Short-term sanctions – the new norm?

January 2020 | EXPERT BRIEFING | GLOBAL TRADE

financierworldwide.com

Within the space of nine days in October 2019, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed and then revoked far-reaching sanctions on Turkey in response to Ankara’s military incursion into northern Syria. These were among the most economically and geopolitically significant set of sanctions OFAC had ever imposed – and the speed with which they were promulgated and then undone was unprecedented.

Although the sanctions were removed after a hastily negotiated ceasefire, the incident serves as a stark reminder that private industry, US government contractors and compliance professionals across an array of sectors are on the front lines of US sanctions policy and must stay vigilant to remain compliant with very fluid sanctions regimes.

On 14 October 2019, the Trump administration authorised new sanctions against the government of Turkey in response to her military incursion into northeast Syria. The president’s executive order described the Turkish military offensive as an action that “undermines the campaign to defeat the Islamic State of Iraq and Syria, or ISIS, endangers civilians, and further threatens to undermine the peace, security, and stability in the region”. OFAC immediately issued sanctions freezing the assets within the possession or control of US persons belonging to Turkey’s Ministry of Energy and Natural Resources (MENR), Turkey’s Ministry of National Defence (MND) and three high-ranking Turkish government officials.

As with other US sanctions programmes, the executive order also authorised the imposition of sanctions on international financial institutions found to have knowingly conducted or facilitated any significant transaction on behalf of any person or entity blocked under the sanctions.

Acting in concert with the president’s announcement, the Treasury Department issued a press release and amended its list of Specially Designated Nationals and Blocked Persons (SDN list) on 14 October to immediately impose the asset-freezing sanctions on the MENR, the MND and the three Turkish officials.

Sanctions were not the only tool in the US government’s arsenal, however. The OFAC announcement was accompanied by president Trump’s warning that tariffs on steel entering the US from Turkey would return to their previous high rate of 50 percent and that the US Department of Commerce would immediately stop negotiations with respect to a $100bn trade deal with Turkey. The White House press release quoted president Trump saying, “I am fully prepared to swiftly destroy Turkey’s economy if Turkish leaders continue down this dangerous and destructive path”.

In light of the US government’s significant connections to the Turkish economy in the form of defence and energy-related sales and humanitarian assistance, the Treasury Department issued regulatory authorisations, known as general licences, simultaneously with the sanctions to permit the conduct of official business of US employees or contractors with the sanctioned entities. As with other OFAC sanctions programmes, the Treasury Department also provided an exception to allow the activities of intergovernmental organisations like the United Nations, World Bank and World Health Organisation, with the targeted persons to continue. However, these narrowly crafted general licences did not include any US company’s direct commercial engagement with the sanctioned persons.

Despite the administration’s strong rhetoric, OFAC sanctions were removed a mere nine days later at the conclusion of a five-day ceasefire negotiated between the US, Turkey and Kurdish fighters in Syria. A White House press release on 23 October 2019 announced the lifting of all sanctions imposed by the 14 October executive order and reported that the Turkish government had agreed to make the ceasefire permanent. However, president Trump’s comments reflected in the press release noted that the definition of ‘permanent’ in the region was “somewhat questionable”. Tellingly, the parallel Treasury Department press release lifting the sanctions described the ceasefire as the “pause of Turkish operations in northeast Syria”.

While the MENR, MND and senior Turkish officials are no longer subject to the blocking sanctions, the executive order remains in place. It would be possible for the Treasury Department to reimpose sanctions if, for example, the ceasefire did not hold or Turkey engaged in other actions that the Treasury Department deemed to threaten the peace, security, stability or territorial integrity of Syria.

These short-lived sanctions were notable for being only the second time that the US government has sanctioned governmental entities of a G20 country, and they were the first sanctions that the US government had issued against the government ministries of a NATO member. In light of Turkey’s longstanding military, economic and trade connections with the US and its integration into the international financial system, the blocking of all assets and prohibition on further private-sector dealings with the MENR and MND – ministries that have among the largest US exposures of any parts of the Turkish government – would have had a significant impact on multinational companies in the energy and defence sectors, as well as international financial institutions, which could have faced blocking sanctions themselves for continuing to facilitate transactions with the blocked Turkish ministries or officials.

While neither the White House nor Treasury Department have taken any further action against Turkey at present, Congress appears to be dissatisfied with the status quo. On 29 October 2019, the US House of Representatives passed two bills critical of Turkey. One of those bills, ‘Protect Against Conflict by Turkey Act’, passed the House by a vote of 403 to 16 and would require the president to impost visa- and asset-blocking sanctions on specific Turkish officials connected to the Syrian invasion, to impose financial sanctions on the large Turkish state-owned bank known as Halkbank, and to limit sales of defence articles or services to Turkey, among other actions.

US lawmakers and the US Department of Defence have also been critical of Turkey for its purchase of a defence missile system from Russia, which US officials state is inconsistent with Turkey’s obligations as a NATO member. A 13 November 2019 meeting between president Trump and Turkish president Recep Tayyip Erdogan in Washington did not appear to break the impasse.

In addition, on 11 November 2019, the European Union (EU) announced its decision to authorise economic sanctions against Turkey following Ankara’s decision to commence drilling off the coast of Cyprus. The EU decision authorises asset freezes and visa ban sanctions against individuals and entities, but no names have yet been designated.

Considering the shaky ceasefire, US congressional attitudes toward Turkey and the recent European sanctions, it would be prudent for US companies in the energy and defence sectors to monitor their contacts with Turkish governmental entities. By doing so, they would be better prepared to assess their risk if sanctions are reimposed.

In addition, non-US firms and foreign financial institutions should also take this action as a spur to revisit their own contacts. Currently, the 14 October executive order remains in place. It authorises sanctions not only against persons found to be directly involved in activities detrimental to the peace and stability of Syria, as well as other US foreign policy interests in the region, but also authorises sanctions against non-US firms that are found to have “materially assisted” or provided “financial, material, or technological support” to persons who become blocked. Further, foreign financial institutions may be subject to sanctions for knowingly conducting or facilitating a “significant financial transaction” on behalf of a blocked person.

In light of the broad authorisations currently in place that would allow the reimposition of sanctions on previously-blocked Turkish entities, or the imposition of new and broader sanctions, a small amount of diligence now may go a long way toward ensuring a quick and comprehensive response to a future compliance risk scenario.

Judith Alison Lee is a partner and Samantha Sewall is an associate at Gibson, Dunn & Crutcher LLP. Ms Lee can be contacted on +1 (202) 887 3591 or by email: jalee@gibsondunn.com. Ms Sewall can be contacted on +1 (202) 887 3509 or by email: ssewall@gibsondunn.com.

Judith Alison Lee and Samantha Sewall

Gibson, Dunn & Crutcher LLP