Since February 2022, the Western states have rapidly tightened their policy of sanctions against Russia, which has become the undisputed leader in the number of restrictive measures imposed against it. The United States has shown the most zeal and resolve in this regard. At the same time, Washington has continued to expand restrictions on China, particularly with respect to export controls. The policy of reducing China’s access to technology through the introduction of export restrictions has been accompanied by targeted financial sanctions against individuals and legal entities, investment restrictions and other measures. The United States has maintained momentum in terms of sanctions pressure on Iran and other countries.
Washington has continued its policy of strictly enforcing existing sanctions regimes. Characteristically, in this regard, not only persons from third countries, but also American citizens and companies have found themselves under attack. At the same time, the use by the United States of the instrument of fines, which performs a number of functions at once, is especially indicative. In particular, for those persons subject to punitive measures, they can serve as a signal that they should accept the conditions of US regulators, or otherwise, more serious consequences, such as blocking, may occur. For organisations that have not faced enforcement measures, fines serve as a warning to comply with sanctions regimes. As a result, in a number of cases, companies have improved compliance programmes and independently monitor the status of counterparties, thereby adopting the US sanctions. Along with other agencies, and in some cases in direct cooperation with them, penalties are systematically used by the Office of Foreign Assets Control of the US Department of the Treasury (OFAC).
The US Treasury’s punitive measures are a type of enforcement taken in response to violations of financial sanctions, involving that the object, in order to settle the violations committed by participating in the settlement agreement, assumes the obligation to pay a fine imposed by the US Department. Infringement in this context refers to the conduct of transactions prohibited in accordance with US regulations. According to RIAC, during the period from January 1, 2009 to October 20, 2022, 262 individuals and legal entities were fined. About 30% are organisations operating in the financial sector, which, due to the specifics of their activities, face an increased risk of enforcement. In particular, they regularly conduct a large number of transactions. Consequently, they may lack the resources, financial, technological or human, to verify these transactions, but deliberate violations cannot be ruled out.
Interestingly, Americans are the leaders in terms of getting fined by the US Treasury: 76% of the people who have faced this type of coercive measure during the period under review were American companies or their joint ventures. This fact once again emphasises the difference between sanctions, which place costs on businesses, and trade wars, which are mainly aimed at creating better market conditions for their companies.
The experience of applying penalties against Chinese companies is noteworthy. The amounts of fines can be impressive. For example, in 2017, the Chinese company ZTE entered into an agreement with OFAC to pay $100 million for transactions in violation of US sanctions against Iran. At the same time, the punitive cases themselves are not widespread, despite the continuing growth of the Sino-American confrontation. There were three of them during the period under review. In addition to ZTE, Hong Kong Sojitz Limited in 2022 and the Jereh Group in 2018 were fined in 2018.
This is partly due to the active use of blocking secondary sanctions by the Treasury, as well as the fact that the US Department of Commerce plays a leading role in this area, since sanctions against China to a greater extent affect the issues of technology and “dual-use” goods.
The total amount of all payments to the US Treasury amounted to a little over $5.7 billion, $5.3 billion of which was paid by financial sector companies, mainly from the European Union, Switzerland and the UK. The bank BNP Paribas paid a record fine – more than $963 million, for violating the US sanctions regimes against Sudan (in force at that time), Iran, Cuba and Myanmar. The bank conducted 3,897 prohibited transactions through US financial institutions. The management was aware of this, which was an aggravating circumstance in this case, as OFAC considers a number of criteria when calculating the fine, including management awareness. Moreover, there was collusion, which was the reason for the involvement of the US Department of Justice in the investigation. As a result, in total, the bank had to pay about $9 billion.
It may seem paradoxical that US individuals and entities, which accounted for 76% of punitive damages for 2009-2022, paid less than 5% of the total payments, i.e. about $260 million, while their allies bear the brunt. However, this asymmetry may be due to the fact that EU companies were more involved in work with sub-sanctioned jurisdictions, for example, with Iran. In addition, it is important that a large proportion of companies from Europe and the UK that have been fined are large banks that have committed hundreds and thousands of violations. The top ten companies that paid the largest amounts of fines accounted for 54,783 violations. In 74 cases, the number of violations committed by American individuals and legal entities does not exceed ten, and the companies themselves are willing to cooperate with the American regulator: for example, Western Union voluntarily reported minor violations to OFAC and cooperated with the investigation.
Meanwhile, concerns remain in the United States about the damage that American businesses are suffering as a result of sanctions. The US Treasury Department’s 2021 Sanctions Policy Review noted the intention to adapt sanctions to accommodate smaller companies that may not have the resources to comply effectively, and as a result, according to the regulator, tend to forego opportunities to develop business relationships in order to avoid such costs. Translating this idea into reality is difficult. Moreover, we are not talking about the refusal to apply coercive measures.
However, OFAC still reserves the right to take into account all the circumstances of the company in making a decision.
As a rule, companies faced with a fine proceed from the assumption that they cannot avoid a financial fine, but they can influence its final amount. 143 companies cooperated with OFAC during the investigation, eight did not. The most popular measures to “correct” behaviour are software upgrades (taken in 38 cases), the organisation of training for staff (in 60 cases), as well as hiring new employees in specialised departments, conducting an external audit, and investing in a compliance programme.
Thus, the United States continues to be guided by the goal of increasing the effectiveness of sanctions, which is considered an essential condition for ensuring compliance with existing regimes through coercive measures. They often cover US legal entities (and less often individuals) but the largest amounts are paid by European financial companies. This causes dissatisfaction among the allies and encourages them to look for ways to protect business, however, on a global scale it does not affect Euro-Atlantic solidarity in terms of applying sanctions against other countries.
From our partner RIAC