. 13871], Russia [E.O. 13694], and Iran [E.O. 13224], respectively.

The Sanctioned Person

Next, we considered whether OFAC sanctioned an entity, or an individual, natural person. In the last year, it appears that approximately 59% of secondary sanctions were directed toward entities.

Sanctioned Conduct

Next, we analyzed OFAC’s stated reasons for making each secondary sanctions designation.  Secondary sanctions designations were made on a number of bases, including that the person designated under secondary sanctions authorities:  (i) materially assisted SDNs; (ii) acted for or on behalf of SDNs; (iii) operated in a sanctioned industry sector of a country subject to sectoral sanctions; (iv) was owned or controlled by SDNs; (v) was involved in a significant transaction involving an SDN; or (vi) committed conduct that fell into multiple categories.

1. Material Assistance: OFAC appeared to sanction individuals and entities that provided material assistance to SDNs most frequently.  Material assistance can include providing financial, material, or technological support for, or goods or services in support of SDNs. It is worth noting this conduct usually includes high value transactions, activity either at the core of U.S. sanctions objectives (such as transactions involving Iranian oil exports), or demonstrates structured, deceptive or evasionary conduct. Examples of conduct that resulted in sanctions within this category, over the last year, include:
   • Facilitating the shipment or sale of Iranian petrochemical products;
   • Falsifying documents, or otherwise attempting to conceal the nature of the sanctioned activity;
   • Laundering proceeds derived from dealings with SDNs; and
   • Owning and operating significant assets (such as a private jet and yacht) used by SDNs.
2. Acted for or on Behalf of SDN: OFAC also appeared to sanction individuals and entities that acted for or on behalf of SDNs relatively frequently. Examples of conduct that resulted in sanctions within this category, over the last year, include:
   • Individuals who were leaders or other officials of SDNs;
   • Facilitating shipments or other business transactions to intentionally circumvent U.S. sanctions regulations;
   • Directing SDN entities to conduct sanctioned conduct; and
   • Captains of certain vessels used to deliver Iranian gasoline to the Maduro regime in Venezuela.
3. Operating in Sanctioned Sectors: Almost equally frequently, OFAC sanctioned individuals and entities that conducted business related to sanctioned industries sectors. Some of industry sectors are described more thoroughly below.  Examples of conduct that resulted in sanctions within this category, over the last year, include:
   • Fronts companies for SDNs, created to conceal the SDN’s role in selling Iranian petroleum or petrochemicals;
   • Producing a significant percentage of Iran’s total production for certain materials;
   • Trading, processing, and transporting of raw materials, particular unrefined petroleum and petroleum products, in Venezuela; and
   • Involvement in a large percentage of Venezuela’s total oil exports.
4. Owned or controlled by SDN: OFAC also frequently sanctioned individual and entities that were owned or controlled by SDNs. Examples of conduct that resulted in sanctions within this category, over the last year, include:
   • Front companies for SDNs that concealed the SDN’s role in sanctioned conduct;
   • Handling the daily operations of the SDN;
   • Helping the SDN set up shell companies; and
   • Entities in which SDNs serve as directors.
5. Significant Transaction:  By far, it appears that OFAC sanctioned individuals or entities that conducted a single, significant transaction least frequently.  It is worth noting that these transactions generally exceeded millions of dollars.  Examples of conduct that resulted in sanctions within this category, over the last year, include:
   • Owning a vessel used to transport Iranian steel slabs purchased by one SDN from another SDN, from Iran to China; and
   • Purchasing tens of thousands of metric tons of Iranian steel slabs on a monthly basis from SDNs.
6. Multiple Types of Conduct: The final category includes individual and entities that were sanctioned based on conduct that fell into multiple categories described above.

Industry Sectors

Finally, we analyzed the specific industries that the sanctioned individuals and entities participated in.  It is worth noting that OFAC did not publish this information for every sanctioned person. Accordingly, this analysis is limited to the descriptions in OFAC’s designation announcements, if available.

In general, it seems that the majority of the sanctioned individuals and entities  conducted business in either: (i) the Iranian petroleum and petrochemicals industry; (ii) cybercrime or “hacking”; (iii) the Iranian iron, steel, aluminum, and/or copper industries; or (iv) the Venezuelan oil, gold, or airline industries.

By far, it appears that OFAC most frequently sanctioned individuals and entities operating in the Iranian petroleum and petrochemicals industries, the cybercrime or “hacking” industries, and Iranian iron, steel, aluminum, and/or copper industries, respectively.

OFAC’s designations over the last year underscore the broad scope of OFAC’s secondary sanctions authority and, accordingly, the need for non-US companies to maintain appropriate sanctions compliance policies in order to avoid risks under US secondary sanctions.

We have a global platform specializing in compliance and investigations work, and are ready to help companies design and implement sanctions and other compliance programs to meet regulators’ expectations. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.