New Reality of Compliance

November 9, 2017

On Wednesday, August 2, 2017, President Trump signed into law “the Countering America’s Adversaries Through Sanctions Act” (the Act). The Act significantly expands and codifies US sanctions targeting Russia, and it adds several measures to the already comprehensive US sanctions on Iran and North Korea.

In general, the imposed sanctions can be divided into “primary” and “secondary”. The so-called “secondary sanctions” described in the Act target the activities of non-US persons. These “secondary” sanctions can be applied to parties beyond the jurisdiction of the United States, and they effectively take the form of a denial of US benefits, as opposed to monetary penalties available under US “primary” sanctions (which apply to US persons).

The list of the “secondary” sanctions looks like an ultimatum to the non-US persons, prescribing not to deal with any person or entity if it’s activity is prohibited under the Act. Moreover, describing such activity the Act uses very broad provisions. For instance, the Act requires the President to impose secondary sanctions on those (including non-US persons) who he determines make an investment of US$10 million or more or facilitate such an investment, if the investment “directly and significantly” contributes to the ability of the Russian government to “privatize state-owned assets in a manner that unjustly benefits” Russian government officials or “close associates” or family members of those officials. The Act does not define the terms “investment”, “unjustly benefit” and “close associates.”

In fact, these new rules create a new globalized world order without formal borders (jurisdictions). The effect of such provisions is that banks and other financial institutions refuse to continue any dealings with persons and entities if it’s capital or activity is somehow connected with sanctioned persons or entities all around the world.
Omitting political reasons of the Act, it should be understood that henceforth niether citizenship nor place of business matter if the question of sanctions arises. Today the sanctions are imposed on Russia, Iran and North Korea, next time it could be any another country. The idea is that penalties can be imposed on any person or entity that:
knowingly have materially violated, attempted to violate, or conspired to violate or caused a violation of US sanctions;
facilitates a significant transaction or transactions, including deceptive or structured transactions for or on behalf of a person that is a target of US sanctions, or for that person’s child, spouse, parent, or sibling.

In such conditions the significance of Compliance drammatically increases. That’s why we call it “New Reality of Compliance”.
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