All for One, or One for All?
14 Jul 2021

When President Biden signed Executive Order (E.O.) 14024 in April, there were likely more than a few eyebrows raised within the compliance community.

For one, the order, which authorized the imposition of sanctions on Russian interests for “specified harmful foreign activities”, marked a departure from the previous administration’s response to the alleged misdeeds of the Kremlin. From a more technical standpoint, the sweeping details of E.O. 14024 raise broad questions about the promulgation and organization of sanctions generally. Are sanctions programs instituted under a methodology that best ensures compliance? Are they consistent in how they treat like actions or are they confusing due to inherent fragmentation?

And why do we need so many executive orders in the first place?

14024’s Designation Powers

E.O. 14024 consists of three sets of designation authorities, two of which represent truly new categories of justifications for regulatory action.

The first of these (Section 1(b)) permits the U.S. government to designate parties who provide support for other governments sanctioned by the United States. This is a reflection of Russia’s current and past support for sanctioned countries, ruling regimes and state-owned enterprises in Venezuela, Iran, North Korea, Cuba and Syria. Interestingly, the Russian-supported, but not broadly recognized, governments in the Crimea, Donetsk and Luhansk regions of Ukraine do not fall under this authority, as they are not recognized by the U.S. as a government. It may also represent a warning to Russia to not take advantage of the current unrest in Belarus (even though the Minsk government’s assets are not currently blocked).

It should be noted, however, that while E.O. 14024 targets Russian efforts in this regard, other nations targeted by U.S. sanctions or other punitive measures also engage in similar diplomatic, military and/or commercial support, most notably China. The past few years have also seen alliances of convenience between sanctioned nations, such as Nicaragua and Venezuela, Iran and Venezuela, and Iran and Syria. Section 1(b) could represent a unique way to deter such cooperation in the future. Would Iran’s petroleum industry want to risk the reimposition of sanctions, should OFAC’s sanctions be lifted, in order to aid another sanctioned nation? It would not be surprising to see such a clause become a standard feature of future executive orders.

The second interesting element of E.O. 14024 (Section 1(c)) permits the designation of any party that causes disruptions to energy supplies through Russian energy pipelines to Europe, the Caucasus and Asia. These would include, among others, the Nord Stream 2 and TurkStream pipelines targeted by multiple pieces of legislation passed during the Trump Administration, including the Protecting Europe’s Energy Security Act (PEESA). Although one could consider it just another “activity-based” sanctions authority, Section 1(c) is notable for achieving the real goal of the prior laws, while removing the geopolitical land mines those pieces of legislation set. Section 1(c)’s designation authority not only has the power to protect both Western and Eastern European nations from Russia’s well-documented use of its energy products as a geopolitical weapon (as documented in a recent report produced by the European Parliament), but it does so while avoiding the potential targeting of parties in allied countries.

The first of the three subsections, Section 1(a), however, seems to be a conventional set of designation authorities for parties who participate in a number of specific activities “for or on behalf of, or for the benefit of” the Russian government:

  • Undermining democratic processes or institutions in any country
  • Undermining the “peace, security, political stability or territorial integrity” of the U.S. or its allies or partners
  • Killing or causing bodily harm to U.S. persons or those of U.S. allies or partners
  • Dealings designed to evade U.S. sanctions (specifically mentioning digital assets and physical assets)

That list also includes three elements that are very familiar to those who follow U.S. sanctions programs:

  • “Malicious cyber-enabled activities”
  • Interfering in any country’s election
  • “Transnational” corruption

Beyond Direct Involvement

Most executive orders contain clauses that enable the designation of those who can potentially prevent sanctions from having their desired effect. In that regard, E.O. 14024 is no exception. For example, as has been included in other pieces of legislation and regulation, OFAC has the authority to sanction the spouses and adult children of any designated person involved in the previously listed activities. The order also allows for the blacklisting of officials of the Russian government as well as their spouses and adult children. Any subdivision of the Russian  government can also be specifically targeted.

The order also enables the designation of anyone providing assistance or support to sanctioned individuals, or aiding the commission of any of the listed activities. It also can be used to sanction those who are deemed to be “owned”, such as defined under the 50 Percent Rule, as well as those who are deemed to be “controlled”, or those acting for or on behalf of, the Russian government or any party designated under E.O. 14024. The slight difference in wording is notable; providing assistance or support to the Russian government, if it does not involve any of the specified activities, or specifically designated parties, does not expose one to potential designation by OFAC. In that regard, it protects existing ties between the Russian government and America’s Western European allies, although designations made under E.O. 14024 may necessitate the issuance of General Licenses to minimize any future impacts.

A Catch-All Authority

Under E.O. 14024, the U.S. can also designate any party in the technology or defense sectors of the Russian economy, as well as any other sector selected by the Secretary Treasury. This “catch-all” authority is similar to the one that has been used in other current sanctions programs, most notably the Iran program, and enables the U.S. to increase the economic pressure on Russian interests should the other specified authorities not induce a change of behavior by the Kremlin.

One tool of sanction-craft not evident in E.O. 14024, however, is the authority to impose secondary sanctions on any third-country party whose dealings with Russian entities materially blunts the impact of the primary sanctions. This is likely for a number of reasons. First, since a majority of Russian imports and exports are exchanged with European nations, the damage to U.S. alliances likely outweighs the value of even creating, much less using, that authority.

Secondly, outside Europe, China is Russia’s largest trade partner. Relations between Washington and Beijing being as strained as they are, threatening additional sanctions is more likely than not to hinder any progress on other fronts. Such additional pressure could also push the Russian and Chinese governments together in solidarity, both economically and politically. And this is an outcome that neither the U.S. nor its allies in Europe and Asia wishes to see come to pass.

Reinventing the Wheel?

The list of activities in Section 1(a) listed above was divided into two smaller lists to highlight their familiarity. The second list appears to be quite similar to existing activity-based sanctions programs for corruption, election interference, and malign cyber-related activities.

While the precise definitions of the sanctionable activities differ under these programs, and the Global Magnitsky program can also be used in the case of human rights abuses, it begs the question: why not use the existing authorities, amending them if need be with additional executive orders in those existing programs? One could also question the need for both a Magnitsky sanctions program just for Russian malfeasance, and a Global Magnitsky program for the rest of the world. And, while one is examining the list of OFAC sanctions programs, one could also challenge why a new sanctions program was created for E.O. 14024 instead of combining it with the existing Ukraine/Russia-related sanctions program.

Good questions, all – among others.

One Executive Order to Rule them All

E.O. 14024 raises a number of issues about how sanctions are organized.

First, the order covers a number of disparate elements, which could have been relegated to their own E.O.s. Executive orders 13660, 13661 and 13662, which are part of the underpinnings of OFAC’s Ukraine/Russia-related sanctions program, make up the most notable (and most recent) example of multiple related E.O.s targeting the same basic foreign policy concern. That they were all issued within the same two-week span suggests that the ideas for the later actions were not formulated until the ink was dry on the earlier ones.

There are good justifications both for issuing a single broader executive order, and for issuing a series of “smaller” individual orders. A single E.O. highlights the perceived breadth and severity of alleged offenses. From a rhetorical standpoint, however, it begs the question: why did the regulator wait until such a set of offenses accumulated?

Issuing individual executive orders, on the other hand, permits each type of bad behavior to be highlighted separately, in a relatively more timely fashion. Subsequently, economic pressures can be applied multiple times, to different sets of actors. When such designations occur, referring to the specific E.O. (for example, with a separate OFAC sanctions program tag) immediately brings clarity as to the purpose of the action. By contrast, designations made under a single overarching order would require detailing which section of the authorities were being invoked (or would require the reading of the press releases issued by the U.S. Treasury Department).

Admittedly, E.O. 14024 represents a special case. The Biden Administration was playing catch-up after a period of benign neglect (or willful blindness, perhaps more accurately) under the previous administration. Nonetheless, the E.O. could still have been broken up into multiple pieces, all issued the same day, or in rapid succession. This would have permitted the U.S. to create a drumbeat of new consequences (and publicity for them) for these “malign foreign activities.” This might have been preferable for certain of the elements of E.O. 14024 – Section 1(c)’s focus on European energy security might have particularly benefitted from being in the spotlight in its own right.

A Matter of Perspective

The overlap between E.O. 14024 and the existing Cyber-related, Global Magnitsky, and Foreign Interference in a United States Election sanctions programs raises a different set of issues. First among them is the relative value of country-based programs, as opposed to activity-based programs.

Prior to the Trump administration, the overwhelming focus of activity-based programs, with the possible exception of the Non-Proliferation sanctions program’s use, was on non-state actors. However, since 2017, designations under the Cyber-related, Counter Terrorism and Non-Proliferation sanctions programs, and those under the activity-based programs instituted under former President Trump’s administration (Global Magnitsky, Foreign Interference in a United States Election), have included a significant number of state actors from Iran, North Korea and Russia, among others.

The advantage of activity-based programs appears clear: the basic reason why some party is sanctioned is evident from the title of the program. On the other hand, when a state actor is involved, the government behind the sanctioned activities is truly the focus of the designation, not the individual party.

One assumes that the true intent of such designations is to de-incentivize the country, not the person, from continuing its campaign of such activities. It is unlikely, in authoritarian regimes (the overwhelming majority of targeted regimes are de facto authoritarian, even if some are nominally democratic), for a party to refuse the direction of the state. While sanctioning individual parties may not change the trajectory of activities directed by a nation, it can make the activity harder and more expensive to carry out without detection and interdiction of any assets.

Rules are Rules?

Additionally, this overlap in similar authorities makes one question the value of consistency in how undesirable activity is defined and addressed in sanctions regulations. For example, the Foreign Interference in a United States Election program is limited to interference in U.S. elections, while the Russian Harmful Foreign Activities program includes elections of U.S. allies and partners. Similarly, the relatives of those sanctioned under E.O. 14024 are subject to sanctions as well; a reasonable person might expect similar authority to exist in the current activity-based programs, especially when many target state actors in significant numbers.

There is probably no good justification for this lack of consistent treatment of the same activities, other than the U.S. has not chosen (yet) to issue Executive Orders to bring those programs into conformity with E.O. 14024. Those programs would likely achieve U..S. foreign policy and security goals better and quicker if they were consistently defined and enforced.

Unfinished Business?

Given the breadth of 14024, one wonders why a new program was created for it. After all, the original Ukraine-related program was renamed. The Ukraine-related elements (as well as the Magnitsky program) could be made part of a larger all-encompassing Russia sanctions program. In a similar fashion, existing designations of Russian parties under activity-based programs could be pulled back into such a country-based program (and removed from the other programs). As discussed above, these activities are all animated by the Russian state; such changes would make the government the proper focus of OFAC’s  program.

To be fair, it’s not just Russian sanctions designations that suffer from this fragmentation. Many Iranian parties have been also designated under the counterterrorism program, for example.

Such centralization and simplification has practical effects for those in compliance and management oversight roles. Sanctions regulations are very complex and dealing with parties designated under multiple programs makes understanding the scope of prohibited and permitted activity,  as well as licensing, more complex. And complexity leads to errors, and those can lead to enforcement actions, or to reluctance to conduct even permissible business transactions.

There is a reason why “misinterpreting, or failing to understand the applicability of, OFAC’s regulations” is one of the “root causes” of sanctions compliance failures listed in A Framework for OFAC Compliance Commitments. How OFAC organizes its sanctions programs is undoubtedly a contributing factor.

Is the goal of regulation to encourage compliance or to play “gotcha”?

With Great Power Comes Great Responsibility

As evidenced by the recent issuance of Executive Order 14032, which addressed the lack of clarity in OFAC’s Chinese Military Companies sanctions program by replacing the overwhelming majority of the two existing E.O.s with a clearer, simpler, designation mechanism, sanctions programs can be reformed so that companies can be clear as to how to comply with the regulatory requirements.

There is no reason a more general untangling of sanctions programs cannot be achieved, resulting in clearer messages being sent to those in operational roles, and as well as being sent to bad actors globally:

  • Retain activity-based programs for definitional purposes. Issue an executive order for each that codifies the definition and scope of the prohibited activity. If that definition needs to be changed in the future, make the change in the activity-based program.
  • If a bad actor is not a state actor, or acts on behalf of a government not targeted by a country-based sanctions program, designate them under the activity-based program.
  • Use a single country-based program for each nation whose undesired activities are state-sanctioned or directed. Within that program, use separate program tags to denote which type of activity is being sanctioned; for a broad executive order, like E.O. 14024, references to the section of the order may be used either in the tag verbiage, or in the description on OFAC’s website. This creates significantly better transparency than the current system, which uses tags such as [RUSSIA-EO].
  • When a sanctioned activity is being instituted in a country-based program, the E.O. should refer to the activity-based program’s definition. If the activity-based program’s definition needs to be changed, that should also be by executive order (for clarity, in the activity-based program).
  • Since parties sanctioned under country-based programs should only be designated under one or more authorities under that program, General Licenses can be written to more clearly define when licensing applies and when it does not.

While this is not a panacea for the complexity of OFAC’s sanctions, it is a start to making OFAC requirements and applicability easier to understand and, therefore, easier to comply with.

Eric A. Sohn, CAMS, CGSS, global market strategist and product director, Dow Jones Risk & Compliance, New York, NY, USA, [email protected]

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