Countries May Soon Create Payment System to Avoid US Sanctions, Panelist Says

While Europe did not have much success implementing Instex, the European payment system designed to allow countries to trade with Iran despite U.S. sanctions, countries will continue trying to create a similar system and may eventually succeed, Mortlock said.

“The more we see these types of vehicles, the more it becomes likely that someone happens upon a system that does actually avoid the U.S.’s ability to go after it,” Mortlock said, speaking with other sanctions experts at a Sept. 19 panel hosted by the Atlantic Council.

Instex was a trial-run at trading with Iran, Mortlock said. Other experts have said the payment system was symbolic and was meant to appease Iran to keep it committed to the Joint Comprehensive Plan of Action (see 1907030047). But now that countries have seen how and where Instex fell short, they will be able to improve on it with a new system, Mortlock said.

“We’ve seen the limits of what Instex is able to accomplish,” he said. “This is essentially the efforts of others in the global financial system to kick the tires on the limits of U.S. jurisdiction and the limits of how far our sanctions can actually reach activity and deter activity.”

The rise of Instex and other attempts to avoid U.S. sanctions have coincided with the Trump administration's heavy reliance on sanctions to address foreign policy issues, other panelists said. The U.S. added about 1,000 entries to its Specially Designated Nationals list in 2018, a “significant jump” from just 600 additions in 2016, said Mark Nakhla, executive vice president of research for Kharon, a company that provides sanctions screening, analytics and guidance. Nakhla also said the U.S. has updated the SDN list every four days for the last 18 months.

“That’s significant if you're on the private side in a compliance department,” he said during the panel.

Joshua Shrager, senior vice president for Kharon and a former sanctions officer at the Treasury's Office of Foreign Assets Control, said one of the most complicated issues faced by private companies is the so-called 50 percent rule. The rule makes it illegal to do business with any company that is owned 50 percent or more by a U.S.-sanctioned person or entity.

“If I get 50 questions a week from colleagues or clients or friends in the private sector, 49 of those questions are about the so-called 50 percent rule,” Shrager said.

The rule is difficult to comply with because it does not require OFAC to add companies that fall under the 50 percent rule to its SDN list. Shrager said more than 5,000 entities worldwide are not listed on the SDN list but are majority owned by sanctioned people or companies.

“That’s mind-boggling as a compliance officer to think about,” Shrager said. “There are 5,000 entities out there that don’t appear on the list and somehow I’m supposed to know about them and not do business with them.”

Many of those companies are in Russia. There are almost 10 times as many Russian companies that fall under the 50 percent rule that do not appear on the SDN list as Russian companies that do appear on the list, Shrager said.

“They’re in oil, gas, financial services -- you name it,” he said. “There’s just a tremendous amount of pressure and challenges that fall on the private sector to understand and identify these companies.”

The increased sanctions have led to increased compliance expectations and an increasingly unclear set of guidances from OFAC, said Samantha Sultoon, a senior fellow with the Atlantic Council. This has been exacerbated by an increasing “pace of action” in the sanctions space, she said, including unclear announcements from President Donald Trump over Twitter.

“It leaves very little time to develop or augment current practices to incorporate new sanctions actions before being asked to turn around and do the exact same thing all over again,” Sultoon said. “It leaves a lack of clarity, lack of nuance and a lot of questions for the private sector.”

Sultoon was also critical of OFAC’s 12-page guidance on the components of a successful compliance program released in May (see 1905030055), saying it led to questions rather than clarity for U.S. companies.

“It outlines five essential components of an effective program but doesn’t offer clear definitions or a framework for any of them,” she said. “The lack of specificity allows OFAC flexibility in pursuing enforcement actions, but it also makes it difficult on the private sector to implement the guidance.”