Secondary US Sanctions

By Dr. Julius Hagen, Attorney at Law

Exposure without a US connection

A German supplier can no longer obtain financing, even though its contract is to be performed outside the United States and paid in euros. The bank cites secondary US sanctions. These sanctions allow certain transactions by non-US persons to become grounds for imposing restrictions on those persons themselves. Neither a German registered office nor a different currency provides protection by itself.

Other prohibitions may already apply because a US bank or US person is involved, or because the sanctions programme provides another basis for US jurisdiction. OFAC's guidance on who must comply also covers non-US companies in defined circumstances. Both forms of exposure can arise in the same transaction. A bank enquiry alone does not, however, show that sanctions have already been imposed on your company.

Which transactions can trigger sanctions?

There is no single prohibition covering every transaction with every SDN-listed person for all companies worldwide. The applicable legal authority determines which conduct can lead to sanctions against a third party. It may cover specified support, a significant transaction or services for a sanctioned economic sector. Knowledge requirements and exceptions also differ between sanctions programmes.

The full list entry for the business partner, its programme tags and the actual contractual performance therefore need to be examined. Is the company selling goods, arranging a payment or financing a project? Who receives the economic benefit? An assurance from the direct counterparty is insufficient if the records point to a different end recipient or another sanctioned participant.

Consequences for a foreign bank

One example is section 11 of Executive Order 14024, as amended. In specified circumstances, it authorises sanctions against foreign financial institutions for transactions involving Russia's military-industrial base. Consequences can include restrictions on correspondent accounts in the United States or blocking of the institution itself. This rule concerns financial institutions; it cannot simply be applied to every supplier.

Where a significant transaction is required, there is more to the assessment than a fixed monetary threshold. OFAC FAQ 1151 identifies factors including size and frequency, the nature of the transaction, management awareness and deceptive practices. Related payments, internal approvals and the information provided about the parties therefore also matter.

Why a bank refuses a transaction

Banks, insurers and investors may decline business because of their own sanctions exposure or internal policies. That is not an official designation of your company. Whether a bank is entitled to refuse depends, among other things, on the contract, the legal provisions it invokes and any relevant limits under EU law.

We examine the correspondence to establish whether the bank identifies a specific prohibition or needs further documents. Corporate records may resolve an incorrect ownership finding. If the transaction is in fact covered by sanctions rules, a general assurance of compliance will not remove the risk. We address blocked payments and mistaken screening matches separately under first steps after an OFAC match.

Before the next shipment

For continuing contracts, each outstanding obligation needs to be considered. An earlier payment does not establish that the next delivery or financing arrangement is permissible. Designations and rules may have changed. An exception or licence only helps to the extent that it covers the transaction and the persons involved.

A new intermediary, another currency or an altered delivery route is not a reliable solution. Such changes can raise additional concerns about circumvention. Nor should a contract be terminated without review: termination rights, payment obligations and possible claims by the counterparty need to be assessed as well.

When US sanctions conflict with EU law

The EU Blocking Regulation can prohibit compliance with certain US requirements. It covers only the laws specified in its Annex and measures based on them, currently certain sanctions concerning Iran and Cuba. It does not provide general protection against all US secondary sanctions.

A company may therefore face conflicting requirements. The precise scope of the rules, possible authorisation from the European Commission and contractual alternatives need to be examined. For an account closure, the response depends on the Blocking Regulation and the applicable contract law.

How we advise you

We review the proposed or completed transaction against the contracts, delivery records and payment documents. Our legal assessment identifies the parties affected, the applicable rules and facts that remain unresolved. It gives management and the responsible employees a basis for deciding how to handle outstanding obligations.

We handle legal correspondence with banks and counterparties and coordinate any necessary US legal steps with US counsel. If your company has already been designated, we assess the grounds for a delisting petition.