US issues sanctions [OFAC] against Turkey after the military offensive in Syria

On October 14, 2019, the Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury announced that President Trump had issued sanctions against Turkey in connection with its military offensive into northeast Syria, which President Trump has said undermines efforts to defeat the Islamic State of Iraq and Syria, threatens peace in the region and which is putting civilians at risk.

The new sanctions regime consists of an Executive Order [EO] and three General Licenses. These are discussed below

EXECUTIVE SUMMARY

1. The E.O. directly impacts US and non-US dealings in Turkey’s energy sector. 
2. Companies engaged in this sector need to conduct third party due diligence to identify potential links to the designated Turkish ministries.
3. In issuing these sanctions, OFAC stated specifically that it intends to grant specific licenses to prevent disruption in the sector, which will likely result in a slew of specific license applications to OFAC.
4. FFI secondary sanctions are becoming a more regular feature within US sanctions regimes. 
5. They act to extend the scope of US sanctions to financial institutions that would not normally fall within the scope of US sanctions.  If imposed, these secondary sanctions would be highly disruptive to any FFI. 
6. Most non-US financial institutions will have existing policies and procedures in place for dealing with such restrictions (most notably in connection with CAATSA) and must now ensure that these are extended to include the sanctions relating to the new E.O.
7. On the same day as signing the E.O., President Trump also announced that the US is pulling out of talks to reach a trade agreement with Turkey and would increase tariffs on US imports of Turkish steel to 50 percent, the level of steel tariffs in place prior to reduction in May.  Meanwhile, members of Congress are reportedly preparing a sanctions bill to further sanction Turkey for its actions in Syria.
8. This is an area of significant development, which should be monitored closely.

THE DETAIL

The Executive Order (the “E.O.”)

Secnion 1 of the E.O. blocks property and interests in property, within the US or under the possession or control of US persons,[1] of any person OFAC has determined to:

(i)    be responsible for or complicit in, has directly or indirectly engaged in, or attempted to engage in” actions or policies that “further threaten the peace, security, stability, or territorial integrity of Syria” or the commission of serious human rights abuse;

(ii)    be a current or former official of the Government of Turkey;

(iii)   be a subdivision, agency, or instrumentality of the Government of Turkey;

(iv)    operate in certain sectors of the Turkish economy, as determined by OFAC;

(v)     to have materially assisted, sponsored, or provided financial, material or technological support for, or goods or services to or in support of any sanctioned person per the E.O.; or

(vi)    to be owned or controlled by, or to have acted or purported to act for or on behalf of – directly or indirectly – any sanctioned person per the E.O.    

Pursuant to the authority of Section 1 of the E.O., OFAC has designated two ministries of the Turkish Government and three Turkish Ministers on the Specially Designated Nationals (“SDN”) List. 

The two designated ministries are

• the Republic of Turkey Ministry of National Defence and
• the Republic of Turkey Ministry of Energy and Natural Resources. 

The three designated individuals are

1. Suleyman Soylu, the Turkish Ministers of Interior
2. Fatih Donmez, the Turkish Ministers of Energy and Natural Resources
3. and Hulusi Akar, the Turkish Ministers OF National Defence, respectively.

Section 1 (v) grants OFAC the authority to impose secondary sanctions on non-US persons – not just financial institutions, but any foreign person who has materially assisted or provided material support, goods, or services to the designated persons under this Section.

Section 2 of the E.O. grants the authority for sanctions to be imposed on any foreign (i.e., non-US) person who is responsible for or complicit in, has directly or indirectly engaged in, or attempted to engage in, or financed:

The obstruction, disruption or prevention of a ceasefire in Northern Syria;

1. the intimidation of, or prevention of, displaced persons from voluntarily returning to their homes in Syria;
2. the forcible repatriation of persons or refugees to Syria; or
3. the obstruction, disruption or prevention of efforts to promote a political solution to the Syrian conflict.
4. Section 2 of the E.O. also applies to family members of persons designated pursuant to the above. Finally, Section 2 grants the authority to impose sanctions on foreign persons determined to be responsible for or complicit in, or has directly or indirectly engaged in, or attempted to engage in, the expropriation of property, including real property, for personal gain or political purposes in Syria.

Where it is found that a foreign person falls within the scope of Section 2, the E.O. grants the US Secretary of State  the authority

1. TO impose a raft of sanctions, including prohibiting US agencies from procuring or entering into a contract for the procurement of any goods or services from sanctioned persons;
2. denying a US visa to any non-US person determined to be a corporate officer or principal of, or a shareholder with a controlling interest in, a sanctioned person;
3. the blocking of assets within the US; prohibiting US financial institutions from making certain loans; prohibiting transactions in foreign exchange that are subject to US jurisdiction;
4. prohibiting transfers of credit or payments between financial institutions; prohibiting US persons from making certain loans or investing in or purchasing “significant amounts” of equity or debt instruments of the sanctioned persons; prohibiting or restricting imports into the US of goods, technology, or services from sanctioned persons. 

Section 3 of the E.O. authorizes “secondary sanctions” to be imposed on foreign financial institutions (“FFIs”) determined by OFAC to have “knowingly conducted or facilitated any significant financial transaction for or on behalf of any person” subject to the blocking sanctions set out in Section 1 of the E.O. 

Where an FFI is determined to have conducted or facilitated such “significant financial transactions,” it may face prohibitions or restrictions on the opening or maintenance of US correspondent accounts.

The term “significant financial transaction” is not defined within the E.O., however, it is a defined term in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which imposes sanctions on Iran, Russia, and North Korea, which would likely also apply here.

As such, whether a transaction is deemed to be a “significant financial transaction” will likely depend upon the totality of the facts relating to the transaction in question, to be determined by OFAC on a case-by-case basis.  In determining whether a financial transaction is “significant,” OFAC generally considers the following seven broad factors:

1. size, number and frequency of transactions;
2. nature of the transactions;
3. level of awareness of management and whether the transaction is part of a pattern of conduct;
4. the nexus between the transaction and the SDN;
5. the impact of the transaction on statutory objectives;
6. whether the transaction involved deceptive practices; and
7. any other factors deemed relevant.[2]

Section 4 of the E.O. imposes travel restrictions on persons designated pursuant to Sections 1(a) and 2(a) of the E.O.

Section 5 of the E.O. prevents making certain donations to persons designated pursuant to Section 1 of the E.O.

OFAC General Licenses

OFAC also issued three General Licenses to authorize certain transactions that would otherwise be prohibited under the E.O.:

1. General License 1 authorises activities by US Government employees, grantees, or contractors in connection with official US Government business, including activities of US Government contractors.
2. General License 2 provides for a 30-day wind down period up to and including 13 November 2019 to wind down existing operations, contracts, or other agreements involving the Turkish Ministry of Energy and Natural Resources and the Turkish Ministry of National Defence (or any entities which these Ministries own (directly or indirectly) a 50% or more interest in).  General License 2 does not permit transfer of funds to a sanctioned person’s account at a US financial institution.
3. General License 3 authorises official United Nations (“UN”) business involving the Turkish Ministry of Energy and Natural Resources and the Turkish Ministry of National Defence (or any entity in which they own (directly or indirectly) a 50% or more interest[3]), that are for the official business of the UN, including its Programmes and Finds and its Specialised Agencies and Related Organisations.

In addition to the general licenses, OFAC stated that it is prepared to issue specific licenses so as not to disrupt Turkey’s “ability to meet its energy needs.” 

European Union (“EU”) and UK position

On 14 October 2019, the EU released a statement, joined by the UK Government, condemning the military action taken by Turkey and calling on it to withdraw its forces.  The UK Foreign Secretary also condemned, in a statement in the House of Commons, Turkey’s actions and called to an end to the military action.   However, neither the EU nor the UK have taken any steps to issue its owns sanctions at this stage.

Key Takeaways

The E.O. directly impacts US and non-US dealings in Turkey’s energy sector. 

Companies engaged in this sector need to conduct third party due diligence to identify potential links to the designated Turkish ministries.

In issuing these sanctions, OFAC stated specifically that it intends to grant specific licenses to prevent disruption in the sector, which will likely result in a slew of specific license applications to OFAC.

FFI secondary sanctions are becoming a more regular feature within US sanctions regimes.  They act to extend the scope of US sanctions to financial institutions that would not normally fall within the scope of US sanctions.  If imposed, these secondary sanctions would be highly disruptive to any FFI.  Most non-US financial institutions will have existing policies and procedures in place for dealing with such restrictions (most notably in connection with CAATSA) and must now ensure that these are extended to include the sanctions relating to the new E.O.

On the same day as signing the E.O., President Trump also announced that the US is pulling out of talks to reach a trade agreement with Turkey and would increase tariffs on US imports of Turkish steel to 50 percent, the level of steel tariffs in place prior to reduction in May.  Meanwhile, members of Congress are reportedly preparing a sanctions bill to further sanction Turkey for its actions in Syria.

This is an area of significant development, which should be monitored closely.

[1] The term, “US person” means any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

[2] OFAC FAQ #542.

[3] Under OFAC’s “50% Rule,” entities that are directly or indirectly owned 50% or greater in the aggregate by SDNs are also considered designated and blocked.

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