What happens when the world's most powerful economy decides to blacklist your business or you personally as a security threat? Brace yourself for the harsh reality of the United States' sanctions list. It adds to the thrill that you will probably have no advance warning and will find out about your new status when all your bank accounts get blocked, unless you had a reason to suspect that you may be targeted. In our experience, most do not even understand why exactly they have been sanctioned as they do not realise that something they did could lead to this outcome.
This article provides an introduction to commonly occurring sanctions issues in the UAE. The UAE has a sanctions regime which consists of the following two main components:
- Sanctions initiated by the UAE.
- Sanctions introduced by the United Nations and the Terrorist Financing Targeting Centre (whose members apart from the UAE are US, Bahrain, Kuwait, Oman, Qatar and Saudi Arabia).
These sanctions are enforced by law and are a subject for another day. The focus of this article is on the practical ad hoc enforcement of the US sanctions. It looks at what may lead to being added to the sanctions list of the US's Office of Foreign Assets Control (OFAC), its practical effects and what can be done about it within the UAE. Similar considerations apply to persons designated by the EU and UK.
By their scope of application, OFAC sanctions are categorised as primary or secondary.
The primary sanctions require compliance when there is a US nexus. This means compliance is required by US persons (which includes entities incorporated/organised in the US and their foreign branches, US citizens, permanent residents (wherever located), and anyone located in the US) and anyone who is involved in transactions processed in the US dollar or via the US financial system. Certain programs also require compliance by subsidiaries owned or controlled by US companies and by foreign persons in possession of US-origin goods.
Violation of the primary sanctions may lead to a fine or imprisonment by the US.
The secondary sanctions regime is applicable even when there is no US nexus. This means that anyone anywhere in the world risks facing the consequences of non-compliance. The scope of activities that may constitute violations however represent a small fraction of those that are prohibited by the primary sanctions. These primarily include the following:
- Material support to an individual, entity, vessel, or aircraft sanctioned by OFAC (SDN). This includes supply of financial, material, or technological support for SDNs, or goods or services in support of SDNs. Support needs to be deemed material by OFAC – usually, it involves high value transactions, activity at the core of US sanctions objectives, deceptive or evasive conduct and acting for or on behalf of SDNs.
- Significant transactions with SDNs (usually worth millions of dollars).
- Operating in sanctioned sectors.
- Ownership or control by SDN.
Violation of the secondary sanctions regime may result in limitations on or exclusion from accessing the US financial system and market or it may result in being sanctioned by OFAC.
For example, OFAC has sanctioned individuals and entities for owning or managing/operating significant assets (e.g. aircrafts or vessels) used by SDNs, attempting to conceal SDNs' involvement or a sanctioned activity, acting as a leader/representative of SDNs, facilitating circumvention of sanctions by SDNs, handling daily operations of SDNs, and helping SDNs to set up shell companies.
The effect of being sanctioned by OFAC usually makes it extremely difficult or impossible to continue business. The practical effects within the UAE usually include the following:
- Software registered to the accounts of SDN's are frozen – for example, Microsoft and Apple accounts.
- Vendors may refuse to supply services or goods even when there is an existing contract with no US nexus.
- Banks block all SDN's accounts and request to transfer all funds elsewhere. While technically, the prohibition on dealing with SDN's relates only to US dollar accounts, in practice, we have seen that all SDN's accounts have been frozen, regardless of currency.
The author is not aware of any cases in the UAE courts testing the legality of such actions by the UAE banks and other service providers. If the UAE courts are requested to consider it, then they are likely to consider not only law but also the public policy of the UAE.
Whether the newly designated SDN is a company or an individual, they will find it very difficult, if not impossible, to engage in business activities due to the effect of sanctions. In practice, they will have the following main options concerning the sanctions:
- Do nothing.
If the SDN is a company and it does not intend to continue its business, it can be liquidated or continue its existence in a dormant state.
If the business tries to continue (whether via the sanctioned or a newly established entity) without eliminating the factors which led to the imposition of sanctions, then its owners and managers might well be sanctioned in a further round.
- Change behaviour.
The main goal of OFAC's sanctions is to change behaviour of SDNs. Accordingly, an SDN may change their behaviour to ensure that it no longer violates the sanctions regime and continue its business. Due to the effect of sanctions, it will usually be necessary to set up a new entity. For example, if a shipping company has been sanctioned because it has shipped dual-use items to Russia, it may set up a new entity and continue its shipping business, however it must ensure that it does not ship dual-use items to Russia, and the safest options would be to refrain from any shipments to Russia or states that are known to facilitate sanctions evasion. This does not lift sanctions, which requires a de-listing application to OFAC. Rather, it simply reduces the risk of the owners and managers of the designated company being subject to a further round of sanctions later.
- Seek de-listing.
Many SDN's believe they have no chance of being de-listed. However, there has been success by a number of those who have. There are various grounds for seeking de-listing, including claiming designation in error (or a lack of lawful basis for being listed) or demonstrating a clear change of behaviour, whether or not it is admitted that past behaviour justified the listing. (It should also be noted that the basis for seeking delisting from the UK and EU sanctions is very different).
While sanctions have been and can be a very effective deterrent for the US and others to advance foreign policy objectives, at the same time, the practical effects upon an SDN's business and (for individuals) personal life can be devastating. While of course those issues cannot be compared to the suffering of individuals caught up in Russia's war against Ukraine and other conflicts, it does not detract from the fact that the existing regime is ill-resourced to address those who have been designated in error and those who inadvertently breached sanctions and have since changed their behaviour. The process is slow and there are no shortcuts. During that time, even within the UAE, a designated person may struggle to buy a carton of milk, thanks to the dependence we now all have on being able to use a bank account.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.