United States: Doing Business Sanctions - Ignorance Is Never Bliss

As the reach of project finance continues to expand abroad, awareness of limitations the U.S. government places on U.S. companies doing business overseas is increasingly crucial. Currently, more than 75 countries are subject to or threatened by some form of U.S. foreign policy sanction. The government derives its authority to impose sanctions from statutes, such as the International Emergency Economic Powers Act (IEEPA),¹ the Trading With the Enemy Act (TWEA)^,2 and the Export Administration Act (EAA).³ Violations of these and other statutes can have serious repercussions, including fines of up to $1,000,000 and 12 years imprisonment. Indeed, to safeguard against unintentional violations of these statutes the Office of Foreign Assets Control (OFAC), a branch of the Treasury Department, has advised financial institutions to appoint an officer responsible for overseeing compliance with their regulations. The government and other organizations maintain specific websites that provide periodically updated summaries of countries subject to U.S. economic sanctions. Helpful sites include the Department of Treasury home page,⁴ the Department of Commerce home page,⁵ and USA Engage⁶ (a coalition for economic engagement).

This article will focus on selected provisions of sanctions currently in force vis-à-vis Cuba, Iraq, and North Korea. It must be noted, however, this article is only meant to briefly highlight potential pitfalls for the unwary. It does not purport to provide any advice for companies seeking to do business abroad.

The United States has enacted broad economic sanctions against Cuba in order to isolate the Cuban Government. The earliest sanctions were imposed under the Cuban Assets Control Regulations,⁷ promulgated in 1963 pursuant to TWEA. These sanctions, still in force, were strengthened by the Cuban Democracy Act of 1992.⁸ This Act prohibits subsidiaries of U.S. firms from trading with Cuba by denying licenses for such activity. The regulations restricting trade with Cuba extend to U.S. citizens, permanent residents and subsidiaries of U.S. organizations, wherever they may be located. They also extend to all people and organizations located within U.S. territory.

Exportation to Cuba or to Cuban nationals is generally prohibited. The prohibition covers products, technology and services. Goods and services may not be indirectly exported to Cuba through third countries. In some instances, however, the Commerce Department may grant a license allowing for the exportation of food, medical supplies, medicine and agricultural products to non-governmental Cuban entities. Because the licenses permit otherwise prohibited activity, they are issued on a case-by-case basis.

Similar restrictions apply to importation. For example, goods or services originating in Cuba may not be imported into the United States directly from Cuba or through a third country such as Canada. Furthermore, dealing in property in which a Cuban or a Cuban national has an interest is also prohibited. It is important to note that "property" includes contracts and services, in addition to goods. Thus, for example, an American company may not purchase Cuban goods in France, nor may it enter into a contract with France if the contract contains provisions that involve Cuba. Exceptions to these provisions include the importation of informational materials and instances where a specific license has been obtained.

Financial dealings with Cuba are also precluded. Any property in the United States in which Cuba has an interest is blocked. OFAC defines "blocking" as "immediately impos[ing] an across-the-board prohibition against transfers or transactions of any kind with regard to the property."⁹ With respect to a "blocked account," transactions involving such an account may not be made except as licensed by OFAC or otherwise authorized by the Treasury Department. Debits are disallowed, but credits are authorized. Banks are further prohibited from issuing a letter of credit involving Cuba.

President Bush imposed economic sanctions against Iraq after concluding that the Government of Iraq represented an "unusual and extraordinary threat to the national security and foreign policy of the United States . . . ."¹⁰ These economic sanctions, which are still in force today, are implemented under the Iraqi Sanctions Regulations. Violation of these regulations can result in up to 12 years in jail and a $1,000,000 fine. In addition, a civil penalty of up to $275,000 may be imposed for such violation.

Unlike the Cuban regulations, the Iraqi Sanctions Regulations do not apply to foreign subsidiaries of U.S. firms. However, the regulations do apply to U.S. organizations and to all U.S. citizens, wherever they may be located. Thus, those covered by the regulations may not foster the involvement of foreign subsidiaries in prohibited transactions with Iraq. For example, a U.S. firm may not provide financial assistance or approval to a subsidiary in Latin America if the subsidiary is planning to use such support for the purpose of providing services to Cuba.

Exporting goods, services, or technology from the United States to Iraq is prohibited. Exceptions include food, medical supplies, and other humanitarian goods (all subject to licensing requirements). U.S. persons are barred from dealing in any goods exported from Iraq to a third country or in any property exported to Iraq.

In general, Iraqi goods or services cannot be imported directly from Iraq or indirectly from a third country into the United States. However, all dealings with Iraq are not prohibited. A temporary program was established in 1995 under the authority of the United Nations Security Council (UNSC) Resolution 986. The program was created in order to permit the importation of petroleum and petroleum products originating in Iraq, and to permit related financial transactions. The resulting proceeds were to be used for the humanitarian needs of the Iraqi people.

Although the program was to last only six months, the UNSC has continued to extend the time frame, while frequently reviewing and amending the plan. Under the original Resolution, U.S. persons may enter into executory contracts with the Iraqi Government for certain transactions including purchasing Iraqi petroleum and petroleum products both from within and outside Iraq, and exporting to Iraq materials to operate the Kirkuk-Yumurtalik pipeline system. A specific license must be obtained for such an executory contract.

Contracts involving industrial, commercial, public utility or governmental projects with Iraq are also prohibited. Thus, U.S. persons cannot provide services to a foreign company if those services would aid an Iraqi project. All financial transactions with Iraq are prohibited. Specifically, U.S. persons may not transfer funds to Iraq. Likewise, unless operating under a specific license, banks may not transfer funds to persons in Iraq. Foreign corporate accounts of banks must not be used in connection with projects in Iraq. Banks are required to block all funds involving an interest in the Government of Iraq.

After North Korea invaded South Korea in June 1950, the United States imposed a complete trade embargo and financial prohibitions against North Korea. However, some of the regulations have been modified in the recent past in an effort to normalize relations between the United States and North Korea. The regulations cover U.S. citizens and permanent residents, all people and organizations located within the geographical U.S. and all subsidiaries of U.S. organizations wherever located in the world.

In general, U.S. goods, services or technology may not be exported directly or indirectly to North Korea. Exceptions are made for those who obtain a license from the Bureau of Export Administration of the U.S. Department of Commerce, and for information and informational materials. In addition, a license may be obtained to do business with North Korea in connection with light-water reactor power plants. Goods or services may not be imported from North Korea. In some instances, however, approval may be given by OFAC. For example, specific licenses may be obtained to import North Korean magnesite or magnesia.

Dealing in North Korean assets or assisting the sale of goods or services to North Korea is generally prohibited. All transactions with North Korean property in the possession of or controlled by persons subject to U.S. jurisdiction are blocked. U.S. financial institutions may, under a general license, transfer funds in which North Korea has an interest. Originators or ultimate beneficiaries of transfers, however, may not receive the funds if the underlying transaction is prohibited.

Economic sanctions are a powerful foreign policy tool. As the universe of economic sanctions rapidly increases in size, so does their complexity. In addition to the above mentioned sanctions, other restrictions may exist, such as those relating to travel, insurance, gifts and estates. It is critical to investigate if U.S. sanctions apply before engaging in project finance development or financing involving an unfamiliar country.

1. 50 U.S.C. § § 1701-1706 (1991 & Supp. 1999).
2. 50 U.S.C. app. § § 1-44 (1990 & Supp. 1999).
3. 50 U.S.C. app. § § 2401-2420 (1991 & Supp. 1999).
4. The Office of Foreign Assets Control [hereinafter Treasury Department Home Page].
5. US State Department .
6. USA Engage
7. 31 C.F.R. pt. 515 (1998).
8. 22 U.S.C. § § 6001-6010 (Supp. 1999).
9. Treasury Department Home Page, supra note 4.
10. Executive Order No. 12,722, 50 Fed. Reg. 31,803 (1990).