According to the media outlet Bloomberg, US financial institutions have been lobbying the Biden administration to reduce the number of new and existing sanctions designations, after four years of high temp activity under President Trump. The issue comes at a key time for the US, as it considers whether to return to the nuclear deal with Iran.
Sanctions have long been a major tool of US foreign policy and economic statecraft, but in recent years, the tempo of new designations against Russia, China, Iran, and other jurisdictions has reached unprecedented levels. According to the law firm Gibson Dunn & Crutcher, the Trump administration issued about 1,000 new designations a year — twice as many as the Obama administration.
The US financial services industry is reported to have told Wally Adeyemo, the Deputy Secretary of the US Treasury, that the number and complexity of sanctions now in place has created a massive burden for the private sector that not only hampers business opportunities but generates rising compliance costs in order to avoid regulatory fines and censure.
Many major international banks headquartered outside the US but with major operations in the country have expressed particular concern about the growing complexity of ‘secondary sanctions’, which prevent non-US affiliates from doing business with sanctioned entities. This can often put these institutions in ‘no-win’ situations, especially when other jurisdictions such as the EU or China seek to override some US designations with ‘blocking statutes’ or court judgments (on the latter, see our Regulatory Highlights, March 25, 2021).
The industry is reported to have shared these views as part of the consultation process in Adeyemo’s ongoing review of the overall US sanctions regime. Adeyemo is reported to have solicited views from individual firms, the US financial services industry’s largest lobbying groups, such as the American Bankers Association (ABA), and foreign governments. The outcome of his review is expected to be published this summer.
Although there is undoubtedly a significant element of self-interest in the financial services industry’s concerns, there is a widespread consensus across the policy research community that there is indeed a problem to be addressed. Angelena Bradfield, Senior Vice President for Sanctions and Privacy at the Bank Policy Institute in Washington told Bloomberg that “sanctions have definitely gotten more complex,” and that “banks are having to create bespoke compliance apparatus to cope with an increasingly complex landscape and complex sanctions.”
The US government – primarily the Treasury’s Office of Foreign Assets Control (OFAC) – is responsible for financial designations, but financial institutions are individually responsible for working out how to comply with their requirements. This obliges them to screen accounts and transactions, and ensure they have up-to-date company ownership figures to identify businesses that are majority-owned by designated individuals or entities, which are also sanctioned by extension. “It is not always a simple matter to identify those 50% entities,” Rob Rowe of ABA told Bloomberg.
The Adeyemo review comes at a significant time in the development of the US sanctions regime, as negotiations continue about the US’s potential return to the Joint Comprehensive Plan of Action (JCPOA), more widely known as the Iran nuclear deal. President Trump announced the US’s withdrawal from the agreement in May 2018, claiming that the deal was a bad one for the US.
Other JCPOA signatories – China, Russia, Germany, France, the UK, and the EU – remained in the deal, despite Iran’s subsequent infringement of some of its requirements. Since his election, President Biden has been under significant pressure from European allies to rejoin the arrangement. In recent comments, Iran’s current President, Hassan Rouhani, has said that he believes a US return to the deal is near. The Biden administration has not commented, but media reports suggest that both sides wish to see progress.
If the US does return to the JCPOA – and the Adeyemo review simplifies and streamlines the US sanctions regime to an extent – this is likely to provide some administrative relief to US financial institutions. However, as noted at the outset of this article, the use of sanctions as a tool of coercive diplomacy has a long history in the US and has been on the rise over recent decades. Although the intensity of usage seen in the Trump years is likely to abate, designations will remain an important part of the US arsenal, especially with regard to perpetrators of human rights abuses and corruption. It is also worth recalling that Iran remains under a raft of other US sanctions unrelated to the nuclear deal, which will continue in place for the foreseeable future.
As a consequence, businesses with potential exposure to sanctions risks will need to continue to maintain a close watch on the development of the US sanctions regime, and endeavor to meet their obligations as vigorously as possible. As highlighted last week, OFAC has taken recent enforcement actions which suggest a proactive stance and an interest in seeing firms use more innovative and flexible screening platforms than entrenched legacy systems can often provide (see Regulatory Highlights, May 6, 2021). Although forthcoming changes are likely to make life a little simpler for affected businesses, they will not take away the fundamental requirement to detect and report sanctions risks as efficiently as possible.