Earlier this month, after the Senate overwhelmingly passed a bill that would authorize (and in some cases mandate) sanctions on foreign energy firms that participated in certain Russian energy projects, the Governments of Germany and Austria issued a joint statement that they “cannot accept a threat of extraterritorial sanctions, illegal under international laws, against European companies that participate in developing European energy supplies.”

The debate over the legitimacy and legality of U.S. “extraterritorial” sanctions has raged on and off for decades – and the use of extraterritorial sanctions on non-U.S. companies involved in Russian energy projects is itself a controversial topic that dates back to the Cold War.  While it is fair to characterize some of the sanctions in the Senate’s Russia bill as “extraterritorial,” they are not of the same type that generated controversy in an earlier episode involving Soviet pipelines – and at least some of the sanctions in the Russia bill appear to provide the Executive Branch with the discretion that would be required to responsibly implement the sanctions and assuage some concerns.  Still, it is not surprising that Europe would react strongly to these sanctions – particularly if they provide little to no implementation or enforcement flexibility.

U.S. sanctions generally prohibit U.S. persons (United States citizens and lawful permanent residents, entities organized under United States law, and others physically located in the United States) from engaging in transactions with designated persons or countries.  When the U.S. imposes so-called “extraterritorial” or “secondary” sanctions, however, it purports to extend its jurisdiction, or at least the power of its law indirectly, to non-U.S. firms.  The U.S. extraterritorial sanctions that have generated the most controversy in recent decades have directly prohibited foreign subsidiaries of U.S. companies from engaging in certain types of activity, or have indirectly targeted non-U.S. firms that are not U.S.-owned by trying to restrict their access to the U.S. market. 

Extraterritorial sanctions that regulate foreign subsidiaries of U.S. firms

The embargoes implemented by the United States against Cuba, North Korea, China, and Vietnam in the post-World War II era purported to restrict the activities of foreign subsidiaries of U.S. firms.  However, complaints about the application of U.S. sanctions to foreign subsidiaries came to a head in the early 1980s, when the United States sought to prevent the construction of a natural gas pipeline from the former Soviet Union to Western Europe.   Frustrated by the United States’ inability to convince partners and allies to voluntarily stop the project, President Reagan imposed sanctions in 1982 that prohibited foreign subsidiaries of U.S. companies from providing parts and services for the project.  A number of European countries objected to these measures as illegal under international law because they were improperly “extraterritorial,” and some went so far as prohibiting European subsidiaries of U.S. companies from complying with the measures.  Within less than a year, the United States reversed itself and no longer applied these prohibitions to foreign subsidiaries of U.S. firms.

Currently, most U.S. sanctions programs do not apply directly to foreign subsidiaries of U.S. firms.  Cuba and Iran are notable exceptions, although regulations and licenses issued by Treasury’s Office of Foreign Assets Control (OFAC) currently authorize foreign subsidiaries of U.S. firms to engage in a limited set of transactions related to Cuba and Iran that would otherwise be prohibited under U.S. law.

Secondary sanctions

The Russia sanctions bill passed by the Senate does not seek to directly regulate the behavior of foreign subsidiaries of U.S. firms.  It would, however, require OFAC to impose sanctions, subject to a waiver, on foreign persons that the President determines “knowingly” make “significant” investments in a “special Russian crude oil project,” which means deepwater (more than 500 feet deep), Arctic offshore or shale.  (The bill would also expand existing provisions that restrict the ability of U.S. persons to work on, supply or finance such projects.)

The bill would also authorize, but would not require, OFAC to impose sanctions on persons who make investments that “directly and significantly” contribute to the “enhancement” of Russia’s ability to construct energy export pipelines, or who provide goods, services, technology, information, or support that could “directly and significantly” facilitate Russia’s ability to maintain or expand the construction, modernization, or repair of energy pipelines, when any of this activity breaches certain monetary thresholds.  (While U.S. persons are not currently prohibited from engaging in these activities as such, there are restrictions in place that would significantly complicate any such undertaking.)

Secondary sanctions – measures that would impose sanctions on designated foreign persons who contribute to the problem that led to the imposition of sanctions – differ from sanctions that would directly regulate behavior by a foreign firm.  Secondary sanctions do not purport to regulate foreign firms directly, but rather cut off access to certain aspects of the U.S. economy by imposing prohibitions on U.S. persons that would deal with the foreign firm.  Hence the “secondary” label, because these sanctions essentially work through a back door by targeting U.S. persons and thereby impacting the foreign firm indirectly (but often severely).

In a sense, secondary sanctions are common features of virtually all sanctions programs administered by OFAC.  For example, virtually all of the sanctions programs administered by OFAC broadly allow for sanctions to be imposed against foreign persons who are owned or controlled by, or who work for or on behalf of, or provide material support to, other designated persons.  Reserving some discretion for the sanctions implementer is a critical feature of these programs.  These sanctions programs typically do not mandate sanctions against everyone who meets the relevant criteria.  Instead, they typically authorize the imposition of sanctions, subject to the discretion of the Secretary of the Treasury, acting in consultation with the Secretary of State, to decide whether sanctions should be imposed.  The Executive Branch argues that this discretion is essential to ensuring that secondary sanctions can be administered in an appropriate fashion.

Congressional attempts to mandate the imposition of extraterritorial sanctions frequently put the Congress and the Executive Branch at odds with each other.  The Executive Branch generally chafes at sanctions legislation as an unnecessary constraint on the President’s pre-existing broad authority to impose sanctions under the International Emergency Economic Powers Act or other similarly broad authorities – particularly where such sanctions do not provide for discretion in implementation.  (Secretary Tillerson’s recent comments that sanctions legislation was unnecessary and that it would be essential to preserve flexibility for the Executive in dealing with Russia could have been uttered by any Secretary of State from the Clinton, Bush, or Obama Administrations.)

At one time, the Clinton Administration went so far as to make a commitment that it would “resist” the imposition of extraterritorial sanctions by Congress.  In 1996, the European Union instituted a WTO proceeding against the United States over extraterritorial aspects of a Cuba sanctions law, the Helms—Burton Act.  The Helms-Burton Act led the EU, Canada and others to pass so-called “blocking” statutes – still on the books today – that prohibit companies within their jurisdiction from taking measures to comply with the U.S. Cuba sanctions program.  This Cuba WTO dispute was resolved in part by a 1998 understanding reached between the Clinton Administration and the European Commission in which both sides committed “not to seek or propose” and to “resist” “the passage of new economic sanctions legislation based on foreign policy grounds which is designed to make economic operators of the other behave in a manner similar to that required of [the partner’s] own economic operators.”

Where to go from here?

It is clear that secondary sanctions and other extraterritorial sanctions are here to stay – if anything, it is remarkable how little attention they have received in recent years.  The many secondary sanctions on Iran imposed by the President and the Congress during the Obama administration received little criticism – in part because of the multilateral nature of many of the Iran sanctions efforts.  Similarly, recent enforcement actions taken by OFAC in Cuba in response to the activities of foreign subsidiaries of U.S. companies have received little attention – even where countries have in place blocking statutes that prohibit their companies from taking actions to comply with U.S. Cuba sanctions.

However, if the United States were to revert to a more muscular, unilateral approach to sanctions implementation or enforcement without sufficient room for discretion – we should expect to see additional objections and potentially new legal challenges from Europe and elsewhere.