Most Americans are probably aware that they may not engage in business dealings with nations with which the United States has an antagonistic relationship, such as Cuba, Iraq and North Korea. But many people may not be aware that the United States aggressively enforces a broad range of economic sanctions against 12 countries or geographic areas and more than 3,500 organizations and individuals. These sanctions prohibit individuals and companies from conducting any type of business with the targeted entities and subject violators to heavy civil and criminal penalties. Because of the sheer number of targeted entities, and the fact that connections among individuals, organizations and foreign governments may be shadowy and ill-defined, it is very easy to do business with the enemy unknowingly and thus to violate the law unwittingly. For example:

1. A Georgia company sends some of its employees to a convention and trade show held at a luxury hotel on the Mediterranean resort island of Malta. During the trip, the company is informed that the hotel is owned by a group of companies with some connection to the Libyan government. The employees vacate the hotel the next day, but the company is forced to respond to formal inquires from the U.S. Treasury Department.

2. A California company, using a broker, charters a boat to carry products from Chile to Japan. Unbeknownst to the company, the owner of the chartered boat has ties to the Cuban government. The company is hit with a $50,000 fine by the U.S. government for violating U.S. sanctions against Cuba.

3. A Milwaukee company makes six shipments of television sets to a company in Panama. It turns out that the Panamanian company has ties to the Cuban government. The Milwaukee company is slapped with a $300,000 fine for violating the Trading with the Enemy Act.

THE OFFICE OF FOREIGN ASSETS CONTROL

These incidents were all the result of the enforcement of the United States’s economic sanctions program by the Office of Foreign Assets Control (OFAC), a division of the United States Treasury Department. OFAC administers and enforces economic sanctions that are mandated by eight statutes: the Trading with the Enemy Act, the International Emergency Economic Powers Act, the Iraqi Sanctions Act, the United Nations Participation Act, the International Security and Development Cooperation Act, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act, and the Antiterrorism and Effective Death Penalty Act. The sanctions are targeted against a list of specified countries and against an extensive list of Specially Designated Nationals and Blocked Persons (SDNs). SDNs are individuals and entities located in the United States and throughout the world who are connected with the government of a sanctioned country, as well as designated international narcotics traffickers and terrorists. There are currently over 3,500 SDNs, many of whom may have innocuous names, may be located in friendly countries and may not appear to have an obvious connection to a sanctioned country. Further, the list of targeted entities is constantly growing and changing. For example, in the month of November 2002 alone, OFAC added close to 20 new entities to the SDN list. The addresses given for the new entities include Azerbaijan and Oak Lawn, Illinois. OFAC maintains a current list of sanctioned countries and SDNs on its Web site.

WHO IS AFFECTED BY THE SANCTIONS?

The restrictions created by the sanctions are applicable to all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States and all U.S. incorporated entities and their foreign branches (U.S. persons). U.S. persons are also prohibited from assisting foreign corporations with transactions in which the U.S. persons themselves could not directly participate. Thus, U.S. employees of foreign corporations must take care to ensure that they do not participate in any transactions that would be illegal if their employer were an American company. Likewise, U.S. parent companies must be careful that they have no involvement in any transactions with sanctioned entities that are conducted by their foreign subsidiaries. U.S. companies and their foreign subsidiaries should also be aware that the sanctions against Cuba and North Korea are directly applicable to the foreign subsidiaries of U.S. companies.

SCOPE OF THE SANCTIONS

Each of the targeted entities is subject to different levels of restriction based upon U.S. foreign policy goals and national security concerns. Generally, the sanctions that are targeted at particular countries prohibit U.S. persons from engaging in specified conduct with (1) the target country’s government and its individual citizens and residents; (2) all entities organized under the laws of the target country; and (3) entities outside of the target country that are owned or controlled by the target country or its nationals. Prohibited conduct includes engaging in any type of direct or indirect commercial, financial or trade transactions with the targeted entities. The sanctions also generally prohibit travel to the targeted countries by U.S. persons. The targeted countries may also be subject to other specific prohibitions that may vary from country to country.

EXCEPTIONS

U.S. persons may apply to OFAC for a license to engage in what would otherwise be a prohibited transaction. OFAC grants or denies license applications based upon consideration of the particular circumstances set forth in the license application and U.S. foreign policy and national security concerns. Most of the sanctions programs also specifically authorize OFAC to grant licenses for humanitarian exports of food, clothing and medicine to targeted countries.

PUNISHMENT IS SWIFT AND SEVERE (AND CONSTITUTIONAL)

Punishment for violations of the sanctions can be severe. Civil fines range from $11,000 to $1 million for each violation. Civil fines may be imposed even if the violation was committed unknowingly and with innocent intent. The majority of the fines imposed are most likely the result of corporations simply failing to recognize trade transactions involving a targeted country or SDN. Additionally, criminal penalties may be levied for willful violations and include fines from $50,000 to $10 million and imprisonment from 10 to 30 years.

The dangers of running afoul of the sanctions are further exacerbated by the fact that OFAC has unfettered discretion to impose penalties. For example, under the Libyan, Iranian and Iraqi sanctions programs, OFAC may issue a notice of intent to impose a monetary penalty to any U.S. person that OFAC has reasonable cause to believe has violated the regulations implementing the sanctions.¹ The recipient of such a notice has 30 days from the date of the mailing of the notice to provide a written response to OFAC.² If, after considering the written response, OFAC determines that a violation was committed, OFAC will impose the monetary penalty.³ Although the penalized individual or company may file an action in federal court challenging the imposition of the penalty, the courts tend to give great deference to OFAC’s enforcement of the sanctions.

Indeed, aggressive government enforcement of the sanctions has led to a variety of legal challenges not only to OFAC’s actions, but also to the laws and regulations that implement the sanctions. For the most part, courts have rejected these challenges. For example, in the early 1980s, the U.S. Government arrested Midgalia Fernandez-Pertierra and accused her of conspiring with others to transport Cuban refugees to Key West, Florida, in violation of the sanctions against Cuba.⁴ Ms. Fernandez-Pertierra raised a number of constitutional challenges to the regulations implementing the Cuban sanctions, including claims that the regulations were an unauthorized exercise of executive power; that the regulations violated the Equal Protection Clause; and that the regulations were fatally overbroad and vague.⁵ The United States District Court for the Southern District of Florida rejected each of these challenges and found both the Trading with the Enemy Act and the specific regulations implementing the Cuban sanctions to be constitutional.⁶

Although the overall trend has been for courts to reject legal challenges to the sanctions and regulations, at least one court has refused to rubber-stamp an OFAC enforcement action.⁷ The target of the OFAC action was an American attorney, Donald Looper, who was seized by custom agents as he arrived home after an overseas business trip at Houston Intercontinental Airport.⁸ Mr. Looper and his briefcase were seized because OFAC believed that Mr. Looper had violated the sanctions against Libya by representing a Bermuda corporation in a joint-venture transaction with a Libyan SDN.⁹ OFAC claimed that Mr. Looper had violated the sanctions by assisting his client in “evading or avoiding” the sanctions against Libya.¹⁰ Mr. Looper claimed that he had only advised his client on how to comply with the sanctions and filed suit in the United States District Court for the Southern District of Texas to prevent government agents from searching the documents in his briefcase.¹¹

In a scathing opinion, the court ruled for Mr. Looper and stated that:

[t]he Constitution certainly cannot abide the Kafkaesque interpretation that OFAC proposes–that the Libyan sanctions prohibit, at the whim of OFAC regulators, any effort to structure transactions with the purpose of complying with the remainder of the Libyan sanctions regulations, including any attempt to hire an attorney for guidance.¹²

Although Mr. Looper was able to secure relief from the courts, his successful challenge to an OFAC enforcement action is the exception rather than the rule. Thus, the best strategy is to avoid running afoul of the sanctions in the first place.

AVOIDING THE SANCTIONS TRAP

While economic sanctions may be an effective tool for the implementation of U.S. foreign policy, as well as a powerful weapon in the war on terror, they can also be a trap for the uninformed. In order to avoid falling into the sanctions trap, corporations should implement a compliance program that combines an awareness of exactly who the corporation’s trading partners are (and who those trading partners may be associated with) with an awareness and understanding of the laws and regulations that implement the sanctions. Because the list of targeted entities is constantly changing and expanding to reflect U.S. foreign policy goals and national security concerns, it is vitally important that business people and corporations take steps to ensure that they do not unknowingly do business with the enemy.

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