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Biden Administration Doubles Down On Its Love Affair With Sanctions

Recent legislation once again has displayed the Biden Administration’s not so secret love affair with sanctions and its intense focus on strengthening the U.S. sanctions regime while combating national security-related corporate crime. The Biden-era Department of Justice (DOJ) has made numerous announcements over the past few years about this “sea change” in sanctions enforcement. For example, in her keynote remarks at 2022 GIR Live: Women in Investigations in June 2022, Deputy Attorney General Lisa O. Monaco explained how DOJ will now approach sanctions enforcement as it has previously approached the Foreign Corrupt Practices Act, in part by expanding enforcement across industries, encouraging cooperation from foreign partners and counterparts, fueling an increase in risk and compliance requirements for multinational corporations, and incentivizing self-disclosure. Collectively, this invigorated push for sanctions suggests that financial institutions may need to increase their de-risking strategies. Finally, one recent change in U.S. sanctions law, a doubling of the time period in which the government may bring a civil or criminal enforcement action, is likely to have a lasting impact on sanctions investigations and penalties for international business.

The expanded statute of limitations for prosecuting sanctions violations is the result of the passage of the 21st Century Peace Through Strength Act (the “Act”), which recently was signed into law as part of H.R. 815, a bipartisan national security legislative package. The Act includes a provision that doubles the statute of limitations on civil and criminal prosecution of sanctions violations imposed under the International Emergency Economic Powers Act (IEEPA) and the Trading With The Enemy Act (TWEA). The Act also addresses several substantive foreign policy changes, including targeting transnational criminal organizations involved in the international trafficking of fentanyl. In addition, it expands the President’s authority to sanction entities, and contains several provisions targeting Russia, China, and Iran, including imposing sanctions on ports and refineries that receive and process Iranian oil, authorizing the President to transfer frozen Russian sovereign assets to Ukraine to fund Ukrainian war compensation or reconstruction, and requiring the President to determine whether a Chinese financial institution has engaged in the purchase of petroleum or petroleum products from Iran.

Inner Workings of the 21st Century Peace Through Strength Act

On April 24, 2024, President Joe Biden signed into law H.R. 815, a bill which provides substantial supplemental foreign aid for federal agencies to respond to the current conflicts in Israel and the Ukraine, and for assistance in the Indo-Pacific region for the fiscal year ending September 30, 2024. The funding provided for this legislation is designated as emergency spending. In addition to this foreign aid, part of this national security legislative package includes the 21st Century Peace Through Strength Act, which establishes law on various foreign policy matters and includes several provisions concerning U.S. economic and trade sanctions.

One of the significant provisions of the Act, Section 3111, establishes a 10-year statute of limitations on violations of sanctions imposed under the IEEPA and TWEA. Previously, the statute of limitations had been five years. The Act effectively doubles the statutes of limitations from five to 10 years for civil and criminal violations of IEEPA and TWEA, which are the two primary statutes underlying economic and trade sanctions programs administered by the Office of Foreign Assets Controls (OFAC).

In addition, the Act emphasizes U.S. authorities’ continued focus on China, Iran and Russia in connection with sanctions enforcement. For example, the Act requires the President to impose property-blocking sanctions for any foreign individuals and entities associated with international fentanyl trafficking and directs the Treasury Department to target, sanction and block the financial assets of transnational criminal organizations, which is designed to target China’s involvement in fentanyl trafficking, and also Mexican cartels. Among other provisions, the Act also (1) imposes sanctions on ports and refineries that receive and process Iranian oil; (2) authorizes the President to seize and transfer certain Russian sovereign assets to fund Ukrainian war compensation or reconstruction; and (3) prohibits U.S. financial institutions from opening or maintaining certain accounts with Chinese financial institutions that support Iranian petroleum exports.

Strength of the U.S. Sanctions Regime: IEEPA and TWEA

Doubling the statute of limitations for violations of IEEPA and TWEA certainly highlights the Biden Administration’s more aggressive posture towards sanctions violations, and it strengthens the potential reach of enforcement actions brought by OFAC and DOJ. The U.S. Department of Treasury’s OFAC administers and enforces several different sanctions programs, in some respects by blocking assets and imposing trade restrictions to achieve economic or foreign policy goals or protect against threats to national security. Most economic and trade sanctions, which are largely the target focus of the Act, fall under the statutory authority of the IEEPA and the TWEA.

Under IEEPA, the President is empowered to declare the existence of an “unusual and extraordinary threat . . . to the national security . . . of the United States” that originates “in whole or substantial part outside the United States,” 50 U.S.C. § 1701(a), and to “prescribe, by means of instructions, licenses, or otherwise – investigate, regulate, or prohibit – any transaction in foreign exchange, transfer of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or a national thereof.” 50 U.S.C. § 1702(a)(1)(A)(i)-(ii). IEEPA authorizes the President, once he declares a national emergency with respect to a threat to national security, to regulate or block transactions involving property “in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States . . . .” 50 U.S.C. § 1702(a)(1)(B). Violation of an Executive Order or regulation promulgated pursuant to the IEEPA is punishable by imprisonment of up to 20 years.

Any U.S. Person (i.e. an individual or an entity) can be subject to sanctions and can be subject to OFAC sanctions investigations or enforcement. OFAC enforces economic and trade sanctions authorized under IEEPA by “issu(ing) Pre-Penalty Notices, Penalty Notices, and Findings of Violation; impos(ing) monetary penalties; engag(ing) in settlement discussions and enter(ing) into settlements; refer(ring) matters to the United States Department of Justice for administrative collection; and, in appropriate circumstances, refer(ring) matters to appropriate law enforcement agencies for criminal investigation and/or prosecution.” 31 C.F.R. § 587.701(b). OFAC’s determinations are generally fact dependent, as potential violations are reviewed under the totality of the circumstances.

The TWEA, like IEEPA, is also focal point for the modern U.S. sanctions regime, and it has become an important means to impose economic-based sanctions. The TWEA, which is invoked during states of emergency, gives the President the authority to block international financial transactions, seize U.S.-based assets held by foreign nationals, restrict exports and to limit foreign direct investment in U.S. companies.

The Costs We Pay for Increased Sanctions Enforcement

The extended statute of limitations under the Act will have the effect of doubling the amount of time U.S. authorities have to investigate civil or criminal sanctions violations. It may even lead to the imposition of tougher sanctions on individuals and entities, or substantially higher dollar amounts for civil and criminal penalties in more serious cases. Sanctions may be the new flavor of the month, but doubling the statute of limitations under the Act for civil and criminal violations of IEEPA and TWEA is consistent with Congress’s penchant for extending the statute of limitations in order to give prosecutors more time to investigate and pursue actions generally, including outside of the sanctions context. Congress recently passed legislation extending the statute of limitations for disgorgement in SEC cases, and for Paycheck Protection Program and Economic Injury Disaster Loan fraud. Congress’s knee jerk impulse to give government officials extended time to investigate or prosecute cases in various contexts could have negative consequences, including eliminating any sense of urgency on the part of investigating officials to complete their investigation or bring any related charges or sanctions as a result. For example, generally, OFAC can take a long time to complete sanctions investigations, and there are common requests for tolling agreements. Increasing the statute of limitations to 10 years could lead to fewer requests for extended tolling agreements, but it could also lead to investigators taking longer to resolve these sanctions cases. As a result, companies will need to be more diligent and mindful of their compliance and risk obligations under OFAC to avoid potential sanctions violations.

One area on which U.S. companies subject to OFAC requirements can focus is OFAC’s recordkeeping requirements. Pursuant to 31 CFR §501.601, OFAC currently requires that those “engaging in any transaction subject” to its provisions “shall keep a full and accurate record of each such transaction engaged in . . . and such record shall be available for examination for at least 5 years after the date of such transaction.” OFAC has not yet extended the requirement for companies to keep such records for a 10-year period instead of five, but a strong possibility exists OFAC will amend this requirement given the increased statute of limitations period under the Act. Otherwise, it might defeat the purpose of extending the statute of limitations if OFAC continues to allow companies to stop maintaining records of transactions after only five years. Thus, companies will want to be aware of any potential changes to OFAC’s recordkeeping requirements in the near future.

Another issue of which U.S. companies should be mindful is a potential increase in de-risking by foreign banks given the strict focus on sanctions enforcement. De-risking occurs when “financial institutions terminate or restrict business relationships indiscriminately with broad categories of customers rather than analyzing and managing the risk of those customers.” Given the increased sanctions provisions under the Act, and the Biden Administration’s focus on sanctions enforcement, de-risking might have a chilling effect on some foreign banks who are concerned about running afoul of OFAC’s requirements.

To read more from Robert Anello, please visit www.maglaw.com.

Kayasha Lyons, an associate at the firm, assisted in the preparation of this blog.

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