The Future of US Sanctions Policy

• United Kingdom

• Fraud and financial crime
• Litigation and dispute management

12-04-2021

On 7 November 2020, Joe Biden was announced the winner of the United States (US) election. Despite resistance from the Trump administration and allegations of voter fraud, the federal General Services Administration has officially recognised Joe Biden as the President-elect, marking the beginning of the formal transition period. Biden will officially take office as the 46th US President on 20 January 2021. Meanwhile, in its final days, the actions of the Trump administration indicate that it is seeking to hardwire US sanctions policy, through a variety of Executive Orders and other actions, which will inevitably complicate matters for the incoming administration.

There has been much speculation around how the Biden administration will approach sanctions policy, with many expecting a departure from President Trump’s heavy reliance on unilateral sanctions and a move towards the promotion of multi-lateral coordination with other nations. Zia Ullah, Kimberly Jones and Omar Alami of Eversheds Sutherland (International) LLP explore how the future of US sanctions policy may shape up under the Biden administration.

Iran – the future of the JCPOA

US sanctions policy towards Iran has undergone drastic reversals in the last decade, highlighted by the US’ entry into the Joint Comprehensive Plan of Action (“JCPOA”) with Iran and other signatory states in 2015. The nuclear deal was lauded by some as one of the Obama administration’s key diplomatic achievements in office, while also being viewed as alarming by Iran’s regional adversaries. As a result of the JCPOA, in return for Iran’s concessions relating to its nuclear program, the U.S. relaxed sanctions as applied to non-U.S. persons (so-called “secondary sanctions). Specifically, the sanctions relief during the JCPOA period involved contingent waivers of secondary sanctions authorities as to Iran's civil aviation, petrochemicals, gold and oil sector. With respect to the oil sector, that sanctions relief meant allowing third countries to purchase Iranian oil, including via payments processed by Iranian banks.

In May 2018, the Trump administration controversially withdrew from the JCPOA despite evidence that Iran was in full compliance with the agreement at this time. This action demonstrated the beginning of a move to a “maximum pressure” campaign by President Trump, which has been ratcheting up over his final weeks in office. Since that time, the Trump Administration has overlaid more and more “secondary sanctions” as hostilities with Iran have intensified.

Biden has pledged that “if Iran returns to strict compliance with the nuclear deal, the US would re-join the agreement as a starting point for follow-on negotiations”, and has reiterated his view that “the best way to achieve getting some stability in the region” is to deal “with the nuclear program.” It is nevertheless too simplistic to consider whether the Biden administration will only look to re-join the JCPOA. There are two key considerations the Biden administration will be occupied with in negotiating with Iran:

1. the timing and the impact of the June 2021 Iran elections; and

2. the incentives/concessions Iran will require, in order to re-engage with the US.

The window of opportunity available for the renegotiation of a revived deal will be narrow from the time Biden takes office in January 2021. This constraint is due to the decision by Hassan Rouhani, Iran’s current president, to stand down following the completion of his two terms in office. Rouhani was a key supportive figure of the JCPOA and Iran’s government will likely only have a short time to renegotiate before facing an election challenge from hard-line conservatives who oppose any engagement with western powers. Moreover, the possibility of a new US president in 2024, who may want to undo any revived deal reached with the Biden administration, may make Iran less likely to come to the table.

Iran’s response to Trump’s “maximum pressure” campaign has been one of “maximum resistance” and ultimately mistrust of the US. Before returning to full compliance with the deal, Iran stated that the US must first “return to law and international commitments”. It previously stated that only once the US has returned to full compliance with the JCPOA, will Iran take steps to do the same. Iran has also indicated a desire for compensation for economic harm suffered as a result of the US sanctions imposed under the Trump administration. The Biden administration may therefore find that in order to multi-lateralise and collaborate with the EU and the UK, the US could have to offer sanctions relief in accordance with the JCPOA despite the recent lack of compliance by Iran.

Biden and his national security team are also of the view that if the JCPOA is restored, there will then need to be, in very short order, a round of negotiations seeking to lengthen the duration of the restrictions on Iran’s production of fissile material that could be used to make a bomb, as well as to address Iran’s malign regional activities. Biden’s team reportedly would like to involve Saudi Arabia and the United Arab Emirates in these follow-on negotiations, in addition to involving the original signatories to the JCPOA. To summarize, the stage is set for negotiations toward re-entering the deal, but several obstacles remain. The renewed commitment of not only the US but also the other parties will be needed to bring Iran back to the negotiating table. Therefore the process for re-entry, as in the first iteration of the JCPOA, is likely to involve a challenging diplomatic process that is constrained by a short window of time.

Russia – increasing sanctions pressure?

Contrastingly to the other jurisdictions reviewed in this article, Russia is one of the few countries where the Biden administration may be expected to increase sanctions pressure. It is anticipated that Biden will pursue a more consistent western strategy in order to align the US with the approach of its European allies.

In 2014, the Obama administration, with Biden as its point man, led the way globally in imposing sanctions on Russia for its actions in Ukraine, encroaching on the sovereignty and territorial integrity of the Crimean Peninsula. The comprehensive sanctions and export control measures were then expanded upon and codified in 2017 through the Countering America's Adversaries Through Sanctions Act (“CAATSA 2017”). It is anticipated that these measures concerning Crimea will endure under Biden.

The Nord Stream II pipeline, designed to bring natural gas from Russia to Europe, is a sensitive and divisive issue among European states. Under the Trump administration, the US imposed a series of sanctions on entities involved in Nord Stream II. Congress has since demonstrated bipartisan support for the imposition of further sanctions relating to the pipeline. Russia recently announced that it will restart construction of its Nord Stream 2 gas pipeline to Germany in the face of US sanctions that have paused construction for more than a year. However, this is a complex issue amongst Biden’s European allies with many states in disagreement with respect to the completion of the pipeline. As a result, it remains unclear how Biden will seek to navigate tensions in his approach.

Russia is also under US sanctions for the alleged Novichok poisoning of Sergei Skripal and his daughter in 2018, as well as for its interference in the 2016 US elections. Contrastingly, the Trump administration has demonstrated reticence to act in light of the poisoning of Russian opposition leader, Alexei Navalny in August of this year. President Trump’s refusal is in defiance of the bipartisan support garnered for the imposition of further sanctions. Biden may therefore take the opportunity to follow the EU and UK’s lead and impose similar sanctions in response.

Additionally, the bilateral New Strategic Arms Reduction Strategy (“New START”) agreement is due to expire in February 2021. The agreement is an arms reduction treaty and imposes limits on the strategic nuclear arsenals the two nations can deploy. Biden has indicated a desire to agree an extension to the agreement and this will likely be high on his list of priorities from the outset of his presidency.

China – a fresh approach?

As it stands, it remains to be seen whether the Biden administration will change its overall policies towards China, though it is reasonable to expect some changes in the tactical approaches. Biden has indicated that he thinks the best China strategy will be one that gets the US “back on the same page with our allies.” Meanwhile he could face political backlash for taking actions that are viewed as too “China friendly.”

In 2018, the Telecoms firm Huawei became a prominent target for the Trump administration, and has since been the subject of a series of Executive Orders, legal action and international political controversy. As a consequence, Huawei has reported financial losses and the loss of some state contracts. However, and perhaps against the odds, Huawei has made gains in some jurisdictions, and has sought to navigate US restrictions.

Meanwhile the Trump administration is “pulling out all the stops” to hit China with sanctions that will be politically costly for Biden to undo after he takes office. In the short period since Biden’s election on November 6, 2020 the Trump administration has 1) issued an Executive Order banning trade in publicly traded securities of 35+ designated “Communist Chinese Military Companies;” 2) named no less than 59 Chinese entities on the U.S. Commerce Department Entity List (banning all exports/reexports of US items); 3) designated 57 entities as China “Military End Users” under the Export Administration Regulations (EAR); 4) removed Hong Kong from the list of destinations in the EAR; and 5) lifted all U.S. “self-imposed restrictions” on contact between U.S. officials and Taiwan, upending decades of U.S. foreign policy and threatening the continuation of the “one China” policy. China has reacted with its own measures prohibiting Chinese companies and individuals from complying with “punitive measures mandated by foreign governments.”

Some believe the Biden administration might adopt a harsher approach towards US-China trade. Biden’s willingness to coordinate with its allies, and the growing cynicism felt against China in Europe, might lead to a unified campaign across the continents. Although these plans might be obstructed by China’s recent attempts to strengthen its ties with Europe via an investment pact to come into effect in 2022.

Despite adopting a more cooperative tone, the Biden administration is likely to maintain a sceptical attitude towards China, as foreshadowed by Biden’s recent US Trade Representative nominee, Katherine Tai, who has a history of challenging China’s trade tactics. In light of Biden’s vows to focus on boosting the US technology sector, the administration is likely to continue restrictions in some form in order to maintain a competitive edge over China’s dominating industry.

With respect to what we may expect from Biden’s presidency, there are three main factors to consider:

1. Competing interests: Biden has explicitly stated that he does not support allowing Chinese firms to build critical US infrastructure, which could include 5G networks. However, a great deal of financial support for Biden’s campaign came from Silicon Valley, the financial interests of which have been negatively affected by the Huawei ban.

2. Bipartisan support: An additional consideration Biden will have to balance is the bipartisan support the measures taken against China and Huawei have received in Congress. Biden may therefore consider it imprudent to make sweeping amendments to a popular foreign policy.

3. Canada: Canadian Prime Minister Justin Trudeau has appealed to Biden to assist in securing the release of two Canadians, arrested in purported retaliation for the arrest of Meng Wanzhou, Huawei’s CFO. Ms Wanzhou was arrested on the request of the US in 2018 while travelling through Canada on charges of fraud and conspiracy.

North Korea – denuclearisation or arms control?

“It’s likely Chairman Kim would have preferred another four years of Donald Trump.”

Joe Biden has signalled that his approach to North Korea will be one of “principled diplomacy.” Biden’s call for diplomacy suggests a different approach that could yield benefits not only for the US, but also to the Kim Jong-un regime. North Korea needs an agreement with the US to kickstart an economy ravaged by COVID-19, recurrent natural disasters and sanctions. Without a deal a relief from sanctions is unlikely. North Korea is increasingly dependent on the possibility of US sanctions relief particularly with the growing need for large-scale aid and investment into the North Korean economy in the wake of the current pandemic. This could be the time for Kim Jong-un to move towards his ultimate foreign policy goal of diplomatic normalisation. Biden wrote that he “will engage in principled diplomacy and keep pressing toward a denuclearized North Korea and a unified Korean Peninsula.”

The new administration’s approach to North Korea will require a measured approach. The prospect of North Korea relinquishing its nuclear arsenal before receiving any concession in return is, quite simply, a nonstarter. A likely course of action may instead be one of arms control as opposed to total denuclearisation. Incoming Vice President, Kamala Harris has written that “simply demanding complete denuclearization is a recipe for failure. The US must work closely to contain and reverse the short-term threats posed by Pyongyang as it works toward that long term-goal of denuclearisation.” Arms control facilitated by South Korea’s support for diplomacy seems the realistic starting point before any disarmament process is put in place. The incoming US government can use aid as a goodwill message and as a strong diplomatic signal to kickstart any positive developments. Ultimately, for North Korea, nuclear weapons are a necessary deterrent against a perceived hostile US and subsequent aid offerings would symbolise a move away from the alleged hostility.

However, from an immediate sanctions perspective it is unlikely that there will be any considerable movement or relaxation by the US - lifting sanctions before Pyongyang dismantles major components of its nuclear weapons program is widely considered a serious mistake. Particularly given North Korea’s track record of operating illicit overseas businesses and forming elaborate financial networks around the world with the help of numerous foreign individuals, front companies, and financial institutions enabling Pyongyang to evade banking restrictions, continue overseas export of labour, and maintain trade of sanctioned goods such as luxury products, coal, oil, and weapons. Biden’s approach to North Korea will likely be a slow process driven by trust and piecemeal aid offerings in exchange for initial arms control measures with the ultimate goal of total denuclearisation some way off on the horizon.

Syria – humanitarian progress

While Syria had been designated a State Sponsor of Terrorism by the US since December 1979, it was specifically in response to the 2011 uprisings in the Middle Eastern state that Washington pursued a new wave of sanctions on the repressive regime in recent years. Since the first civil-war related measures were introduced in April 2011, sanctions on the Assad regime have gradually expanded to include an extensive list of restrictions against individuals, such as asset freezes and travel bans. The individuals targeted in this exercise include persons linked to state-owned companies and persons offering material support to the regime.

More recently, new US sanctions came into force against Syria on 17 June 2020 under the Caesar Civilian Protection Act. This legislation significantly broadens existing Syrian sanctions by aiming to deter third parties from facilitating the Assad regime’s acquisition of goods, services, or technologies that support the regime’s military activities unless or until the regime meets certain stated conditions. This most recent action offered a clear signal of intent by the Trump administration to curtail the business activities of those seen to be enabling the Assad regime.

Despite the political change on the horizon within the US halls of power, the policy intent looks set to be an area of continuity from one administration to the next. Press reports made during the US election campaign demonstrated Biden’s inclination to maintain a robust stance in respect of Syria. The President-elect gave campaign-trail assurances that sanctions were an integral constituent part of his wider foreign policy options for Syria.

If there is to be any movement in the design of Syria-related US sanctions, it will most likely be focused on clarifying the humanitarian exemptions to the existing rules and setting out civilian protection tests for the Assad regime. Indeed, in light of the worsening civilian situation in Syria, the International Crisis Group has recommended that the US “explicitly lay(s) out the range of partial and reversible sanctions waivers and relief they are prepared to provide” to leverage political progress on the ground. While the results of this lobbying is yet to be seen, greater nuance within the Syrian sanctions regime could be a key feature of the next US Presidential term.

Venezuela – a shift in strategy?

For more than a decade, the US has imposed sanctions in response to the activities of the Venezuelan government and Venezuelan individuals. After Nicolas Maduro’s inauguration in January 2019, the White House unleashed a barrage of sanctions, especially on Venezuela’s energy sector, and recognised Juan Guaido as Venezuela’s legitimate president, albeit one with no power.

The US now have a total embargo on Venezuela which has led to international pressure to force Venezuela’s leader from power. Indeed, the US threatens sanctions actions against non-US commercial actors who are viewed as providing “material support” to the Maduro regime through their dealings with Petróleos de Venezuela S.A. (“PdVSA”). Despite the pressure, Maduro remains in power almost two years since the US ceased to recognise his presidency, and is backed by the Venezuelan military as well as key allies Cuba, Russia, China, Turkey and Iran.

The Trump administration intensified sanctions in 2019 by imposing an oil embargo that blocked the purchase of petroleum from Venezuela's state oil company, PdVSA, which accelerated a decline in oil production. Though initially a ban on US import and swap transactions, US policy later evolved to block most categories of energy trading transactions even by non-U.S. persons. The sanctions have been a huge blow for Venezuela, where 90% of government revenue derives from the oil industry. The US government has also frozen $5.5 billion worth of Venezuelan funds in international accounts in at least 50 banks and financial institutions. Even if Venezuela could obtain funds from abroad, the US has long blocked international trade by threatening sanctions on foreign companies for doing business with the country. Other sanctions also remain in place, including terrorism and drug trafficking related sanctions, as well as targeted sanctions relating to human rights violations and corruption.

On a bipartisan basis, Congress has always supported targeted sanctions against Maduro officials, but views on broader sanctions vary. Whilst some in Congress support economic sanctions as a means to put pressure on Maduro’s government, others are concerned about the humanitarian effects of those sanctions and have called for a suspension or relaxation of sanctions during the COVID-19 pandemic.

Biden’s win has sparked debate among those who back President Trump's hard-line approach and others who say it is time for a new course. Critics say heavy sanctions have failed to remove Maduro from power, and have instead opened Venezuela to US competitors like China, while making life harder for millions of Venezuelans. Meanwhile, while recognising that most of the humanitarian crisis has resulted from the failed domestic policies of the Maduro regime, the Venezuelan opposition is concerned that humanitarian impacts of US sanctions will turn domestic political support against them.

Despite promising to “reverse” many of President Trump’s policies, Biden’s team has previously vouched to “push for stronger multilateral sanctions” against Venezuela “in an intelligent way” and “with specific goals.” Juan Gonzalez, who has advised Biden on Latin American issues, said that the Biden administration would take "serious measures" to address Venezuela's humanitarian crisis. It will also apply "intelligent sanctions" as part of a broad international strategy to restore democracy.

Sparking speculation of potential improvement in the relations between the two countries, Maduro has congratulated Biden on winning the US elections and in a televised speech said that he would work to resume “decent, sincere” political dialogue with the US, once Biden assumes the presidency in January. At this stage, the exact measures Biden will take are unclear, but Biden reportedly does not plan to lift sanctions or US indictments against Maduro, who he has called “a dictator, plain and simple,” or other members of the regime. It is likely that he will focus more on the humanitarian dilemma facing Venezuelans at home and abroad and seek a multilateral approach for increasing pressure on the Maduro regime and its regional allies in Cuba and Nicaragua while maintaining sanctions on oil transactions that provide liquidity to the Maduro regime.

Cuba - a return to the Obama era?

Under President Obama, US relations with Cuba improved significantly, and sanctions were relaxed. This stance was reversed throughout President Trump’s time in the White House. During the Trump era, tougher sanctions were imposed on Cuba that have been considered to have caused significant hardship to the people of Cuba. Indeed, during President Trump’s last full week in office, the Trump administration re-designated Cuba as a “state sponsor of terrorism,” hitting the country with new sanctions that will make it more difficult for Biden to renew relations. Whilst Biden has hinted that he will look to ease Cuba sanctions, there are significant factors at play that will limit his practical ability to do so.

Following in the footsteps of his predecessors, Biden will be able to achieve changes through the issuance of Executive Orders. In particular, it is expected that Biden will loosen sanctions with respect to family remittances and travel. Sanctions in this area have caused significant economic hardship to the Cuban people and such changes will be a move towards improving relations with Cuba, which soured dramatically during the Trump administration.

Whilst it is likely that sanctions targeting the aforementioned areas will be relaxed, there are limits to the extent of easing that may take place. President-elect Biden is constrained due to the political and legislative framework within which he will operate. Politically, Biden will be conscious of the voters of Florida, specifically the state’s Cuban-American voters, many of whom are opposed to the removal of US sanctions on Cuba. Furthermore, like his predecessors, Biden will be constrained by the Helms-Burton Act, the effect of which makes it difficult for a President to revoke Cuban sanctions without congressional approval to remove the trade embargo imposed on the region.

In addition, a key question is whether Biden will revert back to the waiving of Title III of the Helms-Burton Act. The provision allows claims against ”any persons” that traffic in property owned by a US national which was confiscated by the Cuban government on or after January 1 1959, as long as the “amount in controversy” exceeds $50,000. Since the enactment of the provision, successive presidents have continued to waive this provision of the act. However, in 2019, President Trump ceased the Title III waivers and since doing so less than three dozen claims have been brought. It is expected that Biden will reimpose the waiver when he takes office, although lawsuits already filed would not be affected.

In light of the significant political and legislative factors at play, it is unlikely that there will be sweeping change to the sanctions regime the US imposes on Cuba. Whilst it is expected that sanctions will be eased, it is highly unlikely that US foreign policy will return to the more open stance seen under President Obama.

The International Criminal Court – a rollback of sanctions?

The Trump administration imposed sanctions against employees of the Hague-based International Criminal Court (“ICC”) and anyone supporting its work, in response to the ICC’s investigation of US activities in Afghanistan, and placed the ICC’s chief prosecutor, Fatou Bensouda, on the SDN list. The ICC sanctions have been widely criticised by human rights groups, and the ICC has called them an unacceptable attempt to interfere with the rule of law. Moreover, in January 2020, a US judge in New York issued a preliminary injunction against the White House from imposing criminal or civil penalties against four law professors for supporting the ICC’s work. A Biden administration may not decide to fully embrace the ICC, but it is likely to consider lifting these sanctions, particularly the sanctions against individual ICC members.

Final thoughts

President-elect Biden is likely to quickly take steps to make US sanctions policy his own, align closer to the approach of European allies of the US and to push for multi-lateralisation where feasible. However, it is not expected that the incumbent administration will simply overhaul the sanctions regimes imposed under President Trump; nor is it likely that the Biden administration will simply mirror the approach to sanctions taken during Obama’s presidency, despite Biden’s key role within that administration. Come 20 January 2021, Biden will likely be cautious to maintain sanctions in jurisdictions where the approach has received bipartisan support under Trump’s administration. We can expect less volatility in this area under Biden, but any relaxation of sanctions policies are likely to be incremental in nature and tied to specific diplomatic or policy gains.

With special thanks to Sarah Paul (Partner) and Ginger Faulk (Partner) of Eversheds Sutherland (US) for their insight for this article.

This article first appeared in Money Laundering Bulletin on 19 Janurary 2021.

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