How do economic sanctions work

US extraterritorial sanctions

Since the founding of the republic, the US government has expanded its authority beyond its own national borders in order to pursue economic, foreign and security policy goals. The extraterritorial application of US law to natural and legal persons, assets and actions outside one's own territory is favored by three factors: Firstly, by an ideological obligation to a natural right, which is expressed in a commitment to the inviolability of inalienable rights, which also exceed one's own limits are held to be valid. Second, through a legal culture that is shaped by the experience of constant territorial expansion and domination - initially as a former settler society and later as an occupying power after the Second World War. And third, through an independent judiciary that has a great deal of discretion to interpret the geographic scope of US law and its enforcement by administrative authorities.

The extraterritorial US jurisdiction results from laws of the Congress (regulatory sovereignty), administrative ordinances (enforcement sovereignty) and the jurisdiction of domestic courts (jurisdiction). In the late 18th and early 19th centuries, US extraterritorial jurisdiction primarily concerned claims for damages and piracy. Since the early 20th century, there has been a gradual expansion to include environmental and economic policy, particularly in antitrust, banking, bankruptcy, stock corporation, tax and labor law. Since the 1970s, the extraterritorial reach of US jurisdiction has increased significantly because US foreign and security policy pursues many different goals. This extensive claim to validity disregards the sovereignty of other nations and in the past has repeatedly led to conflicts with both challengers and allies. The current conflict over Iran has created a serious crisis in the transatlantic relationship.

US law takes precedence over EU law

With the withdrawal from the Joint Comprehensive Action Plan announced on May 8, 2018 (Joint Comprehensive Plan of Action, JCPOA) President Donald J. Trump fulfilled a key election promise. The JCPOA was negotiated with Iran by several governments and adopted by the United Nations Security Council with resolution 2231 (2015). In accordance with the commitments it had made, the Iranian government agreed to limit its nuclear program and subject it to close international scrutiny in return for an easing of international sanctions. Because of its limited scope and duration, a bipartisan majority in Congress refused to support the JCPOA from the start. The exit by the Trump administration was followed by a so-called strategy of maximum pressure. As Foreign Minister Michael R. Pompeo declared in May 2018, the Iranian leadership is to be forced to submit to twelve far-reaching demands. In addition to a comprehensive restriction of the nuclear program, Iranian regional and domestic policy should change fundamentally, according to Pompeo.

In order to achieve these maximum demands, unilateral US sanctions are primarily used. The Trump administration consequently carried out a large number of unilateral US sanctions, which, declared as “not related to nuclear power,” also existed alongside the JCPOA. The US Treasury and State Department listed a total of 168 natural and legal persons in 19 rounds for participation in the missile program and for alleged human rights violations.

On August 6, 2018, President Trump reintroduced those US sanctions with Executive Ordinance 13846 that had been suspended since January 2016 as "nuclear-related" under the terms of the JCPOA. These measures, largely enacted by Congress against the will of the Obama administration, largely paralyzed the Iranian economy between mid-2010 and the end of 2013. The first tranche took effect immediately and contained a limited number of prohibitions. The second came into force on November 5, 2018 and included numerous measures that collectively aimed to dry up the Iranian government's revenues from oil exports. From the beginning of May 2019, the US State Department will also deny the remaining four importers of Iranian oil special permits to purchase it through a financial transaction.

Even before the deadlines set by the Trump administration and before any enforcement measures were taken, large European and Asian companies withdrew from the otherwise lucrative Iranian market. This forced withdrawal from the Iran business and the resulting deterioration in the economic situation prompted the Iranian leadership to partially terminate its obligations under the JCPOA at the beginning of May. In order to avert the impending collapse of the nuclear deal, European decision-makers would have to effectively protect domestic companies from US sanctions. However, there is currently a lack of suitable instruments for this.

Helpless Europeans

In response to President Trump's decision to end US participation in the JCPOA, European decision-makers publicly vowed to stick to the nuclear deal with Iran. To protect EU-based companies from the threat of the reintroduced unilateral US sanctions, the governments of France, Germany and the United Kingdom (E3) together with the European Union (EU) have so far taken four steps.

On the one hand, the European Council updated Regulation (EC) No. 2271/96. This prohibits individuals and companies based in the EU from complying with the unilateral US sanctions listed in the appendix, while at the same time making it possible to claim damages in European courts. Second, the European Council and the European Parliament have expanded the mandate of the European Investment Bank (EIB) for lending in third countries to facilitate lending for private investments in Iran. Third, the European Commission announced a series of confidence-building measures, including an aid package worth 50 million euros for economic cooperation with the Iranian private sector. Fourth, the High Representative of the Union for Foreign Affairs and Security Policy and the governments of France and Germany are working together on a payment mechanism that is independent of the US dollar. A special purpose vehicle (Instrument in Support of Trade Exchanges, INSTEX), which is registered in France, is managed by the former Commerzbank executive, Per Fischer, and controlled by three ministerial officials from the foreign ministries of the E3 countries. It is supposed to make the European-Iranian trade of humanitarian, agricultural and medical goods and services possible without a dollar transaction.

However, all four steps are not enough to effectively protect EU-based companies from unilateral US sanctions. While the EIB simply refuses to participate in the Iran deal, the economic aid package fizzles out. The same applies to Regulation (EC) No. 2271/96, which previously proved ineffective because the threatened fines are very low compared to the much greater losses that could result from non-compliance with unilateral US sanctions. The regulation allows EU-based companies to make their own business decisions to avoid certain transactions that happen to be affected by certain unilateral US sanctions. And claims for damages awarded by European courts would not be enforceable in the United States anyway. Given the foreseeable problems of embedding INSTEX in the broader European economy, the mechanism is likely to be limited to facilitating trade in agricultural products, pharmaceuticals and other medical products. Although US law explicitly allows it, it is made more difficult by the banks' premature obedience.

The EU / E3 would have to relieve domestic companies of the concern of being affected by the extraterritorial reach of US laws. Only then can it succeed in preserving the JCPOA as one of the most important achievements of European diplomacy in view of the active sabotage by the Trump administration. Previous US governments backed off their claims because they feared alienating their European allies. The Trump administration, on the other hand, shows no willingness to relax the transatlantic legal conflict in a similar way. This uncompromising stance could soon develop into a serious problem for the European and German economy: Congress is currently working flat out to tighten the unilateral US sanctions against Russia. Even if the European dependence on US goods, technologies and (financial) services could be reduced in the future, this would offer little protection against extraterritorial US sanctions, as these are increasingly directed against natural and legal persons, assets and actions - even without Points of contact with the US jurisdiction - direct.

Legal basis

The most important legal bases for unilateral US sanctions in the field of foreign and national security policy are, on the one hand, those restricted to wartime Trading with the Enemy Act (TWEA) from 1917, on the other hand the International Emergency Economic Powers Act (IEEPA) from 1977. After prior declaration of a national emergency according to the National Emergencies Act From 1976 far-reaching powers are activated, which the Congress with the IEEPA has transferred to the President. This includes the ban on unauthorized imports and exports of goods, technologies and (financial) services, including further exports from third countries. In addition, the IEEPA enables the President to freeze assets falling under US jurisdiction.

In addition to the TWEA and the IEEPA, there are other laws under which unilateral sanctions can be imposed. The most important are the Atomic Energy Act (AEA) from 1954, the Arms Export Control Act (AECA) from 1976 and the Export Controls Act (ECA) of 2018, which give the President the authority, almost all unauthorized exports of nuclear equipment and materials (AEA), of military goods and software (AECA) and of goods, technologies and services with civil-military uses (ECA) to prohibit, including further export from third countries.

All of the foregoing laws contain what are known as primary sanctions, which are directed solely against persons, property, and actions that "come under US jurisdiction." While the specific scope of each law varies, there are similarities in terminology. The term "US persons" usually refers to individuals with permanent residence in the United States, but also to nationals anywhere in the world. The term “legal entity” includes both not-for-profit organizations and corporations incorporated under US law, including their overseas branches. And the term "assets" usually applies to all goods, technologies and (financial) services that are exported from the USA or further exported from third countries.

Since the early 1990s, bipartisan majorities in Congress have passed an increasing number of laws containing so-called secondary sanctions. These laws, mostly passed against the opposition of the executive branch, are directed against certain activities of foreign persons such as investments in specific sectors of the Iranian or Russian economy or like doing business with persons who are on the black list of the US Treasury Department. US secondary sanctions cannot be legally violated because the activating activities are not illegal under the relevant laws, but merely subject to sanctions. When implementing secondary sanctions, the President has considerable leeway by establishing a violation beforehand. In such event, US persons will be prohibited from engaging in certain business activities that would then result in partial or total exclusion from the $ 14 trillion economy. For example, the Treasury Secretary can order that US banks must strictly restrict or even close their correspondent or transit accounts of certain foreign banks in order to cut their access to dollar transactions - the "Wall Street equivalent of the death penalty." In addition, in 2012, Congress authorized the Treasury Department to freeze assets under US jurisdiction from foreign persons doing business with certain Iranian blacklisted persons.

Extra-territorial enforcement

Different authorities are charged with the extraterritorial enforcement of unilateral US sanctions. These include, among other things, the one belonging to the Ministry of Energy Nuclear Regulatory Commissionfor provisions of the AEA, which settled in the Ministry of Commerce Bureau of Industry and Security for provisions of the ECA and that Directorate of Defense Trade Controls the Ministry of Foreign Affairs for Regulations of the AECA.

The Office of Foreign Assets Control (OFAC) of the Ministry of Finance enforces a small number of other laws in addition to the IEEPA. Moreover, it manages the infamous Specially Designated Nationals (SDN) and Blocked Persons List, which currently lists over 15,000 natural and legal persons. This listing results in the blocking of your assets under US jurisdiction. In addition, natural and legal US persons are prohibited from entering into business relationships with these so-called SDNs.

All SDNs were managed under at least one of the more than 30 country or topic-related sanction programs directed against state and non-state actors. Most of these programs are based on executive regulations mandated under the IEEPA; some stem from laws passed by Congress. A listing is justified either on the basis of status or activity. The latter rationale encompasses a wide range of acts that are punishable under various laws: such as material support for international terrorism, the proliferation of weapons of mass destruction and their means of delivery, human rights violations and transnational crime, especially drug trafficking and cyber attacks.

The regulations enacted by OFAC under the IEEPA generally do not contain any applicable thresholds for the determination of violations. As a result, any unauthorized export of goods, technology, and (financial) services from the United States, regardless of quantity, is strictly prohibited. In a historical comparison with its two predecessors, OFAC limits the scope of its enforcement sovereignty, namely to US persons. An exception to this are the Cuban Assets Control Regulations and the Iran Transaction and Sanctions Regulationswhich apply to all natural and legal persons »subject to US law«. This seemingly small difference is of fundamental legal significance because the latter formulation also encompasses the large number of branches of US parent companies that operate independently abroad.

In enforcing the IEEPA, OFAC can impose civil fines of up to $ 295,141 per violation, or twice the amount of the incriminated transaction. The exact sum is calculated after weighing various factors that are included in Economic Sanctions Enforcement Guidelines are held. This administrative process is intransparent and cannot be checked in court.In December 2007, Congress decided to hold accountable anyone who causes a US person to violate the IEEPA. As a result, large foreign banks were fined heavily for having previously processed financial transactions in dollars on behalf of people listed as SDNs.

OFAC has recently been monitoring whether foreign persons who have been removed from the SDN list because of an agreement on a settlement are adhering to the agreed conditions. In the future, OFAC could thus ensure that it can also target important shareholders of major companies without affecting global value chains.

Finally, OFAC can refer violations of the IEEPA to the Department of Justice for law enforcement purposes. However, while trial guarantees better legal protection under the U.S. Constitution, conviction can result in hefty fines and sentences of up to 30 years. The extraterritorial enforcement of US sanctions is supported by bilateral extradition agreements in order to be able to apprehend wanted individuals anywhere in the world.

Gray area under international law

With the global enforcement of unilateral US sanctions, the US administration operates in a gray area of ​​international law, which regulates the relations between sovereign nation-states either through formal treaties or through widely recognized customary principles.

Under international law, the US government enjoys wide leeway in limiting trade and financial relationships. In its numerous friendship, trade and shipping treaties with other nations, it is not subject to any restrictions on the application of unilateral sanctions due to exemptions based on foreign and security policy. This absence of legal barriers also affects multilateral treaties that contain wide exemptions for national security issues, including Article VIII, Section 2 (b) of the International Monetary Fund Convention and Article XXI of the World Trade Organization.

In contrast to the loud criticism of unilateral US sanctions, according to a landmark ruling by the International Court of Justice in 1986, the case exists Nicaragua v. United States of America however, no right to economic exchange. To date, the use of economic power in international relations has largely defied all attempts at legal regulation.

According to customary international law, the US government is generally free to assert its enforcement jurisdiction extraterritorially with reference to the following five principles: First, it allows objective principle of territoriality to counteract direct and significant effects that result from activities beyond one's own national borders. This so-called "effect principle" goes back centuries subjective principle of territoriality; it establishes jurisdiction over natural and legal persons, property and actions within its own state territory. Second, that allows active principle of nationality own nationals to regulate anywhere in the world. Third, that enables passive nationality principle prosecute natural persons who harm their own citizens abroad. Fourth, under the Protection principle identified threats to national security are counteracted. And finally it can Universality principle be interpreted broadly to hold accountable those who have committed widely outlawed crimes such as terrorism.

The application of these principles in individual cases is a matter of interpretation. In addition to the protection principle, the US administration has interpreted two principles in particular in the last few decades in such a way that it can justify the enforcement of its own laws abroad.

On the one hand, OFAC in particular relies on the active nationality principle in order to claim enforcement authority over foreign companies that are at least 50 percent (sometimes less) owned or controlled by a US person. This so-called control theory, introduced in 1942 by the Franklin D. Roosevelt administration in the fight against the Axis powers, is controversial under international law. The International Court of Justice rejected such an extension of the active nationality principle in its February 1970 decision Barcelona Traction from. The court found that the nationality of a company is not based on its owners or board members, but on its respective location. The Commission of the European Communities reaffirmed this argument in an aide-mémoire to the US State Department in August 1982. This demarche was part of the European reaction to a previous extension of US export controls to subsidiaries of US parent companies established in Europe in order to obtain their participation in the construction of a gas pipeline between West Germany and the Soviet Union.

In addition, the US authorities generously interpret the principle of nationality to the effect that they apply their jurisdiction not only to goods, technologies and (financial) services even after they have been exported, but also to goods, technologies and (financial) services worldwide that are more Contains more than 10 percent genuine parts from the United States. Even the use of the dollar for international payments between foreign banks - a central practice in the global economy - is viewed by the US administration and some federal courts as an export of services, as it requires a correspondence account with a US bank.

On the other hand, OFAC and other authorities have expanded the objective principle of territoriality: The decisive factor is no longer the place where an incriminated act is carried out, but the territory on which this act adversely affects. This first time by the Permanent International Court of Justice in the case of precedent lotus of September 1927 recognized interpretation later found its way into US case law: with the judgment in the case United States v. Alcoa in March 1945 before the appellate court for the second judicial district (148 F.2d 416). In contrast to common practice in US antitrust law, the extraterritorial enforcement of the IEEPA generally lacks objective criteria as to when certain effects on US territory are to be regarded as "direct" and "material". Therefore, interpretations of the objective territoriality principle in relation to US foreign and security policy are and will remain extremely subjective.

By expanding the active principle of nationality and the objective principle of territoriality on the one hand and continuously undermining the subjective principle of territoriality on the other, the US government is making a decisive contribution to the centuries-old principle of mutual agreement (comity) to erode. It says that states exercise restraint in the event of conflicting legal acts.

Protection by US courts only

In the German Basic Law, international law is not only defined as a component of federal law, but also goes beyond it (Article 25). In contrast, the US Constitution does not impose any limits on the extraterritorial application of US law to Congress. In most US laws and their respective implementing regulations, the geographical scope remains indefinite, as is the case in the IEEPA. Their exact scope beyond national borders is determined by US courts on a case-by-case basis.

Indeed, many U.S. federal courts support the administration's broad interpretation of their jurisdiction and typically do not balance the interests of the United States with those of other participating nations. Most foreign defendants accused of violating US law overseas prefer to avoid criminal prosecution: they sign an agreement to suspend prosecution (Deferred Prosecution Agreement)with which they submit to civil action by the US administration. So far, the extraterritorial application of the IEEPA has rarely been tried in federal district or appellate courts, let alone in the Supreme Court.

This reluctance to assert oneself in court is understandable in view of the high risks to reputation and business activity. But the prospects of successfully challenging the US administration's lavish interpretation of law enforcement in domestic courts may have improved recently. This is due to a strengthening of two principles of interpretation that the Supreme Court uses to determine the extraterritorial scope of US law, and which are binding on all lower instances. According to the as Presumption Against Extraterritoriality (Presumption against extraterritoriality) US laws apply primarily domestically, unless Congress has expressly determined otherwise. This principle supplements an earlier one for the determination of extraterritoriality, the one called Charming Betsy is common and has its origin in the early 19th century. As a result, the intention of Congress can only be interpreted in such a way that it only violates international law in the event that no other construction is possible.

These two interpretative principles would provide a powerful lever to defendants accused of violating US law overseas: they could argue that US law cannot be applied to them or their actions. The conservative justices at the Supreme Court and in the lower courts would probably be receptive to such an argument, as they advocate a more literal interpretation of the US Constitution and are deeply skeptical of the steady increase in power of the administrative state over the past 60 years. A positive signal in this direction is the consent of the Supreme Court to hear a case that may lead to the verdict in the so-called Except Deference could revoke or at least restrict. This precedent goes to the decision in the case Auer v. Robbins from 1997, which has since allowed administrative authorities to interpret ambiguous regulations at their own discretion. A conservative majority in the Supreme Court could also go a step further and derive the decision in the case Chevron U.S.A. v. Natural Resources Defense Council Rethink the precedent that emerged. This 1984 ruling enables the authorities to interpret the laws that authorize their own administrative action.

On the way to more strategic autonomy vis-à-vis the US government, European decision-makers should make better use of existing channels of influence by relying on US case law within the constitutional system of the Checks and Balances support. In practice, this means systematically encouraging and then supporting companies based in the EU to challenge the extraterritorial enforcement of the IEEPA by the US administration - and perhaps other laws - in domestic courts. This approach would initially be appropriate for state-affiliated companies such as the EIB or INSTEX and would have to be closely coordinated between the European Commission, the individual member states and the private sector on both sides of the Atlantic. As long as there is no diplomatic understanding with the US administration or resistance from Congress to the extraterritorial application of law, the only effective means of protecting European sovereignty lies in the normative power of the rule of law - before US courts.

Dr. Sascha Lohmann is a scientist in the America research group.