As international business operations become more complex, European and Swiss companies are increasingly affected by global regulatory measures, particularly US primary and secondary sanctions. These sanctions can have serious consequences, including restrictions on accessing the US financial system, reputational harm, and disruptions to international business activities. Therefore, it is essential for companies based in Europe and Switzerland to understand what U.S. primary and secondary sanctions are, how they may be impacted, and what measures they can take to ensure compliance.
In our latest article, we answer key questions related to this topic, exploring the risks and requirements for European and Swiss entities related to U.S. primary and secondary sanctions.
What are U.S. primary Sanctions?
U.S. primary sanctions are generally applied to non-U.S. companies and persons, regardless of any direct U.S. nexus, who engage in certain activities that have been identified by the U.S. government as being subject to sanctions and inclusion on the Specially Designated Nationals (SDN) List. The SDN List is administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which has the authority—along with the U.S. Department of State, in some instances—to place people and companies on the SDN List for engaging in those activities. For example, under Executive Order 14024, the U.S government can designate persons or companies who operate in the Russian financial services sector, or several other sectors including the accounting, trust, and corporate formation sectors. This authority also allows the U.S. government to designate persons who materially support actors who are already on the U.S. sanctions list as well. This type of designation is oftentimes referred to as a “derivative” sanctions designation because the targeted actor is found to be supporting another sanctioned party.
What are U.S. secondary Sanctions?
U.S. secondary sanctions are measures targeting non-U.S. financial institutions for transactions involving certain sanctioned actors, regardless of any direct U.S. nexus. Unlike primary sanctions, which apply to companies and individuals who are engaged in a certain type of activity (e.g., operating in certain sectors of the Russian Federation economy), secondary sanctions target non-U.S. financial institutions simply for engaging in transactions with sanctioned parties or engaging in certain types of transactions. Secondary sanctions can include measures short of a full sanctions designation, such as the U.S. cutting off access to a foreign financial institution’s correspondent bank accounts, thereby preventing the financial institution from accessing U.S. dollars.
✔ U.S. Secondary Sanctions with respect to foreign financial institutions, i. e. EU, Swiss, Liechtenstein banks:
Secondary sanctions do not require a U.S. nexus and apply to non-U.S. financial institutions (FFIs) engaged in transactions deemed against U.S. foreign policy interests. These sanctions serve as a deterrent, discouraging foreign banks from dealing with certain individuals, entities, or sectors, even if no U.S. persons or property are involved. A prominent example is Executive Order 14114, which authorizes secondary sanctions for certain transactions related to Russia’s military-industrial base, along with transactions involving certain (U.S.) sanctioned persons. In this case, secondary sanctions apply to FFIs that engage in significant transactions with entities on the Specially Designated Nationals (SDN) List pursuant to E.O. 14024, regardless of the type of transaction. As with all sanctions designations (primary or secondary), the United States does not require a U.S. nexus to designate an FFI as an SDN.
✔ U.S. Sanctions with respect to other professional services:
U.S. sanctions extend beyond foreign (non-U.S.) financial institutions to a variety of professional services. OFAC primary sanctions now target accounting, trust and corporate formation services, and management consulting, as well as the following sectors: architecture, engineering, construction, manufacturing, and transportation. Sanctions can also apply to services related to technology, defense and related material, aerospace, electronics, marine, financial services, quantum computing, metals and mining. For instance, OFAC has taken action to target Swiss, EU and Liechtenstein trust service providers, restricting their ability to engage in business globally and limiting the provision of professional services that can aid the sanctioned actors.
Violating U.S. sanctions can lead to exclusion from the U.S. financial system, inability to transact in U.S. dollars, and potential SDN designation. This can severely disrupt European or Swiss companies’ global operations and market access, effectively extending U.S. policy reach. Given the reach and influence of the US financial system, U.S. sanctions effectively extend U.S. policy objectives beyond its borders, compelling foreign compliance without direct jurisdictional enforcement.
How can European or Swiss persons and companies get added to the OFAC list?
European and Swiss companies can find themselves on the OFAC list if they engage in activities that are identified for a U.S. sanctions designation. For example, under Executive Order 14024, OFAC holds the authority to designate foreign actors involved in the Russian Federation’s trust and corporate formation services sector. This designation can lead to primary blocking sanctions as Specially Designated Nationals (SDNs). Crucially, OFAC does not need to prove that these entities are directly assisting SDNs; mere operation within this sector provides sufficient legal grounds for their designation.
In a recent measure, the U.S. Department of the Treasury’s OFAC designated two Swiss lawyers for their role in establishing companies and trusts that enabled Russian clients to circumvent sanctions. This action highlights a gap in Swiss law that permits lawyers to serve as non-financial intermediaries without mandatory due diligence or reporting obligations.
These sanctions designation actions by OFAC underscore the U.S. government’s proactive stance in monitoring international business activities, including indirect dealings with sanctioned entities. For any entities or persons dealing with U.S. counterparties—or who are located in the United States—the U.S. Treasury Department emphasizes the importance of rigorous compliance and due diligence processes for foreign companies to avoid inadvertent violations of U.S. sanctions.
What are the impact of US Primary and Secondary Sanctions on European or Swiss persons or companies?
European or Swiss companies placed on the OFAC list due to U.S. sanctions face severe consequences, including:
✘ Loss of Access to the U.S. Financial System:
Companies on the OFAC list are barred from transacting in U.S. dollars and using the U.S. financial network, which is critical for global business operations. This isolation can disrupt international trade, payments, and investments.
✘ Operational Disruptions:
Exclusion from global financial networks that rely on U.S. institutions leads to significant operational challenges. This includes difficulties in cross-border transactions, interruptions in supply chains, and restrictions on accessing goods and services with U.S. components.
✘ Reputational Damage:
Being on the OFAC list signals high risk to other global businesses. Many companies enforce strict compliance policies to avoid secondary sanctions, which can result in the termination of contracts and business relationships with listed entities. This reputational impact can lead to long-term financial losses.
✘ Loss of Business Opportunities:
Multinational corporations often avoid dealing with OFAC-listed entities to protect their interests. European and Swiss companies on the list may find it increasingly difficult to engage in new partnerships, as potential partners may seek to avoid any risk of U.S. sanctions related to providing material support to sanctioned parties.
✘ Restricted Market Access:
Entities on the OFAC list are generally restricted from the U.S. market, limiting their ability to access U.S.-origin goods, services, and technology. This can hamper competitiveness, particularly in industries reliant on U.S. technology or intellectual property.
✘ Mitigation Requirements:
To avoid these consequences, companies must adopt robust compliance programs and conduct thorough due diligence to ensure they do not inadvertently engage in activities that could trigger U.S. sanctions. This involves ongoing monitoring of transactions and business relationships for potential exposure to sanctioned entities.
Can a company or an individual be removed from US Sanctions list?
It is possible to be removed from the U.S. sanctions list, although it is a rare occurrence and usually requires significant efforts to demonstrate a change in circumstances or compliance with U.S. regulations. For example, a recent case involved a Swiss businessman who was initially sanctioned due to alleged connections to entities supporting Russian activities that contradicted U.S. policy. After 18 months on the list, he was eventually removed.
The businessman achieved this by engaging in legal and diplomatic efforts to prove his case. The U.S. authorities reviewed his situation, and it was ultimately determined that the reasons for the sanctions no longer applied. His removal from the sanctions list suggests that the U.S. may consider lifting sanctions when individuals or companies can effectively demonstrate that they are no longer involved in prohibited activities, or when there is a significant change in the context of the initial sanction.
This example illustrates that delisting is not straightforward and typically involves a process of negotiation, legal argumentation, and providing evidence of compliance or changed behavior. However, it also shows that, under the right circumstances and with the correct approach, it is feasible for European or Swiss individuals or entities to be removed from U.S. sanctions.
In light of the complexities and ever-evolving landscape of US sanctions, it is essential for European and Swiss companies to thoroughly understand the risks and implement comprehensive compliance strategies. At LINDEMANNLAW, our team of legal experts, including U.S. attorneys, is uniquely qualified to assist clients through the complexities of U.S. sanctions regulations. We provide tailored, strategic counsel to support your business operations, mitigate exposure to risks, and ensure adherence to US policies.
If your company seeks expert guidance on U.S. sanctions compliance and risk mitigation, understanding OFAC regulations, or evaluating your current compliance framework, we invite you to contact us to schedule a consultation. LINDEMANNLAW is prepared to safeguard your business interests and support your global operations in alignment with US law.
Disclaimer:
The strategies and information provided herein are for general informational purposes only and do not constitute legal advice. Businesses should consult with a qualified attorney at LINDEMANNLAW for tailored legal advice specific to their individual circumstances and to ensure compliance with applicable laws and regulations.
