In connection with recent Russia-related sanctions issued by the US government, organizations face a variety of issues when navigating the questions of who and what transactions may be subject to the reach of these sanctions. Economic sanctions administrated by the US Department of Treasury’s Office of Foreign Asset Control (OFAC) are often intended to have extraterritorial effect, and therefore can impose significant compliance costs and penalties on US subsidiaries as well as their non-US affiliates or parent entities.
The situation relating to Russia’s operations in Ukraine remains fluid and dynamic, with US allies and partners, including the United Kingdom and EU member states, adopting similar Russia-related restrictions on a daily basis, although the precise contours of the sanctions’ terms and their extraterritorial reach may vary. This LawFlash focuses on the extraterritorial reach of US sanctions.
Following US President Joseph Biden’s announcement of plans to sanction Russia, OFAC issued Russia-related Directive 1A under Executive Order on Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation (EO 14024) on February 22, 2022.
EO 14024 was originally promulgated on April 19, 2021, setting a new bar as a sweeping sanctions tool aimed at countering a wide range of Russian government–backed problematic activities. Pursuant to EO 14024, OFAC subsequently issued additional Russia-related sanctions Directive 2 and Directive 3 on February 24, 2022, and Directive 4 on February 28, 2022.
At a high level, the Russia-related Directives prohibit, as of the time of this writing, at least the following:
The sanctions extend to parties subject to US jurisdiction wherever located—such as foreign companies that (1) have a branch in the United States; (2) have a subsidiary in the United States; or (3) do business in the United States. In addition, the sanctions could reach parties not located in the United States—such as foreign entities processing payments in US dollars through US banks. This extraterritorial reach, however, can be limited or recast through OFAC’s issuance of general licenses authorizing otherwise prohibited activities, new or expanded definitions, and interpretive guidance found in frequently asked questions posted on the OFAC website.
As foreign policy and national security tools, sanctions regulations, licenses, or interpretations provide the US government a broad range of interpretive flexibility, which makes compliance a more challenging process. To help the general public understand the contour of sanctions, the US government often includes definitions related to prohibited activities and industry descriptions, in conjunction with actual sanctions regulations; for example, the general license for the energy sector permitted certain activities for a period of time and includes a definition of the energy industry.
The scope of US sanctions is also framed within the context of the executive order from which the rules, policies, and guidance are derived (i.e., EO 14024); the jurisdictional reach of the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA); and the circumstances under which OFAC has discretionary authority to exercise jurisdiction over an individual or entity (such as when a foreign entity subjects itself to US jurisdiction through certain transactions or activities subject to OFAC’s jurisdiction). Independently and collectively, these sources support the reach of US sanctions laws and regulations to parties outside the United States.
For example, Section 6(d) of EO 14024 defines “person” as “an individual or entity,” and an “entity” is defined in Section 6(a) to mean “a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.” Accordingly, a person can be an individual or any form of corporate entity. Section 3(e) defines “United States person” to mean “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”
EO 14024, however, does not contain any geographic limitation on its application. Rather, in the context of EO 14024, the text of IEEPA gives the president authority to deal with the threat resulting from extraterritorial activities resulting from, among other things, “efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners” and the violation of “well-established principles of international law, including respect for the territorial integrity of states.” Accordingly, OFAC likely can exercise its jurisdiction hook liberally and extraterritorially.
Additionally, OFAC, through the authorities granted under IEEPA and NEA, consistently extends its jurisdiction to foreign parties such as financial institutions located outside the United States. Both IEEPA and NEA have become important tools for US presidents to impose economic-based sanctions targeting foreign states or their governments, non-state individuals and groups, and business entities. As the primary source of the president’s power under EO 14024, IEEPA authorizes the president to regulate foreign economic transactions when the president declares a national emergency to deal with any unusual and extraordinary threat to the United States that has a foreign source.
By its terms, IEEPA vests the president with authority over “transactions” that involve a “person . . . subject to the jurisdiction of the United States,” and does not specifically require that the transaction itself occur within the United States. Most US statutes and their implementing regulations are silent on their geographical scope, including IEEPA, but federal courts have supported the expansive interpretation of extraterritorial reach of the IEEPA.
For example, the US District Court for the Southern District of New York rejected the defendants’ argument that IEEPA could not reach business transactions conducted overseas between a foreign national and Iran. United States v. Zarrab, 15-867-RMB, 2016 WL 6820737 (S.D.N.Y. Oct. 17, 2016) (dismissing defendant’s motion to dismiss, which argued that IEEPA did not apply to foreign nationals; the defendant did not dispute that he had conducted business with US nationals). The district court noted that the plain language of the statute makes clear that IEEPA “is not limited to individuals (such as U.S. citizens) who are subject to the jurisdiction of the United States, indicating that Congress intended the statute to be applied extraterritorially.” Id. at *9.
Similarly, in another case, the US District Court for the District of Columbia held that IEEPA applies to foreign nationals, stating that the “plain language of several provisions of the IEEPA unambiguously indicate that the IEEPA applies extraterritorially.” United States v. Tajideen, 319 F. Supp. 3d 445, 457 (D.D.C. 2018).
Other US sanctions regimes also define the terms relating to the jurisdictional reach. Although those definitions do not apply directly to implementation of this executive order, they are helpful for providing context for the potential scope of the rules implementing EO 14024:
The reach of laws and regulations helps entities manage their compliance obligations, as being subject to US jurisdiction helps frame what requirements apply. As discussed, “subject to US jurisdiction” can be, and frequently is, broadly construed in the foreign policy and national security contexts to reach a non-US “person” and “entity” in a number of ways:
While these and other regulations provide guidance on how the US government may interpret “subject to US jurisdiction,” we look primarily to the cases that interpret IEEPA and NEA writ large for the framework. Consequently, the question of whether one is “subject to US jurisdiction” or subject to EO 14024 and corresponding sanctions is always a fact-specific inquiry that will depend on the facts of each circumstance.
We also note that while the United States, the United Kingdom, and EU member states have adopted similar sanctions on Russia, the question of extraterritorial application can differ among the countries and hence require a jurisdiction-by-jurisdiction analysis. The situation can be further complicated by Russia’s countermeasures, including, for example, the decree, “On Special Economic Measures in connection with the Unfriendly Actions of the United States of America and Other Foreign Countries” of February 28, 2022. Please refer to our LawFlash regarding Russia’s special decree and its implications.
Our lawyers have long been trusted advisers to clients navigating the complex and quickly changing global framework of international sanctions. Because companies must closely monitor evolving government guidance to understand what changes need to be made to their global operations to maintain business continuity, we offer this centralized portal to share our insights and analyses. To receive the latest updates, subscribe to our Ukraine Conflict: How to Maintain Global Business Continuity mailing list.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Ukraine Task Force
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Georgia M. Quenby
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Daniel Lopez Rus
Charles C. Rush