Sanctioned – what being added to OFAC’s SDN list really means

Posted on August 6, 2023 by Farhad Alavi — Leave a comment

With all the news surrounding the imposition of sanctions on Russia following the country’s February 2022 invasion of Ukraine, many questions abound as to what “being sanctioned” really means. This post will address the issues surrounding being named onto the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals and Blocked Persons (commonly referred to as the SDN list or the OFAC list).

My law firm Akrivis Law Group‘s recent success in securing the removal from the SDN List of two high profile Russian ex-bankers, Elena Titova and Andrey Golikov, has garnered quite a bit of coverage, not only in Russia but also by others such as Bloomberg. The delisting of the two former Otkritie Bank supervisory board members followed petitioning before federal authorities (OFAC and the State Department) and filing suit in the US District Court of the District of Columbia (DDC). Listings are exceptionally common, removals very much less so. But what does an SDN listing really involve? How does one get off the list?

Many may be familiar with embargo-style sanctions, so-called “country programs” like longstanding US sanctions on Cuba, Iran, North Korea, and Syria. Russia is still not under a comprehensive embargo, but the US restricts the exportation of many items to that country, ranging from luxury goods to “dual use” items are restricted, as well as many services, such as accounting and management consulting. Beyond these types of limitations are designation on the SDN List.

With the increasing use of sanctions against countries and particular sectors of those countries’ economies as a tool of US foreign policy, many natural persons (individuals) and legal persons (companies, organizations, etc.) are finding themselves on the SDN List (notably, the list also includes ships and aircraft). The reasons behind such listing can vary – having served an entity that is designated (e.g., being on the board of a company), assisting a foreign government in illicit activities, being the spouse or adult child of a sanctioned party. OFAC usually adds parties to the list under authority granted by the President pursuant to Executive Orders or regulations issued pursuant to Executive Orders under a handful of federal statutes, such as the International Emergency Economic Powers Act (IEEPA), or the Foreign Narcotics Kingpin Designation Act (FNKDA). In effect, Congress has empowered the President to engage in sanctioning under certain circumstances, and that ability is regularly delegated to agencies within the executive branch, including not just OFAC but for example, the US Department of Commerce’s Bureau of Industry & Security (BIS) (you may have heard of the Entity List, which includes companies such as Huawei).

Being named to the SDN list (which currently includes well above 15,000 names) is effectively a blacklisting from the US economy. With very rare exceptions, US persons (citizens and permanent residents, wherever located, individuals physically in the US, and US companies) cannot trade in goods, services, or technologies with entities on the list. If the designated party has assets subject to US jurisdiction (e.g., in the US or under possession of a US person) they effectively become blocked, such as bank accounts. In the case of other property, e.g., real estate or aircraft, etc., the sanctioned party cannot use the assets, and their monetization must be under an OFAC license, typically with the earnings going into a blocked account (effectively a custodial account) that the party cannot access. Subsidiaries owned 50% or more are generally considered “blocked” too, even if they are not separately named on the list.

Alas, one may ask, many if not most of these people, have no dealings with the US, so is being on this list even relevant or that big of a deal for those outside the US and having no assets or business here? The answer is yes, it certainly can. The United States and US persons are effectively ground zero for OFAC-blocked parties – assets get blocked, and US persons are barred from doing business with them. However, being on the SDN list often triggers a “domino effect” outside the United States, whereby parties in many countries, even those not necessarily legally bound by US sanctions, de-risk from the sanctioned party, what in present day parlance may be referred to as “canceling” – think of accounts in third countries getting blocked or closed, or individuals not being able to fly on some airlines or serve on company boards. Reasons for this can vary, but in the case of banking, it could be because the financial institution is a branch of a US company, under which it usually must be blocked. It could also be because the financial institution has agreements with corresponding banks in the US that it will comply with US sanctions. Alternatively, the financial institution just might be afraid, rightfully or not, depending on the legal authority, that it could face sanctions for serving the sanctioned party.

Following submission of a petition for removal, a questionnaire is generally sent to the petitioner within 90 days. The process can be a long one, and some have taken their cases to court, in part to speed up the process. OFAC’s stated policy on its website is that sanctions are not meant to serve as punishment, but are instead aimed to change behavior. As such, unless one’s strategy is to categorically deny the basis of the sanctioning, seeking removal from the list arguably requires a very serious approach and a willingness to remediate. In other words, one probably won’t be delisted just because they asked.