Render Unto OFAC

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When the U.S. Congress enacts sanctions by passing legislation, it is often unwelcome by the executive branch. Such legislation can restrict the flexibility and autonomy of the executive branch in responding to changed diplomatic circumstances when trying to advance U.S. foreign policy goals. That was certainly the case during the Obama administration, whose ability to relax sanctions imposed on Cuba was limited by previously enacted congressional acts. Similarly, Title II of the Countering America’s Adversaries Through Sanctions Act (CAATSA)―which imposes new sanctions on parties associated with the Russian Federation―appears specifically designed with President Donald Trump in mind. In addition, CAATSA limits the president’s ability to relax sanctions that are already in place, which seems to have been an attempt by Congress to restrain the president’s apparent reticence toward being assertive with Russia, as evidenced by his unwillingness to confront President Vladimir Putin about Russia’s interference in the 2016 presidential election.

CAATSA limits the president’s ability to relax sanctions that are already in place

Therefore, it is interesting to analyze such laws through the lens of congressional intent and then predict how the powers given to the administration will likely be utilized because of, or despite, the letter of the law. A prime example of this is the Caesar Syria Civilian Protection Act (Caesar Act), which was passed as part of the National Defense Authorization Act for Fiscal Year 2020 (NDAA).

What Is in The Law?

The Caesar Act contains both punitive measures and measures intended to assist Syria’s civilian population. The punitive measures are twofold. First, the U.S. secretary of the treasury was directed to determine within 180 days whether or not the Central Bank of Syria (Central Bank) should be designated a financial institution (FI) of primary money laundering concern (PMLC). If he makes that determination, he is required to impose sanctions as described in Section 311 of the USA PATRIOT Act.

Secondly, sanctions can be imposed on foreign persons if they:

  • Provide support (financial, material or technological) or have a significant transaction with the Syrian government (including senior officials of that government); parties who are involved in military capacities within Syria for the Syrian government, Russia or Iran; or parties sanctioned under the U.S.’ Syria or Syria-related sanctions
  • Sell or provide goods or services that enable the Syrian government to maintain or expand their domestic petroleum and natural gas production
  • Sell or provide aircraft or aircraft parts, or provide goods or services for operating aircraft, for military use within Syria for the Syrian government to anyone operating in areas controlled by the government or with other forces allied with it
  • Provide construction or engineering services to the Syrian government

The act also includes a “Sense of Congress” section that suggests that the president should include loans, credits or export credits when defining what constitutes “financial support.”

The sanctions that are to be imposed include asset freezes, a ban from admission into the U.S., denial of new visas and revocation of existing ones.

The act also makes comparatively minor amendments to the Syria Human Rights Accountability Act of 2012. Most notably, the amendments add a list of specific Syrian government roles for the president to consider for inclusion in the list of persons that the law requires be submitted to Congress.

Why Was It Passed?

The “Caesar” in the legislation’s title refers to the code name of a military defector who smuggled a trove of thousands of photographs that documented extensive human rights abuses (including torture and starvation) and deaths of persons detained by the Assad regime from March 2011 to August 2013. It was originally filed in the House of Representatives in July 2016 by Rep. Eliot Engel (D-NY) after Caesar testified and shared some of the photographic evidence before Congress in 2014. However, various versions of the bill repeatedly failed to pass Congress for a variety of reasons, including objections to other unrelated provisions in larger legislative packages in which it was included, and a lone senator’s objection to unanimous consent for the bill based on his desire to proceed with diplomatic measures rather than mandating coercive ones.

The version that ultimately passed was introduced on January 3, 2019, coincidentally close on the heels of President Trump’s December 2018 announcement of a withdrawal of U.S. combat troops from Syria. That decision by the president played a part in Senate Majority Leader Mitch McConnell expressed opinion to throw his support behind the bill.1 Due largely to efforts by Senator McConnell’s office, the Caesar Act became a part of the NDAA for 2020, a “must-pass” bill that eventually passed and was signed into law on December 20, 2019. So, while the original impetus for the bill’s passage was the outrage over the human rights abuses of the Syrian regime, ultimately it was Congress’ perceived need for greater influence in Syria, a country in which the U.S. had ceded the battle on the ground to nations not aligned with U.S. foreign policy interests, that enabled it to finally become law.

How Could It Be Used (And How Will It)?

The Caesar Act aims to pressure the Assad regime in a diverse set of ways. First, the law directs the secretary of the treasury to consider the imposition of Special Measures under Section 311 of the USA PATRIOT Act on the Central Bank. Special Measure 5, the most severe, would prohibit all U.S.-organized banks and U.S. branches of foreign banks from offering correspondent services to the Central Bank. As a practical matter, it would also deny the Central Bank dollar-denominated accounts at other banks as well. Such a move by the Treasury would force the Central Bank to use less desirable currencies for any international trade transactions. The Central Bank is already sanctioned by the United Kingdom, European Union, Switzerland and Canada, which would force any financial services needs mostly to financial firms in the Middle East, Asia and Oceania. Therefore, with the possible exception of Chinese currency, financing Syrian trade flows would incur additional foreign exchange costs. This is due to the need to use currencies that are comparatively more volatile, or less easily convertible, than the U.S. dollar, which makes them more expensive to use (since potential foreign exchange losses due to volatility are factored into the exchange rates).

The prospect of sanctions imposed on third parties is intended to have a chilling effect on Syria’s current partners, both politically and economically

In addition, the prospect of sanctions imposed on third parties is intended to have a chilling effect on Syria’s current partners, both politically and economically. According to the Observatory of Economic Complexity,2 in 2018, Syria imported $6.21 billion in goods, with almost 60% of this roughly evenly split between China, Turkey and the United Arab Emirates (UAE). Of the remainder, other countries in the Middle East comprised approximately 9%, and its close ally Russia contributed 3.67%. The latest figures for imported services from 2010 showed that the vast majority of Syria’s $3.53 billion of imported services were for transportation ($1.59 billion), personal travel ($1.51 billion) and insurance services ($121 million).

Therefore, it is not unreasonable to assume that the Caesar Act is intended to give pause to existing major trade partners that could easily leverage existing economic ties to aid the Assad regime. However, each of the largest trade partners presents cause for concern. These countries were still exporting goods to Syria as late as 2018, despite the country’s long-running civil war and the atrocities documented by Caesar years earlier.

Turkey has been used as a transit country for foreign terrorist fighters, and its purchase of Russian S-400 missiles makes it subject to sanctions under Section 231 of CAATSA. Similarly, companies in the UAE have been involved―as documented in multiple Office of Foreign Assets Control (OFAC) enforcement actions―in facilitating trade with Iran. Lastly, China has a long-standing record of being willing to allow its companies to continue to trade with North Korea. In addition, while not part of any original justification behind the composition of the law, the Caesar Act should also make China think twice about expanding its influence in Syria under its Belt and Road Initiative, as that would likely involve prohibited construction and engineering services. Given that the U.S. government has not been shy in imposing sanctions on individuals and entities on all three countries (although the Syria-related sanctions imposed on Turkish officials were not in place for very long), the Caesar Act is likely to make firms from these countries think twice before expanding their commercial ties. Even given countervailing geopolitical concerns (e.g., U.S. Air Force bases in Turkey) that may make OFAC think twice before making designations, the economic impact of designation by OFAC (and the knock-on avoidance of sanctioned parties by firms in mortal fear of being designated themselves) will undoubtedly be a factor to consider for firms that are contemplating Syrian business ties proscribed by the Caesar Act.

However, it is unclear whether the Caesar Act explicitly targeting assistance to the Iranian and Russian governments’ military involvement within Syria will inhibit those nations (or firms that already trade with them) in any way. Given the extent of current Iranian sanctions and the fact that secondary sanctions are attached to parties designated by OFAC (including Iran’s defense department, and the Islamic Revolutionary Guard Corps, or IRGC), it is unlikely that any firms currently conducting business with the Iranian government would cease doing so due solely because of the passage of this measure. Similarly, given the lack of a response to both India’s and Turkey’s purchase of S-400 missiles from the Russian firm Almaz-Antey (which appears on a Department of State list issued under Section 231 of CAATSA that bars third-party business with such firms, under penalty of menu-based sanctions) and the willingness of OFAC to give extended reprieves from sanctions to firms owned by Oleg Deripaska (a sanctioned Russian oligarch), any firms willing to aid Russian military forces in Syria will probably not be deterred by the Caesar Act. Similarly, given the transfer of the Venezuelan book of business from units of Rosneft to Russian state-owned companies has, to date, elicited no regulatory response from OFAC, the threat of sanctions is unlikely to stop Russian firms from aiding the Assad regime in cementing its grip on power.

Given this, what will likely occur as a result of the passage of the Caesar Act? The first glimpses of actions taken under this authority are quite limited but are not heartening. The June 17 OFAC designations were largely made under the authority of executive order 13894, which targets human rights abuses and officials of the Turkish government, rather than the Caesar Act. Of the handful of entities sanctioned with the SYRIA-CAESAR sanctions program tag, all were Syrian firms involved in real estate activities, with one also being involved in building construction. The three individuals sanctioned under the Caesar Act sanctions on that date were all Syrian nationals, although two of them had connections to Canada. While consistent with the letter of the law, designation of domestic Syrian parties is clearly at odds with congressional intent, as seen in the targeting of “foreign” parties (as opposed to “Syrian”) for sanctions designations in the legislation.

It is likely that the Caesar Act will be followed to the letter but not the spirit of the law

In addition, as of July 6, the determination of whether or not the Central Bank is an FI of PMLC appears not to have been made, despite the 180-day deadline mandated by the law having passed over two weeks earlier. This lack of definitive action may be a deliberate ploy to thwart the will of Congress. By not making the mandated determination, the Trump administration can avoid congressional wrath (by not designating the Central Bank as an FI of PMLC), while also not forcing Russia to prop up Syria financially or to increase its military presence in the vacuum created by the Syrian government’s decreased ability to finance its military operations due to the loss of correspondent services.

With a Bang or a Whimper?

The history of legislative sanctions laws is mixed. The ones that have more successfully tied the hands of the executive branch are those that include the imposition of trade bans, such as laws enacted that restricted trade with Cuba and Myanmar. On the other hand, the sections of Title II of CAATSA that dictate the imposition of sanctions on classes of parties have been shown to be relatively toothless three years after their passage since the legislation says the president shall impose sanctions without specifying a time frame for that action. The purchase of Russian S-400 missiles by Turkey without regulatory consequence, despite the clear language of Section 231 of the CAATSA statute is a notable example of this. In a similar fashion, a list of Russian oligarchs was apparently created from a list in a mainstream business publication, technically fulfilling the regulatory requirement under CAATSA to produce such a list, without following the spirit of the requirement (which would have necessitated an independent, rigorous research effort).

It is likely that the Caesar Act will be followed to the letter but not the spirit of the law as demonstrated by the designations made on June 17. Such divergences between congressional intent and executive branch action represents the defiance of the requirements imposed by a co-equal branch of government. Whether legislation imposing economic sanctions other than trade restrictions can be made impervious to presidential desires to ignore or subvert congressional intent is a question that will need to wait for a future bill landing on the White House’s Resolute Desk; the Caesar Act does not meet that bar. 

Eric A. Sohn, CAMS, CGSS, global market strategist and product director, Dow Jones Risk & Compliance, New York, NY, USA, eric.sohn@dowjones.com

  1. Mitch McConnell, “Mitch McConnell: Withdrawing from Syria is a grave mistake,” The Washington Post, October 18, 2019, https://www.washingtonpost.com/opinions/mitch-mcconnell-withdrawing-from-syria-is-a-grave-mistake/2019/10/18/c0a811a8-f1cd-11e9-89eb-ec56cd414732_story.html
  2. The Observatory of Economic Complexity, https://oec.world

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