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Treasury Releases Long-Awaited Sanctions Policy Review – International Law

The US Treasury Department has released its 2021 Sanctions Review (the “Review”),
which describes the US sanctions framework and the agency’s
future sanctions priorities. The Review reflects on the evolution
over two decades of US sanctions, noting various policy successes
while emphasizing the importance of modernizing sanctions so that
they can remain an effective national security tool. To that end,
Treasury outlines five steps that will “modernize and adapt
its sanctions policy and operational framework” to address
“new, emerging challenges,” including cybercriminal
activity, the role of digital currencies, and an increasingly
complex financial and technical infrastructure.

A. Challenges to the Efficacy of Sanctions Programs and Other
Trends

1.   Heightened efforts by adversaries to reduce
exposure to the US financial system.

The Review reflects an awareness that sanctions may contribute
to geopolitical risks to the United States as certain countries
attempt to evade sanctions by pursuing alternatives to the US
financial system. This has been a growing concern for years; in
2016, former Secretary of the Treasury Jack Lew warned of a “risk of overuse” of
sanctions. As the Review explains, “adversaries—and some
allies—are already reducing their use of the U.S. dollar and
their exposure to the U.S. financial system more broadly in
cross-border transactions”, trends which “could erode the
effectiveness of our sanctions.”

Indeed, adversaries such as China and Russia have undertaken
concerted efforts to develop their own payment systems that do not
rely on the financial services infrastructure of the United States.
For example, Russia has been working to develop international transfer alternatives to SWIFT
to avoid US and EU sanctions, while Chinese economists have
encouraged the development of international payment systems to insulate China from US sanctions imposed in
response to the recent crackdown on democratic institutions in Hong
Kong. According to Deputy Secretary Wally Adeyemo, multilateral
engagement will be key in responding to these evasion efforts, as
it is more difficult to evade sanctions that cover not only
transactions in US dollars but other global currencies such as the
Euro, the pound, and the yen.

2. Emerging payment technologies, including
cryptocurrency.

Increasingly, the Office of Foreign Assets Control
(“OFAC”) and other parts of the Treasury Department have
emphasized the risks presented by virtual currencies and other
emerging payment technologies. The Review expands on these
warnings, highlighting the challenges of “technological
innovations such as digital currencies, alternative payment
platforms, and new ways of hiding cross-border transactions,”
because these technologies “offer malign actors opportunities
to hold and transfer funds outside the traditional dollar-based
financial system.” In his Senate testimony, Deputy Secretary
Adeyemo recognized that cryptocurrencies have required Treasury to
look at new ways to combat sanctions evasion and estimated that
digital currencies have facilitated evasive transactions in the
range of hundreds of millions of dollars.

Several federal agencies, including the Treasury Department,
have recently issued guidance on the sanctions implications of
malicious cyber activity (such as ransomware) for the digital
currency industry. As we previously summarized in September 2021, OFAC levied
its first sanctions against a Russian-operated virtual currency
exchange involved in facilitating ransomware payments and published
an updated advisory on sanctions risks for ransomware victims and
the virtual currency platforms that process them. In addition, on
October 13, 2021, OFAC released a brochure on “Sanctions Compliance
Guidance for the Virtual Currency Industry,” which updates
information provided in past Treasury advisories and summarizes OFAC’s
recommendations for how virtual currency companies implement
successful sanctions compliance programs. Specifically, the
brochure encourages all members of the virtual currency industry to
“develop, implement, and routinely update a tailored,
risk-based sanctions compliance program,” which should include
internal controls such as know-your-customer onboarding procedures,
sophisticated geolocation software, and transaction monitoring.

Treasury also hints that the threat presented by these emerging
technologies may extend beyond cybercrime; the Review concludes
that they can “empower our adversaries seeking to build new
financial and payment systems intended to diminish the dollar’s
global role” and that “if left unchecked, these digital
assets and payments systems could harm the efficacy of our
sanctions.”

3. Significant increase in the number of US sanctions
programs.

Observers of US sanctions have long noted the proliferation of sanctions programs and designations. The Treasury
Department acknowledged both trends in the Review. It highlighted
the vast increase in US sanctions programs created by statute or
Executive Order, from 69 in 2000 to 176 in 2021. Across two
decades, Iran has remained the country targeted by the largest
number of sanctions programs; in recent years, however, the United
States has created new sanctions programs, comprising multiple
different statutory and executive authorities, targeting Russia,
China, and Venezuela, among others. The Review also notes a 933%
increase in sanctions designations over the past two decades: prior
to 9/11 there were fewer than 1,000 designated persons, whereas
today there are over 9,000. US and global companies, many of which
spend considerable resources ensuring their compliance with US
sanctions laws and regulations, should welcome this acknowledgement
by the Treasury Department about the proliferation of sanctions
programs and designations.

B. Modernizing Sanctions

The Review outlines the following five steps to “modernize
sanctions,” “address current policy priorities,” and
keep the sanctions “tool sufficiently nimble to address future
threats.” These steps broadly reflect the Biden
Administration’s efforts to adopt a multilateral sanctions
approach in harmonization with global partners, the continued
importance of sanctions as a foreign policy tool, and the need to
expand the capacity of Treasury and its partner agencies (such as
the State Department) to tackle emerging threats.

1. A new policy framework.

The Review prescribes a policy framework for “link[ing]
sanctions to a clear policy objective,” which Treasury will
use “to inform its recommendations on the use of
sanctions.” The factors in the framework include whether a
sanctions measure:

  • Supports a clear policy objective within a broader U.S.
    government strategy;

  • Serves as the right tool for the circumstances;

  • Incorporates anticipated economic and political implications
    for the sanctions target(s), U.S. economy, allies, and third
    parties and has been calibrated to mitigate unintended
    impacts;

  • Includes a multilateral coordination and engagement strategy;
    and

  • Will be easily understood, enforceable, and, where possible,
    reversible.

The Treasury Department contemplates that consistently applying
this framework will “establish clear criteria for the use of
sanctions” and urges the US government to “develop and
implement an analytical construct to assess its sanctions programs
and actions systematically.” This “analytical
construct” may enable the United States to manage existing
sanctions programs in a more directed way, for example by adapting
or winding down programs or designations to better achieve US
policy objectives.

2. Focus on multilateral coordination.

Importantly, the Review stresses that United States sanctions
“are most effective when coordinated” with the efforts of
allies and partners, such as the United Nations. Recent
designations have highlighted the role of sanctions coordination
with partners such as the European Union in
confronting mutual threats from adversaries (such as Russia). The
emphasis on returning to a multilateral approach to sanctions
policy reflects the Biden Administration’s priorities of
promoting US global leadership and broadening the impact of US
sanctions programs; companies should also welcome greater
harmonization between US sanctions and those of its allies and
trading partners, as the convergence of international rules and
standards simplifies compliance and reduces the exposure of global
firms to varying regimes.

3. Recognition of costs on US businesses implementing
compliance programs for novel and complex sanctions.

In another development, the Treasury Department recognized the
“unintended economic and political impacts on domestic workers
and businesses,” including “small businesses [which] may
lack the resources to bear the costs of sanctions compliance.”
This is an important observation for US and global companies,
particularly in light of the increasing number and complexity of US
sanctions and the myriad and growing risks of sanctions evasion.
The Review suggests that the Treasury Department will look for
opportunities to better calibrate sanctions to promote
competitiveness and prevent unwanted costs to US businesses. It
also reiterates the agency’s longstanding insistence (reflected
in OFAC’s regulations and public guidance) that US sanctions
not frustrate the provision of humanitarian support to vulnerable
populations.

4. Improving Public Messaging and Education

Treasury also recognizes that the efficacy of US sanctions will
depend in part on how well it communicates and coordinates with
stakeholders, both domestic and international. To that end, the
Review promotes “enhanced communication with industry,
financial institutions, allies, civil society, and the media,”
particularly flagging those “in the digital assets
space.” These efforts depend in part on messaging and the
clear presentation of information (for example, a user-friendly
website), but they will also be informed by OFAC’s interactions
with stakeholders in the industry, for example, in implementing the
mechanisms for self-reporting potential sanctions issues and
sharing information about effective compliance techniques
.

5. Investing in Treasury’s Sanctions
Capabilities

Finally, the Review recommends that Treasury invest in its
sanctions programs by developing relevant expertise and improving
its technology and infrastructure. Treasury again emphasizes the
need to deepen its capabilities “in the evolving digital
assets and services space.” The Review also notes that these
steps will have to be taken on an inter-agency basis in
coordination with the State Department, the Justice Department, and
other partners.

* * *

WilmerHale closely monitors US sanctions policy and
implementation and is prepared to advise clients on US sanctions
regulatory compliance and enforcement as the agency pursues the
approach described in the Review.

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.