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.
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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.